Question 1

An indorsement in trust creates a trust for the benefit of the indorser or others.

Accepted Answer

An indorsement in trust allows the indorser to create a trust for their own benefit or the benefit of others.

Question 2

An indorsement "Pay Alice Adams" is an assignment rather than a negotiation since it lacks words of negotiability.

Accepted Answer

An indorsement "Pay Alice Adams" is considered a negotiation rather than an assignment because it transfers the right to payment under the negotiable instrument directly to Alice Adams, maintaining the instrument's negotiability.

Question 3

An indorsement must be written on the instrument itself.

Accepted Answer

An indorsement can be on the instrument itself or on a paper attached to it (allonge), as long as it is intended to be a part of the instrument.

Question 4

David makes and delivers a promissory note for $500 to the order of Kerry,who indorses the note and delivers it to Stan in payment of an outstanding debt Kerry owes him.Stan has given value as far as the Code requirements for a holder in due course.

Accepted Answer

Since Stan has given value and Kerry has indorsed the note, Stan can be considered a holder in due course and has the right to enforce the note.

Question 5

A "without recourse" indorsement eliminates all of an indorser's liability.

Accepted Answer

A "without recourse" indorsement only limits the indorser's liability for future transfers of the instrument. The indorser may still be held liable for previous transfers or for breach of other warranties.

Question 6

A negotiation may be valid to transfer the instrument even under which of the following condition(s)?

Accepted Answer

A negotiation can still be valid even if made by an infant, a person without capacity, or as part of an illegal transaction, as these factors do not necessarily invalidate the transfer of the instrument itself.

Question 7

An indorsement "Pay to Jones Construction Company upon completion of the job at No.10 Park Place" is ineffective under Revised Article 3; the indorsee can enforce the instrument.

Accepted Answer

According to Revised Article 3, an indorsement that requires the performance of an act (in this case, completion of the job) to take effect is considered a conditional indorsement and does not affect the negotiability of the instrument. Therefore, the indorsee can enforce the instrument even if the condition has not been met.

Question 8

Ella induces Tammy,by fraud in the inducement,to make an instrument payable to the order of Ella.She subsequently negotiates the instrument to Adam,a holder in due course.If Ella later reacquires the instrument from Adam,Ella will succeed to Adam's rights as a holder in due course under the shelter rule.

Accepted Answer

Fraudulent inducement vitiates the entire transaction, meaning that Ella has no rights to the instrument, therefore cannot pass on holder in due course status to Adam, and cannot receive it back under the shelter rule.

Question 9

Jerry takes a $400 check to Primary Bank,where he asks for $75 in cash and he deposits the remaining balance.Primary Bank has "given value" as far as the requirements of holder in due course status to the extent of $75.

Accepted Answer

According to the scenario, Jerry took a check to Primary Bank and asked for $75 in cash, which means that the bank has given him the requested value. If the bank deposits the remaining balance, it means they have credited Jerry's account with that amount, which also constitutes "giving value." Therefore, to the extent of $75, Primary Bank has fulfilled the requirements of holder in due course status.

Question 10

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

Accepted Answer

This statement is true. To become a holder in due course, a person must meet the requirements laid out in the UCC or inherit the rights under the shelter rule.

Question 11

Horst,a holder in due course,buys a note made out by Arthur to Superior Motors.Even though Arthur's debt was discharged through bankruptcy,Horst can collect on the note.

Accepted Answer

If Arthur's debt was discharged through bankruptcy, the note would also be discharged and Horst would not be able to collect on it.

Question 12

Jill issues a negotiable promissory note to Cherice,who indorses it and delivers it to Lee.If Lee knows that the note was given to Cherice in exchange for worthless securities,Lee cannot be a holder in due course.

Accepted Answer

Lee cannot be a holder in due course because he has knowledge of a defense or claim to the note (the worthless securities). Therefore, he takes the note subject to that defense or claim.

Question 13

A negotiation is void if the transaction in which it occurs is void.

Accepted Answer

A negotiation itself is not automatically void if the transaction in which it occurs is void. The validity of a negotiation depends on the specific circumstances and legal principles applicable to the transaction, such as the negotiability of the instrument, the rights of the parties involved, and the presence of any fraud or illegality. A transaction can be void for certain reasons, but the negotiation of a negotiable instrument within that transaction might still be valid if it meets the requirements set forth by law, especially in cases where the negotiator or holder in due course has rights that are protected by law.

Question 14

An executory promise,which is valid consideration to support a contract,is also the giving of value to support holder in due course status.

Accepted Answer

The answer of An executory promise,which is valid consideration to...

Question 15

The FTC upholds the preferential position enjoyed by a holder in due course of instruments concerning debts arising out of consumer credit contracts.

Accepted Answer

The FTC (Federal Trade Commission) enforces the FTC Holder Rule, which does not allow a holder in due course to be in a preferential position regarding claims and defenses on debts arising out of consumer credit contracts. This means consumers can assert against any holder of the credit contract the same claims and defenses they could assert against the seller of the goods or services.

Question 16

The shelter rule did not exist at common law.

Accepted Answer

The answer of The shelter rule did not exist at...

Question 17

Revised Article 3 provides that the impostor rule does not include an impostor who impersonates an agent of a principal and who induces someone to create a negotiable instrument payable to the principal.

Accepted Answer

Revised Article 3 of the Uniform Commercial Code (UCC) actually states that the impostor rule applies when an impostor induces someone to issue a negotiable instrument by impersonating the payee. The rule allows the person who was tricked into making the instrument to assert that the endorsement by the impostor (or anyone who obtained the instrument from the impostor) is effective as the endorsement of the person to whom the instrument was made payable, thus making the instrument payable to the impostor or subsequent holders in due course.

Question 18

Tina forges Vivian's indorsement on a promissory note and negotiates it to Ned.If Vivian subsequently ratifies Tina's act,both Tina and Vivian are liable to Ned on the note and Vivian's ratification relieves Tina from civil liability to Vivian.

Accepted Answer

The answer of Tina forges Vivian's indorsement on a promissory...

Question 19

Any transfer for value of an instrument is a negotiation.

Accepted Answer

Negotiation refers specifically to the transfer of an instrument in such a manner that the transferee becomes the holder of the instrument. Not all transfers for value constitute negotiation, as negotiation requires endorsement and delivery if the instrument is order paper, or just delivery if it is bearer paper.

Question 20

A person can be a holder if:

Accepted Answer

A person can become a holder either by receiving a negotiable instrument through its issuance to that person (option A) or through transfer by negotiation (option B). Therefore, option D, which includes both A and B, is correct. Option C, which mentions ambiguity, is not relevant to whether someone can be a holder.

Quiz 25: Transfer and Holder in Due Course