Chapter 27. Transfer and Holder in Due Course
1. Under the shelter rule, the transferee gets the rights of the transferor who is a holder in due course even if the
transfer is not for value.
a. True
b. False
2. The requirements for negotiation are the same for both order paper and bearer paper.
a. True
b. False
3. The principal advantage of negotiable instruments is their safety.
a. True
b. False
4. A negotiation is void if the transaction in which it occurs is void.
a. True
b. False
5. A qualified indorsement destroys negotiability.
a. True
b. False
6. A blank indorsement converts order paper to bearer paper and leaves bearer paper as bearer paper.
a. True
b. False
7. Subsequent indorsers are always bound by an indorsement in trust.
a. True
b. False
8. The transfer of a nonnegotiable promise or order operates as an assignment.
a. True
b. False
9. Bearer paper runs to whomever is in possession of it.
a. True
b. False
10. An indorsement limiting payment to a particular person is effective.
a. True
b. False
11. Every indorsement is either blank or special.
a. True
b. False
12. Both negotiable instruments and nonnegotiable undertakings are transferable by assignment and can result in the
transferee’s becoming a holder.
a. True
b. False
13. The “impostor rule” is an exception to the general rule that negotiation of an order instrument requires a valid
indorsement by the person to whose order the instrument is payable.
a. True
b. False
14. A negotiation obtained by duress, mistake, or fraud is ineffective to transfer the instrument.
a. True
b. False
15. The type of indorsement used in first negotiating an instrument affects its subsequent negotiation.
a. True
b. False
16. Revised Article 3 provides that the impostor rule does not include an impostor who impersonates an agent of a
principal and who induces someone to create a negotiable instrument payable to the principal.
a. True
b. False
17. The fictitious payee rule is based on the idea that employers should bear the risk of their own unscrupulous
employees.
a. True
b. False
18. Under Article 3, the employer is allowed to recover from its bank, despite the applicability of the fictitious payee rule,
if the bank failed to exercise ordinary care in paying the instrument.
a. True
b. False
19. An indorsement may be written on a paper other than the instrument itself as long as the paper with the indorsement
is affixed to the instrument.
a. True
b. False
20. A bearer instrument is comparable to cash in that it is negotiated by mere possession.
a. True
b. False
21. An indorsement must be written within 1 1/2 inches of the trailing edge of the back of the check and must be written
in ink or the check’s negotiability is destroyed.
a. True
b. False
22. The shelter rule applies even if the transferee was a party to fraud or illegality affecting the instrument.
a. True
b. False
23. The Code provides that for checks, a reasonable time for demand for payment is sixty days, after which a purchaser
should be on notice the paper is overdue for the purpose of becoming a holder in due course.
a. True
b. False
24. A person other than the owner of an instrument cannot be entitled to enforce it.
a. True
b. False
25. A “holder” may transfer the instrument, negotiate it, enforce payment of it subject to valid claims and defenses, and
with some exceptions discharge it.
a. True
b. False
26. It is necessary that one own the instrument to be a “holder.”
a. True
b. False
27. A check is made payable “to the order of Sam Johnson.” If this check is indorsed by Sam Johnson and given to Alex,
Alex becomes the holder of the instrument.
a. True
b. False
28. The status of holder in due course was created to encourage the free transferability of negotiable instruments.
a. True
b. False
29. A mere holder or an assignee takes a negotiable instrument subject to all claims and defenses to it.
a. True
b. False
30. A bank “gives value” when it allows a depositor to withdraw funds against a deposited item.
a. True
b. False
31. Glenn indorsed his paycheck by signing just his name and cashed it at the grocery store. The check was stolen from
the store, indorsed in a false name and transferred to a convenience store. The convenience store could not be a
holder in due course since the check had been stolen and indorsed with a false name.
a. True
b. False
32. The “value” requirement of a holder in due course is the same as “consideration“ for a contract.
a. True
b. False
33. Maria gives Joe $250 cash in return for Joe‘s indorsed check for $300. If Maria subsequently finds out that the
check she took was given to Joe in return for a stolen car, Maria is no longer a holder in due course.
a. True
b. False
34. An executory promise is the giving of value to support holder in due course status.
a. True
b. False
35. Buying a negotiable instrument at a discounted price demonstrates lack of good faith.
a. True
b. False
36. A person who takes a check stamped “NSF“ may still be a holder in due course.
a. True
b. False
37. Revised Article 3 adopts a definition of good faith that has both a subjective and an objective component.
a. True
b. False
38. A holder in due course would have the right to collect from the original maker of an instrument even if the maker
had a valid personal defense.
a. True
b. False
39. A holder in due course has the same rights under a consumer credit contract as under the UCC as long as a special
notice requirement has been met.
a. True
b. False
40. A person is never entitled to enforce an instrument if that person is not the owner of the instrument or if that person
is in wrongful possession of the instrument.
a. True
b. False
41. A payee may be a holder in due course under the Code.
a. True
b. False
42. Under the shelter rule, a person who is not a holder in due course can obtain the rights of a holder in due course.
a. True
b. False
43. Fraud in the execution of an instrument is a real defense which can be used against a holder in due course.
a. True
b. False
44. A person who knows that an instrument is overdue or has been dishonored cannot become a holder in due course.
a. True
b. False
Multiple Choice
45. Alexander Schwing indorses his check with his own name and the words “for deposit only.” What type of
indorsement is this?
a. A blank indorsement
b. A special indorsement
c. An unrestrictive indorsement
d. A blank, restrictive indorsement
46. Art signs a promissory note payable to the order of Swains Jewelers for $8,000 for a wedding ring. If the owner of
Swains simply signs “Swains Jewelers”:
a. the note is restrictively indorsed.
b. the indorsement is ineffective because the note will have to bear the signature of the person who indorsed it.
c. the note is negotiable by delivery.
d. the indorsement will be valid only if dated.
47. Order paper is negotiated by:
a. indorsement alone.
b. delivery alone.
c. either delivery or indorsement.
d. transfer of possession and indorsement.
48. Which of the following is not a restrictive indorsement?
a. “Without recourse”
b. “For deposit”
c. “Pay any bank“
d. “For collection”
49. Ricardo is the holder of a check that contains the indorsement “Without Recourse, (signed) Mary Roberts.” This
indorsement:
a. makes further indorsement impossible.
b. requires a special indorsement by the transferee.
c. limits the liability of Mary Roberts.
d. limits the liability of all subsequent holders including Ricardo.
50. Assuming a note made by Barbara payable to Carol, which indorsement will limit negotiability?
a. “Pay Al. Carol”
b. “For deposit only, Acct. #602–043. Carol”
c. “Pay Connie for Al. Carol”
d. “Pay Claudia as attorney for John Jones. Carol”
51. If Kathy indorses a check “without recourse”:
a. Kathy is not contractually liable if the check is not paid.
b. negotiability is destroyed.
c. the check cannot be transferred.
d. Kathy cannot transfer good title to the check.
52. Which of the following is a special indorsement?
a. “John Doe”
b. “Without recourse, John Doe”
c. “Pay to Richard Roe, John Doe”
d. “John Doe, for collection only”
53. The customary manner of disclaiming the indorser’s contractual liability is to add which of the following sets of
words before or after his signature?
a. For collection only
b. Without recourse
c. Pay to the order of
d. For deposit only
54. One who is in possession of a negotiable instrument that is drawn, issued, or indorsed to him or to his order or that is
indorsed in blank is a(n):
a. bearer.
b. holder.
c. transferor.
d. assignee.
55. If there is no indorsee designated on an indorsement bearing only the indorser’s signature, it is a(n):
a. qualified indorsement.
b. conditional indorsement.
c. blank indorsement.
d. allonge.
56. A transfer of order paper:
a. gives the transferee the specifically enforceable right to have the unqualified indorsement of the transferor,
whether the transfer was for value or not.
b. to a bank, such as the deposit of a check, without an indorsement requires the bank to provide the customer’s
indorsement.
c. not for value creates a presumption by the courts that the parties intended to negotiate rather than assign the
paper.
d. for value creates a presumption by the courts that a negotiation was intended by the parties unless the parties
have agreed that the transfer is to be an assignment, which requires no indorsement.