Deck 23: Transferability and Holder In Due Course

Question 1

In an assignment,the assignee cannot receive greater rights than those held by the assignor.

Answer 1

True

Question 2

A holder is a person in possession of a negotiable instrument regardless of whether it has been properly indorsed to him or to his order.

Answer 2

False

Question 3

A blank indorsement is one that does not indicate a particular indorsee,and it also creates bearer paper.

Answer 3

True

Question 4

Bearer paper cannot be converted from order paper,but order paper may be converted to bearer paper.

Question 5

A restrictive indorsement is one that has no instructions or conditions attached to the payment of the funds.

Question 6

An instrument that is payable to a specific payee or indorsee is bearer paper.

Question 7

An instrument that is bearer paper can be changed to order paper by a later indorsement.

Question 8

A holder is the same as a holder in due course.

Question 9

If a payee's name is misspelled,the payee will be prevented from indorsing the instrument,as it may amount to fraud,depending on the jurisdiction the payee resides in.

Question 10

When a negotiable instrument is transferred,the holder has greater rights because he or she is not subject to some of the defenses that could otherwise have been raised against the transferor.

Question 11

Because an indorsement is not required on bearer paper to deliver it,the indorsement has no legal effect.

Question 12

According to the UCC,a qualified indorsement is one that disclaims or limits liability on the instrument.

Question 13

A holder in due course can acquire greater rights than his transferor had.

Question 14

If a virgule - a slash mark - is used between two names listed on an instrument,this means that either person may individually indorse and negotiate the instrument.

Question 15

An assignment occurs when a nonnegotiable contract is transferred.

Question 16

A blank indorsement is preferred over a special indorsement,as a blank indorsement prevents against theft.

Question 17

When an instrument has no room for an indorsement,it may be written on an allonge.

Question 18

If Joe Johnson gives an instrument to Sally Smith that reads,"payable to Sally Smith and Roger Reed," either person's indorsement is sufficient to negotiate the instrument.

Question 19

An indorsement is the signature of a signer,who is also the maker,that is placed on the instrument to negotiate it to another person.

Question 20

Being a holder is a prerequisite to being a holder in due course.

Question 21

The advantage of a holder in due course over a simple holder of an instrument is that the holder in due course can:

A) indorse the instrument "without recourse," thus limiting his liability
B) transfer the instrument to others,thus using it as a substitute for money
C) collect on the instrument even if it has been forged
D) collect on the instrument if the maker or drawer asserts a personal defense
E) collect punitive damages from a party who wrongly does not pay a negotiable instrument

Question 22

Under the red light doctrine a person cannot become a holder in due course of an instrument if there is obvious evidence of an irregularity in the instrument.

Question 23

Which of the following is true about the requirement for a holder in due course to give value for an 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 settlement of a preexisting 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.

Question 24

If a check has been marked "payment refused - not sufficient funds" a person in possession of it can qualify as a holder in due course.

Question 25

What effect can indorsements have on the character of negotiable instruments?

A) Indorsements can convert bearer paper to order paper,but not vice versa.
B) Indorsements can convert order paper to bearer paper,but not vice versa.
C) Indorsements can convert order paper to bearer paper,and can convert bearer paper to order paper.
D) Indorsements can convert order paper to bearer paper,and can convert bearer paper to order paper,so long as the instrument expressly allows such conversions.
E) Indorsement cannot change either bearer or order paper to the other classification.

Question 26

Which of the following is the best description of an indorsement?

A) A signature that creates no new legal obligations.
B) A signature that often creates potential liability for the indorser.
C) A transfer that creates no new legal obligations.
D) A transfer that usually creates potential liability.
E) A payment of an instrument that discharges the liability of the maker or drawer.

Question 27

A holder of a negotiable instrument is:

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 a bearer instrument or anyone 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 28

Which of the following is not required in order for someone to be a holder in due course of a negotiable instrument?

A) taking the instrument directly from the maker or drawer
B) taking the instrument in good faith
C) taking the instrument without notice of any defenses
D) taking the instrument for value

Question 29

A holder,through a holder in due course,qualifies for the rights of a holder in due course under the shelter principle.

Question 30

A holder cannot become a holder in due course to an instrument that is forged or altered.

Question 31

To qualify as a holder in due course what must a holder do?

A) take the instrument in good faith
B) take the instrument for value
C) take the instrument without notice that it is overdue or defective
D) A,B,and C
E) B and C only

Question 32

Wayne issues a draft payable to Molly.Molly indorses the draft in blank on the back and gives it to Jerry.Which of the following statements correctly describes the status of this instrument?

A) The draft started out as bearer paper,but Molly converted it to order paper.
B) The draft started out as order paper,but Molly converted it to bearer paper.
C) The draft started out as bearer paper and it is still bearer paper.
D) The draft started out as order paper and it is still order paper.

Question 33

Negotiation of which type(s)of instrument requires indorsement?

A) bearer instruments only
B) order instruments only
C) both bearer and order instruments
D) neither bearer nor order instruments

Question 34

The negotiation of an order instrument requires:

A) delivery only
B) indorsement only
C) delivery and indorsement
D) delivery,indorsement,and acceptance
E) delivery and acceptance

Question 35

Even though an unperformed promise qualifies as consideration,it does not meet the value requirement for qualifying as a holder in due course.

Question 36

With respect to negotiable instruments,the "red light doctrine" prevents a holder from being a holder in due course if the holder has knowledge of a defense to the payment of the instrument.

Question 37

The transfer of a negotiable instrument in such a manner that the transferee becomes a holder is known as:

A) indorsement
B) negotiation
C) assignment
D) invalidation

Question 38

Which of the following is correct with regard to a holder in due course?

A) A holder in due course is primarily liable on an instrument.
B) A holder in due course must notify subsequent transferees of his holder in due course status.
C) A holder in due course can obtain greater rights to payment of an instrument than his transferor had.
D) A holder in due course can give greater rights to a transferee than he has as a holder in due course.

Question 39

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

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

Question 40

Which of the following is true about the assignment and the negotiation of a negotiable instrument?

A) An assignment does not require a signature whereas a negotiation does.
B) A negotiation results in a transfer of rights,but an assignment does not.
C) An assignment applies to bearer paper,and a negotiation applies to order paper.
D) An assignment can transfer no greater rights than those held by the transferor,whereas the transferee in a negotiation can receive greater rights than those held by the transferor.

Question 41

Paul Painter agreed to paint Harry Homeowner's house for $5,000.Paul never planned to actually paint the house,but made a habit of entering into contracts,taking partial or complete payment in advance,and never doing the work.Paul got his friend,Beth,to talk to Harry about how competent and honest Paul was,and explain that Harry should not be concerned about the quality of work or paying Paul in advance.Harry wrote Paul a $3,000 check 1 week before the painting was to be started.Paul transferred the check to Allison in exchange for Allison's car,which was worth $2,800.Before Allison had a chance to deposit the check,there were several news stories about Paul and all the fraud he had been committing.Allison then transferred the check to Beth,who then transferred it to Cathy.Beth gave Allison value for the check,and Cathy gave Beth value.Explain the applicability of the shelter principle in this situation.

Question 42

Why are there so many different kinds of indorsements? Why is a restriction in an indorsement that limits payment to the named payee not effective? Shouldn't the parties be allowed to set these terms between themselves?

Question 43

Don,who owed Dan $1,000 for his share of the cost of a fishing trip they took together 2 years ago,transferred to Dan a check for $700 that he had just received from a customer.Has Dan given value for holder in due course purposes?

A) Yes,because accepting an instrument in payment of a prior debt is considered to be value given for holder in due course purposes.
B) Yes,but only if Dan still intends to collect the remaining $300 from Don.
C) No,because the check was less than the amount of the debt.
D) No,because the check was from a business transaction and the debt was personal.
E) No,because Don had a preexisting duty to pay Dan the $1,000.

Question 44

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

A) It applies to both the transferor and the transferee of a negotiable instrument.
B) The UCC contains detailed requirements for meeting 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 45

What is dishonor in connection with a negotiable instrument?

A) an instrument being created in connection with a fraudulent transaction
B) any potential transferee refusing to accept the instrument
C) the refusal of the maker or drawer to pay the instrument when it is presented for payment
D) the transfer of an order instrument without the proper indorsement

Question 46

A check is drawn "payable to Tami Thomas,M.D.,in trust for Cathy Wilson." Dr.Thomas indorses the check to a computer store in payment for a computer that she personally purchased.The computer store as indorsee has not adhered to the instructions on the check.Who is the computer store liable to and why?

Question 47

A person can become a holder in due course of an instrument that has been altered:

A) in all circumstances
B) in all circumstances so long as the person did not know of the alteration
C) only if the alteration could not reasonably be detected
D) only if the alteration was not done by the person's immediate transferor
E) under no circumstances

Question 48

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

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.

Question 49

Which of the following describes the shelter principle?

A) In order to receive the benefits of a holder in due course status,all holders must qualify as holders in due course.
B) Anyone who does not meet holder in due course requirements can obtain the same rights as a holder in due course through the shelter principle.
C) The shelter principle gives additional special rights to only those who qualify as a holder in due course.
D) One who takes an instrument from a holder in due course can often obtain the rights of a holder in due course,even if that transferee does not meet the requirements of a holder in due course.

Question 50

Billy,a minor,buys a car form Ajax Auto Dealers,signing a $2,000 negotiable installment note in payment.Ajax needs the cash,so it sells the note to Acme Finance Company,for its fair market value,indorsing the note in blank.The owner of Acme,who personally purchased the note,knew that Billy was a minor.Circumstances occur such that Acme can collect the note only if it is a holder in due course.Is Acme a holder in due course with respect to this note?

A) Yes; Acme is a holder in due course.
B) No,because the note was not properly negotiated to Acme.
C) No,because Acme did not take the note in good faith.
D) No,because Acme took the note with notice that there was a defense to its payment.
E) No; Acme is not a holder in due course because of some other reason.

Question 51

If Stanley Starre receives a check payable to "Stanley Starr," how can he endorse the check?

A) He can indorse the check using "Stanley Starr."
B) He can indorse the check using "Stanley Starre."
C) He can indorse the check as both "Stanley Starre" and "Stanley Starr."
D) A,B,and C are correct.

Question 52

Dad has a negotiable instrument that he gives to his daughter as a birthday present.Dad is a holder in due course of that instrument.Circumstances arise such that the daughter can collect that instrument only if she has holder in due course status.Which of the following best describes this situation?

A) The daughter is not a holder in due course,so she cannot collect on this instrument.
B) The daughter qualifies as a holder in due course,so she can collect on this instrument.
C) The daughter does not qualify as a holder in due course,but she can claim the holder in due course status of her father and collect the instrument.
D) The shelter provision cannot apply to the daughter in this situation.

Question 53

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?

Question 54

Which of the following would constitute "notice" of a fact for the holder in due course purposes?

A) actual knowledge of the fact
B) having received notice or notification of the fact
C) having reason to know from facts and circumstances of the fact
D) A,B,and C
E) A and B only

Question 55

Under what doctrine could a party who is aware that an instrument is overdue take that instrument and acquire the rights of a holder in due course?

A) The shelter principle.
B) The indorsement protection doctrine.
C) The personal defense doctrine.
D) The public policy exception.
E) The taking for value doctrine.

Question 56

In order to become a holder in due course,one must take a negotiable instrument without notice of the following EXCEPT:

A) that the instrument is overdue
B) that the instrument has been dishonored
C) that the instrument was signed by an agent
D) that there was a claim to it by another person
E) that there is a defense against it