NegotiableIns-CPAexcel

Question 1

Give an example of language that results in bearer paper.

Answer 1

“Pay to cash” or “Pay to the order of cash” or “Pay to Jane Downs or bearer.”

Question 2

Give an example of language that results in order paper.

Answer 2

“Pay to the order of Jane Downs.”

Question 3

Give an example of language on an instrument that would affect negotiability.

Answer 3

Language that makes the date of payment uncertain (Payable when I pass the CPA Exam).

Question 4

List the requirements of a negotiable instrument.

Answer 4

1. In writing;
2. Signed by Maker or Drawer;
3. Contain an unconditional promise or order to pay;
4. State a sum Certain in Money;
5. Be payable on demand or at a definite time;
6. Be payable to order or bearer (words of negotiability).

Question 5

Describe the writing requirement of a negotiable instrument.

Answer 5

Must have be on something with a degree of permanence and be readily transferable.

Question 6

Define a “demand instrument.”

Answer 6

Those that are payable immediately upon issue, such as “payable at sight” or “payable upon presentation,” or those for which no time period is specified.

Question 7

List the parties who draft negotiable instruments.

Answer 7

1. Drawers - for checks or drafts;

2. Makers - for notes and Certificates of Deposits.

Question 8

Define “negotiation.”

Answer 8

The transfer of possession of a negotiable instrument to a party who becomes a holder.

Question 9

Define “accommodation party.”

Answer 9

A “person” who signs an instrument in any capacity for the purpose of lending his or her name as credit to another party on the instrument.

Question 10

List some examples of nonnegotiable instruments.

Answer 10

1. Letters of Credit;
2. Warehouse Receipts
3. Bill of Lading
4. Stocks and Bonds
5. Contracts

Question 11

List the two types of negotiable instruments.

Answer 11

1. Orders to Pay (checks and drafts);

2. Promises to Pay (notes and CDs).

Question 12

List the parties to a draft or a check.

Answer 12

1. Drawer;
2. Drawee
3. Payee

Question 13

List the parties to a note or certificate of deposit (CD).

Answer 13

1. Maker;
2. Payee

(Note: there is no maker of a check, only notes and CDs; liability of these parties is different so use terms carefully.)

Question 14

List the types of drafts that can be used to pay money.

Answer 14

1. Sight Draft (on demand);
2. Time Draft
3. Trade acceptance

Question 15

Describe the various types of checks that can be used to pay money.

Answer 15

1. Cashier’s check (bank is drawer and drawee);
2. Teller’s check (draft drawn by one bank on another bank;
3. Traveler’s check (draft payable on a bank that requires a counter signature);
4. Certified check (check accepted by a drawee bank; obliges drawee bank to pay)
5. Money order (is a check if drawn on a bank and payable on demand).

Question 16

Define “indorsement.”

Answer 16

Signature by payee for purposes of negotiation.

Question 17

Define “bearer of paper.”

Answer 17

Instrument made payable in blank, to bearer, or to cash; transferred by delivery only.

Question 18

Define “order payer.”

Answer 18

Instrument made payable to individual or entity; transferred by indorsement and delivery.

Question 19

List the criteria for becoming a holder in due course (HDC) of a negotiable instrument.

Answer 19

1. Must be a holder;
2. Must take instrument for value;
3. Must take in good faith; and
4. Must take without notice that the instrument is overdue, has previously been dishonored, or of any claim or defense on the part of any person.

Question 20

When does a time instrument become overdue?

Answer 20

If taken one minute after due date.

Question 21

When does a demand instrument become over-due?

Answer 21

After an unreasonable amount of time has lapsed or on the day after the day a demand for payment is made.

Question 22

When does a check become overdue?

Answer 22

More than 90 days after its date.

Question 23

Describe the shelter rule.

Answer 23

Any holder who cannot qualify as an holder in due course (HDC) but took the instrument through a HDC, has the same rights as if a HDC.

Question 24

How are order instruments negotiated?

Answer 24

By delivery plus indorsement.

Question 25

How are bearer instruments negotiated?

Answer 25

By delivery.

Question 26

What is the legal effect of a blank indorsement?

Answer 26

1. Converts order instrument into bearer instrument;
2. For transfer with consideration warranties are extended to all subsequent holders;
3. Blank indorser has a secondary liability to pay all subsequent holders.

Question 27

Describe the concept of blank indorsements.

Answer 27

Indorsement specifies no particular person to receive payment.

Question 28

What is the legal effect of a special indorsement?

Answer 28

1. Converts bearer into order or continues order instrument;
2. Transfer with consideration extends transfer warranties to all subsequent holders;
3. Indorser has secondary liability to pay all subsequent holders.

Question 29

Describe the concept of special indorsements.

Answer 29

Indorsement specifies a person to whom payment or to whose order payment is to be made.

Question 30

What is the legal effect of a qualified indorsement?

Answer 30

1. Disclaims contract signature liability;

2. Still extends transfer warranties to all subsequent holders.

Question 31

Describe the concept of qualified indorsement.

Answer 31

Usually includes words “without recourse” or similar words.

Question 32

What is the legal effect of a restrictive indorsement (“For Deposit Only”)?

Answer 32

1. Does not prohibit further negotiation;

Question 33

List the three kinds of restrictive indorsements that can be used on negotiable instruments.

Answer 33

1. Conditional;
2. Prohibitive;
3. For Deposit or Collection.

Question 34

True or false: If the holder is not a holder in due course for failure to give value, the holder can ship through to another, take back for value, and step up to the holder in due course classification.

Answer 34

This is a true statement. However, the holder cannot ship through and eliminate knowledge of problem on the instrument.

Question 35

Define “value”.

Answer 35

Different from consideration.Seller gives value if receives note from buyer who already owes money for goods delivered but has not paid FIFO concept for banks and giving value on deposited checks.

Question 36

Define “holder in due course”.

Answer 36

A holder who takes possession of a negotiable instrument for present value, in good faith and without notice of any defense or claims to ownership of the instrument.

Question 37

Define “holder”.

Answer 37

A party in possession of an instrument, To be a holder of bearer paper requires delivery. To be a holder of order paper requires delivery and proper indorsement.

Question 38

Define “presentment warranty.”

Answer 38

Person who presents instument is authorized to receive payment.

Question 39

List the warranties given by transferors.

Answer 39

1. Transferor is entitled to enforce the instrument;
2. All signatures are genuine or authorized;
3. Instrument has not been altered;
4. Instrument not subject to defenses;
5. Transferor has no knowledge of any insolvency proceeding.

Question 40

When must a notice of dishonor be given?

Answer 40

Must be given within 30 days of dishonor or notice of dishonor; for banks must be given by midnight of the next banking day.

Question 41

Define “dishonor.”

Answer 41

Primary party refuses to pay the instrument.

Question 42

Define “presentment.”

Answer 42

Negotiable instrument presented for payment. ID can be required.

Question 43

List the two types of holder defenses that may be used against having to pay an instrument.

Answer 43

1. Personal;

2. Real or Universal.

Question 44

List the presentment warranties associated with negotiable instruments.

Answer 44

1. Person presented is authorized to receive payment;
2. The instrument has not been altered;
3. Person has no knowledge instrument is unauthorized.

Question 45

List the transferor warranties associated with negotiable instruments.

Answer 45

1. Transferor is entitled to enforce the instrument;
2. All signatures are genuine or authorized;
3. Instrument has not been altered;
4. Instrument not subject to defenses;
5. Transferor has no knowledge of any insolvency proceeding.

Question 46

Who is liable for an imposter payee?

Answer 46

The drawer has liability.

Question 47

Who is liable for a fictitious payee on a negotiable instrument?

Answer 47

The drawer has liability.

Question 48

When an authorized agent signs on behalf of a principal, who is liable for the instrument?

Answer 48

An authorized agent can bind his principal on an instrument by signing the instrument in such a way as to clearly show that he is signing on behalf of the principal. In such a case, the principal, rather than the agent, will be liable on the instrument.

Question 49

List the two forms of negotiable instrument liability.

Answer 49

1. Contract (signature liability);

2. Warranty liability.

Question 50

List the three personal defenses against liability on negotiable instruments.

Answer 50

1. Breach of contract;
2. Failure of consideration;
3. Fraud in the inducement.

Question 51

Define “fraud in factum”.

Answer 51

Fraud in factum occurs when a party is deceived into signing something that he does not know is a contract. Fraud in factum is used interchangeable with fraud in execution.

Question 52

What is the effect of material alteration on an instrument?

Answer 52

Discharges obligation of payment to either holder and holder in due course (HDC). If maker or drawer was sloppy in creating instrument and allowed alteration, obligation of payment according to original terms remains to HDC.

Question 53

Define the “material alteration” of an instrument.

Answer 53

Changing the instrument in a manner that materially affects the nature of the instrument or payment terms.

Question 54

List the real or universal defenses available for not honoring an instrument.

Answer 54

1. Forgery;
2. Fraud in execution or fraud in factum;
3. Minority;
4. Discharge in bankruptcy;
5. Illegality;
6. Mental incapacity;
7. Duress (to the extent conduct is illegal).

Question 55

Who are the secondary parties to an instrument?

Answer 55

1. Payees;
2. Drawers;
3. Indorsers.

Question 56

Who are the primary parties to an instrument?

Answer 56

1. Makers;

2. Drawees.