Chapter 13: "Transferability and Holder in Due Course"

Question 1

One of the differences between transfer by negotiation and an assignment is that:

a) an assignment can only happen with the expressed written consent of the government.
b) a transfer by negotiation can give a holder more rights in the instrument than the prior possessor had.
c) an instrument must be indorsed, whereas a transfer by negotiation will not require an indorsement.

Answer 1

b) a transfer by negotiation can give a holder more rights in the instrument than the prior possessor had.

Question 2

Under contract law principles, an assignment gives the assignee only those rights that the assignor possessed. Therefore any defenses that can be raised against an assignor can be raised against the assignee.

Answer 2

True

Question 3

A holder of an instrument receives, at the very least, the rights of the previous possessor.

Answer 3

True

Question 4

Order instruments are negotiated by ____

`

Answer 4

delivery with the necessary indorsement

Question 5

An instrument that is payable to bearer is negotiated by ____

Answer 5

delivery

Question 6

trust indorsements

Answer 6

Definition:
An indorsement for the benefit of the indorser or a third person; also known as an agency indorsement. The indorsement results in legal title vesting in the original indorsee.

Question 7

holder in due course (HDC)

Answer 7

Definition:
A holder who acquires a negotiable instrument for value; in good faith; and without notice that the instrument is overdue, that it has been dishonored, that any person has a defense against it or a claim to it, or that the instrument contains unauthorized signatures, alterations, or is so irregular or incomplete as to call into question its authenticity.

Question 8

restrictive indorsement

Answer 8

Definition:
Any indorsement on a negotiable instrument that requires the indorsee to comply with certain instructions regarding the funds involved. A restrictive indorsement does not prohibit the further negotiation of the instrument.

Question 9

shelter principle

Answer 9

Definition:
The principle that the holder of a negotiable instrument who cannot qualify as a holder in due course (HDC), but who derives his or her title through an HDC, acquires the rights of an HDC.

Question 10

conversion

Answer 10

Definition:

The wrongful taking, using, or retaining possession of personal property that belongs to another.

Question 11

trust indorsement

Answer 11

Definition:

The wrongful taking, using, or retaining possession of personal property that belongs to another.

Question 12

qualified indorsement

Answer 12

Definition:
An indorsement on a negotiable instrument in which the indorser disclaims any contract liability on the instrument; the notation “without recourse” is commonly used to create a qualified indorsement.

Question 13

Even with a bearer instrument, indorsement is still necessary.

• hint
  What is the difference between an order instrument and a bearer instrument?

a. True
b. False

Answer 13

b. False

Question 14

An instrument that has no room for indorsements:

a. can have a separate piece of paper firmly attached to it with an indorsement.	
b. can be negotiated without an indorsement.	
c. is void.

Answer 14

a. can have a separate piece of paper firmly attached to it with an indorsement.

Question 15

If an order instrument is indorsed in blank, is it still a “secure” instrument?

a. No, because it becomes a bearer instrument, which anybody can cash.	
b. Yes, because it is made out to a particular person or business.	
c. Yes, because the person who signed it has to authorize its delivery.

Answer 15

a. No, because it becomes a bearer instrument, which anybody can cash.

Question 16

special indorsement

Answer 16

Definition:
An indorsement on an instrument that indicates the specific person to whom the indorser intends to make the instrument payable; that is, it names the indorsee.

Question 17

Lloyd indorses a check “Pay to Erin, without recourse,” [signed] Lloyd. The legal effect this indorsement has on Lloyd is:

a. none at all.	
b. that Lloyd is relieved of all liability on the check.	
c. that Lloyd is now liable for Erin's debts.

Answer 17

b. that Lloyd is relieved of all liability on the check.

Question 18

Which of the following is NOT an example of restrictive indorsements?

a. Pay to Sonja Caballero.

b. For collection only.	
c. Pay to Jaime Zapata as agent for Janice Stone.	
d. For deposit only.	
e. Pay to Ellen Everson in trust for Steve Ramirez.

Answer 18

a. Pay to Sonja Caballero.

Question 19

Conditional language that appears on the back of an instrument has the same effect as conditional language that appears on the front of an instrument.

a. True
b. False

Answer 19

b. False

The effect of a conditional indorsement differs from the effect of conditional language that appears on the face of an instrument. As noted, conditional instruments do not prevent further negotiation. In contrast, an instrument with conditional language on the face is not negotiable because it does not meet the requirement that a negotiable instrument must contain an unconditional promise to pay.

Question 20

Jill indorses a check “Payable to Tess, as agent for Jill.” Tess is Jill’s daughter. Jill has created _____

Answer 20

a trust indorsement.

Question 21

Which of the following examples is NOT a trust indorsement?

a. Rao asks his accountant to pay some bills for him while he is out of the country, so he indorses his payroll check to the accountant

“

as agent for Rao.

”

b. Rao indorses his payroll check in blank.	
c. Rao has to leave town, but wants to purchase a used car from a friend. He has his lawyer do the transaction and indorses his payroll check to his lawyer "as agent for Rao."

Answer 21

b. Rao indorses his payroll check in blank.

Question 22

Trust indorsements are also known as agency indorsements.

a. True
b. False

Answer 22

a. True

Question 23

The result of the trust indorsement is that the legal rights in the instrument are transferred to the original _____

Answer 23

indorsee

Question 24

If the original indorsee pays or applies the proceeds consistently with the indorsement, the indorsee is a(n)_____

Answer 24

holder

Question 25

The method used for negotiation of an order instrument or bearer instrument depends on the character of the instrument at the time the negotiation takes place.

a. True
b. False

Answer 25

a. True

Question 26

A check originally payable to cash, but subsequently indorsed with the words “pay to Li Ping,” must be negotiated as:

a. a conditional I.O.U.

b. an order instrument by indorsement and delivery.	
c. a bearer instrument by delivery only.

Answer 26

b. an order instrument by indorsement and delivery.

Question 27

Misspelled Names

Answer 27

An indorsement should be identical to the name that appears on the instrument. A payee or indorsee whose name is misspelled can indorse with the misspelled name, the correct name, or both

Question 28

Harold Burton writes a check “payable to Debra or Kelsey.” On this instrument, Debra and Kelsey are payees in the ____

Answer 28

alternative

Question 29

When an instrument is made payable to two or more persons jointly (by use of the word “and”), all of the payees’ indorsements are necessary for negotiation.

T/F

Answer 29

True

Question 30

Whenever an instrument payable to two or more persons does not clearly indicate whether it is payable in the alternative or payable jointly, then the instrument is payable jointly.

T/F

Answer 30

False

Question 31

When a drawer gives one alternative or joint payee a check, the drawer’s obligation on the check to other payees is

continuing
preliminary
suspended

Answer 31

suspended

Question 32

antecedent claim

Answer 32

A preexisting claim. In negotiable instruments law, taking an instrument in satisfaction of an antecedent claim is taking the instrument for value—that is, for valid consideration.