Question 1

Drawers of checks and drafts and unqualified indorsers of negotiable instruments have ________ on the instruments.
A) strict liability
B) no liability
C) secondary liability
D) primary liability

Accepted Answer

Drawers of checks and drafts have primary liability, but unqualified indorsers have secondary liability. This means they are liable only if the primary liable parties (such as the drawer or previous indorsers) do not pay. Therefore, the correct answer is C- secondary liability.

Question 2

Martin borrows $15,000 from Tom,in the form of a check,and signs a promissory note,promising to pay Tom this amount plus 10 percent interest in one year.Tom indorses the note and negotiates it to Fronston.Fronston indorses the note and negotiates it to Liza.Liza presents the note to Martin for payment when the note is due.Martin refuses to pay the note.Who is secondarily liable to pay Liza?
A) Tom
B) Frontston
C) all liabilities lie with Martin
D) the bank that issued the check to Tom

Accepted Answer

Frontston is secondarily liable to pay Liza because he/she was the last person to negotiate the note before it was presented for payment and therefore has the responsibility to ensure that Martin pays. Tom is only primarily liable and is not responsible for the actions of subsequent endorsers. The bank that issued the check to Tom is not liable as they were not part of the negotiation of the promissory note. Martin is primarily liable for the note but has refused to pay, making Frontston secondarily liable.

Question 3

Absolute liability to pay a negotiable instrument,subject to certain universal or real defenses is known as ________.
A) primary liability
B) secondary liability
C) warranty liability
D) signature liability

Accepted Answer

Absolute liability to pay a negotiable instrument without any condition or limitation is known as primary liability. This liability is imposed on the maker of the promissory note, the acceptor of a bill of exchange, and the drawer of a cheque. Primary liability is unconditional and arises as soon as the negotiable instrument is issued. The primary party is absolutely obliged to pay the instrument on its due date.

Question 4

Stanley,who owes Milton money,indorses a draft to him with the term "without recourse." The instrument later is dishonored.Which of the following types of indorser is Stanley?
A) a holder
B) an agent
C) an unqualified indorser
D) a qualified indorser

Accepted Answer

Stanley is a qualified indorser because he included the term "without recourse" which means he is not liable for the payment of the instrument in case of dishonor. This limits his liability as an indorser.

Question 5

Discharge of an instrument by payment or cancellation is a type of ________.
A) warranty liability
B) transfer warranty
C) personal defense
D) universal defense

Accepted Answer

Discharge of an instrument by payment or cancellation is considered a personal defense, as it involves a claim that can prevent the enforcement of the instrument against certain parties, but not against holders in due course or those with similar rights. Universal defenses, on the other hand, can be used against all holders, including holders in due course.

Question 6

Liability in which a person cannot be held contractually liable on a negotiable instrument unless his or her signature appears on the instrument is referred to as ________.
A) warranty liability
B) unqualified liability
C) contract liability
D) accommodation

Accepted Answer

Contract liability on a negotiable instrument is directly linked to the presence of the person's signature on the instrument. Without the signature, the individual cannot be held liable under the contract terms of the negotiable instrument.

Question 7

Liability on a negotiable instrument that is imposed on a party only when the party primarily liable on the instrument defaults and fails to pay the instrument when due is referred to as ________.
A) secondary liability
B) unqualified liability
C) fringe liability
D) warranty liability

Accepted Answer

Secondary liability is the liability that is imposed on a party only when the party primarily liable on the instrument defaults and fails to pay the instrument when due. This type of liability is also known as "back-up liability" or "guarantor liability."

Question 8

Which of the following defenses,if proven,may be deemed unenforceable by a holder but enforceable by an HDC?
A) extreme duress
B) fraud in inception
C) forgery
D) breach of contract

Accepted Answer

A breach of contract is a personal defense that can be enforced against a holder but not against a Holder in Due Course (HDC), who takes the instrument free of personal defenses.

Question 9

Stanley,who owes Milton money,indorses a draft to him with the term "without recourse." The instrument later is dishonored.What liability does Stanley have on the instrument?
A) He has no liabilities on the instrument.
B) He has to pay Milton in case the instrument defaults.
C) He has primary liabilities.
D) He has secondary liabilities.

Accepted Answer

By using the term "without recourse" during the endorsement, Stanley is disclaiming any liability on the instrument in case it is dishonored. This means he will not be responsible for paying Milton if the draft defaults.

Question 10

Those who are secondarily liable on negotiable instruments they endorse are known as ________.
A) unqualified indorsers
B) qualified indorsers
C) accommodation parties
D) agents

Accepted Answer

The answer of Those who are secondarily liable on negotiable...

Question 11

In which of the following accommodations is an accommodation party primarily liable?
A) in a guarantee of payment
B) in a guarantee of collection
C) in a guarantee of demand
D) in a guarantee of promise

Accepted Answer

An accommodation party who guarantees payment is primarily liable and agrees to pay the debt if the primary obligor (the borrower) fails to do so. In a guarantee of collection, the accommodation party guarantees the debt up to the amount that can be collected from the primary obligor. In a guarantee of demand, the accommodation party guarantees to pay the debt only when the creditor demands payment. A guarantee of promise is not a recognized term in commercial law.

Question 12

________ is a type of personal defense where a person is wrongfully influenced or threatened to enter into a negotiable instrument.
A) Forgery
B) Discharge in bankruptcy
C) Fraud in the inducement
D) Ordinary duress

Accepted Answer

Ordinary duress involves situations where a person is wrongfully influenced or threatened to enter into a contract or agreement, such as signing a negotiable instrument under pressure. This contrasts with fraud in the inducement, which involves deception about the nature of the agreement itself, and forgery, which is the unauthorized signing of someone else's name. Discharge in bankruptcy refers to the release of a debtor from most of their debts.

Question 13

Which of the following has primary liability when it comes to instruments with a promise to pay?
A) the person in physical possession of the instrument
B) the drawer of the instrument
C) the drawee of the instrument
D) the payee of the instrument

Accepted Answer

The drawer of the instrument (such as a check) has primary liability to pay the amount if the instrument is not honored by the drawee (such as the bank). However, the person in physical possession of the instrument (such as the holder of the check) may also have some secondary liability depending on the circumstances. The drawee (such as the bank) only has liability if they fail to honor the instrument despite having sufficient funds or if they wrongfully dishonor the instrument. The payee (such as the recipient of the check) does not have any liability to pay.

Question 14

In which of the following conditions is a drawee primarily liable to a draft?
A) when the instrument is issued
B) when the instrument is dishonored
C) when the instrument is presented for payment
D) when the drawee is an acceptor to the instrument

Accepted Answer

The drawee is primarily liable to a draft when they accept the instrument, indicated by the fact that they become an acceptor to the instrument. Therefore, option D is the correct answer. Options A, B, and C all refer to different stages of the life of the instrument, but do not indicate the primary liability of the drawee.

Question 15

A person who authorizes an agent to sign a negotiable instrument on his or her behalf is known as a(n)________.
A) agent
B) accommodation party
C) principal
D) assignor

Accepted Answer

The person who authorizes an agent to sign a negotiable instrument on his or her behalf is known as a principal. The principal is ultimately responsible for any actions taken by the agent in regards to the negotiable instrument.

Question 16

Those who disclaim liability and are not secondarily liable on instruments they endorse are referred to as ________.
A) unqualified indorsers
B) qualified indorsers
C) agents
D) accommodation parties

Accepted Answer

Qualified indorsers disclaim liability by using phrases like "without recourse" during endorsement, indicating they do not wish to be held liable if the instrument is not honored.

Question 17

Calvin,a college student,wants to purchase an automobile on credit from Irontilt Motors.He does not have sufficient income or the credit history to justify the extension of credit to him alone.Calvin asks his father to cosign a note to Irontilt Motors,which his father agrees to.What role does Calvin's father fulfill here so that Calvin can buy the car?
A) an accommodation party
B) an agent
C) a principal
D) a qualified indorser

Accepted Answer

Calvin's father is acting as an accommodation party by cosigning the note, which means he is agreeing to be responsible for the debt if Calvin is unable to pay. This allows Irontilt Motors to extend credit to Calvin based on the father's credit history and income, rather than solely on Calvin's limited credit and income.

Question 18

A person who has been authorized to sign a negotiable instrument on behalf of another person is known as a(n)________.
A) holder in due course
B) accommodation party
C) agent
D) principal

Accepted Answer

An authorized person who signs a negotiable instrument on behalf of another person is known as an agent. The holder in due course refers to someone who has legally acquired a negotiable instrument, while an accommodation party is someone who signs a negotiable instrument as a favor to another party. The principal is the person on whose behalf the agent is signing the negotiable instrument.

Question 19

________ is a type of personal defense where a wrongdoer makes a False statement or misrepresentation to another person to lead that person to enter into a contract with the wrongdoer.
A) Forgery
B) Discharge in bankruptcy
C) Fraud in the inducement
D) Extreme duress

Accepted Answer

Fraud in the inducement is a type of personal defense where a wrongdoer makes a false statement or misrepresentation to another person to lead them to enter into a contract with the wrongdoer. This type of fraud involves inducing someone to act on a false premise, leading to an agreement that the person would not have entered if they had known the truth. Forgery, discharge in bankruptcy, and extreme duress are not related to this type of defense.

Question 20

A person who signs an instrument and lends his or her name,and credit to another party to the instrument is referred to as a(n)________.
A) agent
B) qualified indorser
C) unqualified indorser
D) accommodation party

Accepted Answer

An accommodation party is a person who signs an instrument and lends his or her name and credit to another party to the instrument, without receiving value or consideration.

Quiz 21: Holder in Due Course and Liability of Parties

Drawers of checks and drafts and unqualified indorsers of negotiable instruments have ________ on the instruments.

Absolute liability to pay a negotiable instrument,subject to certain universal or real defenses is known as ________.

Stanley,who owes Milton money,indorses a draft to him with the term "without recourse." The instrument later is dishonored.Which of the following types of indorser is Stanley?

Discharge of an instrument by payment or cancellation is a type of ________.

Liability in which a person cannot be held contractually liable on a negotiable instrument unless his or her signature appears on the instrument is referred to as ________.

Liability on a negotiable instrument that is imposed on a party only when the party primarily liable on the instrument defaults and fails to pay the instrument when due is referred to as ________.

Which of the following defenses,if proven,may be deemed unenforceable by a holder but enforceable by an HDC?

Stanley,who owes Milton money,indorses a draft to him with the term "without recourse." The instrument later is dishonored.What liability does Stanley have on the instrument?

Those who are secondarily liable on negotiable instruments they endorse are known as ________.

In which of the following accommodations is an accommodation party primarily liable?

________ is a type of personal defense where a person is wrongfully influenced or threatened to enter into a negotiable instrument.

Which of the following has primary liability when it comes to instruments with a promise to pay?

In which of the following conditions is a drawee primarily liable to a draft?

A person who authorizes an agent to sign a negotiable instrument on his or her behalf is known as a(n) ________.

Those who disclaim liability and are not secondarily liable on instruments they endorse are referred to as ________.

A person who has been authorized to sign a negotiable instrument on behalf of another person is known as a(n) ________.

________ is a type of personal defense where a wrongdoer makes a False statement or misrepresentation to another person to lead that person to enter into a contract with the wrongdoer.

A person who signs an instrument and lends his or her name,and credit to another party to the instrument is referred to as a(n) ________.