K Liability

Question 1

To what situation does contract liability apply?

Answer 1

When you are trying to collect on the instrument in the first instance.

Question 2

When does an agent who signed an instrument on behalf of the principal escape personal liability?

Answer 2

(i) the principal is identified in the instrument;
and
(ii) signature unambiguously shows that it was made on behalf of the principal.

Question 3

If the instrument does not clearly establish that the agent signed for the principal, what is the agent’s liability to an HDC?

Answer 3

Agent is liable to HDC unless agent can prove that HDC had notice of the representative nature of agent’s signature.

Question 4

If the instrument does not clearly establish that the agent signed for the principal, what is the agent’s liability to a non-HDC?

Answer 4

Agent is liable to NON HDC unless agent can prove that the original parties (principal, NON-HDC, and agent) did not intend for the agent to be liable.

Question 5

Is the agent liable if the principal drawer’s name is on the check?

Answer 5

No - agent is not personally liable even if the agent did not indicate agency capacity on the document.

Question 6

What is the result if the agent signed but they were not authorized to do so?

Answer 6

This is a forgery; the agent is bound but not the principal.

Question 7

What is the primary liability of a maker of a note?

Answer 7

To pay the instrument when its due according to the terms of the instrument.

Question 8

Is the Maker of a note liable to the holder or indorse who paid on the instrument?

Answer 8

Yes

Question 9

Can a maker raise defenses?

Answer 9

Yes - effectiveness depends on whether the party is an HDC or not.

Question 10

Can a drawer disclaim liability on a check by writing no recourse?

Answer 10

No

Question 11

Can a drawer disclaim liability by writing no recourse on another instrument?

Answer 11

Yes

Question 12

Which two conditions must be satisfied before the drawer is liable?

Answer 12

Presentment and Dishonor

Question 13

What must occur before a party can sue to collect on a check?

Answer 13

They must present the check to the drawee (the bank)

Question 14

If a party waits more than 30 days to cash a check, are you still liable for the amount?

Answer 14

Yes - unless the drawee bank has become insolvent.

Question 15

What is dishonor of a check?

Answer 15

The bank refuses to pay the instrument upon proper presentment - it is a bounced check

Question 16

What is the effect of an indorsement on a note or draft signed “without recourse”?

Answer 16

It functions only to pass title - no contract liability attaches.

Question 17

Is a liability disclaimer allowed on a note or draft of “no recourse”?

Answer 17

Yes - the indorsement will then just pass title - no additional liability attaches.

Question 18

How are indorsers found to be liable to the other?

Answer 18

Endorsers are liable to each other by the order of their signatures

Sue prior indorser for payment
Liable to later indorsers

Question 19

In the chain of indorsement, who can the first indorsers sue?

Answer 19

Only the original party to the instrument (Maker or Drawer)

Question 20

When does the indorser take on secondary liability?

Answer 20

1) Presentment
2) Dishonor
3) Notice of Dishonor

Question 21

What is the impact if presentment to Maker or Drawee is done after 30 days and the payment bounces?

Answer 21

The presenting party may not connect from the indorser because their liability was discharged after 30 days.

Question 22

How long after delivery of instrument does liability attach to an indorser contract?

Answer 22

30 days

Question 23

How long does a party have to notify an indorser of the dishonor?

Answer 23

30 days from the date of the dishonor

Question 24

Does the drawee have any liability for dishonored payment?

Answer 24

General Rule: No because the drawee did not make any negotiable instrument contract. They did not sign the check and have no liability.

Question 25

What is a certified check?

Answer 25

When the drawee agrees to pay the draft by signing the draft.

Question 26

What is the legal effect of a certified check?

Answer 26

Certification discharges the drawer and all prior indorsers.

Question 27

If a drawee required to accept or certify a draft?

Answer 27

No

Question 28

True or False: Once a drawee bank pays a check, contract actions may no longer be pursued and the drawee bank may not recover on the check from person its paid.

Answer 28

True - exception is if there was a breach of the presentment warranty.

Question 29

When does final payment occur?

Answer 29

When the drawee bank pays the item in cash or does not revoke a provisional settlement by midnight of the next banking day after the banking day of receipt.

Question 30

If a bank gives final payment to a third party and does not realize by midnight of the next banking day after the banking day of receipt that the payor has no funds, what is their recourse?

Answer 30

They cannot go after the third party but they can recover payment from the payor.

Question 31

A drawee who pays on a forged indorsement is liable of what crime?

Answer 31

Conversion - liable to the payee.

Question 32

What are the conditions to sue for conversion?

Answer 32

The person suing must have received delivery of the instrument. No action can be held if the physical check never reaches the payee.

Question 33

What is the rule of payment of checks after drawer’s death?

Answer 33

Drawee bank can continue to pay checks until it knows that the drawer has died and has a reasonable change to act on such knowledge.

Question 34

Drawee may pay for no more than _____ after the drawer’s death if the bank knew of the drawer’s death.

Answer 34

10 days

Question 35

True or False: If someone claiming an interest in the account of a deceased drawer requests that the drawee bank stop paying checks, the drawee bank must comply.

Answer 35

True

Question 36

What is a guarantor?

Answer 36

A person who signs an instrument to held his credit to another but who does not receive any direct benefit.

Question 37

Accommodated party

Answer 37

Principal/Debtor/Obligor

Party with bad credit

Question 38

Accommodation Party

Answer 38

Co-signor

Question 39

Holder

Answer 39

Creditor/Obligee - the person who wants payment assured.

Question 40

What is the liability of an accomodation party?

Answer 40

Liability in the capacity in which they sign; there is no special contract. Presumed to be a guaranty of payment.

Question 41

What are a Holder’s options for collection?

Answer 41

Can go after the Accommodated or Accomodation party.

Question 42

If the accomodation party pays on the debt, what is their recourse?

Answer 42

They can seek reimbursement from the accomodated party.

Question 43

What is the presumption when there is an indorsement by a person who is outside the chain of title?

Answer 43

Notice of an accomodation