23: Holder in Due Course and Transferability

Which of the following is correct regarding an unqualified indorsement? A) It does not limit or disclaim liability. B) It obligates the indorser to pay for the instrument. C) It guarantees payment of the instrument if the maker defaults. D) It protects subsequent indorsees from liability.

A) It does not limit or disclaim liability.

Tilda purchases an automobile from Ronston. At the time of sale, Ronston tells Tilda that the car has had only one (1) previous owner and has been driven only 25,000 miles. Tilda, relying on these statements, purchases the car. She pays ten (10) percent down and signs a promissory note to pay the remainder of the purchase price, with interest, in fifteen (15) equal monthly installments. Ronston transfers the note to Patty. Tilda then discovers that the car has actually had three (3) previous owners and has been driven 250,000 miles. Which of the following is the legal outcome if Patty is a holder in due course (HDC)? A) Tilda must pay Patty and find recourse with Ronston. B) Patty must pay Tilda and find recourse with Ronston. C) Patty is not required to pay anyone, and the indorsement is considered void. D) Tilda can rescind the note and refuse to pay Patty.

A) Tilda must pay Patty and find recourse with Ronston.

Lisa buys a used car from Kelly. She pays ten (10) percent of the cost as a down payment and signs a negotiable promissory note promising to pay Kelly the remainder of the purchase price, with interest, in twelve (12) equal monthly installments. At the time of sale, Kelly lied about the mileage on the automobile. Later, Kelly negotiated the note to Frances, who had no notice of Kelly's misrepresentation. Frances, a holder in due course (HDC), negotiated the note to Zoe, who is not an HDC. Which of the following is Zoe with regard to the promissory note? A) an HDC B) a holder C) an assignee D) an assignor

A) an HDC

If a transferred negotiable instrument fails to qualify under Article 3 of the Uniform Commercial Code (UCC), it is known as a(n) ________. A) assignment B) nonnegotiable contract C) indorsement D) restrictive indorsement

A) assignment

The transfer of rights under a nonnegotiable contract is known as a(n) ________. A) assignment B) negotiation C) indorsement D) virgule

A) assignment

An indorsement that does not specify a particular indorsee is known as a ________ indorsement. A) blank B) special C) qualified D) restrictive

A) blank

A person who is in possession of a negotiable instrument that is drawn, issued, or indorsed to him or to his order, or to bearer, or in blank is a(n) ________. A) holder B) holder in due course C) assignor D) assignee

A) holder

Which of the following would be a legitimate method to convert order paper to bearer paper? A) indorsement B) adding the language "pay to the order of" C) delivering the order paper D) specifying a payee

A) indorsement

An ________ states that it is for the benefit or use of the indorser or another person. A) indorsement in trust B) indorsement for deposit C) indorsement prohibiting further indorsement D) indorsement for collection

A) indorsement in trust

The transfer of a negotiable instrument by a person other than the issuer to a person who thereby becomes a holder is referred to as a(n) ________. A) negotiation B) assignment C) indorsement D) delegation

A) negotiation

Which of the following is a nonrestrictive indorsement? A) pay to the order of Jane Doe B) pay to Jane Doe only C) for deposit only D) pay to Jane Doe, trustee

A) pay to the order of Jane Doe

A(n) ________ indorsement includes the words "without recourse" or similar language that disclaims liability of the indorser. A) qualified B) unqualified C) special D) restrictive

A) qualified

Which of the following is one of the requirements for becoming a holder in due course? A) the holder takes the negotiable instrument for value B) the holder is subject to adverse claims and defenses to the enforceability of the instrument C) the holder is in possession of an instrument issued in his name D) the holder is in possession of an instrument issued in another person's name

A) the holder takes the negotiable instrument for value

Which of the following would constitute an assignment? A) the transfer of a nonnegotiable instrument B) a negotiation pursuant to the requirements of Uniform Commercial Code (UCC) Article 3 C) a involving a holder in due course D) an indorsement that is subject to the shelter principle

A) the transfer of a nonnegotiable instrument

Which of the following is correct regarding a special indorsement? A) It is only considered valid if it includes words of negotiation. B) It requires the signature of the indorser to be valid. C) It can be negotiated just by delivery. D) It is considered a bearer instrument.

B) It requires the signature of the indorser to be valid.

What happens if the name of the indorsee or payee is misspelled in an indorsement? A) The instrument becomes nonnegotiable. B) The instrument can be indorsed with the misspelled name. C) The instrument must be remade to be valid. D) The instrument cannot be subsequently indorsed.

B) The instrument can be indorsed with the misspelled name.

Which of the following indorsements may consist of just a signature? A) a special indorsement B) a blank indorsement C) a restrictive indorsement D) a qualified indorsement

B) a blank indorsement

A separate piece of paper attached to an instrument on which an indorsement is written is known as a(n) ________. A) bill of exchange B) allonge C) supplement D) appendage

B) allonge

Which of the following makes a negotiable instrument transferable to a third party? A) a delegation B) an indorsement C) a bill of exchange D) a trade acceptance

B) an indorsement

An instrument that is not payable to a specific payee or indorsee is known as ________. A) order paper B) bearer paper C) an allonge D) a draft

B) bearer paper

A person who takes a negotiable instrument for value, in good faith, and without notice that it is defective or overdue is a(n) ________. A) holder B) holder in due course C) unqualified indorser D) third party beneficiary

B) holder in due course

An indorsement that contains some sort of instruction from the indorser is known as a ________ indorsement. A) nonrestrictive B) restrictive C) qualified D) special

B) restrictive

Which of the following Uniform Commercial Code (UCC) requirements for becoming a holder in due course addresses the holder having performed the agreed-upon promise associated with a negotiable instrument? A) the taking in good faith requirement B) the taking for value requirement C) the taking without notice of defect requirement D) the no evidence of forgery, alteration, or irregularity requirement

B) the taking for value requirement

Which of the following is correct regarding a qualified indorsement? A) An instrument containing a qualified indorsement can only be negotiated once. B) An indorsement, once qualified, will protect all subsequent indorsers. C) A qualified indorsement protects only the indorser who wrote the indorsement. D) A qualified indorsement obligates the indorser to pay if the maker defaults.

C) A qualified indorsement protects only the indorser who wrote the indorsement.

Which of the following is correct regarding an assignment? A) It is considered as a negotiation under Article 3 of the Uniform Commercial Code (UCC). B) The transferee is known as a holder in due course. C) Defenses to the enforcement of the contract against the assignor can be raised against the assignee. D) Only negotiable instruments can become assignments.

C) Defenses to the enforcement of the contract against the assignor can be raised against the assignee.

Which of the following is correct regarding an indorsement to multiple persons using a virgule? A) It can only be indorsed further with the signature of the drawer. B) Neither person can individually negotiate the instrument. C) Either person can individually negotiate the instrument. D) Such an instrument cannot be subsequently negotiated.

C) Either person can individually negotiate the instrument.

Which of the following is correct regarding an allonge? A) It must contain the name of the payee to be valid. B) It must be accepted by the payee to be valid. C) It must be affixed to the indorsement. D) It must be provided only on demand.

C) It must be affixed to the indorsement.

Which of the following is required to negotiate order paper, but not required to negotiate bearer paper? A) security B) collateral C) an indorsement D) a warranty

C) an indorsement

Which of the following is a similarity between bearer paper and order paper? A) both require a specific payee to be named B) both require indorsements to be considered negotiable C) both require delivery to be considered negotiable D) both can be claimed by whoever presents the instrument for payment

C) both require delivery to be considered negotiable

If an instrument is payable to multiple persons using the word "and," the instrument ________. A) cannot be negotiated any further B) cannot be negotiated by either party individually C) can only be further negotiated with the endorsement of both payees D) can only be further negotiated with the signature of the drawer

C) can only be further negotiated with the endorsement of both payees

A(n) ________ is a signature and other directions written by or on behalf of the holder somewhere on an instrument. A) recommendation B) assignment C) indorsement D) reference

C) indorsement

A(n) ________ has no instructions or conditions attached to the payment of the funds. A) indorsement in trust B) indorsement for deposit C) nonrestrictive indorsement D) restrictive indorsement

C) nonrestrictive indorsement

Which of the following is correct regarding bearer paper? A) both an indorsement and delivery are required for it to be negotiable B) only an indorsement is necessary for it to be negotiable C) only delivery is necessary for it to be negotiable D) it must also meet the requirements for order paper

C) only delivery is necessary for it to be negotiable

According to the ________, a holder who does not qualify as a holder in due course in his own right becomes a holder in due course (HDC) if he acquires the instrument through an HDC. A) exclusionary rule B) acceleration clause C) shelter principle D) good faith principle

C) shelter principle

Under the Uniform Commercial Code's (UCC's) ________ requirement, a person cannot qualify as a holder in due course (HDC) if she has notice that the instrument is overdue. A) no evidence of forgery, alteration, or irregularity B) taking in good faith C) taking without notice of defect D) taking for value

C) taking without notice of defect

An indorsement whereby the indorser promises to pay the holder or any subsequent indorser the amount of the instrument if the maker, drawer, or acceptor defaults is referred to as a(n) ________ indorsement. A) special B) restrictive C) unqualified D) qualified

C) unqualified

Which of the following requirements must be met for a holder to qualify as a holder in due course (HDC) under the shelter principle? A) The holder must not be in possession of a prior negotiable instrument. B) The holder must have notice of a defense or claim against the payment of the instrument. C) The holder must have been a party to a fraud or an illegality affecting the instrument. D) The holder must have acquired the instrument from an HDC.

D) The holder must have acquired the instrument from an HDC.

Which of the following indorsements can be negotiated just by delivery? A) an unqualified indorsement B) a special indorsement C) a qualified indorsement D) a blank indorsement

D) a blank indorsement

Which of the following can be exchanged for cash by merely having possession of the instrument? A) a certificate of deposit (CD) B) an allonge C) order paper D) bearer paper

D) bearer paper

An instrument that is refused payment when presented for payment is called a ________ instrument. A) void B) restricted C) voidable D) dishonored

D) dishonored

Which of the following is an instrument that is payable to a specific payee or indorsed to a specific indorsee? A) a bearer bond B) bearer paper C) an allonge D) order paper

D) order paper

An indorsement that contains the signature of the indorser and specifies the person to whom the indorser intends the instrument to be payable is known as a(n) ________ indorsement. A) qualified B) unqualified C) blank D) special

D) special

A holder can convert a blank indorsement into a special indorsement by adding her signature on it.

FALSE

A holder in due course is subject to all the claims and defenses that can be asserted against the transferor.

FALSE

A qualified indorsement protects subsequent indorsers from liability.

FALSE

A special indorsement does not specify to whom the indorser intends the instrument to be payable.

FALSE

An indorsee who knowingly accepts a defective instrument nevertheless qualifies as a holder in due course (HDC).

FALSE

An indorsement is required to negotiate bearer paper.

FALSE

An instrument that is not payable to a specific payee or indorsee is called order paper.

FALSE

An instrument that is payable to a specific payee or indorsed to a specific indorsee is called bearer paper.

FALSE

If a virgule is used, both parties are required to negotiate the instrument.

FALSE

If the name of the payee is misspelled, the indorsement is invalid.

FALSE

If there is no space for an indorsement on the instrument, a new instrument has to be made to accommodate the indorsement.

FALSE

Most indorsements are restrictive.

FALSE

Nonnegotiable instruments are negotiated by holders in due course.

FALSE

Nonrestrictive indorsements contain instructions from the indorser.

FALSE

The good faith test for becoming a holder in due course (HDC) applies to both the transferor and the transferee.

FALSE

A holder of a defective instrument cannot qualify as a holder in due course (HDC) if she has notice that the instrument is defective.

TRUE

A qualified indorsement is often used by persons who sign instruments in a representative capacity.

TRUE

A qualified indorsement puts limited liability on the indorsee.

TRUE

A special indorsement is negotiable by indorsement and delivery.

TRUE

A specially qualified indorsement can only be negotiated by indorsement and delivery.

TRUE

An allonge must be affixed to an instrument to be valid.

TRUE

An indorsement that purports to prohibit further negotiation of an instrument does not destroy the negotiability of the instrument.

TRUE

An indorsement with just the indorsee's signature and a specific, named payee is a nonrestrictive indorsement.

TRUE

An indorser is allowed to indorse an instrument so as to make the indorsee his collecting agent.

TRUE

An instrument can be converted from order paper to bearer paper and vice versa many times until the instrument is paid.

TRUE

An instrument containing a qualified indorsement can be further negotiated.

TRUE

For order paper to be negotiated, there must be delivery and indorsement.

TRUE

For the purpose of becoming a holder in due course (HDC), a holder has given value if the holder takes the instrument in payment of an antecedent claim.

TRUE

If a person promises to perform but has not yet done so, no value has been given, and that person is not a holder in due course (HDC).

TRUE

If an instrument is payable jointly using the word "and," both persons' indorsements are necessary to negotiate the instrument.

TRUE

Negotiable instruments are used as a substitute for money.

TRUE

Order paper that is indorsed in blank becomes bearer paper.

TRUE

The holder of a negotiable instrument has the same rights as the holder of an ordinary nonnegotiable contract.

TRUE

The transfer of rights under a nonnegotiable contract is known as an assignment.

TRUE

To qualify as a holder in due course (HDC), a person must be the holder of a negotiable instrument that was taken for value.

TRUE