Law Practice Test II

One of the requirements needed for a holder of a negotiable instrument to be a holder in due course is the value requirement. Ruper is the holder of a $1000 check written out to her. Which of the following would not satisfy the value requirement?

. Ruper received the check in exchange for a promise to do certain specified services three months later.

A $5000 promissory note payable to order of Neptune is discounted to Bane by blank indorsement for $4000. King steals the note from Bane and sells it to Ott, who promises to pay King $4500. After paying King, $3000, Ott learns that King stole the note. Ott makes no further payment to King. Ott is

A holder in due course to the extent of $3,333.

Dan wrote a check payable to Pete and delivered it on January 1, 2016. On January 15, 2016, Pete indorsed it and delivered the check to Henry. On February 15, 2016, Henry indorsed it and delivered the check to Hank. Which of the following statements is correct?

At least two of the above are correct

Angie writes a check payable to Brad. Brad indorses the check "without recourse" and delivers it to Cathy. Cathy indorses it and delivers it to Donna. Donna makes a timely presentment of the check to the drawee for payment. The drawee dishonors the check. Donna immediately notifies all parties. Donna can enforce the check against:

Cathy and Angie. Cathy has liability as an indorser; Angie has liability as the drawer.

Commercial Factors, Inc., purchased for $1,500 a $2,100 promissory note payable in two years. It paid $500 initially and promised to pay the balance ($1,000) within 10 days. Before Commercial Factors paid the balance, it learned that the note had been obtained originally by fraud in the inducement. To what extent will Commercial factors be considered a HDC?

Commercial Factors will qualify as a HDC of $700 regardless of whether it pays the additional $1,000.

Payne borrowed $500 from the First National Bank, executing a promissory note promising repayment. At the time the loan was made to Payne, Gem agreed with First that Gem would repay the loan if Payne failed to do so. Gem signed the back of the note as surety. Under the circumstances:

Gem is secondarily liable to repay the loan.

Dan Drawer wrote a check for $500 to Dr. I.N. Cisor as payment for dental services rendered. Two days later the crown fell out of Dan's mouth indicating that the work had not been done properly. Dan stopped payment on the check. However, before Dan did so,. Dr. Cisor negotiated the check to Hank Holder, a HDC.

Hank will be able to recover on the instrument because a HDC takes free of personal defenses, and Dan has only a personal defense.

Dan Drawer wrote a check on October 31, to the Grocery Store $80. The Grocery Store cashed the check at its bank on February 3, and it bounced on February 15, when the drawee bank informed the bank that Joe had stopped payment because groceries had been spoiled. Is the bank a HDC?

No, because the bank had knowledge that the check was overdue.

Buffy writes a check payable to Muffy and delivers it to her. Muffy presents the check to the drawee, The Prep State Bank. The bank refuses to pay the check. Can Muffy, as a holder, hold the bank liable on its drawee's contract?

No.

On June 1, 2015, M & M Machinery makes a promissory note payable to the First National Bank which is payable on June 1, 2017. First indorses it and negotiates it to the Last National Bank on July 3, 2015. Last presents the note for payment to M & M on June 15, 2017. First claims that it was discharged by the late presentment. Is it correct?

No. First is an indorser on a note. Indorsers on notes are not owed the right of presentment.

On June 1, 2015, M & M Machinery makes a promissory note payable to the First National Bank which is payable on June 1, 2017. First indorses it and negotiates it to the Last National Bank on July 3, 2015. Last presents the note for payment to M & M on June 15, 2017. M & M claims that it was discharged by the late presentment. Is it correct?

No. M & M is incorrect. M & M is the maker and makers are absolutely, primarily liable. They are not owed the right of presentment.

Andy decided to start a business. He needed a business loan. Mike agreed to loan Andy $100,000 if he would issue a promissory demand note to him in the amount of $110,000, and obtain a co-signer on the note. Andy agreed. Joey agreed to co-sign the note for Andy. Andy and Joey signed the front of the note and Andy issued it to Mike. Mike indorsed the note in blank and negotiated it to Friendly Finance Co. at a discount. Assume that Friendly is a HDC.

None of the above are true. Andy is liable in the capacity in which he signed. As an accommodation maker, he is absolutely, primarily liable just like a maker.

Sue indorses a check "without recourse" an negotiates the check to the Big Grocery Store in exchange for groceries. Big Grocery indorses the check and deposits the check in its account at State Bank. State Bank indorses and presents the check to the drawee bank, Magnolia Bank for payment. Who has made a transfer warranty?

Sue and Big Grocery

Danielle Dabney writes a check drawn on the Last National Bank and made payable to Penny Pepper. Before the check can be delivered to Penny, Tom Thief steals the check and forges her signature. Tom takes the check to the First Avenue Grocery Store and the Grocery Store takes the check as payment for groceries. First then deposits the check into its account with the Second National Bank, who negotiates it to the Third National Bank, who presents it for payment to Last.

The Grocery Store has breached both the presentment warranty and transfer warranty of good title.

A customer's account has a balance of $2000 at 9:00; at 10:00 he deposits check #1 in the amount of $2,000; and at 11:00 he deposits check #2 in the amount of $3,000. On the next day the customer withdraws $2,500 from the account. Thereafter, both checks bounce since payment has been stopped on each of them. Since the customer has vanished without a trace, the bank sues the drawer on the checks alleging HDC status.

The bank is a HDC for the full value of each check.

Acme is the holder of a check which was originally drawn by Dante and made payable to Sylvia. Sylvia properly indorsed the check to Field. Field had the check certified by the drawee bank and then indorsed the check to Bates. As a result:

The drawee bank becomes primarily liable and both Sylvia and Dante are discharged.

Under Article 3, which of the following circumstances would prevent a person from becoming a HDC?

The person was notified that payment was refused.

John induces Paul by fraud to make a note payable to John. John negotiates it to George, who in good faith and without notice of the fraud. George gives it to Ringo as a birthday gift. When Ringo attempts to collect from Paul, Paul asserts the defense of fraud in the inducement.

While Ringo is not a HDC, he acquired the instrument through a HDC, thus acquiring the rights of a HDC, and Paul's defense of fraud in inducement is not good against Ringo.

Scarlett O'Hara makes a promissory note payable to Rhett Butler, repayment to be made in a balloon payment at the end of the 12 month period. Furthermore, monthly interest payments are to be made in installments on the 15th of each month beginning in June. Rhett sells the note at a discount to the Rebel State Bank on the 17th of June. The note has written on it in big letters a penciled notation "missed paying first installment." Can Rebel State Bank qualify as an HDC?

Yes

Frank Forger steals a pad of checks from Debbie Davis. On March 1, the bank pays forged check #1 for $300. On March 5, the bank pays forged check #2 for $325. On March 20, Debbie receives her bank statement revealing the forged checks. On March 25, the bank pays check #3 forged by Frank for $700. Forged checks #4 and #5 are paid on April 25 for $600 and $700 respectively. On April 27, Debbie notifies the bank of the forgeries and demands recredit for all 5 items. Under these facts Denise:

can recover on checks #1, 2, and 3, but loses her right to recover on checks #4 and 5.

A purchaser of a negotiable instrument would least likely be a holder in due course if, at the time of purchase, the instrument is

overdue by three weeks