Deck 17: Holders in Due Course,defenses,and Liabilities

Question 1

Regardless of circumstances,an acceptor of a draft is obligated to pay an instrument without reservations.

Answer 1

True

Question 2

If Spader is considered insane and crazy by his parents and close friends,any checks he writes will be considered void.

Answer 2

False

Question 3

A person can become a "holder in due course" if she takes an instrument as a gift,and without notice that anything is wrong with the underlying transaction.

Answer 3

False

Question 4

Only the acceptor of a draft is obligated to pay an instrument without reservations of any kind.

Question 5

The maker of a bearer note that has not been negotiated is obligated to pay the draft to anyone who is holding the instrument.

Question 6

The holder in due course of a note discharged in bankruptcy can never collect any funds because bankruptcy is a real defense against payment.

Question 7

Duress is a personal defense for payment against holders in due course.

Question 8

Fraud in the inducement is a real defense against holders in due course.

Question 9

An alteration that involves changing the payee's name may be used as a personal defense.

Question 10

To be a holder in due course,the person in possession of the instrument must first give consideration and then be an indorser.

Question 11

Regardless of the holder's actions,she may stipulate that she will not acquire the rights of a holder in due course if she cannot qualify as a holder in due course.

Question 12

Presentment can only be made in person by the holder of the instrument,properly identified.

Question 13

Sarah received a negotiable instrument as a birthday present and is now a holder in due course of the instrument.

Question 14

Xena writes a check on her Boise Bank account to Hercules in the amount of $1,000,and gives it to Mutley.On the way to give Hercules the check,Mutley expertly alters the check by adding an extra "zero," to make it $10,000,payable instead to Mutley.Boise Bank honored the check payable to Mutley in the amount of $10,000.Regretfully,Xena has no recourse against Boise Bank.

Question 15

The modern concept of 'value' emerged from within the practices of the medieval principles of the Law Merchant.

Question 16

A holder in due course of a negotiable instrument always has more rights than previous holders of the instrument.

Question 17

When Tina was fifteen years of age,she bought a car from Sam and signed a promissory note payable five years later.Sam negotiated it to Neighborhood Bank,who comes to collect on the note.Tina's age is a personal defense against Neighborhood Bank that allows her to disaffirm the payment.

Question 18

A check given in Colorado (where gambling is illegal)to pay a gambling debt in Nevada (where gambling is legal)provides a real defense to payment,even against a holder in due course.

Question 19

Assume there is a material alteration,but the holder took it in good faith and for value.The holder has a real defense and is not required to pay on the instrument.

Question 20

A lack of good faith will be imputed to a party when she is negligent in discovering something is wrong with the instrument.

Question 21

Which of the following is true of using the defense of failure of consideration by a maker or drawer of an instrument?

A)It can be used when the instrument is negotiated to a holder in due course.
B)It can be used when no consideration exists in the underlying contract for which the instrument was issued.
C)It can be used when one of the parties breaches the contract by not furnishing the agreed consideration.
D)It can be used if a party,induced by a fraudulent statement to enter a contract,is the holder of a negotiable instrument issued as part of the transaction.

Question 22

________ means a demand made by a holder to pay or accept an instrument.

A)Dishonor
B)Presentment
C)Alteration
D)Real defense

Question 23

Green Grocer Wholesale,Inc.received an $850.00 check from Bob for a grocery purchase.The check was from Forest Enterprises to Ana and had been indorsed to Bob who,in turn,indorsed the check to Green.The clerk at Green failed to carefully examine the check,not noticing that the number 5 had been changed to an 8.Green Grocer has:

A)not taken the instrument in good faith.
B)taken the instrument in good faith.
C)not taken the instrument in good faith to $500.
D)taken the instrument in good faith to $300.

Question 24

When one of the parties to a contract has failed to do what he or she has previously agreed to do,it is a:

A)fraud in the inducement.
B)failure of consideration.
C)breach of contract.
D)lack of delivery.

Question 25

Indorsers are obligated to make the payment only when the:

A)instrument has not been properly presented to the drawee or party obliged to pay the instrument.
B)instrument is not dishonored.
C)notice of dishonor is not given to the secondary party within the time and manner mentioned.
D)instrument has been properly presented to the drawee or party obliged to pay the instrument,and payment must be demanded.

Question 26

A holder in due course of a negotiable instrument:

A)can receive more rights than the previous holders.
B)cannot transfer greater rights than they have themselves.
C)can take an instrument even when it is not indorsed to him or her.
D)is a person to whom the instrument is transferred as a gift.

Question 27

A(n)________ of a note is required to ________ the instrument without reservations of any kind.

A)indorser;pay
B)maker;pay
C)drawer;transfer
D)maker;assign

Question 28

Ted gave Stanley a $300 negotiable note for repairs to his car.Stanley did not do the repairs,but indorsed the note to Nami who did not know of Stanley's lack of work and paid Stanley for its note.Nami gave the note to her daughter,Sopan,for Christmas and Sopan attempted to collect the note.What is Sopan's legal status?

A)Sopan is not a holder in due course,but has the rights of a holder in due course.
B)Sopan is not a holder in due course and has no rights of a holder in due course.
C)Sopan is not a holder in due course,but does qualify as a holder in gift status.
D)Sopan has no rights,since she did not give consideration.

Question 29

Any person who ________ contributes to the ________ of an instrument ________ exercise the defense of ________ against a holder in due course who pays the instrument in good faith.

A)negligently;fraud in the inducement;may;alteration
B)negligently;presentment;may not;alteration
C)intentionally;material alteration;may;alteration
D)negligently;material alteration;may not;alteration

Question 30

Mark is mentally incompetent and delights in signing documents.Henry persuades Mark to sign numerous promissory notes which he negotiates.Must Mark pay these notes if they have been held by holders in due course?

A)Mark must pay these notes since duress is not involved.
B)Mark does not have to pay these notes since he has a real defense.
C)Mark must pay these notes since there is a fraud in the inducement.
D)Mark may not pay these notes since no one could anticipate this happening.

Question 31

According to the FTC's ________,holders in due course who possess consumer credit contracts are subject to all claims and defenses that the buyer could use against the seller.

A)shelter provision
B)holder in due course rule
C)lack of consideration rule
D)universal defense rule

Question 32

Which of the following is true of real defenses?

A)Real defenses can be used against holders,but not holders in due course.
B)Anyone who has a real defense is required to pay an instrument.
C)Real defenses can be used against everyone,including holders in due course.
D)Real defenses include breach of contract,failure or lack of consideration,fraud in the inducement,and payment.

Question 33

Carl finds a lost dog and returns it to its owner,Betty.Betty gives Carl a check for $50 for his efforts,but later stops payment on the check.Carl cashed the check at Cash-All-Checks,who now seeks to recover from Betty.Will Cash-All-Checks be successful?

A)Betty has a real defense against Carl and Cash-All-Checks.
B)Betty has no defense against Cash-All-Checks,hence the latter will be successful.
C)Betty has a personal defense that allows Cash-All-Checks to be successful.
D)Betty has a defense against Cash-All-Checks since the check is less than $100.

Question 34

Tom gave celebrity Lynnetta Landau a blank sheet of paper and asked her to sign her autograph on it.Then,without Lynetta's knowledge,Tom wrote a promissory note made payable to him for $3,000 above her signature.This kind of fraud is known as fraud:

A)as to the essential nature of the transaction,which may not be used as a defense against a holder in due course.
B)as to the essential nature of the transaction,which may be used as a defense against a holder in due course.
C)in the inducement,which may not be used as a defense against a holder in due course.
D)in the inducement,which may be used as a defense against a holder in due course.

Question 35

A holder in due course must show that he took the instrument (1)for fair value, (2)in good faith.and (3)without any alteration.

Question 36

Which of these is true regarding "failure of consideration" and "lack of consideration"?

A)They are real defenses which can be used against holders in due course.
B)Failure of consideration is a real defense and lack of consideration is a personal defense.
C)Failure of consideration is a personal defense and lack of consideration is a real defense.
D)They are personal defenses which cannot be used against holders in due course.

Question 37

On May 15,2015,Jason indorsed a check dated January 15,2015,and payable by him to ALS Check Cashing Service.ALS:

A)can be a holder in due course,even though the check is antedated.
B)cannot be a holder in due course as it has notice that the instrument is overdue.
C)cannot be a holder in due course only if ALS contacted the drawer who agreed to honor the check.
D)can be a holder in due course only if ALS contacted the drawee who agreed to honor the check.

Question 38

Personal defenses are defenses that can be used against:

A)natural persons,but not corporations.
B)a holder in due course of a negotiable instrument,but not a holder.
C)a holder,but not a holder in due course of a negotiable instrument.
D)any party with whom the holder in due course has dealt with.

Question 39

A defense that may not be used against a holder in due course of a negotiable instrument is a:

A)limited defense.
B)personal defense.
C)real defense.
D)secondary defense.

Question 40

Thomas signed a blank promissory note and placed it on his office desk.Kelly,also present there,pilfered the note.The note ended up in the possession of Big Bank.What defense to payment does Thomas have?

A)Contributory negligence
B)Lack of delivery
C)Failure of consideration
D)Lack of possession

Question 41

Ten-year-old Felicity fell in love with a golden retriever puppy which she saw in the window of Pet World.She decided to use the money she had saved from her paper route to buy the dog and wrote a $300 check,payable to Pet World.Does Pet World qualify as a holder in due course?

Question 42

LeVoe wrote a check for $1,200 to the order of Henry Smith and delivered it to Smith in payment for a used car that Smith said had a rebuilt engine.Smith indorsed the check and delivered it to Kraus.LeVoe stopped payment on the check when she discovered that the engine had not been rebuilt.Analyze the case.

Question 43

Bob purchases a $1,000 negotiable promissory note from a stranger for $100 that appears to be valid.Will Bob qualify as a holder in due course?

Question 44

Shane carefully wrote a check for $300 and gave it to Ethos Art Gallery for the purchase of a painting.Ethos raised the check to read $800.Shane's bank honored the altered check.Analyze the course of actions Shane could take.

Question 45

Big Bank is unable to provide notice of dishonor for three days because a fiber optic cable was accidentally cut by a construction worker.Will Big Bank be liable for its failure to act in a timely manner?

Question 46

Tammy purchases a promissory note that has numbers scratched out and rewritten.What legal problem will Tammy encounter in claiming to be a holder in due course of the note?

Question 47

Dishonor means:

A)fraud in the payment method.
B)deception in the amount of payment.
C)refusal to pay a negotiable instrument.
D)an extension of payment.

Question 48

A demand negotiable note for $500 issued by Sabin and given to Norm is altered to read $5,000 and subsequently presented for payment by Bridget,a holder in due course.Discuss the case.

Question 49

Callaghan bought a bedroom set from a furniture store and signed a consumer credit contract agreeing to pay $150 in 12 monthly installments.The furniture store immediately negotiated the credit contract to a finance company,with which it had an arrangement,and received payment.The furniture turned out to be defective.Discuss if Callaghan can use the defense of defective furniture against the furniture store and the finance company for the money owed.

Question 50

Charles writes a check payable to Jane on his account at Friendly Bank.Friendly accepts the check,but subsequently determines that there are insufficient funds in Charles' account to pay the check.Explain what liability Charles has.

Question 51

In exchange for some illegal drugs,Popka wrote a $500 check to White.Immediately thereafter,Popka stopped payment on the check.Can White recover the $500 from Popka in court? Explain.