Questions: Negotiable Instruments
Select the best answer to each question. Note that a question and its answers may be split across a page break, so be sure that you have seen the entire question and all the answers before choosing an answer.
1. Brenda wrote a check to Kelli for $50 to be drawn from her account at Beverly Bank. Beverly Bank refused to cash the check. Which of the following correctly states Brenda's liability in this situation?
A. Brenda is secondarily liable if she is given timely notice of the dishonor.
B. Brenda is primarily liable regardless of any notice of dishonor.
C. Brenda is secondarily liable regardless of any notice of dishonor.
D. Brenda is primarily liable if she is given timely notice of the dishonor.
2. Carrie owed Charlotte $20,000. Carrie offered Charlotte a promissory note (a negotiable instrument) worth $20,000 on maturity, which occurred in six months, as payment for the debt. Carrie had actually stolen the promissory note from her friend Samantha. Charlotte probably won't qualify as a holder in due course because
A. Charlotte didn't give value for the instrument.
B. the instrument was stolen from Samantha.
C. Charlotte should have known the instrument was stolen.
D. Charlotte didn't take the instrument in good faith.
3. Zeke writes a check payable to "Peter Jones or Sally Jones." Sally indorses the check, but Peter is out of town. Which of the following statements is true?
A. Sally can deposit the check, but it will be honored only to the extent of half the amount.
B. Sally can deposit the check, and it will be honored.
C. Sally will need to wait until Peter gets back into town and can sign the check before depositing it.
D. The check need not be honored because it's not properly indorsed.
4. Leroy writes a $50 check made payable to "Cash" and gives the check to Laurie. Which of the following best describes what has happened?
A. Transfer by assignment
B. Taking for value
C. Transfer to a holder in due course
D. Transfer by negotiation
5. Jayla and Jamal enter an agreement in which Jamal agrees to pay Jayla $500 over the next three months for a new stereo. Jamal calls Jayla on the phone and promises to pay her the entire $500 no later than 90 days from that date. This agreement fails to constitute a negotiable instrument, because negotiable instruments must
A. be in writing.
B. state a fixed amount of money.
C. state an unconditional promise or order to pay.
D. be payable on demand or at a definite time.
6. Janice gives Chandler a promissory note made out in her favor, signed by Joey for $1,000. When the note comes due, Joey asserts a personal defense to avoid liability on the note. Chandler isn't a holder in due course and thus doesn't benefit from the protections afforded a holder in due course, because Chandler
A. didn't take the note in good faith.
B. should have known a defense existed to the note.
C. didn't take the note for value.
D. should have known the note would be dishonored.
7. Carl writes a check for $500, payable to Fred. Fred indorses it over to Sally in exchange for a television set. Sally deposits the check, only to discover that Carl stopped payment on the check. Which of the following statements is true?
A. Carl must pay $500 to Sally.
B. The bank must pay $500 to Sally.
C. No one is obligated to pay anything to Sally.
D. Fred must pay $500 to Sally.
8. Robbie, in response to an advertisement in a magazine, orders computer equipment by mail from someone named Zeke Jones for $2,500. Under the terms of the order, a bill will be sent for the equipment within 30 days. One day while Robbie is in the office, someone enters and identifies himself as Zeke Jones, shows Robbie a bill and demands payment for the computer equipment. Robbie writes a check to this person for $2,500. Unbeknownst to Robbie, the person is Jake Smith, an impostor. Smith indorses the check "Zeke Jones" and gives it to Sally in exchange for a used car. Sally deposits the check in her account at Big Bank. Then the real Zeke Jones approaches Robbie, demanding payment, and Robbie realizes that he was tricked. Which of the following statements is true?
A. The indorsement by Jake Smith was effective.
B. The indorsement by Jake Smith was ineffective.
C. Robbie won't bear the loss because he was deceived.
D. Sally will bear the loss in this case.
9. Zeke pulls out a knife and tells Bob to write him a check for $500. Bob does so. Zeke takes the check to his bank, properly endorses it, and receives $500 in cash. Bob stops payment on the check. Which of the following statements is true?
A. Bob need not pay the check because it was obtained illegally.
B. Bob must pay the check because the bank is a holder in due course.
C. Bob need not pay the check because the bank is a holder, not a holder in due course.
D. Bob must pay the check because Zeke was a holder in due course.
10. Attorney Smith receives a check from the defendant to settle a case. The check is made payable to Smith. Smith indorses the check, adding the words "without recourse," and gives it to Clara Client. Clara deposits the check but it fails to clear. Which of the following statements is true?
A. Smith will have to pay the check amount to Clara but can sue the defendant for reimbursement.
B. Smith doesn't have to pay the amount of the check to Clara.
C. Clara has no remedy against Smith or the defendant because the check contained the words "without recourse."
D. Smith will have to pay the check amount to Clara.
11. Carl writes a check for $500, payable to the order of Fred. Fred owes Greta $600, so Fred changes the 5 to a 6 and endorses it over it to Greta to pay the debt. Greta deposits the check. Carl's bank, in good faith, honors the check. Then everyone discovers that the check was altered. Which of the following statements is true?
A. Carl's bank may debit $600 from Carl's account, but Carl can sue Fred for $100.
B. Carl's bank may not debit any amount from Carl's account.
C. Carl's bank may debit $600 from Carl's account.
D. Carl's bank may debit only $500 from Carl's account.
12. Carl writes a check to Fred for $500 dated January 2. Fred forgets to deposit the check until August. When the check arrives at Carl's bank for presentment, Carl's bank
A. must not honor the check.
B. must honor the check.
C. may honor the check.
D. may honor the check if it's acting in good faith.
13. Without authority to do so and unbeknownst to Candy, Amos signed Brook's name to a promissory note to pay Candy $3,000 with 6 percent interest in 90 days in exchange for a used car. Candy negotiated the promissory note to David, who was a holder in due course, who presented the note to Brook for payment on the due date. Which of the following statements is true?
A. Candy won't have to pay the note because she was a holder in due course.
B. Candy won't have to pay the note because the original signature was unauthorized.
C. Brook will have to pay the note because David was a holder in due course.
D. Brook won't have to pay the note because the signature was unauthorized.
14. Ella owed Mark $500. Since Ella didn't have the money to pay Mark, she asked Mark if he would accept a negotiable instrument, such as a promissory note, as payment for the debt. Mark indicated he would accept a negotiable instrument as payment. Ella wrote out a promissory note in which she agreed to pay Mark $550 in 60 days if she failed to pay him the $500 in cash within the next 30 days. Ella's promissory note isn't negotiable because negotiable instruments must
A. be payable at a definite time.
B. be payable to order or to bearer.
C. give an unconditional promise or order to pay.
D. state a fixed amount of money.
15. Carl writes a $500 check payable to Bob and Bob endorses the check in blank and gives it to Sally. Sally is now a/an
A. maker.
B. endorser.
C. bearer.
D. drawee.
16. Luke makes a check for $5,000 payable to Greg. Greg writes his name on the back of the check. This is an example of
A. blank indorsement.
B. qualified indorsement.
C. special indorsement.
D. indorsement in full.
17. Tom sold 100 cases of tomato soup to Louie for $1,500. Louie gave Tom a promissory note, which stated "I promise to pay to the order of Tom the sum of $1,500 three months from date, together with 5% interest." Tom negotiated the note, making it payable to Sally, in exchange for Sally's trampoline. Later, Louie discovers that the tomato soup was spoiled and is worthless. When Sally presents the note to Louie for payment, Louie refuses. Which of the following statements is true?
A. Louie doesn't have to pay Sally but would have to pay Tom if Tom presented the note.
B. Louie has to pay Sally because she is a holder in due course.
C. Louie has to pay Sally, but she is a holder.
D. Louie doesn't have to pay Sally because the tomato soup was spoiled.
18. Tom falsely tells Harold that the car Tom is selling has only 30,000 miles on it. In fact, Tom has turned back the odometer and the true mileage is 150,000. Harold purchases the car by giving Tom a check for $3,000. Tom endorses the check to Sally in exchange for a plasma TV. Harold discovers the fraud and stops payment on the check, so it's dishonored when Sally deposits it in her bank account. Sally sues Harold to enforce payment of the check. Which of the following statements is true?
A. Harold has a real defense that can be asserted against Sally.
B. Harold can successfully assert the defense of fraud in the inducement to avoid paying $3,000 to Sally.
C. Harold must pay Sally, but only to the extent of the value of the plasma TV that Tom bought from Sally.
D. Harold can't successfully assert the defense of fraud in the inducement to avoid paying $3,000 to Sally.
19. Carl writes a check for $500, payable to the order of Fred. Fred owes Greta $600, so Fred changes the 5 to a 6 and endorses it over it to Greta to pay the debt. Which of the following statements is true?
A. Greta is a holder in due course because she isn't the one who altered the instrument.
B. Greta is a holder in due course unless she knew Fred altered the instrument.
C. Greta isn't a holder in due course because the instrument has been altered.
D. Greta isn't a holder in due course because she didn't take for value.
20. Rick leaves his checkbook on the table, and Zeke steals a couple of checks. Zeke forges Rick's signature on the checks and cashes them. Rick doesn't examine his bank statements and doesn't notice the forgeries. Rick discovers the forgeries 60 days later, notifies the bank, and demands they reimburse him for the loss. Which of the following statements is true?
A. Rick is entitled to reimbursement because the signatures were forged.
B. Rick isn't entitled to reimbursement because he failed to notify the bank of the forgery within 30 days after receiving his bankstatement.
C. Rick is entitled to reimbursement because he notified the bank promptly after he discovered the forgery.
D. Rick isn't entitled to reimbursement because he could have prevented the forgery by guarding his checkbook more carefully.