Question 1

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

Accepted Answer

When a drawee pays an unaccepted instrument in full to the holder in good faith, all parties are discharged from liability to the negotiable instrument. This is because the drawee has effectively accepted and paid the instrument, and therefore is liable for it rather than the other parties involved.

Question 2

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

Accepted Answer

Maria is accountable under the fictitious payee rule because she made out a payroll check payable to her maid, who does not work for the company, and endorsed Carolyn's name on the check, naming herself as the indorsee. This constitutes a fictitious payee and therefore falls under the fictitious payee rule.

Question 3

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

Accepted Answer

When an agent signs a negotiable instrument on behalf of a principal and clearly indicates they are signing as an agent (e.g., "Sylvester, by Jerry, agent"), the agent is not personally liable on the instrument. This is because the agent has properly disclosed their representative capacity and the principal's identity.

Question 4

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

Accepted Answer

Transfer of an instrument refers to the passing of the ownership or possession of the instrument from one party to another, other than through issuance and presentment for payment. This is typically done through endorsements or assignment. Option A refers to the initial creation of the instrument, option B refers to its payment, and option D refers to its cancellation or destruction.

Question 5

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.

Accepted Answer

Jennifer is only obligated to pay the original amount of $2,500 that she agreed to in the promissory note. Any alteration made to the note after Jennifer signed it would be considered fraudulent and not enforceable by law. Therefore, Jennifer is not obligated to pay the altered amount of $25,000 or any other amount that exceeds the original agreement.

Question 6

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

Accepted Answer

The answer of Jennifer signs a promissory note to pay...

Question 7

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

Accepted Answer

The liquor store can only legally recover from the person who cashed the check, which is Leslie. Martha is not liable because she wrote the check properly, and Karen and Stella are not liable because they did not forge the indorsement or cash the check themselves.

Question 8

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

Accepted Answer

The rule being described is the fictitious payee rule, which holds a drawer or maker liable on a forged or unauthorized indorsement if the named payee is fictitious. This means that the person identified as the payee is not a real person or entity with an interest in the instrument. The rule also applies when the drawer or maker intends for the named payee to have no interest in the instrument. The imposter rule relates to situations where someone impersonates the named payee and is not relevant here. The fraud in the inception and fraud in the inducement rules address different types of fraud and are not relevant to this particular scenario.

Question 9

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

Accepted Answer

The liquor store is liable because it accepted a check with a forged endorsement, which means it did not obtain proper title to the check.

Question 10

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.

Accepted Answer

When a principal accepts the benefits of a contract entered into by an unauthorized agent, the principal is bound to the contract. Therefore, Burnstar Constructions is liable on the promissory note, although Cameron, the unauthorized agent, is also potentially liable. The fraud in the inducement and fraud in the inception rules do not apply in this scenario.

Question 11

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.

Accepted Answer

The answer of What is the similarity between the fictitious...

Question 12

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

Accepted Answer

Calvin's father becomes a primary liable party by cosigning the note, which means he is equally responsible for repaying the debt along with Calvin.

Question 13

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

Accepted Answer

Discharge refers to an action or event that relieves certain parties from liability on negotiable instruments. It can occur in various ways, such as payment or cancellation of the instrument. Presentment refers to the act of presenting the negotiable instrument for payment or acceptance. Accommodation refers to a situation where one party (the accommodator) signs a negotiable instrument to provide credit or support to another party (the accommodated party). Breach of contract refers to a violation of the terms of a contract.

Question 14

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

Accepted Answer

The FTC HDC rule eliminates HDC status for negotiable instruments that arise out of certain consumer credit transactions, such as those involving payday loans, car loans, and retail installment contracts. The exclusionary rule pertains to evidence gathered illegally and cannot be used in court. The imposter rule applies to situations where the person presenting the negotiable instrument is impersonating the payee. The fictitious payee rule applies to situations where the payee listed on the instrument is fake.

Question 15

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.

Accepted Answer

A presentment warranty on an instrument presented for payment states that the instrument has not been materially altered. This warranty is made by the person who presents the instrument for payment, and it protects the payor bank from losses resulting from material alterations. Note that this warranty is distinct from other warranties on negotiable instruments, such as the warranty of good title and the warranty against forged signatures.

Question 16

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

Accepted Answer

Transfer warranties are applicable when the negotiable instrument is endorsed by the holder, as this creates a new transfer of ownership. Issuance of the instrument, presentment of the instrument, and accommodation of the instrument are all instances where the instrument is initially created or presented for payment, but no transfer of ownership has occurred.

Question 17

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

Accepted Answer

The FTC HDC (Holder in Due Course) rule applies when the buyer signs a sales contract that includes a promissory note. The rule is meant to protect the rights of innocent third-party purchasers of consumer debt.

Question 18

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

Accepted Answer

Under the imposter rule, the drawer (Susan) is responsible for the loss because she was the one who drew the check and gave it to the imposter (Brenton). The liquor store is not liable because they received a check that appeared to be valid. Brenton and William are both liable for the fraud, but they are not liable on the check itself as they did not sign it as a maker, drawer, or indorser. Therefore, choice C, Susan, is the best answer.

Question 19

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

Accepted Answer

The holder can discharge the liability of any party by canceling the instrument, which effectively nullifies the obligation.

Question 20

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

Accepted Answer

The imposter rule is an exception to the general rule that the loss falls on the party who first takes the forged instrument after the forgery. Under the imposter rule, if a person is induced by fraud or misrepresentation to issue a negotiable instrument to an imposter, title does not pass to the imposter, and the person who issued the instrument is not liable on it. Instead, the loss falls on the person who took the instrument from the imposter.

Quiz 21: Holder in Due Course and Liability of Parties

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

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?

What is transfer of an instrument?

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?

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.

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?

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

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

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

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

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

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

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

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?