Chapter 31: Discharge of Commercial Paper and Electronic
Fund Transfers
1. Universal defenses are good against all holders but not against holders in due course.
2. Limited defenses are good against a holder through a holder in due course.
3. The obligation to pay commercial paper may be discharged by cancellation.
4. Failure of consideration is a universal defense.
5. Duress depriving control is a universal defense.
6. Breach of contract is a limited defense.
7. Minority is a universal defense.
8. A holder cannot overcome the defense of ordinary duress but a holder in due course can.
9. Temporary intoxication or temporary insanity provide limited defenses to the collection of commercial paper
issued during the period of incapacitation.
10. A holder through a holder in due course can overcome fewer limited defenses than a holder in due course.
11. Both fraud in the inducement and fraud in the execution are defenses against collection by a mere holder.
12. Any transfer of funds, other than that originated by a paper instrument, that is initiated by electronic
terminal, telephone, computer, or magnetic tape and that authorizes or orders a financial institution to debit or
credit an account can be categorized as an electronic fund transfer.
13. Commercial paper law, due to its emphasis on the need for a writing, has been generally inapplicable to
consumer EFTs.
14. While there are many defenses to collection, most commercial paper is enforceable according to its terms
and promptly paid.
15. If the consumer detects an error of overbilling under the EFTA, it must be reported within 30 days of the
date the statement was sent.
16. All holders have the right to
A. assign but not discharge the paper.
B. negotiate but not enforce payment.
17. A mere holder of an instrument who sells it to a qualified HDC and then takes it back from the HDC has
C. the rights of an HDC.
D. the rights of an HHDC.
C. universal defenses.
D. all of these.
19. At maturity or on demand, the holder of commercial paper may
A. accept payment made in money.
B. agree to accept other commercial paper.
20. Commercial paper may not be discharged by
C. fraudulent alteration.
D. novation.
C. mandatory at all financial institutions.
D. both a and b.
22. Unless extenuating circumstances caused the delay, if more than two days have passed before notification of
unauthorized transfers, the customer may be responsible for up to a maximum of
A. $50.
B. $100.
23. Domestic electronic fund transfers by businesses are governed by
C. EDI.
D. EFTA.
24. Which of the following is true regarding electronic fund transfers?
A. The consumer must immediately receive a written receipt and later must receive a statement of all transfers
during a particular period.
B. If the consumer detects an error of overbilling, he or she must report the error within 60 days of the date the
statement was sent, barring extenuating circumstances.
25. Which of the following may be used in discharging the obligation associated with commercial paper?
A. novation
26. Which of the following statements regarding alteration is true?
C. It is always fraudulent in nature.
D. both b and c
27. In which of the following situations can neither an HDC nor an HHDC collect on commercial paper?
A. fraud in the inducement
C. is governed by both the FTC and the FDIC.
D. none of these.
29. Which of the following is a universal defense to collection?
A. prior payment
B. non-delivery
30. Which of the following is not true regarding limited defenses?
C. Theft is considered a limited defense
D. both a and c
31. Consumers frequently use computers, telephones, or other terminals to debit or credit their accounts. The
U.S. government enacted a law known as the ______________________________ to protect consumers who
make these types of transactions.
32. An electronic fund transfer is also referred to as a ____________________ .
33. As long as notification is given to the appropriate financial institution within two business days of learning
of the loss or theft of the card used in EFTs, the consumer is responsible only for the lesser of
____________________ or the value obtained in unauthorized transfers prior to the notification.
34. If more than two days have elapsed before notification is provided by the consumer to the appropriate
financial institution of the loss or theft of a card used in EFTs, barring extenuating circumstances, the consumer
35. Unlike consumer EFTs, ____________________ EFTs generally involve large sums of money moving
between highly sophisticated parties.
36. A(n) ____________________ is usually discharged by being paid upon demand by the bank on which it is
drawn.
37. If a holder extends the time of payment, releases the principal debtor, or impairs collateral provided as
security for payment of a negotiable instrument, the action ____________________ any party to the instrument
38. A discharge of commercial paper obligations could occur because of the running of the statute of
____________________.
39. When trying to collect on an instrument, a party who qualifies as either a holder in due course or a holder
through a holder in due course is legally placed in a much better position than a mere holder or a(n)
40. To be an HDC, a person must qualify as a holder and, in addition, take the commercial paper in
____________________, give value for it, and not have knowledge of any defense, adverse claim to, or
dishonor of the instrument.
41. The holder of Eric’s note fraudulently changed the rate of interest due from 8 percent to 18 percent. Does
Eric, the maker of the note, have to pay? Explain your answer.
If the fraudulent change is proven in court, Eric will not have to pay for the extra interest. However, the rule is
42. Late one night Lana drove to her bank’s ATM machine and withdrew $100. The machine neglected to give
her a printed receipt. On her next month’s statement, the ATM withdrawal was listed for $1,000 instead of $100.
Under the EFTA what must Lana do to correct this situation? What responsibility does the bank have?
Answers will vary. Lana has 60 days from the date her bank statement was sent to report the error to her bank.