Chapter 28 Liability, Defenses, and Discharge Copyright © 2017 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Overview • LO28-1: What information is needed to determine signature liability? • LO28-2: What is warranty liability? • LO28-3: How does one avoid liability for negotiable instruments? 28-2 Chapter 28 Hypothetical Case • Logan Aldridge has presented a check for $3,000 to Stephanie Brooks The check is in payment for a set of antique furniture Brooks sold to Aldridge Per Brooks's request, the check is certified by Aldridge's bank, 1st Bank of the North American Hemisphere • Why would Brooks (or any other payee, for that matter) request that the drawer present a certified check, as opposed to a non-certified one? What is the legal effect of a certified check? 28-3 Chapter 28 Hypothetical Case • According to UCC 3-416(a), "a person who transfers an instrument for consideration warrants to the transferee, and, if the transfer is by endorsement, to any subsequent transferee that: (1) the warrantor is a person entitled to enforce the instrument; (2) all signatures on the instrument are authentic and authorized; (3) the instrument has not been altered; (4) the instrument is not subject to a defense or claim in recoupment of any party which can be asserted against the warrantor; and (5) the warrantor has no knowledge of any insolvency proceeding commenced with respect to the maker or acceptor or, in the case of an unaccepted draft, the drawer." These implied promises are commonly referred to in the legal profession as transfer warranties They are implied by law, meaning that the transferor of commercial paper need not expressly make these warranties; instead, they are recognized automatically by operation of law Most laypeople are unfamiliar with these warranties—that is, until a complainant seeks to hold the transferor liable for breach of one or more of them! • From an ethical standpoint, is it fair to hold transferors of commercial paper responsible for transfer warranties, even though the transferor does not expressly make them? 28-4 Signature Liability • Definition: Liability that is attributed because of a party's signature on an instrument 28-5 Parties Signing Negotiable Instruments • • • • Maker • • Person promising to pay set sum to holder of promissory note/certificate of deposit Promises to pay money Acceptor • • Person (drawee) who accepts and signs draft to agree to pay draft when it is presented Pays money (or responsible for paying money) when it is requested Drawer • • Person ordering drawee to pay Orders someone (drawee) to pay Endorser • • Person who signs instrument to restrict payment of it, negotiate it, or incur liability Signs instrument at some point during process of negotiation 28-6 Primary Liability Versus Secondary Liability • Primary liability of makers and acceptors: Must pay stated amount on instrument when it is presented for payment • Secondary liability of drawers and endorsers: Must pay amount on instrument if following conditions met: • • • Presentment (on party with primary liability) Dishonor (by party with primary liability) Notice of dishonor (given to party with secondary liability) 28-7 Proper Presentment of Negotiable Instrument • Presented to proper party • Presented in proper way • Presented in timely manner 28-8 Accommodation Party • Definition: Party who signs instrument to provide credit for another party who has also signed instrument 28-9 Unauthorized Signature • General rule: If signature to negotiable instrument unauthorized, signature will not impose liability on named party 28-10 Negotiable Instrument Warranty Liability • Transfer warranty: When party transfers instrument to another party in good faith for consideration, party makes certain guarantees/warranties regarding instrument and transfer itself • Presentment warranty: Covers the parties accepting an instrument for payment; ensures that the accepting or paying party is paying the proper party 28-11 Transfer Warranties • Transferor entitled to enforce negotiable instrument • Signatures on instrument authentic and authorized • Instrument has not been altered • Instrument not subject to defense or claim in recoupment • Transferor has no knowledge of insolvency proceedings against maker, acceptor, or drawer of instrument 28-12 Presentment Warranties • Warrantor of instrument is entitled to enforce instrument • Instrument has not been altered • Warrantor has no knowledge that drawer's signature or draft is unauthorized 28-13 Avoiding Liability for Negotiable Instruments • Defenses to liability • Real defenses • Personal defenses 28-14 Real Defenses Applicable to All Parties • • • • • • • • Infancy (below legal age of consent) Duress Lack of legal capacity Illegality of transaction Fraud in factum (fraud in execution, fraud in essence) Discharge through insolvency proceedings (bankruptcy) Forgery Material alteration 28-15 Personal Defenses Applicable to Non-HDC Holders • Two types of personal defenses • • General defenses can be asserted against defendant on general contract theory Specific personal defenses are listed in UCC, provisions of Article 28-16 Discharge of Liability on Instruments • Payment/tender of payment • Cancellation/renunciation • Reacquisition • Impairment of recourse • Impairment of collateral 28-17 Chapter 28 Hypothetical Case • Ira Ofseyer is an 18-year-old freshman at Golden State University He arrives on campus several days before classes begin and learns of a party scheduled at Tau Phi Gamma Fraternity on Friday evening Ofseyer arrives at the party, confident that a thorough university education means more than mere academics Beer is served at the party, and that night, Ofseyer consumes the first alcohol of his young life In the haze of the alcohol, and caught up in socializing with the Tau Phi fraternity brothers (who are trying to convince him of the merits of fraternity membership), Ofseyer inadvertently leaves his checkbook on the dining room table Three days later, Ofseyer realizes his checkbook is missing He returns to the fraternity to find his checkbook, but has no luck He hurries to his bank's university branch on University Avenue, and learns that one check has been written on his account in the last three days, for $3,500 at University Stereo Shack Ofseyer's remaining checking account balance is $5.83 His parents will not be happy • Is Ofseyer's bank legally obligated to re-credit his account in the amount of $3,500? 28-18 Chapter 28 Hypothetical Case • Rhonda Kepler receives a Carolina State Bank check for $500 from Heather Gonzalez as repayment of a loan Kepler takes the check to SpartaBank, where she holds an account, and deposits it When the check is processed, Gonzalez's bank finds that there are insufficient funds in her account, and the check is dishonored • In this situation, which party is primarily liable for the negotiable instrument? Which party is secondarily liable? 28-19 ... They are implied by law, meaning that the transferor of commercial paper need not expressly make these warranties; instead, they are recognized automatically by operation of law Most laypeople