Business Law 2 - Chapter 24 Intro to Negotiable Instruments
European Free Trade Association (EFTA)
A free trade association including Norway, Iceland, and Switzerland.
Real Defenses
Defenses that are valid against all holders of negotiable notes, including holders in due course.
Checks, notes, and cash money are NOT commercial paper.
a. True (b. False)
How could state law - the UCC - be preempted in regard to commercial paper?
federal or int'l preemption is possible
indorsee
is the one to whom a draft or note is indorsed - when a check is deposited in a bank the bank is the indorsee
Surety
one who guarantees payment if the primarily obligated party fails to pay
negotiable
transferable by endorsement
A customer's ORAL request to stop payment on a check is binding on the bank for ______ days.
(a.14) b.30 c.60 d.180
If the same wrongdoer commits successive forgeries or alterations to checks, the customer must examine and notify the bank within ______ days after the first item and statement are available.
(a.30) b.60 c.90 d.180
A certified check has already been accepted by the drawee bank.
(a.True) b.False
Personal Defenses
Defenses valid against holders of negotiable notes but not against holders in due course.
The ______ Act regulates the use of wire transfers in point-of-sale transactions and other consumer payments.
(a.Electronic Fund Transfer) b.Funds in Transferc.Electroni c Transfer of Funds d.Wire Transfer in Sales
Which of the following is NOT true about personal defenses?
(a.May be asserted against anyone, including a holder in due course.) b.May be used in a claim involving a negotiable instrument. c.May be asserted against a holder in due course. d.May not be asserted only against a party when real defenses are also asserted.
A draft does NOT require the payor of the draft to ______.
(a.Pay the holder of the draft a higher rate of interest if a future event occurs) b.Pay the holder of the draft a definite amount of money c.Pay the holder of the draft money when requested d.Pay the holder of the draft on a fixed date
If a bank honors an instrument that is presented by a customer, the bank:
(a.Pays or accepts the instrument that is presented.) b.Defers its acceptance of the instrument that is presented until the following business day. c.Accepts, but does not agree to pay, the instrument that is presented. d.Credits a customer's account with the minimum statutory rate of interest.
A depositary bank's stamp that says a check was deposited can act as an endorsement if a customer fails to endorse a check.
(a.True) b.False
A holder in due course is subject to real defenses.
(a.True) b.False
A note is a two-party instrument in which the maker promises to pay the bearer.
(a.True) b.False
A provisional settlement must be revoked by the bank by a midnight deadline.
(a.True) b.False
Banks have a duty to customers to certify checks only by previous agreement.
(a.True) b.False
Commercial markets today continue to recognize the concept of "banking days."
(a.True) b.False
If a bank is presented with an altered or forged check, the bank cannot charge a customer account for the check.
(a.True) b.False
If a check is written on a financial institution that is in the same Federal Reserve check processing region as the depositary bank, the check is considered a local check.
(a.True) b.False
If a payor bank dishonors a check, the presenting bank will charge the item back to the account of the prior collecting bank.
(a.True) b.False
If the same wrongdoer commits successive forgeries or alterations, the customer must notify the bank within 30 days.
(a.True) b.False
Negotiating a negotiable instrument and assigning a contract are different transactions.
(a.True) b.False
Once a bank has certified a check, the drawer of the check cannot stop payment.
(a.True) b.False
Personal defenses cannot be asserted against a holder in due course.
(a.True) b.False
Savings accounts generally offer customers a lower rate of interest, but are generally more convenient than a certificate of deposit (CD).
(a.True) b.False
The bank is liable even if both the customer and the bank are at fault in allowing a forged check to be honored.
(a.True) b.False
The person who is in possession of an instrument is called the "bearer."
(a.True) b.False
Two parties are involved in negotiating notes.
(a.True) b.False
Uncollected funds are unavailable to a depositor.
(a.True) b.False
A two-party instrument in which the maker promises to pay a bearer is a ______.
(a.note) b.certificate of deposit c.demand deposit d.certified check
A two-party instrument in which the issuer promises to pay to the order of a payee is a ______.
(a.note) b.draft c.check d.certificate of deposit
The ______ is a bank by which an item is payable as drawn. The ______ bank is any bank that an item is transferred to in course of collection.
(a.payor; intermediary) b.payor; depositary c.depositary; intermediary d.intermediary; payor
Deposits can be seized by a bank under the right of ______ to protect accounts receivable.
(a.setoff) b.redemption c.restitution d.garnishment of wages
indorser
(same as endorser) is one who transfers ownership of a negotiable instrument by signing it
bill of exchange
A bill of exchange is a written order once used primarily in international trade that binds one party to pay a fixed sum of money to another party on demand or at a predetermined date. Bills of exchange are similar to checks and promissory notes—they can be drawn by individuals or banks and are generally transferable by endorsements. a written order to a person requiring the person to make a specified payment to the signatory or to a named payee; a promissory note.
The note is a two-party instrument whereby one person (maker) promises to pay money to a second person (payee). like a loan
The draft is a three-party instrument whereby one person (drawer) directs a second (drawee) to pay money to the third (payee). Example drawer-me check writer drawee-bank payee-person check made out to
Commercial Paper is a medium of exchange used like cash but safer than cash; cash is rarely used today except for small transactions.
The key to success of this invention is the concept of negotiability: through this process, a person can pass on in most cases better title to receive payment than he had; thus the transferee of such paper will most likely get paid by the obligor and will not be subject be subject to most defenses of any prior holders.
Two basic types of commercial paper are drafts and notes
The note is 2-party and the draft is 3-party
Setoff
The right of a creditor, such as a bank, to seize money from the account of a customer who is the debtor
When funds are deposited to a checking account, the first ______ of the deposit must be made available to the customer the following day.
a.$200 (b.$100) c.$50 d.$25
The length of time a bank is obligated to honor a check is no more than ______ months.
a.12 b.9 (c.6) d.3
WRITTEN orders to stop payment on a check are valid for ______ months.
a.14 b.1 (c.6) d.3
Which of the following is NOT an advantage of holding a certified check?
a.A certified check has already been accepted by the drawee bank. b.The bank sets aside funds from its customer's account to cover the amount of the check. (c.A certified check earns interest until the date it is accepted.) d.The bank assumes responsibility for payment of the certified check.
The term "banking day" is best defined as:
a.All days in a calendar year on which banks observe holidays. b.That part of any day when banks offer reduced interest rates on small business loans. c.A designated day in the work week on which banks will provide certain services to the public. (d.That part of any day on which a bank is open to the public for carrying on substantially all banking functions.)
Which of the following is an advantage of a certificate of deposit (CD) when compared to a savings account?
a.CDs present considerably less risk than savings accounts. b.Unlike a savings account, all moneys placed into CDs are immediately invested in stocks and bonds. (c.The bank will likely pay a higher rate of interest on a CD than it would on a savings account.) d.A CD allows a customer to make an unlimited amount of withdrawals without paying penalties or a monthly service fee.
Which of the following describes the position of a "holder in due course"?
a.Does not have title to the instrument, but is likely to have title to the instrument in the foreseeable future. b.Is required to wait for a determined period of time before it can present the negotiable instrument to a bank. c.Has title to the instrument, but risks defenses available against the original party to the instrument. (d.Has title to the instrument free and clear of defenses available against the original party to the instrument.)
When a bank receives a check for collection, to act reasonably, the bank generally must act:
a.Immediately. (b.Before the midnight deadline following the receipt of the check.) c.Within 120 days of the receipt of the check. d.When it receives written notice from the depositary bank to proceed.
Which of the following is true about real defenses?
a.May only be asserted against banks and other financial institutions. b.May not be asserted under the Uniform Commercial Code. c.May be asserted against anyone, except a holder in due course. (d.May be asserted against anyone, including a holder in due course.)
Which of the following are two-party instruments?
a.Notes and checks. b.Checks and CDs. (c.CDs and notes.) d.Checks and bank drafts.
A "depositary bank" is best defined as:
a.The last bank that makes payment on or accepts a negotiable instrument. (b.The first bank to which an item is transferred for collection.) c.Every bank that has a policy of accepting certified checks for deposit. d.A bank that accepts deposits but does not transfer items for collection.
A bank establishes a "cutoff hour" for the following reasons EXCEPT:
a.To process items. b.To prove balances. (c.To trade bank securities in established markets.) d.To make entries to determine the bank's position for the day.
A bank has no obligation to use ordinary care in performing collection operations when it receives a check for collection.
a.True (b.False)
A depositary bank is a clearinghouse or association of payors that clear items.
a.True (b.False)
A holder in due course has title to an instrument, subject to defenses available against the original party to the commercial paper.
a.True (b.False)
Banks are prohibited from seizing bank deposits to protect an account receivable.
a.True (b.False)
Congress gave the Federal Trade Commission authority to issue regulations aimed at implementing the provisions of the EFTA.
a.True (b.False)
Funds must be made available to the customer within three business days after a customer deposits a cashier's or government check.
a.True (b.False)
The EFTA serves the same purposes at the federal level that UCC Article 4A does at the state level.
a.True (b.False)
The priority among checks drawn on a particular account, and presented to a bank on any particular day, is based on the amount of each check drawn.
a.True (b.False)
A bill of exchange requires a payer to pay the holder of the instrument an amount of money when the holder demands the money.
a.True b.False
When a bank receives a check for collection, it has a duty to do the following EXCEPT:
a.Use ordinary care in performing its collection operations. b.Send notice of nonpayment if nonpayment occurs. (c.Cease and desist collection efforts until it determines its likelihood of receiving final payment.) d.Settle for the check when it receives final payment.
Notes, certificates of deposit, and checks are examples of ______.
a.accounts payable notes. (b.commercial paper) c.accounts receivable notes d.commerce paper
The ______ relationship closely resembles the legal relationship between banks and depositors.
a.agent and principal b.landlord and tenant (c.debtor and creditor) d.employer and employee
If a bank is considered both the drawer and the drawee of a check, the check is considered a ______ check.
a.certified b.bank draft c.transit (d.cashier's)
If Bank A makes out a check from its deposit account at Bank B, this is considered a ______.
a.certified check b.holder instrument (c.bank draft) d.cashier's check
The need for something to be acceptable in commerce as an alternative to money led to the creation of ______.
a.credit cards b.lending (c.negotiable instruments) d.securities
Demanding a payor bank to accept a check and make payment on it is ______ of the check.
a.endorsement b.setoff (c.presentment) d.settlement
The holder of a note is the person who ______.
a.issues a note to pay someone (b.is in possession of the instrument) c.is promised to be paid d.is required to be paid on demand
The bank by which an item is payable as drawn or accepted is the ______ bank. The first bank that an item is transferred to for collection is the ______ bank.
a.payor; collecting (b.payor; depositary) c.collecting; intermediary d.depositary; payor
The ______ is the person who owns the account and signs the check. The ______ is the bank obligated to pay the check from the owner's account.
a.payor; payee (b.drawer; drawee) c.payee; payor d.drawee; drawer
If a check is not presented to a bank for a substantial amount of time after the check was written, the check is ______.
a.post-dated b.lapsed (c.stale) d.overdue
When a debtor also has other asset accounts with its creditor, and the debtor fails to make payments on its loan, the creditor has the legal right to take funds from the asset accounts to repay the loan. This is the creditor's right of ______.
a.settlement b.presentment c.dishonor (d.setoff)
Negotiable instruments arose from ______.
a.the need in commerce to deter consumer spending (b.the need for something to be acceptable in commerce as an alternative to money) c.the desire by banks to increase profitability d.the need for government regulation of securities
Requirements for Negotiability
must be in writing must be signed by maker or drawer must be an unconditional promise or order to pay must be for a fixed amount of money must be payable on demand or at a definite time must be payable to order or bearer, unless it is a check
Accomodation party
one who signs a negotiable instrument in order to lend her name to another party to the instrument. It does not matter in what capacity instrument is signed, whether as maker, comaker, drawer, codrawer, or indorser. As a signatory, an accomodation party is always a surety.
notes=loans
promissory notes-A Promissory Note is a legal form that documents a loan between two parties. It enforces a borrower's promise to pay back a sum of money to a lender within a specific time period. bank notes-A banknote is a type of negotiable promissory note, made by a bank, payable to the bearer on demand. Banknotes were originally issued by commercial banks, which were legally required to redeem the notes for legal tender when presented to the chief cashier of the originating bank.
