Bus. Law: Negotiable Instruments

Question 1

Is the endorser/intended payer of a negotiable instrument liable to the holder of the instrument?

Answer 1

1. The endorser is secondarily liable for the original amount of the instrument.
2. The company on which the instrument is drawn is not bound unless they agree to be bound.
3. The person to which the instrument was endorsed has the ability to negotiate the instrument to the original holder.

Question 2

essential elements of a check

Answer 2

A check is always drawn on a bank, payable on demand, and payable in money only.

Question 3

W/a check, is the drawee or the drawer bank expected to pay? Which bank incurs liability? Which type of liability?

Answer 3

1. Drawee bank is expected to pay, but assumes no liability. If signs, though, drawee becomes primarily liable.
2. Drawer bank assumes secondary liability.

Question 4

drawer bank

Answer 4

issues check; assumes secondary liability.

Question 5

drawee bank

Answer 5

pays check; assumes no liability unless it signs the check

Question 6

fictitious payee rule

Answer 6

1. No party can become a holder unless the instrument is properly endorsed.
2. In this case, the party in the best position to detect the fraud – the company w/in which an employee is committing fraud – should bear the loss.

Question 7

incomplete instrument

Answer 7

1. A signed writing, whether or not issued by the signer, the contents of which show at the time of signing that it is incomplete but that the signer intended it to be completed by the addition of words or numbers.
2. Such an instrument can be enforced according to its terms which are completed.

Question 8

promissory note

Answer 8

Drawer of the note serves as the maker by promising payment to the stated payee.

Question 9

cashier’s check

Answer 9

draft with respect to which the drawer and drawee are the same bank or branches of the same bank.

Question 10

traveler’s check

Answer 10

instrument that is drawn on or payable at or through a bank, payable on demand, and requires, as a condition to payment, a countersignature by a person whose specimen signature appears on the instrument.

Question 11

certificate of deposit

Answer 11

promissory note of a bank

Question 12

blank endorsement

Answer 12

does not name the person to whom the instrument was negotiated

Question 13

nonrestrictive endorsement

Answer 13

does not include the words “For Deposit Only”

Question 14

qualified endorsement

Answer 14

endorsement includes words eliminating contractual liability (“without recourse”)

Question 15

An endorser of a nonnegotiable draft makes all of the following assurances:

Answer 15

1. He will pay the draft if it is dishonored (secondary liability).
2. All signatures prior to his are genuine.
3. The instrument has not been materially altered.

Question 16

liability of the maker of the note

Answer 16

1. If maker signs note, maker is primarily liable.
2. If maker does not sign, endorser has warranty liability.
3. If makers signature is fraudulent, endorser is liable to endrosee.

Question 17

Under the UCC article on negotiable instruments, which of the following parties is primarily liable on an instrument?

Answer 17

1. Acceptor, or drawee that signs the note.

2. Otherwise, the maker has primary liability.

Question 18

When someone endorses a note, what type of liability does s/he assume?

Answer 18

Secondary liability.

Question 19

bearer paper

Answer 19

1. An instrument is given a restrictive endorsement.
2. The person to whom that endorsement was addressed can endorse it and turn it into bearer paper, but not necessarily a draft.

Question 20

Under the UCC, how can an instrument be dated?

Answer 20

1. An instrument can be antedated or postdated.
2. The date stated on an instrument determines the time of payment if the instrument is payable at a fixed period after date.
3. If an instrument is undated, its date is the date of its issue, or in the case of an unissued instrument, the date it first comes into possession of a holder.

Question 21

defenses for a holder in due course

Answer 21

1. duress
2. bankruptcy (after signing note)
3. infancy

Question 22

How long are these stop orders valid (oral vs. written)?

Answer 22

1. Oral stop order is valid for 14 days.

2. Written stop order is valid for 6 mos.

Question 23

A valid stop order means that…

Answer 23

a holder in due course has no right to demand payment from the drawee’s bank.

Question 24

Does the right to stop payment cease once a bank has certified a check?

Answer 24

Yes.

Question 25

The burden of establishing a loss resulting from payment of an item contrary to a stop payment order is on the…

Answer 25

customer/drawer.

Question 26

In the case of check fraud, who bears the loss?

Answer 26

1. The fraudster.

2. OR, the fraudster’s bank.

Question 27

A holder of a negotiable document of title acquires:

Answer 27

1. Title to the document.
2. Title to the goods.
3. Issuer’s obligation to deliver the goods according to the terms of the document.

Question 28

Does a holder in due course (HDC) have the right to demand payment in the face of a stop payment order?

Answer 28

No.

Question 29

HDC and original instrument liability

Answer 29

1. The issuer of an instrument is liable for the original amount of the instrument.
2. This liability cannot be changed by later alteration, even if the instrument is in the hands of a HDC.

Question 30

check

Answer 30

1. Written order for the payment of money.

2. Not a promise to pay, an IOU, or an indication that payment will be made upon the completion of specified actions.

Question 31

In order for a financial instrument to be negotiable, it must be…

Answer 31

1. Written.
2. Signed by the maker.
3. Contain in it an unconditional promise to pay a stated amount.

Question 32

Regulation E (UCC)

Answer 32

applies to consumer EFTs

Question 33

UCC Article 4A

Answer 33

applies to commercial EFTs

Question 34

Ways in which a party can be discharged from his/her liability on a note:

Answer 34

1. Intentional destruction by the holder discharges all parties primarily and secondarily liable.
2. The holder’s cancellation of an endorsement in writing will discharge that party from liability.
3. When the primary party makes payment, all other parties are discharged.
4. Oral revocation DOES NOT work.