Chapter 26
Liability, Defenses, and
Discharge
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. A signature can be made by use of any device or machine.
A2. A maker is secondarily liable on an instrument.
A3. Signature liability is contingent liability.
A4. A drawer’s liability does not arise until presentment and notice of dishonor.
A5. To properly present a draft for payment, the holder must present it to the drawer.
A6. Dishonor occurs if payment of an instrument is refused with the prescribed time.
A7. Failure to present an instrument on time is not improper presentment.
A8. An authorized agent binds a principal on an instrument if the agent clearly names the
principal in the signature.
A9. An authorized agent is never personally liable on a negotiable instrument.
A10. An unauthorized signature binds the person whose name is signed.
A11. An imposter’s indorsement on an instrument can be effective against its drawer or
maker.
A12. Warranty liability is subject to the conditions of proper presentment, dishonor, and
notice of dishonor.
A13. Transfer of an order instrument by indorsement and delivery extends warranty
liability to any subsequent holder who takes the instrument in good faith.
A14. Presentment warranties protect the person to whom an instrument is presented for
payment.
A15. A person whose name is forged on an instrument is liable to pay only a holder in due
course the value of the forged instrument.
A16. An ordinary holder can recover nothing on an instrument that has been materially
altered.
A17. Personal defenses are used to avoid payment to an ordinary holder of a negotiable
instrument, but not to an HDC or a holder through an HDC.
A18. Discharge in bankruptcy is no defense on any instrument regardless of the status of
the holder.
A19. All parties to a negotiable instrument will be discharged when the party primarily
liable on it pays to a holder the full amount due.
A20. Destruction or mutilation of a negotiable instrument by accident discharges it.
MULTIPLE CHOICE QUESTIONS
A1. Ethel signs a note “payable to the order of Fidelity Bank.” Fidelity indorses the note in
blank and negotiates it to Ghani, who sells it to Huck. Liability associated with the
transfer of the note from Ghani to Huck is
a. fitness.
b. quality.
c. signature.
d. warranty.
A2. Puck signs a check “pay to the order of Quik Mart” drawn on Puck’s account in
Regional Bank. Puck shows the check to Silky, who agrees that the signature is Puck’s
and that Quik Mart is owed the amount that the check represents. Quik Mart signs
the back of the check. Liability on this check extends to
a. Puck, Quik Mart, and Regional Bank.
b. Puck and Quik Mart only.
c. Puck and Silky only.
d. Silky only.
A3. Toby signs a note “payable to the order of United Credit Union.” Unless Toby has a
valid defense against payment, Toby’s liability on this note is
a. immediate.
b. imposed only after payment is demanded.
c. postponed until the note is dishonored by United Credit Union.
d. suspended until payment is due.
A4. Derby Stables writes a check to Extendo Credit, Inc., that is drawn on Derby’s account
at Farm & Ranch Bank. If the bank does not accept the check, liability for its amount is
on
a. Derby.
b. Extendo.
c. Farm & Ranch.
d. the holder of the check.
A5. Nero signs a check “pay to the order of Olive” drawn on Nero’s account in Peachtree
Bank. Olive signs the back of the check. Secondary liability on this check extends to
a. Nero and Olive only.
b. Nero and Peachtree Bank only.
c. Nero only.
d. Peachtree Bank only.
A6. Dirk is the maker of a note, on which Erv is secondarily liable. Friendly Credit Company
is the current holder of the note. Erv will be obligated to pay the note if
a. Dirk defaults on the note.
b. Friendly Credit breaches a transfer warranty.
c. Friendly Credit negotiates the note to a third party.
d. Friendly Credit presents the note for payment.
Fact Pattern 26–1A (Questions A7–A8 apply)
Seymour writes a check on his account at Platinum Bank to Teri to pay a debt. Teri negotiates
the check by indorsement to Rosanna, who presents it for payment to Onyx Bank.
A7. Refer to Fact Pattern 26-1A. Teri is
a. not liable for payment under any circumstances.
b. primarily liable.
c. secondarily liable.
d. simultaneously liable.
A8. Refer to Fact Pattern 26-1A. If Onyx Bank dishonors the check, Rosanna can obtain
payment from Teri
a. if Rosanna timely notifies Teri.
b. only if Seymour refuses to pay the check.
c. under any circumstances.
d. under no circumstances.
A9. To borrow the money to buy a car, Klaus signs a note “payable to the order of Lake
City Auto Financing.” Minnie cosigns the note to guarantee the repayment of the loan.
Minnie’s liability on this note is
a. lateral.
b. primary.
c. secondary.
d. tertiary.
A10. Audio Science Company’s agent Bailey is authorized to draw checks on Audio
Science’s account in Citizen Bank. The checks are preprinted with the company name.
Bailey writes a check “pay to the order of Darlene [signed] Bailey.” Darlene presents
the check for payment. If Citizen Bank dishonors it, liability extends to
a. no one.
b. Audio Science and Bailey.
c. Audio Science only.
d. Bailey only.
A11. Celia, an employee of Delite Dairy Company, forges the signature of Elin, Delite’s
president, on a Delite check and cashes it at First Federal Bank. Elin would ratify
Celia’s actions by
a. asking First Federal to prosecute Celia for forgery.
b. discharging Celia from Delite ‘s employment.
c. entering into a repayment agreement with Celia.
d. filing criminal charges against Celia herself.
A12. Birdie, an accountant for Country Custom Furniture, Inc., issues company checks
payable to nonexistent persons drawn on Country’s account at Debit Bank. Birdie
indorses the checks and deposits them in her account. Country discovers the theft and
demands that Debit recredit its account. Debit’s best defense is that
a. Birdie was not authorized to issue the checks.
b. Country was in a better position than Debit to prevent the theft.
c. Debit did not know that the checks were not to be paid.
d. the checks were the property of Country, not Debit.
A13. Rodeo Ranch’s agent Slim is authorized to write checks on Rodeo Ranch’s account in
Town Bank. Upper Range Corporation is a Rodeo Ranch supplier. Slim writes a check
on Rodeo Ranch’s account “pay to the order of Upper Range [signed] Slim,” indorses it
in Upper Range’s name, and deposits it in his own account in Verity Bank. If Verity
Bank collects payment, the ultimate party most likely to suffer the loss is
a. no one.
b. Rodeo Ranch.
c. Town Bank.
d. Upper Range.
A14. Cash National Bank is an HDC of a note for $1,000 on which there is the forged
signature of “Dudley.” If sued on the note by Cash
a. Dudley must pay the note.
b. Dudley’s best defense would be fraud in the execution.
c. Dudley’s best defense would be material alteration.
d. Dudley’s best defense would be forgery.
A15. Opalina asks Paolo, who does not understand English, to sign what Opalina says is an
application to open a bank account. In fact, the “application” is a note. If sued on the
note by an HDC
a. Paolo must pay the note.
b. Paolo’s best defense would be fraud in the execution.
c. Paolo’s best defense would be fraud in the inducement.
d. Paolo’s best defense would be mistake.
A16. Chris convinces Dion, who does not understand English, to sign a $1,000 note that
Dion believes is an application for a credit card. Chris negotiates the note to EZ
Finance Company. Dion
a. can avoid payment on the note even if EZ is an HDC.
b. can avoid payment on the note only if EZ is a holder.
c. must pay EZ the amount that it paid for the note.
d. must pay the note in full.
A17. Dandy Lyin’ Furniture Store borrows $100,000 at 6 percent interest from Easy Loan
Company and signs a promissory note for that amount. Easy changes the amount of
the note to $120,000 and increases the rate to 8 percent. Easy materially altered the
note when it changed
a. neither the amount nor the interest rate
b. the amount and the interest rate.
c. the amount only.
d. the interest rate only.
A18. Quincy signs a check payable to Richland Investors, Inc., and gives it to Richland,
leaving the amount blank but authorizing Richland to fill in the check for $1,000.
Richland fills in $1,500 and negotiates the check to Silverado Bank, to whom Richland
owes $1,500. Silverado Bank, an HDC, can enforce the check for
a. $0.
b. $500.
c. $1,000.
d. $1,500.
A19. Laptop Assembly Company gives a $3,000 promissory note to My-T-Fast Delivery
Service to deliver a load of computer chips to Laptop’s plant. The chips are contami–
nated during transit, and are useless to Laptop on delivery. If My-T-Fast presents the
note for payment
a. Laptop’s best defense would be breach of warranty.
b. Laptop must pay the note.
c. Laptop’s best defense would be nondelivery of an instrument.
d. Laptop’s best defense would be failure of consideration.
A20. Bing signs a note payable to the order of Cameron. Cameron indorses the note and
gives it to Daphne as payment for a debt. Daphne presents it to Bing, who pays it.
Bing’s payment discharges
a. all of the parties.
b. only Bing.
c. only Cameron.
d. only Daphne.
ESSAY QUESTIONS
A1. Dale issues a check for $4,000, dated June 1, to Evelyn. The check is drawn on First
Federal Bank. Evelyn indorses the check and transfers it to Gene. What will trigger the
liability of Dale and Evelyn on the check?
A2. Ian transfers a note, for consideration, to Jock by blank indorsement and delivery. Jock
transfers the note to Kelly, who takes it in good faith. What does Ian warrant to Kelly?