Question 1

Which of the following is both a transfer warranty and a presentment warranty? Assume that the instrument in question is a draft.

Accepted Answer

A transfer warranty and a presentment warranty both include the assurance that the draft has not been altered.

Question 2

Menzes is the Treasurer of ABC Corp. As such, he is authorized to sign checks for the corporation. A supplier bills ABC for a legitimate obligation. Menzes makes out a check to the supplier and signs it "ABC Corp., by Menzes, Treasurer. Who is liable on this check?

Accepted Answer

When a representative signs an authorized signature to an instrument,then the representative is not bound provided the signature shows "unambiguously" that the signature was made on behalf of the represented person who is named in the instrument.

Question 3

Able carefully drew a check for $10 on her checking account at ABC bank, payable to the order of Baker. Baker altered the check to read $100, and then negotiated it to Cain. Cain presented the check for payment to ABC bank, which paid Cain $100. The bank then deducted $100 from Able's account. When Able saw her bank statement she demanded that ABC credit her account for the altered check. ABC credited Able's account and then sued Cain. Is Cain liable?

Accepted Answer

If an unaccepted draft (such as a check)is presented to the drawee for payment or acceptance and the drawee pays or accepts the draft,then the person obtaining payment or acceptance warrants to the drawee making payment or accepting the draft in good faith that the draft has not been altered.

Question 4

National bank is reluctant to lend money to James and takes a note from him because of his shaky financial condition. However, the bank is willing to lend money to James if he signs the note and a friend also signs the note. Here the friend serves as the:

Accepted Answer

The friend in this scenario is serving as an accommodation party, which means they are signing the note to provide additional assurance to the bank that the loan will be repaid.

Question 5

The transferor of which of the following instrument cannot disclaim transfer warranties?

Accepted Answer

The answer of The transferor of which of the following...

Question 6

A representative is personally liable to a holder in due course that took the instrument without notice that the representative was not intended to be liable if:

Accepted Answer

The key phrase in the question is "not intended to be liable." Choice B states that if the form of the signature does not clearly indicate that the representative is signing in a representative capacity, then they will be personally liable. This means that if the holder in due course can argue that they did not have notice that the representative was signing in a representative capacity, then the representative will be personally liable, even if the instrument identifies the represented person or states that the representative would be liable. Choice A is incorrect because the instrument identifying the represented person does not necessarily affect the representative's liability. Choice C is incorrect because stating that the representative would be liable even if the signature is authorized only strengthens the argument for personal liability. Choice D is incorrect because proving the intent of the original parties is often difficult and not always determinative of liability.

Question 7

Jack received a check as payment for the work he did. He indorsed the check "without recourse." What legal effect does this have?

Accepted Answer

The indorser can avoid secondary liability only by qualifying his indorsement,such as "without recourse," on the instrument when he indorses it.

Question 8

If the drawee bank mistakenly paid a check with a forged or unauthorized drawer's signature on it:

Accepted Answer

The bank cannot recover the amount if the presenter had taken the instrument in good faith and for value. This is based on the principle of 'holder in due course' which protects a bona fide holder of a negotiable instrument from liability even if the instrument is later found to be defective or forged. The bank has a responsibility to verify the authenticity of the signature before paying out a check, and if it fails to do so, it cannot recover the amount from the presenter who took the check in good faith.

Question 9

If Jay signs Mila's name to a negotiable instrument without Mila's authorization or approval:

Accepted Answer

Signing someone else's name without their authorization is considered fraud and the signature is not valid or binding on the person whose name appears. Therefore, Mila would not be liable for any transactions or debts associated with that negotiable instrument.

Question 10

Maya Efrat, Chief Financial Officer for BAZ Inc., is authorized to sign checks for BAZ Inc. She signs a check "BAZ Inc. by Efrat, Chief Financial Officer." Which of the following statements is most accurate?

Accepted Answer

When Maya signs the check as "BAZ Inc. by Efrat, Chief Financial Officer," she is acting as an agent of BAZ Inc. and indicating that she is signing on behalf of the company. Therefore, BAZ Inc. is liable on the check, not Maya personally.

Question 11

Which of the following is true regarding a transferor's liability on a transfer warranty?

Accepted Answer

If the transfer was by indorsement, the transferor's liability on a transfer warranty extends to all subsequent transferees, and not just the immediate transferee. This means that any subsequent transferee who suffers a loss due to a breach of warranty by the transferor can bring a claim against the transferor. The other options provided do not accurately describe a transferor's liability on a transfer warranty.

Question 12

If a person signs a check as an accommodation indorser:

Accepted Answer

When a person signs a check as an accommodation indorser, their contractual liability is that of an indorser, which means they are liable for payment of the check if the primary obligor fails to pay. As an accommodation indorser, the signer has no beneficial interest in the underlying obligation and is not entitled to any payment or consideration from the primary obligor.

Question 13

Usually, who may have the power to surrender the instrument if full payment is made?

Accepted Answer

The party to whom the holder presents the instrument has the power to surrender it if full payment is made. This is because they are typically the payee or the party designated to receive payment on the instrument. The indorser, accommodation maker, and drawer do not necessarily have the power to surrender the instrument upon full payment.

Question 14

Which of the following is not one of the presentment warranties that the holder of an unaccepted draft makes to the drawee?

Accepted Answer

Presentment warranties include that the warrantor is,or was,at the time the warrantor transferred the draft,a person entitled to enforce the draft or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft,the draft has not been altered and the warrantor has no knowledge that the signature of the drawer of the draft has not been authorized.

Question 15

Mike authorizes his agent, Ben to borrow a sum of $10,000 on his behalf from the National Bank. Ben signs his name to a note without disclosing that the signature was on behalf of Mike. Who is liable on the note?

Accepted Answer

Ben signed the note without disclosing that it was on behalf of Mike, so only Ben is liable on the note. National Bank cannot be held liable because they had no knowledge that Ben was signing on behalf of someone else. Mike cannot be held liable because he did not personally sign the note or authorize someone to sign on his behalf.

Question 16

In the event of a breach of a presentment warranty:

Accepted Answer

In the event of a breach of a presentment warranty, the drawee can withdraw an amount equal to the amount paid by the drawee less the amount the drawee received or is entitled to receive from the drawer. This is known as the right of chargeback. The other options are not correct because the drawee may still have the right to recover damages for breach of warranty even if the drawee failed to exercise ordinary care, the warrantor cannot defend by showing that the indorsement is effective under the impostor or fictitious payee rules if there was a breach of presentment warranty, and providing compensation for expenses and loss of interest is not the appropriate remedy for a breach of presentment warranty.

Question 17

All the following constitute transfer warranties under Article 3 except:

Accepted Answer

Option D, "that the instrument is negotiable," is not a transfer warranty under Article 3 of the Uniform Commercial Code. The other options (A, B, and C) are all transfer warranties mandated under Article 3.

Question 18

Salmond signs a note for the purpose of lending credit to John. Salmond also makes his father Richard sign the note because of his shaky financial condition. This indicates that Richard has signed the note in the capacity of a(n):

Accepted Answer

An accommodation party is someone who signs a negotiable instrument (like a note) for the purpose of lending credit to the borrower, but does not receive any direct benefit from the transaction. In this case, Richard has signed the note to help John obtain credit, despite his own shaky financial condition, making him an accommodation party. Salmond would be the drawer, as he is the one initiating the note, and there is no drawee mentioned in the scenario. An indorser would be someone who signs the note after it has already been issued, which does not apply in this situation.

Question 19

Tom steals Dave's checkbook, completes a check for $1000, forges Dave's signature, and gets payment from Tom's bank. The bank paid in good faith. Who is liable to the bank for the $1000 in this case?

Accepted Answer

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.

Question 20

Which of the following is true regarding an indorser's liability on a note?

Accepted Answer

For the indorser to be liable, there must be presentment to the maker, dishonor by the maker, and notice to the indorser. This is known as the "notice of dishonor" rule. The holder must notify the indorser of the dishonor within a reasonable amount of time after receiving notice from the maker. A qualified indorsement by the indorser, such as "without recourse," may disclaim liability against subsequent holders, but not against a holder who takes it in good faith and for value. A holder can proceed directly against the indorser only after presentment to the maker, dishonor by the maker, and notice to the indorser have occurred.

Quiz 33: Liability of Parties