216 MODULE 25 COMMERCIAL PAPER

having notice of the defense on the instrument. Answer (c)
is incorrect because the party received the instrument from a
holder in due course and thus becomes a holder through a
holder in due course. Answer (d) is incorrect because this
party personally qualifies as a holder in due course, thereby
obtaining those rights.
33. (c) An unauthorized completion of an incomplete
instrument is a personal defense, and, as such, will
not be
v y of the maker, and ex- 40. (c) Various acts or failures of a holder can cause a
al treme duress are all real defenses which are good against a discharge of prior holders of an instrument. Among these
i HDC. are an unexcused delay in presenting an instrument, cancel-
d lation or renunciation of the instrument, fraudulent or mate-
a 34. (d) Since Cobb left the amount blank on the signed rial alteration, and certification of a check. Notice of dis-
g check and Garson filled it in contrary to Cobb's instructions, honor generally should be given by midnight of the third
ai this is a case of unauthorized completion which is a personal business day after the dishonor or notice of the dishonor.
n defense. Garson then negotiated the check to Josephs who is Banks must give notice by midnight of the next banking day.
st a holder in due course because he gave value for the nego- In either case, answer (c) is correct. Answers (a), (b),
a tiable instrument and took in good faith without notice of and (d) are all incorrect because they are all acts that cause
H any problems. He gave value for the full $1,000 since cash the discharge of prior holders.
D and taking the check for a previous debt are both value un-
C der negotiable instrument law. Therefore, Josephs may col- 41. (d) When a holder procures certification of a check,
. lect the full $1,000 and win over the personal defense that all prior endorsers are discharged. This is true because when
I Cobb has. a bank certifies a check, it has accepted the check and agreed
n to honor it as presented. Answers (a) and (b) are incorrect
f 35. (d) A maker of a note may use real defenses against
a a holder in due course but not personal defenses. Lack of . because although lack of notice of dishonor to other endors-
n consideration is a personal defense. Discharge in bank- ers and late presentment of the instrument will normally
c ruptcy, forgery, and fraud in the execution are all real de- discharge all endorsers, this is not true if the lack of notice
y fenses, which create a valid defense against a holder in due of dishonor or the late presentment is excused. They can be
( course. excused in such cases as the delay is beyond the party's
u control or the presentment is waived. Furthermore in this
n H. Liability of Parties fact pattern, Hopkins endorsed the check "payment guaran-
le teed" and Quarry endorsed it "collection guaranteed." When
s 36. (d) The maker of a note has primary liability on that words of guaranty are used, presentment or notice of dis-
s note. No one has primary liability on a draft or check unless honor are not required to hold the users liable. Answer (c) is
t the drawee accepts it. This is true because although the incorrect because when the maker is insolvent the endorsers
h drawee has been ordered by the drawer to pay, the drawee will likely be sought after for payment.
e
has not agreed to pay unless it accepts the draft or check.
i 42. (d) Since Dodsen did not endorse the note, slhe gave
n transfer warranties and presentment warranties only to the
37. (c) When there are multiple endorsers on a negotia-
st immediate transferee (i.e., Mellon). Mellon gave these war-
ble instrument, each is liable to subsequent endorsers or
r ranties to Bloom. Therefore although Mellon will be liable
u holders. Oral renunciation of a prior party's liability does
to Bloom, Dodsen will not be.
m not discharge that party's liability. Answer (a) is incorrect
e because once the primary party pays on the instrument, all
43. (c) Normally, Bilco could seek collection on the
n endorsers are discharged from liability. Answer (b) is incor-
defaulted note from the previous endorsers, Tamp and
t rect because cancellation of a prior party's endorsement does
Miller. However, in this case, Bilco agreed to release the
is discharge that party's liability. Answer (d) is incorrect be-
collateral underlying this note. Since this materially affects
e cause when a holder intentionally destroys a negotiable in-
the rights of Tamp and Miller to use this collateral, this act
x strument, the prior endorsers are discharged.
releases them. Answer (a) is incorrect because except for
- the release of the collateral, Bilco could have collected from
c 38. (a) When a negotiable instrument is indorsed and a
hislher immediate transferor even without the endorsement.
h specific person is indicated, the instrument is order paper
and can be further negotiated by that person. Note also that Answers (b) and (d) are incorrect because the release of the
a
n payment of the instrument is guaranteed. If the primary collateral releases Tamp and Miller.
g party to the negotiable instrument does not pay, the in-
e 44, (b) When a person endorses a negotiable instrument,
dorser(s) are obligated to pay on the instrument when the
d holder demands payment or acceptance in a timely manner. slhe is normally secondarily liable to later endorsers. This
f liability means that the endorser can be required to make
o 39. (c) Striking out the endorsement of a person dis- good on the instrument. If slhe endorses without recourse,
r charges that person's secondary liability and discharges sub- the endorser can avoid this liability. Answer (a) is incorrect
n sequent endorsers who have already endorsed. This does because the endorser is not liable to prior endorsers anyway
e not, however, discharge any of the prior parties. Therefore, whether or not slhe endorses without recourse. Answer (c)
c in this case, Betty Ash is discharged from secondary liability is incorrect because the endorser still gives the transferor's
e to the later endorsers. warranties with some modification. Answer (d) is incorrect
s because a check is converted into order paper only if the
s endorser also specifies a payee.
a
ri J. Banks
e
s) 45. (b) Under the Revised Article 3, postdating a check
, does not destroy negotiability but makes the check properly
b payable on or after the date written on the check. Although
a the postdated check is not properly payable before the date
n on the instrument, if a bank pays it earlier, it is not liable
k unless the drawer had notified the bank that the check was
r postdated.
u
p
tc
46. (c) If the bank fails to follow a stop payment order,
it is liable to the customer only if the customer had a valid
defense on the check and therefore suffers a loss. Comp
Electronics, the payee, can qualify as a HDC and Stanley
would have to pay anyway despite the stop payment order.
Answer (a) is incorrect because the bank did not cause
Stanley a loss. Answer (b) is incorrect because oral stop
payment orders are valid for fourteen days. Answer (d) is
incorrect because from the facts given, there is no evidence
that Comp Electronics breached the contract.

M. Transfer of Negotiable Documents of Title

47. (c) A trade acceptance is a special type of draft in

which a seller of goods extends credit to the buyer by draw-
ing the draft on the buyer ordering the buyer to make pay-
ment to the seller on a specified date.

48. (c) A negotiable bearer bill of lading is a document

of title that under the UCC allows the bearer the rights to the
goods mentioned including the right to designate who will
receive delivery of the goods. The carrier is required to
deliver the goods to the holder of negotiable bearer bill of
lading or to that holder's designee. The carrier is liable for
any misdelivery for any damages caused.

49. (b) A person who negotiates a negotiable document

of title for value extends the following warranties to the
immediate purchaser: (1) negotiation by the transferor is
rightful and fully effective with respect to the goods it repre-
sents, (2) the transferor has no knowledge of any facts that
would impair the document's validity or worth, and (3) the
document is genuine. However, the transferor of a negotia-
ble warehouse receipt does not necessarily warrant that the
warehouseman will honor the document.

SO. (d) A negotiable warehouse receipt is a document

issued as evidence of receipt of goods by a person engaged
in the business of storing goods for hire. The warehouse
receipt is negotiable if the face of the document contains the
words of negotiability (order or bearer). Answer (a) is in-
correct because the. negotiability of the warehouse receipt is
not destroyed by the inclusion of a contractuallirnitation on
the warehouseman's liability. Answer (b) is incorrect be-
cause to qualify as commercial paper, the instrument must
be payable only in money. If an instrument is payable in
money or by the delivery of goods, it is a nonnegotiable
instrument. Answer (c) is incorrect because the UCC does
not state that only a bonded and licensed warehouseman can
issue a warehouse receipt.