Deck 27: Transfer and Holder in Due Course

Question 1

The "impostor rule" is an exception to the general rule that negotiation of an order instrument requires a valid indorsement by the person to whose order the instrument is payable.

Answer 1

True

Question 2

Every indorsement is either blank or special.

Answer 2

True

Question 3

Under Article 3,the employer is allowed to recover from its bank,despite the applicability of the fictitious payee rule,if the bank failed to exercise ordinary care in paying the instrument.

Answer 3

True

Question 4

The fictitious payee rule is based on the idea that employers should bear the risk of their own unscrupulous employees.

Question 5

Both negotiable instruments and nonnegotiable undertakings are transferable by assignment and can result in the transferee's becoming a holder.

Question 6

An indorsement may be written on a paper other than the instrument itself as long as the paper with the indorsement is affixed to the instrument.

Question 7

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.

Question 8

A blank indorsement converts order paper to bearer paper and leaves bearer paper as bearer paper.

Question 9

A negotiation is void if the transaction in which it occurs is void.

Question 10

Negotiability is destroyed by a qualified indorsement.

Question 11

The principal advantage of negotiable instruments is the safety.

Question 12

The type of indorsement used in first negotiating an instrument affects its subsequent negotiation.

Question 13

A bearer instrument is comparable to cash in that it is negotiated by mere possession.

Question 14

Bearer paper runs to whomever is in possession of it.

Question 15

A negotiation obtained by duress,mistake,or fraud is ineffective to transfer the instrument.

Question 16

The transfer of a nonnegotiable promise or order operates as an assignment.

Question 17

The requirements for negotiation are the same for both order paper and bearer paper.

Question 18

Under the shelter rule,the transferee gets the rights of the transferor who is a holder in due course even if the transfer is not for value.

Question 19

Subsequent indorsers are always bound by an indorsement in trust.

Question 20

An indorsement limiting payment to a particular person is effective.

Question 21

The "value" requirement of a holder in due course is the same as "consideration" for a contract.

Question 22

A "holder" may transfer the instrument,negotiate it,enforce payment of it subject to valid claims and defenses,and with some exceptions discharge it.

Question 23

The status of holder in due course was created to encourage the free transferability of negotiable instruments.

Question 24

It is necessary that one own the instrument to be a "holder."

Question 25

Buying a negotiable instrument at a discounted price demonstrates lack of good faith.

Question 26

A check is made payable "to the order of Sam Johnson." If this check is indorsed by Sam Johnson and given to Alex,Alex becomes the holder of the instrument.

Question 27

A payee may be a holder in due course under the Code.

Question 28

A holder in due course would have the right to collect from the original maker of an instrument even if the maker had a valid personal defense.

Question 29

A bank "gives value" when it allows a depositor to withdraw funds against a deposited item.

Question 30

A person is never entitled to enforce an instrument if that person is not the owner of the instrument or if that person is in wrongful possession of the instrument.

Question 31

An executory promise is the giving of value to support holder in due course status.

Question 32

A person who takes a check stamped "NSF" may still be a holder in due course.

Question 33

Under the shelter rule,a person who is not a holder in due course can obtain the rights of a holder in due course.

Question 34

A person other than the owner of an instrument cannot be entitled to enforce it.

Question 35

Revised Article 3 adopts a definition of good faith that has both a subjective and an objective component.

Question 36

The shelter rule applies even if the transferee was a party to fraud or illegality affecting the instrument.

Question 37

The Code provides that for checks,a reasonable time for demand for payment is sixty days,after which a purchaser should be on notice the paper is overdue for the purpose of becoming a holder in due course.

Question 38

An indorsement must be written within 1 1/2 inches of the trailing edge of the back of the check or negotiability is destroyed.

Question 39

A mere holder or an assignee takes a negotiable instrument subject to all claims and defenses to it.

Question 40

A holder in due course has the same rights under a consumer credit contract as under the UCC as long as a special notice requirement has been met.

Question 41

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

Question 42

A(n)____ indorsement is an indorsement made by a person that is not the holder of the instrument.The effect of this indorsement is to make the signer liable on the instrument as an indorser.

A) anomalous
B) blank
C) unqualified
D) special

Question 43

Fraud in the execution of an instrument is a real defense which can be used against a holder in due course.

Question 44

A person who knows that an instrument is overdue or has been dishonored cannot become a holder in due course.

Question 45

Cynthia Todd is the holder of a check with the indorsement "Judd Solomon." To protect herself,Cynthia may:

A) convert the special indorsement to a blank indorsement.
B) convert the special indorsement to a qualified indorsement.
C) write above Judd's signature,"Pay Cynthia Todd."
D) not convert the indorsements,but could only protect her interest in the check by depositing it in her account as soon as possible.

Question 46

Laura is in possession of a check which contains the following indorsement,"Juliet Grant,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.

Question 47

Which of the following are not types of restrictive indorsements?

A) Conditional indorsements
B) Indorsements prohibiting further transfer
C) Indorsements in trust
D) Blank indorsements

Question 48

Delivery alone is insufficient to negotiate an instrument when it is payable to:

A) order and the last indorsement is in blank.
B) cash and signed by the drawer.
C) bearer and is not indorsed.
D) the order of Doreen Tyrell and is not indorsed.

Question 49

An indorsement stating "Pay Paula Hobson only":

A) is designed to restrict the rights of the indorser.
B) is given the same effect as an unrestrictive indorsement.
C) will,under the Code,be effective to prohibit further transfer beyond Paula Hobson.
D) is labeled a "qualified indorsement," and it destroys negotiability.

Question 50

Which of the following is a special indorsement?

A) "John Doe"
B) "Without recourse,John Doe"
C) "Pay to Richard Roe,John Doe"
D) "John Doe,for collection only"

Question 51

If there is no indorsee designated on an indorsement bearing only the indorser's signature,it is a(n):

A) qualified indorsement.
B) conditional indorsement.
C) blank indorsement.
D) allonge.

Question 52

Art signs a promissory note payable to the order of Swains Jewelers for $8,000 for a wedding ring.If the owner of Swains simply signs "Swains Jewelers":

A) the note is restrictively indorsed.
B) the indorsement is ineffective because the note will have to bear the signature of the person who indorsed it.
C) the note is negotiable by delivery.
D) the indorsement will be valid only if dated.

Question 53

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.

Question 54

Alexander Schwing indorses his check with his own name and the words "for deposit only." What type of indorsement is this?

A) A blank indorsement
B) A special indorsement
C) An unrestrictive indorsement
D) A blank,restrictive indorsement

Question 55

A transfer of order paper:

A) gives the transferee the specifically enforceable right to have the unqualified indorsement of the transferor,whether the transfer was for value or not.
B) to a bank,such as the deposit of a check,without an indorsement requires the bank to provide the customer's indorsement.
C) not for value creates a presumption by the courts that the parties intended to negotiate rather than assign the paper.
D) for value creates a presumption by the courts that a negotiation was intended by the parties unless the parties have agreed that the transfer is to be an assignment,which requires no indorsement.

Question 56

Order paper is negotiated by:

A) indorsement alone.
B) delivery alone.
C) either delivery or indorsement.
D) transfer of possession and indorsement.

Question 57

Which of the following is a special unqualified indorsement?

A) Pay to the order of John Doe,without recourse
B) For deposit only,John Jones
C) Without recourse,Sandra Adams
D) Pay to the order of April Smith

Question 58

Which of the following is not a restrictive indorsement?

A) "Without recourse"
B) "For deposit"
C) "Pay any bank"
D) "For collection"

Question 59

If Aubree indorses a check "without recourse":

A) Aubree is not contractually liable if the check is not paid.
B) negotiability is destroyed.
C) the check cannot be transferred.
D) Aubree cannot transfer good title to the check.

Question 60

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.

Question 61

Clint induces David,by fraud in the inducement,to make an instrument payable to the order of Clint.Clint then negotiates the instrument to Eric,a holder in due course,and later reacquires it from Eric.In this case:

A) Clint is a holder in due course.
B) Clint is not a holder in due course,but he succeeds to the rights of one,because of the shelter rule.
C) Clint does not succeed to Eric's rights as a holder in due course and remains subject to the defense of fraud.
D) because fraud in the inducement is a real defense,it can be used against both Clint and Eric.

Question 62

Real defenses include all but which of the following?

A) Forgery of instrument
B) Minority of maker
C) Material alteration
D) Theft of bearer paper

Question 63

Scott buys a television from Kacey's Electronics,giving Kacey a check for $550.Kacey uses a special indorsement and negotiates the check to Rory.Rory carefully changes the amount to read $1550 and loses the check on the way to the bank.Harry picks it up and tries to cash it.What will he get?

A) Scott will have to pay him $550.
B) Kacey will have to pay him $550.
C) Rory will have to pay him $1550.
D) No one will have to pay Harry.

Question 64

Steve issues a negotiable promissory note to Bob in exchange for Bob's promise to build an addition to Steve's home.The promissory note indicates this reason when Bob negotiates it to Willard for value.Can Willard be a holder in due course?

A) Yes,unless he knows that Bob has not built the addition
B) Yes,unless he did not give adequate value
C) No,since he has taken the instrument with notice of a defense
D) No,since he has violated the "good faith" requirement

Question 65

Alice Jones receives a bonus of $500 from her boss.She needs cash for her vacation,so she indorses the check to Charlie who gives her $300 cash and an IOU for $200.When Charlie presents the check to Alice's company for payment,her boss says the check was meant for Alex Jones instead;it was all a big mistake.What will Charlie be able to collect from the company?

A) $500
B) $300
C) $420
D) Nothing

Question 66

Miller does the payroll for Phoenix Company.In between 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 Phoenix require the bank to recredit?

A) No,because of the holder rule
B) No,because Miller is an Phoenix employee and the fictitious payee rule applies
C) Yes,because the indorsement is forged
D) Yes,because the check was,in effect,stolen

Question 67

Tony is fraudulently induced to issue a check to Rita.Tony has:

A) a claim to ownership of the check.
B) a defense to Rita's demand for payment.
C) neither a claim nor a defense.
D) both a claim and a defense.

Question 68

Personal defenses include all but which of the following?

A) Breach of contract
B) Fraud in the execution
C) Misrepresentation
D) Failure of consideration

Question 69

Which of the following is required regarding indorsements?

A) An indorsement must be written on the back side of the instrument.
B) There must be compliance with Federal Reserve Board guidelines in order for the instrument to be negotiable.
C) An indorsement must be written on the instrument or on a paper affixed to the instrument.
D) An indorsement must be dated.

Question 70

Which of the following is not a real defense?

A) Forgery
B) Fraudulent alteration
C) Discharge in insolvency proceedings
D) Change in price

Question 71

A Federal Trade Commission rule limits the rights of a holder in due course of an instrument that evidences a debt arising out of a(n):

A) consumer credit contract.
B) insurance contract.
C) consumer purchase paid for with a check.
D) construction contract.

Question 72

The refusal to pay or accept an instrument when it becomes due is:

A) the shelter rule.
B) dishonor.
C) demand.
D) discharge.

Question 73

Blane indorsed his paycheck in blank and cashed it at a store where he was a well-known customer.The check was then stolen from the store.The store immediately notified Blane's employer,who gave the drawee bank a stop payment order.The thief indorsed the check in a false name and transferred the check to a gas station/convenience store,which took the check in good faith and for value.The check was dishonored when presented to the drawee bank.Which of the following statements is true?

A) The thief was a holder within the Code definition and could negotiate the check.
B) The thief could not negotiate the check because he forged the indorsement.
C) The gas station/convenience store is entitled to nothing from the drawer of the check.
D) The gas station/convenience store could not be a holder in due course because it took the check from a thief.

Question 74

The notice requirement of the Federal Trade Commission rule for consumer credit contracts has the effect of:

A) limiting the types of defenses to payment available to a consumer.
B) eliminating the real defenses to payment.
C) placing a holder in due course in the position of an assignee.
D) permitting a holder in due course to have a questionable instrument reviewed by the FTC.

Question 75

Erin stole a paycheck from Carl prior to his indorsing it.She then forged Carl's signature and transferred the check to a gas station which took it in good faith,for value,without notice,and without reason to question its authenticity.The gas station:

A) was a holder in due course.
B) could not be a holder.
C) could be a holder,but not a holder in due course.
D) can collect the amount of the check only from the drawer since Carl did not indorse it.

Question 76

An indorsement that is not in the chain of title is assumed to be a(n):

A) anomalous indorsement.
B) blank indorsement.
C) special indorsement.
D) indorsement in trust.

Question 77

A holder in due course could recover from the maker where the:

A) maker's signature is forged.
B) bearer instrument was stolen after it was completed.
C) maker signed the instrument under physical duress.
D) maker is a fifteen-year-old.

Question 78

All of the following are "real defenses" except a:

A) note made by a minor.
B) check written while a gun is held to the drawer's head.
C) note given in exchange for worthless securities.
D) check fraudulently changed from $100 to $400.

Question 79

Which one of the following is not a personal defense?

A) Infancy,to the extent that it is a defense to a simple contract
B) Breach of contract
C) Non-delivery of an instrument
D) Failure of consideration

Question 80

Defenses that may be asserted against a holder in due course are called:

A) personal defenses.
B) real defenses.
C) special defenses.
D) holder in due course defenses.