Deck 13: Negotiable Instruments and Banks

Question 1

Margo is in possession of a check issued to her by Felix.The check states,"Pay to the order of Margo." If Margo wishes to transfer the check to Pete to pay a debt she owes him,all she needs to do is indorse the back of the check and give it to him.

Answer 1

True

Question 2

Francenie has a checking account at Corner Bank.She wants tickets to an upcoming concert.She writes a check to Ticketmaster for the cost of two tickets.In this scenario:

A) Francenie is the drawee, Corner Bank is the drawer, and Ticketmaster is the payee.
B) Francenie is the maker, Corner Bank is the drawee, and Ticketmaster is the payee.
C) Francenie is the drawer, Corner Bank is the drawee, and Ticketmaster is the payee.
D) Francenie is the payee, Corner Bank is the drawer, and Ticketmaster is the maker.

Answer 2

C

Question 3

Shane called his bank and asked that it wire his mortgage payment each month to his lender.This authorization is effective until he gives the bank written notice of cancellation at least three business days before the scheduled payment date.

Answer 3

False

Question 4

Maria writes a check for $120 on September 2.This instrument is overdue on October 3.

Question 5

On March 14 Michael wrote checks to the electric company for $134.85 and to his dentist for $145.If both checks arrive at the bank on March 17 and Michael has only $230 in his account,the bank may choose which check to pay,or it may pay both checks even if that causes an overdraft.

Question 6

Tim wrote a negotiable note.Subsequently,Tim's debts were discharged in bankruptcy.If a holder in due course presents the note for payment,Tim does not have to pay.

Question 7

To be negotiable an instrument need not be in writing,but must contain a conditional promise or order to pay.

Question 8

Promissory notes have two parties: a maker and a payee.

Question 9

Charlene has possession of a check made out to her order which she received in payment for writing a manuscript for her publisher.Charlene is a holder in due course and the publisher cannot claim any defenses to payment.Charlene has an unconditional right to be paid for the check.

Question 10

The holder must meet both an objective and a subjective test to be considered to have acquired an instrument in good faith.

Question 11

If West Side Bank pays a $350 check on which the issuer's name is forged,it must recredit the issuer's account.

Question 12

An instrument is negotiable if it satisfies six standards.Which of the following is a standard of negotiability?

A) The instrument can be oral provided there is proof beyond a reasonable doubt.
B) The instrument must be payable on demand.
C) The instrument must be conditional.
D) The instrument must state a definite sum of money.

Question 13

The section of the UCC that governs negotiable instruments is:

A) Article 3.
B) Article 2.
C) Article 6.
D) Article 9.

Question 14

A bank may continue to pay checks for 20 days after it learns of the death of its customer who wrote them unless it receives a stop payment order from someone claiming an interest in the account.

Question 15

Hayden owes Luther $5,000.Hayden will only be able to pay this debt if he is able to sell his one-year-old Harley motorcycle,valued at $20,000.Hayden writes a check to Luther that reads,"Payable to the order of Luther the sum of $5,000 as soon as my Harley motorcycle sells for a reasonable amount." This check is:

A) negotiable, assuming Luther accepts delivery of the check.
B) negotiable if Hayden also includes a date that he expects the motorcycle to sell.
C) non-negotiable because it does not state a definite amount of money.
D) non-negotiable because the check is conditional.

Question 16

The transferee's rights in non-negotiable commercial paper are conditional,but the transferee's rights in negotiable commercial paper are unconditional.

Question 17

There are two types of commercial paper: express and implied.

Question 18

Anthony purchased a $3800 promissory note from Sheila for the discounted amount of $3400.Anthony paid value in good faith and had no notice of any outstanding claims against this note that read,"Pay to the order of Sheila on March 2,2011,for the purchase of a 2005 Ford Taurus provided no major problems with the car arise prior to said payment date." Anthony is a holder in due course of a negotiable note.

Question 19

In good faith,Clint gave Nora $600 for a negotiable promissory note made out to Nora for $650.She needed some money before the due date on the note,and Clint had no notice of outstanding claims or other defects of the note.Clint:

A) has more rights in the instrument than Nora.
B) has the same rights in the instrument as Nora.
C) has only conditional rights.
D) cannot transfer the note to anyone else.

Question 20

If Fred writes a check that in figures shows $650 and in writing on the second line of the check states "eight hundred fifty," UCC rules would resolve the uncertainty to make the payment for $850.

Question 21

Which of the following would prevent Marcel from being a holder in due course?

A) A check written on April 14 is indorsed to Marcel on August 1.
B) A check written on April 14 is indorsed to Marcel on June 2.
C) Marcel knows there is a dispute between the original parties to the instrument.
D) All of the above.
E) Only (a) and (c).

Question 22

A "holder" of order paper can best be described as:

A) the payee.
B) any person in possession of the instrument.
C) any person in possession of the instrument if it is payable to or indorsed to her.
D) the first party to come in contact with a negotiable instrument.

Question 23

Darrell owes Judy $50.He naively signs a blank check and tells Judy to fill it out for $50.Judy takes the opportunity to steal money from Darrell and fills in the check for $500.Judy then takes the check to the payor bank,cashes it,and is never heard from again.Which of the following is correct?

A) If the bank pays the check, it is liable for $450. This is an altered check, so Darrell is liable for the original tender of $50.
B) If the bank pays the check, it is not liable at all since Darrell bears the risk of loss for giving the signed, incomplete check to Judy. The bank may be liable if it was on notice that the completion was improper.
C) If the bank pays the check, it is liable for $500.
D) Darrell and the bank will share the loss equally.

Question 24

Which of the following regulates ATMs?

A) Article 3 of the UCC.
B) Article 4 of the UCC.
C) Article 2A of the UCC.
D) The Electronic Fund Transfer Act.

Question 25

Faye has been declared incompetent by a court.Her bank:

A) may continue to pay her checks until it has received notice that a court has determined her to be incompetent.
B) must itself make a determination of her competence.
C) is not liable if it pays her checks since it has contractual obligations to pay her checks as long as she has an account and there are sufficient funds in the account to cover the checks.
D) is liable only for reasonable check amounts written by Faye.

Question 26

Dan received his bank statement on Monday.On the following Friday,he noticed an omitted electronic transfer and called the bank informing it of the error.The bank:

A) must investigate and report to Dan within ten business days.
B) if it discovers an error, must recredit Dan's account, including interest, within one business day.
C) if it finds no error, must give Dan a full, written explanation within three business days of so finding.
D) if it cannot complete its investigation within ten business days, must provisionally credit Dan's account, including interest, pending the termination of its investigation, which must be completed within 45 calendar days.
E) All of the above.

Question 27

Thomas received his March checking account statement and then his April statement,but he failed to reconcile these statements with his bank records.The bank statements included a list of check numbers,amounts and dates of payment,but not the canceled checks.Unbeknownst to Thomas,Brian had been stealing blank checks,forging Thomas's name,and passing the checks as payment for goods and services during the months of March and April.The bank was not careless in paying the checks.When Thomas got his May monthly bank statement,he examined the statements for all three months.It was then he realized that his account balance showed $2000 less than what it should,and he began to investigate.If Thomas sues the bank for total reimbursement for the forged checks,Thomas will:

A) lose because Thomas did not report the forgeries within 30 days of receiving his monthly bank statements.
B) win because the bank did not send him the canceled checks.
C) win because the bank paid a check on which Thomas's name was forged.
D) win because this is a breach of contract by the bank.

Question 28

An oral stop payment order is valid for ___________;a written order is valid for ____________.

A) seven days; six weeks
B) 14 days; three months
C) 14 days; six months
D) 30 days; one year

Question 29

Without notifying her bank,Sonya wrote a postdated check to the university for her tuition.Sonya's bank:

A) will be liable if it cashes the check before its date unless it gets permission from Sonya.
B) will not be liable if it cashes the check before its date.
C) cannot cash the check.
D) can only make provisional credit available until the check's date.

Question 30

The evening news reported that Emerson sold fraudulent negotiable instruments to investors around the country.Three days later McBride,who had not heard the news reports,bought some of the fraudulent negotiable instruments from a swindled investor.To be a holder in due course,McBride must:

A) meet only a subjective test of good faith, which asks whether the holder believed the transaction was honest in fact.
B) meet only an objective test of good faith, which asks whether the transaction appears to be commercially reasonable.
C) only show that he gave value for the instruments and had no notice of outstanding claims against the instruments.
D) meet both a subjective and an objective test of good faith, must be a holder, must have given value, and must have had no notice of outstanding claims or other defects.

Question 31

The EFTA addresses all but which of the following kinds of errors?

A) Unauthorized transfers.
B) Disbursement errors.
C) Computational mistakes.
D) Payments on altered and forged checks.

Question 32

Under the UCC:

A) banks must provide customers with a monthly statement listing transactions.
B) a bank statement must include either canceled checks, substitute checks, or a list of check numbers, amounts, and dates of payment.
C) a bank statement must include any fees imposed by the bank and the number of days covered by the statement.
D) All of the above.

Question 33

Sprock is a holder in due course on an instrument issued by Klingon.Which of the following defenses could be successfully raised by Klingon?

A) Forgery.
B) Prior payment.
C) Breach of contract.
D) Lack of consideration.

Question 34

Which of the following can be negotiable?

A) A promissory note that states, "Pay to Luis Calvillo $500 on September 30, 2013. "
B) A check written on the standard check form that does not state the date it was issued.
C) A promissory note from Howard to Hainey Feed & Seeds, Inc. promising to pay for the seed purchased in the spring with bushels of grain harvested in the fall.
D) An oral promise to pay to the order of Manny $800 on demand.

Question 35

A holder in due course:

A) inherits whatever claims and defenses arise out of the contract between the issuer and payee.
B) has an automatic right to receive payment for a negotiable instrument unless the issuer can claim a valid defense.
C) has a right of payment dependent upon the relationship between the issuer and payee.
D) has a status that increases the value of an instrument but does not change the probability of being paid on the instrument.

Question 36

Negotiation means an instrument has been transferred:

A) to another.
B) to someone by the issuer.
C) to the holder by someone other than the issuer.
D) by the issuer to a holder in due course.

Question 37

If a bank wrongfully dishonors an authorized check,the bank is:

A) liable to the customer for all actual damages proximately caused by the dishonor.
B) not liable to the customer for consequential damages.
C) liable to the payee for actual and consequential damages proximately caused by the dishonor.
D) liable to any party injured by the dishonor.

Question 38

On December 4,Quentin signed a promissory note prepared by Landers Finance for $1,200.The preprinted form used by Landers stated the amount,plus interest,was due and payable in six months.On the line of the form that specified repayment terms,Landers had typed in that the note was due and payable by June 30 of the following year.How would this ambiguity be resolved?

A) A new note would have to be negotiated and drawn up since the payment terms are contradictory.
B) The June 30 date would be effective because, if terms in a negotiable instrument contradict each other, typed terms win over pre-printed terms.
C) The June 30 date would be effective because, if terms in a negotiable instrument contradict each other, the term that favors the consumer takes precedence.
D) The six-month date would be effective because, if terms in a negotiable instrument contradict each other, the pre-printed terms win over typed or handwritten terms.

Question 39

Sophie issues a promissory note made "payable to the order of Molly." Molly indorses the note by signing her name and gives the note to Dana.Which of the following is correct?

A) Sophie issued a bearer instrument and Molly kept it in bearer form.
B) Sophie issued an order instrument, but Molly changed it to bearer form.
C) Sophie issued an order instrument and Molly kept it in order form.
D) Sophie issued a bearer instrument and Molly changed it to order form.

Question 40

To complete some home repairs,Kenton purchases several power tools from Quality Plus by borrowing money from QP Sales Finance,an affiliate of Quality Plus.The promissory note Kenton signs:

A) must contain an FTC notice which prevents a holder of the note from being a holder in due course.
B) must set forth in the instrument that it is not valid if the borrower's signature is forged or if the borrower's debts are subsequently discharged in bankruptcy.
C) will allow the holder to be a holder in due course since it is a negotiable instrument.
D) is the result of an illegal credit contract because a lender must be independent of the seller of goods.

Question 41

On March 26,Janet wrote a $3,200 check to Legend Travel Agency.If the check is presented for payment the following January,should the bank pay the check? Explain the bank's obligations under these circumstances.

Question 42

On February 23,Ginny wrote a check for $436 to Framer Home Improvement as a deposit on some windows.When will the check be overdue? What is the effect of the check's being overdue? What is the effect if the check is stamped "Insufficient Funds" by Ginny's bank?

Question 43

Al has authorized the payment of his cell phone bill through electronic fund transfer each month.In July,the bank's system malfunctions,preventing the usual transfer.Discuss the effect of the malfunction on Al's obligations.

Question 44

Hammer bought a tool set from Weekend Projects,Inc.and signed a consumer credit contract promising to pay for the tool set in 12 monthly installments.Weekend promptly negotiated the instrument to its affiliate Easy Finance Co.in exchange for a discounted payment.Easy Finance gave value for the instrument,in good faith,and without knowledge of any defects or claims against the instrument.The tool set was defective and therefore Hammer stopped making the monthly payments.Easy Finance sues Hammer for the balance due on the instrument.Can Hammer raise the defense of breach of the implied warranty of merchantability against Easy Finance? Discuss.

Question 45

Russ wrote a check to buy some motors from Sam's Small Engine Shop.Before the check was cashed,Russ stopped payment on it because he found out the motors were not powerful enough for his needs and he was going to return them.The bank negligently paid the check over the stop payment order.Discuss what makes a stop payment order valid,including the length of time for which a stop payment order is effective,and whether a bank has liability for paying a check over a stop payment order.