clark 11e tb a ch26

265

Chapter 26

Liability, Defenses, and Discharge

TRUE/FALSE QUESTIONS

A1. A signature may be typed.

ANSWER: T PAGE: 523 TYPE: =NAT: AACSB Reflective AICPA Legal

A2. A signature may be handwritten.


A3. Signature liability extends to any person who signs a negotiableinstrument.

ANSWER: T PAGE: 523 TYPE: =NAT: AACSB Analytic AICPA Legal

A4. A maker is secondarily liable on an instrument.

ANSWER: F PAGE: 524 TYPE: =NAT: AACSB Analytic AICPA Legal

A5. A drawer’s liability does not arise until presentment and notice ofdishonor.


A6. To properly present a draft for payment, the holder must present it to thedrawee.

ANSWER: T PAGE: 524 TYPE: +NAT: AACSB Analytic AICPA Legal

266 TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS

A7. Dishonor occurs if payment of an instrument is refused despite properand timely presentment.

ANSWER: T PAGE: 525 TYPE: NNAT: AACSB Analytic AICPA Legal

A8. In general, an agent must clearly indicate that he or she is signing onbehalf of a clearly named principal to bind the principal.


A9. An authorized agent may be personally liable on an instrument if theagent signs the agent’s name but not the principal’s name.


A10. An unauthorized signature binds the person whose name is forged.


A11. A drawer who is induced by an imposter to issue a check in the name ofan impersonated payee can avoid payment on the check to an innocentholder.


A12. Transfer warranties attempt to impose liability on the party who dealtmost closely to the last party to take an instrument.

ANSWER: F PAGE: 530 TYPE: NNAT: AACSB Analytic AICPA Legal

A13. Presentment warranties protect the person to whom an instrument ispresented for payment.

ANSWER: T PAGE: 531 TYPE: NNAT: AACSB Reflective AICPA Legal

A14. Presentment warranties can be disclaimed with respect to checks.

ANSWER: F PAGE: 531 TYPE: NNAT: AACSB Analytic AICPA Legal

CHAPTER 26: LIABILITY, DEFENSES, AND DISCHARGE 267

A15. Personal defenses defeat the claims of HDCs.


A16. A person whose name is forged on an instrument is liable to pay only aholder in due course the value of the forged instrument.

ANSWER: F PAGE: 533 TYPE: NNAT: AACSB Reflective AICPA Legal

A17. An alteration of an instrument is material if it changes the termsbetween two parties in any way.

ANSWER: T PAGE: 534 TYPE: NNAT: AACSB Analytic AICPA Legal

A18. The defense of illegality is always a personal defense.


A19. When the drawee of an unaccepted draft or check pays to a holder theamount due in full, all parties to the instrument are discharged.


A20. Accidental destruction of a negotiable instrument cancels it.

ANSWER: F PAGE: 539 TYPE: =NAT: AACSB Reflective AICPA Legal

MULTIPLE CHOICE QUESTIONS

A1. Ethel signs a note “payable to the order of Fidelity Bank.” Fidelityindorses the note in blank and negotiates it to Ghani, who sells it toHuck. Liability associated with the transfer of the note from Ghani toHuck is

a. fitness.b. quality.c. signature.d. warranty.

ANSWER: D PAGE: 523 TYPE: NNAT: AACSB Reflective AICPA Legal


A2. Puck signs a check “pay to the order of Quik Mart” drawn on Puck’saccount in Regional Bank. Puck shows the check to Silky, who agreesthat the signature is Puck’s and that Quik Mart is owed the amount thatthe check represents. Quik Mart signs the back of the check. Liability onthis check extends to

a. Puck, Quik Mart, and Regional Bank.b. Puck and Quik Mart only.c. Puck and Silky only.d. Silky only.

ANSWER: B PAGE: 523 TYPE: NNAT: AACSB Reflective AICPA Legal

A3. Toby signs a note “payable to the order of United Credit Union.” UnlessToby has a valid defense against payment, Toby’s liability on this note is

a. immediate.b. imposed only after payment is demanded.c. postponed until the note is dishonored by United Credit Union.d. suspended until payment is due.

ANSWER: A PAGE: 523 TYPE: NNAT: AACSB Reflective AICPA Legal

A4. Nero signs a check “pay to the order of Olive” drawn on Nero’s account inPlum Bank. Olive signs the back of the check. Secondary liability on thischeck extends to

a. Nero and Olive only.b. Nero and Plum Bank only.c. Nero only.d. Plum Bank only.

ANSWER: A PAGE: 524 TYPE: NNAT: AACSB Reflective AICPA Legal

A5. Dirk is the maker of a note, on which Erv is secondarily liable. FriendlyCredit Company is the current holder of the note. Erv will be obligated topay the note if

a. Dirk defaults on the note.b. Friendly Credit breaches a transfer warranty.c. Friendly Credit negotiates the note to a third party.d. Friendly Credit presents the note for payment.

ANSWER: A PAGE: 524 TYPE: =NAT: AACSB Reflective AICPA Legal


Fact Pattern 26-1A (Questions A6–A7 apply)Roy writes a check on his account at State Bank to Teri to pay a debt. Terinegotiates the check by indorsement to Uma, who presents it for payment toVital Bank.

A6. Refer to Fact Pattern 26-1A. Teri is

a. not liable for payment under any circumstances.b. primarily liable.c. secondarily liable.d. simultaneously liable.

ANSWER: C PAGE: 524 TYPE: +NAT: AACSB Reflective AICPA Legal

A7. Refer to Fact Pattern 26-1A. If State Bank dishonors the check, Uma canobtain payment from Teri

a. if Uma timely notifies Teri.b. only if Roy refuses to pay the check.c. under any circumstances.d. under no circumstances.

ANSWER: A PAGE: 524 TYPE: +NAT: AACSB Reflective AICPA Legal

A8. Ed acquires a check drawn on First National Bank. To present the checkfor payment, he may use any commercially reasonable

a. electronic or written means of communication only.b. oral or written means of communication only.c. electronic, oral, or written means of communication.d. written means of communication only.

ANSWER: C PAGE: 524 TYPE: =NAT: AACSB Reflective AICPA Legal

A9. To borrow the money to buy a car, Klaus signs a note “payable to theorder of Lake City Auto Financing.” Minnie cosigns the note toguarantee the repayment of the loan. Minnie’s liability on this note is

a. lateral.b. primary.c. secondary.d. tertiary.



A10. Super Company’s agent Tyra is authorized to draw checks on Super’saccount in Unity Bank. The checks are preprinted with Super’s name.Tyra writes a check “pay to the order of Vern [signed] Tyra.” Vernnegotiates the check to Weber, who does not know about the agencyrelationship. If Weber presents the check for payment and Unity Bankdishonors it, liability extends to

a. no one.b. Super and Tyra.c. Super only.d. Tyra only.

ANSWER: c PAGE: 527 TYPE: NNAT: AACSB Reflective AICPA Legal

A11. Call, an employee of Delite Dairy Company, forges the signature of Elin,Delite’s president, on a Delite check and cashes it at First Federal Bank.Elin would ratify Call’s actions by

a. asking First Federal to prosecute Call for forgery.b. discharging Call from Delite ‘s employment.c. entering into a repayment agreement with Call.d. filing criminal charges against Call herself.

ANSWER: C PAGE: 527 TYPE: =NAT: AACSB Reflective AICPA Legal

A12. Rodeo Ranch’s agent Slim is authorized to draw checks on Rodeo Ranch’saccount in Town Bank. Upper Range Corporation is a Rodeo Ranchsupplier. Slim writes a check “pay to the order of Upper Range [signed]Slim,” indorses the check in Upper Range’s name, and deposits it in hisaccount in Verity Bank. If Verity Bank collects payment, the ultimateparty most likely to suffer the loss is

a. no one.b. Rodeo Ranch.c. Town Bank.d. Upper Range.



A13. Dina, an accountant for Eagle, Inc., issues company checks payable tononexistent persons drawn on Eagle’s account at First State Bank. Dinaindorses the checks and deposits them in her account. Eagle discoversthe theft and demands that First recredit its account. First’s bestdefense is that

a. Dina was not authorized to issue the checks.b. Eagle was in a better position than First to prevent the theft.c. First did not know that the checks were not to be paid.d. the checks were the property of Eagle, not First.

ANSWER: B PAGE: 528 TYPE: =NAT: AACSB Reflective AICPA Legal

A14. City Bank issues to Dave a cashier’s check. Evan steals the check, forgesDave’s signature, adds his own signature, and cashes it at First CountyBank, which obtains payment from City. Dave discovers the theft and ob-tains a replacement check from City, which sues First. The court willlikely rule in favor of

a. City, because First breached the presentment warranty that thereare no unauthorized indorsements on the check.

b. City, because First can recover the money from Evan.c. First, because City breached the presentment warranty that there

are no unauthorized indorsements on the check.d. First, because City can recover the money from Dave.


A15. Opal asks Paolo, who does not understand English, to sign what Opalsays is an application to open a bank account. In fact, the “application” isa note. If sued on the note by an HDC, Paolo’s best defense would be

a. extreme duress.b. fraud in the execution.c. fraud in the inducement.d. mistake.



A16. Chris convinces Dion, who does not understand English, to sign a $1,000note that Dion believes is an application for a credit card. Chrisnegotiates the note to EZ Finance Company. Dion

a. can avoid payment on the note even if EZ is an HDC.b. can avoid payment on the note only if EZ is a holder.c. must pay EZ the amount that it paid for the note.d. must pay the note in full.


A17. Quincy signs a check payable to Regal Investors, Inc., and gives it toRegal, leaving the amount blank but authorizing Regal to fill in thecheck for $1,000. Regal fills in $1,500 and negotiates the check to StateBank, to whom Regal owes $1,500. State Bank, an HDC, can enforce thecheck for

a. $0.b. $500.c. $1,000.d. $1,500.

ANSWER: D PAGE: 534 TYPE: =NAT: AACSB Reflective AICPA Legal

A18. Dandy Furniture Store borrows $100,000 at 6 percent interest fromEasy Loan Company and signs a promissory note for that amount. Easychanges the amount of the note to $120,000 and increases the rate to 8percent. Easy materially altered the note when it changed

a. neither the amount nor the interest rateb. the amount and the interest rate.c. the amount only.d. the interest rate only.



A19. Laptop Assembly Company gives a $3,000 promissory note to My-T-FastDelivery Service to deliver a load of computer chips to Laptop’s plant.The chips are contaminated during transit, and are useless to Laptop ondelivery. Laptop’s best defense to payment on the note is

a. breach of warranty.b. failure of consideration.c. illegality.d. nondelivery of an instrument.


A20. Pritty Products sells shoddy goods to consumers for promissory notes,and sells the notes to Quik Finanz Company. Pritty Products goes out ofbusiness. The consumers may be able to avoid payment on the notesunder

a. Article V of the U.S. Constitution.b. FTC Rule 433.c. the shelter principle.d. UCC Article 3.


ESSAY QUESTIONS

A1. Dale issues a check for $4,000, dated June 1, to Evelyn. The check isdrawn on First Federal Bank. Evelyn indorses the check and transfers itto Gene. What will trigger the liability of Dale and Evelyn on the check?

ANSWER: In this question, Dale and Evelyn are secondarily liable par-ties. A party who is secondarily liable on an instrument promises to payit only if the following events occur: (1) the instrument is properly andtimely presented; (2) the instrument is dishonored; and (3) notice of dis-honor is given in a timely manner to the party. Thus, to trigger Dale andEvelyn’s liability, Gene will need to properly and timely present thecheck for payment to First Federal, which would have to dishonor theinstrument, and Gene would then have to give timely notice to Dale andEvelyn.

PAGES: 524–526 TYPE: =NAT: AACSB Reflective AICPA Decision Modeling


A2. Ian transfers a note, for consideration, to Jock by blank indorsement anddelivery. Jock transfers the note to Kelly, who takes it in good faith.What does Ian warrant to Kelly?

ANSWER: Any person who transfers an instrument for considerationmakes certain warranties to the transferee and, if the transfer is by in-dorsement, to all later transferees and holders who take the instrumentin good faith. These are referred to as transfer warranties. In this prob-lem, Ian warrants to Kelly that he is entitled to enforce the note, all sig-natures are authentic and authorized, the note has not been altered, thenote is not subject to a defense or claim that can be asserted against him,and he has no knowledge of any insolvency proceedings against themaker.

PAGES: 530–531 TYPE: =NAT: AACSB Reflective AICPA Decision Modeling

clark 11e tb a ch26

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