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Interactive Quiz for ALT-12e, Chapter 25

Chapter 25 – Transferability and Holder in Due Course

1. What is one of the differences between a transfer by negotiation and an assignment?

a. An assignment can only happen with the express written consent of the state.

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

c. An assignment will need to be indorsed, while a transfer by negotiation will never require an indorsement.

d. An assignment is always completed by delivery, while a negotiation may never be completed by delivery.

Answers:

a. Incorrect. This is not a difference between the two.

b. Correct. Someone who receives a transfer by negotiation may acquire greater rights than the previous possessor, and this is not the case with an assignment.

c. Incorrect. This is not a difference between the two.

d. Incorrect. This is not a difference between the two.

2. If an instrument is “payable to bearer,” how is it negotiated?

a. By rescission.

b. By reformation.

c. By distillation.

d. By delivery.

Answers:

a. Incorrect. Rescission, or cancellation, is not the way to negotiate an instrument made “payable to bearer.”

b. Incorrect. Reformation is not the way to negotiate a bearer instrument.

c. Incorrect. Bearer instruments cannot be distilled in order to be negotiated.

d. Correct. Delivery is the proper way to negotiate a bearer instrument.

3. If there is no room on instrument to add an indorsement, what may happen?

a. The instrument can be negotiated without an indorsement.

b. An allonge can be firmly attached to provide space for indorsements.

c. A codicil may be written to amend the document.

d. Nothing may be done. The document is now void.

Answers:

a. Incorrect. The document may not be negotiated without an indorsement.

b. Correct. An allonge may affixed to the document to provide room for indorsements.

c. Incorrect. Codicils amend wills, not negotiable instruments.

d. Incorrect. Something may be done; an allonge may be created.

4. Suppose that John indorses a check “Pay to Deborah, without recourse, [signed] John.” In legal terms, how does this indorsement affect John?

a. It does not affect him at all.

b. It makes him liable for Deborah’s debts.

c. It renders the check nonnegotiable.

d. It relieves him of liability on the check.

Answers:

a. Incorrect. The indorsement relieves John of further liability on the check.

b. Incorrect. The indorsement does not make John liable for Deborah’s debts.

c. Incorrect. The indorsement does not make the check nonnegotiable.

d. Correct. This indorsement is qualified and relieves John of further liability on the check.

5. Now suppose that John indorses the check, “Pay to Samuel, as agent for Deborah.” What kind of indorsement is this?

a. A trust indorsement.

b. A relative indorsement.

c. A collection indorsement.

d. An indorsement for deposit.

Answers:

a. Correct. Samuel is to hold or use the money for the benefit of Deborah, because Samuel is her agent, so this is a trust, or agency, indorsement.

b. Incorrect. This is not a relative indorsement.

c. Incorrect. This is not a collection indorsement.

d. Incorrect. This is not an indorsement for deposit.

6. As a general rule, which of the following statements about holders in due course (HDCs) is correct?

a. HDCs receive no immunity in terms of defenses against payment on a negotiable instrument.

b. HDCs receive a higher level of immunity in terms of defenses against payment on a negotiable instrument than ordinary holders do.

c. HDCs are immune from the kinds of strict liability claims that always affect other holders.

d. HDCs receive full immunity from any defenses in cases involving negotiable instruments.

Answers:

a. Incorrect. HDCs receive immunity from many defenses against payment.

b. Correct. HDCs do acquire a higher level of immunity to defenses against payment than do ordinary holders.

c. Incorrect. HDCs are not immune from strict liability claims, and such claims do not “always” affect other holders.

d. Incorrect. HDCs do not receive full immunity from defenses against payment on negotiable instruments.

7. The UCC requires that to become an HDC, a holder must take an instrument in good faith. This means that:

a. a holder must have performed a special oath before taking the instrument.

b. a holder must be assured that the instrument has no defects.

c. a holder must be aware that the instrument is defective.

d. a holder must have acted honestly in fact and observed all reasonable commercial standards of fair dealing.

Answers:

a. Incorrect. There is no oath-taking requirement to meet the good faith standard.

b. Incorrect. Defects in an instrument are related to notice requirements, not to good faith requirements.

c. Incorrect. If holders know an instrument is defective they will not be HDC.

d. Correct. A holder must act honestly in fact and observe reasonable commercial standards of fair dealing to meet the good faith requirement for HDC status.

8. Which of the following IS NOT a way that an instrument may be defective?

a. It has previously been honored.

b. There is an uncorrected default with respect to another instrument issued as part of the same series.

c. It has previously been dishonored.

d. It is overdue.

Answers:

a. Correct. An instrument that has been honored is not defective.

b. Incorrect. In this situation, an instrument is considered defective.

c. Incorrect. A dishonored instrument is considered defective.

d. Incorrect. If an instrument is overdue, it is defective, and the holder is not an HDC.

9. If First Union bank refuses to pay a check written by a person who has an account with First Union, what has happened?

a. First Union has created a time instrument.

b. First Union has created a demand instrument.

c. First Union has dishonored the instrument.

d. First Union has created an irregular instrument.

Answers:

a. Incorrect. This is not a time instrument.

b. Incorrect. This is not a demand instrument.

c. Correct. First Union has dishonored the instrument.

d. Incorrect. This is not an irregular instrument.

10. Anyone who does not qualify as an HDC, but who derives his or her title through an HDC, can acquire the right and privileges of a HDC. This principle is known as:

a. the impermanence principle.

b. the shelter principle.

c. the reformed holder rule.

d. the new holder principle.

Answers:

a. Incorrect. There is no “impermanence principle” with respect to negotiable instruments law.

b. Correct. The shelter rule allows a non-HDC to find shelter in the privileges and immunities of a previous HDC.

c. Incorrect. There is no “reformed holder rule” with respect to HDCs.

d. Incorrect. There is no “new holder principle” in negotiable instruments law.

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