Deck 18: Holder in Due Course, Liability, and Defenses

Question 1

The purpose of the shelter principle is to discourage the marketability of instruments.

Answer 1

False
Explanation: The purpose of the shelter principle is to encourage the marketability of instruments.The greater protection offered to a holder in due course is very appealing; thus,allowing parties to achieve the rights of a holder in due course through the shelter principle encourages financial interactions.

Question 2

A time instrument becomes overdue ninety days after it is executed.

Answer 2

False
Explanation: A time instrument,an instrument payable at a definite time,becomes overdue at any time after the expressed due date on the instrument.

Question 3

The "for value" requirement for holder-in-due-course status is the same as taking something for consideration.

Answer 3

False
Explanation: In other areas of the law,taking something for value usually means taking something with consideration,a bargained-for promise.However,the "for value" requirement for holder-in-due course status is more stringent than consideration.The party must take the instrument in exchange for a promise that has already been performed.The Uniform Commercial Code explicitly excludes from "value" any promises that have not yet been performed.In other words,the party must suffer an out-of-pocket loss.

Question 4

The purpose of holder-in-due-course status is to protect a financial intermediary.

Question 5

A holder in due course is free from the defenses of fraud in the inducement in the underlying contract,unauthorized completion or material alteration of the instrument,and unauthorized acquisition of the instrument.

Question 6

Even if a holder is aware that an instrument he or she is taking has been dishonored,the holder can still become a holder in due course by paying value for the instrument.

Question 7

Regardless of whether a transfer is through an endorsement,transfer warranties apply to any future holders.

Question 8

A party who signs an instrument to provide credit for another party who has also signed the instrument is a denomination party.

Question 9

A payee can be considered a holder in due course.

Question 10

According to the Uniform Commercial Code,a signature can be a name or a word,but not a mark or a symbol,used by a party to authenticate a writing.

Question 11

According to the shelter principle,if a holder cannot attain holder-in-due course status,the holder cannot acquire the rights and privileges of a holder in due course even if the item is being transferred from a holder in due course.

Question 12

A holder in due course must take the negotiable instrument in good faith.

Question 13

A holder can take an instrument for value if the holder acquires a security interest or some other lien in the instrument.

Question 14

When a party receives a negotiable instrument as a gift,the party will be a holder instead of a holder in due course.

Question 15

The Uniform Commercial Code's definition of good faith is strictly a subjective standard.

Question 16

A party who is conditionally liable on an instrument must pay the stated amount when it is presented for payment and make the payment without resorting to any other party.

Question 17

According to the Uniform Commercial Code,a party may be a holder in due course of a non-negotiable instrument.

Question 18

When a party signs a negotiable instrument without knowing that it is in fact a negotiable instrument,the party can claim fraud in the exactum.

Question 19

If a demand instrument is a check,the Uniform Commercial Code states that the check is overdue 30 days after its date.

Question 20

The Uniform Commercial Code imposes liability if the party,or the party's agent,signs the instrument.

Question 21

According to the Uniform Commercial Code,a party who signs as an issuer of an instrument is liable for the amount of the instrument ________.

A)as soon as it is issued
B)three business days after the instrument is executed
C)three calendar days after the instrument is presented for payment
D)three business days after the instrument is presented for payment
E)three calendar days after the instrument is executed

Question 22

A party who is ________ liable is responsible for paying the amount designated on an instrument if the primarily liable party defaults.

A)primarily
B)secondarily
C)customarily
D)statutorily
E)strictly

Question 23

Which of the following sections of the Uniform Commercial Code establishes the four requirements for becoming a holder in due course?

A)1-202
B)2-302
C)2A-302
D)3-302
E)4-202

Question 24

What type of liability arises when the transfer of the instrument breaches a warranty associated with the instrument?

A)Warranty
B)Payee
C)Signature
D)Primary
E)Secondary

Question 25

According to the Uniform Commercial Code,________ is defined as "honesty in fact and the observance of reasonable commercial standards of fair dealing."

A)merchantability
B)subjective reasonableness
C)objective reasonableness
D)good faith
E)commercial practicability

Question 26

According to the Uniform Commercial Code,if a demand instrument is a check,the check is overdue ________ after its date.

A)60 days
B)90 days
C)180 days
D)six months
E)one year

Question 27

Which of the following is true regarding liability on negotiable instruments?

A)Makers and acceptors are primarily liable for a negotiable instrument,while drawers and endorsers are secondarily liable
B)Drawers and endorsers are primarily liable for a negotiable instrument,while makers and acceptors are secondarily liable
C)Makers and drawers are primarily liable for a negotiable instrument,while acceptors and endorsers are secondarily liable
D)Acceptors and endorsers are primarily liable for a negotiable instrument,while makers and drawers are secondarily liable
E)Makers,acceptors,drawers,and endorsers are all secondarily liable for a negotiable instrument.

Question 28

What type of liability occurs when a person signs a negotiable instrument?

A)Warranty
B)Payee
C)Signature
D)Primary
E)Secondary

Question 29

The "for-value" requirement for becoming a holder in due course is more stringent that the ________ requirement of ordinary contract law.

A)fraud
B)good faith
C)consideration
D)bad faith
E)detrimental reliance

Question 30

Which principle states that if an item is transferred from one person to another,the transferee acquires all the rights that the transferor had in the item?

A)Shelter
B)Holder
C)Holder-in-due-course
D)Assignee
E)Third-party-beneficiary

Question 31

A party who is in possession of an instrument that is payable to the party or to the bearer of the instrument is known as a(n)________.

A)holder
B)third-party beneficiary
C)payee
D)assignee
E)transferee

Question 32

What type of notice prevents 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 is overdue,notice that the instrument has been dishonored,or notice that the instrument was issued as part of a series that is in default.
E)Notice that the instrument is overdue or notice that the instrument has been dishonored,but not notice that the instrument was issued as part of a series that is in default.

Question 33

To be considered a holder in due course,the holder must take the instrument in ________.

A)trust
B)good faith
C)abeyance
D)remission
E)accord and satisfaction

Question 34

Which type of party must pay the stated amount of an instrument when it is initially presented for payment?

A)A party who is secondarily liable
B)A drawer or a party who is secondarily liable
C)An endorser
D)A drawer or an endorser
E)A party who is primarily liable

Question 35

A holder in due course is free from the following personal defenses:

A)Lack or failure of consideration and breach of contract.
B)Fraud in the inducement in the underlying contract and breach of contract.
C)Lack or failure of consideration and fraud in the inducement in the underlying contract.
D)Lack or failure of consideration,breach of contract,and fraud in the inducement in the underlying contract.
E)Fraud in the essence,discharge of the party liable through bankruptcy,and material alteration of a completed instrument.

Question 36

Which of the following is not a requirement for becoming 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 37

Which of the following is true regarding negotiable instruments in England?

A)Promissory notes can be negotiated between parties.
B)Checks can be negotiated between parties.
C)Bills of exchange can be negotiated between parties.
D)Promissory notes,checks,and bills of exchange can be negotiated between parties.
E)Promissory notes and checks can be negotiated between parties,but bills of exchange cannot.

Question 38

According to the Uniform Commercial Code,when does a person have notice of a fact?

A)When the person has actual knowledge of the fact.
B)When the facts and circumstances known to the person at the time in question give the person reason to know that the fact exists.
C)When the person receives notice or notification of the facts.
D)When the person has actual notice of the fact,when the facts and circumstances known to the person at the time in question give the person reason to know that the fact exists,or when the person receives notice or notification of the facts.
E)When the person has actual knowledge of the fact or the facts and circumstances known to the person at the time in question give the person reason to know that the fact exists,but not when the person receives notice or notification of the fact.

Question 39

When a party receives a negotiable instrument as a gift or acquires it through mistake,the party will become a(n)________.

A)holder
B)holder in due course
C)assignee
D)delegatee
E)incidental beneficiary

Question 40

If Adam Brewer possesses a check that states "Payable to Adam Brewer," Adam is a(n)________.

A)assignee
B)holder
C)holder in due course
D)delegatee
E)incidental beneficiary

Question 41

Which of the following is a person who orders the drawee to pay?

A)Maker
B)Acceptor
C)Drawer
D)Endorser
E)Promisor

Question 42

A(n)________ is a party who signs an instrument to provide credit for another party who has also signed the instrument.

A)subrogation party
B)accommodation party
C)third party beneficiary
D)incidental beneficiary
E)intervenor

Question 43

Which of the following may be considered a commercially reasonable manner by which notice of dishonor can be given to a secondarily liable party?

A)Orally
B)In writing
C)Electronically
D)Orally,in writing,or electronically
E)By certified letter,return receipt requested only

Question 44

Which of the following must occur for a drawer to become liable on an instrument?

A)The holder of the instrument must present the instrument in a proper and timely fashion.
B)The instrument must be dishonored.
C)Notice of the dishonor must be given to the drawer.
D)The holder of the instrument must present the instrument in a proper and timely fashion,the instrument must be dishonored,and notice of the dishonor must be given to the drawer.
E)The holder of the instrument must present the instrument in a proper and timely fashion and the instrument must be dishonored,but no notice of dishonor is required because the party adversely affected by the dishonor may proceed directly to court.

Question 45

After initially receiving notice of dishonor,when must parties other than a collection bank give notice of dishonor to a secondarily liable party?

A)Before midnight of the next day
B)Within 48 hours
C)Within 7 days
D)Within 10 days
E)Within 30 days

Question 46

If the party that dishonors an instrument is a collection bank,when must the collecting bank give notice of the dishonor to a secondarily liable party?

A)Before midnight of the next banking day
B)Within 48 hours
C)Within 7 days
D)Within 10 days
E)Within 30 days

Question 47

A(n)________ is a person who signs an instrument to restrict payment of it,negotiate it,or incur liability.

A)maker
B)acceptor
C)drawer
D)endorser
E)promisor

Question 48

When will a party's negligence not permit the party to escape liability for an unauthorized signature?

A)Any type of negligence will result in a party being unable to escape liability for an unauthorized signature.
B)The issue of negligence is irrelevant as to whether a party may escape liability for an unauthorized signature,because a party is always liable for an unauthorized signature.
C)A party who is negligent may not escape liability for an unauthorized signature if the party whose signature was forged behaved so negligently as to substantially contribute to the making of the forgery.
D)A party's negligence will not permit the party to escape liability for an unauthorized signature,but only if the negligence amounts to a finding of recklessness.
E)A party's negligence will not permit the party to escape liability for an unauthorized signature,but only if the negligence involved a certified check.

Question 49

Zachary,who has been authorized to write a check from a company account to pay employees,draws bonus checks from the company account for five imaginary employees; he then endorses the checks in their names and deposits the checks into his own bank account.Which of the following is true regarding whether the company will be required to take the loss on the checks?

A)Under the fictitious payee rule,the company will be required to take the loss on the checks unless the company can obtain the funds from Zachary.
B)Under the imposter rule,the company will be required to take the loss on the checks unless the company can obtain the funds from Zachary.
C)Under the transferor rule,the company will be required to take the loss on the checks unless the company can obtain the funds from Zachary.
D)Under the employee-liability rule,the company will be able to recover from any bank that cashed the check in addition to Zachary.
E)Under the Banking Liability Enhancement Act of 2009,the company will be able to recover from any bank that cashed the check in addition to Zachary.

Question 50

Under the Uniform Commercial Code,how can a proper presentment be made?

A)By any commercially reasonable means
B)Through a clearinghouse procedure
C)At a place designated in the instrument
D)By any commercially reasonable means,through a clearinghouse procedure,or at a place designated in the instrument
E)Through a clearinghouse procedure or at the place designated in the instrument,but not by any commercially reasonable means

Question 51

How can an accommodation party sign an instrument?

A)As a maker or a drawer,but not as an acceptor or an endorser.
B)As an acceptor or an endorser,but not as a maker or a drawer.
C)As a maker or an acceptor,but not as a drawer or an endorser.
D)As a drawer or an endorser,but not as a maker or an acceptor.
E)As a maker,a drawer,an acceptor,or an endorser.

Question 52

Which of the following are types of warranties regarding instruments?

A)Transfer and acknowledgement
B)Presentment and acknowledgement
C)The implied warranty of merchantability and the implied warranty of title,but not the implied warranty of fitness for a particular purpose
D)Transfer,presentment,the implied warranty of merchantability,the implied warranty of title,and the implied warranty of fitness for a particular purpose
E)Transfer and presentment

Question 53

A(n)________ accepts and signs a draft to agree to pay the draft when it is presented.

A)maker
B)acceptor
C)drawer
D)endorser
E)promisor

Question 54

Carl,without Eddie's knowledge,impersonates Eddie and thereby convinces Connie,who has never seen Eddie,to write a check to Eddie.Carl forges Eddie's name on the check and deposits it into his,Carl's,account.Which of the following is true regarding whether Connie will be liable for the amount of the check?

A)Under the forgery rule,Connie will be held liable.
B)Under the transferor rule,Connie will be held liable.
C)Under the payee rule,Connie will be held liable.
D)Under the imposter rule,Connie will be held liable.
E)Under the fictitious payee rule,Connie will not be held liable.

Question 55

Which of the following is true if an instrument contains more than one endorsement?

A)Each endorser is liable for the full amount to any subsequent endorser or to any holder.
B)Only the last endorser is liable to the holder,and no prior endorsers are liable to a subsequent endorser.
C)Each endorser is liable for the full amount to the subsequent endorser,but only the last endorser is liable to any holder.
D)The last endorser is liable to the holder,whereas subsequent endorsers are responsible for reimbursing previous endorsers in proportion to the number of endorsers that exist.
E)Each endorser is liable to the holder in proportion to the number of endorsers.

Question 56

Which of the following is true regarding the liability of an accommodation party?

A)As a maker,an accommodation party has primary liability,but as an endorser,the accommodation party has secondary liability.
B)An accommodation party has primary liability both as a maker and as an endorser.
C)An accommodation party has secondary liability both as a maker and as an endorser.
D)An accommodation party has primary liability as either a maker or endorser,but only if all other parties to the instrument have filed for and received bankruptcy protection.
E)An accommodation party has primary liability as a maker only if all other parties to the instrument have filed for and received bankruptcy protection,and secondary liability in any other case regardless of whether the accommodation party is a maker or an endorser.

Question 57

When a holder presents an instrument in a timely and proper manner but acceptance or payment is refused,the instrument has been ________.

A)annulled
B)dishonored
C)converted
D)rescinded
E)executed

Question 58

What was the result in the Rakestraw v.Rodriguez case referenced in the textbook,a case in which a husband had forged his wife's signature to obtain a loan to start a grocery store?

A)The court affirmed the criminal liability of the husband,but remanded the case for further findings regarding the propriety of the husband's prison sentence for forgery.
B)The court remanded the case for further findings regarding whether the wife gave her husband express authority to sign her name.
C)The court ruled that the wife's actions in sharing in profits and in helping run the business effectively voided her signature.
D)The court ruled that the wife's actions in sharing in profits and in helping run the business effectively ratified her signature.
E)The court ruled that the wife's actions in sharing in profits and in helping run the business effectively rescinded her signature.

Question 59

If an instrument is not an unaccepted draft presented to a drawee,which of the following presentment warranties is applicable?

A)That the warrantor of the instrument is entitled to enforce the instrument.
B)That the instrument has not been altered.
C)That the warrantor has no knowledge that the drawer's signature or the draft is unauthorized.
D)That the warrantor of the instrument is entitled to enforce the instrument,that the instrument has not been altered,and that the warrantor has no knowledge that the drawer's signature or the draft is unauthorized.
E)That the warrantor of the instrument is entitled to enforce the instrument and that the warrantor has no knowledge that the drawer's signature or the draft is unauthorized,but not that the instrument has not been altered.

Question 60

Which of the following results in liability of the principal because the principal approved of an unauthorized agent's signature?

A)Ratification
B)Authorization
C)Acknowledgement
D)Rescission
E)Accord and satisfaction

Question 61

When can a transferee bring suit against a transferor for a breach of warranty regarding a negotiable instrument?

A)As soon as a transferee discovers a breach of warranty has occurred,he or she can bring suit against the transferor.
B)A transferee must wait at least 3 business days after he or she discovers that a breach of warranty has occurred before bringing suit against the transferor.
C)A transferee must wait at least 5 calendar days after he or she discovers that a breach of warranty has occurred before bringing suit against the transferor.
D)A transferee must wait at least 10 business days after he or she discovers that a breach of warranty has occurred before bringing suit against the transferor.
E)A transferee must wait at least 30 calendar days after he or she discovers that a breach of warranty has occurred before bringing suit against the transferor.

Question 62

Hot Dress.Doreen writes a check for a dress to Hot Dresses,Inc.,a small specialty shop owned primarily by Betty.Betty was getting ready to go on an extended European vacation and temporarily closed down the shop the day after the dress sale to Doreen.When Betty returned,she had a number of other things to do and did not take Doreen's check and some other checks to the bank for three months.Betty was independently wealthy and only ran the shop as a hobby,so she had not been in need of funds.When Betty finally took Doreen's check to the bank,Betty requested that her bank,ABC Bank,deposit the check into her account.When ABC Bank,however,requested payment from Doreen's bank,XYZ Bank,the check was dishonored because of insufficient funds in Doreen's account.Although Betty did not particularly need the funds,she did not like to feel as if she had been cheated; therefore,she demanded that Doreen make the check good.As defined by the Uniform Commercial Code,which of the following actions constituted presentment?

A)When Doreen issued the check to Hot Dresses,Inc.
B)When Betty took the check to ABC Bank
C)When ABC Bank requested payment from XYZ Bank
D)When XYZ Bank notified Betty that it would not pay due to insufficient funds
E)When Betty requested that Doreen to make good on the check

Question 63

Run Around.Millie issues a note to Bob.Bob endorses the note and transfers it to Anne.Anne endorses the note and transfers it to Henry.In a timely fashion,Henry endorses the note and presents it to Millie for payment.When Henry presents the note to Millie,she asks him for reasonable identification.He did not have any identification with him and told her that she had no right to dishonor the instrument.Millie,however,refused to provide him the funds until he returned with proper identification.Nevertheless,when he returned with proper identification,Millie refused to pay the note,claiming that she lacked the funds with which to do so.Henry proceeded immediately to request that Anne pay the note,but she told him that he would have to get his money from Bob,who cannot be found.Which of the following is the likely result if Henry sues Anne,Bob,and Millie?

A)The judge is likely to rule that Henry can recover from Anne,Bob,or Millie.
B)The judge is likely to rule that Henry's only option of recovery is against Millie.
C)The judge is likely to rule that Henry's only option of recovery is against Anne.
D)The judge is likely to rule that Henry can recover against Bob and that Bob may recover against Millie,but Henry cannot recover directly from Anne.
E)The judge is likely to rule that Henry's only option for recovery is against Bob.

Question 64

A right to ________ is the ability of a party to seek reimbursement.

A)rescission
B)recourse
C)renunciation
D)revocation
E)recusal

Question 65

Hot Dress.Doreen writes a check for a dress to Hot Dresses,Inc.,a small specialty shop owned primarily by Betty.Betty was getting ready to go on an extended European vacation and temporarily closed the shop the day after the dress sale to Doreen.When Betty returned,she had a number of other things to do and did not take Doreen's check and some other checks to the bank for three months.Betty was independently wealthy and only ran the shop as a hobby,so she had not been in need of funds.When Betty finally took Doreen's check to the bank,Betty requested that her bank,ABC Bank,deposit the check into her account.However,when ABC Bank requested payment from Doreen's bank,XYZ Bank,the check was dishonored because of insufficient funds in Doreen's account.Although Betty did not particularly need the funds,she did not like to feel as if she had been cheated; therefore,she demanded that Doreen make the check good.Which of the following parties would be considered the drawer of the check Doreen presented to Betty at Hot Dresses,Inc.?

A)Doreen
B)Hot Dresses,Inc.
C)Betty,because she owns Hot Dresses,Inc.
D)Doreen's bank
E)Betty's bank

Question 66

Personal defenses to the payment of an instrument include:

A)Breach of contract or warranty
B)Fraud in the inducement
C)Illegality
D)Breach of contract or warranty,fraud in the inducement,and illegality
E)Illegality and lack or failure of consideration,but not breach of contract or warranty

Question 67

Run Around.Millie issues a note to Bob.Bob endorses the note and transfers it to Anne.Anne endorses the note and transfers it to Henry.In a timely fashion,Henry endorses the note and presents it to Millie for payment.When Henry presents the note to Millie,she asks him for reasonable identification.He did not have any identification with him and told her that she had no right to dishonor the instrument.Millie,however,refused to provide him the funds until he returned with proper identification.Nevertheless,when he returned with proper identification,Millie refused to pay the note,claiming that she lacked the funds with which to do so.Henry proceeded immediately to request that Anne pay the note,but she told him that he would have to get his money from Bob,who cannot be found.Which of the following is true regarding Anne's statement to Henry that he must seek recovery from Bob?

A)Anne is correct.
B)Anne is correct,but only if Bob is able to pay and has not filed bankruptcy.
C)Anne is correct in that Henry should seek recovery from Bob only if Millie has filed bankruptcy because,otherwise,Henry should be seeking primary payment from Millie.
D)Anne is correct unless the notice is for over $10,000,in which case Henry can seek recovery from her without resorting to recovery from Bob or Millie.
E)Anne is incorrect.Henry may seek recovery from her without first seeking recovery from Bob or Millie.

Question 68

Real defenses apply to ________,while personal defenses do not apply to ________.

A)all parties; holders in due course
B)holders; holders in due course
C)holders; endorsers
D)all parties; holders
E)all parties; endorsers

Question 69

Check Cashing Business.Susan owns and operates a check cashing business.A customer,Bob,claiming to be Sam,came in and cashed a $2,000 check issued by ABC Trucking to Sam.The day after Susan cashed the check,she received a notice from ABC Trucking that some checks had been stolen.It was later discovered that the customer had forged Sam's name on the check issued by ABC Trucking.At the time she took the ABC Trucking check,Susan was very busy with several customers in line.She simply glanced at the check and cashed it.A reasonable examination would have revealed that the check had been materially altered and changed from the amount of $200 to $2,000.Susan decided that she needed to hire some people to help her because she also had a problem with another check.On the same day that she took the ABC Trucking check,she took a check from another customer,Maurice.It was later discovered that the check from Maurice,which was four months old,was the subject of a dispute between Maurice and the issuer of the check for whom Maurice had done some work.The issuer claimed that the work was improperly done.Both ABC Trucking and the issuer of the check to Maurice stopped payment on the checks.Susan claims that she was entitled to the status of a holder in due course and was entitled to payment on both checks.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 is only considered overdue if it is outstanding for 120 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)She would not be considered a holder in due course,because a check is considered overdue 90 days after its date.
E)It has no effect,because a check is never considered overdue.

Question 70

Which of the following is a correct statement regarding discharge by impairment of the collateral?

A)Discharge cannot occur through impairment of the collateral.
B)If a party posts collateral to ensure his or her performance of the negotiable instrument and the holder of the collateral impairs its value,the party to the instrument is discharged from the instrument to the extent of the damage to the collateral.
C)If a party posts collateral to ensure his or her performance of the negotiable instrument and the holder of the collateral impairs its value,the party to the instrument is totally discharged from the instrument regardless of the extent of the damage to the collateral.
D)If a party posts collateral to ensure his or her performance of the negotiable instrument and the holder of the collateral impairs its value,the party to the instrument is totally discharged from the instrument only if the instrument is for less than $500; otherwise,the party to the instrument is discharged from the instrument to the extent of the damage to the collateral.
E)If a party posts collateral to ensure his or her performance of the negotiable instrument and the holder of the collateral impairs its value,the party to the instrument is totally discharged from the instrument only if the instrument is for less than $1,000; otherwise,the party to the instrument is discharged from the instrument to the extent of the damage to the collateral.

Question 71

Which of the following occurs when a former holder of an instrument has the instrument transferred back to him or her by negotiation or other means?

A)Remand
B)Renunciation
C)Reacquisition
D)Rescission
E)Revocation

Question 72

When a party's liability for a negotiable instrument is terminated,this party's liability has been ________.

A)remanded
B)annulled
C)discharged
D)ratified
E)absconded

Question 73

Check Cashing Business.Susan owns and operates a check cashing business.A customer,Bob,claiming to be Sam,came in and cashed a $2,000 check issued by ABC Trucking to Sam.The day after Susan cashed the check,she received a notice from ABC Trucking that some checks had been stolen.It was later discovered that the customer had forged Sam's name on the check issued by ABC Trucking.At the time she took the ABC Trucking check,Susan was very busy with several customers in line.She simply glanced at the check and cashed it.A reasonable examination would have revealed that the check had been materially altered and changed from the amount of $200 to $2,000.Susan decided that she needed to hire some people to help her because she also had a problem with another check.On the same day that she took the ABC Trucking check,she took a check from another customer,Maurice.It was later discovered that the check from Maurice,which was four months old,was the subject of a dispute between Maurice and the issuer of the check for whom Maurice had done some work.The issuer claimed that the work was improperly done.Both ABC Trucking and the issuer of the check to Maurice stopped payment on the checks.Susan claims that she was entitled to the status of a holder in due course and was entitled to payment on both checks.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,but only if she had been put on notice of prior criminal behavior on the part of Bob.
D)The alteration will affect her status as a holder in due course,but only if the issuer can establish that it was not negligent in allowing a thief to gain access resulting in the alteration.
E)The alteration will affect her status as a holder in due course because it involved over $500; otherwise,based on the purpose of the law to protect holders,the alteration would have had no effect.

Question 74

Hot Dress.Doreen writes a check for a dress to Hot Dresses,Inc.,a small specialty shop owned primarily by Betty.Betty was getting ready to go on an extended European vacation and temporarily closed the shop the day after the dress sale to Doreen.When Betty returned,she had a number of other things to do and did not take Doreen's check and some other checks to the bank for three months.Betty was independently wealthy and only ran the shop as a hobby,so she had not been in need of funds.When Betty finally took Doreen's check to the bank,Betty requested that her bank,ABC Bank,deposit the check into her account.When ABC Bank,however,requested payment from Doreen's bank,XYZ Bank,the check was dishonored because of insufficient funds in Doreen's account.Although Betty did not particularly need the funds,she did not like to feel as if she had been cheated; therefore,she demanded that Doreen make the check good.Which of the following parties is the holder of the check?

A)Doreen
B)Hot Dresses,Inc.
C)Doreen's bank
D)Betty's bank
E)The intermediary bank that will ultimately negotiate the check from Betty's bank to Doreen's bank.

Question 75

Hot Dress.Doreen writes a check for a dress to Hot Dresses,Inc.,a small specialty shop owned primarily by Betty.Betty was getting ready to go on an extended European vacation and temporarily closed the shop the day after the dress sale to Doreen.When Betty returned,she had a number of other things to do and did not take Doreen's check and some other checks to the bank for three months.Betty was independently wealthy and only ran the shop as a hobby,so she had not been in need of funds.When Betty finally took Doreen's check to the bank,Betty requested that her bank,ABC Bank,deposit the check into her account.When ABC Bank,however,requested payment from Doreen's bank,XYZ Bank,the check was dishonored because of insufficient funds in Doreen's account.Although Betty did not particularly need the funds,she did not like to feel as if she had been cheated; therefore,she demanded that Doreen make the check good.Which of the following parties is the drawee of the check Doreen presented to Hot Dresses,Inc.?

A)Doreen
B)Hot Dresses,Inc.
C)Betty,because she owns Hot Dresses,Inc.
D)Doreen's bank
E)Betty's bank

Question 76

According to Uniform Commercial Code Article 3,which of the following is a personal defense to liability on a negotiable instrument?

A)The non-issuance of an instrument
B)The modification of an obligation by a separate agreement
C)The non-delivery of an instrument
D)The non-issuance of an instrument,the modification of an obligation by a separate agreement,or the non-delivery of an instrument
E)The non-delivery of an instrument or the non-issuance of an instrument,but not the modification of an obligation by separate agreement

Question 77

Run Around.Millie issues a note to Bob.Bob endorses the note and transfers it to Anne.Anne endorses the note and transfers it to Henry.In a timely fashion,Henry endorses the note and presents it to Millie for payment.When Henry presents the note to Millie,she asks him for reasonable identification.He did not have any identification with him and told her that she had no right to dishonor the instrument.Millie,however,refused to provide him the funds until he returned with proper identification.Nevertheless,when he returned with proper identification,Millie refused to pay the note,claiming that she lacked the funds with which to do so.Henry proceeded immediately to request that Anne pay the note,but she told him that he would have to get his money from Bob,who cannot be found.Which of the following is true regarding when,or if,the note was dishonored?

A)The note was never dishonored by Millie,because she eventually acknowledged his entitlement to payment and only refused to pay because she lacked funds with which to do so.
B)Millie dishonored the instrument when she asked for proper identification.
C)Millie dishonored the instrument when she refused to pay it because she lacked the funds to do so,but Anne did not dishonor the instrument.
D)Anne dishonored the instrument when she told Henry that he would have to seek recovery from Bob,but Millie did not dishonor the instrument.
E)Millie dishonored the instrument when she told Henry that she could not pay him because she lacked the funds,and Anne dishonored the instrument when she told Henry that he would have to seek payment from Bob.

Question 78

When a party signs a negotiable instrument without knowing that it is,in fact,a negotiable instrument,the party can claim ________.

A)negligence
B)recklessness
C)malice
D)fraud in the factum
E)fraud in the factum and fraud in the inducement

Question 79

Run Around.Millie issues a note to Bob.Bob endorses the note and transfers it to Anne.Anne endorses the note and transfers it to Henry.In a timely fashion,Henry endorses the note and presents it to Millie for payment.When Henry presents the note to Millie,she asks him for reasonable identification.He did not have any identification with him and told her that she had no right to dishonor the instrument.Millie,however,refused to provide him the funds until he returned with proper identification.Nevertheless,when he returned with proper identification,Millie refused to pay the note,claiming that she lacked the funds with which to do so.Henry proceeded immediately to request that Anne pay the note,but she told him that he would have to get his money from Bob,who cannot be found.Which of the following is true regarding Henry's entitlement to payment from Millie?

A)Henry is only entitled payment from Millie because Anne dishonored the payment.
B)Henry is not entitled to payment from Millie unless Bob,in addition to Anne,dishonors the instrument.
C)Henry is never entitled payment from Millie because he must seek recovery only from Anne.
D)Henry is entitled to recover on the note from Millie.
E)Henry is entitled to recover on the note from Millie only if both Anne and Bob have filed bankruptcy or cannot be found.

Question 80

Check Cashing Business.Susan owns and operates a check cashing business.A customer,Bob,claiming to be Sam,came in and cashed a $2,000 check issued by ABC Trucking to Sam.The day after Susan cashed the check,she received a notice from ABC Trucking that some checks had been stolen.It was later discovered that the customer had forged Sam's name on the check issued by ABC Trucking.At the time she took the ABC Trucking check,Susan was very busy with several customers in line.She simply glanced at the check and cashed it.A reasonable examination would have revealed that the check had been materially altered and changed from the amount of $200 to $2,000.Susan decided that she needed to hire some people to help her because she also had a problem with another check.On the same day that she took the ABC Trucking check,she took a check from another customer,Maurice.It was later discovered that the check from Maurice,which was four months old,was the subject of a dispute between Maurice and the issuer of the check for whom Maurice had done some work.The issuer claimed that the work was improperly done.Both ABC Trucking and the issuer of the check to Maurice stopped payment on the checks.Susan claims that she was entitled to the status of a holder in due course and was entitled to payment on both checks.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 a 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,but only if Bob had been convicted of check-cashing offenses in the past,because she would have discovered his history had she checked.
D)The notice prevents her from being a holder in due course,but 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.