Question 1

When an instrument is transferred, an ordinary holder obtains only those rights that the transferor had in the instrument but is free of most of the defenses and claims that could be asserted against the transferor.

Accepted Answer

An ordinary holder obtains the same rights as the transferor had, but a holder in due course (not an ordinary holder) is the one who obtains the instrument free of most defenses and claims that could be asserted against the transferor.

Question 2

A promise to perform or give value in the future is sufficient value to make the promisor an HDC.

Accepted Answer

For someone to be considered a holder in due course (HDC), the instrument must be taken for value, in good faith, and without notice of any defect. A mere promise to perform or give value in the future does not constitute "value" as required for HDC status; the value must be given at the time of the transaction.

Question 3

In the event that there is a conflicting, superior claim to an instrument, a holder in due course will not be able to collect payment.

Accepted Answer

A holder in due course holds the instrument free from most claims and defenses against it, meaning they can still collect payment even if there is a conflicting, superior claim to the instrument.

Question 4

A loss from a well-crafted forgery usually falls on the party to whom the forger transferred the instrument.

Accepted Answer

The Uniform Commercial Code (UCC) places the loss from a forged instrument on the party to whom the forger transferred the instrument, unless that party can prove that it acted in good faith and without knowledge of the forgery.

Question 5

Neither an ordinary holder nor an HDC can enforce an instrument that was originally incomplete and later completed in an unauthorized manner.

Accepted Answer

An HDC (Holder in Due Course) can enforce an instrument that was originally incomplete and later completed, even if it was completed in an unauthorized manner, because their status provides them protection against many defenses that could be raised against ordinary holders.

Question 6

Keyes negotiates a bearer instrument to Liu by delivery
A)with an assignment of its rights under a contract.
B)with any necessary indorsement.
C)without more.
D)with formal presentment in response to a demand by Liu.

Accepted Answer

Bearer instruments are negotiated by delivery alone, without the need for an indorsement or any other formalities.

Question 7

To obtain HDC status, a holder must take an instrument in good faith from a transferor who likewise acts in good faith.

Accepted Answer

To obtain HDC (Holder in Due Course) status, the holder must take the instrument for value, in good faith, and without notice of any defect at the time of acquisition. The transferor's good faith is not a requirement for the holder to achieve HDC status.

Question 8

A person can become an HDC only if he or she knows or has reason to know that an instrument is defective and is willing to assume the risk of its dishonor.

Accepted Answer

A person can become a holder in due course (HDC) without knowing that the instrument is defective. The status of HDC is generally obtained by taking the instrument for value, in good faith, and without notice of any defect at the time of acquisition.

Question 9

A difference between the handwriting in the body of a check and in the signature affects the validity of the item and will bar a holder from HDC status.

Accepted Answer

The difference in handwriting between the body of a check and the signature does not affect the validity of the check or bar a holder from obtaining Holder in Due Course (HDC) status. HDC status is primarily concerned with the holder acquiring the instrument for value, in good faith, and without notice of any defects.

Question 10

Anya issues a check payable to Bo, who indorses the back, gives it to Credit Union, and receives cash. The transfer of the check from Bo to Credit Union is
A)an assignment.
B)a negotiation.
C)a payment.
D)a sale.

Accepted Answer

The transfer of the check from Bo to Credit Union, especially after Bo indorses the back of the check, is a negotiation. Negotiation is the process in commercial law by which a negotiable instrument such as a check is transferred from one person to another in such a manner that the recipient becomes the holder of the instrument.

Question 11

The shelter principle permits a holder with notice of a claim or defense to attain HDC status by reacquiring the instrument from a later HDC.

Accepted Answer

The shelter principle allows a person who acquires an instrument from a holder in due course (HDC) to obtain the rights of an HDC, but it does not permit someone with notice of a claim or defense to attain HDC status by reacquiring the instrument from a later HDC.

Question 12

With a few exceptions, anyone who can ultimately trace his or her title to an instrument back to an HDC can acquire the rights and privileges of an HDC.

Accepted Answer

An HDC, or Holder in Due Course, is a party who has acquired a negotiable instrument in good faith and for value, and thus is protected in certain ways under the Uniform Commercial Code (UCC). If a subsequent holder can trace their title back to an HDC, they can also acquire the rights and privileges of an HDC, provided they meet the necessary qualifications (good faith, value, and without notice of any defect). This principle allows for the free and trusted exchange of negotiable instruments in commerce.

Question 13

In most instances, a payee on a note will qualify as an HDC by virtue of the fact that he or she has dealt directly with the maker.

Accepted Answer

A payee on a note does not automatically qualify as a holder in due course (HDC) simply by dealing directly with the maker. To qualify as an HDC, the payee must take the note for value, in good faith, and without notice of any defects.

Question 14

If an instrument is acquired as part of a corporate purchase of assets, the holder will have only the rights of an ordinary holder.

Accepted Answer

When an instrument is acquired as part of a corporate purchase of assets, the holder will have only the rights of an ordinary holder because they are not a party to the original contract and do not have any special rights or privileges.

Question 15

Rafe signs a check payable to Shop Mart, which transfers the note by negotiation to Trans-State Bank. With respect to any defenses to payment on the note that Rafe could have raised against Shop Mart, most likely Rafe can
A)raise those defenses against the bank.
B)no longer present any defense to payment.
C)not assert those defenses against the bank.
D)claim more defenses against the bank than Shop Mart.

Accepted Answer

Trans-State Bank, as a holder in due course (assuming it meets the criteria), takes the note free from most claims and defenses that Rafe could assert against Shop Mart. This means Rafe generally cannot assert those defenses against the bank.

Question 16

Factory Inc. issues a check payable to Gila, who gives it to Hometown Bank without signing it, and receives cash. The transfer of the check from Gila to Hometown is
A)an assignment.
B)a negotiation.
C)fraudulent and therefore void.
D)a sale.

Accepted Answer

The transfer of a check without endorsement is considered an assignment rather than a negotiation, as negotiation requires endorsement.

Question 17

A person who takes a demand instrument knowing that demand has been made has notice that the instrument is overdue.

Accepted Answer

A demand instrument is considered overdue immediately after demand for payment is made. Therefore, if a person takes the instrument knowing that such a demand has already been made, they have notice that the instrument is overdue.

Question 18

A holder will be deemed to have notice of a defect in an instrument if he or she has reason to know that it exists, given all the facts and circumstances known at the time.

Accepted Answer

Under the principles of the Uniform Commercial Code (UCC), a holder of a negotiable instrument is considered to have notice of any defect if, based on all the facts and circumstances known at the time, the holder has reason to know that a defect exists. This includes knowledge of facts that would lead a reasonable person to inquire further about potential defects.

Question 19

Dani signs a note payable to Equity Credit, which transfers the note by assignment to Finance Collection. With respect to any defenses that Dani could have raised against Equity, most likely Dani can
A)raise those defenses against Finance.
B)no longer present any defense to payment.
C)not assert those defenses against Finance.
D)claim more defenses against Finance than Equity.

Accepted Answer

Dani can raise those defenses against Finance Collection that she could have raised against Equity Credit because the transfer of the note by assignment does not alter the debtor's rights or defenses.

Question 20

In terms of the requirements for HDC status, first a party must be a holder of a negotiable instrument.

Accepted Answer

To achieve the status of a holder in due course (HDC), the first step is indeed to be a holder of the negotiable instrument, which means possessing the instrument in a manner that the law recognizes as sufficient to transfer the rights of the instrument to the possessor.

Quiz 26: Transferability and Holder in Due Course