REG 12 - UCC Article 3 - Negotiable Instruments 2 - HDC/Presentment/Payment/Dishonor Flashcards Preview

REG - CPA Excel > REG 12 - UCC Article 3 - Negotiable Instruments 2 - HDC/Presentment/Payment/Dishonor > Flashcards

Flashcards in REG 12 - UCC Article 3 - Negotiable Instruments 2 - HDC/Presentment/Payment/Dishonor Deck (27):

Under the Negotiable Instruments Article of the UCC, which of the following circumstances would prevent a person from becoming a holder in due course of an instrument?
A. The person was notified that payment was refused.
B. The person was notified that one of the prior endorsers was discharged.
C. The note was collateral for a loan.
D. The note was purchased at a discount.

A. To be a holder in due course the holder must take the instrument without notice that he or she knows or has reason to know that an instrument has been previously dishonored. If you acquire a check that has been marked "insufficient funds," for example, you cannot become an HDC of that check.


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

C. 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.


In a note executed and negotiable, the following signatures are on the back:
(front of note) Pay: Ian Wolf
Ian P Wolf (signed)
Pay: George Vernon
Samuel Thorn (signed)
Pay: Alan Yule
George Vernon (signed)
Alan Yule (signed)
In sequence, beginning with Wolf's receipt of the note, this note is properly characterized as what type of commercial paper?
A. Bearer, bearer, order, order, order.
B. Order, bearer, order, order, bearer.
C. Order, order, bearer, order, bearer.
D. Bearer, order, order, order, bearer.

B. The note received by Wolf is an order instrument and requires Wolf's endorsement to negotiate the instrument. Wolf's endorsement is a blank endorsement and converts the note to a bearer instrument upon delivery to Thorn. Thorn's special endorsement converted the note back to an order instrument, which requires delivery to Vernon and Vernon's endorsement. Vernon made a special endorsement to Yule which upon delivery to Yule continues the note as an order instrument requiring Yule's delivery and endorsement to further negotiate the note. Yule's blank endorsement again converts the note to be a bearer instrument.


Under the Negotiable Instruments Article of the UCC, which of the endorser's liabilities are disclaimed by a "without recourse" endorsement?
A. Contract liability only.
B. Warranty liability only.
C. Both contract and warranty liability.
D. Neither contract nor warranty liability.

A. An endorsement "without recourse" is a qualified endorsement. A qualified endorsement does not contractually guaranty payment (disclaims contact 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.


Under the Negotiable Instruments Article of the UCC, what kind of indorsement is made by the use of the words "Lee Louis"?
A. Blank, nonrestrictive, and unqualified.
B. Blank, nonrestrictive, and qualified.
C. Special, nonrestrictive, and unqualified.
D. Special, nonrestrictive, and qualified.

A. 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.


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?
A. Blank.
B. Special.
C. Qualified.
D. Restrictive.

C. A qualified indorsement is one that limits the warranties that the transferor of the instrument gives. This is the "without recourse" indorsement, an indorsement that eliminates one of the five transferor warranties.


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?
A. No, because Link is a holder in due course of the check.
B. No, because Link is the payee of the check and had no obligation on the check once it is cashed.
C. Yes, because Link is subject to Park's defense of fraud in the inducement.
D. Yes, because Link, as the payee of the check, takes it subject to all claims.

A. This is correct because even a payee can be a holder in due course if the payee meets the requirements: To be a holder in due course of a negotiable instrument and not be subject to personal defenses, the party must be a holder, give value (includes payment for an antecedent debt), take the instrument in good faith, and take the instrument without notice that the instrument is overdue (previously dishonored) or that there is claim or defense against payment. Here Link is a holder, gave value (payment of an antecedent debt), took the check in good faith and without notice the check was overdue or had been previously dishonored or that there was any claim or defense that Park had.


Y/N: Erin Marie is a holder in due course of a time note. Erin Marie gives the note to her son Able Marie as a gift. Later, Able Marie transfers the note two days after its due date to his landlord, John Shelter.

Is John Shelter an HDC?

An instrument that is payable at a definite time in the future or, a time instrument, is overdue if taken one minute after it's due date. Because Able transferred the note after the due date, John cannot be a HDC because the transfer occurred AFTER the due date for the note.


T/F: A postdated check is nonnegotiable.

A postdated check is still negotiable, the only stipulation is a future date that the check can then be cashed out.


T/F: Jonathan is the payee of a $1,000 check. Jonathan needs money immediately and negotiates the check to Chuck. Chuck pays Jonathan $500 in cash, and Chuck promises to pay Jonathan $500 in two weeks when Chuck receives his paycheck. Chuck discovers that the drawer of the check has stopped payment on the check because of Jonathan's breach of contract to provide the drawer computer service. Chuck is a holder in due course for the full $1,000 amount on the check.

Chuck is a HDC for $500, the amount he has paid.


T/F: A check is issued to Erin Marie for $500. Erin Marie, by blank indorsement, negotiates the check to Robin Orange, with Robin Orange paying Erin Marie $200 in cash and giving her as total payment a negotiable promissory note for $250 payable 60 days from the date. Robin Orange is an HDC for $500.



T/F: An income tax refund check made payable to JoAnn and Gaylord Fentz requires the indorsement of both parties to negotiate the check.



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

B. 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.


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

B. The primary party has refused payment and Bart must turn to secondary parties – indorsers.


Horton wrote a check for $50,000 to Wallace who in turn endorsed it to Halbert. When Halbert presented the check to the bank it was dishonored because of insufficient funds. Which of the following statements is correct?
A. Halbert is not entitled to payment because of dishonor.
B. Halbert must present the dishonored check to Horton for payment.
C. Wallace is discharged from liability.
D. Halbert has 30 days to notify Wallace of the dishonor.

D. Non-bank parties have this amount of time to turn to secondary parties after primary party refuses to pay.


T/F: The failure to present a check for payment within 30 days has no effect on the parties' liability if the bank remains solvent.



T/F: For a holder to hold an indorser contractually liable on the indorser's signature on a check, the holder must properly present the check for payment within 30 days of the check's issue.

within 30 days after indorsement to hold the indorser liable.

within 30 days after date to hold drawer liable.


T/F: On May 1, West Bank receives a check through the collection process drawn on it by John, a customer. John's account is overdrawn and West notifies John that it will dishonor the check unless John deposits sufficient funds to clear up the deficit and payment of this check. John promises to do so but after six days has not made any deposit. West Bank now sends the check back with notice of dishonor (nonpayment for insufficient funds). The payee wants to hold West Bank accountable for the check. West Bank claims it has 30 days to give notice of dishonor, has done so, and therefore is not liable. West Bank is correct.

A notice of dishonor must be given within 30 days of dishonor or within 30 days after notice of dishonor is received.

*For Banks, notice of dishonor must be given by midnight of the next banking day or the bank can be held accountable for the instrument.


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?

No, 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.


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
A. Lack of consideration.
B. Infancy.
C. Forgery.
D. Fraud in the execution.

A. 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.


Which of the following parties has (have) primary liability on a negotiable instrument?

I. Drawer of a check.
II. Drawee of a time draft before acceptance.
III. Maker of a promissory note.

III Only. The maker of a promissory note is a primary party – the party to whom we turn first for payment.


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

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.


Under the Negotiable Instruments Article of the UCC, which of the following parties has secondary liability on an instrument?
A. Acceptor of a note.
B. An issuer of a cashier's check.
C. A drawer of a draft.
D. A maker of a note.

C. Parties who sign a negotiable instrument have either primary or secondary liability. Drawers of a draft or check have secondary liability.


Cobb gave Garson a signed check with the amount payable left blank. Garson was to fill in, as the amount, the price of fuel oil Garson was to deliver to Cobb at a later date. Garson estimated the amount at $700, but told Cobb it would be no more than $900. Garson did not deliver the fuel oil, but filled in the amount of $1,000 on the check. Garson then negotiated the check to Josephs in satisfaction of a $500 debt with the $500 balance paid to Garson in cash. Cobb stopped payment and Josephs is seeking to collect $1,000 from Cobb. Cobb's maximum liability to Josephs will be
A. $0
B. $500
C. $900
D. $1,000

D. The moral of this story is, "Do not give blank checks to anyone." Josephs is a holder in due course of this note and therefore may collect the entire amount. A holder in due course is someone who takes a negotiable instrument in good faith, for value (payment of an antecedent debt and cash constitutes value), and without notice of any defenses against it. Josephs may collect the full $1,000, even though Cobb has a personal defense against Garson for unauthorized completion. Personal defenses are not effective against holders in due course.
Only universal defenses are effective against an HDC.


T/F: A drawer is a party on an instrument with primary liability.

Drawers are a secondary party liability.


T/F: Sly cleverly raises a $7 check to $70 in both the numerical and written amounts, and then negotiates the check for value to Jim. Sly has made a material alteration of the check, but Jim can qualify as a holder in due course to the amount of seven ($7) dollars.



T/F: Fraud in inducement (ordinary fraud) is only a personal defense, while fraud in execution is a real defense.


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