© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. C HAPTER 26: L IABILITY OF P ARTIES

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. I. Contractual Liability. A. Signature. B. Liability of Primary Parties. C. Liability of Secondary Parties. D. Termination of Liability. II. Liability Based on Warranty. A. Warranties on Transfer. B. Warranties on Presentment. T OPICS C OVERED C HAPTER 26: L IABILITY OF P ARTIES 2

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. C ONTRACTUAL L IABILITY  Liability on the Instrument –  Liability on the Instrument – no person has contractual liability on an instrument unless her signature appears on it. 3

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. S IGNATURE  A signature may be made by the individual herself or by her authorized agent.  Authorized – agent who executes a negotiable instrument on behalf of his principal is not liable if the instrument is executed properly and as authorized. 4

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. S IGNATURE  Unauthorized –forgeries and signatures made by an agent without power; generally not binding on the person whose name appears but are binding on the unauthorized signer. C OHEN V. D ISNER (1995). C OHEN V. D ISNER (1995). 5

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. C ONTRACTUAL L IABILITY

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. L IABILITY OF P RIMARY P ARTIES  Primary Liability –  Primary Liability – absolute obligation to pay a negotiable instrument.  Makers –  Makers – the maker guarantees that he will pay the note according to its original terms. 7

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. L IABILITY OF P RIMARY P ARTIES  Acceptors –  Acceptors – a drawee has no liability on the instrument until she accepts it; she then becomes primarily liable. Acceptance – a drawee's signed engagement to honor the instrument. Certification – acceptance of a check by a bank.  8

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. L IABILITY OF P RIMARY P ARTIES  Acceptors. Effect of Acceptance – when a draft is accepted by a bank the drawer and all prior indorsers are discharged from contractual liability. 9

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. L IABILITY OF S ECONDARY P ARTIES  Secondary (Conditional) Liability –  Secondary (Conditional) Liability – obligation to pay a negotiable instrument that is subject to conditions precedent.  10

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. L IABILITY OF S ECONDARY P ARTIES  Drawers –  Drawers – liability is generally only contingent upon dishonor and does not require notice. D AVIS V. W ATSON B ROTHERS P LUMBING, I NC. (1981). D AVIS V. W ATSON B ROTHERS P LUMBING, I NC. (1981).  Indorsers –  Indorsers – liability is contingent upon dishonor and notice of dishonor. 11

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. L IABILITY OF S ECONDARY P ARTIES  Effect of Acceptance. When a bank accepts a draft, the drawer and all prior indorsers are discharged. 12

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. L IABILITY OF S ECONDARY P ARTIES  Disclaimer by Secondary Parties –  Disclaimer by Secondary Parties – a drawer (except of a check) or indorser may disclaim liability by a qualified drawing or indorsing (“without recourse”). 13

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. L IABILITY OF S ECONDARY P ARTIES  Conditions Precedent to Liability. Dishonor: involves refusal to pay an instrument when presented. What constitutes dishonor depends on the instrument and whether presentment is required. Notes. Drafts.  14

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. L IABILITY OF S ECONDARY P ARTIES  Conditions Precedent to Liability. Dishonor. Checks. Notice of Dishonor. Obligation of indorser or drawer is not enforceable unless proper notice is given.  15

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. L IABILITY OF S ECONDARY P ARTIES  Conditions Precedent to Liability. Presentment and Notice of Dishonor Excused.   Liability for Conversion. Tort Liability – conversion occurs (1)­ when a drawee refuses to return a draft that was presented for acceptance,  16

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. L IABILITY OF S ECONDARY P ARTIES   Liability for Conversion. Tort Liability. … (2)­when any person refuses to return an instrument after he dishonors it, or (3)­when an instrument is paid on a forged indorsement. 17

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. T ERMINATION OF L IABILITY  Discharge –  Discharge – obligated individual is released from liability on the instrument under UCC or contract law. Liability may be discharged based upon: Payment. Tender of Payment. Cancellation and Renunciation. 18

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. L IABILITY B ASED ON W ARRANTY  Article 3 imposes two types of implied warranties: transferor’s warranties, and presenter’s warranties. May be disclaimed by agreement between the parties. Must be specifically disclaimed. 19

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. W ARRANTIES ON T RANSFER  Entitlement to Enforce.  Authentic and Authorized Signatures.  No Alteration.  No Defenses.  No Knowledge of Insolvency. 20

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Pay to John Doe /s/Lilli Justin Transfer by Indorsement Transferor’s Warranties Indorser’s Liability Subsequent Holders + Pay to John Doe without recourse /s/Lilli Justin Transfer by Qualified Indorsement Modified Transferor’s Warranties Indorser’s Liability Subsequent Holders + Pay to John Doe Transfer without Indorsement Transferor’s Warranties Subsequent Holders Indorser’s Liability + L IABILITY ON T RANSFER

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. W ARRANTIES ON P RESENTMENT  Warrantor –  Warrantor – all people who obtain payment or acceptance of an instrument as well as all prior transferors give the presenter's warranties.  Beneficiary –  Beneficiary – the presenter's warranties run to any person who in good faith pays or accepts an instrument.  22

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. W ARRANTIES ON P RESENTMENT  Drawees of Unaccepted Drafts. Receive presentment warranties from the person obtaining payment or acceptance, from all prior transferors of the draft, as follows: Entitled to Enforce. No Alteration. T RAVELER ’ S I NDEMNITY C O. V. S TEDMAN (1995). T RAVELER ’ S I NDEMNITY C O. V. S TEDMAN (1995). 23

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. W ARRANTIES ON P RESENTMENT  Drawees of Unaccepted Drafts. Presentment warranties include: Genuineness of drawer’s signature.  All Other Payors. M ESSING V. B ANK OF A MERICA, N.A. (2003). M ESSING V. B ANK OF A MERICA, N.A. (2003). 24

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. L IABILITY B ASED ON W ARRANTY