Question 1

The maker of a note or the drawer of a check or draft may deduct from the amount demanded by an immediate party any amounts owed to him or her by the payee. This type of personal defense is called a:

Accepted Answer

This type of personal defense is commonly known as a counterclaim, where the maker of a note or drawer of a check can subtract any amounts owed to them by the payee from the amount demanded by an immediate party.

Question 2

In order for a person to be a holder in due course of a negotiable instrument, the paper must have been acquired:

Accepted Answer

In order to be a holder in due course, the individual must have acquired the negotiable instrument for valuable consideration, meaning they exchanged something of value (money, goods, services, etc.) for the instrument. Mala fide (bad faith) consideration would refer to a fraudulent or illegal transaction, and contingent and premeditated consideration are not relevant to the concept of being a holder in due course.

Question 3

An endorsement to which words have been added that limit the further endorsement of the instrument, such as "for deposit only," is a:

Accepted Answer

A restrictive endorsement adds specific limitations to the further endorsement of the instrument, such as "for deposit only" or "payable to [name]" to prevent unauthorized endorsement. Blank endorsement simply requires a signature, special endorsement requires a specific endorsement to be made, and qualified endorsement adds a conditional statement to the endorsement.

Question 4

If a negotiable instrument is not accepted when presented, if it is not paid when presented for payment at maturity, or if presentment is excused or waived and the instrument is past due and unpaid, then it is considered:

Accepted Answer

A negotiable instrument is considered dishonored if it is not accepted or paid when presented or if it is past due and unpaid. This means that the issuer or maker has failed to meet their obligations under the instrument, and it may have legal consequences. The other options, ineligible, defunct, and abandoned, do not accurately describe the status of a dishonored negotiable instrument.

Question 5

Often state statutes expressly declare that commercial paper given for gambling transactions or at usurious rates of interest are:

Accepted Answer

State statutes often declare that commercial paper given for gambling transactions or at usurious rates of interest are void, meaning they have no legal effect. This is intended to discourage such activities and protect consumers from entering into risky or unfair financial agreements.

Question 6

In order to ensure negotiability, the Uniform Commercial Code assumes that the endorser is the true owner of the paper. If he or she found or stole the paper and transferred it to another by endorsement, the:

Accepted Answer

The Uniform Commercial Code assumes that the endorser is the true owner of the paper to ensure negotiability. Therefore, if the endorser found or stole the paper and transferred it to another by endorsement, the endorser is liable for any loss suffered by the endorsee. This means the answer is B.

Question 7

A person cannot be held liable, even by a holder in due course, if he or she signs an instrument that is apparently not negotiable and the paper is later fraudulently converted into a(n):

Accepted Answer

If a person signs an instrument that is apparently not negotiable, they cannot be held liable if the paper is later fraudulently converted into a negotiable instrument. This is because the person did not intend to create a negotiable instrument in the first place and was not aware that the instrument could be converted into one. A holder in due course would also not be able to hold the person liable in this situation.

Question 8

Any change made to an instrument that affects the rights of the parties is called a _______________.

Accepted Answer

A material alteration is one that changes the terms of the instrument in a significant way, such as adding or removing obligations or changing the amount owed. If a material alteration is made without the consent of all parties, it can invalidate the entire instrument. Declarative alteration is not a common term and has no legal meaning. Respective alteration and special alteration are not commonly used terms in this context.

Question 9

A qualified endorsement can be used together with a blank endorsement or special endorsement by using phrases such as:

Accepted Answer

A qualified endorsement is used to limit the liability of the endorser, and the phrase "Without recourse" is commonly used to indicate this limitation.

Question 10

Fraud in executing an instrument is a real, or absolute, defense but fraud related to the circumstances surrounding the issuing of a paper and not to the paper itself is a

Accepted Answer

Fraud related to the circumstances surrounding the issuing of a paper and not to the paper itself is a personal defense. Personal defenses are only effective against the party asserting the claim and do not affect the validity of the instrument itself.

Question 11

All of the following are personal defenses against payment of commercial paper, EXCEPT:

Accepted Answer

Material alteration is a real defense, not a personal defense, against payment of commercial paper. Real defenses are valid against all holders, including holders in due course, whereas personal defenses are not valid against holders in due course.

Question 12

According to the UCC, if the ____________ of overdue negotiable paper did not have notice or knowledge that the commercial paper was overdue, he or she could be a holder in due course

Accepted Answer

The UCC defines a holder in due course as someone who takes possession of a negotiable instrument for value, in good faith, without knowledge that the instrument is overdue or has been dishonored. The buyer is the one who takes possession of the negotiable instrument, and if they meet the other requirements of being a holder in due course, they could be protected against certain defenses that could be raised against the original transferor of the instrument.

Question 13

A holder in due course is sometimes called a:

Accepted Answer

A holder in due course is often referred to as a "bona fide holder for value without notice," which means they have taken the instrument in good faith, for value, and without notice of any defect.

Question 14

All the following conditions release an endorser from liability EXCEPT:

Accepted Answer

An invalid tender of payment by a prior party does not release an endorser from liability because it does not fulfill the obligation of the instrument or alter the endorser's responsibility in a way that would discharge them.

Question 15

A demand instrument such as a note or check must be presented for payment:

Accepted Answer

According to the law, a demand instrument must be presented for payment within a reasonable time after the date of issue. What constitutes a reasonable time may vary depending on the circumstances, but generally, it is considered within 30 days. Failure to present the instrument within a reasonable time may result in the person who should have presented it losing their rights to payment.

Question 16

If a completed negotiable instrument comes into the possession of an immediate party (the payee indicated on the instrument) before the maker or drawer has delivered it, then the:

Accepted Answer

The payee cannot collect on the instrument because delivery is a necessary element for the instrument to be enforceable. Without delivery, the instrument is not considered to be issued.

Question 17

The party who has taken commercial paper in good faith and for value, before maturity, and without actual or constructive notice of any defects in the instrument is a (n):

Accepted Answer

A holder in due course is someone who has taken commercial paper in good faith, for value, and without notice of any defects in the instrument. They have certain rights and protections, including the ability to enforce the instrument against prior parties, even if there are defects or problems with the underlying transaction.

Question 18

When commercial paper on which the signature of the maker or drawer has been forged, the person liable is the:

Accepted Answer

The answer of When commercial paper on which the signature...

Question 19

A defense against payment of commercial paper that may be used against any party EXCEPT a holder in due course is called a:

Accepted Answer

A defense against payment of commercial paper that may be used against any party except a holder in due course is called a personal defense. Personal defenses are based on the relationship between the parties involved in the transaction, such as fraud or breach of contract, and can be used to prevent payment to the holder of the instrument. However, a holder in due course is protected against personal defenses and can still demand payment from the maker or drawer of the instrument.

Question 20

The Uniform Commercial Code assumes there are warranties in every endorsement to ensure the:

Accepted Answer

The Uniform Commercial Code assumes warranties in every endorsement in order to ensure the negotiability of commercial paper. This means that the person or entity endorsing the paper is guaranteeing that there are no defects or problems with the paper that would prevent it from being sold or transferred to another party. This helps to maintain the integrity and reliability of commercial paper as a valid form of payment and financing in business transactions.

Quiz 23: Transfer and Discharge of Commercial Paper