Deck 39: Negotiation and Holder in Due Course

Question 1

An instrument that is indorsed with a special indorsement remains order paper.

Answer 1

True

Question 2

The Federal Trade Commission rule designed to protect consumers against operation of the holder excludes persons who sell to consumers on credit.

Answer 2

False

Question 3

A holder in due course takes a negotiable instrument free of all personal defenses and claims to the instrument, but is subject to claims in recoupment either of the person obligated on the instrument or of a third party.

Answer 3

False

Question 4

Which of the following can be negotiated by transfer of possession of an instrument after indorsement by the person specified?

A) Order paper
B) Bearer paper
C) Blank endorsement
D) Teller's check

Question 5

There are three basic kinds of indorsements: (1) special, (2) blank, and (3) constructive.

Question 6

Order paper can be negotiated by transfer of possession of the instrument after indorsement by the person specified.

Question 7

"For collection only" is an example of a special indorsement.

Question 8

A person is not a holder if she is in possession of an instrument that is payable to bearer.

Question 9

An instrument that is indorsed with a special indorsement can be negotiated only with the indorsement of the person specified.

Question 10

A person is a(n) _____ if she is in possession of an instrument that is payable to bearer or that is made payable to an identified person and she is that identified person.

A) issuer
B) holder
C) payor bank drawee
D) drawer

Question 11

If an indorser merely signs his name and does not specify to whom the instrument is payable, he has made a constructive indorsement.

Question 12

A person who receives a check as a gift cannot qualify as a holder in due course.

Question 13

Hamid has a check indorsed "Pay to the order of Hamid Ali." Hamid gives the check to Yasmin without indorsing it. Which of the following statements is true of this case?

A) Yasmin is not a holder of the check because she failed to indorse the check.
B) Yasmin is not a holder of the check because Hamid failed to indorse the check.
C) Yasmin is a holder of the check because only delivery was necessary to negotiate the check.
D) Yasmin is a holder of the check because she may supply the missing indorsement herself.

Question 14

An instrument payable to bearer may be negotiated by transfer of possession alone.

Question 15

If someone gives you a check that is made payable "to the order of cash," you cannot negotiate the check merely by giving it to the person to whom you wish to transfer it.

Question 16

No indorsement is necessary to negotiate an instrument payable to bearer.

Question 17

To be a holder of a negotiable instrument, a person must not have possession of an instrument that is payable to bearer.

Question 18

Which of the following statements is true of negotiating an instrument?

A) It must not be transferred involuntarily.
B) It must be transferred voluntarily.
C) It must be transferred by a person other than the issuer.
D) It must be transferred by the issuer.

Question 19

Fraud in the essence is an example of a real defense that can be used as a reason against payment of a negotiable instrument to any holder, including a holder in due course.

Question 20

An instrument payable to cash:

A) can be negotiated only after indorsement by the person specified.
B) is known as an order paper.
C) may be negotiated by transfer of possession alone.
D) does not allow the person who takes the instrument to ask for an indorsement for her protection.

Question 21

An indorsement that specifies the purpose of the indorsement or specifies the use to be made of the instrument is termed as a _____ indorsement.

A) special
B) restrictive
C) blank
D) qualified

Question 22

A claim in recoupment:

A) is a claim of the original payee against the obligor of the instrument.
B) must arise from the transaction that gave rise to the instrument.
C) is actually not an offset to liability, but a defense to an instrument.
D) can make a person a holder in due course even if he knows about it before the negotiation.

Question 23

Except for the special provisions concerning depositary banks, if an order instrument is transferred without indorsement, the _____.

A) instrument has not been negotiated
B) transferee can qualify as a holder
C) transferee has the right to the qualified indorsement of the transferor
D) transferee has none of the rights of the transferor to enforce the instrument

Question 24

A holder in due course takes a negotiable instrument free of all:

A) negotiable defenses.
B) real defenses.
C) claims in recoupment.
D) claims to the bearer.

Question 25

Which of the following statements is true of an indorsement?

A) It applies only to payments made to a depositary bank.
B) It does not affect future attempts to negotiate the instrument.
C) It generally does not make a person liable on the instrument even if he or she is engaged in any illegality affecting the instrument.
D) It makes a person liable on an instrument indorsed by him or her if the person primarily liable on it does not pay it.

Question 26

If Jonathan indorses an instrument in blank and gives it to Lily, she _____.

A) must indorse it before it can be negotiated further
B) may negotiate it without indorsing it
C) cannot convert the blank indorsement to a special one
D) is not liable even if she indorses it as it was given to her by Jonathan

Question 27

Which of the following statements is true of a qualified indorsement?

A) It does not change the negotiable nature of the instrument.
B) It specifies the purpose of the indorsement or specifies the use to be made of the instrument.
C) It contains the signature of the indorser along with the words indicating to whom, or to whose order, the instrument is payable.
D) It does not eliminate the contractual liability of the indorser.

Question 28

Bella contracted with Marco Furnishing to complete the work on her house by November 1, 2013. She gave Marco a negotiable promissory note in the amount of $20,000 payable to the order of Marco on November 1. Marco then negotiated the note to the bank. He, however, could not complete the work by November 1. In this scenario, which of the following statements is true if the bank is able to qualify as a holder in due course?

A) Bella is not liable to the bank because Marco breached the contract, not her.
B) The bank can collect the amount from Marco because he negotiated the note to the bank.
C) The bank can be held liable by Bella if she asserts personal defense against the bank as Marco did not complete the work on time.
D) Bella cannot assert personal defense against the bank and avoid payment as it was a negotiation, and not a simple contract.

Question 29

Mantra Oil Inc. indorses a check "Pay Habib Coal Corp. only if it delivers 1,000 tons of coal by September 30, 2014." Under Revised Article 3 of the Uniform Commercial Code, this is a _____ indorsement.

A) blank
B) qualified
C) conditional
D) restrictive

Question 30

If an indorsement contains the signature of the indorser along with the words indicating to whom, or to whose order, the instrument is payable, it can be termed as a _____ indorsement.

A) special
B) restrictive
C) blank
D) qualified

Question 31

A check drawn "Pay to the Order of Shoma Chatterjee" is indorsed "Shoma Chatterjee" by Shoma. Given this information, we can conclude that the type of indorsement is _____.

A) special
B) restrictive
C) blank
D) qualified

Question 32

Under the Revised Article 3 of the Uniform Commercial Code, a check deposited in a depositary bank without indorsement makes the:

A) bank a holder of an item delivered to it only if the customer indorses it.
B) bank a holder of an item delivered to it for collection whether or not the customer indorses it.
C) customer the holder only if the bank indorses it at the time of delivery.
D) customer the holder only if the bank at the time of delivery qualified as a holder.

Question 33

With instruments payable at a definite time, Revised Article 3 of the Uniform Commercial Code requires that if:

A) the principal is not payable in installments and the due date has not been accelerated, the instrument is overdue on the day after the due date.
B) the principal is due in installments and a due date has not been accelerated, the instrument is overdue on the day after the due date.
C) a due date for the principal has been accelerated, the instrument is overdue upon default.
D) there is a default in payment of the interest but no default in the payment of principal, the instrument becomes overdue.

Question 34

Which of the following statements is true of a restrictive indorsement?

A) A person who purchases a check indorsed "for collection" automatically converts it even if the indorser received the amount paid for it.
B) If an indorser merely signs his name and does not specify to whom the instrument is payable, he has indorsed the instrument in restriction.
C) A person who takes an instrument with a restrictive indorsement should not pay for the instrument consistently with the indorsement.
D) It includes indorsements for collection, which are commonly put on by banks involved in the collection process, and indorsements for deposit.

Question 35

In order to become a holder in due course, a person who takes a negotiable instrument must be a holder, and take the instrument:

A) without notice that the instrument contains an authorized signature.
B) with notice that it is overdue or has been dishonored.
C) with notice of any claim of a property or possessory interest in it.
D) without notice that any party has any defense against it or claim in recoupment to it.

Question 36

If a negotiable instrument is payable on demand, it is overdue:

A) the day after demand for payment has been made in a proper manner and form.
B) 30 days after its date if it is a check.
C) 3 days after demand for payment has been made in a proper manner and form.
D) 60 days after its date if it is a check.

Question 37

An instrument which reads "For deposit only" is an example of a _____ indorsement.

A) qualified
B) special
C) restrictive
D) blank

Question 38

When the holder of an instrument has presented it for payment or acceptance and it has then been refused, the negotiable instrument:

A) is considered overdue.
B) has been dishonored.
C) is considered unauthorized.
D) has been held to be irregular.

Question 39

Lei signs a 30-day note payable to Yuan Appliances Inc. for $500 and gives it to Yuan as payment for a washing machine. When Yuan asks Lei for payment, she refuses to pay because the washing machine does not work properly. Yuan informs a bank about Lei's refusal to pay and then negotiates the note to the bank. Which of the following statements is true of this case?

A) The bank is not a holder in due course of the note.
B) The bank is a holder in due course of the note.
C) A dishonored instrument always makes the indorser the holder.
D) Yuan is the holder in due course.

Question 40

Ming indorsed a check from his employer by signing Ming's name and the words "without recourse." This indorsement is an example of a _____ indorsement.

A) qualified
B) blank
C) special
D) restrictive

Question 41

List the claims and defenses available to a holder in due course under the Revised Article 3 of the Uniform Commercial Code.

Question 42

An art dealer sells a painting to Priya, telling her that it is an original painting made by a famous painter, and takes Priya's check for $500 in payment. Before making the sale, the art dealer was aware that the painting is not genuine, and it is a forgery. Can Priya claim any defenses against the payment made to the art dealer?

Question 43

Any person who can trace his title to an instrument back to a holder in due course receives rights similar to a holder in due course even if he cannot meet the requirements himself. This is known as the _____.

A) shelter rule
B) holder in due course rule
C) Federal Trade Commission rule
D) irregular paper law

Question 44

Explain personal defenses against the payment of negotiable instruments. Give suitable examples.

Question 45

The Federal Trade Commission (FTC) regulation:

A) cannot fine a seller who fails to include the FTC notice in the note or contract.
B) does not apply to persons who sell to consumers on credit.
C) is designed to protect consumers against operation of the holder in due course rule.
D) is designed to make the consumer subject to all claims and defenses of a potential holder.

Question 46

Explain the formal requirements for negotiation of order paper and bearer paper.

Question 47

Which of the following is a partial defense against a holder in due course and a complete defense against a non-holder in due course?

A) Illegality that makes a contract voidable
B) Fraud in the inducement of any underlying contract
C) Alteration of the completed instrument
D) Lack or failure of consideration

Question 48

How does one become a "holder in due course"?

Question 49

The claims and defenses to payment of an instrument that go to the validity of the instrument are called _____.

A) real defenses
B) personal defenses
C) claims in recoupment
D) claims to an instrument

Question 50

Which of the following is a real defense that can be used to avoid or reduce liability on a negotiable instrument?

A) Fraud in the inducement
B) Discharge in bankruptcy
C) Breach of contract
D) Conditional issuance