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Exam 27: Liability Defenses and Dischapterarge

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Question 31

True/False

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Timely notice of the dishonor of an instrument that has been properly presented for payment discharges the liability of parties who are secondarily liable on the instrument.

A) True
B) False

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Question 32

Multiple Choice

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Development Corporation obtains a business loan from Equity LLC in exchange for a note signed by the borrower. Equity alters the amount due on the note before selling it to Finance Inc., which takes it in good faith, and in turn sells it to Grande Invest Company. Grande can sue for breach of a warranty on the note

A) none of the choices.
B) when payment of the note becomes due.
C) only if Finance Inc. had reason to suspect the breach.
D) as soon as Grande has reason to know of the breach.

E) All of the above
F) A) and C)

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Question 33

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Although the purpose of bankruptcy is to settle finally all of the insolvent party's debts, a discharge in bankruptcy is not a valid defense against payment on an instrument to an HDC.

Rau obtains a loan from Security Funds and signs a note for the amount payable to the lender. Security Funds indorses the note and sells it to Tomas. With the intent to cancel Rau's obligation on the note, Tomas writes "Paid" across its face. This discharges the liability of

Discharge from liability on an instrument cannot occur if a holder impairs another party's right of recourse-right of reimbursement-on the instrument.

Faro is an agent authorized to sign negotiable instruments on behalf of Global Supply Inc. To protect against potential liability on a note signed on the corporation's behalf, Faro should

Bass signs a note "payable to the order of Credit Bank." Unless Bass has a valid defense against payment, his liability on this note is

Equity Credit Company has in its possession an instrument dated May 1, 2019. The instrument is payable to the order of First Choice Moving & Storage Company "on June 1, 2020," for $5,000. In the upper left corner is an address for Greater Metro Development Corporation-10 Corporate Park Avenue, Chicago, Illinois-and in the lower right corner is the signature of "Hilltop Investments, Inc., By Ida, President." In the lower left corner is stamped "ACCEPTED: Greater Metro Development Corporation by John, President, May 5, 2019." On the back is the signature of "First Choice Moving & Storage Company by Kathleen, President." Who, if anyone, is primarily liable on this instrument on May 1? On May 5? Who, if anyone, is secondarily liable on this instrument?

Generally, when an indorsement is unauthorized, the burden of loss falls on the first party to take the instrument.

The lack or failure of consideration is a personal defense and can be used to avoid payment to an ordinary holder, an HDC, and a holder through an HDC.

Warranty liability arises in the negotiation of an instrument only when a transferor indorses it.

Every party who signs a negotiable instrument is potentially liable for payment of that instrument when it comes due.

A consumer who signs a note to buy a defective product continues to be liable on the note to an HDC even if the consumer returns the faulty product to the seller.

Because liability for payment on a negotiable instrument is immediate when the instrument is signed or issued, no action by the holder is required.

A person who transfers an instrument for consideration warrants to all subsequent transferees and holders who take the instrument in good faith that all signatures on the item are authentic and authorized.

Leda deceives Merchant Company into signing a note by telling the firm's staff accountant Nano that it is not a note but a receipt for a delivery of goods. In light of Nano's experience and other circumstances, a reasonable review of the instrument would have revealed its nature. Merchant is most likely liable on the note to

Textile Inc. sells goods to United Stores in exchange for a note signed by the buyer. Textile sells the note to Valley Finance Company. In this situation, transfer warranties arise because

Drill Bit Company issues a check drawn on East Bank made payable to Faux Products for a shipment of Genuine-brand machine parts. Drill Bit discovers that the goods are counterfeit and orders East Bank not to pay the check. Meanwhile, Faux negotiates the check to Haul-Away Trucking, which takes it in good faith, for value, and unaware of Faux's fraud. Entitled to payment on the check is

The transfer of an instrument, with or without indorsement, extends warranty liability to any subsequent holder who takes the instrument in good faith.

An investor who signs a note on behalf of a business is primarily liable and therefore has no right to reimbursement from the payee if the investor pays.