Deck 32: Negotiation and Holder in Due Course

Question 1

Rachel's father gave her a check drawn on his checking account marked "payable to the order of Rachel Stern". This instrument is order paper, because:

A) the instrument uses the word "order."
B) the instrument names a specific payee.
C) the instrument was properly negotiated to Rachel.
D) the instrument was an order to pay cash.

Answer 1

B

Question 2

Order paper that is indorsed in blank becomes bearer paper.

Answer 2

True

Question 3

Generally, real defenses arise out of the transaction in which the negotiable instrument was issued and are based on negotiable instruments law or contract law.

Answer 3

False

Question 4

In some circumstances, Article 3 allows a person to become a holder by negotiation, even though the transfer of possession is involuntary.

Question 5

Which of the following is order paper?

A) A check made out "to the order of cash."
B) A note payable to the order of X and indorsed in blank by X.
C) A note made out to Y's order and indorsed "Pay to Z, Y."
D) A receipt for a payment made by Z.

Question 6

Under the new Article 3, a depositary bank cannot become a holder of a check that is deposited by a customer without an indorsement.

Question 7

Indorsements that state a condition to the right of the indorsee to receive payment do not affect the right of the indorsee to enforce the instrument.

Question 8

In qualified indorsement, the indorser accepts the liability to make the instrument good, if the maker or drawer defaults on it.

Question 9

The new Article 3 recognizes and enforces indorsements that prohibit further negotiation of the instrument.

Question 10

On June 1, Mike writes a check payable to Pete. Without ever being paid, the check is eventually negotiated to Hal, who receives it on September 15, with notice of the date on its face. Hal is not a holder in due course of the check.

Question 11

Svetlana Mills gives a check "payable to the order of Svetlana Mills," to a shopkeeper for some groceries. Here, the check would be considered as negotiated only upon the fulfillment of which of the following conditions?

A) The check should be indorsed by the shopkeeper.
B) The check should bear the name of the shopkeeper.
C) Svetlana should indorse the check in the name of the shopkeeper.
D) Svetlana should indorse the check in her own name.

Question 12

A claim in recoupment is a claim of the person obligated on the instrument against the original payee of the instrument.

Question 13

Value is identical to simple consideration.

Question 14

A person who makes a completely executory promise, in return for a negotiable instrument, has given value for it.

Question 15

Sonia through fraudulent representations induced Gracie to execute a negotiable note payable to Sonia. Sonia is a holder in due course.

Question 16

Which of the following is bearer paper?

A) A check payable to the order of X and specially indorsed to Y.
B) A check payable to the order of X and indorsed in blank by X.
C) A check payable to the order of cash and specially indorsed by the person who received it.
D) A check payable to the order of cash to Y.

Question 17

An instrument that is payable "to the order of cash" can be negotiated simply by giving it to the person to whom you wish to transfer it.

Question 18

Under Revised Article 3, a person is a(n) _____ if she is in possession of an instrument that is payable to bearer or made payable to an identified person and she is that identified person.

A) payor
B) issuer
C) bailor
D) holder

Question 19

A person cannot be a holder in due course of a negotiable instrument if, when she takes it, the instrument is irregular or some important or material term is blank.

Question 20

Anyone other than a bank, who purchases a check indorsed "for deposit," has converted it; unless the indorser received the amount paid for the check or the bank deposited the check in the indorser's account.

Question 21

John received a check from his employer marked "pay to the order of John Jones." John used this check to pay for groceries from ABC Foods. He wrote on the back of the check: "pay to ABC Foods, for groceries". Was this check properly negotiated?

A) No, because the statement that the check was for payment to ABC Foods defeats this negotiation.
B) No, because John did not indorse the check.
C) Yes, because John transferred possession of the check and ABC Foods acted in good faith.
D) Yes, because a holder's signature is not always needed in order to negotiate a check.

Question 22

An instrument that is indorsed with a _____ indorsement remains "order paper."

A) special
B) blank
C) restrictive
D) conditional

Question 23

If a check is drawn "Pay to the order of Maria" and Maria indorses it "pay to the order of Jay, Maria". This falls under:

A) blank indorsement.
B) restrictive indorsement.
C) special indorsement.
D) simple indorsement.

Question 24

Ahmed Cohen received a check for $5,000 for a used car he sold. The check was marked "pay to the order of Ahmed Cohen." On back of this check he wrote, in his handwriting, "Ahmed Cohen." This has the legal effect of:

A) making this instrument non-negotiable.
B) making this instrument void.
C) making this instrument order paper.
D) making this instrument bearer paper.

Question 25

Which of the following indorsements is a restrictive indorsement?

A) "Pay to Jack Black, Mel Gibbs"
B) "Mel Gibbs"
C) "Pay to Jack Black in Trust for Mel Gibbs."
D) "Pay to the Order of Jack Black, Mel Gibbs"

Question 26

The new Article 3 no longer considers _____ as restrictive indorsements.

A) indorsements for deposit
B) conditional indorsements
C) indorsements directing the indorsee to act for someone else's benefit
D) indorsements for collection

Question 27

_____ is defined to mean "a signature (other than that of a maker, drawer or acceptor) that alone or accompanied by other words, is made on an instrument for purpose of (i) negotiating the instrument, (ii) restricting payment of the instrument, or (iii) incurring indorser's liability on the instrument."

A) Indemnification
B) Recoupment
C) Indorsement
D) Ratification

Question 28

_____ indorsements indicate that they are effective only if the payee satisfies a certain condition.

A) Special
B) Conditional
C) Qualified
D) Blank

Question 29

When a customer deposits a check to her account without an indorsement, then the bank:

A) puts the sign of the manager under the typed name of the customer.
B) signs the customer's name.
C) stamps the name of the bank on the check to cover for the customer's signature.
D) stamps on it that it was deposited by the customer.

Question 30

Jackie Collins is issued a check payable to the order of Jacky Collens. She takes the check to the bank. In order to cash the check she has to:

A) sign either Jackie Collins or Jacky Collens.
B) sign only Jackie Collins.
C) sign only Jacky Collens.
D) sign both Jackie Collins and Jacky Collens.

Question 31

A _____ indorsement is one where the indorser disclaims her liability to make the instrument good if the maker or drawer defaults on it.

A) special
B) conditional
C) qualified
D) blank

Question 32

When a holder makes a blank indorsement of a negotiable instrument that is bearer paper, what legal effect does this have?

A) There is no effect-bearer paper does not need to be indorsed.
B) The bearer negotiates it by transfer alone and no further indorsement is necessary for negotiation.
C) The instrument is no longer negotiable, as it has been altered.
D) The instrument is converted into order paper.

Question 33

Which of the following is an example of restrictive endorsements recognized under Article 3?

A) "Pay to Bruce Zucker in Trust for Jay Zucker."
B) "Pay to Bruce Zucker Only."
C) "Pay to Jay Zucker on the condition that he completes construction of my house by November 1, 2012."
D) "Pay to the order of my account."

Question 34

The transfer of an instrument:

A) vests in the transferee any right of the transferor, to enforce the instrument.
B) bars the transferee from attaining the rights of the transferor.
C) vests in the payor any right of the transferor, to enforce the instrument.
D) bars the transferor to pass on his rights to the transferee.

Question 35

Ordinary nonphysical and nonviolent duress that causes the transfer of a negotiable instrument:

A) prevents its negotiation.
B) is a good defense against a holder in due course of the instrument.
C) is subject to rescission before the instrument is transferred to a holder in due course.
D) is a good defense against the maker of a note.

Question 36

If the holder's name on an instrument is misspelled or wrong, then the indorsement:

A) can be made only in his name.
B) can be made only in the name that is on the instrument.
C) can be made either in his name or in the name that is on the instrument.
D) can be made by putting his name as well as the name that is on the instrument.

Question 37

If an order instrument is transferred without indorsement, then the instrument:

A) is deemed to have been negotiated and the bank can qualify as a holder.
B) has not been negotiated and the transferee cannot qualify as a holder.
C) is deemed to have been negotiated and the transferee can qualify as a holder.
D) has been transferred and the bank and the transferee can qualify as a holder.

Question 38

Which of the following indorsements is a blank indorsement?

A) "For Deposit Only"
B) "Mel Gibbs"
C) "Pay to Jack Black in Trust for Mel Gibbs"
D) "Pay to the Order of Jack Black, Mel Gibbs"

Question 39

Which of the following indorsements is a special indorsement?

A) "For collection only."
B) "Mel Gibbs"
C) "Pay to Jack Black in Trust for Mel Gibbs"
D) "Pay to the Order of Jack Black, Mel Gibbs"

Question 40

A person who takes an instrument containing a restrictive indorsement, "Pay to Jack Black in Trust for Mel Gibbs,":

A) may not pay the proceeds to the indorsee without the due approval of the indorser.
B) may pay the proceeds to the indorsee paying due regard to whether the indorsee violates a fiduciary duty to the indorser.
C) may pay the proceeds to the indorsee without regard to whether the indorsee violates a fiduciary duty to the indorser.
D) may pay the proceeds to the indorser only with the approval and concurrence of the indorsee.

Question 41

In which of the following situations has the holder of a negotiable instrument not given value for it?

A) Where the holder takes the instrument as security for an antecedent claim.
B) Where the holder gives a negotiable instrument in return for the one received.
C) Where the holder receives the instrument as a gift.
D) Where the holder acquires a security interest in the instrument.

Question 42

Which of the following is a "real" defense that is good against a holder in due course of a note?

A) The maker of the note is 15 years old.
B) The note was procured by the payee's threat to prosecute the maker for drug dealing.
C) No consideration was given for the note.
D) The maker was in a seriously delusional state when he completed the note (but had not been declared insane or institutionalized).

Question 43

In the context of overdue instruments, if a due date for the principal has been accelerated:

A) the instrument is overdue when the court passes a judgment to that effect.
B) the instrument is overdue on the day after the grace period of seven days from the accelerated due date.
C) the instrument is overdue on the day after the accelerated due date.
D) the instrument is overdue on the day of the due date.

Question 44

If a negotiable instrument is payable on demand, it is overdue:

A) the day before the demand for payment has been made.
B) 30 days after the demand for payment has been made.
C) the day after demand for the payment has been made in a proper manner.
D) the week after payment has been demanded.

Question 45

A check becomes overdue:

A) 30 days after its date.
B) 60 days after its date.
C) 90 days after its date.
D) after a "reasonable" period of time, in the light of trade practice.

Question 46

What are the general requirements to become a holder in due course?

Question 47

What is the shelter rule in Article 3?

Question 48

In general, the material alteration of a completed negotiable instrument:

A) is a complete defense against a holder in due course.
B) is no defense whatsoever against a holder in due course.
C) means that a holder in due course can enforce the instrument against the maker, but only according to its original tenor.
D) means that a holder in due course can enforce the instrument as modified.

Question 49

Which of the following is NOT a defense specified in Revised Article 3?

A) By way of damages
B) Real defenses
C) Claims to an instrument
D) Claims in recoupment

Question 50

A _____ is a claim of the person obligated on the instrument against the original payee of the instrument.

A) real defense
B) personal defense
C) claim in recoupment
D) claim to an instrument

Question 51

In which of the following situations is an instrument termed as overdue?

A) Where a check was made out 60 days ago.
B) Where there is a default in payment of interest on a note, but not in the payment of the principal.
C) Where the principal on a note is due in installments and an installment has not been paid.
D) Where a note dated January 1 is payable "30 days after date" and is paid on January 31.

Question 52

Which of the following is a personal defense against a holder in due course?

A) Fraud in the essence
B) Forgery
C) Breach of contract
D) Minority or infancy

Question 53

What are the four categories of claims listed in Revised Article 3?

Question 54

_____ are legal reasons for avoiding or reducing liability of an individual who is liable on a negotiable instrument.

A) Personal defenses
B) Procedural defenses
C) Real defenses
D) Excuse defenses

Question 55

Which of the following is generally true about the Federal Trade Commission's (FTC) regulations of the holder in due course rule?

A) Some states have eliminated the holder in due course rule by repealing the previous version of Article 3 and refusing to adopt the new version.
B) The FTC has seriously limited the rule's impact in consumer credit situations in which the consumer signs a note or an installment sales contract, or gets financing from a third party.
C) These changes in the holder in due course rule reflect the economic power and political influence of business interests, especially banks.
D) Overall, the FTC's changes in the holder in due course rule are insignificant, especially in consumer cases.

Question 56

What are the three significant effects resulting from the indorsement of a negotiable instrument?

Question 57

A _____ indorsement can be used with either a blank indorsement or a special indorsement.

A) rebuttal
B) conditional
C) qualified
D) restrictive

Question 58

Pete Payee specially indorses a note payable to his order and also uses the words "without recourse." What is the effect of the words "without recourse" here?

Question 59

A holder in due course does not take free of the _____, which go to the validity of the instrument or of claims that develop after he becomes a holder.

A) personal defenses
B) relative defenses
C) procedural defenses
D) real defenses

Question 60

The negotiation of an instrument made in breach of duty is subject to _____ before the instrument has been negotiated to a transferee who can qualify as a holder in due course

A) rescission
B) remission
C) restitution
D) reformation