National American University

BUSINESS L 3100

Chapter 30-LIABILITY OF THE PARTIES UNDER NEGOTIABLE INSTRU- MENTS

TRUE/FALSE

1)Parties with rights in a negotiable instrument can be assignees or holders.

 

                                           

 

2. A holder can recover from any of the parties who are liable on the instrument, regardless of the order of the signatures on the instrument.

 

                                           

 

3. The law gives certain holders of a negotiable instrument a preferred standing by protecting them from all defenses when they sue to collect payment.

 

                                           

 

4. To have the status of a holder in due course, a person must first be a holder.

 

                                           

 

5. Value is similar to consideration..

 

                                           

 

6. Under the “close-connection” doctrine, a holder has taken so many instruments from its transferor or is so closely connected with the transferor that any knowledge the transferor has is deemed transferred to the holder, preventing holder in due course status.

 

                                           

 

7. Bad faith sometimes exists just because a transferee takes an instrument under odd circumstances.

 

                                           

 

8. Instruments may not be negotiated if they have been dishonored by non-acceptance.

 

                                           

 

9. A holder of a negotiable instrument cannot be a holder in due course when the holder learns of a de- fense to payment after the acquisition of the instrument.

 

                                           

 

10. In general, transferees who are aware of facts that would make a reasonable person ask questions are deemed to know what they would have learned if they had asked questions.

 

                                           

11. A person cannot become a holder through a holder in due course unless that person satisfies the re- quirements for holder in due course status.

 

                                           

 

12. A holder through a holder in due course is subject to limited defenses.

 

                                           

 

13. A holder who is neither a holder in due course nor a holder through a holder in due course is subject to every defense, just as though the instrument were not negotiable.

 

                                           

 

14. Generally defenses that could be raised in a breach of contact claim cannot be raised against a holder in due course.

 

                                           

 

15. Ordinarily the maker’s lack of capacity may be raised as a defense against a holder in due course.

 

                                           

 

16. A holder having the rights of a holder in due course is subject to the defense of fraud in the induce- ment.

 

                                           

 

17. Fraud as to the nature or essential terms of an instrument is a limited defense not available against a holder in due course.

 

                                           

 

18. A universal defense will defeat a holder in due course and a holder through a holder in due course.

 

                                           

 

19. The fact that a person signs a negotiable instrument because he or she is fraudulently deceived regard- ing its nature or essential terms is a defense available against all holders.

 

                                           

 

20. The defense that a signature was forged or signed without authority cannot be raised against any holder if the person whose name was signed has ratified it.

 

                                           

 

21. Economic duress, in the form of a reluctance to enter into a financially demanding instrument, is a uni- versal defense.

 

                                           

22. Illegality, such as a note for gambling, is a universal defense.

 

                                           

 

23. For a change to constitute an alteration, the person making the change must be a party to the instru- ment.

 

                                           

 

24. An altered instrument can be enforced according to its original terms.

 

                                           

 

25. In 1976 the Federal Trade Commission adopted a rule that expands the rights of a holder in due course in a consumer credit transaction.

 

                                           

 

26. The FTC rule concerning holders in due course is confined to consumer credit transactions.

 

                                           

 

27. The primary party on a note or certificate of deposit is the drawer.

 

                                           

 

28. The primary party on a draft is the drawee, assuming that the drawee has accepted the draft.

 

                                           

 

29. Drawers are secondary parties on a note.

 

                                           

 

30. Presentment occurs when the primary party refuses to pay an instrument according to its terms.

 

                                           

 

MULTIPLE CHOICE

 

1. A holder is a party in possession of an instrument that “runs” to him. An instrument runs to a party if it is:
   1. payable to his or her order.
   2. bearer paper.
   3. indorsed to him or her.
   4. all of the above.

                                           

2. A holder may:
   1. demand payment.
   2. bring suit for the collection of an instrument.
   3. give a discharge or release from liability on the instrument.
   4. all of the above.

                                           

 

3. A holder in due course must meet all of the following conditions except:
   1. giving value for the instrument.
   2. taking the instrument when it is overdue.
   3. acting in good faith.
   4. being ignorant of defenses and adverse claims.

                                           

 

4. Jones issued a check to Smith in return for Smith's promise to do work. Smith never did the promised work, but offered to buy goods from Gomez by endorsing the check to Gomez. Gomez had had no prior dealings with Jones or Smith, but accepted the check in payment. Gomez:
   1. cannot be a holder in due course.
   2. is considered an assignee of Smith's rights.
   3. is a holder through a holder in due course.
   4. is a holder in due course.

                                           

 

5. Which of the following will not be considered value in connection with determining holder in due course status?
   1. performing the act for which the instrument was given
   2. promising to perform an existing legal obligation
   3. receiving the instrument as security for a loan
   4. taking the instrument in payment of a debt

                                           

 

6. Under the                        doctrine, the holder has taken so many instruments from its transferor or is so closely connected with the transferor that any knowledge the transferor has is deemed transferred to the holder, preventing holder in due course status.
   1. constructive partnership
   2. close-connection
   3. symbiotic relationship
   4. collaborative relationship

                                           

 

7. An instrument may be negotiated even though:
   1. it has been dishonored.
   2. it is overdue.
   3. it is demand paper that has been outstanding for more than a reasonable period of time.
   4. all of the above.

                                           

8. A person who acquires a negotiable instrument with notice or knowledge that any party might have a defense or that there is any adverse claim to the ownership of the instrument:
   1. has acted in bad faith.
   2. has acted illegally.
   3. cannot be a holder in due course.
   4. has taken unfair advantage of the maker.

                                           

 

9. A taker of an instrument who is a holder in due course at the time of the transfer but who thereafter learns of a defense:
   1. becomes a holder through a holder in due course.
   2. becomes an ordinary holder.
   3. remains a holder in due course.
   4. becomes an assignee.

                                           

 

10. Mabel issues a negotiable promissory note to the order of Rachel. Rachel endorses the note to Batton, who takes it as a holder in due course. Batton gives the note to his brother, Albert, as a gift. In this situ- ation:
    1. Albert will acquire Batton's rights.
    2. Albert is a holder through a holder in due course.
    3. both a. and b.
    4. none of the above.

                                           

 

11. A holder through a holder in due course:
    1. has greater rights than a holder in due course.
    2. has fewer rights than a holder in due course.
    3. has the same rights as a holder in due course.
    4. must meet the requirements for becoming a holder in due course in order to achieve holder in due course status.

                                           

 

12. Fraud in the inducement is a:
    1. limited defense not available against a holder in due course.
    2. universal defense available against all holders.
    3. limited defense available against all holders.
    4. universal defense not available against a holder in due course.

                                           

 

13. Fraud in factum:
    1. occurs when a person is persuaded to execute an instrument because of fraudulent state- ments.
    2. occurs when a person signs an instrument as a result of being fraudulently deceived re- garding essential terms.
    3. is not a universal defense.
    4. cannot be raised against a holder in due course.

                                           

14. A(n)                           is an unauthorized change or completion of a negotiable instrument designed to modify the obligation of a party to the instrument.
    1. alteration
    2. modification
    3. transformation
    4. transmutation

                                           

 

15. Which of the following is not a universal defense available against all holders?
    1. fraud as to the nature or essential terms of the instrument
    2. forgery or lack of authority
    3. fraud in the inducement
    4. duress depriving control

                                           

 

16. Universal defenses work against:
    1. holders.
    2. a holder through a holder in due course.
    3. a holder in due course.
    4. all of the above.

                                           

 

17. A negotiable promissory note was issued by Gold. It was properly issued in all ways. Nevertheless, the payee managed to alter the note and raise the amount from $500 to $5,000. A holder in due course pre- sented the note for payment to Gold who discovered the alteration. In this case:
    1. Gold is liable for $500 only.
    2. Gold is liable for the full $5,000.
    3. Gold has no liability on the altered note.
    4. Gold is liable for $2,500.

                                           

 

18. A taker of a negotiable instrument may be denied the status and protection of a holder in due course where:
    1. one party is a consumer.
    2. the close-connection doctrine applies.
    3. the instrument is bearer paper.
    4. none of the above.

                                           

 

19. The FTC rule, which provides that a notice provision must be included in all consumer credit con- tracts, requires that the notice:
    1. limit recovery under the contract to amounts paid by the debtor plus a reasonable charge for incidental damages.
    2. be in italic type.
    3. be at least 20 points in size.
    4. has the effect that no subsequent person can be a holder in due course of the instrument.