BLT&E-7e: Practice Quiz
Chapter 24: Transferability and Liability
1. As a general rule, which of the following statements about holders in due course (HDCs) is correct? a. HDCs receive no immunity in terms of defenses against payment on a negotiable instrument. b. HDCs receive a higher level of immunity in terms of defenses against payment on a negotiable instrument than ordinary holders do. c. HDCs are immune from the kinds of strict liability claims that always affect other holders. d. HDCs receive full immunity from any defenses in cases involving negotiable instruments.
Answers:
a. Incorrect. HDCs receive immunity from many defenses against payment. b. Correct. HDCs do acquire a higher level of immunity to defenses against payment than do ordinary holders. c. Incorrect. HDCs are not immune from strict liability claims, and such claims do not “always” affect other holders. d. Incorrect. HDCs do not receive full immunity from defenses against payment on negotiable instruments.
2. The UCC requires that to become an HDC, a holder must take an instrument in good faith. This means that: a. a holder must have performed a special oath before taking the instrument. b. a holder must be assured that the instrument has no defects. c. a holder must be aware that the instrument is defective. d. a holder must have acted honestly in fact and observed all reasonable commercial standards of fair dealing.
Answers:
a. Incorrect. There is no oath-taking requirement to meet the good faith standard. b. Incorrect. Defects in an instrument are related to notice requirements, not to good faith requirements. c. Incorrect. If holders know an instrument is defective they will not be HDC. d. Correct. A holder must act honestly in fact and observe reasonable commercial standards of fair dealing to meet the good faith requirement for HDC status.
3. What two kinds of liability are associated with negotiable instruments? a. Withholding and reverse. b. Warranty and signature. c. Essential and nonessential. d. Dispatch and relief.
Answers:
a. Incorrect. These are not the two kinds of liability associated with negotiable instruments. b. Correct. Warranty and signature liability are the two kinds of liability associated with negotiable instruments. c. Incorrect. There is no essential or nonessential liability for negotiable instruments. d. Incorrect. There is no dispatch and relief liability for negotiable instruments.
4. In order to be liable on a negotiable instrument, what must a person do? a. Sign the instrument. b. Discuss the instrument with others. c. Have a relative who is not an agent sign the instrument. d. Craft an arbitration clause for the instrument.
Answers:
a. Correct. A person must either sign an instrument or have an agent sign an instrument in order to be liable on it. b. Incorrect. Discussion is not enough to make someone liable on an instrument. c. Incorrect. This is not enough to make someone liable on an instrument. d. Incorrect. An arbitration clause is not necessary to make someone liable on an instrument, but a signature is.
5. If a person is primarily liable on a negotiable instrument, that person: a. may not raise any defenses to payment. b. may not be required to pay under any circumstances. c. may be required to pay only if the party with secondary liability does not pay. d. is absolutely required to pay unless he or she has a valid defense to payment. Answers:
a. Incorrect. Parties who are primarily liable may raise defenses to payment. b. Incorrect. Parties who are primarily liable are absolutely required to pay unless they raise a valid defense. c. Incorrect. Such parties are required to pay before parties with secondary liability, not the other way around. d. Correct. Parties with primary liability on an instrument must pay unless they have a valid defense.
6. Suppose that Leslie breaks into Wilkie’s locked desk, steals a blank check, and fills it out for $50,000, payable to CASH. Leslie then signs Wilkie’s name and presents the check to Wilkie’s bank for payment. The bank cashes the check for $50,000, and Leslie leaves for Brazil. Who is liable? a. Wilkie bears the responsibility based on his notice of Leslie’s action. b. The bank is liable because it should have checked the signature. c. No one is liable. These kinds of unfortunate events happen. d. Leslie is the only liable party, and she is out of the country.
Answers:
a. Incorrect. Wilkie does not bear the responsibility in this case; rather, the bank does because it cashed a check with a forged signature. b. Correct. The bank should not have cashed this check and so it is liable. c. Incorrect. The bank bears the liability in this case. d. Incorrect. Leslie is not the only liable party; the bank is also liable for paying the check over a forged signature.
7. Which of the following IS NOT a transfer warranty? a. The instrument has not been altered. b. The transferor may not enforce the instrument. c. All signatures are authentic and authorized. d. The instrument is not subject to a defense or claim of any party that can be asserted against the transferor.
Answers:
a. Incorrect. This is one of the transfer warranties. b. Correct. Transfer warranties include the right of the transferor to enforce the instrument. c. Incorrect. This is one of the transfer warranties. d. Incorrect. This also is one of the transfer warranties. 8. One universal defense to liability for payment on a negotiable instrument is: a. breach of contract. b. lack of consideration. c. forgery. d. nondelivery of the instrument.
Answers:
a. Incorrect. Breach of contract is a personal defense, not a universal defense. b. Incorrect. Lack of consideration is a personal defense. c. Correct. Forgery is a universal defense to payment so long as the maker or drawer does not ratify the forgery or is otherwise precluded from denying the forgery. d. Incorrect. Nondelivery of the instrument is a personal defense that may be used to avoid payment.
9. A warranty that a negotiable instrument has not been altered is known as: a. a presentment warranty. b. an authorized warranty. c. a transfer warranty. d. a fraudulent warranty.
Answers:
a. Correct. This is a presentment warranty. b. Incorrect. This is not an authorized warranty. c. Incorrect. This is not a transfer warranty. d. Incorrect. This is not a fraudulent warranty.
10. An instrument signed by a person who has been adjudged mentally incompetent will be: a. enforceable by any holder, including an HDC. b. enforceable by an HDC but not by an ordinary holder. c. unenforceable by any holder, including an HDC. d. unenforceable by an ordinary holder, but enforceable by an HDC.
Answers:
a. Incorrect. The instrument is void ab initio (from the beginning) and is unenforceable by any holder or any HDC. b. Incorrect. Neither an ordinary holder nor an HDC can enforce the instrument in these circumstances. c. Correct. The instrument is unenforceable by any holder, including an HDC. d. Incorrect. The instrument is unenforceable by any holder, including an HDC.