Chapter 27 - Liability

Question 1

Signature Liability

Answer 1

Every party who signs the negotiable instrument is either primarily or secondarily liable

Question 2

Exception to signature liability

Answer 2

Qualified indorser

Question 3

What parties are primarily liable for negotiable instruments?

Answer 3

Makers and Accommodation Parties

Question 4

Parties who are secondarily liable

Answer 4

Drawers (writers of the check) and indorsers

Question 5

Requirements to become secondarily liable

Answer 5

1) Instrument must be properly and timely presented (30 days)
2) Instrument is dishonored by the person who is primarily liable
3) Timely notice of dishonor is given to those secondarily liable

Question 6

Accommodation Party/Maker

Answer 6

One who signs an instrument to lend their name as credit (cosigner)

Question 7

Accommodation party’s liability to the party accommodated (the one they cosigned for)

Answer 7

Accommodation party is NEVER liable to the party accommodated, only bank or other person.

Question 8

Requirements for Agent to make Principal liable via signature

Answer 8

1) Agent must be authorized to sign the instrument
2) Agent must clearly name the principal in the signature

Question 9

3 Situations where Agent is held personally liable

Answer 9

1) Agent signs name with no indication of agency status, a HDC can hold the agent personally liable
2) When Agent signs both the agent & principal’s names but doesn’t indicate agency status (“Abel & Paul”)
3) When agent says they are an agent but fails to name the principal (unless P’s name is on check).

Question 10

Exceptions to where an unauthorized signature by an agent can still bind principal

Answer 10

1) Ratification
2) Negligence

Question 11

Universal Defenses vs Personal Defenses of Liability

Answer 11

Universal: Valid against all holders, even HDC & holders through HDC’s.
Personal: Valid only against ordinary holders, not HDC’s & holders through HDC’s

Question 12

Universal Defenses to Liability

Answer 12

1) Forgery
2) Material Alteration: Complete Defense against Ordinary, partial against HDC (defendant still owes OG amount)
3) Bankruptcy
4) Minority
5) Illegality
6) Mental Incapacity

Question 13

Personal Defenses to Liability

Answer 13

1) Breach of Contract: if obligee does not perform, indorser still owes current holder
2) Lack of Consideration
3) Fraud: if relied on false statements by other party, maybe can avoid payments to current holder

Question 14

3 Instances of Discharge from Liability

Answer 14

1) Payment: When holder is paid, all are discharged
2) Cancellation: Purposeful destruction (ripping up mortgage note)
3) Impairment of Recourse: When holder collects amount from an indorser, indorser can seek recourse from any prior indorsers.