Deck 26: Holder in Due Course

Question 1

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.

Answer 1

True

Question 2

Whether a holder has notice is determined by a wholly objective standard under the Code.

Answer 2

False

Question 3

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

Answer 3

False

Question 4

To acquire the preferential rights of a holder in due course, a person must either meet the requirements of the Code or must "inherit" these rights under the shelter rule.

Question 5

Under general contract law, an antecedent debt (a preexisting obligation) is consideration.

Question 6

To become a holder in due course the transferee must first be a holder.

Question 7

Kenneth deposits three checks for $275, $150, and $100 and asks for $120 in cash.In tracing the deposit to determine if value was given, the Code would follow the "LIFO" or "last-in, first-out" method of accounting.

Question 8

To be a "holder," one must actually have the instrument in his possession.

Question 9

Otis, a holder in due course, buys a note made out by Joe to Southern Appliance.Even though Joe's debt was discharged through bankruptcy, Otis can collect on the note.

Question 10

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

Question 11

Constructive notice through public filing or recording is sufficient notice to prevent a person from being a holder in due course.

Question 12

A holder does not include a person who is in possession of a negotiable instrument that is payable to bearer.

Question 13

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

Question 14

Sue makes a note payable to the order of Eric.Eric indorses it and delivers it to Henry, who gives Eric his indorsed paycheck in return.Henry is a "holder" of the note.

Question 15

Bill issues a negotiable promissory note to Paula, who indorses it in blank and delivers it to Allen.If Allen knows that the promissory note was given to Paula in exchange for worthless securities, Allen may still be a holder in due course.

Question 16

A person who is not the owner of an instrument or a person in wrongful possession of an instrument may be entitled to enforce it.

Question 17

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

Question 18

The rules pertaining to "holder in due course" were instituted in order to encourage easy negotiability of commercial paper.

Question 19

It is not necessary that one own the instrument to be a "holder."

Question 20

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 21

The revised Article 3 of the UCC does not define the concept of good faith.

Question 22

Which of the following would prevent the holder of an instrument from asserting holder in due course status?

A)An executory promise as value.
B)Knowledge that the instrument is overdue.
C)Being the payee on a check.
D)Two of the above, (a) and (b).

Question 23

The case of Turman v.Ward's Home Improvement, Inc.held that an assignment is not an indorsement and, thus, the transaction between Ward and Pomerantz was an assignment rather than a negotiation.

Question 24

If a person knows that an instrument is overdue or has been dishonored, he cannot become a holder in due course.

Question 25

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

Question 26

D has owed C a debt of $500 for two years.If D now signs a promissory note payable to C, the antecedent debt meets the requirement of "value" in determining C's status as a holder in due course.

Question 27

A transferee who has been a party to fraud affecting the instrument can still acquire the rights of a holder in due course because of the shelter rule.

Question 28

Revised Article 3 defines __________ as "honesty in fact and the observance of reasonable commercial standards of fair dealing."

A)executory promise
B)good faith
C)value
D)None of the above.

Question 29

The subjective component of good faith measures good faith by what the purchaser knows or believes.

Question 30

A payee cannot be a holder in due course under the Code.

Question 31

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 32

An unauthorized signature may be ratified and thereby become valid so far as its effect as a signature and so far as removing civil and criminal liability of the person who had forged the signature.

Question 33

Fraud in the inducement is a real defense.

Question 34

Buying an instrument for a price less than face value means the buyer had notice of a defense or claim against the instrument.

Question 35

Only a holder in due course may collect on a negotiable instrument.

Question 36

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 37

Notice of which of the following circumstances should alert a purchaser of a negotiable instrument that he might not be accorded the favored position of a holder in due course?

A)The instrument has a limited indorsement.
B)The instrument is overdue.
C)The instrument is given as a security interest.
D)None of the above.

Question 38

The financial officer responsible for signing checks left the signature stamp on her desk when she went out of her unlocked office for lunch and a dishonest employee used the stamp to place an unauthorized signature on an instrument.The financial officer may deny the validity of the signature since it was unauthorized.

Question 39

Erin left her checkbook and wallet on her desk during lunch hour.Carl Cryer wrote out a check payable to himself and signed Erin's name.He then indorsed the check "Carl Cryer" and cashed it at First Federal Bank.Can Erin get the money back?

A)Yes, since her name was forged.
B)Yes, because the bank is estopped from asserting a defense.
C)No, because her name is on the check.
D)No, Erin is precluded from asserting the defense of forgery because her negligence substantially contributed to the making of the unauthorized signature.

Question 40

Phyllrox Co., a large manufacturer, purchased a forklift from Brown's Equipment Co.Phyllrox made a $14,500 down payment and signed a promissory note for $3,500.Brown's sold the note to Corporate Bank and received $3,400.After Phyllrox used the forklift for two weeks, it broke down and could not be repaired.Phyllrox refuses to make any more payments to Corporate Bank.In this case:

A)Phyllrox can assert the failure of the forklift as a defense to making payments to Corporate Bank.
B)Corporate Bank is a holder in due course.
C)Both (a) and (b) are correct.
D)Neither (a) nor (b) is correct.

Question 41

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 42

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

A)the shelter rule.
B)dishonor.
C)being overdue.
D)subject to claim or defense.

Question 43

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 of Alice; 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 44

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

Question 45

__________ is overdue for purposes of preventing a purchaser from becoming a holder in due course if the purchaser has notice that she is taking the instrument on a day after demand has been made or after it has been outstanding for an unreasonably long time.

A)Demand paper
B)Time paper
C)A defense
D)A claim

Question 46

In the Federal Deposit Insurance Corporation v.Meyer case, the court held:

A)the Federal Deposit Insurance Act bars both personal and real defenses.
B)duress of any type is a real defense under the UCC.
C)the partners' defense of economic duress was not valid against the FDIC.
D)duress by threat or physical compulsion renders a contract void.

Question 47

The concept of value, for purposes of negotiable instruments, includes:

A)the giving of an irrevocable obligation to a third party.
B)executory promises.
C)judicial liens.
D)None of the above.

Question 48

In the Triffin v.Cigna Insurance Co.case, the court:

A)dealt with the issue of whether a payee could be a holder in due course.
B)ruled on a case involving the shelter provision of the UCC.
C)stated that negotiation is only one of three ways for a holder to claim the status of holder in due course.
D)found that the party seeking holder in due course status did not take the instrument for value.

Question 49

The Code provides an exception to the executory promise rule in which of the following situations?

A)The giving of a negotiable instrument.
B)The making of an irrevocable obligation to a third party.
C)Lack of notice.
D)Both (a) and (b) are correct.
E)None of the above.

Question 50

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.

Question 51

To acquire the preferential rights of a holder in due course, a person must:

A)meet the requirements under the Code.
B)"inherit" these rights under the shelter rule.
C)None of the above.
D)Both (a) and (b) are correct.

Question 52

Claims, relating to whether the purchaser of an instrument can become a holder in due course, include:

A)claims to a lien.
B)only claims to ownership.
C)no claims made against thieves.
D)no claims against possessors with void or voidable title.

Question 53

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 54

Which of the following would meet the requirement of a holder in due course's having given value?

A)A third party receives an instrument as a gift from the holder.
B)An executory promise is given in receipt of an instrument.
C)A holder takes an instrument in payment of an antecedent debt.
D)A holder promises to perform several major household tasks in exchange for an instrument.

Question 55

Scott buys a television set from Joe's TV Store, giving Joe a check for $450.Joe uses a special indorsement and negotiates the check to Tom.Tom carefully changes the amount to read $1450 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 $450.
B)Joe will have to pay him $450.
C)Tom will have to pay him $1450.
D)No one will have to pay Harry.

Question 56

Real defenses include all but which of the following?

A)Forgery of instrument.
B)Minority of the maker.
C)Fraudulent alteration.
D)Theft of a bearer instrument.

Question 57

The notice requirement of the Federal Trade Commission's 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)permitting claims and defenses to payment to be asserted by a consumer, even against holders in due course.
D)permitting some personal defenses to be asserted.

Question 58

For purposes of negotiable instruments, "value" is defined as:

A)the actual performing of the agreed promise.
B)the acquiring of a security interest or lien, other than a judicial lien, in the instrument.
C)the taking of the instrument in payment of or as security for an antecedent debt.
D)the giving of either a negotiable instrument or an irrevocable obligation to a third party.
E)All of the above.

Question 59

Joanne had a paycheck for $74 made out to her.She indorsed it with her name and gave it to Larry, who in return agreed to paint her living room next Saturday.In this situation:

A)the check is not negotiable.
B)Larry is not a "holder."
C)Larry is not a "holder in due course."
D)Larry has given value for the check.

Question 60

Clint induces David, by fraud in the inducement, to make an instrument payable to the order of Clint.Clint then negotiates the instrument to Erin, a holder in due course.If Clint later reacquires the instrument from Erin:

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 Erin'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 Erin.

Question 61

Define notice according to the Code, and explain how notice relates to the concept of holder in due course.

Question 62

Michael issues a check to Paula.She negotiates the check to Harold as payment for a used television set.Harold has no notice of any claims or defenses and takes the check in good faith.Harold indorses the check and gives it to his son as a birthday present.
a.Is Harold's son a holder in due course? Explain.
b.What rights does Harold's son have with respect to the check? Why? Explain.
c.Assume that Michael has a defense of fraud in the inducement against Paula.Can he use that defense against Harold? Can he use that defense against Harold's son? Explain.

Question 63

Sharp Finance Company has furnished Carl with some pre-printed forms for customers to sign to finance repairs on their homes.After the customers sign the notes naming Carl as the payee, he sells them to Sharp Finance.Sometimes Carl is busy and does a poor job on the homes so he can get on to the next job.When customers complain, he says he'll get around to it.If the customers don't pay the note, Sharp Finance sues them.Can the customers use the defenses they have against Carl against Sharp Finance? Explain what law or laws apply to this situation.

Question 64

In a nonconsumer transaction, a holder in due course takes the instrument free from:

A)all claims on the part of any person.
B)all defenses of any party with whom he has not dealt, except for a limited number of defenses that are available against anyone, including a holder in due course.
C)the defense of incapacity, duress or illegality that renders the obligation void.
D)Both (a) and (b) are correct.

Question 65

Carmen needs quick cash, so she hits upon a scheme.She tells Frank she's collecting for Laotian refugees.Frank writes a check for $100 payable to the order of Carmen.Carmen indorses the check and delivers it to Joanne, who doesn't know of Carmen's scam, for $90 cash.Joanne gives it to Margaret as a present.Frank discovers Carmen's deception and refuses to pay Margaret.Will he win?

A)No, because Margaret is a holder in due course.
B)No, because of the shelter rule.
C)Yes, since Margaret did not take the check for value.
D)Yes, since the check was not negotiated to Margaret.

Question 66

Time paper that states it is due on July 1, a Sunday, is overdue on:

A)July 1.
B)July 2.
C)July 3.
D)It depends upon when the instrument is presented for payment.

Question 67

On January 30, Karen writes out a check for her groceries and dates it February 2, the day she gets paid.That same day, the grocer negotiates the check to the Tip Top Bakery delivery man for hot dog buns.If he notices the date, is he a "holder"?

A)Yes, since he has no notice of a defense.
B)No, because he has not given value for the check.
C)No, since it is not negotiable.
D)Yes, he has possession of an instrument with the necessary indorsements.

Question 68

Zeke indorsed his paycheck in blank and cashed it at his local grocery store.A burglar stole the check from the store, which immediately notified Zeke's employer.The employer gave the drawee bank a stop payment order.The burglar indorsed the check with a false name and transferred it to a convenience store, which took it for value and in good faith.When the check is presented to the drawee bank:

A)in the absence of a real defense, the convenience store is entitled to payment from the drawer.
B)the forged indorsement prevents the convenience store from collecting payment on the check.
C)the convenience store cannot receive payment because it is not a holder.
D)the convenience store cannot receive payment because it is not a holder in due course.