Transfer of instruments and holders in due course Flashcards
Ashley needs to endorse a check that had been endorsed by two other individuals prior to Ashley’s receipt of the check. Ashley does not want to have surety liability, so Ashley endorses the check “without recourse.” Under the Negotiable Instruments Article of the UCC, which of the following types of endorsement did Ashley make?
A. Blank.
A blank indorsement will not eliminate surety liability. Indeed, it is full transferor liability.
B. Special.
C. Qualified.
A qualified indorsement is one that limits the warranties that the transferor of the instrument gives. This is the “without recourse” indorsement, an indorsement that eliminates one of the five transferor warranties.
D. Restrictive.
C. Qualified.
A qualified indorsement is one that limits the warranties that the transferor of the instrument gives. This is the “without recourse” indorsement, an indorsement that eliminates one of the five transferor warranties.
Under the Negotiable Instruments Article of the UCC, which of the endorser’s liabilities are disclaimed by a “without recourse” endorsement?
A. Contract liability only.
An endorsement “without recourse” is a qualified endorsement. A qualified endorsement does not contractually guaranty payment (disclaims contract liability). The qualified endorsement only makes warranties as to good title, signatures are genuine, etc. to subsequent holders of the instrument. Thus, B, C, and D are incorrect because warranty liability to subsequent holders is not disclaimed, only contract liability.
B. Warranty liability only.
C. Both contract and warranty liability.
D. Neither contract nor warranty liability.
An endorsement “without recourse” is a qualified endorsement. A qualified endorsement does not contractually guaranty payment (disclaims contract liability). The qualified endorsement only makes warranties as to good title, genuine signatures, etc., to subsequent holders of the instrument. Thus, this answer is incorrect because warranty liability to subsequent holders is not disclaimed.
A. Contract liability only.
An endorsement “without recourse” is a qualified endorsement. A qualified endorsement does not contractually guaranty payment (disclaims contract liability). The qualified endorsement only makes warranties as to good title, signatures are genuine, etc. to subsequent holders of the instrument. Thus, B, C, and D are incorrect because warranty liability to subsequent holders is not disclaimed, only contract liability.
Question #4 (AICPA.930538REG-BL)
On February 15, 1993, P.D. Stone obtained the following instrument from Astor Co. for $1,000.
Stone was aware that Helco, Inc. disputed liability under the instrument because of an alleged breach by Astor of the referenced computer purchase agreement. On March 1, 1993, Willard Bank obtained the instrument from Stone for $3,900.
Willard had no knowledge that Helco disputed liability under the instrument.
The reverse side of the instrument is endorsed as follows:
Which of the following statements is correct?
A. Willard Bank cannot be a holder in due course because Stone’s endorsement was without recourse.
B. Willard Bank must endorse the instrument to negotiate it.
The special qualified endorsement on the instrument makes it order paper. It must be endorsed by Willard Bank before it can be further negotiated. Contrast this situation with one in which an instrument is payable to bearer. In that case, the holder may negotiate the instrument without endorsing it and negotiate it only by delivery.
C. Neither Willard Bank nor Stone are holders in due course.
D. Stone’s endorsement was required for Willard Bank to be a holder in due course.
An endorsement was not required, because the instrument’s face made it bearer paper. The phrase “Astor Co. or bearer” has this effect. To be an HDC, one must take an instrument for value in good faith and have no knowledge of defenses or claims against it. As these requirements are met, the bank is an HDC.
B. Willard Bank must endorse the instrument to negotiate it.
The special qualified endorsement on the instrument makes it order paper. It must be endorsed by Willard Bank before it can be further negotiated. Contrast this situation with one in which an instrument is payable to bearer. In that case, the holder may negotiate the instrument without endorsing it and negotiate it only by delivery.
Question #6 (AICPA.901149REG-BL)
The following note was executed by Elizabeth Quinton on April 17, 1990, and delivered to Ian Wolf:
(Face)
(Back)
In sequence, beginning with Wolf’s receipt of the note, this note is properly characterized as what type of commercial paper?
A. Bearer, bearer, order, order, order.
B. Order, bearer, order, order, bearer.
The note received by Wolf is an order instrument and requires Wolf’s endorsement to negotiate the instrument. Wolf’s endorsement is a blank endorsement and converts the note to a bearer instrument upon delivery to Thorn. Thorn’s special endorsement converted the note back to an order instrument, which requires delivery to Vernon and Vernon’s endorsement. Vernon made a special endorsement to Yule which upon delivery to Yule continues the note as an order instrument requiring Yule’s delivery and endorsement to further negotiate the note. Yule’s blank endorsement again converts the note to be a bearer instrument.
C. Order, order, bearer, order, bearer.
Refer to the correct answer for the complete explanation.
D. Bearer, order, order, order, bearer.
B. Order, bearer, order, order, bearer.
The note received by Wolf is an order instrument and requires Wolf’s endorsement to negotiate the instrument. Wolf’s endorsement is a blank endorsement and converts the note to a bearer instrument upon delivery to Thorn. Thorn’s special endorsement converted the note back to an order instrument, which requires delivery to Vernon and Vernon’s endorsement. Vernon made a special endorsement to Yule which upon delivery to Yule continues the note as an order instrument requiring Yule’s delivery and endorsement to further negotiate the note. Yule’s blank endorsement again converts the note to be a bearer instrument.
Question #7 (AICPA.900541REG-BL)
Fred Anchor is the holder of the following check:
The check is endorsed on the back as follows:
Jacobs gave the check to his son as a gift, who transferred it to Anchor for $78.00. Which of the following statements is correct?
A. The unqualified endorsement of Jacobs was necessary in order to negotiate the check to his son.
B. Nix’s endorsement was required to negotiate the check to any subsequent holder.
This was payable to Mary or to bearer. If a check is payable to bearer, it requires no endorsement to be transferred, because anyone who holds it can cash it. It is when a check is payable to a particular person or order that the endorsement of that person is required to negotiate the check.
C. Anchor does not qualify as a holder because less than full consideration was given for the check.
D. The check is bearer paper in Jacobs’ son’s hands.
Once the check has been endorsed by blank endorsement by the father, it becomes bearer paper because it is not made payable to any particular person by a special endorsement. If the check had been endorsed, “Pay to my son (and the son’s name),” (a special endorsement) the son would have had to endorse it to transfer it.
D. The check is bearer paper in Jacobs’ son’s hands.
Once the check has been endorsed by blank endorsement by the father, it becomes bearer paper because it is not made payable to any particular person by a special endorsement. If the check had been endorsed, “Pay to my son (and the son’s name),” (a special endorsement) the son would have had to endorse it to transfer it.
Under the Negotiable Instruments Article of the UCC, when an instrument is indorsed “Pay to John Doe” and signed “Faye Smith,” which of the following statements is(are) correct?
Payment of the instrument is guaranteed The instrument can be further negotiated
Yes Yes
This answer is correct because the above indorsement is a special indorsement made by Faye Smith. As a special indorsement Smith guarantees upon proper presentment and proper notice of dishonor that she will pay the instrument to a subsequent holder. In addition, being that this is a special indorsement upon delivery to John Doe, Doe can further negotiate the instrument by Doe’s blank or special indorsement.
Yes No
This answer is incorrect because the special indorsement of the instrument by Smith can, by Doe’s indorsement, further negotiate the instrument.
No Yes
No No
Yes Yes
This answer is correct because the above indorsement is a special indorsement made by Faye Smith. As a special indorsement Smith guarantees upon proper presentment and proper notice of dishonor that she will pay the instrument to a subsequent holder. In addition, being that this is a special indorsement upon delivery to John Doe, Doe can further negotiate the instrument by Doe’s blank or special indorsement.
Under the Negotiable Instruments Article of the UCC, what kind of indorsement is made by the use of the words “Lee Louis”?
A. Blank, nonrestrictive, and unqualified.
Signing your name only as an indorsement turns order paper into bearer paper and can be transferred by anyone at anytime by delivery only without restrictions and without limitations on liability.
B. Blank, nonrestrictive, and qualified.
C. Special, nonrestrictive, and unqualified.
D. Special, nonrestrictive, and qualified.
A special indorsement requires that the signature be preceded by “Pay to ______” or “Pay to the order of _______.” A qualified indorsement is one that includes the words “Without recourse,” and this endorsement has only the payee’s name.
A. Blank, nonrestrictive, and unqualified.
Signing your name only as an indorsement turns order paper into bearer paper and can be transferred by anyone at anytime by delivery only without restrictions and without limitations on liability
Under the Negotiable Instruments Article of the UCC, which of the following requirements must be met for a transferee of order paper to become a holder?
I. Possession
II. Endorsement of transferor
A. I only.
B. II only.
In addition to a proper endorsement, a holder must be in actual physical possession.
C. Both I and II.
A transferee to be a holder must have the instrument delivered (actual or constructive possession), and the instrument must be endorsed by the transferor before the transferee can become a holder in due course.
D. Neither I nor II.
C. Both I and II.
A transferee to be a holder must have the instrument delivered (actual or constructive possession), and the instrument must be endorsed by the transferor before the transferee can become a holder in due course.
