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Business Law > Ch. 27 Liability, Defenses and Discharge > Flashcards

Ch. 27 Liability, Defenses and Discharge Flashcards

1
Q

Liability on a negotiable instrument can arise from what two things?

A

1) Signature Liability

2) Warranty Liability

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2
Q

What is signature liability?

A

Liability on a negotiable instrument that arises from:

- a person’s signature on the instrument

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3
Q

What is warranty liability?

A

Liability on a negotiable instrument that arises from:

-the warranties that are implied when the person presents the instrument for negotiation

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4
Q

Does warranty liability require a signature?

A

No

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5
Q

To whom does warranty liability extend?

A
  • Extends to both signers and nonsigners
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6
Q

When can a breach of warranty occur?

A

When the instrument is transferred OR presented for payment

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7
Q

Define qualified indorser.

A
  • One who indorses “without recourse”
  • Undertakes no obligation to pay
  • Merely assumes warranty liability
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8
Q

What is the general rule in regards to signature liabilit?

A
  • Every party, except a qualified indorser
  • Who signs a negotiable instrument
  • Is either primarily or secondarily liable
  • For payment of that instrument
  • When it comes due
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9
Q

Is primary liability conditional?

A

No, it is unconditional

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10
Q

Fill in the blank.

Only ________ and ____________ are primarily liable.

A
  • Makers

- Acceptors

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11
Q

Give an example of an acceptor.

A

Bank

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12
Q

Define acceptor.

A
  • A drawee (e.g. bank)
  • That promises to pay an instrument
  • When it’s presented later for payment
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13
Q

Failure to pay an accepted draft when presented leads to what type of liability?

A

Primary signature liability for drawee-acceptor (e.g. bank)

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14
Q

Fill in the blank.

________ and _______ are secondarily liable.

A
  • Drawers

- Unqualified Indorsers

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15
Q

On a negotiable instrument, secondary liability is “contingent liability.” A drawer or indorser will be liable only if what?

A
  • Party that is primarily responsible for paying the instrument refuses to do so
  • That is, dishonors the instrument
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16
Q

Parties are secondarily liable on a negotiable instrument only if what events occur?

A

1) Instrument is properly and timely presented
2) Instrument is dishonored
2) Timely notice of dishonor is given to the secondarily liable party

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17
Q

When does presentment occur?

A

When a person presents an instrument either to the party liable on the instrument for payment or to a drawee for acceptance.

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18
Q

A note or CD must be presented to whom for payment?

A

Maker

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19
Q

A draft is presented to whom for acceptance, payment, or both?

A

Drawee

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20
Q

Presentment can be made by any commercially reasonable means, including what?

A
  • Oral
  • Written OR
  • Electronic communication
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21
Q

To make the drawer secondarily liable, the holder of a check must present that check for payment or collection w/i what time frame?

A

30 days of check’s date to make drawer secondarily liable

22
Q

With respect to indorsers, the holder must present a check w/i what time frame to make the indorser secondarily liable?

A

30 days after its indorsement

23
Q

What is an accommodation party?

A

One who signs an instrument for the purpose of lending his/her name as credit to another party on the instrument

24
Q

If the accommodation party signs on behalf of the maker, he or she is a what and is primarily liable on the instrument?

A

Accommodation maker

25
Q

If the accommodation party signs on behalf of a payee or other holder (usually to make the instrument more marketable), he or she is a what?

A

Accommodation indorser

26
Q

Is an accommodation indorser primarily or secondarily liable?

A

Secondarily liable

27
Q

What is a basic requirement to hold the principal liable on the instrument?

A

Agent must be authorized to sign the instrument on principal’s behalf

28
Q

Generally, an authorized agent binds a principal on an instrument if the agent clearly does what?

A

Clearly names the principal in the signature

29
Q

When an agent signs his name on the instrument with no indication of agency status, can an HDC hold the agent personally liable on a negotiable instrument?

A

YES

30
Q

When an agent signs in both the agent’s name and the principal’s name but nothing on the instrument indicates the agency relationship, may the agent be liable on a negotiable instrument?

A

YES

31
Q

To protect against potential personal liability, an authorized agent should disclose what info on the negotiable instrument?

A
  • Identity of the principal

- Indicate that the agent is signing in a representative capacity

32
Q

Unauthorized signatures arise in what two types of situations?

A

1) When a person forges another person’s name on a negotiable instrument
2) When an agent who lack the authority signs an instrument on behalf of a principal

33
Q

Unlike secondary signature liability, warranty liability is not subject to the conditions of what?

A
  • Proper presentment
  • Dishonor
  • Notice of dishonor
34
Q

Warranties fall into what two categories?

A

1) Those that arise from the transfer of a negotiable instrument
2) Those that arise on presentment

35
Q

A person who transfers an instrument for consideration makes what five transfer warranties to all subsequent transferees and holders who take the instrument in good faith?

A

1) Transferor is entitled to enforce the instrument
2) All signatures are authentic and authorized
3) Instrument has not been altered
4) Instrument is not subject to a defense or claim of any party that can be asserted against the transferor
5) Transferor has no knowledge of any bankruptcy proceedings against the maker, the acceptor, or the drawer of the instrument

36
Q

For transfer warranties to arise, what must happen?

A

An instrument must be transferred for consideration

37
Q

Transfer of an order instrument by indorsement and delivery extends warranty liability to whom?

A

Any subsequent holder who takes the instrument in good faith

38
Q

Transfer of a bearer instrument by delivery extends warranty liability to whom?

A

To the immediate transferee

39
Q

Any person who presents an instrument for payment or acceptance makes what presentment warranties to any other person who in good faith pays or accepts the instrument?

A

1) Person obtaining payment or acceptance is entitled to enforce the instrument or is authorized to obtain payment or acceptance on behalf of a person who is entitled to enforce the instrument
2) Instrument has not been altered
3) Person obtaining payment or acceptance has no knowledge that the signature of the drawer of the instrument is unauthorized

40
Q

What are universal defenses also referred to as?

A

Real Defenses

41
Q

Universal defenses are valid against whom?

A

All holders (including HDCs and holders through HDCs)

42
Q

What are six universal defenses?

A

1) Forgery of a signature on an instrument
2) Fraud in the execution
3) Material alteration
4) Discharge in bankruptcy
5) Minority
6) Illegality, mental incapacity, extreme duress

43
Q

Personal (limited) defenses are valid against whom?

A

Ordinary holders (not HDCs)

44
Q

What are nine personal (limited) defenses?

A

1) Breach of contract
2) Lack or failure of consideration
3) Fraud in the inducement
4) Illegality, mental incapacity, or duress, if contract is voidable
5) Previous payment or cancellation of the instrument
6) Unauthorized completion of an incomplete instrument and nondelivery of the instrument
7) Discharge by previous payment or cancellation
8) Unauthorized completion of an incomplete instrument
9) Nondelivery of the instrument

45
Q

Is material alteration a complete defense against an HDC?

A

No, only a partial defense

46
Q

Can an HDC enforce an incomplete instrument that was subsequently altered?

A

YES (drawer or maker could have avoided the alteration by exercise of greater care in completing the instrument)

47
Q

If a statute provides than an illegal transaction is void, then is this a defense universal?

A

YES (absolute against both ordinary holder and an HDC)

48
Q

What did a party assert as a defense in the Mills v. Chauvin case?

A

A party asserted lack of consideration as a defense for not paying a promissory note

49
Q

What rule places an HDC of an instrument in the position of a contract assignee?

A

FTC Rule 433

50
Q

Discharge from liability on an instrument can come from what?

A
  • Payment
  • Cancellation
  • OR material alteration
51
Q

Discharge from liability on an instrument can ALSO come from what?

A
  • If a party reacquires an instrument
  • If a holder impairs another party’s right of recourse
  • If a holder surrenders collateral w/o consent

Business Law (20 decks)

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