Deck 40: Liability of Parties

Question 1

The rationale for the imposter rule is to put the responsibility for determining the true identity of the payee on the drawer or maker of a negotiable instrument.

Answer 1

True

Question 2

Revised Article 3 of the Uniform Commercial Code (UCC) provides that in the event of a breach of a transfer warranty, a beneficiary of the transfer warranties who took the instrument in good faith may recover from the warrantor an amount equal to three times the loss suffered as a result of the breach (i.e., treble damages).

Answer 2

False

Question 3

The terms of the contract of the parties to a negotiable instrument are set out in:

A) the text of the instrument.
B) Article 3 of the Uniform Commercial Code.
C) the cashier's check.
D) Article 5 of the Uniform Commercial Code.

Answer 3

B
Explanation: When a person signs a negotiable instrument, whether as maker, drawer, or indorser, or in some other capacity, she generally becomes contractually liable on the instrument. This depends on the capacity in which the person signed the instrument. The terms of the contract of the parties to a negotiable instrument are not set out in the text of the instrument. Rather, Article 3 of the Uniform Commercial Code supplies the terms, which are as much part of the instrument as if they were part of its text.

Question 4

The maker of a promissory note is primarily liable for payment of it.

Question 5

Contractual liability on negotiable instruments flows from:

A) proper payment of the instruments.
B) signatures on the instruments.
C) nonpresentment of the instruments.
D) writing "without recourse" on the instruments.

Question 6

The Uniform Commercial Code (UCC) allows any indorsement in the name of a fictitious payee to be effective as the payee's indorsement in favor of any person that pays the instrument in good faith or takes it for value or for collection.

Question 7

If a person purporting to act as a representative signs an instrument by signing either the name of the represented person or the name of the signer, that signature binds the represented person to the same extent she would be bound if the signature were on a simple contract.

Question 8

A person who is secondarily liable is like a(n):

A) guarantor on a contract.
B) assignor to a contract.
C) assignee to a contract.
D) drawer of a negotiable instrument.

Question 9

When a person signs a negotiable instrument, she generally becomes contractually liable on the instrument.

Question 10

Which of the following statements is true of the obligations of a maker?

A) The maker of a promissory note is secondarily liable for payment of it.
B) The maker of a promissory note makes a conditional promise to pay a fixed amount of money.
C) The obligation of the maker is to pay the negotiable instrument according to its terms at the time he issues it.
D) The obligation of the maker is owed to an indorser, a person entitled to enforce the instrument.

Question 11

When a representative signs an authorized signature to an instrument, then the representative is not bound provided the signature shows unambiguously that the signature was made on behalf of the represented person who is named in the instrument.

Question 12

A person entitled to enforce a negotiable instrument may not discharge the liability of the parties to the instrument by canceling or renouncing it.

Question 13

Under Revised Article 3 of the Uniform Commercial Code (UCC), presentment must be made by written communication.

Question 14

A person who transfers a negotiable instrument to someone else and for consideration does not warrant that all signatures on the instrument are authentic or authorized.

Question 15

Transfer warranties may not be utilized after the time for giving notice of dishonor has expired.

Question 16

If an authorized representative signs his name as the representative of a drawer of a check without noting his representative status, but the check is payable from an account of the represented person who is identified on the check, the signer is not liable on the check as long as his signature was authorized.

Question 17

If a drawee bank mistakenly paid a check over a stop-payment order, the bank cannot recover if it paid the check to a presenter who had taken the instrument in good faith and for value.

Question 18

The terms of the contract of the parties to a negotiable instrument are typically set out in the text of the instrument.

Question 19

Which of the following statements is true of contractual liability on negotiable instruments?

A) It can arise even when a person has not signed the negotiable instrument.
B) It cannot arise when a person has authorized someone else to sign the negotiable instrument.
C) It can arise from negligence relating to the issuance.
D) It cannot arise from improper payment.

Question 20

If a person has been so negligent in writing or signing a negotiable instrument that he in effect invites an alteration of an unauthorized signature on it, Article 3 of the Uniform Commercial Code (UCC) nevertheless allows her to use the alteration or lack of authorization as a reason for not paying a person who in good faith pays the instrument or takes it for value.

Question 21

Under Revised Article 3 of the Uniform Commercial Code rules for beneficiaries, in the event of a breach of transfer warranty, _____.

A) the damages recoverable will be less than the amount of the instrument
B) the damages recoverable may not be more than the amount of the instrument plus expenses and loss of interest incurred as a result of the breach
C) a beneficiary of the transfer warranties who took the instrument in good faith may not recover from the warrantor an amount equal to the loss suffered as a result of the breach
D) no damages may be recovered

Question 22

Mack is Bertha's agent and is authorized to sign checks for her. Mack signs one of Bertha's checks with his own name only. Which of the following parties is liable on the check?

A) Bertha
B) Mack
C) Mack's bank
D) Bertha's bank

Question 23

When an incomplete instrument is completed after it has left the drawer's hands, a holder in due course can:

A) enforce it as completed.
B) enforce only the intent of the drawer.
C) lose all rights to the instrument.
D) not enforce it as completed.

Question 24

A person who transfers a negotiable instrument to someone else and for consideration makes a warranty that:

A) all signatures on the instrument are authentic.
B) some signatures on the instrument are authorized.
C) the beneficiary cannot recover any amount from the warrantor if the warranty has been breached.
D) the warrantor is aware of insolvency proceedings commenced with respect to the maker.

Question 25

Which of the following statements is true of primary liability on a check when it is issued?

A) The payee is primarily liable on it.
B) The drawer is primarily liable on it.
C) The drawee bank is primarily liable on it.
D) No party is primarily liable on it.

Question 26

Anne borrows $2,000 from Jerry and gives him a promissory note for $2,000 at 10 percent annual interest payable in 100 days. Jerry indorses the note "Pay to the order of Ethan" and negotiates the note to Ethan. At the end of 100 days, Ethan takes the note to Anne. Under these circumstances, if Anne _____.

A) dishonors the note, Ethan can hold Jerry secondarily liable without giving him notice of the dishonor
B) dishonors the note, Ethan cannot sue Anne on the basis of her maker's obligation
C) dishonors the note, Ethan cannot hold Jerry secondarily liable on his indorsement
D) pays Ethan the $2,000 and accrued interest, she can have Ethan mark it "paid" and give it back to her

Question 27

The acceptor's obligation:

A) extends to a person entitled to enforce the draft.
B) does not extend to the drawer.
C) extends to an indorser who does not pay the instrument pursuant to the indorser's liability.
D) does not extend to the indorser who paid the instrument.

Question 28

Chang gives a promissory note to Rahim. Rahim indorses it and negotiates it to John, who indorses it and negotiates it to Andy. Which of the following statements is true of this scenario?

A) Even if John and Rahim do not pay the note, Chang cannot be held liable by Andy because Chang is the maker.
B) Rahim is primarily liable on the basis of his indorsement.
C) John has no liability to Rahim because John indorsed after Rahim indorsed the note.
D) John is primarily liable on the basis of his indorsement.

Question 29

Which of the following is true of the obligations of an acceptor?

A) If the certification or acceptance does not state an amount, then the acceptor is free of all obligations.
B) If the certification of a check or other acceptance of a draft states the amount accepted, the obligation of the acceptor is the amount of the instrument at the time a holder in due course takes it.
C) If the certification of a check or other acceptance of a draft states the amount certified or accepted, the obligation of the acceptor is that amount.
D) If the certification or acceptance does not state an amount, or if the amount of the instrument is subsequently raised, then the obligation of the acceptor is the raised amount.

Question 30

A nonindorsing transferor makes:

A) all six transfer warranties only to the immediate transferor.
B) all five transfer warranties to all subsequent holders.
C) only four transfer warranties to the immediate transferor.
D) all five transfer warranties, with a change in the fourth warranty, to all subsequent holders.

Question 31

Which of the following parties is primarily liable on a certified check?

A) The payee who is a certified holder of the check
B) The drawer
C) The drawee bank that certifies the check
D) The cashier

Question 32

An indorser's liability is discharged if the check is not presented within _____ after the indorsement.

A) 15 days
B) 14 days
C) 30 days
D) 48 hours

Question 33

Themba stole Umi's checkbook and wrote a check for $100 forging Umi's signature. Under these circumstances, _____.

A) Themba, but not Umi, is liable on the check
B) Umi, but not Themba, is liable on the check
C) both Themba and Umi are liable on the check
D) the bank will be liable on the check

Question 34

Anupama drew a check on her account at Mortimer Bank payable to the order of Prahlad. When Prahlad presented the check for payment, Mortimer Bank refused to honor the check. Under these circumstances, the bank _____.

A) may be liable to Anupama for wrongfully refusing payment if Anupama has sufficient funds in her checking account to cover it
B) may be liable to Prahlad for wrongfully refusing payment if Anupama has sufficient funds in her checking account to cover it
C) has breached its transferor's warranties
D) will be liable to both Prahlad and Anupama

Question 35

Which of the following statements is true of the obligation of the maker?

A) It is owed to a person who is not entitled to enforce the instrument.
B) It is given to a nonholder in possession of the instrument, who does not have the rights of a holder.
C) It is owed to any indorser who paid the instrument pursuant to her indorser's liability.
D) It is to pay the negotiable instrument even if it has not been signed by the maker.

Question 36

James draws a check on his account at Harper Bank payable to the order of Terry. James does not ask Harper Bank to accept or certify the check. If Harper Bank does not pay the check when Terry presents it for payment, then:

A) Harper Bank is liable to James because it was not asked to accept or certify the check.
B) James is liable to Terry on the basis of his drawer's obligation.
C) James transfers his duties as a drawer to the drawee bank, and the bank is liable.
D) Terry is liable to James because the bank does not pay the check when Terry presents it for payment.

Question 37

Gabrielle borrows $1,000 from Frank to pay for school and gives Frank a note for that amount. Frank wants Gabrielle's father to sign as an accommodation party. Gabrielle's father signs below Gabrielle's signature on the fall of the note. Which of the following statements is true of this case?

A) Only Gabrielle has primary liability as a maker.
B) Only Gabrielle's father has primary liability as an accommodation maker.
C) Gabrielle and her father have the same contractual liability.
D) Gabrielle has primary liability, and her father has secondary liability.

Question 38

Igor signed a note to Gogh Bank, and his friend Sergei also signed the note as an accommodation maker. If Igor defaults on the note when it is due, what are Sergei's rights and obligations?

A) Sergei has the right to recover his payment from the bank.
B) Sergei has the same contractual liability as Igor and must pay the bank.
C) Sergei cannot recover his money from Igor or the bank since he has primary liability.
D) Sergei has secondary liability.

Question 39

Peter draws a check on his account at Wright Bank payable to the order of Stella. Peter asks Wright Bank to certify the check and the bank certifies it. Stella presents the check to Wright Bank for payment. Which of the following statements is true of this case?

A) Wright Bank becomes primarily or absolutely liable on the check.
B) Peter is primarily liable on the check.
C) Wright Bank is secondarily liable on the check.
D) Wright Bank has no contractual liability on the check whatsoever.

Question 40

People who present drafts for warranties:

A) do not make a warranty that they have knowledge of the insolvency proceedings commenced regarding the drawer.
B) make a warranty that the instrument has not been altered.
C) make warranties that are similar to those transferors make.
D) make a warranty that they are aware of the unauthorized signature of the maker.

Question 41

"Responsibility" with respect to instruments means the authority to:

A) access instruments in incoming or outgoing mails.
B) process instruments for issue in the name of fictitious payees.
C) prepare or process instruments for issue in the name of the employer.
D) have access to instruments in storage.

Question 42

Maya stole a check from Orhan payable to the order of Orhan. Maya forged Orhan's signature and presented the check for payment at Winston Bank, which honored the check. If Orhan sues Winston Bank for the amount of the check, under what theory, can Orhan recover the funds from the bank?

A) Conversion
B) Fraud
C) Unfair and deceptive practices
D) Fictitious payee rule

Question 43

Conversion of an instrument:

A) is an authorized assumption and exercise of ownership over it.
B) may occur if a person pays an instrument on a forged indorsement.
C) differs from conversion of personal property with respect to the applicable laws.
D) occurs if it does not lack indorsement necessary for negotiation.

Question 44

What are the most common ways an obligor on a negotiable instrument is discharged from his liability?

Question 45

Discuss the obligation of the maker of a promissory note.

Question 46

List the six transfer warranties made by a person who transfers his or her negotiable instrument to someone else and for consideration.

Question 47

Define the situations that lead to the dishonoring of a note by the maker.

Question 48

A holder in due course may discharge the liability of the parties to the instrument by:

A) publishing notice.
B) canceling it.
C) accidentally destroying it.
D) paying for it even if it is a stolen one.

Question 49

Ivan is a representative of Sigma Inc., Checks are drawn by "Sigma Inc., Payroll Account (signed)
D. Ivan," but the checks are not paid. Who is liable on the instrument-the individual or the corporation?
When a representative signs an authorized signature to an instrument, then the representative is not bound provided the signature shows "unambiguously" that the signature was made on behalf of the represented person who is named in the instrument. Sigma Inc. is, therefore, liable for payment of the checks and not Ivan, even though Ivan signed the checks.

Question 50

The impostor rule regarding negotiable instruments:

A) is devised not to put the responsibility for determining the true identity of the payee on the drawee of a check.
B) makes the payee's signature valid even though it is a forgery.
C) does not force the maker to find the wrongdoer.
D) lays the responsibility of determining the identity of payee on later holders of an instrument.