Deck 17: Liability, Defenses, and Discharge

Question 1

Notice of dishonor can be given in any reasonable manner.

Answer 1

True

Question 2

The general law of agency does not apply to negotiable instruments.

Answer 2

False

Question 3

An imposter's indorsement on an instrument can be effective as if the real payee had signed.

Answer 3

True

Question 4

An indorser is secondarily liable on an instrument.

Question 5

An authorized agent binds a principal on an instrument if the agent clearly names the principal in the signature.

Question 6

A maker is primarily liable on an instrument.

Question 7

An unauthorized signature binds the person whose name is signed.

Question 8

A drawer's liability does not arise without notice of dishonor.

Question 9

If payment of an instrument cannot be obtained within the prescribed time, dishonor occurs.

Question 10

Failure to present an instrument on time is improper presentment.

Question 11

A refusal to pay an instrument constitutes dishonor under any circumstances.

Question 12

A person who signs an instrument without authorization can be held personally liable for payment by a holder in due course.

Question 13

If a promissory note is incomplete at the time a maker signs it, the maker is not obligated to pay.

Question 14

The dishonor of an instrument relieves secondary parties of liability.

Question 15

A maker is secondarily liable on an instrument.

Question 16

To properly present a draft for payment, a holder must present it to the drawer.

Question 17

Primary liability on a negotiable instrument is conditional.

Question 18

When an instrument has a forged indorsement, the loss usually falls on the first party to take the instrument.

Question 19

The key to liability on a negotiable instrument is a signature.

Question 20

A person is not liable on an instrument unless he or she has signed it personally or through an authorized representative.

Question 21

All parties to a negotiable instrument will be discharged when the party primarily liable on it pays to a holder the full amount due.

Question 22

Lewis makes a note payable to MaxiFinance Corporation. MaxiFinance indorses the back of the note and negotiates it to Hedge Investments Inc. Primarily liable on the note is​

A) ​none of the choices.
B) ​MaxiFinance.
C) ​Hedge.
D) ​Lewis.

Question 23

An ordinary holder can recover nothing on an instrument that has been materially altered.

Question 24

One of the transfer warranties is that the instrument has not been altered.

Question 25

Rubin writes a check drawn on his account at Clearwater Bank and payable to the order of Gwyn. The bank does not pay the check. Rubin is​

A) ​absolved of liability on the check.
B) ​liable to Gwyn 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 Gwyn.

Question 26

Fiona writes a check "pay to the order of Gerri" drawn on Fiona's account at Home State Bank. Gerri presents the check for payment to Home State, which accepts it. Primarily liable on the check is​

A) ​Fiona.
B) ​Gerri.
C) ​Hearthstone.
D) ​none of the choices.

Question 27

Warranty liability arises only from a transferor's signature.

Question 28

Under the fictitious payee rule, the payee's indorsement is not treated as a forgery.

Question 29

When there is a breach of an underlying contract for which an instrument was issued, the drawer of a check can order his or her bank to stop payment.

Question 30

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

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

Question 31

A person who transfers an instrument for consideration makes transfer warranties to all subsequent transferees who take the instrument in good faith.

Question 32

Personnel Company draws a check payable to Felix. Felix indorses the back and negotiates the check to Guaranty Bank. Primarily liable on the check is​

A) ​Personnel.
B) ​Felix.
C) ​Guaranty Bank.
D) ​none of the choices.

Question 33

Presentment warranties protect the person to whom an instrument is presented for payment.

Question 34

A person whose name is forged on an instrument normally has no liability to pay any holder the value of the instrument.

Question 35

Transfer of an order instrument by indorsement and delivery extends warranty liability to any subsequent holder who takes the instrument in good faith.

Question 36

If delivery of goods becomes impossible, a party who has issued a draft or note on the contract has a defense for not paying it.

Question 37

The completion of an originally incomplete instrument in an unauthorized manner is not a defense against payment on the instrument to an HDC.

Question 38

Under the fictitious payee rule, an innocent holder can hold the maker or drawer liable on the instrument.

Question 39

Discharge in bankruptcy is no defense on any instrument regardless of the status of the holder.

Question 40

Presentment warranties can be disclaimed only with respect to checks.

Question 41

Community Bank receives a check drawn by Dennis. The check lacks a proper indorsement. Payment can be postponed without dishonor​

A) ​indefinitely.
B) ​under no circumstances.
C) ​for thirty days.
D) ​until the proper indorsement is obtained.

Question 42

Dulcey agrees to cosign a promissory note for Excavation Equipment Inc. to buy a backhoe. The note is payable to Premier Bank. Dulcey is an accommodation​

A) ​drawee.
B) ​indorser.
C) ​maker.
D) ​drawer.

Question 43

To borrow the money to buy a car, Megan signs a note "payable to the order of Purchase Financing." Olaf cosigns the note to guarantee the repayment of the loan. Olaf's liability on this note is​

A) ​contractual.
B) primary.
C) ​secondary.
D) ​qualified.

Question 44

Darby writes a check to Education Loan Management, Inc., that is drawn on Darby's account at Federal Bank. If the bank does not accept the check, liability for its amount is on​

A) Darby.
B) ​Education Loan Management.
C) ​Federal Bank.
D) ​no one.

Question 45

Fran signs a note "payable to the order of Guaranty Bank." Guaranty indorses the note in blank and negotiates it to Holly, who sells it to Iona. Liability associated with the transfer of the note from Holly to Iona is​

A) ​conceptual.
B) ​contractual.
C) ​signature.
D) ​warranty.

Question 46

Resource Industries Inc.'s agent Polly is authorized to draw checks on the company's account in Sterling Bank. The checks are preprinted with the company name. Polly writes a check "pay to the order of Don [signed] Polly." Don presents the check for payment. If the bank dishonors it, liability extends to​

A) ​no one.
B) ​Resource Industries.
C) ​Sterling Bank.
D) ​Polly.

Question 47

Logan is Mining Corporation's agent and is authorized to write checks on Mining's account in Northwest Bank. Logan writes a check "pay to the order of Oceanside Resort." Logan signs the check "Mining Corporation, by Logan, agent." Northwest Bank dishonors the check. Liability extends to​

A) ​Logan.
B) ​Oceanside.
C) ​Mining Corporation.
D) ​no one.

Question 48

Fact Pattern 17-1
Chuck is the maker of a $200,000 promissory note payable to Investors Corporation. Investors indorses the note to Equity Lenders, which in turn indorses it to Select Holdings LLC, which then indorses it to Global Bank, the present holder.
Refer to Fact Pattern 17-1.Suppose that Select Holdings pays Global Bank on the note. With timely notice to the proper parties, Select Holdings may then collect payment on the note from​

A) ​Chuck, Investors, or Equity Lenders.
B) ​Chuck or Investors only.
C) ​Equity Lenders only.
D) ​no one.

Question 49

Fact Pattern 17-2
Lisa writes a check on her account at Metro Bank to Niklas to pay a debt. Niklas negotiates the check by indorsement to O'Leary, who presents it for payment to Prime Bank.
Refer to Fact Pattern 17-2.If Prime Bank dishonors the check, O'Leary can obtain payment from Niklas​

A) ​if O'Leary timely notifies Niklas.
B) ​only if Lisa refuses to pay the check.
C) ​only to the extent that Lisa overpaid her debt to Niklas.
D) ​under no circumstances.

Question 50

Elena, an employee of Builders, Inc., forges the signature of Carly, Builders's president, on a company check and cashes it at Delta Bank. Carly would ratify Elena's actions by​

A) ​asking Delta Bank to prosecute Elena for forgery.
B) ​discharging Elena from Builders's employment.
C) ​entering into a repayment agreement with Elena.
D) ​filing criminal charges against Elena herself.

Question 51

Orson signs a check "pay to the order of Painless Dental" drawn on Orson's account in Quantum Bank. To impose liability on Orson if the bank dishonors the check, Painless Dental should present it for payment within​

A) ​one year.
B) ​six months.
C) ​ten days.
D) ​thirty days.

Question 52

Jen is the maker of a note, on which Bart is secondarily liable. Credit Instruments Company (CIC) is the current holder of the note. Bart will be obligated to pay the note if​

A) ​Jen defaults on the note.
B) ​CIC breaches a transfer warranty.
C) ​CIC negotiates the note to Delta Collection Agency, a third party.
D) ​CIC presents the note for payment.

Question 53

Gulf Bank receives a check drawn by Hayley. The check is received after the established "cutoff" hour. Payment can be postponed without dishonor​

A) ​indefinitely.
B) ​under no circumstances.
C) ​for thirty days.
D) ​until the following business day.

Question 54

Hilltop Bank is an HDC of a note for $1,000 on which there is the forged signature of "Rob." If sued on the note by Hilltop, Rob's best defense would be​

A) ​illegality.
B) ​fraud in the execution.
C) ​material alteration.
D) ​forgery.

Question 55

Cici signs a check "pay to the order of Doug" drawn on Cici's account in East Bank. Cici shows the check to Frieda, who agrees that the signature is Cici's and that Doug is owed the amount the check represents. Doug signs the back of the check. Liability on this check extends to​

A) ​Cici, Doug, and East Bank.
B) ​Cici and Doug only.
C) ​Cici and Frieda only.
D) ​Frieda only.

Question 56

Fact Pattern 17-1
Chuck is the maker of a $200,000 promissory note payable to Investors Corporation. Investors indorses the note to Equity Lenders, which in turn indorses it to Select Holdings LLC, which then indorses it to Global Bank, the present holder.
Refer to Fact Pattern 17-1.Global Bank properly presents the note to Chuck for payment, but he dishonors it. With timely notice to the proper parties, Global Bank may collect payment on the note from​

A) ​Investors, Equity Lenders, or Select Holdings.
B) ​Investors or Equity Lenders only.
C) ​Select Holdings only.
D) ​no one.

Question 57

Len signs a note "payable to the order of Account Collection Agency." Unless Len has a valid defense against payment, his liability on this note is​

A) ​immediate.
B) ​imposed only after payment is demanded.
C) ​postponed until the note is dishonored by the payee.
D) ​suspended until payment is due.

Question 58

Olivia is Physicians Clinic agent and is not authorized to sign checks or notes on its behalf. Despite the lack of authority, Olivia issues a note "payable to the order of Loan Company [signed] Physicians Clinic, by Olivia." Liability on this note extends to​

A) ​Physicians Clinic.
B) ​Olivia.
C) ​Loan Company.
D) ​no one.

Question 59

Fact Pattern 17-2
Lisa writes a check on her account at Metro Bank to Niklas to pay a debt. Niklas negotiates the check by indorsement to O'Leary, who presents it for payment to Prime Bank.
Refer to Fact Pattern 17-2.Niklas is​

A) ​not liable for payment under any circumstances.
B) ​primarily liable.
C) ​secondarily liable.
D) ​contractually liable.

Question 60

Celine issues a note "payable to the order of Celine," forges Dash's signature as the maker, and indorses the note "pay to Erica." Celine sells the note to Erica, who negotiates it by indorsement and delivery to Forest. Forest can extend liability to​

A) ​no one.
B) ​Celine.
C) ​Dash.
D) ​all of the parties.

Question 61

Nan, an accountant for Outdoor Outfitters, Inc., issues company checks payable to nonexistent persons drawn on Outdoor's account at Peerless Bank. Nan indorses the checks and deposits them in her account. Outdoor discovers the theft and demands that Peerless recredit its account. Peerless's best defense is that​

A) ​Nan was not authorized to issue the checks.
B) ​Outdoor was in a better position than Peerless to prevent the theft.
C) ​Peerless did not know that the checks were not to be paid.
D) ​the checks were the property of Outdoor, not Peerless.

Question 62

Dental Clinic agent Emma is authorized to write checks on the clinic's account in Finance Bank. Pharma Corporation is a clinic supplier. Emma writes a check on the clinc's account "pay to the order of Pharma [signed] Emma," indorses it in Pharma's name, and deposits it in her own account at Third Bank. If the bank collects payment, the ultimate party most likely to suffer the loss is​

A) ​no one.
B) ​Dental Clinic.
C) ​Finance Bank.
D) ​Pharma.

Question 63

Equity Credit Company has in its possession an instrument dated May 1, 2014. The instrument is payable to the order of First Choice Moving & Storage Company "on June 1, 2015," 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, 2014." 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 64

Owen is a holder of a note obtained from Purchase Money, Inc. Regarding the defenses against payment of the note to which Purchase Money is subject, Owen, as an ordinary holder, is subject to​

A) ​more defenses.
B) ​no defenses.
C) ​some defenses, but not as many.
D) ​the same defenses.

Question 65

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

Question 66

Home Products, Inc., warrants its goods to be free of defects. Ian issues an instrument to obtain a thermos from Home Products that leaks. With respect to payment on the instrument, Ian​

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

Question 67

Rona issues a check for $4,000, dated May 1, to Stavros. The check is drawn on United Bank. Stavros indorses the check and transfers it to Tony. Stavros will be liable on the check if​

A) ​United Bank dishonors the check.
B) ​Tony loses the check.
C) ​Rona stops payment on the check.
D) ​all of the choices.

Question 68

Curt writes a check on his account at North Bank to Mandy, a famous singer. The person claiming to be Mandy is an imposter, however, named Debra. Debra indorses the check to Portions, a casino, for which North Bank cashes it. Ultimately, the loss will most likely fall on​

A) ​Curt.
B) ​North Bank.
C) ​Mandy.
D) ​Portions.

Question 69

Vera gives Will a $500 check as payment for a debt. Will crudely increases the amount of the check to $5,000 and deposits the check in his First Bank account. Vera is liable for the payment of $5,000 to​

A) ​no one.
B) ​Will and First Bank.
C) ​First Bank only.
D) ​Will only.

Question 70

Harley signs a check payable to Pro Accountants, P.C., and gives it to Pro, leaving the amount blank but authorizing the firm to fill in the check for $10,000. Pro fills in $15,000 and negotiates the check to Valley Bank, to whom Pro owes $15,000. Valley Bank, an HDC, can enforce the check for​

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

Question 71

Realty Acquisitions borrows $1,000,000 at 4 percent interest from Shady Credit Lenders and signs a promissory note for that amount. Without the borrower's authorization, Shady changes the amount of the note to $1,200,000 and increases the rate to 8 percent. Shady materially altered the note when​

A) Realty borrowed $1,000,000.
B) ​Shady changed the amount and the interest rate.
C) ​Shady decided to change the terms.
D) ​Shady failed to obtain Realty's authorization.

Question 72

Isabel transfers a note, for consideration, to Juliet by blank indorsement and delivery. Juliet transfers the note to Kip, who takes it in good faith. In this situation, Isabel warrants to Kip that​

A) ​he is entitled to enforce the note.
B) ​the note has been fully paid.
C) ​any defense to payment on the note can be assered against him.
D) ​none of the choices.