1. Chapter 24 Liability, Defenses, and Discharge

2. Signature Liability for Negotiable Instruments
Signature liability: Liability in which a person cannot be held contractually liable on a negotiable instrument unless his or her signature appears on the instrument
Also called contract liability
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3. Signature Liability for Negotiable Instruments
Signer: A person signing an instrument who acts in the capacity of:
A maker of notes or certificates of deposit
A drawer of drafts or checks
A drawee who certifies or accepts checks or drafts
An indorser who indorses an instrument
An agent who signs on behalf of others
An accommodation party
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4. Signature Liability for Negotiable Instruments
Signature: 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
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5. Primary Liability for Negotiable Instruments
Primary liability: Absolute liability to pay a negotiable instrument, subject to certain universal defenses
Makers of promissory notes and CDs
have primary liability for the instrument
unconditionally promise to pay amount stipulated in the note when due
Are absolutely liable to pay the instrument, subject only to certain universal defenses
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6. Primary Liability for Negotiable Instruments
No party is primarily liable when check or draft is issued
If drawee accepts a draft or check, the drawee is primarily liable
Check accepted when certified by bank
Certification discharges drawer and all prior indorsers
The issuer of a cashier’s check is primarily liable on the instrument
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7. Secondary Liability for Negotiable Instruments
Secondary liability: Liability on a negotiable instrument that is imposed on a party only when the party primarily liable on the instrument defaults and fails to pay the instrument when due
Liability is similar to that of a guarantor of a simple contract
Unqualified indorsers: Those who are secondarily liable on negotiable instruments they endorse
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8. Secondary Liability for Negotiable Instruments
Qualified indorsers: Those who disclaim liability and are not secondarily liable on instruments they endorse
Presentment: A demand for acceptance or payment of an instrument made upon the maker, acceptor, drawee, or other payer by or on behalf of the holder
Notice of dishonor: The formal act of letting the party with secondary liability to pay a negotiable instrument know that the instrument has been dishonored
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9. Secondary Liability for Negotiable Instruments
Requirements for imposing secondary liability
The instrument is properly presented for payment
The instrument is dishonored
Notice of the dishonor is timely given to the person to be held secondarily liable on the instrument
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10. Secondary Liability for Negotiable Instruments
Accommodation party: A party who signs an instrument and lends his or her name (and credit) to another party to the instrument
Liability of an accommodation party
Guarantee of payment: The accommodation party is primarily liable on the instrument
Guarantee of collection: The accommodation party is secondarily liable on the instrument
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11. Secondary Liability for Negotiable Instruments
Agent’s signature
Principal is bound if the agent signs either or both names
Agent is not liable if signature shows that the agent signed on behalf of the principal
Agent is liable if he or she signed only his or her name and cannot show that parties intended to bind only principal
Principal is not liable for unauthorized signature
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12. Forged Negotiable Indorsements
Forged indorsement: The forged signature of a payee or holder on a negotiable instrument
Loss falls on party who first takes forged instrument after the forgery
Exceptions:
Imposter rule: If an imposter forges the indorsement of the named payee, the drawer or maker is liable on the instrument to any person who, in good faith, pays the instrument or takes it for value or for collection
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13. Forged Negotiable Indorsements
Fictitious payee rule: A rule that states that a drawer or maker is liable on a forged or unauthorized indorsement if the person signing as or on behalf of a drawer or maker intends the named payee to have no interest in the instrument or when the person identified as the payee is a fictitious person
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14. Warranty Liability for Negotiable Instruments
Certain warranties implied on transferors of negotiable instruments
Transfer Warranties
Presentment Warranties
Warranty liability is imposed whether or not the transferor signed the instrument
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Transfer Warranties
The 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
The instrument has not been materially altered
No defenses of any party are good against transferor
The transferor has no knowledge of any insolvency proceeding against the maker, the acceptor, or the drawer of an unaccepted instrument
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16. Presentment Warranties
The presenter has good title to the instrument or is authorized to obtain payment or acceptance of the person who has good title
The instrument has not been materially altered
The presenter has no knowledge that the signature of the maker or drawer is unauthorized
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17. Universal (Real) Defenses
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Personal Defenses
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19. Discharge of Negotiable Instruments
FTC HDC Rule: A rule adopted by the Federal Trade Commission that eliminates HDC status with regard to negotiable instruments that arise out of certain consumer credit transactions
All defences and claims that can be raised by the consumer-purchaser against holders can also be raised against HDCs
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20. Discharge of Negotiable Instruments
Discharge: Actions or events that relieve certain parties from liability on negotiable instruments
Methods of discharge
Payment of the instrument
Cancellation
Impairment of the right of recourse
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21. Discharge of Negotiable Instruments
Impairment of the right of recourse: A situation in which certain parties are discharged from liability on an instrument if the holder:
Releases an obligor from liability
Surrenders collateral without consent of the parties who would benefit by it
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