Test 1

Test 1

Chapter 11Liability of Accountants and Other Professionals

True / False Questions

1. (p. 290) Accountants may not be sued for malpractice because that action is only available in the medical community. FALSE

AACSB standard: 7Blooms Taxonomy: KnowledgeDifficulty: EasyLearning Objective: 1

2. (p. 293) An accountant who commits fraud is liable to those parties he or she reasonably should have foreseen would be injured though a justifiable reliance upon the fraudulent information. TRUE


3. (p. 293) Over the last few years, plaintiffs have been successful in bringing fraud suits against accountants under the Racketeer Influenced and Corrupt Organizations Act. TRUE

AACSB standard: 7Blooms Taxonomy: ComprehensionDifficulty: MediumLearning Objective: 3

4. (p. 293) Whether third parties have a claim against an accountant on the basis of their reliance upon negligently prepared financial statements is the same in all states because it is governed by federal law. FALSE

AACSB standard: 7Blooms Taxonomy: KnowledgeDifficulty: MediumLearning Objective: 2

5. (p. 297) The Reasonably Foreseeable Users Test holds an accountant liable to any third-party who was or should have been foreseen as a possible user of the accountant's work product and did, in fact, use and rely upon that work product for a proper business purpose. TRUE

AACSB standard: 7Blooms Taxonomy: KnowledgeDifficulty: HardLearning Objective: 2

6. (p. 300) After an audit, the accountant is the legal owner of working papers. TRUE


7. (p. 300) When a federal law is at issue, state protection of an accountant/client privilege does not apply. TRUE


8. (p. 301) A plaintiff may only recover under Section Eleven of the Securities Act of 1933 if the plaintiff can establish that the plaintiff purchased securities in an initial public offering. FALSE


Multiple Choice Questions

9. (p. 290) An action against an accountant for failing to properly perform the job for which the accountant was hired is referred to as a _________ action. A. MalfeasanceB. MalpracticeC. ImproprietyD. MisguidanceE. Misjudgment.


10. (p. 290) After a significant amount of responsibility for the bankruptcy of ____________ Corporation was placed on the firms that provided accounting services for the corporation, the role of accountants became a question of significant public interest. A. EnronB. AcronC. SelinasD. ProlificE. Deltoid


11. (p. 290) Which of the following theories are not one of the three primary types of liability assessed against accountants? A. NegligenceB. Breach of contractC. FraudD. Breach of contract and fraudE. Accounting misalignment


12. (p. 290) At a minimum, the duty of care of the accountant entails compliance with ______________. A. Generally acknowledged accounting principlesB. Generally acknowledge auditing standardsC. Generally accepted accounting principlesD. Generally accepting auditing standardsE. Both generally accepted accounting principles and generally accepting auditing standards


13. (p. 290) Which of the following established GAAP? A. The American Institute of Certified Public AccountantsB. The American Institute of AuditorsC. The Financial Accounting Standards BoardD. The American Accounting and Auditing Standards BoardE. The Federal Accounting Standards Board


14. (p. 290) GAAS was established by which of the following? A. The American Institute of Certified Public AccountantsB. The American Institute of AuditorsC. The Financial Accounting Standards BoardD. The American Accounting and Auditing Standards BoardE. The Federal Accounting Standards Board


15. (p. 290) Which of the following is false regarding compliance with GAAP and GAAS? A. Failure to comply with GAAP and GAAS will almost certainly constitute a breach of dutyB. Compliance with GAAP and GAAS does not automatically mean that the duty of care has been metC. In some circumstances, a reasonable, competent accountant would do more than GAAP or GAAS requiresD. At times a state statute may impose additional legal requirements on accountants beyond GAAP and GAASE. Judicial opinions may not impose additional legal requirements on accountants beyond GAAP and GAAS


16. (p. 290) Generally, unless engaged to detect _____________, an accountant is not a fraud detector unless the fraud is uncovered in the course of exercising reasonable care and skill. A. NegligenceB. MisfeasanceC. MalfeasanceD. FraudE. Malpractice


17. (p. 291) Which of the following is false regarding the maintenance of an effective internal control system? A. A company should maintain adequate recordsB. Employees who transfer large amounts of cash should be bondedC. The responsibility of handling assets should be incorporated with the responsibility of recordkeeping for those assetsD. Responsibility for transactions or a series of transactions should be divided among several individuals or departmentsE. Regular reviews by internal auditors, along with external auditors, should be performed


18. (p. 291) When an audit is complete, an accountant usually issues a[n] _______________ opinion letter stating his or her assessment of the company that was audited. A. UnqualifiedB. QualifiedC. UnrestrictedD. RestrictedE. None of the above


19. (p. 292) A financial statement is considered ____________ if no, or insubstantial, accounting procedures were used in the compilation of the document. A. AuditedB. UnauditedC. UnqualifiedD. QualifiedE. Generally accepted


20. (p. 292) The contract entered into with a client when an accountant is hired to perform at task is referred to as a[n] _________________. A. Accounting contractB. Accounting and auditing agreementC. Engagement letterD. Procurement letterE. Performance letter


21. (p. 292) In the instance of substantial performance, an accountant is entitled to which of the following? A. The full amount of the contractually agreed-on fee minus the amount of damages caused by the accountantB. The contractually agreed-on fee without any deductionC. A reasonable hourly rateD. No more than one thousand dollarsE. Nothing


22. (p. 293) Which of the following is fraud without fraudulent intent? A. Actual fraudB. Presumed fraudC. Immaterial fraudD. Constructive fraudE. Reliance fraud


23. (p. 293) When accountants are found liable for fraud, what type of damages may they be assessed in addition to compensatory damages? A. PunishableB. PunitiveC. MaterialD. NominalE. None of the above


24. (p. 293) Which of the following involves accountant liability to third parties based upon privity or near privity? A. The Ultramares RuleB. The Privity RuleC. The Near Privity RuleD. The Restatement RuleE. The Reasonably Reliance Rule


25. (p. 293) Which of the following involved liability of accountants to third parties based upon foreseen users and classes of users. A. The Ultramares RuleB. The Privity RuleC. The Near Privity RuleD. The Restatement RuleE. The Reasonably Reliance Rule


26. (p. 294) In Ultramares v. Touche, justice Cardozi took a _______________ view of which third parties are permissible plaintiffs in actions against accountants. A. BroadB. Middle of roadC. NarrowD. PermissiveE. Liberal


27. (p. 294) Which of the following is true regarding states adhering to the privity or near privity rule for third party liability of accountants? A. All the states utilize itB. All states except one utilize itC. Three-quarters of the states utilize itD. One-half of the states utilize itE. Only a few states utilize it


28. (p. 294-295) In reference to the case of Credit Alliance Corp. v. Arthur Anderson & Co., what did the court rule regarding the effort to hold the defendant liable on a third-party reliance theory? A. The plaintiff was allowed to recover because the Ultramares Rule was appliedB. The plaintiff was not allowed to recover because the Ultramares Rule was appliedC. The plaintiff was allowed to recover because it was a foreseen userD. The plaintiff was allowed to recover because it was in a foreseen class of usersE. The plaintiff was not allowed to recover because the court did not find the necessary link between the plaintiff and the accounting firm

AACSB standard: 3Blooms Taxonomy: AnalysisDifficulty: HardLearning Objective: 2

29. (p. 296) Which of the following is true regarding the number of states that have adopted the Restatement Test of accountant liability for negligence to third-parties? A. None because there is no Restatement TestB. All the statesC. About half the statesD. One-fourth of the statesE. Only a few states


30. (p. 296) Which of the following sets forth the Restatement Test of accountant liability to third-parties? A. There is no Restatement TestB. An accountant is liable to known third-party users of the accountant's work product and also to those in the limited classes whose reliance upon the work was specifically foreseen by the accountantC. An accountant is liable to known third-party users of the accountant's work product onlyD. An accountant is liable to anyone who relied upon the accountant's work regardless of whether that person was specifically foreseen as one who would relyE. An account is liable to a third-party only if privity can be established


31. (p. 296) What is the rational behind the Restatement Test of accountant liability to third-parties? A. There is no such testB. That it is only fair to hold accountants liable if they are in privity with a plaintiffC. That much of what accountants do is prepare work for parties that are not their clients and that, therefore, it makes sense for accountants to owe a duty to intended receiversD. That potential investors should have a route of recovery even if they could not be foreseen by accountantsE. That the general public should have a route of recovery even if they could not be foreseen by the accountant

AACSB standard: 3Blooms Taxonomy: AnalysisDifficulty: MediumLearning Objective: 2

32. (p. 296) Which of the following is viewed as a middle ground test in regards to accounting liability to third-party users? A. The Privity RuleB. The Near Privity RuleC. The Restatement TestD. The Ultramares RuleE. The Reasonably Foreseeable Users Rule


33. (p. 297) Which of the following is true regarding states that have adopted the Reasonably Foreseeable Users Test for accountant liability to third-parties? A. All states have adopted itB. Three-quarters of the states have adopted itC. Half the states have adopted itD. Very few states have adopted itE. None of the states have adopted it


34. (p. 297) Under which of the following tests is an accountant held liable to any third-party that was or should have been foreseen as a possible user of the accountant's work product and that, in fact, did use and rely upon that work product for a proper business purpose? A. The Reasonably Foreseeable Users TestB. The Restatement TestC. The Privity TestD. The Near Privity TestE. None of the above


35. (p. 297) Under which of the followings do courts use reasoning similar to that used for the Reasonably Foreseeable Users Test regarding accountant liability to third-parties? A. Strict product liabilityB. NegligenceC. FraudD. Breach of contractE. None of the above


36. (p. 299) Which of the following is true regarding auditor liability to third parties under the Restatement Rule? A. An auditor retained to conduct an annual audit and to furnish an opinion for no particular purpose generally undertakes no duty to third partiesB. An auditor retained to conduct an annual audit and to furnish an opinion for no particular purpose does undertake a duty to any foreseeable third party usersC. An auditor retained to conduct an annual audit and to furnish an opinion for no particular purpose undertakes a duty only to third parties who are financial institutionsD. An auditor retained to conduct an annual audit and to furnish an opinion for no particular purpose generally undertakes a duty only to directors to the company who provide loans to the companyE. An auditor retained to conduct an annual audit and to furnish an opinion for no particular purpose generally undertakes no duty to third parties except for financial institutions and also directors who provide loans to a company

AACSB standard: 3Blooms Taxonomy: ApplicationDifficulty: HardLearning Objective: 2

37. (p. 300) Which of the following are various documents used and developed during an audit including, notes, calculations and memorandums? A. Calculation documentsB. Working papersC. Auditing copiesD. Accounting memorandaE. Client documentation


38. (p. 300) Which of the following is true regarding the use of accountant working papers in negligence cases involving their work? A. Working papers can be used as evidence in negligence casesB. Working papers cannot be used as evidence in negligence casesC. Working papers can be used as evidence in negligence cases only if a bank is the plaintiffD. Working papers can be used as evidence in negligence cases only if a non-corporate plaintiff is involvedE. Working papers may be used as evidence in negligence cases only if the accountant failed to provide the client with copies of them


39. (p. 300) Which of the following does the Sarbanes-Oxley Act of 2002 require regarding working papers? A. Accountants must maintain working papers for ten yearsB. Accountants must maintain working papers for seven yearsC. Accountants must maintain working papers for five yearsD. Accountants must maintain working papers for one yearE. The act does not require that accountants maintain working papers


40. (p. 300) Which of the following are penalties under the Sarbanes-Oxley Act for the willful violation of the section requiring the retention of working papers? A. There are no penalties because the Sarbanes-Oxley Act does not require the retention of working papersB. Accountants may be fined but not imprisonedC. Accountants may be fined or imprisoned for up to ten years, but not bothD. Accountants may be fined and imprisoned for up to ten years, or bothE. Accountants may be fined and imprisoned up to six months or both


41. (p. 301) Under which of the following are accountants civilly liable for misstatements and omissions of material facts made in registration statements the SEC requires? A. Section Eleven of the Securities Act of 1933B. Section Ten of the Securities Act of 1934C. Section Twelve of the Securities Act of 1934D. Section Thirteen of the Securities Act of 1935E. Section Twelve of the Securities Act of 1933


42. (p. 301) Which of the following is true regarding what a plaintiff who purchased a security cover by registration statement containing false information or missing information must do in order to recover under the Securities Act of 1933? A. A plaintiff must prove reliance on the registration statementB. A plaintiff must prove privity with the accountant at issueC. The plaintiff must establish reliance and privityD. The plaintiff must establish reliance on the financial statement, privity with the accountant, and also that the securities were purchased in an initial public offeringE. The plaintiff does not have to prove reliance on the financial statement nor must the plaintiff prove contractual privity


43. (p. 303) For which of the following does the Securities Exchange Act impose liability? A. For fraudulent statements made to the SECB. For fraudulent statements made to courtsC. For fraudulent statements made to a client in connection with performing an auditD. For negligence in performing an audit or in the construction of a financial statementE. For fraud in performing an audit


44. (p. 307) Which of the following must be shown in order to establish a violation of Section 20(a) of the Securities Exchange Act? A. That there was a primary violation by a controlled personB. That the defendant controlled the primary violatorC. That the defendant in a meaningful way participated in the primary violationD. All the aboveE. Only that there was a primary violation by a controlled person and that the defendant controlled the primary violator


45. (p. 307) Which of the following is true regarding any affirmative defenses available under Section 20(a) of the Securities Exchange Act? A. There are no affirmative defenses availableB. Comparative negligenceC. Contributory negligenceD. When the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the underlying violation or cause of actionE. Comparative negligence, contributory negligence, and also when the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the underlying violation or cause of action


46. (p. 307) Which of the following requires accountants to use adequate procedures so that they can detect illegal acts committed by an audited company? A. The Private Securities Litigation Reform ActB. The Public Securities Auditing Reform ActC. The Public Detection ActD. The Accountant Crime Deterrence ActE. The Fraud and Illegality Deterrence Act


47. (p. 307) Which of the following is false regarding the Private Securities Litigation Reform Act? A. The act sets forth a specific set of actions and guidelines an accountant must follow after identifying a potentially illegal activity when conducting an auditB. Depending on the circumstances, unpon detectoin of potentially illegally activity, an accountant must immediately notify the board of directors and the audit committee, but not the SECC. The act states that accountants are liable for the portion of the damages for which they are resonsibleD. In the event of a willful violation of the act, the SEC can seek an injunction against the accountantE. Under the act an accountant's silence when the accountant thinks he or she might have discovered fraud is enough to constitute aiding and abetting


48. (p. 307-308) Which of the following was created by the Sarbanes-Oxley Act to obtain greater government oversight of public accounting firms? A. The Public Accounting Firms Oversight CommissionB. The Public Company Accounting Oversight BoardC. The Securities Review BoardD. The Auditing Analysis and Review BoardE. The Certified Public Accountant Commission


49. (p. 309) Which of the following may not be held liable in a malpractice action? A. AccountantsB. DoctorsC. Real estate brokersD. ArchitectsE. None, all of the above may be held liable for malpractice


Paul agreed to perform accounting services for Teresa, and they entered into a contract setting forth the terms of their agreement. Teresa wanted Paul to review her financial information and her system of internal controls. Teresa became dissatisfied with Paul's work after he reported some irregularities in her financial statements. Paul, on the other hand, claimed that he had adequately performed his duties and that, at the most, any mistakes that he made were minimal.

50. (p. 292) The contract that Paul and Teresa entered into setting for the scope of Paul's duties is referred to as a ______________. A. Engagement letterB. Accounting contractual letterC. Auditing contractual letterD. GAAP letterE. GAAS letter


51. (p. 292) Assuming that Teresa can establish that Paul failed to meet his contractual obligations, which of the following would be available to her? A. A recovery for the cost of obtaining a different accountant to perform breached contractual dutiesB. Reasonable and foreseeable damages related to the breachC. Damages for fraud which would be presumedD. The cost of obtaining a different accountant to perform breached contractual duties and also any reasonable and foreseeable damages related to the breach, but not damages for fraud unless fraud can be actually provenE. Nothing unless the contact specifically provides for damages in the event of a breach

AACSB standard: 3Blooms Taxonomy: ApplicationDifficulty: MediumLearning Objective: 1

52. (p. 292) If Paul engaged in a ____________ breach, he is not entitled to compensation for work completed. A. SubstantialB. AdequateC. MaterialD. ProhibitedE. Comprehensive


53. (p. 292) If Paul ______________ performed on the contract, he may be entitled to partial compensation. A. CompletelyB. SubstantiallyC. PartiallyD. AdequatelyE. Materially


Selena, a certified public accountant, is hired by Bob to do an audit on his business. He tells her that the audit results will be used by him in an attempt to obtain a $10,000 loan from ABC Bank. Later, however, Bob changes his mind and uses the approved financial statements from Selena to get a loan for $100,000 from XYZ Bank. On the same day that she was hired by Bob, Selena, who specializes in reviewing financial statements for companies seeking loans, was approached by Carl who asked her to review his financial statements so that he could get a loan for $10,000 from an unspecified bank. Selena approved the statements, and he got a loan from ABC Bank. Additionally, Alice requested that Selena review her financial statements so that she could get a loan of $25,000 from a rich uncle. Selena is a bit uneasy about Alice because she believes that Alice is somewhat untrustworthy. Therefore, Selena requires that Alice agree in writing that the report will be transmitted only to the uncle, not to any other potential lenders. Selena approved the financial statements but, in fact, Alice uses the approved statements to get a loan for $25,000 from XYZ Bank. During the time that she had set aside to audit and review the financial statements of Bob, Carl, and Alice, Selena was also preparing for her wedding. She was engaged in choosing menus, dress fittings, and parties. All of this negatively affected her work and she negligently approved all financial statements referenced. Unfortunately, Bob, Carl, and Alice ended up defaulting on the loans. The lenders sued Selena.

54. (p. 299) Under the Restatement Test, which of the following is true regarding whether XYZ Bank can recover claim against Selena based upon the loan to Bob? A. XYZ will not be able to recover because it was not in privity with SelenaB. XYZ Bank will not be able to recover because Selena did not know that Bob planned to get a loan from XYZ BankC. XYZ Bank will not be able to recover from Selena because the transaction went from $10,000 to $100,000, increasing materially the audit riskD. XYZ Bank will be able to recover from Selena because there was privity of contractE. XYZ Bank will be able to recover from Selena only if they have been a client of hers in the past


55. (p. 299) When the Restatement Test is applied, which of the following is true regarding the action against Selena brought by ABC Bank based upon the loss of funds on Carl's loan? A. The bank will be able to recover because there was privity of contractB. The bank will be able to recover because no more than $10,000 was involvedC. The bank will be able to recover because Selena was aware of how her work would be used even if she did not know the exact name of the bank involvedD. The bank will not be able to recover because the identity of the bank was not known to SelenaE. The bank will not be able to recover unless it can establish that it had dealt with Selena in the past


56. (p. 299) When the Restatement test is applied, which of the following is true regarding the effort by XYZ Bank to recover against Selena based upon Alice' default? A. The bank will be able to recover because it was in privity with SelenaB. The bank will be able to recover because it was in privity with Alice, and Alice was in privity with SelenaC. The bank will be able to recover because Selena was aware that her audit would be used to obtain a loanD. The bank will not be able to recover because it cannot establish reliance upon Selena's workE. The bank will not be able to recover because Selena and Alice had specifically agreed that the audit would only be used to obtain a loan from Alice's uncle


Rhonda performed accounting services for Greg's used car business. In auditing Greg's business, she developed various notes, calculations, memorandums and other papers. Candace, Greg's fiancé, approached Rhonda to inquire about Greg's business. Candace and Rhonda had been friends for many years. Rhonda allowed Candace to look at the various notes, calculations and other papers resulting from her review of Greg's financial statements and other records. Candace told Rhonda that she really needed to investigate Greg because they were thinking of getting married, and she believed he had a legal obligation to disclose the information to her because of negotiations involving a prenuptial agreement. Rhonda agreed and proceeded to discuss Greg's finances with Candace revealing all information Greg had disclosed to her. When Greg discovered what Rhonda had done, he was very angry and told her that she was unethical and had violated of the accountant-client privilege.

57. (p. 300) What are the various documents including, notes, calculations and memorandums that Rhonda developed in her review of Greg's financial statements called? A. Working papersB. Consultation papersC. Computation papersD. Analysis papersE. Review papers


58. (p. 300) Was Rhonda correct in allowing Candace access to the documents involving her review of Greg's financial statements? A. No, because the only justification for revealing the documents was Greg's consentB. No, because the only justification for revealing the documents was Greg's consent or court ordered production of the documentsC. Yes, because no rules prohibited disclosureD. Yes, but only because a prenuptial agreement was involvedE. Yes, because if presented with the issue, a judge would have ruled that Candace had a right to the information for purposes of the prenuptial agreement

AACSB standard: 2, 3Blooms Taxonomy: ApplicationDifficulty: MediumLearning Objective: 3

59. (p. 300) Which of the following is accurate regarding Greg's assertion that Rhonda violated the accountant-client privilege? A. Greg was correct since the accountant/client privilege exists in all statesB. Greg was incorrect because there is not an accountant/client privilege in any stateC. Greg was correct because the accountant/client privilege is recognized by federal lawD. Greg was correct because the accountant/client privilege is recognized by statutory lawE. More information is needed in order to know if Greg is correct because the accountant-client privilege is recognized in some states but not all states

AACSB standard: 2, 3Blooms Taxonomy: KnowledgeDifficulty: MediumLearning Objective: 3

60. (p. 300) Assuming that Rhonda discussed with Candace confidential communications that she had with Greg, which of the following is true regarding the ethical nature of that communication? A. Rhonda did not commit an ethical violation in disclosing information to Candace unless there was a state law providing for an accountant/client privilegeB. Regardless of whether a state law existed providing an accountant-client privilege, Rhonda did not commit an ethical violation in disclosing the information to CandaceC. Because a judge would likely have ordered the communication disclosed based upon issues involving the prenuptial agreement, Rhonda did not commit an ethical violation in disclosing information to CandaceD. Rhonda committed an ethical violation but only because Candace was not engaged in a business relationship with GregE. Rhonda committed an ethical violation

AACSB standard: 2, 7Blooms Taxonomy: ComprehensionDifficulty: MediumLearning Objective: 3

Essay Questions

61. (p. 291) What should an effective internal control system incorporate?

An effective internal control system should incorporate the following principles: (1) An internal control system should clearly identify individuals responsible for performing particular tasks; (2) A company should maintain adequate records; (3) Expensive assets should be insured, and employees who transfer large amounts of cash should be bonded, so that an insurance policy would cover losses from theft by those employees; (4) The responsibility of handling assets should be separated from the responsibility of recordkeeping for those assets; (5) Responsibility for transactions or a series of transactions should be divided among several individuals or departments; (6) Technological control should be implemented to reduce the likelihood of mechanical and mathematical errors; (7) Regular reviews by internal auditors, along with external auditors should be performed to increase the likelihood that financial statements accurately present company information.

AACSB standard: 3Blooms Taxonomy: Synthesis and evaluationDifficulty: HardLearning Objective: 3

62. (p. 291) Discuss the defenses available to an accountant charged with negligence.

Defenses to an accountant charged with negligence are as follows:1. The accountant can simply argue that he or she did not fail to meet the professional standards.2. The accountant can argue that regardless of the failure to meet the professional standard of care, the alleged failure was not the cause of the client's loss.3. An accountant may argue the defense of contributory or comparative negligence if that defense is available in the state at issue.


63. (p. 293) When can an accountant be held liable for fraud?

An accountant is liable to his or her client for fraud when the following have occurred: (1) The accountant misrepresented a material fact; (2) The accountant acted with the intent to deceive; (3) The client justifiably relied upon the misrepresentation and; (4) The client suffered an injury by relying upon the fraudulent information.


64. (p. 301-302) Discuss how an accountant can avoid liability under Section Eleven of the Securities Act of 1933.

Accounts can avoid liability as follows:1. Under Section Eleven an accountant is not liable if after reasonable investigation the accountant had reasonable grounds to believe and did believe, at the time the part of the registration statement at issue became effective, that the statements therein were true and that there was no omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading.2. An accountant can prove due diligence by showing evidence the he or she did not act fraudulently or negligently in preparing the registration statements in question.3. An accountant can argue that no misstatements or omissions exist.4. An accountant may acknowledge the existence of misstatements or omissions but contest liability based upon the misstatements not involving material facts.5. An accountant may claim as a defense that the misstatements or omissions had no causal connection to the purchaser's loss or that the purchaser invested in the securities knowing of the misstatement or omission.6. An accountant may argue that the misstatement or omission did not occur as a result of the financial statement created by the accountant.


65. (p. 304-306) John, a certified public accountant, advised Susie in regards to her hobby shop business. Susie incorporated her business, and a number of investors bought stock. To encourage individuals to buy stock, Susie issued a press release about her financial condition. John reviewed it and advised her that the information in the release conformed with GAAP. Susie's business went bankrupt, investors lost money. Investors sued John alleging violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b. Discuss what must be proven in order to establish a violation of Section 10(b) and Rule 10b-5. Also discuss what will be the result if the court follows the case in the test of Great Neck Capital Appreciation Inv. P' Ship, L.L.P. v. Pricewaterhousecoopers, L.L.P. Answer: For a buyer or seller of a security to recover under Section 10(b) and Rule 10b-5, the following elements must be proven:Status as a purchaser or seller, but privity is not required. Scienter Fraudulent act or deception. Reliance on the fraudulent statement. Statement in regard to material fact. Reliance on the statement as the cause of the plaintiff's loss. Under the referenced case, recovery would be denied based upon statements made in the press release because the actions of the accountant were more closely associated with aiding and abetting than actually making misstatements.

Chapter 26

Negotiable Instruments: Negotiability and ...


1. (p. 658) A currency or cash substitution is a relatively new development in the law arising in the 20 th century. FALSE


2. (p. 660) A note is a promise, by the maker of the note, to pay a payee. TRUE


3. (p. 660) A draft is an order by a drawer to a drawee to pay a payee. TRUE


4. (p. 661) If an instrument fails to qualify as a negotiable instrument, that means that the instrument fails to be an enforceable contract. FALSE


5. (p. 663) A negotiable instrument must be a conditional order to pay. FALSE

AACSB standard: 3Blooms Taxonomy: AnalysisDifficulty: EasyLearning Objective: 3

6. (p. 663) The law does not permit an oral negotiable instrument. TRUE


7. (p. 665) An automated signature satisfies the UCC requirement that the signature of the creator appear in order for an instrument to be negotiable. TRUE


8. (p. 666) Wire transfers may be considered written instruments for the purpose of determining negotiability. TRUE


9. (p. 667) Even the mention of another document in an instrument prevents the instrument from being negotiable. FALSE


10. (p. 671) The words "pay to cash" are sufficient words of negotiability. TRUE



11. (p. 673) What was the result in the case opener regarding the gambler who wrote bad checks and tried to avoid payment on the basis of an oral agreement by which the checks were to be exchanged for markers with which to gamble, but he was told he had insufficient casino credits with which to receive markers? A. The potential oral agreement as to the markers was irrelevant to the negotiability of the checksB. The oral agreement was relevant, but it did not affect the gambler's liability on the checksC. The oral agreement was relevant, and acted to excuse the gambler from liability on the checksD. The oral agreement established that the checks were not negotiable instrumentsE. The oral agreement established breach of contract; therefore, while another type of instrument would have been negotiable, the checks involved were not


12. (p. 658) Once a sales contract has been created and executed, and the parties are aware of their respective obligations under the contract, the next phase is the ______ by the buyer to the seller for the goods purchased. A. PaymentB. NegotiationC. AcknowledgementD. ApprovalE. Consideration


13. (p. 658) In which of the following way is payment usually made? A. In cashB. Through credit arrangementsC. With a substitute for cashD. All the aboveE. In cash and through credit arrangements, but not with a substitute for cash


14. (p. 658) Which of the following is a substitute for cash? A. A negated instrumentB. A promised instrumentC. A negotiable instrumentD. A promissory agreementE. A negotiable oral promise


15. (p. 658) Which of the following is a written document containing the signature of the creator that makes an unconditional promise or order to pay a sum certain in money at either a time certain or on demand? A. A negated instrumentB. A promised instrumentC. A negotiable instrumentD. A promissory agreementE. A negotiable agreement


16. (p. 658) Which of the following is an example of a negotiable instrument? A. ChecksB. DraftsC. Promissory notesD. All the aboveE. Checks and drafts, but not promissory notes


17. (p. 658) The ancient ______, or law of merchants, of ______ recognized that agreements could be paid for with documents that promised payment and that these documents themselves could then be circulated as a substitute for money. A. Lex mercatoria, EnglandB. Lax merchant, EnglandC. Lex merchantia, FranceD. Lax merchant, ItalyE. Lexi merchant, France


18. (p. 658) In which of the following did England codify the law of merchants? A. The Bill of Merchants ActB. The Law of Merchants ActC. The Bill of Exchange ActD. The Law of Exchange ActE. The Negotiable Instrument Act


19. (p. 658) Which of the following served as the precursor to Article 3 of the UCC governing negotiable instruments? A. The Uniform Promissory Instruments LawB. The Uniform Negotiable Instruments LawC. The National Promissory ActD. The Federal Negotiability ActE. The National Uniform Negotiable Instruments Act


20. (p. 658) Documents used as payments to facilitate commercial transactions were originally generically called ______. A. Negotiable instrumentsB. Commercial paperC. Promissory paperD. Commerce notesE. Payment notes


21. (p. 658) Documents used as payments to facilitate commercial transactions were labeled as ______ under article 3 of the UCC. A. Commerce paperB. Commercial paperC. Commerce notesD. Negotiable instrumentsE. Payment notes


22. (p. 659) Which of the following is true regarding contracts as commercial paper? A. Contracts may not be commercial paperB. A common law contract is commercial paper, but a UCC Article 2 contract is notC. A UCC Article 2 contract is commercial paper, but a common law contract is notD. Both common law contracts and UCC Article 2 contracts are commercial paperE. Both common law contracts and UCC Article 2 contracts are commercial paper, but neither can be assigned


23. (p. 659) Which of the following types of contractual obligation may not be assigned? A. Personal obligationsB. Non assignable obligationsC. Obligations not to be received within one yearD. All the aboveE. Personal obligations and nonassignable obligations may not be assigned, but obligations not to be received within one year may be assigned


24. (p. 659) Which of the following is false regarding requirements for an instrument to be negotiable? A. The instrument must be a written documentB. The instrument must be signed by the creator of the instrument at the end of the instrumentC. The instrument must have an unconditional promise or order to payD. The amount to be paid in the instrument must be a sum certain in moneyE. All the above are false


25. (p. 660) Which of the following is a promise, by the maker of a note, to pay a payee? A. A noteB. A draftC. A novationD. A checkE. A certificate of deposit


26. (p. 660) Which of the following is an order by a drawer to a drawee to pay a payee? A. A noteB. A draftC. A novationD. A checkE. A certificate of deposit


27. (p. 660) With a[n] ______ instrument, the payee or subsequent holder can demand actual payment at any time. A. TimeB. DemandC. RecourseD. Non recourseE. Immediate


28. (p. 660) With a ______ instrument, payment can be made only at a specific time designated in the future. A. TimeB. DemandC. RecourseD. Non recourseE. Immediate


29. (p. 660) The UCC defines an instrument "payable on demand" as one that ______. A. States that it is payable on demand or at sight, or otherwise indicates that it is payable at the will of the holderB. Does not state any time of paymentC. Is payable within ten days after presentmentD. States that it is payable on demand or at sight or otherwise indicates that it is payable at the will of the holder, or does not state any time of paymentE. States that it is payable on demand or at sight, otherwise indicates that it is payable at the will of the holder; does not state any time of payment; or is payable within ten days after presentment


30. (p. 660) Which of the following is a promise made by a bank to pay a payee a certain amount of money at a future time? A. A noteB. A draftC. A novationD. A checkE. A certificate of deposit


31. (p. 660) A certificate of deposit is a ______ of the bank. A. A noteB. A draftC. A novationD. A checkE. A promissory contract


32. (p. 660) Because ______ have present value, even though they are not payable until some future time, the payee may transfer them or even sell them before the future date of payment. A. Promissory contractsB. Certificates of depositsC. DraftsD. ChecksE. All the above


33. (p. 660) A ______ is a specific draft, drawn by the owner of a checking account, ordering the bank to pay the payee from that drawer's account. A. Promissory contractB. Certificates of depositC. NoteD. CheckE. Time instrument


34. (p. 660) Which of the following is a draft with respect to which the drawer and drawee are the same bank or branches of the same bank? A. Cashier's checkB. Traveler's checkC. Certified checkD. All the aboveE. A cashier's check and a traveler's check, but not a certified check


35. (p. 660) Which of the following is a check accepted by the bank on which it is drawn? A. Cashier's checkB. Traveler's checkC. Certified checkD. All the aboveE. A cashier's check and a traveler's check, but not a certified check


36. (p. 664) What characteristics must a written document have in order to satisfy the requirement that a negotiable instrument be in writing? A. A signature by both partiesB. A signature at the end by the party to be chargedC. Relative permanenceD. MovabilityE. Both relative permanence and movability


37. (p. 665) Which of the following is true regarding the UCC's signature requirement for a negotiable instrument? A. The signature must be the actual name of a person, and an "X" will not suffice even if the party intended that the mark be placed on the instrument and uses that mark to identify himselfB. A signature may be made by means of a device or machineC. A signature may be made manuallyD. The signature of an agent on behalf of the principal binds the principal and satisfies the signature requirementE. All the above


38. (p. 667) Which of the following is false regarding negotiable instruments in the Netherlands? A. An acknowledgment of debt is made when a negotiable instrument is formedB. An example of an acknowledgment of debt is the wisselbrief, or a bill of exchangeC. An example of an acknowledgment of debt is the checkD. A bill of exchange binds the drawee to the payee automaticallyE. A bill of exchange is an instruction by the issuer of the bill to the person responsible for payment to pay a designated amount to a third party

AACSB standard: 7Blooms Taxonomy: KnowledgeDifficulty: HardLearning Objective: 13Learning Objective: 5

39. (p. 667) Which of the following is true regarding the relationship between negotiability and an unconditional promise or order to pay? A. There is no such requirement in order to find negotiabilityB. A promise or order to pay must be specific and not be implied in order for negotiability to be foundC. Simply acknowledging a debt satisfies the negotiability requirement of an unconditional promise to payD. A common IOU is a sufficient to satisfy the negotiability requirement of an unconditional promise to payE. Simply acknowledging a debt satisfies the negotiability requirement of an unconditional promise to pay, and also a common IOU is sufficient to satisfy the negotiability requirement of an unconditional promise to pay


40. (p. 665) Which of the following is true regarding whether an agent's signature may satisfy the requirement of negotiability that the signature of a maker or drawer appear? A. An agent's signature on behalf of his or her principal binds the principal and satisfies the signature requirement for negotiabilityB. An agent's signature on behalf of his or her principal cannot bind the principal and does not satisfy the signature requirement for negotiabilityC. An agent's signature on behalf of his or her principal binds the principal and satisfies the signature requirement for negotiability only if specific authorization from the principal allowing the agent to act on the specific transaction at issue is attached to the documentD. An agent's signature on behalf of his or her principal binds the principal and satisfies the signature requirement for negotiability only if the instrument is for an amount over $1,000E. An agent's signature on behalf of his or her principal binds the principal and satisfies the signature requirement for negotiability only if the instrument is in an amount of $1,000 or less


41. (p. 667) Under the UCC which of the following is sufficient to make a promise or order to pay conditional? A. A statement of an express condition to payment in the order or promiseB. The promise or order is subject to or governed by another writingC. Rights or obligations with respect to the promise or order are stated in another writingD. All the aboveE. A statement of an express condition to payment; or that the promise or order is subject to or governed by another writing; but not that rights or obligations with respect to the promise or order are stated in another writing


42. (p. 667) Which of the following is true regarding the negotiability of an instrument that references the reasons that an instrument is created and the sources of payment? A. Referencing the reason an instrument is created does not affect negotiability, but identifying the source of a payment does destroy negotiabilityB. Identifying the source of a payment does not destroy negotiability, but referencing the reason an instrument is created does destroy negotiabilityC. Both referencing the reason an instrument is created and identifying the source of payment destroy negotiabilityD. Referencing the reason an instrument is created does not destroy negotiability, and identifying the source of payment only destroys negotiability if the instrument is made payable in an amount of over $1,000E. Neither referencing the reasons that an instrument is created nor identifying the sources of payment destroys negotiability


43. (p. 669) Which of the following satisfy the currency requirement for negotiability in this country? A. U.S. dollarsB. U.S. dollars or English poundsC. U.S. dollars, English pounds, or EurosD. U.S. dollars, English pounds, Euros, and Japanese yenE. U.S. dollars, English pounds, Euros, Japanese yen, and gold


44. (p. 671) Which of the following does not satisfy the requirement that to be negotiable an instrument must be payable at a time certain or on demand? A. The instrument states a specific date for paymentB. The instrument is dated and then states that "payment will be made 5 days after the above date."C. An instrument that permits an extension of the payment and also a fixed time for payment, and the maker does not have the right to extend the time of payment indefinitelyD. An instrument that states that "payment will be made 10 days after delivery of the goods."E. An instrument that permits acceleration of payment and has a fixed date of payment if the acceleration clause is not effected


45. (p. 671) When are demand instruments, such as checks, payable? A. As soon as it is issuedB. Twenty-four hours after it is issuedC. Two days after it is issuedD. At midnight the day it is issuedE. One hour after it is issued


46. (p. 667) Which of the following is true regarding an IOU instrument containing the language "payable on demand"? A. The instrument is not negotiable because is does not contain an unconditional promise or order to pay, but it may be an enforceable contractB. The instrument contains an unconditional promise to pay; and, therefore, the fact that it is an IOU instrument does not affect negotiabilityC. The instrument contains an unconditional promise to pay but nevertheless is not negotiable because it is an IOU instrumentD. The instrument is not negotiable because the words "payable on demand" are included; otherwise, the IOU instrument would contain an unconditional promise to payE. The instrument is not negotiable, nor could it be an enforceable contract, because it does not contain an unconditional promise to pay


47. (p. 671) If an instrument is silent as to the time of payment, which of the following is assumed by the UCC? A. That it is a demand instrumentB. That it is a time instrumentC. That it is a void instrumentD. That it is a voidable instrumentE. That it is a nonnegotiable instrument


48. (p. 671) For an instrument to be negotiable, the instrument must indicate that it was created for the purpose of being ______. A. TransferredB. PaidC. MaintainedD. BankedE. Retained


49. (p. 671) When a specific payee is named in an instrument, the instrument is known as a[n] _____ instrument. A. DemandB. OrderC. TransactionalD. BearerE. Payor


50. (p. 671) Negotiable instruments payable to whoever is bearing them are known as ______ instruments. A. DemandB. OrderC. TransactionalD. BearerE. Payor


Molly and Pat signed a contract providing that "Pat will furnish the correct used business law book for use in Molly's business law class; and on August 15, 2008, Molly promises to pay Pat $50 for the book." Molly took the book and planned to pay Pat. Meanwhile, Pat properly assigned the contract Molly had signed to Jack. When Molly went to class, however, she discovered that the book was the incorrect book. When Jack asked Molly for payment, Molly refused. Molly told Jack that the book was useless to her and that she was not paying either him or Pat anything for it. Jack told Molly that he had an enforceable assignment in the form of a negotiable instrument and that he could collect regardless of whether the book was useless. Molly did not believe him; and since she was trying to save money on books, she also agreed to buy Tim's U.S. history book for $40. She had an oral agreement with Tim that he would give her the book and that she would pay him in three days. This time Molly got the right book. Tim, in writing, properly assigned the right to the $40 payment to Richard. Richard asked Molly for the money. Molly admitted her agreement with Tim but told Richard that she was not going to pay him because he did not have a negotiable instrument. Molly also purchased a communications book from Sam promising in writing to give him, to his order, a DVD she had in return the next day.

51. (p. 671) Which of the following is true regarding Jack's claim that he had a negotiable instrument and could collect from Molly? A. Jack is correctB. The agreement is not negotiable because it does not contain words of negotiabilityC. The agreement is not negotiable because the book was the wrong bookD. The agreement is not negotiable because Jack was not a party to the original contractE. The agreement is not negotiable both because it does not contain words of negotiability and also because Molly received the wrong book


52. (p. 663) Which of the following is true regarding Molly's assertion that Richard did not have a negotiable instrument? A. Molly is incorrect, and the document by which Tim assigned the right to Richard is a negotiable instrument in regard to her duty to payB. Molly is correct because her agreement with Tim was not in a writing containing words of negotiabilityC. Molly is correct because Richard was not a party to the original contractD. Molly is incorrect because her admission establishes the existence of a negotiable instrument between her and Tim that could be assigned to RichardE. Molly is correct because she did not immediately transfer funds to Tim and also because her agreement with Tim was not in a writing containing words of negotiability


53. (p. 669) What is the effect of Molly agreeing to give Sam a DVD in return for the book? A. Molly and Sam have an enforceable contract, and Molly has also satisfied the negotiability condition regarding the form of paymentB. Molly and Sam have an enforceable contract, but the agreement fails to satisfy the negotiability requirement that payment be in a sum certain in moneyC. Because payment is not in a sum certain for money, Molly and Sam do not have an enforceable contract nor does the agreement satisfy the negotiability requirement that payment be in a sum certain in moneyD. Because payment is not in a sum certain for money, Molly and Sam do not have an enforceable contract, but the requirement of negotiability regarding the form of payment has been satisfiedE. Unless Sam acknowledges in writing that the fair market value of the DVD is equivalent to the value of the book he provided to Molly, there is no enforceable contract nor is the agreement negotiable


Paula agreed to mow John's yard once a week for $50 per week throughout the summer. Paula, however, was having trouble getting her money from John. On one occasion, he in handwriting gave her in IOU saying "I, John Jones, owe Paula Smith $50." A couple of weeks later, John did not the money to pay Paula what he owed her, and he handwrote the following on a piece of paper and gave it to her: "I, John Jones, promise to pay Paula Smith or to bearer, the sum of $100 on Monday, July 22, 2008." Paula quit mowing John's yard, and disgusted with John, Paula assigned both documents to Vince. When Vince presented the documents to John, John refused to pay on the basis that after inspecting the yard, he decided that Paula was doing a poor job. Vince told him the documents constituted negotiable instruments, but John pointed out that he had not signed the documents with his signature at the end.

54. (p. 663) Which of the following is true regarding the effect on negotiability of John's determination that Paula did a poor job mowing the yard? A. Paula's performance prevents the instruments from being negotiable only if John meets the burden of proof of establishing to the judge by a preponderance of the evidence that Paula did a poor job mowing the yardB. Paula's performance prevents the instruments from being negotiable only if Paula meets the burden of proof of establishing to the judge by a preponderance of the evidence that she did an acceptable job mowing the yardC. Paula's performance prevents the instruments from being negotiable only if John meets the burden of proof of establishing to the judge by a preponderance of the evidence that Paula did a poor job mowing the yard, and if Paula signed a document agreeing that the instrument would lack negotiability unless she properly performedD. Paula's performance prevents the instruments from being negotiable only if Paula meets the burden of proof of establishing to the judge by a preponderance of the evidence that she did an acceptable job mowing the yard and that she did not sign any document agreeing that the instrument would lack negotiability upon John's objectionE. Manner of performance is not one of the listed elements for a finding of negotiability

AACSB standard: 3Blooms Taxonomy: ComprehensionDifficulty: HardLearning Objective: 3

55. (p. 665) What is the effect of the instruments being written by hand? A. Handwriting does not prevent the instruments from being considered negotiable only because neither Paula nor John would be considered merchants in the transactions at issueB. Handwriting does not prevent the instruments from being considered negotiable only because John would not be considered a merchant in the transaction at issue, and Paula's status as a merchant is irrelevantC. Handwriting does not prevent the instrument from being considered negotiable only because Paula would not be considered a merchant in the transaction at issue, and John's status as a merchant is irrelevantD. Handwriting does not prevent the IOU instrument from being negotiable, but it does prevent the other instrument from being negotiableE. The issue of the instruments being handwritten does not prevent either from being considered negotiable


56. (p. 667) Considering only the issue of terminology, not the issue of handwriting or whether Paula properly performed, which of the following is true regarding whether the language "I, John Jones, owe Paula Smith $50" is insufficient to establish elements required for a negotiable instrument? A. The language is sufficient because it acknowledges the debt, and that is the only required standardB. The language is insufficient because it only acknowledges the debt and is not a promise to payC. The language is sufficient only because the instrument is in an amount under $500D. The language is sufficient because it acknowledges the debt and is also a promise to payE. The language is sufficient because it acknowledges the debt and is unconditional


57. (p. 665) Disregarding the issue of whether Paula properly performed, is the statement "I, John Jones, promise to pay Paula Smith or to bearer, the sum of $100 on Monday, July 22, 2008," without a signature anywhere else on the document, sufficient to satisfy negotiability requirements? A. Yes, because it is in handwritingB. Yes, it is sufficient regardless of whether it is in handwriting or not because it contains an unconditional promise to payC. No, because it was not signed at the bottomD. Yes, but only if John later signed another document confirming that he meant the handwritten statement to constitute his signatureE. No, because it was not signed at the bottom or anywhere else on the document


William promised to sell Helen's car for her, but he wanted a commission of 10%. Helen signed an instrument promising to pay William a 10% commission if he sold her car. William assigned the agreement to Phil. Helen's car was sold and the buyer paid Helen. A dispute ensued between Helen and William regarding whether William found the buyer or the buyer found Helen. When Phil asked Helen for payment on the instrument, Helen refused. William, Helen, and Phil settled their dispute without going to court and Helen wrote Phil a check for $3,000. Phil endorsed the check on the back planning to take it to the bank the next day. Unfortunately, Phil lost the check which was found by Helen and cashed by the local bank. Helen then left town.

58. (p. 663) Which of the following is true regarding the instrument signed by Helen promising to pay William a 10% commission if he sold her car? A. The instrument is negotiableB. The instrument is not negotiable because it is based on a conditionC. The instrument is not negotiable because Helen is not a merchantD. The instrument is not negotiable because it is not for a sum certainE. The instrument is not negotiable because it is based on a condition and also because it is not for a sum certain


59. (p. 663) Before Phil endorsed the check it was a ______ instrument; and after he endorsed it, the check was a _____ instrument. A. Order, orderB. Order, transactionalC. Order, bearerD. Transactional, bearer


60. (p. 663) Which of the following is the most likely result if Phil attempts to require that the bank reimburse him for the value of the check cashed by Helen? A. The check was an order instrument, and the bank must take the loss because it should only have provided funds to PhilB. Because the check was an order instrument, the bank was within its rights to pay Helen because she presented the check; and Phil has no rights against the bankC. Because the check was a bearer instrument, the bank must take the loss because it should only have provided the funds to PhilD. Because the check was a bearer instrument, the bank was authorized to pay Helen; and Phil has no rights against the bankE. Regardless of what type of instrument the check was, the bank had no right to cash the check when presented by Helen unless the bank can establish by a preponderance of the evidence that Helen misrepresented herself as an agent of Phil


Essay Questions

61. (p. 860) What is the difference between a demand instrument and a time instrument?

With a demand instrument, the payee (or subsequent holder) can demand actual payment at any time. With a time instrument, payment can be made only at a specific time designated in the future.


62. (p. 660) Set forth the definition of a traveler's check.

A traveler's check is an instrument that (i) is payable on demand, (ii) is drawn on or payable at or through a bank, (iii) is designated by the term "traveler's check" or by a substantially similar term, and (iv) requires, as a condition to payment, a countersignature by a person whose signature appears on the instrument.


63. (p. 663) Set forth the six requirements for an instrument to be negotiable.

The six requirements for an instrument to be negotiable are as follows: (1) The instrument is a written document; (2) It is signed by the creator of the instrument; (3) The instrument has an unconditional promise or order to pay; (4) The amount to be paid is a sum certain in money; (5) Payment is to be made either on demand or at a fixed future time (a time certain); and (6) The document must contain the words of negotiability "to the order of" or, in the alternative, words indicating that it is a bearer instrument.


64. (p. 671) Set forth the two exceptions to the time-certain requirement for negotiability.

First, an instrument that permits acceleration of payment does not violate the time-certain requirement as long as there is a fixed date of payment if the acceleration clause is not effected. Second, an instrument that permits an extension of the payment is still negotiable if there is a fixed time for payment provided that the maker does not have the right to extend the time of payment indefinitely.


65. (p. 663) Anne orally promises Judy that in return for Judy washing Anne's dog, Anne unconditionally promises to pay Judy $50 the next Wednesday. Is a contract formed, is it negotiable, and why or why not?

It appears that a contract is formed because there has been offer, acceptance and consideration. Negotiability is absent, however, because the agreement was not written, not signed, and does not contain words indicating that it is a bearer instrument.


Chapter 27Negotiation, Holder in Due Course and Defenses


1. (p. 685) In Russia a transaction involving a promissory note is a legitimate documentary transaction. TRUE


2. (p. 686) A restricted endorsement may limit the transferability of the instrument. FALSE


3. (p. 686) Once an instrument is negotiable, it remains negotiable. TRUE


4. (p. 689) An endorsement to prohibit further endorsement prohibits further transfer. FALSE


5. (p. 689) A conditional endorsement destroys negotiability. FALSE


6. (p. 691) A payee may not be a holder in due course. FALSE


7. (p. 694) A party cannot be a holder in due course of a non-negotiable instrument. TRUE


8. (p. 695) Receiving an instrument as a gift satisfies the requirement of taking an instrument for value. FALSE


9. (p. 695) A bank has given value for a negotiable instrument to the extent that the bank has a security interest in the instrument. TRUE


10. (p. 702) A time instrument becomes overdue at any date after the expressed due date on the instrument. TRUE


11. (p. 702) An instrument is dishonored when a party refuses to pay the instrument. TRUE



12. (p. 682) Which of the following is a written document signed by the maker or drawer with an unconditional promise or order to pay a certain sum in money on demand or at a specified time to the order of bearer? A. An acknowledged instrumentB. A contract instrumentC. A negotiable instrumentD. A holder instrumentE. A delivered instrument


13. (p. 682) Which of the following is the transfer of possession of a negotiable instrument to a third party who becomes a holder of the negotiable instrument? A. TransferB. NegotiationC. AcknowledgementD. ReferralE. Delivery


14. (p. 682) Which of the following is the party who possesses a negotiable instrument payable to the party or to the bearer of the instrument? A. A holderB. A delivererC. A transferorD. An acknowledgerE. An orderer


15. (p. 682) Which of the following is an instrument payable to a specific, named payee? A. A bearer instrumentB. A delivery instrumentC. An order instrumentD. A transfer instrumentE. An acknowledgement instrument


16. (p. 682) Which of the following is an instrument payable to cash or whoever is in possession of the instrument? A. A bearer instrumentB. A delivery instrumentC. An order instrumentD. A transfer instrumentE. An acknowledgement instrument


17. (p. 682) Which of the following types of paper require only a delivery of the instrument to the holder by the payee? A. A bearer instrumentB. A delivery instrumentC. An order instrumentD. A transfer instrumentE. An acknowledgement instrument


18. (p. 682) Which of the following types of paper require delivery and an endorsement by the holder? A. A bearer instrumentB. A delivery instrumentC. An order instrumentD. A transfer instrumentE. An acknowledgement instrument


19. (p. 685) Which of the following is the term for a person creating an endorsement? A. AllongeB. A transferorC. A transfereeD. An endorserE. An endorsee


20. (p. 685) A ___________ is a person receiving an endorsement. A. AllongeB. A transferorC. A transfereeD. An endorserE. An endorsee


21. (p. 685) If there is no room on an instrument for an endorsement or if all the room has been taken by previous endorsements, a[n] ______ may be attached. A. AcknowledgementB. Blank EndorsementC. Special EndorsementD. AllongeE. None of the above. The instrument can no longer be endorsed


22. (p. 685) Which of the following are types of unqualified endorsements? A. Blank and specialB. Allonge and specialC. Allonge and blankD. Qualified and blankE. Qualified and special


23. (p. 685) Which of the following is the payee's or last endorsee's signature and nothing else? A. A special endorsementB. An allongeC. A blank endorsementD. A qualified endorsementE. A restricted endorsement


24. (p. 685) What is the effect of an unqualified, blank endorsement? A. It turns previous order paper into bearer paperB. It turns previous bearer paper into order paperC. It turns a blank endorsement into a special endorsementD. It turns an allonge into an endorsementE. It turns an endorsement into an allonge


25. (p. 685) A ______ endorsement is the endorser's signature along with a named endorsee. A. BlankB. AllongeC. QualifiedD. SpecialE. Specific


26. (p. 685) The words, "Pay to Alla Smith" followed by the endorser's signature create a ______ endorsement. A. BlankB. AllongeC. QualifiedD. SpecialE. Specific


27. (p. 686) Which of the following is a version of a qualified endorsement? A. Blank qualified endorsementsB. Special qualified endorsementsC. Special endorsementsD. All of the aboveE. Blank qualified endorsements and special qualified endorsements, but not special endorsements


28. (p. 686) Which of the following results in an endorsement being considered qualified? A. A special endorsementB. Restricted endorsementC. Addition of the words, "without recourse"D. Addition of the words, "conditional entrustment"E. Addition of the words, "trust endorsement"


29. (p. 686) Which of the following types of endorsements attempt to either limit the transferability of the instrument or control the manner of payment under the instrument? A. Blank qualifiedB. Special qualifiedC. RestrictiveD. ConditionalE. Trust


30. (p. 687) Which of the following is an example of a restrictive endorsement? A. The endorsement for deposit or collection onlyB. The endorsement to prohibit further endorsementC. The conditional endorsementD. The trust endorsementE. All of the above


31. (p. 689) The statement, "Pay to Constance only," with the endorser's signature is an example of which of the following types of endorsements? A. Conditional endorsementB. Trust endorsementC. Endorsement to prohibit further endorsementD. Bearer endorsementE. Conditional bearer endorsement


32. (p. 689) An endorsement that places a condition on payment is referred to as which of the following types of endorsements? A. Conditional endorsementB. Trust endorsementC. Endorsement to prohibit further endorsementD. Bearer endorsementE. Conditional bearer endorsement


33. (p. 689) Which of the following types of endorsements is used when the instrument is being transferred to an agent or trustee for the benefit of either the endorser or a third party? A. Conditional endorsementB. Trust endorsementC. Endorsement to prohibit further endorsementD. Bearer endorsementE. Conditional bearer endorsement


34. (p. 689-690) In the event of a misspelled name, how may the holder endorse the document? A. With the misspelled nameB. With the holder's actual nameC. With the holder's actual name or with the misspelled nameD. Endorsement is impossible in such a situationE. With the misspelled name and also with a statement indicating to any later holder what the correct spelling should have been


35. (p. 690) Which of the following may endorse an instrument made payable to a legal entity such as a corporation? A. The President onlyB. The Chief Executive Officer onlyC. The Chief Financial Officer onlyD. The Treasurer onlyE. Any authorized representative of the corporation


36. (p. 690) An instrument that reads, "Pay to the order of Jones or Green," is payable to _________ payees. A. JointB. ConcurrentC. ConsecutiveD. AlternativeE. Alternate


37. (p. 690) An instrument that reads, "Pay to the order of Jones and Green," establishes ________ payees. A. JointB. ConcurrentC. ConsecutiveD. AlternativeE. Alternate


38. (p. 691) Which of the following is false regarding the elements a party must meet in order to be considered a holder in due course? A. The party must be a holder of a complete and authentic negotiable instrumentB. The holder must take the instrument for valueC. The holder must take the instrument in good faithD. The holder must take the instrument without notice of defectsE. The holder must either pay for the instrument or receive it as a gift


39. (p. 693) Which of the following is a party who is in possession of an instrument that is payable to the party or to the bearer of the instrument. A. A holderB. A bearerC. A payeeD. An issuerE. A transferee


40. (p. 694) What is the effect of an issuer forgetting to write the date on a check? A. The payee may write in the date consistent with the intent of the issuer but must put a notation on the check to the effect that it was alteredB. The payee may write in the date consistent with the intent of the issuer and may transfer the check to a holder in due courseC. The payee may write in the date consistent with the intent of the issuer, but may not transfer the check to a holder in due courseD. The check is no good, cannot be completed by anyone and should be destroyedE. The check is good only if the payee can get in touch with the issuer and have the issuer fill in the appropriate date.F. The check should be delivered to the issuer's bank for insertion of a proper date after confirmation of available funds


41. (p. 694) Which of the following is the result if a payee who receives an instrument with missing information completes the missing information in a way that is inconsistent with the intent of issuer and the instrument has been clearly materially altered? A. The person taking the instrument cannot become a holder in due courseB. The alteration does not prevent a person taking the flawed instrument from becoming a holder in due courseC. There is no effect so long as the payee can establish that he or she did not receive any more consideration than that to which the payee was entitledD. The instrument is considered materially altered, but it only prevents transfer to a holder in due course if the holder in due course had knowledge that the payee had done the alterationE. The instrument is considered materially altered, but it only prevents transfer to a holder in due course if the holder in due course participated in the material alteration


42. (p. 694-695) Which of the following is true regarding the requirement that a party take an instrument for value in order to be considered a holder in due course? A. The party must provide considerationB. The party must have provided a bargained-for promiseC. The party must take the instrument in exchange for a promise that has already been performedD. The party must have begun performance on a promise and have provided considerationE. The party must have provided consideration or received the note as a gift


43. (p. 695) Which of the following is false regarding the ways by which a holder may take an instrument for value? A. The holder performs the promise for which the instrument was issued or has started performanceB. The holder acquires a security interest or other lien in the instrumentC. The holder takes the instrument for payment of a preceding claimD. The holder exchanges the instrument for another negotiable instrumentE. The holder exchanges the instrument for an irrevocable obligation to a third party


44. (p. 697-698) Which of the following does the UCC define as, "honesty in fact and the observance of reasonable commercial standards for fair dealing?" A. Commercial standardsB. Subjective reasonablenessC. Objective reasonablenessD. Good faithE. Reasonable investigation


45. (p. 698) Which of the following is true regarding the status of a bank as a holder in due course? A. A bank may not be a holder in due course because the UCC bars financial institutions from holding that statusB. A bank may only be a holder in due course in situations in which the issuer has no valid defense to paymentC. A bank may only be a holder in due course in situations in which the instrument is presented for payment by a customer of the bankD. A bank may only be a holder in due course for instruments made payable in an amount under $1,000E. The bank will be a holder in due course to the same extent as any other individual or business entity


46. (p. 698) Which of the following is relevant regarding state of mind when the issue of holder in due course status is raised? A. Whether the transferor acted in good faithB. Whether the holder acted in good faithC. Whether both the transferor and the holder acted in good faithD. Only whether the holder acted in good faith unless the holder is related to the transferor, in which case both must have acted in good faithE. None of the above because the state of mind of both the holder and the transferor is irrelevant when holder in due course status is determined


47. (p. 698, 701) Which of the following prevent a holder from being a holder in due course? A. Notice that the instrument is overdueB. Notice that the instrument has been dishonoredC. Notice that the instrument was issued as part of a series that is in defaultD. All of the aboveE. Notice that the instrument is overdue or notice that the instrument has been dishonored, but not notice that the instrument was issued as part of a series that is in default


48. (p. 701) According to the UCC, when does a person have notice of a fact? A. When the person has actual notice of the factB. When the facts and circumstances known to the person at the time in question give the person reason to know that the facts existC. When the person receives notice or notification of the factsD. All of the aboveE. When the person has actual knowledge of the fact or the facts and circumstances known to the person at the time in question give the person reason to know that the fact exists, but not that the person receives notice or notification of the fact


49. (p. 697) By which of the following may a holder take an instrument for value, but not become a holder in due course? A. By purchasing the instrument at judicial sale or by taking it under legal processB. By acquiring an instrument through taking over an estateC. By purchasing an instrument as part of a bulk transaction not in the regular course of business of the transferorD. All of the aboveE. By purchasing the instrument at judicial sale or by taking it under legal process or by acquiring the instrument through taking over an estate, but not through purchasing it as part of a bulk transaction not in the regular course of business of the transferor


50. (p. 705) Which of the following is the principle that if an item is transferred from one person to another, the transferee acquires all the rights to transfer or have in the item? A. The shelter principleB. The transfer principleC. The transferee principleD. The transferor principleE. The holder principle


51. (p. 706) Susan purchased a refrigerator from ABC Appliance store for $700. She takes the refrigerator home and discovers that it is defective. She calls ABC Appliance store and tells them that she would like to return the refrigerator. ABC Appliance store tells her that they have assigned the promissory note she provided the store in order to purchase the refrigerator to a finance company and that the finance company is a holder in due course. Which of the following is true regarding the rights of parties? A. The finance company is subject to the defenses of Susan because of the Federal Trade Commission rule created to protect consumersB. ABC Appliance store is correct in that Susan cannot assert her defenses against the finance companyC. Susan can assert her defenses against the finance company only if she can prove that the finance company had knowledge that ABC Appliance store sold defective equipment from time to timeD. Susan can assert her defenses against the finance company only because she gave notice of the problem within 5 days of the saleE. Susan can assert her defenses against the finance company only if she agrees to arbitrate the dispute


52. (p. 707) Which of the following is true regarding negotiable instruments in England? A. Promissory notes can be negotiated between partiesB. Checks can be negotiated between partiesC. Bills of exchange can be negotiated between partiesD. All the aboveE. Promissory notes and checks can be negotiated between parties, but bills of exchange can not be negotiated between parties

AACSB standard: 5, 13Blooms Taxonomy: KnowledgeDifficulty: HardLearning Objective: 3

Susan Jones teaches business law at Learn-A-Lot University. Learn-A-Lot requested that all of the teachers ask the students to wear T-shirts with Learn-A-Lot University Football printed on the front on the day of the first football game. All of the teachers are asked to sell the shirts in class. A student, Bobby, gave Susan a check for $10 for payment for one of the shirts. Bobby, however, wrote the check and put Susan Jones as the payee. Susan wanted to turn the check over to the school, so on the back of the check, she wrote, "Susan Jones, without recourse." She then gave the check to the treasurer for Learn-A-Lot University. Unfortunately, the treasurer for Learn-A-Lot dropped the check on the ground as she was going to the bank. A student, Shifty, found the check and promptly took it to the bank and cashed it. The treasurer, Bernice, did not want to get into trouble, so she asked Susan to personally cover the check because she said that Susan had endorsed the check on the back guaranteeing payment.

53. (p. 686) What type of endorsement did Susan make on the back of the check? A. A special endorsementB. A special qualified endorsementC. A blank endorsementD. A blank qualified endorsementE. Both a special endorsement and a special qualified endorsement


54. (p. 682) Was the check properly delivered to Shifty? A. Yes; because it was bearer paper, delivery occurred whenever possession was takenB. Yes; because it was order paper, delivery occurred whenever possession was takenC. Yes, but only because it was thereafter presented to the bank and cashedD. Yes, because both Shifty and the bank are considered holders in due courseE. No, because he was not entitled to it


55. (p. 686) Would the school be able to require that Susan cover the amount of the check? A. Yes, because she signed on the back with a blank unqualified endorsementB. Yes, because she signed on the back with a special qualified endorsementC. Yes, because she signed on the back regardless of the type of endorsementD. No, because she signed on the back using the words, "without recourse"E. No, because the check was not properly delivered to Shifty


Susie Smith signed a note agreeing to pay, "Annie Greene, Mary Hodge," $1,000. The payment was for painting her house. The problem with the note was that it spelled Annie's last name, "Greene," whereas Annie spells it simply, "Green." Annie and Mary were having a disagreement regarding how to split up the funds for painting the house. Annie proceeded to sign the note on the back, "Annie Green," and presented it to Bill Brown to satisfy a debt that she owed him. Bill Brown endorsed the note on the back, "Bill Brown, without recourse," and delivered it to Sam Smith who took it to the bank for payment. Mary is unhappy because she did not obtain any of the funds and stated that Annie could not legally endorse the instrument because it misspelled her name and also because Mary did not also sign it.

56. (p. 690) Which of the following is true regarding Mary's claim that the endorsement by Annie was illegal because the note misspelled Annie's name? A. Mary is correctB. Mary is correct, but only because Annie signed the note, "Green," instead of "Greene," as such was on the noteC. Mary is correct, but only because two payees are listedD. Mary is incorrectE. Mary is incorrect unless she can prove that Susie intentionally and purposefully spelled the name wrong to prevent negotiation


57. (p. 690) Which of the following is true regarding the complaint of Mary that she did not also endorse the instrument? A. She is correct because both names are required in order to provide legal endorsementB. She is correct in that her name was needed for legal endorsement, but that is only the case because of the name misspelling of Annie's nameC. She is correct because regardless of whether the payees are listed with no designation as to whether they are alternate or joint or whether the words, "or," or "and," are used to designated payees, any listed payee must endorse a note in order for it to be properly payableD. She is incorrect because Annie properly endorsed the note and only her signature was neededE. She is incorrect, but only if it can be established that Bill Brown lacked knowledge that she had not given her consent to the form of the endorsement


58. (p. 686) What is the effect of the designation, "Bill Brown, without recourse?" A. It has no effect on any subsequent holderB. It has no effect on anyone, including, but not limited to, any subsequent holderC. It means that Bill Brown does not provide any guarantees and that if the instrument is later dishonored, he cannot be held liableD. It means that Bill Brown is providing that any subsequent holder cannot be held liableE. Bill Brown is providing that the person who transferred the instrument to him cannot be held further liable to any subsequent holder


Susan owns and operates a check cashing business. A regular customer, Bob, comes in and cashes a $2,000 check issued by ABC Trucking. The day after Susan cashed the check, she received a notice from ABC Trucking that some checks had been stolen. It was later discovered that the checks she cashed for Bob had been stolen. At the time she took the check, Susan was very busy with several customers in line. She simply glanced at the check and cashed it. A reasonable examination would have revealed that the check had been materially altered and changed from the amount of $200 to $2,000. Susan decided that she needed to hire some people to help her because she also had a problem with another check. On the same day that she took Bob's check, she took a check from another customer, Maurice. It was later discovered that the check, which was four months old, was the subject of a dispute between Maurice and the issuer of the check for whom Maurice had done some work. The issuer claimed that the work was improperly done. Both ABC Trucking and the issuer of the check to Maurice had stopped payment on the checks. Susan claimed that she was entitled to the status of holder in due course and was entitled to payment on both checks.

59. (p. 701) What is the effect of Susan receiving notice the day after she cashed the check for Bob that the check had been stolen? A. The notice has no effect on her status as holder in due course because it was provided after she cashed the checkB. The notice prevents her from being a holder in due courseC. The notice prevents her from being a holder in due course only if Bob had been convicted of check cashing offenses in the past since she should have checked his criminal recordD. The notice prevents her from being a holder in due course only if she subjectively knew that Bob had been charged criminally with check cashing violations in the pastE. The notice prevents her from being a holder in due course because it was presented to a business; only individuals can avoid the effect of notice of theft by cashing a check prior to receiving notice


60. (p. 701) What is the effect of the alteration of the check on Susan's status as a holder in due course? A. The alteration has no effect because a holder is not charged with examining an instrument presented for paymentB. The alteration will likely prohibit her from being a holder in due courseC. The alteration will affect her status as a holder in due course only if she had been put on notice of prior criminal behavior in the past on the part of BobD. The alteration will affect her status as a holder in due course only if the issuer can establish that it was not negligent in allowing a thief to gain access resulting in the alterationE. The alteration will only affect her status as a holder in due course since it involved over $500 because the law does not want to unduly burden holders


61. (p. 702) What is the effect on Susan's status as a holder in due course in taking the check from the customer that was four months old? A. There is no effect on her status as a holder in due course because an instrument is only considered overdue if it is outstanding for 150 daysB. There is no effect on her status as a holder in due course because an instrument is only considered overdue if it is outstanding for 180 daysC. There is no effect on her status as a holder in due course because an instrument is only considered overdue if it is outstanding for one yearD. It has no effect because a check is never considered overdueE. She would not be considered a holder in due course because a check is considered overdue 90 days after its date


Essay Questions

62. (p. 682) Susan, who owned a pet store, bought a number of dog leashes from a business called Happy Paws in Florida. Susan, who was somewhat unorganized, was very busy and told her assistant, Zach, to pay her bills, including the bill she owed to Happy Paws. Susan had lost the invoice. She knew that she owed Happy Paws $1,000 and simply told Zach to send Happy Paws $1,000. She told Zach she did not know the address, but that he should be able to find it on the internet. Zach checked on the internet and found a listing and an address for a company called Happy Paws in North Carolina. Zach, therefore, sent the check for $1,000 to Happy Paws in North Carolina. The bookkeeper for Happy Paws in North Carolina did not act in bad faith and thought that the check was for goods sent to Susan. Happy Paws in North Carolina deposited the check in the bank. Happy Paws in North Carolina was not affiliated with the Florida Happy Paws. In fact, Happy Paws in North Carolina sold booties for children. Happy Paws in North Carolina was also in financial difficulty and went bankrupt. Happy Paws in Florida contacted Susan regarding the $1,000 they were owed. Susan and Zach then discovered their mistake. They requested that Happy Paws in North Carolina refund the money, but bankruptcy prevented that. Susan then attempted to get the funds returned from the bank in North Carolina. What is the most likely result regarding her attempt to receive the funds from the North Carolina bank and why?

It is unlikely that Susan will be able to receive a refund. The reason is that the bank acted reasonably and the check was negligently delivered to the wrong business, which acted in good faith in cashing the check.


63. (p. 687) Barry is sending his agent, Richard, who he does not particularly trust, to deposit into Barry's business bank account a check belonging to Barry. What is the best way for Barry to endorse the check to attempt to limit any misappropriation?

Barry should sign the back of the check with an endorsement for collection only naming his bank and account, for example, "For deposit only into National Bank Account #12345."


64. (p. 690) Discuss whether or not you believe that our law should recognize holder in due course status with its resulting rights.

Student responses will vary. While the result of holder in due course status at times seems unfair, it does promote the economy and commercial transactions.

AACSB standard: 2Blooms Taxonomy: Synthesis and EvaluationDifficulty: MediumLearning Objective: 1

65. (p. 691) Set forth the requirements a party must meet in order to be considered a holder in due course.

In order to be considered a holder in due course, the following requirements must be met: (1) The party must be a holder of a complete and authentic negotiable instrument; (2) The holder must take the instrument for value; (3) The holder must take the instrument in good faith; (4) The holder must take the instrument without notice of defects.


66. (p. 695) Set forth the conditions under which a holder may take an instrument for value.

A holder may take an instrument for value if: (1) The holder performs the promise for which the instrument was issued; (2) Acquires a security interests or other lien in the instrument; (3) Takes the instrument for payment of a preceding claim; (4) Exchanges the instrument for another negotiable instrument; (5) Exchanges the instrument for an irrevocable obligation to a third party.


Chapter 28

Liability, Defenses and Discharge


1. (p. 716) According to the UCC, a signature can be any name, word, mark or symbol used by a party to authenticate a writing. TRUE


2. (p. 716) A party who is primarily liable on an instrument must pay without resorting to any other party. TRUE


3. (p. 717) Students may not electronically sign student loans. FALSE


4. (p. 718) The fact that an instrument has been refused by a bank means that it has been dishonored. FALSE


5. (p. 720) If an accommodation party pays a note for an accommodated party, the accommodation party has a right of action against the accommodated party to recover the money paid. TRUE


6. (p. 720) If an accommodated party pays a note when it is due, the accommodated party can force any accommodation party to contribute based upon the number of accommodation parties that exist. FALSE


7. (p. 722) As long as an agent is authorized to sign a negotiable instrument on behalf of a principal, the agent's signature can create liability for the principal. TRUE


8. (p. 722) In order for the principal to be held liable when an agent signs a note on behalf of the principal, the principal's name must be shown on the instrument. FALSE


9. (p. 727) If a transfer is through endorsement, transfer warranties apply to any future holder; however, if the transfer does not occur through endorsement, the warranties apply only to the transferee. TRUE


10. (p. 734) If Alice makes a proper tender of the full payment of $1,000 due on Richard's note on the note's due date, but Richard improperly refuses to accept the money, Alice will still be liable for the $1,000, but will not have to pay any interest on the amount. TRUE



11. (p. 716) The type of liability that occurs because a person signs a negotiable instrument is referred to as which of the following? A. Warranty liabilityB. Payee liabilityC. Signature liabilityD. Primary liabilityE. Secondary liability


12. (p. 716) Which of the following is a type of liability on an instrument arising when the transfer of the instrument breaches a warranty associated with the instrument? A. Warranty liabilityB. Payee liabilityC. Signature liabilityD. Primary liabilityE. Secondary liability


13. (p. 716) When a party signs a negotiable instrument, which of the following is the position that person could hold? A. MakerB. AcceptorC. DrawerD. EndorserE. All of the above


14. (p. 716) Which of the following is true regarding liability on negotiable instruments? A. Issuers and acceptors are primarily liable for a negotiable instrument, while drawers and endorsers are secondarily liableB. Drawers and endorsers are primarily liable, while issuers and acceptors are secondarily liableC. Issuers and drawers are primarily liable, while acceptors and endorsers are secondarily liableD. Acceptors and endorsers are primarily liable, while issuers and drawers are secondarily liableE. Issues, acceptors, drawers and endorsers are all secondarily liable


15. (p. 716) Which of the following is the case when it is not possible to determine the status of the signer of an instrument? A. The general rule is that the party is considered the makerB. The general rule is that the party is considered the acceptorC. The general rule is that the party is considered the drawerD. The general rule is that the party is considered the endorserE. Both an acceptor and a drawer


16. (p. 716) Which of the following is a party who must pay the stated amount of an instrument when it is presented for payment? A. A party who is secondarily liableB. A party who is a drawer and a party who is secondarily liableC. A party who is an endorserD. A party who is a drawer or an endorserE. A party who is primarily liable


17. (p. 716) Which of the following is a person promising to pay a set sum to the holder of a promissory note or certificate of deposit? A. MakerB. AcceptorC. DrawerD. EndorserE. Promisor


18. (p. 716) Which of the following is a person (drawee) who accepts and signs the draft to agree to pay the draft when it is presented? A. MakerB. AcceptorC. DrawerD. EndorserE. Promisor


19. (p. 716) Which of the following is a person ordering the drawee to pay? A. MakerB. AcceptorC. DrawerD. EndorserE. Promisor


20. (p. 716) Which of the following is a person who signs an instrument to restrict payment of it, negotiate it or incur liability? A. MakerB. AcceptorC. DrawerD. EndorserE. Promisor


21. (p. 717) Which of the following gives legal force to digital signatures and online contracts in financial, business, consumer, personal and government contexts? A. The Digital Signatures in Commerce ActB. The Electronic and National Digital ActC. The Electronic Signatures in Global and National Commerce ActD. The Digital Signals in International and National Transactions ActE. The Electronic Signatures in International and Federal Commerce Act


22. (p. 717) Which of the following is a personal identifier that can be broken into electronic code? A. A screen nameB. A digital signatureC. A code signatureD. An identified signatureE. A maker signature


23. (p. 717) Which of the following is a type of digital signature? A. BiometricB. Key-basedC. IdentifiableD. All of the aboveE. Biometric and key-based, but not identifiable


24. (p. 717) Which of the following is the type of liability establishing that the party must pay the amount due on the instrument if the primarily liable party defaults? A. A party who has transfer liabilityB. A party who has acceptor liabilityC. A party who has maker liabilityD. A party who has secondary liabilityE. A party who has recognition liability


25. (p. 718) Which of the following must occur for a drawer to become liable on an instrument? A. The holder of the instrument must present the instrument in a proper and timely fashionB. The instrument must be dishonoredC. Notice of the dishonor must be given to the drawerD. All of the aboveE. The holder of the instrument must present the instrument in a proper and timely fashion and the instrument must be dishonored, but there is no requirement of notice of dishonor since the injured party may proceed directly to court


26. (p. 718) Under the UCC, how can proper presentment be made? A. By any commercially reasonable meansB. Through a clearinghouse procedureC. At a place designated in the instrumentD. All of the aboveE. By any commercially reasonable means or at the place designated in the instrument, but not through a clearinghouse procedure


27. (p. 718) To hold an endorser secondarily liable on a check, a holder must present a check within ______ days of the endorsement period. A. 120B. 90C. 60D. 50E. 30


28. (p. 718) When a holder presents an instrument in a timely and proper manner, but acceptance or payment is refused, the instrument has been ______. A. DestroyedB. DishonoredC. ConvertedD. RejectedE. Refused


29. (p. 719) If the party that dishonors an instrument is a collecting bank, when must notice of the dishonor be given to a secondarily liable party by the collecting bank? A. Before midnight of the next dayB. Within 48 hoursC. Within 7 daysD. Within 10 daysE. Within 30 days


30. (p. 719) When must parties other than a collecting bank give notice of dishonor to a secondarily liable party? A. Before midnight of the next dayB. Within 48 hoursC. Within 7 daysD. Within 10 daysE. Within 30 days


31. (p. 719) Which of the following may be considered a commercially reasonable manner by which notice of dishonor can be given to a secondarily liable party? A. OralB. WrittenC. ElectronicD. All of the aboveE. By certified letter only


32. (p. 719) Which of the following is true in the event an instrument contains more than one endorsement? A. Each endorser is liable for the full amount to the subsequent endorser or to the holderB. Only the last endorser is liable to the holder and no prior endorsers are liable to a subsequent endorserC. Each endorser is liable for the full amount to the subsequent endorser, but only the last endorser is liable to any holderD. The last endorser is liable to the holder, whereas subsequent endorsers are not liable to the holder, but are responsible for reimbursing the last endorser in proportion to the number of endorsers that existE. Each endorser is liable to the holder in proportion to the number of endorsers that exist


33. (p. 720) A[n] ______ party is a party who signs an instrument to provide credit for another party that has also signed the instrument? A. AgreeableB. AccommodationC. AgentD. PrincipleE. Promisor


34. (p. 720) Which of the following is true regarding the liability of an accommodation party? A. As a maker, an accommodation party has primary liability; but, as an endorser, the party has secondary liabilityB. An accommodation party has primary liability both as a maker and as an endorserC. An accommodation party has secondary liability both as a maker and as an endorserD. An accommodation party has primary liability as either a maker or endorser only if all other parties to the instrument have filed bankruptcyE. An accommodation party has primary liability as a maker only if all other parties have filed bankruptcy and secondary liability in any other case regardless of whether the accommodation party is the maker or endorser


35. (p. 720) Which of the following is true regarding how an accommodation party may sign an instrument? A. As a makerB. As a drawerC. As an acceptorD. As an endorserE. All of the above


36. (p. 720) Which of the following is a party who has authority to act on behalf of and bind another party? A. An agentB. A principalC. A warrantorD. A transferorE. A real endorser


37. (p. 720) Violet has authority to act on behalf of and bind Robert. Which of the following is a legal term for the position of Robert? A. An agentB. A principalC. A warrantorD. A transferorE. A real endorser


38. (p. 724) Which of the following is false regarding negotiability and forgery in Japan? A. If a forgery occurs in Japan, the true purchaser is protected over the real ownerB. If a forgery occurs in Japan, the purchaser's title is unaffected in the event of forgeryC. In Japan, a bank that pays a check with a forgery is not responsible for compensating the real ownerD. If a forgery occurs in Japan, the purchaser retains his or her rights over the instrumentE. In Japan a bank that pays a check with a forgery is responsible for compensating the real owner


39. (p. 724) Which of the following results in liability of the principal because the principal approved of an unauthorized agent's signature? A. RatificationB. AuthorizationC. AcknowledgementD. Pre-approvalE. Post-approval


40. (p. 724) Which of the following is the most likely result if an agent admits to the principal that a check for the principal was forged and placed into the agent's bank account, but the principal does nothing until two months later after the agent later town with the funds? A. Because the checks were forged, the principal can receive reimbursement of the funds from any maker involved or any bank that cashed the checksB. The principal can receive reimbursement from makers of the checks onlyC. The principal can receive reimbursement from any bank that cashed the checks onlyD. It is likely that it will be determined that the principal ratified the signatures and that the principal cannot recover from either makers or banks that cashed the checksE. The principal can recover from either the makers or any banks who cashed the checks only if it can be shown that the agent cannot be located for criminal prosecution


41. (p. 725) When will a party's negligence not permit the party to escape liability for an unauthorized signature? A. Any type of negligence will result in a party being unable to escape liability for an unauthorized signatureB. The issue of negligence is irrelevant as to the issue of whether a party may escape liability for an unauthorized signatureC. A party who is negligent may not escape liability for an unauthorized signature if the party whose signature was forged behaved so negligently as to substantially contribute to the making of the forgeryD. A party's negligence will not permit the party to escape liability for an unauthorized signature only if the negligence amounts to a finding of recklessnessE. A party's negligence will not permit the party to escape liability for an unauthorized signature only if the negligence rises to the level of gross negligence


42. (p. 725) Carl, without Eddie's knowledge, impersonates Eddie and thereby convinces Connie, who has never seen Eddie, to write a check to Eddie, on which Carl forges Eddie's name and deposits into his, Carl's, account. Which of the following is true regarding whether Connie will be liable for the amount of the check? A. Under the forgery rule, Connie will be held liableB. Under the transferor rule, Connie will be held liableC. Under the payee rule, Connie will be held liableD. Under the imposter rule, Connie will be held liableE. Under the fictitious payee rule, Connie will not be held liable


43. (p. 725-726) Zachary, who has been authorized to write a check from a company account to pay employees, draws bonus checks from the company account for five fictitious employees, endorses the checks in their names and deposits those into his own bank account. Which of the following is true regarding whether the company will be required to take the loss on the checks? A. Under the fictitious payee rule, the company will be required to take the loss on the checks unless the company can obtain the funds from ZacharyB. Under the imposter rule, the company will be required to take the loss on the checks unless the company can obtain the funds from ZacharyC. Under the transferor rule, the company will be required to take the loss on the checks unless the company can obtain the funds from ZacharyD. Under the employee-liability rule, the company will be able to recover from any bank that cashed the check in addition to ZacharyE. Under the banking liability act, the company will be able to recover from any bank that cashed the check in addition to Zachary


44. (p. 726) Which of the following is a type of warranty regarding instruments? A. TransferB. PresentmentC. AcknowledgementD. All of the aboveE. Transfer and presentment, but not acknowledgement


45. (p. 726) Which of the following tests may employers require that job candidates take? A. AbilityB. Job performanceC. PersonalityD. DrugE. All of the above


46. (p. 728) If an instrument is not an unaccepted draft presented to a drawee, which of the following presentment warranties is applicable? A. That the warrantor of the instrument is entitled to enforce the instrumentB. That the instrument has not been alteredC. That the warrantor has no knowledge that the drawer's signature or the draft is unauthorizedD. All of the aboveE. The warrantor of the instrument is entitled to enforce the instrument and that the warrantor has no knowledge that the drawer's signature or the draft is unauthorized, but not that the instrument has not been altered


47. (p. 730) Real defenses apply to ______ and personal defenses do not apply to ______. A. All parties, holders in due courseB. Holders, holders in due courseC. Holders, holdersD. All parties, holdersE. All parties, endorsers


48. (p. 730) When a party signs a negotiable instrument without knowing that it is, in fact, a negotiable instrument, the party can claim _________. A. NegligenceB. RecklessnessC. MaliceD. Strict liabilityE. Fraud in the factum.F. Fraud and non acknowledgement


49. (p. 733) Which of the following will be considered personal defensive to payment of an instrument? A. Breach of contract or warrantyB. Fraud in the inducementC. IllegalityD. All of the aboveE. Illegality and lack or failure of consideration, but not breach of contract or warranty


50. (p. 734) When a party's liability for a negotiable instrument is terminated, this party's liability has been ______. A. TerminatedB. ReleasedC. DischargedD. AbrogatedE. Delivered


51. (p. 735) Which of the following occurs when a former holder of an instrument has the instrument transferred back to him by negotiation or other means? A. CancellationB. RenunciationC. ReacquisitionD. RecourseE. Release


Doreen writes a check for a dress to Hot Dresses, Inc., a small specialty shop whose shares were owned primarily by Betty. Betty was getting ready to go on an extended European vacation and temporarily closed down the shop the next day. When Betty returned, she had a number of other things to do and did not take Doreen's check and some other checks to the bank for three months. Betty was independently wealthy and only ran the shop as a hobby, so she had not been in need of funds. When Betty finally took Doreen's check to the bank, Betty requested that her bank, ABC Bank, deposit the check into her account. When ABC Bank, however, requested payment from Doreen's bank, XYZ Bank, the check was dishonored because of insufficient funds in Doreen's account. Although Betty did not particularly need the funds, she did not like to feel as if she had been cheated; therefore, she demanded that Doreen make the check good.

52. (p. 717) Which of the following would be considered the drawer of the check Doreen presented to Betty at Hot Dresses, Inc.? A. DoreenB. Hot Dresses, IncC. Betty, because she owned Hot Dresses, IncD. Doreen's bankE. Betty's bank

AACSB standard: 3Blooms Taxonomy: ComprehensionDifficulty: EasyLearning Objective: 1

53. (p. 717) Which of the following is the drawee of the check Doreen presented to Hot Dresses, Inc.? A. DoreenB. Hot Dresses, IncC. Betty, because she owned Hot Dresses, IncD. Doreen's bankE. Betty's bank


54. (p. 717) Which of the following is the holder of the check? A. DoreenB. Hot Dresses, IncC. Doreen's bankD. Betty's bankE. There is no holder in this instance


55. (p. 717-718) Which of the following would be when presentment, as defined in the UCC, occurred? A. When Doreen presented the check to Hot Dresses, IncB. When Betty took the check to ABC BankC. When ABC Bank requested payment from XYZ BankD. When XYZ Bank notified Betty that it would not pay based upon insufficient fundsE. When Betty requested that Doreen make the check good


56. (p. 718) Which of the following is the most likely result of Betty's request that Doreen pay the amount due on the check? A. It is likely that Doreen will have to pay the amount dueB. It is unlikely that Doreen will have to pay on the check because the UCC states that a check must be presented within 60 days in order to hold a drawer secondarily liableC. It is unlikely that Doreen will have to pay on the check because the UCC states that a check must be presented within 30 days in order to hold a drawer secondarily liableD. It is unlikely that Doreen will have to pay on the check because the UCC states that a check must be presented within 20 days in order to hold a drawer secondarily liableE. It is unlikely that Doreen will have to pay on the check because the UCC states that a check must be presented within 10 days in order to hold a drawer secondarily liable


Millie issues a note to Bob. Bob endorses the note and transfers it to Anne. Anne endorses the note and transfers it to Henry. Henry presents the note to Millie for payment. When Henry presents the note to Millie, she asks him for reasonable identification. He did not have any identification with him and told her that she had no right to dishonor the instrument. Millie, however, refused to provide him the funds until he returned with proper identification. Nevertheless, when he returned with proper identification, Millie refused to pay the note, claiming that she lacked the funds with which to do so. Henry proceeded to request that Anne pay the note, but she told him that he would have to get his money from Bob, who cannot immediately be found.

57. (p. 719) Which of the following is true regarding when and if, the note was dishonored? A. The note was never dishonored by Millie because she acknowledged his entitlement to payment eventually and only refused to pay because she lacked funds with which to do soB. Millie dishonored the instrument when she asked for proper identificationC. Millie dishonored the instrument when she refused to pay it on the basis that she lacked funds with which to do soD. Anne dishonored the instrument when she told Henry that he would have to seek recovery from BobE. Millie dishonored the instrument when she told Henry that she could not pay him because she lacked the funds and also Anne dishonored the instrument when she told Henry that he would have to seek payment from Bob


58. (p. 719) Which of the following is true regarding Henry's entitlement to payment from Millie? A. Henry is only entitled payment from Millie because Anne dishonored the paymentB. Henry is not entitled to payment from Millie unless Bob, in addition to Anne, dishonors the instrumentC. Henry is never entitled payment from Millie because he must seek recovery only from AnneD. Henry is entitled to recover on the note from MillieE. Henry is entitled to recover on the note from Millie only if both Anne and Bob have filed bankruptcy


59. (p. 719) Which of the following is true regarding Anne's statement to Henry that he must seek recovery from Bob? A. Anne is correctB. Anne is correct only if Bob is able to pay and has not filed bankruptcyC. Anne is correct in that Henry should seek recovery from Bob only if Millie has filed bankruptcy because, otherwise, Henry should be seeking primary payment from MillieD. Anne is correct unless the notice is for over $10,000, in which case Henry can seek recovery from her without resorting to recovery from Bob or MillieE. Anne is incorrect. Henry may seek recovery from her without first seeking recovery from Bob or Millie


60. (p. 710) Which of the following is the likely result if Henry sues Anne, Bob and Millie? A. The judge is likely to rule that Henry can recover from Anne, Bob or Millie; but in the event Anne pays Henry, she can recover from Bob or Millie and in the event that Bob pays Henry, he can recover from MillieB. The judge is likely to rule that Henry's only option of recovery is against MillieC. The judge is likely to rule that Henry's only option of recovery is against AnneD. The judge is likely to rule that Henry can recover against Bob and that Bob may recover against Millie, but Henry cannot recover directly from AnneE. The judge is likely to rule that Henry's only option for recovery is against Bob


Constance and Blair are both loan officers at ABC Bank. Constance, being somewhat dishonest, tells Henry, a customer of the bank who is wealthy and rarely checks the status of outstanding loans and balances, that she is collecting money for a local animal shelter. She asks him to sign a pledge that he will contribute $50 to the animal shelter. In fact, she had him sign a promissory note made out to her for $5,000, which she later endorsed to Richard. Henry proceeds back to one of his businesses, a used car dealership. Taylor comes in to purchase a used car. He and Henry agree that Taylor will purchase a car for $3,000. Martha also comes in and she and Henry agree that she will purchase a used car for $4,000. Both Taylor and Martha make out promissory notes payable to Henry. At the end of the day, Henry is looking through the notes and decides that Taylor's was mistakenly made out for $3,000. Henry mistakenly, but honestly, believed that the deal was for $3,500. Therefore, he changes the note to reflect that Taylor owed $3,500. Henry, on the other hand, simply did not like Martha. He decided that $4,000 was not enough for the car. Accordingly, he changed the note to $4,5000.

61. (p. 730) Which of the following is the most likely result if Henry refuses payment on the promissory note that was endorsed to Richard claiming that he never signed it? A. He will be liable because an official banking document was involvedB. He will not be liable because a party is never liable when the party signed a negotiable instrument without knowing that it is, in fact, a negotiable instrumentC. He will be liable without further inquiry unless he can establish that the note had not been endorsed to a holder in due courseD. He can claim fraud in the factum and whether he is liable or not will depend upon whether a court determines that he should have known what he was signingE. He can claim fraud in the inducement


62. (p. 731) Which of the following is true regarding Taylor's liability to Henry? A. Because of the alteration, Taylor is not liable to Henry for any amounts under the promissory noteB. Taylor's obligation will be enforced only in the amount of $3,000C. Taylor's obligation will be enforced in the amount of $3,500 unless Taylor has a writing signed by Henry to the effect that the deal was for $3,000. No other evidence would be allowedD. Unless Taylor has a written document from Henry to the effect that the agreement was for $3,000 only, Taylor and Henry will be legally required to split the remainder with Taylor being held responsible for $3,250E. Unless Taylor either has a written document from Henry showing that the agreement was for $3,000 or unless he can get Henry to admit that the agreement was for $3,000, then Taylor will be required to pay $3,500 because the obligation was upon Taylor to obtain confirmation of the terms of the original agreement


63. (p. 731) Which of the following is true regarding Martha's liability to Henry? A. Because of the fraudulent alteration, Martha is not liable to Henry for any amounts under the promissory noteB. Martha's obligation will be enforced only in the amount of $4,000C. Martha's obligation will be enforced in the amount of $4,500 unless she has a writing signed by Henry to the effect that the deal was for 4,000. No other evidence would be allowedD. Unless Martha has a written document from Henry to the effect that the agreement was for $4,000 only, Martha and Henry will be legally required to split the remainder with Martha being held responsible for $4,250E. Unless Martha either has a written document from Henry showing that the agreement was for $4,000 or unless he can get Henry to admit that the agreement was for $4,000, then Martha will be required to pay $4,500 because the obligation was upon Martha to obtain confirmation of the terms of the original agreement


Essay Questions

64. (p. 717) Identify and describe the two types of digital signatures.

The two types of digital signatures are biometric and key-based signatures. Biometric digital signatures stamp the document with unique physical characteristics. Key-based signatures use digital keys. The signer has a public key and a private key. These keys scramble information so that only parties with appropriate keys may read the information. The signer can use the private key to sign documents.


65. (p. 719) Effie had received a check written by Sam who she did not really trust. Accordingly, she rushed to his bank to get the check cashed. The bank told her, however, that presentment would be considered as being made on the next business day and refused to immediately give her the funds. The bank representative told her that the bank's cut-off hour was 2:00 p.m. and that she did not present the check until 3:00 p.m. Effie was upset and told the bank that they were violating provisions of the UCC. Discuss the rights of the parties.

A bank to whom presentment is made may treat presentment as occurring on the next business day after the day of presentment if the bank has established a cut-off hour not earlier than 2:00 p.m. for the receipt and processing of instruments presented for payment or acceptance and presentment is made after the cut-off hour.


66. (p. 720) What are the requirements for a holder to turn to secondarily liable parties?

The holder must:(1) Present the note to the maker for payment;(2) Dishonor by the maker should occur and(3) The holder should then give notice of dishonor to secondarily liable party (endorsers).


67. (p. 722) Discuss whether an authorized agent can be held personally liable on a note if the agent did not sign her own name. Also discuss the kind of personal liability an agent has who simply signs her name to an instrument.

An authorized agent cannot be liable if she did not sign her own name to the instrument. If the authorized agent simply signs her own name to the instrument, she might be liable. If the holder of the instrument is a holder in due course and is not aware and does not have reason to know that the agent has signed on behalf of the principal, the agent can be held personally liable. If the holder of the instrument is not a holder in due course, the agent can usually escape liability by demonstrating that it was not the intent of the principal to hold the agent personally responsible. If the instrument is a check payable from the principal's account and the principal is clearly identified on the check, the agent will not be held liable on the check even if the agent only signs her own name. Also, the agent can be personally liable if she is not authorized to sign on behalf of the principal.


68. (p. 726-727) Set forth the five items that a party warrants when the party transfers an instrument for consideration.

When a party transfers an instrument for consideration, he or she warrants that: (1) The transferor is entitled to enforce the negotiable instrument(2) Signatures on the instrument are authentic and authorized(3) The instrument has not been altered(4) The instrument is not subject to a defense or claim in recoupment(5) The transferor has no knowledge of insolvency proceedings against the maker, acceptor or drawer of the instrument


Chapter 29Checks and Electronic Fund Transfers


1. (p. 744) According to the UCC, a check is a special kind of draft. TRUE


2. (p. 747) Money orders are considered checks under the UCC. TRUE


3. (p. 747) Banks are required by the UCC to certify the check if a customer has sufficient funds in the account. FALSE


4. (p. 750) A bank involved in the check collection process may only be classified as one type of bank during the entire process. FALSE


5. (p. 750) Sometimes the depositary is the same bank as the payer bank. TRUE


6. (p. 751) A substitute check is a check that is substituted for a lost check. FALSE


7. (p. 756) A written stop payment order is valid for 30 days. FALSE


8. (p. 756) The UCC states that a customer can postdate a check and that the customer has no obligations to give the bank notice of the postdated check. FALSE


9. (p. 766) The customer cannot order a stop payment on an electronic fund transfer. TRUE



10. (p. 744) Which of the following governs the transfer of checks between banks? A. Article 1 of the UCCB. Article 2 of the UCCC. Article 3 of the UCCD. Article 4 of the UCCE. Article 5 of the UCC


11. (p. 744) Which of the following parties are related to an order? A. A drawerB. A payeeC. A draweeD. All of the aboveE. A drawer and a payee, but not a drawee


12. (p. 744) Which of the following is an instrument whereby one party orders the second party to pay an amount of money to the party listed on the instrument? A. A draftB. A noteC. A markD. All of the aboveE. A draft and a note, but not a mark


13. (p. 744) Which of the following is the party giving the order to pay on a draft? A. The drawerB. The draweeC. The payeeD. The draftorE. The draftee


14. (p. 744) Which of the following is the party ordered to pay on a draft? A. The drawerB. The draweeC. The payeeD. The draftorE. The draftee


15. (p. 744) Which of the following is the party receiving the money from the draft? A. The drawerB. The draweeC. The payeeD. The draftorE. The draftee


16. (p. 744) A ______ is a special draft that orders the bank to pay a fixed amount of money on demand. A. NoteB. Promissory noteC. CheckD. Acknowledgment draftE. Promissory draft


17. (p. 744) Which of the following are considered banks under the UCC? A. Savings and LoansB. Credit UnionsC. Trust CompaniesD. All of the aboveE. Savings and Loans and Credit Unions, but not Trust Companies


18. (p. 745) A ______ check is a check for which both the drawer and the drawee are the same bank. A. CertifiedB. AgreedC. AcknowledgedD. Cashier'sE. Promise


19. (p. 745) In which of the following is the payee of a check a specific person and the bank draws on itself? A. CertifiedB. AgreedC. AcknowledgedD. Cashier'sE. Promise


20. (p. 746) A _____________ check is a check that is drawn by one bank and usually drawn on another bank. A. Cashier'sB. CertifiedC. Teller'sD. AcknowledgedE. Transferable


21. (p. 747) A ______ check is a check that is accepted at the bank at which it is drawn. A. Cashier'sB. CertifiedC. AcknowledgedD. TransferredE. Drawee


22. (p. 747) Which of the following is false regarding certified checks? A. If a bank refuses to certify a check, the check is considered dishonoredB. If a bank refuses to certify a check, the check lacks the extra protection of certificationC. If a bank certifies a check, the drawer of the check is no longer liable for the amount of the checkD. If a bank certifies a check, the bank has become primarily liable for the checkE. Once a check is certified, funds of the customer are removed from his or her account and placed in the bank's certified check account


23. (p. 748) Assuming a proper claim is made, for which of the following does the UCC allow full recovery in the event of theft? A. A cashier's checkB. A teller's checkC. A certified checkD. All of the aboveE. A cashier's check or teller's check, but not a certified check


24. (p. 749) A ______ bank is the first bank that receives the check for payment. A. PayerB. PayeeC. DepositaryD. TransferE. Acceptor


25. (p. 749) The ______ bank is the bank upon which a check is drawn. A. PayorB. PayeeC. DepositaryD. TransferE. Acceptor


26. (p. 750) Which of the following is the bank ultimately responsible for granting funds for a check? A. DepositaryB. PayorC. CollectingD. IntermediaryE. Transferring


27. (p. 750) Which of the following is a bank, other than the payor bank, handling the check at any point from the time the check is deposited to the time it reaches the payor bank? A. DepositaryB. AcknowledgingC. CollectingD. IntermediaryE. Transferring


28. (p. 750) Which of the following is a bank receiving a transferred check during a collection process (excluding the first bank and the last bank)? A. DepositaryB. AcknowledgingC. CollectingD. IntermediaryE. Transferring


29. (p. 750) When the depositary bank is the same bank as the payer bank, the check is referred to as a[n] ______. A. On-us itemB. Combined itemC. Condensed itemD. Unitary itemE. Uniform item


30. (p. 750) A bank may determine that ______ or later is the cut-off hour for handling checks. A. NoonB. 1:00 p.m.C. 2:00 p.m.D. 3:00 p.m.E. 4:00 p.m.


31. (p. 750) The Federal Reserve System consists of ______ central banks. A. SixB. EightC. TwelveD. TwentyE. Thirty


32. (p. 750) A[n] ______ is an institution created to facilitate banks and their exchange of checks and drafts drawn on one another, as well as to enable banks to settle their daily balances. A. ClearinghouseB. Transferring institutionC. Facilitating institutionD. Acknowledging institutionE. Approval institution


33. (p. 751) The first ______ of any amount deposited in a bank must be available to the depositor on the business day following the day of deposit. A. $100B. $200C. $300D. $400E. $500


34. (p. 752) If a customer makes a deposit over ______, the depositary bank may place an 8-day hold on the funds. A. $1,000B. $2,000C. $3,000D. $4,000E. $5,000


35. (p. 753) Under the ______, a bank has a duty to pay checks from a customer's account so long as the check is properly payable. A. Account ruleB. Properly payable ruleC. Payability in fact regulationD. Check pay ruleE. Account pay rule


36. (p. 756) An oral stop payment order is valid for _________ unless the order is later confirmed in writing. A. 10 DaysB. 14 DaysC. 30 DaysD. 45 DaysE. 90 Days


37. (p. 756) If a check is not presented to a bank within ____________ of its date, the check is considered stale check. A. 30 DaysB. 90 DaysC. 6 MonthsD. 9 MonthsE. 1 Year


38. (p. 760) If a customer discovers a forgery when examining the customer's bank statement, the customer must notify the bank within ______ after the statement has been made available. A. 10 DaysB. 20 DaysC. 30 DaysD. 45 DaysE. 60 Days


39. (p. 760-761) Assuming the bank is not negligent, in the case of multiple forgeries by the same wrongdoer, if a customer examines a bank statement and does not notify the bank of the first forgery within the time required by the UCC, what is the effect on subsequent forgeries? A. There is no effect because each forgery stands on its ownB. The customer is barred from recovering on the subsequent forgeriesC. The customer may recover on the subsequent forgeries if they are reported to the bank within 5 days after the statement showing the forgery is received by the customerD. The customer may recover on the subsequent forgeries if they are reported to the bank within 10 days after the statement showing the forgery is received by the customerE. The customer may recover on the subsequent forgeries if they are reported to the bank within 15 days after the statement showing the forgery is received by the customer


40. (p. 762) Regardless of the care used in cashing a check by the bank, a customer must report a forgery within ________ from the date the bank statement showing the forgery is available to the customer or the customer will lose the right to recover. A. 90 DaysB. 120 DaysC. 180 DaysD. 9 MonthsE. 1 Year


41. (p. 763) Generally, when an endorsement on a check has been forged, which party is the party ultimately liable for the loss? A. The drawerB. The first party to accept the forged instrumentC. The first endorser of the instrumentD. The bank of the first party to accept the forged instrumentE. The bank of the drawer even if proper notice was given of the forgery


42. (p. 763) Which of the following is defined by the UCC as a change, without consent, that nullifies the obligation of a party to the instrument? A. An alterationB. A defacementC. A material additionD. A transformationE. A reformation


43. (p. 764) When money is transferred by an electronic terminal, telephone or computer, this transfer is a called a[n] ______ A. Automatic fund transferB. Electronic fund transferC. Computer generated transferD. Wire transferE. Consumer electronic transfer


44. (p. 764) Which of the following allows a consumer to directly transfer funds from a banking account to a merchant? A. An electronic authorized systemB. A direct pay systemC. An authorized direct pay systemD. A point-of-sale systemE. A pay-by-electronics system


45. (p. 764) Which of the following is a deposit that is preauthorized and performed on a customer's account through an electronic terminal? A. A point-of-saleB. An authorized depositC. A transferred depositD. A direct depositE. An approved deposit


46. (p. 764-765) Which of the following are types of electronic fund systems? A. Automated teller machinesB. Pay by telephone systemsC. Point-of-sale systemsD. All of the aboveE. Neither automated teller machines, pay by telephone systems, nor point-of-sale systems are types of electronic funds systems


47. (p. 765) Which of the following governs consumer fund transactions? A. The Electronic Fund Transfer Act of 1978B. The Automated Transfer Act of 1990C. The Electronic Banking Act of 2000D. The Automated Fund Transfer Regulation of 2002E. The Uniform Money Services Business Act of 1990


48. (p. 765) If a customer's ATM card is lost or stolen, the customer must notify the bank within _____ days and if that is done, the customer is then liable for only the first _____ stolen. A. 5 Days, $50B. 3 Days, $100C. 2 Days, $50D. 7 Days, $200E. 10 Days, $500


49. (p. 765) A customer who notifies the bank that an ATM card is lost or stolen 45 days after it is lost or stolen is liable for up to the first ______ that is stolen. A. $0B. $200C. $300D. $400E. $500


50. (p. 767) Which of the following is an unauthorized electronic transfer? A. A transfer that is initiated by a person who has no authority to transferB. A transfer from which the customer receives no benefitC. A transfer for which the customer did not give his personal identification number to the unauthorized partyD. All of the aboveE. A transfer initiated by a person who has no authority to transfer or a transfer or a transfer from which a customer receives no benefit, but not a transaction for which the customer did not give his personal identification number to the unauthorized party


51. (p. 767) Which of the following is money stored electronically on microchips, magnetic strips or other computer media that would allow for the elimination of physical currency? A. Electronic fundsB. Electronic mediumC. Digital cashD. Digital resourcesE. Electronic resources


52. (p. 767) Which of the following is a card containing microchips for storing data that can be used to transfer funds? A. Stored-value cardsB. Smart cardsC. Intel cardsD. Transfer cardsE. Electronic cards


53. (p. 768) Which of the following is the period between the time a check is written and the time it is presented for final payment, during which time a customer can still use his or her funds? A. Transfer timeB. Electronic timeC. Chargeable timeD. Float timeE. Usable time


54. (p. 769) Which of the following is the model state law passed by the National Conference on Commissioners on Uniform State Laws that would affect online services and e-money services as well as traditional money services? A. The Uniform Money Services Business ActB. The Uniform State Transfer ActC. The Uniform E-Money and Online Services ActD. The Uniform State Electronic Funds Transfer ActE. The Uniform Transfer Act


55. (p. 770) The Uniform Money Services Business Act changes all references to money to ______. A. CashB. Electronic fund transferC. Monetary valueD. Transactional valueE. Funds value


Mindy, a bank teller, saw that customer Fred did not have sufficient funds in his account to cover a check that had been presented for payment. Mindy was new and was confused about what to do with the check. She asked the bank manager, Trevor, about any available options. Trevor told her that the bank was required by law to dishonor the check, that the check should be returned to the holder with a notation that it had been dishonored and that it could not be presented again. Mindy asked Trevor if there were any policies the bank could institute to provide customers with overdraft protection and Trevor answered that those were prohibited by law.

56. (p. 755) Which of the following is true regarding Trevor's statement that the bank's only choice was to dishonor the check? A. Trevor is correctB. Trevor is incorrect because under the UCC, the bank could have created an overdraft by paying the check and charging the account the amount shortC. Trevor is incorrect because under the UCC, the bank could have created a subsequent draft by paying the check and charging the account the amount shortD. Trevor is incorrect because under the UCC, the bank could have created a secondary draft by paying the check and charging the account the amount shortE. Trevor is incorrect because under the UCC, the bank could have created an excessive draft by paying the check and charging the account the amount short

AACSB standard: 3Blooms Taxonomy: ApplicationDifficulty: EasyLearning Objective: 4

57. (p. 755) Which of the following is true regarding what a bank may do to offer overdraft protection to customers? A. A bank may link a checking account to the customer's savings account and charge the savings account when a checking account has insufficient fundsB. A bank may promise to credit a customer's account if there are insufficient fundsC. A bank may charge a customer for crediting a customer's account in the case of insufficient fundsD. All of the aboveE. The bank may link a checking account to a customer's savings account; a bank may draw on a savings account in the event insufficient funds exist in the checking account and a bank may promise to credit a customer's account in the event of insufficient funds, but the bank may not charge the customer for that service


58. (p. 755) Which of the following is true regarding Trevor's statement that once the check had been dishonored, it could not be presented again? A. He was correctB. The holder can attempt to resubmit the check at a later dateC. The holder may attempt to resubmit the check at a later date only if all endorsers of the check have been notified of the dishonorD. The holder may resubmit the check only if notice is given to the drawerE. The check may be presented again for payment only if notice has been given both to endorsers and the drawer


Elaine ordered a pair of diamond stud earrings from GEM Jewelry Store. She paid in advance because the sales clerk told her that the store would have to pay the supplier before the earrings could be shipped. Later that day, Elaine found out from a friend of hers that GEM Jewelry Store was in financial trouble. Elaine was concerned and immediately called her bank and issued a stop payment order on the check she wrote to GEM Jewelry Store. She gave the bank all of the correct information orally needed to stop payment on the check. The bank, however, did not stop payment on the check. The check was paid, GEM Jewelry Store went bankrupt and Elaine was unable to get either her money or the earrings from GEM Jewelry Store. Elaine asked the bank manager of the bank for a refund of the check amount. The bank manager told her that the stop payment order was not good because it was oral and that in any event, under the UCC, banks are not liable for failing to stop payment on a check. The bank manager further told Elaine that both GEM Jewelry Store and the bank were holders in due course and that Elaine is liable for any damages sustained by GEM Jewelry Store or the bank based upon her attempt to stop payment on the check.

59. (p. 756) Which of the following is correct regarding the manager's statement that stop payment orders may not be oral? A. It depends upon the state because some states allow oral stop payment orders and some do notB. The manager is incorrect because all states allow oral stop payment ordersC. The manager is correct because no states allow oral stop payment ordersD. The manager is correct in that all states allow stop payment orders, but that is true only in the even that the drawer is solventE. The manager is correct in that all states allow stop payment orders, but that is true only in the event that the payee has filed bankruptcy


60. (p. 755) Which of the following is true regarding the bank manager's statement that the bank could not incur any liability for damages for the failure to stop payment on a check? A. The manager is correctB. The manager is incorrect and the bank will incur liability or damages suffered by a customer due to the failure to stop payment when a stop payment order was properly providedC. The manager is incorrect and the bank will incur liability or damages suffered by a customer due to the failure to stop payment when a stop payment order was properly provided, but only up to $500D. The manager is incorrect and the bank will incur liability or damages suffered by a customer due to the failure to stop payment when a stop payment order was properly provided, but only up to $1,000E. The manager is incorrect and the bank will incur liability or damages suffered by a customer due to the failure to stop payment when a stop payment order was properly provided, but only up to $1,500


61. (p. 756) Which of the following is true regarding the bank manager's statement that both the bank and GEM Jewelry Store were holders in due course and that stop payment orders could not affect the right of a holder in due course to collect? A. The bank manager is wrong on all countsB. The bank manager is correct only in so far as he stated the bank was a holder in due courseC. The bank manager is incorrect only in so far as he stated that GEM Jewelry Store was a holder in due courseD. The bank manager is correct in that if the holder of the check is a holder in due course, the drawer's defenses will not apply and the drawer will be liable for the check; but, the bank manager is incorrect that either he or the GEM Jewelry Store are holders in due courseE. The bank manager is correct in that the holder in due course may be paid even in the face of a stop payment order and he is correct that the bank is a holder in due course, but he is incorrect that the GEM Jewelry store is a holder in due course


Harold, who is 97 years old, runs a successful hardware store. He had never had any trouble with dishonest employees in the past. Unfortunately, he hired Renee, who had significant financial problems and began to steal from Harold. One thing that Renee did was that she came in early and took the rubber stamp of his signature that Harold kept in an unlocked drawer and used the signature stamp to create a check payable to her. She then took it to the bank and cashed it. Harold, who was diligent in examining his bank statements, noticed the unauthorized check to Renee and immediately informed his bank about it. Harold, who was honest, also told the bank what he suspected had happened involving Renee taking his stamp. The bank manager told Harold that the bank was not required to reimburse Harold because no forgery was involved since it was so easy for Renee to get to the stamp. Harold decided to institute litigation against the bank. A few months later when Harold was out playing golf, immediately after he hit a hole-in-one and had his picture taken for the local newspaper, he died from all the excitement and pleasure involved. A few hours later, but before anyone at the bank knew of Harold's death, the bank cashed a check from Good Time Jewelers representing a payment Harold had given Good Time Jewelers for a $30,000 3 karat diamond for his girlfriend, who was 25 years old. Later that day, the bank was notified of Harold's death. The bank manager was still annoyed with Harold for instituting litigation against him over the check involving Renee. Therefore, when Fast Boats presented a $50,000 check that Harold had written for a good friend of his, Bud, the bank manager went ahead and accepted the check. The bank manager accepted the check for the boat 11 days after the date of Harold's death and 11 days after the bank had notice.

62. (p. 759) Which of the following is correct regarding whether the bank will legally have to accept responsibility for the check presented by Renee? A. The bank will not be required to repay Harold's estate because the check was not forgedB. The bank will be required to repay Harold's estate because the check was forgedC. The bank will be required to repay Harold's estate only if it had notice of the forgery within 5 days after the forgeryD. The bank will be required to repay Harold's estate only if the bank had knowledge of the forgery within 15 days after the forgeryE. The bank will likely not be required to repay Harold's estate because, although a forgery was involved, Harold's negligence in leaving the rubber stamp with his signature readily available likely substantially contributed to the forged signature

AACSB standard: 3Blooms Taxonomy: Synthesis and EvaluationDifficulty: HardLearning Objective: 4

63. (p. 759) Which of the following is true regarding whether the bank will have to repay Harold's estate for accepting the check from the Jewelry Store? A. The bank will have to repay Harold's estate because Harold was dead at the time the check was acceptedB. The bank will not have to repay Harold's estate because Harold had just died and the bank did not have knowledgeC. The bank will have to repay Harold's estate only if a court determines that the executor of Harold's will had not been notified of the death at the time the bank cashed the check and, therefore, could not have notified the bank of the deathD. The bank will be held liable for the check because under the UCC after a customer reaches the age of 80, a bank is supposed to check with the customer before cashing any check in an amount over $20,000E. The bank will be held liable for the check because under the UCC after a customer reaches the age of 80, a bank is supposed to check with the customer before cashing any check in an amount over $100,000


64. (p. 759) Which of the following is true regarding whether the bank will be required to reimburse Harold's estate for the check accepted from the boat seller? A. The bank will not be required to reimburse Harold's estate because the bank was justified in cashing any checks that Harold had written before his deathB. The bank will have to reimburse Harold's estate because it could only cash checks for 5 days after learning of Harold's deathC. The bank will have to reimburse Harold's estate because after learning of Harold's death on the date of his death, the bank could only accept checks for 10 daysD. The bank will have to reimburse Harold's estate because after learning of Harold's death on the date of his death, the bank could only accept checks for 15 daysE. The bank will have to reimburse Harold's estate because after learning of Harold's death on the date of his death, the bank could only accept checks for 20 days


Essay Questions

65. (p. 746-747) Set forth the characteristics that a traveler's check must have.

A traveler's check must:(1) Be payable on demand;(2) Be drawn on or through a bank;(3) Be designated by the phrase traveler's check and(4) Require a countersignature by a person whose signature appears on the instrument.


66. (p. 748-749) Bruce buys a used car from Tony for $5,000. The car is in great shape and Bruce leaves town in it. Bruce paid Tony with a cashier's check, but decided that he would rather not pay at all. Accordingly, he stopped payment on the check claiming that the check was lost. What rights, if any, would Tony have and what liabilities and other problems, if any, would Bruce have?

Tony may sue and recover against Bruce for breach of warranty and Bruce is also liable for bank fraud.


67. (p. 752) What does the Truth-in-Savings Act require regarding information to be provided to customers before accounts are opened?

The act requires that the following information be provided to a customer before the customer opens a deposit account:(1) The minimum balance required to open an account and to be paid interest;(2) The manner in which the balance of the account will be calculated;(3) The annual percentage yield of interest for the account;(4) The way interest on the account will be calculated;(5) Notification of any fees, charges and penalties the account may be assessed and how they are calculated and(6) Notification of any limitations on withdrawals or deposits.


68. (p. 753) Set forth the requirements for a check to be considered properly payable.

For a check to be considered properly payable, it must:(1) Have the drawer's authorized signature on the check;(2) Be paid to a person entitled to enforce the check;(3) Not have been altered;(4) Not have been completed by addition of unauthorized terms if the check was incomplete;(5) Be paid on or after the date of the check and(6) Not be subject to a stop payment from the drawer.


69. (p. 756) What items should a stop payment order list?

A stop payment order should list:(1) The date of the check;(2) The name of the payee;(3) The amount of the check;(4) The number of the check and(5) The checking account number.


Chapter 29Checks and Electronic Fund Transfers


1. (p. 744) According to the UCC, a check is a special kind of draft. TRUE


2. (p. 747) Money orders are considered checks under the UCC. TRUE


3. (p. 747) Banks are required by the UCC to certify the check if a customer has sufficient funds in the account. FALSE


4. (p. 750) A bank involved in the check collection process may only be classified as one type of bank during the entire process. FALSE


5. (p. 750) Sometimes the depositary is the same bank as the payer bank. TRUE


6. (p. 751) A substitute check is a check that is substituted for a lost check. FALSE


7. (p. 756) A written stop payment order is valid for 30 days. FALSE


8. (p. 756) The UCC states that a customer can postdate a check and that the customer has no obligations to give the bank notice of the postdated check. FALSE


9. (p. 766) The customer cannot order a stop payment on an electronic fund transfer. TRUE



10. (p. 744) Which of the following governs the transfer of checks between banks? A. Article 1 of the UCCB. Article 2 of the UCCC. Article 3 of the UCCD. Article 4 of the UCCE. Article 5 of the UCC


11. (p. 744) Which of the following parties are related to an order? A. A drawerB. A payeeC. A draweeD. All of the aboveE. A drawer and a payee, but not a drawee


12. (p. 744) Which of the following is an instrument whereby one party orders the second party to pay an amount of money to the party listed on the instrument? A. A draftB. A noteC. A markD. All of the aboveE. A draft and a note, but not a mark


13. (p. 744) Which of the following is the party giving the order to pay on a draft? A. The drawerB. The draweeC. The payeeD. The draftorE. The draftee


14. (p. 744) Which of the following is the party ordered to pay on a draft? A. The drawerB. The draweeC. The payeeD. The draftorE. The draftee


15. (p. 744) Which of the following is the party receiving the money from the draft? A. The drawerB. The draweeC. The payeeD. The draftorE. The draftee


16. (p. 744) A ______ is a special draft that orders the bank to pay a fixed amount of money on demand. A. NoteB. Promissory noteC. CheckD. Acknowledgment draftE. Promissory draft


17. (p. 744) Which of the following are considered banks under the UCC? A. Savings and LoansB. Credit UnionsC. Trust CompaniesD. All of the aboveE. Savings and Loans and Credit Unions, but not Trust Companies


18. (p. 745) A ______ check is a check for which both the drawer and the drawee are the same bank. A. CertifiedB. AgreedC. AcknowledgedD. Cashier'sE. Promise


19. (p. 745) In which of the following is the payee of a check a specific person and the bank draws on itself? A. CertifiedB. AgreedC. AcknowledgedD. Cashier'sE. Promise


20. (p. 746) A _____________ check is a check that is drawn by one bank and usually drawn on another bank. A. Cashier'sB. CertifiedC. Teller'sD. AcknowledgedE. Transferable


21. (p. 747) A ______ check is a check that is accepted at the bank at which it is drawn. A. Cashier'sB. CertifiedC. AcknowledgedD. TransferredE. Drawee


22. (p. 747) Which of the following is false regarding certified checks? A. If a bank refuses to certify a check, the check is considered dishonoredB. If a bank refuses to certify a check, the check lacks the extra protection of certificationC. If a bank certifies a check, the drawer of the check is no longer liable for the amount of the checkD. If a bank certifies a check, the bank has become primarily liable for the checkE. Once a check is certified, funds of the customer are removed from his or her account and placed in the bank's certified check account


23. (p. 748) Assuming a proper claim is made, for which of the following does the UCC allow full recovery in the event of theft? A. A cashier's checkB. A teller's checkC. A certified checkD. All of the aboveE. A cashier's check or teller's check, but not a certified check


24. (p. 749) A ______ bank is the first bank that receives the check for payment. A. PayerB. PayeeC. DepositaryD. TransferE. Acceptor


25. (p. 749) The ______ bank is the bank upon which a check is drawn. A. PayorB. PayeeC. DepositaryD. TransferE. Acceptor


26. (p. 750) Which of the following is the bank ultimately responsible for granting funds for a check? A. DepositaryB. PayorC. CollectingD. IntermediaryE. Transferring


27. (p. 750) Which of the following is a bank, other than the payor bank, handling the check at any point from the time the check is deposited to the time it reaches the payor bank? A. DepositaryB. AcknowledgingC. CollectingD. IntermediaryE. Transferring


28. (p. 750) Which of the following is a bank receiving a transferred check during a collection process (excluding the first bank and the last bank)? A. DepositaryB. AcknowledgingC. CollectingD. IntermediaryE. Transferring


29. (p. 750) When the depositary bank is the same bank as the payer bank, the check is referred to as a[n] ______. A. On-us itemB. Combined itemC. Condensed itemD. Unitary itemE. Uniform item


30. (p. 750) A bank may determine that ______ or later is the cut-off hour for handling checks. A. NoonB. 1:00 p.m.C. 2:00 p.m.D. 3:00 p.m.E. 4:00 p.m.


31. (p. 750) The Federal Reserve System consists of ______ central banks. A. SixB. EightC. TwelveD. TwentyE. Thirty


32. (p. 750) A[n] ______ is an institution created to facilitate banks and their exchange of checks and drafts drawn on one another, as well as to enable banks to settle their daily balances. A. ClearinghouseB. Transferring institutionC. Facilitating institutionD. Acknowledging institutionE. Approval institution


33. (p. 751) The first ______ of any amount deposited in a bank must be available to the depositor on the business day following the day of deposit. A. $100B. $200C. $300D. $400E. $500


34. (p. 752) If a customer makes a deposit over ______, the depositary bank may place an 8-day hold on the funds. A. $1,000B. $2,000C. $3,000D. $4,000E. $5,000


35. (p. 753) Under the ______, a bank has a duty to pay checks from a customer's account so long as the check is properly payable. A. Account ruleB. Properly payable ruleC. Payability in fact regulationD. Check pay ruleE. Account pay rule


36. (p. 756) An oral stop payment order is valid for _________ unless the order is later confirmed in writing. A. 10 DaysB. 14 DaysC. 30 DaysD. 45 DaysE. 90 Days


37. (p. 756) If a check is not presented to a bank within ____________ of its date, the check is considered stale check. A. 30 DaysB. 90 DaysC. 6 MonthsD. 9 MonthsE. 1 Year


38. (p. 760) If a customer discovers a forgery when examining the customer's bank statement, the customer must notify the bank within ______ after the statement has been made available. A. 10 DaysB. 20 DaysC. 30 DaysD. 45 DaysE. 60 Days


39. (p. 760-761) Assuming the bank is not negligent, in the case of multiple forgeries by the same wrongdoer, if a customer examines a bank statement and does not notify the bank of the first forgery within the time required by the UCC, what is the effect on subsequent forgeries? A. There is no effect because each forgery stands on its ownB. The customer is barred from recovering on the subsequent forgeriesC. The customer may recover on the subsequent forgeries if they are reported to the bank within 5 days after the statement showing the forgery is received by the customerD. The customer may recover on the subsequent forgeries if they are reported to the bank within 10 days after the statement showing the forgery is received by the customerE. The customer may recover on the subsequent forgeries if they are reported to the bank within 15 days after the statement showing the forgery is received by the customer


40. (p. 762) Regardless of the care used in cashing a check by the bank, a customer must report a forgery within ________ from the date the bank statement showing the forgery is available to the customer or the customer will lose the right to recover. A. 90 DaysB. 120 DaysC. 180 DaysD. 9 MonthsE. 1 Year


41. (p. 763) Generally, when an endorsement on a check has been forged, which party is the party ultimately liable for the loss? A. The drawerB. The first party to accept the forged instrumentC. The first endorser of the instrumentD. The bank of the first party to accept the forged instrumentE. The bank of the drawer even if proper notice was given of the forgery


42. (p. 763) Which of the following is defined by the UCC as a change, without consent, that nullifies the obligation of a party to the instrument? A. An alterationB. A defacementC. A material additionD. A transformationE. A reformation


43. (p. 764) When money is transferred by an electronic terminal, telephone or computer, this transfer is a called a[n] ______ A. Automatic fund transferB. Electronic fund transferC. Computer generated transferD. Wire transferE. Consumer electronic transfer


44. (p. 764) Which of the following allows a consumer to directly transfer funds from a banking account to a merchant? A. An electronic authorized systemB. A direct pay systemC. An authorized direct pay systemD. A point-of-sale systemE. A pay-by-electronics system


45. (p. 764) Which of the following is a deposit that is preauthorized and performed on a customer's account through an electronic terminal? A. A point-of-saleB. An authorized depositC. A transferred depositD. A direct depositE. An approved deposit


46. (p. 764-765) Which of the following are types of electronic fund systems? A. Automated teller machinesB. Pay by telephone systemsC. Point-of-sale systemsD. All of the aboveE. Neither automated teller machines, pay by telephone systems, nor point-of-sale systems are types of electronic funds systems


47. (p. 765) Which of the following governs consumer fund transactions? A. The Electronic Fund Transfer Act of 1978B. The Automated Transfer Act of 1990C. The Electronic Banking Act of 2000D. The Automated Fund Transfer Regulation of 2002E. The Uniform Money Services Business Act of 1990


48. (p. 765) If a customer's ATM card is lost or stolen, the customer must notify the bank within _____ days and if that is done, the customer is then liable for only the first _____ stolen. A. 5 Days, $50B. 3 Days, $100C. 2 Days, $50D. 7 Days, $200E. 10 Days, $500


49. (p. 765) A customer who notifies the bank that an ATM card is lost or stolen 45 days after it is lost or stolen is liable for up to the first ______ that is stolen. A. $0B. $200C. $300D. $400E. $500


50. (p. 767) Which of the following is an unauthorized electronic transfer? A. A transfer that is initiated by a person who has no authority to transferB. A transfer from which the customer receives no benefitC. A transfer for which the customer did not give his personal identification number to the unauthorized partyD. All of the aboveE. A transfer initiated by a person who has no authority to transfer or a transfer or a transfer from which a customer receives no benefit, but not a transaction for which the customer did not give his personal identification number to the unauthorized party


51. (p. 767) Which of the following is money stored electronically on microchips, magnetic strips or other computer media that would allow for the elimination of physical currency? A. Electronic fundsB. Electronic mediumC. Digital cashD. Digital resourcesE. Electronic resources


52. (p. 767) Which of the following is a card containing microchips for storing data that can be used to transfer funds? A. Stored-value cardsB. Smart cardsC. Intel cardsD. Transfer cardsE. Electronic cards


53. (p. 768) Which of the following is the period between the time a check is written and the time it is presented for final payment, during which time a customer can still use his or her funds? A. Transfer timeB. Electronic timeC. Chargeable timeD. Float timeE. Usable time


54. (p. 769) Which of the following is the model state law passed by the National Conference on Commissioners on Uniform State Laws that would affect online services and e-money services as well as traditional money services? A. The Uniform Money Services Business ActB. The Uniform State Transfer ActC. The Uniform E-Money and Online Services ActD. The Uniform State Electronic Funds Transfer ActE. The Uniform Transfer Act


55. (p. 770) The Uniform Money Services Business Act changes all references to money to ______. A. CashB. Electronic fund transferC. Monetary valueD. Transactional valueE. Funds value


Mindy, a bank teller, saw that customer Fred did not have sufficient funds in his account to cover a check that had been presented for payment. Mindy was new and was confused about what to do with the check. She asked the bank manager, Trevor, about any available options. Trevor told her that the bank was required by law to dishonor the check, that the check should be returned to the holder with a notation that it had been dishonored and that it could not be presented again. Mindy asked Trevor if there were any policies the bank could institute to provide customers with overdraft protection and Trevor answered that those were prohibited by law.

56. (p. 755) Which of the following is true regarding Trevor's statement that the bank's only choice was to dishonor the check? A. Trevor is correctB. Trevor is incorrect because under the UCC, the bank could have created an overdraft by paying the check and charging the account the amount shortC. Trevor is incorrect because under the UCC, the bank could have created a subsequent draft by paying the check and charging the account the amount shortD. Trevor is incorrect because under the UCC, the bank could have created a secondary draft by paying the check and charging the account the amount shortE. Trevor is incorrect because under the UCC, the bank could have created an excessive draft by paying the check and charging the account the amount short

AACSB standard: 3Blooms Taxonomy: ApplicationDifficulty: EasyLearning Objective: 4

57. (p. 755) Which of the following is true regarding what a bank may do to offer overdraft protection to customers? A. A bank may link a checking account to the customer's savings account and charge the savings account when a checking account has insufficient fundsB. A bank may promise to credit a customer's account if there are insufficient fundsC. A bank may charge a customer for crediting a customer's account in the case of insufficient fundsD. All of the aboveE. The bank may link a checking account to a customer's savings account; a bank may draw on a savings account in the event insufficient funds exist in the checking account and a bank may promise to credit a customer's account in the event of insufficient funds, but the bank may not charge the customer for that service


58. (p. 755) Which of the following is true regarding Trevor's statement that once the check had been dishonored, it could not be presented again? A. He was correctB. The holder can attempt to resubmit the check at a later dateC. The holder may attempt to resubmit the check at a later date only if all endorsers of the check have been notified of the dishonorD. The holder may resubmit the check only if notice is given to the drawerE. The check may be presented again for payment only if notice has been given both to endorsers and the drawer


Elaine ordered a pair of diamond stud earrings from GEM Jewelry Store. She paid in advance because the sales clerk told her that the store would have to pay the supplier before the earrings could be shipped. Later that day, Elaine found out from a friend of hers that GEM Jewelry Store was in financial trouble. Elaine was concerned and immediately called her bank and issued a stop payment order on the check she wrote to GEM Jewelry Store. She gave the bank all of the correct information orally needed to stop payment on the check. The bank, however, did not stop payment on the check. The check was paid, GEM Jewelry Store went bankrupt and Elaine was unable to get either her money or the earrings from GEM Jewelry Store. Elaine asked the bank manager of the bank for a refund of the check amount. The bank manager told her that the stop payment order was not good because it was oral and that in any event, under the UCC, banks are not liable for failing to stop payment on a check. The bank manager further told Elaine that both GEM Jewelry Store and the bank were holders in due course and that Elaine is liable for any damages sustained by GEM Jewelry Store or the bank based upon her attempt to stop payment on the check.

59. (p. 756) Which of the following is correct regarding the manager's statement that stop payment orders may not be oral? A. It depends upon the state because some states allow oral stop payment orders and some do notB. The manager is incorrect because all states allow oral stop payment ordersC. The manager is correct because no states allow oral stop payment ordersD. The manager is correct in that all states allow stop payment orders, but that is true only in the even that the drawer is solventE. The manager is correct in that all states allow stop payment orders, but that is true only in the event that the payee has filed bankruptcy


60. (p. 755) Which of the following is true regarding the bank manager's statement that the bank could not incur any liability for damages for the failure to stop payment on a check? A. The manager is correctB. The manager is incorrect and the bank will incur liability or damages suffered by a customer due to the failure to stop payment when a stop payment order was properly providedC. The manager is incorrect and the bank will incur liability or damages suffered by a customer due to the failure to stop payment when a stop payment order was properly provided, but only up to $500D. The manager is incorrect and the bank will incur liability or damages suffered by a customer due to the failure to stop payment when a stop payment order was properly provided, but only up to $1,000E. The manager is incorrect and the bank will incur liability or damages suffered by a customer due to the failure to stop payment when a stop payment order was properly provided, but only up to $1,500


61. (p. 756) Which of the following is true regarding the bank manager's statement that both the bank and GEM Jewelry Store were holders in due course and that stop payment orders could not affect the right of a holder in due course to collect? A. The bank manager is wrong on all countsB. The bank manager is correct only in so far as he stated the bank was a holder in due courseC. The bank manager is incorrect only in so far as he stated that GEM Jewelry Store was a holder in due courseD. The bank manager is correct in that if the holder of the check is a holder in due course, the drawer's defenses will not apply and the drawer will be liable for the check; but, the bank manager is incorrect that either he or the GEM Jewelry Store are holders in due courseE. The bank manager is correct in that the holder in due course may be paid even in the face of a stop payment order and he is correct that the bank is a holder in due course, but he is incorrect that the GEM Jewelry store is a holder in due course


Harold, who is 97 years old, runs a successful hardware store. He had never had any trouble with dishonest employees in the past. Unfortunately, he hired Renee, who had significant financial problems and began to steal from Harold. One thing that Renee did was that she came in early and took the rubber stamp of his signature that Harold kept in an unlocked drawer and used the signature stamp to create a check payable to her. She then took it to the bank and cashed it. Harold, who was diligent in examining his bank statements, noticed the unauthorized check to Renee and immediately informed his bank about it. Harold, who was honest, also told the bank what he suspected had happened involving Renee taking his stamp. The bank manager told Harold that the bank was not required to reimburse Harold because no forgery was involved since it was so easy for Renee to get to the stamp. Harold decided to institute litigation against the bank. A few months later when Harold was out playing golf, immediately after he hit a hole-in-one and had his picture taken for the local newspaper, he died from all the excitement and pleasure involved. A few hours later, but before anyone at the bank knew of Harold's death, the bank cashed a check from Good Time Jewelers representing a payment Harold had given Good Time Jewelers for a $30,000 3 karat diamond for his girlfriend, who was 25 years old. Later that day, the bank was notified of Harold's death. The bank manager was still annoyed with Harold for instituting litigation against him over the check involving Renee. Therefore, when Fast Boats presented a $50,000 check that Harold had written for a good friend of his, Bud, the bank manager went ahead and accepted the check. The bank manager accepted the check for the boat 11 days after the date of Harold's death and 11 days after the bank had notice.

62. (p. 759) Which of the following is correct regarding whether the bank will legally have to accept responsibility for the check presented by Renee? A. The bank will not be required to repay Harold's estate because the check was not forgedB. The bank will be required to repay Harold's estate because the check was forgedC. The bank will be required to repay Harold's estate only if it had notice of the forgery within 5 days after the forgeryD. The bank will be required to repay Harold's estate only if the bank had knowledge of the forgery within 15 days after the forgeryE. The bank will likely not be required to repay Harold's estate because, although a forgery was involved, Harold's negligence in leaving the rubber stamp with his signature readily available likely substantially contributed to the forged signature

AACSB standard: 3Blooms Taxonomy: Synthesis and EvaluationDifficulty: HardLearning Objective: 4

63. (p. 759) Which of the following is true regarding whether the bank will have to repay Harold's estate for accepting the check from the Jewelry Store? A. The bank will have to repay Harold's estate because Harold was dead at the time the check was acceptedB. The bank will not have to repay Harold's estate because Harold had just died and the bank did not have knowledgeC. The bank will have to repay Harold's estate only if a court determines that the executor of Harold's will had not been notified of the death at the time the bank cashed the check and, therefore, could not have notified the bank of the deathD. The bank will be held liable for the check because under the UCC after a customer reaches the age of 80, a bank is supposed to check with the customer before cashing any check in an amount over $20,000E. The bank will be held liable for the check because under the UCC after a customer reaches the age of 80, a bank is supposed to check with the customer before cashing any check in an amount over $100,000


64. (p. 759) Which of the following is true regarding whether the bank will be required to reimburse Harold's estate for the check accepted from the boat seller? A. The bank will not be required to reimburse Harold's estate because the bank was justified in cashing any checks that Harold had written before his deathB. The bank will have to reimburse Harold's estate because it could only cash checks for 5 days after learning of Harold's deathC. The bank will have to reimburse Harold's estate because after learning of Harold's death on the date of his death, the bank could only accept checks for 10 daysD. The bank will have to reimburse Harold's estate because after learning of Harold's death on the date of his death, the bank could only accept checks for 15 daysE. The bank will have to reimburse Harold's estate because after learning of Harold's death on the date of his death, the bank could only accept checks for 20 days


Essay Questions

65. (p. 746-747) Set forth the characteristics that a traveler's check must have.

A traveler's check must:(1) Be payable on demand;(2) Be drawn on or through a bank;(3) Be designated by the phrase traveler's check and(4) Require a countersignature by a person whose signature appears on the instrument.


66. (p. 748-749) Bruce buys a used car from Tony for $5,000. The car is in great shape and Bruce leaves town in it. Bruce paid Tony with a cashier's check, but decided that he would rather not pay at all. Accordingly, he stopped payment on the check claiming that the check was lost. What rights, if any, would Tony have and what liabilities and other problems, if any, would Bruce have?

Tony may sue and recover against Bruce for breach of warranty and Bruce is also liable for bank fraud.


67. (p. 752) What does the Truth-in-Savings Act require regarding information to be provided to customers before accounts are opened?

The act requires that the following information be provided to a customer before the customer opens a deposit account:(1) The minimum balance required to open an account and to be paid interest;(2) The manner in which the balance of the account will be calculated;(3) The annual percentage yield of interest for the account;(4) The way interest on the account will be calculated;(5) Notification of any fees, charges and penalties the account may be assessed and how they are calculated and(6) Notification of any limitations on withdrawals or deposits.


68. (p. 753) Set forth the requirements for a check to be considered properly payable.

For a check to be considered properly payable, it must:(1) Have the drawer's authorized signature on the check;(2) Be paid to a person entitled to enforce the check;(3) Not have been altered;(4) Not have been completed by addition of unauthorized terms if the check was incomplete;(5) Be paid on or after the date of the check and(6) Not be subject to a stop payment from the drawer.


69. (p. 756) What items should a stop payment order list?

A stop payment order should list:(1) The date of the check;(2) The name of the payee;(3) The amount of the check;(4) The number of the check and(5) The checking account number.


Chapter 34Liability to Third Parties and Termination


1. (p. 886) Because an agent with express authority has specific goals he or she is to achieve, the agent is also granted the use of other means, beyond the express agreement, reasonably necessary to achieve the desired goal. TRUE


2. (p. 886) The equal dignity rule requires that all agency agreements be in writing. FALSE


3. (p. 886) An agent's implied authority is derived from an agent's apparent authority and consists of what is reasonably necessary for carrying out the agent's grant of express authority. FALSE


4. (p. 890) When a third party is aware that an agent does not represent the principal, the law does not hold the agent liable for an agreement in cases in which the agent exceeds his or her authority to act on behalf of the principal. TRUE


5. (p. 891) Agents who go beyond their authority when the principal is disclosed or partially disclosed are liable for breach of contract, not breach of implied warranty. FALSE


6. (p. 895) If an agent commits a crime in the scope of employment for a principal without the authorization of the principal, the principal is not liable for the agent's crime. TRUE


7. (p. 897) In order to terminate a principal's responsibility, actual notice of agency termination must be given to third parties who have had business interactions with the agent. TRUE


8. (p. 895) Actual notice of agency termination may never by given orally. FALSE


9. (p. 899) The principal may terminate an agency coupled with an interest. FALSE


10. (p. 900) Bankruptcy of either the principal or agent always terminates the agency relationship. FALSE



11. (p. 886) In an express agency relationship, the agent has ______ authority. A. ExpressB. ImpliedC. ApparentD. InherentE. Acknowledged


12. (p. 886) Express authority is often referred to as ______ authority. A. AbsoluteB. InherentC. ActualD. NoticedE. Approved


13. (p. 886) Which of the following is the term for the rule enforced by most states that when express authority is granted for an agent to enter into a contract legally required to be in writing, the grant of authority also must be in writing? A. The equal dignity ruleB. The required writing ruleC. The statute of frauds ruleD. The matching ruleE. The documentation rule


14. (p. 886) Upon which of the following is the equal dignity rule based? A. The statute of writingsB. The statute of fraudsC. The documentation ruleD. The enforcement ruleE. The common rule


15. (p. 886) Which of the following is a specific form of express authority, usually in writing, granting an agent specific powers? A. Grant of authorityB. Power of attorneyC. Grant of express authorizationD. Grant of sealed authorityE. Grant of specific authority


16. (p. 886) Which of the following is a type of power of attorney? A. GeneralB. SpecificC. AcknowledgedD. All the aboveE. General and specific, but not acknowledged


17. (p. 886) Which of the following grants an agent express authority over specifically outlined acts? A. Real power of attorneyB. General power of attorneyC. Acknowledged power of attorneyD. Special power of attorneyE. Equal power of attorney


18. (p. 886) Which of the following allows an agent to conduct all business for the principal? A. Special power of attorneyB. General power of attorneyC. Acknowledged power of attorneyD. Special power of attorneyE. Equal power of attorney


19. (p. 886) Which of the following specifies that the agent's authority is intended to continue beyond the principal's incapacitation? A. Special power of attorneyB. Durable power of attorneyC. Nonterminable power of attorneyD. Permanent power of attorneyE. Living power of attorney


20. (p. 886) In which types of agency relationships is the agency relationship inferred from the conduct of the parties? A. Express agencyB. Agency by estoppelC. Implied agencyD. Both agency by estoppel and implied agencyE. None of the above


21. (p. 886) An agent's implied authority is derived from an agent's _____ authority. A. ExpressB. ApparentC. PerceivedD. AcknowledgedE. Temporary


22. (p. 887) Which of the following types of agency exists when a third party reasonably believes, on the basis of a principal's actions, that an agency relationship exists between the principal and another individual? A. Express agencyB. Implied agencyC. Acknowledged agencyD. Perceived agencyE. Apparent agency


23. (p. 887) When a principal is classified as a[n] ______ principal, a third party is aware that an agent is making an agreement on behalf of a principal and the third party also knows the identity of the principal. A. AcknowledgedB. PermittedC. DisclosedD. RevealedE. Uncovered


24. (p. 887) Which of the following is the classification of a principal when a third party is aware than an agent is making an agreement on behalf of a principal, but the third party is unaware of the identity of the principal? A. Partially disclosed principalB. Unidentified principalC. Unrevealed principalD. All the aboveE. Partially disclosed principal or unidentified principal, but not unrevealed principal


25. (p. 888) Which of the following is true regarding liability of an agent acting within his or her authority on a contract involving an undisclosed principal? A. The law will likely hold the agent liable for the agreementB. The law will hold the agent liable for the agreement unless the contract the agent had with the principal expressly provided that the agent would not be held liable in such casesC. The law will hold the agent liable for the agreement unless the contract the agent had with the principal impliedly or expressly provided that the agent would not be held liable in such casesD. The law will hold the agent liable for the agreement unless a contract for under $1,000 is involved in which case only the principal would be held liableE. The law would not hold the agent liable on the agreement


26. (p. 888) Which of the following is true regarding liability of a principal if a contract an agent makes with a third party expressly excludes the principal from the contract? A. The principal is liable on the contract because it is unconscionable to exclude a principal from a contractB. The principal is liable on the contract only if the principal is an unidentified principalC. The principal is liable on the contract only if the principal is a partially disclosed principalD. The principal is liable on the contract unless the principal gave the agent authority in writing to make the agreement with the third partyE. The principal is not liable on the contract


27. (p. 888) Which of the following is true under the UCC regarding liability of a principal to an agent if the agent enters into a contract that is a negotiable instrument? A. The principal is liable to the same extent as if no negotiable instrument were involved because the negotiable instrument has no effect on the principal's liabilityB. The principal cannot be held liable unless the principal's name is on the instrumentC. The principal cannot be held liable unless the agent's signature indicates that it was made in a representative capacityD. The principal cannot be held liable unless the principal's name is on the instrument or the agent's signature indicates that it was made in a representative capacityE. The principal cannot be held liable unless the principal's name is on the instrument or the agent's signature indicates that it was made in a representative capacity, or the agent has been ruled insolvent


28. (p. 888) Which of the following is true regarding the right of a third party to reject the performance of the principal? A. The third party may reject the performance of the principal at any timeB. The third party may never reject the performance of the principalC. The third party may reject the performance of the principal if the third party entered into a contract with the agent such that the performance of the agent is requiredD. The third party may reject the performance of the principal if the third party entered into a contract with the agent such that the performance of the agent is required or the third party can establish that the third party had been involved in past litigation with the principalE. The third party may reject the performance of the principal if the third party entered into a contract with the agent such that the performance of the agent is required; the third party can establish that the third party had been involved in past litigation with the principal; or the principal owes money to the third party


29. (p. 888) What was the result The Heiby Oil Company v. Galen case in the text in which the court ruled on the efforts of the plaintiff oil company to hold a defendant personally liable after the defendant purchased gasoline for a service station? A. That the defendant failed to disclose that he was contracting on behalf of a disclosed principal and that he was, therefore, personally liableB. That the defendant disclosed the existence of the principal and was not, therefore, liable for the debtC. That the defendant disclosed the existence of the principal but was liable because the principal could not payD. That the defendant disclosed the existence of the principal but was liable because he had agreed to individual liabilityE. That there was insufficient information to determine as a matter of law whether the defendant disclosed the existence of the principal and that the trial court therefore erred in granting summary judgment to the defendant


30. (p. 889) Which of the following is true in situations in which a principal was undisclosed and the third party comes to know of the undisclosed principal's identify, but proceeds to get a judgment against the agent? A. The principal is liable to the third party anywayB. The principal is liable to the third party only if the agent does not payC. The principal is liable to the third party only if the agent files for bankruptcyD. The principal is released from liability to the third partyE. The principal is released from liability unless a contract for personal service was involved


31. (p. 889) Which of the following is true regarding agent liability when a third party gets a judgment against a previously undisclosed principal? A. The agent is freed from liability to the third partyB. The agent remains liable to the third partyC. The agent is freed from liability to the third party unless the principal refuses to payD. The agent is freed from liability to the third party unless the principal files for bankruptcyE. The agent is freed from liability to the third party unless a contract for personal service was involved


32. (p. 890) Which of the following is true if an agent has no authority to act on behalf of a principal, but the agent still enteres into a contract with a third party? A. The principal is bound only if the principal is a disclosed principalB. The principal is bound only if the principal is an unidentified principalC. The principal is bound only if the principal is a partially disclosed principalD. The principal is bound only if the principal is a disclosed principal or a partially disclosed principalE. The principal is not bound unless the principal ratifies the contract


33. (p. 891) Which of the following is true regarding an agent's liability when the agent commits a tort while acting as an agent for a principal? A. The agent is personally liable only if the agent was on a mission for an unidentified principalB. The agent is personally liable only if the agent was on a mission for an unidentified principal or a partially disclosed principalC. The agent is liable regardless of the classification of the principal or the liability of the principalD. The agent is not liable if the principal is liableE. The agent is not liable unless the principal is insolvent


34. (p. 892) The doctrine of ______ is used in the context of the principal / employer–agent / employee relationship. A. Superior respondeatB. Respondeat superiorC. Stare decisisD. Res superiorE. Supre superior


35. (p. 892) What does the Latin phrase respondeat superior mean? A. Let the superior speakB. Let the agent speakC. Let the employee speakD. Let all speakE. Let all be responsible


36. (p. 892) Which of the following holds the principal–employer liable for any harm caused by the agent-employee during the time that the agent-employee is working for the principal? A. Vicarious liabilityB. Responsible liabilityC. Comparative liabilityD. Contributory liabilityE. Applied liability


37. (p. 892-893) Which of the following are factors considered by courts in determining whether an act committed by an employee occurred within the course and scope of employment? A. Whether the employer authorized the employee's actB. Whether the employer provided the tools by which the act occurredC. Whether the employer knew that the act would involve the commission of a serious crimeD. All the aboveE. Whether the employer authorized the employee's act and whether the employer provided the tools by which the act occurred, but not whether the employer knew that the act would involve the commission of a serious crime


38. (p. 893-894) Which of the following was the result in Iglesia Cristiana La Casa Del Senor, Inc., Etc. v. L.M., the case in which an alleged victim sued the former pastor and a church alleging the pastor had sexually assaulted her when she was a minor? A. That the assault did not occur within the scope of the pastor's employment and that the church was not vicariously liable for his actB. That the assault occurred within the scope of the pastor's employment and that the church was vicariously liable for his actC. That although the assault did not occur within the scope of the pastor's employment, the church was vicariously liable for the act because of its criminal natureD. That the church was vicariously liable because it knew of the criminal act but did nothingE. That regardless of whether or not the assault occurred within the scope of the pastor's employment, the church was vicariously liable because it had negligently hired the priest


39. (p. 894) Which of the following is true regarding the rights of an employer who is held liable and pays a third party, not because of the employer's negligence, but under the doctrine of respondeat superior based upon negligence of an employee? A. The employer has no right to receive any reimbursement from the negligent employeeB. The employer has a right to recover only 50% of any amounts paid from a negligent employeeC. The employer has a right of indemnification from the negligent employeeD. The employer can recover 100% of any amounts paid from a negligent employee but only if it can be shown that the employee's negligence was based upon the violation of a statuteE. The employer can recover 50% of any amounts paid from a negligent employee but only if it can be shown that the employee's negligence was based upon the violation of a statute


40. (p. 895) Which of the following is false regarding the relationship between a principal and an independent contractor? A. An independent contractor is not an employee of the principalB. The principal does not control the details of the independent contractor's performanceC. An individual who hires an independent contractor cannot be held liable for the independent contractor's tortious actions under the doctrine of respondeat superiorD. A principal is not liable for extremely dangerous actions engaged in by the independent contractorE. If an independent contractor commits a crime without the authorization of the principal, the principal is not liable for the agent's crime


41. (p. 897) How long does an agent's apparent authority continue once an agency relationship is terminated? A. It ends immediatelyB. 24 hoursC. 7 daysD. 30 daysE. Until the principal notifies third parties that the agency relationship has ended


42. (p. 897) Which of the following is true regarding notice of the termination of an agency relationship? A. It must be provided by actual noticeB. It must be provided by constructive noticeC. It must be provided by actual noticeD. It must be provided by actual notice in written formE. It may be provided by actual or constructive notice


43. (p. 897) Which of the following is the most typical way in which to provide constructive notice of agency termination? A. By telephoneB. By letterC. By posting a notice at the courthouseD. By newspaper publicationE. By e-mail


44. (p. 897) If a manager has business transactions in one of the European Union countries and wants to terminate an agency relationship, he or she would want to have access to knowledge about which of the following? A. Chapter IV of the Agency Relationship LawB. Chapter VII of the Employment RelationshipC. Article VI of the European Union RegulationsD. Article VII of the European Union RegulationsE. Section X of the Agency Regulations


45. (p. 897, 899) By which of the following means may an agency relationship be terminated? A. Fulfillment of purposeB. Occurrence of a specific eventC. Revocation of authorityD. All the aboveE. Fulfillment of purpose and occurrence of a specific event, but not revocation of authority


46. (p. 899) Which of the following is false regarding revocation of the authority of an agent and renunciation by an agent? A. At anytime, a principal can revoke an agent's authorityB. A principal's revocation of an agent's authority might be a breach of contract entitling the agent to damagesC. An agent can terminate the agency relationship by renouncing the authority given to the agentD. An agent's renunciation of a contract might be a breach of contract entitling the principal to damagesE. If an agent has breached a fiduciary duty to the principal, the principal can revoke the agent's authority, but the agent may be entitled to damages


47. (p. 899) Which of the following is an agency agreement created for the agent's benefit, not for the principal's? A. Agency interest principleB. Agency coupled with an interestC. Agency benefit interestD. Agency compensation principleE. Agency entitlement principle


48. (p. 900) Which of the following is false regarding the principal-agent relationship in Mexico? A. Mexico does not recognize the death of the principal as a termination of agencyB. Mexico does not see the death of the principal as an immediate end to the agent's obligationsC. Mexican law requires that an agent continue to manage the affairs of his agency after the principal's deathD. In the case of a principal's death, agents may request that a judge stipulate a period of time within which the heirs must take charge of propertyE. In the case of a principal's death, an agent is required to continue management only until the principal's heirs can assume the responsibilities of the deceased


49. (p. 900) Which of the following results in termination of agency by operation of law? A. Death of either the principal or the agentB. Adjudicated insanity of the principal or agentC. InsolvencyD. All the aboveE. Death or adjudicated insanity of either the principal or agent, but not insolvency


50. (p. 901) Which of the following is false regarding termination of agency in the Netherlands? A. The agent is entitled to compensation if his or her duties are concluded within a reasonable time after terminationB. Compensation is due if the agent received the orders for a certain action before the termination of the contractC. The agent is entitled to goodwill compensation in certain situationsD. An agent is not entitled to additional compensation based on bringing the principal new customers or because agreements with clients obtained by the agent remain profitableE. There are requirements on the agent in regard to time limits in filing for compensation


51. (p. 900-901) Which of the following is false regarding termination of agency based on operation of law? A. Impossibility of performance terminates the agency relationshipB. An agency agreement is terminated whenever the agent, unknown to the principal, acquires an interest against the principal's interestC. The agency agreement is terminated if the agent breaches the duty of loyalty he or she has to the principalD. A change in law passed subsequent to the formation of an agency agreement may not terminate the agency agreementE. If there is an unusual change in circumstances that leads the agent to believe that the principal's instructions do not apply, the agency relationship terminates


Harold wants to purchase a lot next door to Sarah's home that is owned by Sarah. Harold knows Sarah will not sell the lot to him because of his barking dogs that she dislikes. Harold agrees with Alice that Alice will purchase the lot from Sarah for him. Alice and Sarah reach an agreement and enter into a contract whereby Sarah is to sell the lot to Alice for a price within the scope of Alice's authority. Alice tells Sarah nothing about her plan to later transfer the lot to Harold. Before title to the lot is transferred to Alice, Harold tells Alice that he no longer wants the lot. Alice tells Sarah about Harold. Sarah tells Alice that as far as she is concerned, Alice has bought a lot. Sarah says that she plans to move anyway and really does not care whether Alice or Harold end up with the lot. She just wants her money and is unconcerned about barking dogs. They will be the next owner's problem.

52. (p. 887) What type of principal is Harold? A. DisclosedB. UndisclosedC. Partially disclosedD. UnidentifiedE. Legally nonexistent


53. (p. 887) Which of the following is true regarding whether Alice is personally bound on the contract with Sarah? A. Alice is not personally bound because she was acting on behalf of HaroldB. Alice is personally bound unless she can establish that Sarah would not have sold her the lot if she had known that Harold was involvedC. Alice is personally bound unless she can establish that Harold has the funds with which to pay SarahD. Alice is not personally bound unless Harold has legally filed for bankruptcyE. Alice is personally bound


54. (p. 888) Which of the following is true regarding whether Harold is liable to Alice for the cost of the lot if Alice pays Sarah the purchase price? A. Harold is liable to Alice for the cost of the lotB. Harold is liable to Alice for the cost of the lot only if the contract between Harold and Alice expressly stated that he would reimburse her for the cost of the lotC. Harold is liable to Alice only if she resells the lot and is unable to recover as much as she paid for itD. Harold is not liable to Alice for the cost of the lotE. Harold can avoid liability to Alice only if he can establish that unexpected circumstances caused him to refuse to purchase the lot from her


Christy, the owner of ABC department store, needed to hire a number of employees in a hurry because of a big summer sale she was planning. Bob was hired by Christy to run a cash register and to assist customers with taking large purchases to their cars. Bob encountered a particularly annoying customer, Frank. Frank started complaining the minute he saw Bob. Frank complained about having to wait for Bob to assist him with carrying his television purchase to his car, about the merchandise in the store, and about the quality of the store's employees. Bob tried to control himself while he carted Frank's television to the car. The final straw, however, came when Bob told Frank that he should get the earring out of his ear, cut his hair, and act professionally. Bob threw the television to the ground and punched Frank in the nose. Frank did investigation and discovered that Bob has just been fired from his last three jobs for violent actions against customers. Two of his former employers are willing to testify that if Christy had called them, they would have disclosed Bob's tendencies to her. Bob listed the former employers on his application, but because she was in a hurry to hire employees, Christy did not take the time to check with the former employers. Another problem confronting Christy during the big sale is that Susie, a long time employee of Christy who had never caused any problem before, accidentally dropped a box on the foot of Greg, a customer. Greg had to have an X-ray and is threatening to sue both Christy and Susie.

55. (p. 892) Which of the following is a theory under which Christy may be held directly liable for her own tortuous conduct in regards to Frank's injury? A. Negligent hiringB. Strict liabilityC. Breach of customer warrantyD. All of the aboveE. There is no such theory


56. (p. 891) Which of the following is true regarding whether Greg has any right of recovery against Susie for his injured foot? A. Greg has no right of recovery against Susie because of her status as an employeeB. Greg has no right of recovery against Susie because she did not intentionally harm himC. Greg has no right of recovery against Susie because of her status as an employee and also because she did not intentionally harm himD. Greg has a right of recovery against Susie only if Christy is bankruptE. Greg has a right of recovery against Susie


57. (p. 892) Which of the following is true regarding whether Greg has any right of recovery against Christy for his injured foot? A. Greg has no right of recovery against Christy because Susie had not dropped any boxes before, and Christy had no reason to suspect she would injure GregB. Greg has a right of recovery against Christy only if Susie is insolventC. Greg has a right of recovery against Christy, but only for 50% of his damagesD. Greg has no right of recovery against Christy because he will not be able to establish any wrongdoing on her part in hiring SusieE. Greg has a right of recovery against Christy


Manny was hired by John to deliver furniture purchased from John's furniture store, Good Furniture. John had authorized Manny to drive the delivery truck home from work, but Manny was not authorized to use the truck for any personal errands. Manny decided to help his friend Helen move believing that John would never find out. Unfortunately, while moving Helen's furniture to her new home, Manny was speeding and hit Bobby's vehicle in the rear causing whiplash to Bobby. Bobby is threatening to sue both John and Manny. John also has another problem involving Connie, his niece, an aspiring interior designer who John hired to provide design services to customers. Both Connie and John were aware that customers would likely have no interest in the services of Connie if they knew she had no experience and no training in design. Therefore, they inflated her accomplishments to customers telling them that she had both training and experience. In reliance on those claims, Beth agreed to have Connie do the interior design work for her new business building while Beth was out of town on an extended business trip. Unfortunately, Connie did a terrible job. For example, she put in purple carpeting and painted the walls orange. Beth was outraged when she returned. She found out from Sandy, a disgruntled employee of John, that Connie actually had no training or experience in interior design. Sandy wants to sue both Connie and John.

58. (p. 893) Which of the following is true regarding John's liability to Bobby? A. John will likely be held liable for Bobby's injuries because while Manny was not acting within the scope of his duties at the time of the accident, he had not substantially departed from the course of his employer's businessB. John will likely be held liable for Bobby's injuries because Manny was driving John's truck at the time of the accidentC. John will likely be held liable for Bobby's injuries because Manny allowed John to take the truck home regardless of John's instructions regarding the use of the truckD. It is unlikely that John will be held liable for Bobby's injuries because Manny had substantially departed from the course of his employer's businessE. It is unlikely that John will be held liable for Bobby's injuries unless it can be proven that Manny had no insurance and lacks the ability to pay


59. (p. 892, 894) If John pays, does he have any remedy against Manny? A. If John covers Bobby's damages, then John may receive full reimbursement from Manny based upon the right of indemnificationB. If John covers Bobby's damages, then John is not entitled to any reimbursement from MannyC. If John covers Bobby's damages, John is only entitled to reimbursement from Manny for 50% of whatever he paidD. Any recovery John receives from Manny will be based upon principles of comparative negligenceE. Any recovery John receives from Manny will be based upon principles of contributory negligence


60. (p. 895) Which of the following is true regarding any liability John has to Sandy? A. John has no liability to SandyB. John has liability to Sandy under the theory of misrepresentation but only if Connie is insolventC. John is liable to Sandy under the theory of negligenceD. John is liable to Sandy for only 50% of any damages she can proveE. John is liable to Sandy under the theory of misrepresentation


Essay Questions

61. (p. 886) Set forth the two key exceptions to the equal dignity rule.

The first exception to the equal dignity rule pertains to executive officers. When the executive officer is conducting business in the usual course of her job, she need not obtain written approval from the corporation for every decision she makes. The second exception is that the equal dignity rule does not apply to the agent when the agent is working in the direct presence of the principal.


62. (p. 891) Contrast the liability of a principal to a third party in civil law countries and in common law countries when the involvement of a principal has not been disclosed until after the transaction.

Civil law favors the protection of the principal by not allowing the third party to bring suit against him or her. The third party may sue only the agent. Common law jurisdictions extend to the third party the right to sue either the agent or the principal when the involvement of a principal has not been disclosed.


63. (p. 895) Set forth the options of an injured third party when a principal is found liable for a misrepresentation.

The third party has the following two options:1. The third party can cancel the contract with the principal and be compensated for any money lost.2. The third party can affirm the contract and sue the principal to recover damages.


64. (p. 892) Set forth the rationale behind the doctrine of respondeat superior and discuss whether ethically you believe is an appropriate doctrine for our society.

The rationale behind the doctrine is that employers should be held liable for employees who commit torts because the employer is furthering his or her business through the work of the employee. If the employer is benefiting by the work of the employee, the employer should also be responsible for the harms caused by the employee. Students well vary on whether ethically the doctrine is appropriate. On one hand, it seems unfair to hold a business owner liable for acts of negligence that were not his or her own. On the other hand, the employer hired the agent or employee and is benefiting from work performed. Additionally, the doctrine should encourage the exercise of care in hiring employees.


65. (p. 893) Melinda, who works in a jewelry store owned by Cindy, was picking up some gem stones for use in the store. On the way back to the jewelry store, she went through a drive-through fast food restaurant to get a soda. While in line, she negligently bumped the vehicle in front of her which was owned by Ralph. Melinda did not have insurance. Ralph asked Cindy to pay for the damage to his bumper. Cindy refused on the basis that she never gave Melinda authority to stop for a soda. Should Cindy be held liable, and why or why not?

Cindy should be held liable. Melinda was not acting on behalf of Cindy when the accident occurred. She, however, did not make a substantial departure from the business of the employer; and Cindy would, therefore, be subject to liability.
