Chapter 27:Liability of Parties to Negotiable Instruments

Business Law, Sixth Edition
© 2019 BVT Publishing. All rights reserved.
S-1
Chapter 27:
Liability of Parties to
Negotiable Instruments

S-2
Learning Objectives
• Discuss the liability of negotiable instruments
based on signatures.
• Understand conditional liability.
• Distinguish between presentment, dishonor,
and protest.
• Describe the liability of secondary parties.
• Recognize excuses for failure to perform
conditions precedent.
• Discuss the discharge of liability.

S-3
27.0 In the News
Metals Trading Has a Paper Fraud Problem
http://bvtlab.com/26B79
Warehouse receipts can be faked, and there are
signs that more lenders are being ripped off by
crooks exploiting weaknesses in what
commodity businesses refer to as trade
financing.
• What is a forgery?
• What is the recourse that banks and others have
when given a forged document?

S-4
27.1a In General
• Liability on commercial paper results from
signatures on the instrument.
– Signature of a maker, drawer, or acceptor
on the face of the instrument.
– Endorsement on the back.
• Liability varies, based on the capacity of
the signer.
• Signature generally must be genuine or
signed by an authorized agent.

S-5
27.1b Capacity of the Signature
Where a person signs usually indicates
capacity or status.
• Makers and drawers usually sign in the lower
right-hand corner.
• Endorsers sign on the back of an instrument.
• A drawee places signature of acceptance on
the face.
- When the signature does not reveal the
obligation of the party who signs, the signature
is an endorsement.

S-6
27.1c Agency Principles (Slide 1 of 2)
General principles of the law of agency
are applicable to commercial paper.
– Principal is bound when authorized agent
signs the principal’s name.
– If the agent is not authorized to sign, the
principal is not bound unless:
• Principal ratifies the signature
• Principal is estopped from asserting lack of
authority.

S-7
27.1c Agency Principles (Slide 2 of 2)
• Agent who fails to bind his/her principal
because of lack of authority will usually
be personally liable to third parties.

S-8
27.1c Critical Thinking
CASE: Helmer
Issue is whether an authorized signatory on a
corporate account be held personally liable for
corporate checks returned for insufficient funds.
• Who is favored by the 1996 amendment?
• Are there ways to secure personal liability for a
representative of a corporation without relying on
section 3-402? What avenues are available?

S-9
27.1d Exceptions: Impostors and
Fictitious Payees (Slide 1 of 2)
• An exception to the general rule that
signatures are genuine arises when an
instrument is made payable to an imposter
or to a fictitious person.
• Imposter situation: one poses as a payee
• Fictitious payee situation: name of payee
provided to drawer but has no intent for
payee to have an interest

S-10
27.1d Exceptions: Impostors and
Fictitious Payees (Slide 2 of 2)
• Revisions to Article 3 holds the drawer
liable rather than the drawee.
• Exception does not apply to:
– Instruments that have been diverted and forged
by employee
– Check is stolen.
– In both of these situations, the liability would be
on the drawee who accepted the forged
instrument.

S-11
27.1e Classification of Parties
Primary parties
• Makers of notes and acceptors of drafts
• Incurred an obligation to pay
• Parties who will actually pay the instrument
• Payor banks of checks are primary parties
Secondary parties
• Drawers of drafts, drawers of checks, and
endorsers of any instrument
• Do not expect to pay the instrument

S-12
27.1f Liability of Primary Parties (Slide 1 of 2)
Maker’s Liability
• If a maker signs an incomplete note, a
holder can enforce the note against the
maker in due course.
• If an instrument is materially altered after it
is made, the maker has a real defense in
the absence of negligence.

S-13
27.1f Liability of Primary Parties (Slide 2 of 2)
Acceptor’s Liability
• Drawee of a check or draft is not liable until
acceptance.
• Acceptor is primarily liable after
acceptance.
• Party presenting a draft for acceptance is
entitled to an unqualified acceptance by
the drawee.

S-14
27.2a Introduction to
Conditional Liability
Conditional liability
• Used to describe the secondary liability that
results from the status of parties as drawers or
endorsers
• Certain conditions precedent must be fulfilled
to establish liability.
- Presentment
- Dishonor
- Notice of dishonor
- Protest

S-15
27.2b Critical Thinking
CASE: Messing
Addresses the question of whether a fingerprint
is “reasonable identification” under the Code.
• Do you agree that requiring a thumbprint is a
reasonable manner of identification?
• Why did the court find that the bank did not
dishonor the check?

S-16
27.3b Accommodation Parties
One who signs an instrument for the
purpose of lending name and credit to
another party to an instrument.
– May sign as an endorser, maker, acceptor,
co-maker, or as a co-acceptor
– Liable in the capacity in which he/she signed
– As an endorser, this party does not endorse
to negotiate but to lend credit.
– An accommodation party is a surety.

S-17
27.3c Guarantors
Parties are identified by the nature of the
language accompanying their signatures.
• Payment guarantors
– If the instrument is not paid when due, guarantor
will pay it.
• Collection guarantors
– Becomes liable only after the holder has reduced
a claim against the maker
• Guarantor’s liability is based on the primary
party’s failure to pay alone.

S-18
27.3d Drawers
Drawer is liable to pay if the drawee
refuses to pay a properly drawn draft.
• Drawers are parties to the underlying
contract.
• Drawer’s contract
• Anytime a person signs a negotiable draft
as a drawer, that party implicitly makes a
promise.

S-19
27.3e Endorsers (Slide 1 of 2)
An endorser implicitly creates a contract
of liability with the endorsement.
• Endorser’s contract is based on the conditional
liability of the endorser as a secondary party.
• Unreasonable delay in presentment being made
or in notice of dishonor being delivered: The
endorsers are discharged from liability.
• Endorsers may endorse “without recourse.”

S-20
27.3e Endorsers (Slide 2 of 2)
• Parties promise to the primary party that the
endorsers have good title to the instrument
and no knowledge of the maker’s or
drawer’s signature being forged, and that the
instrument is not materially altered.
• Endorsers become unconditionally liable to
pay the endorsed instrument under certain
circumstances.
• Endorsers warrant to holders

S-21
27.3f Transferors Without Endorsement
• Transferors who do not endorse, but
who simply deliver the bearer paper,
still make the unconditional warranties.
• These warranties bind the transferor
only to the immediate transferee and
not to subsequent holders.

S-22
27.3g Forgeries
• A bank that pays on a forged signature of the
drawer cannot charge drawer.
• A bank paying on the forged signature of an
endorser must return the instrument to the
party whose name was forged.
• In the event of the forged signature of a
drawer, the bank cannot collect from the party
receiving payment unless that party is the
forger or the party dealt with the forger
negligently.

S-23
27.3f Critical Thinking
CASE: Halifax Corp v. Wachovia Bank
Halifax contends that Code gives rise to an
affirmative cause of action for the negligence of a
depositary bank with respect to the alteration of an
instrument or the making of a forged signature.
• Why did the court fail to acknowledge a right of action
against the depository bank?
• What avenues might the employer pursue, given the
outcome of this case?

S-24
27.3h Double Forgeries
• If the drawer’s signature and
endorsement are forged, loss falls on
the drawee.
• If the drawer’s signature is forged, it is
irrelevant whether the payee is real or
fictitious and whether the endorsement
is forged, missing, or otherwise
defective.

S-25
27.4a Excuses for Failure to Perform
Conditions Precedent
• An unexcused delay discharges parties of
the conditions precedent.
• Performance of the conditions precedent is
entirely excused if the party to be charged
has waived the condition.
• Performance of the conditions precedent is
excused if the party to be charged has
dishonored the instrument or has
countermanded payment.

S-26
27.4b Discharge of Liability
• Certification of a check at the request of a
holder discharges all prior parties.
• Payment usually discharges a party’s liability.
• A holder canceling the instrument
• A holder agrees not to sue one party or
agrees to release collateral.
• A prior party reacquires an instrument.
• Fraudulent and material alteration of an
instrument

Chapter 27:Liability of Parties to Negotiable Instruments

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Chapter 27:Liability of Parties to Negotiable Instruments

Similar to Chapter 27:Liability of Parties to Negotiable Instruments (20)

More from Tara Kissel, M.Ed

More from Tara Kissel, M.Ed (20)

Recently uploaded

Recently uploaded (20)

Chapter 27:Liability of Parties to Negotiable Instruments