CHAPTER 23 - PowerPoint Presentation

Slide1

CHAPTER 23

Liability for

Negotiable

InstrumentsSlide2

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Quote of the Day

“The law is not the place for the artist or the poet. The law is the calling of the thinkers.”Oliver Wendell Holmes,Jr.Supreme Court JusticeSlide4

Introduction – Liability

Signature liability – liability of someone who has signed a document. Warranty liability -- liability of someone who has received payment.Slide5

Contract vs. Instrument

Negotiable instruments are issued to fulfill a contract. The instruments create a second contract to pay the debt created by the first agreement. Once an instrument is accepted in payment for a debt, the debt is suspended until the instrument is paid or dishonored.Slide6

Enforcing an Instrument

In a signature liability, to whom is the signer liable?To the holder of the instrument.To anyone to whom the shelter rule applies (non-holder with the rights of a holder).A holder who has lost the instrument.Slide7

Primary vs. Secondary Liability

Someone with primary liability must pay unless he has a valid defense.Someone with secondary liability must pay only if the person with primary liability does not pay.The holder of an instrument must first try to get payment from the party with primary liability before making demands against a party with secondary liability.Slide8

The Payment Process

Presentment – holder demands payment.Dishonor – if payment is not received when due or demanded, the instrument is considered dishonored.Notice of Dishonor – notice is given to the party with secondary liability when the instrument is dishonored.Slide9

Signature Liability

The maker is primarily liable.The drawer of a check has secondary liability.The bank (drawee) is not liable to the holder and owes no damages to the holder for refusing to pay the check.Indorsers are secondarily liable.See next slide for more detail.Slide10

Signature Liability -- Indorsers

Indorsers are not liable if:they write the words “without recourse” next to their signature on the instrument, a bank certifies the check, the check is presented for payment more than 30 days after the indorsement, or the check is dishonored and the indorser is not notified within 30 days.Slide11

Accommodation Party

An accommodation party (sometimes called a co-signer or guarantor) is someone who adds her signature to an instrument in a capacity other than issuer, acceptor or indorser, in order to be liable for the instrument.An accommodation party has the same liability to the holder as the person for whom she signed.Slide12

AgentTo avoid personal liability when signing an instrument, an agent must:

indicate that she is signing as an agent and give the name of the principal.The principal is liable if the agent signs correctly, the agent signs just her own name, or the agent signs only the name of the principal.Slide13

Basic Rules of Warranty Liability

The culprit is always liable.The drawee bank is liable if it pays a check on which the drawer’s name is forged. The bank can recover from the payee only if the payee had reason to suspect the forgery.In any other case of wrongdoing, a person who first acquires an instrument from a culprit is ultimately liable to anyone else who pays value for it.Slide14

Transfer Warranties

When someone transfers an instrument, she warrants that:She is the holder of the instrument,All signatures are authentic and authorized,The instrument has not been altered,No defense can be asserted against her, andAs far as she knows the issuer is solvent.Slide15

Transfer Warranty RulesOne who violates transfer warranty rules is liable for the value of the instrument, plus expenses and interest.

Transfer warranties flow to all subsequent holders in good faith who have indorsed the instrument.Transfer warranties for bearer paper only extend to the first transferee.Slide16

Transfer Warranty RulesWarranty claims must be made within 30 days of discovering the breach or damages may be reduced.Transfer warranties apply only if the transfer is made for consideration; if given as a gift, no warranties apply.Slide17

Comparison of Signature Liability and Transfer Warranties (cont’d)

HolderUnder signature liability, holder cannot make a claim until indorser or drawer has been notified that the instrument was presented and dishonored.

Under

the transfer warranty rules, the holder need not

wait.Slide18

Comparison of Signature Liability and Transfer Warranties

A forged signature Invalid; creates no signature liability for person whose name was signed. Receiver may recover under transfer warranty

rules.

B

earer paper

S

ignature liability rules do not apply; bearer paper can be negotiated simply by delivery; no indorsement

is required. Transfer warranties do apply, but only to first transferree.Slide19

Presentment Warranties

Apply to someone who demands payment for an instrument from the maker, drawee, or anyone else liable.Presenter warrants that:She is a holder,The check has not been altered, andShe has no reason to believe the drawer’s signature is forged.

Anyone who presents a promissory note for payment warrants only that he is a holder of the instrument.Slide20

Other Liability Rules

Conversion Liability Conversion means that (1) someone has stolen an instrument or (2) a bank has paid a check that has a forged indorsement.Imposter RuleIf someone issues an instrument to an imposter, then any indorsement in the name of the payee is valid as long as the person (a bank, say) who pays the instrument does not know of the fraud.Slide21

Other Liability Rules (cont’d)

Fictitious Payee RuleIf an instrument is issued to a person who does not exist, any indorsement in the name of the payee is valid as long as the payer does not know of the fraud.Employee Indorsement RuleIf an employee with responsibility for issuing instruments forges an instrument, any indorsement in the name of the payee is valid as long as the payer does not know of the fraud.Slide22

Negligence

Anyone negligent in creating or paying an unauthorized instrument is liable to an innocent third party.Anyone careless in paying an unauthorized instrument is liable despite the three rules (impostor rule, fictitious payee rule and employee indorsement rule).Anyone careless in allowing a forged or altered instrument to be created is also liable.Slide23

CrimesBouncing a check

Writing a check on an account with insufficient funds is illegal, but usually only has a monetary penalty if the funds are deposited quickly.Check Kiting An illegal scheme where checks are passed between overdrawn accounts at two banks, earning interest at one bank before reversing the process to “repay” the other account. Forgery Creating a fake document or passing on a known fake document is illegal.Slide24

Discharge

Discharge means that liability on an instrument terminates.By Payment By AgreementBy Cancellation By CertificationBy AlterationDischarge of an indorser or accommodation party

Article 3 provides that virtually any change in an instrument that harms an indorser or accommodation party also discharges them unless they consent to the change.Slide25

“It is never wise to play an important game without understanding the rules. The rules of negotiable instruments are complex, but important because this game is played by virtually everyone.”