1. There are two types of commercial paper: express and implied.
a.
True
b.
False
2. Commercial paper is a contract to pay money.
a.
True
b.
False
True
Easy
3. A possessor of non-negotiable commercial paper has the same rights as the person who made the original contract.
a.
True
b.
False
True
Moderate
4. There are three parties on a promissory note: the maker, the drawee, and the payee.
a.
True
b.
False
False
Easy
5. To be negotiated, bearer paper must simply be delivered to the recipient.
a.
True
b.
False
True
Moderate
6. 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
False
False
Easy
7. A draft is always a check, but a check is not always a draft.
a.
True
b.
False
False
Moderate
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.
a.
True
b.
False
9. 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
10. With non-negotiable commercial paper, a transferee’s rights are conditional.
a.
True
b.
False
True
Moderate
11. Tyron purchased a $2900 promissory note from Jared for the discounted amount of $2500. 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 $2900
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.
a.
True
b.
False
Moderate
12. 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
True
Moderate
13. 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
True
Moderate
14. Trisha loaned Brian $600 evidenced by a promissory note. When Brian paid off the loan, he did not ask Trisha for the
note. She sold it to Carin, a holder in due course. Brian does not have to pay Carin since he already paid Trisha the full
$600.
a.
True
b.
False
False
Moderate
15. A claim in recoupment can be used against a holder in due course.
a.
True
b.
False
False
Easy
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.
d.
is used in relation to commercial paper only to indicate the bank which creates a certificate of deposit.
False
Moderate
17. Generally, Rita signs her name using an infinity symbol rather than her legal name. Rita signed an instrument using
this symbol. Which statement is correct?
a.
The instrument cannot be negotiable. To be a negotiable, the instrument must be signed in Rita’s legal name.
b.
The instrument cannot be negotiable. To be negotiable, the instrument must be signed in Rita’s given name.
c.
The instrument cannot be negotiable. To be negotiable, the instrument must be signed using letters from the
alphabet.
d.
The instrument can be negotiable. Rita intended to indicate her signature.
Moderate
Bloom’s: Comprehension
18. 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.
Moderate
Bloom’s: Comprehension
19. Valley National Bank issued a note promising to repay an investor on October 1, 2011, three years from the date of
issue, plus interest. The note
a.
is a certificate of deposit, and it will pay a lower rate of interest than a regular savings account at Valley.
b.
is a certificate of deposit, and it will pay a higher rate of interest than a regular savings account at Valley.
c.
is a certificate of deposit, and whether the bank pays a higher or lower rate of interest than it pays on its
regular savings accounts depends upon particular bank policy.
d.
constitutes a trade acceptance.
Moderate
Bloom’s: Comprehension
20. Hayden owes Luther $5000. 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
$5000 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.
Easy
Bloom’s: Knowledge
21. 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.
Bloom’s: Comprehension
22. 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.
must be written on a pre-printed bank issued check.
Bloom’s: Knowledge
23. The section of the UCC that governs negotiable instruments is
a.
Article 3.
b.
Article 2.
c.
Article 6.
d.
Article 9.
Bloom’s: Knowledge
24. 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.
Bloom’s: Comprehension
25. A “holder” of order paper can be described as
Bloom’s: Application
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.
26. A bank that draws a check on itself has issued
a.
a special indorsement.
b.
a claim in recoupment.
c.
a certificate of depsosit.
d.
a cashier’s check.
Bloom’s: Knowledge
27. George’s Wholesaling agrees to purchase 1000 pounds of bananas from Chickadee Exports at 39 cents per pound.
George’s does not have the money for the bananas now, but promises to pay in two months. Chickadee Exports wants
George’s business but needs the money now. Chickadee (as drawer) prepares an instrument ordering George’s (as drawee)
to pay $390 to Primary Bank (the payee). This is an example of
a.
a check.
b.
a trade acceptance.
c.
a promissory note.
d.
an outstanding claim.
28. 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.
Bloom’s: Comprehension
29. Lucky loses in a high-stakes poker game to Fat Chance. To pay his debt, Lucky writes a check to Fat Chance, who
negotiates the check to Convenient, who then tries to cash the check at Lucky’s bank. Lucky has already stopped payment
on the check, so the check is not honored by her bank. Convenient then tries to collect the check by suing Lucky. High-
Bloom’s: Comprehension
stakes poker games are illegal in this state. Which statement is correct?
a.
If Convenient can demonstrate that he is a holder in due course, he will prevail.
b.
If Convenient can demonstrate that he was a buyer in the ordinary course of business, he will prevail.
c.
If Convenient can demonstrate that he gave value without notice, he will prevail.
d.
Convenient will not prevail.
30. 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.
Moderate
Bloom’s: Comprehension
31. 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.
Moderate
Bloom’s: Comprehension
32. 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
Moderate
Bloom’s: Comprehension
AACSB Reflective Thinking
33. 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
Moderate
Bloom’s: Application
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.
34. 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.
Moderate
Bloom’s: Comprehension
35. 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 immigration
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.
36. 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.
Moderate
Bloom’s: Application
37. Laurel Speckle received a check from State University. She indorsed the check as follows: “For Deposit only, /s/
Laurel Speckle.” Laurel’s indorsement is a(n)
a.
blank indorsement.
b.
special indorsement.
c.
restrictive indorsement.
d.
improper indorsement.
38. In June, The Seascape Gallery sells an oil painting to Collegiate Systems, Inc. Collegiate promises to pay for the
painting in three months. The gallery prepares a draft ordering Collegiate Systems to pay $3,000 to First Bank on
September 15. Collegiate Systems signs the draft. The draft is a
a.
sight draft.
b.
time draft.
c.
trade draft.
d.
future draft.
Moderate
Bloom’s: Comprehension
39. 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.
Brightly cannot be a holder in due course because once an action of fraud is discovered, no additional claims
against that party can be sought.
40. 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 or printed onto a
promissory note and terms that are handwritten.
judgment rate applies. The judgment rate is the rate that courts use on court-ordered judgments. In
situation (c), handwritten terms prevail over typed and printed terms.
Moderate
Moderate
Bloom’s: Comprehension
41. TriColor purchased an industrial stamping machine from Vicy, Inc. TriColor paid for the machine with a negotiable
note. The note was payable to the order of Vicy, Inc. Vicy, Inc. indorsed the note and gave it to CCLoans to satisfy a debt.
CCLoans knew nothing about the contract between TriColor and Vicy, Inc. CCLoans indorsed the note and gave it to
Great River Youth Club as a charitable donation. When Great River Youth Club presented the note for payment on its due
date, TriColor refused to pay, claiming that the stamping machine was defective.
(A)
Is Great River Youth Club a holder in due course?
(B)
Will TriColor be able to avoid liability to Great River Youth Club on the basis that the
machine was defective?
that the holder must give value for the instrument. Great River Youth Club did not give value for
the note. It was a gift to the organization.
the note. The defense that the machine was defective, a breach of contract, is a personal defense.
TriColor will have to pay the amount of the note to Great River Youth Club.
Bloom’s: Analysis
42. 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?
A check is order paper. To negotiate order paper, the instrument must be indorsed and then delivered to
the transferee. Thus, Alistar needs to sign the check on the back and give it to Totally Tough.
Moderate
Bloom’s: Comprehension
43. 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?
Moderate
Bloom’s: Comprehension
44. 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?
Bloom’s: Comprehension
45. 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?