Deck 25: Transfer and Holder in Due Course

Question 1

A holder need not actually have the instrument in his possession.

Answer 1

False

Question 2

The shelter rule did not exist at common law.

Answer 2

False

Question 3

If the issuer and the person paying an instrument subject to the impostor rule are both negligent, comparative negligence would apply.

Answer 3

True

Question 4

Arnie deposits a check from his sister in First City Bank, but forgot to indorse it. First City cannot become a holder until Arnie completes the indorsement.

Question 5

If a person paying an instrument subject to the impostor rule fails to exercise ordinary care, the issuer may recover from the payor to the extent the payor's negligence contributed to the loss.

Question 6

"Order paper" is negotiated by delivery only.

Question 7

A "without recourse" indorsement eliminates all of an indorser's liability.

Question 8

The transfer of a nonnegotiable promise or order operates as an assignment.

Question 9

A qualified indorsement destroys negotiability.

Question 10

An indorsement "Pay Alice Adams" is an assignment rather than a negotiation since it lacks words of negotiability.

Question 11

Whether a transfer is by assignment or by negotiation, the transferee does not acquire the rights the transferor had.

Question 12

The impostor rule is an exception to the general rule that negotiation of any order instrument requires a valid indorsement by the person to whose order the instrument is payable.

Question 13

The courts will never presume a negotiation of order paper was intended; the parties must clearly indicate a negotiation or else the courts will presume an assignment was intended.

Question 14

The FTC upholds the preferential position enjoyed by a holder in due course of instruments concerning debts arising out of consumer credit contracts.

Question 15

Kripps, who is a holder in due course, buys a note made by Aldridge, who is under bankruptcy protection, to Huron Motors. Even though Aldridge's debt was discharged through bankruptcy, Kripps can collect on the note.

Question 16

Cyrus takes a $700 check to Wheeling State Bank, where he asks for $100 in cash back and he deposits the remaining balance of $600. Wheeling State Bank has "given value" t o the extent of $100 according to the requirements of holder in due course status.

Question 17

An indorsement must be written on the instrument itself.

Question 18

An indorsement "for deposit" is a collection indorsement.

Question 19

Sadie is the bookkeeper for the Binkly Construction Company. She makes out the payroll; prepares all of the payroll checks and reconciles the bank statements for the firm. She decides to increase her income by padding the payroll; accordingly, she makes out a check in the name of someone who does not exist. She then indorses the check with the payee's name and her name and cashes the check herself at First Bank where the company has its account. Under the fictitious payee rule, Binkly and not the bank will be liable for this check.

Question 20

The principal advantage of negotiable instruments is their legitimacy.

Question 21

Mamie induces Reagan, by fraud in the inducement, to make an instrument payable to the order of Mamie . She subsequently negotiates the instrument to Jeff, a holder in due course. If Mamie later reacquires the instrument from Jeff , Mamie will succeed to Jeff 's rights as a holder in due course under the shelter rule.

Question 22

Revised Article 3 provides that the impostor rule does not include an impostor who impersonates an agent of a principal and who induces someone to create a negotiable instrument payable to the principal.

Question 23

An indorsement in trust creates a trust for the benefit of the indorser or others.

Question 24

Mycha indorsed a check from her aunt by signing her name on the back, but she dropped it on the subway on the way to the bank. The check is now comparable to cash because it is a bearer instrument.

Question 25

Tina forges Vivian's indorsement on a promissory note and negotiates it to Ned. If Vivian subsequently ratifies Tina's act, both Tina and Vivian are liable to Ned on the note and Vivian's ratification relieves Tina from civil liability to Vivian.

Question 26

To acquire the preferential rights of a holder in due course, a person either must meet the requirements of the UCC or must inherit the rights under the shelter rule.

Question 27

A negotiation to transfer an instrument can be effective even if it is  obtained by fraud, duress, or mistake.

Question 28

A negotiation is void if the transaction in which it occurs is void.

Question 29

The requirements for negotiation are the same for both order paper and bearer paper.

Question 30

An indorsement may be simple or complex.

Question 31

Defenses that may not be asserted against a holder in due course are referred to as personal (or contractual) defenses.

Question 32

David makes and delivers a promissory note for $500 to the order of Kerry, who indorses the note and delivers it to Stan in payment of an outstanding debt Kerry owes him. Stan has given value as far as the Code requirements for a holder in due course.

Question 33

An executory promise, which is valid consideration to support a contract, is also the giving of value to support holder in due course status.

Question 34

Jennifer, who stole a check "payable to cash," cannot be a holder since she did not receive possession by voluntary transfer.

Question 35

A forged or otherwise unauthorized signature necessary to negotiation breaks the chain of title to the instrument.

Question 36

"Pay to the order of Jose Dejesus" is a special indorsement.

Question 37

The two types of indorsements are blanket or partial.

Question 38

Any transfer for value of an instrument is a negotiation.

Question 39

An indorsement "Pay to Jones Construction Company upon completion of the job at No. 10 Park Place" is ineffective under Revised Article 3; the indorsee can enforce the instrument.

Question 40

Jill issues a negotiable promissory note to Cherice, who indorses it and delivers it to Lee. If Lee knows that the note was given to Cherice in exchange for worthless securities, Lee cannot be a holder in due course.

Question 41

The case, State of Qatar v. First American Bank of Virginia , held that:

A) the phrase "for deposit only" is not an effective restrictive indorsement.
B) depositary banks are not required to handle checks consistent with the restrictive indorsement.
C) the phrase "for deposit only" effectively limits the depositary bank to handle the instrument in a manner consistent with the transaction.
D) a stolen check which is indorsed in blank cannot be freely negotiated by the bearer.

Question 42

A person can be a holder if:

A) the instrument has been issued to that person.
B) the instrument has been transferred to that person by negotiation.
C) the instrument is ambiguous.
D) Either the instrument has been issued to that person or  the instrument has been transferred to that person by negotiation.

Question 43

Delivery alone is insufficient to negotiate an instrument when it is payable to:

A) order and the last indorsement is in blank.
B) cash and signed by the drawer.
C) bearer and is not indorsed.
D) the order of John Jones and is not indorsed.

Question 44

A negotiation to transfer an instrument cannot be effective if it is  made by a person without contractual capacity.

Question 45

Marty Sandidge wrote a check payable to "Charles Saxon" when the payee's real name was spelled "Charles Saxton." In order to obtain payment, Charles:

A) must have Marty void the check and rewrite another check with Charles's name spelled correctly.
B) may be required by a person taking the instrument for value to sign both "Charles Saxon" and the correct spelling of his name.
C) must sign only his real name with the correct spelling or he will be liable for forgery.
D) must sign only "Charles Saxon" since that was the name on check.

Question 46

Vicki, a bookkeeper for Emilio Enterprises, steals some of the checks she is supposed to post to her employer's account. She forges her employer's indorsement. The indorsement is:

A) effective as the employer's indorsement because Vicki's duties included processing the checks.
B) effective as the employer's indorsement because of the shelter rule.
C) not effective as the employer's indorsement since Vicki was an impostor.
D) not effective as the employer's indorsement because an unauthorized signature necessary to negotiation is inoperative.

Question 47

A restrictive indorsement:

A) disclaims contract liability.
B) removes warranty liability.
C) attempts to restrict the rights of the indorsee in some fashion.
D) always destroys negotiability.

Question 48

In a nonconsumer transaction, a holder in due course takes the instrument free from:

A) only personal claims.
B) all defenses of any party with whom he has not dealt, except for a limited number of defenses that are available against anyone, including a holder in due course.
C) the defense of incapacity, duress, or illegality that renders the obligation void.
D) no claims.

Question 49

Landscaping company Phyllrox Co. purchased a forklift from Brown's Equipment Co. Phyllrox made a down payment in cash and signed a promissory note for $7,500. For $7,200 Brown's sold the note to Corporate Bank, who took it in good faith without notice of any problems with it. After Phyllrox used the forklift for two weeks, it broke down and could not be repaired. Phyllrox refuses to make any more payments to Corporate Bank. In this case:

A) Phyllrox can assert the failure of the forklift as a defense to making payments to Corporate Bank.
B) Corporate Bank is a holder in due course.
C) Both of these are correct.
D) Neither answer is correct.

Question 50

Assuming a note made by Barbara payable to Carol Jones, which indorsement will limit negotiability?

A) "Pay Carol Jones ."
B) "For deposit only, Acct. #602-043. Carol Jones ."
C) "Pay Connie for Carol M. Jones ."
D) "Pay Claudia as attorney for John Jones. Carol Jones ."

Question 51

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

A) assignment.
B) negotiation.
C) indorsement.
D) accommodation.

Question 52

Ricardo is the holder of a check that contains the indorsement "Without Recourse, (signed) Mary Roberts." This indorsement:

A) makes further indorsement impossible.
B) requires a special indorsement by the transferee.
C) limits the liability of Mary Roberts.
D) limits the liability of all subsequent holders, including Ricardo.

Question 53

Time paper that states it is due on July 1, which is a Sunday, is overdue on:

A) July 1.
B) July 2.
C) July 3.
D) It depends on when the instrument is presented for payment.

Question 54

Real defenses include all but:

A) forgery of the instrument.
B) minority of the maker.
C) fraudulent alteration.
D) theft of a bearer instrument.

Question 55

A(n) ___________ is the voluntary transfer to a third party of the rights arising from a contract.

A) negotiation of bearer paper
B) negotiation of order paper
C) assignment
D) negotiation

Question 56

The customary manner of disclaiming the indorser's contractual liability is to add which of the following sets of words before or after his signature?

A) For collection only.
B) Without recourse.
C) Pay to the order of.
D) For deposit only.

Question 57

Opal had a check for $294 made out to her. She indorsed it with her name and gave it to Daryl who, in return, agreed to paint her living room the next Saturday. In this case:

A) the check is not negotiable.
B) Daryl is not a holder.
C) Daryl is not a holder in due course.
D) Daryl has given value for the check.

Question 58

An anomalous indorsement is:

A) one that specifically identifies the person to whose order the instrument is payable.
B) an indorsement made by a person that is not the holder of the instrument.
C) one that makes the signer liable on the instrument as an indorser.
D) Both one that specifically identifies the person to whose order the instrument is payable  and  an indorsement made by a person that is not the holder of the instrument.
E) Both  an indorsement made by a person that is not the holder of the instrument and  one that makes the signer liable on the instrument as an indorser.

Question 59

Federal Reserve Board guidelines for checks:

A) require indorsements to be in blue or black ink.
B) must be followed or the check will not go through the banking system.
C) require bank indorsements to be made within 2 inches of the left edge of the back of the check.
D) require indorsements to be in cursive handwriting.

Question 60

Laura is in possession of a check which contains the following indorsement, "Sam Smith, without recourse, for collection only." The indorsement would be classified as:

A) blank, qualified, and restrictive.
B) blank, unqualified, and unrestrictive.
C) special, unqualified, and restrictive.
D) special, qualified, and unrestrictive.

Question 61

Michael issues a check to Paula. She negotiates the check to Hal as payment for a used television set. Hal has no notice of any claims or defenses and takes the check in good faith. Hal indorses the check and gives it to his son as a birthday present. Is Hal's son a holder in due course? What rights does he have with respect to the check? If Michael has a defense of fraud in the inducement against Paula, can he use that defense against Hal or Hal's son?

Question 62

Lily drew a check on First Bank payable to Shelley. Lily signed the check in the normal place at the bottom, right side of the check. Glenn signed the check at the bottom left of the front of the check. In what capacity will the Code interpret Glenn to have signed? Will Glenn be able to introduce parol evidence to establish his intent?

Question 63

Which of the following is required regarding indorsements?

A) An indorsement must be written on the back side of the instrument.
B) Indorsements must comply with Federal Reserve Board guidelines in order for the instrument to be negotiable.
C) Indorsements must be made on a separate sheet of paper stapled to the instrument.
D) It must be the signature of the indorser.

Question 64

Which of the following is not a restrictive indorsement?

A) "Pay only Jane Doe."
B) "For deposit."
C) "Pay any bank."
D) "For collection."

Question 65

Personal defenses include all but:

A) lack of consideration.
B) minority of the maker.
C) fraud in the inducement.
D) breach of contract.

Question 66

Identify the type of indorsement each of the following represents.
a. Pay to Bill, for collection.
b. Pay to the order of The American Bank for deposit only.
c. Pay to Albert, without recourse.
d. John Smith.

Question 67

Carmen needs quick cash, so she thinks of a scheme. She tells Frank she is collecting for Laotian refugees. Frank writes a check for $100 payable to the order of Carmen. Carmen indorses the check and delivers it to Pete, who doesn't know of Carmen's scam, for $90 cash. Pete gives the check to Emily as a present. Frank discovers Carmen's deception and refuses to pay Emily. Will he win?

A) No, because Emily is a holder in due course.
B) No, because of the shelter rule.
C) Yes, since Emily did not take the check for value.
D) Yes, since the check was not negotiated to Emily.

Question 68

Indorsements with ineffective restrictions include which of the following?

A) The indorser makes the rights of the indorsee subject to the happening or nonhappening of a specified event.
B) An indorsement "For Collection."
C) An indorsement stating "Pay to Melanie for Sharon."
D) An indorsement that says "For deposit only."

Question 69

Identify the defenses that can be used against a holder in due course and those defenses that cannot be used against a holder in due course.

Question 70

What is negotiation? How does one become a "holder" of an instrument?

Question 71

One who is in possession of a negotiable instrument that is drawn, issued, or indorsed to him or to his order or that is indorsed in blank is a(n):

A) bearer.
B) holder.
C) transferor.
D) assignee.

Question 72

Sharp Finance Company has furnished Keith with some pre-printed forms for customers to sign to finance repairs on their homes. After the customers sign the notes naming Keith as the payee, he sells them to Sharp Finance. Sometimes Keith is busy and does a poor job on the homes so he can get on to the next job. When customers complain, he says he'll get around to fixing the problems. If the customers don't pay the note, Sharp Finance sues them. Can the customers use the defenses they have against Keith against Sharp? Explain.