UCC Article 3-Negotiable Instruments

Question 1

What is a draft?

Answer 1

A commercial paper involving three parties- a drawer; a payee and a drawee
A drawer orders a sum to be paid to a payee by the drawee
May be payable on demand or in the future

Question 2

What is the difference between a post-dated check and a negotiable time draft?

Answer 2

A check is payable on demand; even if post-dated.

A negotiable time draft is not payable until the date designated for payment.

Question 3

What is a trade acceptance?

Answer 3

Seller extends credit to Buyer
Buyer agrees to pay Seller - Buyer has primary liability
Seller is both Drawer and Payee - Seller has Secondary Liability

Question 4

What is the purpose of the negotiation of commercial paper?

Answer 4

Transfers ownership to another party

Question 5

What is required to maintain the negotiability of a commercial paper?

Answer 5

Must be in writing

Signed by drawer/maker

Be without conditions for payment (other than limitations on payment sources)

Amount of money must be stated

Payable to order or bearer

Question 6

What characteristics will cancel the negotiability of a commercial paper?

Answer 6

An additional promise is stated in addition to the promise to pay (like the option to purchase Real Estate)

The promise to pay occurs after some action by another party or an event; it cancels negotiability

Cannot allow for an alternative such as payment or some other action by the maker

Note: a stated amount of payment plus a stated % of interest is OK

Question 7

What is required to negotiate Order Paper?

Answer 7

Must have delivery and endorsement

If paper is exchanged for value; transferor must give an UNQUALIFIED endorsement

Question 8

What are the major types of endorsements on commercial paper?

Answer 8

Blank -
Special - signs over check
Restrictive - Adds restrictions; doesnt stop further negotiation
Qualified - Payment not guaranteed; without recourse added to endorsement

Question 9

If endorsed; within what amount of time must a check be presented for payment in order to hold the ENDORSER liable?

Answer 9

Within 7 days

Question 10

On a commercial paper; which value will supersede - words or numerical dollar amount?

Answer 10

Written amount supersedes the numerical dollar amount.

For example; if the words say One hundred dollars and the numerical amount states $1000.00; the value of the paper will be $100.00.

Question 11

Define primary liability with respect to a contract.

Answer 11

First in line to pay on the note/draft

Maker of a Promissory Note has primary liability and must pay according to terms of the note

With a Check; no party has Primary Liability

Exception: Drawee (your bank) is primarily liable to pay if they certify - i.e. promise to
pay

Question 12

Define secondary liability with respect to contract liability

Answer 12

Drawers are Secondarily Liable if Drawee fails to pay a Draft

Endorsers (the payee) are secondarily liable

Holder in due course can hold Endorser liable

Exception: Endorsed Without Recourse

Question 13

Define contract liability.

Answer 13

Guarantees payment of a liability

Question 14

When does warranty liability occur?

Answer 14

Occurs when you negotiate commercial paper

By signing; you warrant to all future parties

By not signing; you warrant to current party only

Question 15

What five warranties occur with every commercial paper transfer?

Answer 15

Warranty of Title

No defense will stand against it

No material alteration

No knowledge of bankruptcy proceedings

All signatures are legitimate

Question 16

What are the requirements for a holder to be a holder in due course?

Answer 16

Holding a negotiable instrument
Taking instrument in Good Faith - Even if you buy a stolen note and you dont know that its stolen; youre still an HDC
Having no knowledge of defenses again instrument; i.e. problems with the instrument
Giving a present value for the instrument (a future value doesnt count)

Question 17

What are the personal defenses against a holder in due course (HDC) which will LOSE?

Answer 17

An HDC takes an instrument free of Personal Defenses (LOSE vs. HDC)

Lack of consideration/value given
Breach of contract/warranty
Duplicate payments
Fraud (in the inducement only)
Voidable contracts

Question 18

What are the REAL defenses against a holder in due course (HDC); which will WIN?

Answer 18

A holder in due course takes an instrument subject to Real Defenses (WIN vs. HDC)
Material alterations to the instrument
Forgery Bankruptcy Maker not competent to Contract Fraud in the execution

Question 19

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

Answer 19

Sight Draft (on demand)
Time draft
Trade acceptance

Question 20

List the two types of negotiable instruments

Answer 20

Orders to Pay (checks and drafts);

Promises to Pay (notes and CDs)

Question 21

List some examples of nonnegotiable instruments

Answer 21

Letters of Credit;
    Warehouse Receipts;
    Bills of Lading;
    Stocks and Bonds;
    Contracts.

Question 22

True or False: A Warehouse Receipt or a Letter of Credit is considered a negotiable instrument

Answer 22

False

Question 23

List the requirements of a negotiable instrument.

Answer 23

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

Question 24

List the parties who draft negotiable instruments.

Answer 24

Drawers - for checks or drafts;

Makers - for notes and Certificates of Deposits

Question 25

Is a bank a drawee or a drawer

Answer 25

Drawee

Question 26

True or False: To be negotiable a draft doesn’t not have to have be payable to order or to bearer

Answer 26

False. Only checks can be blank

Question 27

What negotiable instruments must be made payable to order or bearer in order to be payable?

Answer 27

Drafts, Promissory Notes, CDs

Question 28

If an instrument does not name any payee, it is considered to be payable to bearer or order?

Answer 28

Bearer

Question 29

True or False: If a person writes a post dated check and notifies the bank of such fact, the bank will be liable for cashing it before the posted date

Answer 29

True. The bank is not liable unless the drawer has given the bank prior notice of the postdating.

Question 30

How would someone sign a a qualified endorsement?

Answer 30

“without recourse”, waives warranty

Question 31

How would someone sign a restricted endorsement?

Answer 31

For deposit only

Question 32

How would someone sign a special endorsement?

Answer 32

Pay to the order of: