Liability of Parties

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McGraw-Hill/Irwin
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Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
P
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Commercial Paper
7
• Negotiable Instruments
• Negotiation and Holder in Due Course
• Liability of Parties
• Checks and Electronic Transfers
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C H A P
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E R
33
Liability of Parties
Always do right.
This will gratify some people, and astonish the rest.
Mark Twain, Speech to Young People’s Society (1901)
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Learning Objectives
• Explain difference between primary
and secondary liability
• List five warranties made to transfer
negotiable instruments and three
warranties made when presenting
these for payment or acceptance
• Discuss three exceptions to normal
liability rules
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Primary vs. Secondary Liability
• A person may be primarily liable if s/he
agreed to pay the negotiable instrument.
– The maker of a promissory note is primarily
liable for paying the debt
• A person who is secondarily liable is a
contract guarantor and, under UCC
Article 3, must pay the instrument only if
the person who is primarily liable defaults
on the obligation
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Acceptor and Drawee Liability
• The acceptor of a draft must pay the
draft according to the terms at the time
of acceptance (drawee’s signed
engagement to honor the draft as
presented)
• A drawee has no liability on a check or
draft unless it certifies or accepts it
– In Harrington v. MacNab, the drawee
bank had no liability to a payee for a
drawer’s insufficient funds
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Indorser Liability
• A person who indorses a negotiable
instrument usually is secondarily liable
– Indorsers are liable to each other in
chronological order, from the last indorser
back to the first
• To trigger secondary liability, the instrument
must be properly presented for payment or
acceptance, the instrument must be
dishonored, and notice of the dishonor must
be given to the person secondarily liable
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Discharge of Indorser Liability
• An indorser is discharged from liability if:
– A bank accepts a draft after indorsement
[3–415(d)]
– Notice of dishonor is required and proper
notice is not given to the indorser [3–415(c)]
– No one presents a check or gives it to a
depositary bank for collection within 30
days after the date of an indorsement [3–
415(e)]
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Presentment of a Note
• Since the maker of a note is primarily liable
to pay it when due, dishonor occurs if the
maker does not pay amount due when:
1) it is presented in the case of (a) a demand note
or (b) a note payable at or through a bank on a
definite date and presented on or after that
date, or
2) if it is not paid on the date payable in the case
of a note payable on a definite date (but not
payable at or through a bank) [3–502]
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Presentment of a Draft or Check
• To obtain payment or acceptance on a
draft or check, holder must present it to
drawee by any commercially reasonable
means
– Written, oral, or electronic [3–501]
• Drawee obligated when it accepts (certifies)
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Warranty Liability
• Person who transfers negotiable
instrument or presents it for payment
may have liability for implied warranties
of presentment or transfer
– Bank One, N.A. v. Streeter: Person who
deposited checks to his account on which
the payee’s name had been altered
breached transfer warranties and was not
entitled to enforce the instruments
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Mistake in Payment or Acceptance
• Revised Article 3 follows
general rule that payment
or acceptance is final in
favor of a holder in due
course or payee who
changes position in
reliance on payment or
acceptance
– Bank bears burden of
mistake
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Other Liability Rules
• Imposter rule: If impostor convinces drawer
to make check payable to the impersonated
person or organization s/he “represents,”
UCC makes any indorsement substantially
similar to that of named payee effective
• Fictitious payee rule: If check written to
fictitious payee, UCC allows any indorsement
in name of fictitious payee to be effective as
payee’s indorsement in favor of any person
that pays in good faith or takes for value or
collection
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Other Liability Rules
• Fraudulent indorsements by employees:
Risk of loss for indorsements by
employees given responsibilities for
instruments (e.g., checks) falls on
employer rather than bank that takes
check or pays it
• Conversion: Law applicable to
conversion of personal property applies
to instruments
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Discharge of
Negotiable Instruments
• An obligor is discharged from liability by:
1.
2.
3.
4.
Payment of the instrument
Cancellation of the instrument
Alteration of the instrument
Modification of principal’s obligation causing a
loss to a surety or impairing collateral
5. Unexcused delay in presentment or notice of
dishonor with respect to a check
6. Acceptance of a draft by a bank (e.g., if a
check is certified by a bank)
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Thought Questions
• What steps would you take to make sure
that fictitious payees and fraudulent
indorsement did not occur in your
business?
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