Business Law, 8e (Cheeseman)
Chapter 23 Holder in Due Course and Transferability
1) Negotiable instruments are used as a substitute for money.
2) Only a holder in due course can legally negotiate commercial paper.
3) The transfer of rights under a nonnegotiable contract is known as an assignment.
4) Nonnegotiable instruments are negotiated by holders in due course.
5) An instrument that is payable to a specific payee or indorsed to a specific indorsee is called a
bearer paper.
6) For an order paper to be negotiated there must be delivery and indorsement.
7) An instrument that is not payable to a specific payee or indorsee is called an order paper.
8) If there is no space for an indorsement on the instrument, a new instrument has to be made to
accommodate the indorsement.
9) The allonge must be affixed to the instrument to be valid.
10) Indorsements are required to negotiate bearer papers.
11) An order paper that is indorsed in blank becomes bearer paper.
12) A special indorsement does not specify to whom the indorser intends the instrument to be
payable.
13) A special indorsement is negotiable by indorsement and delivery.
14) A holder can convert a blank indorsement into a special indorsement by adding his or
signature on it.
15) Unqualified indorsements are considered negotiable instruments.
16) A qualified indorsement puts limited liability on the indorser.
17) A qualified indorsement protects subsequent indorsers from liability.
18) An instrument containing a qualified indorsement can be further negotiated.
19) A specially qualified indorsement can only be negotiated by indorsement and delivery.
20) Nonrestrictive indorsements contain instructions from the indorser.
21) An indorsement that purports to prohibit further negotiation of an instrument does not
destroy the negotiability.
22) An indorser is allowed to indorse an instrument so as to make the indorsee his collecting
agent.
23) A restrictive indorsement can also be a bearer instrument.
24) An indorsement with just the indorsee’s signature on it, and a specific payee would be an
example of a nonrestrictive indorsement.
25) Where the name of the payee is misspelled, the indorsement becomes invalid.
26) If an instrument is payable jointly using the word “and,” both persons’ indorsements are
necessary to negotiate the instrument.
27) If a virgule is used, both parties are necessary to negotiate the instrument.
28) The holder of a negotiable instrument has the same rights as the holder of an ordinary
nonnegotiable contract.
29) A holder in due course is subject to all the claims and defenses that can be asserted against
the transferor.
30) To qualify as an HDC, a person must be the holder of a negotiable instrument that was taken
for value.
31) Value has been given by the holder if he or she acquires a security interest in or lien on the
instrument.
32) The good faith test applies to both transferor and transferee.
33) An indorsee who accepts a defective instrument qualifies as a holder in due course.
34) A holder who takes an instrument with notice of its dishonor cannot qualify as an HDC.
35) If the transferor is a holder in due course then the transferee becomes a holder in due course.
36) Which of the following makes negotiable instruments transferable to a third party?
A) an insurance
B) an indorsement
C) a bill of exchange
D) a trade acceptance
37) The transfer of rights under a nonnegotiable contract is known as a(n) ________.
A) assignment
B) negotiation
C) indorsement
D) dishonored instrument
38) Which of the following is true about an assignment?
A) It is considered as a negotiation under Article 3 of the UCC.
B) The transferee is known as a holder in due course.
C) Defenses against the transferor can be raised against the transferee.
D) Only negotiable instruments can become assignments.
39) Which of the following would constitute the creation of an assignment?
A) if the transfer is of nonnegotiable instruments
B) if a transfer qualifies as a negotiation under Article 3
C) if a transferee qualifies as a holder in due course
D) if the indorsement falls under the shelter principle
40) If a transferred negotiable instrument failed to qualify under the article 3 of the UCC, it is
known as a(n) ________.
A) assignment
B) nonnegotiable contract
C) indorsement
D) restrictive indorsement
41) The transfer of a negotiable instrument by a person other than the issuer to a person who
thereby becomes a holder is referred to as ________.
A) negotiation
B) assignment
C) indorsement
D) insurance
42) A(n) ________ is an instrument that is payable to a specific payee or indorsed to a specific
indorsee.
A) bearer bond
B) bearer paper
C) allonge
D) order paper
43) Which one of the following is a similarity between bearer paper and order paper?
A) both require a specific payee to be named
B) both require indorsements to be considered negotiable
C) both require delivery to be considered negotiable
D) both can be claimed by whoever presents the instrument for payment
44) Which of the following is true of a bearer paper?
A) both indorsement and delivery is required for it to be negotiable
B) only indorsement is necessary for it to be negotiable
C) only delivery is necessary for it to be negotiable
D) a payee must be specified in the paper
45) An instrument that is not payable to a specific payee or indorsee is known as a ________.
A) order paper
B) bearer paper
C) allonge
D) draft
46) Which of the following can be claimed by merely having possession of the instrument?
A) a certificate of deposit
B) an allonge
C) an order instrument
D) a bearer instrument
47) Which one of the following would be a legitimate method to convert an order paper to a
bearer paper?
A) by indorsement
B) by adding the term “pay to the order of”
C) by delivering the order paper
D) by specifying a payee
48) A(n) ________ is a signature and other directions written by or on behalf of the holder
somewhere on an instrument.
A) recommendation
B) assignment
C) indorsement
D) reference
49) A separate piece of paper attached to an instrument on which an indorsement is written is
known as a(n) ________.
A) bill of exchange
B) allonge
C) supplement
D) appendage
50) ________ are required to negotiate order paper, but they are not required to negotiate bearer
paper.
A) Securities
B) Collaterals
C) Indorsements
D) Warranties
51) Which of the following is true about an allonge?
A) It must contain the name of a the payee to be valid.
B) It must be accepted by the payee to be valid.
C) It must be affixed to the indorsement.
D) It must be provided only on demand.
52) An indorsement that does not specify a particular indorsee is known as a(n) ________.
A) blank indorsement
B) special indorsement
C) qualified indorsement
D) restrictive indorsement
53) Which of the following indorsements can be negotiated just by delivery?
A) unqualified indorsement
B) special indorsement
C) special qualified indorsement
D) black indorsement
54) Which order paper when indorsed becomes a bearer paper?
A) unqualified indorsement
B) black indorsement
C) special indorsement
D) special qualified indorsement
55) An indorsement that contains the signature of the indorser and specifies the person to whom
the indorser intends the instrument to be payable is known as a(n) ________.
A) qualified indorsement
B) unqualified indorsement
C) black indorsement
D) special indorsement
56) Which of the following is true for a special indorsement?
A) It is only considered valid if it includes words of negotiation.
B) It requires the signature of the indorser to be valid.
C) It can be negotiated just on delivery.
D) It is considered a bearer instrument.
57) An indorsement whereby the indorser promises to pay the holder or any subsequent indorser
the amount of the instrument if the maker, drawer, or acceptor defaults is referred to as a(n)
________.
A) competent indorsement
B) promissory indorsement
C) unqualified indorsement
D) qualified indorsement
58) Which of the following is true about an unqualified indorsement?
A) It does not limit or disclaim liability.
B) It obligates the indorser to pay for the instrument.
C) It guarantees payment of the instrument if the maker defaults.
D) It protects subsequent indorsees from liability.
59) A(n) ________ is an indorsement that includes the notation “without recourse” or similar
language that disclaims liability of the indorser.
A) qualified indorsement
B) unqualified indorsement
C) promissory indorsement
D) competent indorsement
60) Which of the following is true for a qualified indorsement?
A) An instrument containing a qualified indorsement can only be negotiated once.
B) An indorsement once qualified will protect all subsequent indorsers.
C) A qualified indorsement protects only the indorser who wrote the indorsement.
D) A qualified indorsement obligates the indorser to pay in case the maker defaults.
61) A(n) ________ is an indorsement that has no instructions or conditions attached to the
payment of the funds.
A) indorsement in trust
B) indorsement for deposit
C) nonrestrictive indorsement
D) restrictive indorsement
62) An indorsement that contains some sort of instruction from the indorser is known as a(n)
________.
A) nonrestrictive indorsement
B) restrictive indorsement
C) qualified indorsement
D) special indorsement
63) A(n) ________ is an indorsement that states that it is for the benefit or use of the indorser or
another person.
A) indorsement in trust
B) indorsement for deposit
C) indorsement prohibiting further indorsement
D) indorsement for collection
64) Which of the following indorsements would be considered a nonrestrictive indorsement?
A) pay to the order of Jane Doe
B) pay to Jane Doe only
C) for deposit only
D) pay to Jane Doe, trustee
65) What happens if the name of the indorsee or payee is misspelled in an indorsement?
A) The instrument becomes nonnegotiable.
B) The instrument can be indorsed with the misspelled name.
C) The instrument has to be remade to be valid.
D) The instrument cannot be subsequently indorsed.
66) Which of the following is true of an indorsement to multiple persons using the virgule?
A) it can only be indorsed further with the signature of the drawer
B) neither person can individually negotiate the instrument
C) either person can individually negotiate the instrument
D) such an instrument cannot be subsequently negotiated
67) If an instrument is payable to multiple persons using the word “and,” then the instrument
________.
A) cannot be negotiated any further
B) cannot be negotiated by either party individually
C) can only be further negotiated jointly
D) can only be further negotiated with the signature of the drawer
68) A person who is in possession of a negotiable instrument that is drawn, issued, or indorsed to
him or to his order, or to bearer, or in blank is referred to as a(n) ________.
A) holder
B) holder in due course
C) assignor
D) assignee
69) A person who takes a negotiable instrument for value, in good faith, and without notice that
it is defective or overdue is referred to as a(n) ________.
A) holder
B) holder in due course
C) unqualified indorser
D) assignee
70) Which of the following qualification renders a person as a holder in due course of a
negotiable instrument?
A) if he takes the negotiable instrument for value
B) if he is subject to claims and defenses against the transferor
C) if he is in possession of an instrument issued in his name
D) if he is in possession of an instrument issued in another’s name
71) Tilda purchases an automobile from Ronston. At the time of sale, Ronston tells Tilda that the
car has had only one previous owner and has been driven only 25,000 miles. Tilda, relying on
these statements, purchases the car. She pays 10 percent down and signs a promissory note to
pay the remainder of the purchase price, with interest, in fifteen equal monthly installments.
Ronston transfers the note to Patty. Then Tilda discovers that the car has actually had three
previous owners and has been driven 250,000 miles. If Patricia is an HDC, which of the
following is the legal outcome?
A) Tilda must pay Patty; find recourse with Ronston.
B) Patty must pay Tilda; find recourse with Ronston.
C) Patty pays no one; indorsement is considered void.
D) Tilda can rescind the note; refuse to pay Patty.
72) Under which of the following UCC requirements is a holder considered a “holder in due
process,” given that the holder performs the agreed-upon promise in a negotiable instrument?
A) taking in good faith requirement
B) taking for value requirement
C) taking without notice of defect requirement
D) no evidence of forgery, alteration, or irregularity requirement
73) Under the UCC’s ________ requirement, a person cannot qualify as an HDC if he or she has
noticed that the instrument is overdue.
A) no evidence of forgery, alteration, or irregularity
B) taking in good faith
C) taking without notice of defect
D) taking for value
74) An instrument that is refused payment when presented for payment is called a(n) ________.
A) blank instrument
B) restrictive instrument
C) demand instrument
D) dishonored instrument
75) The ________ is a doctrine that says a holder who does not qualify as a holder in due course
in his or her own right becomes a holder in due course if he or she acquires an instrument
through a holder in due course.
A) exclusionary rule
B) acceleration clause
C) shelter principle
D) good faith principle
76) Which of the following requirements has to be met for a holder to qualify as an HDC under
the shelter principle?
A) The holder must not be in possession of a prior negotiable instrument.
B) The holder must have notice of a defense or claim against the payment of the instrument.
C) The holder must have been a party to a fraud or an illegality affecting the instrument.
D) The holder must have acquired the instrument from an HDC.
77) Lisa buys a used car from Kelly. She pays 10 percent down of the cost and signs a negotiable
promissory note, promising to pay Kelly the remainder of the purchase price, with interest, in 12
equal monthly installments. At the time of sale, Kelly materially misrepresented the mileage of
the automobile. Later, Kelly negotiates the note to Frances, who has no notice of the
misrepresentation. Frances, an HDC, negotiates the note to Zoe, who is not an HDC. Which of
the following is Zoe in regards to the indorsement?
A) a holder in due course
B) a holder
C) an assignee
D) an assignor
78) Give an account of the transfer of nonnegotiable contracts by assignment.
79) Give an account of how an indorsement is made.
80) What are qualified indorsements?
81) What is the difference between a holder and holder in due course?
82) Explain the no evidence of forgery, alteration, or irregularity requirement for an HDC under
the UCC.