Chapter 25 – Creating a Negotiable Instrument

T/F There are two types of commercial paper: express and implied.

T/F Commercial paper is a contract to pay money.

T/F A possessor of non-negotiable paper has the same rights as the person who made the original contract.

T/F There are three parties on a promise instrument: the maker, the drawee, and the payee.

T/F To be negotiated, bearer paper must simply be delivered to the recipient.

T/F Margo is in possession of a check issued to her by Felix. The check states, \"Pay to the order of Margo.\" If Margo wishes to transfer the check to Pete to pay a debt she owes him, all she needs to do is strike out her name on the front of the check, write in Felix's name and give it to him.

T/F A draft is always a check, but a check is not always a draft.

T/F A&D, Inc. wrote a negotiable not payable to Vicy, Inc. for the purchase of some satellite receivers. A&D left the amount of the note blank because it was uncertain as to amount of the applicable tax. Vicy completed the note for $3,000 more than A&D actually owed for the receivers it purchased. The note was negotiated to a holder in due course. A&D will not have to honor the note as this constituted fraud in the execution.

T/F Charlene Brown has possession of a check made out to the order of Charlene Brown (herself) which she received a payment for writing a manuscript for her publisher. Charlene is a holder in due course and the publisher cannot claim any \"real\" defenses to payment. Charlene has an unconditional right to be paid for the check.

T/F With non-negotiable commercial paper, a transferees rights are conditional.

T/F Tyron purchased a $2900 promissory note from Jared for the discounted amount of $2500. Tyron paid value, in good faith and without notice of any outstanding claims against his promissory note that read, \"Pay to the Order of Jared $2900 on July 1, 2009, for the purchase of a 2001 Ford Taurus provided no major problems with the car arise prior to said payment date.\" Tyron is a holder in due course of a negotiable note.

T/F Personal and real defenses are valid against an ordinary holder, only real defenses can be used against a holder in due course.

T/F Tim wrote a negotiable note. Subsequently, Tim's debts were discharged in bankruptcy. If a holder in due course presents the note for payment, Tim does not have to pay.

T/F Trisha loaned Brian $600 evidenced by a promissory note. When Brian paid off the loan, he did not ask Trisha for the note. She sold it to Carin, a holder in due course. Brian does not have to pay Carin since he already paid Trisha the full $600.

T/F A claim in recoupment can be used against a holder in due course.

The term \"issuer\": a) is not used in relation to commercial paper. b) is an all-purpose term that means both maker and drawer. c) is synonymous with drawee d) is used in relation to commercial paper only to indicate the bank which creates a certificate of deposit.

Generally, Rita signs her name using an infinity symbol rather than her legal name. Rita signed an instrument using this symbol. Which statement is correct? a) The instrument cannot be negotiable. To be negotiable, the instrument must be signed in Rita's legal name. b) The instrument cannot be negotiable. To be negotiable, the instrument must be signed in Rita's given name. c) The instrument cannot be negotiable. To be negotiable, the instrument must be signed using letters from the alphabet. d) The instrument can be negotiable. Rita intended to indicate her signature.

Francenie has a checking account at Corner Bank. She wants tickets to an upcoming concert. She writes a check to Ticketmaster for the cost of two tickets. In this scenario: a) Francenie is the drawee, Corner Bank is the drawer, and Ticketmaster is the payee. b) Francenie is the maker, Corner Bank is the drawee, and Ticketmaster is the payee. c) Francenie is the drawer, Corner Bank is the drawee, and Ticketmaster is the payee. d) Francenie is the payee, Corner Bank is the drawer, and Ticketmaster is the maker.

Valley National Bank issued a note promising to repay an investor on October 1, 2011, three years from the date of issue, plus interest. The note: a) is a certificate of deposit, and it will pay a lower rate of interest than a regular savings account at Valley. b) is a certificate of deposit, and it will pay a higher rate of interest than a regular saving account at Valley. c) is a certificate of deposit, and whether the bank pays a higher or lower rate of interest than I pays on its regular savings account depends on particular bank policy. d) constitutes a trade acceptance.

Hayden owes Luther $5000. Hayden will only be able to pay this debt if he is able to sell his one-year-old Harley motorcycle, valued at $20,000. Hayden writes a check to Luther that reads, \"Payable to the order of Luther the sum of $5000 as soon as my Harley motorcycle sells for a reasonable amount.\" This check is: a) negotiable, assuming Luther accepts delivery of the check. b) negotiable if Hayden also includes a date that he expects the motorcycle to sell. c) non-negotiable because it does not state a definite amount of money. d) non-negotiable because the check is conditional.

Sophie issues a promissory note made \"payable to the order of Molly.\" Molly indorses the note by signing her name and gives the note to Dana. Which of the following is correct? a) Sophie issued a bearer instrument and Molly kept it in bearer form. b) Sophie issued an order instrument, but Molly changed it to bearer form. c) Sophie issued a order instrument and Molly kept it in order form. d) Sophie issued a bearer instrument and Molly changed it to bearer form.

To be negotiable, a check must be in writing. Under the UCC, a check: a) Article 3 b) Article 2 c) Article 6 d) Article 9

An instrument is negotiable if it satisfies six standards. Which of the following is a standard of negotiability? a) The instrument can be oral provided there is proof beyond a reasonable doubt. b) The instrument must be payable on demand. c) The instrument must be conditional. d) The instrument must state a definite sum of money.

A \"holder\" of order paper can be described as: a) the payee b) any person in possession of the instrument. c) any person in possession of the instrument if it is payable to or indorsed to him. d) the first party to come in contract with a negotiable instrument.

Which of the following would be notice of an overdue instrument? a) Taking a demand instrument after a request for payment is made. b) Taking an instrument one day after the due date. c) Taking a check 91 days after its issue date. d) All of the above illustrate overdue instruments.

George's Wholesaling agrees to purchase 1000 pounds of bananas from Chickadee Exports at 39 cents per pound. George's does not have the money for the bananas now, but promises to pay in two months. Chickadee Exports wants George's business but needs the money now. Chickadee (as drawer) prepares an instrument ordering George's (as drawee) to pay $390 to Primary bank (the payee). This is an example of: a) check. b) trade acceptance. c) promissory note. d) None of the above.

In good faith, Clinton gave Jane $500 for a negotiable promissory note made out to Jane for $550. She needed some money before the due date on the note, and Clinton had no notice of outstanding claims or other defects of the note. Clinton: a) has more rights than Jane. b) has the same rights as Jane. c) has only conditional rights because they depend on Jane's rights. d) cannot transfer the note to anyone else.

Lucky loses in a high-stakes poker game to Fat Chance. To pay his debt, Lucky writes a check to Fat Chance, who negotiates the check to Convenient, who then tries to cash the check at Lucky's bank. Lucky has already stopped payment on the check, so the check is not honored by her bank. Convenient then tries to collect the check by suing Lucky. High-stakes poker games are illegal in this state. Which statements is correct? a) If Convenient can demonstrate that he is a holder in due course, he will prevail. b) If Convenient can demonstrate that he was a buyer in ordinary course of business, he will prevail. c) If Convenient can demonstrate that he gave value without notice, he will prevail. d) Convenient will not prevail.

Which of the following can be negotiable? a) A promissory note that states, \"Pay to Floyd Burchett $3,000 on September 1, 2015.\" b) A check written on the standard check form that does not state the date it was issued. c) A promissory note from Farmer Douglas to Hainey Seeds, Inc. promising to pay for the seed purchased in the spring with bushels of grain harvested n the fall. d) An oral promise to pay to the order of Justin $500 on demand.

To be negotiable, a check must be in writing. Under the UCC, a check: a) must be written on standard size paper of 6\" x 2.5\". b) must be written on an official blank form. c) need not be on any official form or even on paper. d) Both a and b are requirements for a negotiable check.

Maia wrote a check which said, \"Pay to the order of Kevin Mathews $10.97.\" The next line of the check stated, \"One thousand ninety-seven Dollars.\" In applying the rules of interpretation, how much should the drawee pay? a) Nothing; when the instrument is ambiguous it is declared non-negotiable. b) Ten dollars and 97 cents. Numbers control over words. c) One thousand, ninety-seven dollars or $1,097.00. Words control over numbers. d) Parol evidence would be needed to determine the purpose of the check.

Sprock is a holder in due course on an instrument issued by Klingon. Which of the following defenses could be successfully raised by Klingon? a) Forgery. b) Prior payment. c) Breach of contract. d) Fraud in the inducement.

Under the UCC, a holder in due course is a holder who has given value for the instrument. Which of the following holders have given value for the instrument? a) Beth promises to paint the neighbor's house in exchange for a promissory note as an advance payment for a job. b) Steve gives a note and mortgage on his house to his attorney as a retainer to handle his pending divorce. c) Todd, a newspaper carrier, accepts a properly indorsed two-party check for the past two months of deliveries. d) All of the above are correct.

Kent Weston wrote a check for $500 payable to the order of Chester Jones. Chester indorsed the back of the check as follows: \"Chester Jones.\" The check is now: a) order paper. b) bearer paper. c) a cashier's check d) special paper.

Sonny has a negotiable instrument which he gives to Cheryl as a birthday present. Sonny is a holder in due course o the instrument. As it turns out, Cheryl can only collect on the instrument if she has holder in due course status. If Cheryl sues to collect this instrument, what will be the result? a) Cheryl is not a holder in due course, so she is subject to personal and real defenses of the issuer. b) If Cheryl took the instrument in good faith and without knowledge of any claims against the instrument, she is a holder in due course even though Sonny gave her the instrument for her birthday. c) Cheryl must pass the instrument on to someone else for money. That is the only way she can realize payment of the instrument. d) Although Cheryl does not qualify as a holder in due course, she can claim the holder in due course status through Sonny and collect the instrument.

Felicia, an elderly woman, does not speak or read English well. Felicia is a recent immigrant to this country. A dishonest immigration officer tells Felicia to sign several documents as being necessary to maintain her legal alien status. Unknown to Felicia, she signs a promissory note. The immigration officer thereafter sells the note to Neighborhood Bank, a holder in due course, who goes after Felicia for payment of the note. Felicia's defense to the Neighborhood Bank is: a) fraud in the inducement; a real defense. b) fraud in the execution; a real defense. c) unauthorized completion; a personal defense. d) breach of contract; a real defense.

Tim buys a high-powered tool from Binford Tools to use on the construction of his own garage. Binford Tools provides a full warranty on the tool for the first six months. To pay for the tool, Tim signs a negotiable promissory note which contains the FTC Notice. Binford properly negotiates the note to First Finance. Within three weeks, the tool stops working and Binford refuses to repair or replace it. In the meantime, First Finance demands payment from Tim. Under the FTC rules, this consumer credit situation means First Finance can: a) collect if it is a holder in due course. b) collect if it is not a holder in due course. c) collect whether or not it is a holder in due course. d) not collect.

Laurel Speckle received a check from State University. She indorsed the check as follows: \"For Deposit only, /s/ Laurel Speckle.\" Laurel's indorsement is a: a) blank indorsement b) special indorsement c) restrictive indorsement d) None of the above is correct.

In June, The Seascape Gallery sells an oil painting to Collegiate Systems, Inc. Collegiate promises to pay for the painting in three months. The gallery prepares a draft ordering Collegiate Systems to pay $3,000 to First Bank on September 15. Collegiate Systems signs the draft. The draft is a: a) sight draft b) time draft c) trade acceptance d) Both B and C

The evening news was full of stories about how Levine sold fraudulent negotiable instruments to investors around the country. Two days later, Brighty, who did not hear the news report, bought some of the fraudulent negotiable instruments from a swindled investor. Can Brighty claim the position of a holder in due course considering the publicity of the scam? a) Brighty is presumed to have knowledge of the scam and therefore did not purchase the instruments in good faith. b) Although Brighty passes the subjective test of good faith, he fails the objective test and therefore cannot claim to have purchased the instruments in good faith. c) Brighty can claim to have purchased the instruments in good faith if he subjectively believed the instruments were valid and if objectively his purchase of the instruments was commercially reasonable. d) None of the above are correct.