Liability of Parties Flashcards
(41 cards)
Basic idea
a number of parties to a negotiable instrument may be held liable simply because their names appear on the instrument.
Generally, no one may be held liable unless her signature or the signature of an authorized representative is on the instrument.
Parties Who May Be Liable on an Instrument:
Maker of Note, Issuer of Cashier’s Check
by signing her name, maker of note (or issuer of cashier’s check) makes a contract to pay the instrument according to its terms at the time it is issued.
This promise is unconditional, but proper defenses may be raised.
Parties Who May Be Liable on an Instrument- Indorser:
Indorser
indorser signs instrument (usually on its backside) for a number of purposes:
e.g. negotiating the instrument, restricting payment, incurring indorser’s liability
an indorser is considered to be secondarily liable (i.e. a person entitled to enforce the instrument looks first to the drawer or maker)
Parties Who May Be Liable on an Instrument- Indorser:
Basic Obligation: Indorser’s Contract
indorser’s contract, the basic obligation to pay according to the terms of the instrument at the time of the indorsement, arises merely from the indorser’s signing her name on the instrument,.
BUT, the obligation may be negated if the indorser includes the word “without recourse” with her indorsement.
Before a holder can look to an indorser for payment, the holder must fulfill three prerequisites: presentment, dishonor, and notice of dishonor.
Parties Who May Be Liable on an Instrument- Indorser:
Presentment
demand for payment made by a person entitled to enforce the instrument.
Presentment is usually made on the drawee of a draft or the maker of a note
checks: indorser’s liability on a check is discharged unless the check is presented for payment or given to a depository bank for collection within 30 days after the indorsement.
Parties Who May Be Liable on an Instrument- Indorser:
When Presentment May Be Excused
presentment is excused if:
(i) the person entitled to present cannot with reasonable diligence;
(ii) the maker or acceptor has repudiated the obligation to pay or is dead or insolvent;
(iii) by the instrument’s terms, presentment is unnecessary;
(iv) the obligor has waived presentment; or
(v) the drawer has instructed the drawee not to pay or the drawee was not obligated to pay.
*Parties Who May Be Liable on an Instrument- Indorser:
Dishonor
occurs when the maker or drawee does not pay within the allowed time after presentment
Time instruments (e.g. instruments payable at a particular time): dishonored if not pay when due or date of presentment, whichever is later.
Checks: dishonored if it is presented for payment and payment is refused. If check is presented for other than immediate payment (e.g. when you deposit whole paycheck into your checking account without receiving cash back), it is dishonored if the bank returns the check or sends a written notice of dishonor before final payment (which usually occurs after settlement through a clearinghouse) or before the bank’s midnight deadline (i.e. the midnight of the next banking day after the day the instrument is deposited)
*if payout some of the money from a check before settlement, that money is considered final settlement of that portion of the check and cannot become regained.
*Parties Who May Be Liable on an Instrument- Indorser:
Notice of Dishonor
indorser not liable on an instrument unless she is given timely notice that the instrument has been dishonored.
Notice may be given by any commercially reasonable means, and generally must be given within 30 days after dishonor
notice of dishonor need not be given to the maker of a n note or the drawer of a draft
Parties Who May Be Liable on an Instrument- Indorser:
Notice of Dishonor Excused
delay excused: if delay is caused by circumstances beyond the control of a notifier who exercised reasonable diligence after the cause of the delay ceased to exist.
notice entirely excused if:
(i) the terms of the instrument make it unnecessary; or
(ii) obligor waives notice
Parties Who May Be Liable on an Instrument- Indorser:
Multiple Indorsers
an indorser is liable for the full amount of the instrument at the time she indorsed it to any holder or later indorser of the instrument
*Parties Who May Be Liable on an Instrument- Indorser:
Transferor-Transfer Warranties
warranties are made by:
(i) any person who transfers (i.e. any movement except issuance or presentment) an instrument or customer or collecting bank that transfers an item for consideration
Warranties run to all subsequent holders if the transfer is by indorsement, but only to the immediate transferee if transfer is not by indorsement.
*Parties Who May Be Liable on an Instrument- Indorser:
Negating transfer warranties
Other than on checks, warranty liability can be negated by a transferor if she places words to that effect on the instrument, but a customer or collecting bank cannot disclaim its obligation to pay a dishonored item.
*Parties Who May Be Liable on an Instrument- Indorser:
List of Warranties
Transferor warrants:
- she is entitled to enforce the instrument
- all signatures are genuine or authorized
- instrument or item has not been materially altered
- no defense or claim of any party is good against her
- she has no knowledge of any insolvency proceedings that have been instituted against the maker or drawer;
- if the instrument is a “remotely created item”, creation of the instrument was authorized by the person identified as the drawer (remotely created item: created by a third party other than payor bank, under the purported authority of the drawer, for the purpose of charging the customer’s account with a bank, and does not bear a handwritten signature purporting to be the signature of the drawer)
*Parties Who May Be Liable on an Instrument- Indorser:
Contract Liability vs. Warranty Liability
Transferor who transfers the instrument or item without consideration warrants nothing (so no warranty), although this does not shield her from contract liability (i.e. the obligation to pay the instrument according to its terms when the endorser signed if there is presentment, dishonor, and notice of dishonor)
- discuss both K liability and warranty liability if there is a question about indorsers
Parties Who May Be Liable on an Instrument- Drawer
if a draft is dishonored, the drawer is obliged to pay according to the draft’s terms when the drawer signed (or, if incomplete, according to its terms as completed)
However, if a draft is accepted by a bank, the drawer is discharged and cannot be held liable if the bank fails to pay.
If drawer signs the draft “without recourse”, she is not liable to pay in the event of dishonor, but note that checks may not be drawn without recourse
Parties Who May Be Liable on an Instrument- Drawee
Drawee does not have any liability on an instrument unless and until she signs the instrument (and thus becomes an acceptor).
Thus, a holder generally cannot force a drawee to pay out on draft.
while there is no liability for on an instrument absent acceptance, a bank can incur common law tort or contract liability with regard to an instrument (e.g. if Payee calls Drawee Bank to ask whether Drawer has sufficient funds to cover a check, and Bank says there are sufficient funds when in reality there are not, Bank can be liable under promissory estoppel)
Parties Who May Be Liable on an Instrument- Drawee
Duties of a Drawee Bank to Customer
when a bank is drawee (E.g. checks), the bank may be liable to its customer for failure to honor the draft, because a contractual which imposes duties on both bank and customer.
Bank is obliged to honor its customer’s check if sufficient funds are available to to cover the draft and if bank wrongfully dishonors a draft, the customer may collect damages for harm proximately caused by the wrongful dishonor.
Banks may refuse to pay checks over six months old, unless again ordered to pay by the drawer
Parties Who May Be Liable on an Instrument- Drawee
Duties of a Drawee Bank to Customer: Insufficient Funds and When Bank Cannot Charge the Account
Insufficient Funds: if the customer has insufficient funds to cover a check, the bank may pay it anyway, and the customer is liable to the bank for the overdraft.
When a Bank Cannot Charge the Account: bank must honor a check as drawn. Therefore, it cannot charge the account:
(i) if there is no order by the depositor (where the drawer’s signature is forged);
(ii) for more money than the original order (where a third party altered the amount);
(iii) if the bank pays the wrong person (e.g. the forger of the payee’s or indorsee’s signature); or
(iv) if the item is postdated and the customer notifies the bank of the postdating (the bank cannot pay it before the stated date).
If the bank violates these principles, the customer is entitled to a recredit on her account.
*Parties Who May Be Liable on an Instrument- Drawee
Duties of Customer to Bank
bank can successfully charge the customer’s account if it can show that it suffered a loss because the customer negligently failed to discover and notify the bank of any unauthorized payments on his bank statement resulting from alteration or forgery of his signature.
Customer may answer such proof by showing that bank was negligent in paying the item (if this is the case, then the loss will be allocated between the bank and the customer in proportion to the fault of each)
Parties Who May Be Liable on an Instrument- Drawee
Death of Customer
customer’s death does not revoke the bank’s authority to pay a check until the bank:
(i) knows the death; and
(ii) has a reasonable time to act on the knowledge
even with such knowledge, bank may continue paying checks for 10 days after the date of death, unless someone claiming an interest in the account orders that payment be stopped.
Parties Who May Be Liable on an Instrument- Drawee
Subrogation
bank that pays check is subrogated to the rights of the person it pays against the customer.
e.g. if a bank pays an HDC, it can assume the position of an HDC in attempting to charge its customer’s account.
*Parties Who May Be Liable on an Instrument- Drawee
Stop Payment Orders
written stop payment order is binding for six months and may be renewed.
*Bank must be given reasonable time to act
If bank pays an item in spite of a stop payment order, the customer has the burden of proving that a loss has occurred and the amount of the loss.
if there is an HDC in the chain of transferees of the item, the customer cannot recover-since even if payment had been stopped, the customer would have had to pay the HDC.
Parties Who May Be Liable on an Instrument- Drawee
Bank’s Right to Recover Payment from Party Paid
if the bank erroneously pays out on a forged instrument to an HDC, it generally may not recover back from the party paid unless there has been a breach of transfer warranty or a presentment warranty
Parties Who May Be Liable on an Instrument- Acceptor
acceptor (usually, but not necessarily, a drawee bank) signs a draft and thereby becomes primarily bound to pay the instrument.
In essence, the acceptor contracts to pay the draft, when due in accordance with its terms when accepted.
Accepted drafts are often required when the payee does not want to rely on the credit of an unfamiliar drawer. Draft is usually presented to the acceptor, which signs the draft (and usually charges its customer’s account at that time) and returns it to the presenting party.
Typically called “presentment by acceptance” and may be sought at any time by any party entitled to enforce the instrument.