This Document Contains Chapters 26 to 30 Chapter 26—Obligations and Performance TRUE/FALSE 1. The obligation of all parties to perform in good faith is the same because everyone is required to be honest. Answer: False 2. The UCC imposes a higher degree of good faith on a merchant seller or buyer of goods than on a nonmerchant seller or buyer of goods. Answer: True 3. In a cash sale not requiring the movement of goods, each party has the right to demand that the other perform at the same time. Answer: True 4. When a party refuses to perform a contract when the time for performance arises, an anticipatory repudiation has occurred. Answer: False 5. The statement, "I doubt that I can perform the contract," is a repudiation of the contract. Answer: False 6. When a party refuses to perform a contract at the time of performance, a repudiation has occurred. Answer: True 7. A party to a sales contract may demand at any time that the other party provide adequate assurance of performance. Answer: False 8. The person on whom a demand for assurance is made must reply in writing for the assurance to be deemed "adequate." Answer: False 9. The UCC does not specify the form that the assurance of performance is to take. Answer: True 10. If a person upon whom the assurance is demanded does not have a good reputation or economic position, a guarantee of performance or a pledge of security may be required. Answer: True 11. If adequate assurance of performance is not given within five (5) business days from the time of the demand for assurance, the demanding party may treat the contract as repudiated. Answer: False 12. A seller's duty to deliver goods requires the seller to transport the goods to the place designated by the buyer. Answer: False 13. A delivery is sufficient if it is made in accordance with the terms of the contract to sell. Answer: True 14. Unless otherwise specified, the place of delivery is the seller's place of business. Answer: True 15. When a method of transportation called for by a contract becomes unavailable for any reason, the contract is automatically voided. Answer: False 16. When a contract to sell identified goods does not specify a place of delivery, but both parties know that the goods are in a place other than the seller's place of business, that other place is the place of delivery. Answer: True 17. A buyer has a right to insist that all the goods be delivered at one time. Answer: True 18. A buyer always has a right to examine the goods to determine if, in fact, the goods conform to the contract. Answer: False 19. The standard for rejection requires that any defect in the good be material. Answer: False 20. A buyer has the right to accept some commercial units of a shipment and reject other commercial units. Answer: True 21. The seller’s right to cure a defective tender means that the seller will be given a second chance to make a proper tender of conforming goods. Answer: True 22. Upon a seller's tender of nonconforming goods and the buyer's rejection of them, the transaction has ended. Answer: False 23. Unless otherwise agreed by the parties, payment by a buyer requires payment either in cash or by certified check. Answer: False 24. The standard for determining commercial impracticability is objective, not subjective. Answer: True 25. An acceptance of goods can be done either expressly or by implication. Answer: True 26. Substantial impairment requires proof that goods are worthless. Answer: False MULTIPLE CHOICE 1. In a cash sale that does not require the physical moving of the goods, the: A. parties are required to perform concurrently. B. seller is required to tender the goods before the buyer must pay for them. C. buyer must pay for the goods in advance. D. buyer must actually receive the goods before he or she is required to pay for them. Answer: A 2. A party to a sales contract who is afraid that the other party will not perform may seek to gain additional confidence by demanding some form of: A. bailment. B. security. C. assurance. D. assignment. Answer: C 3. If appropriate assurance is not given in response to a demand for assurance of performance, the demanding party may: A. treat the contract as repudiated. B. sue for libel. C. file for an insurance payment. D. not replace the repudiated contract. Answer: A 4. After a proper demand has been made, for assurance of performance to be adequate, it must: A. include consideration. B. allow for the additional examination of the goods. C. be sufficient to assure a reasonable person that the contract will be performed. D. be written. Answer: C 5. The obligations of the parties to a sales contract include: A. the seller's duty to deliver the goods to the buyer's place of business. B. the buyer's duty to always accept the goods. C. the seller's duty to arrange for appropriate transport. D. the buyer's duty to pay for the goods. Answer: D 6. If a contractually-specified mode of transportation is not available, the: A. contract is automatically voided. B. seller must make delivery by a commercially-reasonable substitute. C. buyer must arrange to pick up the goods. D. seller must make personal delivery. Answer: B 7. Unless otherwise agreed, the proper place for the delivery of goods is: A. the buyer's place of business. B. the seller's home. C. a delivery service selected by the seller. D. the seller's place of business. Answer: D 8. When goods are shipped COD: A. the buyer always has the right to examine them before making payment. B. the underlying contract must specify when the buyer may inspect the goods. C. the buyer has no right to examine the goods until payment is made. D. the buyer gives up all rights to inspection of the goods. Answer: C 9. The right to ___________ is a second chance for a seller to make a proper tender of conforming goods. A. rehabilitate B. repair C. heal D. cure Answer: D 10. When a buyer demonstrates in some way that the goods conform to the contract, the buyer has made a(n): A. acceptance of the goods. B. assignment of the goods. C. substitution of the goods. D. avoidance of the contract. Answer: A 11. Which of the following does not constitute an acceptance? A. An express statement of approval by the buyer. B. The buyer’s examination of the goods. C. The buyer’s retention of goods for an unreasonable period of time. D. The buyer’s modification of the goods. Answer: B 12. Substantial impairment: A. only requires proof that goods do not conform to the contract. B. requires that the goods are shown to be worthless. C. requires proof that the use to the buyer is materially different than the contract promised. D. none of the above. Answer: C 13. Once goods have been accepted: A. the buyer may never revoke that acceptance. B. the buyer may only revoke acceptance if the defect was known at the time of the original acceptance. C. the buyer may revoke acceptance without cause or reason. D. none of the above. Answer: D 14. Which method of payment gives the buyer credit by postponing the time for payment? A. a promissory note B. a check C. a draft D. a certified check Answer: A 15. The standard for commercial impracticability is: A. hypothetical. B. conjectural. C. objective. D. subjective. Answer: C CASE 1. In January, a buyer and a seller agreed on the sale of 10,000 pounds of tomatoes to be delivered on July 1. The contract stated that the seller would set the price on June 15 and that the buyer would pay the price on delivery. On June 15, the market price of tomatoes was approximately 75 cents per pound. The seller set the price at $1.50 per pound and the buyer demanded that the price be lowered. When the parties could not agree, a lawsuit developed. The key issue was whether the seller had the right to set the $1.50 price. Decide. Answer: Each party to a sales contract is required to act in good faith. For a merchant, the requirement of good faith includes observing reasonable commercial standards of fair dealing. In this case, when the market price was 75 cents, the seller was arguably not acting in good faith when it established a price of $1.50. Assuming the court concludes that the buyer was not acting in good faith in setting an unreasonably high price, the merchant will be deemed to have breached the contract. 2. Jared agrees to purchase twelve computers from Zack Enterprises, Inc. for sale in Jared's department store. Twelve boxes from Zack Enterprises have just arrived at the department store. What are Jared's rights and responsibilities? Answer: Jared first has a right to examine, or inspect, the goods. This right extends beyond merely looking at the boxes to determine whether there is evidence of damage. Jared may remove the computers from their boxes and test each computer. If the goods are not conforming to the contract in any way, Jared may reject the shipment. If Jared does not reject a non-conforming delivery, he may have the right to revoke acceptance. In order to revoke acceptance, Jared would have to establish that the computers did not conform to the contract, the defect is such that it substantially impairs the value of the contract to him, and either the defect is such that he could not have discovered the problem prior to acceptance, or Zack Enterprises promised to correct a problem Jared was aware of and pointed out to the seller prior to acceptance. Chapter 27—Remedies for Breach of Sales Contracts TRUE/FALSE 1. The UCC statute of limitations applies to actions brought for remedies on the breach of a sales contract. Answer: True 2. An action for breach of warranty generally must be brought within three (3) years of the breach. Answer: False 3. A buyer seeking damages because of a breach of the sales contract must give the seller notice of the breach within a reasonable time after the buyer discovers or should have discovered it. Answer: True 4. The UCC statute of limitations applies when a party is seeking recovery on strict tort liability, fraud or negligence. Answer: False 5. In the absence of an agreement for the extension of credit to the buyer for the purchase of goods, and until the buyer pays for the goods or performs whatever actions the contract requires, the seller has the right to retain possession of the goods. Answer: True 6. When a sales contract is broken by the buyer, the seller has only the remedies of lien and resale available. Answer: False 7. A seller does not have the right to stop shipment if the buyer has received goods on credit and the seller learns that the buyer is insolvent. Answer: False 8. When a buyer has broken a sales contract, the seller may resell the goods or the balance of them in the seller's possession. Answer: True 9. When a buyer materially breaches a contract, the seller may cancel it. Answer: True 10. If goods are specially manufactured and the buyer refuses to take them, it is possible for the seller to recover as damages the full purchase price and keep the goods. Answer: True 11. Some courts allow sellers to recover the profits they would have made if the buyer had completed the transaction. Answer: True 12. If a buyer refuses to pay for goods after an acceptance that was not revoked, the seller may bring action to recover the purchase price and any incidental damages. Answer: True 13. A cured transaction is a pledge of property by the buyer-debtor that enables the seller to take possession of the goods if the buyer fails to pay the amount owed. Answer: False 14. Rejection of an improper tender of goods constitutes a revocation of acceptance on the part of the buyer. Answer: False 15. A buyer may revoke acceptance because of a seller’s failure to complete promised repairs. Answer: True 16. A buyer may reject the goods or revoke the acceptance for any defects in the goods. Answer: False 17. Proof of substantial impairment of the value of a contract to the buyer is required to justify revocation of acceptance. Answer: True 18. A buyer returning to the seller a raincoat that shrank in the rain is revoking acceptance. Answer: True 19. If a buyer chooses to cover the substituted goods purchased must be substantially identical to the contract goods. Answer: False 20. Consequential damages are available to the buyer but not to the seller. Answer: False 21. In an action by a third party against the buyer that is based on the seller's breach of warranty, the buyer must give notice of the action to the seller. Answer: False 22. A buyer who cancels a sales contract because the seller fails to deliver the goods is entitled to recover as much of the purchase price as had been paid. Answer: True 23. The right of a buyer to cancel or rescind a sales contract is never impacted by a delay in exercising that right. Answer: False 24. Under UCC Article 2, specific performance is a remedy available only to buyers in those circumstances in which the goods are specially manufactured, unique, or rare. Answer: True 25. A defrauded buyer may avoid the contract and recover damages. Answer: True 26. A liquidated damages clause is a contractual provision stipulating the amount of damages to be paid in the event of default or breach of contract. Answer: True 27. A buyer who breaches a contract after making a down payment generally will be subject to the rule that the seller may retain the full down payment as damages. Answer: False 28. A buyer can be barred from claiming a breach if the sales contract expressly states that the buyer will not assert any defenses against the seller. Answer: True 29. Consumer protection law prohibits the waiver of defenses in consumer contracts. Answer: True 30. Under both the CISG and the UCC, a buyer may reject goods only if the tender of the goods is a fundamental breach of the contract. Answer: False MULTIPLE CHOICE 1. The statute of limitations for breach of a sales contract: A. may be reduced between merchants to one year. B. may be expanded by the buyer and the seller to six years. C. begins to run from the signing of the contract. D. always requires a notice to the seller to activate the statute. Answer: A 2. When a plaintiff sues on the basis of strict tort liability, the action is subject to: A. the UCC statute of limitations. B. the appropriate state’s tort statute of limitations. C. no statute of limitations. D. FTC approval. Answer: B 3. The tort statutes of limitations tend to be __________ the UCC statute of limitations. A. shorter than B. longer than C. equal to D. excluded by Answer: A 4. A seller's right to retain possession of goods until the seller has been paid is called a: A. seller's lien. B. buyer's lien. C. merchandise estoppel. D. nonpayment tort. Answer: A 5. If a seller elects to resell the goods remaining in the seller's possession after the buyer breaks the contract, the seller: A. must always give notice of the sale to the original buyer. B. is never required to give notice of the sale to the original buyer. C. is required to follow strict standards in the resale of the goods. D. is not required to give notice of the sale to the original buyer when the goods are perishable. Answer: D 6. A seller may cancel a sales contract if the buyer: A. wrongfully rejects the goods. B. repudiates the contract. C. fails to make a payment due on or before delivery. D. all of the above. Answer: D 7. The commercially reasonable charges incurred by a seller in caring for goods after the buyer's breach are recoverable by the seller in an action for damages as: A. contract damages. B. punitive damages. C. additional damages. D. incidental damages. Answer: D 8. Which of the following is not an example of incidental damages recoverable by a seller? A. expenses for the care of the goods after the buyer's breach B. expenses for transportation of the goods after the buyer's breach C. expenses for resale of the goods after the buyer's breach D. expenses for the attorney's fees after the buyer's breach Answer: D 9. A buyer may reject a tender of delivery: A. if the goods do not conform to the contract in some way. B. only if the goods have a substantial defect. C. unless the seller promises to cure the defective tender. D. unless the goods have been sold on credit. Answer: A 10. To revoke acceptance of goods: A. any defect or nonconformity must be discovered. B. the goods must be dangerously defective. C. the nonconformity must substantially impair the value of the goods. D. action must be taken by the buyer within 60 days of delivery. Answer: C 11. If a buyer procures the same or similar goods as those involved in the sales contract breached by the seller, the buyer: A. loses all rights to prosecute for breach. B. is said to have validated the seller's action. C. is said to have covered. D. is also in breach. Answer: C 12. In the case of a breach of warranties, the buyer: A. should not notify the seller. B. is required to notify the seller. C. does not have the option to resell the goods. D. is not able to recover consequential damages. Answer: B 13. The buyer may cancel the contract if the: A. seller fails to deliver the goods. B. seller has repudiated the contract. C. goods have been rightfully rejected. D. all of the above. Answer: D 14. When a buyer has possession of goods after rightfully rejecting them, the buyer is treated: A. the same as a seller in the possession of goods after default by a buyer. B. as being strictly liable for the safety of the goods. C. the same as if an entrustment had been created. D. as an insurer of the goods until the seller retakes possession. Answer: A 15. When a seller breaches a contract for the sale of goods to a buyer, the buyer is entitled to specific performance of the contract if the: A. goods are unique. B. market cost of the goods has increased. C. goods can be purchased in any major city in the country. D. buyer's customers will be disappointed if the buyer does not obtain the goods. Answer: A 16. A liquidation of damages clause in a consumer contract is enforceable if it: A. is not in excess of twice the provable damages. B. is agreed to by both parties to the contract. C. reasonably attempts to estimate the actual harm caused by a breach. D. is a reasonable amount designed to punish the breaching party. Answer: C 17. When goods are sold for consumer use and personal injuries are sustained, a total exclusion of liability in the sales contract is: A. enforceable. B. unenforceable. C. unconscionable. D. both b. and c. Answer: D 18. In the absence of a liquidated damages clause and in the absence of proof of greater damages, the seller’s damages are computed as A. 25% of the purchase price or $500, whichever is less. B. 25% of the purchase price or $500, whichever is greater. C. 20% of the purchase price or $500, whichever is greater. D. 20% of the purchase price or $500, whichever is less. Answer: D 19. Consumer defenses: A. are preserved by a FTC regulation. B. are provided for by the CISG. C. are contained in UCC Article 2. D. none of the above. Answer: A 20. Under the CISG, a buyer may reject goods A. consistent with the right of rejection set forth in the UCC. B. if the goods are nonconforming to the contract in any way. C. only if the tender is a fundamental breach of the contract. D. only if the tender is illegal in subject matter and/or purpose. Answer: C CASE 1. On January 15, 2012, Anders brought an action against Barnes for breach of a contract for the sale of electronic parts. The breach occurred on January 10, 2008, and Anders discovered the breach on January 20, 2008. The state statute of limitations for contract actions is five years. Barnes raised the UCC statute of limitations as a defense to the action. Is this defense valid? Answer: Yes. Judgment will be for Barnes. Contracts for the sale of goods are governed by the UCC statute of limitations, which is four (4) years from the date the cause of action arises. Thus, the five-year state statute of limitations for contracts does not apply. The cause of action arose on January 10, 2008, the date on which the contract was breached. It is irrelevant that Barnes did not learn of the breach until January 20, 2008. The action was brought on January 15, 2012, which is more than four (4) years after the cause of action arose on January 10, 2008. Therefore, the action is barred by the UCC statute of limitations. 2. Peter contracted to purchase five (5) cases of soda and a vacuum cleaner because Peter was planning a party for his son's graduation. Both contract forms that Peter signed contained exclusion of damages clauses; i.e., each contract stated that the buyer had no right to sue the seller in the event that the goods were defective. Instead, each seller's sole obligation was to replace or repair the defective goods within a reasonable time of being notified of the defect(s). These clauses in the contract were set forth in the ordinary type of the contract and were not especially conspicuous. The vacuum cleaner was delivered on Friday, the day before the party, when the rugs in Peter's home were quite dirty. The vacuum cleaner did not work properly. Peter notified the seller, who responded by saying that nothing could be done until the following week. Frantic because guests were coming, Peter hired a cleaning service to clean the rugs. While serving the soda to guests, one of the bottle caps burst from an unopened bottle with great force. It struck Peter in the eye and he required medical treatment and hospitalization. Eventually, Peter sued both sellers for damages. Peter sought the expense of the cleaning service from one. From the other, Peter sought damages for personal injury, including his medical and hospitalization expenses. Both defendant-sellers cited the exclusion of damages clauses as their defense. Answer: An exclusion of damages clause does not have to be conspicuously set forth in the contract. Generally, such clauses are upheld unless they are found to be unconscionable. The clause in regard to the vacuum cleaner would be enforceable, so Peter would lose that lawsuit. Where a defective product causes injury to a consumer, however, such clauses are prima facie unconscionable. Accordingly, the likelihood is that the clause would not effectively limit Peter's remedies, and Peter would recover in the personal injury case. 3. Fran had a very rare, and therefore expensive, automobile that she wished to sell. Fran worried that if the first attempt at selling the auto failed, the value of the auto might come into question. To prevent any potential loss of profit if the auto needed to be resold, Fran created a sales contract that provided for an estimation of damages should the contract later be breached by the potential buyer. A potential buyer was found, and the contract was signed. Later, because of a lack of sufficient financing, the buyer breached the sales contract. Fran requested the estimated damages provided for in the contract. The buyer refused, calling the clause unconscionable and excessive. Can Fran recover? Answer: Fran can recover from the buyer's breach. Parties to a sales contract may seek to limit or exclude the recovery of damages in case of a breach. The estimated losses agreed to by the parties would be termed a liquidated damages clause. Such a clause is valid if the losses would be difficult to prove and alternative remedies would not be adequate under the circumstances. If the amount requested under the contract was reasonable in light of the situation, it is valid. Chapter 28—Kinds of Instruments, Parties, and Negotiability TRUE/FALSE 1. Commercial paper facilitates the transfer of funds and payment. Answer: True 2. Instruments are always negotiable. Answer: False 3. Instruments are transferable, written, signed promises or orders to pay a specified sum of money. Answer: True 4. Instruments are negotiable when they contain the terms required by contract law. Answer: False 5. The maker is the person who writes out and creates a promissory note. Answer: True 6. The person on whom the order to pay a draft is made is called a drawer. Answer: False 7. The drawee on a check is a bank. Answer: True 8. The payee has no rights in an instrument until the drawer or the maker has delivered it to the payee. Answer: True 9. When a drawee has signified in writing on a draft the willingness to make a specified payment, the drawee is called the acceptor. Answer: True 10. A payee is not liable on an instrument until the payee transfers the instrument to someone else. Answer: True 11. When a party who is not originally named in an instrument allows her name to be added to it for the benefit of another party in order to add strength to the collectability of the instrument, that party becomes a secondary obligor and assumes a liability role. Answer: True 12. A drawee on a draft has no responsibility under the draft until it has accepted that instrument. Answer: True 13. Revised UCC Article 3 refers to drawers, indorsers, and accommodation parties as “secondary obligors.” Answer: True 14. Negotiability is the characteristic that distinguishes commercial paper and instruments from ordinary contracts. Answer: True 15. A non-negotiable instrument’s terms are not enforceable. Answer: False 16. If an instrument is negotiable, it is governed by Article 2 of the UCC. Answer: False 17. Negotiation of commercial paper results in lesser rights to transferees than those rights afforded assignees of contracts under contract law. Answer: False 18. If an instrument is non-negotiable, the rights of the parties are governed by the general principles of contract law. Answer: True 19. A negotiable instrument may be partly printed and partly typewritten. Answer: True 20. The signature on an instrument must appear at the lower right-hand corner of the face of the instrument. Answer: False 21. An authorized agent signing an instrument will not be liable on the instrument if the agent discloses on the paper either the identity of the principal or the fact that the agent has signed in a representative capacity. Answer: False 22. In a negotiable instrument, the promise or order to pay must be unconditional. Answer: True 23. A promissory note that is payable "on the date of my marriage" is non-negotiable even if the maker of the note marries. Answer: True 24. If an order or promise is not for money, the instrument is not negotiable. Answer: True 25. The requirement of a sum certain in money is fulfilled even though the interest rate changes at maturity. Answer: True 26. If an instrument states no time for payment, the note is payable on demand. Answer: True 27. A check that is postdated ceases to be order paper. Answer: True 28. An instrument is order paper when by its terms it is payable to the order of any person described in it, or to a person or order. Answer: True 29. Antedating an instrument affects an instrument’s negotiability. Answer: False 30. Article 3 of the UCC establishes a four year statute of limitations for most actions involving negotiable instruments. Answer: False MULTIPLE CHOICE 1. An unconditional written promise made by one person to another, signed by the maker, that promises to pay on demand a specific sum of money to the bearer is a: A. non-negotiable draft. B. bill of exchange. C. promissory note. D. certificate of deposit. Answer: C 2. If a check is made payable to Paolo, and Paolo signs on the back of the check, Paolo is: A. the payee and the indorser. B. the drawee and the indorser. C. the payee and the endorsee. D. only the indorser. Answer: A 3. The person to whom the order in a draft is addressed is known as the: A. payee. B. drawee. C. drawer. D. maker. Answer: B 4. The party who writes or creates a promissory note is called the: A. payee. B. drawee. C. drawer. D. maker. Answer: D 5. When the drawee of a draft has indicated by writing or record a willingness to pay the amount specified in the draft the drawee is called a(n): A. acceptor. B. accommodation party. C. payee. D. secondary obligator. Answer: A 6. A person who becomes a party to an instrument to add strength to the instrument for the benefit of another party to the instrument is called a: A. benefactor. B. secondary obligor. C. collateral obligor. D. contingent beneficiary. Answer: B 7. Revised UCC Article 3 refers to which of the following parties as secondary obligors? A. drawers B. indorsers C. accommodation parties D. all of the above Answer: D 8. A payee has no rights in an instrument until: A. the drawer or the maker has delivered the instrument to the payee. B. an acceptor has been established. C. an accommodation party has signed the instrument. D. a guarantor has signed the instrument. Answer: A 9. A(n) __________ instrument’s terms are enforceable, but the instrument is treated simply as a contract governed by contract law. A. non-negotiable B. negotiable C. accommodation D. secondary Answer: A 10. If instrument is negotiable, it can be: A. paid on demand. B. cancelled by the maker. C. assigned by contract. D. transferred by negotiation. Answer: D 11. To be negotiable, an instrument must: A. be in writing. B. be signed by the maker or the drawer. C. contain a promise or order to pay. D. all of the above. Answer: D 12. The signature requirement, as an element of negotiability, can be met by: A. the use of initials. B. a mark. C. a trade name. D. all of the above. Answer: D 13. Action taken by one on behalf of another is: A. agency. B. negotiability. C. representative capacity. D. Identification of principal. Answer: C 14. An instrument is conditional if: A. it contains an order for the payment of money out of a particular fund. B. it is to be paid from the assets of an existing trust. C. it is to be paid from the assets of an existing estate. D. none of the above. Answer: D 15. Which of the following terms would make an instrument non-negotiable? A. It is dependent upon an event. B. It is undated. C. It is payable in foreign money. D. It gives the holder the right to receive interest. Answer: A 16. An instrument is payable on demand if it is payable: A. on or before a stated date. B. at sight or presentation. C. at a fixed time after acceptance. D. all of the above. Answer: B 17. An instrument is order paper if: A. it is payable to bearer or the order of bearer. B. it is payable to cash. C. the last or only indorsement is a blank indorsement. D. none of the above. Answer: D 18. Which of the following factors do not affect negotiability of an instrument? A. A provision specifying the collateral that secures the debt. B. The antedating of the instrument.. C. The omission of a date of execution. D. None of the above affect negotiability. Answer: D 19. When ambiguous language exists: A. words control figures if a conflict exists. B. handwriting supersedes typewritten words or terms. C. typewritten terms supersede preprinted terms. D. all of the above. Answer: D 20. Article 3 of the UCC establishes a __________-year statute of limitations for most actions involving negotiable instruments. A. one B. two C. three D. four Answer: C CASE 1. George was the maker of a written promissory note that stated that $500 would be paid on the sale of George's automobile. George initialed the note instead of writing his full name. The promissory note stated that it would be payable six months from the date. The promissory note was not dated. You now have come into possession of this note. Is this note negotiable? Discuss the elements of negotiability and whether each one has been met. Answer: This note is not negotiable. For an instrument to be negotiable, a series of elements must be satisfied. First, the note must be written. This promissory note was written. The note must be signed by the maker or drawer. George as the maker of the note has signed the document (his initials are sufficient). The exact wording of the note is unknown, but we could assume that the appropriate language establishing a promise to pay a sum certain ($500) in money is present. An unconditional promise or order to pay must exist. George left the payment contingent on the sale of his automobile, and therefore does not meet this requirement. The note must be payable on demand or at a definite time. The date of maturity of the note is not known, for it refers to a six-month time period with no established starting point. When a date is missing from commercial paper, it is deemed dated on the day that it is issued to the payee. Any holder may add the correct date. 2. Conville signed a note as an officer of the Hughesville Manufacturing Corporation, but she did not name the corporation in the note or indicate that she was acting as an officer for it. Later, she was sued by the Grange National Bank, the holder of the note. She raised the defense that the corporation was liable on the note. Who was liable? Answer: Conville was personally liable on the note because she failed to disclose on the note itself both the name of the corporation and her representative capacity. Chapter 29—Transfers of Negotiable Instruments and Warranties of Parties TRUE/FALSE 1. An instrument may be transferred by negotiation or by assignment. Answer: True 2. When a negotiable instrument is transferred by negotiation, the transferee is recognized as the holder of the paper. Answer: True 3. A holder of the paper has immunity from certain defenses that might have been asserted against the transferor. Answer: False 4. A holder is also known as an assignee of the paper Answer: False 5. An instrument that originally was bearer paper always remains bearer paper. Answer: False 6. The order or bearer character of a paper is determined as of the time when the negotiation is about to take place. Answer: True 7. If an instrument is payable to bearer, it may be negotiated by transfer of possession alone. Answer: True 8. Bearer paper may only be negotiated by the actual transfer of possession of the instrument. Answer: False 9. Order paper is negotiated by the indorsement of the holder and delivery. Answer: True 10. Indorsements may be classified in terms of whether the indorser has added any words to the indorsement and what those words are. Answer: True 11. A blank indorsement indicates the person to whom the instrument is to be paid-that is, the transferee. Answer: False 12. A person who acquires the instrument on which the last indorsement is blank becomes the holder. Answer: True 13. Order paper is converted into bearer paper by the holder's blank indorsement. Answer: True 14. When a special indorsement is made, the instrument continues to be order paper and may be negotiated only by an indorsement and delivery. Answer: True 15. A special indorsement consists of the signature of the indorser and the words identifying the person to whom the indorser makes the instrument payable. Answer: True 16. An indorsement "Pay to Donald Hames, Cathy Dukes" is not a valid indorsement because it does not contain the words "order" or "bearer." Answer: False 17. A qualified indorsement qualifies the effect of a blank or special indorsement by disclaiming certain liabilities of the indorser to a maker or drawee. Answer: True 18. A restrictive indorsement specifies the purpose of the indorsement or the use to be made of the paper. Answer: True 19. If an instrument bears a restrictive indorsement, any further transfer or negotiation is effectively barred. Answer: False 20. A payee or indorsee whose name is misspelled may indorse the wrong name, the correct name, or both. Answer: True 21. The transfer and collection of negotiable instruments between banks requires specific indorsements. Answer: False 22. If an instrument is payable to alternative payees or if it has been negotiated to alternative indorsees, it may be indorsed and delivered by either of them. Answer: True 23. If an instrument is drawn in favor of an officer of a named corporation, the instrument is payable to the corporation, the officer, or any successor to such officer. Answer: True 24. Under the UCC, a negotiation is not effective when it is made by a minor or any other person lacking capacity. Answer: False 25. It is worse for the holder to lose order paper than to lose bearer paper. Answer: False 26. If a lost negotiable instrument is in bearer form at the time of the loss, the finder is entitled to enforce payment. Answer: True 27. The warranties made by an unqualified indorser guarantee that payment of the instrument will be made. Answer: False 28. Thomas, the holder of a check, presents it to the drawee bank for payment. If Thomas indorses the check, Thomas warrants that the account of the drawer in the drawee bank contains funds sufficient to cover the check. Answer: False 29. To enforce an implied warranty of an indorser, the party claiming under the warranty must give the indorser notice of the breach within fourteen (14) days after the claimant learns or has reason to know of the breach and the identity of the indorser. Answer: False 30. The warranty liability of a qualified indorser is the same as that of an unqualified indorser. Answer: True MULTIPLE CHOICE 1. The transferee has only those rights that were possessed by the transferor of the note when a transfer of an instrument is made by: A. an assignment. B. a negotiation. C. a sale. D. a will. Answer: A 2. The transferring of an instrument in such a way as to make the transferee the holder of the paper is termed: A. an assignment. B. a conversion. C. a sale. D. a negotiation. Answer: D 3. The order or bearer character of the paper determines how it may be: A. assigned. B. sold. C. negotiated. D. all of the above. Answer: C 4. Negotiation of bearer paper requires: A. delivery only. B. indorsement only. C. both indorsement and delivery. D. neither indorsement nor delivery. Answer: A 5. Negotiation of order paper requires: A. delivery only. B. indorsement only. C. both indorsement and delivery. D. neither indorsement nor delivery. Answer: C 6. A blank indorsement turns a(n) __________ instrument into a(n) __________ instrument. A. negotiable; non-negotiable B. non-negotiable; negotiable C. bearer; order D. order; bearer Answer: D 7. When the indorser merely signs a negotiable instrument, the indorsement is called a __________ indorsement. A. special B. qualified C. blank D. restrictive Answer: C 8. A __________ indorsement consists of the signature of the indorser and words specifying the person to whom the indorser makes the instrument payable. A. qualified B. restrictive C. special D. blank Answer: C 9. A qualified indorsement is given by using the phrase __________. A. “as is” B. “without recourse” C. “with all faults” D. “buyer beware” Answer: B 10. An indorsement "for deposit only" is: A. restrictive. B. qualified. C. special. D. blank. Answer: A 11. When the name of the payee is spelled incorrectly, the payee: A. must indorse the instrument with the incorrect spelling of the payee’s name. B. must indorse the instrument with the correct spelling of the payee’s name. C. may indorse the instrument with either the correct or incorrect spelling of the payee’s name. D. may not indorse the instrument. Answer: C 12. When parties intend to negotiate an order instrument but the holder fails to indorse it: A. there is no negotiation. B. the transfer has the effect of a contract assignment. C. the transferee has the right to require the transferor’s indorsement if consideration was given. D. all of the above. Answer: D 13. A forged or unauthorized indorsement is by definition: A. an indorsement of the person by whom it appears to have been made. B. no indorsement of the person by whom it appears to have been made. C. binding on the party who refuses to ratify the instrument. D. incapable of being ratified. Answer: B 14. Clark is the senior payroll clerk for Gonzalez Corporation. When preparing the weekly payroll, Clark added the name of Simmons, a fictitious employee, to the payroll list. Lewis, the treasurer of the corporation, signed the payroll checks and delivered them to Clark. Clark distributed checks to the correct employees and kept the one made payable to the order of Simmons. Clark indorsed the name of Simmons to the check, cashed it at Diamond Check Cashing. In this situation: A. an indorsement was not necessary to negotiate the instrument. B. the Gonzalez Corporation can seek recovery against Diamond Check Cashing. C. the forged signature is given the same effect as though it had been authorized by the named payee. D. Clark is not subject to civil or criminal liability. Answer: C 15. The situation in which an individual impersonates the holder of a savings account and, by presenting a forged withdrawal slip to the savings bank, receives from the bank a check payable to the bank's customer, is covered by the: A. impostor rule. B. negotiation rule. C. assignment rule. D. bank rule. Answer: A 16. In the case of a check, when the impostor rule applies: A. the drawer of the check can successfully raise the defense of the forged indorsement. B. the forged indorsement is effective to negotiate the instrument. C. the forged indorsement is ineffective to negotiate the instrument. D. the instrument becomes non-negotiable. Answer: B 17. A transferor may be able to set aside a negotiation obtained by fraud or duress unless: A. a minor is involved. B. the negotiation was part of an illegal transaction. C. the negotiation was beyond the powers of the corporation. D. the instrument has been acquired in the meantime by a holder in due course who did not know of the misconduct. Answer: D 18. If a lost instrument is order paper, the finder __________. A. becomes the assignee of the instrument. B. becomes the owner of the instrument. C. becomes the holder of the instrument. D. does not become the holder of the instrument. Answer: D 19. An unqualified indorser who receives consideration for the indorsement impliedly warrants that: A. the warrantor is a person entitled to enforce the instrument. B. all signatures on the instrument are authentic and authorized. C. the instrument has not been altered. D. all of the above. Answer: D 20. The implied warranties of an unqualified indorser do not include a guarantee that: A. payment of the instrument will be made. B. the account of the drawer in the drawee bank contains funds sufficient to cover the check. C. both a. and b. D. neither a. nor b. Answer: C 21. If a negotiable order instrument is transferred to another party without an indorsement, the instrument has been: A. assigned. B. negotiated. C. obtained by fraud, and is therefore invalid. D. obtained by fraud, but may be ratified. Answer: A 22. When a negotiable instrument is negotiated by delivery without indorsement, the warranty liability of the transferor runs: A. only to the immediate transferee. B. not to the immediate transferee, but to all subsequent transferees. C. to both the immediate transferee and all subsequent transferees. D. neither to the immediate transferee, nor to any subsequent transferees. Answer: A CASE 1. Coppersmith executed and delivered negotiable notes to the payee, Charlene. The payee indorsed the notes to Whitehurst but did not deliver them. Instead, she kept the notes in her possession because she wanted to collect the interest during her life and wanted the indorsee to have the notes on her death. After Charlene's death, her executor, Cartwright, found the notes. Both Cartwright and Whitehurst sought to enforce the notes against Coppersmith. Who was entitled to do so? Answer: Cartwright. As executor of the payee, Cartwright acquired by operation of the law the right to enforce payment by assignment. The indorsement to Whitehurst was not effective to negotiate the instruments because negotiation required both indorsement and delivery by the person to whom they were then payable, and there had been no delivery. 2. Sue is an employee at an ABC store. One of Sue's duties is to prepare the bank deposit at the end of the business day. Sue had a very busy day and made a few mistakes. All of the checks, except two, were indorsed with the stamp "ABC, Inc." that ABC had provided. The bank received the deposit and noticed the lack of indorsement on the two checks. In addition, three of the checks that Sue was to include with the deposit were lost in the parking lot after closing. Phil found the checks and deposited them into his personal account. What is the effect of ABC's indorsement on the lost checks and the lack of indorsement on the two deposited checks? Answer: A bank may provide an indorsement for its customer absent any specific prohibition on the instrument. The checks that Sue failed to stamp will be processed without any difficulty. The stamp that Sue used, with a blank indorsement, created a bearer instrument. The stamp should be changed to create a restrictive indorsement to afford greater protection. When a bearer instrument is lost, the finder (Phil), as the possessor of bearer paper, is the holder and is entitled to enforce payment. Some alternate cause of action based on another area of law would be Sue's only hope for recovery of the lost checks. 3. Al was a well-respected attorney in a small town. A couple retained Al to represent them on the purchase of a home. Before closing, Al informed the couple of payments that they were required to make by check at the closing. Among the required payments the attorney told the couple to make were a check for $1,500 to Bob Brown and a check for $610 to Susan Lee. The attorney explained that the check to Brown was for a survey of the property and the check to Lee was for termite control work that the couple had authorized. The checks were issued and taken by Al who promised to deliver them. Al did not, however, deliver them. Instead, Al forged the indorsements of the respective payees and cashed the checks. When Al was later arrested on a similar matter, the couple learned what had happened. The couple made a claim against its bank for reimbursement, claiming the bank was not authorized to pay these checks because they had not been effectively negotiated to the bank. When the facts came to light, no person named Bob Brown had done a survey on the property, but the termite work had been done by Lee. Decide both cases. Answer: The couple will not recover on the check to Brown because the impostor rule applies when the drawer is fraudulently fooled by an employee into issuing a check to a dummy payee. However, the couple may recover on the check to Lee because this was a valid check to an actual creditor. Accordingly, the forged indorsement is not treated as effective to negotiate the Lee check. The couple had not been fooled by its employee into issuing the Lee check. Chapter 30—Liability of The Parties Under Negotiable Instruments TRUE/FALSE 1. Parties with rights in a negotiable instrument can be assignees or holders. Answer: True 2. A holder can recover from any of the parties who are liable on the instrument, regardless of the order of the signatures on the instrument. Answer: True 3. The law gives certain holders of a negotiable instrument a preferred standing by protecting them from all defenses when they sue to collect payment. Answer: False 4. To have the status of a holder in due course, a person must first be a holder. Answer: True 5. Value is similar to consideration.. Answer: True 6. Under the “close-connection” doctrine, a holder has taken so many instruments from its transferor or is so closely connected with the transferor that any knowledge the transferor has is deemed transferred to the holder, preventing holder in due course status. Answer: True 7. Bad faith sometimes exists just because a transferee takes an instrument under odd circumstances. Answer: True 8. Instruments may not be negotiated if they have been dishonored by non-acceptance. Answer: False 9. A holder of a negotiable instrument cannot be a holder in due course when the holder learns of a defense to payment after the acquisition of the instrument. Answer: False 10. In general, transferees who are aware of facts that would make a reasonable person ask questions are deemed to know what they would have learned if they had asked questions. Answer: True 11. A person cannot become a holder through a holder in due course unless that person satisfies the requirements for holder in due course status. Answer: False 12. A holder through a holder in due course is subject to limited defenses. Answer: False 13. A holder who is neither a holder in due course nor a holder through a holder in due course is subject to every defense, just as though the instrument were not negotiable. Answer: True 14. Generally defenses that could be raised in a breach of contact claim cannot be raised against a holder in due course. Answer: True 15. Ordinarily the maker’s lack of capacity may be raised as a defense against a holder in due course. Answer: False 16. A holder having the rights of a holder in due course is subject to the defense of fraud in the inducement. Answer: False 17. Fraud as to the nature or essential terms of an instrument is a limited defense not available against a holder in due course. Answer: False 18. A universal defense will defeat a holder in due course and a holder through a holder in due course. Answer: True 19. The fact that a person signs a negotiable instrument because he or she is fraudulently deceived regarding its nature or essential terms is a defense available against all holders. Answer: True 20. The defense that a signature was forged or signed without authority cannot be raised against any holder if the person whose name was signed has ratified it. Answer: True 21. Economic duress, in the form of a reluctance to enter into a financially demanding instrument, is a universal defense. Answer: False 22. Illegality, such as a note for gambling, is a universal defense. Answer: True 23. For a change to constitute an alteration, the person making the change must be a party to the instrument. Answer: True 24. An altered instrument can be enforced according to its original terms. Answer: True 25. In 1976 the Federal Trade Commission adopted a rule that expands the rights of a holder in due course in a consumer credit transaction. Answer: False 26. The FTC rule concerning holders in due course is confined to consumer credit transactions. Answer: True 27. The primary party on a note or certificate of deposit is the drawer. Answer: False 28. The primary party on a draft is the drawee, assuming that the drawee has accepted the draft. Answer: True 29. Drawers are secondary parties on a note. Answer: False 30. Presentment occurs when the primary party refuses to pay an instrument according to its terms. Answer: False MULTIPLE CHOICE 1. A holder is a party in possession of an instrument that “runs” to him. An instrument runs to a party if it is: A. payable to his or her order. B. bearer paper. C. indorsed to him or her. D. all of the above. Answer: D 2. A holder may: A. demand payment. B. bring suit for the collection of an instrument. C. give a discharge or release from liability on the instrument. D. all of the above. Answer: D 3. A holder in due course must meet all of the following conditions except: A. giving value for the instrument. B. taking the instrument when it is overdue. C. acting in good faith. D. being ignorant of defenses and adverse claims. Answer: B 4. Jones issued a check to Smith in return for Smith's promise to do work. Smith never did the promised work, but offered to buy goods from Gomez by endorsing the check to Gomez. Gomez had had no prior dealings with Jones or Smith, but accepted the check in payment. Gomez: A. cannot be a holder in due course. B. is considered an assignee of Smith's rights. C. is a holder through a holder in due course. D. is a holder in due course. Answer: D 5. Which of the following will not be considered value in connection with determining holder in due course status? A. performing the act for which the instrument was given B. promising to perform an existing legal obligation C. receiving the instrument as security for a loan D. taking the instrument in payment of a debt Answer: B 6. Under the __________ doctrine, the holder has taken so many instruments from its transferor or is so closely connected with the transferor that any knowledge the transferor has is deemed transferred to the holder, preventing holder in due course status. A. constructive partnership B. close-connection C. symbiotic relationship D. collaborative relationship Answer: B 7. An instrument may be negotiated even though: A. it has been dishonored. B. it is overdue. C. it is demand paper that has been outstanding for more than a reasonable period of time. D. all of the above. Answer: D 8. A person who acquires a negotiable instrument with notice or knowledge that any party might have a defense or that there is any adverse claim to the ownership of the instrument: A. has acted in bad faith. B. has acted illegally. C. cannot be a holder in due course. D. has taken unfair advantage of the maker. Answer: C 9. A taker of an instrument who is a holder in due course at the time of the transfer but who thereafter learns of a defense: A. becomes a holder through a holder in due course. B. becomes an ordinary holder. C. remains a holder in due course. D. becomes an assignee. Answer: C 10. Mabel issues a negotiable promissory note to the order of Rachel. Rachel endorses the note to Batton, who takes it as a holder in due course. Batton gives the note to his brother, Albert, as a gift. In this situation: A. Albert will acquire Batton's rights. B. Albert is a holder through a holder in due course. C. both a. and b. D. none of the above. Answer: C 11. A holder through a holder in due course: A. has greater rights than a holder in due course. B. has fewer rights than a holder in due course. C. has the same rights as a holder in due course. D. must meet the requirements for becoming a holder in due course in order to achieve holder in due course status. Answer: C 12. Fraud in the inducement is a: A. limited defense not available against a holder in due course. B. universal defense available against all holders. C. limited defense available against all holders. D. universal defense not available against a holder in due course. Answer: A 13. Fraud in factum: A. occurs when a person is persuaded to execute an instrument because of fraudulent statements. B. occurs when a person signs an instrument as a result of being fraudulently deceived regarding essential terms. C. is not a universal defense. D. cannot be raised against a holder in due course. Answer: B 14. A(n) __________ is an unauthorized change or completion of a negotiable instrument designed to modify the obligation of a party to the instrument. A. alteration B. modification C. transformation D. transmutation Answer: A 15. Which of the following is not a universal defense available against all holders? A. fraud as to the nature or essential terms of the instrument B. forgery or lack of authority C. fraud in the inducement D. duress depriving control Answer: C 16. Universal defenses work against: A. holders. B. a holder through a holder in due course. C. a holder in due course. D. all of the above. Answer: D 17. A negotiable promissory note was issued by Gold. It was properly issued in all ways. Nevertheless, the payee managed to alter the note and raise the amount from $500 to $5,000. A holder in due course presented the note for payment to Gold who discovered the alteration. In this case: A. Gold is liable for $500 only. B. Gold is liable for the full $5,000. C. Gold has no liability on the altered note. D. Gold is liable for $2,500. Answer: A DIF: 18. A taker of a negotiable instrument may be denied the status and protection of a holder in due course where: A. one party is a consumer. B. the close-connection doctrine applies. C. the instrument is bearer paper. D. none of the above. Answer: B 19. The FTC rule, which provides that a notice provision must be included in all consumer credit contracts, requires that the notice: A. limit recovery under the contract to amounts paid by the debtor plus a reasonable charge for incidental damages. B. be in italic type. C. be at least 20 points in size. D. has the effect that no subsequent person can be a holder in due course of the instrument. Answer: D 20. When the primary party refuses to pay an instrument according to its terms, said party is required to give: A. notice of nonpayment. B. notice of dishonor. C. notice of denial. D. secondary party notice. Answer: B CASE 1. Manuel sued Patricia on a promissory note. Patricia admitted signing the note, but raised the defense that Manuel was not a holder in due course. Can Manuel recover without proving that he is a holder in due course? Answer: Yes. Manuel was the holder and Patricia admitted signing the note. Therefore, Manuel was entitled to recover on the note unless Patricia established a defense. As no defense was asserted, it was immaterial whether Manuel was a holder in due course, against whom certain defenses could not be asserted. 2. Bill decided that it was time to remodel his home. Among the features that Bill had included in his remodeling plan was the addition of several very large picture windows. Because of the great expense of the windows, Bill financed the cost through the issuance of a promissory note. The manufacturer of the windows sold the promissory note to a bank. Just after the promissory note matured, the windows began to leak badly. Bill refused to pay on his promissory note and brought action against the manufacturer for breach of contract. Will the bank recover on the promissory note? Answer: The bank will recover from Bill on the promissory note. Because the bank was the first transferee, the status of a holder through a holder in due course is unavailable. However, the bank probably meets the requirements of a holder in due course. Arguably, value was given for the promissory note, and it was probably an arm's-length transaction indicating good faith. It also appears that the bank had no notice of the defect. Given the bank's holder in due course status, the argument of breach of contract will not be effective, for it is a limited defense that is not available against a holder in due course. 3. Isidro issued a negotiable promissory note to his attorney in return for the attorney's promise to perform legal services. The attorney never rendered the legal services but quickly negotiated the note to Anna, a holder in due course. Anna and Mark were involved in business negotiations and Anna offered to purchase a car from Mark. She offered as part payment for the car the note issued by Isidro. By coincidence, Mark knew both Isidro and the attorney and the facts concerning the note and the unperformed legal services. Despite this, Mark accepted a negotiation of the note from Anna. Isidro refused to pay the note and Mark eventually sued Isidro to collect. What is the probable outcome? Answer: Mark knew of the defense of the maker, Isidro. Accordingly, Mark was not a holder in due course. Mark does, however, qualify as a holder through a holder in due course, and will therefore be entitled to collect. Isidro's defense, breach of contract, is a limited defense not available against a party with the rights of a holder in due course. Test Bank for Business Law: Principles for Today's Commercial Environment David P. Twomey, Marianne M. Jennings 9781133588245, 9781305575158, 9780324786699
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