Chapter 14: "Liability, Defenses, and Discharge"

Question 1

imposter

Answer 1

Definition:
One who, by use of the mail, telephone, or personal appearance, induces a maker or drawer to issue an instrument in the name of an impersonated payee. Indorsements by imposters are not treated as unauthorized under Article 3 of the Uniform Commercial Code.

Question 2

A person who transfers an instrument for consideration makes the following five transfer warranties to all subsequent transferees and holders who take the instrument in good faith [UCC 3-416] (with some exceptions, as will be discussed shortly):

Answer 2

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

Question 3

Any person who presents an instrument for payment or acceptance makes the following presentment warranties to any other person who in good faith pays or accepts the instrument [UCC 3-417(a), (d)]:

Answer 3

(1) The 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. (This is, in effect, a warranty that there are no missing or unauthorized indorsements.)
(2) the instrument has not been altered

(3) The person obtaining payment or acceptance has no knowledge that the signature of the drawer of the instrument is unauthorized.Footnote

Question 4

Universal defenses

Answer 4

Definition:
A defense that is valid against all holders of a negotiable instrument, including holders in due course (HDCs) and holders with the rights of HDCs. Universal defenses are also called real defenses.

Question 5

Personal defenses

Answer 5

Definition:
A defense that can be used to avoid payment to an ordinary holder of a negotiable instrument but not a holder in due course (HDC) or a holder with the rights of an HDC.

Question 6

To be liable on a negotiable instrument, a person must:

a. have a relative who is not an agent sign the instrument.	
b. sign the instrument.	
c. draft an arbitration clause for the instrument.

Answer 6

b. sign the instrument.

Question 7

four types of signatures broadly defined by the UCC that are executed or adopted by a person.

Answer 7

name
word
mark
symbol

Question 8

An indorser is a party with

secondary liability

primary liability

full liability

Answer 8

secondary liability

A party with secondary liability is responsible for paying an instrument only if the party with primary liability does not pay.

Question 9

Drawers and indorsers are secondarily liable.

Answer 9

True

Question 10

On a negotiable instrument, secondary liability is equivalent to primary liability.

Answer 10

False

Question 11

On drafts and checks, a drawer’s secondary liability does not arise until the drawee fails to pay or to accept the instrument, whichever is required.

Answer 11

True

Question 12

Parties are secondarily liable on a negotiable instrument only if the following events occur:

Answer 12

The instrument is properly and timely presented.

The instrument is dishonored.

Timely notice of dishonor is given to the secondarily liable party

Question 13

For a drawer to be held secondarily liable on a domestic check, the check must be presented for payment within:

a reasonable period of time

30 days of its date

30 days of its indorsement

Answer 13

30 days of its date

Question 14

The main difference between an accommodation maker and an accommodation indorser is:

a. an accommodation maker is not required to sign the instrument, whereas an accommodation indorser must do so.

b. that an accommodation maker has primary liability, whereas an accommodation indorser has secondary liability.	
c. an accommodation maker has secondary liability, whereas an accommodation indorser has primary liability.

Answer 14

b. that an accommodation maker has primary liability, whereas an accommodation indorser has secondary liability.

Question 15

When an agent agrees to represent another person, the person being represented is known as the ____

Answer 15

Principal

Question 16

An authorized agent may be held personally liable on a negotiable instrument in the following three situations.

Answer 16

When the agent signs his or her own name on the instrument with no indication of agency status, an HDC can hold the agent personally liable as noted above.

When the agent signs in both the agent’s name and the principal’s name but nothing on the instrument indicates the agency relationship, the agent may be liable. (Thus, in Example 14.6, if Binney signed the instrument “Sandra Binney, Bob Aronson” or “Aronson, Binney,” she may be held personally liable because it is not clear that there is an agency relationship.)

When the agent indicates his or her agency status in signing a negotiable instrument but fails to name the principal (such as, “Sandra Binney, agent”), the agent may be liable

Question 17

Generally, an authorized agent binds a principal on an instrument if the agent clearly names the principal in the signature (in handwriting, or by some mark or symbol).

a. True
b. False

Answer 17

a. True

Question 18

Nathan, Willy’s agent, has authority to sign notes on Willy’s behalf. Nathan signs a promissory note promising to pay Kayla $12,000 in three months using the signature “Nathan, as agent for Willy.” Is Willy liable for the $12,000?

a. Yes, because Nathan clearly signed as Willy

’

s agent and therefore Willy is liable.

b. No, because Nathan failed to sign Willy's name, Willy is not liable.	
c. Yes, but Willy only has secondary liability; Nathan is primarily liable.

Answer 18

a. Yes, because Nathan clearly signed as Willy’s agent and therefore Willy is liable.

Question 19

Unauthorized signatures arise in two situations:

Answer 19

When a person forges another person’s name on a negotiable instrument.

When an agent who lacks the authority signs an instrument on behalf of a principal.

Question 20

Universal defenses (also called real defenses) are valid against all holders, including HDCs and holders through HDCs. Universal defenses include those listed below and described in the following subsections.

Answer 20

Forgery of a signature on the instrument.

Fraud in the execution.

Material alteration.

Discharge in bankruptcy.

Minority.

Illegality, mental incapacity, and extreme duress.

Question 21

Personal defenses (sometimes called limited defenses) are used to avoid payment to an ordinary holder of a negotiable instrument. They are not a defense against an HDC or a holder through an HDC. Personal defenses include the following:

Answer 21

Breach of contract or breach of warranty.

Lack or failure of consideration.

Fraud in the inducement (ordinary fraud).

Illegality.

Mental incompetence.

Ordinary duress or undue influence rendering the contract voidable [UCC 3-305(a)(1)(ii)].

Discharge by previous payment or cancellation [UCC 3-601(b), 3-602(a), 3-603, 3-604].

Unauthorized completion of an incomplete instrument [UCC 3-115, 3-302, 3-407, 4-401(d)(2)].

Nondelivery of the instrument [UCC 1-201(14), 3-105(b), 3-305(a)(2)].

Question 22

Generally, when an indorsement is forged or unauthorized, the burden of loss falls on the first party to take the instrument with the forged or unauthorized indorsement.

a. True
b. False

Answer 22

a. True

Question 23

Fictitious payees most often arise in two situations:

Answer 23

When a dishonest employee deceives the employer into signing an instrument payable to a party with no right to receive payment on the instrument.

When a dishonest employee or agent has the authority to issue an instrument on behalf of the employer and issues a check to a party who has no interest in the instrument.

Question 24

Unlike secondary signature liability, warranty liability is not subject to the conditions of proper presentment, dishonor, or notice of dishonor.

a. True
b. False

Answer 24

a. True

Warranty liability is particularly important when a holder cannot hold a party liable on her or his signature, such as when a person delivers a bearer instrument. Unlike secondary signature liability, warranty liability is not subject to the conditions of proper presentment, dishonor, or notice of dishonor.

Question 25

Fred owes Tracy $50,000. Fred steals a check from Megan and makes it out for $50,000, payable to Lester. Fred then indorses the back of the check, “Pay to the order of Tracy [signed] Lester. Fred then gives the check to Tracy. Tracy deposits the check into her account and Megan’s bank pays the check. The loss is born by

Tracy
Megan’s bank
Megan
Lester

Answer 25

Generally, the first party to take a check with a forged or unauthorized indorsement bears the loss. The first party to take an instrument is in the best position to prevent the loss. Therefore Tracy will bear the loss.

Question 26

Natalie, Webster’s friend, breaks into his locked desk, steals a blank check, and fills it out for $50,000 payable to “CASH.” Natalie signs Webster’s name and presents the check to Webster’s bank for payment. The bank cashes the check and Natalie leaves for Brazil. The liable party is

Webster
The bank
Natalie

Answer 26

The bank is liable; it has a duty to verify signatures, and it cashed the check with a forged signature. Natalie is also liable, of course, but not because of her signature reliability—her name is not signed on the check.

Question 27

A claim for breach of warranty of negotiable instruments must be given to the warrantor within ____ days after the claimant knows or has reason to know of the breach and the identity of the warrantor.

Answer 27

30

Question 28

The defense of fraud in the execution cannot be raised if a reasonable inquiry would have revealed the nature and terms of the instrument.

Answer 28

True

Question 29

When a person forges an instrument, the person whose name is forged has partial liability to pay a holder or any HDC the value of the forged instrument.

Answer 29

False

Question 30

Any of the following acts—if done by the holder with the intent to cancel the obligation—will discharge liability:

Answer 30

Writing “Paid” across the face of an instrument.

Intentionally tearing up an instrument.

Crossing out a party’s signature. Doing this will discharge that party’s liability and the liability of subsequent indorsers who have already signed the instrument.

Surrendering the instrument (such as a promissory note) to the party to be discharged.