Deck 26: Transferability and Holder in Due Course

Question 1

If a check is made "payable to the order of Marcus or Nathan," both parties' indorsements are necessary for negotiation.

Answer 1

False

Question 2

A check payable to stacked payees is ambiguous and thus payable only jointly-with the indorsements of all of the payees.

Answer 2

False

Question 3

Usually, an indorsement is unqualified, which means that the indorser is guaranteeing payment on an instrument, in addition to transferring title to it.

Answer 3

True

Question 4

The holder of a note who needs the funds owed on it can transfer it for cash to a third party, whom the maker must pay when the note comes due.

Question 5

An insurance agent who receives a check payable to the agent when the item was actually intended as payment to the insurance company is required to make good on the check if it is later dishonored.

Question 6

Negotiating bearer instruments requires both indorsement and delivery because the use of bearer instruments involves more risk through loss or theft.

Question 7

To avoid the risk of loss from theft, a holder can convert a blank indorsement to a special indorsement by writing, above the signature of the indorser, the name of the indorsee.

Question 8

If the thief of a stolen bearer instrument delivers it to an innocent, third party, negotiation of the item is complete.

Question 9

A check "payable to Orit" followed by the signature of Petr, the indorser, sufficiently identifies the indorsee.

Question 10

A holder who takes a negotiable instrument from a thief cannot become an HDC even if the item was acquired in good faith and there was no reason to be suspicious of the transaction.

Question 11

Generally, an indorser, merely by indorsing, impliedly promises to the pay the holder, or any subsequent endorser the amount of the instrument if the drawer or maker defaults.

Question 12

When a drawer gives one alternative or joint payee a check, the drawer's obligation on the check to the other payees is suspended.

Question 13

A check "payable to the order of Laura" is indorsed in blank if Laura simply delivers it without signing it.

Question 14

The assignee of a negotiable instrument receives only those rights that the assignor had before the assignment.

Question 15

An instrument that requires an indorsement for negotiation must contain a handwritten signature.

Question 16

The authorized representative of an entity can negotiate an instrument payable to the entity only if the item has been converted into a bearer instrument.

Question 17

If Dora delivers a check payable to her order to Equity Bank without signing it and receives cash, the transfer is an assignment, not a negotiation.

Question 18

Only the payee's bank can acquire the rights of a holder and negotiate a check indorsed by the payee "For deposit only."

Question 19

Whenever a transfer fails to qualify as a negotiation because it fails to meet one of the requirements for a negotiable instrument, it is considered a breach.

Question 20

The method of negotiating an instrument so that the receiver becomes a holder depends on whether an indorsement on the instrument is blank or special.

Question 21

When an instrument is transferred, an ordinary holder obtains only those rights that the transferor had in the instrument but is free of most of the defenses and claims that could be asserted against the transferor.

Question 22

A promise to perform or give value in the future is sufficient value to make the promisor an HDC.

Question 23

In the event that there is a conflicting, superior claim to an instrument, a holder in due course will not be able to collect payment.

Question 24

A loss from a well-crafted forgery usually falls on the party to whom the forger transferred the instrument.

Question 25

Neither an ordinary holder nor an HDC can enforce an instrument that was originally incomplete and later completed in an unauthorized manner.

Question 26

Keyes negotiates a bearer instrument to Liu by delivery

A)with an assignment of its rights under a contract.
B)with any necessary indorsement.
C)without more.
D)with formal presentment in response to a demand by Liu.

Question 27

To obtain HDC status, a holder must take an instrument in good faith from a transferor who likewise acts in good faith.

Question 28

A person can become an HDC only if he or she knows or has reason to know that an instrument is defective and is willing to assume the risk of its dishonor.

Question 29

A difference between the handwriting in the body of a check and in the signature affects the validity of the item and will bar a holder from HDC status.

Question 30

Anya issues a check payable to Bo, who indorses the back, gives it to Credit Union, and receives cash. The transfer of the check from Bo to Credit Union is

A)an assignment.
B)a negotiation.
C)a payment.
D)a sale.

Question 31

The shelter principle permits a holder with notice of a claim or defense to attain HDC status by reacquiring the instrument from a later HDC.

Question 32

With a few exceptions, anyone who can ultimately trace his or her title to an instrument back to an HDC can acquire the rights and privileges of an HDC.

Question 33

In most instances, a payee on a note will qualify as an HDC by virtue of the fact that he or she has dealt directly with the maker.

Question 34

If an instrument is acquired as part of a corporate purchase of assets, the holder will have only the rights of an ordinary holder.

Question 35

Rafe signs a check payable to Shop Mart, which transfers the note by negotiation to Trans-State Bank. With respect to any defenses to payment on the note that Rafe could have raised against Shop Mart, most likely Rafe can

A)raise those defenses against the bank.
B)no longer present any defense to payment.
C)not assert those defenses against the bank.
D)claim more defenses against the bank than Shop Mart.

Question 36

Factory Inc. issues a check payable to Gila, who gives it to Hometown Bank without signing it, and receives cash. The transfer of the check from Gila to Hometown is

A)an assignment.
B)a negotiation.
C)fraudulent and therefore void.
D)a sale.

Question 37

A person who takes a demand instrument knowing that demand has been made has notice that the instrument is overdue.

Question 38

A holder will be deemed to have notice of a defect in an instrument if he or she has reason to know that it exists, given all the facts and circumstances known at the time.

Question 39

Dani signs a note payable to Equity Credit, which transfers the note by assignment to Finance Collection. With respect to any defenses that Dani could have raised against Equity, most likely Dani can

A)raise those defenses against Finance.
B)no longer present any defense to payment.
C)not assert those defenses against Finance.
D)claim more defenses against Finance than Equity.

Question 40

In terms of the requirements for HDC status, first a party must be a holder of a negotiable instrument.

Question 41

Because a party's authenticating intent with respect to a note is shown by the name of the party written on the line that calls for the name of that party,

A)the name must be handwritten to negotiate the note.
B)a signature of the name must be witnessed to effect an assignment.
C)a stamped imprint of the name can be sufficient to transfer the note.
D)proof that an indorsement is legitimate is required to validate the note.

Question 42

On the back of a check "payable to Demos," Demos signs her name and negotiates the item to Ethos. To most effectively avoid a risk of loss from a theft of the check, Ethos should

A)immediately indorse the check in blank.
B)make a copy of the check and place it in a secure location.
C)write, above Demos' signature, "Pay to Ethos."
D)indorse the check "without recourse."

Question 43

An instrument payable to two or more persons in the alternative, such as a check "payable to the order of Elena or Ferrar,"

A)requires the indorsement of only of the parties to be negotiated.
B)requires the indorsement of both of the parties to be negotiated.
C)must be converted to a bearer instrument to be negotiated.
D)is nonnegotiable.

Question 44

To make Credit Bank a collecting agent on a check "payable to the order of Duane," Duane should

A)indorse the check "for deposit only."
B)refrain from signing the check before delivering it to Credit Bank.
C)write, above his signature, "Pay to Credit Bank."
D)indorse the check "without recourse."

Question 45

Resources Inc. receives a check from Steel Products Company and indorses it with a stamped imprint of its name on the back. This converts the check to

A)a bearer instrument.
B)a non-transferable instrument.
C)an order instrument.
D)a special indorsement.

Question 46

An instrument payable to two or more persons without an "and" or an "or" between the parties' names, such as a check "payable to the order of Gerhard Hans,"

A)requires the indorsement of only of the parties to be negotiated.
B)requires the indorsement of both of the parties to be negotiated.
C)must be converted to a bearer instrument to be negotiated.
D)is nonnegotiable.

Question 47

On the back of a check payable to Lo, she writes "Pay to Mei, without recourse" and signs it. This

A)does not effect the check's negotiability or any party's liability.
B)relieves Lo of liability on the check.
C)relieves Mei of liability on the check.
D)renders the check nonnegotiable.

Question 48

Coki receives a payroll check from Data Solutions Inc. and indorses it by signing her name on the back of the check. This is

A)a blank indorsement.
B)a qualified indorsement.
C)a restrictive indorsement.
D)a special indorsement.

Question 49

Edna is the payee of a bearer instrument-a promissory note in the amount of $10,000. Flem offers to irrigate Edna's ranch next week in exchange for the note. She agrees and delivers the note to Flem. Flem is

A)an HDC, because he promised to perform services at a future date.
B)an HDC, because the transferor was the original payee on the note.
C)not an HDC, because he did not acquire the instrument in good faith.
D)not an HDC, because he did not yet give value for the instrument.

Question 50

Vel indorses in blank a check payable to her order, and then loses it. Wang finds the check and, without indorsing it, sells it to Xhi. This is

A)an assignment.
B)a negotiation.
C)a bank transfer.
D)a trade acceptance.

Question 51

Farmers Field LLC negotiates a bearer instrument to Grain Co-op by delivery

A)with an assignment of its rights under a contract.
B)with any necessary indorsement.
C)without more.
D)with formal presentment in response to a demand by the payee.

Question 52

A payee or indorsee whose name is misspelled on an instrument

A)can indorse with the misspelled name, the correct name, or both.
B)must indorse with the misspelled name.
C)must indorse with the correct name.
D)is prevented from negotiating the instrument further.

Question 53

On the back of a check "payable to Huan," Huan signs her name and negotiates the item to Ito. To avoid liability on the item if it is later dishonored, Ito should

A)immediately indorse the check in blank.
B)make a copy of the check and place it in a secure location.
C)write, above Huan's signature, "Pay to Ito."
D)indorse the check "without recourse."

Question 54

Hedy draws a check "payable to the order of Ilsa or Jeto" and gives the check to Ilsa. Hedy's obligation on the check to Jeto is

A)suspended.
B)to render half of the amount of the check to each party.
C)discharged.
D)to hold the full amount of the check for the benefit of both payees.

Question 55

Rehab LLC owes $20,000 to Stonemason Inc. Rehab executes a note to Stonemason as security for the debt. This security

A)does not constitute sufficient consideration for HDC status.
B)does not satisfy the value requirement for HDC status.
C)satisfies the consideration requirement for HDC status.
D)satisfies the value requirement for HDC status.

Question 56

Emil writes and signs a check payable to "Film Arts Cinema." George, Film Arts' manager, indorses the check "For deposit only." This is

A)a blank indorsement.
B)a qualified indorsement.
C)a restrictive indorsement.
D)a special indorsement.

Question 57

A conditional indorsement on the back of an instrument

A)does not affect the right of an indorsee to enforce the instrument.
B)suspends further negotiation of the instrument until the condition occurs.
C)has the same effect as a conditional promise on the instrument's face.
D)prevents further negotiation of the instrument.

Question 58

An instrument, such as a check, drawn payable to an organization

A)can be negotiated by an authorized representative of the entity.
B)must be indorsed with a stamped imprint of the name of the entity.
C)must be converted to a bearer instrument to be negotiated further.
D)is nonnegotiable.

Question 59

Durable Goods Inc. negotiates an order instrument to Equity Finance by delivery

A)with an assignment of its rights under a contract.
B)with any necessary indorsement.
C)without more.
D)with formal presentment in response to a demand by the payee.

Question 60

Machine Shop Inc. issues a payroll check drawn on Nation Bank "payable to the order of O'Dell." O'Dell takes the check to the bank and delivers it to the teller without signing it. This is

A)an assignment.
B)a negotiation.
C)a bank transfer.
D)a trade acceptance.

Question 61

Leno makes a gift of a check to Millie who takes it in good faith and without notice of any claim, defense, or defect. With respect to this check, Millie is

A)an acceptor.
B)a good faith purchaser.
C)an ordinary holder.
D)an ordinary holder in due course.

Question 62

Rochelle fraudulently induces Sybil to sign a note. Rochelle sells the note to Terry, who does not know of the fraud and takes the note for value and in good faith, and thus becomes an HDC. Terry sells the note to Ulrich, who sells the note back to Rochelle. Does Rochelle acquire Terry's HDC rights in the note?

Question 63

An irregularity on the face of an instrument that calls into question its validity or ownership, thereby barring HDC status, occurs when

A)handwriting used in the body of a check and used in a signature differ.
B)a forged maker's or drawer's signature is visibly evident.
C)a check is antedated or postdated.
D)the amount of the item is stated in digits but not written out in numbers.

Question 64

Muni Investment Company signs a check payable to Notes & Loans Inc. to buy a promissory note executed by Omni Corporation. This check

A)does not constitute sufficient consideration for HDC status.
B)does not satisfy the value requirement for HDC status.
C)satisfies the consideration requirement for HDC status.
D)satisfies the value requirement for HDC status.

Question 65

Lamont and Marcel collaborate to defraud Nina, who is induced to give Marcel a note payable to Marcel's order. Marcel indorses the note for value to Orson, an HDC. Later, Orson sells the note to Lamont. Under the shelter principle,

A)Orson's right to repurchase the note from Lamont is limited.
B)Lamont cannot acquire HDC rights in the note.
C)Lamont attains HDC status by acquiring the note.
D)the principal amount of the note is sheltered without recourse.

Question 66

At 1 A.M., in front of EZ Credit Corporation, which is closed, Frey buys a $500 promissory note for $50 from Greco. When presented with Frey's demand for payment, Diaz, the maker of the note, could successfully claim that Frey

A)acquired the note with notice that it was overdue.
B)did not acquire the instrument in good faith.
C)did not give value for the instrument.
D)none of the choices.

Question 67

Beth, an accountant for Credits & Debits, acquires a negotiable instrument from Ellen by promising to pay its face value in thirty days. Beth acquires the status of an HDC when she

A)acquires possession of the negotiable instrument.
B)agrees with Ellen to buy the negotiable instrument.
C)pays the face value due on the instrument.
D)transfers the instrument to another party.

Question 68

Kris transfers a note, on which Lin is the maker, to Mari, who takes it for value and in good faith. Mari knows that Kris breached the contract underlying the note, giving Lin a defense against payment. With respect to this note, Mari is

A)a knowledgeable holder in due course.
B)an ordinary holder.
C)an ordinary holder in due course.
D)a knowledgeable acceptor.

Question 69

In good faith and for value, Joya gets from Kyle a negotiable bearer instrument. Joya does not know that Kyle stole the instrument. Joya is

A)an HDC.
B)not an HDC, because Kyle did not acquire the instrument for value.
C)not an HDC, because Kyle did not acquire the instrument in good faith.
D)not an HDC, because Kyle transferred the instrument without notice.

Question 70

Raul wants to transfer a check to Schmidt. The check is defective if it

A)is clearly stamped "insufficient funds."
B)contains handwritten terms.
C)is undated.
D)is payable to alternative or join payees.

Question 71

Doyle gives a check to eMarket Finance to buy 100 shares of stock in FabNu Corporation for Doyle. The price of the shares is constantly fluctuating. eMarket asks Doyle to leave the amount of the check blank and allow it to fill in the price when making the purchase. Doyle agrees. eMarket buys the stock when the price is $4,000, but fills in the check for $5,000. The check is negotiated as payment for a $5,000 debt to Guido & Hollis Accountants (G&H), which takes the check in good faith and without notice of eMarket's act. G&H later learns that eMarket was not authorized to fill in the check for $1,000 over the price. Is G&H an HDC? If so, for how much?

Question 72

The shelter principle promotes the marketability and free transferability of negotiable instruments by

A)limiting the rights and privileges of an HDC.
B)extending the benefits of HDC status.
C)permitting any holder to attain HDC status by reacquiring an instrument.
D)sheltering the principal amount of an instrument without recourse.