1. CHAPTER 23 NEGOTIABLES: LIABILITY AND DISCHARGE DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8 th Ed.)

2. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 2 BASIC CONCEPTS Commercial paper as substitute for money will eventually be converted to money. Commercial paper as substitute for money will eventually be converted to money. Proper presentment to maker or drawer usually results in payment and cancellation. Proper presentment to maker or drawer usually results in payment and cancellation. When maker or drawer refuses to pay presented instrument they dishonor it. When maker or drawer refuses to pay presented instrument they dishonor it. When dishonor occurs creates secondary liability. When dishonor occurs creates secondary liability. Issue of discharge arises. Issue of discharge arises.

3. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 3 THE CHAINS OF LIABILITY Liability, when used with negotiable instruments, refers to obligation to pay negotiable instrument. Liability, when used with negotiable instruments, refers to obligation to pay negotiable instrument. Several different types of liability in commercial paper. Several different types of liability in commercial paper. Obligation to pay is based on either primary or secondary liability. Obligation to pay is based on either primary or secondary liability.

4. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 4 THE CHAINS OF LIABILITY Primary Liability. Primary Liability. – Every negotiable instrument has primary party normally expected to pay instrument. – Every negotiable instrument has secondary parties who face conditional liability if primary party refuses to pay.

5. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 5 THE CHAINS OF LIABILITY Primary Liability of Certain Parties: Primary Liability of Certain Parties: – Maker of note has primary liability to pay holder. – When maker signs it, maker primarily liable to holder or subsequent holders. – Issuer of cashier’s check or other draft drawn on drawer has primary liability to pay. – Upon acceptance, drawee has primary liability to pay accepted instrument. – Prior to acceptance, drawer not liable to payee or holder to pay.

6. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 6 THE CHAINS OF LIABILITY Secondary Liability. Secondary Liability. – Secondary parties agree to pay instrument. – Is a conditional liability. – Secondary parties held liable if conditions are satisfied. – Secondary party waives the need for the conditions to be met.

7. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 7 THE CHAINS OF LIABILITY Secondary Liability (Cont’d). Secondary Liability (Cont’d). – Secondary party liable if: Proper presentment made of instrument. Proper presentment made of instrument. Primary party dishonors instrument upon presentment. Primary party dishonors instrument upon presentment. Notice of dishonor is properly given to secondary party. Notice of dishonor is properly given to secondary party. – Types of potential secondary liability: Contractual; or Contractual; or Warranty. Warranty.

8. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 8 ESTABLISHING LIABILITY Presentment. Presentment. – Demand for acceptance or for payment of a negotiable instrument. To pay the instrument made to the drawee or a party obliged to pay. To pay the instrument made to the drawee or a party obliged to pay. To accept a draft made to the drawee. To accept a draft made to the drawee. – Holder is to make presentment at proper place and within reasonable time. – Presenting party must satisfy reasonable demands or requests of the primary party.

9. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 9 ESTABLISHING LIABILITY Presentment (Cont’d). Presentment (Cont’d). – Must be made before a dishonor can be shown. – Made through mail, it occurs when mail is received. – Persons receiving presentment have protection. Can require proof. Can require proof. Can require presenter to show them the instrument. Can require presenter to show them the instrument. Demand reasonable identification of presenter. Demand reasonable identification of presenter. Require a showing of authority to make the presentment. Require a showing of authority to make the presentment.

10. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 10 ESTABLISHING LIABILITY Acceptance. Acceptance. – Drawee accepts by signing it. – By signing drawee agrees to honor the instrument. – Fixes the primary liability of the drawee. – Can be made even if instrument is incomplete. – Must be made for the instrument as presented.

11. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 11 ESTABLISHING LIABILITY Dishonor. Dishonor. – When proper presentment made and acceptance or payment is refused. – Also occurs when presentment is excused and instrument not accepted or paid. – Failure of primary party to accept instrument within proper time. – Refusal by primary party to accept instrument. – Denial by primary party, activates secondary liability of indorser and drawer.

12. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 12 ESTABLISHING LIABILITY Notice. Notice. – To establish secondary liability. – Given to any/all persons secondary liable on the instrument. – May be given by any person who has received notice. – Given in any commercially reasonable means. – Must be given in reasonable time.

13. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 13 ESTABLISHING LIABILITY Notice. Notice. – Notice regarding instrument taken for collection must be given: By bank by midnight deadline or when it receives notice of dishonor. By bank by midnight deadline or when it receives notice of dishonor. By anyone else within 30 days following day on which person receives notice of dishonor. By anyone else within 30 days following day on which person receives notice of dishonor. – Failure to give notice release all secondary parties except drawer from liability.

14. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 14 ESTABLISHING LIABILITY Notice. Notice. – Delay in making presentment excused if: Person entitled to make presentment can’t with reasonable diligence make presentment. Person entitled to make presentment can’t with reasonable diligence make presentment. Maker/acceptor repudiated an obligation to pay instrument. Maker/acceptor repudiated an obligation to pay instrument. Instrument state presentment not necessary. Instrument state presentment not necessary. Drawer/indorser obligation enforced has waived presentment. Drawer/indorser obligation enforced has waived presentment. Drawer instructed drawee not to pay or accept. Drawer instructed drawee not to pay or accept.

15. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 15 ESTABLISHING LIABILITY Notice (Cont’d). Notice (Cont’d). – Dishonor excused if: Terms of instrument, notice not necessary to enforce the obligation of a party to pay. Terms of instrument, notice not necessary to enforce the obligation of a party to pay. Party whose obligation is enforced waived notice of dishonor. Party whose obligation is enforced waived notice of dishonor. Presentment was waived, which constitutes a waiver of notice. Presentment was waived, which constitutes a waiver of notice.

16. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 16 TYPES OF LIABILITY Negotiable instrument is contract with special treatment under the law. Negotiable instrument is contract with special treatment under the law. Person not liable of instrument unless: Person not liable of instrument unless: – Person signed instrument. – Person is represented by an agent who signed the instrument. – Signature is binding on the represented person. Type of liability depends on capacity in which it was signed. Type of liability depends on capacity in which it was signed.

17. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 17 INDORSEMENT LIABILITY Indorsement Liability. Indorsement Liability. – Indorser promises that upon dishonor and notice indorser will pay instrument as indorsed to any subsequent holder. – Two parties may be involved in contractual liability on commercial paper: The accommodation party; or The accommodation party; or The guarantor. The guarantor.

18. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 18 INDORSEMENT LIABILITY Indorsement liability (Cont’d). Indorsement liability (Cont’d). – Two special types of indorsements: Accommodation party. Accommodation party. –Signs instrument in order to benefit another person to instrument. –Lends his name. Guarantor. Guarantor. –Unambiguously person guaranteeing collection, rather than guaranteeing the payment of the obligation of another party to the instrument.

19. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 19 WARRANTY LIABILITY Warranty Liability. Warranty Liability. – Person who transfer or present negotiable instruments make certain warranties. – Transfer warranties protect transferee: Warrantor is person entitled to enforce instrument. Warrantor is person entitled to enforce instrument. All signatures are authentic and authorized. All signatures are authentic and authorized. Instrument has not been materially altered. Instrument has not been materially altered. Instrument not subject to defense or claim. Instrument not subject to defense or claim. Warrantor has no knowledge of an insolvency proceedings. Warrantor has no knowledge of an insolvency proceedings.

20. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 20 WARRANTY LIABILITY Warranty Liability (Cont’d). Warranty Liability (Cont’d). – Presentment warranties protect drawee: Warrantor is/was, at time warrantor transferred draft. Warrantor is/was, at time warrantor transferred draft. Draft has not been altered. Draft has not been altered. Warrantor has no knowledge that the signature of the drawer is unauthorized. Warrantor has no knowledge that the signature of the drawer is unauthorized. – Time limit within person claiming damages based on breach of warranty must give notice in order to have maximum protection.

21. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 21 SPECIAL PROBLEMS Forgery or illegal signature has no legal effect. Forgery or illegal signature has no legal effect. Unauthorized signature can be ratified by named person, and becomes effective. Unauthorized signature can be ratified by named person, and becomes effective. Special rules in effect for situations involving: Special rules in effect for situations involving: – Imposters; or – Fictitious payees.

22. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 22 SPECIAL PROBLEMS Imposter. Imposter. – Person who pretends to be intended payee and deceives person into issuing an instrument. Fictitious payee. Fictitious payee. – Person who obtains an instrument that either: Is payable to the order of legitimate person, but one who has no legitimate claim to particular instrument. Is payable to the order of legitimate person, but one who has no legitimate claim to particular instrument. Is payable to a nonexistent person, a “fictitious” payee. Is payable to a nonexistent person, a “fictitious” payee.

23. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 23 DISCHARGEDISCHARGE Removes liability or potential liability on a negotiable instrument. Removes liability or potential liability on a negotiable instrument. Payment. Payment. – Primary party pays the instrument on presentment and cancels it. – Payment will not operate as discharge when: It is made in bad faith to a thief. It is made in bad faith to a thief. To a person holding through or after a thief. To a person holding through or after a thief.

24. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 24 DISCHARGEDISCHARGE Tender of Payment. Tender of Payment. – Party tenders payment in full to a holder when an instrument is due, or later, and holder refuses payment. Cancellation and Renunciation. Cancellation and Renunciation. – Holder may discharge party by canceling party’s signature on instrument or canceling instrument itself. – Renounces his or her rights on instrument in a signed writing.

25. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 25 DISCHARGEDISCHARGE Impairment. Impairment. – Holder elects to release party from liability on the instrument. – Holder releases a prior party or collateral securing payment. – Holder also discharges some or all of secondary parties on instrument.

26. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 26 DISCHARGE Other Discharges. Other Discharges. – Other acts may cause a complete or partial discharge of liability.