Question 1

The accidental destruction of a negotiable instrument will not result in its cancellation.

Accepted Answer

The accidental destruction of a negotiable instrument does not result in its cancellation. The holder of the instrument can still request payment or replacement using the necessary legal procedures.

Question 2

An indorser who writes "without recourse" next to her signature on a negotiable instrument is not liable for payment.

Accepted Answer

When an indorser write "without recourse" next to their signature, it means that they are not liable for payment in case the instrument is dishonored by the issuer. This limits their liability and protects them from financial loss.

Question 3

Negotiable instruments are normally issued to fulfill a contract.

Accepted Answer

Negotiable instruments, such as checks, promissory notes, and bills of exchange, are often used as a means of fulfilling a contractual obligation. For example, a promissory note may be issued to evidence a loan agreement between two parties.

Question 4

Lance indorses a promissory note to Connie in exchange for consideration. Unknown to Lance, the note is not good because the maker's signature was forged. Connie later attempts to present the instrument for payment to the original alleged maker, Lilly, who is able to deny liability for payment due to the forged signature. Connie may later sue Lance for breach of a transfer warranty.

Accepted Answer

Lance made a transfer warranty to Connie, which means he warranted (promised) that the note was genuine and that he had good title to it. Since the signature was forged, the note was not genuine, and Lance breached his transfer warranty. Connie can later sue Lance for breach of that warranty.

Question 5

Under the UCC, all of the following have the right to enforce payment of an instrument EXCEPT
A) a holder of the instrument.
B) anyone to whom the shelter rule applies.
C) a holder who has lost the instrument.
D) a holder who intentionally destroys the instrument..

Accepted Answer

A holder who intentionally destroys the instrument cannot enforce payment because they have not only destroyed the physical instrument but also the legal evidence of their ownership and entitlement to payment.

Question 6

Warranty liability is the liability of someone who gives payment on a negotiable instrument.

Accepted Answer

This statement is incorrect. Warranty liability actually refers to the legal or contractual obligations of a seller to repair, replace or refund a product if it is found to be defective or not as described. It has nothing to do with payment on a negotiable instrument.

Question 7

Nelson writes Leah a check for mowing his lawn. Leah deposits the check in her bank, but it is not paid by Nelson's bank. Leah calls Nelson to notify him that her bank returned his check to her unpaid. Leah's notice of the dishonor is insufficient; she must provide written notice.

Accepted Answer

This statement is false. According to the Uniform Commercial Code (UCC), oral notice is sufficient for notifying the drawer of a dishonored check. Written notice may be required in certain situations, but it is not a general requirement.

Question 8

If an employee with responsibility for issuing instruments forges a check or other instrument, then any indorsement in the name of the payee, or a similar name, is valid as long as the person who pays the instrument doesn't know of the fraud.
A) the Imposter Rule
B) the Conversion Rule
C) the Employee Indorsement Rule
D) the Fictitious Payee Rule

Accepted Answer

The answer of If an employee with responsibility for issuing...

Question 9

Maurina Barker is an agent of Southland, and she is authorized to sign checks on Southland's bank account. If Maurina signs a check as "Maurina Barker, as agent for Southland" she is not liable on the instrument.

Accepted Answer

By specifying that she is signing as an agent for Southland, Maurina is indicating that she is not personally liable for the check. This is because she is signing on behalf of the company and not in her individual capacity.

Question 10

Conversion means that someone has stolen an instrument or a bank has paid a check that has a forged indorsement.

Accepted Answer

Conversion, in legal terms, refers to an act of unauthorized control or appropriation of someone else's property, which includes situations where an instrument is stolen or a bank pays out on a check with a forged endorsement.

Question 11

When signing a company check, an agent must clearly indicate that he or she is signing on behalf of the company in order to be free of liability.

Accepted Answer

The answer of When signing a company check, an agent...

Question 12

An accommodation party and a co-maker of a note have the same liability on an instrument.

Accepted Answer

An accommodation party is liable to the holder of the instrument as if they were directly liable on the instrument, even though they receive no direct benefit, acting merely to lend their credit to another party. A co-maker, on the other hand, is directly liable and typically benefits from the proceeds of the note. Their liabilities differ in terms of primary obligations and the expectations of benefit from the transaction.

Question 13

Assume that Joel signs a promissory note to Andrew, who in turn negotiates the instrument to Luke. Of the three, Joel is the only person who has primary liability.

Accepted Answer

Primary liability means that the person who signed the promissory note is directly responsible for its payment. Therefore, Joel is the only one who has primary liability as he is the one who signed the note. Andrew and Luke may have secondary liability if Joel fails to pay, but they do not have primary liability.

Question 14

Which of the following is NOT one of the five ways to discharge a negotiable instrument?
A) payment
B) cancellation
C) alteration
D) presentation

Accepted Answer

Presentation is not a method to discharge a negotiable instrument. Discharge refers to the termination of all legal obligations on the instrument, and presentation merely involves showing or submitting the instrument for payment or acceptance, not terminating obligations.

Question 15

Drawers and indorsers are secondarily liable on negotiable instruments.

Accepted Answer

Drawers and indorsers are both types of endorsers who assume secondary liability on a negotiable instrument, meaning they are responsible for payment only if the primary party (usually the maker or acceptor) fails to make payment.

Question 16

Sandy may be charged a fee, but will not face criminal penalties for writing checks on an account with insufficient funds to pay them.

Accepted Answer

Writing checks on an account with insufficient funds, known as writing bad checks, can lead to criminal penalties in addition to any fees charged by the bank, depending on the jurisdiction and the circumstances surrounding the act.

Question 17

A drawee has primary liability on a draft.

Accepted Answer

The answer of A drawee has primary liability on a...

Question 18

Paula is a sales agent for The Rock Insurance Company. Paula accepts a check from a customer made payable to her in payment for the premium on an insurance policy. Prior to depositing the check in The Rock's bank account, Paula indorses the check as follows: "The Rock Insurance Company, by Paula Beck, agent." Assuming that Paula has authority to indorse company checks, if the check is dishonored, then between Paula, The Rock, and the bank
A) Paula only will be liable.
B) Paula and The Rock will be liable.
C) The Rock only will be liable.
D) The bank will be stuck with the dishonored check.

Accepted Answer

The Rock only will be liable because Paula, acting within her authority, indorsed the check on behalf of The Rock Insurance Company, making the company the party responsible for the check.

Question 19

Verne has possession of a draft that has been validly negotiated to him. His payment process necessarily includes
A) presentment of the draft, dishonor, and notice of dishonor.
B) exhibiting the instrument, showing reasonable identification, and surrendering the draft if it is paid in full.
C) exhibiting the draft, providing a thumbprint signature, and giving a receipt.
D) suspending the underlying debt, applying the shelter rule, and making a demand for payment.

Accepted Answer

When a draft has been validly negotiated to Verne, he must exhibit the instrument, show reasonable identification and surrender the draft if it is paid in full. This is in accordance with the process of a holder in due course. Presentment of the draft, dishonor, and notice of dishonor are necessary when the holder is attempting to collect on the instrument after it has been dishonored. Providing a thumbprint signature and giving a receipt are not required in the negotiation process. Suspending the underlying debt, applying the shelter rule, and making a demand for payment are not applicable in this situation.

Question 20

Suppose that Emmett impersonates a famous clown. He goes into an advertising agency and convinces the manager to issue a check to him in the name of the famous clown, purportedly as part of a fund-raising campaign for a nursing home for old retired clowns. If Emmett negotiates the check to a check-cashing store by forging the name of the famous clown, then the ad agency will be able to argue that the bank must reimburse the account because the bank paid a check on a forged signature.

Accepted Answer

The answer of Suppose that Emmett impersonates a famous clown....

Quiz 26: Liability for Negotiable Instruments