ACCT 331- Exam 2 Short Answers

Recall which articles of the UCC we’ve covered and what those articles regulate/govern

Article 4A of the UCC- commercial fund transfers

Article 4 of the UCC- deposit, electronic fund transfers (EFTs), and checking agreements

Article 3 of the UCC- negotiable instruments, including checks

If a conflict between 3 and 4, 4 controls.

Define negotiable instrument

is a signed writing containing an unconditional promise to pay an exact sum of money

Identify and define types of negotiable instruments (order to pay; promise to pay)

Order to pay- draft and check

Promise to pay- promissory note and certificate of deposit

Understand the requirements for an instrument to be negotiable

In writing

Signed by maker or drawer

An unconditional promise or order to pay

State a fixed amount of money

Payable on demand or at a definite time

Payable to order or to bearer

Understand the difference between an order instrument and a bearer instrument

Order instrument- payable to the order of an identified person or to an identified person or order

Bearer instrument- does not designate a specific payee

Explain how instruments can be negotiated

Order instrument- payable to a specified/identified person

Bearer instrument- payable to bearer or not specified specific payee

Understand and identify various types of endorsements (blank, special, qualified, restrictive)

Blank Indorsement- does not specify particular indorsee, may consist of only a signature, and becomes a bearer instrument

Special Indorsement- contains a signature and indorsee (payee) and maintains or creates an order instrument

Qualified Indorsement- limits liability of indorser and includes “without recourse” generally

Restrictive Indorsement- provides certain instructions such as for deposit

Explain how to convert a bearer instrument to an order instrument and an order instrument to a bearer instrument

An order instrument payable to a named payee and indorsed in blank becomes a bearer instrument

A bearer instrument can be converted into an order instrument through indorsement

Define holder in due course and understand how a holder achieves that status

A holder who takes an instrument free from most defenses and claims that could be asserted against the transferor.

Takes the instrument for value, in good faith, and without notice of any defect

Identify benefits of holder in due course status

can collect payment even if problems existed in earlier transactions

protected from most personal defenses

has a stronger right to payment

Be able to explain the shelter rule/principle

If an HDC transfers an instrument (even by assignment or gifting), the transferee takes the rights of the transferor, meaning the transferee obtains all of the rights and benefits of an HDC

Extends benefits of HDC and allows HDC to dispose of instrument

Understand they types of liability associated with negotiable instruments

Signature liability- arises from the person’s signature on the instrument

Warranty liability- arises from warranties that are implied when the person presents the instrument for negotiation

Explain signature liability and which parties are primarily and secondarily liable as signors

Signers of negotiable instruments are potentially liable for the amount stated on the instrument

Primary liability- maker and acceptor

Secondary liability- drawers and indorsers

Understand when an agent can be liable for signing a negotiable instrument

• The agent fails to disclose the principal's identity.

• The agent fails to indicate representative capacity when signing.

• The agent signs without authority from the principal.

Be familiar with transfer warranties and presentment warranties

Transfer warranties- upon transfer of an instrument, the transferor who transfers an instrument for consideration makes certain all subsequent transferees and holders who take the instrument in good faith

Presentment warranties- present the person whom the instrument is presented. Oftentimes, they shift liability to the party in the best position to prevent the wrongdoing

Identify defenses and limitations to liability associated with negotiable instruments

Universal (real) defenses- Include: material alteration; bankruptcy discharge; other debt discharge; incapacity; illegality; forgery; real fraud; severe duress.

Personal (limited) defenses- Include all other defenses that could be raised against a transferor including breach of contract, lack of consideration, ordinary fraud.

Explain universal and personal defenses

Real defenses (aka universal defenses)- valid against all holders.

Personal defenses (aka limited defenses)- valid against ordinary holders only.

Explain when parties can be discharged from liability with negotiable instruments

Discharged when: payment, cancellation, material alteration, reacquisition, impairment of recourse, and impairment of collateral.

Identify and explain cashier’s checks, traveler’s checks, and certified checks

Cashier’s check- when a bank draws a check on itself

Traveler’s check- payable on demand, drawn on or payable at a financial institution

Certified check- check that has been accepted by the bank on which it is drawn

Be familiar with bank-customer relationships

Creditor-Debtor relationship- when a customer deposits funds into her bank account, she becomes the bank’s creditor, and the bank becomes her debtor for the amount of the deposit

Agency relationship- the bank acts as the customer’s agent and must pay customer’s checks and collect payment for customer when she/he deposits checks

Contractual relationship- when a bank-customer is established, certain contractual rights and duties arise that depend on the nature of the transaction

Understand whether a bank has a duty to honor checks in various situations

Overdrafts- no or yes bank can decide

Postdated checks- yes

Stale check- no

Stop payment order- no

Forged signatures- no

Altered check- no

Outline a bank’s duty to deposit checks

Local checks- one business day

Nonlocal checks- no more than 5 business days

Cash deposits, wire transfers, and government checks- next business day

First $100 of any deposit- opening of the next business day

Deposits made in nonproprietary ATMs- 5 business days

New-customer deposits- 8 business days

Large deposits- may place a hold on the funds and must notify customer

Checks- a bank must credit a customer’s account as soon as the bank receives the funds

Illustrate the check collection process

1.Drawer writes a check

2.Payee receives and deposits the check

3.Depositary bank processes the check

4.Check is sent to the drawee/payor bank

5.Drawee bank verifies the check

6.Payment is made

7.Funds become available to the payee

Define electronic fund transfer

transfer of funds made through electronic means