Deck 24: Liability,Defenses and Discharge

Question 1

Contract liability is another term used to refer to signature liability.

Answer 1

True

Question 2

The drawer of a draft has primary liability on the draft when it is issued.

Answer 2

False

Question 3

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

Answer 3

True

Question 4

When a drawee accepts a draft,the drawee becomes secondarily liable on the draft,because the drawer has the primary liability for payment.

Question 5

Drawers of checks and drafts have secondary liability on the instruments.

Question 6

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

Question 7

Qualified indorsers are secondarily liable on instruments because they have not expressly disclaimed liability.

Question 8

Primary liability occurs when a draft or check is issued,as such instruments are orders to pay.

Question 9

Drawers of checks and drafts and unqualified indorsers are secondarily liable on negotiable instruments.

Question 10

An accommodation party who pays an instrument can recover reimbursement from the accommodated party and enforce the instrument against him or her.

Question 11

An unauthorized signature may be ratified.

Question 12

A check,which is a special form of a draft,is accepted when it is certified by a bank.

Question 13

Unqualified indorsers have no liability on negotiable instruments,as banks usually insure their customers accounts.

Question 14

The location of a person's signature on an instrument generally determines the signer's capacity.

Question 15

Qualified indorsers and agents that properly sign a negotiable instrument are not primarily or secondarily liable on the instrument.

Question 16

A party can incur contract liability on a negotiable instrument only if that party's signature appears on the instrument.

Question 17

Before a party can be held secondarily liable on an instrument,that party must have received a timely notice that the instrument was dishonored.

Question 18

Certification of a check by the drawee bank makes the bank primarily liable.

Question 19

A qualified indorser will incur secondary,rather than primary,liability.

Question 20

Unqualified indorsers must pay any dishonored instrument to the holder or to any subsequent according to its terms,when issued or properly completed.

Question 21

Of the following roles that persons who sign a negotiable instrument can play,which do not have signature liability on the instrument?

A) accommodation signers and qualified indorsers
B) qualified indorsers and those signing properly as an authorized agent
C) authorized signers,qualified indorsers,and those signing properly as an authorized agent
D) accommodation signers,qualified indorsers,and those signing properly as an authorized agent
E) None of these is correct because anyone who signs an instrument incurs signature liability.

Question 22

Breach of contract is a real defense.

Question 23

Someone can have warranty liability on an instrument without having signed it.

Question 24

Cancellation of a negotiable instrument will discharge any party with primary liability as well as any party with secondary liability.

Question 25

Which of the following is true about primary liability on a check?

A) No one has primary liability on a check when it is written,and no one can have primary liability until it is paid.
B) No one has primary liability on a check when it is written,but the drawee incurs primary liability if the check becomes certified.
C) No one has primary liability on a check when it is written,but the drawer incurs primary liability if the check is certified.
D) The drawee has primary liability when the check is written.
E) The drawer has primary liability when the check is written.

Question 26

A maker's discharge in bankruptcy is considered to be a real defense.

Question 27

A special form of appointment is necessary in order to grant an agent authority to sign an instrument.

Question 28

Transferors cannot be held liable for breaching implied warranties when negotiating instruments.

Question 29

Andy Anderson is an agent for Peterson Corporation,whose name does not appear on its checks.If Andy signs a check as the drawer,for which of the following signatures could Andy be personally liable on the instrument?

A) "Peterson,Andy Anderson"
B) "Peterson,by Andy Anderson,agent"
C) "Andy Anderson"
D) A and C
E) A,B,and C

Question 30

The fact that the Federal Trade Commission has eliminated holder in due course status in connection with consumer credit transactions is a disadvantage for consumers.

Question 31

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

Question 32

A principal will be held liable for ratifying an agent's unauthorized signature.

Question 33

The accommodation indorser is primarily liable on the instrument.

Question 34

Any passage of an instrument other than its issuance and presentment for payment is considered a transfer.

Question 35

Which of the following applies to signers when determining signature liability?

A) The location of the signature on an instrument usually determines the signer's capacity.
B) Qualified indorsers and agents are primarily or secondarily liable on the instrument.
C) Most indorsements appear on the front side of the instrument.
D) It is usually presumed that the indorsement is someone else's signature unless the instrument clearly indicates that it is that of the indorser.

Question 36

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

Question 37

What is needed for a party to be considered secondarily liable on an instrument?

A) The instrument must be properly presented for payment.
B) The instrument is dishonored.
C) The notice of dishonor must be timely.
D) The notice of dishonor must be given to the person to be held secondarily liable.
E) All of these are correct.

Question 38

Signature liability on a negotiable instrument is also known as:

A) contract liability
B) agent liability
C) warranty liability
D) secondary liability
E) shelter liability

Question 39

When does acceptance of a draft occur?

A) Acceptance occurs if an accommodation has occurred.
B) Acceptance occurs if an unqualified indorser is involved.
C) Acceptance of a draft occurs when the drawee writes the word acceptance across the face of the draft.
D) All of these are correct.

Question 40

Which of the following is true?

A) The maker of a note has primary liability upon signing a note,but the drawer of a check does not have primary liability upon signing the check.
B) The maker of a note has primary liability upon signing the note and the drawer of a check has primary liability upon signing the check.
C) The maker of a note has primary liability upon signing the note,and the drawee of a check has primary liability upon the drawer's signing of the check.
D) The drawer of check has primary liability upon signing the check,but the maker of a note does not have primary liability upon signing the note.
E) The maker of a note does not have primary liability upon signing the note,nor does the drawer of a check upon signing the check.

Question 41

Which kind(s)of liability can be imposed only if a party has signed an instrument?

A) warranty liability only
B) contract liability only
C) both contract liability and warranty liability
D) neither contract liability nor warranty

Question 42

Which of the following best describes what a transfer is?

A) A transfer is when one bank account is shifted to another bank account.
B) A transfer is a holder who takes an instrument free from personal defenses.
C) A transfer is any passage of an instrument other than its issuance and presentment for payment.
D) A transfer is a universal defense to a negotiable instrument.

Question 43

If Bill Snick presents a draft or check for payment of acceptance,which of the following presentment warranties is Bill Snick making?

A) That he had good title to the check or is authorized to obtain payment or acceptance of the person who has good title.
B) That the instrument has not been materially altered.
C) That the presenter has no knowledge that the signature of the maker or drawer is unauthorized.
D) All of these are correct.

Question 44

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

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.

Question 45

What is the effect of the presence of a defense in connection with a negotiable instrument?

A) Payment of the instrument can be avoided.
B) The instrument becomes null and void.
C) The transfer warranties are no longer applicable.
D) The maker or drawer becomes liable for damages.

Question 46

Which of the following parties are liable only after a negotiable instrument has been presented and dishonored,and proper notice has been given?

A) drawer,maker,acceptor,and qualified indorser
B) maker,acceptor,and unqualified indorser
C) acceptor and qualified indorser
D) drawer and unqualified indorser
E) maker and unqualified indorser

Question 47

Alan guarantees Visa that he will pay for his daughter Florence's debt with Visa.If Alan fails to pay Visa,who is liable for Florence's debt?

A) Alan is primarily liable to Visa,the accommodation maker.
B) Florence is primarily liable to Visa,as she was the party who used the credit in the first place.
C) Both Alan and Florence are primarily liable to Visa for Florence's debt.
D) Neither is liable to Visa.

Question 48

The transferor of a negotiable instrument warrants that the transferor has good title or is authorized to obtain payment of acceptance of one who has good title as part of:

A) the transfer warranties
B) the presentment warranties
C) both transfer and presentment warranties
D) neither transfer nor presentment warranties

Question 49

What is the significance of a defense being a real defense rather than a personal defense?

A) A real defense applies to order instruments whereas a personal defense applies to bearer instruments.
B) A real defense applies where the negotiable instrument arose out of a business transaction whereas a personal defense applies where the negotiable instrument arose out of a nonbusiness transaction.
C) A real defense applies to a holder in due course whereas a personal defense does not.
D) A real defense can be asserted at any time whereas a personal defense must be asserted within 90 days of notice.
E) A real defense entitles the plaintiff to receive punitive damages whereas a personal defense does not.

Question 50

In order to impose secondary liability,the following requirements must be met EXCEPT for which of the following?

A) The instrument is properly presented for payment.
B) The instrument is dishonored.
C) The reason that the instrument was dishonored is justified.
D) Timely notice of the dishonor is given to the party with secondary liability.

Question 51

Betty Bongo,a real estate agent working for ABC Realty sells a home to Jason Biggs.Upon escrow closing,Betty signs the paperwork,"ABC Realty,by Betty Bogo,agent." Later it was determined that the home had Jason bought had a mold problem that should have been disclosed.Who is personally responsible on the instrument?

A) Betty Bongo,as agent for ABC Realty
B) ABC realty
C) both Betty Bongo and ABC Realty
D) All of these are correct.
E) None of these are correct.

Question 52

Which of the following would be considered an exception to the rule that the loss from a forged instrument falls on the party who first takes the forged instrument after the forgery?

A) where a drawer or maker bears the loss
B) where an indorsement is forged
C) where there has been no forgery
D) A and B
E) A,B,and C

Question 53

Can transfer warranties be disclaimed?

A) No; they cannot be disclaimed for any negotiable instruments.
B) Yes; they can be disclaimed for any negotiable instruments.
C) Yes; they can be disclaimed,but only by holders in due course.
D) Yes; they can be disclaimed,but only for bearer instruments.
E) Yes; they can be disclaimed,but only for instruments other than checks.

Question 54

Which of the following warranties is given by the transferor of a negotiable instrument?

A) All signatures are genuine or authorized.
B) There is no knowledge of a material alteration.
C) There is no knowledge that any defense is good against him.
D) A,B,and C are given.
E) B and C only are given.

Question 55

An accommodation party can sign:

A) only as maker or drawer
B) only as maker or indorser
C) only as maker,drawer,or indorser
D) only as acceptor or indorser
E) as maker,drawer,indorser,or acceptor

Question 56

If Royce wanted to know which universal defenses against the payment of a negotiable instrument that he could use,which of the following would he have available to him?

A) infancy or minority
B) extreme duress
C) discharge in bankruptcy
D) material alteration
E) All of these are correct.

Question 57

What are the two general kinds of implied warranties for which warranty liability can be imposed in connection with a negotiable instrument?

A) transfer and contract
B) signature and contract
C) transfer and secondary
D) with recourse and without recourse
E) transfer and presentment

Question 58

If Royce comes to you and asks what type of personal defenses can he raise against enforcement of a negotiable instrument by an ordinary holder,which of the following would you say qualify as such?

A) mental illness
B) illegality of a contract
C) undue influence
D) discharge of an instrument by payment or cancellation
E) All of these are correct.

Question 59

Betty Bongo,a real estate agent working for ABC Realty sells a home to Jason Biggs.Upon escrow closing,Betty signs the paperwork,"ABC Realty,by Betty Bogo,agent." Later it was determined that the home had Jason bought had a mold problem that should have been disclosed.If Betty Bongo did not show that her signature was made in a representative capacity and she cannot prove that the original parties did not intend her to be liable,who is liable?

A) ABC realty
B) Visa
C) Betty Bongo
D) All of these are correct.

Question 60

When a person transfers a negotiable instrument,to whom does this transferor make transfer warranties?

A) only parties to whom the transferor makes a written assertion in connection with the transfer
B) for all transfers,to the immediate transferee only
C) for all transfers,to the immediate transferee and all subsequent transferees
D) for transfers for consideration,to the immediate transferee,and if the transfer is by indorsement,to all subsequent transferees as well

Question 61

Which of the following will not discharge a party from liability on a negotiable instrument?

A) payment by the party who is primarily liable
B) cancellation of the instrument
C) a subsequent holder releasing collateral securing the instrument
D) failing to comply with a restrictive indorsement

Question 62

Marti issues a check payable to the order of John,who indorses the check in blank and transfers the check to Amy,who transfers the check to Bill without indorsement.Bill wishes to cash the check.Which of the following best describes the liabilities of the parties?

A) The drawee bank is primarily liable on the check.
B) At this point,no one is primarily liable on the check.
C) The drawee bank is not primarily liable on the check until it accepts the check.
D) Marti is primarily liable on the check.
E) B and C only are correct.

Question 63

Against whom can the maker of a note successfully assert a personal defense?

A) the payee
B) a holder in due course
C) a holder who is not a holder in due course
D) A and B only
E) A and C only

Question 64

Stan Johnson is the secretary of Balzene's,Inc.,a small corporation.Before an important meeting with some potential clients,Stan purchases some supplies from a local office supply store.Stan takes one of the company's checks that are imprinted with the company's name to pay for this merchandise.In his rush before the meeting,Stan simply signs the check "Stan Johnson." Which of the following is true in this situation?

A) Stan is not an agent of Balzene's because he did not sign as an agent.
B) Stan will have exclusive primary liability on this check.
C) Stan and Balzene's will share primary liability on this check.
D) Stan will not have any liability on this check because the check was imprinted with Balzene's name.
E) Balzene's has exclusive primary liability at the time the check is written.

Question 65

An accommodating party that signs an instrument guaranteeing collection is ________ on the instrument.

A) not liable
B) primarily liable
C) secondarily liable
D) limited with respect to liability

Question 66

Why is fraud in the inducement treated as a personal defense and fraud in the inception treated as a real defense? Is this distinction justifiable? On what grounds?

Question 67

Lisa purchases a home theater system from Homeplace Cinema.Lisa signs a $10,000 negotiable promissory note in connection with this purchase.This note requires monthly payments for 5 years.After the system is installed,Lisa begins to have trouble with it.It turns out that there are defective components in both the video and audio aspects of the system.Meanwhile,Homeplace Cinema has sold Lisa's promissory note to Amalgamated Finance,which meets all the requirements of a holder in due course.Lisa refuses to make any further payments on the notes due to the breach of contract by Homeplace Cinema.Which of the following is true?

A) Lisa has no further obligation to pay because the breach of contract is a real defense.
B) Lisa must pay the note to the extent of the fair market value of the home theater system in its current condition.
C) Lisa does not have to pay because federal legislation has eliminated holder in due course protection for negotiable instruments that are part of a consumer credit transaction.
D) Lisa must pay because the obligation of a promissory note is always unconditional.

Question 68

What is the consequence of a defense to a negotiable instrument being a personal defense?

A) The instrument must be paid to any holder.
B) The maker or drawer has personal liability on the instrument.
C) The instrument must be paid despite the defense if the defense is being asserted against a holder in due course.
D) The instrument must be paid to any party presenting it for payment.
E) The defense is not effective against a holder of any kind.

Question 69

Terry has a business in which he visits with client's pet cats in the client's home while the client is out of town.The primary purpose is to prevent the cats from becoming psychotic due to the owner's absence.Terry contracted to visit Valerie's cat daily for a 2-week period when Valerie was on vacation.Because Terry charged by the hour,Valerie gave Terry a signed check with the amount blank for Terry to fill in based on $10 per hour.While visiting with Valerie's cat,Terry noticed a check on Valerie's desk that had the amount of $100 filled in,but no payee and no signature.Terry took the check,converted the $100 to $1,000 and signed Valerie's name.Terry then filled out the check that Valerie had given him in the amount of $10,000,rather than the $200 he had earned at $10 per hour.Terry transferred both checks to a holder in due course,who later seeks payment from Valerie.How much must Valerie pay on each of these checks?

Question 70

Carl is the maker of a note on which David is the payee.David indorses the note in blank and delivers it to Edward,who then transfers it to Fred without indorsement.Fred then presents it to Carl for payment when it becomes due,but Carl claims he signed the note base upon fraud in the inducement.If all of the transfers in question were for value and there are no other defenses available:
a.Who has primary liability of the instrument? Who is secondarily liable on the instrument?
b.Who has warranty liability? Why? Explain.
c.From whom can Fred try to collect now that Carl has refused to pay?

Question 71

What is the purpose of the Federal Trade Commission rule that eliminates the benefits of holder in due course status in certain consumer credit transactions?

A) to protect merchants of goods from consumers improperly refusing to pay
B) to protect subsequent holders of consumer credit contracts from consumers improperly refusing to pay
C) to protect consumers from having to pay a holder in due course of a promissory note if the goods that gave rise to the note are defective
D) to encourage merchants to extend credit to consumers

Question 72

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:

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 73

An accommodation party that signs an instrument guaranteeing payment is ________ on the instrument.

A) not liable
B) primarily liable
C) secondarily liable
D) limited with respect to liability

Question 74

Forger drafted a promissory note and forged Fred's signature on it.Before he could do anything with it,Thief stole it and transferred it to Commercial Loan Co.,for value.Commercial usually did not buy commercial paper from people who walk in off the street,but business was slow,so the company took the note.Commercial had no notice of the forgery.On the note's due date,Commercial demanded payment from Fred.Obviously,Fred refused to pay.Commercial sues Fred on the note.Assuming the note qualifies as a negotiable instrument in all aspects not mentioned above,discuss the probable outcome of this suit.

Question 75

What is the purpose and effect of eliminating the holder in due course provisions for consumer credit transactions? Will doing so raise the cost of borrowing for these consumers?

Question 76

Betty issues a note payable to the order of John for $2,000.John properly indorses the note,but raises the amount to $20,000,and negotiates it to Mary.On the due date,Mary attempts to collect $20,000 from Betty.Betty refuses to pay.Assuming that Mary is a holder in due course,which parties can Mary recover from in a lawsuit?

A) $20,000 from Betty; nothing from anyone else
B) $2,000 from Betty; nothing from anyone else
C) $2,000 from Betty; $18,000 from John
D) $20,000 from John; nothing from anyone else
E) nothing from anyone

Question 77

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 78

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

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