1. 19 - 1 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Chapter 24: Liability, Defenses, and Discharge Chapter 24: Liability, Defenses, and Discharge

2. 19 - 2 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Signature Liability A person cannot be held contractually liable on a negotiable instrument unless his or her signature appears on the instrument. The signatures on a negotiable instrument identify those who are obligated to pay it. If it is unclear who the signer is, parol evidence can identify the signer.

3. 19 - 3 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Signature Defined 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

4. 19 - 4 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Signers of instruments sign in many different capacities, including: A maker of notes and certificates of deposit A drawer of drafts and checks A drawee who certifies or accepts checks and drafts An indorser who indorses an instrument An agent who signs on behalf of others An accommodation party

5. 19 - 5 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Primary Liability Makers of promissory notes and certificates of deposit have primary liability for the instrument. Maker unconditionally promises to pay the amount stipulated in the note when due. Makers are absolutely liable to pay the instrument, subject only to certain real defenses.

6. 19 - 6 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Secondary Liability Drawers of checks and drafts and unqualified indorsers of negotiable instruments have secondary liability on the instrument. This liability is similar to that of a guarantor of a simple contract. It arises when the party primarily liable on the instrument defaults and fails to pay the instrument.

7. 19 - 7 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Secondary Liability (continued) Unqualified indorsers have secondary liability. Qualified indorsers have no secondary liability. –They have expressly disclaimed liability. Secondary liability arises from an instrument being: –Properly presented –Dishonored. –Notice being timely given to person who is secondarily liable.

8. 19 - 8 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Accommodation Party A party who signs an instrument and lends his or her name (and credit) to another party to the instrument. The accommodation party is obliged to pay the instrument in the capacity in which he or she signs. –Accommodation Maker – primarily liable –Accommodation Indorser – secondarily liable Liability of accommodation party: –Guarantee of payment –Guarantee of collection

9. 19 - 9 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Other Signatures Agents may sign representing principal. –Principal bound if agent signs either or both names. –Agent not liable if it shows that they signed on behalf of principal. –Agent liable if only his name and cannot show that parties intended to bind principal. Unauthorized signatures do not bind principal.

10. 19 - 10 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Forged Indorsement The Imposter Rule A rule that says if an imposter forges the indorsement of the named payee, the drawer or maker is liable on the instrument and bears the loss. The Fictitious Payee Rule A rule that says that a drawer or maker is liable on a forged or unauthorized indorsement of a fictitious payee.

11. 19 - 11 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Warranty Liability The law implies certain warranties on transferors of negotiable instruments. Warranty liability is imposed whether or not the transferor signed the instrument. There are two types of implied warranties: –Transfer Warranties –Presentment Warranties

12. 19 - 12 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Transfer Warranties Any person transferring an instrument for consideration warrants that: 1. 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. 2. All signatures are genuine or authorized.

13. 19 - 13 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Transfer Warranties (continued) 3. The instrument has not been materially altered. 4. No defenses of any party are good against the transferor. 5. The transferor has no knowledge of any insolvency proceeding against the maker, the acceptor, or the drawer of an unaccepted instrument.

14. 19 - 14 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Presentment Warranties Any person who presents a draft or check for payment or acceptance makes the following warranties to a drawee or acceptor who pays or accepts the instrument in good faith: 1. The presenter has good title to the instrument or is authorized to obtain payment or acceptance of the person who has good title. 2. The instrument has not been materially altered. 3. The presenter has no knowledge that the signature of the maker or drawer is unauthorized.

15. 19 - 15 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Defenses The creation of negotiable instruments may give rise to a defense against its payment. There are two general types of defenses: –Universal Defenses –Personal Defenses A holder in due course (HDC) takes the instrument free from personal defenses but not real defenses.

16. 19 - 16 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Universal Defenses Effect 1.Minority 2.Extreme duress 3.Mental incapacity 4.Illegality 5.Discharge in bankruptcy 6.Fraud in the inception 7.Forgery 8.Material alteration Real defenses can be raised against a holder in due course

17. 19 - 17 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Personal Defenses Effect 1.Breach of contract 2.Fraud in the inducement 3.Mental illness that makes a contract voidable instead of void 4.Illegality of a contract that makes the contract voidable instead of void 5.Ordinary duress or undue influence 6.Discharge of an instrument by payment or cancellation Personal defenses cannot be raised against a holder in due course

18. 19 - 18 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Discharge Actions or events that relieve certain parties from liability on negotiable instruments. There are three methods of discharge: 1. Payment of the instrument 2. Cancellation 3. Impairment of the right of recourse

19. 19 - 19 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Impairment of the Right of Recourse Certain parties (holders, indorsers, accommodation parties) are discharged from liability on an instrument if the holder: 1. Releases an obligor from liability, or 2. Surrenders collateral without the consent of the parties who would benefit by it