Deck 21: Holder in Due Course and Liability of Parties

Question 1

Under which of the following UCC requirements is a holder considered a "holder in due process," given that the holder performs the agreed-upon promise in a negotiable instrument?

A) taking in good faith requirement
B) taking for value requirement
C) taking without notice of defect requirement
D) no evidence of forgery, alteration, or irregularity requirement

Answer 1

B

Question 2

________ is a type of universal defense where a person is deceived into signing a negotiable instrument,thinking that it is something else.

A) Extreme duress
B) Fraud in inception
C) Forgery
D) Material alteration

Answer 2

B

Question 3

A person who takes a negotiable instrument for value,in good faith,and without notice that it is defective or overdue is referred to as a(n)________.

A) holder
B) holder in due course
C) unqualified indorser
D) assignee

Answer 3

B

Question 4

Which of the following requirements has to be met for a holder to qualify as an HDC under the shelter principle?

A) The holder must not be in possession of a prior negotiable instrument.
B) The holder must have notice of a defense or claim against the payment of the instrument.
C) The holder must have been a party to a fraud or an illegality affecting the instrument.
D) The holder must have acquired the instrument from an HDC.

Question 5

Harold borrows $20,000 from Alex and signs a note promising to pay Alex this amount plus interest in one year.Alex negotiates the note to Reese,an HDC.Before the note is due,Harold declares bankruptcy and the court finds it to be true.According to the discharge in bankruptcy defense,which of the following is true in this scenario?

A) Reese can recover from Harold.
B) Reese can recover from Alex.
C) Alex can recover from Harold.
D) Reese cannot enforce the instrument.

Question 6

Under the UCC's ________ requirement,a person cannot qualify as an HDC if he or she has taken an instrument after detecting that it has been dishonored.

A) no evidence of forgery, alteration, or irregularity
B) taking in good faith
C) taking without notice of defect
D) taking for value

Question 7

Which of the following is a personal defense?

A) extreme duress
B) fraud in inception
C) forgery
D) breach of contract

Question 8

Which of the following is a universal defense?

A) fraud in inducement
B) breach of contract
C) material alteration
D) ordinary duress

Question 9

A ________ defense is a type of defense that can be raised against both holders and HDCs.

A) universal
B) personal
C) fraud in the inducement
D) breach of contract

Question 10

A(n)________ defense is a type of defense that can be raised against enforcement of a negotiable instrument by an ordinary holder,but not against an HDC.

A) discharge in bankruptcy
B) extreme duress
C) personal
D) universal

Question 11

Under the UCC,value is given if the holder ________.

A) detects an unauthorized signature
B) performs the agreed-upon promise
C) takes an instrument in good faith
D) notices that the instrument is defective

Question 12

Mark acquires an instrument from a stranger under suspicious circumstances and at a high discount.This disqualifies him from acquiring HDC status because he did not ________.

A) give value for the instrument
B) check if the instrument was defective
C) take the instrument in good faith
D) check the authenticity of the instrument

Question 13

________ is a type of universal defense where force or violence is used to issue a negotiable instrument.

A) Extreme duress
B) Fraud in inception
C) Forgery
D) Material alteration

Question 14

Gary asks his friend,Adam,to look after his house while he goes to another country for work,for two years.Adam leases the house to Brad by signing a contract with Brad.Adam signs as a representative of Gary even though he does not have the right to do so.Gary comes back and attempts to evict Brad.Brad can claim the defense of ________.

A) extreme duress
B) mental incapacity
C) fraud in the inception
D) breach of contract

Question 15

Charles executes a note payable to Hilarie for $1,000 for goods she purchased from him.Hilarie transfers the note to Lucas,who pays $850 for the note.By doing this,which requirement for acquiring the holder in due course status does Lucas meet?

A) taking for value
B) taking in good faith
C) taking without notice
D) taking where there is no evidence of forgery, alteration, or irregularity

Question 16

The ________ is a doctrine that says a holder who does not qualify as a holder in due course in his or her own right becomes a holder in due course if he or she acquires an instrument through a holder in due course.

A) exclusionary rule
B) acceleration clause
C) shelter principle
D) good faith principle

Question 17

Lisa buys a used car from Kelly.She pays 10 percent down of the cost and signs a negotiable promissory note,promising to pay Kelly the remainder of the purchase price,with interest,in 12 equal monthly installments.At the time of sale,Kelly materially misrepresented the mileage of the automobile.Later,Kelly negotiates the note to Frances,who has no notice of the misrepresentation.Frances,an HDC,negotiates the note to Zoe,who is not an HDC.Which of the following is Zoe in regards to the indorsement?

A) a holder in due course
B) a holder
C) an assignee
D) an assignor

Question 18

Which of the following qualifications renders a person as a holder in due course of a negotiable instrument?

A) if he takes the negotiable instrument for value
B) if he is subject to claims and defenses against the transferor
C) if he is in possession of an instrument issued in his name
D) if he is in possession of an instrument issued in another's name

Question 19

Under the UCC's ________ requirement,a person cannot qualify as an HDC if he or she has noticed that the instrument is overdue.

A) no evidence of forgery, alteration, or irregularity
B) taking in good faith
C) taking without notice of defect
D) taking for value

Question 20

A person who is in possession of a negotiable instrument that is drawn,issued,or indorsed to him or to his order,or to bearer,or in blank is referred to as a(n)________.

A) holder
B) holder in due course
C) assignor
D) assignee

Question 21

Drawers of checks and drafts and unqualified indorsers of negotiable instruments have ________ on the instruments.

A) strict liability
B) no liability
C) secondary liability
D) primary liability

Question 22

Martin borrows $15,000 from Tom,in the form of a check,and signs a promissory note,promising to pay Tom this amount plus 10 percent interest in one year.Tom indorses the note and negotiates it to Fronston.Fronston indorses the note and negotiates it to Liza.Liza presents the note to Martin for payment when the note is due.Martin refuses to pay the note.Who is secondarily liable to pay Liza?

A) Tom
B) Frontston
C) all liabilities lie with Martin
D) the bank that issued the check to Tom

Question 23

Absolute liability to pay a negotiable instrument,subject to certain universal or real defenses is known as ________.

A) primary liability
B) secondary liability
C) warranty liability
D) signature liability

Question 24

Stanley,who owes Milton money,indorses a draft to him with the term "without recourse." The instrument later is dishonored.Which of the following types of indorser is Stanley?

A) a holder
B) an agent
C) an unqualified indorser
D) a qualified indorser

Question 25

Discharge of an instrument by payment or cancellation is a type of ________.

A) warranty liability
B) transfer warranty
C) personal defense
D) universal defense

Question 26

Liability in which a person cannot be held contractually liable on a negotiable instrument unless his or her signature appears on the instrument is referred to as ________.

A) warranty liability
B) unqualified liability
C) contract liability
D) accommodation

Question 27

Liability on a negotiable instrument that is imposed on a party only when the party primarily liable on the instrument defaults and fails to pay the instrument when due is referred to as ________.

A) secondary liability
B) unqualified liability
C) fringe liability
D) warranty liability

Question 28

Which of the following defenses,if proven,may be deemed unenforceable by a holder but enforceable by an HDC?

A) extreme duress
B) fraud in inception
C) forgery
D) breach of contract

Question 29

Stanley,who owes Milton money,indorses a draft to him with the term "without recourse." The instrument later is dishonored.What liability does Stanley have on the instrument?

A) He has no liabilities on the instrument.
B) He has to pay Milton in case the instrument defaults.
C) He has primary liabilities.
D) He has secondary liabilities.

Question 30

Those who are secondarily liable on negotiable instruments they endorse are known as ________.

A) unqualified indorsers
B) qualified indorsers
C) accommodation parties
D) agents

Question 31

In which of the following accommodations is an accommodation party primarily liable?

A) in a guarantee of payment
B) in a guarantee of collection
C) in a guarantee of demand
D) in a guarantee of promise

Question 32

________ is a type of personal defense where a person is wrongfully influenced or threatened to enter into a negotiable instrument.

A) Forgery
B) Discharge in bankruptcy
C) Fraud in the inducement
D) Ordinary duress

Question 33

Which of the following has primary liability when it comes to instruments with a promise to pay?

A) the person in physical possession of the instrument
B) the drawer of the instrument
C) the drawee of the instrument
D) the payee of the instrument

Question 34

In which of the following conditions is a drawee primarily liable to a draft?

A) when the instrument is issued
B) when the instrument is dishonored
C) when the instrument is presented for payment
D) when the drawee is an acceptor to the instrument

Question 35

A person who authorizes an agent to sign a negotiable instrument on his or her behalf is known as a(n)________.

A) agent
B) accommodation party
C) principal
D) assignor

Question 36

Those who disclaim liability and are not secondarily liable on instruments they endorse are referred to as ________.

A) unqualified indorsers
B) qualified indorsers
C) agents
D) accommodation parties

Question 37

Calvin,a college student,wants to purchase an automobile on credit from Irontilt Motors.He does not have sufficient income or the credit history to justify the extension of credit to him alone.Calvin asks his father to cosign a note to Irontilt Motors,which his father agrees to.What role does Calvin's father fulfill here so that Calvin can buy the car?

A) an accommodation party
B) an agent
C) a principal
D) a qualified indorser

Question 38

A person who has been authorized to sign a negotiable instrument on behalf of another person is known as a(n)________.

A) holder in due course
B) accommodation party
C) agent
D) principal

Question 39

________ is a type of personal defense where a wrongdoer makes a False statement or misrepresentation to another person to lead that person to enter into a contract with the wrongdoer.

A) Forgery
B) Discharge in bankruptcy
C) Fraud in the inducement
D) Extreme duress

Question 40

A person who signs an instrument and lends his or her name,and credit to another party to the instrument is referred to as a(n)________.

A) agent
B) qualified indorser
C) unqualified indorser
D) accommodation party

Question 41

Which of the following actions renders all parties as discharged from liability to a negotiable instrument?

A) when the instrument is presented for payment
B) when the signature of the indorser is intentionally struck out
C) when the instrument is accidentally destroyed or mutilated
D) when a drawee in good faith pays an unaccepted instrument in full to the holder

Question 42

Maria is the treasurer of Rex Caldwell Corporations.As treasurer,she makes out and signs the payroll checks for the company.Maria draws a payroll check payable to the order of her maid,Carolyn Doss,who does not work for the company.Maria does not intend Carolyn to receive this money.She indorses Carolyn's name on the check and names herself as the indorsee.She cashes the check at a liquor store.Under which rule of forged instruments is Maria accountable?

A) good faith rule
B) exclusionary rule
C) imposter rule
D) fictitious payee rule

Question 43

Sylvester,acting as a representative agent for Jerry,signs a negotiable instrument with the signature-Sylvester,by Jerry,agent.What kind of liability does Sylvester have for this type of signature?

A) he is not liable to the instrument
B) he is liable to the payee
C) he is liable to Jerry
D) he is liable to the HDC of the instrument

Question 44

What is transfer of an instrument?

A) the issuance of the instrument
B) the presentment for payment of the instrument
C) the passage of the instrument other than issuance and presentment
D) the cancellation of the instrument

Question 45

Jennifer signs a promissory note to pay $2,500 to Clara.Clara negotiates the instrument and indorses it to Anthony.Anthony alters the note to make the payment amount $25,000 and negotiates the note to Nicholas.Nicholas indorses the note and negotiates it to Mack.Nicholas and Mack are both unaware of the alteration done by Anthony.If Mack presents the note to Jennifer for payment,how much,if anything is Jennifer obligated to pay?

A) $25,000
B) $27,500
C) $2,500
D) Jennifer is not obliged to pay Mack.

Question 46

Jennifer signs a promissory note to pay $2,500 to Clara.Clara negotiates the instrument and indorses it to Anthony.Anthony alters the note to make the payment amount $25,000 and negotiates the note to Nicholas.Nicholas indorses the note and negotiates it to Mack.Nicholas and Mack are both unaware of the alteration done by Anthony.At this point,who has primary liability over the note?

A) Nicholas
B) Anthony
C) Clara
D) Jennifer

Question 47

Martha draws a check payable to the order of Stella.Stella indorses the check to Karen.But Leslie steals the check from Karen,forges Karen's indorsement,and cashes the check at a liquor store.When the forgery is exposed,who can the liquor store legally recover from?

A) Martha
B) Leslie
C) Karen
D) Stella

Question 48

The ________ states that a drawer or maker is liable on a forged or unauthorized indorsement if the person signing as or on behalf of a drawer or maker intends the named payee to have no interest in the instrument or when the person identified as the payee is a fabricated person.

A) imposter rule
B) fictitious payee rule
C) fraud in the inception rule
D) fraud in the inducement rule

Question 49

Martha draws a check payable to the order of Stella.Stella indorses the check to Karen.But Leslie steals the check from Karen,forges Karen's indorsement,and cashes the check at a liquor store.Who is liable to the check?

A) the liquor store
B) Martha
C) Stella
D) Leslie

Question 50

Cameron,a purported agent,signs a contract and promissory note to purchase a building for Burnstar Constructions,a purported principal.Though Cameron is an unauthorized representative,Burnstar Constructions likes the deal and accepts it.Which of the following is true of the deal ratified by Burnstar Constructions?

A) The deal is invalid due to the fraud in the inducement rule.
B) The deal is invalid due to the fraud in the inception rule.
C) Burnstar Constructions is liable on the note.
D) Cameron is liable on the note.

Question 51

What is the similarity between the fictitious payee rule and the imposter rule?

A) Both hold the drawee liable to the instrument.
B) Both hold the drawer liable to the instrument.
C) Both put the risk of loss on the forger.
D) Both put the risk of loss on the indorsee.

Question 52

Calvin,a college student,wants to purchase an automobile on credit from Irontilt Motors.He does not have sufficient income or the credit history to justify the extension of credit to him alone.Calvin asks his father to cosign a note to Irontilt Motors,which his father agrees to.What kind of liability does Calvin's father come under?

A) secondary liability
B) primary liability
C) fringe liability
D) warranty liability

Question 53

A(n)________ is an action or event that relieves certain parties from liability on negotiable instruments.

A) presentment
B) discharge
C) accommodation
D) breach of contract

Question 54

Which of the following is a rule that eliminates HDC status with regard to negotiable instruments that arise out of certain consumer credit transactions?

A) FTC HDC rule
B) exclusionary rule
C) imposter rule
D) fictitious payee rule

Question 55

Which of the following is a characteristic of a presentment warranty on an instrument presented for payment?

A) The transferor has no knowledge of any insolvency.
B) The transferor has good title to the instrument.
C) No defenses of any party are good against the transferor.
D) The instrument has not been materially altered.

Question 56

To which of the following placements of a negotiable instrument would transfer warranties be applicable?

A) indorsement of the instrument
B) issuance of the instrument
C) presentment of the instrument
D) accommodation of the instrument

Question 57

In which of the following consumer credit transactions does the FTC HDC rule apply?

A) when the buyer signs a sales contract that includes a check
B) when the buyer signs a sales contract that includes a promissory note
C) when the buyer signs an installment sales contract that does not contain a waiver of defenses clause
D) when the buyer arranges financing with a third-party lender

Question 58

Susan purchases goods by telephone from Parker.Susan has never met Parker.Brenton goes to Susan and pretends to be Parker.Susan draws a check payable to the order of Parker and gives the check to Brenton,believing him to be Parker.Brenton forges Parker's indorsement and indorses the check to his brother,William,with the term "without recourse." William then cashes the check at a liquor store.Under the imposter rule,who is liable on the check?

A) Brenton
B) the liquor store
C) Susan
D) William

Question 59

The holder of a negotiable instrument can discharge the liability of any party to the instrument by ________.

A) cancellation of instrument
B) accommodation of instrument
C) indorsement of instrument
D) mutilation of instrument

Question 60

When an indorsement on an instrument has been forged or is unauthorized,the loss falls on the party who first takes the forged instrument after the forgery.Which of the following is an exception to this rule?

A) the FTC HDC rule
B) the exclusionary rule
C) the imposter rule
D) the good faith rule

Question 61

The good faith test applies to both the holder and the transferor of an instrument.

Question 62

If an instrument arises out of an illegal transaction,it is unenforceable.

Question 63

Only personal defenses and not universal defenses may be asserted against an HDC.

Question 64

An agent is a person who is in possession of a negotiable instrument that is drawn,issued,or indorsed to him or to his order,or to bearer,or in blank.

Question 65

A check is accepted when it is certified by a bank.

Question 66

The location of the signature on an instrument generally determines the signer's capacity.

Question 67

Personal defenses cannot be raised against HDCs to deny the payment of negotiable instruments.

Question 68

A check is an order from a drawer to a drawee to pay the instrument to a payee according to its terms.

Question 69

Good faith refers to honesty in fact in the conduct or transaction concerned.

Question 70

A transferor acquires greater rights than a holder in due course.

Question 71

Universal defenses can be raised only against ordinary holders and not holders in due course to deny the payment of negotiable instruments.

Question 72

Commercial paper held by a holder in due course is virtually as good as money.

Question 73

The imposter rule eliminates HDC status with regard to negotiable instruments that arise out of certain consumer credit transactions.

Question 74

Every party that signs a negotiable instrument is primarily liable on the instrument.

Question 75

A signature on a negotiable instrument identifies who is obligated to pay it.

Question 76

A drawee that refuses to pay a draft or a check is liable to the payee or holder.

Question 77

If there is a breach of contract,the negotiable instrument may be deemed unenforceable by a holder but enforceable by an HDC.

Question 78

Material alteration,extreme duress,forgery,and mental incapacity are examples of personal defenses.

Question 79

Most indorsements appear on the front of an instrument.

Question 80

An instrument is dishonored when it is presented for payment and payment is refused.