CH 26 BUSINESS LAW

A person who in good faith acquires a negotiable instrument from a thief cannot become an HDC under any circumstances. T/F

FALSE

A person who receives an instrument as a gift automatically possesses the rights of a holder in due course. T/F

FALSE

A purchaser can become an HDC of an instrument even if it is so incomplete that an element of negotiability is lacking. T/F

FALSE

A special indorsement does not specify a particular indorsee. T/F

FALSE

A transfer by assignment can make it possible for a transferee to receive more rights in the instrument than the prior possessor had. T/F

FALSE

An instrument can only be transferred by negotiation. T/F

FALSE

An instrument payable to two or more persons in the alternative requires the indorsement of both payees for negotiation. T/F

FALSE

Negotiating order instruments requires neither delivery nor indorsement. T/F

FALSE

The good faith requirement applies to both the holder and the transferor. T/F

FALSE

Under the UCC, a transfer of rights under a contract is a negotiation. T/F

FALSE

Usually, indorsements are qualified indorsements. T/F

FALSE

ESSAY Doyle gives a check to eMarket Finance to buy 100 shares of stock in FabNu Corporation for Doyle. The price of the shares is constantly fluctuating. eMarket asks Doyle to leave the amount of the check blank and allow it to fill in the price when making the purchase. Doyle agrees. eMarket buys the stock when the price is $4,000, but fills in the check for $5,000. The check is negotiated as payment for a $5,000 debt to Guido & Hollis Accountants (G&H), which takes the check in good faith and without notice of eMarket's act. G&H later learns that eMarket was not authorized to fill in the check for $1,000 over the price. Is G&H an HDC? If so, for how much?

G&H is an HDC to the extent of $5,000, the amount of the preexisting debt that eMarket owed G&H, and for which G&H accepted the check as payment. To qualify as an HDC, a holder must give value for a negotiable instrument. Taking an instrument as payment for an antecedent claim is giving value. G&H accepted the $5,000 check from eMarket as payment for the debt. This is value. G&H accepted this check before receiving notice of Doyle's defense against payment of it, so G&H is an HDC for this amount. Even if G&H had known that the check was incomplete when it was given to eMarket, G&H would have qualified as an HDC. Knowledge that an incomplete instrument has been completed is not notice of a defense against payment. Doyle is liable to G&H for the amount of the check as completed.

ESSAY Rochelle fraudulently induces Sybil to sign a note. Rochelle sells the note to Terry, who does not know of the fraud and takes the note for value and in good faith, and thus becomes an HDC. Terry sells the note to Ulrich, who sells the note back to Rochelle. Does Rochelle acquire Terry's HDC rights in the note?

No, Rochelle does not acquire Terry's HDC rights in the note. A person who does not qualify as an HDC but who acquires an instrument from an HDC or from someone with HDC rights receives the rights and privileges of an HDC. A holder who was a party to fraud affecting the instrument, however, knows of a defense against payment on it and cannot improve his or her status by buying it from a later HDC. Because of the fraud perpetrated on Sybil, the signer of the note, Rochelle does not qualify as an HDC because she knows of a defense against payment on the note. Terry and Ulrich, both of whom apparently are not aware of the fraud, can become HDCs in the negotiation of the note to them. But Rochelle cannot improve her status by buying the note from either of them because she is aware of Sybil's defense against payment.

An indorser who does not wish to be liable on an instrument can use a qualified indorsement. T/F

TRUE

An instrument is defective if it is overdue. T/F

TRUE

An instrument is dishonored when the party to whom the instrument is presented refuses to pay it. T/F

TRUE

Any irregularity on the face of an instrument that calls into question its validity will bar HDC status.​ T/F

TRUE

For a check, a "reasonable time" is ninety days after the date of the check. T/F

TRUE

Negotiating order instruments requires indorsement. T/F

TRUE

Often, whether a holder will be able to obtain payment on an instrument will depend on whether he or she is a holder in due course. T/F

TRUE

The effect of a conditional indorsement on the back of an instrument differs from the effect of conditional language that appears on its face. T/F

TRUE

There are some limitations on the shelter principle. T/F

TRUE

To avoid the risk of loss from theft, a holder may convert a blank indorsement to a special indorsement. T/F

TRUE

Visible evidence that a signature on a check was forged will disqualify a purchaser from HDC status. T/F

TRUE

When an instrument is transferred by negotiation, the transferee becomes a holder. T/F

TRUE

Jess receives a check from Kelly. Without Jess's knowledge, Leo indorses it in his own name and deposits it in his account at Metro Bank. In Jess's subsequent suit against the bank for the money, the court will most likely rule in favor of a. Jess, because Leo's signature is not authorized. b. Jess, because Metro Bank is not a holder in due course. c. Metro Bank, because Leo's signature is not authorized. d. Metro Bank, because it is a holder in due course.

a. Jess, because Leo's signature is not authorized.

Avril receives a payroll check from Business Solutions, Inc., and indorses it by signing her name on the back of the check. This is a. a blank indorsement. b. a qualified indorsement. c. a restrictive indorsement. d. a special indorsement.

a. a blank indorsement.

Plumbing & Pipes Supply Company issues a promissory note as a demand instrument with a due date of October 5. QuikPay Loan Company accepts the note. QuikPay has notice that the note is overdue if the firm takes the note a. after October 5. b. before October 5. c. on October 5. d. at any time.

a. after October 5.

. Vicenzo, in good faith and for value, gets from Wren a check "payable to the order of bearer." Vicenzo does not know that Wren stole the check. Vicenzo is a. an HDC. b. not an HDC, because Wren did not acquire the check for value. c. not an HDC, because Wren did not acquire the check in good faith. d. not an HDC, because the check is a bearer instrument.

a. an HDC.

Jill, in good faith and for value, gets from Kiley a negotiable bearer instrument. Jill does not know that Kiley stole the instrument. Jill is a. an HDC. b. not an HDC, because Kiley did not acquire the instrument for value. c. not an HDC, because Kiley did not acquire the instrument in good faith. d. not an HDC, because the instrument is a bearer instrument.

a. an HDC.

Secure Loan Company has notice that a promissory note is overdue if the note is a demand instrument and Secure Loan takes it a. an unreasonable time after its due date. b. before its due date. c. on its due date. d. without noticing its due date.

a. an unreasonable time after its due date.

Refer to Fact Pattern 26-1. By writing "Pay to Patricia" above Nina's signature, Patricia a. avoids the risk of loss from theft of the instrument. b. relieves himself from liability on the instrument. c. converts a legitimate negotiable instrument into a stolen instrument. d. locks the instrument into the bank collection process.

a. avoids the risk of loss from theft of the instrument.

Idina wants to buy a promissory note from Jo. The note is due on April 1. To become an HDC, Idina must buy the note a. before midnight on April 1. b. before noon on April 1. c. before 8:00 a.m. on April 1 d. within thirty days of April 1.

a. before midnight on April 1.

Talia, who is not a Urban Bank customer, attempts to cash a check drawn on the bank. The check is considered dishonored if Urban Bank a. refuses to pay it. b. charges a fee to cash it. c. asks Talia for reasonable identification. d. asks Talia to sign a receipt for the payment on the check.

a. refuses to pay it.

Berton transfers a draft by signing it and delivering it to Cormac. Berton is​ a. ​an indorser. b. an indorsee. c. a drafter. d. a promisor.

a. ​an indorser.

Connie transfers a note by signing it and delivering it to Dana. Dana is​ a. an indorser. b. an indorsee. c. a drafter. d. a promisor.

b. an indorsee.

Refer to Fact Pattern 26-A1. When Patricia writes "Pay to Patricia" above Nina's signature, the check becomes a. a bearer instrument. b. an order instrument. c. a promissory note. d. a stolen instrument.

b. an order instrument.

Kris transfers a note, on which Liu is the maker, to Mia, who takes it for value and in good faith. Mia knows that Kris breached the contract underlying the note, giving Liu a defense against payment. With respect to this note, Mia is a. a knowledgeable holder in due course. b. an ordinary holder. c. an ordinary holder in due course. d. an ordinary note taker.

b. an ordinary holder.

Ryan negotiates an order instrument to Selina by​ a. delivery with an assignment of his rights under a contract. b. delivery with any necessary indorsement. c. delivery alone. d. presenting it in response to a demand by Selina.

b. delivery with any necessary indorsement.

At 1 a.m., on the sidewalk in front of EZ Credit Corporation, which is closed, Frank buys a $500 promissory note for $50 from Greg. When presented with Frank's demand for payment, Diane, the maker of the note, could successfully claim that Frank a. acquired the note with notice that it was overdue. b. did not acquire the instrument in good faith. c. did not give value for the instrument. d. none of the choices.

b. did not acquire the instrument in good faith.

Mort negotiates an instrument to Nadia. Negotiation is the transfer of an instrument a. for valuable consideration under a contract. b. in such form that the transferee becomes a holder. c. pursuant to preliminary contract discussions. d. without the payment of a recognized medium of exchange.

b. in such form that the transferee becomes a holder.

Calvert buys a promissory note from Darin. The note is due on December 5. December 5 is a Sunday. The note is a. payable anytime the week of December 6. b. payable December 6. c. payable on December 5 only. d. considered defective.

b. payable December 6.

On the back of a check payable to Nero, he writes "Pay to Odell, without recourse" and signs it. This a. does not effect the check's negotiability or any party's liability. b. relieves Nero of liability on the check. c. relieves Odell of liability on the check. d. renders the check nonnegotiable.

b. relieves Nero of liability on the check.

Estes receives a check from Fleet Trucking Corporation. On the back of the check, Estes writes "pay to Garden Valley Bank only" and signs his name. This is a. a blank indorsement. b. a qualified indorsement. c. a restrictive indorsement. d. a special indorsement.

c. a restrictive indorsement.

Refer to Fact Pattern 26-1. When Patricia writes "Pay to Patricia" above Nina's signature, Nina's signature becomes​ a. a blank indorsement. b. a qualified indorsement. c. a special indorsement.​ d. a forgery.

c. a special indorsement.​

Len makes a gift of a check to Millie who takes it in good faith and without notice of any claim, defense, or defect. With respect to this check, Millie is a. an extraordinary holder in due course. b. an ordinary check passer. c. an ordinary holder. d. an ordinary holder in due course.

c. an ordinary holder.

Sergio makes a gift of a check to Todd who takes it in good faith and without notice of any claim, defense, or defect. With respect to this check, Todd is a. none of the choices. b. an assignee. c. an ordinary holder. d. an ordinary holder in due course.

c. an ordinary holder.

Gwen signs a check payable to Hart and gives it to him. Hart indorses the back, and transfers the check to Ingrid. To negotiate the check to Jaime, Ingrid must​ a. write "Ingrid" on the back. b. write "pay to the order of Jaime [signed] Ingrid" on the back. c. deliver the check to Jaime. d. obtain Jaime's signature on the back.

c. deliver the check to Jaime.

Rod negotiates a bearer instrument to Shauna by a. delivery with an assignment of its rights under a contract. b. delivery with any necessary indorsement. c. delivery alone. d. presenting it in response to a demand by Shauna.

c. delivery alone.

Beth, an accountant for Credits & Debits, acquires a negotiable instrument from Ellen by promising to pay its face value in thirty days. Beth acquires the status of an HDC when she a. acquires possession of the negotiable instrument. b. agrees with Ellen to buy the negotiable instrument. c. pays the face value due on the instrument. d. transfers the instrument to another party.

c. pays the face value due on the instrument.

Lindsey, an accountant for Madison & Monroe, acquires a negotiable instrument from Norma by promising to pay its face value in thirty days. Lindsey acquires the status of an HDC when she a. acquires possession of the negotiable instrument. b. promises to pay the face value due on the instrument. c. pays the face value due on the instrument. d. transfers the instrument to another party.

c. pays the face value due on the instrument.

. Refer to Fact Pattern 26-1. After Patricia writes "Pay to Patricia" above Nina's signature, further negotiation of the check a. requires Nina's re-indorsement and delivery. b. requires delivery alone. c. requires Patricia's indorsement and delivery. d. is not possible.

c. requires Patricia's indorsement and delivery.

To pay for investment advice from Buffet & Carraldo P.A., Doris signs a check payable to "Buffet or Carraldo." A proper indorsement of the check is a. not possible. b. "Buffet" and "Carraldo" only. c. "Buffet" only, or "Carraldo" only, but not "Buffet" and "Carraldo." d. "Buffet" only, or "Carraldo" only, or "Buffet" and "Carraldo."

d. "Buffet" only, or "Carraldo" only, or "Buffet" and "Carraldo."

Edna is the payee of a bearer instrument—a promissory note in the amount of $10,000. Flem offers to irrigate Edna's ranch next week in exchange for the note. She agrees and delivers the note to Flem. Flem is a. an HDC, because he promised to perform services at a future date. b. an HDC, because the transferor was the original payee on the note. c. not an HDC, because he did not acquire the instrument in good faith. d. not an HDC, because he did not yet give value for the instrument.

d. not an HDC, because he did not yet give value for the instrument.

Entrepreneur LLC owes Sole Saver Auto Dealership $2,000. Entrepreneur executes a note to Sole Saver as security for the debt. This security a. does not constitute sufficient consideration for HDC status. b. does not satisfy the value requirement for HDC status. c. satisfies the consideration requirement for HDC status. d. satisfies the value requirement for HDC status.

d. satisfies the value requirement for HDC status.

Raul wants to transfer a check to Schmidt. The check is defective if it a. has been previously dishonored. b. contains handwritten terms. c. is undated, antedated, or postdated. d. all of the choices.

a. has been previously dishonored.

Noah transfers an instrument to Olivia in a form and by a means that makes Olivia a "holder." This is a. none of the choices. b. an assignment. c. a negotiation. d. a sale.

c. a negotiation.

Emily writes and signs a check payable to "Five Star Cinema." George, Five Star's manager, indorses the check "For deposit only." This is a. a blank indorsement. b. a qualified indorsement. c. a restrictive indorsement. d. a special indorsement.

c. a restrictive indorsement.

A holder does not take an instrument for value if he or she gives a negotiable instrument as payment. T/F

FALSE

A holder takes an instrument for value by promising to perform in the future. T/F

FALSE

A holder takes an instrument for value if he or she inherits an instrument. T/F

FALSE

. It is possible for a person who does not qualify as an HDC to acquire the rights and privileges of an HDC. T/F

TRUE

A bearer instrument can be converted into an order instrument through indorsement. T/F

TRUE

A blank indorsement can consist of a mere signature. T/F

TRUE

A holder cannot become an HDC if he or she has notice of any claim to the instrument or defense against it. T/F

TRUE

A holder takes an instrument for value if he or she accepts the instrument in payment of a preexisting obligation. T/F

TRUE

A holder takes an instrument for value if the holder has performed the promise for which the instrument was issued.​ T/F

TRUE

A restrictive indorsement does not destroy negotiability. T/F

TRUE

An indorsement is a signature, with or without additional words or statements. T/F

TRUE

An instrument is defective if it has been previously dishonored. T/F

TRUE

Allie signs a check payable to Bess, who indorses the back, gives it to County Credit Union (CCU), and receives cash. The transfer of the check from Bess to CCU is a. an assignment. b. a negotiation. c. none of the choices. d. a sale.

b. a negotiation.

Dan signs a check payable to Ed, who indorses the back, gives it to Foodway Market, and receives cash. The transfer of the check from Dan to Ed is a. an assignment. b. a negotiation. c. none of the choices. d. a sale.

b. a negotiation.