Deck 24: Liability, Defenses, and Discharge

Question 1

In which of the following is an accommodation party primarily liable?

A) guarantee of payment
B) guarantee of collection
C) guarantee of demand
D) guarantee of promise

Answer 1

A

Question 2

Absolute liability to pay a negotiable instrument, subject to certain universal or real defenses is known as ________.

A) primary liability
B) secondary liability
C) warranty liability
D) signature liability

Answer 2

A

Question 3

Lolek, who owes Stanislaw money, indorses a draft to him with the term "without recourse." The instrument later is dishonored. Which of the following types of indorsers is Lolek?

A) a holder
B) an agent
C) an unqualified indorser
D) a qualified indorser

Answer 3

D

Question 4

A signature in the lower-right corner of a promissory note indicates that the signer is the maker of the note.

Question 5

A drawee is primarily liable on a draft when ________.

A) the instrument is issued
B) the instrument is dishonored
C) the instrument is presented for payment
D) the drawee is an acceptor to the instrument

Question 6

A person who signs an instrument and lends his or her name, and credit to another party to the instrument is referred to as a(n) ________.

A) agent
B) qualified indorser
C) unqualified indorser
D) accommodation party

Question 7

The payee of a cashier's check is also primarily liable on the instrument.

Question 8

Those who disclaim liability and are not secondarily liable on instruments they endorse are referred to as ________.

A) unqualified indorsers
B) qualified indorsers
C) agents
D) accommodation parties

Question 9

Those who are secondarily liable on negotiable instruments they endorse are known as ________.

A) unqualified indorsers
B) qualified indorsers
C) accommodation parties
D) agents

Question 10

In the context of instruments that are merely promises to pay, which of the following has primary liability?

A) the person in physical possession of the instrument
B) the drawer of the instrument
C) the drawee of the instrument
D) the payee of the instrument

Question 11

A person cannot be held contractually liable on a negotiable instrument unless his or her signature appears on it.

Question 12

An accommodation party is secondarily liable if the accommodation is in a ________.

A) guarantee of promise
B) guarantee of demand
C) guarantee of collection
D) guarantee of payment

Question 13

Martin borrows $15,000 from Tom, in the form of a check, and signs a promissory note, promising to pay Tom this amount plus 10 percent interest in one year. Tom indorses the note and negotiates it to Fronston. Fronston indorses the note and negotiates it to Liza. Liza presents the note to Martin for payment when the note is due. Martin refuses to pay the note. Who is secondarily liable to pay Liza?

A) Tom
B) Frontston
C) Martin
D) the bank that issued the check to Tom

Question 14

Liability on a negotiable instrument that is imposed on a party only when the party primarily liable on the instrument defaults and fails to pay the instrument when due is referred to as ________.

A) secondary liability
B) unqualified liability
C) fringe liability
D) warranty liability

Question 15

Marks used in lieu of a written signature cannot be used for indorsements.

Question 16

________ is a demand for acceptance or payment of an instrument made upon the maker, acceptor, drawee, or other payer by or on behalf of the holder.

A) Accommodation
B) Duress
C) Presentment
D) Allonge

Question 17

A check is only accepted once it has been certified by the bank.

Question 18

Stanley, who owes Milton money, indorses a draft to him with the term "without recourse." The instrument later is dishonored. What liability does Stanley have on the instrument?

A) He has no liabilities on the instrument.
B) He has to pay Milton if the instrument defaults.
C) He has primary liabilities.
D) He has secondary liabilities.

Question 19

Liability in which a person cannot be held contractually liable on a negotiable instrument unless his or her signature appears on the instrument is referred to as ________.

A) warranty liability
B) unqualified liability
C) contract liability
D) accommodation

Question 20

A signature on a negotiable instrument can be any name, word, or mark used in lieu of a written signature.

Question 21

An agent is only liable on the instrument that he or she signs in if it clearly mentions the principal.

Question 22

A presentment is a demand for the acceptance of a dishonored instrument.

Question 23

A person who has been authorized to sign a negotiable instrument on behalf of another person is known as a(n) ________.

A) holder in due course
B) accommodation party
C) agent
D) principal

Question 24

Sylvester, acting as a representative agent for Jerry, signs a negotiable instrument with the signature-Jerry, by Sylvester, agent. What kind of liability does Sylvester have for this type of signature?

A) He is not liable on the instrument.
B) He is liable to the payee.
C) He is liable to Jerry.
D) He is liable to the HDC of the instrument.

Question 25

An unqualified indorser has secondary liability on negotiable instruments.

Question 26

Calvin, a college student, wants to purchase an automobile on credit from IronTilt Motors. He does not have sufficient income or the credit history to justify the extension of credit to him alone. Calvin asks his father to co-sign a note to IronTilt Motors, which he does. What role does Calvin's father fulfill here so that Calvin can buy the car?

A) an accommodation party
B) an agent
C) a principal
D) a qualified indorser

Question 27

What are the requirements for imposing secondary liability for a negotiable instrument?

Question 28

Maria is the treasurer of Rex Caldwell Corporation. As treasurer, she makes out and signs the payroll checks for the company. Maria draws a payroll check payable to the order of her maid Carolyn Doss, who does not work for the company. Maria does not intend Carolyn to receive this money. She indorses Carolyn's name on the check and names herself as the indorsee. She cashes the check at a liquor store. Under which rule of forged instruments is Maria accountable?

A) good faith rule
B) exclusionary rule
C) imposter rule
D) fictitious payee rule

Question 29

A person represented by an agent is known as the principal.

Question 30

Rhodes, a college student, wants to purchase a motorcycle on credit from Landier Motors. He does not have sufficient income or the credit history to justify the extension of credit to him alone. Rhodes asks his father to cosign a note to Landier Motors, which he does. What kind of liability does Rhodes's father come under?

A) secondary liability
B) primary liability
C) fringe liability
D) warranty liability

Question 31

The ________ states that a drawer or maker is liable on a forged or unauthorized indorsement if the person signing as or on behalf of a drawer or maker intends the named payee to have no interest in the instrument or when the person identified as the payee is a fabricated person.

A) imposter rule
B) fictitious payee rule
C) fraud in the inception rule
D) fraud in the inducement rule

Question 32

A purported principal is liable for an unauthorized signature by a purported agent if the purported principal ratifies the unauthorized signature.

Question 33

Which of the following is a similarity between the fictitious payee rule and the imposter rule?

A) Both hold the drawee liable on the instrument.
B) Both hold the drawer liable on the instrument.
C) Both put the risk of loss on the forger.
D) Both put the risk of loss on the indorsee.

Question 34

Cameron, a purported agent, signs a contract and promissory note to purchase a building for Burnstar Constructions, a purported principal. Though Cameron is an unauthorized representative, Burnstar Constructions, the purported principal, likes the deal and accepts it. Which of the following is true of the deal ratified by Burnstar Constructions?

A) The deal is invalid due to the fraud in the inducement rule.
B) The deal is invalid due to the fraud in the inception rule.
C) Burnstar Constructions is liable on the note.
D) Cameron is liable on the note.

Question 35

Martha draws a check payable to the order of Stella. Stella indorses the check to Karen. But Leslie steals the check from Karen, forges Karen's indorsement, and cashes the check at a liquor store. Who is liable on the check?

A) the liquor store
B) Martha
C) Stella
D) Leslie

Question 36

A person who authorizes an agent to sign a negotiable instrument on his or her behalf is known as a(n) ________.

A) agent
B) accommodation party
C) principal
D) assignor

Question 37

An accommodation party who signs an instrument guaranteeing payment is secondarily liable on the instrument.

Question 38

A qualified indorser is only liable for secondary liability.

Question 39

Martha draws a check payable to the order of Stella. Stella indorses the check to Karen. But Leslie steals the check from Karen, forges Karen's indorsement, and cashes the check at a liquor store. When the forgery is exposed, whom can the liquor store legally recover from?

A) Martha
B) Leslie
C) Karen
D) Stella

Question 40

Susan purchases goods by telephone from Parker. Susan has never met Parker. Brenton goes to Susan and pretends to be Parker. Susan draws a check payable to the order of Parker and gives the check to Brenton, believing him to be Parker. Brenton forges Parker's indorsement and indorses the check to his brother, William, with the term "without recourse." William then cashes the check at a liquor store. Under the imposter rule, who is liable on the check?

A) Brenton
B) the liquor store
C) Susan
D) William

Question 41

Presentment warranties are made by the drawer of a check or draft.

Question 42

An imposter is someone who impersonates a payee and induces the maker or drawer to issue an instrument in the payee's name and give the instrument to the imposter.

Question 43

A ________ defense is a type of defense that can be raised against both holders and HDCs.

A) universal
B) personal
C) fraud in the inducement
D) breach of contract

Question 44

Transfer warranties would be applicable to which of the following placements of a negotiable instrument?

A) indorsement
B) issuance
C) presentment
D) accommodation

Question 45

Personal and universal defenses can be raised against a normal holder of a negotiable instrument.

Question 46

"All signatures are genuine or authorized" is a transfer warranty that a transferor of a negotiable instrument for consideration makes.

Question 47

Jennifer signs a promissory note to pay $2,500 to Clara. Clara negotiates the instrument and indorses it to Anthony. Anthony alters the note to make the payment amount $25,000 and negotiates the note to Nicholas. Nicholas indorses the note and negotiates it to Mack. Nicholas and Mack are both unaware of Anthony's alteration. If Mack presents the note to Jennifer for payment, how much, if anything is Jennifer obligated to pay?

A) $25,000
B) $22,500
C) $2,500
D) Jennifer is not obliged to pay Mack

Question 48

Transfer warranties cannot be disclaimed with respect to checks.

Question 49

A holder in due course takes an instrument free from personal defenses but not universal defenses.

Question 50

Joan signs a promissory note to pay $1,000 to Alex. Alex cleverly raises the note to $10,000 and negotiates the note to Ned. Ned indorses the note and negotiates it to Mark. When Mark presents the note to Joan for payment, she has to pay only the original amount of the note, $1,000.

Question 51

If a universal defense is proven, the holder or HDC cannot recover on the negotiable instrument.

Question 52

What is a transfer of an instrument?

A) issuance of the instrument
B) presentment of the instrument for payment
C) passage of the instrument other than issuance and presentment
D) cancellation of the instrument

Question 53

Implied warranties are made when a negotiable instrument is originally issued.

Question 54

Warranty liability is imposed whether or not the transferor signed the instrument.

Question 55

A(n) ________ defense is a type of defense that can be raised against enforcement of a negotiable instrument by an ordinary holder but not against an HDC.

A) discharge in bankruptcy
B) extreme duress
C) personal
D) universal

Question 56

List the presentment warranties related to negotiable instruments.

Question 57

Transfer warranties cannot be disclaimed if the indorsement states "without recourse."

Question 58

A transferee who took an instrument in good faith may recover damages for breach of transfer warranty from the warrantor equal to the loss suffered.

Question 59

What are forged negotiable instruments?

Question 60

Which of the following is a characteristic of a presentment warranty on an instrument presented for payment?

A) The transferor has no knowledge of any insolvency.
B) The transferor has good title to the instrument.
C) No defenses of any party are good against the transferor.
D) The instrument has not been materially altered.

Question 61

What is the defense of fraud in the inducement?

Question 62

Fraud in the inducement is a personal defense that is not effective against HDCs.

Question 63

The defense of breach of contract is effective against an HDC.

Question 64

Harold borrows $20,000 from Alex and signs a note promising to pay Alex this amount plus interest in one year. Alex negotiates the note to Reese, an HDC. Before the note is due, Harold declares bankruptcy. According to the discharge in bankruptcy defense, which of the following is true?

A) Reese can recover from Harold.
B) Reese can recover from Alex.
C) Alex can recover from Harold.
D) Reese cannot enforce the instrument.

Question 65

Which of the following is a rule that eliminates HDC status with regard to negotiable instruments that arise out of certain consumer credit transactions?

A) FTC HDC rule
B) exclusionary rule
C) imposter rule
D) fictitious payee rule

Question 66

The FTC rules apply to consumer credit transactions in which the buyer signs a sales contract that includes a promissory note.

Question 67

Discharge of an instrument by payment or cancellation is a type of ________.

A) warranty liability
B) transfer warranty
C) personal defense
D) universal defense

Question 68

Which of the following actions by a holder constitutes the complete cancellation of a negotiable instrument?

A) destruction or mutilation of the negotiable instrument to eliminate obligation
B) deliberately striking out the signature of an indorser
C) releasing an obligor from liability
D) surrendering collateral without the consent of the parties who would benefit from it

Question 69

________ is a type of personal defense when a wrongdoer makes a false statement to another person to lead them to enter into a contract and issue a negotiable instrument.

A) Forgery
B) Discharge in bankruptcy
C) Fraud in the inducement
D) Extreme duress

Question 70

All parties are discharged from liability on a negotiable instrument when ________.

A) the instrument is presented for payment
B) the signature of the indorser is intentionally struck out
C) the instrument is accidentally destroyed or mutilated
D) a drawee in good faith pays an unaccepted instrument in full to the holder

Question 71

A minor who does not misrepresent his or her age can disaffirm negotiable instruments.

Question 72

A(n) ________ is an action or event that relieves certain parties from liability on negotiable instruments.

A) presentment
B) discharge
C) accommodation
D) breach of contract

Question 73

Adjudicated mental incompetence is a universal defense that can be raised against holders and HDCs.

Question 74

Discharge of an instrument by payment can be raised against enforcement of a negotiable instrument by an ordinary holder.

Question 75

A contract made by a person who has not yet been adjudicated to be mentally incompetent is considered void.

Question 76

Material alteration consists of adding to any part of a signed instrument, removing any part of a signed instrument, or making changes to the dollar amount of the instrument.

Question 77

Extreme duress is considered a personal defense.

Question 78

What is material alteration as a universal defense to a negotiable instrument?

Question 79

Fraud in the inception is a type of personal defense.

Question 80

________ refers to a situation in which certain parties are discharged from liability on an instrument by the action of the holder.

A) Impairment of the right of recourse
B) Fraud in the inception
C) Fraud in the inducement
D) Discharge in bankruptcy