Question 1

Which of the following did the court determine on appeal in Wawel Savings Bank v. Jersey Tractor Trailer Training Inc., the case in the text in which a lender who perfected an interest in a debtor's collateral claimed to have priority in bankruptcy over an entity who later entered into an agreement whereby it purchased rights to the debtor's accounts receivables? A) Under the "first in time" rule, the court ruled in favor of the lender who perfected the interest in the debtor's collateral. B) Under the "first to file" rule, the court ruled in favor of the lender who perfected the interest in the debtor's collateral. C) The court ruled in favor of the purchaser of receivables on the basis that the agreement the lender had with the debtor did not expressly prohibit the sale of receivables. D) The court ruled in favor of the purchaser of receivables on the basis that an immediate transaction for value was involved. E) The court remanded the case for a determination as to whether the purchaser of receivables was a holder in due course or a purchaser of instruments in which case it would prevail. According to the court, the purchaser of the receivables "has priority over that interest if it is either a holder in due course or a purchaser of instruments," and the case was remanded for a determination as to whether the purchaser qualified as such.

Accepted Answer

According to the court, the purchaser of the receivables "has priority over that interest if it is either a holder in due course or a purchaser of instruments," and the case was remanded for a determination as to whether the purchaser qualified as such.

Question 2

In the process of negotiation, what is meant by the term "delivery"?
A) The physical handing of an instrument from someone entitled to it to the person intended to receive it.
B) The passing of a warranty that the instrument is collectible.
C) The passing of a warranty that an instrument qualifies as a negotiable instrument.
D) The passing of a warranty that the recipient is a holder.
E) The passing of a warranty that the recipient is a holder in due course.

Accepted Answer

Delivery simply means the physical handing of an instrument from someone entitled to it to the person intended to receive it.

Question 3

A party cannot be a holder in due course of a non-negotiable instrument.

Accepted Answer

To be considered a holder in due course, a party must meet four requirements established in UCC Section 3-302:
1. The party must be a holder of a complete and authentic negotiable instrument.
2. The holder must take the instrument for value.
3. The holder must take the instrument in good faith.
4. The holder must take the instrument without notice of defects.

Question 4

Which of the following was the result in Mid-Atlantic Tennis Courts Inc., v. Citizens Bank and Trust Company of Maryland, the case in the text in which an employee of the plaintiff fraudulently deposited into his own account at the defending bank checks for which the plaintiff was payee, and the plaintiff sued the defending bank for checks endorsed by it "for deposit only" or with no endorsement? A) The court ruled that because the defending bank was merely the depositary bank, it held no responsibility to the plaintiff. B) The court ruled that because employee fraud was involved, the defending bank held no responsibility to the plaintiff. C) The court ruled that because a fraud was involved, regardless of whether or not it was on the part of plaintiff's employee, the defending bank held no responsibility to the plaintiff. D) The court ruled that the defending bank was liable to the plaintiff for checks bearing the endorsement "for deposit only," but not for the checks with no endorsement because as to those checks, the bank was entitled to assume that the depositor was entitled to deposit the checks. E) The court ruled that plaintiff was entitled to recover from the bank for all the checks.

Accepted Answer

"According to the court, there is no genuine dispute of material fact, that plaintiff is entitled to summary judgment against the defendant for all the items deposited bearing no endorsement or the "endorsement" of "for deposit only." The damages are the face amounts of the items."

Question 5

A restrictive endorsement may limit the transferability of the instrument.

Accepted Answer

No type of endorsement can prohibit further transfer; once negotiable, an instrument remains negotiable. But a restrictive endorsement can limit what is done with it.

Question 6

An instrument is dishonored when a party refuses to pay the instrument such as when a bank refuses to pay because insufficient funds exist.

Accepted Answer

An instrument is dishonored when a party refuses to pay it.

Question 7

Order paper must be ______ as well as _____ to be negotiated.
A) Stamped with an allonge; delivered
B) Delivered; transferred
C) Transferred; delivered
D) Negotiated; held
E) Endorsed; delivered

Accepted Answer

Order paper must be endorsed as well as delivered to be negotiated.

Question 8

Which of the following is an instrument payable to a specific, named payee?
A) A bearer instrument.
B) A delivery instrument.
C) An order instrument.
D) A transfer instrument.
E) An acknowledgement instrument.

Accepted Answer

An order instrument is payable to a specific, named payee.

Question 9

Once an instrument is negotiable, it remains negotiable.

Accepted Answer

No type of endorsement can prohibit further transfer; once negotiable, an instrument remains negotiable. But a restrictive endorsement can limit what is done with it.

Question 10

A payee may not be a holder in due course.

Accepted Answer

In Watson Coatings Inc., v. American Express Travel Services Inc., the court recognized that a payee can be considered a holder in due course.

Question 11

Receiving an instrument as a gift satisfies the requirement of taking an instrument for value.

Accepted Answer

A party who receives a negotiable instrument as a gift or through mistake will be a holder instead of an HDC.

Question 12

A conditional endorsement destroys negotiability.

Accepted Answer

No type of endorsement can prohibit further transfer; once negotiable, an instrument remains negotiable. But a restrictive endorsement can limit what is done with it.

Question 13

An endorsement to prohibit further endorsement prohibits further transfer.

Accepted Answer

No type of endorsement can prohibit further transfer; once negotiable, an instrument remains negotiable. But a restrictive endorsement can limit what is done with it.

Question 14

Which of the following is an instrument payable to cash or whoever is in possession of the instrument?
A) A bearer instrument.
B) A delivery instrument.
C) An order instrument.
D) A transfer instrument.
E) An acknowledgement instrument.

Accepted Answer

A bearer instrument is payable to cash or whoever is in possession of the instrument.

Question 15

Helen worked for ABC Company as the company treasurer. She took 20 of ABC Company's checks, labeled as belonging to ABC Company. Over the course of one year, she signed and mailed the checks to American Express, her own credit card company, to pay her own credit card debt. Assuming the court follows the case in the text, Watson Coatings Inc., v. American Express Travel Services Inc., which of the following is the most likely result in a lawsuit by ABC Company against American Express to recover the amounts of the checks? A) ABC Company will prevail because American Express, as a payee, does not qualify as a holder in due course. B) ABC Company will prevail because American Express should have realized that fraud was involved from the fact that the checks were ABC Company checks. C) ABC Company will prevail because fraud was involved. D) American Express will prevail and will not be required to return funds. E) American Express will have to return ½ of the funds because the parties were equally at fault, American Express for taking the checks, and ABC Company for not more carefully supervising its employee.

Accepted Answer

Under similar facts, it was determined in Watson Coatings Inc., v. American Express Travel Services Inc., that American Express qualified as a holder in due course, took the checks in good faith, and was entitled to a summary judgment ruling in its favor.

Question 16

Which of the following is a written document signed by the maker or drawer with an unconditional promise or order to pay a certain sum in money on demand or at a specified time to the order of bearer?
A) An acknowledged instrument.
B) A contract instrument.
C) A negotiable instrument.
D) A holder instrument.
E) A delivered instrument.

Accepted Answer

A negotiable instrument is a written document signed by the maker or drawer with an unconditional promise or order to pay a certain sum of money on demand or at a specified time to the order of bearer (UCC Section 3-104).

Question 17

A bank has given value for a negotiable instrument to the extent that the bank has a security interest in the instrument.

Accepted Answer

A holder can take an instrument for value if the holder acquires a security interest or some other lien in the instrument.

Question 18

For negotiation, which of the following types of paper require only delivery of the instrument to the holder by the payee?
A) Bearer
B) Delivery
C) Order
D) Transfer
E) Acknowledgement

Accepted Answer

For negotiation, bearer paper requires only delivery of the instrument to the holder by the payee.

Question 19

In Russia a transaction involving a promissory note is a legitimate documentary transaction.

Accepted Answer

In March 1997, the Russian Federation undertook a rare act in the Russian legal system and reintroduced previously repealed legislation from 1937, declaring that bills of exchange and promissory notes are legitimate documentary transactions in accordance with language of the 1930 Geneva Convention.

Question 20

A time instrument becomes overdue at any date after the expressed due date on the instrument.

Accepted Answer

A time instrument becomes overdue at any time after the expressed due date on it.

Quiz 27: Negotiation, Holder in Due Course, and Defenses

In the process of negotiation, what is meant by the term "delivery"?

A party cannot be a holder in due course of a non-negotiable instrument.

A restrictive endorsement may limit the transferability of the instrument.

An instrument is dishonored when a party refuses to pay the instrument such as when a bank refuses to pay because insufficient funds exist.

Order paper must be __ as well as _ to be negotiated.

Which of the following is an instrument payable to a specific, named payee?

Once an instrument is negotiable, it remains negotiable.

A payee may not be a holder in due course.

Receiving an instrument as a gift satisfies the requirement of taking an instrument for value.

A conditional endorsement destroys negotiability.

An endorsement to prohibit further endorsement prohibits further transfer.

Which of the following is an instrument payable to cash or whoever is in possession of the instrument?

Which of the following is a written document signed by the maker or drawer with an unconditional promise or order to pay a certain sum in money on demand or at a specified time to the order of bearer?

A bank has given value for a negotiable instrument to the extent that the bank has a security interest in the instrument.

For negotiation, which of the following types of paper require only delivery of the instrument to the holder by the payee?

In Russia a transaction involving a promissory note is a legitimate documentary transaction.

A time instrument becomes overdue at any date after the expressed due date on the instrument.