Liability

Question 1

Who can be sued for contract or signature liability?

What do they all have in common?

Answer 1

1) The maker of a promissory note (for failure to pay)
2) the indorser of a check (if check bounces and notice is received)
3) The drawer of the check (persons who signs it)

They have all signed something making promises to pay

Question 2

Who cannot be sued for contract / signature liability?

Answer 2

The drawee (i.e. the bank). The bank does not SIGN, and thus not liable

Question 3

What happens when the words “Without Recourse” accompany the signature?

Answer 3

The indorser/drawer has disclaimed signature liability

Question 4

What is warranty or transfer liability?

Answer 4

Liability for selling a defective instrument

Question 5

Who may be sued for breach of warranty?

Answer 5

Any transferor who sells the negotiable instrument (i.e. not a donor).

Question 6

Who is entitled to sue for breach of warranty where the defendant indorsed the instrument (signed the back)?

Answer 6

Any plaintiff in possession of the instrument may sue, provided that the defendant is not a donor, of course.

In that sense, the warranties RUN with the instrument

Question 7

Who is entitled to sue for breach of warranty where the defendant did not indorse the instrument?

Answer 7

Only the defendant’s immediate transferee may sue - the warranties do NOT run.

Question 8

What are the five warranties made by the defendant?

Answer 8

Defendant promises:

1) that P has good title
2) That all signatures are genuine and authentic (thus, forgery is a breach of warranty)
3) that the instrument has not been materially altered (tampered with)
4) that there is no defense or claim against the defendant (meaning that the instrument is enforceable);
5) that she has no knowledge of any bankruptcy or insolvency action against the maker/drawer