Liability on Checks and Notes

Question 1

A co-maker’s liability is:

Answer 1

joint and several

Question 2

A drawee is liable:

Answer 2

• to the drawer to make payment according to the terms of the draft if the drawer “accepted” (e.g., by signed agreement)
• to the drawer for wrongful dishonor if there are actual damages

Question 3

Certified checks:

Answer 3

relieve the drawer of liability; bank has certified payment and taken funds from the drawer’s account immediately

Question 4

Indorser’s liability (general rule):

Answer 4

• if the instrument is dishonored, all indorsers up the chain of indorsement are liable to pay the amount on instrument at the time it was dishonored

Question 5

How can an indorser disclaim liability on an instrument?

Answer 5

indorsing with the words “without recourse” disclaims contract/signature liability

Question 6

When is an indorser’s liability discharged?

Answer 6

if the instrument is presented to the drawer more than 30 days after the indorsement

Question 7

What are transferor’s warranties?

Answer 7

A person who takes value and transfers an instrument warrants to the transferee and any subsequent transferees:

(1) transferor is entitled to enforce the instrument
(2) all signatures are authentic and authorized
(3) the instrument has not been dishonored
(4) there are no claims in recoupment
(5) there are no insolvency proceedings
(6) it was authorized by the account for whom it was drawn on

Question 8

Can a transferor disclaim warranties?

Answer 8

Not for checks; yes for notes when expressed with words, such as “without warranties”

Question 9

What can be recovered for breach of warranties of transfer?

Answer 9

Damages to the extent of the injury, but not more than the amount of the instrument

Question 10

Who can be liable on a contract theory of liability on negotiable instruments?

Answer 10

Contract liability (also called “signature” liability) applies to any party who signs the instrument: makers, drawers, indorsers. Signing the instrument is essentially a promise to pay.

• Indorsers are saying, I will pay you if this is dishonored and I am given notice.
• Drawees are never liable on contract/signature claims

Question 11

What is the theory of warranty liability on a negotiable instrument?

Answer 11

Warranty liability (also called transfer liability) is the seller’s liability for selling a defective instrument.

Question 12

Who can be a defendant on a breach of warranty claim for a negotiable instrument?

Answer 12

The defendant must have SOLD the instrument; a donor is not liable on transfer warranty theory. Two elements: (1) takes value and (2) transfers the instrument.

Question 13

Who can sue on a breach of warranty claim for a negotiable instrument?

Answer 13

• If defendant indorsed –> warranties run with the instrument and anyone in possession can sue for breach of warranty
• If defendant did not indorse –> then only defendant’s immediate transferee may sue defendant for breach of warranty

Question 14

What is the difference between a valid negotiation of an instrument payable to order and an instrument payable to bearer?

Answer 14

When an instrument is payable to order, it is only considered negotiated upon
delivery of the instrument to the specified payee. Further negotiation requires that payee to indorse the instrument and deliver it to the transferee.

When an instrument is payable to bearer, it is negotiated by delivery alone.

Question 15

What is the difference between a special and blank indorsement?

Answer 15

A special indorsement names a particular person; the indorsee must sign in order for the instrument to be further negotiated.

A blank indorsement does not name anyone.

Question 16

Hypo: B indorses his paycheck “pay to H, signed B.” H loses the check. J finds it, signs H’s name, cashes at the shop. What result?

Answer 16

The shop is not at holder and cannot enforce the check because B made a special indorsement to H. The indorsee of a special endorsement must sign his name to further negotiate. H did not sign, so there was not a valid negotiation to J or shop.

Question 17

Hypo: B indorses his paycheck by signing his name on back and delivers it to E, who loses it. J finds it and cashes it at store. What result?

Answer 17

The store is a holder and can enforce the check because B made a blank endorsement by signing his name and delivering it to E. After a blank indorsement, further negotiation is accomplished by transfer of possession and further indorsement is not required. When E lost the note and J found it, possession transferred to J. When J delivered it to the store possession transferred again. Thus, a valid negotiation occurred from E to J, then from J to store.

Question 18

What is a restrictive endorsement?

Answer 18

an endorsement with a condition

Question 19

Hypo: B indorses his check “for deposit only, B.” L steals the check from B and cashed it at bank. What result?

Answer 19

Bank is not a holder and cannot enforce the check, and B can recover from the bank for conversion. By writing “for deposit only” on his check, B made a restrictive endorsement conditioning further negotiation on deposit of funds into his account. No funds were deposited into B’s account. Thus, the check was not validly negotiated to L and could not be sold to bank.