When dealing w/ commercial paper, on what theories might the D get sued?

Question 1

In a commercial paper hypothetical, how does the defendant get sued? AKA what are the two theories of suit?

Answer 1

• Contract or Signature Liability

- Warranty or Transfer Liability

Question 2

Contract or Signature Liability

- Who is the defendant?

Answer 2

The defendant SIGNED the negotiable instrument. This means the defendant can be either:

• the MAKER (the promisor in a promissory note); OR
• the INDORSER (person who signs the back of the instrument); OR
• the DRAWER (the party who signs the draft/check)

Question 3

What promises do the following people make when the sign the negotiable instrument:

• maker
• indorser
• drawer

Answer 3

• the maker of a promissory note agrees to pay the instrument; if he fails to pay, he can be sued
• the indorser signs his name on the back of the instrument and promises that if the instrument bounces, and he is notified, he will pay. If he doesn’t, he can be sued. [ex- Emeril uses his Food Channel paycheck to purchase a meal at Manhattan’s “21 Club” restaurant. The restaurant requires Emeril’s indorsement on the back of the check.]
• the drawer, the party who signs the front of the check (draft) promises that if it bounces, and he is notified, he will pay. If he fails to do so, he can be sued.

Question 4

When the words “Without Recourse” accompany the signature

Answer 4

WITHOUT RECOURSE is a term of art used by INDORSERS and DRAWERS. It represents a disclaimer of liability. The signer passes title but assumes NO signature/contract liability

Question 5

Warranty OR Transfer Liability

• what is it?
• who is the D?

Answer 5

• seller’s liability for selling a defective instrument

- D = any transferor who SELLS the negotiable instrument. Thus, if our transferor is NOT a donor, he can be sued.

Question 6

Warranty OR Transfer Liability

- Who is entitled to sue the D for breach of warranty?

Answer 6

• if D INDORSED the instrument (signed the back), ANY person in possession of that instrument may sue –> WHEN A D INDORSES, WARRANTIES RUN W/ THE INSTRUMENT
• If D did NOT indorse, then only the Ds immediate transferee may sue him. The warranties will not run w/ the instrument.

Question 7

The 5 Warranties Made by a Transferor Who SELLS a Negotiable Instrument

Answer 7

Transferor Promises:
1- P has good title to the instrument
2- All signatures are genuine and authorized
3- instrument has not been materially altered or tampered w/
4- that there is no defense or claim good against the D, AKA that the instrument is enforceable
5- that he has no knowledge of any bankruptcy or insolvency action against the maker or drawer