chapter 27

Discharge by Impairment of Recourse

discharge can also occur when a party's right of recourse is impaired. A right of recourse is a right to seek reimbursement. Ordinarily, when a holder collects the amount of an instrument from an indorser, the indorser has a right of recourse against prior indorsers, the maker or drawer, and accommodation parties.

timely presentment

1. If the instrument is payable on demand: the holder must present it for payment or acceptance within a reasonable time. 2. If it is a promissory note, the holder must present it to the maker on the note's due date. The holder of a domestic check must present it for payment or collection within thirty days of its date to make the drawer secondarily liable. With respect to indorsers, the holder must present a check within thirty days after its indorsement to make the indorser secondarily liable

Transfer Warranties

1. The transferor is entitled to enforce the instrument. 2. All signatures are authentic and authorized. 3. The instrument has not been altered. 4. The instrument is not subject to a defense or claim of any party that can be asserted against the transferor. 5. The transferor has no knowledge of any bankruptcy proceedings against the maker, the acceptor, or the drawer of the instrument.

Unauthorized Signature

1. When a person forges another person's name on a negotiable instrument. 2. When an agent who lacks the authority signs an instrument on behalf of a principal. A person who forges a check or signs an instrument without authorization can be held personally liable for payment by a holder in due course, or HDC. First person to take the check has the burden of loss

not dishonor

1. When presentment is made after an established cutoff hour. 2. When the holder refuses to exhibit the instrument, to give reasonable identification, or to sign a receipt for the payment on the instrument, a bank's refusal to pay does not dishonor the instrument. 3. When an instrument is returned because it lacks a proper indorsement

Secondary Liability

1. drawers and indorsers. 2. Liability on a negotiable instrument only when the primary dishonors. (eg: A, drawer, writes B, drawee, a check. B indorse and brought to bank but bank dishonor the check.) secondary liable only if the following events occur: 1. The instrument is properly and timely presented. 2. The instrument is dishonored. 3. Timely notice of dishonor is given to the secondarily liable party

Liability of Agent

1. when the agent signs his or her own name on the instrument with no indication of agency status, an HDC can hold the agent personally liable as noted above. 2. When the agent signs in both the agent's name and the principal's name but nothing on the instrument indicates the agency relationship, the agent may be liable. 3. When the agent indicates his or her agency status in signing a negotiable instrument but fails to name the principal (such as, "Sandra Binney, agent"), the agent may be liable. Exception: s. If an agent signs his or her own name on a check that is payable from the account of the principal, and the principal is identified on the check, the agent will not be personally liable on the check

forgery of a signature on an instrument

A forged signature will not bind the person whose name is used (exceptions: ratification, negligence)

Recovery for Breach of Warranty

A holder can sue for breach of warranty Warranty must be a contributing factor that enticed buyer/lessee to enter the contract A retailer is liable for the express warranties made by manufacturers of goods it sells

Accomodation Party

A party who signs an instrument and lends his or her name (and credit) to another party to the instrument

Primary Liability

Absolute liability to pay a negotiable instrument, unless universal (real) defenses.

Discharge by Impairment of Collateral

a party to an instrument gives collateral as security that her or his performance will occur. When a holder "impairs the value" of that collateral without the consent of the parties who would benefit from it in the event of nonpayment, those parties are discharged to the extent of the impairment

Universal Defenses

Defenses that are valid against all holders of a negotiable instrument, including holders in due course (HDCs) and holders with the rights of HDCs.

Personal defenses

Defenses valid against holders of negotiable notes but voidable against HDC 1. breach of contract/warranty 2. lack or failure of consideration 3. fraud in the inducement 4. Illegality 5. Mental incapacity 6. ordinary duress render the contract voidable 7. previous payment or cancel unauthorized completion 9. Nondelivery of instrument

Accommodation Indorsers

If the accommodation party signs on behalf of a payee or other holder (usually to make the instrument more marketable) secondarily liable after the accommodated party

Accomodation Maker

If the accommodation party signs on behalf of the maker, he or she is an accommodation maker and is primarily liable on the instrument (eg: A cosign B's student loan, A will be the accommodation maker for the credit and will be primary liable)

Presentment Warranties

Implied warranties, made by any person who presents an instrument for payment or acceptance, that (1) the person is entitled to enforce the instrument or is authorized to act on behalf of a person who is so entitled, (2) the instrument has not been altered, and (3) the person has no knowledge that the drawer's signature is unauthorized. they protect the person to whom the instrument is presented.

Discharge by Cancellation or Surrender

Intentional cancellation of an instrument discharges the liability of all parties. 1. Writing "Paid" across the face of an instrument. 2. Intentionally tearing up an instrument. 3. Crossing out a party's signature. Doing this will discharge that party's liability and the liability of subsequent indorsers who have already signed the instrument. 4. Surrendering the instrument (such as a promissory note) to the party to be discharged.

Discharge by Material Alteration

Material Alteration of an instrument may discharge all parties

Proper Notice

Once an instrument has been dis- honored, proper notice must be given to secondary parties (drawers and indorsers) for them to be held liable.

Signature Liability

The liability of someone who signs an instrument 1st or 2nd

acceptor

The person (the drawee) who accepts a draft and who agrees to be primarily responsible for its payment (eg: chase)

Discharge by Reacquisition

The reacquisition of an instrument by a person who held it previously discharges all intervening indorsers against subsequent holders who do not qualify as HDCs

discharge in bankruptcy

The release of a debtor from all debts that are provable, exceptions: excepted from discharge by statute.

Fictious Payee

When a person causes an instrument to be issued to a payee who will have no interest in the instrument (fictitious payee), drawer/maker is liable (eg: employee A writes check to herself (blank in name section) using employer B's checks. B can not sue the bank, drawee, on the fictitious checks)

Material Alteration

a deliberate change or alteration of an important element in a written contract that affects the rights or obligations of the parties (eg: addition of zeros to checks) it's a complete defense ordinarily but a partial defense against HDC. HDC can enforce an incomplete instrument that was subsequently altered

tender of payment

a money offer of payment of an obligation

Discharge by Payment

all parties are discharged when the party primarily liable pays the holder in full. payment by anyone else discharges only that person and subsequent parties. requires good faith

Liability of Principal

an authorized agent binds a principal on an instrument if the agent clearly names the principal in the signature

General Rule

an unauthorized signature is wholly inoperative and will not bind the person whose name is signed or forged. Exceptions: 1. Ratification: 2. negligence:

proper presentment

can be made by any commercially reasonable means, including oral, written, or electronic communication (eg: a draft is given to B payable 30 days from date of issue. B can present the draft to bank, drawee, any time from tomorrow to 30 days)

parties to whom warranty liability extends

extends warranty liability to any subsequent holder who takes the instrument in good faith. The warranties of a person who, for consideration, transfers without indorsement (by delivery of a bearer instrument), however, will extend only to the immediate transferee

Warranty Liability

important when a holder cannot hold a party liable on her/his signature (bearer instrument)

Fraud in the Execution

lying about the nature of a document in order to obtain a person's signature (eg: A sign a paper, presented to him as a delivery notice in French, but is in fact a promissory note. A will not be liable because he doesn't know French)

Makers

persons who sign a promissory note and obligate themselves to pay at maturity are called

Imposter Rule

the drawer or maker is liable on the impostered instrument to any person who, in good faith, pays the instrument or takes it for value or for collection.