CHAPTER 14 – NEGOTIABLE INSTRUMENTS
TRUE/FALSE
1. Commercial paper is a system to transfer money.
2. A possessor of non-negotiable paper has the same rights as the person who made the original contract.
3. There are three parties on a promisory note: the maker, the drawee, and the payee.
4. To be negotiated, bearer paper must simply be delivered to the recipient.
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 Pete’s name and give it to him.
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.
7. Personal and real defenses are valid against an ordinary holder, only real defenses such as forgery,
incapacity or duress can be used against a holder in due course.
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.
9. Warranty liability is the liability of someone who gives payment on a negotiable instrument.
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.
11. Drawers and indorsers are secondarily liable on negotiable instruments.
12. A drawee has primary liability on a draft.
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.
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.
15. An indorser who writes “without recourse” above her signature on a negotiable instrument is not liable
for payment.
MULTIPLE CHOICE
1. 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.
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.
3. 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.
4. The section of the UCC that governs negotiable instruments is:
a.
Article 3.
b.
Article 2.
c.
Article 6.
d.
Article 9.
5. 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.
6. 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.
7. 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 100 days after its issue date.
d.
All of the above illustrate overdue instruments.
8. 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.
9. 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.
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.
11. Sprock is a holder in due course on an instrument apparently 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.
12. 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 for his agreement to handle
his upcoming 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.
13. 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.
14. 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.
forgery
b.
fraud
c.
duress
d.
incapacity
15. 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.
16. 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.
17. 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; Hannah is an indorser.
b.
Grace is the acceptor; Hannah is an indorser.
c.
Hannah is the drawer; Grace is the acceptor.
d.
Hannah is the maker; Grace is an indorser.
18. An accommodation party on a negotiable instrument:
a.
must receive consideration.
b.
is secondarily liable on the instrument.
c.
is the same as a co-maker.
d.
has the same liability to a holder as the person for whom he signed.
19. 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.
20. 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.
21. 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.
22. 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.
23. 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.
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.
b.
Breanna and Tyler only.
c.
either Tyler, Ryan, or Breanna.
d.
neither Tyler, Ryan, nor Breanna.
24. 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.
d.
Both a and b are requirements for a negotiable check.
25. 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.
ESSAY
1. Discuss the effect on an instrument of: contradictory amounts between the numerals and amount
written in words on a check.
2. 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?
3. 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?
4. 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.
5. Explain when presentment warranties apply. Identify the presentment warranties on a check and a
promissory note.
ANS:
the instrument; no indorsement is necessary. Roger is a holder of the check and could
cash it.
deposited into her account. Roger would not have been able to cash it or deposit it into
his own account.
6. List the warranties a transferor of a negotiable instrument makes.