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
A1. Under the UCC, a transfer of rights under a contract is a negotiation.
A2. An order instrument is negotiated by delivery with any necessary indorsements.
A3. Negotiation is a transfer in such form that the transferee becomes a holder.
A4. A negotiable instrument can only be transferred by negotiation.
A5. A special indorsement does not specify a particular indorsee.
A6. An indorser who does not wish to be liable on an instrument can use a qualified
indorsement.
A7. The effect of a conditional indorsement on the back of an instrument is the same as
the effect of conditional language that appears on its face.
A8. Indorsement can convert an order instrument into a bearer instrument
A9. An instrument payable to two persons jointly requires the indorsement of only one of
the payees for negotiation.
A10. A person who receives an instrument as a gift normally becomes an ordinary holder.
A11. An executory promise does not constitute sufficient value to make the promisor a
holder.
A12. A holder does not take an instrument for value if he or she gives a negotiable
instrument as payment.
A13. For an ordinary holder to become an HDC, the holder must have acted honestly in the
process of acquiring the instrument.
A14. An instrument is not defective simply because it is overdue.
A15. If a person purchasing an instrument does not know and has no reason to know that it
has been dishonored, the person cannot become an HDC.
A16. A person who acquires a check stamped “insufficient funds” is put on notice and
thereby acquires HDC status.
A17. Knowledge of one defense precludes a holder from asserting HDC status in regard to
all other defenses.
A18. Any irregularity on the face of an instrument that calls into question its validity will bar
HDC status.
A19. A person who accepts an instrument that has been completed without knowing that it
was incomplete when issued can take it as an HDC.
A20. The shelter principle allows persons who formerly held instruments to improve their
positions by later reacquiring the instruments from HDCs.
MULTIPLE CHOICE QUESTIONS
A1. Ollie negotiates an order instrument to Phil by
a. assignment of its rights under a contract.
b. delivery with any necessary indorsement.
c. making an unconditional promise to pay.
d. presenting it in response to a demand by B.
A2. Lauren transfers an instrument to Miguel in a form and by a means that makes Miguel
a “holder.” This is
a. a holding.
b. an assignment.
c. negotiation.
d. presentment.
A3. Petra signs a check payable to Quincy, who indorses the back, gives it to Regional
Credit Union, and receives cash. The transfer of the check from Quincy to the credit
union is
a. an assignment.
b. a negotiation.
c. a payment.
d. a sale.
A4. Ivy signs a check payable to Jon and gives it to him. Jon indorses the back, and
transfers the check to Ked. To negotiate the check to Luis, Ked must
a. write “Ked” on the back.
b. write “pay to the order of Luis [signed] Ked” on the back.
c. deliver the check to Luis.
d. obtain Luis’s signature on the back.
Fact Pattern 25–A1 (Questions A5–A8 apply)
Rollo obtains a check payable to his order from Simone. Rollo signs the back and gives the
check to Trey. Trey writes “Pay to Trey” above Rollo’s signature.
A5. Refer to Fact Pattern 25-A1. When Trey writes “Pay to Trey” above Rollo’s signature,
Rollo’s signature becomes
a. a blank indorsement.
b. a qualified indorsement.
c. a special indorsement.
d. a restrictive indorsement.
A6. Refer to Fact Pattern 25-A1. When Trey writes “Pay to Trey” above Rollo’s signature,
the check becomes
a. a bearer instrument.
b. an order instrument.
c. a promissory note.
d. a nonnegotiable instrument.
A7. Refer to Fact Pattern 25-A1. By writing “Pay to Trey” above Rollo’s signature, Trey
a. avoids the risk of loss from theft of the instrument.
b. relieves himself from liability on the instrument.
c. converts the check into a nonnegotiable instrument.
d. locks the instrument into the bank collection process.
A8. Refer to Fact Pattern 25-A1. After Trey writes “Pay to Trey” above Rollo’s signature,
further negotiation of the check
a. requires Rollo’s re-indorsement and delivery.
b. requires delivery alone.
c. requires Trey’s indorsement and delivery.
d. is not possible.
A9. Tiffany transfers a draft by signing it and delivering it to Uma. Tiffany is
a. an indorser.
b. a draft dodger.
c. a drafter.
d. a promisor.
A10. Velma transfers a note by signing it and delivering it to Woz. Woz is
a. a delivery person.
b. an indorsee.
c. a note passer.
d. a promisee.
A11. Mike receives a payroll check from National Computer Systems, Inc., and indorses it
by signing his name on the back of the check. This is
a. a blank indorsement.
b. a qualified indorsement.
c. a restrictive indorsement.
d. a special indorsement.
A12. Dora receives a check from Eagle Corporation. Dora indorses the check to First
National Bank by writing “pay to First Nat’l Bank only” and signing her name. This is
a. a blank indorsement.
b. a qualified indorsement.
c. a restrictive indorsement.
d. a special indorsement.
A13. Gina writes and signs a check payable to “Happy Market.” Ira, Happy’s manager,
indorses the check “For deposit only.” This is
a. a blank indorsement.
b. a qualified indorsement.
c. a restrictive indorsement.
d. a special indorsement.
A14. To pay for investment advice from financial consultants Smith and Jones, Tony signs a
check payable to “Smith or Jones.” A proper indorsement of the check is
a. not possible.
b. “Smith” and “Jones” only.
c. “Smith” only, or “Jones” only, but not “Smith” and “Jones.”
d. “Smith” only, or “Jones” only, or “Smith” and “Jones.”
A15. Blythe, an accountant for Credits & Debits, acquires a negotiable instrument from
Eton by promising to pay its face value in thirty days. Blythe acquires the status of an
HDC when she
a. acquires possession of the negotiable instrument.
b. agrees with Eton to buy the negotiable instrument.
c. pays the face value due on the instrument.
d. transfers the instrument to another party.
A16. Jen makes a gift of a check to Kilroy who takes it in good faith and without notice of
any claim, defense, or defect. With respect to this check, Kilroy is
a. an extraordinary holder in due course.
b. an ordinary check passer.
c. an ordinary holder.
d. an ordinary holder in due course.
A17. Jill, in good faith and for value, gets from Kit a check “payable to the order of bearer.”
Jill does not know that Kit stole the check. Jill is
a. an HDC.
b. not an HDC, because Kit did not acquire the check for value.
c. not an HDC, because Kit did not acquire the check in good faith.
d. not an HDC, because the check is a bearer instrument.
A18. Florencia, who is not a GigaBank customer, attempts to cash a check drawn on the bank.
The check is considered dishonored if GigaBank
a. refuses to pay it.
b. charges a fee to cash it.
c. asks Florencia for reasonable identification.
d. asks Florencia to sign a receipt for the payment on the check.
A19. Bob receives a check from Chris. Without Bob’s knowledge, Dan indorses it in his own
name and deposits it in his account at Elm City Bank. In Bob’s subsequent suit against
the bank for the money, the court will most likely rule in favor of
a. Bob, because Dan’s signature is not authorized.
b. Bob, because Elm City Bank is not a holder in due course.
c. Elm City Bank, because Dan’s signature is not authorized.
d. Elm City Bank, because it is a holder in due course.
A20. Clem gets a $100 check as a gift from Daria. Clem crudely increases the amount of the
check to $1,00—the alteration is obvious—and transfers it to eReady Sets, Inc., in
exchange for a 3D HD TV. eReady deposits the check in its bank account at First Town
Bank. HDCs of this check include
a. Clem, eReady, and First Town Bank.
b. Clem only.
c. eReady and First Town Bank only.
d. none of these parties.
ESSAY QUESTIONS
A1. Eppie gives a check to Fund Investments to buy 100 shares of stock in GR8 Tech
Corporation for Eppie. The price of the shares is constantly fluctuating. Fund
Investments asks Eppie to leave the amount of the check blank and allow it to fill in
the price when making the purchase. Eppie agrees. Fund Investments buys the stock
when the price is $4,000, but fills in the check for $5,000. The check is negotiated as
payment for a $5,000 debt to Hasty Accounting Services, which takes the check in
good faith and without notice of Fund Investments’s act. Hasty later learns that Fund
Investments was not authorized to fill in the check for $1,000 over the price. Is Hasty
an HDC? If so, for how much?
A2. Colby fraudulently induces Dian to sign a note. Colby sells the note to Elen, who does
not know of the fraud and takes the note for value and in good faith, and thus
becomes an HDC. Elen sells the note to Fred, who sells the note back to Colby. Does
Colby acquire Elen’s HDC rights in the note?