Deck 22: Negotiable Instruments

Question 1

Any instrument that orders the drawee to pay a certain sum of money is a draft.

Answer 1

True

Question 2

A trade acceptance is created when, as part of a deal to buy wheat from Moyo, Naruta signs a draft ordering the buyer to pay for the wheat within ninety days.

Answer 2

True

Question 3

Mortgage notes tied to a variable rate of interest-fluctuating in response to market conditions-are not negotiable.

Answer 3

False

Question 4

On an instrument, a mere reference to another writing-"As per contract"- does not render the instrument nonnegotiable.

Question 5

With an order instrument, the payee must be identified with certainty because the transfer of the instrument requires his or her signature.

Question 6

If Elin delivers a check payable to her order to First Bank without signing it and receives cash, the transfer is an assignment, not a negotiation.

Question 7

A note made in exchange for funds that contains an acceleration clause is not negotiable because the exact value of the note cannot be ascertained.

Question 8

When a note is lost, impaired, or destroyed, the owner loses the right to be paid its value, even if its existence can be proved with a copy.

Question 9

For a negotiable instrument to operate practically as a substitute for cash, it must be easily transferable and uncollectible.

Question 10

To determine the value of an instrument, it is necessary to know when the maker, drawer, or acceptor is required to pay.

Question 11

If the numerical and written amounts on a check differ, the check is payable in the written amount.

Question 12

Negotiating bearer instruments requires both indorsement and delivery because the use of bearer instruments involves more risk through loss or theft.

Question 13

A person can sign an instrument as an authorized agent of the drawer, but the instrument is not negotiable unless the drawer also signs it.

Question 14

An instrument is not negotiable unless it is "payable to order or to bearer" at the time it is issued or first comes into the possession of a holder.

Question 15

To be negotiable, if an instrument is not payable on demand, it must be payable at a definite time.

Question 16

A promise that states an express condition to payment is negotiable if the condition is stated in writing on the instrument.

Question 17

To most securely minimize the risk of loss on a loan evidenced by a note, a creditor needs only the debtor's promise that the note will be paid.

Question 18

The holder of a note who needs the funds owed on it can transfer it for cash to a third party, whom the maker must pay when the note comes due.

Question 19

A check "payable to the order of Bethany" is indorsed in blank if Bethany simply delivers it without signing it.

Question 20

To avoid the risk of loss from theft, a holder can convert a blank indorsement to a special indorsement by writing, above the signature of the indorser, the name of the indorsee.

Question 21

LNG LLC and Mainline Utility Corporation enter a contract for a sale of liquefied natural gas. LNG draws a draft unconditionally ordering Mainline to pay $50,000 to LNG's order in sixty days. Mainline signs and dates the draft. LNG can sell the draft to

A) Mainline only.
B) LNG's bank only.
C) any party after the draft has been paid.
D) any party before payment is due.

Question 22

Warranty liability arises in the negotiation of an instrument even when the transferor does not sign it.

Question 23

A consumer who signs a note to buy a defective product continues to be liable on the note to an HDC even if the consumer returns the faulty product to the seller.

Question 24

In terms of requirements for holder-in-due-course (HDC) status, first a party must be a holder of a negotiable instrument.

Question 25

Every party who signs a negotiable instrument is primarily liable for payment of that instrument when it comes due.

Question 26

If a check is made "payable to the order of Marcus or Nathan," both parties' indorsements are necessary for negotiation.

Question 27

Only the payee's bank can acquire the rights of a holder and negotiate a check indorsed by the payee "For deposit only."

Question 28

Jane signs an instrument using a "J" with a swirl around it. With this mark for a signature, the instrument is

A) negotiable.
B) nonnegotiable, because an initial does not state the signer's name.
C) nonnegotiable, because an initial is not a signature.
D) nonnegotiable, because a simple initial implies a lack of binding intent.

Question 29

The shelter principle promotes the marketability of instruments by permitting a holder with notice of a claim or defense to attain HDC status by reacquiring the instrument from a later HDC.

Question 30

Karen writes on a piece of paper, "I owe you $600," signs it, and gives it to Lou. This instrument is

A) negotiable.
B) nonnegotiable, because it does not include an express promise to pay.
C) nonnegotiable, because it does not recite any consideration.
D) nonnegotiable, because it does not state any conditions to payment.

Question 31

In the event that there is a conflicting, superior claim to an instrument, a holder in due course will not be able to collect payment.

Question 32

A difference between the handwriting in the body of a check and in the signature affects the validity of the item and will bar a holder from HDC status.

Question 33

A holder who takes a negotiable instrument from a thief cannot become an HDC even if the item was acquired in good faith and there was no reason to be suspicious of the transaction.

Question 34

If an instrument is acquired as part of a corporate purchase of assets, the holder will have only the rights of an ordinary holder.

Question 35

A person who transfers an instrument for consideration warrants to all subsequent transferees and holders who take the instrument in good faith that all signatures on the item are authentic and authorized.

Question 36

The lack or failure of consideration is a personal defense and can be used to avoid payment to an ordinary holder, an HDC, and a holder through an HDC.

Question 37

Generally, when an indorsement is unauthorized, the burden of loss falls on the first party to take the instrument.

Question 38

Rico agrees to buy a bicycle from Salvatore for $250. Salvatore agrees to deliver the bike on September 1. Rico writes a draft for $250 payable to Salvatore on September 1. This is

A) none of the choices.
B) a time draft.
C) a sight draft.
D) a promissory note.

Question 39

A holder will be deemed to have notice of a defect in an instrument if he or she has reason to know that it exists, given all the facts and circumstances known at the time.

Question 40

To operate practically as a substitute for cash or a credit device, a negotiable instrument must be

A) conditional without the risk of being collectable.
B) transferable without the danger of being uncollectable.
C) qualified with a promise to set aside the qualification.
D) payable without recourse.

Question 41

Oren signs an instrument payable to the order of Pay-Out Loans, Inc., "on or before" June 15. This instrument is

A) negotiable.
B) nonnegotiable, because the maker can move up the payment date.
C) nonnegotiable, because moving up the payment date is optional.
D) nonnegotiable, because the exact payment date cannot be determined from the face of the instrument.

Question 42

Fred has six nieces, ages five to sixteen. He writes an order instrument for $50 that states "Pay to the order of my niece." The order instrument is

A) negotiable.
B) nonnegotiable, because the amount of money is less than $500.
C) nonnegotiable, because it is illegal to write an order instrument payable to a relative.
D) nonnegotiable, because there is no specific person identified.

Question 43

Kelly signs an instrument in favor of Leo that states it is "subject to a certain agreement between Kelly and Mona." This instrument is

A) negotiable.
B) nonnegotiable, because it is made subject to a separate agreement.
C) nonnegotiable, because it refers to a separate agreement.
D) nonnegotiable, because Kelly and Mona are not the same persons.

Question 44

Commerce LLC owes Data Analysis Company $2,000. Commerce executes a note to Data as security for the debt. This security

A) does not constitute sufficient consideration for HDC status.
B) does not satisfy the value requirement for HDC status.
C) satisfies the consideration requirement for HDC status.
D) satisfies the value requirement for HDC status.

Question 45

Oliver signs an instrument that states it is being executed "as per a contract for the sale of a case of apples dated May 1." This instrument is

A) negotiable.
B) nonnegotiable, because banks cannot easily process commodities.
C) nonnegotiable, because it includes the specific date of a contract.
D) nonnegotiable, because it refers to an express contract.

Question 46

At 1 A.M., in front of EZ Credit Corporation, which is closed, Frank buys a $500 promissory note for $50 from Greg. When presented with Frank's demand for payment, Diane, the maker of the note, could successfully claim that Frank

A) acquired the note with notice that it was overdue.
B) did not acquire the instrument in good faith.
C) did not give value for the instrument.
D) none of the choices.

Question 47

Rick negotiates a bearer instrument to Shane by delivery

A) with an assignment of its rights under a contract.
B) with any necessary indorsement.
C) without more.
D) with formal presentment in response to a demand by Shane.

Question 48

Brie signs an instrument in which she promises to pay Carmen a certain price for her Dodge Dart. The instrument will be negotiable if it meets all of the requirements for negotiability, including that it is payable in

A) goods equal in value to the market price of the car.
B) money.
C) any of the choices.
D) services equal in value to the market price of the car.

Question 49

Ben signs a promissory note for $1,500 in favor of Community College. The note is undated but specifies that it is "payable one month after date." This note is

A) negotiable.
B) nonnegotiable, because one month is not a reasonable time.
C) nonnegotiable, because there is no option to pay early.
D) nonnegotiable, because the maturity date cannot be determined from the face of the instrument.

Question 50

Beth, an accountant for Credits & Debits, acquires a negotiable instrument from Ellen by promising to pay its face value in thirty days. Beth acquires the status of an HDC when she

A) acquires possession of the negotiable instrument.
B) agrees with Ellen to buy the negotiable instrument.
C) pays the face value due on the instrument.
D) transfers the instrument to another party.

Question 51

Emily writes and signs a check payable to "Festival Cinema." Georg, Festival's manager, indorses the check "For deposit only." This is

A) a blank indorsement.
B) a qualified indorsement.
C) a restrictive indorsement.
D) a special indorsement.

Question 52

On behalf of Bubbly Drinks Company, Calvin signs an instrument in which he promises to deliver 100 cases of soda as payment to Dispatch & Delivery, Inc., on April 1. This instrument is

A) negotiable.
B) nonnegotiable, because soda is not a medium of exchange authorized or adopted by a government as currency.
C) nonnegotiable, because it does not indicate a specific brand of water.
D) nonnegotiable, because it does not recite any consideration.

Question 53

Edna is the payee of a bearer instrument-a promissory note in the amount of $10,000. Flem offers to irrigate Edna's ranch next week in exchange for the note. She agrees and delivers the note to Flem. Flem is

A) an HDC, because he promised to perform services at a future date.
B) an HDC, because the transferor was the original payee on the note.
C) not an HDC, because he did not acquire the instrument in good faith.
D) not an HDC, because he did not yet give value for the instrument.

Question 54

Opal signs a promissory note payable to the order of Payday Loan Company. The note states that it is payable "with interest at the legal rate." This note is

A) negotiable.
B) nonnegotiable, because it does not state a specific rate of interest.
C) nonnegotiable, because it is a promissory note.
D) nonnegotiable, because it is payable only with interest.

Question 55

Coki receives a payroll check from Data Solutions Inc. and indorses it by signing her name on the back of the check. This is

A) a blank indorsement.
B) a qualified indorsement.
C) a restrictive indorsement.
D) a special indorsement.

Question 56

On the back of a check payable to Nero, he writes "Pay to Odell, without recourse" and signs it. This

A) does not effect the check's negotiability or any party's liability.
B) relieves Nero of liability on the check.
C) relieves Odell of liability on the check.
D) renders the check nonnegotiable.

Question 57

Ana signs a check payable to Boz, who indorses the back, gives it to Credit Union, and receives cash. The transfer of the check from Boz to Credit Union is

A) an assignment.
B) a negotiation.
C) a payment.
D) a sale.

Question 58

Muni Investment Company signs a check payable to Notes & Loans, Inc., to buy a promissory note executed by Omni Corporation. This check

A) does not constitute sufficient consideration for HDC status.
B) does not satisfy the value requirement for HDC status.
C) satisfies the consideration requirement for HDC status.
D) satisfies the value requirement for HDC status.

Question 59

Len makes a gift of a check to Millie who takes it in good faith and without notice of any claim, defense, or defect. With respect to this check, Millie is

A) an acceptor.
B) a good faith purchaser.
C) an ordinary holder.
D) an ordinary holder in due course.

Question 60

Ryan negotiates an order instrument to Selina by delivery

A) with an assignment of its rights under a contract.
B) with any necessary indorsement.
C) without more.
D) with formal presentment in response to a demand by Shane.

Question 61

Jill, in good faith and for value, gets from Kiley a negotiable bearer instrument. Jill does not know that Kiley stole the instrument. Jill is

A) an HDC.
B) not an HDC, because Kiley did not acquire the instrument for value.
C) not an HDC, because Kiley did not acquire the instrument in good faith.
D) not an HDC, because Kiley transferred the instrument without notice.

Question 62

Logan is Mining Corporation's agent and is authorized to write checks on Mining's account in Northwest Bank. Logan writes a check "pay to the order of Oceanside Resort." Logan signs the check "Mining Corporation, by Logan, agent." Northwest Bank dishonors the check. Liability extends to

A) Logan.
B) Oceanside.
C) Mining Corporation.
D) no one.

Question 63

Doyle gives a check to eMarket Finance to buy 100 shares of stock in FabNu Corporation for Doyle. The price of the shares is constantly fluctuating. eMarket asks Doyle to leave the amount of the check blank and allow it to fill in the price when making the purchase. Doyle agrees. eMarket buys the stock when the price is $4,000, but fills in the check for $5,000. The check is negotiated as payment for a $5,000 debt to Guido & Hollis Accountants (G&H), which takes the check in good faith and without notice of eMarket's act. G&H later learns that eMarket was not authorized to fill in the check for $1,000 over the price. Is G&H an HDC? If so, for how much?

Question 64

Colin signs a note "payable to the order of Debit Bank." The bank indorses the note in blank and negotiates it to Equity Funds, which sells it to Financial Investments. Liability associated with the transfer of the note from Equity to Financial is

A) none of the choices.
B) contractual.
C) signature.
D) warranty.

Question 65

Employment Company draws a check payable to Felix. Felix indorses the back and negotiates the check to Guaranty Bank. Primarily liable on the check is

A) Employment Company.
B) Felix.
C) Guaranty Bank.
D) none of the choices.

Question 66

Vera gives Will a $500 check as payment for a debt. Will crudely increases the amount of the check to $5,000 and deposits the check in his First Bank account. Vera is liable for the payment of $5,000 to

A) no one.
B) Will and First Bank.
C) First Bank only.
D) Will only.

Question 67

Home Products, Inc., warrants its goods to be free of defects. Ian issues an instrument to Home Products for the purchase of a thermos that leaks. With respect to payment on the instrument, Ian

A) is liable only to a subsequent holder of the instrument.
B) has a universal defense against it.
C) has a personal defense against it.
D) cannot avoid it.

Question 68

Rubin writes a check drawn on his account at Clearwater Bank and payable to the order of Gwyn. The bank does not pay the check. Rubin is

A) absolved of liability on the check.
B) liable to Gwyn for the amount of the check.
C) liable to the bank for the amount of the check.
D) entitled to payment of the amount of the check from Gwyn.

Question 69

Duke signs a note "payable to the order of Equity Bank." Unless Duke has a valid defense against payment, his liability on this note is

A) impaired.
B) primary.
C) secondary.
D) qualified.

Question 70

Raul wants to transfer a check to Schmidt. The check is defective if it

A) is clearly stamped "insufficient funds."
B) contains handwritten terms.
C) is undated.
D) all of the choices.

Question 71

Equity Credit Company has in its possession an instrument dated May 1, 2019. The instrument is payable to the order of First Choice Moving & Storage Company "on June 1, 2020," for $5,000. In the upper left corner is an address for Greater Metro Development Corporation-10 Corporate Park Avenue, Chicago, Illinois-and in the lower right corner is the signature of "Hilltop Investments, Inc., By Ida, President." In the lower left corner is stamped "ACCEPTED: Greater Metro Development Corporation by John, President, May 5, 2019." On the back is the signature of "First Choice Moving & Storage Company by Kathleen, President." Who, if anyone, is primarily liable on this instrument on May 1? On May 5? Who, if anyone, is secondarily liable on this instrument?

Question 72

Kris transfers a note, on which Liu is the maker, to Mia, who takes it for value and in good faith. Mia knows that Kris breached the contract underlying the note, giving Liu a defense against payment. With respect to this note, Mia is

A) a knowledgeable holder in due course.
B) an ordinary holder.
C) an ordinary holder in due course.
D) a knowledgeable acceptor.