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Exam 28: Liability, Defenses, and Discharge

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Question 31

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"Banking Problems." Constance is a loan officer at ABC Bank. Being somewhat dishonest, Constance tells Henry, a customer of the bank, who is wealthy and rarely checks the status of outstanding loans and balances that she is collecting money for a local animal shelter. She asks him to sign a pledge that he will contribute $50 to the animal shelter. In fact, through covering pertinent terms of the document, she had him sign a promissory note made out to her for $5,000, which she later endorsed to Richard. After leaving the bank, Henry proceeded to one of his businesses, a used car dealership. Taylor comes in to purchase a used car. He and Henry agree that Taylor will purchase a car for $3,000. Martha also comes in, and she and Henry agree that she will purchase a used car for $4,000. Both Taylor and Martha make out promissory notes payable to Henry. At the end of the day, Henry is looking through the notes and decides that Taylor's was mistakenly made out for $3,000 when it should have been $3,500. Henry mistakenly, but honestly, believes that the deal was for $3,500. Therefore, he changes the note to reflect that Taylor owes $3,500. Henry, on the other hand, simply does not like Martha. He decides that $4,000 was not enough for the car. Accordingly, he changes the note to $4,500. -Assuming that Henry admits the modification but it is not considered fraudulent, which of the following is true regarding Taylor's liability on the note?

A) Because of the alteration, Taylor is not liable for any amounts under the promissory note.
B) Taylor's obligation will be enforced only to the amount of $3,000 if payment is to be made to Henry; but in the event the note is negotiated to another holder, Taylor is liable for $3,500.
C) Taylor's obligation will be enforced only to the amount of $3,000 if payment is to be made to Henry; but in the event the note is negotiated to a holder in due course, Taylor is liable for $3,500.
D) Unless Taylor has a written document from Henry to the effect that the agreement was for $3,000 only, Taylor and Henry will be legally required to split the remainder with Taylor being held responsible for $3,250.
E) Taylor is liable for $3,000 regardless of whether or not Henry has negotiated the note to another party.

F) C) and D)
G) A) and E)

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Question 32

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A party who is primarily liable for an instrument must pay without resorting to any other party.

A) True
B) False

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Question 33

Multiple Choice

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"Banking Problems." Constance is a loan officer at ABC Bank. Being somewhat dishonest, Constance tells Henry, a customer of the bank, who is wealthy and rarely checks the status of outstanding loans and balances that she is collecting money for a local animal shelter. She asks him to sign a pledge that he will contribute $50 to the animal shelter. In fact, through covering pertinent terms of the document, she had him sign a promissory note made out to her for $5,000, which she later endorsed to Richard. After leaving the bank, Henry proceeded to one of his businesses, a used car dealership. Taylor comes in to purchase a used car. He and Henry agree that Taylor will purchase a car for $3,000. Martha also comes in, and she and Henry agree that she will purchase a used car for $4,000. Both Taylor and Martha make out promissory notes payable to Henry. At the end of the day, Henry is looking through the notes and decides that Taylor's was mistakenly made out for $3,000 when it should have been $3,500. Henry mistakenly, but honestly, believes that the deal was for $3,500. Therefore, he changes the note to reflect that Taylor owes $3,500. Henry, on the other hand, simply does not like Martha. He decides that $4,000 was not enough for the car. Accordingly, he changes the note to $4,500. -Which of the following is the most likely result if Henry refuses payment on the promissory note that was endorsed to Richard claiming that he never signed it?

Set forth the eight real defenses and explain their significance.

Which of the following is the general rule when it is not possible to determine the status of the signer of an instrument?

When a bank accepts a check, it is primarily liable for the amount of the check.

Which of the following results in liability for the principal because the principal approved of an unauthorized agent's signature?

As long as an agent is authorized to sign a negotiable instrument on behalf of a principal, the agent's signature can create liability for the principal.

"Hot Dress." Doreen writes a check for a dress to Hot Dresses Inc., a small specialty shop whose shares are owned primarily by Betty. Betty decided to go on an extended European vacation and temporarily closed down the shop the day after Doreen wrote the check. When Betty returned, she had a number of other things to do and did not take Doreen's check and some other checks to the bank for three months. Betty was independently wealthy and only ran the shop as a hobby, so she had not been in need of funds. When Betty finally took Doreen's check to the bank, Betty requested that her bank, ABC Bank, deposit the check into her account. When ABC Bank, however, requested payment from Doreen's bank, XYZ Bank, the check was dishonored because of insufficient funds in Doreen's account. Although Betty did not particularly need the funds, she did not like to feel as if she had been cheated; therefore, she demanded that Doreen make the check good. -As defined in the UCC, under which of the following circumstances would presentment have occurred?

Zachary, who has been authorized to write a check from a company account to pay employees, draws bonus checks from the company account for five fictitious employees, endorses the checks in their names, and deposits those into his own bank account. Which of the following is true regarding whether the company will be required to take the loss on the checks?

Which of the following accepts and signs a draft to agree to pay the draft when it is presented?

When, if ever, will a party's negligence block a party from escaping liability for an unauthorized signature?

"Run Around." Millie issues a promissory note to Bob. Bob endorses the note and transfers it to Anne. Anne endorses the note and transfers it to Henry. Henry presents the note to Millie for payment. When Henry presents the note to Millie, she asks him for reasonable identification. He did not have any identification with him and told her that she had no right to dishonor the instrument. Millie continued to insist, so finally, on the same day, Bob obtained clear identification and presented it to her. Nevertheless, even with proper identification, Millie refused to pay the note, claiming that she lacked the funds with which to do so. After properly providing notification of dishonor to both Anne and Bob, Henry requested that Anne pay the note, but she told him that he would have to get his money from Bob. Henry has been trying to call Bob for 35 days, but Bob did not return his telephone calls. Henry is exasperated; and within 40 days of when Millie refuses payment, he notifies Millie, Bob, and Anne that the promissory note has been dishonored by Millie and that he is asserting liability on the note against all of them. Millie calls him up and says that she never dishonored the note, she simply lacks the funds with which to immediately pay and thinks that he should seek recovery elsewhere. -Which of the following is the likely result if Henry sues Anne, Bob, and Millie?

"Hot Dress." Doreen writes a check for a dress to Hot Dresses Inc., a small specialty shop whose shares are owned primarily by Betty. Betty decided to go on an extended European vacation and temporarily closed down the shop the day after Doreen wrote the check. When Betty returned, she had a number of other things to do and did not take Doreen's check and some other checks to the bank for three months. Betty was independently wealthy and only ran the shop as a hobby, so she had not been in need of funds. When Betty finally took Doreen's check to the bank, Betty requested that her bank, ABC Bank, deposit the check into her account. When ABC Bank, however, requested payment from Doreen's bank, XYZ Bank, the check was dishonored because of insufficient funds in Doreen's account. Although Betty did not particularly need the funds, she did not like to feel as if she had been cheated; therefore, she demanded that Doreen make the check good. -Who among the following was the holder of the check?

If an accommodation party pays a note for an accommodated party, the accommodation party has a right of action against the accommodated party to recover the money paid.

When a party is tricked into signing a negotiable instrument without having a chance to determine that it is, in fact, a negotiable instrument, the party can claim _______.

"Run Around." Millie issues a promissory note to Bob. Bob endorses the note and transfers it to Anne. Anne endorses the note and transfers it to Henry. Henry presents the note to Millie for payment. When Henry presents the note to Millie, she asks him for reasonable identification. He did not have any identification with him and told her that she had no right to dishonor the instrument. Millie continued to insist, so finally, on the same day, Bob obtained clear identification and presented it to her. Nevertheless, even with proper identification, Millie refused to pay the note, claiming that she lacked the funds with which to do so. After properly providing notification of dishonor to both Anne and Bob, Henry requested that Anne pay the note, but she told him that he would have to get his money from Bob. Henry has been trying to call Bob for 35 days, but Bob did not return his telephone calls. Henry is exasperated; and within 40 days of when Millie refuses payment, he notifies Millie, Bob, and Anne that the promissory note has been dishonored by Millie and that he is asserting liability on the note against all of them. Millie calls him up and says that she never dishonored the note, she simply lacks the funds with which to immediately pay and thinks that he should seek recovery elsewhere. -Which of the following is true regarding Henry's entitlement to payment from Millie?

Which of the following is true regarding how an accommodation party may sign an instrument?

When a party signs a negotiable instrument, which of the following is true regarding the position of that party?

Which of the following person signs an instrument to restrict payment of it, negotiate it, or incur liability?