Commercial Paper - UCC Article 3

Question 1

Negotiability Requirements (WOS FU MAD) (8)

Answer 1

(1) Writing
(2) payable to Order or bearer
(3) Signed by maker or drawer
(4) Fixed amount
(5) Unconditional promise to pay
(6) payable in Money
(7) no Additional undertaking or instruction
(8) payable on Demand or at definite time

Question 2

Requirements for HDC (6)

Answer 2

(1) NEGOTIABLE INSTRUMENT: Must meet all 8 requirements
(2) HOLDER: Must have possession of instrument + good title
(3) NO AUTHENTICITY QUESTIONS: No apparent forgery or alteration of instrument, not irregular or incomplete.
(4) FOR VALUE: Must pay value for instrument. Promise is not enough. Old value is ok. (e.g., payment for goods already received)
(5) GOOD FAITH: Honest in Fact (subjective test) + Observance of reasonable standards of fair dealing (objectives).
(6) WITHOUT NOTICE: No actual knowledge (subjective) that instrument (i) is overdue (principal only); (ii) was dishonored; (iii) has unauthorized signature; (iv) has alteration(s); (v) there’s uncured default with respect to payment of another instrument issued in same series; or (vi) is subject to any claims or defenses. Later notice is OK. Won’t lose HDC status.

Question 3

A negotiable instrument is defined as a written and signed unconditional, promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, that (i) ________________________________ (ii) is payable on demand or at a definite time; and (iii) does not state any unauthorized undertaking or instruction by the person promising or ordering payment.

A is payable to order or to bearer at the time as dated on the draft instrument;
B is payable to order or to bearer at the time it issued or first comes into possession of a holder;
C is payable to order or to bearer at the time of any stated condition precedent;
D is payable to order or to bearer at the time the instrument is tendered for payment by the holder;

Answer 3

B is payable to order or to bearer at the time it issued or first comes into possession of a holder;

Whether an instrument is negotiable depends on its form; it must meet the very technical formal requisites of negotiability listed in the U.C.C. One requirement of a negotiable instrument is that it must be payable to order or to bearer at the time it is issued or first comes in to possession of a holder. The definition of a negotiable instrument does not include the requirement that a negotiable instrument is payable at the date of the draft instrument, nor the requirement that it is payable at the time an instrument is tendered for payment by the holder. An instrument in nonnegotiable if it contains a condition precedent.

Question 4

Which of the following is not an instrument that is payable upon demand:

A an instrument that is payable at sight.
B an instrument that is payable at the will of the holder.
C an instrument that does not state a time for payment.
D an instrument that is payable upon satisfaction of condition.

Answer 4

D an instrument that is payable upon satisfaction of condition.

An instrument is not negotiable if it contains a condition precedent. To be negotiable, an instrument must be payable upon demand or at a definite time. An instrument that is payable upon satisfaction of a condition is not an instrument payable upon demand. An instrument is payable upon demand if it: (i) is payable “on demand” or “at sight” or otherwise indicates that it is payable at will; or (ii) does not state a time for payment.

Question 5

Which of the following is an example of an enforceable negotiable instrument:

A an instrument payable “if the Chicago Bears score more than 28 points next Sunday.”
B an instrument payable “subject to the Chicago Bears winning the Super Bowl.”
C an instrument payable “100 years from date, but if my uncle Sam should die, payable upon his death.”
D an instrument payable “in the amount of $100, provided that uncle Sam predeceases holder.”

Answer 5

C an instrument payable “100 years from date, but if my uncle Sam should die, payable upon his death.”

To be negotiable, an instrument must be payable upon demand or at a definite time. Any clause that accelerates the time of payment upon the occurrence of an event or at the option of the maker or holder is permissible; an acceleration clause does not destroy negotiability. An instrument payable “100 years from date, but if my uncle Sam should die, payable upon his death” is permissible as an enforceable acceleration clause. Instruments containing conditions on payment are not enforceable, and they are not negotiable.

Question 6

A holder in due course takes the claims, free from “personal defenses” and subject only to “real defenses” (fraud in the factum). Which of the following is a “real defense” (fraud in the factum):

A Estoppel
B Unconscionability
C Duress
D Fraud in the inducement

Answer 6

C Duress

Duress is an example of “real” fraud, while estoppel, unconscionability, and fraud in the inducement are examples of “personal” defenses. Fraud in the factum (real fraud) is a defense that may be asserted against a holder in due course and non-holder in due course transferees of the instrument in question. Under the U.C.C., other defenses, commonly referred to as “personal” defenses, cannot be asserted against a holder in due course.

Question 7

“Personal defenses” cannot be asserted against one having the rights of a holder in due course. Which of the following answers is a “personal defense”:

A defendant claims breach of warranty under written contract.
B defendant claims contract was signed under duress.
C defendant signed contract without opportunity to learn of its fraudulent character.
D defendant signed contract without opportunity to obtain legal advice.

Answer 7

A defendant claims breach of warranty under written contract.

Breach of warranty is a contractual defense and is considered a “personal defense.” A claim that a contract was signed under duress, and a contract signed without an opportunity to learn of its fraudulent character are examples of assertable “real defenses” (fraud in the factum). The opportunity to obtain legal advice in advance of signing an agreement is irrelevant.

Question 8

In accordance with Article 3 of the U.C.C, all of the following persons are entitled to enforce an instrument, except one. Who is not a person that may enforce an instrument under the U.C.C.?

A A person not in possession of the instrument who was a former payee, e.g. former payee on a check.
B A holder of the instrument, e.g. the payee on a promissory note.
C A nonholder in possession of the instrument who has the rights of a holder, e.g., subrogation rights.
D A person not in possession of the instrument but who is entitled to enforce it, e.g., the instrument was stolen.

Answer 8

A A person not in possession of the instrument who was a former payee, e.g. former payee on a check.

In accordance with the U.C.C., a person not in possession of an instrument who was a former payee (e.g., a former payee on a check) is not a person entitled to enforce the instrument. A holder of an instrument (a payee under a promissory note), a nonholder in possession of an instrument who has the rights of a holder (e.g., subrogation rights), and a person not in possession of an instrument but is entitled to enforce it (e.g., a stolen instrument) are all persons entitled to enforce an instrument in accordance with Article 3 of the U.C.C.

Question 9

To make out a prima facie case for payment, a person presenting an instrument for payment must prove two things. What answer below provides two things that would prove satisfactory for a plaintiff seeking to make a prima facie case for payment?

A That she is a holder in due course and she is a holder of the instrument.
B That signatures on the instrument are genuine and she is a holder of the instrument.
C That she is a holder in due course and the signatures on the instrument are genuine.
D That there are no conditions to making payment and she is the holder of the instrument.

Answer 9

B That signatures on the instrument are genuine and she is a holder of the instrument.

To make out a prima facie case for payment, a person presenting an instrument for payment may satisfy the requirement by showing the signatures on the instrument are genuine and that she is a holder of the instrument. A plaintiff does not have to prove she is a holder in due course, nor does she have to prove there are no conditions to making a payment.

Question 10

An employer entrusts an employee with responsibility with respect to an instrument and the employee makes a fraudulent indorsement. If a bank accepts the instrument and pays the amount stated therein to the employee, may the bank be held liable for the amount stated in the instrument?

A Yes, but only if the bank failed to exercise ordinary care.
B Yes, always.
C Yes, but only if the bank knew the employee.
D Yes, but only if the employee had cashed checks in the past.

Answer 10

A Yes, but only if the bank failed to exercise ordinary care.

If an employer entrusts an employee with responsibility with respect to an instrument and the employee makes a fraudulent indorsement on the instrument, the indorsement is effective. However, if the party who takes the instrument fails to exercise ordinary care, it may be held liable to the extent of loss caused by the failure. Whether or not a party who takes the instrument actually knew the employee or had cashed checks presented by the employee in the past are not specific requirements presenting the possibility of liability to the bank. However, they may be facts considered to determine whether ordinary care was exercised.

Question 11

Which of the following instruments could be negotiable?

(A) An instrument “payable on my uncle Sal’s death.”
(B) An instrument “payable 30 days after my uncle Sal’s death.”
(C) An instrument “payable 100 years from date, but if my uncle Sal should die, payable on his death.”
(D) An instrument “payable 3 months from date, which may be extended at the option of Maude, Maker.”

Answer 11

(C) An instrument “payable 100 years from date, but if my uncle Sal should die, payable on his death.”

To be negotiable, an instrument must be payable on demand or at a definite time. If an instrument is payable on or after a stated time or event certain to happen but uncertain as to time, it is not negotiable because the time for payment is not readily ascertainable. Therefore, (A) and (B) are incorrect because those instruments state no definite time for payment. (C) is correct because any clause that ACCELERATES the time of payment upon the occurrence of an event is permissible. A clause that EXTENDS the time of payment at the option of the maker will not affect negotiability as long as the extension is to a further definite time stated in the instrument. (D) is thus incorrect because it does not specify when it will be due.

Question 12

What happens if an instrument contains contradictory terms?

Answer 12

Words control figures unless the words are ambiguous or uncertain (e.g., illegible), in which case the figures control Such a discrepancy would not make the instrument void or nonnegotiable.

Question 13

When will a drawer be obligated to pay on the draft?

(A) When the draft is dishonored.
(B) When the draft is presented for payment.
(C) When the draft has been accepted by a bank.
(D) Never.

Answer 13

(A) When the draft is dishonored.

A drawer is secondarily liable on a draft. The drawee is primarily liable and obligated to pay when the draft is presented for payment. However, if the drawee fails to pay within a reasonable time after presentment (i.e., if the draft is dishonored), the drawer becomes obligated to pay the note according to its terms. However, if the draft has been accepted by a bank (i.e., signed by the bank so that the bank is primarily liable on the draft), the drawer is discharged from this obligation regardless of when the draft was accepted or by whom acceptance was obtained.

Question 14

Even thought he holder satisfies the requirements that he take an instrument for value, in good faith, and without notice of certain defects, he will not become a holder in due course if he:

Answer 14

(1) purchases the instrument at judicial sale or takes it under legal process;
(2) acquires the instrument in taking over an estate; or
(3) purchases the instrument as part of a bulk transaction not in the regular course of business of the transferor.

Question 15

Nancy signed an instrument providing for payment “with interest,” to be tendered in either Euros or gold bars. Why is the instrument not negotiable?

(A) Because it calls for the payment of interest.
(B) Because it does not specify an interest rate.
(C) Because it allows for payment in foreign currency.
(D) Because it allows for payment with something other than money.

Answer 15

(D) Because it allows for payment with something other than money.

A negotiable instrument is a written and signed unconditional promise or order to pay a fixed amount of money to order or to bearer, on demand or at a definite time, without stating any unauthorized undertakings or instructions. To be negotiable, the principal due must be fixed, but the instrument may call for the payment of interest. If no interest rate is specified, the rate on a court judgment will be implied. A negotiable instrument may call for payment in foreign currency. However, an instrument will not be negotiable if it calls for payment with something other than money or allows such payment in the alternative.

Question 16

Ana issued Tim a $500 note in exchange for what Tim fraudulently claimed was a real diamond ring. The next day, Tim negotiated the note to Barb in exchange for a refrigerator. Barb then negotiated the note to Cesar in exchange for a television set. Later, Ana, Barb, and Cesar discover Tim’s fraud. Which statement is false?

(A) Ana has no obligation to pay anyone in possession of the note.
(B) Ana must pay Cesar if he took the note in good faith.
(C) Ana has no obligation to pay Barb on the note.
(D) Ana must pay Cesar if Barb took the note in good faith.

Answer 16

(A) Ana has no obligation to pay anyone in possession of the note.

Someone who issues a note is obligated to pay the holder (i.e., the person in possession of the note with the right to enforce it) according to the note’s terms unless she can assert a defense. Thus, Ana’s obligation would extend to Cesar, not Barb. Tim’s fraudulent inducement would give Ana a personal defense to payment on the note, but only real defenses (e.g., incapacity, illegality) can be asserted against an HDC. An HDC is a holder who took an instrument (i) for value, (ii) in good faith, and (iii) without notice of any claims or defenses on it. Barb and Cesar each took the note for value (in exchange for the items mentioned), and neither had notice of the fraud at that time. Thus, if Cesar took the note in good faith, he was an HDC, against whom Ana cannot assert her defense. Furthermore, if Barb took the note in good faith, she would pass her HDC rights to Cesar under the shelter rule.

Question 17

Raj borrowed $10,000 from Ed. Raj agreed to repay the loan in 90 days by making a single payment of $10,500. The additional $500 represented interest at a lawful rate. Raj delivered to Ed a signed and dated promissory note including these terms. On the 90th day, Ed demanded payment from Raj, but Ed could not produce the note, despite a diligent search.

May Ed disregard the note and sue Raj for the amount owed?

(A) Yes, because the obligation has not been satisfied.
(B) No, because tendering the note suspended the underlying obligation.
(C) Yes, because an obligee may opt to enforce either the instrument or the obligation.
(D) No, because tendering the note discharged the underlying obligation.

Answer 17

(B) No, because tendering the note suspended the underlying obligation.

Unless otherwise agreed, if a promissory note is given to satisfy an obligation,t he obligation is suspended to the same extent as if cash were given. Suspension continues until the note is paid or dishonored. If the note is paid, the obligation is discharged. Only if the note is dishonored (i.e., the maker refuses to pay when the note is presented) does the obligee have the option to sue on either the note or the obligation. However, if a note is lost, stolen, or destroyed, the obligation remains suspended to the extent of the instrument, and the obligee’s rights are limited to enforcement of the note.

Question 18

If the party entitled to enforce an instrument cannot produce it because it was lost, stolen, or destroyed, can he still sue not he instrument?

Answer 18

Yes, if he proves ownership, its terms, and the facts that prevent its production.

Question 19

Dot draws a check payable to “Eli and Theo Palmer.” Theo then indoors the check with the words “pay Lana Green” and delivers the check to Lana. Which of the following is correct?

(A) Theo’s indorsement and delivery was sufficient to negotiate the check to Lana.
(B) The indorsement “pay Lana Green” prevents Lana from further negotiating the check.
(C) Both Eli and Theo must indorse the check in order to negotiate it.
(D) The indorsement “pay Lana Green” is ineffective to specify an indorsee.

Answer 19

(C) Both Eli and Theo must indorse the check in order to negotiate it.

If an instrument is payable to multiple payees jointly (i.e., using the word “and”), any subsequent negotiation is effective only if all payees indorse the instrument. Thus, Eli’s signature also was required here. A special indorsement (e.g., “pay Lana Green) requires the named person’s signature to further negotiate the instrument; it does not prevent that person from transferring or negotiating it. However, an indorsement stating a condition to payment (e.g., “pay Lana Green if she attends my recital) is ineffective to condition payment.

Question 20

Art received his paycheck and endorsed it “Art, for deposit.” On the way to deposit the check, Art was mugged by Kip. Kip gave Art’s paycheck to Grocer in exchange for groceries for his children. Grocer deposited the check in Grocer’s Domestic Bank. Grocer’s Domestic Bank credited Grocer’s account and forwarded the check to Payroll Bank, the bank on which the check was drawn. Payroll Bank paid the check. Which party would not be liable for conversion?

(A) Grocer.
(B) Payroll Bank.
(C) Grocer’s Domestic Bank.
(D) Kip.

Answer 20

(B) Payroll Bank.

If an indorsement includes words that indicate that the purpose of having the instrument collected by a bank for the indorser (e.g., “for deposit,” “for collection”), a person or depository bank must pay the instrument consistently with the indorsement or will be deemed to have converted it. However, intermediary banks and the payor bank (unless it is also the depositary bank) may disregard the restrictive indorsement. Thus, both Grocer and Grocer’s Domestic Bank could be held liable for converting the check because it was not deposited in Art’s account, but Payroll Bank cannot. Also, the U.C.C. allows an action for conversion when an instrument is transferred, in a manner other than by negotiation, from one who is not entitled to enforce the instrument. Because Art restrictively endorsed this instrument for deposit only, Kip would be liable.

Question 21

An HDC is a holder who takes the instrument: (i) for value; (ii) in good faith; and (iii) without notice that:

Answer 21

(1) The instrument is overdue or has been dishonored, or that there is an uncured default with respect to payment of another instrument issued as part of the same series;
(2) The instrument contains an unauthorized signature or has been altered;
(3) There is a claim to the instrument; AND
(4) Any party has a defense or claim in recoupment on the instrument.

Question 22

To be an HDC, one cannot have notice of any claim to the instrument. Knowledge of which of the following facts will constitute notice of a claim?

(A) The instrument was postdated.
(B) A party signed the instrument for accommodation.
(C) There has been a default in payment of interest on the instrument.
(D) A fiduciary negotiated the instrument in payment of the fiduciary’s own debt.

Answer 22

(D) A fiduciary negotiated the instrument in payment of the fiduciary’s own debt.

If the purchaser knows that a fiduciary has negotiated the instrument in payment of or as security for the fiduciary’s own debt or in any transaction for the fiduciary’s own benefit or has otherwise breached his duty, the purchaser has notice of a claim.

Question 23

To whom are transfer warranties made if an instrument is transferred without an indorsement?

(A) The immediate transferee only.
(B) The immediate transferee and all subsequent transferees.
(C) Holders in due course only.
(D) No one.

Answer 23

(A) The immediate transferee only.

When a person transfers an instrument for consideration, she warrants that (1) she is entitled to enforce the instrument, (2) all signatures are authentic and authorized, (3) the instrument has not been altered, (4) no defense or claim of any party is good against her, and (5) she has no knowledge of any insolvency proceeding that has been instituted against the maker, acceptor, or drawer. If the instrument is transferred by delivery alone (as with a bearer instrument), transfer warranties run only to the immediate transferee. But if the transferor indoors the instrument, the warranties run to all subsequent transferees.

Question 24

Which of the following may be asserted against an HDC?

(A) Illegality that renders the obligation void.
(B) Forgery of drawer’s signature.
(C) Failure of consideration.
(D) None of the above.

Answer 24

(A) Illegality that renders the obligation void.

Only so-called real defenses may be asserted against an HDC. Illegality in the underlying transaction will be a real defense if it renders the obligation void - not merely voidable - under state law. Forgery of names necessary to title (e.g., payee, special indorsee) precludes HDC status because no one can obtain the right to enforce necessary to qualify as a holder. The forgery of any other name (e.g., maker, drawer) does not affect the right to enforce, and subsequent takers may be HDCs of the instrument if they otherwise qualify. Failure of consideration is a “personal” defense and personal defenses may not be asserted against HDCs.

Question 25

All of the following are personal defenses, which cannot be asserted against one having the rights of an HDC, except:

(A) Lack of consideration.
(B) Failure of a condition precedent.
(C) Unconscionability.
(D) Fraud in the factum.

Answer 25

(D) Fraud in the factum.

Personal defenses available on a negotiable instrument include lack of consideration, failure of a condition precedent, and other defenses available in a simple contract action (e.g., unconscionability). However, only so-called real-defenses may be asserted against an HDC. Fraud in the fact, or “real” fraud, can be asserted against even an HDC. Fraud in the fact is fraud that induced the obligor to sign the instrument without knowledge or a reasonable opportunity to learn its character or essential terms.

Question 26

Harold is the HDC of a check. He transfers the check to Ivy. Does Ivy acquire Harold’s rights with respect to the check?

(A) Yes, unless Ivy did not give value for the check.
(B) Yes, unless Ivy was a party to fraud or illegality affecting the check.
(C) Yes, unless Ivy knew of some defense or claim to the check.
(D) No.

Answer 26

(B) Yes, unless Ivy was a party to fraud or illegality affecting the check.

Under the shelter rule, a transferee acquires whatever rights her transferor had with respect to an instrument. This rule allows any transferee to “step into the shoes” of the person who formerly held the instrument, even acquiring HDC rights when the transfer fails to meet the requirements of due course holding (e.g., because she did not pay value). However, this rule does not protect parties to fraud or illegality affecting the instrument.

Question 27

Presentment is a demand for payment or acceptance made by a person entitled to enforce an instrument. All of the following statements regarding presentment are correct, except:

(A) Presentment is excused if the person entitled to present the instrument cannot with reasonable diligence present.
(B) Presentment can be made by any commercially reasonable means.
(C) Presentment cannot be waived.
(D) Presentment generally must occur for an indorser’s obligation on an instrument to arise.

Answer 27

(C) Presentment cannot be waived.

Presentment is the first of 3 prerequisites to an indorser’s liability arising on an instrument. The next 2 prerequisites are dishonor (i.e., the maker or drawer failing to pay or accept within a reasonable time after presentment) and the indorser being given notice of dishonor. While this is the general rule, both presentment and notice of dishonor can be waived. The remaining choices are correct statements.

Question 28

Who makes presentment warranties?

(A) Any person who obtains payment on an instrument.
(B) Any person who obtains acceptance of an instrument.
(C) Any prior transferor of an instrument that was paid or accepted.
(D) All of the above.

Answer 28

(D) All of the above.

Presentment warranties are made by any person who obtains payment or acceptance of an instrument, and by any prior transferors. The warranties are made to any person who in good faith pays or accepts. 3 presentment warranties apply to unaccepted drafts: (i) the warrantor is entitled or authorized to enforce the draft, (ii) the instrument is not altered, and (iii) the warrantor has no knowledge that the drawer’s signature is unauthorized. Only the first presentment warranty applies to instruments other than unaccepted drafts.