Deck 17: Negotiable Instruments: Negotiability and Transferability

Question 1

Which of the following constitutes taking an instrument for value in order to be considered a holder in due course?

A) Providing consideration for the instrument.
B) Providing a bargained-for promise in return for the instrument.
C) Taking the instrument in exchange for a promise that has already been performed.
D) Taking the instrument after beginning performance on a promise in return.
E) All of these.

Answer 1

C
Explanation: The for-value requirement is more stringent than consideration in that the party must take the instrument in exchange for a promise that has already been performed.

Question 2

The fact that an instrument has been refused by a bank means that it has been dishonored.

Answer 2

True
Explanation: An instrument is dishonored when a party refuses to pay the instrument.

Question 3

A bank has given value for a negotiable instrument to the extent that the bank has a security interest in the instrument.

Answer 3

True
Explanation: A holder can take an instrument for value if the holder acquires a security interest or other lien in the instrument.

Question 4

Which of the following is false regarding the ways by which a holder may take an instrument for value?

A) The holder performs the promise for which the instrument was issued or has started performance.
B) The holder acquires a security interest or other lien in the instrument.
C) The holder takes the instrument for payment of a preceding claim.
D) The holder exchanges the instrument for another negotiable instrument.
E) The holder exchanges the instrument for an irrevocable obligation to a third party.

Question 5

Which of the following prevents a holder from being a holder in due course?

A) Notice that the instrument is overdue.
B) Notice that the instrument has been dishonored.
C) Notice that the instrument was issued as part of a series that is in default.
D) Notice that the instrument is overdue, notice that the instrument has been dishonored, and also notice that the instrument was issued as part of a series that is in default.
E) Notice that the instrument is overdue or notice that the instrument has been dishonored, but not notice that the instrument was issued as part of a series that is in default.

Question 6

Students may not electronically sign student loans.

Question 7

Under the UCC, when does a person have notice of a fact?

A) When the person has actual notice of the fact.
B) When the facts and circumstances known to the person at the time in question give the person reason to know that the facts exist.
C) When the person receives notice or notification of the facts.
D) When the person has actual notice of the fact, when the facts and circumstances known to the person at the time in question give the person reason to know that the facts exist, and also when the person receives notice or notification of the facts.
E) When the person has actual knowledge of the fact, or the facts and circumstances known to the person at the time in question give the person reason to know that the fact exists, but not that the person receives notice or notification of the fact.

Question 8

Which of the following is false regarding the elements a party must meet in order to be considered a holder in due course?

A) The party must be a holder of a complete and authentic negotiable instrument.
B) The holder must take the instrument for value.
C) The holder must take the instrument in good faith.
D) The holder must take the instrument without notice of defects.
E) The holder must either pay for the instrument or receive it as a gift.

Question 9

A time instrument becomes overdue at any date after the expressed due date on the instrument.

Question 10

A party who is primarily liable on an instrument must pay without resorting to any other party.

Question 11

Which of the following is a party who is in possession of an instrument that is payable to the party or to the bearer of the instrument?

A) A holder.
B) A bearer.
C) A payee.
D) An issuer.
E) A transferee.

Question 12

If a transfer is through endorsement, transfer warranties apply to any future holder; however, if the transfer does not occur through endorsement, the warranties apply only to the transferee.

Question 13

If Alice makes a proper tender of the full payment of $1,000 due on Richard's note on the note's due date, but Richard improperly refuses to accept the money, Alice will still be liable for the $1,000, but will not have to pay any interest on the amount.

Question 14

According to the UCC, a signature can be any name, word, mark, or symbol used by a party to authenticate a writing.

Question 15

Receiving an instrument as a gift satisfies the holder in due course requirement of taking an instrument for value.

Question 16

A payee may not be a holder in due course.

Question 17

Which of the following is the principle that if an item is transferred from one person to another, the transferee acquires all the rights to transfer or have in the item?

A) The shelter principle.
B) The transfer principle.
C) The transferee principle.
D) The transferor principle.
E) The holder principle.

Question 18

If an accommodation party pays a note for an accommodated party, the accommodation party has a right of action against the accommodated party to recover the money paid.

Question 19

A party cannot be a holder in due course of a non-negotiable instrument.

Question 20

Which of the following does the UCC define as, "honesty in fact and the observance of reasonable commercial standards for fair dealing?"

A) Commercial standards
B) Subjective reasonableness.
C) Objective reasonableness.
D) Good faith.
E) Reasonable investigation.

Question 21

Which of the following is a personal identifier that can be broken into electronic code?

A) A screen name.
B) A digital signature.
C) A code signature.
D) An identified signature.
E) A maker signature.

Question 22

The type of liability that occurs because a person signs a negotiable instrument is referred to as which of the following?

A) Warranty liability
B) Payee liability
C) Signature liability
D) Primary liability
E) Secondary liability

Question 23

After initially receiving notice of dishonor, when must parties other than a collecting bank give notice of dishonor to a secondarily liable party?

A) Before midnight of the next day.
B) Within 48 hours.
C) Within 7 days.
D) Within 10 days.
E) Within 30 days.

Question 24

A party who is ___________ liable is liable for paying the amount designated on an instrument should the primarily liable party default.

A) Primarily
B) Secondarily
C) Warranty
D) UCC
E) Preventable

Question 25

Which of the following gives legal force to digital signatures and online contracts in financial, business, consumer, personal, and government contexts?

A) The Digital Signatures in Commerce Act.
B) The Electronic and National Digital Act.
C) The Electronic Signatures in Global and National Commerce Act.
D) The Digital Signals in International and National Transactions Act.
E) The Electronic Signatures in International and Federal Commerce Act.

Question 26

Which of the following is a type of digital signature?

A) Biometric.
B) Key-based.
C) Identifiable.
D) Biometric, key-based, and identifiable.
E) Biometric and key-based, but not identifiable.

Question 27

Which of the following is a type of liability on an instrument arising when the transfer of the instrument breaches a warranty associated with the instrument?

A) Warranty liability.
B) Payee liability.
C) Signature liability.
D) Primary liability.
E) Secondary liability.

Question 28

Under the UCC, how can proper presentment be made?

A) By any commercially reasonable means.
B) Through a clearinghouse procedure.
C) At a place designated in the instrument.
D) By any commercially reasonable means, through a clearinghouse procedure, and also at a place designated in the instrument.
E) Through a clearinghouse procedure or at the place designated in the instrument, but not by any commercially reasonable means.

Question 29

Susan purchased a refrigerator from ABC Appliance store for $700 giving the store a promissory note for that amount. She takes the refrigerator home and discovers that it is defective. She calls ABC Appliance store and tells them that she would like to return the refrigerator. ABC Appliance store tells her that they have assigned the promissory note she provided the store in order to purchase the refrigerator to a finance company. The finance company tells her that it is a holder in due course not subject to her claim of defect. Which of the following is true regarding the rights of parties?

A) The finance company is subject to the defenses of Susan because of a Federal Trade Commission (FTC) rule created to protect consumers.
B) ABC Appliance store is correct in that Susan cannot assert her defenses against the finance company.
C) Susan can assert her defenses against the finance company only if she can prove that the finance company had knowledge that ABC Appliance store sold defective equipment from time to time.
D) Susan can assert her defenses against the finance company only because she gave notice of the problem within 5 days of the sale.
E) Susan can assert her defenses against the finance company only if she agrees to arbitrate the dispute.

Question 30

Which of the following is a person (drawee) who accepts and signs a draft to agree to pay the draft when it is presented?

A) Maker.
B) Acceptor.
C) Drawer.
D) Endorser.
E) Promisor.

Question 31

Which of the following must occur for a drawer to become liable on an instrument?

A) The holder of the instrument must present the instrument in a proper and timely fashion.
B) The instrument must be dishonored.
C) Notice of the dishonor must be given to the drawer.
D) The holder of the instrument must present the instrument in a proper and timely fashion, the instrument must be dishonored, and notice of the dishonor must be given to the drawer.
E) The holder of the instrument must present the instrument in a proper and timely fashion and the instrument must be dishonored, but there is no requirement of notice of dishonor since the injured party may proceed directly to court.

Question 32

Which of the following is a person who signs an instrument to restrict payment of it, negotiate it, or incur liability?

A) Maker.
B) Acceptor.
C) Drawer.
D) Endorser.
E) Promisor.

Question 33

In what year did the Electronic Signatures in Global and National Commerce Act become federal law?

A) 1990
B) 1994
C) 1998
D) 2000
E) None of these

Question 34

Which of the following is a person promising to pay a set sum to the holder of a promissory note or certificate of deposit?

A) Maker
B) Acceptor
C) Drawer
D) Endorser
E) Promisor

Question 35

Which of the following is true regarding negotiable instruments in England?

A) Promissory notes can be negotiated between parties.
B) Checks can be negotiated between parties.
C) Bills of exchange can be negotiated between parties.
D) Promissory notes can be negotiated between parties, checks can be negotiated between parties, and bills of exchange can be negotiated between parties.
E) Promissory notes and checks can be negotiated between parties, but bills of exchange cannot be negotiated between parties.

Question 36

Which of the following is true regarding liability on negotiable instruments?

A) Makers and acceptors are primarily liable for a negotiable instrument, while drawers and endorsers are secondarily liable.
B) Drawers and endorsers are primarily liable, while makers and acceptors are secondarily liable.
C) Makers and drawers are primarily liable, while acceptors and endorsers are secondarily liable.
D) Acceptors and endorsers are primarily liable, while makers and drawers are secondarily liable.
E) Makers, acceptors, drawers, and endorsers are all secondarily liable.

Question 37

Which of the following is a party who must pay the stated amount of an instrument when it is initially presented for payment?

A) A party who is secondarily liable.
B) A party who is a drawer and a party who is secondarily liable.
C) A party who is an endorser.
D) A party who is a drawer or an endorser.
E) A party who is primarily liable.

Question 38

When a holder presents an instrument in a timely and proper manner, but acceptance or payment is refused, the instrument has been ___________.

A) Destroyed
B) Dishonored
C) Converted
D) Rejected
E) Refused

Question 39

If the party that dishonors an instrument is a collecting bank, when must notice of the dishonor be given to a secondarily liable party by the collecting bank?

A) Before midnight of the next day.
B) Within 48 hours.
C) Within 7 days.
D) Within 10 days.
E) Within 30 days.

Question 40

Which of the following is a person ordering the drawee to pay?

A) Maker.
B) Acceptor.
C) Drawer.
D) Endorser.
E) Promisor.

Question 41

A[n] ___________ party is a party who signs an instrument to provide credit for another party that has also signed the instrument.

A) Agreeable
B) Accommodation
C) Agent
D) Principle
E) Promisor

Question 42

When a party signs a negotiable instrument without knowing that it is, in fact, a negotiable instrument, the party can claim ______________.

A) Negligence
B) Recklessness
C) Malice
D) Fraud in the factum
E) Fraud and nonacknowledgement

Question 43

Zachary, who has been authorized to write a check from a company account to pay employees, draws bonus checks from the company account for five imaginary employees; endorses the checks in their names; and deposits those into his own bank account. Which of the following is true regarding whether the company will be required to take the loss on the checks?

A) Under the fictitious payee rule, the company will be required to take the loss on the checks unless the company can obtain the funds from Zachary.
B) Under the imposter rule, the company will be required to take the loss on the checks unless the company can obtain the funds from Zachary.
C) Under the transferor rule, the company will be required to take the loss on the checks unless the company can obtain the funds from Zachary.
D) Under the employee-liability rule, the company will be able to recover from any bank that cashed the check in addition to Zachary.
E) Under the banking liability act, the company will be able to recover from any bank that cashed the check in addition to Zachary.

Question 44

Which of the following is the most likely result if an agent admits to the principal that a check for the principal was forged and placed into the agent's bank account, but the principal does nothing until two months later after the agent leaves town with the funds?

A) Because the checks were forged, the principal can receive reimbursement of the funds from any maker involved or any bank that cashed the checks.
B) The principal can receive reimbursement from makers of the checks only.
C) The principal can receive reimbursement from any bank that cashed the checks only.
D) It is likely that it will be determined that the principal ratified the signatures and that the principal cannot recover from either makers or banks that cashed the checks.
E) The principal can recover from either the makers or any banks who cashed the checks only if it can be shown that the agent cannot be located for criminal prosecution.

Question 45

Which of the following will be considered a personal defense to payment of an instrument?

A) Breach of contract or warranty.
B) Fraud in the inducement.
C) Illegality.
D) Breach of contract or warranty, fraud in the inducement, and illegality.
E) Illegality and lack or failure of consideration, but not breach of contract or warranty.

Question 46

Which of the following is true?

A) As soon as a transferee discovers a breach of warranty has occurred, he or she can bring suit against the transferor.
B) A transferee must wait at least 48 hours after he or she discovers that a breach of warranty has occurred before bringing suit against the transferor.
C) A transferee must wait at least 5 days after he or she discovers that a breach of warranty has occurred before bringing suit against the transferor.
D) A transferee must wait at least 10 days after he or she discovers that a breach of warranty has occurred before bringing suit against the transferor.
E) A transferee must wait at least 30 days after he or she discovers that a breach of warranty has occurred before bringing suit against the transferor.

Question 47

Carl, without Eddie's knowledge, impersonates Eddie and thereby convinces Connie, who has never seen Eddie, to write a check to Eddie, on which Carl forges Eddie's name and deposits into his, Carl's, account. Which of the following is true regarding whether Connie will be liable for the amount of the check?

A) Under the forgery rule, Connie will be held liable.
B) Under the transferor rule, Connie will be held liable.
C) Under the payee rule, Connie will be held liable.
D) Under the imposter rule, Connie will be held liable.
E) Under the fictitious payee rule, Connie will not be held liable.

Question 48

Which of the following is an Article 3 personal defense to liability on a negotiable instrument?

A) Nonissuance of an instrument.
B) Modification of obligation by separate agreement.
C) Nondelivery of the instrument.
D) Nonissuance of an instrument, modification of obligation by separate agreement, and nondelivery of the instrument.
E) Nondelivery of the instrument or nonissuance of the instrument, but not modification of obligation by separate agreement.

Question 49

Which of the following may be considered a commercially reasonable manner by which notice of dishonor can be given to a secondarily liable party?

A) Orally
B) In writing
C) Electronically
D) Orally, in writing, and electronically
E) By certified letter only

Question 50

When will a party's negligence not permit the party to escape liability for an unauthorized signature?

A) Any type of negligence will result in a party being unable to escape liability for an unauthorized signature.
B) The issue of negligence is irrelevant as to the issue of whether a party may escape liability for an unauthorized signature because a party is always liable for an unauthorized signature.
C) A party who is negligent may not escape liability for an unauthorized signature if the party whose signature was forged behaved so negligently as to substantially contribute to the making of the forgery.
D) A party's negligence will not permit the party to escape liability for an unauthorized signature only if the negligence amounts to a finding of recklessness.
E) A party's negligence will not permit the party to escape liability for an unauthorized signature only if the negligence involved a certified check.

Question 51

Which of the following is true in the event an instrument contains more than one endorsement?

A) Each endorser is liable for the full amount to the subsequent endorser or to the holder.
B) Only the last endorser is liable to the holder and no prior endorsers are liable to a subsequent endorser.
C) Each endorser is liable for the full amount to the subsequent endorser, but only the last endorser is liable to any holder.
D) The last endorser is liable to the holder, whereas subsequent endorsers are responsible for reimbursing previous endorsers in proportion to the number of endorsers that exist.
E) Each endorser is liable to the holder in proportion to the number of endorsers.

Question 52

Which of the following is true regarding the liability of an accommodation party?

A) As a maker, an accommodation party has primary liability; but, as an endorser, the party has secondary liability.
B) An accommodation party has primary liability both as a maker and as an endorser.
C) An accommodation party has secondary liability both as a maker and as an endorser.
D) An accommodation party has primary liability as either a maker or endorser only if all other parties to the instrument have filed bankruptcy.
E) An accommodation party has primary liability as a maker only if all other parties have filed bankruptcy, and secondary liability in any other case regardless of whether the accommodation party is the maker or endorser.

Question 53

If an instrument is not an unaccepted draft presented to a drawee, which of the following presentment warranties is applicable?

A) That the warrantor of the instrument is entitled to payment.
B) That the instrument has not been altered.
C) That the warrantor has no knowledge that the drawer's signature or the draft is unauthorized.
D) That the warrantor of the instrument is entitled to payment, that the instrument has not been altered, and that the warrantor has no knowledge that the drawer's signature or the draft is unauthorized.
E) The warrantor of the instrument is entitled to enforce the instrument and that the warrantor has no knowledge that the drawer's signature or the draft is unauthorized, but not that the instrument has not been altered.

Question 54

Which of the following results in liability of the principal because the principal approved of an unauthorized agent's signature?

A) Ratification.
B) Authorization.
C) Acknowledgement.
D) Pre-approval.
E) Post-approval.

Question 55

When a party's liability for a negotiable instrument is terminated, this party's liability has been ___________.

A) Terminated
B) Released
C) Discharged
D) Abrogated
E) Delivered

Question 56

Which of the following is a type of warranty regarding instruments?

A) Transfer.
B) Presentment.
C) Acknowledgement.
D) Transfer, presentment, and acknowledgement.
E) Transfer and presentment, but not acknowledgement.

Question 57

Which of the following is true regarding discharge by impairment of collateral?

A) Discharge cannot occur through impairment of collateral.
B) If a party posts collateral to ensure his or her performance of the negotiable instrument and the holder of the collateral impairs the value of the collateral, the party to the instrument is discharged from the instrument to the extent of the damage to the collateral.
C) If a party posts collateral to ensure his or her performance of the negotiable instrument and the holder of the collateral impairs the value of the collateral, the party to the instrument is totally discharged from the instrument regardless of the extent of the damage to the collateral.
D) If a party posts collateral to ensure his or her performance of the negotiable instrument and the holder of the collateral impairs the value of the collateral, the party to the instrument is totally discharged from the instrument only if the instrument is in an amount less than $500; otherwise, the party to the instrument is discharged from the instrument to the extent of the damage to the collateral.
E) If a party posts collateral to ensure his or her performance of the negotiable instrument and the holder of the collateral impairs the value of the collateral, the party to the instrument is totally discharged from the instrument only if the instrument is in an amount less than $1,000; otherwise, the party to the instrument is discharged from the instrument to the extent of the damage to the collateral.

Question 58

Real defenses apply to ___________, and personal defenses do not apply to ___________.

A) All parties; holders in due course
B) Holders; holders in due course
C) Holders; holders
D) All parties; holders
E) All parties; endorsers

Question 59

Which of the following occurs when a former holder of an instrument has the instrument transferred back to him by negotiation or other means?

A) Cancellation.
B) Renunciation.
C) Reacquisition.
D) Recourse.
E) Release.

Question 60

Which of the following is true regarding how an accommodation party may sign an instrument?

A) As a maker.
B) As a drawer.
C) As an acceptor.
D) As an endorser.
E) All of these.

Question 61

A right to ___________ is the ability of a party to seek reimbursement.

A) Reimbursement
B) Recourse
C) Renunciation
D) Remedy
E) Refusal

Question 62

Reference - Run Around. Millie issues a note to Bob. Bob endorses the note and transfers it to Anne. Anne endorses the note and transfers it to Henry. In a timely fashion, Henry endorses the note and presents it to Millie for payment. When Henry presents the note to Millie, she asks him for reasonable identification. He did not have any identification with him and told her that she had no right to dishonor the instrument. Millie, however, refused to provide him the funds until he returned with proper identification. Nevertheless, when he returned with proper identification, Millie refused to pay the note, claiming that she lacked the funds with which to do so. Henry proceeded immediately to request that Anne pay the note, but she told him that he would have to get his money from Bob, who cannot be found. Which of the following is true regarding when, and if, the note was dishonored?

A) The note was never dishonored by Millie because she eventually acknowledged his entitlement to payment and only refused to pay because she lacked funds with which to do so.
B) Millie dishonored the instrument when she asked for proper identification.
C) Millie dishonored the instrument when she refused to pay it on the basis that she lacked funds with which to do so, but Anne did not dishonor the instrument.
D) Anne dishonored the instrument when she told Henry that he would have to seek recovery from Bob, but Millie did not dishonor the instrument.
E) Millie dishonored the instrument when she told Henry that she could not pay him because she lacked the funds, and also Anne dishonored the instrument when she told Henry that he would have to seek payment from Bob.

Question 63

Reference - Hot Dress. Doreen writes a check for a dress to Hot Dresses, Inc., a small specialty shop owned primarily by Betty. Betty was getting ready to go on an extended European vacation and temporarily closed down the shop the day after the dress sale to Doreen. When Betty returned, she had a number of other things to do and did not take Doreen's check and some other checks to the bank for three months. Betty was independently wealthy and only ran the shop as a hobby, so she had not been in need of funds. When Betty finally took Doreen's check to the bank, Betty requested that her bank, ABC Bank, deposit the check into her account. When ABC Bank, however, requested payment from Doreen's bank, XYZ Bank, the check was dishonored because of insufficient funds in Doreen's account. Although Betty did not particularly need the funds, she did not like to feel as if she had been cheated; therefore, she demanded that Doreen make the check good. Which of the following would be considered the drawer of the check Doreen presented to Betty at Hot Dresses, Inc.?

A) Doreen.
B) Hot Dresses, Inc.
C) Betty, because she owned Hot Dresses, Inc.
D) Doreen's bank.
E) Betty's bank.

Question 64

Reference - Angry employee. Martin is in charge of payroll and other expenses for ABC, Inc. He becomes very angry with his boss Adam because Adam started dating Martin's girlfriend Stacy. Martin decided to quit but not before he got some extra money from ABC, Inc. Martin wrote five checks from the account of ABC, Inc. to pay off the five credit card companies that Martin owed money. The credit card companies took the checks without reason to be suspicious as to the source of payment. The checks to the credit card companies in total amounted to $30,000, and each check was in an amount under $10,000. Martin also made out ten checks on the account of ABC to twenty alleged employees who did not really exist. Each of these checks was in the amount of $5,000. Martin took the checks, endorsed and cashed the checks in the names of the various fake employees, and kept the cash. Finally, Martin discovers through office gossip that Adam has been looking for another job with XYZ, Inc. located in a neighboring state and that Adam is supposed to go there for an in person interview in a few weeks. Martin sets up an interview with XYZ, Inc. pretends to be Adam, and induces XYZ, Inc. to give him, posing as Adam, a check for $5,000 as a signing bonus. Martin immediately endorses the check pretending to be Adam and pockets the cash. Finally, Martin leaves town heading for the Caribbean. Is ABC, Inc. entitled to a refund from its bank for the five checks used to pay Martin's credit card companies?

A) Yes, ABC, Inc. is entitled to a refund because the credit card companies cannot be considered payees.
B) Yes, ABC, Inc. is entitled to a refund because the credit card companies cannot be considered holders in due course.
C) Yes, ABC, Inc. is entitled to a refund because the credit card companies can reverse the credits.
D) No, ABC, Inc. is not entitled to a refund because none of the checks were in an amount over $10,000.
E) No, ABC, Inc. is not entitled to a refund because the credit card companies are holders in due course entitled to the funds.

Question 65

Reference - Banking Problems. Constance and Blair are both loan officers at ABC Bank. Constance, being somewhat dishonest, tells Henry, a customer of the bank who is wealthy and rarely checks the status of outstanding loans and balances, that she is collecting money for a local animal shelter. She asks him to sign a pledge that he will contribute $50 to the animal shelter. In fact, she had him sign a promissory note made out to her for $5,000, which she later endorsed to Richard. Henry proceeds back to one of his businesses, a used car dealership. Taylor comes in to purchase a used car. He and Henry agree that Taylor will purchase a used car for $3,000. Martha also comes in, and she and Henry agree that she will purchase a used car for $4,000. Both Taylor and Martha make out promissory notes payable to Henry. At the end of the day, Henry is looking through the notes and decides that Taylor's was mistakenly made out for $3,000. Henry mistakenly, but honestly, believed that the deal was for $3,500. Therefore, he changes the note to reflect that Taylor owed $3,500. Henry, on the other hand, simply did not like Martha. He decided that $4,000 was not enough for the car. Accordingly, he changed the note to $4,500. Which of the following is the most likely result if Henry refuses payment on the promissory note that was endorsed to Richard claiming that he never signed it?

A) He will be liable because an official banking document was involved.
B) He will not be liable because a party is never liable when the party signed a negotiable instrument without knowing that it is, in fact, a negotiable instrument.
C) He will be liable without further inquiry unless he can establish that the note had not been endorsed to a holder in due course.
D) He can claim fraud in the factum and whether he is liable or not will depend upon whether a court determines that he should have known what he was signing.
E) He can claim fraud in the inducement.

Question 66

Reference - Hot Dress. Doreen writes a check for a dress to Hot Dresses, Inc., a small specialty shop owned primarily by Betty. Betty was getting ready to go on an extended European vacation and temporarily closed down the shop the day after the dress sale to Doreen. When Betty returned, she had a number of other things to do and did not take Doreen's check and some other checks to the bank for three months. Betty was independently wealthy and only ran the shop as a hobby, so she had not been in need of funds. When Betty finally took Doreen's check to the bank, Betty requested that her bank, ABC Bank, deposit the check into her account. When ABC Bank, however, requested payment from Doreen's bank, XYZ Bank, the check was dishonored because of insufficient funds in Doreen's account. Although Betty did not particularly need the funds, she did not like to feel as if she had been cheated; therefore, she demanded that Doreen make the check good. Which of the following is the drawee of the check Doreen presented to Hot Dresses, Inc.?

A) Doreen.
B) Hot Dresses, Inc.
C) Betty, because she owned Hot Dresses, Inc.
D) Doreen's bank.
E) Betty's bank.

Question 67

Reference - Banking Problems. Constance and Blair are both loan officers at ABC Bank. Constance, being somewhat dishonest, tells Henry, a customer of the bank who is wealthy and rarely checks the status of outstanding loans and balances, that she is collecting money for a local animal shelter. She asks him to sign a pledge that he will contribute $50 to the animal shelter. In fact, she had him sign a promissory note made out to her for $5,000, which she later endorsed to Richard. Henry proceeds back to one of his businesses, a used car dealership. Taylor comes in to purchase a used car. He and Henry agree that Taylor will purchase a used car for $3,000. Martha also comes in, and she and Henry agree that she will purchase a used car for $4,000. Both Taylor and Martha make out promissory notes payable to Henry. At the end of the day, Henry is looking through the notes and decides that Taylor's was mistakenly made out for $3,000. Henry mistakenly, but honestly, believed that the deal was for $3,500. Therefore, he changes the note to reflect that Taylor owed $3,500. Henry, on the other hand, simply did not like Martha. He decided that $4,000 was not enough for the car. Accordingly, he changed the note to $4,500. Which of the following is true regarding Martha's liability to Henry?

A) Because of the fraudulent alteration, Martha is not liable to Henry for any amounts under the promissory note although she may be liable under some other theory.
B) Martha's obligation will be enforced only in the amount of $4,000.
C) Martha's obligation will be enforced in the amount of $4,500 unless she has a writing signed by Henry to the effect that the deal was for 4,000. No other evidence would be allowed.
D) Unless Martha has a written document from Henry to the effect that the agreement was for $4,000 only, Martha and Henry will be legally required to split the remainder with Martha being held responsible for $4,250.
E) Unless Martha either has a written document from Henry showing that the agreement was for $4,000 or unless she can get Henry to admit that the agreement was for $4,000, then Martha will be required to pay $4,500 because the obligation was upon Martha to obtain confirmation of the terms of the original agreement.

Question 68

Reference - Run Around. Millie issues a note to Bob. Bob endorses the note and transfers it to Anne. Anne endorses the note and transfers it to Henry. In a timely fashion, Henry endorses the note and presents it to Millie for payment. When Henry presents the note to Millie, she asks him for reasonable identification. He did not have any identification with him and told her that she had no right to dishonor the instrument. Millie, however, refused to provide him the funds until he returned with proper identification. Nevertheless, when he returned with proper identification, Millie refused to pay the note, claiming that she lacked the funds with which to do so. Henry proceeded immediately to request that Anne pay the note, but she told him that he would have to get his money from Bob, who cannot be found. Which of the following is true regarding Henry's entitlement to payment from Millie?

A) Henry is only entitled payment from Millie because Anne dishonored the payment.
B) Henry is not entitled to payment from Millie unless Bob, in addition to Anne, dishonors the instrument.
C) Henry is never entitled payment from Millie because he must seek recovery only from Anne.
D) Henry is entitled to recover on the note from Millie.
E) Henry is entitled to recover on the note from Millie only if both Anne and Bob have filed bankruptcy or cannot be found.

Question 69

Reference - Check Cashing Business. Susan owns and operates a check cashing business. A customer, Bob, claiming to be Sam, comes in and cashes a $2,000 check issued by ABC Trucking to Sam. The day after Susan cashed the check, she received a notice from ABC Trucking that some checks had been stolen. It was later discovered that the customer had forged Sam's name on the check issued by ABC Trucking. At the time she took the ABC Trucking check, Susan was very busy with several customers in line. She simply glanced at the check and cashed it. A reasonable examination would have revealed that the check had been materially altered and changed from the amount of $200 to $2,000. Susan decided that she needed to hire some people to help her because she also had a problem with another check. On the same day that she took the ABC Trucking check, she took a check from another customer, Maurice. It was later discovered that the check from Maurice, which was four months old, was the subject of a dispute between Maurice and the issuer of the check for whom Maurice had done some work. The issuer claimed that the work was improperly done. Both ABC Trucking and the issuer of the check to Maurice stopped payment on the checks. Susan claims that she was entitled to the status of holder in due course and was entitled to payment on both checks. What is the effect of Susan receiving notice the day after she cashed the check for Bob that the check had been stolen?

A) The notice has no effect on her status as holder in due course because it was provided after she cashed the check.
B) The notice prevents her from being a holder in due course.
C) The notice prevents her from being a holder in due course only if Bob had been convicted of check cashing offenses in the past since she would have discovered his history had she checked.
D) The notice prevents her from being a holder in due course only if she subjectively knew that Bob had been charged criminally with check cashing violations in the past.
E) The notice prevents her from being a holder in due course because it was presented to a business; only individuals can avoid the effect of notice of theft by cashing a check prior to receiving notice.

Question 70

Reference - Hot Dress. Doreen writes a check for a dress to Hot Dresses, Inc., a small specialty shop owned primarily by Betty. Betty was getting ready to go on an extended European vacation and temporarily closed down the shop the day after the dress sale to Doreen. When Betty returned, she had a number of other things to do and did not take Doreen's check and some other checks to the bank for three months. Betty was independently wealthy and only ran the shop as a hobby, so she had not been in need of funds. When Betty finally took Doreen's check to the bank, Betty requested that her bank, ABC Bank, deposit the check into her account. When ABC Bank, however, requested payment from Doreen's bank, XYZ Bank, the check was dishonored because of insufficient funds in Doreen's account. Although Betty did not particularly need the funds, she did not like to feel as if she had been cheated; therefore, she demanded that Doreen make the check good. Which of the following is the holder of the check?

A) Doreen.
B) Hot Dresses, Inc.
C) Doreen's bank
D) Betty's bank.
E) There is no holder in this instance.

Question 71

Reference - Angry employee. Martin is in charge of payroll and other expenses for ABC, Inc. He becomes very angry with his boss Adam because Adam started dating Martin's girlfriend Stacy. Martin decided to quit but not before he got some extra money from ABC, Inc. Martin wrote five checks from the account of ABC, Inc. to pay off the five credit card companies that Martin owed money. The credit card companies took the checks without reason to be suspicious as to the source of payment. The checks to the credit card companies in total amounted to $30,000, and each check was in an amount under $10,000. Martin also made out ten checks on the account of ABC to twenty alleged employees who did not really exist. Each of these checks was in the amount of $5,000. Martin took the checks, endorsed and cashed the checks in the names of the various fake employees, and kept the cash. Finally, Martin discovers through office gossip that Adam has been looking for another job with XYZ, Inc. located in a neighboring state and that Adam is supposed to go there for an in person interview in a few weeks. Martin sets up an interview with XYZ, Inc. pretends to be Adam, and induces XYZ, Inc. to give him, posing as Adam, a check for $5,000 as a signing bonus. Martin immediately endorses the check pretending to be Adam and pockets the cash. Finally, Martin leaves town heading for the Caribbean. Is ABC, Inc. entitled to a refund from its bank for the checks the bank paid written to fake employees?

A) Yes, because Martin forged the names of the employees.
B) Yes, because Martin posed as an imposter in regard to the employees.
C) Yes, because the bank has a cause of action against Martin and can likely get a default judgment.
D) No, because of the imposter rule.
E) No, because of the fictitious-payee rule.

Question 72

Reference - Run Around. Millie issues a note to Bob. Bob endorses the note and transfers it to Anne. Anne endorses the note and transfers it to Henry. In a timely fashion, Henry endorses the note and presents it to Millie for payment. When Henry presents the note to Millie, she asks him for reasonable identification. He did not have any identification with him and told her that she had no right to dishonor the instrument. Millie, however, refused to provide him the funds until he returned with proper identification. Nevertheless, when he returned with proper identification, Millie refused to pay the note, claiming that she lacked the funds with which to do so. Henry proceeded immediately to request that Anne pay the note, but she told him that he would have to get his money from Bob, who cannot be found. Which of the following is true regarding Anne's statement to Henry that he must seek recovery from Bob?

A) Anne is correct.
B) Anne is correct only if Bob is able to pay and has not filed bankruptcy.
C) Anne is correct in that Henry should seek recovery from Bob only if Millie has filed bankruptcy because, otherwise, Henry should be seeking primary payment from Millie.
D) Anne is correct unless the notice is for over $10,000, in which case Henry can seek recovery from her without resorting to recovery from Bob or Millie.
E) Anne is incorrect. Henry may seek recovery from her without first seeking recovery from Bob or Millie.

Question 73

Reference - Check Cashing Business. Susan owns and operates a check cashing business. A customer, Bob, claiming to be Sam, comes in and cashes a $2,000 check issued by ABC Trucking to Sam. The day after Susan cashed the check, she received a notice from ABC Trucking that some checks had been stolen. It was later discovered that the customer had forged Sam's name on the check issued by ABC Trucking. At the time she took the ABC Trucking check, Susan was very busy with several customers in line. She simply glanced at the check and cashed it. A reasonable examination would have revealed that the check had been materially altered and changed from the amount of $200 to $2,000. Susan decided that she needed to hire some people to help her because she also had a problem with another check. On the same day that she took the ABC Trucking check, she took a check from another customer, Maurice. It was later discovered that the check from Maurice, which was four months old, was the subject of a dispute between Maurice and the issuer of the check for whom Maurice had done some work. The issuer claimed that the work was improperly done. Both ABC Trucking and the issuer of the check to Maurice stopped payment on the checks. Susan claims that she was entitled to the status of holder in due course and was entitled to payment on both checks. What is the effect of the alteration of the check on Susan's status as a holder in due course?

A) The alteration has no effect because a holder is not charged with examining an instrument presented for payment.
B) The alteration will likely prohibit her from being a holder in due course.
C) The alteration will affect her status as a holder in due course only if she had been put on notice of prior criminal behavior in the past on the part of Bob.
D) The alteration will affect her status as a holder in due course only if the issuer can establish that it was not negligent in allowing a thief to gain access resulting in the alteration.
E) The alteration will affect her status as a holder in due course because it involved over $500; otherwise, based on the purpose of the law to protect holders, the alteration would have had no effect.

Question 74

Which of the following was the result in Halliburton Energy Services, Inc. v. Fleet National Bank, the case in the text in which an unknown person stole a check drawn on a Halliburton account, inserted a fictitious name as the payee, and managed to obtain funds through forging the name of the fictitious payee and depositing the cheek with Fleet, a brokerage fund, which then obtained the funds from the payor bank?

A) That because the name of the fictitious payee was forged, the payor bank was required to take the loss, and Halliburton was entitled to a summary judgment ruling in its favor.
B) That because a fictitious payee was involved, Halliburton was required to take the loss as a matter of law; and Fleet, the brokerage firm, was entitled to a summary judgment ruling in its favor.
C) That Halliburton was not entitled to a summary judgment ruling in its favor because of a lack of evidence that Fleet, the brokerage firm, was anything other than a holder in due course.
D) That because of the lack of a showing of bad faith, Halliburton and Fleet were required to split the loss on a 50-50 basis.
E) That because of the lack of a showing of bad faith, Halliburton, Fleet, and the original drawer of the check were all required to share the loss on a proportional basis.

Question 75

Reference - Run Around. Millie issues a note to Bob. Bob endorses the note and transfers it to Anne. Anne endorses the note and transfers it to Henry. In a timely fashion, Henry endorses the note and presents it to Millie for payment. When Henry presents the note to Millie, she asks him for reasonable identification. He did not have any identification with him and told her that she had no right to dishonor the instrument. Millie, however, refused to provide him the funds until he returned with proper identification. Nevertheless, when he returned with proper identification, Millie refused to pay the note, claiming that she lacked the funds with which to do so. Henry proceeded immediately to request that Anne pay the note, but she told him that he would have to get his money from Bob, who cannot be found. Which of the following is the likely result if Henry sues Anne, Bob, and Millie?

A) The judge is likely to rule that Henry can recover from Anne, Bob, or Millie.
B) The judge is likely to rule that Henry's only option of recovery is against Millie.
C) The judge is likely to rule that Henry's only option of recovery is against Anne.
D) The judge is likely to rule that Henry can recover against Bob and that Bob may recover against Millie, but Henry cannot recover directly from Anne.
E) The judge is likely to rule that Henry's only option for recovery is against Bob.

Question 76

Reference - Angry employee. Martin is in charge of payroll and other expenses for ABC, Inc. He becomes very angry with his boss Adam because Adam started dating Martin's girlfriend Stacy. Martin decided to quit but not before he got some extra money from ABC, Inc. Martin wrote five checks from the account of ABC, Inc. to pay off the five credit card companies that Martin owed money. The credit card companies took the checks without reason to be suspicious as to the source of payment. The checks to the credit card companies in total amounted to $30,000, and each check was in an amount under $10,000. Martin also made out ten checks on the account of ABC to twenty alleged employees who did not really exist. Each of these checks was in the amount of $5,000. Martin took the checks, endorsed and cashed the checks in the names of the various fake employees, and kept the cash. Finally, Martin discovers through office gossip that Adam has been looking for another job with XYZ, Inc. located in a neighboring state and that Adam is supposed to go there for an in person interview in a few weeks. Martin sets up an interview with XYZ, Inc. pretends to be Adam, and induces XYZ, Inc. to give him, posing as Adam, a check for $5,000 as a signing bonus. Martin immediately endorses the check pretending to be Adam and pockets the cash. Finally, Martin leaves town heading for the Caribbean. Is XYZ, Inc. entitled to a refund from its bank for the check the bank paid to Martin posing as Adam?

A) Yes, because Martin forged Adam's name.
B) Yes, because Martin posed as an imposter in regard to Adam.
C) Yes, because the XYZ, Inc. has a cause of action against Martin and can likely get a default judgment.
D) No, because of the imposter rule.
E) No, because of the fictitious-payee rule.

Question 77

Reference - Check Cashing Business. Susan owns and operates a check cashing business. A customer, Bob, claiming to be Sam, comes in and cashes a $2,000 check issued by ABC Trucking to Sam. The day after Susan cashed the check, she received a notice from ABC Trucking that some checks had been stolen. It was later discovered that the customer had forged Sam's name on the check issued by ABC Trucking. At the time she took the ABC Trucking check, Susan was very busy with several customers in line. She simply glanced at the check and cashed it. A reasonable examination would have revealed that the check had been materially altered and changed from the amount of $200 to $2,000. Susan decided that she needed to hire some people to help her because she also had a problem with another check. On the same day that she took the ABC Trucking check, she took a check from another customer, Maurice. It was later discovered that the check from Maurice, which was four months old, was the subject of a dispute between Maurice and the issuer of the check for whom Maurice had done some work. The issuer claimed that the work was improperly done. Both ABC Trucking and the issuer of the check to Maurice stopped payment on the checks. Susan claims that she was entitled to the status of holder in due course and was entitled to payment on both checks. What is the effect on Susan's status as a holder in due course in taking the check from the customer that was four months old?

A) There is no effect on her status as a holder in due course because an instrument is only considered overdue if it is outstanding for 150 days.
B) There is no effect on her status as a holder in due course because an instrument is only considered overdue if it is outstanding for 180 days.
C) There is no effect on her status as a holder in due course because an instrument is only considered overdue if it is outstanding for one year.
D) She would not be considered a holder in due course because a check is considered overdue 90 days after its date.
E) It has no effect because a check is never considered overdue.

Question 78

Discuss whether or not you believe that our law should recognize holder in due course status with its resulting rights.

Question 79

Reference - Hot Dress. Doreen writes a check for a dress to Hot Dresses, Inc., a small specialty shop owned primarily by Betty. Betty was getting ready to go on an extended European vacation and temporarily closed down the shop the day after the dress sale to Doreen. When Betty returned, she had a number of other things to do and did not take Doreen's check and some other checks to the bank for three months. Betty was independently wealthy and only ran the shop as a hobby, so she had not been in need of funds. When Betty finally took Doreen's check to the bank, Betty requested that her bank, ABC Bank, deposit the check into her account. When ABC Bank, however, requested payment from Doreen's bank, XYZ Bank, the check was dishonored because of insufficient funds in Doreen's account. Although Betty did not particularly need the funds, she did not like to feel as if she had been cheated; therefore, she demanded that Doreen make the check good. Which of the following would be when presentment, as defined in the UCC, occurred?

A) When Doreen presented the check to Hot Dresses, Inc.
B) When Betty took the check to ABC Bank.
C) When ABC Bank requested payment from XYZ Bank.
D) When XYZ Bank notified Betty that it would not pay based upon insufficient funds.
E) When Betty requested that Doreen make the check good.

Question 80

Reference - Banking Problems. Constance and Blair are both loan officers at ABC Bank. Constance, being somewhat dishonest, tells Henry, a customer of the bank who is wealthy and rarely checks the status of outstanding loans and balances, that she is collecting money for a local animal shelter. She asks him to sign a pledge that he will contribute $50 to the animal shelter. In fact, she had him sign a promissory note made out to her for $5,000, which she later endorsed to Richard. Henry proceeds back to one of his businesses, a used car dealership. Taylor comes in to purchase a used car. He and Henry agree that Taylor will purchase a used car for $3,000. Martha also comes in, and she and Henry agree that she will purchase a used car for $4,000. Both Taylor and Martha make out promissory notes payable to Henry. At the end of the day, Henry is looking through the notes and decides that Taylor's was mistakenly made out for $3,000. Henry mistakenly, but honestly, believed that the deal was for $3,500. Therefore, he changes the note to reflect that Taylor owed $3,500. Henry, on the other hand, simply did not like Martha. He decided that $4,000 was not enough for the car. Accordingly, he changed the note to $4,500. Which of the following is true regarding Taylor's liability to Henry?

A) Because of the alteration, Taylor is not liable to Henry for any amounts under the promissory note.
B) Taylor's obligation will be enforced only in the amount of $3,000.
C) Taylor's obligation will be enforced in the amount of $3,500 unless Taylor has a writing signed by Henry to the effect that the deal was for $3,000. No other evidence would be allowed.
D) Unless Taylor has a written document from Henry to the effect that the agreement was for $3,000 only, Taylor and Henry will be legally required to split the remainder with Taylor being held responsible for $3,250.
E) Unless Taylor either has a written document from Henry showing that the agreement was for $3,000 or unless he can get Henry to admit that the agreement was for $3,000, then Taylor will be required to pay $3,500 because the obligation was upon Taylor to obtain confirmation of the terms of the original agreement.