Chapter 14 - Liability, Defenses, and Discharge

Question 1

accommodation party

Answer 1

• a person who signs an instrument for the purpose of lending his or her name as credit to another party on the instrument

Question 2

dishonor

Answer 2

• to refuse to accost or pay a draft or a promissory note when it is properly presented
• an instrument is dishonored when presentment is properly made and acceptance or payment is refused or cannot be obtained within the prescribed time

Question 3

fictitious payee

Answer 3

• a payee on a negotiable instrument whom the maker or drawer does not intend to have an interest in the instrument
• indorsements by fictitious payees are not treated as unauthorized under Article 3 of the Uniform Commercial Code

Question 4

imposter

Answer 4

• one who, by use of the mail, telephone, or personal appearance, induces a maker or drawer to issue an instrument in the name of an impersonated payee
• indorsements by imposters are not treated as unauthorized under Article 3 of the Uniform Commercial Code

Question 5

personal defense

Answer 5

• a define that can be used to avoid payment to an ordinary holder of a negotiable instrument but not a holder in due course (HDC) or a holder with the rights of an HDC

Question 6

presentment warranty

Answer 6

• person who presents an instrument for payment or acceptance that (1) he or she is entitled to enforce the instrument or authorized on behalf of a person who is entitled, (2) the instrument has not been altered, (3) he or she has no knowledge that the signature of the drawer is unauthorized

Question 7

transfer warranty

Answer 7

• an implied warranty, made by any person who transfer an instrument for consideration to subsequent transferees and holders who take the instrument in good faith, that (1) the transferor is entitled to enforce the instrument, (2) all signatures are authentic and authorized, (3) the instrument has not been altered, (4) the instrument is not subject to a defense or claim of any party that can be asserted against the transferor, and (5) the transferor has no knowledge of an insolvency proceedings against the maker, the acceptor, or the drawer of the instrument

Question 8

universal defense

Answer 8

• a defense that is valid against all holders of a negotiable instrument, including holder in due course (HDCs) and holders with rights of HDCs
• universal defenses are also called real defenses

Question 9

SAMPLE TEST QUESTIONS

1. Duke signs a note “payable to the order of Equity Bank.” Unless Duke has a valid defense against payment, his liability on this note is :
   a. impaired
   b. primary
   c. secondary
   d. qualified

Answer 9

ANSWER :
(B)
CORRECT :
(B)

Question 10

SAMPLE TEST QUESTIONS

2. Rubin writes a check drawn on his account at Clearwater Bank and payable to the order of Gwyn. The bank does not pay the check. Rubin is :
   a. absolved of liability on the check
   b. liable to Gwyn for the amount of the check
   c. liable to the bank for the amount of the check
   d. entitled to payment of the amount of the check from Gwyn

Answer 10

ANSWER :
(A)
CORRECT :
(B)

Question 11

SAMPLE TEST QUESTIONS

3. Employment Personnel Company draws a check payable to Felix. Felix indorses the back and negotiates the check to Guaranty Bank. Primarily liable on the note is :
   a. Employment Personnel
   b. Felix
   c. Guaranty Bank
   d. none of the choices

Answer 11

ANSWER :
(A)
CORRECT :
(D)

Question 12

SAMPLE TEST QUESTIONS

4. Lewis makes a note payable to MaxiFinance Corporation, indorses the back of the note, and negotiates it to Notes & Drafts Investments, Inc. Primarily liable on the note is :
   a. none of the choices
   b. MaxiFinance
   c. Notes & Drafts Investments
   d. Lewis

Answer 12

ANSWER :
(D)
CORRECT :
(D)

Question 13

SAMPLE TEST QUESTIONS

5. Fiona writes a check “pay to the order of Gerri” drawn on Fiona’s account at Home State Bank. Gerri present the check for payment to Home State, which accepts it. Primarily liable on the check is :
   a. Fiona
   b. Gerri
   c. Home State
   d. none of the choices

Answer 13

ANSWER :
(A)
CORRECT :
(C)

Question 14

FACT PATTERN 14-1B
Charlton is the maker of a $200,000 promissory note payable to Development & Sales Corporation. Development & Sales indorses the note to Equity Lenders, which in turn indorses it to First Select Investors, which then indorses it to Global Bank, the present holder.

Question 15

FACT PATTERN 14-1B

6. Refer to Fact Pattern 14-1B. Global Bank properly presents the note to Charlton for payment, but he dishonors it. With timely notice to the proper parties, Global Bank may collect payment on the note from :
   a. Development & Sales, Equity Lenders, or First Select
   b. Development & Sales or Equity Lenders only
   c. First Select only
   d. no one

Answer 15

ANSWER :
(A)
CORRECT :
(A)

Question 16

FACT PATTERN 14-1B

7. Refer to Fact Pattern 14-1B. Suppose that First Select pays Global Bank on the note. With timely notice to the proper parties, First Select may then collect payment on the note from :
   a. Charlton, Development & Sales, or Equity Lenders
   b. Charlton or Development & Sales only
   c. Equity Lenders only
   d. no one

Answer 16

ANSWER :
(C)
CORRECT :
(A)

Question 17

SAMPLE TEST QUESTIONS

8. Ada is the maker of a note, on which Bart is secondary liable. Credit Instruments Company is the current holder of the note. Bart will be obligated to pay the note if :
   a. Ada defaults on the note
   b. Credit Instruments breaches a transfer warranty
   c. Credit Instruments negotiates the note to Delta Collection Agency, a third party
   d. Credit Instruments presents the note for payment

Answer 17

ANSWER :
(A)
CORRECT :
(A)

Question 18

SAMPLE TEST QUESTIONS

9. Orson signs a check “pay to the order of Painless Dental” drawn on Orson’s account in Quantum Bank. To impose liability on Orson if the bank dishonors the check, Painless Dental should present it for payment within
   a. one year
   b. six months
   c. ten days
   d. thirty days

Answer 18

ANSWER :
(D)
CORRECT :
(D)

Question 19

SAMPLE TEST QUESTIONS

10. Gulf Bank receives a check drawn by Hayward. The check is received after the established “cutoff” hour. Payment can be postponed without dishonor :
    a. indefinitely
    b. under no circumstances
    c. for thirty days
    d. until the following business day

Answer 19

ANSWER :
(D)
CORRECT :
(D)

Question 20

SAMPLE TEST QUESTIONS
11 Community a Bank receives a check drawn by Dennis. The check lacks a proper indorsement. Payment can be postponed without dishonor :
a. indefinitely
b. under no circumstances
c. for thirty days
d. until the proper indorsement is obtained

Answer 20

ANSWER :
(D)
CORRECT :
(D)

Question 21

SAMPLE TEST QUESTIONS

12. Dulcey agrees to cosign a promissory note for Excavation Equipment Leasing & Sales to buy a backhoe. The note is payable to Federal Bank. Dulcey is an accommodation :
    a. drawee
    b. indorser
    c. maker
    d. drawer

Answer 21

ANSWER :
(B)
CORRECT :
(C)

Question 22

SAMPLE TEST QUESTIONS

13. Logan is Mining Corporation’s agent and is authorized to write checks on Mining’s account in Northwest Bank. Logan writes a check “pay to the order of Oceanside Resort.” Logan signs the check “Mining Corporation, by Logan, agent.” Northwest Bank dishonors the check. Liability extends to :
    a. Logan
    b. Oceanside
    c. Mining Corporation
    d. no one

Answer 22

ANSWER :
(C)
CORRECT :
(C)

Question 23

SAMPLE TEST QUESTIONS

14. Olivia is Physicians Clinic agent and is not authorized to sign checks or notes on its behalf. Despite the lack of authority, Olivia issues a note “payable to the order of Quik Loan Company [signed] Physicians Clinic, by Olivia.” Liability on the note extends to :
    a. Physicians Clinic
    b. Olivia
    c. Quik Loan
    d. no one

Answer 23

ANSWER :
(B)
CORRECT :
(B)

Question 24

SAMPLE TEST QUESTIONS

15. Celine issues a note “payable to the order of Celine,” forges Dash’s signature as the maker, and indorses the note “pay to Erica.” Celine sells the note to Erica, who negotiates it by indorsement and delivery to Forest. Forest can extend liability to :
    a. no one
    b. Celine
    c. Dash
    d. all of the parties

Answer 24

ANSWER :
(D)
CORRECT :
(B)

Question 25

SAMPLE TEST QUESTIONS

16. Kurt writes a check on his account at Liquidity Ban to Mandy, a famous singer. The person claiming to be Mandy is an imposter, however, named Nila. Nila indorses the check to Outsize Portions, a casino, restaurant, and nightclub, for which Liquidity Bank cashes it. Ultimately, the loss will most likely fall of :
    a. Kurt
    b. Liquidity Bank
    c. Mandy
    d. Outsize Portions

Answer 25

ANSWER :
(A)
CORRECT :
(A)

Question 26

SAMPLE TEST QUESTIONS

17. Jackson pays Phil in good faith for a promissory note. Phil warrants that the draft has not been altered. This is :
    a. a presentment warranty
    b. a transfer warranty
    c. a signature warranty
    d. a breach of warranty

Answer 26

ANSWER :
(A)
CORRECT :
(A)

Question 27

SAMPLE TEST QUESTIONS

18. Danton, a mentally impaired person, is asked by Elmer to sign a piece of paper that he says is an autograph book. In fact, the document is a note. If later sued on the note by an HDC :
    a. Danton must pay the note
    b. Danton’s best defense would be fraud in the execution
    c. Danton’s best defense would be fraud in the inducement
    d. Danton’s best defense would by mistake

Answer 27

ANSWER :
(C)
CORRECT :
(B)

Question 28

SAMPLE TEST QUESTIONS

19. Oiana gives Rick a $50 check as payment for a debt. Rick crudely raises the amount of the check to $500 and transfers it to SmartPhones & Minutes Store for a new phone. SmartPhones & Minutes deposits the check in its Trade Market Bank account. Oiana is liable for the payment of $500 to :
    a. no one
    b. Trade Market Bank
    c. Rick
    d. SmartPhones & Minutes

Answer 28

ANSWER :
(A)
CORRECT :
(A)

Question 29

SAMPLE TEST QUESTIONS

20. Home Entertainment, Inc., warrants its goods to be free of defects. Ira issues a note to obtain goods from Home Entertainment that proves defective. If Home Entertainment presents the note for payment :
    a. Ira’s best defense would be breach of warranty
    b. Ira must pay the note
    c. Ira’s best defense would be fraud in the inducement
    d. Ira’s best defense would be failure of consideration

Answer 29

ANSWER :
(B)
CORRECT :
(A)