Chapter 28 Liability, Defenses, and Discharge Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

Signature Liability General Rule: Party liable for an instrument only if party has signed instrument 28-2

Exhibit 28-1: Parties Signing Negotiable Instrument Maker Maker Person promising to pay set sum to holder of promissory note/certificate of deposit Person promising to pay set sum to holder of promissory note/certificate of deposit Promises to pay money Promises to pay money Acceptor Acceptor Person (drawee) who accepts and signs draft to agree to pay draft when it is presented Person (drawee) who accepts and signs draft to agree to pay draft when it is presented Pays money (or responsible for paying money) when it is requested Pays money (or responsible for paying money) when it is requested Drawer Drawer Person ordering drawee to pay Person ordering drawee to pay Orders someone (drawee) to pay Orders someone (drawee) to pay Endorser Endorser Person who signs instrument to restrict payment of it, negotiate it, or incur liability Person who signs instrument to restrict payment of it, negotiate it, or incur liability Signs instrument at some point during process of negotiation Signs instrument at some point during process of negotiation 28-3

“Primary” Liability Versus “Secondary” Liability Primary Liability of Makers and Acceptors: Must pay stated amount on instrument when it is presented for payment Primary Liability of Makers and Acceptors: Must pay stated amount on instrument when it is presented for payment Secondary (Conditional) Liability of Drawers and Endorsers: Must pay amount on instrument if following conditions met: Secondary (Conditional) Liability of Drawers and Endorsers: Must pay amount on instrument if following conditions met: Presentment (on party with primary liability) Presentment (on party with primary liability) Dishonor (by party with primary liability) Dishonor (by party with primary liability) Notice of Dishonor (given to party with secondary liability) Notice of Dishonor (given to party with secondary liability) 28-4

Exhibit 28-2: Proper Presentment of Negotiable Instrument Presented to Proper Party Presented to Proper Party Presented in Proper Way Presented in Proper Way Presented in Timely Manner Presented in Timely Manner 28-5

Accommodation Party (Definition) Party who signs instrument to provide credit for another party who has also signed instrument 28-6

Unauthorized Signature General Rule: If signature to negotiable instrument unauthorized, signature will not impose liability on named party 28-7

Negotiable Instrument Warranty Liability Transfer Warranty: When party transfers instrument to another party for consideration, party makes certain guarantees/warranties regarding instrument and transfer itself Transfer Warranty: When party transfers instrument to another party for consideration, party makes certain guarantees/warranties regarding instrument and transfer itself Presentment Warranty: When party properly presents instrument for acceptance, party makes certain guarantees/warranties regarding instrument and transfer itself Presentment Warranty: When party properly presents instrument for acceptance, party makes certain guarantees/warranties regarding instrument and transfer itself 28-8

Transfer Warranties Transferor entitled to enforce negotiable instrument Transferor entitled to enforce negotiable instrument Signatures on instrument authentic and authorized Signatures on instrument authentic and authorized Instrument has not been altered Instrument has not been altered Instrument not subject to defense or claim in recoupment Instrument not subject to defense or claim in recoupment Transferor has no knowledge of insolvency proceedings against maker, acceptor, or drawer of instrument Transferor has no knowledge of insolvency proceedings against maker, acceptor, or drawer of instrument 28-9

Presentment Warranties Warrantor of instrument is entitled to enforce instrument Warrantor of instrument is entitled to enforce instrument Instrument has not been altered Instrument has not been altered Warrantor has no knowledge that drawer’s signature or draft is unauthorized Warrantor has no knowledge that drawer’s signature or draft is unauthorized 28-10

Avoiding Liability for Negotiable Instruments Defenses to Liability Real Defenses Real Defenses Personal Defenses Personal Defenses 28-11

“Real Defenses” (Applicable to All Parties): Infancy (below legal age of consent) Infancy (below legal age of consent) Duress Duress Lack of legal capacity Lack of legal capacity Illegality of transaction Illegality of transaction Fraud in factum (fraud in execution, fraud in essence) Fraud in factum (fraud in execution, fraud in essence) Discharge through insolvency proceedings (bankruptcy) Discharge through insolvency proceedings (bankruptcy) Forgery Forgery Material Alteration Material Alteration 28-12

Personal Defenses (Applicable to Holders, But Not Holders In Due Course): Breach of contract/warranty Breach of contract/warranty Lack or failure of consideration Lack or failure of consideration Fraud in inducement Fraud in inducement Illegality Illegality Mental Incapacity Mental Incapacity Non-issuance, conditional issuance, or issuance for special purpose Non-issuance, conditional issuance, or issuance for special purpose Modification/nullification of obligation by second agreement Modification/nullification of obligation by second agreement Non-delivery of instrument Non-delivery of instrument Unauthorized, non-fraudulent completion of instrument Unauthorized, non-fraudulent completion of instrument 28-13

Avoiding Liability for Negotiable Instruments Discharge of Liability Payment/Tender of Payment Payment/Tender of Payment Cancellation/Renunciation Cancellation/Renunciation Reacquisition Reacquisition Impairment of Recourse Impairment of Recourse Impairment of Collateral Impairment of Collateral 28-14