Liability

Question 1

What happens when an instrument is offered and accepted in lieu of an underlying obligation?

Answer 1

The obligation merges** with the instrument, and the **underlying obligation is suspended

Payment** of the instrument **discharges** the **instrument** and the **obligation

If the instrument is dishonored**, the party issuing the instrument is **liable** on **both** the **instrument** and the **obligation** (but plaintiff is limited to only **one recovery)

NOTE: the following will discharge** an **underlying obligation

• cashier’s check (bank=drawer and drawee)
• teller’s check (bank1=drawer; bank2=drawee)
• certified check (check accepted by the bank on which it is drawn)

NOTE: if the party indorses** the instrument and becomes **obligated** on it, discharge but **right of recourse on the instrument against the party

Question 2

What is a note’s maker’s contract liability?

Answer 2

Maker is obligated to pay the instrument according to its terms at the time it was issued

If multiple makers, joint and severally liable

Question 3

What is an indorser’s contract liability?

Answer 3

Obligated to pay according to the terms of the instrument at the time of the indorsement

NOTE: those signing later in time can get complete reimbursement from those signing prior in time.

• indorsers are secondarily liable**–liable only after the instrument has been 1) **presented to the maker/drawee** within a reasonable time; 2) that **party has dishonored** the instrument AND 3) **notice of dishonor** has been given to the indorser within **30 days following the day on which dishonor occurs

NOTE: when there has been an anomalous indorsement, indorsers are jointly and severally liable

• e.g., joint payees; accommodations

NOTE: checks

• must be presented within 30 days after the indorsement
• notice of dishonor must be given 1) by a bank before its midnight deadline (midnight of next banking day); or 2) within 30 days by any other person following the day on which received notice

NOTE: these defenses are not effective against a holder in due course

Question 4

Is waiver of presentment and dishonor notices permissible?

Answer 4

Yes.

They may also be wholly excused or permissibly delayed in the following circumstances:

• repudiation of the obligation
• death
• insolvency
• cannot be found with reasonable diligence
• drawer has instructed drawee not to pay
• circumstances beyond the control of the person giving notice of dishonor plus reasonable diligence afterwards

Question 5

What is a qualified indorsement and what is its effect?

Answer 5

Indorsement: “Peter Payee, without recourse”

If the check is dishonored and appropriate notice is given, no liability as an indorser

Question 6

What is the drawer’s contract liability?

Answer 6

Obligated to pay the draft according to its terms when the drawer signed the instrument.

• secondarily liable** after **presentment** and **dishonor
• excused from contractual liability due** to **delay** in **presentment** only if the **drawee bank has become insolvent** during the delay and **no insurance to cover loss

NOTE: a drawer is generally not entitled to notice of dishonor

• will or should know of the dishonor on her own because of her relationship with the drawee

Question 7

What is the drawee’s contract liability?

Answer 7

Drawee is not liable** on an instrument **because never signed the instrument

NOTE: drawee would be liable** if it was a **certified check

• accepted the obligation

Question 8

Define an accommodation party.

Answer 8

Signs** the **instrument** in **any capacity** for the **purpose of lending his name to another party for it

• Liable in the capacity in which she signed
• if liable, may get complete reimbursement from the original maker
• accommodation party is not liable to the party accommodated
• alterations to the instrument without the accommodation party’s consent relieves the accommodation party to the extent that can prove the alteration caused her loss
• accommodation party may defend using any of the defenses that the party accommodated could raise except: 1) insolvency; 2) infancy; or 3) lack of legal capacity

Question 9

In what instances does “collection guaranteed” impose liability on the signor?

Answer 9

Execution of judgment** against the other party has been returned **unsatisfied

The other party is insolvent or in insolvency proceedings

The other party cannot be served with process

Otherwise apparent** that **payment cannot be obtained from the other party

Question 10

When is an agent personally liable for signing an instrument?

Answer 10

“Jane Doe, President.”

• parol evidence permissible except as against an HDC who takes without notice
• likely a close call, but not liable

“Jane Doe.”

• parol evidence permissible except as against an HDC who takes without notice
• likely liable

NOTE: as long as the agent is authorized to sign** for the principal, then the **principal can be bound to the instrument

NOTE: if agent signs her name to a principal’s check, no liability if it is drawn on the principal’s account and indicates the identity of the principal