Deck 27: Liability, Defenses, and Discharge

Question 1

When a negotiable instrument contains the notice required under FTC Rule 433, a consumer can bring any defense to payment that he or she has against the seller of a product against a subsequent holder as well.

Answer 1

True

Question 2

Presentment war?ranties cannot be disclaimed with respect to checks.

Answer 2

True

Question 3

Notice of dishonor can be given in any reasonable manner, including notice written or stamped on the instrument itself.

Answer 3

True

Question 4

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

Question 5

Warranty liability arises only when a transferor indorses the instrument.

Question 6

In some situations, the unauthorized indorsement of a payee's name can be as effective as if the real payee had signed.

Question 7

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

Question 8

On drafts and checks, a drawer's secondary liability does not arise until the drawer fails to pay or to accept the instrument.

Question 9

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

Question 10

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

Question 11

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

Question 12

An unauthorized signature is wholly inoperative and will not bind the person whose name is signed or forged.

Question 13

The forgery of a signature on an instrument is a valid defense against all holders except HDCs and holders through HDCs.

Question 14

Primary liability on a negotiable instrument is conditional.

Question 15

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

Question 16

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 on the check.

Question 17

A delay in payment or a refusal to pay an instrument will dishonor the instrument in all circumstances.

Question 18

An indorser is secondarily liable on an instrument.

Question 19

Under the fictitious payee rule, the payee's indorsement is not treated as a forgery, and an innocent holder can hold the maker or drawer liable on the instrument.

Question 20

Even if a promissory note is incomplete at the time a maker signs it, the maker is still obligated to pay.

Question 21

Gulf Bank receives a check drawn by Hayward. The check is re?ceived af?ter 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 22

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 23

Home Entertainment, Inc., warrants its goods to be free of defects. Ira is?sues a note to obtain goods from Home Entertainment that proves defective. If Home Entertainment presents the note for payment

A) Ira's best defense would be breach of warranty.
B) Ira must pay the note.
C) Ira's best defense would be fraud in the inducement.
D) Ira's best defense would be failure of consideration.

Question 24

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 Quik Loan Company [signed] Physicians Clinic, by Olivia." Liability on this note extends to

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

Question 25

Lewis makes a note payable to MaxiFinance Corporation. MaxiFinance indorses the back of the note and negotiates it to Notes & Drafts Investments, Inc. Primarily liable on the note is

A) none of the choices.
B) MaxiFinance.
C) Notes & Drafts Investments.
D) Lewis.

Question 26

Fact Pattern 27-1B (Questions B6-B7 apply)
Charlton is the maker of a $200,000 promissory note payable to Development & Sales Corporation. Development & Sales indorses the note to Equity Lenders, which in turn indorses it to First Select Investors, which then in?dorses it to Global Bank, the present holder.
Refer to Fact Pattern 27-1B. Global Bank properly pre?sents the note to Charlton for pay?ment, but he dishonors it. With timely notice to the proper parties, Global Bank may collect payment on the note from

A) Development & Sales, Equity Lenders, or First Select.
B) Development & Sales or Equity Lenders only.
C) First Select only.
D) no one.

Question 27

Danton, a mentally impaired person, is asked by Elmer to sign a piece of pa?per that he says is an autograph book. In fact, the document is a note. If later sued on the note by an HDC

A) Danton must pay the note.
B) Danton's best defense would be fraud in the execution.
C) Danton's best defense would be fraud in the inducement.
D) Danton's best defense would be mistake.

Question 28

Ada is the maker of a note, on which Bart is secondarily liable. Credit Instruments Company is the current holder of the note. Bart will be obli?gated to pay the note if

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

Question 29

Kurt writes a check on his account at Liquidity Bank to Mandy, a fa?mous singer. The person claiming to be Mandy is an imposter, however, named Nila. Nila indorses the check to Outsize Portions, a casino, restaurant, and nightclub, for which Liquidity Bank cashes it. Ultimately, the loss will most likely fall on

A) Kurt.
B) Liquidity Bank.
C) Mandy.
D) Outsize Portions.

Question 30

Jackson pays Phil in good faith for a promissory note. Phil warrants that the draft has not been altered. This is

A) a presentment warranty.
B) a transfer warranty.
C) a signature warranty.
D) a breach of warranty.

Question 31

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 32

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

Question 33

Dulcey agrees to cosign a promissory note for Excavation Equipment Leasing & Sales to buy a backhoe. The note is payable to Federal Bank. Dulcey is an accommodation

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

Question 34

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 ac?cepts it. Primarily liable on the check is

A) Fiona.
B) Gerri.
C) Home State.
D) none of the choices.

Question 35

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 36

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 37

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 38

Fact Pattern 27-1B (Questions B6-B7 apply)
Charlton is the maker of a $200,000 promissory note payable to Development & Sales Corporation. Development & Sales indorses the note to Equity Lenders, which in turn indorses it to First Select Investors, which then in?dorses it to Global Bank, the present holder.
Refer to Fact Pattern 27-1B. Suppose that First Select pays Global Bank on the note. With timely notice to the proper parties, First Select may then collect payment on the note from

A) Charlton, Development & Sales, or Equity Lenders.
B) Charlton or Development & Sales only.
C) Equity Lenders only.
D) no one.

Question 39

Qiana gives Rick a $50 check as payment for a debt. Rick crudely raises the amount of the check to $500 and transfers it to SmartPhones & Minutes Store for a new phone. SmartPhones & Minutes deposits the check in its Trade Market Bank account. Qiana is liable for the payment of $500 to

A) no one.
B) Trade Market Bank.
C) Rick.
D) SmartPhones & Minutes.

Question 40

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 41

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

Question 42

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?