1
Chapter 26
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
B1. A transfer by assignment can make it possible for a transferee to receive more
rights in the instrument than the prior possessor had.
B2. Negotiating order instruments requires either delivery or indorsement but not
both.
B3. An indorsement is a signature, with or without additional words or statements.
B4. A blank indorsement can consist of a mere signature.
2 TEST BANK B—UNIT FIVE: NEGOTIABLE INSTRUMENTS
B5. Usually, indorsements are qualified indorsements.
B6. To avoid the risk of loss from theft, a holder may convert a blank indorsement
to a special indorsement.
B7. A restrictive indorsement does not destroy negotiability.
B8. An instrument payable to two or more persons in the alternative requires the
indorsement of both payees for negotiation.
B9. Often, whether a holder will be able to obtain payment on an instrument will
depend on whether he or she is a holder in due course.
B10. A holder takes an instrument for value if he or she inherits an instrument.
B11. A holder takes an instrument for value if he or she accepts the instrument in
payment of a preexisting obligation.
B12. A holder takes an instrument for value by promising to perform or give value in
the future.
CHAPTER 26: TRANSFERABILITY AND HOLDER IN DUE COURSE 3
B13. A person who takes a negotiable instrument from a thief cannot become an
HDC even if he or she acted honestly in the process of acquiring the
instrument.
B14. An indorsement should be identical to the name of the indorsee, regardless of
how the name appears on the instrument.
B15. For a check, a “reasonable time” is ninety days after the date of the check.
B16. A holder cannot become an HDC if he or she has notice of any claim to the
instrument or defense against it.
B17. An instrument is dishonored when the party to whom the instrument is
presented refuses to pay it.
B18. A purchaser can become an HDC of an instrument even if it is so incomplete
that an element of negotiability is lacking.
B19. The shelter principle extends the benefits of HDC status and is designed to aid
the HDC in readily disposing of the instrument.
B20. There are no limitations on the shelter principle.
4 TEST BANK B—UNIT FIVE: NEGOTIABLE INSTRUMENTS
MULTIPLE CHOICE QUESTIONS
B1. Mortimer negotiates an instrument to Nadia. Negotiation is the transfer of an
instrument
a. for valuable consideration under a contract.
b. in such form that the transferee becomes a holder.
c. pursuant to preliminary contract discussions.
d. without the payment of a recognized medium of exchange.
B2. Edgar possesses a check that is “payable to cash.” Fawn steals the check and
delivers it to Godfrey, an innocent third person. All rights to the check are
a. Edgar’s.
b. Fawn’s.
c. Godfrey’s.
d. lost.
B3. Giuseppe writes a check “payable to bearer” and hands it to Hamilton. Imogene
steals the check and delivers it to Jocelyn, an innocent third person. Hamilton
can recover the proceeds of the check from
a. Imogene.
b. Jocelyn.
c. Giuseppe.
d. no one.
B4. Roderick negotiates a bearer instrument to Shauna by
a. assignment.
CHAPTER 26: TRANSFERABILITY AND HOLDER IN DUE COURSE 5
b. delivery.
c. indorsement.
d. promising to pay it.
B5. Baxter obtains a check payable to his order from Chanel. For Baxter to
negotiate this order instrument to Darlene requires
a. indorsement and delivery.
b. assignment and a promise to pay.
c. presentment and dishonor.
d. good faith and value.
B6. Dirk transfers a note by signing it and delivering it to Edwina. Dirk is
a. an indorser.
b. an indorsee.
c. a promisee.
d. a promisor.
B7. Dane transfers a draft by signing it and delivering it to Ebony. Ebony is
a. an indorser.
b. an indorsee.
c. a promisee.
d. a promisor.
Fact Pattern 26-1B (Questions B8–B10 apply)
Destiny obtains a check payable to her order from Eugenia. Destiny signs the back
and adds the notation “without recourse.”
B8. Refer to Fact Pattern 26-1B. Destiny’s signature and the notation “without
recourse” constitute
6 TEST BANK B—UNIT FIVE: NEGOTIABLE INSTRUMENTS
a. a blank indorsement.
b. a qualified indorsement.
c. a special indorsement.
d. a restrictive indorsement.
B9. Refer to Fact Pattern 26-1B. By writing “without recourse” with her signature,
Destiny
a. avoids the risk of loss from theft of the instrument.
b. relieves herself of liability on the instrument.
c. converts the check into a nonnegotiable instrument.
d. locks the instrument into the bank collection process.
B10. Refer to Fact Pattern 26-1B. After Destiny signs the back and adds the notation
“without recourse,” she adds, “Pay to Florence.” This constitutes
a. a blank qualified indorsement.
b. a special qualified indorsement.
c. a restrictive indorsement.
d. none of the choices.
B11. Erin indorses a check, “Pay to Farmers Cooperative, Inc., if they deliver the
grain by May 1, 2015.” This is
a. a blank indorsement.
b. a qualified indorsement.
c. a restrictive indorsement.
d. a special indorsement.
CHAPTER 26: TRANSFERABILITY AND HOLDER IN DUE COURSE 7
B12. Bowie is a holder of a promissory note obtained from Credit Lenders, Inc.
Regarding the defenses against payment of the note to which Credit Lenders is
subject, Bowie, as an ordinary holder, is subject to
a. more defenses.
b. no defenses.
c. some defenses, but not as many.
d. the same defenses.
B13. Diego is the payee of a bearer instrument—a promissory note in the amount of
$1,000. Emil offers to harvest Diego’s field of alfalfa in October in exchange for
the note. Diego agrees and delivers the note to Emil. Emil is not an HDC of the
note because he
a. was not the original payee on the note.
b. did not take the note without notice.
c. did not acquire the note in good faith.
d. did not give value for the note.
B14. Entrepreneur Auto Rentals owes Sole Saver Auto Dealership $20,000.
Entrepreneur executes a note to Sole Saver as security for the debt. This
security
a. does not constitute sufficient consideration for HDC status.
b. does not satisfy the value requirement for HDC status.
c. satisfies the consideration requirement for HDC status.
d. satisfies the value requirement for HDC status.
B15. Muni Investment Company signs a check payable to Enterprise Lenders, Inc.,
to buy a promissory note executed by Fallow Corporation. This check
a. does not constitute sufficient consideration for HDC status.
b. does not satisfy the value requirement for HDC status.
c. satisfies the consideration requirement for HDC status.
d. satisfies the value requirement for HDC status.
8 TEST BANK B—UNIT FIVE: NEGOTIABLE INSTRUMENTS
B16. At 1 A.M., on the sidewalk in front of Ace Credit Corporation, which is closed,
Ben buys a $500 promissory note for $50 from Curt. When presented with
Ben’s demand for payment, Diane, the maker of the note, could successfully
claim that Ben
a. acquired the note with notice that it was overdue.
b. did not acquire the instrument in good faith.
c. did not give value for the instrument.
d. none of the choices.
B17. Plumbing & Pipes Supply Company issues a promissory note as a demand
instrument with a due date of October 5. Quantum Loan Company accepts the note.
Quantum Loan has notice that the note is overdue if the firm takes the note
a. after October 5.
b. before October 5.
c. on October 5.
d. at any time.
B18. Elinor performs ten hours of house cleaning for Floyd in exchange for a
promissory note for $400. At the time that Elinor accepts the note, she is aware
that bankruptcy proceedings are being filed against Floyd. Elinor can
a. obtain HDC status.
b. not obtain HDC status, because she knows that there are bankruptcy
proceedings against Floyd.
c. not obtain HDC status, because she did not fulfill the value requirement.
d. not obtain HDC status, because she did not fulfill the good faith
requirement.
CHAPTER 26: TRANSFERABILITY AND HOLDER IN DUE COURSE 9
B19. Secure Loan Company has notice that a promissory note is overdue if the note
is a demand instrument and Secure Loan takes it
a. an unreasonable time after its due date.
b. before its due date.
c. on its due date.
d. without noticing its due date.
B20. Flossie signs a check payable to Glenn and gives it to him, leaving the amount
blank but authorizing him to fill it in for $1,000. Glenn fills in $1,500 and
negotiates the check to Home Federal Bank, an HDC. Home Federal can
enforce the check for
a. $0.
b. $500.
c. $1,000.
d. $1,500.
ESSAY QUESTIONS
B1. Discount Retail Warehouse Corporation pays its employees every two weeks.
Ethel, a Discount Retail employee, receives her paycheck and indorses the
back (“Ethel Smith”), but loses the check before cashing it or depositing it.
Garth finds it. Has the check been negotiated to Garth? If Garth signs the back
of the check beneath Ethel’s signature, can he cash it? If so, what might Ethel
have done to avoid the loss?
ANSWER: Ethel’s paycheck was negotiated to Garth. Ethel’s blank indorse-
10 TEST BANK B—UNIT FIVE: NEGOTIABLE INSTRUMENTS
B2. Loren signs a note that states, “Payable in thirty days.” The note is dated
March 2. Micah buys the note on April 3. Is Micah an HDC of the note? Explain.