Deck 27: Liability Defenses and Dischapterarge

Question 1

A demand instrument must be presented for acceptance or payment within a reasonable time after its date of issue and before a secondary party becomes liable on it.

Answer 1

False

Question 2

What renders a note negotiable is the maker's unconditional promise to pay even if the note is incomplete at the time the maker signs it.

Answer 2

True

Question 3

Liability for payment on a negotiable instrument extends only to those who sign the instrument.

Answer 3

False

Question 4

A parent who co-signs a note for a student loan with his or her son or daughter is primarily liable if the note states the co-signers "collectively" promise to pay.

Question 5

A person who is primarily liable on a negotiable instrument is absolutely required to pay the instrument regardless of whether he or she has an otherwise valid defense to payment.

Question 6

A drawee places himself or herself into almost the same position as the maker of a note or the drawer of a draft when the drawee accepts the instrument.

Question 7

A person cannot be liable for payment on a negotiable instrument on the basis of signature liability unless he or she has signed it personally.

Question 8

A delay in payment or a refusal to pay an instrument when it is returned because it lacks a proper indorsement is a dishonor of the instrument.

Question 9

Because liability for payment on a negotiable instrument is immediate when the instrument is signed or issued, no action by the holder is required.

Question 10

Every party who signs a negotiable instrument is potentially liable for payment of that instrument when it comes due.

Question 11

The proper presentment of a negotiable instrument for payment can be made only by commercially reasonable written or electronic means.

Question 12

Timely notice of the dishonor of an instrument that has been properly presented for payment discharges the liability of parties who are secondarily liable on the instrument.

Question 13

Like secondary signature liability, warranty liability is subject to the conditions of proper presentment, dishonor, and notice of dishonor.

Question 14

The transfer of an instrument, with or without indorsement, extends warranty liability to any subsequent holder who takes the instrument in good faith.

Question 15

Because banks rely on transfer warranties in the check-collection process, these warranties cannot be disclaimed with regard to checks.

Question 16

Warranty liability arises in the negotiation of an instrument only when a transferor indorses it.

Question 17

Generally, when an indorsement is unauthorized, the burden of loss falls on the first party to take the instrument.

Question 18

Warranty liability does not arise when a party delivers a bearer instrument because a holder cannot hold the party liable on his or her signature on the instrument.

Question 19

An investor who signs a note on behalf of a business is primarily liable and therefore has no right to reimbursement from the payee if the investor pays.

Question 20

A person who transfers an instrument for consideration warrants to all subsequent transferees and holders who take the instrument in good faith that all signatures on the item are authentic and authorized.

Question 21

The lack or failure of consideration is a personal defense and can be used to avoid payment to an ordinary holder, an HDC, and a holder through an HDC.

Question 22

Employers Company draws a check payable to Felipe. Felipe indorses the back and negotiates the check to Guarantors Bank. Primarily liable on the check is

A)Employers Company.
B)Felipe.
C)Guarantors Bank.
D)none of the choices.

Question 23

Because a maker who issues an incomplete note will normally be liable for payment even if the note is later completed in an unauthorized manner, the alteration can be claimed as a defense against an HDC.

Question 24

To protect consumers who buy defective products, the Federal Trade Commission adopted FTC Rule 433 to effectively bolster the HDC doctrine in consumer transactions.

Question 25

The lack or failure of consideration is a personal defense and can be used to avoid payment to an ordinary holder, an HDC, and a holder through an HDC.

Question 26

A consumer who signs a note to buy a defective product continues to be liable on the note to an HDC even if the consumer returns the faulty product to the seller.

Question 27

The destruction or mutilation of an instrument is considered cancellation, and thus discharges the liability of all parties, only if it is done with the intention of eliminating obligation on the instrument.

Question 28

It is not a material alteration to change the figures on a check so that they agree with the written amount, and thus, any holder is entitled to enforce the check.

Question 29

A third party who buys a note arising from a consumer credit transaction that lacks the notice required by FTC Rule 433 is still subject to the buyer's defenses against the seller because of the otherwise harsh effect of the HDC doctrine.

Question 30

When a person forges an instrument, the person whose name is forged is not liable to an ordinary holder but must pay any HDC the value of the instrument.

Question 31

Presentment warranties protect the party to whom an altered instrument is presented because they have the effect of shifting liability back to the party who was in the best position to prevent the wrongdoing.

Question 32

A holder can impair the value of collateral given to secure payment of an instrument without affecting the liability of parties who would benefit from the collateral in the event of nonpayment.

Question 33

On a note that forms part of a consumer's contract to buy goods for personal use, the notice in the contract required by FTC Rule 433 places an HDC of the note in the position of a contract assignee.

Question 34

Bass signs a note "payable to the order of Credit Bank." Unless Bass has a valid defense against payment, his liability on this note is

A)impaired.
B)primary.
C)secondary.
D)qualified.

Question 35

Discharge from liability on an instrument cannot occur if a holder impairs another party's right of recourse-right of reimbursement-on the instrument.

Question 36

When a person claims to have been deceived into signing a negotiable instrument by being told it is something else, the level of his or her intelligence may determine whether he or she should have understood the nature of the deal before signing.

Question 37

Lon is Mill Corporation's agent and is authorized to write checks on the firm's account in North Bank. Lon writes a check "pay to the order of Ocean Shipping." Lon signs the check "Mill Corporation by Lon, agent." The bank dishonors the check. Liability extends to

A)Lon.
B)Ocean Shipping.
C)Mill Corporation.
D)North Bank.

Question 38

Ruiz writes a check drawn on his account at Security Bank and payable to the order of Twyla. The bank does not pay the check. Ruiz is

A)absolved of liability on the check.
B)liable to the payee for the amount of the check.
C)liable to the bank for the amount of the check.
D)entitled to payment of the amount of the check from the payee.

Question 39

Eton executes a preprinted promissory note to First Bank without filling in the due date. The bank does not complete the form by adding the date. The note is

A)not payable.
B)payable on demand.
C)payable thirty days after issue.
D)payable at the election of the maker.

Question 40

Although the purpose of bankruptcy is to settle finally all of the insolvent party's debts, a discharge in bankruptcy is not a valid defense against payment on an instrument to an HDC.

Question 41

Asa executes a preprinted promissory note to Business Loans without filling in the due date. The bank does not complete the form by adding the date. Asa is

A)not liable for payment on the note.
B)secondarily liable for payment on the note.
C)obligated to pay the note.
D)liable for payment on the note only at his option.

Question 42

Transfer of a note "payable to the order of Credit Company" by delivery to Debit Associates, with the payee's indorsement, for consideration, extends warranty liability

A)none of the choices .
B)only to Debit.
C)only to Debit and its immediate transferee.
D)to any subsequent holder who takes the instrument in good faith.

Question 43

Layla executes a preprinted promissory note to Metro Financial without filling in the due date. Metro completes the form with a due date that Layla authorized. The note is

A)not payable.
B)payable on the stated due date.
C)payable on demand.
D)payable at the election of the maker.

Question 44

Kira forges Lew's name as the drawer of a stolen check, drawn on Metro Bank, and makes the item payable to Kira. Lew is liable to pay the amount to

A)no one.
B)ordinary holders only.
C)ordinary holders, HDCs, and holders through HDCs.
D)HDCs only.

Question 45

Housewares Inc. warrants its goods to be free of defects. Ivy issues an instrument to Housewares for the purchase of an appliance that proves to be defective. With respect to payment on the instrument, Ivy

A)is liable only to a subsequent holder of the instrument.
B)has a universal defense.
C)has a personal defense.
D)cannot avoid it.

Question 46

Faro is an agent authorized to sign negotiable instruments on behalf of Global Supply Inc. To protect against potential liability on a note signed on the corporation's behalf, Faro should

A)not identify Global Supply nor indicate his agency status.
B)sign "Faro, Global Supply Inc.," but not indicate his agency status.
C)indicate his agency status, but not identify Global Supply.
D)identify Global Supply and indicate his agency status.

Question 47

Baer writes a check for $500 "payable to Cary" drawn on Baer's account at Debit Bank. Cary indorses and sells the check to Esau, who deposits the check in his account at Fidelity Bank. Fidelity dishonors the check. Baer or Cary may be liable for payment of the check if

A)the drawer of the check does not repudiate the dishonor.
B)timely notice of dishonor is given.
C)more than thirty days have elapsed since the check was written.
D)the check was not properly presented for payment.

Question 48

Qita has the authority to issue checks on behalf of Retail Center. Qita creates a dozen unauthorized checks that she deposits in her account at State Bank. The payee line on each check is blank. In a suit between Retail Center and State Bank over the loss, the party or parties most likely to be held liable is

A)Retail Center.
B)State Bank.
C)Retail Center and State Bank, in prorated amounts.
D)none of the choices.

Question 49

Family Farm signs and delivers a check payable to Gold Digger PC, leaving the amount blank but authorizing the payee to fill in the check for $10,000. Gold fills in $15,000 and gives the check to Hill Bank as payment on Gold's debt to the bank of that amount. As an HDC, the bank can enforce the check for

A)$0.
B)$5,000.
C)$10,000.
D)$15,000.

Question 50

Colin signs a note "payable to the order of Debit Bank." The bank indorses the note in blank and negotiates it to Equity Funds, which sells it to Financial Investments. The transfer of the note from Equity to Financial gives rise to

A)none of the choices.
B)contractual liability.
C)signature liability.
D)warranty liability.

Question 51

Textile Inc. sells goods to United Stores in exchange for a note signed by the buyer. Textile sells the note to Valley Finance Company. In this situation, transfer warranties arise because

A)Valley has no knowledge of any bankruptcy proceedings against United.
B)Textiles did not alter the note.
C)the signatures on the note were authentic and authorized.
D)the note was transferred for consideration.

Question 52

Liam, who is authorized to draw checks on Manufacturing Company's account, signs a check preprinted with the company's name with a signature that reads simply, "Liam." On this check, Liam is

A)proportionately liable.
B)primarily liable.
C)secondarily liable.
D)not liable.

Question 53

Quint brings a draft drawn on Regional Credit Union and "payable to Silo LLC" to Regional. The credit union stamps "accepted" on the face of the draft, signs it, and dates it. Regional is

A)no longer liable for payment of the draft.
B)secondarily liable for payment of the draft.
C)obligated to pay the draft when it is presented for payment.
D)liable for payment of the draft thirty days after issue.

Question 54

Property Company borrows $100,000 at 5 percent interest from Quick Loans LLC and signs a note for the amount. Without Property's authorization, the lender changes the amount of the note to $120,000 and increases the rate to 6 percent. This alteration is a defense to payment on the note against

A)no one.
B)ordinary holders only.
C)ordinary holders, HDCs, and holders through HDCs.
D)HDCs only.

Question 55

The appropriate time for presentment of a negotiable instrument for payment is determined by

A)the nature of the instrument.
B)all of the choices.
C)any usage of banking or trade.
D)the facts of the particular situation.

Question 56

Because he or she was in the best position to prevent wrongdoing with respect to an instrument, transfer and presentment warranties attempt to shift liability to

A)the drawee or payee on an instrument.
B)the holder of an unauthorized item when the wrongdoing is discovered.
C)the party on whose account an unauthorized item is made or drawn.
D)the person who dealt face to face with the wrongdoer.

Question 57

Noah signs Ola's name to a check without Ola's authorization. Noah can be held personally liable for payment on the check by

A)any holder.
B)only an HDC.
C)only an ordinary holder.
D)none of the choices.

Question 58

Klaus forges Lot's name as the maker of a note "payable to Klaus." Klaus indorses the note in blank, sells it to Mort, and disappears. Without indorsement, Mort sells the note to Nora, who, also without indorsement, sells the note to Obie. On discovery of the forgery, most likely liable to Obie is

A)none of the choices.
B)Lot.
C)Mort.
D)Nora.

Question 59

Vita gives Walt a $500 check as payment for a debt. Walt crudely increases the amount of the check to $5,000 and deposits the check in his bank account. Vita is liable for the payment of $5,000 to

A)no one.
B)Walt and his bank.
C)Walt's Bank only.
D)Walt only.

Question 60

Bravo co-signs a $15,000 note payable to College Loan Company enabling Dios to obtain a student loan. The terms of the note stated that Bravo signed "on behalf of" Dios. If Dios stops making payments on the debt, Bravo is

A)discharged from any obligation.
B)not liable because Bravo signed "on behalf of" Dios.
C)primarily liable.
D)secondarily liable.

Question 61

Flo is an administrative assistant with Global Shipping Corporation, but has no authority to sign Global checks. Flo orders merchandise from Home Furnishings Company delivered to her apartment and pays with a Global check, signing "Global Shipping Corp. by Flo, admin. assist." Home does not know that Flo has no authority to sign the check. Who is liable on the check, and why?

Question 62

Leda deceives Merchant Company into signing a note by telling the firm's staff accountant Nano that it is not a note but a receipt for a delivery of goods. In light of Nano's experience and other circumstances, a reasonable review of the instrument would have revealed its nature. Merchant is most likely liable on the note to

A)no one.
B)ordinary holders only.
C)ordinary holders, HDCs, and holders through HDCs.
D)HDCs only.

Question 63

To obtain a loan, Nero signs a note payable to Opie. Opie indorses the note and sells it to Payday Capital, which in turn indorses the note and negotiates it to Quality Investments. Nero tenders a partial payment on the note, which Quality refuses. Discharged to the extent of the tender is

A)no one.
B)Opie only.
C)Opie and Payday Capital.
D)Payday Capital only.

Question 64

Ana issues a check drawn on Best Bank payable to the order of Best, who indorses the check and cashes it at Discount Mart. Discount deposits the check into the store's account at El Centro Credit, which presents it for payment to Best Bank. The drawee's payment of the check in good faith to El Centro discharges the liability of

A)none of the parties.
B)all of the parties.
C)Ana and Best Bank only.
D)Best Bank only.

Question 65

Drill Bit Company issues a check drawn on East Bank made payable to Faux Products for a shipment of Genuine-brand machine parts. Drill Bit discovers that the goods are counterfeit and orders East Bank not to pay the check. Meanwhile, Faux negotiates the check to Haul-Away Trucking, which takes it in good faith, for value, and unaware of Faux's fraud. Entitled to payment on the check is

A)no one.
B)ordinary holders, including Haul-Away, only.
C)ordinary holders, HDCs, and holders through HDCs.
D)HDCs, including Haul-Away, only.

Question 66

Qato forges Rush's name as the drawer of a stolen check, drawn on Scrutiny Bank, makes the item payable to Qato, and deposits it in his own Scrutiny account. In response to a call from the bank, Rush ratifies the signature. In this situation, Rush is liable to pay the amount to

A)no one.
B)ordinary holders only.
C)ordinary holders, HDCs, and holders through HDCs.
D)HDCs only.

Question 67

Wang obtains a loan from Xi and signs a note for the amount payable to the lender, who indorses the note and negotiates it to Yuri. Zhang acquires the note from Yuri, and subsequently agrees not to sue Wang on the note. This discharges

A)none of the parties.
B)Xi only.
C)Xi and Yuri.
D)Yuri only.

Question 68

It is assumed that a drawer or maker will recognize his or her own signature and that a maker or an acceptor will recognize whether an instrument has been materially altered. Therefore, with respect to any of these parties who in good faith accepts an instrument, in terms of presentment warranties,

A)none of them apply.
B)only the warranty that the person obtaining acceptance is entitled to enforce the instrument applies.
C)only the warranties that the instrument has not been altered and that the person obtaining acceptance has no knowledge of an unauthorized signature apply.
D)all of them apply.

Question 69

Development Corporation obtains a business loan from Equity LLC in exchange for a note signed by the borrower. Equity alters the amount due on the note before selling it to Finance Inc., which takes it in good faith, and in turn sells it to Grande Invest Company. Grande can sue for breach of a warranty on the note

A)none of the choices.
B)when payment of the note becomes due.
C)only if Finance Inc. had reason to suspect the breach.
D)as soon as Grande has reason to know of the breach.

Question 70

To buy a truck under warranty from Detour Motors, Eli, a consumer, signs a note payable to the dealer. The note includes the notice required by FTC Rule 433. The dealer sells the note to Finance Company, which takes it in good faith, for value, and unaware of any defenses against payment. Eli discovers that the truck is defective and returns it to Detour Motors. The consumer can assert the breach of warranty to avoid payment on the note against

A)no one.
B)Detour Motors only.
C)Detour Motors and Finance Company.
D)Finance Company only.

Question 71

Equity Credit Company has in its possession an instrument dated May 1, 2019. The instrument is payable to the order of First Choice Moving & Storage Company "on June 1, 2020," for $5,000. In the upper left corner is an address for Greater Metro Development Corporation-10 Corporate Park Avenue, Chicago, Illinois-and in the lower right corner is the signature of "Hilltop Investments, Inc., By Ida, President." In the lower left corner is stamped "ACCEPTED: Greater Metro Development Corporation by John, President, May 5, 2019." On the back is the signature of "First Choice Moving & Storage Company by Kathleen, President." Who, if anyone, is primarily liable on this instrument on May 1? On May 5? Who, if anyone, is secondarily liable on this instrument?

Question 72

Rau obtains a loan from Security Funds and signs a note for the amount payable to the lender. Security Funds indorses the note and sells it to Tomas. With the intent to cancel Rau's obligation on the note, Tomas writes "Paid" across its face. This discharges the liability of

A)no one.
B)Rau only.
C)Rau and Security Funds.
D)Security Funds only.