Question 1

Clint induces David,by fraud in the inducement,to make an instrument payable to the order of Clint.Clint then negotiates the instrument to Eric,a holder in due course,and later reacquires it from Eric.In this case:
A) Clint is a holder in due course.
B) Clint is not a holder in due course,but he succeeds to the rights of one,because of the shelter rule.
C) Clint does not succeed to Eric's rights as a holder in due course and remains subject to the defense of fraud.
D) because fraud in the inducement is a real defense,it can be used against both Clint and Eric.

Accepted Answer

Clint induced David to make the instrument by fraud, which means he used deceit or trickery to obtain the instrument. Thus, Clint does not have the rights of a holder in due course, and he cannot succeed to Eric's rights either. As a result, he remains subject to the defense of fraud. Even though Eric is a holder in due course, Clint's fraud in the inducement can still be used against him.

Question 2

Real defenses include all but which of the following?
A) Forgery of instrument
B) Minority of maker
C) Material alteration
D) Theft of bearer paper

Accepted Answer

Theft of bearer paper is not a defense, it is a crime. Real defenses refer to valid legal reasons for non-payment of a negotiable instrument, such as lack of consideration, fraud in the execution, and breach of warranty. Forgery of instrument, minority of maker and material alteration are all examples of real defenses.

Question 3

Scott buys a television from Kacey's Electronics,giving Kacey a check for $550.Kacey uses a special indorsement and negotiates the check to Rory.Rory carefully changes the amount to read $1550 and loses the check on the way to the bank.Harry picks it up and tries to cash it.What will he get?
A) Scott will have to pay him $550.
B) Kacey will have to pay him $550.
C) Rory will have to pay him $1550.
D) No one will have to pay Harry.

Accepted Answer

Since Harry found the check and did not obtain it through proper negotiation, he has no legal right to the funds. No one will be obligated to pay him the $550 or $1550.

Question 4

Steve issues a negotiable promissory note to Bob in exchange for Bob's promise to build an addition to Steve's home.The promissory note indicates this reason when Bob negotiates it to Willard for value.Can Willard be a holder in due course?
A) Yes,unless he knows that Bob has not built the addition
B) Yes,unless he did not give adequate value
C) No,since he has taken the instrument with notice of a defense
D) No,since he has violated the "good faith" requirement

Accepted Answer

Willard can be a holder in due course unless he knows that Bob has not built the addition. A holder in due course takes an instrument free of most defenses that could be asserted against the original obligor, including claims of fraud, duress, and breach of contract. However, the holder in due course is subject to any claim that could be raised against previous holders of the instrument. Here, if Willard knows that Bob has not built the addition, he cannot claim the status of a holder in due course.

Question 5

Alice Jones receives a bonus of $500 from her boss.She needs cash for her vacation,so she indorses the check to Charlie who gives her $300 cash and an IOU for $200.When Charlie presents the check to Alice's company for payment,her boss says the check was meant for Alex Jones instead;it was all a big mistake.What will Charlie be able to collect from the company?
A) $500
B) $300
C) $420
D) Nothing

Accepted Answer

The answer of Alice Jones receives a bonus of $500...

Question 6

Miller does the payroll for Phoenix Company.In between Adams and Bates,he inserts the name Appleton and makes out a weekly paycheck in that name.He keeps the check for himself,signing "Appleton" and cashing it at a local bank.Auditors discovered the fake payee many months later.May Phoenix require the bank to recredit?
A) No,because of the holder rule
B) No,because Miller is an Phoenix employee and the fictitious payee rule applies
C) Yes,because the indorsement is forged
D) Yes,because the check was,in effect,stolen

Accepted Answer

CThe fictitious payee rule (choice B) applies when an employee authorized to issue checks fraudulently makes a check payable to a non-existent person and then endorses and cashes it. The bank is typically protected in these cases because the employee's actions are considered to fall within their authority, making the endorsement effective. However, choice C is also correct because from the perspective of the law and banking regulations, an endorsement made in the name of a non-existent or fictitious person by someone not authorized to do so (like Miller acting as Appleton) can be considered a forged endorsement. This would allow the company to argue that the bank should not have honored the check with a forged endorsement, thus requiring the bank to recredit the account.

Question 7

Tony is fraudulently induced to issue a check to Rita.Tony has:
A) a claim to ownership of the check.
B) a defense to Rita's demand for payment.
C) neither a claim nor a defense.
D) both a claim and a defense.

Accepted Answer

Tony has both a claim to ownership of the check because it was obtained through fraudulent means, and a defense to Rita's demand for payment for the same reason.

Question 8

Personal defenses include all but which of the following?
A) Breach of contract
B) Fraud in the execution
C) Misrepresentation
D) Failure of consideration

Accepted Answer

The answer of Personal defenses include all but which of...

Question 9

Which of the following is required regarding indorsements?
A) An indorsement must be written on the back side of the instrument.
B) There must be compliance with Federal Reserve Board guidelines in order for the instrument to be negotiable.
C) An indorsement must be written on the instrument or on a paper affixed to the instrument.
D) An indorsement must be dated.

Accepted Answer

According to the Uniform Commercial Code (UCC), an indorsement can be on the back side of the instrument, but it can also be on a separate paper affixed to the instrument. Compliance with Federal Reserve Board guidelines is not required for negotiability, and while it is good practice to include a date on an indorsement, it is not required.

Question 10

Which of the following is not a real defense?
A) Forgery
B) Fraudulent alteration
C) Discharge in insolvency proceedings
D) Change in price

Accepted Answer

Forgery, fraudulent alteration, and discharge in insolvency proceedings are all real defenses recognized in contract law. A change in price does not qualify as a real defense.

Question 11

A Federal Trade Commission rule limits the rights of a holder in due course of an instrument that evidences a debt arising out of a(n):
A) consumer credit contract.
B) insurance contract.
C) consumer purchase paid for with a check.
D) construction contract.

Accepted Answer

The FTC rule referred to is the Holder in Due Course Rule, which applies specifically to consumer credit contracts. It limits the rights of a holder in due course of an instrument by preventing them from having greater rights than the original creditor in certain situations, such as if the debtor has a claim or defense against the original creditor. Therefore, the correct answer is A, as the other options are not subject to this specific FTC rule.

Question 12

The refusal to pay or accept an instrument when it becomes due is:
A) the shelter rule.
B) dishonor.
C) demand.
D) discharge.

Accepted Answer

Dishonor refers to the refusal to pay or accept an instrument when it becomes due. The shelter rule, demand, and discharge are unrelated to this concept.

Question 13

Blane indorsed his paycheck in blank and cashed it at a store where he was a well-known customer.The check was then stolen from the store.The store immediately notified Blane's employer,who gave the drawee bank a stop payment order.The thief indorsed the check in a false name and transferred the check to a gas station/convenience store,which took the check in good faith and for value.The check was dishonored when presented to the drawee bank.Which of the following statements is true?
A) The thief was a holder within the Code definition and could negotiate the check.
B) The thief could not negotiate the check because he forged the indorsement.
C) The gas station/convenience store is entitled to nothing from the drawer of the check.
D) The gas station/convenience store could not be a holder in due course because it took the check from a thief.

Accepted Answer

The answer of Blane indorsed his paycheck in blank and...

Question 14

The notice requirement of the Federal Trade Commission rule for consumer credit contracts has the effect of:
A) limiting the types of defenses to payment available to a consumer.
B) eliminating the real defenses to payment.
C) placing a holder in due course in the position of an assignee.
D) permitting a holder in due course to have a questionable instrument reviewed by the FTC.

Accepted Answer

The notice requirement of the Federal Trade Commission (FTC) rule for consumer credit contracts effectively places a holder in due course in the position of an assignee. This means that the holder is subject to all claims and defenses that the consumer could assert against the seller of the goods or services, thus limiting the holder's ability to enforce the contract free from such claims and defenses.

Question 15

Erin stole a paycheck from Carl prior to his indorsing it.She then forged Carl's signature and transferred the check to a gas station which took it in good faith,for value,without notice,and without reason to question its authenticity.The gas station:
A) was a holder in due course.
B) could not be a holder.
C) could be a holder,but not a holder in due course.
D) can collect the amount of the check only from the drawer since Carl did not indorse it.

Accepted Answer

The answer of Erin stole a paycheck from Carl prior...

Question 16

An indorsement that is not in the chain of title is assumed to be a(n):
A) anomalous indorsement.
B) blank indorsement.
C) special indorsement.
D) indorsement in trust.

Accepted Answer

An anomalous indorsement is an indorsement that does not follow the usual chain of title. It can be any type of indorsement, but it appears out of order, either prior to the original payee or after the final indorsement.

Question 17

A holder in due course could recover from the maker where the:
A) maker's signature is forged.
B) bearer instrument was stolen after it was completed.
C) maker signed the instrument under physical duress.
D) maker is a fifteen-year-old.

Accepted Answer

A holder in due course can recover from the maker if the instrument was stolen after it was completed, as the holder in due course is protected from certain defenses that could be raised by the maker.

Question 18

All of the following are "real defenses" except a:
A) note made by a minor.
B) check written while a gun is held to the drawer's head.
C) note given in exchange for worthless securities.
D) check fraudulently changed from $100 to $400.

Accepted Answer

Real defenses are valid against all holders, including HDCs, and include forgery, fraud in the execution, material alteration, infancy, illegality, mental incapacity, extreme duress, and discharge in bankruptcy. A note given in exchange for worthless securities does not fall under these categories, making it not a real defense.

Question 19

Which one of the following is not a personal defense?
A) Infancy,to the extent that it is a defense to a simple contract
B) Breach of contract
C) Non-delivery of an instrument
D) Failure of consideration

Accepted Answer

The answer of Which one of the following is not...

Question 20

Defenses that may be asserted against a holder in due course are called:
A) personal defenses.
B) real defenses.
C) special defenses.
D) holder in due course defenses.

Accepted Answer

Defenses that may be asserted against a holder in due course are called real defenses. Real defenses are based on defects in the transaction itself, such as fraud in the inducement, duress, or incapacity. These defenses can defeat the holder in due course's ability to enforce the instrument against the party asserting the defense.

Quiz 27: Transfer and Holder in Due Course

Clint induces David,by fraud in the inducement,to make an instrument payable to the order of Clint.Clint then negotiates the instrument to Eric,a holder in due course,and later reacquires it from Eric.In this case:

Real defenses include all but which of the following?

Scott buys a television from Kacey's Electronics,giving Kacey a check for $550.Kacey uses a special indorsement and negotiates the check to Rory.Rory carefully changes the amount to read $1550 and loses the check on the way to the bank.Harry picks it up and tries to cash it.What will he get?

Steve issues a negotiable promissory note to Bob in exchange for Bob's promise to build an addition to Steve's home.The promissory note indicates this reason when Bob negotiates it to Willard for value.Can Willard be a holder in due course?

Tony is fraudulently induced to issue a check to Rita.Tony has:

Personal defenses include all but which of the following?

Which of the following is required regarding indorsements?

Which of the following is not a real defense?

A Federal Trade Commission rule limits the rights of a holder in due course of an instrument that evidences a debt arising out of a(n) :

The refusal to pay or accept an instrument when it becomes due is:

The notice requirement of the Federal Trade Commission rule for consumer credit contracts has the effect of:

Erin stole a paycheck from Carl prior to his indorsing it.She then forged Carl's signature and transferred the check to a gas station which took it in good faith,for value,without notice,and without reason to question its authenticity.The gas station:

An indorsement that is not in the chain of title is assumed to be a(n) :

A holder in due course could recover from the maker where the:

All of the following are "real defenses" except a:

Which one of the following is not a personal defense?

Defenses that may be asserted against a holder in due course are called: