Module 28: Commercial Paper

Overview

Coverage of commercial paper includes the types of negotiable instruments, the requirements of negotiability, negotiation, the holder in due course concept, defenses to a claim of liability, and the rights of parties to a negotiable instrument. The functions of commercial paper are to provide a medium of exchange that is readily transferable like money and to provide an extension of credit. It is easier to transfer commercial paper than contract rights and not subject to as many defenses as contracts are. To be negotiable, an instrument must

1. Be written
2. Be signed by the maker or drawer
3. Contain an unconditional promise or order to pay
4. State a fixed amount in money
5. Be payable on demand or at definite time
6. Be payable to order or bearer

A. General Concepts of Commercial Paper

B. Types of Commercial Paper

C. Requirements of Negotiability

D. Interpretation of Ambiguities in Negotiable Instruments

E. Negotiation

F. Holder in Due Course

G. Rights of a Holder in Due Course

H. Liability of Parties

I. Additional Issues

J. Banks

K. Electronic Fund Transfer Act and Regulation E

L. Fund Transfers under UCC Article 4A

M. Transfer of Negotiable Documents of Title

N. Agencies Involved in Banking

Key Terms

Multiple-Choice Questions

Multiple-Choice Answers and Explanations

Simulations

Simulation Solutions

These requirements must be present on the face of the instrument. Instruments that do not comply with these provisions are nonnegotiable and are transferable only by assignment. The assignee of a nonnegotiable instrument takes it subject to all defenses, whereas a holder of a negotiable instrument may avoid certain defenses.

A central theme of exam questions on negotiable instruments is the liability of the primary parties and of the secondarily liable parties under various fact situations. Similar questions in different form emphasize the rights that a holder of a negotiable instrument has against primary and secondary parties. Your review of this area should emphasize the legal liability arising upon execution of negotiable commercial paper, the legal liability arising upon various types of endorsements, and the warranty liabilities of various parties upon transfer or presentment for payment. A solid understanding of the distinction between real and personal defenses is required. Also tested is the relationship between a bank and its customers. Before beginning the reading you should review the key terms at the end of the module.

A. General Concepts of Commercial Paper

1. Commercial paper has two important functions
a. Used as a substitute for money
EXAMPLE
One often pays a bill with a check instead of using cash.
b. Used as extension of credit
EXAMPLE
X gives a promissory note to Y for $100 that is due one year later.
2. To encourage commercial paper to be transferred more easily by making it easier to be collected, negotiable commercial paper was established
a. If an instrument is negotiable, favorable laws of Article 3 of UCC apply as discussed in this module
b. If an instrument is nonnegotiable, laws of ordinary contract law apply (i.e., assignment of contract rights)
(1) Assignees of contract rights can get only the rights given by the assignor and therefore are burdened by any defenses between prior parties
EXAMPLE
C receives a nonnegotiable instrument from B. C now wishes to collect from A, the one who had issued the nonnegotiable note to B when he purchased some goods from B. Assume that A would have owed B only two-thirds of the amount stated on the instrument due to defects in the goods. Since C obtained only the rights that B had under an assignment under contract law, C can only collect two-thirds from A on this nonnegotiable instrument.
3. It is helpful to get “the big picture” of negotiable instruments (negotiable commercial paper) before covering details
a. Whether an instrument is negotiable is determined by only looking at its form and content on the face (front) of the instrument
(1) This allows individuals seeing an instrument to determine whether it is negotiable
(2) If a person has a negotiable instrument and also is a holder in due course (discussed later), s/he may collect on instrument despite simple contract defenses

B. Types of Commercial Paper

1. Article 3 of UCC describes two types of negotiable commercial paper
a. A draft (also called bill of exchange)
(1) Has three parties in which one person or entity (drawer) orders another (drawee) to pay a third party (payee) a sum of money
EXAMPLE
image
The above is a draft in which Sue Van Deventer is the drawer, ABC Corporation is the drawee, and Bob Smith is the payee
(a) A check
(1) Is a special type of draft that is payable on demand (unless postdated) and drawee must be a bank; banks include savings and loan associations, credit unions, and trust companies
(2) One writing check is drawer (and customer of drawee bank)
b. A note (also called a promissory note)
(1) Unlike a draft or check, is a two-party instrument
(a) One party is called the maker—this party promises to pay a specified sum of money to another party called the payee
EXAMPLE
image
The above is a note in which Bill Jones is the maker and Becky Hoger is the payee.
(2) May be payable on demand or at a definite time
(a) Certificate of deposit (CD): Is an acknowledgement by a financial institution of receipt of money and a promise to repay it. The financial institution is the maker and the customer is the payee.
(b) Most commonly tested note on the CPA exam is a promissory note; see the example above with Bill Jones as the maker.
NOW REVIEW MULTIPLE-CHOICE QUESTIONS 1 THROUGH 4

C. Requirements of Negotiability

1. All of the following requirements must be on face of instrument for it to be a negotiable instrument (be sure to know these)
2. To be negotiable, the instrument must satisfy all of the following requirements
a. Be written
b. Be signed by maker or drawer
c. Contain an unconditional promise or order to pay
d. State a fixed amount in money
e. Be payable on demand or at a definite time
f. Be payable to order or to bearer, unless it is a check
3. Details of requirements of negotiability
a. Must be in writing
(1) Satisfied by printing, typing, handwriting or any other reduction to physical form that is relatively permanent and portable
(2) The UCC has a very liberal definition of a writing under Article 3; it is easy to satisfy this requirement
b. Must be signed by maker (of a note or CD) or drawer (of a draft or check)
(1) Signature includes any symbol used with intent to authenticate instrument
(a) Rubber stamp, initials, letterhead satisfy signing requirement
(b) Assumed name or trade name operates as that party’s signature
(c) Signature may be anywhere on face of instrument
(2) Again, very liberal interpretation.
c. Must contain an unconditional promise or order to pay
(1) This is really two requirements
(a) That the instrument contains an order or a promise to pay, and
(b) That the promise or order be unconditional
(2) If payment depends upon (is subject to) another agreement or event, then it is conditional and therefore destroys negotiability
EXAMPLE
An instrument that is otherwise negotiable states that it is subject to a particular contract. This condition destroys the negotiability of this instrument.
EXAMPLE
An instrument states: “I, Janice Jones, promise to pay to the order of Richard Riley, $1,000 if the stereo delivered to me is not defective.” This instrument is not negotiable whether the stereo is defective or not because it contains a conditional promise.
(a) However, the following are permitted and do not destroy negotiability
(1) Instrument may state its purpose
EXAMPLE
On a check, the drawer writes “for purchase of textbooks.”
(2) Instrument may refer to or state that it arises from another agreement; note here that it is not subject to that agreement. Being “subject to” destroys negotiability.
(3) Instrument is permitted to show that it is secured by a mortgage or by collateral
(4) Instrument is permitted to contain promise to provide extra collateral
(5) Instrument is permitted to limit payment out of particular fund
(b) The key to determining if the promise/order is conditional is, does the language in the instrument make the actual payment subject to some event?
(3) Promises
(a) Are usually contained in a note
(b) Must be an affirmative obligation to pay, not a mere acknowledgement of a debt.
EXAMPLE
Deb Tore gives a piece of paper to Lance Lender, which states, “IOU $500,” signed Deb Tore. Deb’s IOU only acknowledges the debt; she never promised to pay Lance. This instrument is nonnegotiable since it does not contain either a promise or an order to pay money. IOUs are nonnegotiable.
(4) Orders
(a) Are usually contained in a draft
(b) The order is a command or a direction to the drawee to pay
(c) On a check this is the word “Pay”
NOTE: The order is not the “order of” language on a check; it is the command, “pay.”
d. Must state a fixed amount in money—called sum certain under former law
(1) Amount of principal, but not interest, must be determinable from instrument without need to refer to other sources
(a) Stated interest rates are allowed because amount can be calculated
EXAMPLE
A negotiable note states that $1,000 is due one year from October 1 at 14% interest.
EXAMPLE
A note states that $1,000 is payable on demand and bears interest at 14%. This also is negotiable because once payment is demanded, the amount of interest can be calculated.
(b) Variable interest rates are allowed and do not destroy negotiability even if formula for interest rate or amount requires reference to information outside of negotiable instrument
EXAMPLE
The following does not destroy negotiability in an otherwise negotiable instrument: Interest rates tied to some published key interest rate, consumer index market rate, etc.
(c) If interest rate based on legal rate or judgment rate (fixed by statute), then negotiability not destroyed
(d) Stated different rates of interest before and after default or specified dates are allowed
(e) Stated discounts or additions if instrument paid before or after payment dates do not destroy negotiability
(f) Clauses allowing collection costs and attorney’s fees upon default are allowed because they reduce the risk of holding instruments and promote transferability
(g) Must be payable only in money; option to be payable in money or something else destroys negotiability because of possibility that payment will not be in money.
EXAMPLE
A note is payable in $1,000 or its equivalent in gold. This note is not negotiable.
(2) Foreign currency is acceptable even though reference to exchange rates may be needed due to international trade realities
e. Must be payable on demand or at a definite time
(1) On demand includes
(a) Payable on sight
(b) Payable on presentation
(c) No time for payment stated
(2) It is a definite time if payable
(a) On a certain date, or
(b) A fixed period after sight, or
(c) Within a certain time, or
(d) On a certain date subject to acceleration; for example, when a payment is missed, total balance may become due at once
(e) On a certain date subject to an extension of time if
(1) At option of holder, or
(2) At option of maker or drawer only if extension is limited to a definite amount of time
EXAMPLE
Promissory note which states, I promise to pay to the order of Will Smith $1000 on May 15, 2014, but if I lose my job, payment will be made on August 1, 2014. This instrument is negotiable, since any party taking the instrument knows that the latest they will be paid is August 1, 2014.
(3) It is not definite if payable on an act or event that is not certain as to time of occurrence
EXAMPLE
An instrument contains a clause stating that it is payable ten days after drawer obtains a bank loan. This destroys negotiability because it is unknown when, or even if, the drawer will obtain the loan.
f. Must be payable to order or to bearer (these are critical words of negotiability and are often a central issue on the CPA exam)
(1) Instrument is payable to order if made payable to the order of
(a) Any person, including the maker, drawer, drawee, or payee
(b) Two persons together or alternatively
(c) Any entity
(2) Instrument is also payable to order if it is payable “to A or order”
(3) Instrument other than a check is not payable to order if it is only payable to a person (e.g., “Pay John Doe”)
EXAMPLE
A draft that is otherwise negotiable states: “Pay to XYZ Corporation.” This statement destroys negotiability because the draft is not payable “to the order of” XYZ Corporation.
(a) It is not negotiable
(b) “Pay to the order of John Doe” would be negotiable
(4) If a check says “pay to A,” it is negotiable order paper—this is not true of other instruments
(5) Instrument is payable to bearer if it is payable to
(a) “Bearer”
(b) “Cash”
(c) “A person or bearer” is bearer paper if “bearer” handwritten; however, “pay to John Doe, the bearer” is not negotiable because it is not payable to order or to bearer but to a person and simply refers to him as the bearer
(d) “Order of bearer” or “order of cash”
(e) Pay to the order of (payee left blank) is bearer paper unless holder inserts payee’s name
(6) Instrument cannot be made payable to persons consecutively (i.e., maker cannot specify subsequent holders)

D. Interpretation of Ambiguities in Negotiable Instruments

1. Contradictory terms
a. Words control over figures (numerals)
b. Handwritten terms control over typewritten and printed (typeset) terms
c. Typewritten terms control over printed (typeset) terms
2. Omissions
a. Omission of date does not destroy negotiability unless date necessary to determine when payable
EXAMPLE
A check is not dated. It is still negotiable because a check is payable on demand.
EXAMPLE
A draft states that it is payable thirty days after its date. If the date is left off, it is not payable at a definite time and, therefore, it is not negotiable. However, an authorized party may fill in the appropriate date and make the instrument negotiable.
b. Omission of interest rate is allowed because the judgment rate of interest (rate used on a court judgment) is automatically used
c. Statement of consideration or where instrument is drawn or payable not required
3. Other issues
a. Instrument may be postdated or antedated and remain negotiable
(1) Bank is not liable for damages to customer if it pays on postdated check before date on check unless individual notifies bank not to pay check earlier in a separate written document
(2) Once customer does this, bank is liable for any damages caused by early payment
b. Instrument may have a provision that by endorsing or cashing it, the payee acknowledges full satisfaction of debt and remain negotiable
c. If an instrument is payable to order of more than one person
(1) Either payee may negotiate or enforce it if payable to him/her in the alternative
EXAMPLE
“Pay $100 to the order of X or Y.” Either X or Y may endorse it.
(2) All payees must negotiate or enforce it if not payable to them in the alternative
d. If not clear whether instrument is draft or note, holder may treat it as either
e. UCC requires only that a negotiable instrument need be written, must lend itself to permanence, and must be easily transferable (i.e., movable).
NOW REVIEW MULTIPLE-CHOICE QUESTIONS 5 THROUGH 15

E. Negotiation

1. There are two methods of transferring commercial paper
a. By assignment
(1) Assignment occurs when transfer does not meet all requirements of negotiation
(2) Assignee can obtain only same rights that assignor had, and is subject to any defenses that can be asserted against assignor
b. By negotiation
(1) One receiving negotiable instrument by negotiation is called a holder
(2) If holder further qualifies as a holder in due course (as discussed later) s/he can obtain more rights than what transferor had
(3) There are two methods of negotiation, which is dependent on whether the transferor is trying to negotiate order paper or bearer paper
(a) Order paper is a negotiable instrument that is payable to a specific party (e.g., “Pay to the order of Acme Corp.”)
(1) Transferred by physical delivery of the instrument and endorsement
(2) A holder needs possession of the instrument and any necessary endorsements
(b) Bearer paper is a negotiable instrument that is payable to any party (e.g., “Pay to cash”)
(1) Transferred by delivery alone
(2) Holder only needs possession of the instrument
(3) Subsequent parties may require endorsements (even though UCC does not) for identification
(4) Holder may, in any event, endorse it if s/he chooses to do so
(4) Endorsement (Indorsement) refers to signature of payee, drawee, accommodation endorser, or holder
2. Types of endorsements
a. Blank endorsement
(1) Does not specify any endorsee
EXAMPLE
A check made payable to the order of M on the front can be endorsed in blank by M writing only his signature on the back.
(2) Converts order paper into bearer paper
(3) Note that bearer paper may be negotiated by mere delivery; hence a finder, or even a thief, can be a valid holder
EXAMPLE
B endorses a check in blank that had been made payable to his order. He lost it and C found it who delivered it to D. D is a valid holder since C’s endorsement was not required.
b. Special endorsement
(1) Indicates specific person to whom endorsee wishes to negotiate instrument
EXAMPLE
On the back of a check payable to the order of M. Jordan he signs as follows: Pay to L. Smith, (signed) M. Jordan.
(a) Note that words “pay to the order of” are not required on back as endorsements—the instrument needs to be payable to order or to bearer on front only
(b) Also, note that if instrument is not payable to order or to bearer on its face, it cannot be turned into a negotiable instrument by using these words in an endorsement on the back
EXAMPLE
A particular instrument would have been negotiable except that on the front it was payable to A. On the back, A signed it. “Pay to the order of B, (signed) A.” This does not convert it into a negotiable instrument.
(2) Bearer paper may be converted into order paper by use of special endorsement
EXAMPLE
A check made out to cash is delivered to Carp. Carp writes on the back; Pay to Durn, (signed) Carp. It was bearer paper until this special endorsement.
EXAMPLE
Continuing the previous example, Durn simply endorses it in blank. The check is bearer paper again.
(3) If last (or only) endorsement on instrument is a blank endorsement, any holder may convert that bearer paper into order paper by writing “Pay to X,” etc., above that blank endorsement
c. Restrictive endorsement is an attempt by the endorser to restrict further negotiation; some restrictions are enforceable, others are not.
(1) Valid restrictive endorsements
(a) Collection endorsements (e.g. “for deposit only” or “pay any bank”)
(b) Endorsements in trust (e.g. “Pay Smith for Jones”)
(2) Invalid restrictive endorsements
(a) The following endorsements are viewed by the law as saying “Pay to the order of Smith;” the rest of the language in the endorsement is simply ignored or altered by the law.
(1) Pay to Smith, if Smith washes my car
(2) Pay to Smith only
(b) Remember the endorsements cannot affect negotiability, thus order language is not required in an endorsement
(c) Endorsements cannot prohibit further negotiation; to the extent the endorsement attempts to limit further negotiation, the language is ignored.
d. Qualified endorsement
(1) Normally, endorser, upon signing, promises automatically to pay holder or any subsequent endorser the amount of instrument if it is later dishonored
(2) Qualified endorsement disclaims this liability
EXAMPLE
Ann Knolls endorses “Without recourse, (signed) Ann Knolls.”
(3) Qualified endorsements, otherwise, have same effects as other endorsements
e. Combinations of endorsements occur
(1) Special qualified endorsement
EXAMPLE
“Pay to Pete Bell without recourse, (signed) Tom Lack.” Tom Lack has limited his liability and also Pete Bell’s endorsement is needed to negotiate this instrument further.
(2) Blank qualified endorsement
EXAMPLE
“Without recourse, (signed) D. Hamilton.”
(3) Endorsement that is restrictive, qualified, and blank
EXAMPLE
“For deposit only, without recourse, (signed) Bill Coffey.”
3. If payee’s name misspelled, s/he may endorse in proper spelling or misspelling or both; but endorsee may require both
4. If an order instrument is transferred for value without endorsement, transferee may require endorsement from transferor
5. Federal law standardizes endorsements on checks—endorser should turn check over and sign in designated area
a. Purpose is to avoid interference with bank’s endorsements
b. Endorsements placed outside this area do not destroy negotiability but may delay clearing process.
6. If check has statement that it is nonnegotiable, check is still negotiable
a. This is not true of other negotiable instruments whereby such statement destroys negotiability
NOW REVIEW MULTIPLE-CHOICE QUESTIONS 16 THROUGH 21

F. Holder in Due Course

1. Concept of holder in due course (also called HDC) is very important for CPA exam purposes. A HDC is entitled to payment on negotiable instrument despite personal defenses that maker or drawer of instrument may have
a. Recall that an assignee of contract rights receives only rights that assignor had (i.e., assignee takes subject to all defenses that could have been asserted against assignor)
b. Likewise, an ordinary holder of a negotiable instrument has same rights as assignee
2. To be holder in due course, a taker of instrument must
a. Be a holder of a properly negotiated negotiable instrument
b. Give value for instrument
(1) Holder gives value if s/he
(a) Pays or performs agreed consideration; be careful, an executory promise (promise to give value in the future is not value. Promise must actually have been performed.
EXAMPLE
DeMaurice gave $3000 to Roger for a $5000 promissory note and promised to pay Roger an additional $1000 in one month. One week after the initial payment, and before making the final payment to Roger, DeMaurice found out that Roger had stolen the note from Jerry. DeMaurice qualifies as a holder in due course for $3,750. Once DeMaurice learns of the theft he cannot further qualify as a holder in due course. When DeMaurice made the initial payment of $3000, he did not know of the theft, so he qualifies as a holder in due course to the extent he has actually provided value. So why does DeMaurice qualify for $3750 and not just $3000? The law recognizes that DeMaurice was never going to pay $5000 for the $5000 instrument. Instead, he purchased the note at a discount. DeMaurice has paid 75% ($3000/$4000) of what he intended to pay, so the law states that he is entitled to 75% of the face value of the instrument: $3750.
(b) Takes as a satisfaction of a previous existing debt
(c) Gives another negotiable instrument
(d) Acquires a security interest in the instrument (e.g., the holder takes possession of the instrument as collateral for another debt)
(2) A bank takes for value to the extent that credit has been given for a deposit and withdrawn
(a) FIFO method is used to determine whether it has been withdrawn (money is considered to be withdrawn from an account in the order in which it was deposited)
(3) Value does not have to be for full amount of instrument
(a) Purchase at a reasonable discount is value for full face amount of instrument
EXAMPLE
Purchase of a $1,000 instrument in good faith for $950 is considered full value, but purchase of the same instrument for $500 is not considered full value when market conditions show that the discount is excessive.
NOTE: Do not just assume that a large discount is excessive; the Examiners need to provide you with facts that indicate the discount is excessive. Do not forget during the recent financial crisis, there were instruments being sold for pennies on the dollar.
c. Take in good faith
(1) Good faith defined as honesty in fact and observance of reasonable commercial standards of fair dealing
d. Take without notice that the instrument is overdue, has been dishonored, or that any person has a defense or claim of ownership to the instrument
(1) Holder has notice when s/he knows or has reason to know (measured by objective “reasonable person” standard)
(2) Overdue
EXAMPLE
I offer to sell you a $10,000 promissory note for $9,000. The note was payable last week. You should be suspicious since I could go to the maker of the note and collect $10,000 immediately; why would I sell it to you for only $9000, unless there was something wrong with the note? Therefore you cannot qualify as a holder in due course.
(a) Instrument not overdue if default is on payment of interest only
(b) Domestic check, although payable on demand, is overdue ninety days after its date
(3) Defense or claim
(a) Obvious signs of forgery or alteration so as to call into question its authenticity
(b) Incomplete instrument or irregular instrument
(c) If purchaser has notice of any party’s claim, or that all parties have been discharged
(4) There is no notice of a defense or claim if
(a) It is antedated or postdated
(b) S/he knows that there has been a default in payment of interest
(c) The note was purchased at a reasonable discount.
(5) But if one acquires notice after becoming a holder and giving value, s/he may still be a HDC to the extent of the value given (see the above example under value with DeMaurice and Roger)
3. Payee of a negotiable instrument may qualify as a HDC if meets all requirements
NOW REVIEW MULTIPLE-CHOICE QUESTIONS 22 THROUGH 25

G. Rights of a Holder in Due Course

1. The general rule is that a transfer of a negotiable instrument to a HDC cuts off all personal defenses against a HDC
a. Personal defenses are assertable against ordinary holders and assignees of contract rights to avoid payment
EXAMPLE
Art Dobbs negotiates a note to Mary Price in payment of a stereo. Mary negotiates this note to Finch who qualifies as a HDC. When Finch seeks payment, Dobbs points out that Price breached the contract by never delivering the stereo. Finch, as a HDC, still has the right to collect because breach of contract is a personal defense. Dobbs then has to seek recourse directly against Price.
2. Some defenses are assertable against any party including a HDC—these defenses are called real (or universal) defenses
3. Types of personal defenses
a. Breach of contract, including breach of warranty
b. Lack or failure of consideration
c. Prior payment
EXAMPLE
Maker of a negotiable note pays on the note but does not keep or cancel the note. A subsequent party who qualifies as a HDC seeks to collect on this same note. Maker, having only a personal defense, must pay the HDC even though it was paid previously.
d. Unauthorized completion
EXAMPLE
X signs a check leaving the amount blank. He tells Y to fill in the amount necessary to buy a typewriter. Y fills in $22,000 and negotiates the check to a HDC. The HDC may enforce the full amount of the check against X.
e. Fraud in the inducement
(1) Occurs when person signs a negotiable instrument and knows what s/he is signing; however, s/he was induced into doing so by intentional misrepresentation
f. Nondelivery
(1) Occurs when bearer instrument is lost or stolen
EXAMPLE
M issues a note that is bearer paper. It is stolen by T who sells it to a HDC. The HDC wins against M.
g. Ordinary duress or undue influence
(1) Most types of duress are considered a personal defense unless they become very extreme and thus are considered real defenses
EXAMPLE
Jessica threatened to post some unflattering pictures of Anthony on Facebook. Anthony writes Jessica a check so Jessica will not post the pictures. Anthony would only have a personal defense against paying the check.
h. Mental incapacity
(1) Personal defense if state law makes transaction voidable
(2) Real defense if state law makes transaction void
EXAMPLE
Contracts of people who have been adjudicated incompetent are void; those people would have a real defense against enforcement of a negotiable instrument. People who only suffer from some diminished capacity would only have a personal defense.
i. Illegality
(1) Personal defense if state law makes transaction voidable
(2) If state law makes it void, then real defense
j. Theft by holder or subsequent holder after theft
4. Real Defenses
a. Forgery
(1) Forgery of maker’s or drawer’s signature does not act as his/her signature
(a) Does allow forger to be held liable
EXAMPLE
X forges M’s name on a note and sells it to P. P cannot collect from M whether she is a HDC or not. Her recourse is against X. The UCC recognizes the forged signature as X’s signature, not M’s. So even though the instrument states “M,” in the eyes of the law it states “X.”
b. Bankruptcy
c. Fraud in the execution
(1) Occurs when a party is tricked into signing a negotiable instrument believing it to be something else
(a) This defense will not apply if signer, based on his/her age, experience, etc., should have known what was happening
(2) Recall that fraud in the inducement is a personal defense
d. Minority (or infancy)
(1) When minor may disaffirm contract under state law, then is a real defense for a negotiable instrument
e. Mental incapacity, illegality, or extreme duress
(1) Real defenses if transaction is void under state law
f. Material alteration of instrument
(1) Is actually only partially a real defense
(a) If dollar amount was altered, then HDC can collect according to original terms—a non-HDC collects nothing
(b) If an instrument was incomplete originally and then completed without authorization, HDC can enforce it as completed—a non-HDC collects nothing
(2) Material alteration exists when terms between any two parties are changed in any way including
(a) Changes in amount, rate of interest, or days
EXAMPLE
Janice Parks negotiates a $200 negotiable note to Jim Bivins. Bivins deftly changes the amount to $500 and transfers it to E. Melvin for $500 who qualifies as a HDC. The HDC can collect only the original $200 from Janice Parks.
EXAMPLE
Same facts as before except that the material alteration is poorly done by Jim Bivins so that E. Melvin could not qualify as a holder in due course because the change was obvious. E. Melvin cannot collect even the original $200.
(b) Additions to writing or removal of part of instrument
(c) Completion of instrument without authorization
(d) Considered “material” even if small change such as a penny
(e) But not material alteration if done to correct error on address, math computations, or to place marks on instrument for audit purposes. Alterations that are not material are neither real nor personal defenses so all non-HDCs as well as HDCs can enforce the instrument.
(f) Not a real defense if maker’s or drawer’s negligence substantially contributed to the alteration—is a personal defense
5. Holder through a holder in due course (“Shelter Rule”)
a. A party who does not qualify as a HDC but obtains a negotiable instrument from a HDC has the standing of HDC.
b. Obtains all rights of a HDC
(1) Based on fact that is an assignee that gets rights of previous party
(2) Also called shelter provision
c. A HDC “washes” an instrument so that any holder thereafter can be a holder through a holder in due course
EXAMPLE
A HDC transfers a note to H.V. Shelton who knew that the maker of the note has a personal defense. Shelton does not qualify as a HDC but has the same rights because he is a holder through a holder in due course.
EXAMPLE
Extending the example, H.V. Shelton gives the note to B. Evans. B. Evans does not qualify as a HDC (no value given) but is a holder through a holder in due course.
NOTE: Be careful to remember that in the above examples if the Examiners were to ask you if Shelton or Evans is a HDC, the answer is no. If you are asked do Shelton or Evans have the rights of a HDC, the answer is yes.
d. Exceptions
(1) If a party reacquires an instrument, his/her status remains what it originally was
EXAMPLE
P acquires a check from the payee. Neither qualifies in this case as a holder in due course. P delivers the check to Q who qualifies as a HDC. If the check is negotiated back to P, his rights remain those of a non-HDC.
(2) One who was involved in fraud or illegality affecting the instrument may not subsequently become a holder through a holder in due course
6. Federal Trade Commission Rule significantly limits HDC status in consumer credit transactions
a. This federal law takes precedence over state UCCs
b. Law was passed because it was felt standard HDC rule was causing hardship on consumers who signed notes promising to pay retailers for goods purchased which were defective. Retailer could sell notes to other parties cutting off important remedies against retailer who sold defective goods.
c. FTC rule applies to consumer credit transactions when
(1) Consumer signs installment sales contract containing waiver of defenses
(2) Consumer signs sales contract containing promissory note
(3) Retailer arranges financing with a separate party for consumer financing
d. Lenders and sellers of negotiable instruments must put notice defenses consumers could use against sellers
e. Payments for goods or services using checks are not covered by FTC rule
f. Note that rule does not apply to any nonconsumer transactions and does not apply to any consumer noncredit transactions
EXAMPLE
Connie Consumer purchases goods for consumer use and writes out a check. Subsequent holders are governed by ordinary HDC law.
NOW REVIEW MULTIPLE-CHOICE QUESTIONS 26 THROUGH 35
H. Liability of Parties—There are two general types of warranties on negotiable instruments: contractual liability and warranty liability. This explains who is responsible to pay the holder/holder in due course.
1. Contractual liability
a. This is the liability for payment of the instrument’s face value.
b. Applies to any party who signs negotiable instrument. This could include a maker, drawer, acceptor of a draft, or endorser.
c. Primary liability
(1) The holder/HDC must first seek payment from this party
(2) The primary party on a note is the maker
(3) The primary party on a draft is the acceptor of a draft
(a) This is a drawee who accepts the instrument for payment
(b) If drawee dishonors (refuses to make payment) the draft, then no party has primary liability on the draft
d. Secondary liability
(1) If primary party does not pay, then the holder/HDC may either
(a) Sue the primary party to force the primary party to pay, or
(b) Seek payment from a secondary party
(2) Secondary parties are
(a) Endorsers of any instrument
(b) Drawers on a draft
(c) There is no secondary liability on a draft if the draft was accepted by the drawee
(3) Several conditions must be met to hold a secondary party liable for payment
(a) Presentment (demand for payment) of the instrument to the primary party by the holder/HDC
(b) Dishonor (refusal to pay) of the instrument by the primary party
(c) Timely notice of the dishonor provided to the endorsers (notice is not required for the drawer)
(1) Banks, and similar institutions, must provide notice by midnight of the next banking day
(2) All other parties have 30 days to provide notice of the dishonor
e. Drawers, except drawers of a check, and endorsers may avoid secondary liability by signing without recourse
f. Upon certification of check, drawer and all previous endorsers are discharged from liability because bank has accepted check and agreed to pay it
g. A holder/HDC may only seek to collect from prior signatory parties, not subsequent signers
EXAMPLE
Assume that first John and then Paul previously endorsed a note that is in George’s possession. Later George transfers the instrument, by endorsement, to Ringo. Ringo presents the note to the primary party, Peter, for payment; Peter dishonored the note. Ringo then notified all the endorsers of the dishonor and sought payment from Paul, who paid Ringo. Paul could now proceed against John for secondary liability because John signed the note prior to Paul. Paul cannot, however, collect from George because George endorsed after Paul.
2. Warranty liability—two types under which holder can seek payment from secondary parties are transfer warranties and presentment warranties
a. Transfer warranties—transferor gives following transfer warranties whenever negotiable instrument is transferred for consideration
(1) Transferor has good title, which means that there are
(a) No missing endorsements
(b) No unauthorized endorsements
(2) All signatures are genuine or authorized
(3) Instrument has not been materially altered
(4) No defense of any party is good against transferor
(5) Transferor has no notice of insolvency of maker, drawer, or acceptor
EXAMPLE
Pat issued a promissory note made payable to Vince. Vince endorsed the note and negotiated it to Tracy for value. Tracy provided a qualified endorsement and gave the note to Andy as a gift. Andy then transferred the note for value, without endorsement, to Shelley. When the instrument was due, Shelley presented the note to Pat for payment. Pat refused payment because he was a minor. Shelley now seeks to collect on the instrument from Tracy and Andy. Neither Tracy nor Andy has contract liability on the note. Tracy is not liable because his endorsement was qualified; Andy did not sign the instrument, so he has no contract liability. Tracy does not have warranty liability either, because Tracy did not receive consideration to transfer the note. Andy does have warranty liability because he breached the warranty that there were no valid defenses against Andy if he sought to enforce the note. Pat’s minority is a real defense and would prevent Andy from collecting on the note even if Andy was a holder in due course. Even though Andy did not transfer the note by endorsement, he still gives transferor warranties to his immediate transferee, Shelley.
b. These warranties generally allocate the loss to parties that dealt face to face with wrongdoer and thus were in best position to prevent or avoid forged, altered, or stolen instruments
(1) Party bearing loss must then seek payment if possible, from one who forged, altered, or stole instrument
c. Note that transferor, if s/he did not endorse, makes all five warranties only to immediate transferee but if transferor did endorse, makes them to all subsequent holders taking in good faith
d. Presentment warranties—holder/HDC presenting negotiable instrument for payment or acceptance and all prior transferors of the instrument provide presentment warranties to the party who pays on the instrument. The presentment warranties for an unaccepted draft are
(1) The warrantor is entitled to enforce the instrument (i.e. warrantor has good title)
(2) Warrantor has no knowledge that drawer’s signature is forged or unauthorized
(3) The instrument was not altered
e. Presentment warranty for all other instruments (other than unaccepted drafts) is only the first warranty listed: Good title.
f. To recover under warranty liabilities (either transfer or presentment warranties), party does not have to meet conditions of proper presentment, dishonor, or timely notice of dishonor that are required under contractual liability against endorsers
g. Recovery under a warranty theory only allows the injured party to receive what they paid for the instrument. The injured party is not entitled to recover the face value, as s/he would be able to under contract liability, unless the injured party actually paid the face value of the instrument.
3. Signatures by authorized agents
a. Drawers or makers at times authorize agents to sign negotiable instruments on behalf of such drawers or makers
(1) Organizations such as corporations often use corporate officers or employees to be agents to sign their negotiable instruments
(a) Drawers or makers are liable and agent is not personally liable on negotiable instrument if agent’s signature clearly discloses both agency status and identity of drawer or maker
(2) Individuals may also use agents to sign negotiable instruments and same law applies
EXAMPLE
A negotiable instrument has the following signature, signed entirely by A. Underwood, the authorized agent: Mary Johnson, by A. Underwood, agent.
EXAMPLE
If A. Underwood had simply signed Mary Johnson as she had authorized, this would also bind Mary Johnson.
EXAMPLE
If A. Underwood had signed his name only, he is liable. The principal is not liable even if the agent intended her to be because her name is not on the instrument.
4. Accommodation party is liable on the instrument in the capacity in which s/he has signed even if taker knows of his/her accommodation status
EXAMPLE
Accommodating maker is liable as a maker would be.
EXAMPLE
Accommodating endorser is liable as an endorser would be.
a. Accommodation party is one who signs to lend his/her name to other party
EXAMPLE
Father-in-law endorses a note for son-in-law so creditor will accept it.
(1) Notice of default need not be given to accommodation party
(2) The accommodation party has right of recourse against accommodated party if accommodation party is held liable
5. Discharge of parties
a. Once primary party pays, all endorsers are discharged from liability
b. Cancellation of prior party’s endorsement discharges that party from liability
(1) Oral renunciation or oral attempt to discharge a party is not effective
c. Intentional destruction of instrument by holder discharges prior parties to instrument
6. Liability on instruments with forged signatures
a. Person whose signature was forged on instrument is not liable on that instrument
(1) Unless later ratifies it
b. Forged signature operates as signature of forger
c. Therefore, if signature of maker or drawer is forged, instrument can still be negotiated between parties and thus a holder can acquire good title
(1) Recall that forgery is a real defense so that innocent maker or drawer cannot be required to pay even a HDC—forger can be required to pay if found
d. However, a forged endorsement does not transfer title; thus, persons receiving it after forgery cannot collect on it
(1) Three important exceptions to rule that forged endorsements cannot transfer title are imposter rule, fictitious payee rule, and negligence of maker or drawer—these cause maker or drawer to be liable
(a) Imposter rule applies when maker or drawer issues a note or draft to an imposter thinking s/he actually is the real payee—when that imposter forges the real payee’s name, this effectively negotiates this note or draft so that a subsequent holder (if not part of scheme) can collect from maker or drawer
(1) Note that this rule normally places loss on person who was in best position to avoid this scheme (i.e., maker or drawer)
(a) Of course, upon payment, maker or drawer may try to collect from imposter
EXAMPLE
J. Loux owes Larsen (whom she has not met) $2,000. Sawyer, claiming to be Larsen, gets Loux to issue him a check for $2,000. Sawyer forges Larsen’s endorsement and transfers the check to P. Jenkins. Jenkins can collect from Loux because of the imposter rule exception.
EXAMPLE
If in the example above, J. Loux had given the check to the real Larsen and he lost it, the imposter rule would not apply even if someone found the check and forged Larsen’s endorsement. No one after the forgery can collect on the check.
(2) This imposter rule exception also applies if an imposter pretends to be agent of the named payee
(b) Fictitious payee rule applies when maker, drawer, or his/her agent (employee) issues a note or a check to a fictitious payee—then maker, drawer, or employee forges the endorsement—subsequent parties can enforce the note or check against the maker or drawer
(1) Actually payee may be a real person as long as maker, drawer, or other person supplying name never intended for that payee to ever get payment
EXAMPLE
R. Stewart submits a time card for a nonexistent employee and the employer issues the payroll check. Stewart forges the endorsement and transfers it to L. Reed. Reed wins against the employer even though the employer was unaware of the scheme at the time.
(c) If person’s negligence substantially contributes to the forgery that person is prevented from raising the defense of forgery and thus holder wins
EXAMPLE
D. Wolter has a signature stamp and leaves it lying around. Unauthorized use of the stamp is not a defense against a holder as Wolter’s negligence substantially contributed to the forgery. If the forger could be caught, Wolter could sue the forger for losses.
NOW REVIEW MULTIPLE-CHOICE QUESTIONS 36 THROUGH 44

I. Additional Issues

1. Types of drafts—although they follow general rules of drafts, definitions are helpful
a. Trade acceptance is a draft in which a seller of goods extends credit to buyer by drawing a draft on that buyer directing him/her to pay seller a sum of money on a specified date
(1) Trade acceptance also requires signature of buyer on face of instrument—called acceptance—buyer is also called acceptor at this point
(2) Then seller may negotiate trade acceptance at a discount to another party to receive immediate cash
(3) Seller is normally both drawer and payee of a trade acceptance
b. Banker’s acceptance is a draft in which drawee and drawer are a bank
c. Sight draft is one payable upon presentment to drawee
d. Time draft is one payable at a specified date or payable a certain period of time after a specified date
e. Money order is a draft purchased by one party to pay payee in which the third party is typically post office, a bank, or a company
2. Definitions for certain types of checks are also helpful
a. Traveler’s check is purchased from a bank (or company)—drawer (traveler) must sign twice for purposes of identification (once at the time s/he purchases the check and again at the time s/he uses the check)—drawee is bank or company—payee is one who gets paid
(1) Technically, drawee must be a bank to be a true “check”—if drawee is not a bank then traveler’s check is actually a draft
b. Cashier’s check is a check in which drawer and drawee are the same bank with a separate party being the payee
(1) This is still considered a “three-party” instrument even though drawer and drawee are same bank
c. Certified check is a check that payor bank has agreed in advance to pay so that bank becomes primarily liable
d. Teller’s check (bank draft) is draft drawn by one bank on another bank

J. Banks

1. Banks include savings and loan associations, credit unions, and trust companies
2. Relationship between bank and depositor is debtor-creditor
a. Even though the depositor has funds in the bank, a payee cannot force a drawee to make payment
b. Only drawer has an action against drawee-bank for wrongfully dishonoring a check—based on contract between customer (drawer) and bank
c. Bank required to report to IRS any transaction or series of related transactions greater than $10,000
(1) Ordinary checks are exempted but cash and other types of checks such as cashier’s checks come under reporting requirement
d. Bank must report to IRS suspected crimes involving $1,000 or more in funds
e. It is a crime to structure or assist in structuring transactions to evade these reporting requirements
(1) May be punishable by money penalties or under criminal law
3. Checks
a. Banks are not obligated to pay on a check presented more than six months after date
(1) But they may pay in good faith and charge customer’s account
b. Even if check creates an overdraft, a bank may charge customer’s account
c. Bank is liable to drawer for damages caused by wrongful dishonor of a check
(1) Wrongful dishonor may occur if the bank in error believes funds are insufficient when they are sufficient
d. Payment of bad checks (e.g., forgery of drawer or altered checks)
(1) Bank is liable to drawer for payment on bad checks unless drawer’s negligence contributed because bank presumed to know signatures of its drawers
(2) If drawer fails to notify bank of forgery or alterations within thirty days of bank statement, the drawer is held liable on subsequent forgeries or alterations done in same way by same person
(a) In any event, drawer must give notice of forgeries or alterations within one year to keep bank liable or else drawer is liable. This applies to nonrepeating cases as well, even when bank was paying in bad faith.
EXAMPLE
G. Wilson forges the name of M. Gibson as a drawer on a check in an artful way. A subsequent HDC cashes this check at the drawee bank. The bank is liable on this check and cannot recover from either the HDC or M. Gibson as long as Gibson notifies the bank of the forgery within one year. The loss falls on the bank because the bank should know its drawer’s signature.
(b) Forgeries of endorsements are treated differently—depositor has three years to notify bank and also bank may charge check back to party that presented check to bank. Recall that one cashing check gave warranty that all signatures are genuine.
EXAMPLE
D issues a check to P. P loses the check which is found by X. X forges the endorsement and transfers it to H. Finally, H cashes the check at the drawee bank. D soon notifies the bank of the forgery. The bank may charge it back to H (whether or not a HDC) but not to D.
e. Bank is not liable for early payment of postdated check unless drawer notified bank to not pay check until date on check
f. Oral stop payment order is good for fourteen days; written stop payment order is good for six months and is renewable
(1) Stop payment order must be given so as to give bank reasonable opportunity to act on it
(2) Bank is liable to drawer if it pays after effective stop payment order only when drawer can prove that the bank’s failure to obey the order caused drawer’s loss. If drawer has no valid defense to justify dishonoring instrument, then bank has no liability for failure to obey stop payment order.
EXAMPLE
W. Paisley buys a TV set from the Burke Appliance Store and pays for the set with a check. Later in the day Paisley finds a better model for the same price at another store. Paisley telephones his bank and orders the bank to stop payment on the check. If the bank mistakenly pays Paisley’s check two days after receiving the stop payment order, the bank will not be liable if Paisley could not rightfully rescind his agreement with the Burke Appliance Store. With these facts, Paisley suffered no damages from the bank’s mistake.
(3) If drawer stops payment on the check, s/he is still liable to holder of check unless s/he has a valid defense (e.g., if holder qualifies as a holder in due course then drawer must be able to assert a real defense to free him/herself of liability)
g. Bank is entitled to a depositor’s endorsement on checks deposited with the bank
(1) If missing, bank may supply endorsement to negotiate check
h. Banks may choose which checks are charged to account first when several checks received in same day
NOW REVIEW MULTIPLE-CHOICE QUESTIONS 45 THROUGH 46

K. Electronic Fund Transfer Act and Regulation E

1. Applied to consumer electronic fund transfers
2. For lost or stolen debit cards, customer is liable for
a. Limit of $50 if notifies bank within two days of discovery of loss or theft
b. Limit of $500 if notifies bank after two days, but before sixty days after unauthorized use appears on customer’s bank statement
c. Limit of $500 does not apply if fails to notify bank before sixty-day period
d. Note how these rules are very different from those that apply to lost or stolen credit cards
3. Bank is liable for failure to pay electronic fund transfer when customer has sufficient funds in account
4. Unauthorized use of electronic fund transfer is felony under federal law
a. Banks and their officers must comply with strict rules for prevention or be subject to strict fines and/or imprisonment

L. Fund Transfers under UCC Article 4A

1. Applies to commercial electronic fund transfers
a. Adopted by majority of states
b. Does not apply to consumer transfers
c. Applies to any method of transfer including electronic or mail
2. When party gives payment order to bank and that bank or another bank pays too much money or to wrong party, that bank in error is liable for error
a. Then bank has burden of recovery for wrongfully paid amount

M. Transfer of Negotiable Documents of Title

1. Transfer of documents of title is very similar to transfer of negotiable instruments under commercial paper
2. A document of title symbolizes ownership of the item it describes.
3. Types of documents of title
a. Bill of lading is a document issued by a common carrier (a person engaged in the business of transporting or forwarding goods) and given to seller evidencing receipt of the goods for shipment
b. A warehouse receipt is a document issued by a warehouseman (a person engaged in the business of storing goods for hire) and given to seller evidencing receipt of goods for storage
(1) Warehouse receipt must contain the following terms:
(a) Location of the warehouse
(b) Date the receipt was issued
(c) Statement to whom the goods will or can be delivered
(d) Rates (charges) for storing the goods
(e) Description of the goods.
(f) Signature of the warehouseman
4. Form
a. Document of title is negotiable if face of the document contains words of negotiability (order or bearer)
(1) Document of title containing promise to deliver goods to the order of a named person is an order document
(a) If person is named on face of document or, if there are endorsements, on back of document and last endorsement is a special endorsement, then document is an order document
(1) Proper negotiation requires delivery of document and endorsement by named individual(s)
(2) Document of title containing a promise to deliver the goods to bearer is bearer document
(a) If “bearer” is stated on face of document or, if there are endorsements on back of document and last endorsement is a blank endorsement, it is a bearer document
(1) Proper negotiation merely requires delivery of document
b. Nonnegotiable (straight) documents of title are assigned, not negotiated
(1) Assignee will never receive any better rights than assignor had
5. Due negotiation—document of title is “duly negotiated” when negotiated to a holder who takes it in good faith in the ordinary course of business without notice of a defense and pays value
a. Value does not include payment of a preexisting (antecedent) debt—this is an important difference from value concept required to create a holder in due course for commercial paper
6. Holder by due negotiation acquires rights very similar to those acquired by a holder in due course
a. These rights include
(1) Title to document
(2) Title to goods
(3) All rights accruing under law of agency or estoppel, including rights to goods delivered after document was issued, and
(4) The direct obligation of the issuer to hold or deliver the goods according to terms of document
b. A holder by due negotiation defeats similar defenses to those defeated by a holder in due course for commercial paper (personal but not real defenses)
c. A document of title procured by a thief upon placing stolen goods in a warehouse confers no rights in the underlying goods
(1) This defense is valid against subsequent holder to whom document of title has been duly negotiated
(2) Therefore, original owner of goods can assert better title to goods than a holder who has received document through due negotiation
7. Rights acquired in absence of due negotiation
a. Transferee of a document, whether negotiable or nonnegotiable, to whom document has been delivered, but not duly negotiated, acquires title and rights which his/her transferor had or had actual authority to convey
8. Transferor for value warrants that
a. Document is genuine
b. S/he has no knowledge of any fact that would impair its validity or worth, and
c. His/her negotiation or transfer is rightful and fully effective with respect to document of title and goods it represents
NOW REVIEW MULTIPLE-CHOICE QUESTIONS 47 THROUGH 50

N. Agencies Involved in Banking

1. Federal Reserve
a. Central bank of US which regulates US monetary system and oversees bank holding companies
2. FDIC is US entity which insures customer deposits against bank failure
a. Also created to help maintain public confidence and encourage stability in our financial system by promoting sound banking practices
3. OCC is arm of Treasury Department established to regulate and supervise national banks and federal branches of foreign banks
a. Its objective is to promote safety and soundness of banking system
b. Conducts on-site examination of banks
4. CFTC is US agency established to ensure open and efficient operation of futures markets which have grown from trading agricultural futures to more sophisticated financial products
5. OTS issues and enforces regulation governing nation’s savings and loan industry
a. This bureau is responsible for helping to ensure safety and soundness of deposits in thrift banks
6. Agencies involved in banking could be tested on CPA exam especially because of recent debates among business people and politicians over how to better regulate banks
a. There is widespread consensus that current regulatory system does not work well enough
b. Many are recommending merging the SEC and the CFTC, reflecting the blurred lines between securities and commodities

KEY TERMS

Bearer paper. A negotiable instrument that is payable to whomever possesses it.

Contract liability. When a party is responsible to pay the holder/HDC the face value of the instrument.

Draft. A type of negotiable instrument that contains an order to pay money. A draft has three parties: A drawer, a drawee, and the payee.

Drawer. The person who creates the draft and signs the draft on its face.

Drawee. The party that the drawer has instructed to pay the payee; typically this is the drawer’s bank.

Endorsement. A signature, usually on the back of a negotiable instrument, by the payee or some other holder. The endorsement is necessary to further negotiate the instrument when the instrument is order paper.

Face value. The amount for which the instrument is payable.

Holder. A person who has possession of a negotiable instrument, and the instrument has all necessary endorsements.

Holder in due course (HDC). A holder with enhanced rights in the negotiable instrument. Those rights include the best claim of ownership, and HDC’s claims for payment cannot be denied because of a personal defense.

Maker. The person who creates a note and has primary liability for its payment.

Negotiable. A characteristic of an instrument that means the instrument is freely transferable from one party to another.

Negotiation. The actual transfer of ownership of a negotiable instrument from one party to another. Negotiation can be accomplished by delivery alone if the instrument is bearer paper; if the instrument is order paper, then it must be transferred by delivery and the necessary endorsements.

Note. A two-party (the maker and payee) negotiable instrument that contains a promise to pay money.

Order paper. An instrument that is payable to a particular party.

Payee. The party to whom the negotiable instrument was originally payable.

Primary liability. The party from whom the holder/HDC of a negotiable instrument must first seek payment: the maker of a note or the acceptor of a draft.

Secondary liability. Parties who are liable to the holder/HDC if the primary party dishonors the instrument: endorsers and drawers.

Warranty liability. Responsibility to a holder/HDC to return the money actually paid for the negotiable instrument.

Multiple-Choice Questions (1–50)

B. Types of Commercial Paper

1.

image

The above instrument is a

a. Draft.

b. Postdated check.

c. Trade acceptance.

d. Promissory note.

2. Which of the following statements regarding negotiable instruments is not correct?

a. A certificate of deposit is a type of note.

b. A check is a type of draft.

c. A promissory note is a type of draft.

d. A certificate of deposit is issued by a bank.

3. Based on the following instrument:

image

The instrument is a

a. Promissory demand note.

b. Sight draft.

c. Check.

d. Trade acceptance.

4. Under the Commercial Paper Article of the UCC, which of the following documents would be considered an order to pay?

I. Draft

II. Certificate of deposit

a. I only.

b. II only.

c. Both I and II.

d. Neither I nor II.

C. Requirements of Negotiability

5. An instrument that is otherwise negotiable on its face states “Pay to Jenny Larson.” Which of the following statements is (are) correct?

I. It is negotiable if it is a check.

II. It is negotiable if it is a draft drawn on a corporation.

III. It is negotiable if it is a promissory note.

a. I only.

b. I and II only.

c. II and III only.

d. I, II, and III.

6. Under the Commercial Paper Article of the UCC, for a note to be negotiable it must

a. Be payable to order or to bearer.

b. Be signed by the payee.

c. Contain references to all agreements between the parties.

d. Contain necessary conditions of payment.

7. On February 15, P.D. Stone obtained the following instrument from Astor Co. for $1,000. Stone was aware that Helco, Inc. disputed liability under the instrument because of an alleged breach by Astor of the referenced computer purchase agreement. On March 1, Willard Bank obtained the instrument from Stone for $3,900. Willard had no knowledge that Helco disputed liability under the instrument.

image

The reverse side of the instrument is endorsed as follows:

image

The instrument is

a. Nonnegotiable, because of the reference to the computer purchase agreement.

b. Nonnegotiable, because the numerical amount differs from the written amount.

c. Negotiable, even though the maker has the right to extend the time for payment.

d. Negotiable, when held by Astor, but nonnegotiable when held by Willard Bank.

8. A draft made in the United States calls for payment in Canadian dollars.

a. The draft is nonnegotiable because it calls for payment in money of another country.

b. The draft is nonnegotiable because the rate of exchange may fluctuate thus violating the sum certain rule.

c. The instrument is negotiable if it satisfies all of the other elements of negotiability.

d. The instrument is negotiable only if it has the exchange rate written on the draft.

9. An instrument reads as follows:

image

Which of the following statements correctly describes the above instrument?

a. The instrument is nonnegotiable because it is not payable at a definite time.

b. The instrument is nonnegotiable because it is secured by the proceeds of the sale of the ring.

c. The instrument is a negotiable promissory note.

d. The instrument is a negotiable sight draft payable on demand.

10. Kline is holding a promissory note in which he is the payer and Breck is the promissor. One of the terms of the note states that payment is subject to the terms of the contract dated March 1 of the current year between Breck and Kline. Does this term destroy negotiability?

a. No, if the contract is readily available.

b. No, since the note can be enforced without regard to the mentioned contract.

c. No, as long as the terms in the mentioned contract are commercially reasonable.

d. Yes, since this term causes the note to have a conditional promise.

11. Based on the following instrument:

image

The instrument is

a. Nonnegotiable even though it is payable on demand.

b. Nonnegotiable because the numeric amount differs from the written amount.

c. Negotiable even though a payment date is not specified.

d. Negotiable because of Abner’s guaranty.

12. A note has an interest rate that varies based on the stated rate of 2% above the prime rate as determined by XYZ Bank in New York City. Under the Revised Article 3 of the Uniform Commercial Code, which of the following is true?

a. This interest rate provision destroys negotiability since it does not constitute a sum certain.

b. This note is not negotiable because the holder has to look outside the instrument to determine what the prime rate is.

c. The interest rate provision destroys negotiability because the prime rate can vary before the time the note comes due.

d. The interest rate provision is allowed in negotiable notes and does not destroy negotiability.

13. While auditing your client, Corbin Company, you see a check that is postdated and states “Pay to Corbin Company.” You also see a note that is due in forty days and also says “Pay to Corbin Company.” You note that both instruments contain all of the elements of negotiability except for possibly the ones raised by this fact pattern. Which of the following is(are) negotiable instruments?

a. The check.

b. The note.

c. Both the check and the note.

d. Neither the check nor the note.

14. Under the Revised Article 3 of the Uniform Code, which of the following is true if the maker of a note provides that payment must come out of a designated fund?

a. This is allowed even though the maker is not personally obligated to pay.

b. Since the instrument is not based on the general credit of the maker, the instrument is not negotiable.

c. The promise to pay is conditional; therefore, the note is not negotiable.

d. The instrument is not negotiable if the designated fund has insufficient funds.

D. Interpretation of Ambiguities in Negotiable Instruments

15. Wyden holds a check that is written out to him. The check has the amount in words as five hundred dollars. The amount in figures on this check states $200. Which of the following is correct?

a. The check is cashable for $500.

b. The check is cashable for $200.

c. The check is not cashable because the amounts differ.

d. The check is not cashable because the amounts differ by more than 10%.

e. Negotiation

16. Under the Negotiable Instruments Article of the UCC, an endorsement of an instrument “for deposit only” is an example of what type of endorsement?

a. Blank.

b. Qualified.

c. Restrictive.

d. Special.

17. Under the Commercial Paper Article of the UCC, which of the following requirements must be met for a transferee of order paper to become a holder?

I. Possession

II. Endorsement of transferor

a. I only.

b. II only.

c. Both I and II.

d. Neither I nor II.

18. The following endorsements appear on the back of a negotiable promissory note payable to Lake Corp.

image

Which of the following statements is correct?

a. The note became nonnegotiable as a result of Parker’s endorsement.

b. Harris’ endorsement was a conditional promise to pay and caused the note to be nonnegotiable.

c. Smith’s endorsement effectively prevented further negotiation of the note.

d. Harris’ signature was not required to effectively negotiate the note to Sharp.

19. A note is made payable to the order of Ann Jackson on the front. On the back, Ann Jackson signs it in blank and delivers it to Jerry Lin. Lin puts “Pay to Jerry Lin” above Jackson’s endorsement. Which of the following statements is false concerning this note?

a. After Lin wrote “Pay to Jerry Lin,” the note became order paper.

b. After Jackson endorsed the note but before Lin wrote on it, the note was bearer paper.

c. Lin needs to endorse this note to negotiate it further, even though he personally wrote “Pay to Jerry Lin” on the back.

d. The note is not negotiable because Lin wrote “Pay to Jerry Lin” instead of “Pay to the order of Jerry Lin.”

20. You are examining some negotiable instruments for a client. Which of the following endorsements can be classified as a special restrictive endorsement?

a. Pay to Alex Ericson if he completes the contracted work within ten days, (signed) Stephanie Sene.

b. Pay to Alex Ericson without recourse (signed) Stephanie Sene.

c. For deposit only, (signed) Stephanie Sene.

d. Pay to Alex Ericson, (signed) Stephanie Sene.

21. On February 15, P.D. Stone obtained the following instrument from Astor Co. for $1,000. Stone was aware that Helco, Inc. disputed liability under the instrument because of an alleged breach by Astor of the referenced computer purchase agreement. On March 1, Willard Bank obtained the instrument from Stone for $3,900. Willard had no knowledge that Helco disputed liability under the instrument.

image

The reverse side of the instrument is endorsed as follows:

image

Which of the following statements is correct?

a. Willard Bank cannot be a holder in due course because Stone’s endorsement was without recourse.

b. Willard Bank must endorse the instrument to negotiate it.

c. Neither Willard Bank nor Stone are holders in due course.

d. Stone’s endorsement was required for Willard Bank to be a holder in due course.

F. Holder in Due Course

22. Under the Commercial Paper Article of the UCC, which of the following circumstances would prevent a person from becoming a holder in due course of an instrument?

a. The person was notified that payment was refused.

b. The person was notified that one of the prior endorsers was discharged.

c. The note was collateral for a loan.

d. The note was purchased at a discount.

23. One of the requirements needed for a holder of a negotiable instrument to be a holder in due course is the value requirement. Ruper is a holder of a $1,000 check written out to her. Which of the following would not satisfy the value requirement?

a. Ruper received the check from a tax client to pay off a four-month-old debt.

b. Ruper took the check in exchange for a negotiable note for $1,200 which was due on that day.

c. Ruper received the check in exchange for a promise to do certain specified services three months later.

d. Ruper received the check for a tax service debt for a close relative.

24. Larson is claiming to be a holder in due course of two instruments. One is a draft that is drawn on Picket Company and says “Pay to Brunt.” The other is a check that says “Pay to Brunt.” Both are endorsed by Brunt on the back and made payable to Larson. Larson gave value for and acted in good faith concerning both the draft and the check. Larson also claims to be ignorant of any adverse claims on either instrument which are not overdue or have not been dishonored. Which of the following is (are) true?

I. Larson is a holder in due course of the draft.

II. Larson is a holder in due course of the check.

a. I only.

b. II only.

c. Both I and II.

d. Neither I nor II.

25. In order to be a holder in due course, the holder, among other requirements, must give value. Which of the following will satisfy this value requirement?

I. An antecedent debt.

II. A promise to perform services at a future date.

a. I only.

b. II only.

c. Both I and II.

d. Neither I nor II.

G. Rights of a Holder in Due Course

26. Bond fraudulently induced Teal to make a note payable to Wilk, to whom Bond was indebted. Bond delivered the note to Wilk. Wilk negotiated the instrument to Monk, who purchased it with knowledge of the fraud and after it was overdue. If Wilk qualifies as a holder in due course, which of the following statements is correct?

a. Monk has the standing of a holder in due course through Wilk.

b. Teal can successfully assert the defense of fraud in the inducement against Monk.

c. Monk personally qualifies as a holder in due course.

d. Teal can successfully assert the defense of fraud in the inducement against Wilk.

27. To the extent that a holder of a negotiable promissory note is a holder in due course, the holder takes the note free of which of the following defenses?

a. Minority of the maker where it is a defense to enforcement of a contract.

b. Forgery of the maker’s signature.

c. Discharge of the maker in bankruptcy.

d. Nonperformance of a condition precedent.

28. Under the Commercial Paper Article of the UCC, in a nonconsumer transaction, which of the following are real defenses available against a holder in due course?

image

29. On February 15, P.D. Stone obtained the following instrument from Astor Co. for $1,000. Stone was aware that Helco, Inc. disputed liability under the instrument because of an alleged breach by Astor of the referenced computer purchase agreement. On March 1, Willard Bank obtained the instrument from Stone for $3,900. Willard had no knowledge that Helco disputed liability under the instrument.

image

The reverse side of the instrument is endorsed as follows:

image

If Willard Bank demands payment from Helco and Helco refuses to pay the instrument because of Astor’s breach of the computer purchase agreement, which of the following statements would be correct?

a. Willard Bank is not a holder in due course because Stone was not a holder in due course.

b. Helco will not be liable to Willard Bank because of Astor’s breach.

c. Stone will be the only party liable to Willard Bank because he was aware of the dispute between Helco and Astor.

d. Helco will be liable to Willard Bank because Willard Bank is a holder in due course.

30. Northup made out a negotiable promissory note that was payable to the order of Port. This promissory note was meant to purchase some furniture that Port used to own, but he lied to Northup when he claimed he still owned it. Port immediately negotiated the note to Johnson who knew about Port’s lie. Johnson negotiated the note to Kenner who was a holder in due course. Kenner then negotiated the note back to Johnson. When Johnson sought to enforce the promissory note against Northup, she refused claiming fraud. Which of the following is correct?

a. Johnson, as a holder through a holder in due course, can enforce the promissory note.

b. Northup wins because Johnson does not have the rights of a holder in due course.

c. Northup wins because she has a real defense on this note.

d. Johnson’s knowledge of the lie does not affect his rights on this note.

31. Goran wrote out a check to Ruz to pay for a television set he purchased at a flea market from Ruz. When Goran got home, he found out the box did not have the television set but some weights. Goran immediately gave his bank a stop payment order over the phone. He followed this up with a written stop payment order. In the meantime, Ruz negotiated the check to Schmidt who qualified as a holder in due course. Schmidt gave the check as a gift to Buck. When Buck tried to cash the check, the bank and Goran both refused to pay. Which of the following is correct?

a. Buck cannot collect on the check from the bank because Goran has a real defense.

b. Buck cannot collect on the check from Goran because Goran has a personal defense.

c. Buck can require the bank to pay because Buck is a holder through a holder in due course.

d. Buck can require Goran to pay on the check even though the check was a gift.

32. Under the Negotiable Instruments Article of the UCC, which of the following parties will be a holder but not be entitled to the rights of a holder in due course?

a. A party who, knowing of a real defense to payment, received an instrument from a holder in due course.

b. A party who found an instrument payable to bearer.

c. A party who received, as a gift, an instrument from a holder in due course.

d. A party who, in good faith and without notice of any defect, gave value for an instrument.

33. A holder in due course will take free of which of the following defenses?

a. Infancy, to the extent that it is a defense to a simple contract.

b. Discharge of the maker in bankruptcy.

c. A wrongful filling-in of the amount payable that was omitted from the instrument.

d. Duress of a nature that renders the obligation of the party a nullity.

34. Cobb gave Garson a signed check with the amount payable left blank. Garson was to fill in, as the amount, the price of fuel oil Garson was to deliver to Cobb at a later date. Garson estimated the amount at $700, but told Cobb it would be no more than $900. Garson did not deliver the fuel oil, but filled in the amount of $1,000 on the check. Garson then negotiated the check to Josephs in satisfaction of a $500 debt with the $500 balance paid to Garson in cash. Cobb stopped payment and Josephs is seeking to collect $1,000 from Cobb. Cobb’s maximum liability to Josephs will be

a. $0

b. $ 500

c. $ 900

d. $1,000

35. A maker of a note will have a real defense against a holder in due course as a result of any of the following conditions except

a. Discharge in bankruptcy.

b. Forgery.

c. Fraud in the execution.

d. Lack of consideration.

H. Liability of Parties

36. Which of the following parties has (have) primary liability on a negotiable instrument?

I. Drawer of a check.

II. Drawee of a time draft before acceptance.

III. Maker of a promissory note.

a. I and II only.

b. II and III only.

c. I and III only.

d. III only.

37. Which of the following actions does not discharge a prior party to a commercial instrument?

a. Good faith payment or satisfaction of the instrument.

b. Cancellation of that prior party’s endorsement.

c. The holder’s oral renunciation of that prior party’s liability.

d. The holder’s intentional destruction of the instrument.

38. Under the Negotiable Instruments Article of the UCC, when an instrument is endorsed “Pay to John Doe” and signed “Faye Smith,” which of the following statements is (are) correct?

Payment of the instrument is guaranteed The instrument can be further negotiated
a. Yes Yes
b. Yes No
c. No Yes
d. No No

39.

image

Susan Town, on receiving the above instrument, struck Betty Ash’s endorsement. Under the Commercial Paper Article of the UCC, which of the endorsers of the above instrument will be completely discharged from secondary liability to later endorsers of the instrument?

a. Ann Tyler.

b. Mary Thomas.

c. Betty Ash.

d. Susan Town.

40. A subsequent holder of a negotiable instrument may cause the discharge of a prior holder of the instrument by any of the following actions except

a. Unexcused delay in presentment of a time draft.

b. Procuring certification of a check.

c. Giving notice of dishonor the day after dishonor.

d. Material alteration of a note.

41. A check has the following endorsements on the back:

image

Which of the following conditions occurring subsequent to the endorsements would discharge all of the endorsers?

a. Lack of notice of dishonor.

b. Late presentment.

c. Insolvency of the maker.

d. Certification of the check.

42. Robb, a minor, executed a promissory note payable to bearer and delivered it to Dodsen in payment for a stereo system. Dodsen negotiated the note for value to Mellon by delivery alone and without endorsement. Mellon endorsed the note in blank and negotiated it to Bloom for value. Bloom’s demand for payment was refused by Robb because the note was executed when Robb was a minor. Bloom gave prompt notice of Robb’s default to Dodsen and Mellon. None of the holders of the note were aware of Robb’s minority. Which of the following parties will be liable to Bloom?

Dodsen Mellon
a. Yes Yes
b. Yes No
c. No No
d. No Yes

43. Vex Corp. executed a negotiable promissory note payable to Tamp, Inc. The note was collateralized by some of Vex’s business assets. Tamp negotiated the note to Miller for value. Miller endorsed the note in blank and negotiated it to Bilco for value. Before the note became due, Bilco agreed to release Vex’s collateral. Vex refused to pay Bilco when the note became due. Bilco promptly notified Miller and Tamp of Vex’s default. Which of the following statements is correct?

a. Bilco will be unable to collect from Miller because Miller’s endorsement was in blank.

b. Bilco will be able to collect from either Tamp or Miller because Bilco was a holder in due course.

c. Bilco will be unable to collect from either Tamp or Miller because of Bilco’s release of the collateral.

d. Bilco will be able to collect from Tamp because Tamp was the original payee.

44. Under the Commercial Paper Article of the UCC, which of the following statements best describes the effect of a person endorsing a check “without recourse”?

a. The person has no liability to prior endorsers.

b. The person makes no promise or guarantee of payment on dishonor.

c. The person gives no warranty protection to later transferees.

d. The person converts the check into order paper.

J. Banks

45. A check is postdated to November 20 even though the check was written out on November 3 of the same year. The drawer provided notice to the bank of the postdated check. Which of the following is correct under the Revised Article 3 of the Uniform Commercial Code?

a. The check is payable on demand on or after November 3 because part of the definition of a check is that it be payable on demand.

b. The check ceases to be demand paper and is payable on November 20.

c. The postdating destroys negotiability.

d. A bank that pays the check is automatically liable for early payment.

46. Stanley purchased a computer from Comp Electronics with a personal check. Later that day, Stanley saw a better deal on the computer so he orally stopped payment on the check with his bank. The bank, however, still paid Comp Electronics when the check was presented three days later. Which of the following is correct?

a. The bank is liable to Stanley for failure to follow the oral stop payment order.

b. The bank is not liable to Stanley because the stop payment order was not in writing.

c. The bank is not liable to Stanley if Comp Electronics qualifies as a holder in due course.

d. Comp Electronics is liable to Stanley to return the amount of the check.

M. Transfer of Negotiable Documents of Title

47. A trade acceptance is an instrument drawn by a

a. Seller obligating the seller or designee to make payment.

b. Buyer obligating the buyer or designee to make payment.

c. Seller ordering the buyer or designee to make payment.

d. Buyer ordering the seller or designee to make payment.

48. Under the Documents of Title Article of the UCC, which of the following statements is (are) correct regarding a common carrier’s duty to deliver goods subject to a negotiable bearer bill of lading?

I. The carrier may deliver the goods to any party designated by the holder of the bill of lading.

II. A carrier who, without court order, delivers goods to a party claiming the goods under a missing negotiable bill of lading is liable to any person injured by the misdelivery.

a. I only.

b. II only.

c. Both I and II.

d. Neither I nor II.

49. Which of the following is not a warranty made by the seller of a negotiable warehouse receipt to the purchaser of the document?

a. The document transfer is fully effective with respect to the goods it represents.

b. The warehouseman will honor the document.

c. The seller has no knowledge of any facts that would impair the document’s validity.

d. The document is genuine.

50. Under the UCC, a warehouse receipt

a. Will not be negotiable if it contains a contractual limitation on the warehouseman’s liability.

b. May qualify as both a negotiable warehouse receipt and negotiable commercial paper if the instrument is payable either in cash or by the delivery of goods.

c. May be issued only by a bonded and licensed warehouseman.

d. Is negotiable if by its terms the goods are to be delivered to bearer or the order of a named person.

Multiple-Choice Answers and Explanations

Answers

image

Explanations

1. (a) This instrument is a draft because it is a three-party instrument where a drawer (Dexter) orders a drawee (Middlesex National Bank) to pay a fixed amount in money to the payee (Silver). Answer (b) is incorrect because in order for the instrument to qualify as a check, the instrument must be payable on demand. In this situation, the instrument held by Silver is a time draft which specifies the payment date as October 1, 2009. Answer (d) is incorrect because a promissory note is a two-party instrument in which one party promises to pay a fixed amount in money to the payee. Answer (c) is incorrect because a trade acceptance is a special type of draft in which a seller of goods extends credit to the buyer by drawing a draft on that buyer directing the buyer to pay a fixed amount in money to the seller on a specified date. The seller is therefore both the drawer and payee in a trade acceptance.

2. (c) Under the Revised Article 3 of the UCC, there are two basic categories of negotiable instruments (i.e., promissory notes and drafts). Answers (a) and (d) are incorrect because a certificate of deposit is a promissory note issued by a bank. Answer (b) is incorrect because a check is a draft drawn on a bank and payable on demand unless it is postdated.

3. (a) A promissory demand note is a two-party instrument in which the maker (T. T. Tile) promises to pay to the order of the payee (A. B. Shark) and the payment is made upon demand with no time period stated. N. A. Abner made a guaranty but it is still a two-party note. Answers (b), (c), and (d) are all incorrect because sight drafts, checks, and trade acceptances are all three-party instruments requiring a drawee.

4. (a) Drafts and checks are three-party instruments in which the drawer orders the drawee to pay the payee. Notes and certificates of deposit are two-party instruments in which the maker promises to pay the payee.

5. (a) All negotiable instruments are required to be payable to order or bearer with the exception of checks. This instrument says “Pay to Jenny Larson,” therefore, it can only be negotiable if it is a check. All of these instruments in the question would be negotiable if they said “Pay to the order of Jenny Larson,” including a check.

6. (a) One of the elements of negotiability is that the note be payable to order or to bearer. Under the revised UCC, this is true for all negotiable instruments except checks that do not need the words “to the order of” or “bearer.” Answer (b) is incorrect because signing by the payee is a method of negotiation but is not a requirement to make the instrument negotiable. Answer (c) is incorrect because such references are not required. Answer (d) is incorrect because the elements of negotiability do not require the stating of any conditions of payment. In fact, such conditions can destroy negotiability.

7. (c) This promissory note is negotiable because it meets all of the requirements of negotiability. It is written and signed. It contains an unconditional promise to pay a fixed amount in money. It is payable at a definite time under the UCC even though the maker may extend the due date to March 31, because this option of the maker to extend the time is limited to a definite date. And finally, the instrument is payable to bearer because it states “Pay to Astor Co. or bearer.” Answer (a) is incorrect because the reference to the computer purchase agreement does not condition payment on this agreement, it simply refers to it. Answer (b) is incorrect because when the words and numbers are contradictory, the written words control and thus, the instrument still contains a fixed amount. Answer (d) is incorrect because once an instrument is negotiable and remains unaltered, it is negotiable for all parties.

8. (c) The Revised Article 3 of the UCC allows a negotiable instrument to be payable in any medium of exchange of the US or a foreign government. Therefore, answer (a) is incorrect. Answer (b) is incorrect because negotiability is maintained despite the fact that rate of exchange can fluctuate. This is a fact of doing business internationally. Answer (d) is incorrect because the exchange rate can be determined readily.

9. (a) This instrument satisfies all of the requirements for negotiability except for the requirement that it be payable on demand or at a definite time. Since it is payable ten days after the sale of the maker’s diamond ring, the time of payment is not certain as to the time of occurrence. It is unknown when, or if, the ring will be sold. Answer (b) is incorrect because a negotiable instrument may contain a promise to provide collateral. Answer (c) is incorrect because although it is a two-party note, it is not negotiable because it is not payable at a definite time. Answer (d) is incorrect because it is not negotiable and is not a draft. A draft requires a drawer ordering a drawee to pay the payee.

10. (d) Since this note is subject to the terms of another document, the promise in the note is conditional, causing negotiability to be destroyed. Answer (a) is incorrect because since one must look to a document outside of the note, this destroys negotiability. Answer (b) is incorrect because the note itself makes its promise conditioned on the contract. Thus, the contract cannot be ignored. Answer (c) is incorrect because the contract, which is outside of the note, must be examined. This destroys the note’s negotiability.

11. (c) For a note to be negotiable, it must be written and signed by the maker, contain an unconditional promise to pay a fixed amount in money, be payable at a definite time or on demand, and be payable to order or to bearer. This note fulfills all of these requirements. It is therefore negotiable and does not require that the payment date be specified because it is payable on demand. Answer (a) is incorrect because the note fulfills all the requirements of negotiability. Answer (b) is incorrect because in cases of inconsistencies between words and figures, the words control. Answer (d) is incorrect because although the guaranty may make the note more desirable, it was already negotiable.

12. (d) Under the Revised Article 3 of the UCC, interest rates are allowed to be variable or fluctuate. Negotiability is not destroyed. Answer (a) is incorrect because the sum certain rule allows the interest rate to vary based on such things as the prime rate of interest of a given bank. Answer (b) is incorrect because negotiability is not destroyed by needing to resort to information outside of the negotiable instrument. Answer (c) is incorrect because it is allowed for the interest to vary while the negotiable instrument is still outstanding.

13. (a) Under the Revised Article 3 of the UCC, a check may be postdated and need not be payable to order. The words “Pay to Corbin Company” are allowed for checks. However, all negotiable instruments other than checks need to be payable to order or to bearer.

14. (a) Under the Revised Article 3 of the UCC, unlike under earlier versions, payment on a negotiable instrument may be designated to come from a particular source or fund. The maker or drawer does not have to be personally obligated. Therefore, answer (b) is incorrect. Answer (c) is incorrect because this provision is not deemed to make the instrument not negotiable for reason of a conditional promise. Answer (d) is incorrect because lack of payment due to insufficient funds does not destroy negotiability.

15. (a) When the amount in words differs from the amount in figures on a negotiable instrument, the words control over the figures. Answer (b) is incorrect because the law has settled this ambiguity in favor of the words on negotiable instruments. Answer (c) is incorrect because the instrument is still negotiable and can be cashed. Answer (d) is incorrect because there is no such rule involving 10%.

16. (c) This is a very common type of restrictive endorsement. Answer (a) is incorrect because a blank endorsement is one that does not specify any endorsee. Answer (b) is incorrect because a qualified endorsement is one in which the endorser disclaims liability to pay the holder or any subsequent endorser for the instrument if it is later dishonored. An example of this is the endorser putting in the words “without recourse” on the back of the instrument. Answer (d) is incorrect because a special endorsement refers to when the endorser indicates a specific person who needs to subsequently endorse it.

17. (c) Although negotiating bearer paper only requires delivery, negotiating order paper requires both delivery and endorsement by the transferor. Delivery requires that the holder get possession of the instrument.

18. (d) Since John Smith endorsed the instrument in blank (i.e., did not specify any endorsee) it became bearer paper. Since it was bearer paper in Harris’s hands, she did not need to endorse it to negotiate it to the next party, Sharp. Answer (a) is incorrect because when Parker endorsed “Pay to John Smith only” he made the instrument require John Smith’s signature to negotiate it further. Parker’s endorsement will not restrict negotiations beyond John Smith’s and it does not destroy negotiability. Answer (b) is incorrect as although conditions on the front generally destroy the negotiability of an instrument, conditions put into an endorsement do not. Answer (c) is incorrect because the wording “Pay to John Smith only” will not restrict further negotiation after John Smith. When John Smith endorsed it in blank, it became bearer paper.

19. (d) The words “Pay to the order of Jerry Lin” are not necessary because the note is already negotiable on its face where it was payable to the order of Ann Jackson. Answer (a) is not chosen because although when Jackson endorsed the note in blank, it became bearer paper, it was converted back to order paper when Lin put “Pay to Jerry Lin” above Jackson’s endorsement. Answer (b) should not be chosen because when Jackson endorsed it without specifying any payee, the note became bearer paper. Answer (c) should not be chosen because it became order paper once “Pay to Jerry Lin” was written, whether he personally did it or not.

20. (a) This endorsement is special because it indicates “Pay to Alex Ericson” and it is restrictive because of the phrase “if he completes . . .” Answer (b) is incorrect because this endorsement is special and qualified. Answer (c) is incorrect because although it is restrictive, it is also a blank endorsement. Answer (d) is incorrect because although it is a special endorsement stating “Pay to Alex Ericson,” it is not restrictive.

21. (b) Although the note was originally a bearer instrument, Stone endorsed it with a special endorsement when s/he indicated “Pay to the order of Willard Bank, without recourse” above the endorsement. This means that Willard Bank must endorse the note to negotiate it further. Answer (a) is incorrect because qualified endorsements such as “without recourse” disclaim some liability but do not prevent subsequent parties from becoming a holder in due course. Answer (c) is incorrect because although Stone is not a holder in due course because s/he had notice that the maker disputed liability under the note, Willard Bank is a holder in due course because Willard was unaware that Helco disputed liability on the note. Additionally, Willard meets the other requirements to be a holder in due course, because he was a holder of a negotiable note, gave value ($3,900) for it, took in good faith, and had no notice, not only of the alleged breach by Astor, but of any other relevant problems such as being overdue or having been dishonored. Answer (d) is incorrect because the note was bearer paper when Stone received it and thus did not require an endorsement.

22. (a) To be a holder in due course, the holder must, among other things, take without notice that the instrument is overdue, has been dishonored, or that any person has a defense or claim to it. In this case, the person was notified that payment was refused. Answer (b) is incorrect because a prior endorser being discharged does not mean that person necessarily had a defense to the instrument. Answer (c) is incorrect because the use of a note as collateral does not prevent a holder from becoming a holder in due course. Answer (d) is incorrect because reasonable discounts are allowed and do not indicate bad faith or that a person has a defense or claim to the instrument.

23. (c) An executory promise does not satisfy the value requirement to be a holder in due course until the promise is actually performed. Answer (a) is incorrect because Ruper received the check to pay off a previous debt owed to her. Taking in satisfaction of a previous debt constitutes value to be a holder in due course. Answer (b) is incorrect because she took the check in exchange for another negotiable instrument. The fact that the check was for less than the face value of the negotiable note does not violate the value requirements. Answer (d) is incorrect because taking the check to pay off an antecedent debt constitutes value whether the debtor was a relative or not.

24. (b) In order to be a holder in due course, the individual must be a holder of a negotiable instrument as well as fulfilling the additional requirements referred to in the question. In this case, the draft is not negotiable because it is not payable to order or to bearer. However, the check is negotiable because checks do not have to be payable to order or to bearer to be negotiable.

25. (a) Even though an antecedent debt would not be valid for the consideration requirement under contract law, it is valid for the value requirement under negotiable instruments law. A promise to perform services at a future date is an executory promise and is not value until actually performed.

26. (a) Monk is not personally a HDC because although he was a holder of the negotiable note for which he gave value, he did not take in good faith because he had knowledge of the fraud before he purchased the note. Furthermore, he had notice that the note was overdue. Therefore, answer (c) can be ruled out. Answer (a) however, is correct because even though Monk was not a HDC, he obtained the instrument from Wilk who was a HDC. Therefore, Monk qualifies as a holder through a HDC and thus obtains all of the rights of a HDC. Answers (b) and (d) are incorrect because fraud in the inducement is a personal defense. Wilk, as a HDC, and Monk, as a holder through a HDC, both take the note free of personal defenses.

27. (d) A holder in due course takes an instrument free of personal defenses but is subject to real defenses. Answer (d) is correct because it involves a breach of contract or nonperformance of a condition precedent which describes a personal defense. Answer (c) is incorrect because bankruptcy is a real defense. Answer (a) is incorrect because when a minor may disaffirm a contract, it is treated as a real defense. Answer (b) is incorrect because a forgery of a maker’s or drawer’s signature is a real defense.

28. (b) Real defenses include bankruptcy and material alterations of the instrument. Material alterations include a change of any monetary amount. They also include changes in the interest rate, if any, on the instrument or changes in the date if the date affects when it is paid or the amount of interest to be paid. Personal defenses include the more typical defenses such as breach of contract, breach of warranty, and fraud in the inducement.

29. (d) Helco is claiming breach of contract which is a personal defense. The general rule is that transfer of a negotiable instrument to a holder in due course cuts off all personal defenses against the holder in due course. Since Willard Bank is a holder in due course, Helco is liable to Willard Bank. Answer (a) is incorrect because Willard Bank meets all of the requirements to be a holder in due course. That is, Willard is a holder of a negotiable instrument, gave value, took in good faith, and took without notice of certain problems such as Helco’s disputed liability. The fact that Stone was not a holder in due course does not change this. Answer (b) is incorrect because Willard Bank as a holder in due course wins against Helco’s claim of Astor’s breach. The breach of contract would only constitute a personal defense. Answer (c) is incorrect because Helco is liable to Willard Bank.

30. (b) When a negotiable instrument is negotiated from a holder in due course to another holder, this other holder normally obtains the rights of a holder in due course. However, an important exception applies to this case. Since Johnson knew of the lie when he first acquired the note, he was not a HDC and cannot improve his status by reacquiring from a HDC. Answer (a) is incorrect because he did not qualify as a HDC due to his knowledge of the defense. Answer (c) is incorrect because fraud in the inducement is a personal, not real, defense. Answer (d) is incorrect because his knowledge of the lie prevents his becoming a HDC at first and prevents his later becoming a holder through a holder in due course.

31. (d) Even though Buck did not personally qualify as a HDC, he was a holder through a holder in due course and can collect from the drawer despite the drawer’s personal defense. Answer (a) is incorrect because Goran’s defense is a personal defense. Also, the bank is permitted to follow the customer’s stop payment order. Answer (b) is incorrect because Buck as a holder through a holder in due course can collect despite the personal defense. Answer (c) is incorrect because the bank is permitted to refuse payment and then Buck collects from the drawer.

32. (b) A party who found an instrument payable to bearer is a holder but not a holder through a holder in due course. To be the latter, s/he must obtain a negotiable instrument from a holder in due course. If this had been the case, s/he would have obtained the rights of a holder in due course. However, since s/he found the instrument, it cannot be established that the previous holder was a holder in due course. Answer (a) is incorrect because s/he did receive the instrument from a holder in due course. S/he, therefore, does obtain the rights of a holder in due course even though s/he cannot be a holder in due course him/herself because of having notice of the defense on the instrument. Answer (c) is incorrect because the party received the instrument from a holder in due course and thus becomes a holder through a holder in due course. Answer (d) is incorrect because this party personally qualifies as a holder in due course, thereby obtaining those rights.

33. (c) An unauthorized completion of an incomplete instrument is a personal defense, and, as such, will not be valid against a HDC. Infancy (unless the instrument is exchanged for necessaries), bankruptcy of the maker, and extreme duress are all real defenses which are good against a HDC, thus answers (a), (b), and (d) are incorrect.

34. (d) Since Cobb left the amount blank on the signed check and Garson filled it in contrary to Cobb’s instructions, this is a case of unauthorized completion which is a personal defense. Garson then negotiated the check to Josephs who is a holder in due course because he gave value for the negotiable instrument and took in good faith without notice of any problems. He gave value for the full $1,000 since cash and taking the check for a previous debt are both value under negotiable instrument law. Therefore, Josephs may collect the full $1,000 and win over the personal defense that Cobb has.

35. (d) A maker of a note may use real defenses against a holder in due course but not personal defenses. Lack of consideration is a personal defense. Discharge in bankruptcy, forgery, and fraud in the execution are all real defenses, which create a valid defense against a holder in due course.

36. (d) The maker of a note has primary liability on that note. No one has primary liability on a draft or check unless the drawee accepts it. This is true because although the drawee has been ordered by the drawer to pay, the drawee has not agreed to pay unless it accepts the draft or check.

37. (c) When there are multiple endorsers on a negotiable instrument, each is liable to subsequent endorsers or holders. Oral renunciation of a prior party’s liability does not discharge that party’s liability. Renunciation must be in writing to discharge liability. Answer (a) is incorrect because once the primary party pays on the instrument, all endorsers are discharged from liability. Answer (b) is incorrect because cancellation of a prior party’s endorsement does discharge that party’s liability. Answer (d) is incorrect because when a holder intentionally destroys a negotiable instrument, the prior endorsers are discharged.

38. (a) When a negotiable instrument is endorsed and a specific person is indicated, the instrument is order paper and can be further negotiated by that person. Note also that payment of the instrument is guaranteed. If the primary party to the negotiable instrument does not pay, the endorser(s) are obligated to pay on the instrument when the holder demands payment or acceptance in a timely manner.

39. (c) Striking out the endorsement of a person discharges that person’s secondary liability and discharges subsequent endorsers who have already endorsed. This does not, however, discharge any of the prior parties. Therefore, in this case, Betty Ash is discharged from secondary liability to the later endorsers.

40. (c) Various acts or failures of a holder can cause a discharge of prior holders of an instrument. Among these are an unexcused delay in presenting an instrument, cancellation or renunciation of the instrument, fraudulent or material alteration, and certification of a check. Notice of dishonor generally should be given by midnight of the third business day after the dishonor or notice of the dishonor. Banks must give notice by midnight of the next banking day. In either case, answer (c) is correct. Answers (a), (b), and (d) are all incorrect because they are all acts that cause the discharge of prior holders.

41. (d) When a holder procures certification of a check, all prior endorsers are discharged. This is true because when a bank certifies a check, it has accepted the check and agreed to honor it as presented. Answers (a) and (b) are incorrect because although lack of notice of dishonor to other endorsers and late presentment of the instrument will normally discharge all endorsers, this is not true if the lack of notice of dishonor or the late presentment is excused. They can be excused in such cases as the delay is beyond the party’s control or the presentment is waived. Furthermore in this fact pattern, Hopkins endorsed the check “payment guaranteed” and Quarry endorsed it “collection guaranteed.” When words of guaranty are used, presentment or notice of dishonor are not required to hold the users liable. Answer (c) is incorrect because when the maker is insolvent the endorsers will likely be sought after for payment.

42. (d) Since Dodsen did not endorse the note, s/he gave transfer warranties and presentment warranties only to the immediate transferee (i.e., Mellon). Mellon gave these warranties to Bloom. Therefore although Mellon will be liable to Bloom, Dodsen will not be.

43. (c) Normally, Bilco could seek collection on the defaulted note from the previous endorsers, Tamp and Miller. However, in this case, Bilco agreed to release the collateral underlying this note. Since this materially affects the rights of Tamp and Miller to use this collateral, this act releases them. Answer (a) is incorrect because except for the release of the collateral, Bilco could have collected from his/her immediate transferor even without the endorsement. Answers (b) and (d) are incorrect because the release of the collateral releases Tamp and Miller.

44. (b) When a person endorses a negotiable instrument, s/he is normally secondarily liable to later endorsers. This liability means that the endorser can be required to make good on the instrument. If s/he endorses without recourse, the endorser can avoid this liability. Answer (a) is incorrect because the endorser is not liable to prior endorsers anyway whether or not s/he endorses without recourse. Answer (c) is incorrect because the endorser still gives the transferor’s warranties with some modification. Answer (d) is incorrect because a check is converted into order paper only if the endorser also specifies a payee.

45. (b) Under the Revised Article 3, postdating a check does not destroy negotiability but makes the check properly payable on or after the date written on the check. Although the postdated check is not properly payable before the date on the instrument, if a bank pays it earlier, it is not liable unless the drawer had notified the bank that the check was postdated.

46. (c) If the bank fails to follow a stop payment order, it is liable to the customer only if the customer had a valid defense on the check and therefore suffers a loss. Comp Electronics, the payee, can qualify as a HDC and Stanley would have to pay anyway despite the stop payment order. Answer (a) is incorrect because the bank did not cause Stanley a loss. Answer (b) is incorrect because oral stop payment orders are valid for fourteen days. Answer (d) is incorrect because from the facts given, there is no evidence that Comp Electronics breached the contract.

47. (c) A trade acceptance is a special type of draft in which a seller of goods extends credit to the buyer by drawing the draft on the buyer ordering the buyer to make payment to the seller on a specified date.

48. (c) A negotiable bearer bill of lading is a document of title that under the UCC allows the bearer the rights to the goods mentioned including the right to designate who will receive delivery of the goods. The carrier is required to deliver the goods to the holder of negotiable bearer bill of lading or to that holder’s designee. The carrier is liable for any misdelivery for any damages caused.

49. (b) A person who negotiates a negotiable document of title for value extends the following warranties to the immediate purchaser: (1) negotiation by the transferor is rightful and fully effective with respect to the goods it represents, (2) the transferor has no knowledge of any facts that would impair the document’s validity or worth, and (3) the document is genuine. However, the transferor of a negotiable warehouse receipt does not necessarily warrant that the warehouseman will honor the document.

50. (d) A negotiable warehouse receipt is a document issued as evidence of receipt of goods by a person engaged in the business of storing goods for hire. The warehouse receipt is negotiable if the face of the document contains the words of negotiability (order or bearer). Answer (a) is incorrect because the negotiability of the warehouse receipt is not destroyed by the inclusion of a contractual limitation on the warehouseman’s liability. Answer (b) is incorrect because to qualify as commercial paper, the instrument must be payable only in money. If an instrument is payable in money or by the delivery of goods, it is a nonnegotiable instrument. Answer (c) is incorrect because the UCC does not state that only a bonded and licensed warehouseman can issue a warehouse receipt.

Simulations

Task-Based Simulation 1

image

This simulation has four separate fact patterns, each followed by five legal conclusions relating to the fact pattern preceding those five numbered legal conclusions. Determine whether each conclusion is Correct or Incorrect.

An instrument purports to be a negotiable instrument. It otherwise fulfills all the elements of negotiability and it states “Pay to Rich Crane.”

Correct Incorrect
1. It is negotiable if it is a check and Rich Crane has possession of the check. image image
2. It is negotiable if it is a draft drawn on a corporation. image image
3. It is negotiable if it is a promissory note due one year later with 5% interest stated on its face. image image
4. It is negotiable if it is a certificate of deposit. image image
5. It is negotiable even if it is a cashier’s check. image image

Another instrument fulfills all of the elements of negotiability except possibly one, that is, the instrument does not identify any payee.

Correct Incorrect
6. The instrument is not negotiable if it is a draft. image image
7. The instrument is bearer paper if it is a check. image image
8. The instrument is negotiable if it is a promissory note. image image
9. The instrument is bearer paper if it is a promissory note. image image
10. The instrument is negotiable only if it also states the word “negotiable” on its face. image image

A promissory note states that the maker promises to pay to the order of ABC Company $10,000 plus interest at 2% above the prime rate of XYZ Bank in New York City one year from the date on the promissory note.

Correct Incorrect
11. The interest rate provision destroys negotiability because the prime rate can fluctuate during the year. image image
12. The interest rate provision destroys negotiability because one has to look outside the note to see what the prime rate of XYZ Bank is. image image
13. The maker is obligated to pay only the $10,000 because the amount of interest is not a sum certain. image image
14. The maker must pay $10,000 plus the judgment rate of interest because the amount of interest cannot be determined without referring to facts outside the instrument. image image
15. Any holder of this note could not qualify as a holder in due course because of the interest provision. image image

An individual fills out his personal check. He postdates the check for ten days later, notifies his bank of the postdated check, and notes on the face of the check that it is for “Payment for textbooks.”

Correct Incorrect
16. The instrument is demand paper because it is a check and is thus payable immediately. image image
17. The check is not payable before the date on its face. image image
18. If a bank pays on this check before its stated date, the bank is liable to the drawer. image image
19. The notation “Payment for textbooks” destroys negotiability because it makes payment conditional. image image
20. The notation “Payment for textbooks” does not destroy negotiability but only if the check was actually used to pay for textbooks. image image

Task-Based Simulation 2

image

During an audit of Trent Realty Corp.’s financial statements, Clark, CPA, reviewed two instruments.

Instrument 1

image

The following transactions relate to Instrument 1.

  • On March 15, 2010, Dart endorsed the instrument in blank and sold it to Morton for $275,000.
  • On July 10, 2010, Evans informed Morton that Dart had fraudulently induced Evans into signing the instrument.
  • On August 15, 2010, Trent, which knew of Evans’ claim against Dart, purchased the instrument from Morton for $50,000.

Items 1 through 5 relate to Instrument 1. For each item, select from List I the correct answer. An answer may be selected once, more than once, or not at all.

List I
A. Draft E. Holder in due course H. Nonnegotiable
B. Promissory Note F. Holder with rights of a holder in due course under the shelter provision I. Evans, Morton, and Dart
C. Security Agreement J. Morton and Dart
D. Holder G. Negotiable K. Only Dart
image

Instrument 2

image

Items 6 through 13 relate to Instrument 2. For each item, select from List II the correct answer. An answer may be selected once, more than once, or not at all.

List II
A. Bearer paper F. Nonnegotiable
B. Blank G. Note
C. Check H. Order paper
D. Draft I. Qualified
E. Negotiable J. Special
image

Simulation Solutions

Task-Based Simulation 1

image
Correct Incorrect
1. It is negotiable if it is a check and Rich Crane has possession of the check. image image
2. It is negotiable if it is a draft drawn on a corporation. image image
3. It is negotiable if it is a promissory note due one year later with 5% interest stated on its face. image image
4. It is negotiable if it is a certificate of deposit. image image
5. It is negotiable even if it is a cashier’s check. image image

Explanations

1. (C) Even though the instrument states “Pay to Rich Crane,” it is negotiable because a check does not have to be payable to order or bearer.

2. (I) A draft to be negotiable must be payable to order or to bearer, regardless of the drawer of the draft. “Pay to the order of Rich Crane” would have made it negotiable.

3. (I) Promissory notes to be negotiable must be payable to order or to bearer.

4. (I) Certificates of deposit, unlike checks, must be payable to order or to bearer.

5. (C) A cashier’s check is an actual check and thus does not have to be payable to order or to bearer.

Correct Incorrect
6. The instrument is not negotiable if it is a draft. image image
7. The instrument is bearer paper if it is a check. image image
8. The instrument is negotiable if it is a promissory note. image image
9. The instrument is bearer paper if it is a promissory note. image image
10. The instrument is negotiable only if it also states the word “negotiable” on its face. image image

Explanations

6. (I) If an instrument does not name any payee, it is considered to be payable to bearer. Thus, negotiability is not destroyed.

7. (C) If no payee is named, it is bearer paper.

8. (C) Since no payee was named, it is bearer paper and thus negotiability is maintained.

9. (C) Like the cases of drafts, checks, and certificates of deposit, it is bearer paper.

10. (I) There is no such requirement to state “negotiable” on its face.

Correct Incorrect
11. The interest rate provision destroys negotiability because the prime rate can fluctuate during the year. image image
12. The interest rate provision destroys negotiability because one has to look outside the note to see what the prime rate of XYZ Bank is. image image
13. The maker is obligated to pay only the $10,000 because the amount of interest is not a sum certain. image image
14. The maker must pay $10,000 plus the judgment rate of interest because the amount of interest cannot be determined without referring to facts outside the instrument. image image
15. Any holder of this note could not qualify as a holder in due course because of the interest provision. image image

Explanations

11. (I) The negotiability of an instrument is not destroyed simply because the interest rate used may fluctuate.

12. (I) Negotiability is not destroyed even if one has to look outside of the document to determine what the actual rate is.

13. (I) Even though the interest rate may fluctuate, the maker is still obligated to pay the $10,000 plus the interest.

14. (I) The maker must pay the $10,000 plus the interest described on the promissory note.

15. (I) Since this note is negotiable despite the possible fluctuation of the interest rate, a holder could qualify to be a holder in due course under those applicable rules.

Correct Incorrect
16. The instrument is demand paper because it is a check and is thus payable immediately. image image
17. The check is not payable before the date on its face. image image
18. If a bank pays on this check before its stated date, the bank is liable to the drawer. image image
19. The notation “Payment for textbooks” destroys negotiability because it makes payment conditional. image image
20. The notation “Payment for textbooks” does not destroy negotiability but only if the check was actually used to pay for textbooks. image image

Explanations

16. (I) Normally a check is demand paper. However, when it is postdated, it is not payable until that date.

17. (C) The postdating overrides the normal characteristic that it is payable on demand.

18. (C) The bank is liable because the drawer has given the bank prior notice of the postdating.

19. (I) Notations on negotiable instruments that note what it is for do not put conditions on the payment and thus do not destroy negotiability.

20. (I) These notations can be ignored because they are not conditions of payment.

Task-Based Simulation 2

image
image

Explanations

1. (B) Instrument 1 is a two-party instrument in which Evans promises to pay a fixed amount in money to Dart; therefore it qualifies as a promissory note. A promissory note may be payable on demand or at a specific point in time.

2. (G) Instrument 1 meets the requirements of negotiability. It is written and signed by the maker. It contains an unconditional promise or order to pay a fixed amount in money, at a definite time or on demand. The document is also payable to order. The fact that it is payable on a certain date subject to acceleration does not destroy its negotiability.

3. (E) To qualify as a holder in due course, an individual must be a holder of a properly negotiated negotiable instrument, give value for the instrument, and take the instrument in good faith and without notice that it is overdue, has been dishonored, or that any person has a defense or claim to it.

4. (F) When a negotiable instrument is negotiated from a holder in due course to a second holder, the second holder usually acquires the rights of a holder in due course through the shelter provision. The shelter provision applies to holders who have not previously held the instrument with knowledge of any defenses.

5. (I) A holder with rights of a holder in due course under the shelter provision obtains all the rights of a holder in due course. A holder in due course takes an instrument free of personal defenses, including fraud in the inducement. Therefore, Evans’ claim that Dart had fraudulently induced Evans into signing the instrument would not prevent Trent from recovering from Evans. Trent would also be able to recover from Morton and Dart based on his holder in due course status.

image

Explanations

6. (D) Instrument 2 is a draft because it is a three-party instrument where a drawer (Fields) orders a drawee (Pure Bank) to pay a fixed amount in money to the payee (West). It is not a check because it is not payable on demand.

7. (E) The draft qualifies as a negotiable instrument as it meets all of the required elements of negotiability. The draft is written and signed by the drawer. It contains an unconditional order to pay a fixed amount in money. It is made payable to order and is payable at a definite time.

8. (A) A blank endorsement which does not specify any endorsee converts order paper to bearer paper.

9. (H) An endorsement which indicates the specific person to whom the endorsee wishes to negotiate the instrument is a special endorsement. The use of a special endorsement converts bearer paper into order paper.

10. (A) Because Larr’s endorsement does not specify any endorsee, the endorsement converts the order paper into bearer paper.

11. (B) West’s endorsement is a blank endorsement because it does not specify any endorsee.

12. (J) Because Keetin’s endorsement indicates a specific person to whom the instrument is being negotiated, the endorsement is a special endorsement.

13. (I) Larr’s endorsement is a qualified endorsement because Larr disclaimed liability by signing without recourse.

..................Content has been hidden....................

You can't read the all page of ebook, please click here login for view all page.
Reset
18.119.111.179