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Business Law II > Exam 1: Negotiable Instruments > Flashcards

Exam 1: Negotiable Instruments Flashcards

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1
Q

What articles of the UCC govern negotiable instruments?

A

Article 3 - negotiable instruments

Article 4 - banking

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2
Q

What is a negotiable instrument?

A

“a signed writing containing an unconditional promise to pay an exact sum of money”

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3
Q

What are the parties to a draft?

A

Drawer, Drawee and Payee

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4
Q

What defines a check?

A

The Drawee is a financial institution

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5
Q

Cashier’s Check

A

A check when the financial institution is both a Drawer and Drawee

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6
Q

Trade Acceptance

A

Seller is drawer and payee

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7
Q

Promissory Notes Parties

A

Maker (Promisor)

Bearer (Promisee)

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8
Q

Certificate of Deposit

A

Promissory Note where the Maker is a financial institution

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9
Q

Requirements for Negotiability

A 
Written
Unconditional commitment to pay
Signed by the maker or the drawer
Sum certain payable in money
Definite time or payable on Demand
Order of someone or bearer
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10
Q

What rules when handwritten and typewritten are present

A

Handwritten

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11
Q

What rules when words and numbers disagree

A

Words Prevail!

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12
Q

What interest rate applies if the instrument says with interest and does not specify?

A

Judgement rate: the rate of interest fixed by the state statute that applies to a monetary judgement awarded by the court

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13
Q

Transfer by negotiation creates a holder who at the very least

A

received the rights in the instrument of a previous possessor

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14
Q

Holder is

A

anyone who possess instrument with all necessary endorsements

  • payable to bearer: possessor is holder
  • payable to specific person: specific person is holder w/o endorsement
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15
Q

What is an Order Instrument?

A

Either:

  • an instrument that is payable to a certain person (an order instrument) OR
  • Orders to Pay (drafts) [vs. promises to pay]
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16
Q

Negotiating Order Instruments

A

requires endorsement and delivery

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17
Q

Negotiating Bearer Instruments

A

requires delivery only

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18
Q

What is a Bearer Instrument?

A

Payable to anyone who properly possesses the instrument {Bare of endorsement need}

19
Q

Blank endorsement

A

Signature without additional words

-converts a order instrument into a bearer instrument

20
Q

Special endorsement

A

Payable to a specific person {human life is special, people are special}

21
Q

Qualified Endorsement

A

Signature with the words “Without Recourse”

-nullifies the transfer warranty

22
Q

Restrictive Endorsements

A

Restricts what can happen to the check - “includes specific instructions regarding the funds involved or states a condition to the right of the indorsee to receive payment”

  • For Deposit/Collection Only
  • Pay to BLANK as agent for BLANK
  • Pay to BLANK in trust for BLANK
23
Q

Do misspelled names affect negotiability

A

Nope as long as the misspelling is within reason

24
Q

Instruments Payable to Legal Entities

A

Negotiable by authorized representative of the entity

25
Q

Alternative Payees: BLANK or BLANK

A

either payee may indorse

26
Q

Joint Payees: BLANK and BLANK

A

both must endorse which provided evidence that at a minimum the other party knew about payment

27
Q

Multiple payee ambiguity: Pay BLANK BLANK 2

A

presumed alternative payees, meaning “or”

28
Q

Holder in Due Course (HDC) requirements

A
  • Takes for Value
  • Takes in Good Faith
  • Takes without Notice of Payment or a Defect in the Instrument (a reasonable person would be on notice of defect)
29
Q

Holder can take for value by:

A
  • Performing the instrument’s promise
  • Acquiring a security interest or other lien in the instrument
  • Taking instrument in payment for an antecedent debt
  • Giving a negotiable as payment
30
Q

“Good faith” is

A

honesty in fact and the observance of reasonable commercial standards of fair dealing.

31
Q

Holder takes the instrument with notice if she knows/has reason to know:

A
  • instrument is overdue
  • instrument has been dishonored
  • actual knowledge or any suspicious event
  • that a claim or defense exists
  • very irregular, incomplete or bears such evidence of forgery
32
Q

Shelter Principle

A

Person is not an HDC but derives title through HDC

33
Q

What is discharge of a negotiable instrument mean?

A

terminate the liability associated with an instrument

34
Q

Discharge from liability on an instrument can occur by:

A
  • Payment
  • Cancellation or Surrender
  • Reacquisition
  • Impairment of Collateral
35
Q

Two kinds of liability related to negotiable instruments

A

Signature Liability

Warranty Liability

36
Q

What is signature liability?

A

liability that arises from a party’s signature on an instrument

37
Q

What is warranty liability?

A

Liability that arises by operation of law and may be implied /applied to a party who handles an instrument but does not sign the instrument

38
Q

What kind of liability do Makers and Acceptors have for their signature?

A

Primary liability - unconditional

39
Q

What kind of liability to Drawers/Endorsers have for their signature?

A

Secondary liability - only kicks in after the instrument is dishonored

40
Q

Explain Maker’s Primary Liability

A
  • Promises to pay the note

- Obligated to pay terms of instrument at the time of signing

41
Q

Explain Acceptors’ Primary Liability

A

-Drawee promises to pay an instrument when presented for payment
> Certified Check
>Also known as Guaranteed funds/payment

42
Q

What are the requirements for Secondary Liability to apply?

A
  • Proper Presentment (must be timely)
  • Dishonor (the instrument is not paid)
  • Proper Notice (reasonable manner)
43
Q

What do Accommodation Parties do?

A

Sign instruments to lend name as credit to another party on the instrument (liability is identical to the party who is accommodated)

Business Law II (5 decks)

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