Commercial Paper

Question 1

Under the Negotiable Instruments Article of the UCC, which of the endorser’s liabilities are disclaimed by a “without recourse” endorsement?

• Contract liability only.
• Warranty liability only.
• Both contract and warranty liability.
• Neither contract nor warranty liability.

Answer 1

Contract liability only. An endorsement “without recourse” is a qualified endorsement. A qualified endorsement does not contractually guaranty payment (disclaims contract liability). The qualified endorsement only makes warranties as to good title, signatures are genuine, etc. to subsequent holders of the instrument. Thus, B, C, and D are incorrect because warranty liability to subsequent holders is not disclaimed, only contract liability.

Question 2

What type of endorsement is this?

Answer 2

It is a blank, qualified and a restrictive endorsement. Restrictive endorsements limit the liability of the endorser to subsequent holders. “For collection only,” is equivalent to, “For deposit only,” written on the back of a personal check.

Question 3

Train issued a note payable to Blake in payment of contracted services that Blake was to perform. Blake endorsed the note “pay to bearer” and delivered it to Reed in satisfaction of a debt owed Reed. Train refused to pay Reed on the note because Blake had not yet performed the services. Under the Negotiable Instruments Article of the UCC, must Train pay Reed?

• No, Train does not have to pay Reed until the services are performed.
• No, Train does not have to pay Reed because the note was converted into a bearer paper.
• Yes, train has to pay Reed because the note was converted into bearer paper.
• Yes, Train has to pay Reed because Reed was a holder in due course.

Answer 3

Yes, Train has to pay Reed because Reed was a holder in due course. To be a holder in due course the following elements are required:

1. the holder must take the instrument for value (payment of an anteceded debt is value),
2. take the instrument in good faith (usually, honesty in fact and thus, unless unusual circumstances, assumed),
3. take the instrument without notice the instrument is overdue, or has been previously dishonored, or of any claim or defense.

Blake endorsed the note “pay to bearer,” which entitles any person to become a holder, including Reed. Reed gave value as satisfaction of a debt Blake owed Reed, and there are no facts indicating bad faith or notice that the note was overdue, had been previously dishonored, or had any knowledge of a claim or defense. Thus, Reed is a holder in due course and breach of contract or nonperformance is a personal defense and not available against a holder in due course.

Question 4

Under the Negotiable Instruments Article of the UCC, what kind of indorsement is made by the use of the words “Lee Louis”?

• Blank, nonrestrictive, and unqualified.
• Blank, nonrestrictive, and qualified.
• Special, nonrestrictive, and unqualified.
• Special, nonrestrictive, and qualified.

Answer 4

Blank, nonrestrictive, and unqualified. Signing your name only as an indorsement turns order paper into bearer paper and can be transferred by anyone at anytime by delivery only without restrictions and without limitations on liability.

Question 5

Under the Negotiable Instruments Article of the UCC, which of the following requirements must be met for a person to be a holder in due course of a promissory note?

• The note must be payable to bearer.
• The note must be negotiable.
• All prior holders must have been holders in due course.
• The holder must be the payee of the note.

Answer 5

The note must be negotiable. If a note is nonnegotiable, then by definition no transferee can become a holder in due course.

Question 6

A $5,000 promissory note payable to the order of Neptune is discounted to Bane by blank endorsement for $4,000. King steals the note from Bane and sells it to Ott who promises to pay King $4,500.

After paying King $3,000, Ott learns that King stole the note. Ott makes no further payment to King.
Ott is

• A holder in due course to the extent of $5,000.
• An ordinary holder to the extent of $4,500.
• A holder in due course to the extent of $3,000.
• An ordinary holder to the extent of $0.

Answer 6

A holder in due course to the extent of $3,000. Bane was a holder in due course, because Bane took the note for value in good faith and without notice of the note being overdue, previously dishonored, or of claim or defense. Under the shelter principle, Ott has the rights of a holder in due course, because Ott can trace the note back to a holder in due course. However, since Ott did not pay the full value promised, Ott is only a holder in due course to the extent of $3,000, which is the amount actually paid.

Question 7

Bart presented a negotiable demand note supposedly signed by Alice as maker to Alice for payment. Alice claimed the note was a forgery and refused to pay it. Which of the following is correct?

• Bart is out of luck and receives no payment.
• Bart can now turn to any indorsers of the note for payment.
• Bart gets paid by Alice even if there is a forged signature.
• There are no secondary parties on promissory notes.

Answer 7

Bart can now turn to any indorsers of the note for payment. The primary party has refused payment and Bart must turn to secondary parties – indorsers.

Question 8

Janice owes Jake $120,000. Jake cashes the check 45 days after receiving it. Janice’s bank fails. The FDIC will cover $100,000. Janice

• Must pay the $20,000 difference.
• Is not liable for the $20,000 difference.
• Is liable for the $20,000 difference but can recover it from the FDIC.
• Must split the difference with Jake and pay $10,000 if he is an HDC.

Answer 8

Is not liable for the $20,000 difference. If the holder/HDC does not present the check within 30 days and there is a bank failure, the drawer is discharged from liability for the difference.

Non-bank parties have 30 Days to turn to secondary parties after primary party refuses to pay.

Question 9

Under the Negotiable Instruments Article of the UCC, in a nonconsumer transaction, which of the following are real defenses available against a holder in due course?

• Material alteration
• Discharge in bankruptcy
• Breach of contract

Answer 9

Yes, Yes, NO

Real defenses are those that can be asserted universally. That is, they may be asserted against any holder of a negotiable instrument. A material alteration in the instrument and a discharge in bankruptcy may be asserted against any holder. Breach of contract may be asserted against only ordinary holders. A holder in due course is unaffected by this personal defense.

Question 10

Robb, a minor, executed a promissory note payable to bearer and delivered it to Dodsen in payment for a stereo system. Dodsen negotiated the note for value to Mellon by delivery alone and without endorsement. Mellon endorsed the note in blank and negotiated it to Bloom for value. Bloom’s demand for payment was refused by Robb because the note was executed when Robb was a minor. Bloom gave prompt notice of Robb’s default to Dodsen and Mellon. None of the holders of the note were aware of Robb’s minority. Which of the following parties will be liable to Bloom?

• Dodsen
• Mellon

Answer 10

No and YES.

The key to liability in this question is the presence or absence of signatures. When a transfer is made without a signature, as was the case with Dodsen’s transfer, transfer warranty applies only to the immediate transferee and there is no contract signature liability. Therefore, only Mellon has rights against Dodsen, and Dodsen is not liable to Bloom. Mellon, however, has signature liability to Bloom, and must pay the instrument if Robb does not.

Question 11

To the extent that a holder of a negotiable promissory note is a holder in due course, the holder takes the note free of which of the following defenses?

• Minority of the maker where it is a defense to enforcement of a contract.
• Forgery of the maker’s signature.
• Discharge of the maker in bankruptcy.
• Nonperformance of a condition precedent.

Answer 11

Nonperformance of a condition precedent. A holder in due course takes a promissory note free from any personal defenses of the maker but not free from any universal defenses. Universal defenses may be asserted by the maker against any holder and include minority (voidable to a simple contract),forgery of the maker’s signature, and bankruptcy discharge of the maker. Nonperformance of a condition precedent is a personal defense, and may be asserted only against the person to whom the maker originally gave the note.

Question 12

A maker of a note will have a valid defense against a holder in due course as a result of any of the following conditions except:

• Lack of consideration.
• Infancy.
• Forgery.
• Fraud in the execution.

Answer 12

• *Lack of consideration.** Only universal defenses may be asserted against a holder in due course. Personal defenses may be asserted against only ordinary holders. Universal defenses include infancy, forgery, and fraud in the execution.
• *Lack of consideration in the underlying contract upon which the note is based is a personal defense.**

Question 13

Requirements of Negotiability

Answer 13

All of the following requirements must be on face of instrument for it to be a negotiable instrument (be sure to know these)

To be negotiable, the instrument must:

1. Be written
2. Be signed by maker or drawer
3. Contain an unconditional promise or order to pay
4. State a fixed amount in money
5. Be payable on demand or at a definite time
6. Be payable to order or to bearer, unless it is a check

Question 14

Under the Negotiable Instruments Article of the UCC, which of the following statements is(are) correct regarding the requirements for an instrument to be negotiable?

1. The instrument must be in writing, be signed by both the drawer and the drawee, and contain an unconditional promise or order to pay.
2. The instrument must state a fixed amount of money, be payable on demand or at a definite time, and be payable to order or to bearer.

Answer 14

2 Only…All of the items in statement II are required to make an instrument negotiable, although an exception is made for a check that need not be payable to order or to bearer.

Question 15

Clarkson received a check from Shipley which was incomplete as to the amount. The check was given as payment in advance on the purchase of 100 CB radios. The amount was left blank because Clarkson had the right to substitute other CB models if available for those ordered, which would change the price. It was agreed that in no event would the purchase price exceed $1,800. Desperate for cash, Clarkson wrongfully substituted much more expensive CB radios thereby increasing the purchase price to $2,200. Clarkson then negotiated the check to Marshall, one of his suppliers. Clarkson filled in the $2,200 in Marshall’s presence showing him the shipping order and invoice applicable to the sale to Shipley. Marshall accepted the check in payment of $1,400 overdue debts and $800 in cash. Under the circumstances, Marshall is

• A holder in due course but only to the extent of the $800 in cash.
• A holder in due course and entitled to recover the full amount.
• Not a holder in due course because the amount filled in was greater than authorized.
• Not a holder in due course because the instrument was completed in his presence.

Answer 15

A holder in due course and entitled to recover the full amount. Completion of an incomplete instrument other than in accordance with the authority given is a personal defense. Since Marshall is a holder in due course, he takes the instrument free of this personal defense and may enforce the instrument as completed.

The general rule is that a transfer of a negotiable instrument to a HDC cuts off all personal defenses against a HDC

Personal defenses are assertable against ordinary holders and assignees of contract rights to avoid payment

Question 16

Types of Personal Defenses against a Holder in Due Course (HDC)

Answer 16

• Breach of contract
  
  • including breach of warranty
• Lack or failure of consideration
• Prior payment
• Unauthorized completion
• Fraud in the inducement
• Nondelivery (instrument lost or stolen)
• Ordinary duress or undue influence
• Mental incapacity
• Illegality
• Theft by holder or subsequent holder after theft

Question 17

In order to negotiate bearer paper, one must

• Endorse the paper.
• Endorse and deliver the paper with consideration.
• Deliver the paper.
• Deliver and endorse the paper.

Answer 17

Deliver the paper. Negotiation is the transfer of an instrument by the proper means so that the transferee becomes a “holder.” Bearer paper may be negotiated by mere delivery of the instrument.

Negotiating bearer paper may be accomplished by delivery alone (endorsement not necessary),

• EXAMPLE: A check is made payable to the order of cash.

Question 18

Ashley needs to endorse a check that had been endorsed by two other individuals prior to Ashley’s receipt of the check. Ashley does not want to have surety liability, so Ashley endorses the check “without recourse.” Under the Negotiable Instruments Article of the UCC, which of the following types of endorsement did Ashley make?

• Blank.
• Special.
• Qualified.
• Restrictive.

Answer 18

Qualified. A qualified endorsement is one that limits the signer’s liability. By signing without recourse, Ashley has stated that she will not guarantee payment of the instrument.

Question 19

Dilworth, an employee of Excelsior Super Markets, Inc., stole his payroll check from the cashier before it was completed. The check was properly made out to his order but the amount payable had not been filled in because Dilworth’s final time sheet had not yet been received. Dilworth filled in an amount which was $300 in excess of his proper pay and cashed it at the Good Luck Tavern. Good Luck took the check in good faith and without suspecting that the instrument had been improperly completed. Excelsior’s bank paid the instrument in due course. Excelsior is demanding that the bank credit its account for the $300 or that it be paid by Good Luck. Which of the following is correct?

1. Good Luck has no liability for the return of the $300.
2. Excelsior’s bank must credit Excelsior’s account for the $300.
3. A theft defense would be good against all parties including Good Luck.
4. Only in the event that negligence on Excelsior’s part can be shown will Excelsior bear the loss.

Answer 19

Good Luck has no liability for the return of the $300. Unauthorized completion of an incomplete instrument and lack of delivery are personal defenses. Thus, Good Luck, a holder in due course, takes the instrument free of these personal defenses and may enforce it as completed.

Question 20

A maker of a note will have a valid defense against a holder in due course as a result of any of the following conditions except

1. Lack of consideration.
2. Infancy.
3. Forgery.
4. Fraud in the execution.

Answer 20

Lack of consideration. A maker of a note may use real defenses against a holder in due course but not personal defenses. Lack of consideration is a personal defense.

The general rule is that a transfer of a negotiable instrument to a HDC cuts off all personal defenses against a HDC

Types of Personal Defenses:

1. Breach of contract (and warranty)
2. Lack or failure of consideration
3. Prior payment
4. Unauthorized completion
5. Fraud in the inducement
6. Non-delivery

Question 21

Which of the following is true of a stop payment order given by a drawer of a check to the drawee bank?

1. The stop payment order may be oral but is effective for a shorter time than a written stop payment order.
2. Stop payment orders must be in writing to be effective.
3. If the drawee bank fails to follow a valid stop payment order, it is automatically liable to the drawer for the amount of the check.
4. The drawer of a check can give a stop payment order only if s/he can prove a valid defense.

Answer 21

The stop payment order may be oral but is effective for a shorter time than a written stop payment order.

Stop payment orders may be oral and are valid for 14 days. Written stop payment orders are valid for 6 months and are renewable.

Question 22

Jane Lane, a sole proprietor, has in her possession several checks which she received from her customers. Lane is concerned about the safety of the checks since she believes that many of them are bearer paper which may be cashed without endorsement. The checks in Lane’s possession will be considered order paper rather than bearer paper if they were made payable (in the drawer’s handwriting) to the order of

1. Cash.
2. Ted Tint, and endorsed by Ted Tint in blank.
3. Bearer, and endorsed by Ken Kent making them payable to Jane Lane.
4. Bearer, and endorsed by Sam Sole in blank.

Answer 22

Bearer, and endorsed by Ken Kent making them payable to Jane Lane.

If the last endorsement on a negotiable instrument is a special endorsement, the instrument is order paper. A special endorsement specifies the person to whom or to whose order it makes the instrument payable.

A Special Endorsement indicates specific person to whom endorsee wishes to negotiate instrument

EXAMPLE: On the back of a check payable to the order of M. Jordan he signs as follows: Pay to L. Smith, (signed) M. Jordan.

• (a)Note that words “pay to the order of” are not required on back as endorsements—instrument need be payable to order or to bearer on front only
• (b)Also, note that if instrument is not payable to order or to bearer on its face, it can not be turned into a negotiable instrument by using these words in an endorsement on the back

Question 23

Balquist sold a negotiable instrument payable to her order to Farley. In transferring the instrument to Farley, she forgot to endorse it. Accordingly

1. Farley qualifies as a holder in due course.
2. Farley has a specifically enforceable right to obtain Balquist’s unqualified endorsement.
3. Farley obtains a better right to payment of the instrument than Balquist had.
4. Once the signature of Balquist is obtained, Farley’s rights as a holder in due course relate back to the time of transfer.

Answer 23

Farley has a specifically enforceable right to obtain Balquist’s unqualified endorsement.

When an order instrument is transferred for value without endorsement, the transferee has a specifically enforceable right to obtain the transferor’s unqualified endorsement.

Negotiation occurs only when the endorsement is given. Thus, Farley’s rights as a holder in due course relate to the time the endorsement is made and do not relate back to the time of transfer.

Question 24

In connection with a check and a promissory note, which of the following is correct?

1. A promissory note may only be made payable to the order of a named payee.
2. A promissory note may only be payable at a stated time in order to meet the requirements for negotiability.
3. A check may be made payable upon the happening of an event uncertain as to the time of occurrence without affecting its negotiability.
4. A check may be made payable to the order of the drawer or to bearer.

Answer 24

A check may be made payable to the order of the drawer or to bearer.

A check may be made payable to the order of the drawer or to bearer, but a check need not be (unlike other negotiable instruments). For example, “Pay to A” on a check creates negotiable order paper. But “Pay to A” on other types of instruments make them notnegotiable.

Question 25

An otherwise negotiable note has the amount payable as three hundred dollars in words. However, the amount stated in figures is $1,300.00. Which of the following is correct?

1. The amount legally due on this note is $300 because the words control over the figures.
2. The amount legally due on this note is $300 because it is the lesser of the two amounts.
3. The amount legally due on this note is $1,300.
4. This note is not negotiable.

Answer 25

The amount legally due on this note is $300 because the words control over the figures.

Since there is an ambiguity on the amount of this negotiable instrument, the words control over the figures.

Interpretation of Ambiguities in Negotiable Instruments

• Contradictory terms

1. Words control over figures
2. Handwritten terms control over typewritten and printed (typeset) terms
3. Typewritten terms control over printed (typeset) terms

Question 26

A client has in its possession the instrument below.

• I, Margaret Dunlop, hereby promise to pay to the order of Caldwell Motors five thousand dollars ($5,000) upon the receipt of the final distribution from the estate of my deceased uncle, Carlton Dunlop. This negotiable instrument is given by me as the down payment on my purchase of a 20Y2 Lincoln Continental to be delivered in 2 weeks.
  
  • (signature)
  • Margaret Dunlop

The instrument is

1. Negotiable.
2. Not negotiable as it is undated.
3. Not negotiable in that it is subject to the 2-week delivery term regarding the purchase of the Lincoln Continental.
4. Not negotiable because it is not payable at a definite time.

Answer 26

Not negotiable because it is not payable at a definite time.

One of the requirements for negotiability is that the instrument be payable on demand or at a definite time. An instrument which by its terms is otherwise payable only upon an act or event, uncertain as to time of occurrence, is not payable at a definite time.

Payable on Demand includes:

1. Payable on sight
2. Payable on presentation
3. No time for payment stated

It is a definite time if payable:

1. On a certain date, or
2. A fixed period after sight, or
3. Within a certain time, or
4. On a certain date subject to acceleration
5. On a certain date subject to an extension of time if

Question 27

Which of the following defenses may be successfully asserted by the maker against a holder in due course?

1. Wrongful filling in of an incomplete instrument by a prior holder.
2. Total failure to perform the contractual undertaking for which the instrument was given.
3. Fraudulent misrepresentations as to the consideration given by a prior holder in exchange for the negotiable instrument.
4. Discharge of the maker of the instrument in bankruptcy proceedings.

Answer 27

Discharge of the maker of the instrument in bankruptcy proceedings.

A holder in due course takes a negotiable instrument subject only to the real defenses of that instrument. The assertion of any personal defense against a holder in due course will be unsuccessful. Since the discharge of the maker of an instrument in bankruptcy proceedings is a real defense, this defense can be successfully asserted against a holder in due course, thereby destroying the holder’s right to collect on the instrument.

REAL Defenses against a HDC:

1. Forgery
2. Bankruptcy
3. Fraud in the execution
   
   1. Occurs when a party is tricked into signing a negotiable instrument believing it to be something else
   2. Remember that fraud in the inducement is a PERSONAL defense.
4. Minority (or infancy)
5. Mental incapacity, illegality, or extreme duress

Question 28

Which of the following provisions contained in an otherwise negotiable instrument will cause it to be nonnegotiable?

1. It is payable in Mexican pesos.
2. It contains an unrestricted acceleration clause.
3. It grants to the holder an option to purchase land.
4. It is limited to payment out of the entire assets of a partnership.

Answer 28

It grants to the holder an option to purchase land.

If an instrument contains a promise to do any act in addition to the payment of money, it is nonnegotiable. An exception to this rule occurs when the additional promise concerns providing security for the instrument. Granting to the holder an option to purchase land is an additional promise that does not concern the providing of security. Consequently, this second promise would destroy the negotiable aspect of the instrument.

Question 29

Under the Negotiable Instruments Article of the UCC, which of the following parties has secondary liability on an instrument?

1. An acceptor of a note.
2. An issuer of a cashier’s check.
3. A drawer of a draft.
4. A maker of a note.

Answer 29

A drawer of a draft.

The requirement is to identify the parties that have secondary liability on an instrument. The drawer of a draft has secondary liability on the draft.

Question 30

Gomer developed a fraudulent system whereby he could obtain checks payable to the order of certain repairmen who serviced various large corporations. Gomer observed the delivery trucks of repairmen who did business with the corporations, and then he submitted bills on the bogus letterhead of the repairmen to the selected large corporations. The return envelope for payment indicated a local post office box. When the checks arrived, Gomer would forge the payees’ signatures and cash the checks. The parties cashing the checks are holders in due course. Who will bear the loss assuming the amount cannot be recovered from Gomer?

1. The defrauded corporations.
2. The drawee banks.
3. Intermediate parties who endorsed the instruments for collection.
4. The ultimate recipients of the proceeds of the checks even though they are holders in due course.

Answer 30

The defrauded corporations.

Normally forgeries of the payee’s signature would be sufficient to relieve the defrauded corporations of any liability on these instruments. However, a drawer who voluntarily transfers payment to an imposter (Gomer) must bear the loss if a holder in due course subsequently tries to collect. The rationale for such a result is the fact that the defrauded corporations were in the best position to keep the defense (forgery) from occurring.

Question 31

Johnson lost a check that he had received for professional services rendered. The instrument on its face was payable to Johnson’s order. He had endorsed it on the back by signing his name and printing “for deposit only” above his name. Assuming the check is found by Alcatraz, a dishonest person who attempts to cash it, which of the following is correct?

1. Any transferee of the instrument must pay or apply any value given by him for the instrument consistent with the endorsement.
2. The endorsement is a blank endorsement and a holder in due course who cashed it for Alcatraz would prevail.
3. The endorsement prevents further transfer or negotiation by anyone.
4. If Alcatraz simply signs his name beneath Johnson’s endorsement, he can convert it into bearer paper and a holder in due course would take free of the restriction.

Answer 31

Any transferee of the instrument must pay or apply any value given by him for the instrument consistent with the endorsement.

The restrictive endorsement “for deposit only” must be followed by the next transferee. If an order instrument is endorsed with a restrictive endorsement, such as “for deposit only,” and signed by the payee, then any transferee of the instrument must pay or apply any value given by them for the instrument consistent with the restrictive endorsement.

Note that conditions in restrictive endorsements do not destroy negotiability even though conditions placed on front of instruments do destroy negotiability because they create conditional promises or orders to pay.

By writing FOR DEPOSIT ONLY on the back of your check you are protecting yourself in the event the check gets lost or stolen because anyone who finds the check will not be able to cash it or deposit it into an account other then your own.

Question 32

Dodger fraudulently induced Tell to issue a check to his order for $900 in payment for some nearly worthless securities. Dodger took the check and artfully raised the amount from $900 to $1,900. He promptly negotiated the check to Bay who took in good faith and for value. Tell, upon learning of the fraud, issued a stop order to its bank. Which of the following is correct?

1. Dodger has a real defense which will prevent any of the parties from collecting anything.
2. The stop order was ineffective against Bay since it was issued after the negotiation to Bay.
3. Bay as a holder in due course will prevail against Tell but only to the extent of $900.
4. Had there been no raising of the amount by Dodger, the bank would be obligated to pay Bay despite the stop order.

Answer 32

Bay as a holder in due course will prevail against Tell but only to the extent of $900.

Bay, as a holder in due course, took the instrument free of all personal defenses but would be unable to defeat real defenses present on the instrument. Fraud in the inducement is a personal defense which would not be good against Bay. However, Dodger materially altered the check which creates a personal defense to the extent of the original tenor of the check ($900) and a real defense to the extent the instrument was altered ($1,000). Consequently, Bay will prevail against Tell to the extent of $900.

Question 33

John Daly received a check which was originally made payable to the order of one of his customers, Al Pine. The following endorsement was written on the back of the check: Al Pine, without recourse, for collection only

The endorsement on this check would be classified as

1. Blank, unqualified, and nonrestrictive.
2. Blank, qualified, and restrictive.
3. Special, unqualified, and restrictive.
4. Special, qualified, and nonrestrictive.

Answer 33

Blank, qualified, and restrictive

The endorsement in question is a blank, qualified, restrictive endorsement.

1. The endorsement is blank because it does not specify the person to whom the instrument is payable.
2. The endorsement is qualified because the words “without recourse” are present, thus disclaiming contract liability if the instrument is dishonored.
3. The endorsement is restrictive because it restricts payment to a specific condition.

Question 34

Ore Corp. sold 10 tons of steel to Bay Corp. with payment to be by Bay’s check. Since the price of steel was fluctuating daily, Ore requested that the amount of Bay’s check be left blank and it would fill in the current market price. Bay complied with Ore’s request. Within 2 days Ore received Bay’s check. Although the market price of 10 tons of steel at the time Ore received Bay’s check was $40,000, Ore filled in the check for $50,000 and negotiated it to Cam Corp. Cam took the check in good faith, without notice of Ore’s act or any other defense, and in payment of an antecedent debt. Bay will

1. Be liable to Cam for $50,000.
2. Be liable to Cam but only for $40,000.
3. Not be liable to Cam since the check was materially altered by Ore.
4. Not be liable to Cam since Cam failed to give value when it acquired the check from Ore.

Answer 34

Be liable to Cam for $50,000

When a check is completed through the negligence of the drawer, the defense created on the instrument is the personal defense of unauthorized completion, not the real defense of material alteration. Since Bay was negligent to send an incomplete check to Ore, the personal defense created was unauthorized completion. Cam, as a holder in due course (HDC) who took the check for executed value and without knowledge of the unauthorized completion, can defeat the personal defense and receive the full $50,000 from Bay.

Question 35

Filmore had a negotiable instrument in its possession which it had received in payment of certain equipment it had sold to Marker Merchandising. The instrument was originally payable to the order of Charles Danforth or bearer. It was endorsed specially by Danforth to Marker which in turn negotiated it to Filmore via a blank endorsement. The instrument in question, along with some cash and other negotiable instruments, was stolen from Filmore on February 1. Which of the following is correct?

1. A holder in due course will prevail against Filmore’s claim to the instrument.
2. Filmore’s signature was necessary in order to further negotiate the instrument.
3. The theft constitutes a common law conversion which prevents anyone from obtaining a better title to the instrument than the owner.
4. Once an instrument is bearer paper it is always bearer paper.

Answer 35

A holder in due course will prevail against Filmore’s claim to the instrument.

An instrument payable to order and endorsed in blank becomes payable to bearer (i.e., bearer paper). Theft of bearer paper constitutes a personal defense and a holder in due course takes free of all personal defenses of any party to the instrument with whom he has not dealt. Therefore, a holder in due course will defeat Filmore’s claim to the instrument. In contrast, theft of order paper would constitute a real defense, which a holder in due course would take subject to. Proper negotiation of order paper requires delivery and endorsement which would necessitate a forgery by the thief.

Question 36

Under the Negotiable Instruments Article of the UCC, which of the following statements is correct regarding a check?

1. A check is a promise to pay money.
2. A check is an order to pay money.
3. A check does not need to be payable on demand.
4. A check does not need to be drawn on a bank.

Answer 36

A check is an order to pay money.

A draft (also called bill of exchange)

1. Has three parties in which one person or entity (drawer) orders another (drawee) to pay a third party (payee) a sum of money

A check

1. Is a special type of draft that is payable on demand (unless postdated) and drawee must be a bank
   
   • Definition of bank includes savings and loan associations, credit unions, and trust companies
2. One writing check is drawer (and customer of drawee bank)

Question 37

A holder in due course (HDC) of a negotiable promissory note will take the note subject to which of the following defenses?

1. Fraud in the inducement.
2. Failure of consideration.
3. Unauthorized signature.
4. Breach of contract.

Answer 37

Unauthorized signature.

Some defenses are assertable against any party including a HDC—these defenses are called real (or universal) defenses

1. Personal Incapacity Of Defendant
2. Forgery
3. Material Alteration
4. Fraud Going To The Execution
5. Illegality Which By Statute Makes Instrument Void

Question 38

Which of the following aspects of an otherwise negotiable promissory note will render it nonnegotiable?

1. The maker is obligated to pay a fixed amount to the payee but may instead deliver to the payee goods of equal value.
2. The maker has the right to prepay the note, subject to a prepayment penalty of 10% of the amount prepaid.
3. The maker is obligated to pay the payee’s costs of collection upon default by the maker.
4. The maker intentionally using a rubber stamp to sign the note.

Answer 38

The maker is obligated to pay a fixed amount to the payee but may instead deliver to the payee goods of equal value.

A negotiable instrument must, among other requirements, contain an unconditional promise or order to pay a fixed amount in money. Since the maker has the option of delivering goods rather than paying money this would render the note nonnegotiable.

Question 39

Train issued a note payable on June 1 to Blake in payment of contracted services that Blake was to perform. Blake endorsed the note “pay to bearer” and delivered it to Reed in satisfaction of a debt owed Reed. On June 3, Reed presented the note for payment to Train. Train refused to pay Reed on the note because Blake had not yet performed the services. Under the Negotiable Instruments Article of the UCC, must Train pay Reed?

1. No, Train does not have to pay Reed until the services are performed.
2. No, Train does not have to pay Reed because the note was issued to Blake.
3. Yes, Train has to pay Reed because the note was converted into bearer paper.
4. Yes, Train has to pay Reed because Reed was a holder in due course.

Answer 39

Yes, Train has to pay Reed because Reed was a holder in due course.

Question 40

Dunbar is the holder and payee of a check. He takes it to the Federal Bank upon which it was drawn and has it certified. Which of the following is correct?

1. Prior to certification of the check, Federal is only secondarily liable on the check.
2. Federal is obligated to certify the check as long as there are adequate funds in the account.
3. After certification of the check, Federal is primarily liable and the drawer is discharged on the check.
4. If Federal refuses to certify the check, the check will be dishonored.

Answer 40

After certification of the check, Federal is primarily liable and the drawer is discharged on the check.

Certification of a check constitutes acceptance; therefore, Federal becomes primarily liable as an acceptor and engages that it will pay the instrument according to its tenor at the time of its acceptance.

Question 41

Watson made out a negotiable promissory note to the order of Kerrigan as payment for a computer that Kerrigan promised to deliver that afternoon. Kerrigan immediately endorsed the note over to his daughter as a gift. Kerrigan’s daughter was unaware that her father failed to deliver the computer until she tried to get payment on the note from Watson. Which of the following is correct?

1. Watson need not pay on the note because he has a personal defense.
2. Watson need not pay on the note because he has a real defense.
3. Watson need not pay on the note because the holder is a close relative of the person who failed to deliver.
4. Kerrigan’s daughter qualifies as a holder in due course because she was unaware of the nondelivery.

Answer 41

Watson need not pay on the note because he has a personal defense.

Kerrigan’s daughter does not qualify as a HDC because she did not give value. Therefore, Watson need not pay on the note because of the personal defense of breach of contract.

Question 42

Jason contracted to sell his business to Farr. Upon execution of the contract by Farr, he delivered a note in lieu of earnest money which recited the nature of the transaction and indicated that it was payable on the date of the closing which was to be determined by the mutual consent of the parties. The note is

1. Nonnegotiable because no consideration is given.
2. Nonnegotiable because of the recitation of the transaction which gave rise to it.
3. Nonnegotiable since it is not payable at a definite time.
4. Negotiable.

Answer 42

Nonnegotiable since it is not payable at a definite time.

One of the requirements for negotiability is that the instrument be payable on demand or at a definite time. An instrument which by its terms is payable only upon an act or event, uncertain as to time of occurrence, is not payable at a definite time. The instrument presented is not payable on demand, and its payment rests upon an event which is uncertain as to time of occurrence; therefore it is not negotiable.

Question 43

Wilbur executed and delivered a check for $80 payable to the order of Muldowney. Muldowney raised the amount to $800, and negotiated it to Lester, who took the check in good faith and for value without notice of the alteration. When Lester presented it for payment to the bank, the bank refused to honor it due to insufficient funds in Wilbur’s account. Lester is seeking to collect the $800 from Wilbur. Which of the following is correct?

1. Lester is a holder in due course, but is only entitled to collect $80 from Wilbur unless Wilbur’s negligence facilitated the alteration.
2. The bank’s dishonor of the instrument was wrongful.
3. Wilbur is liable for $800 since Lester is a holder in due course and the defense is a personal defense.
4. The material alteration of the check by Muldowney released Wilbur from all liability to subsequent parties.

Answer 43

Lester is a holder in due course, but is only entitled to collect $80 from Wilbur unless Wilbur’s negligence facilitated the alteration.

When Muldowney raised the amount to $800, he created the defense of material alteration. This is a personal defense to the extent of the original tenor of the instrument ($80) and a real defense to the extent of the alteration ($720). Therefore Lester, who qualifies as a holder in due course, is entitled to collect $80 from Wilbur. Lester must collect the remaining $720 from Muldowney, the party that materially altered the instrument.

Material alteration of instrument is actually only partially a real defense

Question 44

Ball borrowed $10,000 from Link. Ball, unable to repay the debt on its due date, fraudulently induced Park to purchase a piece of worthless costume jewelry for $10,000. Ball had Park write a check for that amount naming Link as the payee. Ball gave the check to Link in satisfaction of the debt Ball owed Link. Unaware of Ball’s fraud, Link cashed the check. When Park discovered Ball’s fraud, Park demanded that Link repay the $10,000. Under the Negotiable Instruments Article of the UCC, will Link be required to repay Park?

1. No, because Link is a holder in due course of the check.
2. No, because Link is the payee of the check and had no obligation on the check once it is cashed.
3. Yes, because Link is subject to Park’s defense of fraud in the inducement.
4. Yes, because Link, as the payee of the check, takes it subject to all claims.

Answer 44

No, because Link is a holder in due course of the check.

The requirement is to determine whether Link will be required to repay Park. Link is a holder in due course of the check because s/he

1. is a holder of a negotiable instrument,
2. gave value for the check,
3. took the check in good faith unaware of Ball’s fraud, and
4. had no notice the check was overdue, had been dishonored, or that any person had a defense or claim to it.

Question 45

Under the Negotiable Instruments Article of the UCC, a holder in due course in a nonconsumer transaction takes a negotiable instrument free from which of the following defenses that may be asserted by a party with whom the holder in due course had not dealt?

1. Fraud in the execution.
2. Discharge in an insolvency proceeding.
3. Breach of contract.
4. Infancy, to the extent that it is a simple contract defense.

Answer 45

Breach of contract.

The requirement is to identify the defense that may be asserted by a party with whom the holder in due course had not dealt. The holder in due course is subject toall personal defenses of persons with whom the holder in due course directly dealt. This answer is correct because breach of contract is a personal defense that would have to be asserted by a party with whom the holder had dealt.

Question 46

To the extent that a holder of a negotiable promissory note is a holder in due course, the holder takes the note free from which of the following defenses?

1. Nonperformance of a condition precedent.
2. Discharge of the maker in bankruptcy.
3. Minority of the maker where it is a defense to enforcement of a contract.
4. Forgery of the maker’s signature.

Answer 46

Nonperformance of a condition precedent.

A holder in due course takes an instrument free of personal defenses but is subject to real defenses. Nonperformance of a condition precedent is a personal defense.

Question 47

Dilworth, an employee of Excelsior Super Markets, Inc., stole his payroll check from the cashier before it was completed. The check was properly made out to his order but the amount payable had not been filled in because Dilworth’s final time sheet had not yet been received. Dilworth filled in an amount which was $300 in excess of his proper pay and cashed it at the Good Luck Tavern. Good Luck took the check in good faith and without suspecting that the instrument had been improperly completed. Excelsior’s bank paid the instrument in due course. Excelsior is demanding that the bank credit its account for the $300 or that it be paid by Good Luck. Which of the following is correct?

1. Good Luck has no liability for the return of the $300.
2. Excelsior’s bank must credit Excelsior’s account for the $300.
3. A theft defense would be good against all parties including Good Luck.
4. Only in the event that negligence on Excelsior’s part can be shown will Excelsior bear the loss.

Answer 47

Good Luck has no liability for the return of the $300.

Unauthorized completion of an incomplete instrument and lack of delivery are personal defenses. Thus, Good Luck, a _holder in due course, takes the instrument free of these personal defense_s and may enforce it as completed.

Question 48

Which of the following is an example of an endorsement found on the back of a promissory note that is a special qualified endorsement?

1. Pay to Jenny Eaton if she completes the contract dated August 2, (signed) Jan Brake.
2. For deposit only, without recourse, (signed) Jan Brake.
3. Pay to Jenny Eaton without recourse, (signed) Jan Brake.
4. Without recourse, (signed) Jan Brake.

Answer 48

Pay to Jenny Eaton without recourse, (signed) Jan Brake.

The endorsement is special because it indicates the person, Jenny Eaton, to whom the instrument is negotiated. The endorsement is also qualified using the phrase “without recourse.”

Question 49

Which of the following on the face of an otherwise negotiable instrument will affect the instrument’s negotiability?

1. The instrument is postdated.
2. The instrument is payable 6 months after the death of the maker.
3. The instrument contains a promise to provide additional collateral if there is a decrease in value of the existing collateral.
4. The instrument is payable at a definite time subject to an acceleration clause in the event of a default.

Answer 49

The instrument is payable 6 months after the death of the maker.

One of the requirements for negotiability is that the instrument be payable on demand or at a definite time. An instrument which by its terms is payable only upon an act or event, uncertain as to time of occurrence, is not payable at a definite time. The instrument’s negotiability is affected by basing the time of payment on the maker’s death. This is an event which is uncertain as to time of occurrence and causes the instrument to be nonnegotiable.

Question 50

Archer has in his possession a bearer negotiable instrument. He took it by negotiation from Perth who had stolen it from Cox’s office along with cash and other property. The robbery of Cox’s office had received appropriate coverage in the local papers in the area in which both Archer and Cox reside. Archer did not know that Perth had stolen the instrument when he purchased it at a 20% discount. Cox refuses to pay and Archer has commenced legal action asserting that he is a holder in due course. Which of the following statements is correct?

1. Even if all other requisites are satisfied, Archer’s title is defective in that there was no delivery by Cox of the instrument.
2. Archer is a holder in due course and will prevail.
3. Archer is prevented from qualifying as a holder in due course because there had been general notice published in the community about the robbery.
4. The discount in and of itself prevents Archer from qualifying as a holder in due course or at least prevents him from so qualifying as to the 20%.

Answer 50

Archer is a holder in due course and will prevail

Under the circumstances Archer is a holder who took the instrument for value, in good faith, and without notice that any person had an adverse claim against it. Thus Archer is a holder in due course and will prevail.

Holder gives value if s/he:

• Pays or performs agreed consideration
• An executory promise (promise to give value in the future) is not value until performed
• Takes as a satisfaction of a previous existing debt
• Gives another negotiable instrument
• Acquires a security interest in the instrument (e.g., the holder takes possession of the instrument as collateral for another debt)

Question 51

On August 1, Titan wrote a personal check that was drawn on First Plymouth Bank and made payable to Brass. Brass, on August 2, presented the check to First Plymouth Bank for payment, which was refused. Who had primary liability on this check?

1. First Plymouth on August 1 but not on August 2.
2. First Plymouth on August 2 but not on August 1.
3. Titan on August 2 but not August 1.
4. No one on August 1 or August 2.

Answer 51

No one on August 1 or August 2.

First Plymouth Bank does not have primary liability unless it accepts (certifies) the check. This is true because although the drawer, Titan, has ordered First Plymouth Bank to pay this check, the bank is not obligated to the payee, Brass, to follow that order.

Contractual liability - Refers to liability of any party who signs negotiable instrument as a maker, drawer, drawee, or endorser.

• Maker of a note has primary liability which means s/he has absolute liability to pay according to note’s terms until it is paid or until statute of limitations (period to sue) has run
• No party of a draft (or check) initially has primary liability because drawee has only been ordered to pay by drawer
• Drawer has secondary liability on draft—s/he is liable only if drawee fails to pay
• Endorsers of note or draft have secondary liability—holder can hold endorser liable if primary parties obligated to make payment fail to pay and if following conditions met
• Drawers and endorsers may avoid secondary liability by signing without recourse
• Upon certification of check, drawer and all previous endorsers are discharged from liability because bank has accepted check and agreed to pay it

Question 52

Calhoun has in his possession a negotiable instrument which was originally payable to the order of Bannister. It was transferred to Calhoun by a mere delivery by Travis, who took it from Bannister in good faith in satisfaction of an antecedent debt. The back of the instrument read as follows, “Pay to the order of Travis in satisfaction of my prior purchase of a used IBM typewriter, signed Bannister.” Which of the following is correct?

1. Travis’ taking the instrument for an antecedent debt prevents him from qualifying as a holder in due course.
2. Calhoun is a holder in due course.
3. Calhoun has the right to assert Travis’ rights, including his standing as a holder in due course and also has the right to obtain Travis’ signature.
4. Bannister’s endorsement was a special endorsement; thus, Travis’ signature was not required in order to negotiate it.

Answer 52

Calhoun has the right to assert Travis’ rights, including his standing as a holder in due course and also has the right to obtain Travis’ signature.

Transfer of an instrument causes the rights which the transferor had to vest with the transferee. Since Travis is a HDC, Calhoun acquires the rights of a HDC. Unless otherwise agreed, any transfer for value of an instrument not then payable to bearer (i.e., “order paper”) gives the transferee the specifically enforceable right to have the unqualified endorsement of the transferor.

Question 53

A trade acceptance usually

1. Is an order to deliver goods to a named person.
2. Provides that the drawer is also the payee.
3. Is not regarded as commercial paper under the UCC.
4. Must be made payable “to the order of” a named person.

Answer 53

Provides that the drawer is also the payee.

A trade acceptance is a special type of draft in which a seller of goods extends credit to the buyer by drawing a draft on that buyer directing the buyer to pay the seller a sum of money on a specified date. The seller is therefore both the drawer and payee in a trade acceptance.

1. Trade acceptance also requires signature of buyer on face of instrument—called acceptance—buyer is also called acceptor at this point
2. Then seller may negotiate trade acceptance at a discount to another party to receive immediate cash
3. Seller is normally both drawer and payee of a trade acceptance

Question 54

Under the Negotiable Instruments Article of the UCC, which of the following instruments is classified as a promise to pay?

1. A check.
2. A draft.
3. A trade acceptance.
4. A certificate of deposit.

Answer 54

A certificate of deposit.

The requirement is to identify the instrument that is classified as a promise to pay. A certificate of deposit is a promise from a financial institution to pay to the depositor principle plus interest.

Question 55

Which of the following defenses may be successfully asserted by the maker against a holder in due course?

1. Wrongful filling in of an incomplete instrument by a prior holder.
2. Total failure to perform the contractual undertaking for which the instrument was given.
3. Fraudulent misrepresentations as to the consideration given by a prior holder in exchange for the negotiable instrument.
4. Discharge of the maker of the instrument in bankruptcy proceedings.

Answer 55

Discharge of the maker of the instrument in bankruptcy proceedings.

A holder in due course takes a negotiable instrument subject only to the real defenses of that instrument. The assertion of any personal defense against a holder in due course will be unsuccessful. Since the discharge of the maker of an instrument in bankruptcy proceedings is a real defense, this defense can be successfully asserted against a holder in due course, thereby destroying the holder’s right to collect on the instrument.

The following are Real defenses:

1. Forgery
2. Bankruptcy
3. Fraud in the execution
4. Minority
5. Mental incapacity, illegality or extreme duress

Question 56

Harper made out a draft which indicated Brush was the payee. It was drawn on Murdock Bank. The draft was payable 14 days after Brush delivers all the computers listed in a contract between Harper and Brush. Does this payment term on the draft destroy negotiability?

1. Yes, because the draft is not payable at a definite time.
2. Yes, because a draft needs to be payable on demand.
3. No, because Brush controls the time of delivery.
4. No, because the contract can be ignored, making the payment due in 14 days of the date of the draft.

Answer 56

Yes, because the draft is not payable at a definite time.

Because the payment is subject to delivery of the computers, the time for payment is not a definite term, destroying negotiability.

1. On demand includes

• (a)Payable on sight
• (b)Payable on presentation
• (c)No time for payment stated

1. It is a definite time if payable
2. It is not definite if payable on an act or event that is not certain as to time of occurrence

Question 57

Baker sold goods to Abrams for $300, taking Abrams’ negotiable note in payment, with the agreement that Baker would deliver the goods immediately. Baker sold and endorsed the note to Cantrell, an innocent party, for $250 of which $50 was paid in cash and $200 was to be paid in 10 days. Baker did not deliver the goods for which the note had been given before the 10 days expired, and Abrams so informed Cantrell. Cantrell paid the remaining $200 to Baker on the 10th day as agreed. Cantrell sued Abrams for the $300. Which of the following statements is a correct legal solution or proposition?

1. The total failure to deliver any of the goods constitutes a defense which will prevail even against a holder in due course.
2. Cantrell can only recover $60.
3. Cantrell can only recover $250.
4. Cantrell can recover the full $300.

Answer 57

Cantrell can only recover $60.

Payment of $250 for a $300 note would be considered value to become a holder in due course for the face value of the note. Cantrell, however, only paid $50 before he learned of defenses against the note. The value requirement of the holder in due course concept demands the holder give executed value. The promise to pay $200 in 10 days does not constitute executed value. Cantrell, however is entitled to get the benefit of the bargain. Cantrell was only paying $250 for the $300 note. Section 3-302 (d) of the UCC provides in situations where the holder provides partial value that the holder is entitled to the percentage of the value provided, rather than just the actual value provided. Since Cantrell has paid 20%, $50/$250, before he learned of the defenses, then Cantrell is entitled to 20% of the face value of the note: $60.

Question 58

Hoover is a holder in due course of a check which was originally payable to the order of Nelson or bearer and has the following endorsements on its back:

• Nelson (signature)
• Pay to the order of Maxwell
• Duffy (signature)
• Without Recourse
• Maxwell (signature)
• Howard (signature)

Which of the following statements about the check is correct?

1. It was originally order paper.
2. It was order paper in Howard’s hands
3. Maxwell’s signature was not necessary for it to be negotiated.
4. Duffy’s signature was not necessary for the check to be negotiated.

Answer 58

Duffy’s signature was not necessary for the check to be negotiated.

Nelson’s blank endorsement allow the check to remain as bearer paper, which can be negotiated by delivery alone.

Question 59

Which of the following will not constitute value in determining whether a person is a holder in due course?

1. The taking of a negotiable instrument for a future consideration.
2. The taking of a negotiable instrument as security for a loan.
3. The giving of one’s own negotiable instrument in connection with the purchase of another negotiable instrument.
4. The performance of services rendered the payee of a negotiable instrument who endorses it in payment for services.

Answer 59

The taking of a negotiable instrument for a future consideration.

According to Article 3 of the UCC, in order for a holder to achieve holder in due course status, he must give executed value in exchange for the negotiable instrument. Future consideration is not considered to be adequate value in determining whether a person is a holder in due course. The consideration must be performed to qualify as executed value.

Question 60

An instrument complies with the requirements for negotiability contained in the Negotiable Instruments Article of the Uniform Commercial Code. The instrument contains language expressly acknowledging the receipt of $10,000 by the First Bank of Grand Rapids and an agreement to repay principal with interest at 15% 1 year from date. This instrument is

1. Nonnegotiable because of the additional language.
2. A negotiable certificate of deposit.
3. A banker’s draft.
4. A banker’s acceptance.

Answer 60

A negotiable certificate of deposit.

A negotiable certificate of deposit is an instrument that complies with the requirements of a negotiable instrument and contains an acknowledgment of receipt of money by a bank with an agreement to repay it.

Question 61

Blue is a holder of a check which was originally drawn by Rush and made payable to Silk. Silk properly endorsed the check to Field. Field had the check certified by the drawee bank and then endorsed the check to Blue. As a result

1. Field is discharged from liability.
2. Rush alone is discharged from liability.
3. The drawee bank becomes primarily liable and both Silk and Rush are discharged.
4. Rush is secondarily liable.

Answer 61

The drawee bank becomes primarily liable and both Silk and Rush are discharged.

When a holder obtains certification of a check, the drawer and all prior endorsers are discharged from secondary liability and the bank alone becomes primarily liable. Since Field (a holder) had the bank certify the check, Silk (the payee) and Rush (the drawer) are discharged and the bank becomes primarily liable.

Question 62

On April 2, Harris agreed to sell a computer to Cross for $390. At the time of delivery, Cross gave Harris $90 and a written instrument, signed by Cross, in which Cross promised to pay Harris the balance on April 20. The instrument also made a reference to the sale of the computer. Under the UCC Negotiable Instruments Article, the instrument is a

1. Promissory note.
2. Nonnegotiable draft.
3. Trade acceptance.
4. Negotiable time draft.

Answer 62

Promissory note.

A promissory note is a two-party instrument in which the maker promises to pay the payee a specified sum of money. In this situation, Cross is the maker and Harris is the payee. A promissory note may make reference to the underlying transaction such as the sale of the computer without destroying negotiability.

Question 63

Kirk made a check payable to Haskin’s order for a debt she owed on open account. Haskin negotiated the check by blank endorsement to Carlson who deposited it in his checking account. The bank returned the check with the notation that payment was refused due to insufficient funds. Kirk is insolvent. Under the circumstances

1. Kirk has a real defense assertable against all parties including Carlson, a holder in due course.
2. If Kirk files for bankruptcy, Haskin or Carlson could successfully assert that there had been an assignment of whatever funds were in Kirk’s checking account.
3. If there is a proper presentment, and notice is properly given by Carlson to Haskin, Carlson may recover the amount of the check from Haskin.
4. Haskin or Carlson can correctly assert the standing of a secured creditor.

Answer 63

If there is a proper presentment, and notice is properly given by Carlson to Haskin, Carlson may recover the amount of the check from Haskin.

When Haskin negotiated the check with an unqualified endorsement, he extended contractual liability. Under the concept of contractual liability, the endorser guarantees payment of the instrument if the appropriate party for payment dishonors the instrument. Consequently, if there was proper presentment and notice given, Carlson may recover from Haskin when the bank dishonored the check.

Question 64

To be a holder in due course, the holder must fulfill certain requirements. Which of the following does not fulfill the value requirement?

1. The holder exchanges the negotiable instrument for another negotiable instrument.
2. The holder promises in writing to perform specified services within 6 months.
3. The holder gives $980 for a promissory note with a face amount of $1,000.
4. The holder takes possession of the negotiable instrument as collateral of another debt.

Answer 64

The holder promises in writing to perform specified services within 6 months

Even though this would be valid consideration under contract law, this does not meet the value requirement under the law of negotiable instruments until the services are actually completed.

Question 65

Under the Negotiable Instruments Article of the UCC, which of the following instruments meets the negotiability requirement of being payable on demand or at a definite time?

1. A promissory note payable one year after a person’s marriage.
2. A promissory note payable June 30, year 1, whose holder can extend the time of payment until the following June 30 if the holder wishes.
3. A promissory note payable June 30, year 1, whose maturity can be extended by the maker for a reasonable time.
4. An undated promissory note payable one month after date.

Answer 65

A promissory note payable June 30, year 1, whose holder can extend the time of payment until the following June 30 if the holder wishes.

The requirement is to determine under the UCC which of the instruments listed meets the negotiability requirement of being payable on demand or at a definite time. This answer is correct because a promissory note is payable at a definite time if it is payable on a certain date, even when the holder may extend the time of payment.

Question 66

Mask stole one of Bloom’s checks. The check was already signed by Bloom and made payable to Duval. The check was drawn on United Trust Company. Mask forged Duval’s signature on the back of the check and cashed the check at the Corner Check Cashing Company which in turn deposited it with its bank, Town National Bank. Town National proceeded to collect on the check from United. None of the parties mentioned was negligent. Who will bear the loss assuming the amount cannot be recovered from Mask?

1. Bloom.
2. Duval.
3. United Trust Company.
4. Corner Check Cashing Company.

Answer 66

Corner Check Cashing Company.

Corner Check Cashing Company must bear the loss because as a holder obtaining payment, it warrants that it has good title to the instrument. However, it does not have good title because the forgery prevented good title from passing.

Question 67

Curator contracted to sell Train’s painting. Train issued a $10,000 note to Curator that was payable within 10 days after Curator sold Train’s painting. Curator sold the painting on May 1. Train, alleging that the note was not a negotiable instrument, refused to pay the note. Under the Negotiable Instruments Article of the UCC, which of the following statements is correct regarding the status of the note?

1. The note was not a negotiable instrument because it was not payable at a definite time.
2. The note was not negotiable because it was subject to another writing.
3. The note was negotiable because it was for a sum certain.
4. The note was negotiable because it was conditioned on an event that took place.

Answer 67

The note was not a negotiable instrument because it was not payable at a definite time.

The requirement is to identify the statement that is correct regarding the status of the note. This answer is correct because to be a negotiable instrument the note must (1) be written, (2) be signed by the maker or drawer, (3) contain an unconditional promise to pay, (4) state a fixed amount of money, (5) be payable on demand or at a definite time, and (6) be payable to order or to bearer. In this situation, the note was not payable at a definite time.