Liability and Negotiable Instruments - Module 2 of 6

Question 1

An agent that signs a negotiable instrument

binds the principal but only if the agent clearly indicates evidence of the agency on the instrument.

binds the principal, but only if the holder is a holder in due course.

binds the principal, but only if the agent signs “without recourse.”

does not bind the principal because agency is not allowed in negotiable instruments.

Question 2

With respect to checks, a bank

is always subject to some residual liability on all checks is honors.

assumes liability for checks, but only for its own customers, not customers presenting checks from other banks.

normally does not assume liability on a check unless it is a certified check, cashier’s check, or a teller’s check.

never takes liability on any check.

Question 3

Leo buys a used car from Violet by giving her a cashier’s check he obtained from First Bank. Using the terminology of the Code, which of the following is TRUE?

Violet accepted the cashier’s check.

Leo accepted the cashier’s check.

First Bank accepted the cashier’s check.

No one accepted the cashier’s check.

Question 4

Ethan hires Lily to do electrical work in his home for $200 but he later discovers that, because of a misunderstanding, Lily only rewired Ethan’s fuse box without rewiring the outlets. Lily agrees to accept $75 in payment and Ethan writes Lily a $75 check with the words “paid in full” on the memo line. Is the check valid as a negotiable instrument?

Yes, if the check was tendered as resolution of a “bona fide dispute”

Yes, because $75 is a reasonable amount to pay an electrician to rewire a fuse box.

No, because this is an accord and satisfaction, which the Code does not recognize.

No, unless Lily is a holder in due course.

Question 5

Caleb buys a used car from Mercury Motors with financing from a note issued by First Finance. Several months later First Finance sells the note to National Bank but does not notify Caleb, who keeps making his payments to First Finance. National Bank demands from Caleb back payment of all of the payments Caleb made to First Finance after the transfer of the note. What should the result be?

Cable must pay National Bank because it is the holder of the note.

Caleb must pay National Bank because it is a holder in due course of the note.

Caleb is not responsible to National Bank because he did not get notice of the transfer of the note.

Caleb is not responsible because he did not consent to transfer of the note.

Question 6

Caleb buys a used car from Mercury Motors with financing from a note issued by First Finance. Several months later First Finance sells the note to National Bank and National Bank sends to Caleb a demand that he sends all future payments to National Bank. Caleb contacts First Finance and it denies there was any transfer of the note to National Bank. What can Caleb do?

nothing: Caleb must simply pay National Bank.

request reasonable proof of the transfer from National Bank, if the state has adopted the 2002 Code amendments.

ignore the notice from National Bank and keep paying First Finance.

suspend payment until First Finance and National Bank sort it out.

Question 7

Maddox writes a check for $300 to Rachel for some landscaping work Rachel did on Maddox’s home. The next day Rachel indorses the check as payment to Tabitha for some landscaping equipment. Six months later Tabitha indorses the check to Brandon who indorsers it as well, and then takes the check to First Bank where the bank dishonors the check (refuses payment). The bank notifies no one of the dishonor. Which of the following is FALSE?

If the dishonor and indorsements are effective, then the indorsers become liable on the check.

Tabitha’s indorsement is invalid because the check did not enter into collection within 30 days of the indorsement.

The indorsers are discharged because they did not receive notice of the dishonor of the check.

Brandon’s indorsement is invalid because the check was already transferred.

Question 8

Which of the following is NOT a major source of potential liability under the Code?

Co-signing on a note without knowing the creditworthiness of the borrower.

Leaving blanks on a negotiable instrument for later completion.

Failing to indicate agency status when signing a negotiable instrument.

Signing a draft “without recourse.”

Question 9

Ian takes out a loan from First Bank as a borrower and Horatio signs the promissory note as an indorser. Horatio writes next to his signature “as guarantor,” which makes him

primarily liable for the debt, ahead of Ian.

in a position to require First Bank to seek payment from Ian first upon default.

liable along with Ian to the extent that First Bank can choose which person to bring a claim against in the event of a default on the note.

not responsible for Ian’s debt.

Question 10

Wendell is a secondary obligor on a note and he could conceivably be released from obligation on the note for all but WHICH of the following reasons?

The bank changes the interest rate and payments under the note.

The bank grants an extension of time to the principal obligor.

The bank transfers the note to another bank.

The bank claims an impairment of collateral used to secure the note.