K Liability Flashcards
To what situation does contract liability apply?
When you are trying to collect on the instrument in the first instance.
When does an agent who signed an instrument on behalf of the principal escape personal liability?
(i) the principal is identified in the instrument;
and
(ii) signature unambiguously shows that it was made on behalf of the principal.
If the instrument does not clearly establish that the agent signed for the principal, what is the agent’s liability to an HDC?
Agent is liable to HDC unless agent can prove that HDC had notice of the representative nature of agent’s signature.
If the instrument does not clearly establish that the agent signed for the principal, what is the agent’s liability to a non-HDC?
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.
Is the agent liable if the principal drawer’s name is on the check?
No - agent is not personally liable even if the agent did not indicate agency capacity on the document.
What is the result if the agent signed but they were not authorized to do so?
This is a forgery; the agent is bound but not the principal.
What is the primary liability of a maker of a note?
To pay the instrument when its due according to the terms of the instrument.
Is the Maker of a note liable to the holder or indorse who paid on the instrument?
Yes
Can a maker raise defenses?
Yes - effectiveness depends on whether the party is an HDC or not.
Can a drawer disclaim liability on a check by writing no recourse?
No
Can a drawer disclaim liability by writing no recourse on another instrument?
Yes
Which two conditions must be satisfied before the drawer is liable?
Presentment and Dishonor
What must occur before a party can sue to collect on a check?
They must present the check to the drawee (the bank)
If a party waits more than 30 days to cash a check, are you still liable for the amount?
Yes - unless the drawee bank has become insolvent.
What is dishonor of a check?
The bank refuses to pay the instrument upon proper presentment - it is a bounced check
What is the effect of an indorsement on a note or draft signed “without recourse”?
It functions only to pass title - no contract liability attaches.
Is a liability disclaimer allowed on a note or draft of “no recourse”?
Yes - the indorsement will then just pass title - no additional liability attaches.
How are indorsers found to be liable to the other?
Endorsers are liable to each other by the order of their signatures
Sue prior indorser for payment
Liable to later indorsers
In the chain of indorsement, who can the first indorsers sue?
Only the original party to the instrument (Maker or Drawer)
When does the indorser take on secondary liability?
1) Presentment
2) Dishonor
3) Notice of Dishonor
What is the impact if presentment to Maker or Drawee is done after 30 days and the payment bounces?
The presenting party may not connect from the indorser because their liability was discharged after 30 days.
How long after delivery of instrument does liability attach to an indorser contract?
30 days
How long does a party have to notify an indorser of the dishonor?
30 days from the date of the dishonor
Does the drawee have any liability for dishonored payment?
General Rule: No because the drawee did not make any negotiable instrument contract. They did not sign the check and have no liability.
What is a certified check?
When the drawee agrees to pay the draft by signing the draft.
What is the legal effect of a certified check?
Certification discharges the drawer and all prior indorsers.
If a drawee required to accept or certify a draft?
No
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.
True - exception is if there was a breach of the presentment warranty.
When does final payment occur?
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.
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?
They cannot go after the third party but they can recover payment from the payor.
A drawee who pays on a forged indorsement is liable of what crime?
Conversion - liable to the payee.
What are the conditions to sue for conversion?
The person suing must have received delivery of the instrument. No action can be held if the physical check never reaches the payee.
What is the rule of payment of checks after drawer’s death?
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.
Drawee may pay for no more than _____ after the drawer’s death if the bank knew of the drawer’s death.
10 days
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.
True
What is a guarantor?
A person who signs an instrument to held his credit to another but who does not receive any direct benefit.
Accommodated party
Principal/Debtor/Obligor
Party with bad credit
Accommodation Party
Co-signor
Holder
Creditor/Obligee - the person who wants payment assured.
What is the liability of an accomodation party?
Liability in the capacity in which they sign; there is no special contract. Presumed to be a guaranty of payment.
What are a Holder’s options for collection?
Can go after the Accommodated or Accomodation party.
If the accomodation party pays on the debt, what is their recourse?
They can seek reimbursement from the accomodated party.
What is the presumption when there is an indorsement by a person who is outside the chain of title?
Notice of an accomodation
