Question 1

Audio Science Company's agent Bailey is authorized to draw checks on Audio Science's account in Citizen Bank. The checks are preprinted with the company name. Bailey writes a check "pay to the order of Darlene [signed] Bailey." Darlene presents the check for payment. If Citizen Bank dishonors it, liability extends to
A) no one.
B) Audio Science and Bailey.
C) Audio Science only.
D) Bailey only.

Accepted Answer

The answer of Audio Science Company's agent Bailey is authorized...

Question 2

Nero signs a check "pay to the order of Olive" drawn on Nero's account in Peachtree Bank. Olive signs the back of the check. Secondary liability on this check extends to
A) Nero and Olive only.
B) Nero and Peachtree Bank only.
C) Nero only.
D) Peachtree Bank only.

Accepted Answer

Nero is the drawer of the check, and therefore has primary liability to pay it. Olive, as the payee who endorsed the check, has secondary liability if Nero does not honor the check. Peachtree Bank is not liable unless it somehow acted negligently or wrongly in processing the check. Therefore, the correct answer is A) Nero and Olive only.

Question 3

Ethel signs a note "payable to the order of Fidelity Bank." Fidelity indorses the note in blank and negotiates it to Ghani, who sells it to Huck. Liability associated with the transfer of the note from Ghani to Huck is
A) fitness.
B) quality.
C) signature.
D) warranty.

Accepted Answer

The liability associated with the transfer of the note from Ghani to Huck is warranty. This means that Ghani is providing a guarantee to Huck that the note is valid and enforceable. If there are any issues with the note, such as it not being genuine or having legal problems, Ghani would be liable to Huck for any damages. This is the standard warranty that is implied in any negotiable instrument transfer.

Question 4

To borrow the money to buy a car, Klaus signs a note "payable to the order of Lake City Auto Financing." Minnie cosigns the note to guarantee the repayment of the loan. Minnie's liability on this note is
A) lateral.
B) primary.
C) secondary.
D) tertiary.

Accepted Answer

The answer of To borrow the money to buy a...

Question 5

Dandy Lyin' Furniture Store borrows $100,000 at 6 percent interest from Easy Loan Company and signs a promissory note for that amount. Easy changes the amount of the note to $120,000 and increases the rate to 8 percent. Easy materially altered the note when it changed
A) neither the amount nor the interest rate
B) the amount and the interest rate.
C) the amount only.
D) the interest rate only.

Accepted Answer

The answer of Dandy Lyin' Furniture Store borrows $100,000 at...

Question 6

Derby Stables writes a check to Extendo Credit, Inc., that is drawn on Derby's account at Farm & Ranch Bank. If the bank does not accept the check, liability for its amount is on
A) Derby.
B) Extendo.
C) Farm & Ranch.
D) the holder of the check.

Accepted Answer

The liability for the amount of the check is normally on the person who wrote the check, which in this case is Derby Stables. If the bank did not accept the check, Derby Stables would be responsible for finding another way to pay Extendo Credit, Inc.

Question 7

Birdie, an accountant for Country Custom Furniture, Inc., issues company checks payable to nonexistent persons drawn on Country's account at Debit Bank. Birdie indorses the checks and deposits them in her account. Country discovers the theft and demands that Debit recredit its account. Debit's best defense is that
A) Birdie was not authorized to issue the checks.
B) Country was in a better position than Debit to prevent the theft.
C) Debit did not know that the checks were not to be paid.
D) the checks were the property of Country, not Debit.

Accepted Answer

The answer of Birdie, an accountant for Country Custom Furniture,...

Question 8

Chris convinces Dion, who does not understand English, to sign a $1,000 note that Dion believes is an application for a credit card. Chris negotiates the note to EZ Finance Company. Dion
A) can avoid payment on the note even if EZ is an HDC.
B) can avoid payment on the note only if EZ is a holder.
C) must pay EZ the amount that it paid for the note.
D) must pay the note in full.

Accepted Answer

The answer of Chris convinces Dion, who does not understand...

Question 9

Toby signs a note "payable to the order of United Credit Union." Unless Toby has a valid defense against payment, Toby's liability on this note is
A) immediate.
B) imposed only after payment is demanded.
C) postponed until the note is dishonored by United Credit Union.
D) suspended until payment is due.

Accepted Answer

When Toby signs a note that is payable to the order of United Credit Union, Toby becomes the primary obligor and is immediately liable for payment unless there is a valid defense against payment. Toby's liability is not postponed or suspended, and United Credit Union can demand payment at any time. Therefore, option A is the correct choice.

Question 10

Bing signs a note payable to the order of Cameron. Cameron indorses the note and gives it to Daphne as payment for a debt. Daphne presents it to Bing, who pays it. Bing's payment discharges
A) all of the parties.
B) only Bing.
C) only Cameron.
D) only Daphne.

Accepted Answer

The answer of Bing signs a note payable to the...

Question 11

Laptop Assembly Company gives a $3,000 promissory note to My-T-Fast Delivery Service to deliver a load of computer chips to Laptop's plant. The chips are contaminated during transit, and are useless to Laptop on delivery. If My-T-Fast presents the note for payment
A) Laptop's best defense would be breach of warranty.
B) Laptop must pay the note.
C) Laptop's best defense would be nondelivery of an instrument.
D) Laptop's best defense would be failure of consideration.

Accepted Answer

The answer of Laptop Assembly Company gives a $3,000 promissory...

Question 12

Quincy signs a check payable to Richland Investors, Inc., and gives it to Richland, leaving the amount blank but authorizing Richland to fill in the check for $1,000. Richland fills in $1,500 and negotiates the check to Silverado Bank, to whom Richland owes $1,500. Silverado Bank, an HDC, can enforce the check for
A) $0.
B) $500.
C) $1,000.
D) $1,500.

Accepted Answer

When Quincy signed the check and authorized Richland to fill in the amount, it created what is known as a blank check. However, Quincy did not limit the amount that could be filled in. Richland filled in $1,500 and negotiated the check to Silverado Bank, to whom Richland owes $1,500. Since Silverado Bank is a holder in due course (HDC), they can enforce the check for its full amount of $1,500.

Question 13

Dirk is the maker of a note, on which Erv is secondarily liable. Friendly Credit Company is the current holder of the note. Erv will be obligated to pay the note if
A) Dirk defaults on the note.
B) Friendly Credit breaches a transfer warranty.
C) Friendly Credit negotiates the note to a third party.
D) Friendly Credit presents the note for payment.

Accepted Answer

Erv is secondarily liable on the note, meaning that he is only obligated to pay the note if Dirk does not pay it. Therefore, if Dirk defaults on the note, Erv will be obligated to pay it. The other answer choices are not relevant to Erv's obligation on the note.

Question 14

Celia, an employee of Delite Dairy Company, forges the signature of Elin, Delite's president, on a Delite check and cashes it at First Federal Bank. Elin would ratify Celia's actions by
A) asking First Federal to prosecute Celia for forgery.
B) discharging Celia from Delite 's employment.
C) entering into a repayment agreement with Celia.
D) filing criminal charges against Celia herself.

Accepted Answer

Ratification is the act of approving or accepting a previously unauthorized act, which is exactly what Elin would be doing if she entered into a repayment agreement with Celia. However, the other choices - asking First Federal to prosecute Celia, discharging Celia from employment, or filing criminal charges against Celia herself - would not be considered ratification.

Question 15

Opalina asks Paolo, who does not understand English, to sign what Opalina says is an application to open a bank account. In fact, the "application" is a note. If sued on the note by an HDC
A) Paolo must pay the note.
B) Paolo's best defense would be fraud in the execution.
C) Paolo's best defense would be fraud in the inducement.
D) Paolo's best defense would be mistake.

Accepted Answer

Paolo's best defense would be fraud in the execution. Fraud in the execution applies when a party is deceived as to the actual nature of the document being signed. In this case, Paolo believed he was signing an application for a bank account, not a promissory note. Therefore, he did not understand the nature of the document he was signing.

Question 16

Fact Pattern 26-1A
Seymour writes a check on his account at Platinum Bank to Teri to pay a debt. Teri negotiates the check by indorsement to Rosanna, who presents it for payment to Onyx Bank.
-Refer to Fact Pattern 26-1A. If Onyx Bank dishonors the check, Rosanna can obtain payment from Teri
A) if Rosanna timely notifies Teri.
B) only if Seymour refuses to pay the check.
C) under any circumstances.
D) under no circumstances.

Accepted Answer

Under the Uniform Commercial Code (UCC), if a check is dishonored by a bank, the holder of the check (Rosanna) can seek payment from the person who negotiated the check and their predecessors in title, including Teri. However, under UCC § 3-504, the holder must give notice of dishonor to the prior parties within a reasonable time after receiving notice of dishonor or becoming aware of the dishonor. Therefore, Rosanna can obtain payment from Teri if she timely notifies her of the dishonor.

Question 17

Puck signs a check "pay to the order of Quik Mart" drawn on Puck's account in Regional Bank. Puck shows the check to Silky, who agrees that the signature is Puck's and that Quik Mart is owed the amount that the check represents. Quik Mart signs the back of the check. Liability on this check extends to
A) Puck, Quik Mart, and Regional Bank.
B) Puck and Quik Mart only.
C) Puck and Silky only.
D) Silky only.

Accepted Answer

The liability on the check extends to Puck and Quik Mart only. Puck is responsible for the payment as the account holder, and Quik Mart assumes responsibility for endorsing the check and receiving payment. Silky's agreement that the signature is Puck's and that Quik Mart is owed the amount does not make Silky liable for the payment. Regional Bank is not liable as long as there are sufficient funds in Puck's account to cover the amount of the check.

Question 18

Rodeo Ranch's agent Slim is authorized to write checks on Rodeo Ranch's account in Town Bank. Upper Range Corporation is a Rodeo Ranch supplier. Slim writes a check on Rodeo Ranch's account "pay to the order of Upper Range [signed] Slim," indorses it in Upper Range's name, and deposits it in his own account in Verity Bank. If Verity Bank collects payment, the ultimate party most likely to suffer the loss is
A) no one.
B) Rodeo Ranch.
C) Town Bank.
D) Upper Range.

Accepted Answer

Rodeo Ranch is most likely to suffer the loss since Slim fraudulently wrote a check on their account, and if Verity Bank collects payment, the money will come out of Rodeo Ranch's account. Upper Range could also potentially suffer a loss if they do not receive payment for the goods they supplied, but they are not the ultimate party most likely to suffer the loss in this scenario. Town Bank may also suffer a loss if they are found to be negligent in allowing Slim to write fraudulent checks, but they are not the ultimate party most likely to suffer the loss either.

Question 19

Cash National Bank is an HDC of a note for $1,000 on which there is the forged signature of "Dudley." If sued on the note by Cash
A) Dudley must pay the note.
B) Dudley's best defense would be fraud in the execution.
C) Dudley's best defense would be material alteration.
D) Dudley's best defense would be forgery.

Accepted Answer

Dudley's best defense would be forgery, as the signature on the note is not his own and therefore he did not intend to make the agreement to pay. Fraud in the execution and material alteration are not applicable defenses in this scenario.

Question 20

Fact Pattern 26-1A
Seymour writes a check on his account at Platinum Bank to Teri to pay a debt. Teri negotiates the check by indorsement to Rosanna, who presents it for payment to Onyx Bank.
-Refer to Fact Pattern 26-1A. Teri is
A) not liable for payment under any circumstances.
B) primarily liable.
C) secondarily liable.
D) simultaneously liable.

Accepted Answer

Teri is secondarily liable because she negotiated the check by endorsement to Rosanna. As the holder of the check, Rosanna can seek payment from Teri if the check bounces or is not honored for any reason. However, Platinum Bank remains primarily liable to pay the check.

Quiz 26: Liability, Defenses, and Discharge

Nero signs a check "pay to the order of Olive" drawn on Nero's account in Peachtree Bank. Olive signs the back of the check. Secondary liability on this check extends to

Ethel signs a note "payable to the order of Fidelity Bank." Fidelity indorses the note in blank and negotiates it to Ghani, who sells it to Huck. Liability associated with the transfer of the note from Ghani to Huck is

To borrow the money to buy a car, Klaus signs a note "payable to the order of Lake City Auto Financing." Minnie cosigns the note to guarantee the repayment of the loan. Minnie's liability on this note is

Dandy Lyin' Furniture Store borrows $100,000 at 6 percent interest from Easy Loan Company and signs a promissory note for that amount. Easy changes the amount of the note to $120,000 and increases the rate to 8 percent. Easy materially altered the note when it changed

Derby Stables writes a check to Extendo Credit, Inc., that is drawn on Derby's account at Farm & Ranch Bank. If the bank does not accept the check, liability for its amount is on

Chris convinces Dion, who does not understand English, to sign a $1,000 note that Dion believes is an application for a credit card. Chris negotiates the note to EZ Finance Company. Dion

Toby signs a note "payable to the order of United Credit Union." Unless Toby has a valid defense against payment, Toby's liability on this note is

Bing signs a note payable to the order of Cameron. Cameron indorses the note and gives it to Daphne as payment for a debt. Daphne presents it to Bing, who pays it. Bing's payment discharges

Laptop Assembly Company gives a $3,000 promissory note to My-T-Fast Delivery Service to deliver a load of computer chips to Laptop's plant. The chips are contaminated during transit, and are useless to Laptop on delivery. If My-T-Fast presents the note for payment

Dirk is the maker of a note, on which Erv is secondarily liable. Friendly Credit Company is the current holder of the note. Erv will be obligated to pay the note if

Celia, an employee of Delite Dairy Company, forges the signature of Elin, Delite's president, on a Delite check and cashes it at First Federal Bank. Elin would ratify Celia's actions by

Opalina asks Paolo, who does not understand English, to sign what Opalina says is an application to open a bank account. In fact, the "application" is a note. If sued on the note by an HDC

Fact Pattern 26-1A Seymour writes a check on his account at Platinum Bank to Teri to pay a debt. Teri negotiates the check by indorsement to Rosanna, who presents it for payment to Onyx Bank. -Refer to Fact Pattern 26-1A. If Onyx Bank dishonors the check, Rosanna can obtain payment from Teri

Cash National Bank is an HDC of a note for $1,000 on which there is the forged signature of "Dudley." If sued on the note by Cash

Fact Pattern 26-1A Seymour writes a check on his account at Platinum Bank to Teri to pay a debt. Teri negotiates the check by indorsement to Rosanna, who presents it for payment to Onyx Bank. -Refer to Fact Pattern 26-1A. Teri is