LIABILITY, DEFENSES AND DISCHARGE CHAPTER 24 LIABILITY, DEFENSES AND DISCHARGE © 2010 Pearson Education, Inc., publishing as Prentice-Hall

Signature Liability Only person whose signature appears on instrument may be liable. Signature on instrument identifies who is obligated to pay.

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.

Unauthorized Signatures Unauthorized signature of a person ineffective to bind that person. That person may ratify. Effective as the signature of the unauthorized signer in favor of HDC. Forger may be liable to HDC.

Signers of Instruments Maker of notes and certificates of deposit Drawer of drafts and checks Drawee who certifies or accepts checks and drafts Indorser who indorses an instrument Agent who signs on behalf of others Accommodation party

Primary Liability Makers of promissory notes and CDs have primary liability for the instrument. Maker unconditionally promises to pay amount stipulated in the note when due. Makers absolutely liable to pay the instrument, subject only to certain universal defenses.

Primary Liability (continued) No party primarily liable when check or draft issued. If drawee accepts draft or check, drawee is primarily liable. Check accepted when certified by bank. Certification discharges drawer and all prior indorsers.

Secondary Liability Drawers of checks and drafts and unqualified indorsers of negotiable instruments have secondary liability on the instrument. Liability is similar to that of a guarantor of a simple contract. Liability arises when party primarily liable on instrument defaults and fails to pay the instrument.

Secondary Liability (continued) Secondary liability arises only if instrument was: Properly presented, Dishonored, and Timely notice given to person who is secondarily liable.

Accommodation Party Party who signs instrument to lend name (and credit) to another party to the instrument. If guarantees payment, primarily liable. If guarantees collection, secondarily liable. Accommodation party who pays instrument may seek reimbursement from accommodated party.

Other Signatures Agents may sign representing principal. Principal bound if agent signs either or both names. Agent not liable if signature shows that agent signed on behalf of principal. Agent liable if signed only his name and cannot show that parties intended to bind only principal. Unauthorized signature by purported agent does not bind principal.

Forged Indorsement Unauthorized indorsement inoperative as indorsement of person whose name is signed. Loss falls on party who first takes forged instrument after the forgery. Except: If imposter forges indorsement of named payee, drawer or maker is liable on the instrument and bears the loss. Drawer or maker is liable on a forged or unauthorized indorsement of a fictitious payee.

Warranty Liability Certain warranties implied on transferors of negotiable instruments. Transfer Warranties Presentment Warranties Warranty liability imposed whether or not the transferor signed the instrument.

Transfer Warranties Any person transferring an instrument for consideration warrants that: 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.

Transfer Warranties (continued) Instrument has not been materially altered. No defenses of any party are good against the transferor. Transferor has no knowledge of any insolvency proceeding against maker, acceptor, or drawer of an unaccepted instrument.

Presentment Warranties Any person who presents a draft or check for payment or acceptance warrants: Presenter has good title to the instrument or is authorized. The instrument has not been materially altered. Presenter has no knowledge that signature of the maker or drawer is unauthorized.

Defenses Two types of defenses: Universal Defenses Personal Defenses HDC takes instrument free from personal defenses but not universal defenses.

Universal Defenses Universal Defenses Effect Minority Extreme duress Mental incapacity Illegality Discharge in bankruptcy Fraud in the inception Forgery Material alteration Real defenses can be raised against a holder in due course

Personal Defenses Personal Defenses Effect Breach of contract Fraud in the inducement Mental illness that makes a contract voidable instead of void Illegality of a contract that makes the contract voidable instead of void Ordinary duress or undue influence Discharge of an instrument by payment or cancellation Personal defenses cannot be raised against a holder in due course

FTC Rule Limiting HDC Status Eliminates HDC status arising out of certain consumer credit transactions. Subjects HDC of consumer credit instrument to all defenses and claims of the consumer.

Discharge Actions or events that relieve certain parties from liability on negotiable instruments. Three methods of discharge: Payment of the instrument Cancellation Impairment of the right of recourse

Impairment of the Right of Recourse Certain parties (holders, indorsers, accommodation parties) discharged from liability on an instrument if the holder: Releases an obligor from liability, or Surrenders collateral without consent of the parties who would benefit by it.