liability of parties Flashcards
liability of the maker of the note and issuer of cashier’s check
PRIMARY LIABILITY
maker of a note signs name = makes a K to pay the instrument acc to its terms at the time it is issued
Issuer of cashiers check owes similar liability
TO WHOM DO THEY OWE THEIR OBLIGATION
– a person entitled to enforce the instrument (holder)
– an endorser who paid the instrument after its dishonor
liability of the drawer of draft in general
secondary liability
Generally, the holder of a draft first takes it to the drawee and asks the drawee to pay. The drawee doesn’t owe the holder any duty to pay (the drawee’s duties are owed to the drawer). Nonetheless, usually, the drawee will pay (after all, you’d be pretty upset if the bank on which you draw your checks kept refusing to pay them). However, if the drawee does refuse to pay (what we call “dishonoring” the draft), the drawer is obliged to pay according to the draft’s terms when the drawer signed (or if incomplete, according to its terms as completed).
drawer is liable if
(1) if draft is a check, presentment to your bank within 30 days
and
(2) dishonor [drawee refuses to pay upon presentment] *unless draft had been previously accepted by a bank, in which case drawer is discharged
stop payment order
TIME PERIOD OF VALIDITY
(1) oral stop payment order = effective for 14 days and then lapses unless confirmed in writing within that period
(2) written stop payment order = binding for 6 months
LIMITATIONS
– bank must be given a reasonable time to act and is not obligated to honor stop payment orders on cashier’s checks
– customer has burden of proving that loss was incurred
– if there is an HDC in the chain of transferees, customer cannot recover because even if the payment had been stopped, the customer would have had to pay the HDC
EXAMPLE
Doris writes a check to Paul to purchase a television. Paul transfers the check to Harold, a person who qualifies as an HDC. Before Harold tries to cash the check, Doris discovers that the television is defective and signs a valid stop payment order. The bank is careless and pays the check anyway. Doris won’t be able to recover against the bank because Doris would have had to pay the check anyway because the check reached the hands of an HDC who took free of the personal defense of failure of consideration.
properly payable rule
A bank may charge against the account of a customer an item that is PROPERLY PAYABLE from that account even though the charge creates an overdraft.
“PROPERLY PAYABLE” = authorized by the customer and is in accordance with any agreement between the customer and bank
A customer is not liable for the amount of an overdraft if the customer neither signed the item nor benefited from the proceeds of the item
Bank liability for wrongful dishonor
If a bank (drawee) dishonors a properly payable check, the customer may bring an action
and
- collect damages for harm proxi- mately caused by the wrongful dishonor, – such as the bounced check fee and expenses incurred defending prosecution for writing bad checks.
payee of the check can’t sue the bank even if the bank should have paid the check and the drawer had suffi- cient funds.
BANK’s DEFENSES:
- Payment would overdraw the drawer’s account, and the bank has no obligation to pay when the customer has insufficient funds, and
- The check is more than 6 months old. A bank may honor a stale check if it does so in good faith, but it isn’t obligated to do so.
warranty liability in general
There are implied warranties that arise automatically when an instru- ment is transferred or presented. Since an action on a warranty is a contract liability action, possession of the instrument isn’t necessary. Warranty liability survives the final payment of the instrument.
transfer warranties
WHEN THEY ARISES:
– when a person transfers an instrument OR a customer or collecting bank transfers an item ..
— for consideration
TO WHOM DO THEY RUN:
(1) The immediate transferee whether or not the transfer is by in- dorsement
(2) All subsequent transferees if the transfer is by indorsement
(3) For banks, the liability runs to any subsequent collecting bank
even without indorsement
WHAT THE WARRANTIES ARE:
(1) Transferor is entitled to enforce the instrument (warranty of hold- er status), which means they warrant that all indorsements nec- essary to the chain of title are genuine and that the transferor is a proper person to make presentment and obtain payment
(2) * All signatures are authentic and authorized
(3) * The instrument or item has not been altered
(4) * No defense or claim of any party is good against the transferor
(5) Transferor has no knowledge of any insolvency proceedings that have been instituted against the maker, acceptor, or drawer of an unaccepted instrument; this is the only warranty where the trans- feror’s lack of knowledge is relevant
EXAMPLE:
Law Firm (drawer) pays Law Clerk (payee) with a check for $500 drawn on Texas State Bank (drawee)
Clerk deposits the check into Clerk’s account at ONB Bank.
ONB presents the check to Texas State Bank for payment and Texas State Bank pays.
Clerk made transfer warranties to ONB when Clerk deposited the check
**Drawees and makers can never sue for breach of transfer warranty—they get instruments presented to them, not transferred.
disclaimer of warranties
warranties cannot be disclaimed for checks
presentment warranties
TYPES OF PRESENTMENT WARRANTIES
(1) those made to drawees on unaccepted drafts [normal checks]
– The warrantor is entitled to enforce the draft or is authorized by one who is (in essence a warranty of “good title”—that there are no unauthorized or missing indorsements)
– The draft has not been altered
– The warrantor has no knowledge that the drawer’s signature is
unauthorized
(2) those made to payors of other instruments or items [dishonored draft presented to an indorser or a note to a maker]
– only the warranty that the warrantor is entitled to enforce applies. This is because the drawer, maker, or acceptor should know if their signature is forged or if the instrument or item is altered.
WHO MAKES IT
The defendants in an action on a presentment warranty are the presenter and previous transferors.
WHO HOLDS THE WARRANTY
The plaintiffs in a presentment warranty action are parties who pay in good faith—a maker, drawee, or acceptor.
EXAMPLE:
Law Firm pays Law Clerk with a check for $500 drawn on Texas State Bank. Clerk deposits the check into Clerk’s account at Octo- pus National Bank (“ONB”). ONB presents the check to Texas State Bank for payment and Texas State Bank pays. Clerk and ONB made presentment warranties to Texas State Bank.
presentment warranties
TYPES OF PRESENTMENT WARRANTIES
(1) those made to drawees on unaccepted drafts
(2) those made to payors of other instruments or items.
WHO MAKES IT
The defendants in an action on a presentment warranty are the presenter and previous transferors.
WHO HOLDS THE WARRANTY
The plaintiffs in a presentment warranty action are parties who pay in good faith—a maker, drawee, or acceptor.
forgery of drawer signature
RULE: Forgery of the drawer’s name does not break the chain of title because the forgery operates as the genuine signature of the forger
BANK LIABILITY: Unless they have a defense, the drawee bank must recredit the “drawer’s” account because the check was not properly payable.
BANK DEFENSES:
drawer’s negligence
(1) leaving blanks or spaces on the instrument; (2) mailing the instrument to someone with the same name as the payee; and (3) failing to follow internal procedures designed to avoid forgeries.
bank statement rule - duty to inspect
— The customer (drawer) has a duty to inspect bank statements and canceled checks in a timely manner and report forgeries to the bank. If the customer fails to promptly report a forgery or alteration, they are precluded from complaining that the item was not properly payable.
= Forged drawer’s signatures must be reported to the bank within 1 year from the date the instru- ment became available to the customer (typically the statement date) regardless of the bank’s or customer’s negligence.
– repeat offender rule
If the same person is forging a series of checks, the drawer must report the forgeries within 30 days of when the statement was available. If the drawer doesn’t do so, the bank won’t recredit the account for the subsequent forgeries by the same person.
BANK’S ACTIONS AGAINST OTHERS
The bank who pays over a forged drawer’s signature is unable to pass on the loss UNLESS there was a breach of the presentment warranties.
—- BUT no presentment warranties (such as warranties of entitled to enforce, no alteration, no knowl- edge of forged signature) will be breached by the forged signature. The parties have a right to enforce the obligation against the forger because the forger, by signing the instrument (even though signing the drawer’s name), became the real drawer. The drawee bank takes the risk that the drawer’s signature is unauthorized unless the presenter knew it was unauthorized.
if transferee receive a check for value without an endorsement (which is required), what rights does the transferee have against the transferor?
right to achieve an unqualified endorsement from the transferor
file an action against transferor seeking specific performance
