Question 1

Rubin writes a check drawn on his account at Clearwater Bank and payable to the order of Gwyn. The bank does not pay the check. Rubin is
A) absolved of liability on the check.
B) liable to Gwyn for the amount of the check.
C) liable to the bank for the amount of the check.
D) entitled to payment of the amount of the check from Gwyn.

Accepted Answer

Rubin remains liable to Gwyn for the amount of the check, even though the bank did not pay it. This is because the bank's failure to pay does not relieve Rubin of his obligation to pay the amount to Gwyn. Therefore, Rubin may be sued by Gwyn to collect on the check. Additionally, Rubin may have recourse against the bank for any damages he incurs as a result of the bank's failure to pay, but this does not absolve him of his liability to Gwyn.

Question 2

Darby writes a check to Education Loan Management, Inc., that is drawn on Darby's account at Federal Bank. If the bank does not accept the check, liability for its amount is on
A) Darby.
B) Education Loan Management.
C) Federal Bank.
D) no one.

Accepted Answer

As the check is drawn on Darby's account, the liability for its amount would ultimately fall on Darby. While Education Loan Management and Federal Bank may be involved in the transaction, the responsibility for ensuring that there are sufficient funds in the account to cover the check ultimately rests with the account holder, in this case, Darby.

Question 3

Talia, who is not an 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.

Accepted Answer

A check is considered dishonored if the bank refuses to pay it. Charging a fee, asking for identification, or requesting a receipt does not constitute dishonoring the check.

Question 4

Aziz transfers a negotiable instrument to Bhutto. The instrument is not defective if it is
A) overdue.
B) transferred the day after its expressed due date.
C) transferred the day before its expressed due date.
D) outstanding for an unreasonable time after its date.

Accepted Answer

A negotiable instrument is not considered defective if it is transferred before its expressed due date, as it is still within the valid period for negotiation.

Question 5

Amy is the maker of a note, on which Bert is secondarily liable. Credit Instruments Company (CIC) is the current holder of the note. Bert will be obli-gated to pay the note if
A) Amy defaults on the note.
B) CIC breaches a transfer warranty.
C) CIC negotiates the note to Delta Collection Agency, a third party.
D) CIC presents the note for payment.

Accepted Answer

Bert, as a secondary party, is obligated to pay the note if the primary party, Amy, defaults on it.

Question 6

Paula wants to transfer a check to Quinn. The check is defective if it
A) has been previously dishonored.
B) has no irregularities on its face.
C) is not overdue.
D) is so complete that no element of negotiability is lacking.

Accepted Answer

A check is defective if it has been previously dishonored.

Question 7

Plumbing & Pipes Supply Company issues a promissory note with a due date of October 5. Quantum Loan Company accepts the note. Quantum Loan 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.

Accepted Answer

A promissory note is considered overdue if it is taken after its due date, which in this case is October 5.

Question 8

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) a knowledgeable acceptor.

Accepted Answer

Mia is not a holder in due course since she has knowledge of the breach of contract between Kris and Liu, which gives Liu a defense against payment. Mia is an ordinary holder, and therefore, she assumes the same rights and defenses as the transferor, Kris. As such, Liu can raise the defense of breach of contract against Mia.

Question 9

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 Kiley transferred the instrument without notice.

Accepted Answer

Jill is an HDC because she acquired the instrument in good faith and for value. The fact that Kiley stole the instrument does not affect Jill's status as an HDC.

Question 10

Mark performs moving services for Nell, who pays him with a promissory note for $400. Mark is aware that there are bankruptcy proceedings against Nell. Mark is
A) an HDC.
B) not an HDC, because Mark obtained the note with notice of a defect.
C) not an HDC, because Mark did not acquire the instrument for value.
D) not an HDC, because Mark did not acquire the instrument in good faith.

Accepted Answer

The answer of Mark performs moving services for Nell, who...

Question 11

Duke signs a note "payable to the order of Equity Bank." Unless Duke has a valid defense against payment, his liability on this note is
A) impaired.
B) primary.
C) secondary.
D) qualified.

Accepted Answer

By signing a note "payable to the order of" a bank or other party, Duke is creating a negotiable instrument that can be transferred to others by endorsement. As the signer of the note, Duke has primary liability, meaning he is responsible for paying the full amount of the note unless he has a valid defense against payment (such as fraud, duress, or lack of consideration). This is different from secondary liability, where a party is only responsible for payment if the primary obligor fails to pay. Qualified liability would imply some sort of limitation or condition on Duke's obligation to pay, but none is indicated in the question. Therefore, the best answer is B) primary.

Question 12

Muni Investment Company signs a check payable to Notes & Loans, Inc., to buy a promissory note executed by Omni Corporation.  This check
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.

Accepted Answer

The answer of Muni Investment Company signs a check payable...

Question 13

Raul wants to transfer a check to Schmidt. The check is defective if it
A) is clearly stamped "insufficient funds."
B) contains handwritten terms.
C) is undated.
D) all of the choices.

Accepted Answer

The answer of Raul wants to transfer a check to...

Question 14

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 acceptor.
B) a good faith purchaser.
C) an ordinary holder.
D) an ordinary holder in due course.

Accepted Answer

The answer of Len makes a gift of a check...

Question 15

Cici signs a check "pay to the order of Doug" drawn on Cici's account in East Bank. Cici shows the check to Frieda, who agrees that the signature is Cici's and that Doug is owed the amount the check represents. Doug signs the back of the check. Liability on this check extends to
A) Cici , Doug, and East Bank.
B) Cici and Doug only.
C) Cici and Frieda only.
D) Frieda only.

Accepted Answer

Once Doug signs the back of the check, he becomes the sole legal owner of the check and is responsible for cashing or depositing it. Liability only extends to Cici and Doug since they are the parties involved in creating and executing the check. Frieda's role was simply to verify the signature and endorse the check as a witness. East Bank is not liable since they have no role in the transaction beyond processing the check from Cici's account.

Question 16

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.

Accepted Answer

Frank purchased the promissory note for an incredibly low price, which would not be typical of a reasonable transaction. This would suggest that Frank did not acquire the instrument in good faith. Additionally, the fact that the sale occurred at 1 a.m. on a closed sidewalk further suggests that this was not a legitimate transaction. Diane could claim that Frank did not acquire the note in good faith and therefore does not have an enforceable claim to payment.

Question 17

Personnel Company draws a check payable to Felix. Felix indorses the back and negotiates the check to Guaranty Bank. Primarily liable on the check is
A) Personnel Company.
B) Felix.
C) Guaranty Bank.
D) none of these.

Accepted Answer

Primarily liable on a check is the drawer, which in this case is Personnel Company. However, since the question asks for who is primarily liable after the check has been negotiated to Guaranty Bank, none of the options provided are correct because the drawer remains primarily liable until the check is paid.

Question 18

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.

Accepted Answer

To become a holder in due course (HDC), Beth must give value for the negotiable instrument, which in this context means paying the face value due on the instrument.

Question 19

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.

Accepted Answer

When a due date falls on a weekend, the payment is usually due on the next business day, which in this case is December 6th. Therefore, the note is payable on December 6th.

Question 20

Len signs a note "payable to the order of Account Collection Agency." Unless Len has a valid defense against payment, his liability on this note is
A) immediate.
B) imposed only after payment is demanded.
C) postponed until the note is dishonored by the payee.
D) suspended until payment is due.

Accepted Answer

Len's liability on the note is immediate, which means that he is obligated to pay the amount stated on the note to the Account Collection Agency. Unless he has a valid defense against payment, he cannot avoid this liability.

Quiz 23: Negotiable Instruments: Transfer and Liability

Rubin writes a check drawn on his account at Clearwater Bank and payable to the order of Gwyn. The bank does not pay the check. Rubin is

Darby writes a check to Education Loan Management, Inc., that is drawn on Darby's account at Federal Bank. If the bank does not accept the check, liability for its amount is on

Talia, who is not an Urban Bank customer, attempts to cash a check drawn on the bank. The check is considered dishonored if Urban Bank

Aziz transfers a negotiable instrument to Bhutto. The instrument is not defective if it is

Amy is the maker of a note, on which Bert is secondarily liable. Credit Instruments Company (CIC) is the current holder of the note. Bert will be obli-gated to pay the note if

Paula wants to transfer a check to Quinn. The check is defective if it

Plumbing & Pipes Supply Company issues a promissory note with a due date of October 5. Quantum Loan Company accepts the note. Quantum Loan has notice that the note is overdue if the firm takes the note

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

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

Mark performs moving services for Nell, who pays him with a promissory note for $400. Mark is aware that there are bankruptcy proceedings against Nell. Mark is

Duke signs a note "payable to the order of Equity Bank." Unless Duke has a valid defense against payment, his liability on this note is

Muni Investment Company signs a check payable to Notes & Loans, Inc., to buy a promissory note executed by Omni Corporation. This check

Raul wants to transfer a check to Schmidt. The check is defective if it

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

Cici signs a check "pay to the order of Doug" drawn on Cici's account in East Bank. Cici shows the check to Frieda, who agrees that the signature is Cici's and that Doug is owed the amount the check represents. Doug signs the back of the check. Liability on this check extends to

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

Personnel Company draws a check payable to Felix. Felix indorses the back and negotiates the check to Guaranty Bank. Primarily liable on the check is

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

Calvert buys a promissory note from Darin. The note is due on December 5. December 5 is a Sunday. The note is

Len signs a note "payable to the order of Account Collection Agency." Unless Len has a valid defense against payment, his liability on this note is