Question 1

The imposter rule applies when you write a check to someone who does not exist.

Accepted Answer

A) True 
 B)False  False

Question 2

Vince and Jennifer are good friends.In August,2010,Jennifer borrowed $5,000 from Vince for tuition and has been paying him in installments.Over the next few months Vince grew fond of Jennifer and asked her on a date.The date went well,even though Jennifer repeatedly told Vince that she wanted to stay good friends and no more.Vince,however,has grown to love her.When she shows up to make her December payment,Vince not only rips up her payment check but rips up the promissory note evidencing the debt declaring that he doesn't want her money and she is now free of the debt.She thanks him,shakes his hand,and gives him a peck on the cheek then leaves.That afternoon,Vince goes to a coffee shop and sees Jennifer and Brad in a corner booth kissing passionately.Vince is infuriated.He goes home and pulls the ripped promissory note out of the garbage and tapes the forty pieces together.He then e-mails Jennifer telling her that he expects to be paid on the note.Discuss Vince and Jennifer's rights and whether the note is still enforceable and negotiable.

Accepted Answer

Jennifer has committed no fraud and did not lead him along lying to get the note cancelled.When Vince ripped the note up and declared her free from liability he discharged her from any further payment.Taping the note together does not reconstruct the debt.His voluntary and intentional act,particularly coupled with his statements,extinguished the enforceability of the instrument.The fact that it is in forty pieces and taped would destroy any possible negotiability because anyone presented with this note would have good reason to question whether it has a defense against it and any person who accepted the instrument could not do so in good faith.(Note,an instrument ripped once and taped might be explainable,but not one ripped into 40 pieces.)

Question 3

Which of the following is true about the requirement for a holder in due course to give value for an instrument?

Accepted Answer

A)  It can be met in any way that the consideration requirement can be met in an ordinary contract. 
B)  It can be met only if the holder has paid cash for the instrument. 
C)  In order to meet the requirement to give value, the value given must be comparable to the value of the instrument received. 
D)  Acceptance of the instrument in payment of or as security for an antecedent claim meets the value requirement. 
E)  An unperformed promise meets the value given requirement, so long as the promise is performed prior to the actual collection of any amount on the instrument. 
A)  It can be met in any way that the consideration requirement can be met in an ordinary contract. 
B)  It can be met only if the holder has paid cash for the instrument. 
C)  In order to meet the requirement to give value, the value given must be comparable to the value of the instrument received. 
D)  Acceptance of the instrument in payment of or as security for an antecedent claim meets the value requirement. 
E)  An unperformed promise meets the value given requirement, so long as the promise is performed prior to the actual collection of any amount on the instrument. D

Question 4

If an unauthorized agent signs a note on behalf of a principal,then only the agent is liable on the note.

Accepted Answer

A) True 
 B)False

Question 5

Generally,all parties to a negotiable instrument are discharged from liability if (1)the party primarily liable on the instrument pays it in full to the holder of the instrument,or (2)a drawee in good faith pays an unaccepted draft or check in full to the holder.

Accepted Answer

A) True 
 B)False

Question 6

A signature in the upper-right corner of a promissory note indicates that the signer is the drawer of the note.

Accepted Answer

A) True 
 B)False

Question 7

The holder of a negotiable instrument has fewer rights than an assignee of an ordinary,nonnegotiable contract.

Accepted Answer

A) True 
 B)False

Question 8

A holder who does not qualify as a holder in due course in his or her own right becomes a holder in due course if he or she acquires the instrument through a holder in due course.This is called the "transference" principle.

Accepted Answer

A) True 
 B)False

Question 9

With few exceptions,an unauthorized indorsement is wholly inoperative as the indorsement of the person whose name is signed.

Accepted Answer

A) True 
 B)False

Question 10

A holder in due course:

Accepted Answer

A)  has greater obligations to pay an instrument than a mere holder. 
B)  must notify subsequent transferees of his holder in due course status. 
C)  can obtain greater rights to payment of an instrument than a holder. 
D)  can give greater rights to a transferee than he has as a holder in due course. 
E)  has less rights to payment of an instrument than a holder. 
A)  has greater obligations to pay an instrument than a mere holder. 
B)  must notify subsequent transferees of his holder in due course status. 
C)  can obtain greater rights to payment of an instrument than a holder. 
D)  can give greater rights to a transferee than he has as a holder in due course. 
E)  has less rights to payment of an instrument than a holder.

Question 11

A holder in due course takes an instrument free of which defenses?

Accepted Answer

A)  personal only 
B)  real only 
C)  free of all defenses 
D)  free of no defenses 
E)  legal defenses 
A)  personal only 
B)  real only 
C)  free of all defenses 
D)  free of no defenses 
E)  legal defenses

Question 12

Under the Uniform Commercial Code,value has not been given if the holder acquires a security interest in or lien on the instrument.

Accepted Answer

A) True 
 B)False

Question 13

What does it mean for liability on a negotiable instrument to be secondary liability?

Accepted Answer

A)  The liability is for a small amount. 
B)  The liability arises only if the party with primary liability defaults and does not pay. 
C)  There are two parties to share the secondary liability. 
D)  It means that the liability relates to a two-party negotiable instrument. 
E)  It means that the party only owes one-half of the debt 
A)  The liability is for a small amount. 
B)  The liability arises only if the party with primary liability defaults and does not pay. 
C)  There are two parties to share the secondary liability. 
D)  It means that the liability relates to a two-party negotiable instrument. 
E)  It means that the party only owes one-half of the debt

Question 14

A party who signs an instrument for the purpose of lending his or her name (and credit)to another party to the instrument is the ________ party.

Accepted Answer

A)  collaboration 
B)  secondary 
C)  conditional 
D)  accommodation 
E)  intermediary 
A)  collaboration 
B)  secondary 
C)  conditional 
D)  accommodation 
E)  intermediary

Question 15

Makers of promissory notes and certificates of deposit have ________ liability for the instruments.

Accepted Answer

A)  conditional 
B)  stipulated 
C)  primary 
D)  secondary 
E)  tertiary 
A)  conditional 
B)  stipulated 
C)  primary 
D)  secondary 
E)  tertiary

Question 16

Martha is elderly,does not speak or read English very well,and is unsophisticated in business matters.A salesman convinces her to sign a negotiable note by telling Martha that it is a receipt for his visit.The salesman properly negotiates this note to a holder in due course,who tries to collect from Martha.Martha's defense to this note is:

Accepted Answer

A)  breach of contract, a personal defense. 
B)  fraud in the inducement, a real defense. 
C)  fraud in the inception, a real defense. 
D)  extreme duress, a real defense. 
E)  illegality, a real defense. 
A)  breach of contract, a personal defense. 
B)  fraud in the inducement, a real defense. 
C)  fraud in the inception, a real defense. 
D)  extreme duress, a real defense. 
E)  illegality, a real defense.

Question 17

To qualify as a holder in due course under the shelter principle,the holder must acquire the instrument from a holder in due course,or be able to trace his or her title back to a holder in due course.

Accepted Answer

A) True 
 B)False

Question 18

How does the definition of value for purposes of holder in due course differ from the definition of consideration? Why do you think there is a difference? Should there be a difference?

Accepted Answer

An unfulfilled promise qualifies as cons

Question 19

In terms of signature liability on a negotiable instrument,if it is unclear who the signer is,the parol evidence rule would prohibit consideration of outside evidence to identify the signer.

Accepted Answer

A) True 
 B)False

Question 20

To qualify as a holder in due course under the shelter principle,the holder can have notice of a defense or claim against the payment of the instrument.

Accepted Answer

A) True 
 B)False

Exam 21: Holder in Due Course and Liability of Parties

The imposter rule applies when you write a check to someone who does not exist.

Which of the following is true about the requirement for a holder in due course to give value for an instrument?

If an unauthorized agent signs a note on behalf of a principal,then only the agent is liable on the note.

Generally,all parties to a negotiable instrument are discharged from liability if (1)the party primarily liable on the instrument pays it in full to the holder of the instrument,or (2)a drawee in good faith pays an unaccepted draft or check in full to the holder.

A signature in the upper-right corner of a promissory note indicates that the signer is the drawer of the note.

The holder of a negotiable instrument has fewer rights than an assignee of an ordinary,nonnegotiable contract.

A holder who does not qualify as a holder in due course in his or her own right becomes a holder in due course if he or she acquires the instrument through a holder in due course.This is called the "transference" principle.

With few exceptions,an unauthorized indorsement is wholly inoperative as the indorsement of the person whose name is signed.

A holder in due course:

A holder in due course takes an instrument free of which defenses?

Under the Uniform Commercial Code,value has not been given if the holder acquires a security interest in or lien on the instrument.

What does it mean for liability on a negotiable instrument to be secondary liability?

A party who signs an instrument for the purpose of lending his or her name (and credit)to another party to the instrument is the ________ party.

Makers of promissory notes and certificates of deposit have ________ liability for the instruments.

To qualify as a holder in due course under the shelter principle,the holder must acquire the instrument from a holder in due course,or be able to trace his or her title back to a holder in due course.

How does the definition of value for purposes of holder in due course differ from the definition of consideration? Why do you think there is a difference? Should there be a difference?

In terms of signature liability on a negotiable instrument,if it is unclear who the signer is,the parol evidence rule would prohibit consideration of outside evidence to identify the signer.

To qualify as a holder in due course under the shelter principle,the holder can have notice of a defense or claim against the payment of the instrument.

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