Question 1

In terms of requirements for holder-in-due-course (HDC) status, first an HDC must be a holder of a negotiable instrument.

Accepted Answer

A) True 
 B)False  True

Question 2

When a negotiable instrument is transferred, a holder in due course obtains only those rights that the transferor had in the instrument.

Accepted Answer

A) True 
 B)False

Question 3

A fictitious payee is a person who, with the intent to deceive, pretends to be somebody else.

Accepted Answer

A) True 
 B)False

Question 4

Rubin writes a check drawn on his account at Clearwater Bank and payable to the order of Gwyn. The bank does not pay the check. Rubin is

Accepted Answer

A)   absolved of liability on the check.
B)   liable to Gwyn for the amount of the check.
C)   liable to the bank for the amount of the check.
D)   entitled to payment of the amount of the check from Gwyn.E) A) and D)
F) None of the above

Question 5

A person will be afforded HDC protection if he or she acquires an instrument knowing, or having reason to know, that it is defective.

Accepted Answer

A) True 
 B)False

Question 6

GR8 Products, Inc., warrants its goods to be free of defects. Harold issues an instrument to GR8 to obtain goods that prove to be defective. With respect to payment on the instrument, Harold

Accepted Answer

A)   is liable only to a subsequent holder of the instrument.
B)   has a universal defense against it.
C)   has a personal defense against it.
D)   cannot avoid it.E) A) and C)
F) B) and C)

Question 7

Universal defenses are valid against all holders, including holders in due course.

Accepted Answer

A) True 
 B)False  True

Question 8

Fanny signs a note "payable to the order of Guaranty Bank." Guaranty indorses the note in blank and negotiates it to Haji, who sells it to Iona. Liability associated with the transfer of the note from Haji to Iona is

Accepted Answer

A)   no liability.
B)   contractual liability.
C)   signature liability.
D)   warranty liability.E) B) and C)
F) None of the above

Question 9

Equity Credit Company has in its possession an instrument dated May 1, 2017. The instrument is payable to the order of First Choice Moving & Storage Company "on June 1, 2018," for $5,000. In the upper left corner is an address for Greater Metro Development Corporation-10 Corporate Park Avenue, Chicago, Illinois-and in the lower right corner is the signature of "Hilltop Investments, Inc., By Ida, President." In the lower left corner is stamped "ACCEPTED: Greater Metro Development Corporation by John, President, May 5, 2017." On the back is the signature of "First Choice Moving & Storage Company by Kathleen, President." Who, if anyone, is primarily liable on this instrument on May 1?  On May 5? Who, if anyone, is secondarily liable on this instrument?

Accepted Answer

No one is primarily liable on this instrument on May 1. On May 5, Greater Metro is primarily liable. First Choice and Hilltop Investments are both secondarily liable. 
This instrument is a draft, and it is negotiable. It meets all of the requirements for negotiability: it is in writing, it is signed by the drawer (Hilltop Investments), it is an unconditional order to pay, it states a fixed amount of money ($5,000), it is payable at a definite time (June 1, 2018), and it is payable to order (of First Choice). A draft is an unconditional written order that involves three parties. The party creating the draft (the drawer) orders another party (the drawee) to pay money to a third party (the payee). 
Here, Hilltop Investments, as noted, is the drawer, Greater Metro is the drawee, and First Choice is the payee. Primary liability arises on a negotiable instrument when a party is absolutely required to pay the instrument. On a draft, no party is primarily liable until the drawee accepts it. The drawee's acceptance, or promise to pay the draft when it is presented for payment, places the drawee in the position of primary liability. 
In this problem, Greater Metro, the drawee, accepted this draft on May 5 and became primarily liable. Drawers and indorsers are secondarily liable, which means that they are required to pay the instrument if the party with primary liability refuses to do so. In the case of a draft, Greater Metro's refusal to accept the instrument would have had the same effect. Here, First Choice, who indorsed the back of the instrument, and Hilltop Investments have secondary liability.

Question 10

An instrument is defective if it contains an unauthorized signature or has been altered.

Accepted Answer

A) True 
 B)False

Question 11

The party to whom an instrument must be presented does not depend on what type of instrument involved.

Accepted Answer

A) True 
 B)False

Question 12

Muni Investment Company signs a check payable to Notes & Loans, Inc., to buy a promissory note executed by Omni Corporation.  This check

Accepted Answer

A)   does not constitute sufficient consideration for HDC status.
B)   does not satisfy the value requirement for HDC status.
C)   satisfies the consideration requirement for HDC status.
D)   satisfies the value requirement for HDC status.E) None of the above
F) All of the above

Question 13

Corporate officers are personally liable on instruments signed on their firms' behalf.

Accepted Answer

A) True 
 B)False

Question 14

Vicenzo, in good faith and for value, gets from Wren a check "payable to the order of bearer." Vicenzo does not know, or have reason to know that Wren stole the check. Vicenzo is

Accepted Answer

A)   an HDC.
B)   not an HDC, because Wren did not acquire the check for value.
C)   not an HDC, because Wren did not acquire the check in good faith.
D)   not an HDC, because the check is a bearer instrument.E) All of the above
F) B) and C)

Question 15

Personnel Company draws a check payable to Felix. Felix indorses the back and negotiates the check to Guaranty Bank. Primarily liable on the check is

Accepted Answer

A)   Personnel Company.
B)   Felix.
C)   Guaranty Bank.
D)   none of these.E) B) and C)
F) A) and D)

Question 16

To qualify as an HDC, a person does not need to have acted honestly in acquiring the instrument.

Accepted Answer

A) True 
 B)False

Question 17

A purchaser's knowledge of bankruptcy proceedings against the instrument's maker or drawer constitutes notice that the instrument is defective.

Accepted Answer

A) True 
 B)False

Question 18

A drawer's secondary liability does not arise until the drawee fails to pay or to accept the instrument.

Accepted Answer

A) True 
 B)False

Question 19

Kris transfers a note, on which Liu is the maker, to Mia, who takes it for value and in good faith. Mia knows that Kris breached the contract underlying the note, giving Liu a defense against payment. With respect to this note, Mia is

Accepted Answer

A)   a knowledgeable holder in due course.
B)   an ordinary holder.
C)   an ordinary holder in due course.
D)   a knowledgeable acceptor.E) A) and B)
F) None of the above

Question 20

A holder is a person who, by the terms of a negotiable instrument, is legally entitled to enforce payment of it.

Accepted Answer

A) True 
 B)False

Exam 23: Negotiable Instruments: Transfer and Liability

In terms of requirements for holder-in-due-course (HDC) status, first an HDC must be a holder of a negotiable instrument.

Correct Answer
verified
True

When a negotiable instrument is transferred, a holder in due course obtains only those rights that the transferor had in the instrument.

Correct Answer
verified

A fictitious payee is a person who, with the intent to deceive, pretends to be somebody else.

Correct Answer
verified

Rubin writes a check drawn on his account at Clearwater Bank and payable to the order of Gwyn. The bank does not pay the check. Rubin is

Correct Answer
verified

A person will be afforded HDC protection if he or she acquires an instrument knowing, or having reason to know, that it is defective.

Correct Answer
verified

GR8 Products, Inc., warrants its goods to be free of defects. Harold issues an instrument to GR8 to obtain goods that prove to be defective. With respect to payment on the instrument, Harold

Correct Answer
verified

Universal defenses are valid against all holders, including holders in due course.

Correct Answer
verified
True

Fanny signs a note "payable to the order of Guaranty Bank." Guaranty indorses the note in blank and negotiates it to Haji, who sells it to Iona. Liability associated with the transfer of the note from Haji to Iona is

Correct Answer
verified

An instrument is defective if it contains an unauthorized signature or has been altered.

Correct Answer
verified

The party to whom an instrument must be presented does not depend on what type of instrument involved.

Correct Answer
verified

Muni Investment Company signs a check payable to Notes & Loans, Inc., to buy a promissory note executed by Omni Corporation. This check

Correct Answer
verified

Corporate officers are personally liable on instruments signed on their firms' behalf.

Correct Answer
verified

Vicenzo, in good faith and for value, gets from Wren a check "payable to the order of bearer." Vicenzo does not know, or have reason to know that Wren stole the check. Vicenzo is

Correct Answer
verified

Personnel Company draws a check payable to Felix. Felix indorses the back and negotiates the check to Guaranty Bank. Primarily liable on the check is

Correct Answer
verified

To qualify as an HDC, a person does not need to have acted honestly in acquiring the instrument.

Correct Answer
verified

A purchaser's knowledge of bankruptcy proceedings against the instrument's maker or drawer constitutes notice that the instrument is defective.

Correct Answer
verified

A drawer's secondary liability does not arise until the drawee fails to pay or to accept the instrument.

Correct Answer
verified

Kris transfers a note, on which Liu is the maker, to Mia, who takes it for value and in good faith. Mia knows that Kris breached the contract underlying the note, giving Liu a defense against payment. With respect to this note, Mia is

Correct Answer
verified

A holder is a person who, by the terms of a negotiable instrument, is legally entitled to enforce payment of it.

Correct Answer
verified

Exam 23: Negotiable Instruments: Transfer and Liability

In terms of requirements for holder-in-due-course (HDC) status, first an HDC must be a holder of a negotiable instrument.

Correct AnswerverifiedTrue

When a negotiable instrument is transferred, a holder in due course obtains only those rights that the transferor had in the instrument.

Correct AnswerverifiedShow Answer

A fictitious payee is a person who, with the intent to deceive, pretends to be somebody else.

Correct AnswerverifiedShow Answer

Rubin writes a check drawn on his account at Clearwater Bank and payable to the order of Gwyn. The bank does not pay the check. Rubin is

Correct AnswerverifiedShow Answer

A person will be afforded HDC protection if he or she acquires an instrument knowing, or having reason to know, that it is defective.

Correct AnswerverifiedShow Answer

GR8 Products, Inc., warrants its goods to be free of defects. Harold issues an instrument to GR8 to obtain goods that prove to be defective. With respect to payment on the instrument, Harold

Correct AnswerverifiedShow Answer

Universal defenses are valid against all holders, including holders in due course.

Correct AnswerverifiedTrue

Fanny signs a note "payable to the order of Guaranty Bank." Guaranty indorses the note in blank and negotiates it to Haji, who sells it to Iona. Liability associated with the transfer of the note from Haji to Iona is

Correct AnswerverifiedShow Answer

An instrument is defective if it contains an unauthorized signature or has been altered.

Correct AnswerverifiedShow Answer

The party to whom an instrument must be presented does not depend on what type of instrument involved.

Correct AnswerverifiedShow Answer

Muni Investment Company signs a check payable to Notes & Loans, Inc., to buy a promissory note executed by Omni Corporation. This check

Correct AnswerverifiedShow Answer

Corporate officers are personally liable on instruments signed on their firms' behalf.

Correct AnswerverifiedShow Answer

Vicenzo, in good faith and for value, gets from Wren a check "payable to the order of bearer." Vicenzo does not know, or have reason to know that Wren stole the check. Vicenzo is

Correct AnswerverifiedShow Answer

Personnel Company draws a check payable to Felix. Felix indorses the back and negotiates the check to Guaranty Bank. Primarily liable on the check is

Correct AnswerverifiedShow Answer

To qualify as an HDC, a person does not need to have acted honestly in acquiring the instrument.

Correct AnswerverifiedShow Answer

A purchaser's knowledge of bankruptcy proceedings against the instrument's maker or drawer constitutes notice that the instrument is defective.

Correct AnswerverifiedShow Answer

A drawer's secondary liability does not arise until the drawee fails to pay or to accept the instrument.

Correct AnswerverifiedShow Answer

Kris transfers a note, on which Liu is the maker, to Mia, who takes it for value and in good faith. Mia knows that Kris breached the contract underlying the note, giving Liu a defense against payment. With respect to this note, Mia is

Correct AnswerverifiedShow Answer

A holder is a person who, by the terms of a negotiable instrument, is legally entitled to enforce payment of it.

Correct AnswerverifiedShow Answer

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True

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True

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