Liability, Defenses, and Discharge

Chapter 28Liability, Defenses, and DischargeCopyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Signature LiabilityGeneral Rule: Party liable for an instrument only if party has signed instrument28-228-3Exhibit 28-1: Parties Signing Negotiable InstrumentMakerPerson promising to pay set sum to holder of promissory note/certificate of depositPromises to pay moneyAcceptorPerson (drawee) who accepts and signs draft to agree to pay draft when it is presentedPays money (or responsible for paying money) when it is requestedDrawerPerson ordering drawee to payOrders someone (drawee) to payEndorserPerson who signs instrument to restrict payment of it, negotiate it, or incur liabilitySigns instrument at some point during process of negotiation28-4“Primary” Liability Versus “Secondary” LiabilityPrimary Liability of Makers and Acceptors: Must pay stated amount on instrument when it is presented for paymentSecondary (Conditional) 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)28-5Exhibit 28-2: Proper Presentment of Negotiable InstrumentPresented to Proper PartyPresented in Proper WayPresented in Timely MannerAccommodation Party (Definition)Party who signs instrument to provide credit for another party who has also signed instrument28-6Unauthorized SignatureGeneral Rule: If signature to negotiable instrument unauthorized, signature will not impose liability on named party28-728-8Negotiable Instrument Warranty LiabilityTransfer Warranty: When party transfers instrument to another party for consideration, party makes certain guarantees/warranties regarding instrument and transfer itselfPresentment Warranty: When party properly presents instrument for acceptance, party makes certain guarantees/warranties regarding instrument and transfer itself28-9Transfer WarrantiesTransferor entitled to enforce negotiable instrumentSignatures on instrument authentic and authorizedInstrument has not been alteredInstrument not subject to defense or claim in recoupmentTransferor has no knowledge of insolvency proceedings against maker, acceptor, or drawer of instrument28-10Presentment WarrantiesWarrantor of instrument is entitled to enforce instrumentInstrument has not been alteredWarrantor has no knowledge that drawer’s signature or draft is unauthorized28-11Avoiding Liability for Negotiable InstrumentsDefenses to LiabilityReal DefensesPersonal Defenses28-12“Real Defenses” (Applicable to All Parties):Infancy (below legal age of consent)DuressLack of legal capacityIllegality of transactionFraud in factum (fraud in execution, fraud in essence)Discharge through insolvency proceedings (bankruptcy)ForgeryMaterial Alteration28-13Personal Defenses (Applicable to Holders, But Not Holders In Due Course):Breach of contract/warrantyLack or failure of considerationFraud in inducementIllegalityMental IncapacityNon-issuance, conditional issuance, or issuance for special purposeModification/nullification of obligation by second agreementNon-delivery of instrumentUnauthorized, non-fraudulent completion of instrument28-14Avoiding Liability for Negotiable InstrumentsDischarge of LiabilityPayment/Tender of PaymentCancellation/RenunciationReacquisitionImpairment of RecourseImpairment of Collateral