Worksheet 27.3: Defenses, Limitations, and Discharge

Which of the following does NOT constitute discharge from liability on an instrument?

Discharge by mistake

A breach of contract defense is valid against a holder in due course.

F

When a person forges an instrument, the person whose name is forged has partial liability to pay a holder or any holder in due course the value of the forged instrument.

F

Which Federal Trade Commission rule limits the rights of holders in due course who purchase instruments arising out of consumer credit transactions?

FTC Rule 433

Which of the following is a universal defense to liability for payment on a negotiable instrument?

Forgery

A party will not be discharged if that party knowingly pays a holder who acquired the instrument by theft.

T

An alteration is material if it changes the contract terms between two parties in any way.

T

Discharge from liability on an instrument can come from payment, cancellation, or material alteration.

T

The defense of fraud in the execution cannot be raised if a reasonable inquiry would have revealed the nature and terms of the instrument.

T

A right to seek reimbursement is called

a right of recourse

An instrument signed by a person who has been declared mentally incompetent by a court is:

unenforceable by any holder, including an HDC.

The following are personal defenses that are valid against an ordinary holder of a negotiable instrument, but not a holder in due course or a holder through a holder in due course.

A breach of contract or breach of contract warranty. Lack or failure of consideration. Fraud in the inducement , or ordinary fraud. Illegality or mental incapacity. Ordinary duress or undue influence rendering the contract voidable. Previous payment or cancellation of the instrument. Unauthorized completion of an incomplete instrument. The nondelivery of an instrument.

Personal defenses

A defense that can be used to avoid payment to an ordinary holder of a negotiable instrument but not a holder in due course (HDC) or a holder with the rights of an HDC.

Universal defenses

A defense that is valid against all holders of a negotiable instrument, including holders in due course (HDCs) and holders with the rights of HDCs. Also called real defenses

hat is the effect of the Federal Trade Commission's rule limiting the rights of HDCs?

When a negotiable instrument contains the required FTC notice, a consumer can bring any defense that she or he has against the seller of a product against a subsequent holder as well.