7.1 Commercial Paper Homework Questions

Question 1

Question CPA-01068

Under the Negotiable Instruments Article of the UCC, which of the endorser’s liabilities are disclaimed by a ‘‘without recourse’’ endorsement?

1. Neither contract nor warranty liability.
2. Warranty liability only.
3. Contract liability only.
4. Both contract and warranty liability.

Answer 1

Explanation

Choice ‘‘c’’ is correct. Endorsing a negotiable instrument without recourse negates contract liability but not warranty liability.

Choices ‘‘b’’, ‘‘d’’, and ‘‘a’’ are incorrect. Each of these choices incorrectly addresses warranty and/or contract liability.

Question 2

Question CPA-01074

Under the Negotiable Instruments Article of the UCC, which of the following provisions satisfies the requirement that an instrument, to be negotiable, must be payable at a definite time?

1. The instrument is dated and payable ‘‘in six months but the payor may extend this period indefinitely.”
2. The instrument is undated and payable ‘‘when the payee dies.”
3. The instrument is dated and payable ‘‘15 days after sight.”
4. The instrument is undated and payable ‘‘30 days after date.’’

Answer 2

Explanation

Choice ‘‘c’’ is correct. An instrument is payable at a definite time if it can be established from the face of the instrument when the obligation will become due. An obligation payable 15 days after sight is payable 15 days after it is presented for payment.

Choice ‘‘a’’ is incorrect. Although six months is a definite time, the option of the payor to extend indefinitely the time for payment destroys negotiability.

Choice ‘‘d’’ is incorrect. If an instrument is not dated, we cannot know when 30 days after date is. Therefore, this is not payable at a definite time.

Choice ‘‘b’’ is incorrect. Although the payee will die some day, we do not know when, so the date of payment is not definite.

Question 3

Question CPA-01078

Under the Negotiable Instruments Article of the UCC, an endorsement of an instrument ‘‘for deposit only’’ is an example of what type of endorsement?

1. Special.
2. Blank.
3. Qualified.
4. Restrictive.

Answer 3

Explanation

Choice ‘‘d’’ is correct. The \/1/0rds ‘‘for deposit only’’ restrict further negotiation of the instrument and so are an example of a restrictive endorsement.

Choice ‘‘b’’ is incorrect. A blank endorsement does not name a special endorsee. The words ‘‘for deposit only’’ create a restrictive endorsement, not a blank endorsement.

Choice ‘‘c’’ is incorrect. A qualified endorsement is one that includes the words ‘‘without recourse’’ and so eliminates the endorser’s contract liability on the instrument.

Choice ‘‘a’’ is incorrect. A special endorsement is one that names a new payee.

Question 4

Question CPA-01081

Under the Negotiable Instruments Article of the UCC, which of the following statements is(are) correct regarding the requirements for an instrument to be negotiable?

1. The instrument must be in writing, be signed by both the drawer and the drawee, and contain an unconditional promise or order to pay.
2. The instrument must state a fixed amount of money, be payable on demand or at a definite time, and be payable to order or to bearer.
3. Neither I nor II.
4. Both I and II.
5. I only.

II only

Answer 4

Explanation

Choice ‘‘d’’ is correct. To be negotiable, the instrument must meet all of the following:

1. Be in writing
2. Be signed by the maker or drawer (not drawee)
3. Contain an unconditional promise or order
4. Be for a fixed amount of money
5. Be payable on demand or at a definite time
6. Be payable to order or bearer

Contain no additional undertaking/instruction not authorized by the UCC Alternative I is incorrect because there is no requirement that the drawee sign

Question 5

Question CPA-01083

Which of the following instruments is subject to the provisions of the Negotiable Instruments Article of the UCC?

1. A warehouse receipt.
2. A bill of lading.
3. An investment security.
4. A certificate of deposit.

Answer 5

Explanation

Choice ‘‘d’’ is correct. Checks, drafts, promissory notes and certificates of deposits are within the provisions of the

Negotiable Instruments Article of the UCC (Article 3).

Choice ‘‘b’’ is incorrect. A bill of lading is governed by Article 7. Choice ‘‘a’’ is incorrect. A warehouse receipt is governed by Article 7.

Choice ‘‘c’’ is incorrect. Investment securities (e.g., stocks and bonds) are governed by Article 8.

Question 6

Question CPA-01086

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

1. No
2. Yes
3. No
4. Yes

The instrument can be further negotiated

a. No
b. Yes
c. Yes
d. No

Answer 6

Explanation

Choice ‘‘b’’ is correct. The first assertion is true-payment is guaranteed. The instrument here is endorsed. In essence, an endorser makes a contract of guarantee: if the instrument is presented for payment and is dishonored, the endorser agrees to pay on the instrument according to its terms when it was endorsed. The second assertion is also true. When an instrument is endorsed to a specified person, it becomes order paper, but it still may be negotiated further, as long as the special payee endorses.

Note: Actually, whether or not the instrument may be further negotiated also depends on to whom the instrument was drawn in the first place, and that information is not provided. If the instrument here was payable to bearer or to the order of Faye Smith, it may be further negotiated, but if it was payable to the order of anyone else, it could not be further negotiated without that person’s endorsement.

Question 7

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

1. Draft.
2. Certificate of deposit.
3. II only.
4. Both I and II.
5. Neither I nor II.
6. I only.

Answer 7

Explanation

Choice ‘‘d’’ is correct. Order paper is three-party paper where one person orders another to pay yet a third person. A draft is order paper. A certificate of deposit is two-party paper. In a CD, a bank acknowledges receipt of money and promises to pay. UCC 3-104

Question 8

Question CPA-01100

Under the Commercial Paper Article of the UCC, for an instrument to be negotiable it must:

1. Be signed by the payee.
2. Contain necessary conditions of payment.
3. Contain references to all agreements between the parties.
4. Be payable to order or to bearer.

Answer 8

Explanation

Choice ‘‘d’’ is correct. Any writing to be a negotiable instrument must be payable to order or to bearer, with the exception of checks. If the instrument is payable to order, it is negotiated by delivery with any necessary endorsement; if payable to bearer, it is negotiated by delivery alone. UCC 3-104

Choice ‘‘a’’ is incorrect. Whether an instrument is negotiable is determined by its form when drawn or made; the subsequent signature of a payee can neither create nor destroy negotiability.

Choice ‘‘c’’ is incorrect. A negotiable instrument need not contain references to any other document. Choice ‘‘b’’ is incorrect. If an instrument is conditional, it generally cannot be negotiable.

Question 9

Question CPA-01104

Under the Commercial Paper Article of the UCC, which of the following circumstances would prevent a promissory note from being negotiable?

1. An acceleration clause that allows the holder to move up the maturity date of the note in the event of default.
2. A person having a power of attorney signs the note on behalf of the maker.
3. An extension clause that allows the maker to elect to extend the time for payment to a date specified in the note.
4. A clause that allows the maker to satisfy the note by the performance of services or the payment of money.

Answer 9

Explanation

Choice ‘‘d’’ is correct. To be negotiable, a note must be payable in money and only in money. A note that allows the maker to pay by performing services is not negotiable. UCC 3-104

Choice ‘‘c’’ is incorrect. To be negotiable, an instrument must be payable on demand or at a definite time. If the latest date for payment can be determined from the face of a demand instrument, it is considered to be payable at a definite time even if that latest date can be reached only through an extension clause. UCC 3-109

Choice ‘‘a’’ is incorrect. To be negotiable, an instrument must be payable on demand or at a definite time. If the latest date for payment can be determined from the face of a demand instrument, it is considered to be payable at a definite time even if it includes an acceleration clause. UCC 3-109

Choice ‘‘b’’ is incorrect. An agent, such as a person having a power of attorney, can sign a negotiable instrument on behalf of a principal.

Question 10

Question CPA-01108

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?

1. Possession.
2. Endorsement of transferor.
3. I only.
4. II only.
5. Neither I nor II.
6. Both I and II.

Answer 10

Explanation

Choice ‘‘d’’ is correct. To be a holder of order paper, one must have all necessary signatures, such as that of the transferor, and possession of the instrument must have been transferred. UCC 3-201

Choice ‘‘a’’ is incorrect. To have the status of a holder, one must also have the signatures of all necessary parties, such as that of the transferor.

Choice ‘‘b’’ is incorrect. To have the status of a holder, the instrument must have been transferred to the possession of the holder.

Choice ‘‘c’’ is incorrect. To be a holder of order paper, one must have all necessary signatures, such as that of the transferor, and possession of the instrument must have been transferred.

Question 11

Question CPA-01114

Under the Commercial Paper Article of the UCC, which of the following requirements must be met for a person to be a holder in due course of a promissory note?

1. The holder must be the payee of the note.
2. The note must be negotiable.
3. All prior holders must have been holders in due course.
4. The note must be payable to bearer.

Answer 11

Explanation

Choice ‘‘b’’ is correct. One may be an HOC only of a negotiable instrument. UCC 3-302

Choice ‘‘d’’ is incorrect. One can be an HOC on a negotiable note payable to order; it need not be payable to bearer.

Choice ‘‘c’’ is incorrect. One will be an HOC if he is a holder who takes the instrument for value, in good faith, and without notice that the instrument is overdue or has been dishonored or of any defenses on or claims to the instrument. There is no requirement that all prior holders be HOCs. UCC 3-302

Choice ‘‘a’’ is incorrect. Transferees can be HOCs. The status is not limited to the payee of the note. Indeed, the payee generally cannot be an HOC.

Question 12

Question CPA-01116

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?

1. The note was collateral for a loan.
2. The person was notified that payment was refused.
3. The person was notified that one of the prior endorsers was discharged.
4. The note was purchased at a discount.

Answer 12

Explanation

Choice ‘‘b’’ is correct. One will be an HOC only if the person is a holder who takes the instrument for value, in good faith, and without notice that the instrument is overdue or has been dishonored or of any defenses on or claims to the instrument. A refusal to pay is a dishonor. UCC 3-304

Choice ‘‘c’’ is incorrect. Notice of the fact that a prior endorser was discharged does not prevent a person from becoming an HOC.

Choice ‘‘a’’ is incorrect. Notice that the instrument was collateral is not notice of a defense to an instrument and does not prevent HOC status.

Choice ‘‘d’’ is incorrect. Purchase at a discount does not prevent HOC status.

Question 13

Question CPA-01120

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?’’

1. The person makes no promise or guarantee of payment on dishonor.
2. The person converts the check into order paper.
3. The person has no liability to prior endorsers.
4. The person gives no warranty protection to later transferees.

Answer 13

Explanation

Choice ‘‘a’’ is correct. Signing without recourse negates contract liability on the instrument. Contract liability is the promise to pay upon dishonor. UCC 3-414

Choice ‘‘c’’ is incorrect. An endorser is liable to subsequent parties on an instrument; not to prior parties, and this is true no matter how the endorser signs.

Choice ‘‘d’’ is incorrect. Signing without recourse negates contract liability on the instrument. Warranty liability (e.g., all signatures are genuine, the instrument has not been materially altered, etc.) is not negated.

Choice ‘‘b’’ is incorrect. A person does not automatically convert a check to order paper by endorsing it ‘‘without recourse.” A special endorsement (i.e., one naming a new payee) can convert bearer paper to order paper.

Question 14

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?

Oorfsea Mellon

a.

Yes

Yes

b.

Yes

No

C.

No

No

d.

No

Yes

Answer 14

Explanation

Choice ‘‘d’’ is correct. Mellon can be held liable, but Bloom cannot hold Dodsen liable on an endorser’s contract because Dodsen did not endorse. Neither could Bloom hold Dodsen liable for breach of any transfer warranty since such warranties are made only to immediate transferees when one does not endorse, and Dodsen did not endorse and the immediate transferee was Mellon rather than Bloom. UCC 3-417

Question 15

Question CPA-01537

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 Sileo for value. Before the note became due, Sileo agreed to release Vex’s collateral. Vex refused to pay Sileo when the note became due. Sileo promptly notified Miller and Tamp of Vex’s default. Which of the following statements is correct?

1. Sileo will be able to collect from Tamp because Tamp was the original payee.
2. Sileo will be able to collect from either Tamp or Miller because Sileo was a holder in due course.
3. Sileo will be unable to collect from Miller because Miller’s endorsement was in blank.
4. Sileo will be unable to collect from either Tamp or Miller because of Bilco’s release of the collateral.

Answer 15

Explanation

Choice ‘‘d’’ is correct. When a person entitled to enforce an instrument impairs the value of collateral securing the instrument, the obligations of the endorsers are discharged to the extent of the impairment. The security was completely released so the endorsers will be released from their obligation (assuming the note was fully collateralized). UCC 3-606

Choice ‘‘c’’ is incorrect. An endorsement in blank does not prevent endorser liability. Rather, the endorsement must be qualified (i.e., without recourse) to prevent the endorser’s contract liability. UCC 3-204

Choice ‘‘b’’ is incorrect. When a person entitled to enforce an instrument impairs the value of collateral securing the instrument, the obligations of the endorsers are discharged to the extent of the impairment. UCC 3-606

Choice ‘‘a’’ is incorrect. The fact that Tamp was the original payee is irrelevant.

Question 16

Question CPA-01541

Which of the following negotiable instruments is subject to the UCC Commercial Paper Article?

1. Warehouse receipt.
2. Corporate bearer bond with a maturity date of January 1, 2009.
3. Bill of lading payable to order.
4. Installment note payable on the first day of each month.

Answer 16

Explanation

Choice ‘‘d’’ is correct. Commercial paper includes drafts and notes. Thus, it covers an installment note [UCC 3- 104].

Choice ‘‘b’’ is incorrect. The commercial paper article specifically excludes investment securities such as corporate bonds [UCC 3-103(1)], which are covered under Article 8.

Choice ‘‘a’’ is incorrect. The commercial paper article specifically excludes documents of title [UCC 3-103(1)], which includes warehouse receipts governed by Article 7.

Choice ‘‘c’’ is incorrect. The commercial paper article specifically excludes documents of title [UCC 3-103(1)] , which includes bills of lading governed by Article 7.

Question 17

Question CPA-01547

Which of the following conditions, if present on an otherwise negotiable instrument, would affect the instrument’s negotiability?

1. The instrument is payable at a definite time subject to an acceleration clause in the event of a default.
2. The instrument contains a promise to provide additional collateral if there is a decrease in value of the existing collateral.
3. The instrument is postdated.
4. The instrument is payable six months after the death of the maker.

Answer 17

Explanation

Choice ‘‘d’’ is correct. Negotiable commercial paper must be payable on demand or at a definite time [UCC 3- 104(1)(c)]. An instrument payable at someone’s death or at a time after someone’s death is not payable at a definite time because while all people will die, we don’t know when [UCC 3-109(2)].

Choice ‘‘a’’ is incorrect. Negotiable commercial paper must be payable on demand or at a definite time [UCC 3- 104(1)(c)], and an instrument payable at a definite time but subject to acceleration is considered to be payable at a definite time because only the latest date for payment need be known [UCC 3-109(1)(c)].

Choice ‘‘c’’ is incorrect. An instrument is not made non-negotiable by postdating [UCC 3-114(1)].

Choice ‘‘b’’ is incorrect. While to be negotiable an instrument must not be subject to any unauthorized promises [UCC 3-104(1)(b)], the UCC authorizes promises to maintain collateral [UCC 3-112(1)(c)].

Question 18

Question CPA-01555

For a person to be holder in due course of a promissory note:

1. All prior holders must have been holders in due course.
2. The note must be negotiable.
3. The note must be payable in U.S. currency to the holder.
4. The holder must be the payee of the note.

Answer 18

Explanation

Choice ‘‘b’’ is correct. Negotiability of the instrument is a prerequisite to holder in due course (HOC) status.

Choice ‘‘c’’ is incorrect. A note is negotiable as long as it is payable in currency recognized as money where the currency is issued.

Choice ‘‘d’’ is incorrect. The holder need not be the payee to be a HOC. The whole point of commercial paper is its transferability; the commercial paper may be transferred beyond the original payee.

Choice ‘‘a’’ is incorrect. Not all prior holders need to have been HOCs in order for the present holder to be an HOC. For instance, if the note is endorsed and gifted to a person, the donee is not an HOC because the donee has not given value. (Note: under the ‘‘shelter doctrine,’’ a donee will have the rights of an HOC if the donor was an HOC.) Even though a donee may not be an HOC, a subsequent holder could acquire HOC status if (i) the subsequent holder pays to the donee value for the note and (ii) the other three requirements for HOC status are present: the holder obtained the instrument in good faith, the holder obtained the instrument without notice of any defenses to, or claims of ownership on, the instrument, and the instrument was commerical paper.

Question 19

Question CPA-01557

A maker of a note will have a valid defense against a holder in due course as a result of any of the following conditions, except:

1. Forgery.
2. Infancy.
3. Fraud in the execution.
4. Lack of consideration.

Answer 19

Explanation

Choice ‘‘d’’ is correct. An HOC takes free of personal defenses but is subject to real defenses. Lack of consideration is a personal defense and thus is not valid defense against an HOC.

Choice ‘‘b’’ is incorrect. An HOC takes free of personal defenses but is subject to real defenses. Infancy is a real defense (represented by the ‘‘I’’ in the FAIOS mnemonic) and so is a valid defense for the maker.

Choice ‘‘a’’ is incorrect. An HOC takes free of personal defenses but is subject to real defense. Forgery is a real defense (represented by the ‘‘F’’ in the FAIOS mnemonic) and so is a valid defense for the maker.

Choice ‘‘c’’ is incorrect. An HOC takes free of personal defenses but is subject to real defenses. Fraud in the execution is a real defense (represented by the ‘‘F’’ in the FAIOS mnemonic) and so is a valid defense for the maker.

Question 20

Question CPA-05003

Last Bite Restaurant issues an instrument to Rags for Linen, Inc. Which of the following is not necessary for the instrument to be negotiable?

1. Signed by Last Bite Restaurant.
2. Payable on demand or at a definite time.
3. An unconditional promise or order to pay.
4. A recital of the consideration given in exchange for the promise to pay.

Answer 20

Explanation

Choice ‘‘d’’ is correct. There is no requirement that a negotiable instrument recite the consideration given in exchange for the promise to pay. Including such information is optional (but allowable).

Choices ‘‘c’’, ‘‘b’’, and ‘‘a’’ are incorrect. Each is a necessary requirement for an instrument to be negotiable.

Question 21

Question CPA-05005

Sammy is in possession of a bearer promissory note in the amount of $500. Landscaper Ralph offers to trim the hedges on Sammy’s property next week in exchange for the note. Sammy agrees and delivers the note to Ralph. Ralph:

1. Cannot be a holder in due course, because Ralph did not acquire the instrument in good faith.
2. Cannot be a holder in due course, because the note is a bearer instrument.
3. Can be a holder in due course, because the good faith and value requirements apply only to the transferor, not to the holder.
4. Cannot be a holder in due course, because Ralph did not yet give value for the instrument.

Answer 21

Explanation

Choice ‘‘d’’ is correct. A holder in due course (HOC) is a holder who takes an instrument for value, in good faith, and without notice of any claims or defenses. In addition, the instrument must be a negotiable instrument (commercial paper). While an exectory promise (i.e., one that has not yet been fulfilled) constitutes contract consideration, an executory promise does not constitute value for purposes of ascertaining if a holder is an HOC. Thus, Ralph cannot be an HOC until Ralph performs all that Ralph promised to perform.

Choice ‘‘b’’ is incorrect. One may be an HOC of any negotiable instrument. An instrument may be negotiable even if it is in bearer form.

Choice ‘‘a’’ is incorrect. One can become a holder in due course if he takes an instrument in good faith, and there is no indication that Ralph has not acted in good faith.

Choice ‘‘c’’ is incorrect. To become a holder in due course, a holder must take the instrument in good faith and give value.

Question 22

Question CPA-05008

Peter asks Jen, who suffers from a mental disability, to sign a piece of paper that Peter says is an attendance sheet. In fact, the document is a negotiable note. Jen is later sued by a holder in due course. Jen’s best defense would be:

1. Mistake.
2. Fraud in the execution.
3. Fraud in the inducement.
4. Duress.

Answer 22

Explanation

Choice ‘‘b’’ is correct. Where a person is tricked into signing something that she does not know is a negotiable instrument, there has been a fraud committed in the execution of the document, and this defense is available even against a holder in due course.

Choice ‘‘a’’ is incorrect. The defense of mistake is not available against a holder in due course.

Choice ‘‘d’’ is incorrect. Duress occurs when an innocent party is threatened into committing an act that the innocent party would not normally agree to perform. Whether the defense can be raised against a holder in due course depends on the seriousness of the threat, but here there is no threat.

Choice ‘‘c’’ is incorrect. Fraud in the inducement occurs when one is promised value in exchange for an instrument and the promiser does not intend to and does not give that value. Such a defense is not valid against a holder in due course and is not supported by the facts here anyway.

Question 23

Question CPA-05266

Under the Negotiable Instruments Article of the UCC, an instrument will be precluded from being negotiable if the instrument:

1. Is made subject to another agreement.
2. Fails to state the place of payment.
3. Fails to state the underlying consideration.
4. Is undated.

Answer 23

Explanation

Choice ‘‘a’’ is correct. Under the Negotiable Instruments Article of the UCC, an instrument is not negotiable if it states that it is '’subject to’’ or '’contingent upon’’ another agreement.

Choice ‘‘b’’ is incorrect. A negotiable instrument is not required to state the place of payment.

Choice ‘‘c’’ is incorrect. Consideration is not required for an instrument to be negotiable. We frequently make gifts by check. The check can be negotiable even though no consideration is given for the gift.

Choice ‘‘d’’ is incorrect. Failure to date an instrument will not destroy negotiability. An undated instrument is counted as being payable on demand.

Question 24

Question CPA-05526

Under the Negotiable Instruments Article of the UCC, which of the following instruments meets the negotiability requirement of being payable on demand or at a definite time?

1. A promissory note payable one year after a person’s marriage.
2. An undated promissory note payable one month after date.
3. A promissory note payable June 30, year 1, whose holder can extend the time of payment until the following June 30 if the holder wishes.
4. A promissory note payable June 30, year 1, whose maturity can be extended by the maker for a reasonable time.

Answer 24

Explanation

Choice ‘‘c’’ is correct. An instrument is payable on demand if it says that it is payable on demand or is silent regarding the time for payment. An instrument is payable at a definite time only if the latest date on which payment can be made can be determined from the face of the instrument. An instrument payable on June 30 or the following June 30 if the holder wishes is payable at a definite time because the latest date on which payment is due can be determined from the face of the instrument (the following June 30). Clauses extending the time for payment to a further definite time stated in the instrument does not destroy the negotiability of the instrument.

Choice ‘‘a’’ is incorrect. The instrument here is not payable on demand. Neither is it payable at a definite time­ even if the person’s wedding date is set-because the wedding date could change.

Choice ‘‘d’’ is incorrect. The instrument is not payable on demand. Neither is it payable at a definite time because the extension clause does not set a specific due date.

Choice ‘‘b’’ is incorrect. The note is not payable on demand because it purports to be payable one month in the future. Neither is it payable at a definite time. Because the note is undated, it cannot be determined when the one-month period began or, consequently, when it ends.

Question 25

Question CPA-05658

Under the Negotiable Instruments Article of the UCC, which of the following parties has secondary liability on an instrument?

1. A maker of a note.
2. An acceptor of a note.
3. A drawer of a draft.
4. An issuer of a cashier’s check.

Answer 25

Explanation

Choice ‘‘c’’ is correct. The drawer of a draft is secondarily liable. The drawer is liable only after the draft is presented to the drawee, the draft is dishonored, and the drawer is given notice of dishonor.

Choice ‘‘b’’ is incorrect because an acceptor is primarily liable. When a drawee signs a draft, the drawee becomes an acceptor and is primarily liable.

Choice ‘‘d’’ is incorrect because with a cashier’s check, the bank is both the drawer and the drawee. As the issuer the bank \/1/0uld be primarily liable.

Choice ‘‘a’’ is incorrect because the maker of a note is primarily liable.

Question 26

Question CPA-05659

Train issued a note payable to Blake in payment of contracted services that Blake was to perform. Blake endorsed the negotiable note ‘‘pay to bearer’’ and delivered it to Reed in satisfaction of a debt owed Reed. Train refused to pay Reed on the note because Blake had not yet performed the services. Reed was unaware of this failure when he took the note. Under the Negotiable Instruments Article of the UCC, must Train pay Reed?

1. Yes, Train has to pay Reed because the note was converted into bearer paper.
2. Yes, Train has to pay Reed because Reed was a holder in due course.
3. No, Train does not have to pay Reed because the note was issued to Blake.
4. No, Train does not have to pay Reed until the services are performed.

Answer 26

Explanation

Choice ‘‘b’’ is correct. Reed met all four requirements to be a holder in due course: (i) Reed was the holder of a negotiable instrument (the note); (ii) Reed gave value (receiving from the transferor a note as payment for the transferor’s debt owed to the transferee constitutes value); (iii) nothing in the facts indicates that Reed lacked good faith; and (iv) Reed had no notice of Blake’s nonperformance of services. Nonperformance of services is a personal defense and not a real defense. A holder in due course takes free of personal defenses and is subject only to real defenses. Thus, Train will have to pay Reed.

Choices ‘‘d’’ and ‘‘c’’ are incorrect because both indicate that Train will not have to pay Reed. Train will have to pay Reed due to Reed’s status as a holder in due course.

Choice ‘‘a’’ is incorrect. Train must pay Reed because Reed was a holder in due course, not because the note was bearer paper.

Question 27

Under the Negotiable Instruments Article of the UCC, which of the following instruments is classified as a promise to pay?

1. A draft.
2. A trade acceptance.
3. A check.
4. A certificate of deposit.

Answer 27

Explanation

Choice ‘‘d’’ is correct. A promissory note is a ‘‘promise to pay’’. A draft is an order for a third party to pay. A certificate of deposit is a bank promissory note and is therefore a promise to pay.

Choices ‘‘c’’, ‘‘a’’, and ‘‘b’’ are all incorrect because they are drafts and therefore an order for a third party to pay. They are not a promise to pay.

Question 28

Question CPA-05965

Under the Negotiable Instruments Article of the UCC, which of the following defenses generally may be used against all holders of negotiable instruments?

1. Breach of warranty.
2. Fraud in the inducement.
3. Lack of consideration.
4. Minority of the maker.

Answer 28

Explanation

Choice ‘‘d’’ is correct. Under the Negotiable Instruments Article with respect to a holder who is not a holder in due course and who is not covered by the shelter doctrine, a maker or drawer may raise any contract defense, but the defenses that a maker or drawer can raise against a holder in due course (a holder who takes an instrument for value, in good faith, and without notice of any defenses on or claims to the instrument, and the instrument is a negotiable instrument/commercial paper) and against a holder to whom the shelter doctrine applies are limited to those commonly known as ‘‘real’’ defenses. One such real defense is the minority of the maker (we use the term ‘‘infancy’’ in class, but the two terms mean the same thing).

Choices ‘‘a’’, ‘‘b’’, and ‘‘c’’ are incorrect because they are not so-called real defenses and, as such, cannot be raised against a holder in due course.

Question 29

Question CPA-05983

Under the Negotiable Instruments Article of the UCC, a holder in due course in a nonconsumer transaction takes a negotiable instrument free from which of the following defenses that may be asserted by a party with whom the holder in due course had not dealt?

1. Infancy, to the extent that it is a simple contract defense.
2. Discharge in an insolvency proceeding.
3. Breach of contract.
4. Fraud in the execution.

Answer 29

Explanation

Choice ‘‘c’’ is correct. A holder in due course (a holder who takes an instrument for value, in good faith, and without notice of any defenses, on or claims to, the instrument, and the instrument is a negotiable instrument/commercial paper) takes the instrument free from ordinary contract defenses and is subject to only certain defenses commonly known as known as ‘‘real’’ defenses. Breach of contract is an ordinary contract defense, not a real defense, and the maker/drawer cannot successfully raise against a holder in due course the defense of breach of contract.

Choice ‘‘d’’ is incorrect. Fraud in the execution (as opposed to fraud in the inducement) is a so-called real defense that may be raised against a holder in due course.

Choice ‘‘b’’ is incorrect. Discharge in insolvency is a so-called real defense that may be raised against a holder in due course.

Choice ‘‘a’’ is incorrect. Infancy, to the extent it is a simple contract defense, is a so-called real defense that may be raised against a holder in due course.

Question 30

Question CPA-05985

Train issued a $10,000 note to Curator in exchange for a painting that Curator claimed to have been painted by a certain artist. The note provided that it was payable 10 days after Train sold his car. Train sold his car on May 1. Meanwhile, Curator transferred the note to Contractor in payment of work Contractor had performed for Curator.

When Contractor presented the note to Train for payment 10 days after Train sold his car, Train refused to pay Contractor, claiming that the note was not negotiable and that Curator had defrauded him because the painting was not by the painter specified and, instead, was an almost valueless copy. Under the Negotiable Instruments Article of the UCC, which of the following statements is correct regarding the status of the note?

1. The note was negotiable because it was for a fixed amount of money.
2. The note was not a negotiable instrument because it was not payable at a definite time.
3. The note was not negotiable because it was subject to another writing.
4. The note was negotiable because it was conditioned on an event that took place.

Answer 30

Explanation

Choice ‘‘b’’ is correct. To be negotiable, an instrument must be payable at a definite time. ‘‘10 days after Train sells his car’’ is not a definite time - we do not know when or if the car will be sold. Therefore, the instrument is not negotiable.

Choice ‘‘c’’ is incorrect. To be negotiable, an instrument generally cannot state that it is subject to another writing. However, nothing in the facts indicates that Train’s note said that it was subject to another writing.

Choice ‘‘a’’ is incorrect. To be negotiable, an instrument must be for a fixed amount of money, but that an instrument is for a ‘‘sum certain’’ alone is not sufficient to make the instrument negotiable. The other requirements for negotiability must be met as well, and here the note is not negotiable because it was not payable at a definite time.

Choice ‘‘d’’ is incorrect. Whether a note is negotiable is determined from the face of the instrument (i.e., whether it is conditional depends on what the instrument says). A condition in the instrument is not cured merely because the condition has been fulfilled.

Question 31

Question CPA-06527

Under the Negotiable Instruments Article of the UCC, which of the following statements is correct regarding a check?

1. A check is an order to pay money.
2. A check does not need to be drawn on a bank.
3. A check is a promise to pay money.
4. A check does not need to be payable on demand.

Answer 31

Explanation

Choice ‘‘a’’ is correct. A check is a type of draft with two particular characteristics, namely dra1M1 on a bank and

payable on demana. A draft is order paper (a drawer orders the drawee to pay money to a payee or to bearer).

Choice ‘‘c’’ is incorrect. As indicated above, a draft (including checks) is not a promise to pay (two-party paper) but, rather, is an order to pay.

Choice ‘‘d’’ is incorrect. A check must be payable on demand. An instrument that has all of the other attributes of a check but that is not payable on demand is a time draft.

Choice ‘‘b’’ is incorrect. A check must be drawn on a bank. An instrument that has all of the other attributes of a check but that is not drawn on a bank is simply a draft.

Question 32

Question CPA-06880

Under the Negotiable Instruments Article of the UCC, the proper party to whom a check is presented for payment IS:

1. The drawer.
2. The holder.
3. The drawee.
4. The maker.

Answer 32

Explanation

Choice ‘‘c’’ is correct. A drawer (the check writer) draws a check payable to the payee; the bank whose routing number is set forth on the bottom left of the check is the drawee.

Choice ‘‘a’’ is incorrect. The drawer is the person who writes the check.

Choice ‘‘d’’ is incorrect. A maker is a person who makes a (promissory) note. A note is presented to the maker for payment, but a check is not a type of note; it is a type of draft, and drafts are presented to a drawee for payment.

Choice ‘‘b’’ is incorrect. A holder is someone in legal possession of a check; the holder may be the payee or some subsequent transferee of the payee. In any event, a check is not presented to a holder for payment.

Question 33

Question CPA-06913

Lamont signed a promissory note in fav0r of Roth as part of Lamont’s purchase of supplies from Roth. The note required that the $10,000 be repaid 90 days from the date of the note. There were no conditions attached to repayment. Roth endorsed the note in blank and sold it to the bank. Lamont defaulted on the promissory note. The bank sought a judgment ordering Lamont to pay the bank. Under the Negotiable Instruments Article of the UCC, how will the court most likely rule?

1. The court will not direct Lamont to pay the bank because the promissory note was not a negotiable instrument.
2. The court will not direct Lamont to pay the bank because the promissory note was a negotiable instrument negotiated with Roth.
3. The court will direct Lamont to pay the bank because the note was part of a transaction between merchants.
4. The court will direct Lamont to pay the bank because the promissory note was a negotiable instrument negotiated to the bank in due course.

Answer 33

Explanation

Choice ‘‘d’’ is correct. When a maker signs a negotiable promissory note and when the note is negotiated to a holder in due course (or when an HOC transfers the note to a holder to whom the shelter doctrine applies), the maker must pay the note when due according to its terms when the maker signed unless the maker has a real defense. The facts here do not indicate that the maker has any real defenses.

Choice ‘‘c’’ is incorrect. The mere fact that the note was part of a transaction between merchants is not a reason to order the maker to pay it.

Choice ‘‘b’’ is incorrect. The note here appears to be negotiable- a writing, signed by the maker, containing an unconditional promise to pay a fixed amount of money at a definite time (90 days) with no unauthorized or other promises (making choice ‘‘a’’ also incorrect). The maker of a negotiable promissory note must pay the note when either (i) a holder who is not a holder in due course (and to whom the shelter doctrine does not apply) presents

the note for payment and the maker has no defenses or (ii) a holder in due course (or a holder to whom the shelter doctrine applies) presents the note for payment and the maker has no real defenses (and the facts here do not indicate that any real defense applies).

Question 34

Question CPA-07206

Ashley needs to endorse a check that had been endorsed by two other individuals prior to Ashley’s receipt of the check. Ashley does not want to have surety liability, so Ashley endorses the check ‘‘without recourse.” Under the Negotiable Instruments Article of the UCC, which of the following types of endorsement did Ashley make?

1. Qualified.
2. Restrictive.
3. Blank.
4. Special.

Answer 34

Explanation

Choice ‘‘a’’ is correct. An endorsement that includes the words ‘‘without recourse’’ is called a ‘‘qualified’’ endorsement. When an endorser signs without recourse, the endorser does not undertake the contract liability of an endorser.

Choice ‘‘c’’ is incorrect. A blank endorsement is one that does not name a person to be paid. Such an endorsement makes the check bearer paper, which can be transferred simply by delivery.

Choice ‘‘d’’ is incorrect. A special endorsement is a check that names a new payee. It makes the check order paper. Further transfer requires the signature of the named payee and delivery to the new transferee-holder.

Choice ‘‘b’’ is incorrect. A restrictive endorsement is one that purports to limit further transfers of the check. Such endorsements generally are not effective except to the extent that they limit the transfer to the collection system (e.g., for deposit only).

Question 35

Question CPA-08226

Under the Negotiable Instruments Article of the UCC, what kind of endorsement is made by the use of the words ‘‘Lee Louis’’?

1. Blank, nonrestrictive, and qualified.
2. Special, nonrestrictive, and unqualified.
3. Special, nonrestrictive, and qualified.
4. Blank, nonrestrictive, and unqualified.

Answer 35

Explanation

Choice ‘‘d’’ is correct. The endorsement ‘‘Lee Louis’’ is blank because it does not name a new, specific endorsee, it is nonrestrictive because it does not have any words purporting to restrict further negotiation, and it is unqualified because it does not include the \/1/0rds, ‘‘without recourse.’’

Choice ‘‘a’’ is incorrect. A qualified endorsement would include the words, ‘‘without recourse.” Inclusion of these words means that the endorsee does not agree to be contractually liable on the instrument, but the endorsee still might have warranty liability.

Choice ‘‘b’’ is incorrect. The endorsement is not special because a special endorsement includes the name of a new endorsee, such as ‘‘Pay John Smith Isl Lee Louis.”

Choice ‘‘c’’ is incorrect. The endorsement is not special because a special endorsement includes the name of a new endorsee. Moreover, it is not qualified because it does not include the words, ‘‘without recourse.”

Question 36

Question CPA-01086

Answer 36

Explanation

Choice ‘‘b’’ is correct. The first assertion is true-payment is guaranteed. The instrument here is endorsed. In essence, an endorser makes a contract of guarantee: if the instrument is presented for payment and is dishonored, the endorser agrees to pay on the instrument according to its terms when it was endorsed. The second assertion is also true. When an instrument is endorsed to a specified person, it becomes order paper, but it still may be negotiated further, as long as the special payee endorses.

Note: Actually, whether or not the instrument may be further negotiated also depends on to whom the instrument was drawn in the first place, and that information is not provided. If the instrument here was payable to bearer or to the order of Faye Smith, it may be further negotiated, but if it was payable to the order of anyone else, it could not be further negotiated without that person’s endorsement.

Question 37

Answer 37

Explanation

Choice ‘‘d’’ is correct. Material alteration is a real defense to the extent of the alteration. Bankruptcy also is a real defense. Breach of contract is a personal defense. UCC 3-307

Question 38

Answer 38

Explanation

Choice ‘‘d’’ is correct. A draft is an order by the drawer to a drawee to pay a payee. Here, Dexter is ordering Middlesex National Bank to pay to the order of Silver. UCC 3-104. Note the two different dates.

Choice ‘‘b’’ is incorrect. A check is a draft drawn on a bank and payable on demand. The instrument illustrated is not payable on demand since it was written on September 15, 1994 and was to be paid on October 1, 1994. Thus it is not a check, but rather is a time draft.

Choice ‘‘c’’ is incorrect. A trade acceptance is order paper drawn by the payee on the drawee.

Choice ‘‘a’’ is incorrect. A promissory note is two-party paper (i.e., where one party promises to pay). In the instrument illustrated, one party (Dexter) is ordering another party (Middlesex National Bank) to pay.

Question 39

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?

1. Susan Town
2. Betty Ash
3. Mary Thomas
4. Ann Tyler

Answer 39

Explanation

Choice ‘‘b’’ is correct. Striking a prior endorser discharges the endorser’s liability to all persons who take the instrument after the signature is stricken. UCC 3-601

Choice ‘‘d’’ is incorrect. Striking a prior endorser discharges the endorser’s liability to all persons who take the instrument after the signature is stricken. It has no effect on a prior endorser’s liability because liability goes up the chain of title. UCC 3-601

Choice ‘‘c’’ is incorrect. Striking a prior endorser discharges the endorser’s liability to all persons who take the instrument after the signature is stricken. It has no effect on a prior endorser’s liability because liability goes up the chain of title. UCC 3-601

Choice ‘‘a’’ is incorrect. Striking a prior endorser discharges the endorser’s liability to all persons who take the instrument after the signature is stricken. It has no effect on a subsequent endorser’s own liability.

Question 40

Question CPA-01132

On February 15, 2009, 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, 2009, Willard Bank obtained the instrument from Stone for $3,900. Willard had no knowledge that Helco disputed liability under the instrument.

The instrument is a:

1. Check.
2. Sight draft.
3. Promissory note.

Trade acceptance

Answer 40

Explanation

Choice ‘‘c’’ is correct. The instrument is two-party paper since it merely contains a promise to pay. Promissory note is the only two-party paper choice mentioned.

Choice ‘‘b’’ is incorrect. A draft is three-party paper since it contains an order to pay rather than a promise to pay. This instrument contains a promise to pay, so it cannot be a draft.

Choice ‘‘a’’ is incorrect. A check is three-party paper drawn on a bank. It contains an order to pay rather than a promise to pay. This instrument contains a promise to pay, so it is not three-party paper.

Choice ‘‘d’’ is incorrect. A trade acceptance is three-party paper since it contains an order to a third party to pay rather than a promise to pay. This instrument contains a promise rather than an order, so it cannot be three-party paper.

Question 41

Question CPA-01136

On February 15, 2009, 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, 2009, Willard Bank obtained the instrument from Stone for $3,900. Willard had no knowledge that Helco disputed liability under the instrument.

The instrument is:

1. Nonnegotiable, because the numerical amount differs from the written amount.
2. Nonnegotiable, because of the reference to the computer purchase agreement.
3. Negotiable, when held by Astor, but nonnegotiable when held by Willard Bank.
4. Negotiable, even though the maker has the right to extend the time for payment.

Answer 41

Explanation

Choice ‘‘d’’ is correct. The fact that the time for payment can be extended does not destroy negotiability (because of lack of a definite time for payment) as long as the instrument can be extended only to another definite time. ucc 3-119

Choice ‘‘b’’ is incorrect. Mere reference to the transaction without making the instrument subject to the transaction does not destroy negotiability. UCC 3-112

Choice ‘‘a’’ is incorrect. When the words conflict with the numbers on a negotiable instrument, the Code provides that the words will control. Negotiability is not destroyed by the conflict because the instrument is for the fixed amount stated by the words. UCC 3-118

Choice ‘‘c’’ is incorrect. Negotiability goes to the form of the instrument and not to the identity of the holder. The instrument does not change form merely because it is in the hands of someone other than the payee.

Question 42

Question CPA-01145

On February 15, 2009, 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, 2009, Willard Bank obtained the instrument from Stone for $3,900. Willard had no knowledge that Helco disputed liability under the instrument.

Which of the following statements is correct?

1. Willard Bank cannot be a holder in due course because Stone’s endorsement was without recourse.
2. Stone’s endorsement was required for Willard Bank to be a holder in due course.
3. Neither Willard Bank nor Stone are holders in due course.
4. Willard Bank must endorse the instrument to negotiate it.

Answer 42

Explanation

Choice ‘‘d’’ is correct. Although the note was a bearer instrument when made, the last endorsement controls what is necessary for further negotiation. When a special endorsee is named, the instrument must be signed by that endorsee to further negotiate it. Here, Stone named Willard Bank as a special endorsee by writing on the back of the note that it was payable to Willard Bank. Thus, Willard’s signature is necessary for further negotiation. UCC 3- 204

Choice ‘‘a’’ is incorrect. An endorsement without recourse affects the transferee’s rights to hold the endorser liable upon dishonor but it does not affect the transferee’s ability to become a holder in due course. An endorsement without recourse does not serve as notice of a defense that will prevent holder in due course status. UCC 3-302

Choice ‘‘c’’ is incorrect. Although Stone cannot be a holder in due course because Stone took the instrument with notice of defenses on the instrument, Willard Bank had no such notice. Willard also fulfilled the other requirements for HOC status: it was holder since the instrument contains all necessary signatures and was properly negotiated by Stone delivery, the bank gave value ($3,900), and nothing in the facts indicates that the bank did not take in good faith. UCC 3-302

Choice ‘‘b’’ is incorrect. Stone’s signature was not necessary to negotiate the instrument to Willard Bank. The note was a bearer instrument in the hands of Astor since it was payable to Astor or bearer. Astor did not name Stone as a special endorsee and so no signature was necessary to negotiate the instrument. Delivery alone would have been sufficient. UCC 3-204

Question 43

Question CPA-01150

On February 15, 2009, P. 0. 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, 2009, Willard Bank obtained the instrument from Stone for $3,900. Willard had no knowledge that Helco disputed liability under the instrument.

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?

1. Helco will be liable to Willard Bank because Willard Bank is a holder in due course.
2. Willard Bank is not a holder in due course because Stone was not a holder in due course.
3. Helco will not be liable to Willard Bank because of Astor’s breach.
4. Stone will be the only party liable to Willard Bank because he was aware of the dispute between Helco and Astor.

Answer 43

Explanation

Choice ‘‘a’’ is correct. Willard Bank is an HOC because it took the note for value, in good faith, and without notice of any defense. An HOC is not subject to personal defenses and Helco’s defense is a personal defense. UCC 3- 204

Choice ‘‘b’’ is incorrect. Although Stone was not an HOC because Stone had knowledge of a defense on the note, Willard Bank is an HOC because it took the note for value, in good faith, and without notice of any defense (and the instrument is a commercial paper/negotiable instrument). UCC 3-302

Choice ‘‘c’’ is incorrect. Willard Bank is an HOC because it took the note for value, in good faith, and without notice of any defense. An HOC is not subject to personal defenses and Helco’s defense is a personal defense.

ucc 3-302

Choice ‘‘d’’ is incorrect. Willard Bank is an HOC because it took the note for value, in good faith, and without

notice of any defense. An HOC is not subject to personal defenses and Helco’s defense is a personal defense.

Thus, Helco will be liable to Willard Bank. UCC 3-302

Question 44

Question CPA-01159

An instrument reads as follows:

Which of the following statements correctly describes the above instrument?

1. The instrument is a negotiable promissory note.
2. The instrument is a negotiable sight draft payable on demand.
3. The instrument is nonnegotiable because it is not payable at a definite time.
4. The instrument is nonnegotiable because it is secured by the proceeds of the sale of the ring.

Answer 44

Explanation

Choice ‘‘c’’ is correct. To be negotiable, an instrument must be payable on demand or at a definite time. The note here is payable 10 days after an event that might never happen-the sale of the maker’s ring. Thus, it is not payable at a definite time and therefore is not negotiable. UCC 3-109

Choice ‘‘d’’ is incorrect. The fact that an instrument is secured does not destroy negotiability. UCC 3-112

Choice ‘‘a’’ is incorrect. The instrument is not negotiable because it is not payable on demand or at a definite time. UCC 3-104

Choice ‘‘b’’ is incorrect. The instrument is not a draft (an order to a third party to pay); rather it is a promissory note (a promise to pay). UCC 3-104

Question 45

Question CPA-01529

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

Which of the following statements is correct?

1. Harris’ endorsement was a conditional promise to pay and caused the note to be nonnegotiable.
2. Smith’s endorsement effectively prevented further negotiation of the note.
3. Harris’ signature was not required to effectively negotiate the note to Sharp.
4. The note became nonnegotiable as a result of Parker’s endorsement.

Answer 45

Explanation

Choice ‘‘c’’ is correct. The last endorsement controls what is necessary for further negotiation. If the last endorsement is in blank, the instrument can be negotiated by delivery alone. If the last endorsement is special (i.e., it names a special endorsee), the special endorsee must sign to further negotiate the instrument. The last endorsement before Harris held the instrument was John Smith, and he signed in blank. Thus, Harris could have transferred the instrument without endorsing. UCC 3-204

Choice ‘‘d’’ is incorrect. Parker’s endorsement simply named a special endorsee (one who must sign to further negotiate the instrument). Such an endorsement does not destroy negotiability. UCC 3-204

Choice ‘‘a’’ is incorrect. An endorsement cannot destroy negotiability. Whether an instrument is negotiable is determined by the face of the instrument. Harris’s endorsement is a restrictive endorsement and restrictive endorsements do not destroy negotiability. UCC 205, 206

Choice ‘‘b’’ is incorrect. Smith was a special endorsee and so his signature was required to further negotiate the instrument. He signed the instrument without naming any further special endorsee. Such a ‘‘blank’’ endorsement does not prevent further negotiation. UCC 3-204

Question 46

Question CPA-01552

West Corp. received a check that was originally made payable to the order of one of its customers, Ted Bums. The following endorsement was written on the back of the check:

Which of the following describes the endorsement?

Snecial

Restdcti,1e

a.

Yes

Yes

b.

C.

No

No

Yes

No

d.

Yes

No

Answer 46

Explanation

Choice ‘‘b’’ is correct. An endorsement is special if it specifies the person to whom it is payable [UCC 3-204]. No new payee is named here, so the endorsement is in blank. An endorsement is restrictive if it includes the words ‘‘for collection’’ [UCC 3-205(c)], so the endorsement is restrictive. ‘‘Without recourse’’ means that the endorsement is a qualified endorsement.