NegotiableIns-CPAexcel Flashcards Preview

Regulation > NegotiableIns-CPAexcel > Flashcards

Flashcards in NegotiableIns-CPAexcel Deck (56):
1

Give an example of language that results in bearer paper.

"Pay to cash" or "Pay to the order of cash" or "Pay to Jane Downs or bearer."

2

Give an example of language that results in order paper.

"Pay to the order of Jane Downs."

3

Give an example of language on an instrument that would affect negotiability.

Language that makes the date of payment uncertain (Payable when I pass the CPA Exam).

4

List the requirements of a negotiable instrument.

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




5

Describe the writing requirement of a negotiable instrument.

Must have be on something with a degree of permanence and be readily transferable.

6

Define a "demand instrument."

Those that are payable immediately upon issue, such as "payable at sight" or "payable upon presentation," or those for which no time period is specified.

7

List the parties who draft negotiable instruments.

1. Drawers - for checks or drafts;
2. Makers - for notes and Certificates of Deposits.

8

Define "negotiation."

The transfer of possession of a negotiable instrument to a party who becomes a holder.

9

Define "accommodation party."

A "person" who signs an instrument in any capacity for the purpose of lending his or her name as credit to another party on the instrument.

10

List some examples of nonnegotiable instruments.

1. Letters of Credit;
2. Warehouse Receipts
3. Bill of Lading
4. Stocks and Bonds
5. Contracts

11

List the two types of negotiable instruments.

1. Orders to Pay (checks and drafts);
2. Promises to Pay (notes and CDs).

12

List the parties to a draft or a check.

1. Drawer;
2. Drawee
3. Payee

13

List the parties to a note or certificate of deposit (CD).

1. Maker;
2. Payee

(Note: there is no maker of a check, only notes and CDs; liability of these parties is different so use terms carefully.)

14

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

1. Sight Draft (on demand);
2. Time Draft
3. Trade acceptance

15

Describe the various types of checks that can be used to pay money.

1. Cashier's check (bank is drawer and drawee);
2. Teller's check (draft drawn by one bank on another bank;
3. Traveler's check (draft payable on a bank that requires a counter signature);
4. Certified check (check accepted by a drawee bank; obliges drawee bank to pay)
5. Money order (is a check if drawn on a bank and payable on demand).

16

Define "indorsement."

Signature by payee for purposes of negotiation.

17

Define "bearer of paper."

Instrument made payable in blank, to bearer, or to cash; transferred by delivery only.

18

Define "order payer."

Instrument made payable to individual or entity; transferred by indorsement and delivery.

19

List the criteria for becoming a holder in due course (HDC) of a negotiable instrument.

1. Must be a holder;
2. Must take instrument for value;
3. Must take in good faith; and
4. Must take without notice that the instrument is overdue, has previously been dishonored, or of any claim or defense on the part of any person.


20

When does a time instrument become overdue?

If taken one minute after due date.

21

When does a demand instrument become over-due?

After an unreasonable amount of time has lapsed or on the day after the day a demand for payment is made.

22

When does a check become overdue?

More than 90 days after its date.

23

Describe the shelter rule.

Any holder who cannot qualify as an holder in due course (HDC) but took the instrument through a HDC, has the same rights as if a HDC.

24

How are order instruments negotiated?

By delivery plus indorsement.

25

How are bearer instruments negotiated?

By delivery.

26

What is the legal effect of a blank indorsement?

1. Converts order instrument into bearer instrument;
2. For transfer with consideration warranties are extended to all subsequent holders;
3. Blank indorser has a secondary liability to pay all subsequent holders.

27

Describe the concept of blank indorsements.

Indorsement specifies no particular person to receive payment.

28

What is the legal effect of a special indorsement?

1. Converts bearer into order or continues order instrument;
2. Transfer with consideration extends transfer warranties to all subsequent holders;
3. Indorser has secondary liability to pay all subsequent holders.

29

Describe the concept of special indorsements.

Indorsement specifies a person to whom payment or to whose order payment is to be made.

30

What is the legal effect of a qualified indorsement?

1. Disclaims contract signature liability;
2. Still extends transfer warranties to all subsequent holders.

31

Describe the concept of qualified indorsement.

Usually includes words "without recourse" or similar words.

32

What is the legal effect of a restrictive indorsement ("For Deposit Only")?

1. Does not prohibit further negotiation;

33

List the three kinds of restrictive indorsements that can be used on negotiable instruments.

1. Conditional;
2. Prohibitive;
3. For Deposit or Collection.

34

True or false: If the holder is not a holder in due course for failure to give value, the holder can ship through to another, take back for value, and step up to the holder in due course classification.

This is a true statement. However, the holder cannot ship through and eliminate knowledge of problem on the instrument.

35

Define "value".

Different from consideration.Seller gives value if receives note from buyer who already owes money for goods delivered but has not paid FIFO concept for banks and giving value on deposited checks.

36

Define "holder in due course".

A holder who takes possession of a negotiable instrument for present value, in good faith and without notice of any defense or claims to ownership of the instrument.

37

Define "holder".

A party in possession of an instrument, To be a holder of bearer paper requires delivery. To be a holder of order paper requires delivery and proper indorsement.

38

Define "presentment warranty."

Person who presents instument is authorized to receive payment.

39

List the warranties given by transferors.

1. Transferor is entitled to enforce the instrument;
2. All signatures are genuine or authorized;
3. Instrument has not been altered;
4. Instrument not subject to defenses;
5. Transferor has no knowledge of any insolvency proceeding.


40

When must a notice of dishonor be given?

Must be given within 30 days of dishonor or notice of dishonor; for banks must be given by midnight of the next banking day.

41

Define "dishonor."

Primary party refuses to pay the instrument.

42

Define "presentment."

Negotiable instrument presented for payment. ID can be required.

43

List the two types of holder defenses that may be used against having to pay an instrument.

1. Personal;
2. Real or Universal.

44

List the presentment warranties associated with negotiable instruments.

1. Person presented is authorized to receive payment;
2. The instrument has not been altered;
3. Person has no knowledge instrument is unauthorized.

45

List the transferor warranties associated with negotiable instruments.

1. Transferor is entitled to enforce the instrument;
2. All signatures are genuine or authorized;
3. Instrument has not been altered;
4. Instrument not subject to defenses;
5. Transferor has no knowledge of any insolvency proceeding.

46

Who is liable for an imposter payee?

The drawer has liability.

47

Who is liable for a fictitious payee on a negotiable instrument?

The drawer has liability.

48

When an authorized agent signs on behalf of a principal, who is liable for the instrument?

An authorized agent can bind his principal on an instrument by signing the instrument in such a way as to clearly show that he is signing on behalf of the principal. In such a case, the principal, rather than the agent, will be liable on the instrument.

49

List the two forms of negotiable instrument liability.

1. Contract (signature liability);
2. Warranty liability.

50

List the three personal defenses against liability on negotiable instruments.

1. Breach of contract;
2. Failure of consideration;
3. Fraud in the inducement.

51

Define "fraud in factum".

Fraud in factum occurs when a party is deceived into signing something that he does not know is a contract. Fraud in factum is used interchangeable with fraud in execution.

52

What is the effect of material alteration on an instrument?

Discharges obligation of payment to either holder and holder in due course (HDC). If maker or drawer was sloppy in creating instrument and allowed alteration, obligation of payment according to original terms remains to HDC.

53

Define the "material alteration" of an instrument.

Changing the instrument in a manner that materially affects the nature of the instrument or payment terms.

54

List the real or universal defenses available for not honoring an instrument.

1. Forgery;
2. Fraud in execution or fraud in factum;
3. Minority;
4. Discharge in bankruptcy;
5. Illegality;
6. Mental incapacity;
7. Duress (to the extent conduct is illegal).

55

Who are the secondary parties to an instrument?

1. Payees;
2. Drawers;
3. Indorsers.

56

Who are the primary parties to an instrument?

1. Makers;
2. Drawees.