Q#1:

A draws a bill payable to B or order with X, as the drawee. The bill was successively endorsed to C, D,
E and F, holder. X does not pay and F has duly protested non-payment. Y pays for the honor of C.
Which of the following statement is wrong?
a. D is discharged.
b. E is discharged.
c. C is discharged.
d. Y can ask reimbursement from A.
Answer: C
All parties subsequent to the party whose honor it is paid are discharged but the payor for honor is
subrogated for, and succeeds to both the rights and duties of the holder as regards for the party
whose honor he pays and all the parties liable to the latter.
Q#2:
When an endorser waives presentment and notice of dishonor, he increases his liability. His
endorsement is:
a. Facultative endorsement
b. Qualified endorsement
c. Alternative endorsement
d. Restrictive endorsement
Answer: A
A facultative endorsement is one where the indorser enlarges his liability by waiving the usual deman
and notice of dishonor.
Q#3:
Ariel issued a note to Brando. There was a total failure of consideration. Brando issued the note for
consideration to Cecil who is a holder in due course. Cecil indorsed the note to David who knew of the
failure of consideration. Can David successfully collect from Ariel?
a. No, because David knew the failure of consideration.
b. No, although David acquired the rights of Cecil, a holder in due course and he was not a party to
any illegality.
c. Yes, because David acquired the note for consideration.
d. No, because David is not a holder in due course.
Answer: C
Sec. 58 of Negotiable Instrument Law provides that in the hands of any holder other than the holder in
due course, the negotiable instrument is subject to any defenses as if it were non-negotiable. But a
holder who derives through a holder in due course and who is not a party to any fraud or illegality
affecting the instrument, has all the rights of such former holder in respect of all parties prior to the
latter.
David, a holder in due course, may go against Ariel beacuse of Sec. 58. David acquired all the rights of
Cecil, a holder in due course. It is worth noting the David acquired the rights of Cecil because he was
not a party to fraud; otherwise, he would be disqualified.

Marla is not a holder in due course if she takes an instrument:

(a) believing that the underlying contract was honest, although it turned out to be
dishonest.
(b) That is a consumer credit contract
(c) That appeared commercially reasonable when made but turned out to be
dishonest.
(d) All of the above.
Answer: B.
4. CPA QUESTION In order to negotiate bearer paper, one must:
(a) Indorse the paper
(b) Indorse and deliver the paper with consideration
(c) Deliver the paper
(d) Deliver and indorse the paper
Answer: C. CPA Examination, November 1987, #47.
5. CPA QUESTION Bond fraudulently induced Teal to make a note payable to Wilk, to
whom Bond was indebted. Bond delivered the note to Wilk. Wilk negotiated the
instrument to Monk, who purchased it with knowledge of the fraud and after it was
overdue. If Wilk qualifies as a holder in due course, which of the following
statements is correct?
(a) Monk has the standing of a holder in due course through Wilk.
(b) Teal can successfully assert the defense of fraud in the inducement against
Monk.
(c) Monk personally qualifies as a holder in due course.
(d) Teal can successfully assert the defense of fraud in the inducement against Wilk.
Answer: A. Because of the shelter rule. CPA Examination, May 1990, #38