Question 1

Under Revised Article 3 of the Uniform Commercial Code rules for beneficiaries, in the event of a breach of transfer warranty, _____.

Accepted Answer

Revised Article 3 of the Uniform Commercial Code provides that in the event of a breach of a transfer warranty, a beneficiary of the transfer warranties who took the instrument in good faith may recover from the warrantor an amount equal to the loss suffered as a result of the breach. However, the damages recoverable may not be more than the amount of the instrument plus expenses and loss of interest incurred as a result of the breach.

Question 2

Mack is Bertha's agent and is authorized to sign checks for her. Mack signs one of Bertha's checks with his own name only. Which of the following parties is liable on the check?

Accepted Answer

If a principal authorizes an agent to borrow money on the principal's behalf, and the agent signs her name to a note without disclosing that the signature was on behalf of the principal, the agent is liable on the note. However, if the person entitled to enforce the note can show that the principal authorized the agent to sign on his behalf, then the principal is liable on the note as well. One exception to this rule is in regards to checks. If an authorized representative signs his name as the representative of a drawer of a check without noting his representative status, but the check is payable from the an account of the represented person who is identified on the check, the signer is not liable on the check as long as his signature was authorized (3-402[c]). The rationale for this provision is that because most checks today identify the person on whose account the check is drawn, no one is deceived into thinking that the person signing the check is meant to be personally liable. Thus, in this case, Bertha (the represented person on the check) is liable on the check.

Question 3

When an incomplete instrument is completed after it has left the drawer's hands, a holder in due course can:

Accepted Answer

If the completion of an instrument is unauthorized, then it is considered to be an alteration. However, a subsequent holder in due course may enforce an incomplete instrument as completed. If the instrument is incomplete when the maker signs it and it is completed in an unauthorized manner, then the maker's liability will depend on whether the person seeking to enforce the instrument can qualify as a holder in due course.

Question 4

A person who transfers a negotiable instrument to someone else and for consideration makes a warranty that:

Accepted Answer

Transfer warranties are those which persons who transfer negotiable instruments make to their transferees. A person who transfers a negotiable instrument to someone else and for consideration makes five warranties, one of which is that all signatures on the instrument are authentic or authorized.

Question 5

Which of the following statements is true of primary liability on a check when it is issued?

Accepted Answer

At the time a check or other draft issues, no party is primarily liable on it. Usually, the drawee bank pays a check when it is presented for payment and no person becomes primarily liable. However, the drawer or a holder of the check may ask the drawee bank to accept or certify the check. If the drawee bank certifies the check, it becomes primarily or absolutely liable for paying the check as it reads at the time of its acceptance.

Question 6

Anne borrows $2,000 from Jerry and gives him a promissory note for $2,000 at 10 percent annual interest payable in 100 days. Jerry indorses the note "Pay to the order of Ethan" and negotiates the note to Ethan. At the end of 100 days, Ethan takes the note to Anne. Under these circumstances, if Anne _____.

Accepted Answer

Under the given circumstances, if Anne pays Ethan the $2,000 and accrued interest, she can have Ethan mark it "paid" and give it back to her. If Anne does not pay the note to Ethan when he presents it for payment, then she has dishonored the note. Ethan should give notice of the dishonor to Jerry and advise him that he intends to hold Jerry secondarily liable on his indorsement. Ethan also could sue Anne on the basis of her maker's obligation.

Question 7

The acceptor's obligation:

Accepted Answer

The acceptor of a draft is obligated to pay the draft according to the terms at the time of its acceptance. Acceptance is the drawee's signed engagement to honor the draft as presented and is commonly indicated by the signature of the acceptor on the instrument itself. The acceptor's obligation extends to (1) a person entitled to enforce the draft, (2) the drawer, and (3) an indorser who paid the instrument pursuant to her indorser's liability.

Question 8

Chang gives a promissory note to Rahim. Rahim indorses it and negotiates it to John, who indorses it and negotiates it to Andy. Which of the following statements is true of this scenario?

Accepted Answer

Indorsers are liable to each other in the chronological order in which they indorse, from the last indorser back to the first. In the above case, John has no liability to Rahim, however, because John indorsed after Rahim indorsed the note.

Question 9

Which of the following is true of the obligations of an acceptor?

Accepted Answer

If the certification of a check or other acceptance of a draft states the amount certified or accepted, the obligation of the acceptor is that amount. If the certification or acceptance does not state an amount, or if the amount of the instrument is subsequently raised, and then the instrument is negotiated to a holder in due course, the obligation of the acceptor is the amount of the instrument at the time a holder in due course takes it.

Question 10

A nonindorsing transferor makes:

Accepted Answer

Transfer warranties are those which persons who transfer negotiable instruments make to their transferees. A person who transfers a negotiable instrument to someone else and for consideration makes six warranties to his immediate transferee. If the transfer is by indorsement, the transferor makes these warranties to all subsequent transferees.

Question 11

Which of the following parties is primarily liable on a certified check?

Accepted Answer

At the time a check or other draft issues, no party is primarily liable on it. Usually, the drawee bank pays a check when it is presented for payment and no person becomes primarily liable. However, the drawer or a holder of the check may ask the drawee bank to accept or certify the check. If the drawee bank certifies the check, it becomes primarily or absolutely liable for paying the check as it reads at the time of its acceptance.

Question 12

An indorser's liability is discharged if the check is not presented within _____ after the indorsement.

Accepted Answer

If a bank accepted a draft (for example, by certifying a check) after an indorsement is made, the acceptance discharges the liability of the indorser. If notice of dishonor is required and proper notice is not given to the indorser, she is discharged of liability. And, where no one presents a check or gives it to a depositary bank for collection within 30 days after the date of an indorsement, the indorser's liability is discharged.

Question 13

Themba stole Umi's checkbook and wrote a check for $100 forging Umi's signature. Under these circumstances, _____.

Accepted Answer

Under the given circumstances, Themba, and not Umi, is liable on the check. If someone signs a person's name to a negotiable instrument without that person's authorization or approval, the signature does not bind the person whose name appears. Themba's forgery of Umi's signature operates as Themba's signature. Thus, if Themba cashed the check at the bank, he would be liable to the bank to make it good or if he negotiated it to a store for value, he would be liable to the store to make it good.

Question 14

Anupama drew a check on her account at Mortimer Bank payable to the order of Prahlad. When Prahlad presented the check for payment, Mortimer Bank refused to honor the check. Under these circumstances, the bank _____.

Accepted Answer

A drawee has no liability on a check or other draft unless it certifies or accepts the check or draft-that is, agrees to be liable on it. However, a drawee bank that refuses to pay a check when it is presented for payment may be liable to the drawer for wrongfully refusing payment, assuming the drawer had sufficient funds in his checking account to cover it. In this scenario, the bank may be liable to Anupama for wrongfully refusing payment if Anupama has sufficient funds in her checking account to cover it.

Question 15

Which of the following statements is true of the obligation of the maker?

Accepted Answer

The obligation of the maker is owed to (1) a person entitled to enforce the instrument or (2) any indorser who paid the instrument pursuant to her indorser's liability. A person entitled to enforce an instrument includes (1) the holder of the instrument, (2) a nonholder in possession of the instrument who has the rights of a holder, and (3) a person not in possession of the instrument who has the right to enforce the instrument under Section 3-309, which deals with lost, destroyed, or stolen instruments.

Question 16

James draws a check on his account at Harper Bank payable to the order of Terry. James does not ask Harper Bank to accept or certify the check. If Harper Bank does not pay the check when Terry presents it for payment, then:

Accepted Answer

If Harper Bank does not pay the check when Terry presents it for payment, then James is liable to Terry on the basis of his drawer's obligation. If the drawee bank certifies a check, the drawer is discharged of his drawer's obligation.

Question 17

Gabrielle borrows $1,000 from Frank to pay for school and gives Frank a note for that amount. Frank wants Gabrielle's father to sign as an accommodation party. Gabrielle's father signs below Gabrielle's signature on the fall of the note. Which of the following statements is true of this case?

Accepted Answer

An accommodation party is a person who signs a negotiable instrument for the purpose of lending her credit to another party to the instrument but is not a direct beneficiary of the value given for the instrument. In the above case, Gabrielle and her father have the same contractual liability.

Question 18

Igor signed a note to Gogh Bank, and his friend Sergei also signed the note as an accommodation maker. If Igor defaults on the note when it is due, what are Sergei's rights and obligations?

Accepted Answer

An accommodation party is a person who signs a negotiable instrument for the purpose of lending her credit to another party to the instrument but is not a direct beneficiary of the value given for the instrument. An accommodation maker has the same contractual obligations as the payee. In the above case, Igor and Sergei have the same contractual liability.

Question 19

Peter draws a check on his account at Wright Bank payable to the order of Stella. Peter asks Wright Bank to certify the check and the bank certifies it. Stella presents the check to Wright Bank for payment. Which of the following statements is true of this case?

Accepted Answer

In this case, Wright Bank becomes primarily or absolutely liable on the check. At the time a check or other draft issues, no party is primarily liable on it. Usually, the drawee bank pays a check when it is presented for payment and no person becomes primarily liable. However, the drawer or a holder of the check may ask the drawee bank to accept or certify the check. If the drawee bank certifies the check, it becomes primarily or absolutely liable for paying the check as it reads at the time of its acceptance.

Question 20

People who present drafts for warranties:

Accepted Answer

Persons who present negotiable instruments for payment or drafts for acceptance make warranties, but their warranties differ from those transferors make. People who present drafts for warranties make a warranty that the instrument has not been altered.

Quiz 40: Liability of Parties