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Name:
Class:
Date:
Ch 22 Negotiable Instruments
1. Commercial paper is a contract to pay money.
a.
True
b.
False
2. A possessor of non-negotiable paper has the same rights as the person who made the original contract.
a.
True
b.
False
3. There are three parties on a promise instrument: the maker, the drawee, and the payee.
a.
True
b.
False
4. To be negotiated, bearer paper must simply be delivered to the recipient.
a.
True
b.
False
5. 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.
a.
True
b.
False
6. 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.
a.
True
b.
False
7. Personal and real defenses are valid against an ordinary holder, only real defenses can be used against a holder in due
course.
a.
True
b.
False
8. 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.
a.
True
b.
False
Name:
Class:
Date:
Ch 22 Negotiable Instruments
9. Warranty liability is the liability of someone who gives payment on a negotiable instrument.
a.
True
b.
False
10. Nelson writes Leah a check for mowing his lawn. Leah deposits the check in her bank, but it is not paid by Nelson’s
bank. Leah calls Nelson to notify him that her bank returned his check to her unpaid. Leah’s notice of the dishonor is
insufficient; she must provide written notice.
a.
True
b.
False
11. Drawers and indorsers are secondarily liable on negotiable instruments.
a.
True
b.
False
12. A drawee has primarily liability on a draft.
a.
True
b.
False
13. Assume that Joel signs a promissory note to Andrew, who in turn negotiates the instrument to Luke. Of the three, Joel
is the only person who has primary liability.
a.
True
b.
False
14. Lance indorses a promissory note to Connie in exchange for consideration. Unknown to Lance, the note is not good
because the maker's signature was forged. Connie later attempts to present the instrument for payment to the original
alleged maker, Lilly, who is able to deny liability for payment due to the forged signature. Connie may later sue Lance for
breach of a transfer warranty.
a.
True
b.
False
15. An indorser who writes "without recourse" above her signature on a negotiable instrument is not liable for payment.
a.
True
b.
False
16. 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.
Name:
Class:
Date:
Ch 22 Negotiable Instruments
d.
is used in relation to commercial paper only to indicate the bank which creates a certificate of deposit.
17. 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.
18. 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 bearer form.
19. The section of the UCC that governs negotiable instruments is:
a.
Article 3.
b.
Article 2.
c.
Article 6.
d.
Article 9.
20. 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.
21. 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.
22. Which of the following would be notice of an overdue instrument?
a.
Taking a demand instrument after a request for payment is made.
b.
Taking an instrument one day after the due date.
c.
Taking a check 91 days after its issue date.
Name:
Class:
Date:
Ch 22 Negotiable Instruments
d.
All of the above illustrate overdue instruments.
23. In good faith, Clinton gave Jane $500 for a negotiable promissory note made out to Jane for $550. She needed some
money before the due date on the note, and Clinton had no notice of outstanding claims or other defects of the note.
Clinton:
a.
has more rights than Jane.
b.
has the same rights as Jane.
c.
has only conditional rights because they depend on Jane’s rights.
d.
cannot transfer the note to anyone else.
24. Which of the following can be negotiable?
a.
A promissory note that states, "Pay to Floyd Burchett $3000 on September 1, 2015."
b.
A check written on the standard check form that does not state the date it was issued.
c.
A promissory note from Farmer Douglas to Hainey 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 Justin $500 on demand.
25. 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.
26. 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.
Fraud in the inducement.
27. 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 the above are correct.
28. 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.
29. Felicia, an elderly woman, does not speak or read English well. Felicia is a recent immigrant to this country. A
dishonest immigration officer tells Felicia to sign several documents as being necessary to maintain her legal alien status.
Unknown to Felicia, she signs a promissory note. The immigration officer thereafter sells the note to Neighborhood Bank,
a holder in due course, who goes after Felicia for payment of the note. Felicia's defense to the Neighborhood Bank is:
a.
fraud in the inducement; a real defense.
b.
fraud in the execution; a real defense.
c.
unauthorized completion; a personal defense.
d.
breach of contract; a real defense.
30. Verne has possession of a draft that has been validly negotiated to him. His payment process necessarily includes:
a.
presentment of the draft, dishonor, and notice of dishonor.
b.
exhibiting the instrument, showing reasonable identification, and surrendering the draft if it is paid in full.
c.
exhibiting the draft, providing a thumbprint signature, and giving a receipt.
d.
suspending the underlying debt, applying the shelter rule, and making a demand for payment.
31. When a negotiable instrument is transferred, the transferor warrants all EXCEPT:
a.
that the transferor is a holder in due course of the instrument.
b.
all signatures are authentic.
c.
as far as she knows the issuer is solvent.
d.
the instrument has not been altered.
32. Grace signed a check in the lower right-hand corner and Hannah signed on the back. The presumption is that:
a.
Grace is the issuer.
b.
Grace is the acceptor.
c.
Hannah is the drawer.
d.
Hannah is the maker and Grace is an indorser.
33. An accommodation party on a negotiable instrument:
a.
must receive consideration.
b.
is secondarily liable on the instrument.
c.
is the same as a “guarantor” under the UCC.
d.
has the same liability to a holder as the person for whom he signed.
Name:
Class:
Date:
Ch 22 Negotiable Instruments
34. Mona co-signs a promissory note with her daughter Beth so Beth can purchase her first car. Mona will be discharged
from her obligation on the note:
a.
if Beth pays the obligation in full under the terms of the note.
b.
only if Mona pays half of the value of the note.
c.
when Beth turns 18.
d.
only if Mona dies before Beth’s obligation is discharged.
35. John is a holder in due course of a check. John goes to the drawee bank, Last Chance Bank, to cash the check. What is
the liability of Last Chance?
a.
Last Chance Bank is primarily liable on the check.
b.
Last Chance Bank is not primarily liable on the check until it accepts the check.
c.
Last Chance Bank is secondarily liable on the check.
d.
Last Chance Bank is not secondarily liable on the check until it accepts the check.
36. Cecilia made a check out to Gideon for $15. Gideon fraudulently changed the check to read $150, and cashed it at
Corner Bank. Is Cecilia discharged from liability on the check?
a.
Yes, Cecilia owes nothing on the check because alteration of a check is a real defense and real defenses are
good even against holders in due course.
b.
No, Cecilia pays $150 because of the impostor rule.
c.
No, Cecilia pays $150 because she in not an indorser or accommodation party.
d.
Yes, Cecilia owes nothing unless Corner Bank is a holder in due course in which case she owes the original
$15.
37. To pay for a minor repair, May writes a check for $50 to David, who indorses the check in blank and gives it to his
sister, Glenda, for her birthday. She indorses the check in blank and gives it to her trash collector to pay her quarterly bill.
Which of the following is correct?
a.
David made transfer warranties to Glenda and to her trash collector.
b.
David did not make transfer warranties to Glenda because Glenda gave no consideration for the transfer of the
check to her.
c.
Neither David nor Glenda made any transfer warranties because they indorsed the check with blank
indorsements, making the check bearer paper.
d.
The trash collector must wait until the check is dishonored before making a transfer warranty claim against
Glenda.
38. Jessie is the maker of a $1000 promissory note in favor of Tyler. Tyler subsequently indorses the note to Ryan by
signing just his name. Ryan in turn indorses it to Breanna by indorsing the back of the note, "Without recourse, Ryan."
Breanna then indorses it to Liz, the present holder, with a special indorsement.
If the note is dishonored by Jessie after it is properly presented to her for payment by Liz, then Liz, after giving timely
notice to Tyler, Ryan, and Breanna, may collect payment under signature liability from:
a.
Tyler only.
Name:
Class:
Date:
Ch 22 Negotiable Instruments
b.
Breanna and Tyler only.
c.
either Tyler, Ryan, or Breanna.
d.
neither Tyler, Ryan, nor Breanna.
39. To be negotiable, a check must be in writing. Under the UCC, a check:
a.
must be written on standard size paper of 6" × 2.5".
b.
must be written on an official bank form.
c.
need not be on any official form or even on paper.
d.
Both a and b are requirements for a negotiable check.
40. 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 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 can:
a.
collect if it is a holder in due course.
b.
collect if it is not a holder in due course.
c.
collect whether or not it is a holder in due course.
d.
not collect.
41. Discuss the effect on an instrument of: (a) contradictory amounts between the numerals and amount written in words
on a check; (b) the interest rate left blank on a promissory note; and (c) contradictory terms that are typed onto a
promissory note and terms that are preprinted on the note form.
42. On March 1 Donna wrote a check for $296 to Sun Services. 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 Donna’s bank?
43. It was payday. Navidida decided to run some errands and then deposit her check in the bank over her lunch hour. So
that she wouldn't have to spend too long at the bank, Navidida indorsed the back of the paycheck as follows, "Navidida
Jones," before leaving work. While window shopping, Navidida lost the check. Roger finds Navidida's paycheck.
(A)
Will Roger be able to cash Navidida's check?
(B)
How could have Navidida indorsed the check so that she would not have to be
concerned about losing the check?
Name:
Class:
Date:
Ch 22 Negotiable Instruments
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 this personal
defense (breach of implied warranty of merchantability) against Easy Finance? Discuss.
45. Explain when presentment warranties apply. Identify the presentment warranties on a check and a promissory note.
46. List the warranties a transferor of a negotiable instrument makes.
