Question 1

Discharge in bankruptcy is no defense on any instrument regardless of the status of the holder.

Accepted Answer

Discharge in bankruptcy can be a defense on certain instruments in certain circumstances, so it is not true that it is no defense on any instrument regardless of the status of the holder.

Question 2

A person who acquires an instrument knowing that the instrument contains an unauthorized signature can still be afforded HDC protection.

Accepted Answer

A person who acquires an instrument with knowledge of an unauthorized signature is not considered a holder in due course and cannot be afforded HDC protection.

Question 3

When an instrument is dishonored,only written notice is sufficient to hold secondary parties liable.

Accepted Answer

When an instrument is dishonored, written notice alone is not sufficient to hold secondary parties liable. In addition to the written notice, secondary parties must be given a reasonable opportunity to pay the amount due or to take other appropriate action. This process is known as "protest" and is required for certain types of negotiable instruments, such as bills of exchange and promissory notes.

Question 4

When there is a breach of an underlying contract for which an instrument was issued,the maker of a note can refuse to pay it.

Accepted Answer

This is because a note or other negotiable instrument is considered a separate agreement from the underlying contract. If there is a breach of the underlying contract, the maker of the note may have a defense against payment of the instrument.

Question 5

On April 1 Richard arranges to buy a sixteen-speed bike from his neighbor Phil for $500.Phil agrees to deliver the bike on May 1.Richard writes a draft for $500 payable to Phil on May 1.In this situation,the draft is a
A)certificate of deposit.
B)time draft.
C)sight draft.
D)promissory note.

Accepted Answer

A time draft is a type of bill of exchange, which is a written order from one person to pay a certain amount of money to another person. In this situation, Richard is writing a draft for $500 payable to Phil on May 1, which is a type of time draft since it is payable on a future date (May 1). The other choices are not applicable to this situation - a certificate of deposit is a type of savings account, a sight draft is payable immediately upon presentation, and a promissory note is a written promise to pay a certain amount of money.

Question 6

Sarah has a checking account at Secure Bank.Sarah buys her roommate Sophie's two tickets to a Broadway musical for $200.Sarah writes Sophie a check for the tickets.In this situation,Secure Bank is the
A)drawee.
B)indorser.
C)payee.
D)drawer.

Accepted Answer

The answer of Sarah has a checking account at Secure...

Question 7

A person cannot become an HDC if a defense against payment is appar-ent on the face of the instrument.

Accepted Answer

According to the Uniform Commercial Code (UCC), a person cannot become a holder in due course (HDC) if a defense against payment is apparent on the face of the instrument, which means if there is any indication that the payment of the instrument may be challenged or disputed, it cannot be transferred to an HDC.

Question 8

The drawee who signs a draft or check is not primarily liable to any subsequent holders.

Accepted Answer

The drawee who signs a draft or check becomes primarily liable to subsequent holders upon signing it.

Question 9

When an instrument has a forged indorsement,the loss usually falls on the party whose indorsement was forged.

Accepted Answer

The answer of When an instrument has a forged indorsement,the...

Question 10

To obtain a business license,Bess writes a check to a certain state agency.Bess is
A)the drawee.
B)the drawer.
C)the indorser.
D)the payee.

Accepted Answer

Bess is the one writing the check, which makes her the drawer. The state agency receiving the check is the payee, and the bank processing the check would be the drawee. The term indorser refers to someone who endorses or signs over a check to another party.

Question 11

A fictitious payee is a payee on a negotiable instrument whom the maker or drawer does not intend to have an interest in the instrument.

Accepted Answer

A fictitious payee is someone whose name is on a negotiable instrument (like a check) but the person who wrote the check didn't intend for that person to actually receive the money. It's a type of fraud.

Question 12

A drawer who is induced by an imposter to issue a check in the name of an impersonated payee can avoid payment on the check to an innocent holder.

Accepted Answer

The answer of A drawer who is induced by an...

Question 13

Universal defenses are good against all holders except HDCs and holders through HDCs.

Accepted Answer

Universal defenses are not effective against holders through HDCs.

Question 14

Personal defenses are used to avoid payment to an ordinary holder of a negotiable instrument,but not to an HDC or a holder through an HDC.

Accepted Answer

Personal defenses, such as lack of consideration, breach of contract, or fraud, can be used by a maker or drawer to avoid payment to an ordinary holder of a negotiable instrument. However, these defenses are generally not effective against a holder who is a holder in due course (HDC) or a holder through an HDC. This is because an HDC takes the instrument free from most personal defenses.

Question 15

The good faith requirement applies to both the holder and the transferor.

Accepted Answer

The answer of The good faith requirement applies to both...

Question 16

To obtain office supplies for All-Care Medical Clinic,Britney executes a draft in favor of Chris.A draft is
A)a conditional promise to pay money.
B)an unconditional written order to pay money.
C)a qualified promise to set aside a sum of money.
D)a restricted promise to deliver goods at a future date.

Accepted Answer

A draft is an unconditional written order to pay money. In this scenario, Britney is giving an order to pay money to Chris in order to obtain office supplies. Therefore, the best choice is B.

Question 17

Primary liability is unconditional.

Accepted Answer

Primary liability is an absolute obligation to pay a debt or perform a duty regardless of any circumstances or conditions. It is therefore unconditional.

Question 18

An ordinary holder can recover nothing on an instrument that has been materially altered.

Accepted Answer

An ordinary holder of an instrument that has been materially altered cannot recover any amount on the instrument.

Question 19

InterComp normally sells $50,000 worth of software to Power Source,a retail elec-tronics store,each summer on terms requiring payment in sixty days. One year,InterComp wants cash,but Power Source wants the usual sixty days. To meet both needs,the parties can arrange
A)a certificate of deposit.
B)a bearer bond.
C)a trade acceptance.
D)an international letter of credit.

Accepted Answer

A trade acceptance is a type of financial instrument that is often used in business transactions where a seller wants cash but a buyer wants extended payment terms. In this case, InterComp can issue a trade acceptance to Power Source, which would allow Power Source to pay for the software in sixty days as usual, but would also give InterComp a financial asset that it can then sell to a bank or other investor for cash. This would allow InterComp to get cash upfront while also allowing Power Source to have the same payment terms as usual. A certificate of deposit or bearer bond would not address the payment terms issue, and an international letter of credit is typically used in international trade transactions, which does not seem to be the case here.

Question 20

A person who transfers an instrument for consideration makes certain warranties to the transferee.

Accepted Answer

This is because there are certain implied warranties that come with the transfer of an instrument for consideration, such as the warranty of title (i.e. the transferor has good title to the instrument) and the warranty against prior endorsements (i.e. the transferor has not endorsed the instrument to someone else before transferring it to the transferee). These warranties are meant to protect the transferee from any defects in the instrument or title.

Quiz 17: Negotiability, transferability, and Liability