57. A(n) indorsement is an indorsement made by a person that is not the holder of the instrument. The effect of
this indorsement is to make the signer liable on the instrument as an indorser.
a. anomalous
b. blank
c. unqualified
d. special
58. Delivery alone is insufficient to negotiate an instrument when it is payable to:
a. order and the last indorsement is in blank.
b. cash and signed by the drawer.
c. bearer and is not indorsed.
d. the order of John Jones and is not indorsed.
59. An indorsement stating “Pay Paula Hobson only”:
a. is designed to restrict the rights of the indorser.
b. is given the same effect as an unrestrictive indorsement.
c. will, under the Code, be effective to prohibit further transfer beyond Paula Hobson.
d. is labeled a “qualified indorsement,” and it destroys negotiability.
60. Which of the following are not types of restrictive indorsements?
a. Conditional indorsements
b. Indorsements prohibiting further transfer
c. Indorsements in trust
d. Blank indorsements
61. Which of the following is a special unqualified indorsement?
a. Pay to the order of John Doe, without recourse
b. For deposit only, John Jones
c. Without recourse, Sandra Adams
d. Pay to the order of April Smith
62. Cynthia Todd is the holder of a check with the indorsement “Adam Brock.” To protect herself, Cynthia may:
a. convert the special indorsement to a blank indorsement.
b. convert the special indorsement to a qualified indorsement.
c. write above Adam’s signature, “Pay Cynthia Todd.”
d. not convert the indorsements, but could only protect her interest in the check by depositing it in her account as
soon as possible.
63. Laura is in possession of a check which contains the following indorsement, “Sam Smith, without recourse, for
collection only.” The indorsement would be classified as:
a. blank, qualified, and restrictive.
b. blank, unqualified, and unrestrictive.
c. special, unqualified, and restrictive.
d. special, qualified, and unrestrictive.
64. An indorsement that is not in the chain of title is assumed to be a(n):
a. anomalous indorsement.
b. blank indorsement.
c. special indorsement.
d. indorsement in trust.
65. Which of the following is required regarding indorsements?
a. An indorsement must be written on the back side of the instrument.
b. There must be compliance with Federal Reserve Board guidelines in order for the instrument to be negotiable.
c. An indorsement must be written on the instrument or on a paper affixed to the instrument.
d. An indorsement must be dated.
66. Miller does the payroll for XYZ Company. In between Adams and Bates, he inserts the name Appleton and makes
out a weekly paycheck in that name. He keeps the check for himself, signing “Appleton” and cashing it at a local
bank. Auditors discovered the fake payee many months later. May XYZ require the bank to recredit?
a. No, because of the holder rule
b. No, because Miller is an XYZ employee and the fictitious payee rule applies
c. Yes, because the indorsement is forged
d. Yes, because the check was, in effect, stolen
67. All of the following are “real defenses“ except a:
a. note made by a minor.
b. check written while a gun is held to the drawer’s head.
c. note given in exchange for worthless securities.
d. check fraudulently changed from $100 to $400.
68. Erin stole a paycheck from Carl prior to his indorsing it. She then forged Carl’s signature and transferred the check
to a gas station which took it in good faith, for value, without notice, and without reason to question its authenticity.
The gas station:
a. was a holder in due course.
b. could not be a holder.
c. could be a holder, but not a holder in due course.
d. can collect the amount of the check only from the drawer since Carl did not indorse it.
69. Scott buys a television from Joe’s TV Store, giving Joe a check for $550. Joe uses a special indorsement and
negotiates the check to Tom. Tom carefully changes the amount to read $1550 and loses the check on the way to
the bank. Harry picks it up and tries to cash it. What will he get?
a. Scott will have to pay him $550.
b. Joe will have to pay him $550.
c. Tom will have to pay him $1550.
d. No one will have to pay Harry.
70. Clint induces David, by fraud in the inducement, to make an instrument payable to the order of Clint. Clint then
negotiates the instrument to Eric, a holder in due course, and later reacquires it from Eric. In this case:
a. Clint is a holder in due course.
b. Clint is not a holder in due course, but he succeeds to the rights of one, because of the shelter rule.
c. Clint does not succeed to Eric’s rights as a holder in due course and remains subject to the defense of fraud.
d. because fraud in the inducement is a real defense, it can be used against both Clint and Eric.
71. Personal defenses include all but which of the following?
a. Breach of contract
b. Fraud in the execution
c. Misrepresentation
d. Failure of consideration
72. Real defenses include all but which of the following?
a. Forgery of instrument
b. Minority of maker
c. Material alteration
d. Theft of bearer paper
73. The notice requirement of the Federal Trade Commission rule for consumer credit contracts has the effect of:
a. limiting the types of defenses to payment available to a consumer.
b. eliminating the real defenses to payment.
c. placing a holder in due course in the position of an assignee.
d. permitting a holder in due course to have a questionable instrument reviewed by the FTC.
74. Blane indorsed his paycheck in blank and cashed it at a store where he was a well-known customer. The check was
then stolen from the store. The store immediately notified Blane’s employer, who gave the drawee bank a stop
payment order. The thief indorsed the check in a false name and transferred the check to a gas station/convenience
store, which took the check in good faith and for value. The check was dishonored when presented to the drawee
bank. Which of the following statements is true?
a. The thief was a holder within the Code definition and could negotiate the check.
b. The thief could not negotiate the check because he forged the indorsement.
c. The gas station/convenience store is entitled to nothing from the drawer of the check.
d. The gas station/convenience store could not be a holder in due course because it took the check from a thief.
75. Defenses that may be asserted against a holder in due course are called:
a. personal defenses.
b. real defenses.
c. special defenses.
d. holder in due course defenses.
76. Which of the following is not a real defense?
a. Forgery
b. Fraudulent alteration
c. Discharge in insolvency proceedings
d. Change in price
77. Which one of the following is not a personal defense?
a. Infancy, to the extent that it is a defense to a simple contract
b. Breach of contract
c. Non–delivery of an instrument
d. Failure of consideration
78. A Federal Trade Commission rule limits the rights of a holder in due course of an instrument that evidences a debt
arising out of a(n):
a. consumer credit contract.
b. insurance contract.
c. consumer purchase paid for with a check.
d. construction contract.
79. A holder in due course could recover from the maker where the:
a. maker’s signature is forged.
b. bearer instrument was stolen after it was completed.
c. maker signed the instrument under physical duress.
d. maker is a fifteen-year-old.
80. Joanne had a paycheck from Pizza Plaza for $54 made out to her. She indorsed it with her name and gave it to
Larry, who in return agreed to paint her living room next Saturday. In this case:
a. the check is not negotiable.
b. Larry is not a “holder.”
c. Larry is not a “holder in due course.”
d. Larry has given value for the check by his agreement.
81. Alice Jones receives a bonus of $500 from her boss. She needs cash for her vacation, so she indorses the check to
Charlie who gives her $300 cash and an IOU for $200. When Charlie presents the check to Alice‘s company for
payment, her boss says the check was meant for Alex Jones instead; it was all a big mistake. What will Charlie be
able to collect from the company?
a. $500
b. $300
c. $420
d. Nothing
82. Tony is fraudulently induced to issue a check to Rita. Tony has:
a. a claim to ownership of the check.
b. a defense to Rita’s demand for payment.
c. neither a claim nor a defense.
d. both a claim and a defense.
83. The refusal to pay or accept an instrument when it becomes due is:
a. the shelter rule.
b. dishonor.
c. demand.
d. discharge.
84. Steve issues a negotiable promissory note to Bob in exchange for Bob‘s promise to build an addition to Steve’s home.
The promissory note indicates this reason when Bob negotiates it to Willard for value. Can Willard be a holder in due
course?
a. Yes, unless he knows that Bob has not built the addition
b. Yes, unless he did not give adequate value
c. No, since he has taken the instrument with notice of a defense
d. No, since he has violated the “good faith” requirement
85. Abby needs some quick cash, so she hits upon a scheme. She tells Frank that she is collecting for foreign refugees,
so Frank makes out a check for $100 payable to the order of Abby. Abby indorses it and delivers it to Joanne for
$90 cash. Joanne gives it to Margaret as a present. Frank discovers Abby’s deception and refuses to pay Margaret.
Will he win?
a. No, because Margaret is a holder in due course
b. No, because of the shelter rule
c. Yes, since Margaret did not take the check for value
d. Yes, since the check was not negotiated to Margaret
86. Time paper that states it is due on July 1, a Sunday, is overdue on:
a. July 1.
b. July 2.
c. July 3.
d. It depends on when the instrument is presented for payment.
87. Answer the following:
a. What is negotiation? How does one become a “holder” of an instrument?
b. What is the difference between “transfer“ and “negotiation“? Explain.
88. Answer the following:
a. What is the advantage to the indorser of a qualified indorsement?
b. What is the advantage of a restrictive indorsement?
KEYWORDS: Blooms: Synthesis
89. Is the negotiation of an instrument ever valid even though the transaction in which it occurs is voidable or even void?
Explain.
90. Michael issues a check to Paula. She negotiates the check to Harold as payment for a used television. Harold has no
notice of any claims or defenses and takes the check in good faith. Harold indorses the check and gives it to his son
as a birthday present.
a. Is Harold’s son a holder in due course? Explain.
b. What rights does Harold’s son have with respect to the check? Why? Explain.
c. Assume that Michael has a personal defense of fraud in the inducement against Paula. Can he
use that defense against Harold? Can he use that defense against Harold’s son? Explain.
91.
a. What constitutes value for the purposes of becoming a holder in due course? How does value
for this purpose differ from consideration under contract law?
b. What is good faith under the Code?
92.
a. What defenses can be used against a holder in due course?
b. What defenses cannot be used against a holder in due course?
93. What is the difference between time paper and demand paper? When is each type overdue?
94. What are the requirements for a transferee of a negotiable instrument to be a holder in due course?
95. What is the effect of an alteration on a negotiable instrument? Does it make a difference whether the alteration was
made fraudulently?