Question 1

Payees generally do not meet the requirements for being a holder in due course,because they know about any claims or defenses against the instrument.

Accepted Answer

Holders in Due Course are protected from any claims or defenses against the instrument, but payees are aware of any such claims or defenses and therefore do not meet the requirements for being a Holder in Due Course.

Question 2

A holder who takes an instrument with notice of its dishonor cannot qualify as a holder in due course.

Accepted Answer

A holder who takes an instrument with notice of its dishonor is not considered a holder in due course as per the Uniform Commercial Code (UCC) Section 3-302. Being a holder in due course requires taking the instrument for value, in good faith, and without notice of any claims or defenses against it.

Question 3

If an unauthorized agent signs a note on behalf of a principal,then only the agent is liable on the note.

Accepted Answer

If an unauthorized agent signs a note, the principal is not bound by the note, making the agent personally liable for the unauthorized act.

Question 4

To qualify as a holder in due course under the shelter principle,the holder must qualify as a holder in due course in his or her own right.

Accepted Answer

The shelter principle allows a holder to obtain the rights of a holder in due course even if they do not qualify as one themselves, as long as they derive their title through a holder in due course.

Question 5

In terms of the requirements for becoming a holder in due course,notice of a defect is given when the holder has actual knowledge of the defect,has received a notice or notification of the defect,or has reason to know from the facts and circumstances that the defect exists.

Accepted Answer

This is the correct definition of "notice of a defect" for a holder in due course. Awareness or reason to suspect a defect in the instrument is necessary for the holder to be considered "in due course."

Question 6

In terms of signature liability on a negotiable instrument,if it is unclear who the signer is,the parol evidence rule would prohibit consideration of outside evidence to identify the signer.

Accepted Answer

The parol evidence rule only prohibits outside evidence to contradict or vary the terms of a written contract. In cases where the signature on a negotiable instrument is unclear, outside evidence can be considered to identify the signer.

Question 7

A purchaser cannot be a holder in due course if an instrument is acquired either after demand or at an unreasonable length of time after its issue.

Accepted Answer

According to the Uniform Commercial Code (UCC), a purchaser cannot be a holder in due course if an instrument is acquired either after demand or at an unreasonable length of time after its issue. This is stated in UCC Section 3-302(a).

Question 8

To qualify as a holder in due course under the shelter principle,the holder must acquire the instrument from a holder in due course,or be able to trace his or her title back to a holder in due course.

Accepted Answer

According to the shelter principle, a person who acquires an instrument becomes a holder in due course if they can trace their title back to a previous holder in due course, even if they themselves did not qualify as a holder in due course when they acquired the instrument. Therefore, the statement is true.

Question 9

The signature of the drawee named in a draft on the face of the draft or another location on the draft indicates that the signer is an acceptor of the draft.

Accepted Answer

The signature of the drawee on the face of the draft or another location on the draft indicates that the signer accepts the responsibility of paying the draft, making them the acceptor.

Question 10

The signature on a negotiable instrument can be any name,word,or mark used in lieu of a written signature.

Accepted Answer

According to the Uniform Commercial Code (UCC) section 3-401, the signature on a negotiable instrument may be any name, word, or mark used with the intention of authenticating the instrument. This can include electronic signatures, rubber stamps, or even symbols as long as they are intentionally used to signify the signer's identity.

Question 11

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 the instrument through a holder in due course.This is called the "transference" principle.

Accepted Answer

The correct term is the "shelter" principle, which allows a holder to gain the rights of a holder in due course if they acquire the instrument from a holder in due course.

Question 12

To qualify as a holder in due course under the shelter principle,the holder must not have been a party to a fraud or an illegality affecting the instrument.

Accepted Answer

This statement is true. According to the shelter principle, a holder who receives a negotiable instrument from a holder in due course also receives their rights and protections, as long as the receiving holder did not participate in any fraud or illegality associated with the instrument. Therefore, to qualify as a holder in due course under the shelter principle, the holder must not have been a party to any fraudulent or illegal activity involving the instrument.

Question 13

A holder qualifies as a holder in due course even if at the time the instrument was issued or negotiated to the holder,the instrument bore apparent evidence of forgery or alteration or was otherwise so irregular or incomplete as to call into question its authenticity.

Accepted Answer

A holder cannot qualify as a holder in due course if the instrument bore apparent evidence of forgery, alteration, or irregularity that calls into question its authenticity at the time it was issued or negotiated.

Question 14

In terms of the "good faith" requirement for becoming a holder in due course,the good faith test applies to the transferor of the instrument,as well as the holder.

Accepted Answer

The good faith requirement applies to the holder of the instrument, not the transferor. The holder must take the instrument in good faith to qualify as a holder in due course.

Question 15

A signature in the upper-right corner of a promissory note indicates that the signer is the drawer of the note.

Accepted Answer

A signature in the upper-right corner of a promissory note is typically the endorser's signature, not the drawer's signature. The drawer's signature is typically located on the bottom of the note.

Question 16

Indorsers can have secondary liability but cannot have primary liability.

Accepted Answer

Indorsers typically have secondary liability, meaning they are responsible for payment only if the primary party defaults. Primary liability is usually held by the maker or issuer of the instrument.

Question 17

Contract liability is another term used to refer to signature liability.

Accepted Answer

Contract liability and signature liability are two terms used to describe the same legal concept, which is the legal obligation that arises when a person signs a contract.

Question 18

With respect to negotiable instruments,the "red light doctrine" prevents a holder from being a holder in due course if the holder has knowledge of a defense to the payment of the instrument.

Accepted Answer

The statement is true. The red light doctrine is a legal concept that prevents a holder from being a holder in due course if they have knowledge or notice of any facts that would indicate the negotiable instrument may be invalid or subject to a defense. This means that if a holder receives the instrument with warning signs or "red lights" about its validity, the holder cannot claim the full protection of a holder in due course.

Question 19

To qualify as a holder in due course under the shelter principle,the holder can have notice of a defense or claim against the payment of the instrument.

Accepted Answer

To qualify as a holder in due course under the shelter principle, the holder cannot have notice of a defense or claim against the payment of the instrument. The shelter principle only applies to the rights of a holder who has obtained the instrument from a holder in due course, but it does not protect a holder who had notice of any defect in the instrument or a defense against its payment.

Question 20

A person cannot be held contractually liable on a negotiable instrument unless his or her signature appears on it.

Accepted Answer

This is known as the basic rule of negotiability, which means that only the person who has signed the instrument can be held responsible for its contents.

Quiz 21: Holder in Due Course and Liability of Parties