Question 1

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 2

The Gulf States Section,PGA,Inc.v.Whitney National Bank of New Orleans case addressed liability on a negotiable instrument
A)based on fraud.
B)based on negligence.
C)as an accommodation party.
D)as a signer.

Accepted Answer

B

Question 3

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 validly negotiated draft is in the possession of the holder, he/she must exhibit the instrument, show reasonable identification, and surrender the draft if it is paid in full. This is in accordance with the requirement of presentment for payment. There is no mention of dishonor or notice of dishonor in the payment process for the holder. Similarly, exhibiting the draft, providing a thumbprint signature, and giving a receipt are not necessary steps in the payment process. Finally, suspending the underlying debt, applying the shelter rule, and making a demand for payment are not relevant in this context.

Question 4

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

When Maurina signs the check as "Maurina Barker, as agent for Southland," she is indicating that she is signing on behalf of Southland and not in her personal capacity. Therefore, she is not liable on the instrument. The liability falls on Southland as the principal.

Question 5

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

Accepted Answer

When an indorser writes "without recourse" on a negotiable instrument, it means that the indorser is not liable for payment. This limits the liability of the indorser and protects them from being held responsible for payment in case the instrument is dishonored. Therefore, option A is correct.

Question 6

Drawers and indorsers are secondarily liable on negotiable instruments.

Accepted Answer

Drawers and indorsers are considered secondary parties in the context of negotiable instruments, meaning they are not primarily responsible for payment but may be held liable if the primary obligor (e.g. the maker of a check or the issuer of a promissory note) fails to make payment.

Question 7

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

Accepted Answer

Warranty liability refers to the potential obligation of a manufacturer or seller to cover the costs of repairs or replacements of a product in case of defects or damage. It is not related to negotiable instruments. The liability of someone who gives payment on a negotiable instrument is known as payment liability.

Question 8

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

Accepted Answer

Even if a negotiable instrument is accidentally destroyed, it can still be enforced through other means such as reissuing or re-creating it. It does not result in its cancellation.

Question 9

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

Leah's notice of the dishonor does not have to be in writing. Verbal communication is sufficient as long as it allows Nelson enough time to make arrangements to fulfill the payment.

Question 10

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 must...

Question 11

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

Joel is the maker of the promissory note and therefore has primary liability. Andrew, as the original holder, has secondary liability, and Luke, as the subsequent holder, has even less liability than Andrew.

Question 12

Which rule states that if someone issues an instrument to a person who does not exist,then any indorsement in thename of the payee is valid as long as the person who pays the instrument doesnot know of the fraud?
A)The Imposter Rule
B)The Indorsement Rule
C)The Conversion Rule
D)The Fictitious Payee Rule

Accepted Answer

The rule that states that if someone issues an instrument to a person who does not exist, then any indorsement in the name of the payee is valid as long as the person who pays the instrument does not know of the fraud is called the Fictitious Payee Rule. This rule aims to protect innocent parties who are unaware of the fraud from being held responsible for the payment.

Question 13

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

Connie can sue Lance for breach of transfer warranty because by indorsing the note, Lance made certain warranties to Connie, one of which is that the signature on the note is genuine. Since the signature was forged, Lance breached this warranty.

Question 14

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 a primary party, 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 obligated to pay the note and typically benefits from the loan. Their liabilities differ in terms of their roles and obligations regarding the note.

Question 15

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, including situations where an instrument is stolen or a bank pays out on a check with a forged endorsement.

Question 16

Negotiable instruments are normally issued to fulfill a contract.

Accepted Answer

Negotiable instruments, such as checks and promissory notes, are often used as part of a contractual agreement between parties. They serve as a written promise or order to pay a specified amount of money and can be transferred or assigned to another party.

Question 17

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.He...

Question 18

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 can lead to criminal penalties in many jurisdictions, as it is considered a form of fraud or theft by deception.

Question 19

A drawee has primarily liability on a draft.

Accepted Answer

The drawee is the party expected to pay the draft, but they do not have primary liability until they accept the draft. The drawer, who issues the draft, holds primary liability until acceptance.

Question 20

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 way to discharge a negotiable instrument; it is a step in the process of demanding payment or acceptance.

Quiz 26: Liability for Negotiable Instruments

The Gulf States Section,PGA,Inc.v.Whitney National Bank of New Orleans case addressed liability on a negotiable instrument

Verne has possession of a draft that has been validly negotiated to him.His payment process necessarily includes