Chapter 25
Transferability and
Holder in Due Course
N.B.: TYPE indicates that a question is new, modified, or unchanged, as
follows.
N
+
=
A question new to this edition of the Test Bank.
A question modified from the previous edition of the Test Bank,
A question included in the previous edition of the Test Bank.
TRUE/FALSE QUESTIONS
1.
Contract law governs the assignment of negotiable instruments.
ANSWER:
2.
TYPE:
+
F
PAGE:
495
TYPE:
=
F
PAGE:
495
TYPE:
=
An indorsee cannot use the notation “without recourse” to avoid liability for
payment on the instrument.
ANSWER:
5.
495
An indorsement is required to negotiate a bearer instrument.
ANSWER:
4.
PAGE:
An instrument “payable to bearer” is transferable but not negotiable.
ANSWER:
3.
T
F
PAGE:
496
TYPE:
+
A blank indorsement converts a bearer instrument to an order instrument.
251
252
TEST BANK 2—UNIT FIVE: NEGOTIABLE INSTRUMENTS
ANSWER:
6.
TYPE:
=
T
PAGE:
501
TYPE:
=
T
PAGE:
501
TYPE:
+
T
PAGE:
503
TYPE:
+
T
PAGE:
503
TYPE:
=
T
PAGE:
503
TYPE:
N
F
PAGE:
504
TYPE:
=
A person who acquires an overdue negotiable instrument is on notice that it
is defective.
ANSWER:
14.
499
A person who in good faith acquires a negotiable instrument from a thief
cannot become an HDC.
ANSWER:
13.
PAGE:
A holder takes an instrument for value by performing the promise for which
the instrument was issued.
ANSWER:
12.
F
A holder takes an instrument for value if he or she accepts the instrument
as payment for a preexisting debt.
ANSWER:
11.
=
A holder takes an instrument for value if he or she accepts the instrument
as security for a preexisting debt.
ANSWER:
10.
TYPE:
An HDC takes a negotiable instrument free of most defenses to it.
ANSWER:
9.
498
An ordinary holder takes only those rights that a transferor had in an
instrument.
ANSWER:
8.
PAGE:
A payee whose name is misspelled on an instrument cannot indorse the
instrument.
ANSWER:
7.
F
T
PAGE:
506
TYPE:
+
If a note is payable in thirty days, payment is due by midnight on the thirtieth day.
253
CHAPTER 25: TRANSFERABILITY AND HOLDER IN DUE COURSE
ANSWER:
15.
T
PAGE:
506
TYPE:
N
A person who acquires a check with notice that the drawee bank previously
dishonored it cannot become an HDC.
ANSWER:
T
PAGE:
507
TYPE:
N
254
16.
TEST BANK 2—UNIT FIVE: NEGOTIABLE INSTRUMENTS
Any installment note payment that is less than the amount due will put the
holder on notice that some of the principal is overdue.
ANSWER:
17.
TYPE:
=
F
PAGE:
507
TYPE:
=
F
PAGE:
507
TYPE:
=
A person can become an HDC only by acquiring an instrument with notice
of any defense against it.
ANSWER:
20.
507
A person can become an HDC only if a defense against payment is apparent
on the face of the instrument.
ANSWER:
19.
PAGE:
A person can become an HDC only by acquiring an instrument with notice
of any claim to it.
ANSWER:
18.
T
F
PAGE:
507
TYPE:
+
Under the shelter principle, one who acquires his or her title through an
HDC acquires the HDC’s rights.
ANSWER:
T
PAGE:
510
TYPE:
+
MULTIPLE CHOICE QUESTIONS
1.
Donna transfers an instrument to First National Bank. This transfer is not
a negotiation unless
a.
b.
c.
d.
Donna is an HDC.
First National Bank is an HDC.
the instrument is a negotiable instrument.
the instrument is an order instrument
indorsements.
ANSWER:
2.
C
PAGE:
495
with
all
TYPE:
required
=
Eve possesses an instrument that is “payable to bearer.” She loses it. Fred
finds it. On this instrument, Fred may
a.
collect payment.
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CHAPTER 25: TRANSFERABILITY AND HOLDER IN DUE COURSE
b.
c.
d.
not collect payment, because he did not give value for it.
not collect payment, because he found it.
not collect payment, because he is not the “bearer.”
ANSWER:
A
PAGE:
495
TYPE:
=
256
3.
TEST BANK 2—UNIT FIVE: NEGOTIABLE INSTRUMENTS
Burt pays Carol $100 in the form of a personal check. After Carol transfers
the check to Dennis by signing her name on the instrument, she is
a.
b.
c.
d.
a drawee.
a drawer.
an indorser.
an indorsee.
ANSWER:
4.
TYPE:
+
B
PAGE:
496
TYPE:
=
Todd indorses a check, “Pay to Interstate Trucking if they deliver the
lumber by May 1, 2007.” This is
a.
b.
c.
d.
a blank indorsement.
a qualified indorsement.
a restrictive indorsement.
a special indorsement.
ANSWER:
C
PAGE:
497
TYPE:
=
To pay for a new desk bought at Office Outlet, Pete makes a check payable
to “Offs Outlet.” A proper indorsement of the check is
a.
b.
c.
d.
“Office Outlet” only.
“Offs Outlet” only.
“Office Outlet” or “Offs Outlet.”
“Pete” only.
ANSWER:
7.
496
a blank indorsement.
a qualified indorsement.
a restrictive indorsement.
a special indorsement.
ANSWER:
6.
PAGE:
Joe receives a check from Interstate Transport Corporation and indorses it
“without recourse.” This is
a.
b.
c.
d.
5.
C
C
PAGE:
499
TYPE:
N
To pay property taxes, Alpha Corporation signs a check payable to “Beth,
County Tax Collector.” Before Beth negotiates the check, Dan replaces her
in office. The check can be negotiated by
a.
Alpha only.
257
CHAPTER 25: TRANSFERABILITY AND HOLDER IN DUE COURSE
b.
c.
d.
Beth, Dan, or whoever holds the office of county tax collector.
Beth only.
no one.
ANSWER:
B
PAGE:
499
TYPE:
=
258
8.
TEST BANK 2—UNIT FIVE: NEGOTIABLE INSTRUMENTS
Owen is a holder of a promissory note obtained from Purchase Money, Inc.
Regarding the defenses against payment of the note to which Purchase
Money is subject, Owen, as an ordinary holder, is subject to
a.
b.
c.
d.
more defenses.
no defenses.
some defenses, but not as many.
the same defenses.
ANSWER:
9.
501
TYPE:
=
an HDC, because he promised to perform services at a future date.
an HDC, because the transferor was the original payee on the note.
not an HDC, because he did not acquire the instrument in good faith.
not an HDC, because he did not yet give value for the instrument.
ANSWER:
D
PAGE:
503
TYPE:
+
A+ Auto Rentals owes Apex Auto Dealership $2,000. A+ executes a note to
Apex as security for the debt. This security
a.
b.
c.
d.
does not constitute sufficient consideration for HDC status.
does not satisfy the value requirement for HDC status.
satisfies the consideration requirement for HDC status.
satisfies the value requirement for HDC status.
ANSWER:
11.
PAGE:
Edie is the payee of a bearer instrument—a promissory note in the amount
of $1,000. Frank offers to irrigate Edie’s ranch next week in exchange for
the note. Edie agrees and delivers the note to Frank. Frank is
a.
b.
c.
d.
10.
D
D
PAGE:
503
TYPE:
=
Diner’s Café receives daily shipments of dairy products from Eagle Dairy,
Inc. The price is $900 per month. Diner’s pays six months in advance with a
note for $5,400. One month later, Eagle sells the note to First National
Bank for $5,100. At the time the note is sold, Eagle is
a.
b.
c.
d.
an HDC for $5,400.
an HDC for $5,100.
an HDC for $900.
not an HDC.
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CHAPTER 25: TRANSFERABILITY AND HOLDER IN DUE COURSE
ANSWER:
12.
C
PAGE:
503
TYPE:
=
At 1 A.M., on the sidewalk in front of Ace Credit Corporation, which is
closed, Ben buys a $500 promissory note for $50 from Curt. When presented
with Ben’s demand for payment, Dian, the maker of the note, could
successfully claim that Ben
a.
b.
c.
d.
acquired the note with notice that it was overdue.
did not acquire the instrument in good faith.
did not give value for the instrument.
none of the above.
ANSWER:
B
PAGE:
504
TYPE:
=
Fact Pattern 25-1 (Questions 13–14 apply)
First Bank’s account agreement states that deposited items will be given provisional credit only until collection is final, but the bank’s practice is to extend
immediate credit.
13.
Refer to Fact Pattern 25-1. According to the reasoning of the court in Case
25.2, Mid Wisconsin Bank v. Forsgard Trading, Inc., First Bank’s practice
is consistent with “reasonable commercial standards of fair dealing”
a.
b.
c.
d.
if it is consistent with reasonable banking standards.
if First Bank’s customers have notice, give value, and agree to it in
good faith.
if First Bank has notice, gives value, and agrees to accept items in
good faith.
under no circumstances.
ANSWER:
14.
A
PAGE:
505
TYPE:
N
Refer to Fact Pattern 25-1. Suppose First Bank has no reason to suspect
there would be a problem if immediate credit is extended on an item on
which, in fact, there is an outstanding stop-payment order. According to the
court’s decision in Case 25.2, Mid Wisconsin Bank v. Forsgard Trading,
Inc., with respect to this item, First Bank would be
a.
b.
c.
d.
a holder, but not an HDC.
an HDC.
an HDC as against all parties except the item’s depositor.
an HDC as against all parties except the item’s drawer.
260
TEST BANK 2—UNIT FIVE: NEGOTIABLE INSTRUMENTS
ANSWER:
B
PAGE:
505
TYPE:
N
261
CHAPTER 25: TRANSFERABILITY AND HOLDER IN DUE COURSE
15.
Standard Loan Company has notice that a promissory note is overdue if the
note is a demand instrument and Standard takes it
a.
b.
c.
d.
an unreasonable time after its due date.
before its due date.
on its due date.
without noticing its due date.
ANSWER:
16.
506
TYPE:
=
an unreasonable time after the date of the check.
any time after the date of the check.
any time before the date of the check.
on the date of the check.
ANSWER:
A
PAGE:
506
TYPE:
N
Bruce acquires a series of notes with successive maturity dates that Cody
issued on May 15 for a loan from Delta Credit, Inc. At the time of Bruce’s
acquisition, he learns that Cody defaulted on one of the notes. Bruce is
a.
b.
c.
d.
an HDC if he reacquires the notes after their negotiation to any unsuspecting third party.
an HDC only with respect to the notes on which Cody has not
defaulted.
an HDC with respect to all of notes.
not an HDC.
ANSWER:
18.
PAGE:
First Credit Corporation (FCC) has notice that a check is overdue if FCC
takes it
a.
b.
c.
d.
17.
A
D
PAGE:
507
TYPE:
N
Fine Office Company employs General Construction, Inc. (GCI), to renovate
an office and signs a note for $10,000 payable to GCI. GCI breaches the
contract, but sells the note for $5,000 to Happy Collection Agency, which
knows that GCI has not performed. Happy is an HDC of the note in the
amount of
a.
b.
c.
$0.
$5,000.
$10,000.
262
TEST BANK 2—UNIT FIVE: NEGOTIABLE INSTRUMENTS
d.
$15,000.
ANSWER:
19.
PAGE:
507
TYPE:
+
Aaron signs a check payable to B2C Services, Inc., and gives it to B2C,
leaving the amount blank but authorizing B2C to fill it in for $1,000. B2C
fills in $1,500 and negotiates the check to County Credit Corporation, an
HDC. County Credit can enforce the check for
a.
b.
c.
d.
$0.
$500.
$1,000.
$1,500.
ANSWER:
20.
A
C
PAGE:
507
TYPE:
+
Perfect Roofing Company receives a check from Quik Mart for fixing its
roof, and indorses the check to Repair Supplies, Inc. (RSI). Sam, RSI’s
owner, gives the check to Todd as a gift. In this situation, the party who is
not an HDC of the check but who acquires HDC rights under the shelter
principle is
a.
b.
c.
d.
no one.
Perfect Roofing.
Sam.
Todd.
ANSWER:
D
PAGE:
510
TYPE:
N
ESSAY QUESTIONS
1.
DigiTech Corporation pays its employees every two weeks. Eve gets her
paycheck, indorses the back (“Eve Anderson”), and, on her lunch hour, goes
to cash it at DigiTech’s bank, First State Bank. On the street, in a crowd,
she loses the check. Greg Smith finds it. Has the check been negotiated to
Greg? Greg signs the back of the check beneath Eve’s signature and cashes
it. What might Eve have done to avoid this loss?
ANSWER: Eve’s paycheck was negotiated to Greg. Eve’s blank indorsement on the back of the check converted it from an order instrument to a
bearer instrument. A bearer instrument can be negotiated by delivery
263
CHAPTER 25: TRANSFERABILITY AND HOLDER IN DUE COURSE
alone. Delivery occurred when Greg found the check. To have avoided the
loss that Eve suffered, she might have been more careful with the check, or
at least not signed it until she was at the bank. Also, her indorsement
might have included on the back of the check the words “For deposit only.”
In that circumstance, Greg would have been unable to legitimately cash the
check.
PAGES:
2.
496–497 & 498–499
TYPE:
N
Joan signs a note that states, “Payable in thirty days.” The note is dated
March 2. Kent buys the note on April 3. Is Kent an HDC of the note?
ANSWER: No. Generally, the time that a due date on an instrument begins to run is the day after the date of an instrument, which would mean
that this note is due April 1. That means the note is overdue. One of the
requirements for becoming an HDC is that a party take an instrument
without notice that it is overdue. (Nonpayment by a due date indicates to
any purchaser that the maker or drawer has a defense against payment.)
PAGES:
506–507
TYPE:
=