Business Law Chapter 13 Smartbook

Under Revised UCC Article 3, the term "claims to an instrument" includes all but which of the following?

A claim to offset liability

The acceptor's obligation extends to which of the following parties? (Check all that apply.)

A person entitled to enforce the draft The drawer An indorser who paid the instrument pursuant to their indorser's liability

Which of the following can be used as a reason against payment of a negotiable instrument to any holder, including a person who has the rights of a holder in due course?

A real defense

What are the functions of an indorsement? (Check all that apply.)

An indorsement generally makes a person liable on the instrument. The form of the indorsement the indorser uses affects future attempts to negotiate the instrument. An indorsement is necessary for the negotiation of an instrument that is payable to the order of a specified person to occur

The terms of the contract of the parties to a negotiable instrument are not set out in the text of the instrument. Rather, ______ of the Uniform Commercial Code (UCC) supplies the terms, which are as much a part of the instrument as if they were part of its text.

Article 3

Which of the following generally concern property or possessory rights in an instrument or its proceeds?

Claims to an instrument

True or false: Real and personal defenses are the same under Revised UCC Article 3.

False

Which of the following are formal requirements for the negotiation of an instrument payable to a specific payee? (Check all that apply.)

Indorsement by the payee Transfer of possession

Which of the following are the more common restrictive indorsements? (Check all that apply.)

Indorsements for the benefit of someone other than the person to whom the instrument is payable Indorsements for deposit Indorsements for collection

Which of the following are legal reasons for avoiding or reducing liability of a person who is liable on a negotiable instrument?

Personal defenses

Which of the following are claims and defenses to payment of an instrument that go to the validity of the instrument itself?

Real defenses

Which organization has promulgated a regulation designed to protect consumers against operation of the holder in due course rule?

The Federal Trade Commission

Knowledge of which of the following will prevent a holder from becoming a holder in due course?

The instrument contains an unauthorized signature

True or false: If a holder impairs the value of collateral given for an obligation, the holder may be creating a defense for an obligor.

True

True or false: The use of a qualified indorsement does not change the negotiable nature of the instrument.

True

______ at a depositary bank allows a high-volume customer to deposit checks in their account even if the customer forgets to

______ at a depositary bank allows a high-volume customer to deposit checks in their account even if the customer forgets to

______ of a draft is obligated to pay the draft according to the terms at the time of its acceptance.

acceptor

If a person in possession of an instrument is not a holder in due course and does not have the right to enforce the instrument, they are subject to Blank______ to payment that any party to it has.

all the claims or defenses

The current holder of an instrument cannot qualify as a holder in due course if they know of Blank______ the instrument by someone else

an adverse claim to

A claim in recoupment is not actually a defense to an instrument, but is

an offset to liability

The transferee of an instrument—regardless of whether the the transfer is a negotiation—obtains only those rights that the transferor had, including

any right as a holder in due course the transferor's right to enforce the instrument

Regarding the requirements for becoming a holder in due course, Revised UCC Article 3 requires "that the instrument when issued or negotiated to the holder does not bear such Blank______ as to call into question its Blank______."

apparent evidence of forgery; authenticity

A holder in due course takes free of claims that Blank______, but is subject to those claims arising when or after they became a holder in due course.

arose before they became a holder

If an indorser merely signs their name and does not specify to whom the instrument is payable, the indorser has made a

blank

If a check is made payable to Linda Oliver is indorsed by her writing "Linda Oliver" on the back of the check, this is called a Blank______ indorsement and it becomes Blank______ paper.

blank; bearer

An instrument with a Blank______ indorsement becomes Blank______ paper, is payable to the bearer, and can be negotiated by Blank______ alone.

blank; bearer; transfer

A person who receives a check with only an executory promise to perform has not given value for it and therefore

cannot qualify as a holder in due course

Liability can arise from a person not only signing an instrument, but in what _________ the person signed the instrument.

capacity

Some state laws prohibit a seller from taking a negotiable instrument other than a(n) from a consumer in payment for consumer goods and services

check

A holder in due course takes a negotiable instrument free of all

claims in recoupment of a third party personal defenses claims to the instrument

The writing "Pay any bank, banker, or trust company" on an instrument would indicate an indorsement for

collection

The FTC rule applies to Blank______ transactions.

consumer credit

Some state laws require promissory notes given by consumers in payment for goods and services to carry the words consumer paper. These state laws treat instruments with the legend " paper" as nonnegotiable.

consumers

When a person signs a negotiable instrument, whether as a maker, a drawer, an indorser or an acceptor, the person becomes Blank______ liable on the instrument.

contractually

A person who pays $10 for an instrument that on its face is worth $1000 will have trouble meeting the Blank______ test for becoming a holder in due course.

good faith

If Mardie Oliver has a paycheck in her hands that is made payable "to the order of Mardie Oliver," she is a(n) Blank______ because it is in her possession and it is made out to her

holder

If Mardie Oliver has a paycheck in her hands that is made payable "to the order of Mardie Oliver," she is a(n) Blank______ because it is in her possession and it is made out to her.

holder

To be a(n) of a negotiable instrument, a person must have possession of an instrument that is either payable to "bearer" or that is payable to them

holder

To be a(n) of a negotiable instrument, a person must have possession of an instrument that is either payable to "bearer" or that is payable to them.

holder

According to Revised UCC Article 3, a holder takes an instrument for value if the

holder acquires a security interest in the instrument holder takes the instrument in payment of a preexisting claim agreed-upon promise of performance has been performed

A person who qualifies as a(n) Blank______ of a negotiable instrument gets special rights.

holder in due course

If Bruce is the holder of an instrument, Bruce cannot qualify as a Blank______ if he is aware of an Mark's adverse claim to the instrument.

holder in due course

Real defenses can be used as reasons against payment of a negotiable instrument to any holder, including a(n)

holder in due course

Suppose Joe Consumer signs a financing note with Preferable Purchase, Inc., the seller, and receives defective goods. If Preferable Purchase, Inc. already negotiated the note at a discount to a third party bank, the bank would have Blank______ status, and Joe must pay the note in full to the bank,

holder in due course

Suppose Joe Consumer signs a financing note with Preferable Purchase, Inc., the seller, and receives defective goods. If Preferable Purchase, Inc. already negotiated the note at a discount to a third party bank, the bank would have Blank______ status, and Joe must pay the note in full to the bank.

holder in due course

The UCC Article 3 shelter rule means that any person who can trace their title to an instrument back to a Blank______ receives rights similar to a holder in due course even if they cannot personally meet the requirements.

holder in due course

To be free of claims or defenses from the original parties, the person in possession of a negotiable instrument must be a person entitled to enforce the instrument as well as a(n)

holder in due course

To qualify as a(n) Blank______ of a negotiable instrument, a person must take it Blank______, which means that the person obtained it honestly and in the observance of reasonable commercial standards of fair dealing.

holder in due course; in good faith

Suppose Joe Consumer signs a financing note with Preferable Purchase, Inc., the seller, and receives defective goods. If Preferable Purchase, Inc. negotiates the note for value to a third party bank, the bank becomes a(n) Blank______ and Joe's Blank______ are not valid against the bank. In this case, Joe must pay the bank and then sue Preferable Purchase, Inc. to get his money back.

holder in due course; personal defenses

The only claims or defenses that a Blank______ has to worry about are Blank______ or claims that arose after she became a holder.

holder in due course; real defenses

To qualify as a Blank______ of a negotiable instrument, a person must give Blank______ for it, which is not identical to simple consideration.

holder in due course; value

A person is a Blank______ if they Blank______ an instrument that is payable to the Blank______.

holder; possess; bearer

If Mark Johnson, a contractor, receives a check for his work that says "Pay to the order of Mark Johnson," he is the ______ of the check because he is in ______ of an instrument payable to him as an identifiable person.

holder; possession

To be a Blank______ of a negotiable instrument, a person must have Blank______ of an instrument that is either payable to "bearer" or that is payable to them.

holder; possession

Liability on a negotiable instrument arises from

improper payment by the depositary bank negligence relating to the alteration of the instrument transfer or presentment of the instrument

To qualify as a holder Blank______, a person must take a negotiable instrument before they have notice that it has been dishonored.

in due course

If the holder's name is misspelled or wrong, the indorsement can be made

in the name on the instrument in the holder's legal name

When indorsing an instrument, the holder should spell their name

in the same way as it appears on the instrument

A(n) ______ is made by the ________, usually on the back of an instrument either alone or with other words.

indorsement, holder signing

Under the original Article 3, a bank did not have the right to put the customer's ______ on a check that the customer had deposited if the check: _______.

indorsement, required the customer's signature

A(n) Blank______ generally makes a person liable on the instrument if the person who is Blank______ liable on it does not pay it.

indorsement; primarily

To qualify as a holder in due course, a person also must acquire a negotiable instrument without notice that any party to it has any defenses such as

infancy duress fraud

If Franco, who is a holder of a negotiable instrument, knows that a signature on the instrument was obtained by Blank______, Franco cannot be a holder in due course. (Check all that apply.)

infancy fraud duress

If Lorelei takes a(n) instrument, she is considered to be on notice of any possible defenses to the instrument.

irregular

The only claims or defenses that a Blank______ has to worry about are Blank______ or claims that arose after she became a holder.

irregular

If a negotiable instrument contains a facial irregularity, such as an obvious alteration in the amount, the instrument is considered to be

irregular paper

A person who is secondarily liable

is like a guarantor on a contract

______ is the person who signs the negotiable instrument, and in the case of a promissory note is the

issuer; maker

The party with primary liability to pay a promissory note is called the

maker

If an instrument is incomplete on its face when the Blank______ signs it, their liability will depend on whether the person seeking to enforce the instrument can qualify as a(n) Blank______.

maker; holder in due course

If an indorser's name is Blank______ on the face of the instrument, any person who pays the instrument may require the indorser to Blank______.

misspelled; sign both the correct and the misspelled names

An indorsement is defined to mean "a signature (other than that of a maker, drawer, or acceptor) that alone or accompanied by other words is made on an instrument for purpose of: ________." (Check all that apply)

negotiating the instrument, restricting payment of the instrument incurring the indorser's liability on the instrument

Under Revised Article 3-201 of the Uniform Commercial Code, Blank______ is the transfer of possession to another person who becomes its Blank______

negotiation; holder

A holder in due course of a negotiable instrument is ______ or claims that may exist between the original parties to the instrument.

not subject to any personal defenses

Negotiation is effective to transfer an instrument even if the negotiation is

obtained by fraud, duress, or mistake made by a person without contractual capacity made in breach of a duty

Negotiation is effective to transfer an instrument even if the negotiation is Blank______. (Check all that apply.)

obtained by fraud, duress, or mistake made by a person without contractual capacity made in breach of a duty

If Carolyn Smith receives a paycheck that is made "Payable to the Order of Carolyn Smith", the paper is a(n) Blank______ instrument and she can negotiate the check with a(n) Blank______ and by transferring Blank______ to Tom.

order; indorsement; possession

The rule that a holder in due course of a negotiable instrument is not subject to Blank______ defenses between the original parties to it makes negotiable instruments a readily accepted substitute for money.

personal

Generally, ______ arise out of the transaction in which the negotiable instrument was issued and are based on negotiable instruments law or ______.

personal defenses, contract law

A party to a negotiable instrument may be either Blank______ liable or Blank______ liable for payment of it

primarily; secondarily

If a sale has been induced by fraud or misrepresentation, the seller may Blank______ the sale and recover the goods if the seller acts before the goods are resold to a Blank______ for value.

rescind; bona fide purchaser

A negotiation made under fraud or duress conditions is subject to before the instrument has been negotiated to a transferee who can qualify as a holder in due course.

rescission

A Blank______ indorsement is one that specifies the purpose of the indorsement, or specifies the use to be made of the instrument.

restrictive

______ indorsement is one that specifies the purpose of the indorsement, or specifies the use to be made of the instrument.

restrictive

______ rule means that any person who can trace their title to an instrument back to a holder in due course receives rights similar to a holder in due course even if they cannot personally meet the requirements.

shelter

Liability on negotiable instruments flows primarily from Blank______ on the instruments as well as actions taken concerning them.

signatures

A Blank______ indorsement contains the signature of the indorser along with the words indicating to whom, or to whose order, the instrument is payable.

special

If a check is drawn "Pay to the Order of Alphonso Greene" and Alphonso indorses it "Pay to the Order of Letitia James, /s/ Alphonso Greene," the check has been indorsed with a

special

If an instrument is payable to the order of a Blank______ it is called Blank______, and it can be negotiated by transfer of Blank______ of the instrument after indorsement by the person specified as the payee.

specific payee; order paper; possession

If Marsha takes a negotiable instrument and notices Blank______, she cannot be a holder in due course of the instrument.

that a material term is blank

A check "Payable to the order of Marsha Jones" requires Blank______ for a negotiation to the depositary bank to occur and for the bank to become a Blank______.

the indorsement of Marsha Jones; holder

The obligor may assert a claim up to the amount of the instrument if the holder is Blank______ but cannot assert claims in recoupment against a(n) Blank______.

the original payee; holder in due course

Unless otherwise agreed, if an instrument is transferred for value but without Blank______, the transferee has the right to the Blank______ indorsement of the transferor.

the required indorsement; unqualified

The lawful transfer of an instrument vests in the transferee Blank______ to enforce the instrument, but the transferee cannot become a holder in due course if they Blank______.

the transferor's rights; are engaged in any fraud affecting the instrument

If a negotiable instrument is not paid when it is due, UCC Article 3 considers the person taking it to be on notice that

there may be defenses to payment

A holder who has notice that an instrument contains a(n) Blank______ cannot qualify as a holder in due course of the instrument.

unauthorized signature

An instrument indorsed Blank______ remains Blank______ and can only be negotiated with the indorsement of the person specified.

with a special indorsement; order paper

To become a holder in due course, a person who takes a negotiable instrument must be a holder and take the instrument

without notice that it is overdue for value in good faith

The words "Blank______" are used to qualify an indorsement, and can be used with a Blank______ indorsement to make it a qualified blank indorsement.

without recourse; blank