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

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

3. 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. 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.

5. 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

6. 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.

7. 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.

8. 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.

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

10. 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.

11. 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.

12. 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.

13. 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.

14. 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.

15. 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.

16. 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.

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

18. 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

19. 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

20. 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.

21. 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

22. 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.