Ch. 24 Liability, Defenses, & Discharge

examples of personal defenses

1)breach of contract: instrument may be deemed unenforceable against ordinary holder 2)fraud in the inducement: occurs when a wrongdoer makes false statements to another person to lead that person to enter into a contract with wrongdoers 3)mental illness that makes a contract voidable instead of void: makes negotiable instrument unenforceable 4)illegality of a contract that makes the contract voidable instead of void: negotiable instrument unenforceable 5)ordinary duress of undue influence: if a person is wrongfully influenced or threatened to enter into a negotiable instrument, it is unenforceable 6)discharge of an instrument by payment or cancellation: if an instrument is discharged by payment or cancellation, it is unenforceable

examples of universal defense

1)minority: a minor who does not misrepresent his/her age can disaffirm negotiable instruments 2)extreme duress: if force or violence was used to issue or have issued a negotiable instrument, then it is unenforceable 3)mental incapacity: a person adjudicated mentally incompetent cannot issue a negotiable instrument; the instrument is void from its inception 4)illegality:if an instrument arises out of an illegal transaction, it is unenforceable 5)discharge in bankruptcy: bankruptcy law allows for obligations to pay negotiable instruments to be discharged and therefore unenforceable 6)fraud in the inception: if a person is deceived into signing a negotiable instrument, thinking that it is something else, it is unenforceable

transfer warranties

1)the transferor has good title to the instrument or is authorized to obtain payment or acceptance on behalf of one who does have good title 2)all signatures are genuine and authorized 3)the instrument has not been materially altered 4)no defenses of any party are good against the transferor 5)the transferor has no knowledge of any insolvency proceeding against the maker, acceptor, or the drawer of an unaccepted instrument

universal defense

a defense that can be raised against both holders and HDC'S

personal defense

a defense that can be raised against enforcement of a negotiable instrument by an ordinary holder but not against an HDC

presentment

a demand for acceptance or payment of an instrument made upon the maker, acceptor, drawee, or other payer buy or on behalf of the holder

guarantee of collection

a form of accommodation in which the accommodation party guarantees collection of a negotiable instrument, the accommodation party is secondarily liable on the instrument

guarantee of payment

a form of accommodation in which the accommodation party guarantees payment of a negotiable instrument, the accommodation party is primarily liable on the instrument

accommodation party

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

signer

a person signing an instrument who acts in the capacity of 1) a maker of notes or certificates of deposit, 2) a drawer of drafts or checks, 3) a drawee who certifies or accepts checks or drafts, 4) an endorser who endorses an instrument, 5) an agent who signs on behalf of others, 6) an accommodation party

principal

a person who authorizes an agent to sign a negotiable instrument on his or her behalf

agent

a person who has been authorized to sign a negotiable instrument on behalf of another person

fictitious payee rule

a rule that states that a drawer or maker is liable on a forged or unauthorized endorsement if the person signing as or on behalf of a drawer or maker intends the named payee to have no interest in the instrument or when the person identified as the payee is a fictitious person

imposter rule

a rule that states that if an impostor forges the endorsement of the named payee, the drawer or maker is liable on the instrument to any person who, in good faith, pays the instrument or takes it for value or for collection

unauthorized signature

a signature made by a purported agent without authority for the purported principal

impairment of the right of recourse

a situation in which parties are discharged from liability on an instrument if the holder 1) releases on obligor from liability 2) surrenders collateral without the consent of the parties who would benefit by it

primary liability

absolute liability to pay a negotiable instrument, subject to certain universal (real) defenses

discharge

actions or events the relieve certain parties from liability on negotiable instruments 3 methods of discharge: 1)payment of instrument 2)cancellation 3)impairment of the right of recourse

signature

any name, word, or mark used in lieu of a written signature; any symbol that is 1) handwritten, typed, printed, stamped, or made in almost any other manner 2) executed or adopted by a party to authenticate a writing

transfer

any passage of an instrument other that its issuance and presentment for payment

personal defenses

cannot be raised against a holder in due course, only against ordinary holders

implied warranties

certain warranties that the law implies on transferors of negotiable instruments

signature liability

liability in which a person cannot be held contractually liable on a negotiable instrument unless his or her signature appears on the instrument

secondary liability

liability on a negotiable instrument that is imposed on a party only when the party primarily liable on the instrument defaults and fails to part the instrument when due

FTC HDC rule

rule adopted by the federal trade commission (FTC) that eliminates HDC status with regard to negotiable instruments that arise out of certain consumer credit transactions. All defenses and claims that can be raised by the consumer purchaser against holders can also be raised against HDCs. both personal and universal defenses can be raised against HDCs of negotiable instruments that arise from consumer credit transactions

contract liability is another word for

signature liabilty

forged endorsement

the forged signature of a payee or holder on a negotiable instrument

notice of dishonor

the formal act of letting the party with secondary liability to pay a negotiable instrument know that the instrument has been dishonored

unqualified endorsers

those who are secondarily liable on negotiable instruments they endorse

qualified endorsers

those who disclaim liability and are not secondary liable on instruments they endorse

presentment warranties

three warranties that a person who presents a draft or check for payment or acceptance makes a drawee or an acceptor who pays or accepts the instrument in good faith 1)the presenter has good title to the instrument or is authorized to obtain payment or acceptance of the person who has good title 2)the instrument has not been materially altered 3)the presenter has no knowledge that the signature of the maker or drawer is unauthorized

real defense is another term for

universal defense