Question 1

An indorsement must be written on the instrument itself.

Accepted Answer

An indorsement can be on the instrument itself or on a paper attached to it (allonge), as long as it is intended to be a part of the instrument.

Question 2

Jerry takes a $400 check to Primary Bank, where he asks for $75 in cash and he deposits the remaining balance. Primary Bank has "given value" as far as the requirements of holder in due course status to the extent of $75.

Accepted Answer

By giving Jerry $75 in cash, Primary Bank has provided value to Jerry and fulfilled their obligation as a bank to dispense funds. As a result, they have satisfied the requirement for holder in due course status to the extent of $75.

Question 3

An indorsement in trust creates a trust for the benefit of the indorser or others.

Accepted Answer

An indorsement in trust creates a trust for the benefit of the indorser or others.

Question 4

Revised Article 3 provides that the impostor rule does not include an impostor who impersonates an agent of a principal and who induces someone to create a negotiable instrument payable to the principal.

Accepted Answer

Revised Article 3 of the Uniform Commercial Code (UCC) actually states that the impostor rule applies when an impostor induces someone to issue a negotiable instrument by impersonating the payee. The rule allows the person who was tricked into making the instrument to assert that the endorsement by the impostor (or anyone who obtained the instrument from the impostor) is effective as the endorsement of the person to whom the instrument was made payable, thus making the instrument payable to the impostor or subsequent holders in due course.

Question 5

To acquire the preferential rights of a holder in due course, a person either must meet the requirements of the UCC or must inherit the rights under the shelter rule.

Accepted Answer

This statement is true. To acquire the preferential rights of a holder in due course, a person must meet the requirements of the UCC or inherit the rights under the shelter rule.

Question 6

Ella induces Tammy, by fraud in the inducement, to make an instrument payable to the order of Ella. She subsequently negotiates the instrument to Adam, a holder in due course. If Ella later reacquires the instrument from Adam, Ella will succeed to Adam's rights as a holder in due course under the shelter rule.

Accepted Answer

Fraudulent inducement vitiates the entire transaction, meaning that Ella has no rights to the instrument, therefore cannot pass on holder in due course status to Adam, and cannot receive it back under the shelter rule.

Question 7

Any transfer for value of an instrument is a negotiation.

Accepted Answer

Negotiation refers specifically to the transfer of an instrument in such a manner that the transferee becomes the holder of the instrument. Not all transfers for value constitute negotiation, as negotiation requires endorsement and delivery if the instrument is order paper, or just delivery if it is bearer paper.

Question 8

A person can be a holder if:
A) the instrument has been issued to that person.
B) the instrument has been transferred to that person by negotiation.
C) the instrument is ambiguous.
D) Either the instrument has been issued to that person or  the instrument has been transferred to that person by negotiation.

Accepted Answer

A person can be a holder either if they are the original person to whom the instrument was issued or if it has been transferred to them by negotiation, as per the Uniform Commercial Code (UCC). Therefore, choice (D) is the correct answer. Choice (A) only addresses one scenario, while choice (B) only addresses another scenario. Choice (C) is irrelevant as the ambiguity of the instrument does not determine holder status.

Question 9

An executory promise, which is valid consideration to support a contract, is also the giving of value to support holder in due course status.

Accepted Answer

The answer of An executory promise, which is valid consideration...

Question 10

A negotiation is void if the transaction in which it occurs is void.

Accepted Answer

A negotiation itself is not automatically void if the transaction in which it occurs is void. The validity of a negotiation depends on the specific circumstances and legal principles applicable to the transaction, such as the negotiability of the instrument, the rights of the parties involved, and the presence of any fraud or illegality. A transaction can be void for certain reasons, but the negotiation of a negotiable instrument within that transaction might still be valid if it meets the requirements set forth by law, especially in cases where the negotiator or holder in due course has rights that are protected by law.

Question 11

David makes and delivers a promissory note for $500 to the order of Kerry, who indorses the note and delivers it to Stan in payment of an outstanding debt Kerry owes him. Stan has given value as far as the Code requirements for a holder in due course.

Accepted Answer

Stan is considered a holder in due course because he has given value for the promissory note and Kerry had the legal right to transfer the note as the payee. Therefore, Stan's rights to enforce the note are protected under the Uniform Commercial Code.

Question 12

Tina forges Vivian's indorsement on a promissory note and negotiates it to Ned. If Vivian subsequently ratifies Tina's act, both Tina and Vivian are liable to Ned on the note and Vivian's ratification relieves Tina from civil liability to Vivian.

Accepted Answer

The answer of Tina forges Vivian's indorsement on a promissory...

Question 13

An indorsement "Pay to Jones Construction Company upon completion of the job at No. 10 Park Place" is ineffective under Revised Article 3; the indorsee can enforce the instrument.

Accepted Answer

An indorsement that specifies a condition for payment, such as completion of a job, is called a conditional indorsement. Under Revised Article 3, conditional indorsements are ineffective because they violate the requirement that negotiable instruments be payable on demand or at a definite time. Therefore, the indorsement "Pay to Jones Construction Company upon completion of the job at No. 10 Park Place" is ineffective, and the indorsee (Jones Construction Company) cannot enforce the instrument based on this indorsement.

Question 14

A "without recourse" indorsement eliminates all of an indorser's liability.

Accepted Answer

A "without recourse" indorsement limits but does not eliminate an indorser's liability. The indorser is still liable if the previous parties in the chain of endorsement default on the payment. However, the indorser is not liable if there is a breach of warranty or other defect in the underlying transaction.

Question 15

A negotiation may be valid to transfer the instrument even under which of the following condition(s)?
A) The negotiation is made by an infant.
B) The negotiation is made by a person without capacity.
C) The negotiation is part of an illegal transaction.
D) All of these.
E) None of these.

Accepted Answer

A negotiation can still be valid even if made by an infant, a person without capacity, or as part of an illegal transaction, as the focus is on the transferability of the instrument itself rather than the legality or capacity of the parties involved.

Question 16

Horst, a holder in due course, buys a note made out by Arthur to Superior Motors. Even though Arthur's debt was discharged through bankruptcy, Horst can collect on the note.

Accepted Answer

The answer of Horst, a holder in due course, buys...

Question 17

Jill issues a negotiable promissory note to Cherice, who indorses it and delivers it to Lee. If Lee knows that the note was given to Cherice in exchange for worthless securities, Lee cannot be a holder in due course.

Accepted Answer

A holder in due course must take the note for value and in good faith, without knowledge of any defects or problems with the underlying transaction. If Lee knows about the worthless securities, they cannot be considered a holder in due course.

Question 18

The shelter rule did not exist at common law.

Accepted Answer

The answer of The shelter rule did not exist at...

Question 19

An indorsement "Pay Alice Adams" is an assignment rather than a negotiation since it lacks words of negotiability.

Accepted Answer

An indorsement "Pay Alice Adams" is considered a negotiation rather than an assignment because it transfers the right to payment under the negotiable instrument directly to Alice Adams, maintaining the instrument's negotiability.

Question 20

The FTC upholds the preferential position enjoyed by a holder in due course of instruments concerning debts arising out of consumer credit contracts.

Accepted Answer

The FTC (Federal Trade Commission) enforces the FTC Holder Rule, which does not allow a holder in due course to be in a preferential position regarding claims and defenses on debts arising out of consumer credit contracts. This means consumers can assert against any holder of the credit contract the same claims and defenses they could assert against the seller of the goods or services.

Quiz 25: Transfer and Holder in Due Course

An indorsement must be written on the instrument itself.

Jerry takes a $400 check to Primary Bank, where he asks for $75 in cash and he deposits the remaining balance. Primary Bank has "given value" as far as the requirements of holder in due course status to the extent of $75.

An indorsement in trust creates a trust for the benefit of the indorser or others.

Revised Article 3 provides that the impostor rule does not include an impostor who impersonates an agent of a principal and who induces someone to create a negotiable instrument payable to the principal.

To acquire the preferential rights of a holder in due course, a person either must meet the requirements of the UCC or must inherit the rights under the shelter rule.

Any transfer for value of an instrument is a negotiation.

A person can be a holder if:

An executory promise, which is valid consideration to support a contract, is also the giving of value to support holder in due course status.

A negotiation is void if the transaction in which it occurs is void.

David makes and delivers a promissory note for $500 to the order of Kerry, who indorses the note and delivers it to Stan in payment of an outstanding debt Kerry owes him. Stan has given value as far as the Code requirements for a holder in due course.

Tina forges Vivian's indorsement on a promissory note and negotiates it to Ned. If Vivian subsequently ratifies Tina's act, both Tina and Vivian are liable to Ned on the note and Vivian's ratification relieves Tina from civil liability to Vivian.

An indorsement "Pay to Jones Construction Company upon completion of the job at No. 10 Park Place" is ineffective under Revised Article 3; the indorsee can enforce the instrument.

A "without recourse" indorsement eliminates all of an indorser's liability.

A negotiation may be valid to transfer the instrument even under which of the following condition(s) ?

Horst, a holder in due course, buys a note made out by Arthur to Superior Motors. Even though Arthur's debt was discharged through bankruptcy, Horst can collect on the note.

Jill issues a negotiable promissory note to Cherice, who indorses it and delivers it to Lee. If Lee knows that the note was given to Cherice in exchange for worthless securities, Lee cannot be a holder in due course.

The shelter rule did not exist at common law.

An indorsement "Pay Alice Adams" is an assignment rather than a negotiation since it lacks words of negotiability.

The FTC upholds the preferential position enjoyed by a holder in due course of instruments concerning debts arising out of consumer credit contracts.