MGMT 312 CH 27 PT 2

Intentional cancellation of an instrument discharges the liability of

×all parties.

If the change is not material,

any holder can enforce the instrument to its original terms.

Ordinarily, when a holder collects the amount of an instrument from an indorser (not the maker or drawer), the indorser who pays has a right of recourse (right to seek reimbursement) against

any prior indorsers, the maker or drawer, and any accommodation parties.

Personal defenses (sometimes called limited defenses)

are valid against only ordinary holders, but not HDCs and holders through HDCs.

An immediate threat of force or violence would qualify

as extreme duress.

If the person whose name is forged ratifies the signature or was negligent in allowing his signature to be forged,

he may be liable.

If the innocent party issues a negotiable instrument under the fraudulent contract,

he will be able to avoid payment on that instrument against a holder, but not against an HDC or a holder through an HDC.

If there was no prior court determination of incapacity, but a court later declares the maker/drawer was NCM when he signed the instrument, then

it operates as a personal defense against ordinary holders, but not HDC's.

When a person forges an instrument, the person whose name is forged has

no liability to pay any holder or any HDC the value of the forged instrument.

If the law merely makes the instrument voidable, then the illegality is a

personal defense against an ordinary holder, but not against an HDC

Ordinary duress, however, is a

personal defense against ordinary holders, but not HDC's.

All parties to a negotiable instrument will be discharged when

the party primarily liable on it pays to a holder the full amount due.

two general categories of defenses to liability of a negotiable instrument

universal defenses and personal defenses.

if the note was subsequently negotiated to an HDC, such defense

would not be available against the HDC or a holder through an HDC.

An alteration is material if

× it changes the instrument's terms in any way.

Personal defenses are used to avoid

× payment to an ordinary holder of a negotiable instrument. ×They are not a defense against an HDC or a holder through an HDC.

When a person signs and issues a negotiable instrument under extreme duress,

×, the instrument is void and unenforceable by any holder or HDC. ×It is similar to a forgery.

×Abel writes a check for $1000 to Ben. ×Ben negotiates the check to Cathy. ×Cathy negotiates the check to Dan. ×Dan negotiates the check to Ed. ×Ed negotiates the check to Fred. ×Fred negotiates the check to Gary. ×Gary tries to cash the check, but it bounces.

×Abel through Fred are all liable to Gary.

×Suppose Gary collects on the check from Dan.

×Dan can seek recourse against Cathy, Ben or Abel. ×Cathy and Ben are each prior indorsers, and Abel is the drawer.

×While there are several means to obtain discharge under a negotiable instrument, we will look at only three:

×Discharge by Payment; ×Discharge by Cancellation; ×Discharge by Impairment of Recourse

×Dan cannot seek recourse against Ed or Fred.

×They are each subsequent indorsers.

discharge under ordinary contracts.

×When a party's obligations under a contract are discharged (usually by performance), then he is no longer liable under the contract. ×The same concept applies for negotiable instruments.

A material alteration is a

×a complete defense against an ordinary holder, but only a partial defense against an HDC.

A breach of the underlying contract for which a negotiable instrument was issued is

×a personal defense.

: A discharge in bankruptcy is

×an absolute defense on any instrument regardless of the status of the holder. ×This defense exists because the purpose of bankruptcy is to settle all of the insolvent party's debts.

Universal defenses (also called real defenses)

×are valid against all holders (including HDCs and holders through HDCs).

Making a change in the amount, the date, or the rate of interest—even if the change is a tiny one—

×is material.

: If a statute provides that an illegal transaction is void, then the defense

×is universal (i.e., absolute against both an ordinary holder and an HDC).

if a negotiable instrument was issued for payment in the underlying transaction,

×it is a personal defense. ×Again, it is enforceable against a holder, but not against an HDC or a holder through an HDC.

Destruction or mutilation of a negotiable instrument is considered cancellation only if

×it is done with the intention of eliminating obligation on the instrument. ×If it is destroyed by accident, it is not cancelled.

If a breach occurs, the maker of a note can

×refuse to pay it—or the drawer of a check can order his bank to stop payment on the check.

The absence of consideration may be a

×successful defense in an ordinary breach of contract situation.

Minority is a universal defense only to the extent that

×that the applicable state law recognizes it as a defense to a simple contract. ×Since state laws on minority vary, so do determinations of whether minority is a universal defense against an HDC.

when an innocent party is fraudulently induced to enter into a contract,

×the contract can be avoided because the party did not voluntarily consent to its terms.

If a court has previously declared a person to be mentally incompetent, then any instrument issued by that person is

×void ab initio ("from the beginning") and unenforceable by any holder or an HDC.