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Chapter 26: Liability, Defenses and Discharge

Chapter 26: Liability, Defenses and Discharge. Liability. There are two kinds of liability associated with negotiable instruments: Signature liability. Warranty Liability. §1: Signature Liability. Relates to signatures on instruments.

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Chapter 26: Liability, Defenses and Discharge

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  1. Chapter 26: Liability, Defenses and Discharge

  2. Liability • There are two kinds of liability associated with negotiable instruments: • Signature liability. • Warranty Liability.

  3. §1: Signature Liability • Relates to signatures on instruments. • Signers of negotiable instruments are potentially liable for amount state on instrument. • Primary Liability: Makers/Accepters. • Secondary Liability: Drawers/Indorsers.

  4. Signature Liability [2] • Proper Presentment. • Must be timely (checks w/in 30 days). • Dishonor. • Proper Notice. • Accommodation Parties: Signs instrument to lend name as credit to another party on the instrument. • Case 26.1: Quality Wash Group v. Shawkat Hallak (1996).

  5. Signature Liability [3] • Authorized Agent’s Signature. • To hold Principal liable agent must be authorize to sign and Principal must be clearly named. • Agent personally liable when Principal is not named or disclosed, unless check is drawn on Principal’s account.

  6. Signature Liability [4] • Unauthorized Signatures. • Forgery does not bind owner but Bank is liable. • If Agent has no authority, Agent is personally liable, but Principal is not, unless ratified.

  7. Signature Liability [5] • Unauthorized indorsement does not bind maker/drawer except: • “Imposter Rule”: imposter induces maker/drawer to issue check to imposter. • When imposter signs as/on behalf of maker/drawer intending payee has no interest in the instrument.

  8. §2: Warranty Liability • Extends to both signers and non-signers. • Breach of warranty can occur when the instrument is transferred or presented for payment.

  9. Warranty Liability • Transferors make certain implied warranties regarding instruments they negotiate. • Liability not subject to dishonor, presentment, notice. • Liabilities: Transfer or Presentment.

  10. Transfer Warranties • Following transfer warranties extend to all subsequent holders: • Transferor is entitled to enforce the instrument. • Signatures are authentic and authorized. • Instrument has not been altered. • Instrument not subject to defense. • Transferor has no notice of insolvency.

  11. Presentment Warranties • Person who presents an instrument makes the following presentment warranties: • No missing or unauthorized indorsement. • Instrument has not been altered. • Person obtaining payment has no knowledge signature is unauthorized. • Case 26.2: First National Bank v. MidAmerica Federal Savings (1999).

  12. §3: Defenses • Universal or Real - can be used to defeat a holder and a HDC. • Personal - can be used to defeat a holder but not a HDC.

  13. Universal Defenses • Forgery of maker’s or drawer’s signature. • Or if an authorized agent exceeds his authority to the amount which exceeds his authority. • Fraud in the execution - the ”autograph” situation, not fraud in the inducement.

  14. Universal Defenses [2] • Material Alteration. • Do not have to pay the altered amount ($8 to $800), only a personal defense to the original amount ($8). • Not a real defense if instrument left blank, (.. filled in $800), then have to pay all ($800). • Discharge in Bankruptcy. • Infancy (Minority).

  15. Universal Defenses [3] • Illegality - severe enough to make contract void. • Mental Incapacity (adjudicated by court). • Extreme Duress. If instrument signed under threat of immediate force or violence.

  16. Personal Defenses • Valid against holders but not HDC’s. • Breach of contract or warranty. • Lack of consideration. • Fraud in the inducement. • Illegality - not severe enough to make void. • Case 26.3: Kedzie & 103rd St. Currency Exchange v. Hodge (1993).

  17. Personal Defenses [2] • Mental incapacity - not severe enough to make void. • Discharge. • By payment or cancellation. • Unauthorized completion. • Non-delivery of instrument. • Ordinary duress or undue influence rendering contract voidable.

  18. Federal Limits on HDC Rights • FTC Rule 433 (1976) abolished the HDC doctrine in consumer credit transactions. • Allows Buyer to assert any defense she might have against the Seller of goods or services (Car Dealer), against the subsequent HDC (Bank) as well. • So Buyer’s duty to pay is conditional on Seller’s full performance under contract.

  19. §4: Discharge from Liability • Discharge from liability on an instrument can occur by: • Payment. • Cancellation. • Material Alteration.

  20. Discharge by Payment • All parties to an instrument will be discharged when the party primarily liable on the instrument pays to the holder the amount due in full.

  21. Discharge by Cancellation • Intentional cancellation of an instrument discharges the liability of all parties. • Examples: Intentionally writing “paid” on the front of an instrument, or tearing it up or mutilating it, cancels the instrument.

  22. Law on the Web • Review recent changes to UCC Articles 3 and 4 at Mercer Law Firm. • Legal Research Exercises on the Web.

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