Contracts - UCC Art 3 - Liabilities & Discharge of Duties

Question 1

Who are the secondary parties to an instrument?

Answer 1

1. Payees;
2. Drawers;
3. Indorsers.

Question 2

Define “fraud in factum”.

Answer 2

Fraud in factum occurs when a party is deceived into signing something that he does not know is a contract. Fraud in factum is used interchangeable with fraud in execution.

Question 3

Who are the primary parties to an instrument?

Answer 3

1. Makers;

2. Drawees.

Question 4

List the presentment warranties associated with negotiable instruments.

Answer 4

1. Person presented is authorized to receive payment;
2. The instrument has not been altered;
3. Person has no knowledge instrument is unauthorized.

Question 5

Who is liable for an imposter payee?

Answer 5

The drawer has liability.

Question 6

When an authorized agent signs on behalf of a principal, who is liable for the instrument?

Answer 6

An authorized agent can bind his principal on an instrument by signing the instrument in such a way as to clearly show that he is signing on behalf of the principal. In such a case, the principal, rather than the agent, will be liable on the instrument.

Question 7

List the three personal defenses against liability on negotiable instruments.

Answer 7

1. Breach of contract;
2. Failure of consideration;
3. Fraud in the inducement.

Question 8

What is the effect of material alteration on an instrument?

Answer 8

Discharges obligation of payment to either holder and holder in due course (HDC). If maker or drawer was sloppy in creating instrument and allowed alteration, obligation of payment according to original terms remains to HDC.

Question 9

List the real or universal defenses available for not honoring an instrument.

Answer 9

1. Forgery;
2. Fraud in execution or fraud in factum;
3. Minority;
4. Discharge in bankruptcy;
5. Illegality;
6. Mental incapacity;
7. Duress (to the extent conduct is illegal).

Question 10

List the two forms of negotiable instrument liability.

Answer 10

1. Contract (signature liability);

2. Warranty liability.

Question 11

List the transferor warranties associated with negotiable instruments.

Answer 11

1. Transferor is entitled to enforce the instrument;
2. All signatures are genuine or authorized;
3. Instrument has not been altered;
4. Instrument not subject to defenses;
5. Transferor has no knowledge of any insolvency proceeding.

Question 12

Who is liable for a fictitious payee on a negotiable instrument?

Answer 12

The drawer has liability.

Question 13

Define the “material alteration” of an instrument.

Answer 13

Changing the instrument in a manner that materially affects the nature of the instrument or payment terms.

Question 14

List the two types of holder defenses that may be used against having to pay an instrument.

Answer 14

1. Personal;

2. Real or Universal.