Question 1

An agent is only liable on the instrument that he or she signs in if it clearly mentions the principal.

Accepted Answer

An agent can be liable on an instrument they sign if they do not clearly indicate they are signing on behalf of a principal, even if the principal is not mentioned.

Question 2

A presentment is a demand for the acceptance of a dishonored instrument.

Accepted Answer

A presentment is a formal request for payment or acceptance of a negotiable instrument, not specifically related to a dishonored instrument.

Question 3

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

Accepted Answer

An agent is a person authorized to sign a negotiable instrument on behalf of another person, known as the principal. A holder in due course is a person who has acquired a negotiable instrument for value, in good faith, and without notice of any defects or claims against it. An accommodation party is a person who signs a negotiable instrument to lend their credit to another party without receiving value in return.

Question 4

Sylvester, acting as a representative agent for Jerry, signs a negotiable instrument with the signature-Jerry, by Sylvester, agent. What kind of liability does Sylvester have for this type of signature?

Accepted Answer

Sylvester, by signing "Jerry, by Sylvester, agent," clearly indicates that he is acting in a representative capacity for Jerry. This means Sylvester does not have personal liability on the instrument, as he has properly disclosed his agency relationship.

Question 5

An unqualified indorser has secondary liability on negotiable instruments.

Accepted Answer

An unqualified indorser of a negotiable instrument, such as a check, is liable for payment if the primary obligor fails to pay. This is known as secondary liability, and it arises because the indorser is deemed to have guaranteed payment of the instrument by signing the back of it. However, the indorser's liability may be limited or discharged if certain conditions are met, such as notice of dishonor, presentment, and diligent collection efforts by the holder of the instrument.

Question 6

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 co-sign a note to IronTilt Motors, which he does. What role does Calvin's father fulfill here so that Calvin can buy the car?

Accepted Answer

Calvin's father is acting as an accommodation party by co-signing the note for Calvin. This means that he is lending his creditworthiness and assuming the risk of payment if Calvin fails to make the payments.

Question 7

What are the requirements for imposing secondary liability for a negotiable instrument?

Accepted Answer

The answer of What are the requirements for imposing secondary...

Question 8

Maria is the treasurer of Rex Caldwell Corporation. As treasurer, she makes out and signs the payroll checks for the company. Maria draws a payroll check payable to the order of her maid Carolyn Doss, who does not work for the company. Maria does not intend Carolyn to receive this money. She indorses Carolyn's name on the check and names herself as the indorsee. She cashes the check at a liquor store. Under which rule of forged instruments is Maria accountable?

Accepted Answer

Maria is accountable under the fictitious payee rule, as she drew a payroll check payable to someone who does not work for the company and indorsed Carolyn's name on the check without her knowledge or consent. By doing so, Maria created a fictitious payee and converted the funds for her own personal use. She may be held liable for the misappropriation of company funds under this rule.

Question 9

A person represented by an agent is known as the principal.

Accepted Answer

This statement is true. In agency law, the person who hires an agent to act on their behalf is known as the principal.

Question 10

Rhodes, a college student, wants to purchase a motorcycle on credit from Landier Motors. He does not have sufficient income or the credit history to justify the extension of credit to him alone. Rhodes asks his father to cosign a note to Landier Motors, which he does. What kind of liability does Rhodes's father come under?

Accepted Answer

When someone cosigns a note, they assume secondary liability, meaning they are liable for the debt if the primary signer (in this case, Rhodes) fails to make payments.

Question 11

The ________ states that a drawer or maker is liable on a forged or unauthorized indorsement if the person signing as or on behalf of a drawer or maker intends the named payee to have no interest in the instrument or when the person identified as the payee is a fabricated person.

Accepted Answer

The fictitious payee rule applies in cases where the person identified as the payee is a fabricated person or where the drawer or maker intended the named payee to have no interest in the instrument, making the drawer or maker liable on a forged or unauthorized endorsement. The imposter rule relates to situations where a person poses as the named payee, while the fraud in the inception and fraud in the inducement rules deal with cases where a person is misled into signing a negotiable instrument under false pretenses.

Question 12

A purported principal is liable for an unauthorized signature by a purported agent if the purported principal ratifies the unauthorized signature.

Accepted Answer

If a principal ratifies an unauthorized signature by an agent, they become liable for it. It's important for principals to carefully authorize individuals to act on their behalf and monitor their actions to avoid unauthorized signatures.

Question 13

Which of the following is a similarity between the fictitious payee rule and the imposter rule?

Accepted Answer

Both the fictitious payee rule and the imposter rule hold the drawer liable on the instrument because the drawer is considered to have been negligent in issuing the instrument, thus bearing the risk of loss.

Question 14

Cameron, a purported agent, signs a contract and promissory note to purchase a building for Burnstar Constructions, a purported principal. Though Cameron is an unauthorized representative, Burnstar Constructions, the purported principal, likes the deal and accepts it. Which of the following is true of the deal ratified by Burnstar Constructions?

Accepted Answer

When a principal ratifies a contract that was entered into by an unauthorized agent, the principal becomes liable on the contract as if they had authorized it from the beginning. The fact that Cameron was an unauthorized representative is irrelevant because the principal, Burnstar Constructions, accepted and ratified the deal. Therefore, Burnstar Constructions is liable on the note. Neither of the fraud rules apply in this scenario.

Question 15

Martha draws a check payable to the order of Stella. Stella indorses the check to Karen. But Leslie steals the check from Karen, forges Karen's indorsement, and cashes the check at a liquor store. Who is liable on the check?

Accepted Answer

The answer of Martha draws a check payable to the...

Question 16

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

Accepted Answer

The person who authorizes an agent to sign a negotiable instrument on their behalf is known as the principal.

Question 17

An accommodation party who signs an instrument guaranteeing payment is secondarily liable on the instrument.

Accepted Answer

An accommodation party, by definition, is someone who signs a negotiable instrument (such as a check or promissory note) to guarantee payment by someone else (such as the borrower or buyer). This party is secondarily liable, meaning they are responsible for payment only if the primary party (the borrower or buyer) fails to pay. This is different from a co-signer or co-maker, who is jointly and severally liable for payment along with the primary party.

Question 18

A qualified indorser is only liable for secondary liability.

Accepted Answer

The answer of A qualified indorser is only liable for...

Question 19

Martha draws a check payable to the order of Stella. Stella indorses the check to Karen. But Leslie steals the check from Karen, forges Karen's indorsement, and cashes the check at a liquor store. When the forgery is exposed, whom can the liquor store legally recover from?

Accepted Answer

The liquor store can legally recover from Leslie, the forger who committed the fraud. Martha, the drawer of the check, is not liable because she issued the check to the order of Stella, not Karen or Leslie. Karen is not liable because her indorsement was forged and she did not receive the proceeds of the check. Stella is not liable because she properly indorsed the check to Karen, and it was Karen's indorsement that was forged.

Question 20

Susan purchases goods by telephone from Parker. Susan has never met Parker. Brenton goes to Susan and pretends to be Parker. Susan draws a check payable to the order of Parker and gives the check to Brenton, believing him to be Parker. Brenton forges Parker's indorsement and indorses the check to his brother, William, with the term "without recourse." William then cashes the check at a liquor store. Under the imposter rule, who is liable on the check?

Accepted Answer

According to the imposter rule, Susan would be liable on the check since she was the one who gave the check to Brenton, believing him to be Parker. The fact that Brenton later forged Parker's indorsement and that William cashed the check without recourse does not relieve Susan of her liability on the check. The liquor store would not be liable since they cashed the check in good faith and were not aware of any fraud. Brenton and William may also be liable for their respective roles in the forgery and cashing of the check.

Quiz 24: Liability, Defenses, and Discharge