Chapter 24 Liability, Defenses, and Discharge

Signature Liability for Negotiable Instruments Signature liability: Liability in which a person cannot be held contractually liable on a negotiable instrument unless his or her signature appears on the instrument Also called contract liability 24-2 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Signature Liability for Negotiable Instruments Signer: A person signing an instrument who acts in the capacity of: A maker of notes or certificates of deposit A drawer of drafts or checks A drawee who certifies or accepts checks or drafts An indorser who indorses an instrument An agent who signs on behalf of others An accommodation party 24-3 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Signature Liability for Negotiable Instruments Signature: Any name, word, or mark used in lieu of a written signature Any symbol that is Handwritten Typed, printed, stamped, or made in almost any other manner, and Executed or adopted by a party to authenticate a writing 24-4 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Primary Liability for Negotiable Instruments Primary liability: Absolute liability to pay a negotiable instrument, subject to certain universal defenses Makers of promissory notes and CDs have primary liability for the instrument unconditionally promise to pay amount stipulated in the note when due Are absolutely liable to pay the instrument, subject only to certain universal defenses 24-5 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Primary Liability for Negotiable Instruments No party is primarily liable when check or draft is issued If drawee accepts a draft or check, the drawee is primarily liable Check accepted when certified by bank Certification discharges drawer and all prior indorsers The issuer of a cashier’s check is primarily liable on the instrument 24-6 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Secondary Liability for Negotiable Instruments Secondary liability: Liability on a negotiable instrument that is imposed on a party only when the party primarily liable on the instrument defaults and fails to pay the instrument when due Liability is similar to that of a guarantor of a simple contract Unqualified indorsers: Those who are secondarily liable on negotiable instruments they endorse 24-7 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Secondary Liability for Negotiable Instruments Qualified indorsers: Those who disclaim liability and are not secondarily liable on instruments they endorse Presentment: A demand for acceptance or payment of an instrument made upon the maker, acceptor, drawee, or other payer by or on behalf of the holder Notice of dishonor: The formal act of letting the party with secondary liability to pay a negotiable instrument know that the instrument has been dishonored 24-8 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Secondary Liability for Negotiable Instruments Requirements for imposing secondary liability The instrument is properly presented for payment The instrument is dishonored Notice of the dishonor is timely given to the person to be held secondarily liable on the instrument 24-9 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Secondary Liability for Negotiable Instruments Accommodation party: A party who signs an instrument and lends his or her name (and credit) to another party to the instrument Liability of an accommodation party Guarantee of payment: The accommodation party is primarily liable on the instrument Guarantee of collection: The accommodation party is secondarily liable on the instrument 24-10 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Secondary Liability for Negotiable Instruments Agent’s signature Principal is bound if the agent signs either or both names Agent is not liable if signature shows that the agent signed on behalf of the principal Agent is liable if he or she signed only his or her name and cannot show that parties intended to bind only principal Principal is not liable for unauthorized signature 24-11 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Forged Negotiable Indorsements Forged indorsement: The forged signature of a payee or holder on a negotiable instrument Loss falls on party who first takes forged instrument after the forgery Exceptions: Imposter rule: If an imposter forges the indorsement of the named payee, the drawer or maker is liable on the instrument to any person who, in good faith, pays the instrument or takes it for value or for collection 24-12 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Forged Negotiable Indorsements Fictitious payee rule: A rule that states that a drawer or maker is liable on a forged or unauthorized indorsement if the person signing as or on behalf of a drawer or maker intends the named payee to have no interest in the instrument or when the person identified as the payee is a fictitious person 24-13 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Warranty Liability for Negotiable Instruments Certain warranties implied on transferors of negotiable instruments Transfer Warranties Presentment Warranties Warranty liability is imposed whether or not the transferor signed the instrument 24-14 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Transfer Warranties The transferor has good title to the instrument or is authorized to obtain payment or acceptance on behalf of one who does have good title All signatures are genuine or authorized The instrument has not been materially altered No defenses of any party are good against transferor The transferor has no knowledge of any insolvency proceeding against the maker, the acceptor, or the drawer of an unaccepted instrument 24-15 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Presentment Warranties The presenter has good title to the instrument or is authorized to obtain payment or acceptance of the person who has good title The instrument has not been materially altered The presenter has no knowledge that the signature of the maker or drawer is unauthorized 24-16 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Universal (Real) Defenses 24-17 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Personal Defenses 24-18 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Discharge of Negotiable Instruments FTC HDC Rule: A rule adopted by the Federal Trade Commission that eliminates HDC status with regard to negotiable instruments that arise out of certain consumer credit transactions All defences and claims that can be raised by the consumer-purchaser against holders can also be raised against HDCs 24-19 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Discharge of Negotiable Instruments Discharge: Actions or events that relieve certain parties from liability on negotiable instruments Methods of discharge Payment of the instrument Cancellation Impairment of the right of recourse 24-20 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Discharge of Negotiable Instruments Impairment of the right of recourse: A situation in which certain parties are discharged from liability on an instrument if the holder: Releases an obligor from liability Surrenders collateral without consent of the parties who would benefit by it 24-21 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 24-22 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.