CHAPTER 14-NEGOTIABLE INSTRUMENTS
TRUE/FALSE
1. There are two types of commercial paper: express and implied.
Answer: False
2. A possessor of non-negotiable paper has the same rights as the person who made the
original contract.
Answer: True
3. Assume that Joel signs a promissory note to Andrew, who in turn negotiates the instrument
to Luke. Of the three, Joel is the only person who has primary liability.
Answer: True
4. There are three parties on a promise instrument: the maker, the drawee, and the payee.
Answer: False
5. Sandy may be charged a fee, but will not face criminal penalties for writing checks on an
account with insufficient funds to pay them.
Answer: False
6. To be negotiated, bearer paper must simply be delivered to the recipient.
Answer: True
7. 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.
Answer: False
8. Maurina is an agent of Southland, and she is authorized to sign checks on Southland’s bank
account. If Maurina signs a check without indicating that she is simply an agent, Maurina will
be personally liable on the check.
Answer: False
9. A draft is always a check, but a check is not always a draft.
Answer: False
10. Charlene Brown has possession of a check made out to the order of Charlene Brown
(herself) which she received in 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.
Answer: True
11. Warranty liability is the liability of someone who gives payment on a negotiable
instrument.
Answer: False
12. With non-negotiable commercial paper, a transferee’s rights are conditional.
Answer: True
13. Personal and real defenses are valid against an ordinary holder, only real defenses can be
used against a holder in due course.
Answer: True
14. 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.
Answer: True
15. 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.
Answer: False
MULTIPLE CHOICE
1. 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.
Answer: B
2. Micah signed a check in the lower right-hand corner and Andrew signed on the back. The
presumption is that:
a. Micah is the issuer.
b. Micah is the acceptor.
c. Andrew is the drawer.
d. Andrew is the maker and Micah is an indorser.
Answer: A
3. 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 a 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.
Answer: D
4. 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.
Answer: C
5. 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 savings
account at Valley.
c. is a certificate of deposit, and whether the bank pays a higher or lower rate of interest than
it pays on its regular savings accounts depends upon particular bank policy.
d. constitutes a trade acceptance.
Answer: B
6. 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.
Answer: D
7. 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 an order instrument and Molly kept it in order form.
d. Sophie issued a bearer instrument and Molly changed it to bearer form.
Answer: B
8. To be negotiable, a check must be in writing. Under the UCC, a check:
a. must be written on standard size paper of 6" ´ 2.5".
b. must be written on an official bank form.
c. need not be on any official form or even on paper.
d. Both a and b are requirements for a negotiable check.
Answer: C
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.
Answer: D
10. 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 contact with a negotiable instrument.
Answer: C
11. 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.
Answer: D
12. 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:
a. check.
b. trade acceptance.
c. promissory note.
d. None of the above.
Answer: B
13. 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.
Answer: A
14. All but which of the following serves as a discharge of a negotiable instrument:
a. payment.
b. cancellation.
c. alteration.
d. presentation.
Answer: D
15. 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 statement 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 the 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.
Answer: D
16. Which of the following can be negotiable?
a. A promissory note that states, "Pay to Floyd Burchett $3000 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 in the fall.
d. An oral promise to pay to the order of Justin $500 on demand.
Answer: B
17. Which of the following parties has primary liability on a draft?
a. The drawee.
b. The acceptor.
c. The drawer.
d. Any accommodation parties.
Answer: B
18. 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.
Answer: C
19. 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.
Answer: A
20. 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 the 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.
Answer: C
21. 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.
Answer: B
22. 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.
Answer: B
23. 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.
Answer: C
24. 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.
Answer: D
25. 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 reports, 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.
Answer: C
ESSAY
1. TriColor purchased an industrial stamping machine from Vicy, Inc. TriColor paid for the
machine with a negotiable note. The note was payable to the order of Vicy, Inc. Vicy, Inc.
indorsed the note and gave it to CCLoans to satisfy a debt. CCLoans knew nothing about the
contract between TriColor and Vicy, Inc. CCLoans indorsed the note and gave it to Great
River Youth Club as a charitable donation. When Great River Youth Club presented the note
for payment on its due date, TriColor refused to pay, claiming that the stamping machine was
defective.
(A) Is Great River Youth Club a holder in due course?
(B) Will TriColor be able to avoid liability to Great River Youth Club on the basis that the
machine was defective?
Answer: (A) Great River Youth Club is not a holder in due course. A requirement of a holder
in due course is that the holder must give value for the instrument. Great River Youth Club
did not give value for the note. It was a gift to the organization.
(B) TriColor will not be able to successfully raise the defense that the machine was defective.
Even though Great River Youth Club is not a holder in due course, it is a holder with the
rights of a holder in due course. CCLoans was a holder in due course and since Great River
Youth Club took the note through CCLoans, Great River Youth Club is a holder with the
rights of a holder in due course under the shelter rule. Consequently, TriColor can only raise
real defenses to payment on the note. The defense that the machine was defective, a breach of
contract, is a personal defense. TriColor will have to pay the amount of the note to Great
River Youth Club.
2. Matt wrote a $500 check to Alistar for some yard work that Alistar had done. What will
Alistar have to do negotiate this instrument to Totally Tough, Inc. in payment for some yard
equipment Alistar had bought?
Answer: A check is order paper. To negotiate order paper, the instrument must be indorsed
and then delivered to the transferee. Thus, Alistar needs to sign the check on the back and
give it to Totally Tough.
3. Olga draws a check payable to Sven. Sven indorses the back of the check "without
recourse" and negotiates the check to Hansel who in turn negotiates the check by a blank
indorsement and delivers the check to Gretta. Gretta deposits the check in her checking
account. If the bank dishonors the check because Olga has filed for bankruptcy, and returns
the check to Gretta, who has liability on the check?
Answer: Almost everyone who signs an instrument is potentially liable for it. Olga and
Hansel initially have secondary liability. In order to activate secondary liability, the check
must be properly presented, dishonored, and effective notice must be given. Sven has limited
his liability as an indorser by signing "without recourse." If Gretta is the holder, she properly
presented the check by depositing the check in her own account. Her bank presented the
check to Olga's bank which dishonored the check and returned the check to Gretta's bank
which in turn notified Gretta of the returned check. Gretta now must give notice to Hansel
and Olga within 30 days of her notice of the dishonor to preserve her rights to sue under
signature liability. Hansel has signature liability and is liable for the check unless Hansel has
a real defense that can be raised. Sven does not have signature liability because of his
“without recourse” indorsement. Olga has signature liability, but bankruptcy is a real defense
(assuming that the debt is discharged in bankruptcy) that can be raised. Indorsers are liable
only to those who come after them in the chain of ownership. Thus, it seems likely that
Hansel will bear ultimate liability for the check.
4. On March 1 Donna wrote a check for $296 to Sun Services. When will the check be
overdue? What is the effect of the check’s being overdue? What is the effect if the check is
stamped “Insufficient Funds” by Donna’s bank?
Answer: A check is overdue 90 days after its date. When an instrument is overdue, a recipient
is on notice that it may have a defect. Under UCC Section 3-302, a holder in due course is a
holder who has given value for the instrument, in good faith, without notice of outstanding
claims or other defects. If a check is marked “Insufficient Funds” by a bank, it has been
dishonored. No one who obtains it afterward can be a holder in due course.
5. It was payday. Navidida decided to run some errands and then deposit her check in the
bank over her lunch hour. So that she wouldn't have to spend too long at the bank, Navidida
indorsed the back of the paycheck as follows, "Navidida Jones," before leaving work. While
window shopping, Navidida lost the check. Roger finds Navidida's paycheck.
(A) Will Roger be able to cash Navidida's check?
(B) How could have Navidida indorsed the check so that she would not have to be concerned
about losing the check?
Answer: (A) The check is bearer paper. This means that anyone who is in possession of the
instrument can cash the check. Negotiation of bearer paper is completed by delivery of the
instrument; no indorsement is necessary. Roger is a holder of the check and could cash it.
(B) Navidida should have used a restrictive indorsement such as "For deposit only," before
she signed her name. With a restrictive indorsement, the check could only be deposited into
her account. Roger would not have been able to cash it or deposit it into his own account.
6. Explain when presentment warranties apply. Identify the presentment warranties on a
check and a promissory note.
Answer: Presentment warranties apply to someone who demands payment of an instrument
from anyone liable on it. Presentment warranties apply when an instrument is returned to the
maker or drawee for payment. Someone who presents a check for payment warrants that he is
a holder, the check has not been altered, and he has no reason to believe the drawer’s
signature is forged. If any of these warranties are untrue, the bank has the right to demand a
refund from the presenter. For a promissory note, the presenter makes only one warranty, and
that is that he is a holder of the note. The presenter does not need to warrant that the note is
not altered or that the maker’s signature is authentic because a note is presented for payment
to the maker himself.
Test Bank For Introduction to Business Law
Jeffrey F. Beatty, Susan S. Samuelson
9781133188155
