BLAW 333 - Exam 2

Fictitiou Payee

A payee on a negotiable instrument whom the maker or drawer did not intend to have an interest in the instrument. Indoresements by fictitious payees are treated as authorized indorsements under Article 3 of the UCC

Bearer

A person in possession of an instrument payable to bearer or indorsed in blank

Payee

A person to whom an instrument is made payable

Negotiable Instrument

A signed writing (record) that contains an unconditional promise or order to pay an exact sum on demand or at a specified future time to a specific person or order, or to bearer

Extension Clause

A clause in a time instrument that allows the instrument's date of maturity to be extended into the future

Acceleration Clause

A clause that allows a payee or other holder of a time instrument to demand payment of the entire amount due, with interest, if a certain event occurs, such as a default in the payment of an installment when due

Holder in Due Course (HDC)

A holder who acquires a negotiable instrument for value, in good faith, and without notice that the instrument is defective (such as that it is overdue, has been dishonored, is subject to a defense against it or a claim to it, contains unauthorized signatures, has been altered, or is so irregular or incomplete as to call its authenticity into question).

Indorsement

A signature placed on an instrument for the purpose of transferring one's ownership rights in the instrument

Promissory Note

A written promise made by one person (the maker) to pay a fixed amount of funds to another person (the payee or a subsequent holder) on demand or on a specified date

Anna is the maker of a note, on which Bert is secondarily liable. Cash & Credit Company (C&C) is the current holder of the note. Bert will be obligated to pay the note if

Anna defaults on the note

Restrictive Indorsement

Any indorsement on a negotiable instrument that requires the indorsee to comply with certain instructions regarding the funds involved. A restrictive indorsement does not prohibit the further negotiation of the instrument

Bob receives a check from Chris. Without Bob's knowledge, Dan indorses it in his own name and deposits it in his account at East Bank. In Bob's subsequent lawsuit against the East Bank for the money, the court will most likely rule in favor of

Bob, because Dan's signature is not authorized

Universal Defenses

Defenses that are valid against all holders of a negotiable instrument, including holders in due course (HDCs) and holders with the rights of HDCs

Ann is the maker of a $1000 promissory note in favor of Bob. Bob indorses the note to Cody who, in turn, indorses it to Dru, the present holder. The party entitled to recover payment from Cody is

Dru

Dina, an accountant for Eagle Company, issues company checks payable to nonexistent persons drawn on Eagle's account at First State Bank. Dina indorses the checks and deposits them in her account. Eagle discovers the theft and demands that First re-credit its account. First's best defense is that

Eagle was in a better position than First to prevent the theft

Eve writes a check for $600 drawn on her account at First Federal Bank and presents it to Greg. When Greg presents the check for payment, the bank dishonors it. Greg may sue

Eve on the underlying obligation

Transfer Warranties

Five implied warranties made by any person who transfers an instrument for consideration to the transferee and, if the transfer by indorsement, to all subsequent transferees and holders who take the instrument in good faith

Acceptance

In negotiable instruments law, a drawee's signed agreement to pay a draft when it is presented

Maker

One who promises to pay a fixed amount of funds to the holder of a promissory note or a certificate of deposit (CD)

Drawer

The party that initiates a draft (such as a check), thereby ordering the drawee to pay

Drawee

The party that is ordered to pay a draft or check. With a check, a bank or financial institution is always the drawee

Shelter Principle

The principle that the holder of a negotiable Instrument who cannot qualify as a holder in due course (HDC), but who derives his or her title through an HDC, acquires the rights of an HDC

Negotiation

The transfer of an instrument in such form that the transferee (the person to whom the instrument is transferred) becomes a holder

Dishonor

To refuse to pay or accept a negotiable instrument, whichever is required, even though the instrument is presented in a timely and proper manner

The UCC specifies several types of negotiable instruments. They include: a. All of these choices. b. checks. c. drafts. d. promissory notes.

a. All of these choices.

A drawee that is legally obligated to pay an instrument when it is presented later for payment is called a(n): a. acceptor. b. acceptee. c. payee. d. maker.

a. acceptor

For an instrument to be negotiable, it must meet all of the following requirements except: a. be signed by the drawee. b. state a fixed amount of money. c. be payable on demand or at a definite time. d. be in writing.

a. be signed by the drawee.

A demand made by or on behalf of a person entitled to enforce an instrument to either pay or accept the instrument is referred to as a(n): a. announcement. b. presentment. c. indorsement. d. acceleration clause

b. presentment.

Primary liability on a negotiable instrument is assumed by the: a. drawer. b. maker. c. All of these choices. d. indorser.

b. maker.

Primary liability on a negotiable instrument is assumed by the: a. drawer. b. indorser. c. All of these choices. d. maker.

d. maker

A defense that is valid against all holders of a negotiable instrument is called a(n): a. personal defense. b. unilateral defense. c. genuine defense. d. universal defense.

d. universal defense.

Ed acquires a check drawn on First National Bank. To present the check for payment, he may use any commercially reasonable

electronic, oral, or written means of communication

Aaron, an employee of Beta Company, forges the signature of Chloe, Beta's president, on a Beta check and cashes it at Delta Bank. Chloe can ratify Aaron's actions by

entering into a repayment agreement with Aaron

Anna asks Paul, who does not understand English, to sign what Anna says is an application to open a bank account. In fact, the "application" is a note. If sued on the note by an HDC, Paul's best defense would be

fraud in the execution

Amy takes her car to Better Fix-It, which repairs the car and bills Amy for $500. Amy writes out a check drawn on Capital Bank, but later, believing that Better did not repair the car properly, issues a stop-payment order. Capital Bank pays the check. Capital

is liable for Amy's loss due to the wrongful payment

First National Bank agrees to honor Glen's checks even when his account has insufficient funds. Later, the bank refuses to pay an item payable to Holly that would create an overdraft. The bank is

liable to Glen only

Jack signs an instrument that states it is being executed "in accord with a contract for the sale of three magic beans dated June 1." This instrument is

negotiable

On May 1, Doug signs a check that is payable to the order of Excel Credit Card Corporation and is dated July 1. This check is

negotiable

Ron signs an instrument using an "R" with a circle around it. With this mark for a signature, the instrument is

negotiable

To pay for investment advice from financial consultants Smith and Jones, Tony signs a check payable to "Smith or Jones." A proper indorsement of the check is

"Smith" only or "Jones" only, or "Smith" and "Jones"

Bill signs a check payable to the order of City Bank. Bill fills in the blanks for the amount with the figures "$100" and writes in "One thousand and 00/100 dollars." This check is payable in the amount of

$1,000

Quincy signs a check payable to Regal Investors, and gives it to Regal, leaving the amount blank but authorizing Regal to fill in the check for $1000. Regal fills in $1500 and negotiates the check to State Bank, to whom Regal owes $1500. State Bank, an HDC, can enforce the check for

$1500

Ann orders 100 imprinted pens from Best Ad Art for $1 per pen. She draws a check on County Bank for $100. Ann accepts the first shipment of 10 pens, refuses to accept future shipments, and issues a stop-payment order. County Bank pays the check. Ann can recover from the bank

$90

Personal Defense

A defense that can be used to avoid payment to an ordinary holder of a negotiable instrument byt not a holder in due course (HDC) or a holder with the rights of an HDC

Check

A draft drawn by a drawer ordering the drawee bank or financial institution to pay a certain amount of funds to the payee on demand

Acceptor

A drawee that accepts, or promises to pay, an instrument when it is presented later for payment

Order Instrument

A negotiable instrument that is payable "to the order of an identified person" or "to an identified person or order"

Certificate of Deposit (CD)

A note issued by a bank in which the bank acknowledges the receipt of funds from a party and promises to repay that amount, with interest, to the party on a certain date

Qualified Indorsement

An indorsement on a negotiable instrument in which the indorser disclaims any contract liability on the instrument. The notation "without recourse" is commonly used to create a qualified indorsement

Special Indorsement

An indorsement on an instrument that identifies the specific person to whom the indorser intends to make the instrument payable. Thus, it names the indorsee

Blank Indorsement

An indorsement that specifies no particular indorsee and can consist of a mere signature. An order instrument that is indorsed in blank becomes a bearer instrument

Trust Indorsement

An indorsement to a person who is to hold or use funds for the benefit of the indorser or a third person. It is also known as an agency indorsement

Draft

Any instrument drawn on a drawee that orders the drawee to pay a certain amount of funds, usually to a third party (the payee), on demand or at a definite future time

Bearer Instrument

Any instrument that is payable to a specific person, including instruments payable to the bearer or to "cash"

Holder

Any person in possession of an instrument drawn, issued, or indorsed to him or her, to his or her order, to bearer, or in blank

Presentment Warranties

Implied warranties, made by any person who presents an instrument for payment or acceptance, that (1) the person is entitled to enforce the instrument or is authorized to act on behalf of a person who is so entitled, (2) the instrument has not been altered, and (3) the person has no knowledge that the drawer's signature is unauthorized

Kip writes a check for $1000 drawn on Local Bank and presents it to Mira. Mira presents the check for payment to Local Bank, which dishonors it. The party most likely liable to Mira is

Kip in a civil suit

Imposter

On who, by use of the mails, internet, telephone, or personal appearance, induces a maker or drawer to issue an instrument in the name of an impersonated payee. Indorsements by imposters are treated as authorized indorsements under Article 3 of the UCC

Ray signs a promissory note for $10,000 in favor of State University (SU). The note does not specify the date of its payment. Ray defaults. In SU's suit to collect on the note, the court will most likely rule in favor of

Ray, because the note is not payable at a definite time or on demand

Ruth opens an account with State Bank under an agreement in which the bank reserves the right to charge the account for any item returned due to its unauthorized alteration. Tom deposits an altered check in Ruth's account. When Unity Bank, the check's drawee bank, returns the item due to its alteration, State Bank files a suit against Ruth to recover the amount. The court is most likely to rule that

State Bank is entitled to recover under its account agreement

Presentment

The act of presenting an instrument when it is presented later for payment. Presentment also occurs when a person presents an instrument to a drawee for a required acceptance

Ida executes an instrument in favor of Joy that states, "The holder of this note at the date of maturity, July 1, 2015, can extend the time of payment indefinitely, if the holder so desires." After July 1, 2015, this instrument

a demand instrument

Alan transfers an instrument to Beth by negotiation. On negotiation, Beth becomes

a holder

Wyatt inherits a promissory note from Xena, his aunt. Wyatt has no notice that the note has been dishonored or is overdue. Wyatt has the rights of

a holder only

Dina signs a check payable to Evan, who indorses the back, gives it to First State Bank, and receives cash. The transfer of the check from Evan to the bank is

a negotiation

Gina writes and signs a check payable to "Happy Market". Joe, Happy's manager, indorses the check "For deposit only." This is

a restrictive indorsement

All of the following would be an example of a material alteration to an instrument except: a. correcting the maker's address. b. changing the amount on the instrument by one penny. c. changing the amount on the instrument by one thousand dollars. d. changing the rate of interest.

a. correcting the maker's address.

If an instrument is payable to bearer, it is negotiated by: a. delivery. b. a restrictive negotiation. c. delivery with any necessary indorsements. d. assignment.

a. delivery.

The party that is ordered to pay a draft or check is the: a. drawee. b. payee. c. payer. d. drawer.

a. drawee.

A person will not qualify for HDC protection if he or she is on notice that the instrument being acquired: a. is overdue. b. is a certified check. c. All of these choices. d. contains an authorized signature.

a. is overdue.

A person who does not qualify as a holder of due course but derives his or her title through an HDC can acquire the rights and privileges of an HDC by means of the: a. shelter principle. b. extension clause. c. acceleration clause. d. good faith requirement.

a. shelter principle

The liability of all parties to an instrument is discharged when: a. the party primarily liable on it pays to the holder the full amount due. b. any party pays to the holder the full amount due. c. one of the parties postdates the instrument. d. a holder accidentally tears the instrument in half.

a. the party primarily liable on it pays to the holder the full amount due

One who transfers an instrument for consideration makes all of the following warranties to all subsequent transferees and holders who take the instrument in good faith, except: a. the transferor is not entitled to enforce the instrument. b. the transferor has no knowledge of any insolvency proceedings against the maker, acceptor, or drawer of the instrument. c. all signatures are authentic and authorized. d. the instrument has not been altered.

a. the transferor is not entitled to enforce the instrument.

Jill, in good faith and for value, gets from Kim a negotiable bearer instrument. Jill does not know that Kim stole the instrument. Jill is

an HDC

To obtain office supplies for All-Care medical Clinic, Britney executes a draft in favor of Chris. A draft is

an unconditional written order to pay money

Tina indorses a check. Tina is potentially liable for

any amount paid on the check after Tina indorsed it

Under the UCC, a holder takes an instrument for value if he or she has: a. taken the instrument in payment of a preexisting claim. b. All of these choices. c. given an irrevocable commitment as payment for the instrument. d. performed the promise for which the instrument was issued or transferred.

b. All of these choices

An instrument can be cancelled by: a. intentionally tearing it up. b. Both of these choices. c. Neither of these choices. d. intentionally writing "Paid" across its face

b. Both of these choices

John Watson has a checking account at First National Bank. He writes a check for $40, made payable to Rose Dryer. In this transaction, the payee is: a. First National Bank. b. Rose Dryer. c. both John Watson and First National Bank. d. John Watson.

b. Rose Dryer

In negotiable instruments law, the drawee's signed agreement to pay a draft when it is presented is referred to as a(n): a. promissory note. b. acceptance. c. check. d. offer.

b. acceptance.

A drawee that is legally obligated to pay an instrument when it is presented later for payment is called a(n): a. payee. b. acceptor. c. acceptee. d. maker.

b. acceptor.

If Bethany Lewis receives a check payable to the order of Bethanie Louis, she: a. must use a restrictive indorsement to cash the check. b. can indorse the check either "Bethany Lewis" or "Bethanie Louis." c. will need to ask the drawer to send her a new check. d. will not be able to cash the check.

b. can indorse the check either "Bethany Lewis" or "Bethanie Louis."

The party that initiates a draft (such as a check), thereby ordering the drawee to pay is known as the: a. payee. b. drawer. c. payer. d. maker.

b. drawer

All of the following are examples of universal defenses, except: a. forgery. b. lack of consideration. c. fraud in the execution. d. mental incapacity.

b. lack of consideration

A demand made by or on behalf of a person entitled to enforce an instrument to either pay or accept the instrument is referred to as a(n): a. announcement. b. presentment. c. indorsement. d. acceleration clause.

b. presentment.

An indorsement on a negotiable instrument in which the indorser disclaims any contract liability on the instrument is referred to as a: a. restrictive indorsement. b. qualified indorsement. c. special indorsement. d. blank indorsement.

b. qualified indorsement.

A holder in due course is a holder who: a. has the same status as an assignee. b. takes an instrument free of most of the defenses and claims that could be asserted against the transferor. c. normally is subject to the same defenses that could be asserted against the transferor. d. obtains only those rights that the transferor had in the instrument.

b. takes an instrument free of most of the defenses and claims that could be asserted against the transferor.

All of the following are examples of presentment warranties except: a. the instrument has not been altered. b. the instrument has not been dishonored. c. the person obtaining payment has no knowledge that the signature of the instrument's issuer is unauthorized. d. there are no missing or unauthorized indorsements.

b. the instrument has not been dishonored.

The fact that an instrument is undated does not affect its negotiability: a. None of these choices. b. unless the date of an instrument is necessary to determine a definite time for payment. c. under any circumstances. d. if the drawer and the payee both have accounts at the same financial institution.

b. unless the date of an instrument is necessary to determine a definite time for payment.

Alpha Company gives a $3000 promissory note to Best Delivery Service to deliver a load of computer chips to Alpha's plant. The chips are contaminated during transit, and are useless to Alpha on delivery. Alpha's best defense to payment on the note is

breach of warranty

An indorsement that specifies no particular indorsee and can consist of a mere signature is called: a. a restrictive indorsement. b. a narrow indorsement. c. a blank indorsement. d. a qualified indorsement

c. a blank indorsement.

Chandra has received a note issued by her bank in which the bank acknowledges the receipt of funds from her and promises to repay that amount, with interest, to her on a certain date. This kind of note is referred to as a: a. promissory note. b. check. c. certificate of deposit. d. trade acceptance.

c. certificate of deposit

If the instrument is an order instrument, it is negotiated by: a. None of these choices. b. delivery. c. delivery with any necessary indorsements. d. extension.

c. delivery with any necessary indorsements

When an instrument is presented in a timely manner for payment or acceptance and payment or acceptance is refused, the instrument has been: a. kited. b. rejected. c. dishonored. d. floated.

c. dishonored.

A holder in due course is a holder who: a. has the same status as an assignee. b. obtains only those rights that the transferor had in the instrument. c. normally is subject to the same defenses that could be asserted against the transferor. d. takes an instrument free of most of the defenses and claims that could be asserted against the transferor.

c. normally is subject to the same defenses that could be asserted against the transferor.

A negotiable instrument that is payable to the order of an identified person or to an identified person or order is called a(n): a. holder draft. b. extension clause. c. order instrument. d. bearer instrument.

c. order instrument.

Under the UCC, nearly any symbol executed or adopted by a person with the intent to authenticate a written or electronic document is called a(n): a. mark. b. acceptance. c. signature. d. indorsement.

c. signature.

One who transfers an instrument for consideration makes all of the following warranties to all subsequent transferees and holders who take the instrument in good faith, except: a. the transferor has no knowledge of any insolvency proceedings against the maker, acceptor, or drawer of the instrument. b. all signatures are authentic and authorized. c. the transferor is not entitled to enforce the instrument. d. the instrument has not been altered.

c. the transferor is not entitled to enforce the instrument.

Bill transfers an instrument to Harry by assigning his rights in the instrument to Harry. This transfer is governed by

contract law

Parties are secondarily liable on a negotiable instrument only if: a. the instrument is properly and timely presented. b. timely notice of dishonor is given to the secondarily liable party. c. the instrument is dishonored. d. All of these choices.

d. All of these choices

Juan Cortez writes a check payable "to the order of Sue and Jason Fisher." In order to be negotiated, this check requires the indorsement of: a. either Sue Fisher or Jason Fisher. b. Sue Fisher, Jason Fisher, and Juan Cortez. c. Juan Cortez. d. both Sue Fisher and Jason Fisher

d. both Sue Fisher and Jason Fisher

The party that is ordered to pay a draft or check is the: a. drawer. b. payee. c. payer. d. drawee.

d. drawee.

All of the following are examples of personal defenses, except: a. breach of contract. b. mental incapacity. c. ordinary fraud. d. extreme duress.

d. extreme duress

The most common reason for improper presentment is: a. breach of warranty. b. the imposter rule. c. the use of an unauthorized signature. d. failure to present an instrument on time.

d. failure to present an instrument on time

When a person causes an instrument to be issued to a payee who will have no interest in the instrument, the payee is called a(n): a. innocent holder. b. imposter. c. forger. d. fictitious payee

d. fictitious payee

If a holder acts honestly in the process of acquiring an instrument, she or he is said to have acted: a. on notice. b. under duress. c. with extreme prejudice. d. in good faith.

d. in good faith

On behalf of Digital Supplies Company, Ed signs an instrument in which he promises to deliver 1,000 feet of cable to First Transactions on March 1. This instrument is

nonnegotiable, because cable is not a medium of exchange authorized or adopted by a government as currency

Karen writes on a piece of paper, "I owe you $600", signs it, and gives it to Lou. This instrument is

nonnegotiable, because it does not include an express promise to pay

Kelly signs an instrument in favor of Leo that states it is "subject to a certain agreement between Kelly and Mona," This instrument is

nonnegotiable, because it is made subject to a separate agreement

Quinn writes a check to Ron on May 1 that is drawn on Quinn's account at State Bank. Ron presents the check on December 15. The bank is

not obligated to pay the check under any circumstances

Izzy signs a check payable to Jayne and gives it to her. Jayne indorses the back, and transfers the check to Kyle. To negotiate the check to Leo, Kyle must

only deliver the check to Leo

Beth, an accountant for Credits & Debits, acquires a negotiable instrument from Elle by promising to pay its face value in thirty days. Beth acquires the status of an HDC when she

pays the face value due on the instrument

Holly writes a check on her account at Investment Bank to Jerry to pay a debt. Jerry negotiates the check by indorsement to Kelly, who negotiates the check by indorsement to Lisa, who presents it for payment to Interstate Bank. Holly is

secondary liable