Contracts - UCC Art 3 - Transfer of Instruments & HDC

Question 1

What is the legal effect of a restrictive indorsement (“For Deposit Only”)?

Answer 1

1. Does not prohibit further negotiation;

2. Except for conditional indorsement, liability to subsequent holders is limited to restriction being met.

Question 2

When does a demand instrument become over-due?

Answer 2

After an unreasonable amount of time has lapsed or on the day after the day a demand for payment is made.

Question 3

Describe the concept of blank indorsements.

Answer 3

Indorsement specifies no particular person to receive payment.

Question 4

What is the legal effect of a qualified indorsement?

Answer 4

1. Disclaims contract signature liability;

2. Still extends transfer warranties to all subsequent holders.

Question 5

List the criteria for becoming a holder in due course (HDC) of a negotiable instrument.

Answer 5

1. Must be a holder;
2. Must take instrument for value;
3. Must take in good faith; and
4. Must take without notice that the instrument is overdue, has previously been dishonored, or of any claim or defense on the part of any person.

Question 6

What is the legal effect of a special indorsement?

Answer 6

1. Converts bearer into order or continues order instrument;
2. Transfer with consideration extends transfer warranties to all subsequent holders;
3. Indorser has secondary liability to pay all subsequent holders.

Question 7

Describe the concept of qualified indorsement.

Answer 7

Usually includes words “without recourse” or similar words.

Question 8

When does a check become overdue?

Answer 8

More than 90 days after its date.

Question 9

When does a time instrument become overdue?

Answer 9

If taken one minute after due date.

Question 10

True or false: If the holder is not a holder in due course for failure to give value, the holder can ship through to another, take back for value, and step up to the holder in due course classification.

Answer 10

This is a true statement. However, the holder cannot ship through and eliminate knowledge of problem on the instrument.

Question 11

Describe the concept of special indorsements.

Answer 11

Indorsement specifies a person to whom payment or to whose order payment is to be made.

Question 12

What is the legal effect of a blank indorsement?

Answer 12

1. Converts order instrument into bearer instrument;
2. For transfer with consideration warranties are extended to all subsequent holders;
3. Blank indorser has a secondary liability to pay all subsequent holders.

Question 13

Define “value”.

Answer 13

Different from consideration.
Seller gives value if receives note from buyer who already owes money for goods delivered but has not paid FIFO concept for banks and giving value on deposited checks.

Question 14

Define “holder in due course”.

Answer 14

A holder who takes possession of a negotiable instrument for present value, in good faith and without notice of any defense or claims to ownership of the instrument.

Question 15

List the three kinds of restrictive indorsements that can be used on negotiable instruments.

Answer 15

1. Conditional;
2. Prohibitive;
3. For Deposit or Collection.

Question 16

How are order instruments negotiated?

Answer 16

By delivery plus indorsement.

Question 17

Describe the shelter rule.

Answer 17

Any holder who cannot qualify as an holder in due course (HDC) but took the instrument through a HDC, has the same rights as if a HDC.

Question 18

Define “holder”.

Answer 18

A party in possession of an instrument, To be a holder of bearer paper requires delivery. To be a holder of order paper requires delivery and proper indorsement.

Question 19

How are bearer instruments negotiated?

Answer 19

By delivery.