Deck 15: Negotiable Instruments

Question 1

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 signed by the payee.
C)The instrument must be conditional.
D)The instrument must state a definite sum of money.

Answer 1

D

Question 2

A possessor of non-negotiable commercial paper has the same rights as the person who made the original contract.

Answer 2

True

Question 3

The term "issuer"

A)is not used in relation to commercial paper.
B)is an all-purpose term that means both maker and drawer.
C)is synonymous with drawee.
D)is used in relation to commercial paper only to indicate the bank which creates a certificate of deposit.

Answer 3

B

Question 4

In which case would the holder in due course not receive payment?

A)Nineteen-year-old Dylan signs a promissory note to pay $500 to Alice and hands her the note.
B)Ricardo forges Amberly's name to a promissory note and sells it to Divine.
C)Yoko borrows money from Carole and signs a promissory note to repay the amount with interest.
D)All of these are correct.

Question 5

To be negotiated, bearer paper must simply be delivered to the transferee.

Question 6

An indorsement is the signature of the

A)drawer.
B)payer.
C)issuer.
D)payee.

Question 7

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 strike out her name on the front of the check, write in Felix's name, and give it to him.

Question 8

A & D, Inc. wrote a negotiable note payable to Vicy, Inc. for the purchase of some satellite receivers. A & D left the amount of the note blank because it was uncertain as to amount of the applicable tax. Vicy completed the note for $3,000 more than A & D actually owed for the receivers it purchased. The note was negotiated to a holder in due course. A & D will not have to honor the note as this constituted fraud in the execution.

Question 9

Which is an unconditional order to pay?

A)"I will pay $5,000 for the painting."
B)"I will pay $2,500 for the truck if it is still running."
C)"I will pay $400 if I have the money by Friday."
D)All of these are correct.

Question 10

Maia wrote a check which said, "Pay to the order of Kevin Mathews $10.97." The next line of the check stated, "One thousand ninety-seven Dollars." In applying the rules of interpretation, how much should the drawee pay?

A)Nothing; when the instrument is ambiguous it is declared non-negotiable.
B)Ten dollars and 97 cents. Numbers control over words.
C)One thousand, ninety-seven dollars or $1,097.00. Words control over numbers.
D)Parol evidence would be needed to determine the purpose of the check.

Question 11

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 12

Charlene Brown has possession of a check made out to the order of Charlene Brown (herself)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 "real" defenses to payment. Charlene has an unconditional right to be paid for the check.

Question 13

There are three parties on a promissory note: the maker, the drawee, and the payee.

Question 14

Which statement about notes and drafts is accurate?

A)With a draft, two people are involved: drawer and drawee.
B)With a note, you order someone else to pay.
C)With a note, two people are involved: maker and payee.
D)With a draft, you make a promise that you will pay.

Question 15

Value means that the holder of an instrument

A)has already done something in exchange for the instrument.
B)cannot transfer the instrument to another person.
C)is not in physical possession of the instrument.
D)believes the transaction was honest in fact.

Question 16

Under the UCC, a holder in due course is a holder who has given value for the instrument. Which of the following holders have given value for the instrument?

A)Beth promises to paint the neighbor's house in exchange for a promissory note as an advance payment for the job.
B)Steve gives a note and mortgage on his house to his attorney as a retainer to handle his pending divorce.
C)Todd, a newspaper carrier, accepts a properly indorsed two-party check for the past two months of deliveries.
D)All of these are correct.

Question 17

With non-negotiable commercial paper, a transferee's rights are conditional.

Question 18

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

Question 19

Tyron purchased a $2,900 promissory note from Jared for the discounted amount of $2,500. Tyron paid value, in good faith and without notice of any outstanding claims against this promissory note that read, "Pay to the order of Jared $2,900 on July 1, 2009, for the purchase of a 2001 Ford Taurus provided no major problems with the car arise prior to said payment date." Tyron is a holder in due course of a negotiable note.

Question 20

A "holder" of order paper can 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 him.
D)the first party to come in contact with a negotiable instrument.

Question 21

Tim buys a high-powered tool from Binford Tools to use on the construction of his own garage. Binford Tools provides a full warranty on the tool for the first six months. To pay for the tool, Tim signs a negotiable promissory note which contains the FTC Consumer Credit Notice. Binford properly negotiates the note to First Finance. Within three weeks, the tool stops working and Binford refuses to repair or replace it. In the meantime, First Finance demands payment from Tim. Under the Federal Trade Commission rules, this consumer credit situation means First Finance

A)can collect if it is a holder in due course.
B)can collect if it is not a holder in due course.
C)can collect whether or not it is a holder in due course.
D)cannot collect.

Question 22

Discuss the UCC rules for interpreting ambiguities when the terms in a negotiable instrument contradict each other.

Question 23

Kent Weston wrote a check for $500 payable to the order of Chester Jones. Chester indorsed the back of the check as follows: "Chester Jones." The check is now

A)order paper.
B)bearer paper.
C)a cashier's check.
D)special paper.

Question 24

Matt wrote a $500 check to Alistar for some yard work that Alistar had done. What will Alistar have to do negotiate this instrument to Totally Tough, Inc. in payment for some yard equipment Alistar had bought?

Question 25

The evening news was full of stories about how Levine sold fraudulent negotiable instruments to investors around the country. Two days later, Brighty, who did not hear the news reports, bought some of the fraudulent negotiable instruments from a swindled investor. Can Brighty claim the position of a holder in due course considering the publicity of the scam?

A)Brighty is presumed to have knowledge of the scam and therefore did not purchase the instruments in good faith.
B)Although Brighty passes the subjective test of good faith, he fails the objective test and therefore cannot claim to have purchased the instruments in good faith.
C)Brighty can claim to have purchased the instruments in good faith if he subjectively believed the instruments were valid and if objectively his purchase of the instruments was commercially reasonable.
D)Brighty cannot be a holder in due course because once an action of fraud is discovered, no additional claims against that party can be sought.

Question 26

Because negotiable instruments are more valuable than non-negotiable ones, it is important for buyers and sellers to be able to tell, easily and accurately, if an instrument is indeed negotiable. What six standards must an instrument meet in order for it to be negotiable?