Chapter 19 Vocabulary

Question 1

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

Answer 1

Draft

Question 2

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

Answer 2

Drawer

Question 3

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

Answer 3

Drawee

Question 4

A person to whom an instrument is made payable.

Answer 4

Payee

Question 5

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

Answer 5

Acceptance

Question 6

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

Answer 6

Acceptor

Question 7

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

Answer 7

Check

Question 8

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

Answer 8

Promissory Note

Question 9

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

Answer 9

Maker

Question 10

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

Answer 10

Certificate of Deposit (CD)

Question 11

The act of presenting an instrument to the party liable on the instrument in order to collect payment. Also occurs when a person presents an instrument to a drawee for a required acceptance.

Answer 11

Presentment

Question 12

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

Answer 12

Acceleration Clause

Question 13

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

Answer 13

Holder

Question 14

A clause in a time instrument that allows the instrument’s date to be extended into the future.

Answer 14

Extension Clause

Question 15

A negotiable instrument that is payable “to the order of an identified person” or “to an identified person or oder.”

Answer 15

Order Instrument

Question 16

Any instrument that is not payable to a specific person, including instruments payable to the bearer or to “cash.”

Answer 16

Bearer Instrument

Question 17

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

Answer 17

Bearer

Question 18

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

Answer 18

Negotiation

Question 19

A signature placed on an instrument for the purpose of transferring ownership rights in the instrument.

Answer 19

Indorsement

Question 20

An indorsement on an instrument that specifies no indorsee. An order instrument that is indorsed in blank becomes a bearer instrument.

Answer 20

Blank Indorsement

Question 21

An indorsement on an instrument that identifies the specific person to whom the indorser intends to make the instrument payable.

Answer 21

Special Indorsement

Question 22

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

Answer 22

Qualified Indorsement

Question 23

An indorsement on a negotiable instrument that requires the indorsee to comply with certain instructions regarding the funds involved.

Answer 23

Restrictive Indorsement

Question 24

An indorsement to a person who is to hold or use funds for the benefit of the indorser or a third person.

Answer 24

Trust Indorsement (Agency Indorsement)

Question 25

A holder who acquires a negotiable instrument for value, in good faith, and without notice that the instrument is defective.

Answer 25

Holder in Due Course (HDC)

Question 26

To refuse to pay or to accept a negotiable instrument that has been presented in a timely and proper manner.

Answer 26

Dishonor

Question 27

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

Answer 27

Shelter Principle

Question 28

One who induces a maker or drawer to issue a negotiable instrument in the name of an impersonated payee. These indorsements are treated as authorized indorsements under UCC Article 3.

Answer 28

Imposter

Question 29

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

Answer 29

Fictitious Payee

Question 30

A person who transfers an instrument for consideration impliedly makes five warranties- relating to good title, authentic signatures, no alterations, defenses, or insolvencies- to all subsequent transferees.

Answer 30

Transfer Warranty

Question 31

A person who presents an instrument for payment or acceptance impliedly makes three warranties relating to good title, no alterations, and no unauthorized signatures.

Answer 31

Presentment Warranty

Question 32

A defense that can be used to avoid payment to all holders of a negotiable instrument, including a holder in due course (HDC) or a holder with the rights of an HDC.

Answer 32

Universal Defense (Real Defense)

Question 33

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

Answer 33

Personal Defense

Question 34

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

Answer 34

Negotiable Instrument