Chapter 21
Negotiable Instruments:
Transferability and Liability
N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows.
N A question new to this edition of the Test Bank.
+ A question modified from the previous edition of the Test Bank,
= A question included in the previous edition of the Test Bank.
TRUE/FALSE QUESTIONS
1. A time draft is payable on sight.
2. A personal check cannot be a negotiable instrument.
3. On a trade acceptance, the drawer is also the payee.
4. A promissory note can be a negotiable instrument.
5. A signature must be the full name of a party.
6. Rubber stamp signatures can be legally binding signatures.
7. An instrument that states simply “I.O.U.” is not negotiable.
8. Stating on an instrument the underlying terms of an agreement renders the
instrument nonnegotiable.
9. To be negotiable, an instrument must be payable in a fixed amount.
10. An instrument payable “with ten hours of services” is negotiable.
11. Instruments that say nothing about when payment is due are payable on
demand.
12. A check is not negotiable if it is payable on demand.
CHAPTER 21: NEGOTIABLE INSTRUMENTS: TRANSFERABILITY & LIABILITY 3
13. A maker of an instrument that is payable at a definite time does not have the
option of paying before the stated date.
14. A bearer instrument is an instrument that does not designate a specific payee.
15. A check “payable to the order of bearer” is neither an order instrument nor a
bearer instrument.
16. An instrument “payable to bearer” is transferable but not negotiable.
17. An instrument “payable to bearer” is negotiated by delivery.
18. A special indorsement names the indorsee.
19. A holder takes an instrument for value if he or she gives a check as payment
for it.
20. A promise to give value in the future is sufficient to confer the rights of an HDC
on one in possession of a negotiable instrument.
21. The good faith requirement applies to both the holder and the transferor.
22. A person who acquires an instrument knowing that the instrument contains an
unauthorized signature can still be afforded HDC protection.
23. A person cannot become an HDC if a defense against payment is apparent on
the face of the instrument.
24. Primary liability is unconditional.
25. The drawee who signs a draft or check is not primarily liable to any subsequent
holders.
26. When an instrument is dishonored, only written notice is sufficient to hold
secondary parties liable.
27. When an instrument has a forged indorsement, the loss usually falls on the
party whose indorsement was forged.
28. A drawer who is induced by an imposter to issue a check in the name of an
impersonated payee can avoid payment on the check to an innocent holder.
29. A fictitious payee is a payee on a negotiable instrument whom the maker or
drawer does not intend to have an interest in the instrument.
30. A person who transfers an instrument for consideration makes certain
warranties to the transferee.
31. Universal defenses are good against all holders except HDCs and holders through
HDCs.
32. An ordinary holder can recover nothing on an instrument that has been materially
altered.
33. Discharge in bankruptcy is no defense on any instrument regardless of the status of
the holder.
34. Personal defenses are used to avoid payment to an ordinary holder of a negotiable
instrument, but not to an HDC or a holder through an HDC.
35. When there is a breach of an underlying contract for which an instrument was
issued, the maker of a note can refuse to pay it.
MULTIPLE CHOICE QUESTIONS
1. On April 1 Richard arranges to buy a sixteen-speed bike from his neighbor Phil
for $500. Phil agrees to deliver the bike on May 1. Richard writes a draft for
$500 payable to Phil on May 1. In this situation, the draft is a
a. certificate of deposit.
b. time draft.
c. sight draft.
d. promissory note.
2. To obtain office supplies for All-Care Medical Clinic, Britney executes a draft in
favor of Chris. A draft is
a. a conditional promise to pay money.
b. an unconditional written order to pay money.
c. a qualified promise to set aside a sum of money.
d. a restricted promise to deliver goods at a future date.
3. InterComp normally sells $50,000 worth of software to Power Source, a retail
electronics store, each summer on terms requiring payment in sixty days. One
year, InterComp wants cash, but Power Source wants the usual sixty days. To
meet both needs, the parties can arrange
a. a certificate of deposit.
b. a bearer bond.
c. a trade acceptance.
d. an international letter of credit.
4. Sarah has a checking account at Secure Bank. Sarah buys her roommate
Sophie’s two tickets to a Broadway musical for $200. Sarah writes Sophie a
check for the tickets. In this situation, Secure Bank is the
a. drawee.
b. indorser.
c. payee.
d. drawer.
5. To obtain a business license, Bess writes a check to a certain state agency.
Bess is
a. the drawee.
b. the drawer.
c. the indorser.
d. the payee.
6. Alpha Company issues a trade acceptance with itself and Beta Company as
parties. A trade acceptance is
a. a draft.
b. an order to accept delivery of money.
c. a promise to accept delivery of goods.
d. a promise to deliver goods.
7. If a bank is both the drawer and the drawee with regard to a draft, then the draft
is a
a. certificate of deposit.
b. cashier’s check.
c. nonnegotiable instrument.
d. promissory note.
8. Willy deposits $5,000 with Home State Bank on July 1, 2012. Home State Bank
promises to repay Willy the $5,000 plus 3 percent annual interest on July 1,
2017. Home State Bank has issued Willy a
a. certificate of deposit.
b. cashier’s check.
c. trade acceptance.
d. draft.
9. Ron signs an instrument using an “R” with a circle 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.
10. To borrow money to finance the start-up of his business, Bob executes an
instrument in favor of City Bank. For the instrument to be negotiable, the
signature must be
a. anywhere on the instrument.
b. anywhere on the lower half of the instrument only.
c. in the lower left-hand corner of the instrument only.
d. in the lower right-hand corner of the instrument only.
11. 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.
12. 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.
13. Kris wants one of Jasmine’s purebred Persian kittens. Kris signs an instrument
in which she promises to pay Jasmine for a kitten. The instrument will be
negotiable if it is payable in
a. goods of equal market value.
b. money.
c. any of the choices.
d. shares in stock.
14. Maria signs an instrument payable to the order of National 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.
15. Ralph signs an instrument promising to pay a total of $10,000 to Martha in
$1,000 monthly installments with the final payment being made on August 1.
Ralph unexpectedly inherits $10,000 from his aunt on May 15. Ralph may
a. not complete his $10,000 payment before August 1.
b. complete his $10,000 payment before August 1.
c. increase his monthly payments by five percent, but not more.
d. increase his monthly payments by ten percent, but not more.
16. 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.
17. Efron transfers an instrument to First Citizens Bank. This is not a negotiation
unless
a. the parties bargained over the amount paid for the instrument.
b. the transfer is an assignment.
c. the instrument is a negotiable instrument.
d. the transfer includes rights under a contract.
18. To buy a stuffed cow, Ken executes a check “pay to Laura or bearer” and gives
it to Laura, who does not own a stuffed cow. This check is
a. negotiable.
b. nonnegotiable, because it does not indicate a specific payee.
c. nonnegotiable, because it may be a joke.
d. nonnegotiable, because Laura does not own a stuffed cow.
19. At 1 A.M., on the sidewalk in front of Ace Credit Corporation, which is closed,
Ben buys a $500 promissory note for $50 from Curt. When presented with
Ben’s demand for payment, Diann, the maker of the note, could successfully
claim that Ben
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.
20. Entrepreneur Auto Rentals owes Sole Saver Auto Dealership $2,000.
Entrepreneur executes a note to Sole Saver 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.
21. Jeff’s grandmother is the payee of a promissory note for $7,500. Jeff’s
grandmother gives Jeff the note for his sixteenth birthday. Jeff is
a. an HDC.
b. not an HDC, because he received the note as a gift.
c. not an HDC, because he is a minor.
d. not an HDC, because the note was for less than $10,000.
22. 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.
23. Muni Investment Company signs a check payable to Enterprise Lenders, Inc.,
to buy a promissory note executed by Fallow 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.
24. 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 the instrument is a bearer instrument.
25. Elinor performs ten hours of house cleaning for Zack in exchange for a
promissory note for $400. At the time that Elinor accepts the note, she is aware
that bankruptcy proceedings are being filed against Zack. Elinor
a. can obtain HDC status.
b. cannot obtain HDC status, because she knows that there are bankruptcy
proceedings against Zack.
c. cannot obtain HDC status, because she did not fulfill the value
requirement.
d. cannot obtain HDC status, because she did not fulfill the good faith
requirement.
26. Wilson buys a promissory note from Oli. The note is due on December 5.
December 5 is a Sunday. The note is
a. payable anytime the week of December 6.
b. payable December 6.
c. payable on December 5 only.
d. defective.
27. Dewey is the payee for a check written by Fred. Cash Credit Corporation
(CCC) accepts the check from Dewey as part of a payment. CCC cannot
become a HDC if
a. the check has been transferred more than once.
b. the check has been outstanding for one week.
c. the check has been outstanding for more than ninety days.
d. there are bankruptcy proceedings against Fred.
28. Stature Loan Company has notice that a promissory note is overdue if the note
is a demand instrument and Stature takes it
a. an unreasonable time after its due date.
b. before its due date.
c. on its due date.
d. without noticing its due date.
29. 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.
30. Biff signs a note “payable to the order of County Credit Union.” Unless Biff has
a valid defense against payment, Biff’s liability on this note is
a. nothing.
b. primary.
c. secondary.
d. conditional.
31. Ada is the maker of a note, on which Bart is secondarily liable. Cash & Credit
Company (C&C) is the current holder of the note. Bart will be obligated to pay
the note if
a. Ada defaults on the note.
b. C&C breaches a transfer warranty.
c. C&C negotiates the note to Delta Collection Agency, a third party.
d. C&C presents the note for payment.
32. Jackson pays Phil in good faith for a promissory note. Phil warrants that the
draft has not been altered. This warranty is a
a. presentment warranty.
b. consideration warranty.
c. conditional warranty.
d. fixed warranty.
33. Cash National Bank is an HDC of a note for $1,000 on which there is the forged
signature of “Dudley.” If sued on the note by Cash
a. Dudley must pay the note.
b. Dudley’s best defense would be fraud in the execution.
c. Dudley’s best defense would be material alteration.
d. Dudley’s best defense would be forgery.
34. Opalina asks Paolo, who does not understand English, to sign what Opalina says is
an application to open a bank account. In fact, the “application” is a note. If sued on
the note by an HDC
a. Paolo must pay the note.
b. Paolo’s best defense would be fraud in the execution.
c. Paolo’s best defense would be fraud in the inducement.
d. Paolo’s best defense would be mistake.
35. Burt, a mentally impaired person, is asked by Carl to sign a piece of paper that Carl
says is an autograph book. In fact, the document is a note. If later sued on the note
by an HDC
a. Burt must pay the note.
b. Burt’s best defense would be fraud in the execution.
c. Burt’s best defense would be fraud in the inducement.
d. Burt’s best defense would be mistake.
ESSAY QUESTIONS
1. Eppie gives a check to Fund Investments to buy 100 shares of stock in GR8
Tech Corporation for Eppie. The price of the shares is constantly fluctuating.
Fund Investments asks Eppie to leave the amount of the check blank and allow
it to fill in the price when making the purchase. Eppie agrees. Fund
Investments 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 Hasty
Accounting Services, which takes the check in good faith and without notice of
Fund Investments’ act. Hasty later learns that Fund Investments was not
authorized to fill in the check for $1,000 over the price. Is Hasty an HDC? If so,
for how much?
2. Commercial Credit Company has in its possession an instrument dated May 1,
2012. The instrument is payable to the order of Alpha Company “on June 1,
CHAPTER 21: NEGOTIABLE INSTRUMENTS: TRANSFERABILITY & LIABILITY 19
2013,” for $5,000. In the upper left corner is an address for Beta Corporation—
10 Corporate Park Avenue, Chicago, Illinois—and in the lower right corner is
the signature of “Delta, Inc., By Eve, President.” In the lower left corner is
stamped “ACCEPTED: Beta Corporation by Frank, President, May 5, 2012.”
On the back is the signature of “Alpha Company By Gail, 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?