Law 332 Chapter 27 Exam 2

UD 5. Minority

state laws recognize this.

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.

Secondary Liability

drawers and indorsers are secondary liable. On a negotiable instrument, secondary liability is contingent liability. In other words, a drawer or an indorser will be liable only if the party that is primarily responsible for paying the instrument refuses to do so that is, dishonors the instrument. Secondary Liable if these 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.

PD 2. Lack or Failure of Consideration

the absence of consideration (value) may be a successful defense in some instances.

Exceptions to the General Rule

1. Ratification: when the person whose name is signed ratifies the signature, he or she will be bound. 2. Negligence: when the negligence if the person whose name was forged substantially contributed to the forgery, a court many not allow the person to deny the effectiveness of an unauthorized signature.

Presentment Warranties

1. The person obtaining payment or acceptance is entitled to enforce the instrument or is authorized to obtain payment or acceptance on behalf of a person who is entitled to enforce the instrument. (This is, in effect, a warranty that there are no missing or unauthorized indorsements.) 2. The instrument has not been altered. 3. The person obtaining payment or acceptance has no knowledge that the signature of the drawer of the instrument is unauthorized. They are referred to this because they protect the person to whom the instrument is presented. Limiatations: the second and third warranties do not apply to makers, acceptors, and drawers.

Unauthorized Signatures

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 the principal. - The general rule is that an unauthorized signature is wholly inoperative and will not bind the person whose name is signed or forged.

Fictitious Payees most often arise in

1. When dishonest employee deceives the employer into signing an instrument payable to a party with no right to receive payment on the instrument. 2. When a dishonest employee or agent has the authority to issue an instrument on behalf of the employer and issues a check to a party who has no interest in the instrument.

Will not Dishonor the Instrument

1. when presentment is made after an established cutoff hour, a bank can postpone payment until the following business day without dishonoring the instrument. 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, the instrument is not dishonored.

Liability of the 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.

PD 5. Mental Incapacity

If someone is not in the normal state of mind, even before the court decides this.

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 Impairment of Collateral

Sometimes, 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 form the collateral in the event of nonpayment, those parties to the instrument are discharged to the extent of the impairment.

PD 1. Breach of Contract or Breach of Warranty

a breach of the underlying contract for which the negotiable instrument was issued is a persona. If a breach occurs, the maker of a note can refuse to pay it, or the drawer of a check can order his or her bank to stop payment on the clock. Breach of warranty can also be claimed also be claimed as a defense to liability on the instrument.

UD 1. Forgery

a forged signature will not bind the person whose name is used. Thus, 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.

PD 3. Fraud in the Inducement (Ordinary Fraud)

a person who issues a negotiable instrument based on false statements by the other party will be able to avoid payment on that instrument, unless the holder is an HDC.

Transfer Warranties

a person who transfers an instrument for consideration. 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 transferror. 5. The transferor has no knowledge of any bankruptcy proceedings against the maker, the acceptor, or the drawer of the instrument.

Discharged by Payment or Tender of Payment

all parties to a negotiable instrument will be discharged when the party primarily liable on it pays to a holder the full amount due. - Good Faith Required - Tender of Payment

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.

Universal Defenses

are valid against all holders, including HDCS and holders through HCDS.

Fictitious Payee

can be a person or firm that does not truly exist, or it may be an identifiable party that will not acquire any interest in the instrument.

UD 2. Fraud in the Execution

if a person is deceived into signing a negotiable instrument by being told that is something else (such a receipt), fraud in the execution (or inception) is committed against the signer.

PD 4. Illegailty

if a statue provides that an illegal transaction is voidable, the defense is personal.

UD 3. Material Alteration

if it changes the contract terms between two parties in any way. Examples include any unauthorized addition of words or numbers or other changes to compete an incomplete instrument that affect the obligation of a party to the instrument.

Accommodation Indorsers

if the accommodation party signs on behalf of a payee or other holder (usually to make the instrument more marketable), she or he is an accommodation indorser.

Accommodation Makers

if the accommodation party signs on behalf of the maker, he or she is an accommodation maker and is primarily liable on the instrument.

Acceptors

is a drawee, such as a bank, that promises to pay an instrument when it is presented later for the payment.

Agent

is a person who agrees to represent or act for another

UD 4. 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 finally settle all of the insolvent party's debts.

Accommodation Party

is one who signs an instrument for the purpose of lending his or her name as credit to another party on the instrument.

Warranty Liability

is particularly important when a holder cannot hold a party liable on her or his signature, such as when a person delivers a bearer instrument. Unlike secondary signature liability, warranty liability is not subject to the conditions of proper presentment, dishonor, or notice of dishonor.

Primary Liability

is unconditional. A person who is primarily liable on a negotiable instruments is absolutely required to pay the instrument-unless, of course, he or she has a valid defense to payment . Liability is immediate when the instrument is signed or issued.

Discharge by Material Alteration

materially altering an instrument may discharge the liability of all parties, as previously discussed.

Makers

the maker of a promissory note unconditionally promises to pay the note according to its terms. It is the makers promise to pay that renders the instrument negotiable. Even if the promissory note was incomplete at the time the maker signed it, the make is still obligated to pay.

Discharge by Re-Acquisition

the re-acquisition of an instrument by a person that held it previously discharges all intervening indorsers against subsequent holders who do not qualify as HDC'S.