R7-1 Flashcards
Under the Negotiable Instruments Article of the UCC, which of the endorser’s liabilities are disclaimed by a “without recourse” endorsement?
a.
Warranty liability only.
b.
Both contract and warranty liability.
c.
Neither contract nor warranty liability.
d.
Contract liability only.
Choice “d” is correct. Endorsing a negotiable instrument without recourse negates contract liability but not warranty liability.
Choices “a”, “b”, and “c” are incorrect. Each of these choices incorrectly addresses warranty and/or contract liability.
Under the Negotiable Instruments Article of the UCC, which of the following provisions satisfies the requirement that an instrument, to be negotiable, must be payable at a definite time?
a.
The instrument is undated and payable “30 days after date.”
b.
The instrument is dated and payable “in six months but the payor may extend this period indefinitely.”
c.
The instrument is undated and payable “when the payee dies.”
d.
The instrument is dated and payable “15 days after sight.”
Choice “d” is correct. An instrument is payable at a definite time if it can be established from the face of the instrument when the obligation will become due. An obligation payable 15 days after sight is payable 15 days after it is presented for payment.
Choice “b” is incorrect. Although six months is a definite time, the option of the payor to extend indefinitely the time for payment destroys negotiability.
Choice “a” is incorrect. If an instrument is not dated, we cannot know when 30 days after date is. Therefore, this is not payable at a definite time.
Choice “c” is incorrect. Although the payee will die some day, we do not know when, so the date of payment is not definite.
Under the Negotiable Instruments Article of the UCC, which of the following statements is(are) correct regarding the requirements for an instrument to be negotiable?
I.
The instrument must be in writing, be signed by both the drawer and the drawee, and contain an unconditional promise or order to pay.
II.
The instrument must state a fixed amount of money, be payable on demand or at a definite time, and be payable to order or to bearer.
a.
Both I and II.
b.
I only.
c.
II only.
d.
Neither I nor II.
Choice “c” is correct. To be negotiable, the instrument must meet all of the following:
Be in writing
Be signed by the maker or drawer (not drawee)
Contain an unconditional promise or order
Be for a fixed amount of money
Be payable on demand or at a definite time
Be payable to order or bearer
Contain no additional undertaking/instruction not authorized by the UCC
Alternative I is incorrect because there is no requirement that the drawee sign.
Which of the following instruments is subject to the provisions of the Negotiable Instruments Article of the UCC?
a.
An investment security.
b.
A certificate of deposit.
c.
A warehouse receipt.
d.
A bill of lading.
Choice “b” is correct. Checks, drafts, promissory notes and certificates of deposits are within the provisions of the Negotiable Instruments Article of the UCC (Article 3).
Choice “d” is incorrect. A bill of lading is governed by Article 7.
Choice “c” is incorrect. A warehouse receipt is governed by Article 7.
Choice “a” is incorrect. Investment securities (e.g., stocks and bonds) are governed by Article 8.
Under the Negotiable Instruments Article of the UCC, when an instrument is endorsed “Pay to John Doe” and signed “Faye Smith,” which of the following statements is (are) correct?
~~Payment of the instrument is guaranteed
~~The instrument can be further negotiated
a.
No
No
b.
Yes
Yes
c.
Yes
No
d.
No
Yes
Choice “b” is correct. The first assertion is true-payment is guaranteed. The instrument here is endorsed. In essence, an endorser makes a contract of guarantee: if the instrument is presented for payment and is dishonored, the endorser agrees to pay on the instrument according to its terms when it was endorsed. The second assertion is also true. When an instrument is endorsed to a specified person, it becomes order paper, but it still may be negotiated further, as long as the special payee endorses.
Note: Actually, whether or not the instrument may be further negotiated also depends on to whom the instrument was drawn in the first place, and that information is not provided. If the instrument here was payable to bearer or to the order of Faye Smith, it may be further negotiated, but if it was payable to the order of anyone else, it could not be further negotiated without that person’s endorsement.
Under the Commercial Paper Article of the UCC, which of the following documents would be considered an order to pay?
I.
Draft.
II.
Certificate of deposit.
a.
I only.
b.
II only.
c.
Both I and II.
d.
Neither I nor II.
Choice “a” is correct. Order paper is three-party paper where one person orders another to pay yet a third person. A draft is order paper. A certificate of deposit is two-party paper. In a CD, a bank acknowledges receipt of money and promises to pay. UCC 3-104
Check Written To: Middlesex National Bank 9/15/94
Pay to the order of Robert Silver $4000
by Lynn Dexter on 10/1/94
The above instrument is a:
a.
Postdated check.
b.
Promissory note.
c.
Trade acceptance.
d.
Draft.
Choice “d” is correct. A draft is an order by the drawer to a drawee to pay a payee. Here, Dexter is ordering Middlesex National Bank to pay to the order of Silver. UCC 3-104. Note the two different dates.
Choice “a” is incorrect. A check is a draft drawn on a bank and payable on demand. The instrument illustrated is not payable on demand since it was written on September 15, 1994 and was to be paid on October 1, 1994. Thus it is not a check, but rather is a time draft.
Choice “c” is incorrect. A trade acceptance is order paper drawn by the payee on the drawee.
Choice “b” is incorrect. A promissory note is two-party paper (i.e., where one party promises to pay). In the instrument illustrated, one party (Dexter) is ordering another party (Middlesex National Bank) to pay.
Under the Commercial Paper Article of the UCC, for an instrument to be negotiable it must:
a.
Contain references to all agreements between the parties.
b.
Be payable to order or to bearer.
c.
Be signed by the payee.
d.
Contain necessary conditions of payment.
Choice “b” is correct. Any writing to be a negotiable instrument must be payable to order or to bearer, with the exception of checks. If the instrument is payable to order, it is negotiated by delivery with any necessary endorsement; if payable to bearer, it is negotiated by delivery alone. UCC 3-104
Choice “c” is incorrect. Whether an instrument is negotiable is determined by its form when drawn or made; the subsequent signature of a payee can neither create nor destroy negotiability.
Choice “a” is incorrect. A negotiable instrument need not contain references to any other document.
Choice “d” is incorrect. If an instrument is conditional, it generally cannot be negotiable.
Under the Commercial Paper Article of the UCC, which of the following circumstances would prevent a promissory note from being negotiable?
a.
An acceleration clause that allows the holder to move up the maturity date of the note in the event of default.
b.
An extension clause that allows the maker to elect to extend the time for payment to a date specified in the note.
c.
A clause that allows the maker to satisfy the note by the performance of services or the payment of money.
d.
A person having a power of attorney signs the note on behalf of the maker.
Choice “c” is correct. To be negotiable, a note must be payable in money and only in money. A note that allows the maker to pay by performing services is not negotiable. UCC 3-104
Choice “b” is incorrect. To be negotiable, an instrument must be payable on demand or at a definite time. If the latest date for payment can be determined from the face of a demand instrument, it is considered to be payable at a definite time even if that latest date can be reached only through an extension clause. UCC 3-109
Choice “a” is incorrect. To be negotiable, an instrument must be payable on demand or at a definite time. If the latest date for payment can be determined from the face of a demand instrument, it is considered to be payable at a definite time even if it includes an acceleration clause. UCC 3-109
Choice “d” is incorrect. An agent, such as a person having a power of attorney, can sign a negotiable instrument on behalf of a principal.
Under the Commercial Paper Article of the UCC, which of the following requirements must be met for a transferee of order paper to become a holder?
I.
Possession.
II.
Endorsement of transferor.
a.
I only.
b.
II only.
c.
Both I and II.
d.
Neither I nor II.
Choice “c” is correct. To be a holder of order paper, one must have all necessary signatures, such as that of the transferor, and possession of the instrument must have been transferred. UCC 3-201
Choice “a” is incorrect. To have the status of a holder, one must also have the signatures of all necessary parties, such as that of the transferor.
Choice “b” is incorrect. To have the status of a holder, the instrument must have been transferred to the possession of the holder.
Choice “d” is incorrect. To be a holder of order paper, one must have all necessary signatures, such as that of the transferor, and possession of the instrument must have been transferred.
Under the Commercial Paper Article of the UCC, which of the following requirements must be met for a person to be a holder in due course of a promissory note?
a.
The note must be negotiable.
b.
The note must be payable to bearer.
c.
All prior holders must have been holders in due course.
d.
The holder must be the payee of the note.
Choice “a” is correct. One may be an HDC only of a negotiable instrument. UCC 3-302
Choice “b” is incorrect. One can be an HDC on a negotiable note payable to order; it need not be payable to bearer.
Choice “c” is incorrect. One will be an HDC if he is a holder who takes the instrument for value, in good faith, and without notice that the instrument is overdue or has been dishonored or of any defenses on or claims to the instrument. There is no requirement that all prior holders be HDCs. UCC 3-302
Choice “d” is incorrect. Transferees can be HDCs. The status is not limited to the payee of the note. Indeed, the payee generally cannot be an HDC.
Under the Commercial Paper Article of the UCC, which of the following circumstances would prevent a person from becoming a holder in due course of an instrument?
a.
The note was collateral for a loan.
b.
The note was purchased at a discount.
c.
The person was notified that one of the prior endorsers was discharged.
d.
The person was notified that payment was refused.
Choice “d” is correct. One will be an HDC only if the person is a holder who takes the instrument for value, in good faith, and without notice that the instrument is overdue or has been dishonored or of any defenses on or claims to the instrument. A refusal to pay is a dishonor. UCC 3-304
Choice “c” is incorrect. Notice of the fact that a prior endorser was discharged does not prevent a person from becoming an HDC.
Choice “a” is incorrect. Notice that the instrument was collateral is not notice of a defense to an instrument and does not prevent HDC status.
Choice “b” is incorrect. Purchase at a discount does not prevent HDC status.
Under the Commercial Paper Article of the UCC, which of the following statements best describes the effect of a person endorsing a check “without recourse?”
a.
The person makes no promise or guarantee of payment on dishonor.
b.
The person converts the check into order paper.
c.
The person has no liability to prior endorsers.
d.
The person gives no warranty protection to later transferees.
Choice “a” is correct. Signing without recourse negates contract liability on the instrument. Contract liability is the promise to pay upon dishonor. UCC 3-414
Choice “c” is incorrect. An endorser is liable to subsequent parties on an instrument; not to prior parties, and this is true no matter how the endorser signs.
Choice “d” is incorrect. Signing without recourse negates contract liability on the instrument. Warranty liability (e.g., all signatures are genuine, the instrument has not been materially altered, etc.) is not negated.
Choice “b” is incorrect. A person does not automatically convert a check to order paper by endorsing it “without recourse.” A special endorsement (i.e., one naming a new payee) can convert bearer paper to order paper.
Under the Commercial Paper Article of the UCC, in a nonconsumer transaction, which of the following are real defenses available against a holder in due course?
~~Material alteration
~~Discharge in bankruptcy
~~Breach of contract
a.
Yes
No
No
b.
No
Yes
Yes
c.
Yes
Yes
No
d.
No
No
Yes
Choice “c” is correct. Material alteration is a real defense to the extent of the alteration. Bankruptcy also is a real defense. Breach of contract is a personal defense. UCC 3-307
Pay to Ann Tyler
Paul Tyler
Ann Tyler
Marry Thomas
Betty Ash (marked through)
Pay George Green Only
Susan town
______________________________________
Susan Town, on receiving the above instrument, struck Betty Ash’s endorsement. Under the Commercial Paper Article of the UCC, which of the endorsers of the above instrument will be completely discharged from secondary liability to later endorsers of the instrument?
a.
Betty Ash
b.
Ann Tyler
c.
Susan Town
d.
Mary Thomas
Choice “a” is correct. Striking a prior endorser discharges the endorser’s liability to all persons who take the instrument after the signature is stricken. UCC 3-601
Choice “b” is incorrect. Striking a prior endorser discharges the endorser’s liability to all persons who take the instrument after the signature is stricken. It has no effect on a prior endorser’s liability because liability goes up the chain of title. UCC 3-601
Choice “d” is incorrect. Striking a prior endorser discharges the endorser’s liability to all persons who take the instrument after the signature is stricken. It has no effect on a prior endorser’s liability because liability goes up the chain of title. UCC 3-601
Choice “c” is incorrect. Striking a prior endorser discharges the endorser’s liability to all persons who take the instrument after the signature is stricken. It has no effect on a subsequent endorser’s own liability.
Robb, a minor, executed a promissory note payable to bearer and delivered it to Dodsen in payment for a stereo system. Dodsen negotiated the note for value to Mellon by delivery alone and without endorsement. Mellon endorsed the note in blank and negotiated it to Bloom for value. Bloom’s demand for payment was refused by Robb because the note was executed when Robb was a minor. Bloom gave prompt notice of Robb’s default to Dodsen and Mellon. None of the holders of the note were aware of Robb’s minority. Which of the following parties will be liable to Bloom?
Dodsen
Mellon
a.
No
Yes
b.
No
No
c.
Yes
Yes
d.
Yes
No
Choice “a” is correct. Mellon can be held liable, but Bloom cannot hold Dodsen liable on an endorser’s contract because Dodsen did not endorse. Neither could Bloom hold Dodsen liable for breach of any transfer warranty since such warranties are made only to immediate transferees when one does not endorse, and Dodsen did not endorse and the immediate transferee was Mellon rather than Bloom. UCC 3-417