Deck 27: Negotiation, Holder in Due Course, and Defenses

Question 1

A conditional endorsement destroys negotiability.

Answer 1

False
Explanation: No type of endorsement can prohibit further transfer; once negotiable, an instrument remains negotiable. But a restrictive endorsement can limit what is done with it.

Question 2

An endorsement to prohibit further endorsement prohibits further transfer.

Answer 2

False
Explanation: No type of endorsement can prohibit further transfer; once negotiable, an instrument remains negotiable. But a restrictive endorsement can limit what is done with it.

Question 3

Which of the following is a written document signed by the maker or drawer with an unconditional promise or order to pay a certain sum in money on demand or at a specified time to the order of bearer?

A) An acknowledged instrument.
B) A contract instrument.
C) A negotiable instrument.
D) A holder instrument.
E) A delivered instrument.

Answer 3

C
Explanation: A negotiable instrument is a written document signed by the maker or drawer with an unconditional promise or order to pay a certain sum of money on demand or at a specified time to the order of bearer (UCC Section 3-104).

Question 4

Receiving an instrument as a gift satisfies the requirement of taking an instrument for value.

Question 5

Which of the following is an instrument payable to a specific,named payee?

A) A bearer instrument.
B) A delivery instrument.
C) An order instrument.
D) A transfer instrument.
E) An acknowledgement instrument.

Question 6

Order paper must be ______ as well as _____ to be negotiated.

A) Stamped with an allonge; delivered
B) Delivered; transferred
C) Transferred; delivered
D) Negotiated; held
E) Endorsed; delivered

Question 7

In Russia a transaction involving a promissory note is a legitimate documentary transaction.

Question 8

Which of the following is an instrument payable to cash or whoever is in possession of the instrument?

A) A bearer instrument.
B) A delivery instrument.
C) An order instrument.
D) A transfer instrument.
E) An acknowledgement instrument.

Question 9

A payee may not be a holder in due course.

Question 10

Helen worked for ABC Company as the company treasurer.She took 20 of ABC Company's checks,labeled as belonging to ABC Company.Over the course of one year,she signed and mailed the checks to American Express,her own credit card company,to pay her own credit card debt.Assuming the court follows the case in the text,Watson Coatings Inc.,v.American Express Travel Services Inc.,which of the following is the most likely result in a lawsuit by ABC Company against American Express to recover the amounts of the checks?

A) ABC Company will prevail because American Express, as a payee, does not qualify as a holder in due course.
B) ABC Company will prevail because American Express should have realized that fraud was involved from the fact that the checks were ABC Company checks.
C) ABC Company will prevail because fraud was involved.
D) American Express will prevail and will not be required to return funds.
E) American Express will have to return ½ of the funds because the parties were equally at fault, American Express for taking the checks, and ABC Company for not more carefully supervising its employee.

Question 11

A time instrument becomes overdue at any date after the expressed due date on the instrument.

Question 12

An instrument is dishonored when a party refuses to pay the instrument such as when a bank refuses to pay because insufficient funds exist.

Question 13

A restrictive endorsement may limit the transferability of the instrument.

Question 14

For negotiation,which of the following types of paper require only delivery of the instrument to the holder by the payee?

A) Bearer
B) Delivery
C) Order
D) Transfer
E) Acknowledgement

Question 15

A party cannot be a holder in due course of a non-negotiable instrument.

Question 16

Which of the following was the result in Mid-Atlantic Tennis Courts Inc.,v.Citizens Bank and Trust Company of Maryland,the case in the text in which an employee of the plaintiff fraudulently deposited into his own account at the defending bank checks for which the plaintiff was payee,and the plaintiff sued the defending bank for checks endorsed by it "for deposit only" or with no endorsement?

A) The court ruled that because the defending bank was merely the depositary bank, it held no responsibility to the plaintiff.
B) The court ruled that because employee fraud was involved, the defending bank held no responsibility to the plaintiff.
C) The court ruled that because a fraud was involved, regardless of whether or not it was on the part of plaintiff's employee, the defending bank held no responsibility to the plaintiff.
D) The court ruled that the defending bank was liable to the plaintiff for checks bearing the endorsement "for deposit only," but not for the checks with no endorsement because as to those checks, the bank was entitled to assume that the depositor was entitled to deposit the checks.
E) The court ruled that plaintiff was entitled to recover from the bank for all the checks.

Question 17

Once an instrument is negotiable,it remains negotiable.

Question 18

In the process of negotiation,what is meant by the term "delivery"?

A) The physical handing of an instrument from someone entitled to it to the person intended to receive it.
B) The passing of a warranty that the instrument is collectible.
C) The passing of a warranty that an instrument qualifies as a negotiable instrument.
D) The passing of a warranty that the recipient is a holder.
E) The passing of a warranty that the recipient is a holder in due course.

Question 19

Which of the following did the court determine on appeal in Wawel Savings Bank v.Jersey Tractor Trailer Training Inc.,the case in the text in which a lender who perfected an interest in a debtor's collateral claimed to have priority in bankruptcy over an entity who later entered into an agreement whereby it purchased rights to the debtor's accounts receivables?

A) Under the "first in time" rule, the court ruled in favor of the lender who perfected the interest in the debtor's collateral.
B) Under the "first to file" rule, the court ruled in favor of the lender who perfected the interest in the debtor's collateral.
C) The court ruled in favor of the purchaser of receivables on the basis that the agreement the lender had with the debtor did not expressly prohibit the sale of receivables.
D) The court ruled in favor of the purchaser of receivables on the basis that an immediate transaction for value was involved.
E) The court remanded the case for a determination as to whether the purchaser of receivables was a holder in due course or a purchaser of instruments in which case it would prevail.

Question 20

A bank has given value for a negotiable instrument to the extent that the bank has a security interest in the instrument.

Question 21

A(n)___________ is a person receiving an endorsement.

A) Allonge
B) Transferor
C) Transferee
D) Endorser
E) Endorsee

Question 22

A(n)______ endorsement is the endorser's signature along with a named endorsee.

A) Blank
B) Allonge
C) Qualified
D) Special
E) Specific

Question 23

An endorsement that places a condition on payment is referred to as which of the following types of endorsements?

A) Conditional endorsement.
B) Trust endorsement.
C) Endorsement to prohibit further endorsement.
D) Bearer endorsement.
E) Conditional bearer endorsement.

Question 24

Which of the following results in an endorsement is considered qualified?

A) A special endorsement.
B) Restricted endorsement.
C) Addition of the words, "without recourse."
D) Addition of the words, "conditional entrustment."
E) Addition of the words, "trust endorsement."

Question 25

Which of the following is the payee's or last endorsee's signature and nothing else?

A) A special endorsement.
B) An allonge.
C) A blank endorsement.
D) A qualified endorsement.
E) A restricted endorsement.

Question 26

The words,"Pay to Allan Smith" followed by the endorser's signature create a(n)______ endorsement.

A) Blank
B) Allonge
C) Qualified
D) Special
E) Specific

Question 27

An instrument that reads,"Pay to the order of Jones and Green," establishes ________ payees.

A) Joint
B) Concurrent
C) Consecutive
D) Alternative
E) Alternate

Question 28

What is the effect of an unqualified,blank endorsement?

A) It turns previous order paper into bearer paper.
B) It turns previous bearer paper into order paper.
C) It turns a blank endorsement into a special endorsement.
D) It turns an allonge into an endorsement.
E) It turns an endorsement into an allonge.

Question 29

Which of the following is a version of a qualified endorsement?

A) Blank, special, and allonge.
B) Special and allonge, but not blank.
C) Special and blank, but not allonge.
D) Blank and allonge, but not special.
E) There are no qualified endorsements.

Question 30

Which of the following is the term for a person creating an endorsement?

A) An allonge
B) A transferor
C) A transferee
D) An endorser
E) An endorsee

Question 31

Which of the following types of endorsements is used when the instrument is being transferred to an agent or trustee for the benefit of either the endorser or a third party?

A) Conditional endorsement.
B) Trust endorsement.
C) Endorsement to prohibit further endorsement.
D) Bearer endorsement.
E) Conditional bearer endorsement.

Question 32

If there is no room on an instrument for an endorsement or if all the room has been taken by previous endorsements,a(n)______ may be attached.

A) Acknowledgement
B) Blank endorsement
C) Special endorsement
D) Allonge
E) Codicil

Question 33

In the event of a misspelled name,how may the holder endorse the document?

A) Only with the misspelled name.
B) Only with the holder's actual name or the misspelled name.
C) Only with the misspelled name followed by the actual name.
D) With the holder's actual name, with the misspelled name, or with the misspelled name followed by the actual name.
E) Endorsement is impossible in such a situation.

Question 34

The statement,"Pay to Constance only," with the endorser's signature is an example of which of the following types of endorsements?

A) Conditional endorsement.
B) Trust endorsement.
C) Endorsement to prohibit further endorsement.
D) Bearer endorsement.
E) Conditional bearer endorsement.

Question 35

For negotiation,which of the following types of paper require delivery and an endorsement by the holder?

A) Bearer
B) Delivery
C) Order
D) Transfer
E) Acknowledgement

Question 36

Which of the following types of endorsements attempt to either limit the transferability of the instrument or control the manner of payment under the instrument?

A) Blank qualified.
B) Special qualified.
C) Restrictive.
D) Conditional.
E) Trust.

Question 37

Which of the following are types of unqualified endorsements?

A) Blank and special.
B) Allonge and special.
C) Allonge and blank.
D) Qualified and blank.
E) Qualified and special.

Question 38

Which of the following may endorse an instrument made payable to a legal entity such as a partnership?

A) The managing partner only.
B) The financial officer only.
C) The bookkeeper only.
D) The treasurer only.
E) Any authorized representative.

Question 39

An instrument that reads,"Pay to the order of Jones or Green," is payable to _________ payees.

A) Joint
B) Concurrent
C) Consecutive
D) Alternative
E) Alternate

Question 40

Which of the following is not an example of a restrictive endorsement?

A) The endorsement for deposit or collection only.
B) The endorsement to prohibit further endorsement.
C) The conditional endorsement.
D) The trust endorsement.
E) The endorsement specifying without recourse.

Question 41

Which of the following is true regarding the complaint of Mary that she did not also endorse the instrument?

A) She is correct because both names are required in order to provide legal endorsement.
B) She is correct in that her name was needed for legal endorsement, but that is only the case because of the name misspelling of Annie's name.
C) She is correct because regardless of whether the payees are listed with no designation as to whether they are alternate or joint, or whether the words, "or," or "and," are used to designated payees, any listed payee must endorse a note in order for it to be properly payable.
D) She is incorrect because Annie properly endorsed the note, and only her signature was needed.
E) She is incorrect, but only if it can be established that Bill Brown lacked knowledge that she had not given her consent to the form of the endorsement.

Question 42

Which of the following is true regarding Mary's claim that the endorsement by Annie was illegal because the note misspelled Annie's name?

A) Mary is correct.
B) Mary is correct, but only because Annie signed the note, "Green," instead of "Greene," as such was on the note.
C) Mary is correct, but only because two payees are listed.
D) Mary is incorrect.
E) Mary is incorrect unless she can prove that Susie intentionally and purposefully spelled the name wrong to prevent negotiation.

Question 43

What type of endorsement did Susan make on the back of the check?

A) A special endorsement.
B) A special qualified endorsement.
C) A blank endorsement.
D) A blank qualified endorsement.
E) An ineffective endorsement because the words "without recourse" have no effect.

Question 44

Which of the following is true regarding the concept of negotiable instruments in Japan?

A) The law governing securities in Japan is technical with little ambiguity or arbitrary application.
B) The Japanese recognize the legal concept of yuka shoken, which means "valuable securities."
C) The Japanese have a single legislative act governing both commercial paper and investment securities.
D) The Japanese Commercial Code recognizes the term negotiable instruments.
E) Japanese law does not regulate investment securities.

Question 45

Susan purchased a refrigerator from ABC Appliance store for $800.She takes the refrigerator home and discovers that it is defective.She calls ABC Appliance store and tells them that she would like to return the refrigerator.ABC Appliance store tells her that they have assigned the promissory note she provided the store in order to purchase the refrigerator to a finance company and that the finance company,as a holder in due course,is not subject to defenses.Which of the following is true regarding the rights of parties?

A) The finance company is subject to the defenses of Susan because of the Federal Trade Commission rule created to protect consumers.
B) ABC Appliance store is correct in that Susan cannot assert her defenses against the finance company.
C) Susan can assert her defenses against the finance company only if she can prove that the finance company had knowledge that ABC Appliance store sold defective equipment from time to time.
D) Susan can assert her defenses against the finance company only because she gave notice of the problem within 5 days of the sale.
E) Susan can assert her defenses against the finance company only if she agrees to arbitrate the dispute.

Question 46

Which of the following does not prevent a holder from being a holder in due course?

A) Notice that the instrument is overdue.
B) Notice that the instrument has been dishonored.
C) Notice that the instrument was issued as part of a series that is in default.
D) Notice that the instrument has been altered or contains an unauthorized signature.
E) Notice that an employee other than the treasurer of a company signed an instrument.

Question 47

Which of the following is true regarding the requirement that a party take an instrument for value in order to be considered a holder in due course?

A) The party must provide consideration.
B) The party must have provided a bargained-for promise.
C) The party must take the instrument in exchange for a promise that has already been performed.
D) The party must have begun performance on a promise and have provided consideration.
E) The party must have provided consideration or received the note as a gift.

Question 48

Which of the following is the result if a payee who receives an instrument with missing information completes the missing information in a way that is inconsistent with the intent of issuer,and the instrument has been clearly materially altered?

A) The person taking the instrument cannot become a holder in due course.
B) The alteration does not prevent a person taking the flawed instrument from becoming a holder in due course.
C) There is no effect so long as the payee can establish that he or she did not receive any more consideration than that to which the payee was entitled.
D) The instrument is considered materially altered, but it only prevents transfer to a holder in due course if the holder in due course had knowledge that the payee had done the alteration.
E) The instrument is considered materially altered, but it only prevents transfer to a holder in due course if the transferee participated in the material alteration.

Question 49

Which of the following does the UCC define as,"honesty in fact and the observance of reasonable commercial standards for fair dealing?"

A) Commercial standards.
B) Subjective reasonableness.
C) Objective reasonableness.
D) Good faith.
E) Reasonable investigation.

Question 50

Which of the following is true regarding how a holder may take an instrument for value,but not become a holder in due course?

A) The UCC provides that the only method by which a holder may take an instrument for value but not become a holder in due course is when the holder purchases the instrument at judicial sale or under legal process.
B) The UCC provides that the only method by which a holder may take an instrument for value, but not become a holder in due course is when the holder acquires an instrument through taking over an estate.
C) The UCC provides that a holder may take an instrument for value, but not become a holder in due course under the following two circumstances: (1) when the holder purchases the instrument at judicial sale or under legal process, and (2) when the holder acquires an instrument through taking over an estate.
D) The UCC provides that a holder may take an instrument for value, but not become a holder in due course under the following three circumstances: (1) when the holder purchases the instrument at judicial sale or under legal process, (2) when the holder acquires an instrument through taking over an estate, and (3) when the holder purchases the instrument as part of a bulk transaction not in the regular course of business of the transferor.
E) The UCC does not recognize circumstances under which a holder may take an instrument for value but not become a holder in due course, although under common law, a person who acquired an instrument through taking over an estate was classified as a holder but not a holder in due course.

Question 51

Which of the following is a party who is in possession of an instrument that is payable to the party or to the bearer of the instrument?

A) A holder.
B) A bearer.
C) A payee.
D) An issuer.
E) A transferee.

Question 52

Would the school be able to require that Susan cover the amount of the check based on the law of negotiable instruments?

A) Yes, because she signed on the back with a blank unqualified endorsement.
B) Yes, because she signed on the back with a special qualified endorsement.
C) Yes, because she signed on the back regardless of the type of endorsement.
D) No, because she signed on the back using the words, "without recourse."
E) No, because the check was not properly delivered to Shifty.

Question 53

Which of the following is false regarding the elements a party must meet in order to be considered a holder in due course?

A) The party must be a holder of a complete and authentic negotiable instrument.
B) The holder must take the instrument for value.
C) The holder must take the instrument in good faith.
D) The holder must take the instrument without notice of defects.
E) The holder must either pay for the instrument or receive it as a gift.

Question 54

Which of the following is the principle that if an item is transferred from one person to another,the transferee acquires all the rights to transfer or have in the item?

A) The shelter principle.
B) The transfer principle.
C) The transferee principle.
D) The transferor principle.
E) The holder principle.

Question 55

According to the UCC,which of the following is true regarding when a person has notice of a fact?

A) Under the UCC a person has notice of a fact only when the person has actual knowledge of the fact.
B) Under the UCC a person has notice of a fact under the following two circumstances: (1) when the person has actual knowledge of the fact, and (2) when the person receives notice or notification of the facts.
C) Under the UCC a person has notice of a fact under the following three circumstances: (1) when the person has actual knowledge of the fact, (2) when the person receives notice or notification of the facts, and (3) when the person has reason to know the fact exists.
D) Under the UCC a person has notice of a fact only when the person has signed a verification to the effect that notice was received.
E) Under the UCC a person has notice of a fact only when the person receives written notification either through regular mail or electronic means.

Question 56

What is the effect of the designation,"Bill Brown,without recourse?"

A) It has no effect on any subsequent holder.
B) It has no effect on anyone, including, but not limited to, any subsequent holder.
C) It means that Bill Brown does not provide any guarantees and that if the instrument is later dishonored, he cannot be held liable.
D) It means that Bill Brown is providing that any subsequent holder cannot be held liable.
E) Bill Brown is providing that neither he nor the person who transferred the instrument to him cannot be held further liable to any subsequent holder.

Question 57

Which of the following was the result in Michael J.Kane,Jr.v.Grace Kroll,the case in the text in which the defendant issued a check to the plaintiff to cover the plaintiff's sale of cows to the defendant's son,but later stopped payment on the check because her son said he could not repay her?

A) The plaintiff was not allowed to recover because the stop payment order prevented the plaintiff from being a holder in due course.
B) The plaintiff was not allowed to recover because, although he was a holder in due course, the stop payment order negated his entitlement to payment.
C) The plaintiff was not allowed to recover because the defendant established a lack of consideration to her.
D) The plaintiff was allowed to recover on a contract theory although he was not a holder in due course.
E) The plaintiff was allowed to recover because he was a holder in due course.

Question 58

Was the check properly delivered to Shifty?

A) Yes, because it was bearer paper, delivery occurred whenever possession was taken.
B) Yes, because it was order paper, delivery occurred whenever possession was taken.
C) Yes, but only because it was thereafter presented to the bank and cashed.
D) Yes, because both Shifty and the bank are considered holders in due course.
E) No, because he was not entitled to receive it.

Question 59

Which of the following was the result in the Case Opener,involving the check taken in good faith by a market; later returned to the market based on a stop payment order; and purchased from the market by the plaintiff who sued Cigna,the issuer of the check?

A) The plaintiff was allowed to recover under the shelter principle and holder-in-due-course status.
B) The plaintiff was not allowed to recover because he took the check knowing of a problem.
C) The plaintiff was allowed to recover because the market misrepresented the status of the check.
D) The plaintiff was not allowed to recover because of the shelter principle and holder-in-due-course status.
E) The plaintiff was not allowed to recover because the market misrepresented the status of the check.

Question 60

Which of the following is true regarding the status of Sam?

A) He is not a holder in due course because he did not provide value.
B) He is not a holder because he did not provide value.
C) He is not a holder nor is he a holder in due course because he did not provide value.
D) The fact that a gift was involved does not prevent Sam from being a holder in due course so long as other requirements are satisfied.
E) The fact that a gift was involved does not prevent Sam from being a holder in due course so long as other requirements are satisfied and Sam is not a minor.

Question 61

Susan,who owned a pet store,bought a number of dog leashes from a business called Happy Paws in Florida.Susan,who was somewhat unorganized,was very busy and told her assistant,Zach,to pay her bills,including the bill she owed to Happy Paws.Susan had lost the invoice.She knew that she owed Happy Paws $1,000,and simply told Zach to send Happy Paws $1,000.She told Zach she did not know the address,but that he should be able to find it on the Internet.Zach checked on the Internet and found a listing and an address for a company called Happy Paws in North Carolina.Zach,therefore,sent the check for $1,000 to Happy Paws in North Carolina.The bookkeeper for Happy Paws in North Carolina did not act in bad faith and thought that the check was for goods sent to Susan.The treasurer endorsed Susan's check along with a number of other checks to ABC Financing Company in order to receive operating funds.Happy Paws in North Carolina was not affiliated with the Florida Happy Paws.In fact,Happy Paws in North Carolina sold booties for children.Happy Paws in North Carolina was also in financial difficulty and went bankrupt.Happy Paws in Florida contacted Susan regarding the $1,000 they were owed.Susan and Zach then discovered their mistake.They requested that Happy Paws in North Carolina refund the money,but bankruptcy prevented that.Susan then attempted to get the funds returned from ABC Financing.What is the most likely result regarding Susan's attempt to receive the funds from ABC Financing and why?

Question 62

Barry is sending his brother-in-law and agent,Richard,who he does not particularly trust,to deposit into Barry's business bank account a check belonging to Barry.What is the best way for Barry to endorse the check to attempt to limit any misappropriation?

Question 63

Discuss whether or not you believe that our law should recognize holder in due course status with its resulting rights.

Question 64

What is the effect of the alteration of the check on Susan's status as a holder in due course?

A) The alteration has no effect because a holder is not charged with examining an instrument presented for payment.
B) The alteration will likely prohibit her from being a holder in due course.
C) The alteration will affect her status as a holder in due course only if she had been put on notice of prior criminal behavior in the past on the part of Bob.
D) The alteration will affect her status as a holder in due course only if the issuer can establish that it was not negligent in allowing a thief to gain access resulting in the alteration.
E) On the basis that the law does not want to unduly burden holders, the alteration will affect her status as a holder in due course only because the instrument was written for an amount in excess of $500.

Question 65

Set forth the requirements a party must meet in order to be considered a holder in due course.

Question 66

What is the effect of Susan receiving notice the day after she cashed the check for Bob that the check had been stolen?

A) The notice has no effect on her status as holder in due course because it was provided after she cashed the check.
B) The notice prevents her from being a holder in due course.
C) The notice prevents her from being a holder in due course only if Bob had been convicted of check cashing offenses in the past since she should have checked his criminal record.
D) The notice prevents her from being a holder in due course only if she subjectively knew that Bob had been charged criminally with check cashing violations in the past.
E) The notice prevents her from being a holder in due course because it was presented to a business; only individuals can avoid the effect of notice of theft by cashing a check prior to receiving notice.

Question 67

Set forth the five conditions under which a holder may take an instrument for value.

Question 68

What is the effect on Susan's status as a holder in due course in taking the check from the customer that was four months old?

A) There is no effect on her status as a holder in due course because an instrument such as a check is only considered overdue if it is outstanding for 150 days.
B) There is no effect on her status as a holder in due course because an instrument is only considered overdue if it is outstanding for 180 days.
C) There is no effect on her status as a holder in due course because an instrument is only considered overdue if it is outstanding for one year.
D) It has no effect because a check is never considered overdue.
E) She would not be considered a holder in due course because a check is considered overdue 90 days after its date.

Question 69

Which of the following is true regarding Sam's rights in relation to the check?

A) As a holder, Sam may demand payment from either Susie, Annie, or Mary.
B) As a holder in due course, Sam may demand payment from either Susie, Annie, or Mary.
C) As a holder, Sam may demand payment from either Susie or Annie, but not Mary.
D) As a holder in due course, Sam may demand payment from either Susie or Annie, but not Mary.
E) Sam may not demand payment from either Susie, Annie, or Mary.