Choice "C" is correct. Although the note was a bearer instrument when made, the last endorsement controls what is necessary for further negotiation. When a special endorsee is named, the instrument must be signed by that endorsee to further negotiate it. Here, Stone named Willard Bank as a special endorsee by writing on the back of the note that it was payable to Willard Bank. Thus, Willard's signature is necessary for further negotiation. UCC 3-204
Choice "d" is incorrect. An endorsement without recourse affects the transferee's rights to hold the endorser liable upon dishonor but it does not affect the transferee's ability to become a holder in due course. An endorsement without recourse does not serve as notice of a defense that will prevent holder in due course status. UCC 3-302
Choice "a" is incorrect. Although Stone cannot be a holder in due course because Stone took the instrument with notice of defenses on the instrument, Willard Bank had no such notice. Willard also fulfilled the other requirements for HDC status: it was holder since the instrument contains all necessary signatures and was properly negotiated by Stone delivery, the bank gave value ($3,900), and nothing in the facts indicates that the bank did not take in good faith. UCC 3-302
Choice "b" is incorrect. Stone's signature was not necessary to negotiate the instrument to Willard Bank. The note was a bearer instrument in the hands of Astor since it was payable to Astor or bearer. Astor did not name Stone as a special endorsee and so no signature was necessary to negotiate the instrument. Delivery alone would have been sufficient. UCC 3-204