Question 1

Federal Reserve Board guidelines for checks:

Accepted Answer

A)  require indorsements to be in blue or black ink. 
B)  must be followed or the check will not go through the banking system. 
C)  require bank indorsements to be made within 2 inches of the left edge of the back of the check. 
D)  Require indorsements to be in blue or black ink and that  bank indorsements to be made within 2 inches of the left edge of the back of the check.

Question 2

In a nonconsumer transaction, a holder in due course takes the instrument free from:

Accepted Answer

A)  only personal claims. 
B)  all defenses of any party with whom he has not dealt, except for a limited number of defenses that are available against anyone, including a holder in due course. 
C)  the defense of incapacity, duress, or illegality that renders the obligation void. 
D)  no claims.

Question 3

Joanne had a paycheck for $94 made out to her. She indorsed it with her name and gave it to Larry who, in return, agreed to paint her living and dining rooms the next Saturday. In this case:

Accepted Answer

A)  the check is not negotiable. 
B)  Larry is not a holder. 
C)  Larry is not a holder in due course. 
D)  Larry has given value for the check.

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

Phyllrox Co., a large manufacturer, purchased a forklift from Brown's Equipment Co. Phyllrox made a down payment in cash and signed a promissory note for $7,500. For $7,200 Brown's sold the note to Corporate Bank, who took it in good faith without notice of any problems with it. After Phyllrox used the forklift for two weeks, it broke down and could not be repaired. Phyllrox refuses to make any more payments to Corporate Bank. In this case:

Accepted Answer

A)  Phyllrox can assert the failure of the forklift as a defense to making payments to Corporate Bank. 
B)  Corporate Bank is a holder in due course. 
C)  Both of these are correct. 
D)  Neither answer is correct.

Question 6

Jennifer, who stole a check "payable to cash," cannot be a holder since she did not receive possession by voluntary transfer.

Accepted Answer

A) True 
 B)False

Question 7

Carmen needs quick cash, so she thinks of a scheme. She tells Frank she is collecting for Laotian refugees. Frank writes a check for $100 payable to the order of Carmen. Carmen indorses the check and delivers it to Pete, who doesn't know of Carmen's scam, for $90 cash. Pete gives the check to Emily as a present. Frank discovers Carmen's deception and refuses to pay Emily. Will he win?

Accepted Answer

A)  No, because Emily is a holder in due course. 
B)  No, because of the shelter rule. 
C)  Yes, since Emily did not take the check for value. 
D)  Yes, since the check was not negotiated to Emily.

Question 8

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

A) True 
 B)False

Question 9

If a person paying an instrument subject to the impostor rule fails to exercise ordinary care, the issuer may recover from the payor to the extent the payor's negligence contributed to the loss.

Accepted Answer

A) True 
 B)False

Question 10

The transfer of a negotiable instrument in such a manner that the transferee becomes a holder is known as:

Accepted Answer

A)  assignment. 
B)  negotiation. 
C)  indorsement. 
D)  accommodation.

Question 11

Ricardo is the holder of a check that contains the indorsement "Without Recourse, (signed) Mary Roberts." This indorsement:

Accepted Answer

A)  makes further indorsement impossible. 
B)  requires a special indorsement by the transferee. 
C)  limits the liability of Mary Roberts. 
D)  limits the liability of all subsequent holders, including Ricardo.

Question 12

Any transfer for value of an instrument is a negotiation.

Accepted Answer

A) True 
 B)False

Question 13

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

A) True 
 B)False

Question 14

Marty Sandidge wrote a check payable to "Charles Saxon" when the payee's real name was spelled "Charles Saxton." In order to obtain payment, Charles:

Accepted Answer

A)  must have Marty void the check and rewrite another check with Charles's name spelled correctly. 
B)  may be required by a person taking the instrument for value to sign both "Charles Saxon" and the correct spelling of his name. 
C)  must sign only his real name with the correct spelling or he will be liable for forgery. 
D)  must sign only "Charles Saxon" since that was the name on check.

Question 15

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

A) True 
 B)False

Question 16

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) True 
 B)False

Question 17

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

A) True 
 B)False

Question 18

Delivery alone is insufficient to negotiate an instrument when it is payable to:

Accepted Answer

A)  order and the last indorsement is in blank. 
B)  cash and signed by the drawer. 
C)  bearer and is not indorsed. 
D)  the order of John Jones and is not indorsed.

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

An indorsement must be written on the instrument itself.

Accepted Answer

A) True 
 B)False

Exam 25: Transfer and Holder in Due Course

Federal Reserve Board guidelines for checks:

In a nonconsumer transaction, a holder in due course takes the instrument free from:

Joanne had a paycheck for $94 made out to her. She indorsed it with her name and gave it to Larry who, in return, agreed to paint her living and dining rooms the next Saturday. In this case:

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

Jennifer, who stole a check "payable to cash," cannot be a holder since she did not receive possession by voluntary transfer.

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.

If a person paying an instrument subject to the impostor rule fails to exercise ordinary care, the issuer may recover from the payor to the extent the payor's negligence contributed to the loss.

The transfer of a negotiable instrument in such a manner that the transferee becomes a holder is known as:

Ricardo is the holder of a check that contains the indorsement "Without Recourse, (signed) Mary Roberts." This indorsement:

Any transfer for value of an instrument is a negotiation.

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

Marty Sandidge wrote a check payable to "Charles Saxon" when the payee's real name was spelled "Charles Saxton." In order to obtain payment, Charles:

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.

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.

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.

Delivery alone is insufficient to negotiate an instrument when it is payable to:

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

An indorsement must be written on the instrument itself.