Deck 29: Liability of the Parties Under Negotiable Instruments

Question 1

A holder having the rights of a holder in due course is subject to the defense of fraud in the inducement.

Answer 1

False

Question 2

A universal defense is so basic that the social interest in preserving them outweighs the social interest of giving negotiable instruments the freely transferable qualities of money.

Answer 2

True

Question 3

If a person signs a negotiable instrument because he is fraudulently deceived regarding its nature or essential terms gives the holder a universal defense..

Answer 3

True

Question 4

A person who acquires an instrument with knowledge that there is a defense a party may have cannot be an HDC.

Question 5

A holder through a holder in due course is subject to only certain, limited defenses.

Question 6

Bad faith may exist because a transferee takes an instrument under suspicious circumstances.

Question 7

Fraud as to the nature or essential terms of an instrument is a limited defense not available against a holder in due course.

Question 8

To have the status of a holder in due course, a person must first be a holder.

Question 9

A person cannot become a holder through a holder in due course unless that person satisfies the requirements for holder in due course status.

Question 10

A holder can recover from any of the parties who are liable on the instrument, regardless of the order of the signatures on the instrument.

Question 11

Value is similar to consideration..

Question 12

Instruments may be negotiated even if it is overdue.

Question 13

A holder who is neither a holder in due course nor a holder through a holder in due course is subject to every defense, just as though the instrument were not negotiable.

Question 14

Generally, defenses that could be raised in a breach of contact claim cannot be raised against a holder in due course.

Question 15

A contract signed by a minor raises a universal defense against any kind of holder.

Question 16

If a holder learns of a defense after acquiring an instrument, the knowledge works retroactively to destroy the holder's character as a holder in due course.

Question 17

The close-connection doctrine applies in circumstances that indicate there may be a problem with the instrument.

Question 18

Parties with rights in a negotiable instrument can be assignees or holders.

Question 19

Ordinarily, a maker's lack of capacity may be raised as a defense against a holder in due course.

Question 20

The law gives certain holders of a negotiable instrument a preferred standing by protecting them from all defenses when they sue to collect payment.

Question 21

An altered instrument can be enforced according to its original terms.

Question 22

The FTC rule concerning holders in due course is confined to consumer credit transactions.

Question 23

An instrument is said to "run" to a holder if it contains any of the following attributes, except:

A) payable to his or her order.
B) bearer paper.
C) indorsed to him or her.
D) universal defenses.

Question 24

A person who acquires a negotiable instrument with notice of a defense:

A) has acted in bad faith.
B) has acted illegally.
C) cannot be a holder in due course.
D) has taken unfair advantage of the maker.

Question 25

Jose receives a promissory note from his grandmother as a birthday present. Is Jose a holder in due course (HDC) with respect to the note?

A) No, because the note was a gift
B) No, because the note was signed by a relative
C) Yes, because the note was a gift made in good faith
D) Yes, because although the note was a gift, Jose took it without notice

Question 26

For a change to constitute an alteration, the person making the change must be a party to the instrument.

Question 27

Jones issued a check to Smith in return for Smith's promise to do work. Smith never did the promised work, but offered to buy goods from Gomez by endorsing the check to Gomez. Gomez had had no prior dealings with Jones or Smith, but accepted the check in payment. Gomez:

A) cannot be a holder in due course.
B) is considered an assignee of Smith's rights.
C) is a holder through a holder in due course.
D) is a holder in due course.

Question 28

A holder in due course must meet all of the following conditions except:

A) giving value for the instrument.
B) taking the instrument when it is overdue.
C) acting in good faith.
D) being ignorant of defenses and adverse claims.

Question 29

The primary party on a draft is the drawee, assuming that the drawee has accepted the draft.

Question 30

Which of the following will not be considered value in connection with determining holder in due course status?

A) performing the act for which the instrument was given
B) promising to perform an existing legal obligation
C) receiving the instrument as security for a loan
D) taking the instrument in payment of a debt

Question 31

Drawers are secondary parties on a note.

Question 32

The primary party on a certificate of deposit is the drawer.

Question 33

A taker of an instrument who is a holder in due course at the time of the transfer, but who thereafter learns of a defense:

A) becomes a holder through a holder in due course.
B) becomes an ordinary holder.
C) remains a holder in due course.
D) becomes an assignee.

Question 34

Under the __________doctrine, the holder has taken so many instruments from its transferor or is so closely connected with the transferor that any knowledge the transferor has is deemed transferred to the holder, preventing holder in due course status.

A) constructive partnership
B) close-connection
C) symbiotic relationship
D) collaborative relationship

Question 35

Presentment occurs when the primary party refuses to pay an instrument according to its terms.

Question 36

Economic duress, in the form of a reluctance to enter into a financially demanding instrument, is a universal defense.

Question 37

Illegality, such as a note for gambling, is a universal defense.

Question 38

A holder becomes a holder in due course if they meet all the following requirements except:

A) Takes the instrument for value
B) Takes the instrument in good faith.
C) Takes an instrument with no notice of defects.
D) Takes an instrument that runs to him.

Question 39

A holder is on notice that an instrument is defective when the holder:

A) demands payment.
B) brings suit for the collection of an instrument.
C) gives a discharge or release from liability on the instrument.
D) Has actual notice of a defect

Question 40

In 1976 the FTC adopted a rule that expands the rights of a holder in due course in a consumer credit transaction.

Question 41

A holder through a holder in due course:

A) has greater rights than a holder in due course.
B) has fewer rights than a holder in due course.
C) has the same rights as a holder in due course.
D) must meet the requirements for becoming a holder in due course in order to achieve holder in due course status.

Question 42

Fraud in factum:

A) occurs when a person is persuaded to execute an instrument because of fraudulent statements.
B) occurs when a person signs an instrument as a result of being fraudulently deceived regarding essential terms.
C) is not a universal defense.
D) cannot be raised against a holder in due course.

Question 43

Fraud in the inducement is a:

A) limited defense not available against a holder in due course.
B) universal defense available against all holders.
C) limited defense available against all holders.
D) universal defense not available against a holder in due course.

Question 44

A taker of a negotiable instrument may be denied the status and protection of a holder in due course if:

A) one party is a consumer.
B) the close-connection doctrine applies.
C) the instrument is bearer paper.
D) the presentment is not made in a commercially reasonable manner.

Question 45

Isidro issued a negotiable promissory note to his attorney in return for the attorney's promise to perform legal services. The attorney never rendered the legal services but quickly negotiated the note to Anna, a holder in due course. Anna and Mark were involved in business negotiations and Anna offered to purchase a car from Mark. She offered as part payment for the car the note issued by Isidro. By coincidence, Mark knew both Isidro and the attorney and the facts concerning the note and the unperformed legal services. Despite this, Mark accepted a negotiation of the note from Anna. Isidro refused to pay the note and Mark eventually sued Isidro to collect. What is the probable outcome?

Question 46

Which of the following is not a universal defense available against all holders?

A) fraud as to the nature or essential terms of the instrument
B) forgery or lack of authority
C) fraud in the inducement
D) duress depriving control

Question 47

The FTC rule, which provides that a notice provision must be included in all consumer credit contracts, requires that the notice:

A) limit recovery under the contract to amounts paid by the debtor plus a reasonable charge for incidental damages.
B) be in italic type.
C) be at least 20 points in size.
D) has the effect that no subsequent person can be a holder in due course of the instrument.

Question 48

Manuel sued Patricia on a promissory note. Patricia admitted signing the note, but raised the defense that Manuel was not a holder in due course. Can Manuel recover without proving that he is a holder in due course?

Question 49

A negotiable promissory note was issued by Gold. It was properly issued in all ways. Nevertheless, the payee managed to alter the note and raise the amount from $500 to $5,000. A holder in due course presented the note for payment to Gold who discovered the alteration. In this case:

A) Gold is liable for $500 only.
B) Gold is liable for the full $5,000.
C) Gold has no liability on the altered note.
D) Gold is liable for $2,500.

Question 50

Universal defenses work against all of the following except:

A) holders.
B) holders through a holder in due course.
C) holders in due course.
D) secondary parties.

Question 51

Bill decided that it was time to remodel his home. Among the features that Bill had included in his remodeling plan was the addition of several very large picture windows. Because of the great expense of the windows, Bill financed the cost through the issuance of a promissory note. The manufacturer of the windows sold the promissory note to a bank. Just after the promissory note matured, the windows began to leak badly. Bill refused to pay on his promissory note and brought action against the manufacturer for breach of contract. Will the bank recover on the promissory note?

Question 52

When the primary party refuses to pay an instrument according to its terms, said party is required to give:

A) notice of nonpayment.
B) notice of dishonor.
C) notice of denial.
D) secondary party notice.

Question 53

A(n) __________ is an unauthorized change or completion of a negotiable instrument designed to modify the obligation of a party to the instrument.

A) alteration
B) modification
C) transformation
D) transmutation