Liability on Checks and Notes Flashcards
(19 cards)
A co-maker’s liability is:
joint and several
A drawee is liable:
- to the drawer to make payment according to the terms of the draft if the drawer “accepted” (e.g., by signed agreement)
- to the drawer for wrongful dishonor if there are actual damages
Certified checks:
relieve the drawer of liability; bank has certified payment and taken funds from the drawer’s account immediately
Indorser’s liability (general rule):
- if the instrument is dishonored, all indorsers up the chain of indorsement are liable to pay the amount on instrument at the time it was dishonored
How can an indorser disclaim liability on an instrument?
indorsing with the words “without recourse” disclaims contract/signature liability
When is an indorser’s liability discharged?
if the instrument is presented to the drawer more than 30 days after the indorsement
What are transferor’s warranties?
A person who takes value and transfers an instrument warrants to the transferee and any subsequent transferees:
(1) transferor is entitled to enforce the instrument
(2) all signatures are authentic and authorized
(3) the instrument has not been dishonored
(4) there are no claims in recoupment
(5) there are no insolvency proceedings
(6) it was authorized by the account for whom it was drawn on
Can a transferor disclaim warranties?
Not for checks; yes for notes when expressed with words, such as “without warranties”
What can be recovered for breach of warranties of transfer?
Damages to the extent of the injury, but not more than the amount of the instrument
Who can be liable on a contract theory of liability on negotiable instruments?
Contract liability (also called “signature” liability) applies to any party who signs the instrument: makers, drawers, indorsers. Signing the instrument is essentially a promise to pay.
- Indorsers are saying, I will pay you if this is dishonored and I am given notice.
- Drawees are never liable on contract/signature claims
What is the theory of warranty liability on a negotiable instrument?
Warranty liability (also called transfer liability) is the seller’s liability for selling a defective instrument.
Who can be a defendant on a breach of warranty claim for a negotiable instrument?
The defendant must have SOLD the instrument; a donor is not liable on transfer warranty theory. Two elements: (1) takes value and (2) transfers the instrument.
Who can sue on a breach of warranty claim for a negotiable instrument?
- If defendant indorsed –> warranties run with the instrument and anyone in possession can sue for breach of warranty
- If defendant did not indorse –> then only defendant’s immediate transferee may sue defendant for breach of warranty
What is the difference between a valid negotiation of an instrument payable to order and an instrument payable to bearer?
When an instrument is payable to order, it is only considered negotiated upon
delivery of the instrument to the specified payee. Further negotiation requires that payee to indorse the instrument and deliver it to the transferee.
When an instrument is payable to bearer, it is negotiated by delivery alone.
What is the difference between a special and blank indorsement?
A special indorsement names a particular person; the indorsee must sign in order for the instrument to be further negotiated.
A blank indorsement does not name anyone.
Hypo: B indorses his paycheck “pay to H, signed B.” H loses the check. J finds it, signs H’s name, cashes at the shop. What result?
The shop is not at holder and cannot enforce the check because B made a special indorsement to H. The indorsee of a special endorsement must sign his name to further negotiate. H did not sign, so there was not a valid negotiation to J or shop.
Hypo: B indorses his paycheck by signing his name on back and delivers it to E, who loses it. J finds it and cashes it at store. What result?
The store is a holder and can enforce the check because B made a blank endorsement by signing his name and delivering it to E. After a blank indorsement, further negotiation is accomplished by transfer of possession and further indorsement is not required. When E lost the note and J found it, possession transferred to J. When J delivered it to the store possession transferred again. Thus, a valid negotiation occurred from E to J, then from J to store.
What is a restrictive endorsement?
an endorsement with a condition
Hypo: B indorses his check “for deposit only, B.” L steals the check from B and cashed it at bank. What result?
Bank is not a holder and cannot enforce the check, and B can recover from the bank for conversion. By writing “for deposit only” on his check, B made a restrictive endorsement conditioning further negotiation on deposit of funds into his account. No funds were deposited into B’s account. Thus, the check was not validly negotiated to L and could not be sold to bank.
