Chapter 25
Transferability and
Holder in Due Course
N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows.
N A question new to this edition of the Test Bank.
+ A question modified from the previous edition of the Test Bank.
= A question included in the previous edition of the Test Bank.
TRUE/FALSE QUESTIONS
B1. A negotiable instrument cannot be transferred by assignment.
B2. A bearer instrument is negotiated by delivery with any necessary indorsements.
B3. A transfer of a negotiable instrument can give a holder more rights than its prior
possessor.
B4. A blank indorsement does not specify a particular indorsee.
B5. An unqualified indorsement does not guarantee payment of an instrument.
B6. A restrictive indorsement prohibits further negotiation of an instrument.
B7. A bearer instrument can be converted into an order instrument through indorsement.
B8. A payee whose name is misspelled on an instrument cannot indorse the instrument.
B9. An HDC takes a negotiable instrument free of most defenses and claims that could be
asserted against its transferor.
B10. If an instrument is acquired as part of a corporate purchase of assets, the holder will
have the rights of an HDC.
B11. A holder takes an instrument for value if he or she accepts the instrument as payment
for an antecedent debt.
B12. A holder takes an instrument for value by performing the promise for which the
instrument was issued.
B13. A person who takes a negotiable instrument from a thief may become an HDC.
B14. An instrument is not defective because it has been dishonored.
B15. A demand instrument is overdue on the day after its date.
B16. A holder cannot become an HDC unless hr or she has notice of any claim to the
instrument or defense against it.
B17. Any irregularity on the face of an instrument that creates an ambiguity as to the party
to pay will bar HDC status.
B18. A loss that results from a well-crafted forgery usually falls on the party whose
signature was forged.
B19. A purchaser cannot become an HDC of an instrument so incomplete that an element
of negotiability is lacking.
B20. A person who does not qualify as an HDC but who derives his or her title through an
HDC can acquire the rights and privileges of an HDC.
MULTIPLE CHOICE QUESTIONS
B1. Yves negotiates an instrument to Zachary. Negotiation is the transfer of an instrument
a. for valuable consideration under a contract.
b. in a form and by a means that makes the transferee a holder.
c. pursuant to preliminary contract discussions.
d. without the payment of a recognized medium of exchange.
B2. Demi possesses a check that is “payable to bearer.” Esther steals the check and
delivers it to Fern. All rights to the check are
a. Demi’s.
b. Esther’s.
c. Fern’s.
d. no one’s.
B3. Vladimir negotiates a bearer instrument to Wendy by
a. assignment.
b. delivery.
c. presenting it in response to a demand by Wendy.
d. promising to pay.
B4. Lexy obtains a check payable to her order from Maven. To negotiate this order
instrument to Nicole requires
a. Lexy’s indorsement and delivery.
b. Maven’s indorsement and delivery.
c. Nicole’s indorsement and delivery.
d. delivery without anyone’s indorsement.
B5. Tyrone transfers a note by signing it and delivering it to Uri. Tyrone is
a. an indorser.
b. a notary.
c. a note passer.
d. a promisor.
B6. Rayette transfers a draft by signing it and delivering it to Suki. Suki is
a. a delivery person.
b. a draftee.
c. an indorsee.
d. a promisee.
Fact Pattern 25-1B (Questions B7–B11 apply)
Belle obtains a check payable to her order from Charmayne. Belle signs the back and adds the
notation “without recourse.”
B7. Refer to Fact Pattern 25-1B. After Belle signs the back and adds the notation “without
recourse,” further negotiation of the check
a. requires Belle’s re-indorsement and delivery.
b. requires delivery alone.
c. requires Charmayne’s indorsement and delivery.
d. is not possible.
B8. Refer to Fact Pattern 25-1B. Belle’s signature and the notation “without recourse”
constitute
a. a blank indorsement.
b. a qualified indorsement.
c. a special indorsement.
d. a restrictive indorsement.
B9. Refer to Fact Pattern 25-1B. When Belle signs the back and adds the notation
“without recourse,” the check becomes
a. a bearer instrument.
b. an order instrument.
c. a promissory note.
d. a nonnegotiable instrument.
B10. Refer to Fact Pattern 25-1B. By writing “without recourse” with her signature, Belle
a. avoids the risk of loss from theft of the instrument.
b. relieves herself from liability on the instrument.
c. converts the check into a nonnegotiable instrument.
d. locks the instrument into the bank collection process.
B11. Refer to Fact Pattern 25-1B. After Belle signs the back and adds the notation “without
recourse,” she adds “Pay to Desiree.” This constitutes
a. a blank qualified indorsement.
b. a special qualified indorsement.
c. a restrictive indorsement.
d. none of the choices.
B12. Todd indorses a check, “Pay to Interstate Trucking if they deliver the lumber by May 1,
2012.” This is
a. a blank indorsement.
b. a qualified indorsement.
c. a restrictive indorsement.
d. a special indorsement.
B13. Owen is a holder of a promissory note obtained from Purchase Money, Inc. Regarding
the defenses against payment of the note to which Purchase Money is subject, Owen,
as an ordinary holder, is subject to
a. more defenses.
b. no defenses.
c. some defenses, but not as many.
d. the same defenses.
B14. Edie is the payee of a bearer instrument—a promissory note in the amount of $1,000.
Frank offers to irrigate Edie’s ranch next week in exchange for the note. Edie agrees
and delivers the note to Frank. Frank is
a. an HDC, because he promised to perform services at a future date.
b. not an HDC, because he did not take the instrument without notice.
c. not an HDC, because he did not acquire the instrument in good faith.
d. not an HDC, because he did not yet give value for the instrument.
B15. Pola wants to transfer a check to Quin. The check is defective if it
a. has been previously dishonored.
b. has no irregularities on its face.
c. is not overdue.
d. is so complete that no element of negotiability is lacking.
B16. Finest Office Company employs General Construction, Inc. (GCI), to renovate an office
and signs a note for $10,000 payable to GCI. GCI breaches the contract, but sells the
note for $5,000 to Happy Collection Agency, which knows that GCI has not performed.
Happy is an HDC of the note in the amount of
a. $0.
b. $5,000.
c. $10,000.
d. $15,000.
B17. Reel CGI Animé Company issues a promissory note as a demand instrument with a due date
of October 5. Syncopated Loan Company accepts the note. Syncopated has notice that the
note is overdue if the firm takes the note
a. after October 5.
b. before October 5.
c. on October 5.
d. at any time.
B18. Kris transfers a note, on which Liu is the maker, to Mia, who takes it for value and in
good faith. Mia knows that Kris breached the contract underlying the note, giving Liu a
defense against payment. With respect to this note, Mia is
a. a knowledgeable holder in due course.
b. an ordinary holder.
c. an ordinary holder in due course.
d. an ordinary note taker.
B19. Dru signs a check payable to Excel Services, Inc., and gives it to Excel, leaving the
amount blank but authorizing Excel to fill it in for $1,000. Excel fills in $1,500 and
negotiates the check to Friendly Credit Corporation, an HDC. Friendly Credit can
enforce the check for
a. $0.
b. $500.
c. $1,000.
d. $1,500.
B20. Parkdale Roofing Company receives a check from Quik Mart for fixing its roof, and
indorses the check to Repair Supplies, Inc. (RSI). Stef, RSI’s owner, gives the check to
Tiny as a gift. In this situation, the party who is not an HDC of the check but who
acquires HDC rights under the shelter principle is
a. no one.
b. Parkdale Roofing.
c. Stef.
d. Tiny.
ESSAY QUESTIONS
B1. DigiTech Corporation pays its employees every two weeks. Eve gets her paycheck,
indorses the back (“Eve Anderson”), and, on her lunch hour, goes to cash it at
DigiTech’s bank, First State Bank. On the street, in a crowd, she loses the check. Greg
Smith finds it. Has the check been negotiated to Greg? Greg signs the back of the
check beneath Eve’s signature and cashes it. What might Eve have done to avoid this
loss?
B2. Joan signs a note that states, “Payable in thirty days.” The note is dated March 2. Kent
buys the note on April 3. Is Kent an HDC of the note? Explain.
