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Dynamic business law 4e kubasek 4e CH28

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.


• 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?


Chapter 28 Hypothetical Case 1

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?


Chapter 28 Hypothetical Case 2

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?


Signature Liability

• Definition: Liability that is attributed because of a party's signature on an


Parties Signing
Negotiable Instruments


Person promising to pay set sum to holder of promissory note/certificate of deposit
Promises to pay money


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


Person ordering drawee to pay
Orders someone (drawee) to pay


Person who signs instrument to restrict payment of it, negotiate it, or incur liability
Signs instrument at some point during process of negotiation


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)


Proper Presentment of Negotiable Instrument

• Presented to proper party
• Presented in proper way
• Presented in timely manner


Accommodation Party

• Definition: Party who signs instrument to provide credit for another party
who has also signed instrument


Unauthorized Signature

• General rule: If signature to negotiable instrument unauthorized,
signature will not impose liability on named party


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


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


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


Avoiding Liability for
Negotiable Instruments

• Defenses to liability
• Real defenses
• Personal defenses


Real Defenses
Applicable to All Parties

Infancy (below legal age of consent)
Lack of legal capacity
Illegality of transaction
Fraud in factum (fraud in execution, fraud in essence)
Discharge through insolvency proceedings (bankruptcy)
Material alteration


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 3


Discharge of Liability on Instruments

• Payment/tender of payment
• Cancellation/renunciation
• Reacquisition
• Impairment of recourse
• Impairment of collateral


Chapter 28 Hypothetical Case 3

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?


Chapter 28 Hypothetical Case 4

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?


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