Business Law, 8e (Cheeseman)
Chapter 24 Liability, Defenses, and Discharge
1) A person cannot be held contractually liable on a negotiable instrument unless his or her
signature appears on it.
2) Signature liability is applicable to bearer papers.
3) A signature in the lower-right corner of a promissory note indicates that the signer is the
drawer of the note.
4) Marks used in lieu of a written signature cannot be used on indorsements.
5) A check is only accepted once it has been verified by the bank.
6) The payee of a cashier’s check is also primarily liable on the instrument.
7) An unqualified indorser has secondary liability on negotiable instruments.
8) A qualified indorser is only liable for secondary liability.
9) A presentment is a demand for the acceptance of a dishonored instrument.
10) An accommodation party who signs an instrument guaranteeing payment is secondarily
liable on the instrument.
11) The person represented by a representative agent is known as the principal.
12) An agent is only liable to the instrument that he or she signs in if it clearly mentions the
principal.
13) The purported principal is liable for an unauthorized signature by a purported agent.
14) The imposter rule does not apply for the wrongdoer who poses as the agent of the payee.
15) Implied warranties are made when the negotiable instrument is originally issued.
16) That “all signatures are genuine or authorized” is a transfer warranty that a transferor of a
negotiable instrument for consideration makes.
17) Transfer warranties cannot be disclaimed with respect to checks.
18) Transfer warranties cannot be disclaimed if the indorsement states “without recourse.”
19) A qualified indorser cannot disclaim transfer warranties.
20) Presentment warranties are made by the drawer of a check or draft.
21) A holder in due course takes an instrument free from personal defenses but not universal
defenses.
22) Personal and universal defenses can be raised against an ordinary holder of a negotiable
instrument.
23) If a universal defense is proven, the holder or HDC cannot recover on the instrument.
24) Extreme duress is considered a personal defense.
25) Adjudicated mental incompetence is a universal defense that can be raised against holders
and HDCs.
26) Fraud in the inception is a type of personal defense.
27) Correcting the figure on a check to correspond to the written amount on the check is not
considered material alteration.
28) A minor who does not misrepresent his or her age can disaffirm negotiable instruments.
29) The defense of breach of contract is effective against an HDC.
30) Fraud in the inducement is a personal defense that is not effective against HDCs.
31) A contract made by a person of nonadjudicated mental illness is considered void.
32) Discharge of an instrument by payment can be raised against enforcement of a negotiable
instrument by an ordinary holder.
33) The FTC rules applies to consumer credit transactions in which the buyer signs a sales
contract that includes an order to pay.
34) An instrument is not considered canceled if it is destroyed or mutilated by accident or by an
unauthorized third party.
35) The holder of a negotiable instrument can discharge the liability of any party to the
instrument by cancellation.
36) Liability in which a person cannot be held contractually liable on a negotiable instrument
unless his or her signature appears on the instrument is referred to as ________.
A) warranty liability
B) unqualified liability
C) contract liability
D) accommodation
37) Absolute liability to pay a negotiable instrument, subject to certain universal or real defenses
is known as ________.
A) primary liability
B) secondary liability
C) warranty liability
D) signature liability
38) Which of the following has primary liability when it comes to instruments with a promise to
pay?
A) the person in physical possession of the instrument
B) the drawer of the instrument
C) the drawee of the instrument
D) the payee of the instrument
39) In which of the following conditions is a drawee primarily liable to a draft?
A) when the instrument is issued
B) when the instrument is dishonored
C) when the instrument s presented for payment
D) when the drawee is an acceptor to the instrument
40) Liability on a negotiable instrument that is imposed on a party only when the party primarily
liable on the instrument defaults and fails to pay the instrument when due is referred to as
________.
A) secondary liability
B) unqualified liability
C) fringe liability
D) warranty liability
41) Those who are secondarily liable on negotiable instruments they endorse are known as
________.
A) unqualified indorsers
B) qualified indorsers
C) accommodation parties
D) agents
42) Martin borrows $15,000 from Tom, in the form of a check, and signs a promissory note,
promising to pay Tom this amount plus 10 percent interest in one year. Tom indorses the note
and negotiates it to Fronston. Fronston indorses the note and negotiates it to Liza. Liza presents
the note to Martin for payment when the note is due. Martin refuses to pay the note. Who is
secondarily liable to pay Liza?
A) Tom
B) Frontston
C) all liabilities lie with Martin
D) the bank that issued the check to Tom
43) Those who disclaim liability and are not secondarily liable on instruments they endorse are
referred to as ________.
A) unqualified indorsers
B) qualified indorsers
C) agents
D) accommodation parties
44) Stanley, who owes Milton money, indorses a draft to him with the term “without recourse.”
The instrument later is dishonored. What liability does Stanley have on the instrument?
A) He has no liabilities on the instrument.
B) He has to pay Milton in case the instrument defaults.
C) He has primary liabilities.
D) He has secondary liabilities.
45) Stanley, who owes Milton money, indorses a draft to him with the term “without recourse.”
The instrument later is dishonored. Which of the following types of indorser is Stanley?
A) a holder
B) an agent
C) an unqualified indorser
D) a qualified indorser
46) ________ is a demand for acceptance or payment of an instrument made upon the maker,
acceptor, drawee, or other payer by or on behalf of the holder.
A) Accommodation
B) Duress
C) Presentment
D) Allonge
47) A person who signs an instrument and lends his or her name, and credit to another party to
the instrument is referred to as a(n) ________.
A) agent
B) qualified indorser
C) unqualified indorser
D) accommodation party
48) In which of the following accommodations is an accommodation party primarily liable?
A) in a guarantee of payment
B) in a guarantee of collection
C) in a guarantee of demand
D) in a guarantee of promise
49) An accommodation party is secondarily liable in case the accommodation is in a ________.
A) guarantee of promise
B) guarantee of demand
C) guarantee of collection
D) guarantee of payment
50) What role does Calvin’s father fulfill here so that Calvin can buy the car?
A) an accommodation party
B) an agent
C) a principal
D) a qualified indorser
51) What kind of liability does Calvin’s father come under?
A) secondary liability
B) primary liability
C) fringe liability
D) warranty liability
52) A person who has been authorized to sign a negotiable instrument on behalf of another
person is known as a(n) ________.
A) holder in due course
B) accommodation party
C) agent
D) principal
53) A person who authorizes an agent to sign a negotiable instrument on his or her behalf is
known as a(n) ________.
A) agent
B) accommodation party
C) principal
D) assignor
54) Sylvester, acting as a representative agent for Jerry, signs a negotiable instrument with the
signature—Sylvester, by Jerry, agent. What kind of liability does Sylvester have for this type of
signature?
A) He is not liable to the instrument.
B) He liable to the payee.
C) He is liable to Jerry.
D) He is liable to the HDC of the instrument.
55) Cameron, a purported agent, signs a contract and promissory note to purchase a building for
Burnstar Constructions, a purported principal. Though Cameron is an unauthorized
representative, Burnstar Constructions, the purported principal, likes the deal and accepts it.
Which of the following is true of the deal ratified by Burnstar Constructions?
A) The deal is invalid due to the fraud in the inducement rule.
B) The deal is invalid due to the fraud in the inception rule.
C) Burnstar Constructions is liable on the note.
D) Cameron is liable on the note.
56) Who is liable to the check?
A) the liquor store
B) Martha
C) Stella
D) Leslie
57) When the forgery is exposed, who can the liquor store legally recover from?
A) Martha
B) Leslie
C) Karen
D) Stella
58) Susan purchases goods by telephone from Parker. Susan has never met Parker. Brenton goes
to Susan and pretends to be Parker. Susan draws a check payable to the order of Parker and gives
the check to Brenton, believing him to be Parker. Brenton forges Parker’s indorsement and
indorses the check to his brother, William, with the term “without recourse.” William then cashes
the check at a liquor store. Under the imposter rule, who is liable on the check?
A) Brenton
B) the liquor store
C) Susan
D) William
59) The ________ states that a drawer or maker is liable on a forged or unauthorized
indorsement if the person signing as or on behalf of a drawer or maker intends the named payee
to have no interest in the instrument or when the person identified as the payee is a fabricated
person.
A) imposter rule
B) fictitious payee rule
C) fraud in the inception rule
D) fraud in the inducement rule
60) Maria is the treasurer of Rex Caldwell Corporations. As treasurer, she makes out and signs
the payroll checks for the company. Maria draws a payroll check payable to the order of her
maid Carolyn Doss, who does not work for the company. Maria does not intend Carolyn to
receive this money. She indorses Carolyn’s name on the check and names herself as the indorsee.
She cashes the check at a liquor store. Under which rule of forged instruments is Maria
accountable?
A) good faith rule
B) exclusionary rule
C) imposter rule
D) fictitious payee rule
61) What is the similarity between the fictitious payee rule and the imposter rule?
A) Both hold the drawee liable to the instrument.
B) Both hold the drawer liable to the instrument.
C) Both put the risk of loss on the forger.
D) Both put the risk of loss on the indorsee.
62) What is transfer of an instrument?
A) the issuance of the instrument
B) the presentment for payment of the instrument
C) the passage of the instrument other than issuance and presentment
D) the cancellation of the instrument
63) To which of the following placements of a negotiable instrument would transfer warranties
be applicable?
A) indorsement of the instrument
B) issuance of the instrument
C) presentment of the instrument
D) accommodation of the instrument
64) At this point, who has primary liability over the note?
A) Nicholas
B) Anthony
C) Clara
D) Jennifer
65) If Mack presents the note to Jennifer for payment, how much, if anything is Jennifer
obligated to pay?
A) $25,000
B) $22,500
C) $2,500
D) Jennifer is not obliged to pay Mack
66) Which of the following is a characteristic of a presentment warranty on an instrument
presented for payment?
A) The transferor has no knowledge of any insolvency.
B) The transferor has good title to the instrument.
C) No defenses of any party are good against the transferor.
D) The instrument has not been materially altered.
67) A ________ defense is a type of defense that can be raised against both holders and HDCs.
A) universal
B) personal
C) fraud in the inducement
D) breach of contract
68) Harold borrows $20,000 from Alex and signs a note promising to pay Alex this amount plus
interest in one year. Alex negotiates the note to Reese, an HDC. Before the note is due, Harold
declares bankruptcy and the court finds it to be true. According to the discharge in bankruptcy
defense, which of the following is true?
A) Reese can recover from Harold.
B) Reese can recover from Alex.
C) Alex can recover from Harold.
D) Reese cannot enforce the instrument.
69) A(n) ________ defense is a type of defense that can be raised against enforcement of a
negotiable instrument by an ordinary holder but not against an HDC.
A) discharge in bankruptcy
B) extreme duress
C) personal
D) universal
70) ________ is a type of personal defense where a wrongdoer makes a false statement or
misrepresentation to another person to lead that person to enter into a contract with the
wrongdoer.
A) Forgery
B) Discharge in bankruptcy
C) Fraud in the inducement
D) Extreme duress
71) In which of the following consumer credit transactions does the FTC HDC rule apply?
A) when the buyer signs a sales contract that includes a check
B) when the buyer signs a sales contract that includes a promissory note
C) when the buyer signs an installment sales contract that does not contain a waiver of defenses
clause
D) when the buyer arranges financing with a third-party lender
72) A(n) ________ is an action or event that relieves certain parties from liability on negotiable
instruments.
A) presentment
B) discharge
C) accommodation
D) breach of contract
73) Which of the following is a rule that eliminates HDC status with regard to negotiable
instruments that arise out of certain consumer credit transactions?
A) FTC HDC rule
B) exclusionary rule
C) imposter rule
D) fictitious payee rule
74) Which of the following actions renders all parties as discharged from liability to a negotiable
instrument?
A) when the instrument is presented for payment
B) when the signature of the indorser is intentionally struck out
C) when the instrument is accidentally destroyed or mutilated
D) when a drawee in good faith pays an unaccepted instrument in full to the holder
75) A situation in which certain parties are discharged from liability on an instrument by the
action of the holder is called ________.
A) impairment of the right of recourse
B) fraud in the inception
C) fraud in the inducement
D) discharge in bankruptcy
76) Which of the following actions by a holder constitutes the complete cancellation of a
negotiable instrument?
A) intentionally destroying the negotiable instrument to eliminate obligation
B) deliberately striking out the signature of an indorser
C) releasing an obligor from liability
D) surrendering collateral without the consent of the parties who would benefit from it
77) Discharge of an instrument by payment or cancellation is a type of ________.
A) warranty liability
B) transfer warranty
C) personal defense
D) universal defense
78) Which of the following actions by the holder causes an impairment of the right of recourse?
A) releasing an obligor party from liability
B) withholding collateral that would benefit that party
C) writing canceled on the face of the instrument
D) destruction of the instrument with the intent of eliminating the obligation
79) What are the requirements for imposing secondary liability?
80) What are forged negotiable instruments?
81) List out the presentment warranties.
82) What is material alteration as a universal defense?
83) What is the defense of fraud in the inducement?