Defenses to Liability Flashcards
Universal Defenses
The following defenses are valid against all holders, including HDCs and holders who take by HDCs:
1) Forgery
2) Fraud in the Execution
3) Material Alteration
4) Discharge in Bankruptcy
5) Minority
6) Illegality
7) Mental Incapacity
8) Extreme Duress
Forgery
Forgery of a maker’s or drawer’s signature cannot bind the person whose name is used (unless that person ratifies the signature or is precluded from denying it) [UCC 3-403(a)].
Fraud in the Execution
- Defense is valid if a person is deceived into signing an instrument, believing that it is something else.
- Defense is not valid if a reasonable inquiry would have revealed the nature of the instrument.
Material Alteration
An alteration is material if it changes the contract terms between any two parties in any way (making any change in an unauthorized manner that relates to a party’s obligation) [UCC 3-407(a)].
Material Alteration regarding an Ordinary Holder
Complete Defense. A holder recovers nothing [UCC 3-407(a)]. If an alteration is visible, a holder has notice and cannot be an HDC [UCC 3-302(a)(1)].
Material Alteration regarding an HDC
Partial Defense. If an instrument was originally incomplete and later completed in an unauthorized manner, an HDC can enforce it as completed [UCC 3407(b)].
Discharge in Bankruptcy
This is an absolute defense [UCC 3-305(a)(1)].
Minority
A defense to the extent that state law recognizes it as a defense to a contract [UCC 3-305(a)(1)(i)] (see Chapter 8).
Illegality
A defense if the statute declares that an instrument executed in connection with illegal conduct is void [UCC 3-305(a)(1)(ii)].
Mental Incapacity
An instrument issued by a person who has been adjudicated mentally incompetent by state proceedings is void [UCC 3-305(a)(1)(ii)].
Extreme Duress
Extreme duress is an immediate threat of force or violence [UCC 3-305(a)(1)(ii)].
Personal Defenses
Personal defenses avoid payment to an ordinary holder (but not an HDC), and include—
1) Breach of Contract or Breach of Warranty
2) Lack or Failure of Consideration [UCC 3-303(b), 3-305(a)(2)]
3) Fraud in the Inducement
4) Illegality
5) Mental Incapacity
6) Discharge by payment or cancellation
7) Unauthorized completion of an incomplete instrument
8) Nondelivery of an instrument
9) Ordinary duress or undue influence.
Breach of Contract or Breach of Warranty
If there is a breach of a contract for which an instrument was issued or a breach of warranty (see Chapter 13), the maker or drawer may not pay.
Lack or Failure of Consideration
For example, when there is no consideration for the issuing of a note.
Fraud in the Inducement
If one issues an instrument based on false statements by the other party.
