Transcript Power Point Chapter 26

CHAPTER 26: LIABILITY OF PARTIES
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
TOPICS COVERED CHAPTER 26:
LIABILITY OF PARTIES
I. Contractual Liability.
A. Signature.
B. Liability of Primary Parties.
C. Liability of Secondary Parties.
D. Termination of Liability.
II. Liability Based on Warranty.
A. Warranties on Transfer.
B. Warranties on Presentment.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
2
CONTRACTUAL LIABILITY
 Liability on the Instrument – no
person has contractual liability on an
instrument unless her signature
appears on it.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
3
SIGNATURE
 A signature may be made by the
individual herself or by her authorized
agent.
 Authorized – agent who executes a
negotiable instrument on behalf of his
principal is not liable if the instrument
is executed properly and as authorized.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
4
SIGNATURE
 Unauthorized –forgeries and
signatures made by an agent without
power; generally not binding on the
person whose name appears but are
binding on the unauthorized signer.
• COHEN V. DISNER (1995).
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
5
CONTRACTUAL LIABILITY
Party
Instrument
Liability
Maker
Note
Unconditional None
Acceptor
Draft
Unconditional None
Drawer
Unaccepted draft
Draft accepted by a nonbank
Cashier’s check
Draft drawn on drawer
Draft accepted by a bank
Draft (not check) drawn without
recourse
Conditional
Conditional
Unconditional
Unconditional
None
None
Dishonor
Dishonor and notice
None
None
Indorser
Note or draft
Draft subsequently accepted by a
bank
Note or draft indorsed without
recourse
Conditional
None
Dishonor and notice
Draft
None
Drawee
None
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Conditions
LIABILITY OF PRIMARY PARTIES
 Primary Liability – absolute
obligation to pay a negotiable
instrument.
 Makers – the maker guarantees that
he will pay the note according to its
original terms.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7
LIABILITY OF PRIMARY PARTIES
 Acceptors – a drawee has no liability
on the instrument until she accepts
it; she then becomes primarily liable.
• Acceptance – a drawee's signed
engagement to honor the instrument.
• Certification – acceptance of a check by
a bank. 
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
8
LIABILITY OF PRIMARY PARTIES
 Acceptors.
• Effect of Acceptance – when a draft is
accepted by a bank the drawer and all
prior indorsers are discharged from
contractual liability.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
9
LIABILITY OF
SECONDARY PARTIES
 Secondary (Conditional) Liability –
obligation to pay a negotiable
instrument that is subject to
conditions precedent. 
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
10
LIABILITY OF
SECONDARY PARTIES
 Drawers – liability is generally only
contingent upon dishonor and does
not require notice.
• DAVIS V. WATSON BROTHERS PLUMBING, INC.
(1981).
 Indorsers – liability is contingent upon
dishonor and notice of dishonor.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
11
LIABILITY OF
SECONDARY PARTIES
 Effect of Acceptance.
• When a bank accepts a draft, the
drawer and all prior indorsers are
discharged.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
12
LIABILITY OF
SECONDARY PARTIES
 Disclaimer by Secondary Parties – a
drawer (except of a check) or indorser
may disclaim liability by a qualified
drawing or indorsing (“without
recourse”).
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
13
LIABILITY OF
SECONDARY PARTIES
 Conditions Precedent to Liability.
• Dishonor: involves refusal to pay an
instrument when presented. What
constitutes dishonor depends on the
instrument and whether presentment is
required.
• Notes.
• Drafts. 
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
14
LIABILITY OF
SECONDARY PARTIES
 Conditions Precedent to Liability.
• Dishonor.
• Checks.
• Notice of Dishonor.
• Obligation of indorser or drawer is not
enforceable unless proper notice is given.

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
15
LIABILITY OF
SECONDARY PARTIES
 Conditions Precedent to Liability.
• Presentment and Notice of Dishonor
Excused.
 Liability for Conversion.
• Tort Liability – conversion occurs (1)when a drawee refuses to return a draft
that was presented for acceptance, 
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
16
LIABILITY OF
SECONDARY PARTIES
 Liability for Conversion.
• Tort Liability. … (2)when any person
refuses to return an instrument after he
dishonors it, or (3)when an instrument is
paid on a forged indorsement.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
17
TERMINATION OF LIABILITY
 Discharge – obligated individual is
released from liability on the
instrument under UCC or contract
law. Liability may be discharged
based upon:
• Payment.
• Tender of Payment.
• Cancellation and Renunciation.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
18
LIABILITY BASED ON WARRANTY
 Article 3 imposes two types of
implied warranties: transferor’s
warranties, and presenter’s
warranties.
• May be disclaimed by agreement
between the parties.
• Must be specifically disclaimed.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
19
WARRANTIES ON TRANSFER
 Entitlement to Enforce.
 Authentic and Authorized Signatures.
 No Alteration.
 No Defenses.
 No Knowledge of Insolvency.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
20
LIABILITY ON TRANSFER
Transfer by Indorsement
Pay to
John Doe
/s/Lilli Justin
Transfer by Qualified Indorsement
Pay to
John Doe
without recourse
/s/Lilli Justin
Transfer without Indorsement
Pay to
John Doe
Transferor’s
Warranties
+
Indorser’s
Liability
Subsequent
Holders
Subsequent
Holders
Modified
Transferor’s
Warranties
+
Indorser’s
Liability
+
Indorser’s
Liability
Subsequent
Holders
Transferor’s
Warranties
Subsequent
Holders
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
WARRANTIES ON PRESENTMENT
 Warrantor – all people who obtain
payment or acceptance of an instrument
as well as all prior transferors give the
presenter's warranties.
 Beneficiary – the presenter's warranties
run to any person who in good faith pays
or accepts an instrument. 
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
22
WARRANTIES ON PRESENTMENT
 Drawees of Unaccepted Drafts.
• Receive presentment warranties from the
person obtaining payment or acceptance,
from all prior transferors of the draft, as
follows:
• Entitled to Enforce.
• No Alteration.
• TRAVELER’S INDEMNITY CO. V. STEDMAN (1995).
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
23
WARRANTIES ON PRESENTMENT
 Drawees of Unaccepted Drafts.
• Presentment warranties include:
• Genuineness of drawer’s signature.
 All Other Payors.
• MESSING V. BANK OF AMERICA, N.A. (2003).
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
24
LIABILITY BASED ON WARRANTY
1. Entitled to enforce 2. No alterations
3. No knowledge that signature of drawer is unauthorized
Presenter’s Warranties (PW)
PW
PW
Issues
Drawer
Indorses
P
Indorses
H1
H2
$
$
TW
TW
Transferor’s Warranties (TW)
PW
Presents
Drawee
$
TW
1. Entitled to enforce
2. All signatures authorized and authorized
4. No defenses
5. No knowledge of insolvency proceedings
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
3. No alterations