Question 1

Accommodation parties are guarantors of negotiable instruments.

Accepted Answer

A) True 
 B)False

Question 2

A holder of a negotiable instrument is:

Accepted Answer

A)  anyone who has possession of an instrument. 
B)  anyone who is rightfully in possession of an instrument. 
C)  anyone who is in possession of an instrument that is payable to bearer or an identified person who is in possession of an instrument payable to that person. 
D)  anyone who is in possession of an instrument payable to that person. 
E)  anyone who is in possession of an instrument payable to that person if the person has indorsed the instrument. 
A)  anyone who has possession of an instrument. 
B)  anyone who is rightfully in possession of an instrument. 
C)  anyone who is in possession of an instrument that is payable to bearer or an identified person who is in possession of an instrument payable to that person. 
D)  anyone who is in possession of an instrument payable to that person. 
E)  anyone who is in possession of an instrument payable to that person if the person has indorsed the instrument.

Question 3

The effect of the fictitious payee rule is that:

Accepted Answer

A)  fictitious payees are entitled to collect on instruments. 
B)  the maker or drawer will be liable for payment of an instrument naming a fictitious payee. 
C)  makers and drawers are protected from liability resulting from paying an instrument naming a fictitious payee. 
D)  parties forging the signature of a fictitious payee can be liable for losses incurred by the forgery. 
E)  banks are required to positively identify any holder seeking payment at the bank on an instrument. 
A)  fictitious payees are entitled to collect on instruments. 
B)  the maker or drawer will be liable for payment of an instrument naming a fictitious payee. 
C)  makers and drawers are protected from liability resulting from paying an instrument naming a fictitious payee. 
D)  parties forging the signature of a fictitious payee can be liable for losses incurred by the forgery. 
E)  banks are required to positively identify any holder seeking payment at the bank on an instrument.

Question 4

Indorsers can have secondary liability but cannot have primary liability.

Accepted Answer

A) True 
 B)False

Question 5

If a ________ instrument is not paid on its expressed due date,it becomes overdue the next day.

Accepted Answer

A)  demand 
B)  time 
C)  due-on-sale 
D)  sale-on-approval 
E)  condition precedent 
A)  demand 
B)  time 
C)  due-on-sale 
D)  sale-on-approval 
E)  condition precedent

Question 6

________ means honesty in fact in the conduct or transaction concerned.

Accepted Answer

A)  Due diligence 
B)  Ethics 
C)  Good faith 
D)  Equity 
E)  Transparency 
A)  Due diligence 
B)  Ethics 
C)  Good faith 
D)  Equity 
E)  Transparency

Question 7

Mike approaches you and tells you that he is a sales representative for The Good Hands Massage and Spa,a national chain of health spas.He tells you there is a special half price sale and you write a check for a one year membership payable to The Good Hands Massage and Spa and give it to Mike.Mike in fact does not represent Good Hands.He forges an endorsement and cashes the check.Which rule applies in this situation?

Accepted Answer

A)  the imposter rule 
B)  the fictitious payee rule 
C)  the transfer warranty rule 
D)  the shelter principle rule 
E)  the presentment warranty rule 
A)  the imposter rule 
B)  the fictitious payee rule 
C)  the transfer warranty rule 
D)  the shelter principle rule 
E)  the presentment warranty rule

Question 8

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

Accepted Answer

A)  conditionally operative 
B)  partially operative 
C)  fully operative 
D)  wholly inoperative 
E)  partially inoperative 
A)  conditionally operative 
B)  partially operative 
C)  fully operative 
D)  wholly inoperative 
E)  partially inoperative

Question 9

Can the payee of a negotiable instrument be a holder in due course?

Accepted Answer

A)  yes, the payee is always a holder in due course 
B)  yes, for notes but not for drafts 
C)  no, not under any circumstances 
D)  usually not, because the payee is usually aware of defenses or irregularities 
E)  only if a check is involved 
A)  yes, the payee is always a holder in due course 
B)  yes, for notes but not for drafts 
C)  no, not under any circumstances 
D)  usually not, because the payee is usually aware of defenses or irregularities 
E)  only if a check is involved

Question 10

A holder cannot qualify as a holder in due course if he or she has notice that the instrument contains an unauthorized signature or has been altered or that there is any adverse claim against or defense to its payment.This rule is commonly referred to as the ________ doctrine.

Accepted Answer

A)  promissory estoppel 
B)  due diligence 
C)  blue light 
D)  red light 
E)  learned intermediary 
A)  promissory estoppel 
B)  due diligence 
C)  blue light 
D)  red light 
E)  learned intermediary

Question 11

A holder who either (1)releases an obligor form liability or (2)surrenders the collateral without the consent of the parties who would benefit thereby does not discharge those parties from their obligation on the instrument.

Accepted Answer

A) True 
 B)False

Question 12

Prior payment is a real defense.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following is true about the good faith requirement for becoming a holder in due course?

Accepted Answer

A)  It applies to both the transferor and the transferee of a negotiable instrument. 
B)  The UCC provides no guidance regarding the meaning of good faith. 
C)  It is an objective test applied using the reasonable person standard. 
D)  It means honesty in fact in the conduct of the transaction in question. 
E)  It is an objective test based on a reasonable person. 
A)  It applies to both the transferor and the transferee of a negotiable instrument. 
B)  The UCC provides no guidance regarding the meaning of good faith. 
C)  It is an objective test applied using the reasonable person standard. 
D)  It means honesty in fact in the conduct of the transaction in question. 
E)  It is an objective test based on a reasonable person.

Question 14

Why should a holder in due course receive more protection than a holder?

Accepted Answer

Allowing further protection to persons w

Question 15

To qualify as a holder in due course under the shelter principle,the holder must not have been a party to a fraud or an illegality affecting the instrument.

Accepted Answer

A) True 
 B)False

Question 16

Fraud in the inception occurs when a party is tricked into signing a negotiable instrument while thinking he/she is signing something else.

Accepted Answer

A) True 
 B)False

Question 17

Personal defenses are effective against all holders,whether or not the holder is a holder in due course.

Accepted Answer

A) True 
 B)False

Question 18

On January 10,2011,Jonathan writes a check,payable to Josh in the amount of $500.00,drawn on Jonathan's account with MBNA bank.Josh,on the back of the check,writes,"Pay to the order of Brandi" and leaves the check on his night stand.Brandi comes to visit while Josh isn't home (she has a key)sees the check and takes it believing that it was indorsed to her a repayment of a debt.Brandi,then signs her name to the back of the check and hands it to Lori as a birthday present.If Lori sells the check to Faye,who knows nothing about what has previously occurred,:

Accepted Answer

A)  Brandi would have a personal/limited defense against Faye. 
B)  Faye would be a holder in due course. 
C)  Brandi could buy it from Faye and become a holder in due course based on the re-acquirer rule. 
D)  Josh would have a fraud in the factum defense against Faye. 
E)  Faye would have no rights to the instrument because it was stolen. 
A)  Brandi would have a personal/limited defense against Faye. 
B)  Faye would be a holder in due course. 
C)  Brandi could buy it from Faye and become a holder in due course based on the re-acquirer rule. 
D)  Josh would have a fraud in the factum defense against Faye. 
E)  Faye would have no rights to the instrument because it was stolen.

Question 19

A purchaser cannot be a holder in due course if an instrument is acquired either after demand or at an unreasonable length of time after its issue.

Accepted Answer

A) True 
 B)False

Question 20

Who is discharged if a holder strikes out a prior indorsement on a negotiable instrument?

Accepted Answer

A)  only the party whose name was stricken 
B)  the party whose name was stricken, and all prior indorsers 
C)  the party whose name was stricken, and all subsequent indorsers 
D)  all indorsers 
E)  no indorser is discharged 
A)  only the party whose name was stricken 
B)  the party whose name was stricken, and all prior indorsers 
C)  the party whose name was stricken, and all subsequent indorsers 
D)  all indorsers 
E)  no indorser is discharged

Exam 21: Holder in Due Course and Liability of Parties

Accommodation parties are guarantors of negotiable instruments.

A holder of a negotiable instrument is:

The effect of the fictitious payee rule is that:

Indorsers can have secondary liability but cannot have primary liability.

If a ________ instrument is not paid on its expressed due date,it becomes overdue the next day.

________ means honesty in fact in the conduct or transaction concerned.

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

Can the payee of a negotiable instrument be a holder in due course?

A holder cannot qualify as a holder in due course if he or she has notice that the instrument contains an unauthorized signature or has been altered or that there is any adverse claim against or defense to its payment.This rule is commonly referred to as the ________ doctrine.

A holder who either (1)releases an obligor form liability or (2)surrenders the collateral without the consent of the parties who would benefit thereby does not discharge those parties from their obligation on the instrument.

Prior payment is a real defense.

Which of the following is true about the good faith requirement for becoming a holder in due course?

Why should a holder in due course receive more protection than a holder?

To qualify as a holder in due course under the shelter principle,the holder must not have been a party to a fraud or an illegality affecting the instrument.

Fraud in the inception occurs when a party is tricked into signing a negotiable instrument while thinking he/she is signing something else.

Personal defenses are effective against all holders,whether or not the holder is a holder in due course.

A purchaser cannot be a holder in due course if an instrument is acquired either after demand or at an unreasonable length of time after its issue.

Who is discharged if a holder strikes out a prior indorsement on a negotiable instrument?

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