Exam I

Question 1

If you write a check to pay for your groceries, the check is:

Answer 1

A negotiable instrument

Question 2

Which article of the UCC deals with negotiable instruments?

Answer 2

Article 3

Question 3

The law governing negotiable instruments derives from what?

Answer 3

The law merchant

Question 4

You write a check to pay for your rent. In this transaction, who is the drawee?

Answer 4

Your bank is, because it must pay the check

Question 5

The parties to a promissory note are the payee and whom?

Answer 5

The maker

Question 6

Which of the following is NOT required in order for a promissory note to be negotiable?

a) Promise in the note must be made orally
b) Note must be written
c) Note must be payable on demand or at a definite time
d) Note must be unconditional promise to pay

Answer 6

a) Promise in the note must be made orally

Question 7

In order for an instrument to be negotiable, the UCC requires that it be signed by whom?

Answer 7

By the maker

Question 8

If you write a check to pay for repairs to your automobile, presentment occurs when?

Answer 8

When the person repairing the car presents the check to your bank

Question 9

An acceleration clause allows the holder of a time instrument to do what?

Answer 9

Demand payment of the entire amount due, with interest, if a certain event occurs

Question 10

An extension clause in a negotiable instrument is a what?

Answer 10

The reverse of an acceleration clause

Question 11

What is one of the differences b/w a transfer by negotiation and an assignment?

Answer 11

A transfer by negotiation can give a holder more rights in the instrument than the prior possessor had

Question 12

If an instrument is “payable to bearer,” how is it negotiated?

Answer 12

By delivery

Question 13

If there is no room on an instrument to add an indorsement, what may happen?

Answer 13

An allonge can be firmly attached to provide space for indorsements

Question 14

Suppose that John indorses a check “Pay to Deb, without recourse, [signed] John.” In legal terms, how does this indorsement affect John?

Answer 14

• It relieves him of liability on the check

Question 15

Suppose that John indorses a check, “Pay to Sam, as agent for Deborah.” What kind of indorsement is this?

Answer 15

A trust indorsement

Question 16

Which of the following is not a restrictive indorsement?

a) A trust indorsement
b) A blank indorsement
c) An indorsement prohibiting further indorsement
d) A conditional indorsement

Answer 16

b) A blank indorsement

Question 17

The UCC requires that to become an HDC, a holder must take an instrument in good faith. This means that:

Answer 17

A holder must have acted honestly in fact and observed all reasonable commercial standards of fair dealing

Question 18

Which of the following is NOT a way that an instrument may be defective?

a) It is overdue
b) It has previously been dishonored
c) It has previously been honored
d) There is an uncorrected default

Answer 18

c) It has previously been honored

Question 19

If First Union bank refuses to pay a check written by a person who has an account with First Union, what has happened?

Answer 19

• First Union has dishonored the instrument

Question 20

Anyone who does not qualify as an HDC, but who derives his or her title through an HDC, can acquire the rights and privileges of an HDC. This principle is known as:

Answer 20

The shelter principle

Question 21

What are the two kinds of liability associated with negotiable instruments?

Answer 21

• Warranty liability

- Signature liability

Question 22

If Jeff presents a check for payment at the Lincoln Bank in a timely and proper manner, but Lincoln refuses to pay, legally, what happens?

Answer 22

• Lincoln dishonors the check

Question 23

If a person is primarily liable on a negotiable instrument, that person is:

Answer 23

Is absolutely required to pay unless he or she has a valid defense to payment

Question 24

To hold a drawer secondarily liable on a domestic check, the check must be presented for payment when?

Answer 24

w/i 30 days of its date

Question 25

An agent agrees to represent another person, who is known as:

Answer 25

Principal

Question 26

Ned, Wilkie’s agent, signs a promissory note, promising to pay Kayla $12,000 in three months in the following manner, “Ned, as agent for Wilkie.” Assuming that Ned has the authority to sign the note, is Wilkie liable for the $12,000? Explain.

Answer 26

• Yes.

- Ned clearly signed as Wilkie’s agent, and therefore Wilkie is liable

Question 27

Suppose that Leslie, Wilkie’s friend, breaks into Wilkie’s locked desk, steals a blank check, and fills it out for $50,000, payable to CASH. Leslie then signs Wilkie’s name and presents the check to Wilkie’s bank for payment. The bank cashes the check for $50,000 and Leslie leaves for Brazil. Who is liable?

Answer 27

• The bank is liable b/c it should have checked the signature

Question 28

Which of the following is NOT a transfer warranty?

a) The instrument is not subject to a defense or claim of any party that can be asserted against the transferor
b) All signatures are authentic and authorized
c) The transferor may not enforce the instrument
d) The instrument has not been altered

Answer 28

c) The transferor may not enforce the instrument

Question 29

One universal defense to liability for payment on a negotiable instrument is:

a) Nondelivery of the instrument
b) Forgery
c) Lack of consideration
d) Breach of Contract

Answer 29

b) Forgery

Question 30

Which of the following is NOT a universal defense available to a HDC?

a) Material alteration
b) Discharge by payment
c) Discharge in bankruptcy
d) Minority

Answer 30

b) Discharge by payment (this is a personal defense)

Question 31

The main focus of Article 4 of the UCC is what?

Answer 31

To establish a framework for banking relationhips

Question 32

What is an overdraft?

Answer 32

A check that is written on a checking account in which there are insufficient funds to cover the check and that is paid by the bank

Question 33

When a bank draws a check on itself, this is known as what?

Answer 33

A cashier’s check

Question 34

When a customer writes a check on his or her account, what kind of legal relationship arises between the bank and the customer?

Answer 34

An agency relationship

Question 35

Lynn loses three checks from her checkbook: #536, #537, and #538. She requests and executes a written stop-payment order with her bank, ordering the bank not to pay these checks. Three months later, her bank pays check #537 in the amount of $1,500 causing Lynn’s account to be overdrawn. In this situation, who is liable?

Answer 35

The bank is liable

Question 36

A drawer may be liable for a forged check if:

a) the drawer’s exercise of due care contributed to the loss
b) the drawer’s uncle forged the check
c) the drawer’s negligence substantially contributed to the loss
d) the drawer forged his or her own name on the check

Answer 36

c) the drawer’s negligence substantially contributed to the loss

Question 37

The rule in moving checks from one bank to another is that:

Answer 37

Each bank must pass the check on before midnight of the next banking day after it is received

Question 38

The Federal Reserve System, which clears many checks in the US, is:

Answer 38

A network of 12 district banks located around the US and headed by the Federal Reserve Board of Governors

Question 39

The Electronic Fund Transfer Act states that you will only be liable for $50 if someone steals your debit card, as long as what happens?

Answer 39

You report the theft within two days of discovering it (otherwise your liability will increase)

Question 40

Which of the following would NOT be considered an online banking service?

a) Bill consolidation and payment
b) Applying for loans
c) Transferring funds among accounts
d) Cashing checks

Answer 40

d) Cashing checks