Reg Cpaforfree Negotiable Instruments

Front 1

Farmers Bank was the holder of an instrument which was drawn on Billings Trust and payable to Peebles. Peebles endorsed and transferred the instrument to Branch for artwork which Branch represented to be valuable, but which was later appraised for $350 - $400. The original face amount of the instrument was $10,000, but Branch cleverly increased the figure to $110,000 and negotiated it to Farmers Bank. Assuming Branch cannot be found,


A Peebles is secondarily liable to Farmers Bank for the original amount of the instrument.
B Billings Trust will be liable to Farmers Bank, but for not more than $400.
C Peebles was release from any liability on the instrument by virtue of the alteration.
D Branch lacked the authority to negotiate the instrument to Farmers Bank because it was payable to Peebles.

Back 1

The correct answer was A.

Peebles, because he endorsed the instrument, is secondarily liable to Farmers Bank for the original amount of the instrument. Billings Trust will have no liability on the instrument unless it signed agreeing to be bound. Peebles was not release from liability on the instrument by virtue of the alteration, but has no liability for the altered amount. Branch, as a holder, has the ability to negotiate the instrument to Farmers Bank.

Front 2

Which of the following is not an essential element of a check?


A Payable on demand
B Drawee is a bank
C Drawer takes on primary liability
D Payable in money only

Back 2

The correct answer was C.

A check is always drawn on a bank, payable on demand and payable in money only. The drawer (who issues the check) assumes secondary liability. With a typical check, there is no party who is primarily liable. The drawee bank is expected to pay, but takes on no liability (unless it “accepts” the check, which means the bank signs the check).

Front 3

Hi-Glow, Inc., employs approximately 250 individuals in its assembly plant in Stonington. The Stonington plant experiences a high turnover rate. Marshall, the payroll clerk at the plant, took advantage of this by instituting a scheme of issuing paychecks in the names of non-existent employees, then endorsing the checks and depositing them into her personal account at Hunt Bank. The checks were drawn in the ordinary course of business on Hi-Glow’s account at Shure Bank and ultimately Shure Bank honored the checks when presented by Hunt Bank. If, after discovering the scheme, Marshall cannot be found


A Marshall’s account at Hunt Bank will be closed.
B Hunt Bank must bear the loss.
C Hi-Glow, Inc., must bear the loss.
D Shure Bank must bear the loss .

Back 3

The correct answer was C.

The endorsement of a fictitious payee is effective to negotiate an instrument notwithstanding the general rule that no party can become a holder unless the instrument is properly endorsed. This is the fictitious payee rule which operates in schemes such as this where the party in the best position to detect the fraud -- HiGlow, Inc., -- should bear the loss.

Front 4

An incomplete instrument means a signed writing, whether or not issued by the signer, the contents of which show at the time of signing that it is incomplete but that the signer intended it to be completed by the addition of words or numbers. Which is true with regard to incomplete instruments


A The instrument may be enforced according to its terms if it is not completed.
B The instrument cannot qualify as a negotiable instrument.
C Even though words or numbers are added to an incomplete instrument without authority of the signer, this would not be deemed an alteration of the instrument.
D The burden of establishing that words or numbers were added to an incomplete instrument without authority of the signer is on the holder.

Back 4

The correct answer was A.

An incomplete instrument may be enforced according to the terms which are completed, and can qualify as a negotiable instrument. If words or numbers are added to an incomplete instrument without authority of the signer, this would be deemed an alteration of the instrument. The burden of establishing that words or numbers were added to an incomplete instrument without authority of the signer is on the person asserting lack of authority.

Front 5

Under the provisions of the Uniform Commercial Code article on negotiable instruments, which of the following statements is NOT correct?


A The issuer refers to the drawee on an instrument.
B Cashier's check means a draft with respect to which the drawer and drawee are the same bank or branches of the same bank.
C Traveler's check means an instrument that is drawn on or payable at or through a bank, payable on demand, and requires, as a condition to payment, a countersignature by a person whose specimen signature appears on the instrument.
D A certificate of deposit is, in effect, a promissory note of a bank.

Back 5

The correct answer was A.

The term "issuer" means the maker or drawer of an instrument. All the other statements are correct.

Front 6

Chase is holder in due course of an instrument drawn on Quinn and originally payable to Marx on demand. Marx made demand on Quinn for payment, which was wrongfully refused. Marx then negotiated the instrument, for value, to Chase. Which is correct?


A Chase is secondarily liable on the instrument.
B Chase can assert the rights of a holder in due course even though he was aware of Quinn's refusal to pay.
C Quinn, when he signed the instrument, assumed secondarily liability.
D The drawer of the instrument is primarily liable.

Back 6

The correct answer was B.

Chase would not qualify as a holder in due course if he knew, prior to acquiring the instrument, that it had been dishonored. Nevertheless, Chase may assert Marx's right as a holder in due course. Chase would be referred to as a "holder though a holder in due course." Chase, since he has not signed nor transferred the instrument would have no liability thereon. Quinn, the drawee, would have signed as acceptor, making Quinn primarily liable. The drawer would be secondarily liable.

Front 7

Len Bryant is in possession of an instrument which Will Lorton negotiated to him by a blank, nonrestrictive, qualified endorsement. Which of the following represents such an endorsement?


A Pay Len Bryant only /S/ Will Lorton.
B Pay to the order of Len Bryant or bearer /S/ Will Lorton.
C Without Recourse /S/ Will Lorton.
D Pay Len Bryant /S/ Will Lorton (without recourse).

Back 7

The correct answer was C.

An endorsement which is blank does not name the person to whom the instrument was negotiated. Nonrestrictive means that the endorsement does not include words such as "for deposit only." The term "qualified" means that the endorsement includes words eliminating contractual liability ("without recourse").

Front 8

An endorser of a nonnegotiable draft makes all of the following assurances EXCEPT:


A he will pay the draft if it is dishonored.
B the instrument will be paid on demand.
C all signatures prior to his are genuine.
D the instrument has not been materially altered.

Back 8

The correct answer was B.

An endorser takes on secondary liability which means that if the instrument is dishonored when presented for payment, he will pay it. An endorser also make certain warranties (transferor's warranties) including that the signatures which appear on the instrument are genuine and authorized, and that the instrument has not been materially altered. The foregoing promise and warranties are given regardless whether the instrument is negotiable. An endorser does not promise to pay the instrument on demand since the instrument may be a time instrument (payable at a later date) and not a demand instrument.

Front 9

Under the Uniform Commercial Code article on negotiable instruments, which of the following parties is primarily liable on an instrument?


A Acceptor
B Drawer
C Drawee
D Endorser

Back 9

The correct answer was A.

There are two types of contractual liability that a signer of an instrument can undertake: primary liability or secondary liability. Makers and acceptors take on primary liability. Drawers and endorsers take on secondary liability. Drawees take on no liability on the instrument unless they sign (typically in the capacity of "acceptor"). A drawee bank, however, does have contractual and statutory duties to its customers.

Front 10

Dance was the purported maker of a promissory note payable to Gordon. Gordon negotiated the note, for value, to Farr. Farr endorsed the note to Hayes, including the words "without recourse" above his signature.


A Hayes is primarily liable on the promissory note.
B Farr has no liability with respect to the promissory note.
C Dance, if he actually signed the note, is secondarily liable.
D If Dance's signature is fraudulent, Farr will be liable to Hayes.

Back 10

The correct answer was D.

If Dance actually signed the note (as maker) he would be primarily liable. If Dance did not sign, Farr would have warranty liability. Farr warranted that all material signatures were genuine even though he canceled his secondary liability on the instrument.

Front 11

Welk is in possession of a promissory note issued by Fong and originally payable to Rush. Rush endorsed the promissory note in blank and conveyed it to Gates in exchange for forgiveness of a past obligation. Gates in turn delivered the promissory note to Welk without receiving any consideration. If Fong defaults on his obligation to make payment under the promissory note


A Rush is primarily liable on the promissory note.
B Fong is secondarily liable on the promissory note.
C Gates will be secondarily liable even if he did not endorse the instrument.
D Welk can enforce the note against the maker, Fong.

Back 11

The correct answer was D.

Fong issued the promissory note which means he is the maker of the note and is therefore primarily liable thereon. When Rush endorsed the note he assumed secondary liability (i.e., if Fong failed or refused to pay, Rush must pay). Gates would only have secondary liability if he endorsed the note.

Front 12

Fallon is in possession of an instrument which was originally payable to bearer but was thereafter negotiated to Pollard by endorsement which read "Pay Pollard Only." Thereafter, Pollard endorsed the instrument in blank and transferred it, for value, to Deal, who struck out the previous endorsement and signed the back of the instrument, "Pay Any Holder, /s/ Daniel J. Deal." The instrument


A could no longer be considered negotiable after Fallon's endorsement.
B is now bearer paper.
C can only be cashed by Pollard.
D is a draft.

Back 12

The correct answer was B.

Even though the instrument was at one time endorsed "Pay Pollard Only," this does not prevent it from being negotiated further (with Pollard,s endorsement) nor does it prevent Pollard or a subsequent holder from converting the instrument to bearer paper. There is not enough information to determine whether the instrument is a draft.

Front 13

Under the Uniform Commercial Code article on negotiable instruments, which of the following statements is INCORRECT?


A An instrument may be antedated.
B The date stated on an instrument determines the time of payment if the instrument is payable at a fixed period after date.
C If an instrument is undated, its date is the date of its issue.
D An instrument may NOT be postdated.

Back 13

The correct answer was D.

An instrument may be antedated or postdated. The date stated determines the time of payment if the instrument is payable at a fixed period after date. If an instrument is undated, its date is the date of its issue or, in the case of an unissued instrument, the date it first comes into possession of a holder.

Front 14

Dillon is the holder in due course of a promissory note issued by Kyle. Which of the following would NOT have a real defense to the note?


A Stephens, an endorser of the note who filed bankruptcy 30 days after endorsing.
B Lynch, a co-maker of the note who was 17 years old when she co-signed.
C Kyle, who filed bankruptcy 31 days before issuing the note.
D Paulson, who endorsed the note under threat of physical duress.

Back 14

The correct answer was C.

A holder in due course takes an instrument free and clear of any underlying defenses (i.e., defenses which arise from the transaction which produced the instrument). A holder in due course is, however, subject to "real" defenses, such as duress, bankruptcy and infancy. If the signer (endorser, maker, etc.) of an instrument filed bankruptcy before signing, however, that prior bankruptcy is not a defense.

Front 15

Jeter was in possession of a promissory note which was issued by Banks. The promissory note arose from the sale of a rare coin by Stokes to Banks. Stokes, the payee, endorsed the note specially to Jeter. Which is correct?


A Jeter may not further negotiate the promissory note.
B Jeter may negotiate the note by mere delivery.
C If Stokes regains possession of the note he will NOT qualify as a holder in due course.
D Stokes, by his special endorsement, has eliminated his secondary liability.

Back 15

The correct answer was C.

Since Stokes, the payee, was a party to the contract underlying the note (the sale of the coin to Banks), he would have knowledge of defenses to payment of the obligation. One cannot be a holder in due course, nor obtain the rights of a holder in due course if s/he, as a previous holder, was aware of underlying defenses. Stokes's special endorsement simply made the note run to Banks (order paper), so that Stokes may negotiate the note further, but must first endorse it.

Front 16

Andrews issued a check in the amount of $1,500 to Ling in payment for a ring which was worth less than $100. When Andrews learned that he had been tricked into paying too much for the ring he stopped payment on the check with this bank, Kensington National. Which is correct?


A If the stop payment order was by telephone, it was ineffective.
B In spite of a valid stop payment order, Kensington National would not be liable for honoring the check if the check was cashed by a holder in due course.
C In spite of the stop payment order, Andrews would be primarily liable to any holder in due course of the check.
D Assuming the stop payment was valid, Brant, a holder in due course of the check, can demand payment form Kensington National.

Back 16

The correct answer was B.

An oral stop order would be valid for 14 days; a written stop order is valid for six months. Thereafter, the check would be stale and should not be honored. A holder in due course would have no right to demand payment from Kensington National since Kensington is merely a drawee and is only obligated to its customer, Andrews. Andrews, as drawee, is secondarily liable (not primarily liable) on the check. And if the check passes through a holder in due course, Kensington Bank succeeds to those rights and could cash the check, without liability to Andrews, in spite of the stop order.

Front 17

Under the Uniform Commercial Code article on Bank Deposits and Collections, which of the following statements regarding stop payment orders is INCORRECT?


A The burden of establishing a loss resulting from payment of an item contrary to a stop payment order is on the bank.
B An oral stop payment order lapses after 14 calendar days.
C There is no right to stop payment once a bank has certified a check.
D A stop payment order which has been confirmed in writing may be renewed every six months.

Back 17

The correct answer was A.

The burden of establishing a loss resulting from payment of an item contrary to a stop payment order is on the customer. An oral stop payment order lapses after 14 calendar days, but written confirmation extends the order for six months. A stop payment order which has been confirmed in writing may then be renewed every six months. There is no right to stop payment once a bank has certified a check.

Front 18

Hamilton Supply, Inc., a commercial distributor of plumbing supplies, purchased its inventory from various manufacturers, including Bell, Inc. Bell delivered to Hamilton Supply, Inc., a draft in the amount of $125,000 drawn on Hamilton and payable to Merchants Bank. The draft was for past and future deliveries from Bell to Hamilton. Hamilton accepted the draft and forwarded it, as instructed, to Merchants Bank. Merchants Bank negotiated it for value to Trident Bank. On the due date, Trident Bank presented the draft to Hamilton Supply, Inc., for payment. Hamilton


A may assert defenses from the underlying contract since Trident bank cannot assert the rights of a holder in due course.
B is secondarily liable on the instrument.
C has no liability on the instrument since it is merely a drawee.
D must pay the amount demanded.

Back 18

The correct answer was D.

Hamilton Supply, Inc., is both drawee and acceptor of a trade acceptance (a form of draft used in connection with the sale of goods). As acceptor, Hamilton is primarily liable on the instrument and, since Trident Bank is a holder in due course, Trident takes the instrument free and clear of any underlying defenses.

Front 19

Heath, treasurer of Grand Chocolate Factory Corporation, prepared the company's payroll checks a day early so employees could be paid when Heath was scheduled to be on vacation. Hours after Heath left for vacation, Booth, a cleaning person, removed from Heath's locked drawer a check which was payable to Gill Franco. Booth deposited the check into his personal checking account at Republic Bank by signing Gil Franco's name as endorser. The check was drawn on Grace Bank. Heath did not discover the theft until he returned from his vacation three weeks later. Assuming Booth does not have the ability to repay the funds, and that Heath has complained about the loss to Grace Bank, who will bear the loss?


A Grand Chocolate Factory Corporation because it was negligent.
B Grand Chocolate Factory Corporation because it was defrauded by Booth.
C Grace Bank.
D Republic Bank.

Back 19

The correct answer was D.

Grand Chocolate Factory Corporation has a deposit relationship with Grace Bank whereby it has agreed to honor checks drawn by Grand and presented by a "holder." Booth was not a holder since the check in question did not "run to" Booth. (It was neither payable to Booth, nor properly endorsed by Gill Franco.) Grace Bank is therefore contractually obligated to credit Grand Chocolate Factory Corporation's payroll account for the amount of the check. Grace Bank will in turn look for recovery from the bank which transferred the check to it. The transferring bank has made a transferor's warranty that all necessary signatures were genuine. In this case, the signature of Gil Franco was not genuine. Ultimately, each transferring bank will rely upon the same breach of warranty until reaching Republic Bank, the first transferor who breached its warranty.

Front 20

A holder of a negotiable document of title acquires all of the following except:


A title to the document.
B title to the goods.
C right to demand cash in lieu of the goods.
D issuer's obligation to deliver the goods according to the terms of the document.

Back 20

The correct answer was C.

The rights acquired by due negotiation include: (1) title to the document; (2) title to the goods; (3) the direct obligation of the issuer to hold or deliver the goods according to the terms of the document free of any defense or claim by the issuer.

Front 21

Sharp issued a negotiable instrument, payable to Clarke, in payment for goods purchased from Clarke. Clarke negotiated the instrument for value to Bean who took it in good faith. When Bean demanded payment from Sharp, Sharp refused stating that the goods were severely damaged when received by and that Clarke was notified of this. Which statement is correct?


A Clarke will have no liability to Bean if he negotiated the instrument "without recourse."
B Sharp will be liable on the instrument only if it is bearer paper.
C Sharp will be liable on the instrument even if he immediately rejected shipment of the goods.
D Clarke would have liability on the instrument only if he endorsed it.

Back 21

The correct answer was C.

As issuer, Sharpe will have secondary or primary contractual liability to Bean, and his personal defense (breach of the underlying contract) would be ineffective against Bean, a holder in due course. Clarke, when he negotiated the instrument to Bean, automatically made certain warranties regarding the instrument, even if he did not sign it. If Clarke signed (endorsed) the instrument he also took on secondary contractual liability. One of the warranties which the transferor of an instrument makes is that he has no knowledge of any defenses. Clarke is in breach of this warranty (which is independent of any secondary liability which Clarke may have by virtue of signing).

Front 22

Lacy contracted to purchase 10 refrigeration trailers from Klopf. Lacy paid for the trailers with a negotiable instrument. Klopf negotiated the instrument to Joynes with an unqualified endorsement. If Joynes qualifies as a holder in due course of the instrument, which is correct?


A Lacy may nevertheless raise a defense that the instrument was altered.
B After the transfer, Klopf no longer has liability on the instrument.
C A breach of contract by Klopf with respect to delivery of the trailers will release Klopf’s from his obligation to make full payment on the instrument.
D If the instrument is a check, Joynes can demand payment from Joynes even if Lacy has put a stop payment on the check.

Back 22

The correct answer was A.

If Joynes qualifies as a holder in due course of a negotiable instrument he takes free and clear of underlying defenses, but has no greater right to demand payment in the face of a stop payment order. If one signs an instrument with an "unqualified endorsement," such an endorser remains secondarily liable. This means that if the issuer fails to pay, the endorser can be called upon to pay. Finally, the issuer of an instrument is liable for the original amount of the instrument. This liability cannot be changed by later alteration, even if the instrument is in the hands of a holder in due course.

Front 23

Bean contracted with Eck to purchase a certain quantity of jet fuel, the price of which would be set at the market rate as of the date delivery of the fuel was to begin, which was approximately one month later. To complete the transaction, Bean issued a negotiable draft in favor of Eck with the amount left blank, and with a notation on the face of the draft that it was issued in connection with the sale of jet fuel. Eck later filled in the draft for an amount which exceeded the agreed price. A future holder of the instrument


A can demand full payment from Bean if the instrument was acquired in good faith and for value.
B could NOT qualify as a holder in due course if he learned, before acuiring the instrument, that Eck had filled in the amount.
C could NOT qualify as a holder in due course of the instrument because the memo makes the instument nonnegotiable.
D could only look to Eck for payment.

Back 23

The correct answer was A.

If a negotiable instrument is filled in with an unauthorized amount, a subsequent holder in due course (one who acquires the instrument in good faith, for value) takes the instrument free and clear of this defense, and therefore may demand full payment from the issuer and any endorsers. A memo which merely states the nature of the underlying transaction does not destroy the negotiability of the instrument. Likewise, merely learning the the instrument had been completed by a party other than the issuer is not notice that it was filled in in an unauthorized manner.

Front 24

Blaine is in possession of a negotiable instrument which was originally payable to Frances who endorsed it specially to Timms. Timms endorsed the instrument in blank and negotiated it to Blaine in satisfaction of a past due obligation. Which of the following statements is correct?


A Once the instrument was converted to order paper it could NOT be reconverted to bearer paper.
B Blaine is a holder in due course even though he took the instrument for past due consideration.
C The instrument was only negotiable if it was a draft.
D If the instrument had been lost by Timms prior to his endorsing it, the finder would have the rights of a holder, but not the rights of a holder in due course.

Back 24

The correct answer was B.

The instrument in question, which could either be a promissory note or a draft, was issued to Frances and was then negotiated by Frances to Timms by a special endorsement. (That is, Frances wrote on the back of the instrument, "Pay Timms only" when transferring it to Timms.) This special endorsement caused the instrument to become order paper. But the law says that Timms may later make the instrument bearer paper by endorsing it in blank, which Timms did. In addition, transferring an instrument for past consideration is a valid exchange of consideration. Finally, answer D is incorrect because prior to Timms' blank endorsement, the instrument was "order paper" which meant that it only ran to Timms (that is only Timms could be a holder or holder in due course). Timms later changed this when he endorsed the instrument in blank.