CP: How a Defendant Can Get Sued Flashcards
What are the two theories of liability that can rope in a defendant in a commercial paper issue?
- Contract or Signature Liability,
2. Warranty or Transfer Liability
What is the basis for contract or signature liability?
Those who sign the instrument will be liable to pay what it promises/orders.
What parties could be liable under contract or signature liability?
- the maker
- the indorser
- the drawer
The indorser and drawer must be notified of failure to pay in order to be liable.
Is the drawee liable under contract or signature liability?
No - the drawee (usually the bank) does not sign the draft, and therefore cannot be held liable under contract or signature liability.
When can an indorser or drawer escape contract or signature liability?
When he signs with the words “without recourse” next to his name.
What is the underlying theory behind warranty or transfer liability?
The seller is liable for passing on a defective instrument.
Who can be a defendant under warranty or transfer liability?
Anyone who sells the negotiable instrument (a transferor). This does not apply to people who donate an instrument.
If the transferor indorsed the instrument, who can sue if the instrument is defective?
Anyone in possession of the instrument. If the transferor signs it, the warranty runs with the document.
If the transferor did not indorse the instrument, who can sue if the instrument is defective?
Plaintiffs can only sue the person who transferred it to them. The warranties do not run with the instrument unless the instrument is indorsed.
What are the five warranties transferors make when they sell an instrument?
- P has good title to the instrument,
- all signatures are genuine and authorized,
- the instrument has not been materially altered,
- the instrument is enforceable (no good claims against it)
- the defendant has no knowledge of any bankruptcy or insolvency against the drawer.
