Deck 26: Liability, Defenses, and Discharge

Question 1

A maker is secondarily liable on an instrument.

Answer 1

False

Question 2

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

Answer 2

True

Question 3

Under the UCC, a fictitious payee's indorsement is treated as a forgery.

Answer 3

False

Question 4

A signature may be handwritten.

Question 5

In general, an agent must clearly indicate that he or she is signing on behalf of a clearly named principal to bind the principal.

Question 6

Every person who signs a negotiable instrument is liable for payment of that instrument when it comes due.

Question 7

If an instrument is incomplete when the maker signs it, the maker's ob?ligation is to pay it to an HDC according to the incomplete terms.

Question 8

An authorized agent may be personally liable on an instrument if the agent does not sign his or her own name.

Question 9

An unauthorized signature binds the person whose name is forged.

Question 10

A drawer is not liable on a check made out to an imposter.

Question 11

A signature may be typed.

Question 12

Dishonor occurs if payment of an instrument is refused despite proper and timely presentment.

Question 13

Dishonor occurs when proper presentment of an instrument is excused and its payment is refused.

Question 14

An authorized agent may be personally liable on an instrument if the agent signs the agent's name but not the principal's name.

Question 15

An acceptor is secondarily liable to all subsequent holders of an instrument.

Question 16

A drawer's liability does not arise until presentment and notice of dishonor.

Question 17

An unauthorized signature never binds the person whose name is forged.

Question 18

The dishonor of an instrument relieves secondary parties of liability.

Question 19

Signature liability extends to any person who signs a negotiable instrument.

Question 20

A drawer is primarily liable on an instrument.

Question 21

Presentment war?ranties protect the person who presents an instrument for payment.

Question 22

Accidental destruction of a negotiable instrument cancels it.

Question 23

Personal defenses defeat the claims of HDCs.

Question 24

A breach of a contract for which an instrument was issued will defeat the claim of an ordinary holder for payment on the instrument.

Question 25

When the drawee of an unaccepted draft or check pays to a holder the amount due in full, all parties to the instrument are discharged.

Question 26

An alteration of an instrument is material if it changes the terms between two parties in any way.

Question 27

When a party that is pri?marily liable on an instrument pays to a holder the amount due in full, all parties to the instrument are discharged.

Question 28

A person whose name is forged on an instrument is liable to pay only a holder in due course the value of the forged instrument.

Question 29

A lack or failure of consideration is no defense to payment of a negotiable instrument to any holder.

Question 30

Universal defenses defeat the claims of HDCs.

Question 31

If a court has declared a person to be mentally incompetent, then any instrument issued by that person is void.

Question 32

Presentment war?ranties protect the person to whom an instrument is presented for payment.

Question 33

Transfer warranties attempt to impose liability on the party who dealt most closely to the last party to take an instrument.

Question 34

The completion of an originally incomplete instrument in an unauthor?ized manner is a defense against payment on the instrument to an HDC.

Question 35

Presentment war?ranties can be disclaimed with respect to checks.

Question 36

A drawer who is induced by an imposter to issue a check in the name of an impersonated payee can avoid payment on the check to an innocent holder.

Question 37

The defense of illegality is always a personal defense.

Question 38

If the holder of an instrument strikes out the names of several of the in?dorsers, any liability those parties had on the instrument is canceled.

Question 39

Transfer warranties attempt to impose liability on the wrongdoer or the party who dealt most immediately with the wrongdoer.

Question 40

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

Question 41

Puck signs a check "pay to the order of Quik Mart" drawn on Puck's account in Regional Bank. Puck shows the check to Silky, who agrees that the signature is Puck's and that Quik Mart is owed the amount that the check represents. Quik Mart signs the back of the check. Liability on this check extends to

A) Puck, Quik Mart, and Regional Bank.
B) Puck and Quik Mart only.
C) Puck and Silky only.
D) Silky only.

Question 42

Don writes a check to Eve drawn on Don's account at First Bank. Eve presents the check for payment to First Bank, which ac?cepts it. The bank is

A) not liable for payment.
B) primarily liable for payment.
C) secondarily liable for payment.
D) simultaneously liable, with Don, for payment.

Question 43

Eula signs a check "pay to the order of Eula" and presents to First National Bank for payment. The types of liability associated with this check are

A) fitness and quality.
B) potential and real.
C) sealed and delivered.
D) signature and warranty.

Question 44

Sara agrees to cosign a promissory note for Tom to buy a sport utility ve?hi?cle. The note is payable to Unity Bank. Sara is an accommodation

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

Question 45

Fact Pattern 26-1A
Roy writes a check on his account at State Bank to Teri to pay a debt. Teri negotiates the check by indorsement to Uma, who presents it for payment to Vital Bank.
Refer to Fact Pattern 26-1A. Teri is

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

Question 46

Super Company's agent Tyra is authorized to draw checks on Super's account in Unity Bank. The checks are preprinted with Super's name. Tyra writes a check "pay to the order of Vern [signed] Tyra." Vern negotiates the check to Weber, who does not know about the agency relationship. If Weber presents the check for payment and Unity Bank dishonors it, liability extends to

A) no one.
B) Super and Tyra.
C) Super only.
D) Tyra only.

Question 47

State Bank receives a check drawn by Tricia. The check is re?ceived af?ter the established "cutoff" hour. Payment can be postponed without dishonor

A) indefinitely.
B) under no circumstances.
C) unless Tricia personally demands acceptance.
D) until the close of the next business day.

Question 48

To borrow the money to buy a car, Klaus signs a note "payable to the order of Lake City Auto Financing." Minnie cosigns the note to guarantee the repayment of the loan. Minnie's liability on this note is

A) lateral.
B) primary.
C) secondary.
D) tertiary.

Question 49

Fact Pattern 26-1A
Roy writes a check on his account at State Bank to Teri to pay a debt. Teri negotiates the check by indorsement to Uma, who presents it for payment to Vital Bank.
Refer to Fact Pattern 26-1A. If State Bank dishonors the check, Uma can obtain payment from Teri

A) if Uma timely notifies Teri.
B) only if Roy refuses to pay the check.
C) under any circumstances.
D) under no circumstances.

Question 50

Grady signs a note "payable to the order of Home Mortgage Service," and Home Mortgage takes possession of the note. The focus of any liability associated with this note is on

A) any underlying contract between Grady and Home Mortgage.
B) the fitness and quality of the instrument and its contract.
C) the formalities of the instrument's seal and its delivery.
D) the instrument or related warranties.

Question 51

Toby signs a note "payable to the order of United Credit Union." Unless Toby has a valid defense against payment, Toby's liability on this note is

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

Question 52

Fact Pattern 26-1B
Jake is the maker of a $2,000 promissory note payable to Kim. Kim indorses the note to Lou who, in turn, indorses it to Mona, who then in?dorses it to Nat, the present holder.
Refer to Fact Pattern 26-1B. Suppose that Mona pays Nat on the note. With timely notice to the proper parties, Mona may collect payment on the note from

A) Jake, Kim, or Lou.
B) Jake or Kim only.
C) Lou only.
D) no one.

Question 53

Fact Pattern 26-1B
Jake is the maker of a $2,000 promissory note payable to Kim. Kim indorses the note to Lou who, in turn, indorses it to Mona, who then in?dorses it to Nat, the present holder.
Refer to Fact Pattern 26-1B. Nat properly pre?sents the note to Jake for pay?ment, but Jake dishonors it. With timely notice to the proper parties, Nat may collect payment on the note from

A) Kim, Lou, or Mona.
B) Kim or Lou only.
C) Mona only.
D) no one.

Question 54

Nero signs a check "pay to the order of Olive" drawn on Nero's account in Plum Bank. Olive signs the back of the check. Secondary liability on this check extends to

A) Nero and Olive only.
B) Nero and Plum Bank only.
C) Nero only.
D) Plum Bank only.

Question 55

Ed acquires a check drawn on First National Bank. To present the check for payment, he may use any commercially reasonable

A) electronic or written means of communication only.
B) oral or written means of communication only.
C) electronic, oral, or written means of communication.
D) written means of communication only.

Question 56

Superior Company draws a check payable to Ted. Uri makes a note payable to Vital Finance Corporation. Primarily liable parties include

A) neither Superior nor Uri.
B) Superior and Uri.
C) Superior only.
D) Uri only.

Question 57

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

A) Dirk defaults on the note.
B) Friendly Credit breaches a transfer warranty.
C) Friendly Credit negotiates the note to a third party.
D) Friendly Credit presents the note for payment.

Question 58

Rex signs a check "pay to the order of Sophie" drawn on Rex's account in Town Bank. To impose liability on Rex if Town Bank dishonors the check, Sophie should present it for payment within

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

Question 59

Ethel signs a note "payable to the order of Fidelity Bank." Fidelity indorses the note in blank and negotiates it to Ghani, who sells it to Huck. Liability associated with the transfer of the note from Ghani to Huck is

A) fitness.
B) quality.
C) signature.
D) warranty.

Question 60

Biff signs a note "payable to the order of County Credit Union." Unless Biff has a valid defense against payment, Biff's liability on this note is

A) lateral.
B) primary.
C) secondary.
D) tertiary.

Question 61

Vera gives Willy a $500 check as payment for a debt. Willy crudely raises the amount of the check to $5,000 and transfers it to Xtreem Sportz store for a new bike. Xtreem deposits the check in its Yankee Bank account. Vera is liable for the payment of $5,000 to

A) no one.
B) Willy, Xtreem Sportz, and Yankee Bank.
C) Willy only.
D) Xtreem Sportz and Yankee Bank only.

Question 62

Pete, a Quality Company employee, is authorized to use Quality checks to buy supplies. Pete alters one of the checks to increase its $700 amount by $100, and exchanges it at Retail Office Supply for $700 worth of sup?plies and $100 cash. He keeps the cash. On the check, Retail-an HDC-may obtain pay?ment for

A) $0.
B) $100.
C) $700.
D) $800.

Question 63

City Bank issues to Dave a cashier's check. Evan steals the check, forges Dave's signature, adds his own signature, and cashes it at First County Bank, which obtains payment from City. Dave discovers the theft and ob?tains a replacement check from City, which sues First. The court will likely rule in favor of

A) City, because First breached the presentment warranty that there are no unauthorized indorsements on the check.
B) City, because First can recover the money from Evan.
C) First, because City breached the presentment warranty that there are no unauthorized indorsements on the check.
D) First, because City can recover the money from Dave.

Question 64

Molly signs a promissory note payable to National Credit Corporation while mentally incompetent but before a court judges her to be mentally incompetent. The note is

A) payable to any bearer of the note.
B) payable to any holder of the note.
C) payable to the court only.
D) void or voidable.

Question 65

Dewey is Ezra's agent and is not authorized to sign checks or notes on Ezra's behalf. Despite the lack of authority, Dewey issues a note "payable to the order of Fab Finance Company [signed] Dewey." Liability on this note extends to

A) Dewey and Ezra.
B) Dewey only.
C) Ezra only.
D) no one.

Question 66

Opal asks Paolo, who does not understand English, to sign what Opal says is an application to open a bank account. In fact, the "application" is a note. If sued on the note by an HDC, Paolo's best defense would be

A) extreme duress.
B) fraud in the execution.
C) fraud in the inducement.
D) mistake.

Question 67

Quincy signs a check payable to Regal Investors, Inc., and gives it to Regal, leaving the amount blank but authorizing Regal to fill in the check for $1,000. Regal fills in $1,500 and negotiates the check to State Bank, to whom Regal owes $1,500. State Bank, an HDC, can enforce the check for

A) $0.
B) $500.
C) $1,000.
D) $1,500.

Question 68

Call, an employee of Delite Dairy Company, forges the signa?ture of Elin, Delite's president, on a Delite check and cashes it at First Federal Bank. Elin would ratify Call's actions by

A) asking First Federal to prosecute Call for forgery.
B) discharging Call from Delite 's employment.
C) entering into a repayment agreement with Call.
D) filing criminal charges against Call herself.

Question 69

Kip is Lulu's agent and is authorized to write checks on Lulu's account in Metro Bank. Kip writes a check "pay to the order of Nemo." Kip signs the check "Lulu, by Kip, agent." If Metro Bank dishonors the check, liability extends to

A) Kip and Lulu.
B) Kip only.
C) Lulu only.
D) no one.

Question 70

Laptop Assembly Company gives a $3,000 promissory note to My-T-Fast Delivery Service to de?liver a load of computer chips to Laptop's plant. The chips are contami?nated during transit, and are useless to Laptop on delivery. Laptop's best defense to payment on the note is

A) breach of warranty.
B) failure of consideration.
C) illegality.
D) nondelivery of an instrument.

Question 71

Dan applies to borrow $1,000 at 6 percent interest from Eagle Loan Company and signs a note for the amount. Without Dan's authorization, Eagle changes the rate on the note to 9 percent and attaches a copy of his application to the note. Material alteration of the note occurred

A) only when Eagle attached a copy of Dan's application to the note.
B) only when Eagle changed the interest rate on the note.
C) under none of these circumstances.
D) when Eagle changed the rate and attached the application.

Question 72

Pritty Products sells shoddy goods to consumers for promissory notes, and sells the notes to Quik Finanz Company. Pritty Products goes out of busi?ness. The con?sumers may be able to avoid payment on the notes under

A) Article V of the U.S. Constitution.
B) FTC Rule 433.
C) the shelter principle.
D) UCC Article 3.

Question 73

Rodeo Ranch's agent Slim is authorized to draw checks on Rodeo Ranch's account in Town Bank. Upper Range Corporation is a Rodeo Ranch supplier. Slim writes a check "pay to the order of Upper Range [signed] Slim," indorses the check in Upper Range's name, and deposits it in his account in Verity Bank. If Verity Bank collects payment, the ultimate party most likely to suffer the loss is

A) no one.
B) Rodeo Ranch.
C) Town Bank.
D) Upper Range.

Question 74

Dina, an accountant for Eagle, Inc., issues company checks payable to nonexistent persons drawn on Eagle's ac?count at First State Bank. Dina indorses the checks and deposits them in her account. Eagle discovers the theft and demands that First recredit its account. First's best defense is that

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

Question 75

Dandy Furniture Store borrows $100,000 at 6 percent interest from Easy Loan Company and signs a promissory note for that amount. Easy changes the amount of the note to $120,000 and increases the rate to 8 per?cent. Easy materially altered the note when it changed

A) neither the amount nor the interest rate
B) the amount and the interest rate.
C) the amount only.
D) the interest rate only.

Question 76

Burt, a mentally impaired person, is asked by Carl to sign a piece of pa?per that Carl says is an autograph book. In fact, the document is a note. If later sued by an HDC, Burt's best defense would be

A) duress.
B) mistake.
C) fraud in the inducement.
D) fraud in the execution.

Question 77

Bob writes a check on his account at County Bank to Dona, a fa?mous singer. The person claiming to be Dona is an imposter, however, named Edy. Edy indorses the check to Frank, for whom County Bank cashes it. Ultimately, the loss will most likely fall on

A) Bob.
B) County Bank.
C) Dona.
D) Frank.

Question 78

GR8 Products, Inc., warrants its goods to be free of defects. If Heck is?sues an instrument to obtain goods from GR8 that prove defective, Heck can avoid paying on the instrument

A) only if it is a check.
B) only if it is a note.
C) whether it is a check or a note.
D) under no circumstances.

Question 79

Chris convinces Dion, who does not understand English, to sign a $1,000 note that Dion believes is an application for a credit card. Chris negotiates the note to EZ Finance Company. Dion

A) can avoid payment on the note even if EZ is an HDC.
B) can avoid payment on the note only if EZ is a holder.
C) must pay EZ the amount that it paid for the note.
D) must pay the note in full.

Question 80

Cole issues a note "payable to the order of Cole," forges Dylan's signature as the maker, and indorses the note "pay to Eton." Cole sells the note to Eton, who negotiates it by indorsement and delivery to Franz. Franz negotiates the note to Gert. On this note, Gert can extend liability to

A) no one.
B) only Cole, Eton, or Franz.
C) only Eton or Franz.
D) only Franz.