1.8 VII. CONTRACT LIABILITY

Question 1

Basis of liability:

Answer 1

The primary basis of contract liability on an instrument is a person’s __signature_.

Question 2

A. SIGNATURES BY AGENTS

Answer 2

A. SIGNATURES BY AGENTS
1. Binding Principal — follow general law
2. Binding Agent
a. Agent Escapes Personal Liability if:
(1) Principal __identified_ in Instrument;
and
(2) Signature Unambiguously Shows it Made on Behalf of ___principle__
b. Liability of agent if above two elements not satisfied
(1) To Holder In Due Course
Agent is liable to holder in due course unless the agent can prove that the holder had __notice_ of the representative nature of agent’s signature.
(2) To Non-Holder In Due Course
Agent is liable to a non-holder in due course unless agent can prove that the original parties did not _intent__ the agent to be liable.
3. If Agent Not Authorized
forgery

Question 3

B. MAKER OF NOTE

Answer 3

B. MAKER OF NOTE
1. Primary Liability — no conditions precedent
Maker must pay instrument __when it is due_ according to its terms at the time it was issued (or when incomplete instrument completed).
2. Liable to Holder or Indorser Who Paid Instrument
3. Defenses
Maker may raise defenses; effectiveness depends on status of holder

Question 4

C. DRAWER OF DRAFT

Answer 4

C. DRAWER OF DRAFT
1. Disclaiming Liability
Drawer may not disclaim liability on a check but may disclaim liability on other drafts.
2. Secondary Liability
Drawer liable only after two conditions are first satisfied:
a. Presentment to Drawee Within 30 Days
b. Dishonor
The drawee refuses to pay the instrument upon a proper presentment.

*to holders: liability can be discharged only if bank drawee dishonored because it became insolvent

Question 5

D. INDORSER OF NOTE OR DRAFT

Answer 5

D. INDORSER OF NOTE OR DRAFT
1. Liability Disclaimer Allowed
2. Order of Liability
Indorsers are liable to each other in the order of their signatures. Sue __prior__ indorsers for payment.
Liable to __later__ indorsers.
3. Secondary Liability
Indorser liable only after three conditions are first satisfied:
(1) presentment to Maker or Drawee of Check Within 30 Days of Indorsement
(2) dishonor, and
(3) notice of dishonor. to Indorser Within _30 Days of the Dishonor

Question 6

E. DRAWEE

Answer 6

1. General Rule
   A drawee makes no negotiable instruments contract.
   payee can’t sue drawee bank
2. Acceptance or Certification
   The drawee may agree to pay the draft by signing the draft.
   The drawee has no obligation to accept a draft and cannot be sued for failing to accept.
   Certification discharges the drawer and all prior indorsers.
3. Final Payment
   Once a drawee bank finally pays a check, contract actions (e.g., the drawer’s and indorser’s contracts) may no longer be pursued and the drawee bank may not recover on the check from the persons it paid unless there is a breach of a presentment warranty.
   Final payment occurs when the drawee bank (1) pays the item in cash or (2) does not revoke a provisional settlement by the midnight deadline, that is, midnight of the next banking day after the banking day of receipt.
4. Conversion (Tort) Liability if Drawee Pays on Forged Indorsement
   Drawee who pays on forged indorsement is liable to the payee in conversion.
   Person suing in conversion must have __received delivery__ of the instrument.
5. Payment of Checks After the Drawer’s Death
   a. General Rule
   Drawee bank may continue to pay checks until it __knows_ that the drawer has died and has a reasonable opportunity to act on that knowledge.
   b. Effect of Notice of Death
   Drawee bank may pay for no more than 10 days after the drawer’s death if the bank knows of the drawer’s death.

Question 7

F. ACCOMMODATION PARTIES

Example: Son would like to buy a car on credit but Auto Dealer is reluctant due to Son’s weak credit record. Son convinces Mother to co-sign the note and Auto Dealer sells Son the car.

Answer 7

1. Definition — Co-Signers, Sureties, and Guarantors
   A person who signs an instrument to lend his or her credit to another party but who does not receive any direct benefit, i.e., does not receive any of the borrowed money.
2. Parties
   a. Accommodated Party — principal/debtor/obligor
   The person with bad credit.
   b. Accommodation Party — surety/co-signer
   The person with good credit.
   c. Holder — creditor/obligee
   The person who wants payment assured.
3. Liability – Generally
   Liable in capacity in which accommodation party signs; no special contract.

Mother is liable as an accommodation maker. Auto Dealer may collect the note from Mother and does not need to attempt to collect from Son first.

4. Limiting Liability to Collection Only
   The accommodation party may include express language limiting the contract to a guarantee of collection only.
5. Reimbursement
   If the accommodation party [surety] pays the instrument, the accommodation party is entitled to reimbursement from the accommodated party [maker, indorser].
6. Demonstrating Accommodation Status
   a. Express Language
   b. Anomalous Indorsement
   An indorsement by a person who was not the holder of instrument, i.e., an indorsement outside of the chain of title, is notice of its accommodation character.

Question 8

drawer’s argument as that drawer’s “payment in full” mark on the check acted as accord and satisfaction to satisfy the debt

Answer 8

drawer must prove:
1, drawer acted in good faith
2, the claim was unliquidated or subject to a bona fide dispute
3, payee obtained payment of the check
4, the check tendered as full satisfaction of the claim
5, payee’s return of the check within 90 days didn’t prevent the accord because payee knew the check was tendered in full satisfaction of the claim

exception:
payee returns the money within 90 days
payee is an organization that notify drawer to send payment in full checks before