Business Law 2: Exam 2

A restrictive indorsement specifies the purpose of the indorsement or use to be made of the instrument. Which of the following is not a restrictive indorsement? a. "Pay only John Doe." b. "For collection." c. "Pay any bank." d. "For deposit."

a. "Pay only John Doe."

What is the effect of a restrictive indorsement with an ineffective restriction? a. An indorsement that purports to prohibit further transfer of the instrument is given the same effect as unrestricted indorsement. b. An indorsement that purports to prohibit further transfer of the instrument is given the same effect as a restricted indorsement. c. The indorsement would be regarded as an indorsement in trust. d. All of these are correct.

a. An indorsement that purports to prohibit further transfer of the instrument is given the same effect as unrestricted indorsement.

Which of the following debts would be discharged in bankruptcy? a. Consumer credit loans for a stove. b. Alimony payments past due. c. Property taxes on a beach house. d. Student loans maturing one-year prior to bankruptcy filing.

a. Consumer credit loans for a stove.

Those with secondary (conditional) liability do not unconditionally promise to pay the instrument; rather, they engage to pay the instrument if the party expected to pay does not do so. Who are they? a. Indorsers and drawers. b. Acceptors and drawers. c. Makers and indorsers. d. Makers and acceptors.

a. Indorsers and drawers.

The duty of care exercised by a collecting bank in handling an item transferred to it for collection does not include: a. that it must act within a reasonable time after receipt of the bank item. b. taking time to make a physical examination of each item that comes in. c. taking care in selecting intermediary banks. d. taking care in presenting the item.

b. taking time to make a physical examination of each item that comes in.

A certificate of deposit is similar to a promissory note in that: a. the maker is always a bank. b. there are two parties to the transaction. c. the payee of a CD must be paid on demand. d. All of these are correct.

b. there are two parties to the transaction.

Certification is a special type of acceptance consisting of the drawee bank's promise to pay the check when subsequently presented for payment and signified by: a. telling the one who presents it. b. writing the acceptance on the check c. sending a letter to the drawer. d. All of these are correct.

b. writing the acceptance on the check

Which of the following is a type of collateral involving rights evidenced by indispensable paper? a. A certificated security. b. An uncertificated security. c. A security entitlement. d. All of these are correct.

d. All of these are correct

An involuntary petition for bankruptcy can be filed against a: a. non-profit charitable organization. b. life insurance company. c. wheat farmer. d. partnership that invests in real estate.

d. partnership that invests in real estate.

To be effective, a stop payment order must be received in time to provide the bank a reasonable opportunity to act on it. A written order is effective for how long? a. Six months. b. Indefinitely. c. One month. d. One year.

a. Six months

To become a holder in due course, a holder must take the instrument without notice which of the following? a. The instrument is overdue. b. The instrument has a limited indorsement. c. The instrument is given as a security interest. d. None of these are correct.

a. The instrument is overdue.

What party(ies) is/are involved in a suretyship relationship? a. The principal debtor. b. An ancillary bailee. c. Principal bailee. d. All of these are correct.

a. The principal debtor.

If the instrument is bearer paper, how can a person become a holder? a. Transfer of its possession. b. Its indorsement by the appropriate parties. c. All of these are correct. d. None of these are correct.

a. Transfer of its possession.

With the exception of pledges, a security agreement must: a. be in an authenticated record. b. be signed by the debtor with his personal, not business, name. c. contain at least a generic description of the collateral, such as "all my personal property." d. All of these are correct.

a. be in an authenticated record.

A __________ is a check drawn by a bank upon itself to the order of a named payee. a. cashier's check b. note c. teller's check d. certificate of deposit

a. cashier's check

A specialized promise to pay money given by a bank is a: a. certificate of deposit. b. promissory note. c. check. d. teller's check.

a. certificate of deposit.

Automatic perfection means that: a. no financing statement need be filed. b. no agreement need be made between the debtor and the secured party. c. no attachment is necessary. d. All of these are correct.

a. no financing statement need be filed.

Warranty liability applies to persons who: a. transfer an instrument. b. indorsed the instrument, but disclaimed liability on the check itself. c. have signed the instrument, but not on those who have not signed. d. All of these are correct.

a. transfer an instrument.

In order to disclaim certain liability of the indorser to a maker or drawee, one should add __________ before or after his signature. a. without recourse b. pay to the order of c. for collection only d. for deposit only

a. without recourse

Which of the following is a negotiable instrument? a. A stock certificate. b. A certificate of deposit. c. A will. d. A credit card.

b. A certificate of deposit.

Which of the following would be order paper? a. A check payable to "cash." b. A check that says "pay to the order of Jessie Jones." c. A check that says "pay to the order of bearer." d. All of these are correct.

b. A check that says "pay to the order of Jessie Jones."

The following all I have an interest in goods owned by Elvish Record Corporation: (1) Aaron is an unsecured creditor; (2) Bashir has a security interest; and (3) Carlton has a perfected security interest. Which creditor has priority? a. Bashir b. Carlton c. Aaron d. All of the creditors are equal.

b. Carlton

Which chapter of the Bankruptcy Code covers liquidation? a. Chapter 12. b. Chapter 7. c. Chapter 11. d. Chapter 13.

b. Chapter 7.

A collecting bank, or a bank simply collecting an item for a customer, is protected from liability when it follows its customer's instructions. Which of the following statements is true? a. It does not have an absolute duty to make proper payment. b. It is not required to inquire or verify that the customer had the authority to give such instructions. c. A collecting bank may not be a sub-agent of the owner until settlement becomes final. d. All of these are correct.

b. It is not required to inquire or verify that the customer had the authority to give such instructions.

Within the "four corners" of an instrument which of the following need not be present for it to be negotiable? a. It must contain a promise or order to pay. b. It must be payable on demand. c. It must be for a certain amount. d. It must be signed.

b. It must be payable on demand.

In the United States, the number of checks paid have __________ by more than 50 percent since 2003. a. stayed the same b. declined c. increased d. None of these are correct.

b. declined

A(n) __________ is the transfer of possession, whether voluntary or involuntary, by a person other than the issuer of a negotiable instrument in such a manner that the transferee becomes a holder. a. assignment b. negotiation c. order paper d. bearer paper

b. negotiation

The stop payment order may be either oral or by written or electronic order. If oral; however, the order is binding on the bank for only: a. 14 business days. b. 30 calendar days. c. 14 calendar days. d. six months.

c. 14 calendar days.

All but which one of the following would be exempt from bankruptcy under the federal law? a. $500 received in child support. b. A $200 cashmere sweater. c. A $10,000 truck. d. A $300 cocktail ring.

c. A $10,000 truck.

What constitutes dishonor varies upon the type of instrument and whether presentment is required. Which of the following is true? a. If a check is presented for payment directly to the payor/drawee bank for immediate payment, a refusal to pay the check within seven business days of presentment constitutes dishonor. b. An accepted demand draft is dishonored if the drawer does not pay it on the day of presentment. c. A demand note is dishonored if the maker does not pay it on the day of presentment. d. All of these are correct.

c. A demand note is dishonored if the maker does not pay it on the day of presentment.

A Chapter 13 plan of reorganization may include all but which one of the following? a. The rights of unsecured creditors may be modified. b. Priority debts must be paid in full unless the debtor waives that right. c. Assets must be liquidated. d. Future wages necessary to execute the plan must be controlled by the trustee.

c. Assets must be liquidated.

Order paper is created by making the instrument payable: a. to an identified person or order. b. to the order of an identified person. c. Both of these are correct. d. None of these are correct.

c. Both of these are correct.

__________ means that the obligated individual is released from liability on the instrument by payment, cancellation, or tender of payment: a. Dishonor b. Conversion c. Discharge d. None of these are correct.

c. Discharge

A bank's options for payment on a stale check include all but which one of the following? a. The bank can refuse to pay the check. b. It may pay the check. c. It is not required to exercise reasonable care in making payment on the check. d. All of these are correct

c. It is not required to exercise reasonable care in making payment on the check.

Which of the following is true with regard to the federal Electronic Funds Transfer Act? a. Consumers no longer have to examine their periodic statements for their accounts. b. It gives the same protections to customers that are found in Article 4. c. It limits a customer's liability for unauthorized transfers to $50 if the consumer notifies the financial institution within two days after learning of the loss or theft. d. All of these are correct

c. It limits a customer's liability for unauthorized transfers to $50 if the consumer notifies the financial institution within two days after learning of the loss or theft.

A system for electronic funds transfers (EFT) in which machines are located in a merchant's store and are activated by the consumer's identification card and code is: a. EFTA (Electronic Funds Transfer Act). b. DOS (Disk Operating System). c. POS (Point of Sale). d. RAM (Random Access Memory).

c. POS (Point of Sale).

A(n) __________ is a direct beneficiary of the value received and lends his credit to another party, so his liability is determined by the capacity in which he signs. a. indorser b. authorized agent c. accommodation party d. maker

c. accommodation party

Congress passed the Electronic Funds Transfer Act to protect: a. electronic transfers between financial institutions. b. electronic transfers between financial institutions and businesses. c. consumers making electronic fund transfers. d. electronic transfers between businesses.

c. consumers making electronic fund transfers.

When the person making payment, such as the buyer, requests that payment be made to the beneficiary's bank the transaction is called a: a. debit transfer. b. payment order. c. credit transfer. d. None of these are correct.

c. credit transfer

Holders or takers of instruments must show they took the instrument in __________, or in the UCC: "honesty in fact and the observance of reasonable commercial standards of fair dealing." a. executory promise b. value c. good faith d. None of these are correct.

c. good faith

The right of a surety who has paid the creditor to be repaid by the principal debtor is: a. exoneration. b. subrogation. c. reimbursement. d. None of these are correct.

c. reimbursement

Upon payment of the principal debtor's entire obligation, the surety is __________ the rights of the creditor. a. exonerated by b. set off by c. subrogated to d. subject to

c. subrogated to

"Attachment" occurs when a secured party gives value, the debtor has acquired rights in the collateral, and: a. the debtor has completed his obligation to pay. b. the collateral is delivered to the borrower. c. the debtor and secured party have an agreement. d. All of these are correct.

c. the debtor and secured party have an agreement.

Creditors entitled to priority are paid before: a. the debtor's attorney. b. secured creditors. c. unsecured creditors who file their claims on time. d. All of these are correct.

c. unsecured creditors who file their claims on time.

Warranty liability isn't based on a signature; thus: a. a drawee of an unaccepted draft who pays or accepts in good faith, receives a presentment warranty from only the person transferring the draft. b. if transfer is by delivery alone, warranties on the transfer run to any subsequent transferees. c. warranty liability applies to any persons who transfer an instrument and receive consideration. d. All of these are correct

c. warranty liability applies to any persons who transfer an instrument and receive consideration.

United States trustees: a. are government officials appointed by the U.S. Attorney General. b. have administrative responsibilities in bankruptcy cases in almost all of the districts. c. select bankruptcy trustees. d. All of these are correct

d. All of these are correct

A drawee of an unaccepted draft, who pays or accepts in good faith, receives a presentment warranty from the person obtaining payment or acceptance from all prior transferors of the draft. These parties warrant to the drawee making payment or accepting the draft in good faith that: a. the warrantor is a person entitled to enforce the draft. b. the draft has not been altered. c. the warrantor has no knowledge that the drawer's signature is unauthorized. d. All of these are correct.

d. All of these are correct.

Any person who transfers an instrument, whether by negotiation or assignment and receives consideration, makes which of the following warranties? a. Transferor warrants that he is entitled to enforce the instrument. b. Transferor warrants that all signatures are authentic and authorized. c. Transferor has no knowledge of any insolvency proceedings with respect to the maker, acceptor, or drawer of an unaccepted instrument. d. All of these are correct.

d. All of these are correct.

If a bank receives a check on an account with insufficient funds to cover the amount of the check, the bank can: a. pay the item and charge it to the customer's account even though an overdraft is created. b. treat the overdraft as a loan from the bank to the customer. c. None of these are correct. d. All of these are correct.

d. All of these are correct.

If the principal debtor defaults, the surety has rights against the principal debtor, third parties, and cosureties. These rights would include: a. exoneration. b. reimbursement. c. subrogation. d. All of these are correct.

d. All of these are correct.

Non-bankruptcy compromises to give debtors relief while protecting the rights of creditors include: a. compositions. b. non-statutory assignments for the benefit of creditors. c. receiverships under the direction of a court with equity powers. d. All of these are correct.

d. All of these are correct.

Under Chapter 7, the court will not grant the debtor a discharge if: a. the debtor is not an individual. b. the debtor has destroyed, concealed, or failed to keep records. c. the debtor has transferred, removed, or concealed any of his property with intent to defraud his creditors within 12 months before the filing of the bankruptcy petition. d. All of these are correct.

d. All of these are correct.

Which of the following rules are applied when ambiguous language exists in words or descriptions? a. Words control figures where conflict exists. b. Handwriting supersedes conflicting typewritten and printed terms. c. Typewritten terms supersede preprinted terms. d. All of these are correct.

d. All of these are correct.

A plan for reorganization under Chapter 11 does not have to meet which of the following requirements to be confirmed by the court? a. Cash payments for certain classes of creditors. b. Feasibility. c. Good faith. d. Be accepted by all creditors.

d. Be accepted by all creditors.

Article I of the UCC defines "holder" as: a. the instrument has been transferred to that person by negotiation. b. the instrument has been issued to that person. c. None of these are correct d. Both of these are correct.

d. Both of these are correct.

A check that is wrongfully dishonored by the drawee bank means all but which one of the following? a. When the account on which it is drawn has sufficient funds. b. It is not a breach of contract if the customer has an overdraft protection clause. c. Refuses to pay the amount of the check. d. Despite the fact it is properly payable.

d. Despite the fact it is properly payable.

__________ is the refusal to pay or accept an instrument when it becomes due. a. Being overdue b. The shelter rule c. Subject to claim or defense d. Dishonor

d. Dishonor

Real defenses include all but which of the following? a. Fraudulent alteration. b. Fraud in the execution. c. Infancy. d. Lack of consideration.

d. Lack of consideration.

__________ guarantees that he will pay the note according to its original terms. a. The drawee bank b. The indorsers c. The holder d. The maker

d. The maker

Instruments payable at a definite time are called ________ paper. a. Bearer b. Acceptance c. Order d. Time

d. Time

__________ is due on its stated date if the stated date is a business day, or if not, on the next business day. a. A claim b. Demand paper c. A defense d. Time paper

d. Time paper

Any necessary notice of dishonor must be given: a. by a nonbank, with respect to an instrument taken for collection, within three business days following the day on which it received notice. b. in all situations within seven calendar days following the day on which dishonor occurred. c. by a bank before midnight of the third banking day following the banking day on which it receives notice of dishonor. d. by a bank before midnight on the next banking day following the banking day on which it receives notice of dishonor.

d. by a bank before midnight on the next banking day following the banking day on which it receives notice of dishonor.

A tangible or electronic record that evidences both a monetary obligation and a security interest in or a lease of specific goods is known as: a. a negotiable instrument. b. a promissory note. c. a document of title. d. chattel paper.

d. chattel paper.