1. Liability, Defenses, and Discharge
Chapter 28
Chapter 28: Liability, Defenses, and Discharge
Liability, Defenses, and Discharge
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2. Overview
LO28-1: What information is needed to determine signature liability?
LO28-2: What is warranty liability?
LO28-3: How does one avoid liability for negotiable instruments?

3. Chapter 28 Hypothetical Case 1
Logan Aldridge has presented a check for $3,000 to Stephanie Brooks. The check is in payment for a set of antique furniture Brooks sold to Aldridge. Per Brooks's request, the check is certified by Aldridge's bank, 1st Bank of the North American Hemisphere.
Why would Brooks (or any other payee, for that matter) request that the drawer present a certified check, as opposed to a non-certified one? What is the legal effect of a certified check?
Chapter 28 Hypothetical Case: Logan Aldridge has presented a check for $3,000 to Stephanie Brooks. The check is in payment for a set of antique furniture Brooks sold to Aldridge. Per Brooks's request, the check is certified by Aldridge's bank, 1st Bank of the North American Hemisphere.
Why would Brooks (or any other payee, for that matter) request that the drawer present a certified check, as opposed to a non-certified one? What is the legal effect of a certified check?
[Instructor: See Warranty Liability in Chapter 28]

4. Chapter 28 Hypothetical Case 2
According to UCC 3-416(a), "a person who transfers an instrument for consideration warrants to the transferee, and, if the transfer is by endorsement, to any subsequent transferee that: (1) the warrantor is a person entitled to enforce the instrument; (2) all signatures on the instrument are authentic and authorized; (3) the instrument has not been altered; (4) the instrument is not subject to a defense or claim in recoupment of any party which can be asserted against the warrantor; and (5) the warrantor has no knowledge of any insolvency proceeding commenced with respect to the maker or acceptor or, in the case of an unaccepted draft, the drawer." These implied promises are commonly referred to in the legal profession as transfer warranties. They are implied by law, meaning that the transferor of commercial paper need not expressly make these warranties; instead, they are recognized automatically by operation of law. Most laypeople are unfamiliar with these warranties—that is, until a complainant seeks to hold the transferor liable for breach of one or more of them!
From an ethical standpoint, is it fair to hold transferors of commercial paper responsible for transfer warranties, even though the transferor does not expressly make them?
Chapter 28 Hypothetical Case 2: According to UCC 3-416(a), "a person who transfers an instrument for consideration warrants to the transferee, and, if the transfer is by endorsement, to any subsequent transferee that: (1) the warrantor is a person entitled to enforce the instrument; (2) all signatures on the instrument are authentic and authorized; (3) the instrument has not been altered; (4) the instrument is not subject to a defense or claim in recoupment of any party which can be asserted against the warrantor; and (5) the warrantor has no knowledge of any insolvency proceeding commenced with respect to the maker or acceptor or, in the case of an unaccepted draft, the drawer." These implied promises are commonly referred to in the legal profession as transfer warranties. They are implied by law, meaning that the transferor of commercial paper need not expressly make these warranties; instead, they are recognized automatically by operation of law. Most laypeople are unfamiliar with these warranties—that is, until a complainant seeks to hold the transferor liable for breach of one or more of them!
From an ethical standpoint, is it fair to hold transferors of commercial paper responsible for transfer warranties, even though the transferor does not expressly make them?
[Instructor: See Warranty Liability in Chapter 28]

5. Signature Liability
Definition: Liability that is attributed because of a party's signature on an instrument.
Signature liability is liability that is attributed because of a party's signature on an instrument.

6. Parties Signing Negotiable Instruments
Maker
Person promising to pay set sum to holder of promissory note/certificate of deposit
Promises to pay money
Acceptor
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
Drawer
Person ordering drawee to pay
Orders someone (drawee) to pay
Endorser
Person who signs instrument to restrict payment of it, negotiate it, or incur liability
Signs instrument at some point during process of negotiation
Parties signing a negotiable instrument include a maker, an acceptor, a drawer, and an endorser. A maker is a person promising to pay a certain sum of money to the holder of a promissory note or certificate of deposit. An acceptor is a party (namely, a drawee) who accepts and signs a draft to agree to pay the draft when it is presented for payment. A drawer is a party ordering a drawee to pay a certain sum of money. An endorser is a person who signs an instrument, at some point in the process of negotiation, to restrict the payment of the instrument, negotiate it, or incur liability.

7. Primary Liability Versus Secondary Liability
Primary liability of makers and acceptors: Must pay stated amount on instrument when it is presented for payment
Secondary liability of drawers and endorsers: Must pay amount on instrument if following conditions met:
Presentment (on party with primary liability)
Dishonor (by party with primary liability)
Notice of dishonor (given to party with secondary liability)
Makers and acceptors have primary liability on an instrument. This means they must pay the stated amount on the instrument when it is presented for payment. Drawers and endorsers have secondary liability on an instrument. This means they must pay the amount due on the instrument if the following conditions are met: Presentment (on the party with primary liability), dishonor (by the party with primary liability), and notice of dishonor (given to the party with secondary liability).

8. Proper Presentment of Negotiable Instrument
Presented to proper party
Presented in proper way
Presented in timely manner
Proper presentment of a negotiable instrument includes presenting the instrument to the proper party, in the proper way, and in a timely manner.

9. Accommodation Party
Definition: Party who signs instrument to provide credit for another party who has also signed instrument
An accommodation party is a party who signs an instrument to provide credit for another party who has also signed the instrument.

10. Unauthorized Signature
General rule: If signature to negotiable instrument unauthorized, signature will not impose liability on named party
As a general rule, if a signature to a negotiable instrument is unauthorized, the signature will not impose liability on the named party.

11. Negotiable Instrument Warranty Liability
Transfer warranty: When party transfers instrument to another party in good faith for consideration, party makes certain guarantees/warranties regarding instrument and transfer itself
Presentment warranty: Covers the parties accepting an instrument for payment; ensures that the accepting or paying party is paying the proper party
Negotiable instrument warranty liability includes transfer warranty liability, and presentment warranty liability. In terms of transfer warranty liability, when a party transfers an instrument to another party in good faith for consideration, the party makes certain guarantees or warranties regarding the instrument and the transfer itself. With respect to presentment warranty liability, it covers the parties accepting an instrument for payment and ensures that the accepting or paying party is paying the proper party.

12. Transfer Warranties
Transferor entitled to enforce negotiable instrument
Signatures on instrument authentic and authorized
Instrument has not been altered
Instrument not subject to defense or claim in recoupment
Transferor has no knowledge of insolvency proceedings against maker, acceptor, or drawer of instrument
Transfer warranties include guarantees that the transferor of the instrument is entitled to enforce the instrument, that the signatures on the instrument are authentic and authorized, that the instrument has not been altered, that the instrument is not subject to any defense or claim in recoupment, and that the transferor has no knowledge of any insolvency proceedings against the maker, acceptor, or drawer of the instrument.

13. Presentment Warranties
Warrantor of instrument is entitled to enforce instrument
Instrument has not been altered
Warrantor has no knowledge that drawer's signature or draft is unauthorized
Presentment warranties include guarantees that the warrantor of the instrument is entitled to enforce instrument, that the instrument has not been altered, and that the warrantor has no knowledge that the drawer's signature or draft is unauthorized.

14. Avoiding Liability for Negotiable Instruments
Defenses to liability
Real defenses
Personal defenses
Defenses to liability for negotiable instruments include real defenses and personal defenses.

15. Real Defenses Applicable to All Parties
Infancy (below legal age of consent)
Duress
Lack of legal capacity
Illegality of transaction
Fraud in factum (fraud in execution, fraud in essence)
Discharge through insolvency proceedings (bankruptcy)
Forgery
Material alteration
Real defenses, applicable to all parties, include infancy (a party is below the legal age of consent), duress, lack of legal capacity, illegality of the transaction, fraud in the factum (in other words, fraud in the execution and/or essence of the instrument), discharge through bankruptcy, forgery, and significant alterations of the instrument.

16. Personal Defenses Applicable to Non-HDC Holders
Two types of personal defenses
General defenses can be asserted against defendant on general contract theory
Specific personal defenses are listed in UCC, provisions of Article 3
For holders, but not holders in due course, there are two types of personal defenses. General defenses can be asserted against a defendant on general contract theory. Specific personal defenses are listed in UCC in the provisions of Article 3.

17. Discharge of Liability on Instruments
Payment/tender of payment
Cancellation/renunciation
Reacquisition
Impairment of recourse
Impairment of collateral
Liability for a negotiable instrument is discharged through payment or tender of payment, cancellation or renunciation, reacquisition, impairment of recourse, or impairment of collateral.

18. Chapter 28 Hypothetical Case 3
Ira Ofseyer is an 18-year-old freshman at Golden State University. He arrives on campus several days before classes begin and learns of a party scheduled at Tau Phi Gamma Fraternity on Friday evening. Ofseyer arrives at the party, confident that a thorough university education means more than mere academics. Beer is served at the party, and that night, Ofseyer consumes the first alcohol of his young life. In the haze of the alcohol, and caught up in socializing with the Tau Phi fraternity brothers (who are trying to convince him of the merits of fraternity membership), Ofseyer inadvertently leaves his checkbook on the dining room table. Three days later, Ofseyer realizes his checkbook is missing. He returns to the fraternity to find his checkbook, but has no luck. He hurries to his bank's university branch on University Avenue, and learns that one check has been written on his account in the last three days, for $3,500 at University Stereo Shack. Ofseyer's remaining checking account balance is $5.83. His parents will not be happy.
Is Ofseyer's bank legally obligated to re-credit his account in the amount of $3,500?
Chapter 28 Hypothetical Case 3: Ira Ofseyer is an 18-year-old freshman at State University. He arrives on campus several days before classes begin and learns of a party scheduled at Tau Phi Gamma Fraternity on Friday evening. Ofseyer arrives at the party, confident that a thorough university education means more than mere academics. Beer is served at the party, and that night, Ofseyer consumes the first alcohol of his young life. In the haze of the alcohol, and caught up in socializing with the Tau Phi fraternity brothers (who are trying to convince him of the merits of fraternity membership), Ofseyer inadvertently leaves his checkbook on the dining room table. Three days later, Ofseyer realizes his checkbook is missing. He returns to the fraternity to find his checkbook, but has no luck. He hurries to his bank's university branch on University Avenue, and learns that one check has been written on his account in the last three days, for $3,500 at University Stereo Shack. Ofseyer's remaining checking account balance is $5.83. His parents will not be happy.
Is Ofseyer's bank legally obligated to re-credit his account in the amount of $3,500?
[Instructor: See Signature Liability in Chapter 28]

19. Chapter 28 Hypothetical Case 4
Rhonda Kepler receives a Carolina State Bank check for $500 from Heather Gonzalez as repayment of a loan. Kepler takes the check to SpartaBank, where she holds an account, and deposits it. When the check is processed, Gonzalez's bank finds that there are insufficient funds in her account, and the check is dishonored.
In this situation, which party is primarily liable for the negotiable instrument? Which party is secondarily liable?
Chapter 28 Hypothetical Case 4: Rhonda Kepler receives a Carolina State Bank check for $500 from Heather Gonzalez as repayment of a loan. Kepler takes the check to SpartaBank, where she holds an account, and deposits it. When the check is processed, Gonzalez's bank finds that there are insufficient funds in her account, and the check is dishonored.
In this situation, which party is primarily liable for the negotiable instrument? Which party is secondarily liable?
[Instructor: See Signature Liability in Chapter 28]