- Under UCC Article 3, which of the following correctly describes a 'teller's check'?
Answer: A teller's check is a draft drawn by a bank on another bank, or payable at or through a bank; it is similar to a cashier's check but is drawn on a different bank (such as a correspondent bank) rather than the issuing bank itself.
Under UCC Section 3-104(h), a teller's check is a draft drawn by a bank on another bank, or payable at or through a bank. The key distinction from a cashier's check is that a cashier's check is drawn by a bank on itself (making the issuing bank both drawer and drawee), while a teller's check is drawn by one bank on a different bank - often a correspondent bank. Both represent highly reliable payment instruments backed by a bank's credit. Answer A is correct. Answer B is incorrect; a teller's check is a bank-issued instrument, not a check written by a teller on a customer's personal account. Answer C is incorrect because teller's checks are issued by commercial banks, not the Federal Reserve. Answer D describes a post-dated check, which is an entirely different concept.
- A special endorsement specifies a new payee. If Jane Doe writes 'Pay to John Smith, Jane Doe' on the back of a check payable to her, what type of instrument does this create?
Answer: Order paper payable to John Smith, requiring John Smith's endorsement plus delivery for further negotiation.
Under UCC Section 3-205(a), a special endorsement identifies a specific person as endorsee and makes the instrument payable to that person's order. After a special endorsement ('Pay to John Smith'), the instrument becomes payable to the order of John Smith - it is order paper requiring John Smith's endorsement plus delivery for any further negotiation. Answer B is incorrect because a special endorsement creates order paper, not bearer paper. Answer C is incorrect because endorsement is a normal step in negotiation; it does not destroy negotiability. Answer D describes a restrictive endorsement (such as 'for deposit only'), not a special endorsement.
- A note is payable 'to the order of cash.' Is this order paper or bearer paper, and how is it negotiated?
Answer: It is bearer paper because 'cash' is not an identified person; it may be negotiated by delivery alone.
Under UCC Section 3-109, an instrument is bearer paper if it is payable to 'cash' or 'to the order of cash.' 'Cash' is not an identified person, so the instrument functions as bearer paper - it may be negotiated by delivery alone without endorsement. Answer A is incorrect because 'cash' cannot endorse an instrument. Answer B is incorrect because the UCC specifically recognizes 'pay to the order of cash' as bearer paper. Answer D is incorrect because the instrument is clearly bearer paper requiring only delivery.
- An instrument states 'Pay to Jane Doe or order, $5,000, with interest at prime rate plus 2%.' Does the variable interest rate destroy negotiability?
Answer: No, because UCC Section 3-112 expressly allows instruments to bear interest at a variable rate tied to an external reference, as long as the principal amount is fixed.
Under UCC Section 3-112, an instrument that states the amount of money with reference to interest, a fixed amount plus interest, or a variable amount of interest does not lose its negotiability. The Code specifically allows variable interest rates tied to external references (such as prime rate) without destroying negotiability, as long as the principal amount is fixed. Answer A is incorrect because the UCC expressly permits variable interest rates. Answer C is incorrect because fixed interest rates are not required. Answer D is incorrect because the interest rate provision has no effect on the order/bearer characterization.
- A promissory note states: 'I promise to pay $10,000 to John Smith, subject to the terms of the real estate purchase agreement dated April 1.' Is this a negotiable instrument?
Answer: No, because the promise is conditional - being 'subject to' another agreement destroys the unconditional payment requirement.
Under UCC Section 3-106, a promise or order is unconditional unless it states an express condition to payment or states that the instrument is subject to or governed by another agreement. A note that states payment is 'subject to the terms of the purchase agreement' makes payment conditional on the terms of another document, destroying the unconditional requirement for negotiability. Answer A ignores the conditional language. Answer B is irrelevant to the issue of conditionality. Answer C is incorrect because endorsement cannot cure a fundamental defect in negotiability.
- Which payee line alone makes a draft nonnegotiable?
Answer: Payable to Jane
A negotiable draft must be payable to order or bearer. Naming Jane without 'order' or 'bearer' makes it payable only to Jane, not negotiable. The tempting 'cash' is wrong because payable to cash is payable to bearer and therefore negotiable.
- Under UCC Article 3, what is the effect of adding the words 'without recourse' to an endorsement?
Answer: The endorser disclaims secondary liability on the instrument; if the instrument is dishonored, the holder cannot look to the endorser for payment.
Under UCC Section 3-415(b), an endorser who endorses 'without recourse' disclaims their secondary (contract) liability on the instrument. Normally, an unqualified endorser promises that if the instrument is dishonored, they will pay. A 'without recourse' (qualified) endorser makes no such promise; the holder cannot seek payment from them if the instrument is dishonored. The endorser still makes transfer warranties. Answer B is incorrect because 'without recourse' reduces, not increases, the endorser's liability. Answer C is incorrect because 'without recourse' relates to payment liability, not the order/bearer status. Answer D is incorrect because transfer warranties, not guarantees of others' defenses, survive a qualified endorsement.
- A note is made payable 'to the order of an employee to be designated by the maker.' Is this valid order paper?
Answer: No, because the payee is not identified at the time the note is issued; a payee must be identifiable with reasonable certainty at issuance, and a future designation by the maker does not satisfy this requirement.
Under UCC Section 3-110, the payee of an instrument must be identifiable with reasonable certainty, and the person to whom an instrument is payable is determined by the intent of the signer at the time of signing. An instrument payable to 'an employee to be designated by the maker' fails this requirement because no specific person is identifiable at issuance - the payee depends on a future act by the maker that has not yet occurred. Without an identified payee, the instrument is not valid order paper. It is also not bearer paper because it does not contain bearer language. The instrument fails the payable-to-order-or-bearer requirement for negotiability. Answer B is correct. Answer A is incorrect because the presence of 'to the order of' alone is insufficient if the payee is not identified. Answer C is incorrect because negotiability is determined at the time of issuance, not at some future time when the payee may be designated. Answer D is incorrect because the instrument does not contain bearer language and cannot qualify as bearer paper.
- A note includes the following clause: 'This note may be accelerated at the holder's option upon default.' Does the acceleration clause destroy negotiability?
Answer: No, because UCC Section 3-108(b)(i) expressly provides that an instrument is still payable at a definite time even if it is subject to an acceleration clause, as acceleration merely makes the note payable earlier than the stated maturity.
Under UCC Section 3-108(b), an otherwise negotiable instrument remains payable at a definite time even if it is subject to: (1) acceleration clauses (making it payable earlier than stated), (2) extension clauses (allowing extension for a definite time), or (3) prepayment rights. The acceleration clause does not destroy the definite time requirement because it only causes earlier payment, not indefinite payment. Answer B is incorrect because the UCC expressly preserves negotiability for instruments with acceleration clauses. Answer C is incorrect because acceleration clauses are specifically contemplated by Article 3. Answer D is incorrect because Article 3 does not distinguish between automatic and optional acceleration for this purpose.
- Under the UCC, which signed note is NOT negotiable?
Answer: Bearer $500 note, if bid won
Negotiability requires an unconditional promise. 'If bid won' makes payment conditional, so the note fails Article 3's requirements. The tempting choice is the note 'due June 1': a fixed date is a definite time, not a condition, so that note is negotiable. Thus the only non-negotiable note is the one conditioned on winning the bid.
- Under UCC Article 3, which of the following requirements must be met for a written instrument to qualify as a negotiable instrument?
Answer: It must be in writing, signed by the maker or drawer, contain an unconditional promise or order to pay a fixed amount of money, be payable on demand or at a definite time, and be payable to order or to bearer.
Under UCC Section 3-104, a negotiable instrument must satisfy all of the following: (1) be in writing; (2) be signed by the maker (for a note) or drawer (for a draft/check); (3) contain an unconditional promise (note) or order (draft) to pay; (4) pay a fixed amount of money (with or without interest); (5) be payable on demand or at a definite time; and (6) be payable to order or to bearer. Failure to meet any one of these requirements destroys negotiability. Answer A omits critical requirements and misidentifies who must sign. Answer B adds fictional requirements (special paper, notarization, filing). Answer C omits several requirements including the demand/definite time and order/bearer requirements.
- A blank endorsement consists of only the endorser's signature without specifying a new payee. What effect does a blank endorsement have on an instrument?
Answer: A blank endorsement converts the instrument to bearer paper, allowing subsequent negotiation by delivery alone without further endorsement.
Under UCC Section 3-205(b), a blank endorsement (the endorser's signature alone, without naming a new payee) converts any instrument - including order paper - into bearer paper. Once converted to bearer paper, the instrument may be negotiated by delivery alone, without any further endorsement. This is why blank-endorsed checks left in accessible places can be cashed by anyone who finds them. Answer A reverses the effect; blank endorsement creates bearer, not order, paper. Answer B is incorrect because endorsement does not void an instrument. Answer D describes a restrictive endorsement, not a blank one.
- What is the difference between a promissory note and a draft under UCC Article 3?
Answer: A promissory note involves two parties (maker and payee) and contains a promise to pay; a draft involves three parties (drawer, drawee, and payee) and contains an order to pay.
A promissory note is a two-party instrument in which the maker promises to pay the payee (or bearer). A draft is a three-party instrument in which the drawer orders the drawee (a third person, often a bank) to pay the payee. A check is the most common form of draft - the depositor (drawer) orders the bank (drawee) to pay the payee. Answer B is incorrect because both instruments may be payable on demand or at a definite time. Answer C incorrectly restricts their use. Answer D is incorrect because a note does not involve a bank or drawee at all.
- A note reads: 'Pay to the order of bearer.' Is this payable to order or to bearer, and how may it be negotiated?
Answer: It is bearer paper because it is payable to 'bearer'; it may be negotiated by delivery alone, without endorsement.
Under UCC Section 3-109, an instrument is payable to bearer if it states that it is payable to 'bearer' or 'to the order of bearer' or similar language, or if the only or last endorsement is a blank endorsement. Bearer paper may be negotiated by delivery alone without any endorsement. Answer A is incorrect because bearer paper requires delivery only, not endorsement. Answer B is incorrect because 'pay to the order of bearer' clearly satisfies the order/bearer requirement of negotiability as bearer paper. Answer D is incorrect because the controlling word is 'bearer,' which overrides 'order of' in this context.
- Under UCC Section 3-110, if a check is payable to a fictitious payee named by the drawer, who may endorse and negotiate the check?
Answer: Any person may endorse as the fictitious payee because the check is treated as bearer paper; the forged endorsement of a fictitious payee is effective.
Under UCC Section 3-110(a) and the fictitious payee rule (Section 3-404), if an instrument is payable to a fictitious payee (one whom the drawer does not intend to have an interest), or to a real person whom the drawer did not intend to have any interest, an endorsement by any person in the fictitious payee's name is treated as the payee's own endorsement and is effective. The instrument functions as bearer paper. This rule shifts the loss to the drawer who named a fictitious payee. Answer A is incorrect because the check is not void; the fictitious payee rule addresses its negotiability. Answer B is incorrect because anyone may endorse in the fictitious name. Answer D is incorrect because there is no such restriction.
- A note states 'I promise to pay $10,000 to John Doe' without using the words 'to the order of.' Under the strict technical reading of UCC Article 3, which of the following is most accurate?
Answer: Under a strict technical reading, the note may not qualify as negotiable order paper because the magic words 'to the order of' or 'to bearer' are missing; however, many courts and modern practice treat such instruments as negotiable when the intent is clear.
Under a strict reading of UCC Section 3-104, a negotiable instrument must be 'payable to order or to bearer.' This has historically required the specific words 'pay to the order of [name]' or 'pay to bearer.' A note that simply says 'pay to John Doe' without 'order' or 'bearer' language may technically fail this requirement under strict interpretation. However, many jurisdictions and courts have moved toward a more liberal interpretation recognizing intent-based negotiability. The modern trend accepts such instruments as negotiable, but under strict traditional analysis, the absence of the magic words is a problem. Answer A is incorrect because it lacks bearer language. Answer B overstates the traditional rule. Answer C is incorrect because the note is still enforceable as a contract.
- Which added promise keeps a note negotiable?
Answer: Keep collateral insured
A note stays negotiable only if any added promise fits a UCC exception. Maintaining or protecting collateral to secure payment is allowed, so promising to keep collateral insured does not destroy negotiability. The tempting wrong answer is providing monthly statements, but that is an extra undertaking about information, not collateral, so it falls outside the exception and makes the note nonnegotiable.
- Under UCC Article 3, what must a payable-to-order instrument contain to satisfy the 'payable to order or bearer' requirement?
Answer: The instrument must be payable to the order of an identified person (such as 'Pay to the order of Jane Doe') or must be payable to bearer.
Under UCC Section 3-109 and 3-104, the order/bearer requirement for negotiability requires either: (1) payable to the order of an identified person ('Pay to the order of Jane Doe') - this is order paper; or (2) payable to bearer or to cash - this is bearer paper. Simply naming a person without 'order' language (e.g., 'Pay Jane Doe') may not satisfy the requirement under strict UCC interpretation, though courts and the UCC have been flexible about this in practice. Answer A (any reference to a name) is insufficient without 'order' or 'bearer' language. Answer B ('pay to the order of cash') would be bearer paper. Answer C describes a payment condition unrelated to the order/bearer requirement.
- A restrictive endorsement 'For Deposit Only - Jane Doe' is written on the back of a check. Which of the following correctly describes the effect of this endorsement?
Answer: The restrictive endorsement limits the use of the check to deposit into an account, and a bank that pays contrary to the restriction may be liable.
Under UCC Section 3-206, a restrictive endorsement such as 'For Deposit Only' or 'Pay Any Bank' limits the further negotiation of the instrument. The instrument must be applied consistently with the restriction. A depositary bank (or any bank in the chain of collection) that pays the check contrary to the restriction may be liable for conversion. Answer A is incorrect because the check remains negotiable (as it can be transferred) but restricted in its application. Answer C is incorrect because restrictive endorsements have legal effect on banks. Answer D is incorrect because the endorsement does not automatically deposit the check; it must be presented to a bank for deposit.
- A note states: 'I promise to pay $5,000 to the order of Maria Torres on June 15, 2024, or upon the sale of my house, whichever comes first.' Is this a negotiable instrument?
Answer: No, because the 'whichever comes first' language creates an uncertain time of payment - one of the payment triggers (sale of the house) is not a definite time.
For negotiability, an instrument must be payable on demand or at a definite time. A 'definite time' is a date certain. The phrase 'or upon the sale of my house, whichever comes first' creates an uncertain alternative payment time - the house sale may never occur or may occur at an unknown date. UCC Section 3-108 requires that the definite time be ascertainable when the instrument is issued. The contingency of the house sale destroys the definite time requirement. Answer A is incorrect because having one certain date does not save negotiability when an uncertain contingency also triggers payment. Answer C is incorrect because the uncertain alternative is still part of the instrument's terms. Answer D is incorrect because 'payable to order' is sufficient; bearer language is not required.
