National American University

BUSINESS L 3100

Chapter 31-CHECKS AND FUNDS TRANSFERS

TRUE/FALSE

1)A check is a particular kind of draft.

 

                                           

 

2. The drawee of a check is always a bank.

 

                                           

 

3. A check is drawn on the assumption that the bank has sufficient funds in the drawer's account for pay- ment.

 

                                           

 

4. Most states provide that if a dishonored check is not made good within a stated period of time, it will be presumed that the check was originally issued with the intent to defraud.

 

                                           

 

5. In the case of either a check or a draft, the drawer may be held civilly liable if the instrument is dishon- ored.

 

                                           

 

6. To be effective, checks must be executed on forms that are printed expressly for that purpose and is- sued by a bank or other financial institution.

 

                                           

 

7. The standard form of check does not specify when it is payable, and it is therefore automatically payable on demand.

 

                                           

 

8. The delivery of a check is regarded as an assignment of money on deposit, and the drawee bank is re- quired to pay the holder the amount of the check.

 

                                           

 

9. When a bank certifies a check, the amount involved in the certification will be retained in the deposi- tor's account until payment of the certified check.

 

                                           

 

10. A check may be certified by a bank on request of the drawer or the holder.

 

                                           

11. A tender occurs when the holder of a check or other consumer transaction authorization demands pay- ment.

 

                                           

 

12. A bank is not required to pay a check presented more than six months after its date.

 

                                           

 

13. A notice of dishonor may be oral, written or electronic.

 

                                           

 

14. Checks that involve amounts of more than $5,000 generally trigger the bank reporting requirements under the USA Patriot Act.

 

                                           

 

15. A buyer may stop payment on a certified check issued to a seller if the goods are defective when re- ceived.

 

                                           

 

16. A written stop payment order is effective for one year.

 

                                           

 

17. The fact that payment on a check has been stopped does not affect its negotiable character.

 

                                           

 

18. Although a drawer has stopped payment on a check, the drawer still may be held liable on the check.

 

                                           

 

19. If a bank improperly refuses to make payment of checks for which its customer has sufficient funds on deposit, it is liable to the drawer for damages sustained by the drawer in consequence of such dishonor.

 

                                           

 

20. An “encryption” warranty is a warranty made by any party who encodes electronic information on an instrument.

 

                                           

 

21. A bank must be given a reasonable amount of time to put a stop payment order into effect.

 

                                           

 

22. A bank always is liable for making payments on a postdated check.

 

                                           

23. A bank always is liable to the depositor on a counterfeit check that the bank has paid.

 

                                           

 

 

24. Ordinarily, the drawee bank is liable to the drawer when it pays a check on which the drawer's signa- ture has been forged.

 

                                           

 

25. A bank’s customer whose signature has been forged may be barred from holding the bank liable if the customer’s negligence substantially contributed to the making of the forgery.

 

                                           

 

26. A forged endorsement must be reported within one year of the time that the bank statement is received.

 

                                           

 

27. The Electronic Fund Transfers Act (EFTA) does not cover transactions originated by commercial pa- per.

 

                                           

 

28. A consumer who notifies the issuer of an EFT card within two (2) days after learning of a loss or theft of the card can be held to a maximum liability of $500 for unauthorized use of the card; failure to no- tify within this time will increase the consumer’s liability for losses to a maximum of $5,000.

 

                                           

 

29. In a complex funds transfer, an intermediary bank may receive and transmit the payment order.

 

                                           

 

30. A debit transaction occurs when a person making a payment requests such payment be made to the beneficiary’s bank.

 

                                           

 

 

MULTIPLE CHOICE

 

1. Which of the following statements describes a check?
   1. The drawer is always a bank.
   2. The maker is always a bank.
   3. A check is generally payable on demand.
   4. A check is a particular kind of note.

                                           

2. Certification of a check at the request of a holder:
   1. releases all prior secondary parties.
   2. releases the drawer but not prior indorsers.
   3. releases prior indorsers, but not the drawer.
   4. does not release all prior secondary parties.

                                           

 

3. Which of the following statements is correct concerning a stale check?
   1. A check is stale when dated more than six (6) months before presentation to the bank.
   2. Banks are required to pay stale checks unless a stop payment order has been issued.
   3. Both a. and b.
   4. None of the above.

                                           

 

4. A depositor issued a check and, after mailing the check, suffered a heart attack and died. In the regular course of business, the bank paid the check when presented for payment, despite the fact that the bank had received notice fourteen (14) days earlier of the depositor's death. In terms of the bank’s payment of the check
   1. the bank is not because the payment was made within 20 days of the notification of the death.
   2. the bank is potentially liable to the depositor’s estate.
   3. the bank is not liable unless the depositor's executor posted an indemnity bond.
   4. the bank’s authority to act for the depositor ended on the depositor's death, regardless of whether the bank had been notified of the depositor’s death.

                                           

 

5. If oral, a stop payment order is binding on the bank for                        days unless confirmed in writing within that time.
   1. five (5)
   2. seven (7)
   3. fourteen (14)
   4. thirty (30)

                                           

 

6. A written stop payment order or confirmation is effective for:
   1. fourteen (14) days.
   2. thirty (30) days.
   3. six (6) months.
   4. one (1) year.

                                           

 

7. Stop payment orders:
   1. may be issued if a payee has failed to perform under a contract.
   2. do not prevent a holder in due course from demanding payment.
   3. are invalid for some forms of checks .
   4. all of the above.

                                           

8. Morris issued a check to Al in payment of a debt. There were sufficient funds in Morris' account to cover the check when it was presented for payment. However, due to an error, the bank dishonored the check. Which of the following parties is/are potentially liable to the holder?
   1. the drawee bank only
   2. Morris and the drawee bank
   3. Morris only
   4. the drawee bank and any collecting bank

                                           

 

9. The liability for losses on counterfeit checks depends on:
   1. whether or not the bank acted reasonably in its processing systems in clearing the checks.
   2. whether or not the bank complied with time requirements for customers regarding the checks.
   3. both a. and b.
   4. none of the above.

                                           

 

10. A bank will not be liable for payment of a check on which the drawer's signature has been forged if:
    1. the bank could not have detected the forgery through a reasonable investigation.
    2. there are more than two prior indorsers of the check.
    3. the bank gives a cashier's check in payment of the depositor's check.
    4. the drawer's negligence contributed substantially to the forging of the signature.

                                           

 

11. If a bank pays a check whose face has been altered to increase the amount above that which the drawer intended to pay, the bank:
    1. is liable to the drawer for the amount of the increase.
    2. is liable to the drawer for the full amount of the check.
    3. incurs liability only if it failed to examine the check before payment.
    4. incurs liability only if the drawer made the alteration.

                                           

 

12. When a drawee bank pays on a check that lacks an essential endorsement:
    1. the drawer is liable.
    2. the payee is liable.
    3. the drawee bank is liable.
    4. no one is liable.

                                           

 

13. Customers are precluded from asserting unauthorized signatures or alterations if they do not report them within                          from the time the bank statement is received.
    1. fourteen (14) days
    2. forty (40) days
    3. six (6) months
    4. one (1) year

                                           

14. A forged indorsement must be reported within:
    1. forty (40) days.
    2. six (6) months.
    3. one (1) year.
    4. three (3) years.

                                           

 

15. A thief stole Art's checkbook and forged Art's name as drawer of a check. The drawee paid the check in good faith and sent it to Art with the monthly statement on January 3, 2013. The thief forged other checks during February and March of 2013, which the drawee in good faith paid. All paid checks were sent to Art with monthly statements. On May 25, 2014, Art discovered all of the forgeries and notified the drawee. For which check(s) is Art entitled to be reimbursed?
    1. none of them
    2. all of them
    3. the first check only
    4. the last check only

                                           

 

16. The EFTA is concerned with the:
    1. elimination of foreign terrorists
    2. eradication of foreign tribunals
    3. electronic transfers of funds
    4. eleemosynary, or charitable, transfers of funds

                                           

 

17. Consumers have the responsibility to examine periodic statements provided by their financial institu- tions. If a loss would not have occurred but for the failure of a consumer to report within                                  of the transmittal of the statement any unauthorized transfer, the loss is borne by the consumer.
    1. fourteen (14) days
    2. thirty (30) days
    3. sixty (60) days
    4. six (6) months

                                           

 

18. A consumer who notifies the issuer of an EFT card within two (2) days after learning of a loss or theft of the card is limited to a maximum liability of:

a.    $500.

b. $50.

3. There is no liability limitation in this situation.
4. There is no liability in this situation.

                                           

 

19. Funds transfers made by businesses are governed by                     regulations.
    1. UCC
    2. Federal Reserve
    3. UCC and Federal Reserve
    4. neither UCC nor Federal Reserve

                                           

20. A bank that fails to carry out a payment order is usually liable for:
    1. interest loss and expenses.
    2. loss sustained by the originator.
    3. consequential damages because the payment was not made.
    4. all of the above.

                                           

 

CASE

 

1. The Railway Express Agency delivered a shipment of goods to Lorraine. Payment for the goods was made with a certified check, payable to the order of the Railway Express Agency. The check was drawn by Lorraine on the First National Bank of Detroit. Later, the bank refused to pay the check when it was presented by Railway Express, the holder, because the bank had become insolvent and stopped doing business. The Railway Express Agency sued Lorraine. Lorraine claimed that she was not liable on the check because it was certified. Is she correct?

 

 

 

2. Miriam issued two checks. The first check was made payable to her neighbor for a used car that the neighbor sold to Miriam. The second check was a rent payment to Miriam's landlord for the current month's rent.

 

The car was purchased on the basis of the neighbor's written assurance that the car had only 38,000 miles of use. After Miriam took possession of the car, Miriam's mechanic checked the vehicle and sub- stantiated that the odometer had been turned back. The car had actually been used for 79,000 miles.

Miriam stopped payment on the check and offered to return the car. Meanwhile, the neighbor had pur- chased a computer and had negotiated Miriam's check to the vendor in payment. Discouraged by the problems with the car, Miriam decided to take a vacation. She issued a written stop payment to her bank on the rent check because she intended to use this money for the vacation. Although the drawee bank had ample time to act, it made an error and paid the rent check instead of stopping payment. Two lawsuits resulted. In the first, the vendor of the computer sued Miriam on the check. In the second, Miriam sued her bank for paying over her timely stop payment order. Decide both cases.