Deck 30: Liability of the Parties Under Negotiable Instruments

Question 1

Instruments may not be negotiated if they have been dishonored by non-acceptance.

Answer 1

False

Question 2

In general, transferees who are aware of facts that would make a reasonable person ask questions are deemed to know what they would have learned if they had asked questions.

Answer 2

True

Question 3

Incapacity of the maker or drawer is a limited defense not available against a holder in due course.

Answer 3

True

Question 4

A universal defense will defeat a holder in due course and a holder through a holder in due course.

Question 5

A holder through a holder in due course is subject to all defenses.

Question 6

A holder can recover from any of the parties who are liable on the instrument, regardless of the order of the signatures on the instrument.

Question 7

Parties with rights in a negotiable instrument can be assignees or holders.

Question 8

An ordinary contract defense is a limited defense not available against a holder in due course.

Question 9

For the purposes of determining holder in due course status, the requirement of value is similar to consideration.

Question 10

Unlike ordinary holders or assignees, holders in due course take free of contract assignment defenses that are good against ordinary holders or assignees.

Question 11

The fact that a person signs a negotiable instrument because he or she is fraudulently deceived regarding its nature or essential terms is a defense available against all holders.

Question 12

To have the status of a holder in due course, a person must first be a holder.

Question 13

A holder who is neither a holder in due course nor a holder through a holder in due course is subject to every defense, just as though the instrument were not negotiable.

Question 14

A limited defense will not defeat a holder in due course but will defeat an ordinary holder.

Question 15

The law gives certain holders of a negotiable instrument a preferred standing by protecting them from all defenses when they sue to collect payment.

Question 16

Fraud as to the nature or essential terms of an instrument is a limited defense not available against a holder in due course.

Question 17

A holder of a negotiable instrument cannot be a holder in due course when the holder learns of a defense to payment after the acquisition of the instrument.

Question 18

A person who buys a note from a holder in due course knowing that the maker has a defense will not be a holder through a holder in due course.

Question 19

Under the "close-connection" doctrine, a holder has taken so many instruments from its transferor or is so closely connected with the transferor that any knowledge the transferor has is deemed transferred to the holder, preventing holder in due course status.

Question 20

A holder having the rights of a holder in due course is subject to the defense of fraud in the inducement.

Question 21

The Federal Trade Commission expands the rights of a holder in due course in a consumer credit transaction.

Question 22

You are forced to sign a check over to an individual who subsequently transfers the instrument to another. You have only a limited defense regarding payment and therefore would have to pay a holder in due course.

Question 23

The FTC rule concerning holders in due course is confined to consumer credit transactions.

Question 24

For a change to constitute an alteration, the person making the change must be a party to the instrument.

Question 25

Under the __________doctrine, the holder has taken so many instruments from its transferor or is so closely connected with the transferor that any knowledge the transferor has is deemed transferred to the holder, preventing holder in due course status.

A) constructive partnership
B) close-connection
C) symbiotic relationship
D) collaborative relationship

Question 26

A person who acquires a negotiable instrument with notice or knowledge that any party might have a defense or that there is any adverse claim to the ownership of the instrument:

A) has acted in bad faith.
B) has acted illegally.
C) cannot be a holder in due course.
D) has taken unfair advantage of the maker.

Question 27

Jones issued a check to Smith in return for Smith's promise to do work. Smith never did the promised work, but offered to buy goods from Gomez by endorsing the check to Gomez. Gomez had had no prior dealings with Jones or Smith, but accepted the check in payment. Gomez:

A) cannot be a holder in due course.
B) is considered an assignee of Smith's rights.
C) is a holder through a holder in due course.
D) is a holder in due course.

Question 28

The defense that a signature was forged or signed without authority cannot be raised against any holder if the person whose name was signed has ratified it.

Question 29

A holder is a party in possession of an instrument that "runs" to him. An instrument runs to a party if it is:

A) payable to his or her order.
B) bearer paper.
C) indorsed to him or her.
D) all of the above.

Question 30

Incapacity cannot be raised as a defense against a holder in due course.

Question 31

The primary party on a note or certificate of deposit is the drawer.

Question 32

A holder in due course must meet all of the following conditions except:

A) giving no value for the instrument.
B) taking the instrument for value.
C) acting in good faith.
D) being ignorant of the fact that the paper is overdue or dishonored.

Question 33

An instrument may be negotiated even though:

A) it has been dishonored.
B) it is overdue.
C) it is demand paper that has been outstanding for more than a reasonable period of time.
D) all of the above.

Question 34

Which of the following parties will recover in a lawsuit if no defense is raised?

A) only a holder in due course
B) only a holder through a holder in due course
C) only an ordinary holder
D) any holder or assignee

Question 35

A taker of an instrument who is a holder in due course at the time of the transfer but who thereafter learns of a defense:

A) becomes a holder through a holder in due course.
B) becomes an ordinary holder.
C) remains a holder in due course.
D) becomes an assignee.

Question 36

Illegality is a universal defense regardless of whether the illegality voids an instrument.

Question 37

Mabel issues a negotiable promissory note to the order of Rachel. Rachel endorses the note to Batton, who takes it as a holder in due course. Batton gives the note to his brother, Albert, as a gift. In this situation:

A) Albert will acquire Batton's rights.
B) Albert is a holder in due course.
C) Batton can sue only on the instrument if he took it before maturity.
D) none of the above.

Question 38

The primary party on a draft is the drawee, assuming that the drawee has accepted the draft.

Question 39

If the finance company to which a seller of goods on credit assigns the buyer's promissory note is more than half-owned by the seller, the finance company will likely be held a participating transferee and, as a result, will be denied the status of a holder in due course.

Question 40

Which of the following will not be considered value in connection with determining holder in due course status?

A) performing the act for which the instrument was given
B) promising to perform an existing legal obligation
C) receiving the instrument as security for a loan
D) taking the instrument in payment of a debt

Question 41

Bill decided that it was time to remodel his home. Among the features that Bill had included in his remodeling plan was the addition of several very large picture windows. Because of the great expense of the windows, Bill financed the cost through the issuance of a promissory note. The manufacturer of the windows sold the promissory note to a bank. Just after the promissory note matured, the windows began to leak badly. Bill refused to pay on his promissory note and brought action against the manufacturer for breach of contract. Will the bank recover on the promissory note?

Question 42

Manuel sued Patricia on a promissory note. Patricia admitted signing the note, but raised the defense that Manuel was not a holder in due course. Can Manuel recover without proving that he is a holder in due course?

Question 43

If a negotiable instrument is endorsed to a specific person but never delivered to that person:

A) the maker is guilty of fraud in the inducement.
B) there is no negotiation because there has been no delivery.
C) the instrument is canceled.
D) the maker's obligation is automatically revoked.

Question 44

Universal defenses work against:

A) holders.
B) a holder through a holder in due course.
C) a holder in due course.
D) all of the above.

Question 45

A taker of a negotiable instrument may be denied the status and protection of a holder in due course where:

A) one party is a consumer.
B) the close-connection doctrine applies.
C) the instrument is bearer paper.
D) none of the above.

Question 46

Fraud in the inducement is a:

A) limited defense not available against a holder in due course.
B) universal defense available against all holders.
C) limited defense available against all holders.
D) universal defense not available against a holder in due course.

Question 47

A holder through a holder in due course:

A) has greater rights than a holder in due course.
B) has fewer rights than a holder in due course.
C) has the same rights as a holder in due course.
D) must meet the requirements for becoming a holder in due course in order to achieve holder in due course status.

Question 48

Which of the following defenses will defeat a holder in due course?

A) fraud in the inducement
B) fraud as to the nature or essential terms of the paper
C) ordinary contract defenses
D) none of the above

Question 49

Which of the following is not a universal defense available against all holders?

A) fraud as to the nature or essential terms of the instrument
B) forgery or lack of authority
C) fraud in the inducement
D) duress depriving control

Question 50

Isidro issued a negotiable promissory note to his attorney in return for the attorney's promise to perform legal services. The attorney never rendered the legal services but quickly negotiated the note to Anna, a holder in due course. Anna and Mark were involved in business negotiations and Anna offered to purchase a car from Mark. She offered as part payment for the car the note issued by Isidro. By coincidence, Mark knew both Isidro and the attorney and the facts concerning the note and the unperformed legal services. Despite this, Mark accepted a negotiation of the note from Anna. Isidro refused to pay the note and Mark eventually sued Isidro to collect. What is the probable outcome?

Question 51

A(n) __________ is an unauthorized change or completion of a negotiable instrument designed to modify the obligation of a party to the instrument.

A) alteration
B) modification
C) transformation
D) transmutation

Question 52

The FTC rule, which provides that a notice provision must be included in all consumer credit contracts, requires that the notice:

A) limit recovery under the contract to amounts paid by the debtor plus a reasonable charge for incidental damages.
B) be in italic type.
C) be at least 20 points in size.
D) have the effect of treating any holder of the contract as an assignee of the seller.

Question 53

A negotiable promissory note was issued by Gold. It was properly issued in all ways. Nevertheless, the payee managed to alter the note and raise the amount from $500 to $5,000. A holder in due course presented the note for payment to Gold who discovered the alteration. In this case:

A) Gold is liable for $500 only.
B) Gold is liable for the full $5,000.
C) Gold has no liability on the altered note.
D) Gold is liable for $2,500.