Liabilities and discharge of negotiable instruments

Question 1

Define the “material alteration” of an instrument

Answer 1

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

Question 2

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

Answer 2

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 3

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

Answer 3

The drawer has liability

Question 4

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

Answer 4

1. )Personal

2. )Real or universal

Question 5

Define “fraud in factum.”

Answer 5

Fraud in factum occurs when a party is deceived into signing something that he/she does not know is a contract. The term “fraud in factum” is used interchangeably with “fraud in execution.”

Question 6

What is the effect of material alteration on an instrument?

Answer 6

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

Question 7

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

Answer 7

An authorized agent can bind his/her principal on an instrument by signing the instrument in such a way as to clearly show that he/she is signing on behalf of the principal: for example, “Jane Doe, VP, Charlton Gates, Inc.” In such a case, the principal, rather than the agent, will be liable on the instrument

Question 8

List the three personal defenses against liability on negotiable instruments

Answer 8

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

Question 9

List the presentment warranties associated with negotiable instruments.

Answer 9

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

Question 10

List the two forms of negotiable instrument liability

Answer 10

1. )Contract (signature liability)

2. )Warranty liability

Question 11

Who are the secondary parties to an instrument?

Answer 11

1. )Payees
2. )Drawers
3. )Indorsers

Question 12

Who are the primary parties to an instrument?

Answer 12

1. )Makers

2. )Drawees

Question 13

Who is liable for an imposter payee?

Answer 13

The drawer has liability