317
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
B1. Every person who signs a negotiable instrument is liable for payment of that
instrument when it comes due.
B2. An acceptor is primarily liable on an instrument.
B3. Warranty liability on a negotiable instrument does not require a signature and
extends to both signers and nonsigners.
B4. A drawer is secondarily liable on an instrument.
B5. The dishonor of an instrument relieves secondary parties of liability.
318 TEST BANK B—UNIT FIVE: NEGOTIABLE INSTRUMENTS
B6. Dishonor occurs when acceptance of an instrument cannot be obtained within the
prescribed time.
B7. An agent who signs just her own name on an instrument will be personally liable to a
holder in due course who has not notice of her agency status.
B8. An unauthorized signature never binds the person whose name is signed.
B9. An unauthorized signature will not bind the person whose name is signed even if his
or her negligence substantially contributed to the forgery.
B10. A person who forges a check can be held personally liable for payment by a holder in
due course.
B11. Under the UCC, a fictitious payee’s indorsement is not treated as a forgery.
B12. When an instrument has a forged indorsement, the loss usually falls on its maker or
drawer.
CHAPTER 26: LIABILITY, DEFENSES, AND DISCHARGE 319
B13. Transfer warranties attempt to impose liability on the wrongdoer or the person who
dealt face to face with the wrongdoer.
B14. Presentment warranties protect the person who presents an instrument for payment.
B15. Universal defenses are good against all holders except HDCs and holders through
HDCs.
B16. The completion of an originally incomplete instrument in an unauthorized manner is
not a defense against payment on the instrument to an HDC.
B17. When there is a breach of an underlying contract for which an instrument was issued,
the maker of a note can refuse to pay it.
B18. If delivery of goods becomes impossible, a party who has issued a draft or note under
the contract must still pay it.
B19. A person who issues a negotiable instrument based on false statements by the other
party will be able to avoid payment on that instrument to any party.
B20. Intentional cancellation of an instrument discharges the liability of all parties.
320 TEST BANK B—UNIT FIVE: NEGOTIABLE INSTRUMENTS
MULTIPLE CHOICE QUESTIONS
B1. Biff signs a note “payable to the order of County Credit Union.” Unless Biff has a valid
defense against payment, Biff’s liability on this note is
a. lateral.
b. primary.
c. secondary.
d. tertiary.
B2. Eula signs a check “pay to the order of Eula” and presents to First National Bank for
payment. The types of liability associated with this check are
a. fitness and quality.
b. potential and real.
c. sealed and delivered.
d. signature and warranty.
CHAPTER 26: LIABILITY, DEFENSES, AND DISCHARGE 321
B3. Superior Company draws a check payable to Ted. Uri makes a note payable to Vital
Finance Corporation. Primarily liable parties include
a. Superior, Ted, Uri, and Vital.
b. Superior, Ted, and Uri only.
c. Superior and Uri only.
d. Uri only.
B4. Blayne writes a check “pay to the order of Cherry” drawn on Blayne’s account at Dixie
Bank. Cherry presents the check for payment to Dixie Bank, which accepts it. The bank
is
a. not liable for payment.
b. primarily liable for payment.
c. secondarily liable for payment.
d. simultaneously liable, with Blayne, for payment.
Fact Pattern 26-1B (Questions B5–B6 apply)
Jake is the maker of a $2,000 promissory note payable to Kim. Kim indorses the note to Lyron
who, in turn, indorses it to Mona, who then indorses it to Neville, the present holder.
B5. Refer to Fact Pattern 26-1B. Neville properly presents the note to Jake for payment,
but Jake dishonors it. With timely notice to the proper parties, Neville may collect
payment on the note from
a. Kim, Lyron, or Mona.
b. Kim or Lyron only.
c. Mona only.
d. no one.
322 TEST BANK B—UNIT FIVE: NEGOTIABLE INSTRUMENTS
B6. Refer to Fact Pattern 26-1B. Suppose that Mona pays Neville on the note. With timely
notice to the proper parties, Mona may collect payment on the note from
a. Jake, Kim, or Lyron.
b. Jake or Kim only.
c. Lyron only.
d. no one.
B7. Rex signs a check “pay to the order of Sophie” drawn on Rex’s account in Town Bank.
To impose liability on Rex if Town Bank dishonors the check, Sophie should present it
for payment within
a. one year.
b. six months.
c. ten days.
d. thirty days.
B8. Pacific Bank receives a check drawn by Qiana. The check is received after the
established “cutoff” hour. Payment can be postponed without dishonor
a. indefinitely.
b. under no circumstances.
c. unless Qiana personally demands acceptance.
d. until the close of the next business day.
CHAPTER 26: LIABILITY, DEFENSES, AND DISCHARGE 323
B9. On January 1, Kane issues a note payable to Lorena on May 1. On April 29, Kane dies. In this
situation, the note is
a. dishonored.
b. payable immediately.
c. payable within a reasonable time.
d. payable May 1.
B10. Sara agrees to cosign a promissory note for Tom to buy a sport utility vehicle. The
note is payable to Uno Bank. Sara is an accommodation
a. drawee.
b. indorser.
c. maker.
d. signatory.
B11. Kip is Lulu’s agent and is authorized to write checks on Lulu’s account in Metro Bank.
Kip writes a check “pay to the order of Nemo.” Kip signs the check “Lulu, by Kip,
agent.” If Metro Bank dishonors the check, liability extends to
a. Kip and Lulu.
b. Kip only.
c. Lulu only.
d. no one.
324 TEST BANK B—UNIT FIVE: NEGOTIABLE INSTRUMENTS
B12. Dewey is Ezra’s agent and is not authorized to sign checks or notes on Ezra’s behalf.
Despite the lack of authority, Dewey issues a note “payable to the order of Fab
Finance Company [signed] Ezra, by Dewey.” Liability on this note extends to
a. Dewey and Ezra.
b. Dewey only.
c. Ezra only.
d. no one.
B13. Bob writes a check on his account at County Bank to Darby, a famous singer. The
person claiming to be Darby is an imposter, however, named Etta. Etta indorses the
check to Felipe, for whom County Bank cashes it. Ultimately, the loss will most likely
fall on
a. Bob.
b. County Bank.
c. Darby.
d. Felipe.
B14. Cole issues a note “payable to the order of Cole,” forges Dylan’s signature as the
maker, and indorses the note “pay to Eton.” Cole sells the note to Eton, who
negotiates it by indorsement and delivery to Franz. Franz negotiates the note to Gert.
On this note, Gert can extend liability to
a. no one.
b. only Cole, Eton, or Franz.
c. only Eton or Franz.
d. only Franz.
CHAPTER 26: LIABILITY, DEFENSES, AND DISCHARGE 325
B15. Burt, a mentally impaired person, is asked by Carl to sign a piece of paper that Carl
says is an autograph book. In fact, the document is a note. If later sued on the note by
an HDC
a. Burt must pay the note.
b. Burt’s best defense would be fraud in the execution.
c. Burt’s best defense would be fraud in the inducement.
d. Burt’s best defense would be mistake.
B16. Vera gives Willy a $500 check as payment for a debt. Willy crudely raises the amount
of the check to $5,000 and transfers it to Xtreem Sportz store for a new bike. Xtreem
deposits the check in its Yankee Bank account. Vera is liable for the payment of $5,000
to
a. no one.
b. Willy, Xtreem Sportz, and Yankee Bank.
c. Willy only.
d. Xtreem Sportz and Yankee Bank only.
B17. Pete, a Quality Company employee, is authorized to use Quality checks to buy
supplies. Pete alters one of the checks to increase its $700 amount by $100, and
exchanges it at Retail Office Supply for $700 worth of supplies and $100 cash. He
keeps the cash. On the check, Retail—an HDC—may obtain payment for
a. $0.
b. $100.
c. $700.
d. $800.
326 TEST BANK B—UNIT FIVE: NEGOTIABLE INSTRUMENTS
B18. Delores’s Restaurante borrows $100,000 at 6 percent interest from El Credito y Dinero
Company and signs a promissory note for that amount. El Credito changes the amount of
the note to $120,000 and increases the rate to 8 percent. Delores’s best defense against
payment on the note is
a. breach of warranty.
b. failure of consideration.
c. material alteration.
d. nondelivery of an instrument.
B19. GR8 Products, Inc., warrants its goods to be free of defects. Heck issues a note to
obtain goods from GR8 that prove defective. If GR8 presents the note for payment
a. Heck’s best defense would be breach of warranty.
b. Heck must pay the note.
c. Heck’s best defense would be fraud in the inducement.
d. Heck’s best defense would be failure of consideration.
B20. Molly signs a promissory note payable to Nano Credit Corporation while mentally
incompetent but before a court judges her to be mentally incompetent. The note is
a. payable to any bearer of the note.
b. payable to any holder of the note.
c. payable to the court only.
d. voidable.
ESSAY QUESTIONS
B1. Kris is an administrative assistant with Little Financial Corporation, but has no
authority to sign Little Financial checks. Kris orders merchandise from My-T-Fine Retail
Company delivered to her home and pays with a Little Financial check, signing “Little
Financial Corp. by Kris, admin. assist.” My-T-Fine does not know that Kris has no
authority to sign the check. Who is liable on the check, and why?
CHAPTER 26: LIABILITY, DEFENSES, AND DISCHARGE 327
B2. Commercial Credit Company has in its possession an instrument dated May 1, 2009.
The instrument is payable to the order of Alpha Company “on June 1, 2009,” for
$5,000. In the upper left corner is an address for Beta Corporation—10 Corporate Park
Avenue, Chicago, Illinois—and in the lower right corner is the signature of “Delta, Inc.,
By Eve, President.” In the lower left corner is stamped “ACCEPTED: Beta Corporation
by Frank, President, May 5, 2009.” On the back is the signature of “Alpha Company by
Gail, President.” Who, if anyone, is primarily liable on this instrument on May 1? On
May 5? Who, if anyone, is secondarily liable on this instrument?