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Chapter 25Transfer

TRUE/FALSE 1. Silas deposits his paycheck in First American Bank without indorsing it. First American cannot become a holder until Silas completes the indorsement. ANS: F PTS: 1 MSC: AACSB Reflective Thinking TOP: AICPA BB-Critical Thinking

2. The requirements for negotiation are the same for both order paper and bearer paper. ANS: F PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

3. A holder must actually have the instrument in his possession. ANS: T PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

4. "Order paper" is negotiated by delivery only. ANS: F PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

5. Marie is the bookkeeper for the Buildco Construction Company. She makes out the payroll; prepares all of the payroll checks and reconciles the bank statements for the firm. She decides to increase her income by padding the payroll; accordingly, she makes out a check in the name of someone who does not exist. She then indorses the check with the payees name and her name and cashes the check herself at First Bank where the company has its account. Under the fictitious payee rule, Buildco and not the bank will be liable for this check. ANS: T PTS: 1 MSC: AACSB Reflective Thinking TOP: AICPA BB-Critical Thinking

6. The transfer of a nonnegotiable promise or order operates as an assignment. ANS: T PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

7. An indorsement "for deposit" is a collection indorsement. ANS: T PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

8. The principal advantage of negotiable instruments is their legitimacy. ANS: F PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

9. Maxine indorsed her paycheck by signing her name on the back, but she lost it on the way to the bank. The check is now comparable to cash because it is a bearer instrument.

ANS: T PTS: 1 MSC: AACSB Reflective Thinking

TOP: AICPA BB-Critical Thinking

10. The courts will never presume a negotiation of order paper was intended; the parties must clearly indicate a negotiation or else the courts will presume an assignment was intended. ANS: F PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

11. A qualified indorsement destroys negotiability. ANS: F PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

12. "Pay to the order of Jose Dejesus" is a special indorsement. ANS: T PTS: 1 MSC: AACSB Reflective Thinking TOP: AICPA BB-Critical Thinking

13. The impostor rule is an exception to the general rule that negotiation of any order instrument requires a valid indorsement by the person to whose order the instrument is payable. ANS: T PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

14. Whether a transfer is by assignment or by negotiation, the transferee does not acquire the rights the transferor had. ANS: F PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

15. If a person paying an instrument subject to the impostor rule fails to exercise ordinary care, the issuer may recover from the payor to the extent the payor's negligence contributed to the loss. ANS: T PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

16. Jennifer, who stole a check payable to cash, cannot be a holder since she did not receive possession by voluntary transfer. ANS: F PTS: 1 MSC: AACSB Reflective Thinking TOP: AICPA BB-Critical Thinking

17. If the issuer and the person paying an instrument subject to the impostor rule are both negligent, comparative negligence would apply. ANS: T PTS: 1 MSC: AACSB Analytic 18. An indorsement may be simple or complex. ANS: T PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal TOP: AICPA BB-Legal

19. Every indorsement is either blank or special. ANS: T PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

20. A forged or otherwise unauthorized signature necessary to negotiation breaks the chain of title to the instrument. ANS: T PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

21. Any transfer for value of an instrument is a negotiation. ANS: F PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

22. An indorsement in trust creates a trust for the benefit of the indorser or others. ANS: T PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

23. The shelter rule did not exist at common law. ANS: F PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

24. A conditional indorsement is one by which the indorser makes the rights of the indorsee subject to the happening or nonhappening of a specified event, but such an indorsement is ineffective. ANS: T PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

25. An indorsement "Pay Alice Adams" is an assignment rather than a negotiation since it lacks words of negotiability. ANS: F PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

26. A negotiation is void if the transaction in which it occurs is void. ANS: F PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

27. An indorsement "Pay to Jones Construction Company upon completion of the job at No. 10 Park Place" is ineffective under Revised Article 3; the indorsee can enforce the instrument. ANS: T PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

28. A qualified indorser guarantees payment of the instrument if certain conditions are met. ANS: F PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

29. An indorsement that says, "Pay to the Order of John Jones, signed Michael Johnson" is a blank indorsement that turns a check into bearer paper. ANS: F PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

30. A "without recourse" indorsement eliminates all of an indorser's liability. ANS: F PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

31. Revised Article 3 provides that the impostor rule does not include an impostor who impersonates an agent of a principal and who induces someone to create a negotiable instrument payable to the principal. ANS: F PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

32. The fictitious payee rule is based on the idea that employers should bear the risk of their own unscrupulous employees. ANS: T PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

33. A qualified indorsement does not destroy negotiability or prevent further negotiation of the instrument. ANS: T PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

34. A qualified indorsement plus delivery would transfer title to the indorsee. ANS: T PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

35. An allonge is a piece of paper affixed to the instrument. ANS: T PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

36. The Code specifies that the signer is to be treated as an indorser regardless of the signer's intent unless the accompanying words, terms of the instrument, place of the signature, or other circumstances unambiguously indicate that the signature was made for a purpose other than indorsement. ANS: T PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

37. An indorsement must be written on the instrument itself. ANS: F PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

38. A negotiation can be effective to transfer an instrument even if made by a person without capacity. ANS: T PTS: 1 TOP: AICPA BB-Legal

MSC: AACSB Analytic MULTIPLE CHOICE 1. A negotiation may be valid to transfer the instrument even under which of the following condition(s)? a. The negotiation is made by an infant. b. The negotiation is made by a person without capacity. c. The negotiation is part of an illegal transaction. d. All of the above. e. None of the above. ANS: D PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

2. A person can be a holder if: a. the instrument has been issued to that person. b. the instrument has been transferred to that person by negotiation. c. the instrument is ambiguous. d. Both (a) and (b) are correct. ANS: D PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

3. If the instrument is order paper, how can a person become a holder? a. Transfer of its possession. b. Its indorsement by the appropriate parties. c. Both (a) and (b) are necessary. d. None of the above. ANS: C PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

4. Which of the following is not a restrictive indorsement? a. "Pay only Jane Doe." b. "For deposit." c. "Pay any bank." d. "For collection." ANS: A PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

5. Ricardo is the holder of a check that contains the indorsement "Without Recourse, (signed) Mary Roberts." This indorsement: a. makes further indorsement impossible. b. requires a special indorsement by the transferee. c. limits the liability of Mary Roberts. d. limits the liability of all subsequent holders, including Ricardo. ANS: C PTS: 1 MSC: AACSB Reflective Thinking TOP: AICPA BB-Critical Thinking

6. Assuming a note made by Barbara payable to Carol, which indorsement will limit negotiability? a. "Pay Al. Carol." b. "For deposit only, Acct. #602-043. Carol." c. "Pay Connie for Al. Carol."

d. "Pay Claudia as attorney for John Jones. Carol." ANS: B PTS: 1 MSC: AACSB Reflective Thinking TOP: AICPA BB-Critical Thinking

7. Indorsements with ineffective restrictions include which of the following? a. The indorser makes the rights of the indorsee subject to the happening or non-happening of a specified event. b. An indorsement "For Collection." c. An indorsement stating "Pay to Melanie for Sharon." d. All of the above. ANS: A PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

8. A(n) ___________ is the voluntary transfer to a third party of the rights arising from a contract. a. negotiation of bearer paper b. negotiation of order paper c. assignment d. negotiation ANS: C PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

9. The customary manner of disclaiming the indorser's contractual liability is to add which of the following sets of words before or after his signature? a. For collection only. b. Without recourse. c. Pay to the order of. d. For deposit only. ANS: B PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

10. In the Shearson Lehman Brothers, Inc. v. Wasatch Bank case, the applicable defense was: a. a forged indorsement was ineffective to pass title. b. the instrument was assigned rather than negotiated. c. the fictitious payee defense. d. the impostor rule. ANS: C PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

11. One who is in possession of a negotiable instrument that is drawn, issued, or indorsed to him or to his order or that is indorsed in blank is a(n): a. bearer. b. holder. c. transferor. d. assignee. ANS: B PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

12. A transferee acquires the rights the transferor had in a(n): a. assignment. b. negotiation.

c. Both (a) and (b). d. Neither (a) nor (b) unless expressly stated when the transfer was made. ANS: C PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

13. The transfer of a negotiable instrument in such a manner that the transferee becomes a holder is known as: a. assignment. b. negotiation. c. indorsement. d. accommodation. ANS: B PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

14. Federal Reserve Board guidelines for checks: a. require indorsements to be in blue or black ink. b. must be followed or the check will not go through the banking system. c. require bank indorsements to be made within 2 inches of the left edge of the back of the check. d. Both (a) and (c). ANS: A PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

15. An indorsement which limits further negotiation is a(n): a. qualified indorsement. b. special indorsement. c. indorsement for collection. d. allonge. ANS: C PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

16. When is delivery alone insufficient to negotiate an instrument? a. When it is payable to order and the last indorsement is in blank. b. When it is payable to cash and signed by the drawer. c. When it is payable to bearer and is not indorsed. d. When it is payable to the order of John Jones and is not indorsed. ANS: D PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

17. Which of the following is true with respect to a restrictive indorsement? a. It disclaims contract liability. b. It removes warranty liability. c. It attempts to restrict the rights of the indorsee in some fashion. d. It always destroys negotiability. ANS: C PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

18. Which of the following is required regarding indorsements? a. An indorsement must be written on the back side of the instrument. b. Indorsements must comply with Federal Reserve Board guidelines in order for the

instrument to be negotiable. c. Indorsements must be made on a separate sheet of paper stapled to the instrument. d. None of the above. ANS: D PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

19. Vicki, a bookkeeper for Emilio Enterprises, steals some of the checks she is supposed to post to her employers account. She forges her employers indorsement. The indorsement is: a. effective as the employers indorsement because Vickis duties included processing the checks. b. effective as the employers indorsement because of the shelter rule. c. not effective as the employers indorsement since Vicki was an impostor. d. not effective as the employers indorsement because an unauthorized signature necessary to negotiation is inoperative. ANS: A PTS: 1 MSC: AACSB Reflective Thinking TOP: AICPA BB-Critical Thinking

20. Marty Sandidge wrote a check payable to Charles Saxon when the payees real name was spelled Charles Saxton. In order to obtain payment, Charles: a. must have Marty void the check and rewrite another check with Charless name spelled correctly. b. may be required by a person taking the instrument for value to sign both Charles Saxon and the correct spelling of his name. c. must sign only his real name with the correct spelling or he will be liable for forgery. d. must sign only Charles Saxon since that was the name on check. ANS: B PTS: 1 MSC: AACSB Reflective Thinking TOP: AICPA BB-Critical Thinking

21. An anomalous indorsement is: a. one that specifically identifies the person to whose order the instrument is payable. b. an indorsement made by a person that is not the holder of the instrument. c. one that makes the signer liable on the instrument as an indorser. d. Both (a) and (b). e. Both (b) and (c). ANS: E PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

22. Matt writes on the back of a check, "I assign all of my rights in this instrument to Ronald Stevens." This is a(n): a. qualified indorsement. b. assignment without negotiation. c. special indorsement. d. restrictive indorsement. ANS: B PTS: 1 MSC: AACSB Reflective Thinking TOP: AICPA BB-Critical Thinking

23. Laura is in possession of a check which contains the following indorsement, "Sam Smith, without recourse, for collection only." The indorsement would be classified as: a. blank, qualified, and restrictive. b. blank, unqualified, and unrestrictive.

c. special, unqualified, and restrictive. d. special, qualified, and unrestrictive. ANS: A PTS: 1 MSC: AACSB Reflective Thinking TOP: AICPA BB-Critical Thinking

24. Which of the following would be an indorsement in trust? a. Pay Donna for Alice. b. Pay Donna for account of Alice. c. Pay Donna as agent of Alice. d. All of the above are indorsements in trust. ANS: D PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

25. The case, State of Qatar v. First American Bank of Virginia, held that: a. the phrase "for deposit only" is not an effective restrictive indorsement. b. depositary banks are not required to handle checks consistent with the restrictive indorsement. c. the phrase "for deposit only" effectively limits the depositary bank to handle the instrument in a manner consistent with the transaction. d. a stolen check which is indorsed in blank cannot be freely negotiated by the bearer. ANS: C PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

26. Bob Betts looks a lot like Bruce Springsteen. Bob deceives Jack, who runs a nightclub, as to his identity and Jack, trying to induce Bob/Bruce to play at his club, gives Bob an "advance" check for $1,000. The check is made out to "Bruce Springsteen." Bob indorses the check, "Bruce Springsteen" and cashes it at the bank. Jack discovers the mistake and demands that the bank recredit his account for $1,000. What result? The bank: a. must recredit Jack's account because of forgery. b. must pay to the real Bruce Springsteen. c. correctly paid Bob/Bruce. d. cannot honor the check at all. ANS: C PTS: 1 MSC: AACSB Reflective Thinking TOP: AICPA BB-Critical Thinking

27. Miller does the payroll for XYZ Company. In between the last names of Adams and Bates, he inserts the name Appleton and makes out a weekly paycheck in that name. He keeps the check for himself, signing "Appleton" and cashing it at a local bank. Auditors discovered the fake payee many months later. May XYZ require the bank to recredit? a. No, because of the holder rule. b. No, because Miller is an XYZ employee, and the fictitious payee rule applies. c. Yes, because the indorsement is forged. d. Yes, because the check was, in effect, stolen. ANS: B PTS: 1 MSC: AACSB Reflective Thinking ESSAY 1. What is negotiation? How does one become a "holder" of an instrument? TOP: AICPA BB-Critical Thinking

ANS: Negotiation is the transfer of an instrument in such a manner that the transferee becomes a holder. If the instrument is payable to order, it is negotiated by delivery with any necessary indorsement. If payable to bearer, it is negotiated by delivery. A person becomes a holder by receiving possession of an instrument drawn, issued, or indorsed to him, or to his order, or to bearer, or in blank. PTS: 1 TOP: AICPA BB-Critical Thinking | AICPA FN-Decision Modeling MSC: AACSB Communication | AACSB Reflective Thinking 2. What is the effect of a qualified indorsement and a restrictive indorsement? ANS: A qualified indorsement, such as without recourse, disclaims or limits the indorser's contractual liability on an instrument but does not entirely remove the warranty liability. This indorsement does not destroy negotiability or prevent further negotiation. A restrictive indorsement requires indorsees to comply with certain instructions regarding the funds involved (example: "for deposit only"). PTS: 1 TOP: AICPA BB-Critical Thinking | AICPA FN-Decision Modeling MSC: AACSB Communication | AACSB Reflective Thinking 3. Is the negotiation of an instrument ever valid even though the transaction in which it occurs is voidable or even void? Explain. ANS: Yes, the negotiation of an instrument is effective to transfer the instrument even if the negotiation is: (a) made by an infant, a corporation exceeding its powers, or any other person without capacity; or (b) obtained by fraud, duress, or mistake of any kind; or (c) part of an illegal transaction; or (d) made in breach of duty. The transferor loses all rights in the instrument until he regains possession of it. His right to do so, determined by state law, is valid against the immediate transferee and all subsequent holders except subsequent holders in due course. PTS: 1 TOP: AICPA BB-Critical Thinking | AICPA FN-Decision Modeling MSC: AACSB Communication | AACSB Reflective Thinking 4. Identify the type of indorsement each of the following represents. a. Pay to Bill, for collection. b. Pay to the order of The American Bank for deposit only. c. Pay to Albert, without recourse. d. John Smith. ANS: a. Restrictive, special. b. Restrictive, special. c. Qualified, special indorsement. d. Blank indorsement. PTS: 1 TOP: AICPA BB-Critical Thinking | AICPA FN-Decision Modeling MSC: AACSB Communication | AACSB Reflective Thinking 5. Lily drew a check on First Bank payable to Shelley. Lily signed the check in the normal place at the bottom, right side of the check. Glenn signed the check at the bottom left of the front of the check. In what capacity will the Code interpret Glenn to have signed? Will Glenn be able to introduce parol evidence to establish his intent?

ANS: Customarily, indorsements are made on the back of the instrument, starting at the top of the trailing or left edge of the check. Occasionally a signature may appear on an instrument in such a way that it is impossible to tell with certainty the nature of the liability the signer intended to undertake. In such a case, the UCC specifies that the signer is to be treated as an indorser. A person who signs in an ambiguous capacity may not introduce parol evidence to establish that he intended to be something other than an indorser. PTS: 1 TOP: AICPA BB-Critical Thinking | AICPA FN-Decision Modeling MSC: AACSB Communication | AACSB Reflective Thinking