Deck 24: Liability, Defenses, and Discharge

Question 1

A check is only accepted once it has been verified by the bank.

Answer 1

True

Question 2

The payee of a cashier's check is also primarily liable on the instrument.

Answer 2

False

Question 3

A qualified indorser is only liable for secondary liability.

Answer 3

False

Question 4

An accommodation party who signs an instrument guaranteeing payment is secondarily liable on the instrument.

Question 5

Implied warranties are made when the negotiable instrument is originally issued.

Question 6

The imposter rule does not apply for the wrongdoer who poses as the agent of the payee.

Question 7

Transfer warranties cannot be disclaimed if the indorsement states "without recourse."

Question 8

An unqualified indorser has secondary liability on negotiable instruments.

Question 9

An agent is only liable to the instrument that he or she signs in if it clearly mentions the principal.

Question 10

Signature liability is applicable to bearer papers.

Question 11

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

Question 12

The person represented by a representative agent is known as the principal.

Question 13

A presentment is a demand for the acceptance of a dishonored instrument.

Question 14

Presentment warranties are made by the drawer of a check or draft.

Question 15

A qualified indorser cannot disclaim transfer warranties.

Question 16

That "all signatures are genuine or authorized" is a transfer warranty that a transferor of a negotiable instrument for consideration makes.

Question 17

A person cannot be held contractually liable on a negotiable instrument unless his or her signature appears on it.

Question 18

The purported principal is liable for an unauthorized signature by a purported agent.

Question 19

Transfer warranties cannot be disclaimed with respect to checks.

Question 20

Marks used in lieu of a written signature cannot be used on indorsements.

Question 21

Correcting the figure on a check to correspond to the written amount on the check is not considered material alteration.

Question 22

The defense of breach of contract is effective against an HDC.

Question 23

A contract made by a person of nonadjudicated mental illness is considered void.

Question 24

Liability in which a person cannot be held contractually liable on a negotiable instrument unless his or her signature appears on the instrument is referred to as ________.

A)warranty liability
B)unqualified liability
C)contract liability
D)accommodation

Question 25

A minor who does not misrepresent his or her age can disaffirm negotiable instruments.

Question 26

In which of the following conditions is a drawee primarily liable to a draft?

A)when the instrument is issued
B)when the instrument is dishonored
C)when the instrument s presented for payment
D)when the drawee is an acceptor to the instrument

Question 27

Fraud in the inception is a type of personal defense.

Question 28

The holder of a negotiable instrument can discharge the liability of any party to the instrument by cancellation.

Question 29

A holder in due course takes an instrument free from personal defenses but not universal defenses.

Question 30

Fraud in the inducement is a personal defense that is not effective against HDCs.

Question 31

An instrument is not considered canceled if it is destroyed or mutilated by accident or by an unauthorized third party.

Question 32

Extreme duress is considered a personal defense.

Question 33

Which of the following has primary liability when it comes to instruments with a promise to pay?

A)the person in physical possession of the instrument
B)the drawer of the instrument
C)the drawee of the instrument
D)the payee of the instrument

Question 34

Adjudicated mental incompetence is a universal defense that can be raised against holders and HDCs.

Question 35

The FTC rules applies to consumer credit transactions in which the buyer signs a sales contract that includes an order to pay.

Question 36

Absolute liability to pay a negotiable instrument,subject to certain universal or real defenses is known as ________.

A)primary liability
B)secondary liability
C)warranty liability
D)signature liability

Question 37

If a universal defense is proven,the holder or HDC cannot recover on the instrument.

Question 38

Personal and universal defenses can be raised against an ordinary holder of a negotiable instrument.

Question 39

Discharge of an instrument by payment can be raised against enforcement of a negotiable instrument by an ordinary holder.

Question 40

Liability on a negotiable instrument that is imposed on a party only when the party primarily liable on the instrument defaults and fails to pay the instrument when due is referred to as ________.

A)secondary liability
B)unqualified liability
C)fringe liability
D)warranty liability

Question 41

An accommodation party is secondarily liable in case the accommodation is in a ________.

A)guarantee of promise
B)guarantee of demand
C)guarantee of collection
D)guarantee of payment

Question 42

Calvin,a college student,wants to purchase an automobile on credit from IronTilt Motors.He does not have sufficient income or the credit history to justify the extension of credit to him alone.Calvin asks his father to cosign a note to IronTilt Motors,which he does.
What kind of liability does Calvin's father come under?

A)secondary liability
B)primary liability
C)fringe liability
D)warranty liability

Question 43

Sylvester,acting as a representative agent for Jerry,signs a negotiable instrument with the signature-Sylvester,by Jerry,agent.What kind of liability does Sylvester have for this type of signature?

A)He is not liable to the instrument.
B)He liable to the payee.
C)He is liable to Jerry.
D)He is liable to the HDC of the instrument.

Question 44

Susan purchases goods by telephone from Parker.Susan has never met Parker.Brenton goes to Susan and pretends to be Parker.Susan draws a check payable to the order of Parker and gives the check to Brenton,believing him to be Parker.Brenton forges Parker's indorsement and indorses the check to his brother,William,with the term "without recourse." William then cashes the check at a liquor store.Under the imposter rule,who is liable on the check?

A)Brenton
B)the liquor store
C)Susan
D)William

Question 45

A person who signs an instrument and lends his or her name,and credit to another party to the instrument is referred to as a(n)________.

A)agent
B)qualified indorser
C)unqualified indorser
D)accommodation party

Question 46

Martin borrows $15,000 from Tom,in the form of a check,and signs a promissory note,promising to pay Tom this amount plus 10 percent interest in one year.Tom indorses the note and negotiates it to Fronston.Fronston indorses the note and negotiates it to Liza.Liza presents the note to Martin for payment when the note is due.Martin refuses to pay the note.Who is secondarily liable to pay Liza?

A)Tom
B)Frontston
C)all liabilities lie with Martin
D)the bank that issued the check to Tom

Question 47

Maria is the treasurer of Rex Caldwell Corporations.As treasurer,she makes out and signs the payroll checks for the company.Maria draws a payroll check payable to the order of her maid Carolyn Doss,who does not work for the company.Maria does not intend Carolyn to receive this money.She indorses Carolyn's name on the check and names herself as the indorsee.She cashes the check at a liquor store.Under which rule of forged instruments is Maria accountable?

A)good faith rule
B)exclusionary rule
C)imposter rule
D)fictitious payee rule

Question 48

Martha draws a check payable to the order of Stella.Stella indorses the check to Karen.But Leslie steals the check from Karen,forges Karen's indorsement,and cashes the check at a liquor store.
Who is liable to the check?

A)the liquor store
B)Martha
C)Stella
D)Leslie

Question 49

Stanley,who owes Milton money,indorses a draft to him with the term "without recourse." The instrument later is dishonored.Which of the following types of indorser is Stanley?

A)a holder
B)an agent
C)an unqualified indorser
D)a qualified indorser

Question 50

The ________ states that a drawer or maker is liable on a forged or unauthorized indorsement if the person signing as or on behalf of a drawer or maker intends the named payee to have no interest in the instrument or when the person identified as the payee is a fabricated person.

A)imposter rule
B)fictitious payee rule
C)fraud in the inception rule
D)fraud in the inducement rule

Question 51

Cameron,a purported agent,signs a contract and promissory note to purchase a building for Burnstar Constructions,a purported principal.Though Cameron is an unauthorized representative,Burnstar Constructions,the purported principal,likes the deal and accepts it.Which of the following is true of the deal ratified by Burnstar Constructions?

A)The deal is invalid due to the fraud in the inducement rule.
B)The deal is invalid due to the fraud in the inception rule.
C)Burnstar Constructions is liable on the note.
D)Cameron is liable on the note.

Question 52

When the forgery is exposed,who can the liquor store legally recover from?

A)Martha
B)Leslie
C)Karen
D)Stella

Question 53

________ is a demand for acceptance or payment of an instrument made upon the maker,acceptor,drawee,or other payer by or on behalf of the holder.

A)Accommodation
B)Duress
C)Presentment
D)Allonge

Question 54

Calvin,a college student,wants to purchase an automobile on credit from IronTilt Motors.He does not have sufficient income or the credit history to justify the extension of credit to him alone.Calvin asks his father to cosign a note to IronTilt Motors,which he does.
A person who has been authorized to sign a negotiable instrument on behalf of another person is known as a(n)________.

A)holder in due course
B)accommodation party
C)agent
D)principal

Question 55

Calvin,a college student,wants to purchase an automobile on credit from IronTilt Motors.He does not have sufficient income or the credit history to justify the extension of credit to him alone.Calvin asks his father to cosign a note to IronTilt Motors,which he does.
What role does Calvin's father fulfill here so that Calvin can buy the car?

A)an accommodation party
B)an agent
C)a principal
D)a qualified indorser

Question 56

Calvin,a college student,wants to purchase an automobile on credit from IronTilt Motors.He does not have sufficient income or the credit history to justify the extension of credit to him alone.Calvin asks his father to cosign a note to IronTilt Motors,which he does.
A person who authorizes an agent to sign a negotiable instrument on his or her behalf is known as a(n)________.

A)agent
B)accommodation party
C)principal
D)assignor

Question 57

Those who disclaim liability and are not secondarily liable on instruments they endorse are referred to as ________.

A)unqualified indorsers
B)qualified indorsers
C)agents
D)accommodation parties

Question 58

Stanley,who owes Milton money,indorses a draft to him with the term "without recourse." The instrument later is dishonored.What liability does Stanley have on the instrument?

A)He has no liabilities on the instrument.
B)He has to pay Milton in case the instrument defaults.
C)He has primary liabilities.
D)He has secondary liabilities.

Question 59

Those who are secondarily liable on negotiable instruments they endorse are known as ________.

A)unqualified indorsers
B)qualified indorsers
C)accommodation parties
D)agents

Question 60

In which of the following accommodations is an accommodation party primarily liable?

A)in a guarantee of payment
B)in a guarantee of collection
C)in a guarantee of demand
D)in a guarantee of promise

Question 61

________ is a type of personal defense where a wrongdoer makes a false statement or misrepresentation to another person to lead that person to enter into a contract with the wrongdoer.

A)Forgery
B)Discharge in bankruptcy
C)Fraud in the inducement
D)Extreme duress

Question 62

A(n)________ defense is a type of defense that can be raised against enforcement of a negotiable instrument by an ordinary holder but not against an HDC.

A)discharge in bankruptcy
B)extreme duress
C)personal
D)universal

Question 63

Which of the following is a characteristic of a presentment warranty on an instrument presented for payment?

A)The transferor has no knowledge of any insolvency.
B)The transferor has good title to the instrument.
C)No defenses of any party are good against the transferor.
D)The instrument has not been materially altered.

Question 64

What is transfer of an instrument?

A)the issuance of the instrument
B)the presentment for payment of the instrument
C)the passage of the instrument other than issuance and presentment
D)the cancellation of the instrument

Question 65

To which of the following placements of a negotiable instrument would transfer warranties be applicable?

A)indorsement of the instrument
B)issuance of the instrument
C)presentment of the instrument
D)accommodation of the instrument

Question 66

Harold borrows $20,000 from Alex and signs a note promising to pay Alex this amount plus interest in one year.Alex negotiates the note to Reese,an HDC.Before the note is due,Harold declares bankruptcy and the court finds it to be true.According to the discharge in bankruptcy defense,which of the following is true?

A)Reese can recover from Harold.
B)Reese can recover from Alex.
C)Alex can recover from Harold.
D)Reese cannot enforce the instrument.

Question 67

Which of the following is a rule that eliminates HDC status with regard to negotiable instruments that arise out of certain consumer credit transactions?

A)FTC HDC rule
B)exclusionary rule
C)imposter rule
D)fictitious payee rule

Question 68

Which of the following actions renders all parties as discharged from liability to a negotiable instrument?

A)when the instrument is presented for payment
B)when the signature of the indorser is intentionally struck out
C)when the instrument is accidentally destroyed or mutilated
D)when a drawee in good faith pays an unaccepted instrument in full to the holder

Question 69

What is the similarity between the fictitious payee rule and the imposter rule?

A)Both hold the drawee liable to the instrument.
B)Both hold the drawer liable to the instrument.
C)Both put the risk of loss on the forger.
D)Both put the risk of loss on the indorsee.

Question 70

Discharge of an instrument by payment or cancellation is a type of ________.

A)warranty liability
B)transfer warranty
C)personal defense
D)universal defense

Question 71

Jennifer signs a promissory note to pay $2,500 to Clara.Clara negotiates the instrument and indorses it to Anthony.Anthony alters the note to make the payment amount $25,000 and negotiates the note to Nicholas.Nicholas indorses the note and negotiates it to Mack.Nicholas and Mack are both unaware of the alteration done by Anthony.
At this point,who has primary liability over the note?

A)Nicholas
B)Anthony
C)Clara
D)Jennifer

Question 72

In which of the following consumer credit transactions does the FTC HDC rule apply?

A)when the buyer signs a sales contract that includes a check
B)when the buyer signs a sales contract that includes a promissory note
C)when the buyer signs an installment sales contract that does not contain a waiver of defenses clause
D)when the buyer arranges financing with a third-party lender

Question 73

What are forged negotiable instruments?

Question 74

A situation in which certain parties are discharged from liability on an instrument by the action of the holder is called ________.

A)impairment of the right of recourse
B)fraud in the inception
C)fraud in the inducement
D)discharge in bankruptcy

Question 75

A ________ defense is a type of defense that can be raised against both holders and HDCs.

A)universal
B)personal
C)fraud in the inducement
D)breach of contract

Question 76

Which of the following actions by the holder causes an impairment of the right of recourse?

A)releasing an obligor party from liability
B)withholding collateral that would benefit that party
C)writing canceled on the face of the instrument
D)destruction of the instrument with the intent of eliminating the obligation

Question 77

Jennifer signs a promissory note to pay $2,500 to Clara.Clara negotiates the instrument and indorses it to Anthony.Anthony alters the note to make the payment amount $25,000 and negotiates the note to Nicholas.Nicholas indorses the note and negotiates it to Mack.Nicholas and Mack are both unaware of the alteration done by Anthony.
If Mack presents the note to Jennifer for payment,how much,if anything is Jennifer obligated to pay?

A)$25,000
B)$22,500
C)$2,500
D)Jennifer is not obliged to pay Mack

Question 78

What are the requirements for imposing secondary liability?

Question 79

A(n)________ is an action or event that relieves certain parties from liability on negotiable instruments.

A)presentment
B)discharge
C)accommodation
D)breach of contract

Question 80

Which of the following actions by a holder constitutes the complete cancellation of a negotiable instrument?

A)intentionally destroying the negotiable instrument to eliminate obligation
B)deliberately striking out the signature of an indorser
C)releasing an obligor from liability
D)surrendering collateral without the consent of the parties who would benefit from it