NEGOTIABLE INSTRUMENTS: LIABILITY

1
NEGOTIABLE INSTRUMENTS LIABILITY
2
LIABILITY THEORIES

• Warranty liability (can apply to signors
  nonsignors
• Contract or signature liability
• Negligence conversion

3
Signatures

• Any name, word, or mark used in lieu of written
  signature
• Can be handwritten, typed, printed, stamped, etc.

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Signers may sign as

• Maker of notes or CDs
• Drawer of drafts and checks
• Drawee who certifies or accepts checks and drafts
• Endorser
• Agent who signs on behalf of others
• Accommodation party

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WARRANTY LIABILITY

• Transfer warranties
• Presentment warranties

6
TRANSFER WARRANTIES

• When an instrument is transferred for value, the
  transferor made 5 warranties
• Transferor has good title.
• All signatures are genuine and authorized.
• The instrument has not been materially altered.
• No defenses of any party are good against the
  transferor.
• Transferor has no knowledge of any insolvency
  proceeding against the Maker or Acceptor or
  Drawer.

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TRANSFER WARRANTIES

• If instrument is transferred by endorsement,
  transferor makes warranties to any subsequent
  holder who takes in good faith.
• If transfer without endorsement, warranties made
  by transferor only to immediate transferee.

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PRESENTMENT WARRANITES

• A party presenting an instrument for payment
  warrants that
• He/she has good title or is authorized to obtain
  payment or acceptance of the person who has good
  title.
• He/she has no knowledge that the signature of the
  drawer or maker is unauthorized.
• The instrument has not been materially altered.

9
GARNAC GRAIN CO., INC. V. BOATMENSBANK TRUST
CO. OF KANSAS CITY

• Katherine Millison was employed by the Garmac
  Grain Co. as a bookkeeper. She developed a
  scheme to embezzle money from Garmac whereby she
  would take home fully executed and valid checks
  payable to freight vendors and type or L. R.
  Millison (her husbands name) under the named
  payee with her manual typewriter. She would then
  indorse the check L. R. Millison on the back
  and deposit the check in a joint account she and
  her husband maintained at the State Bank of
  Oskaloosa.
• The bank forwarded the altered checks through the
  Federal Reserve System (through First National
  Bank of Kansas City), which presented them for
  payment to the drawee bank, Boatmens Bank
  Trust Company of Kansas City. Boatmans paid the
  checks. Millison then would intercept the
  monthly bank statements from Boatmens Bank
  Trust, remove the altered checks, and obliterate
  the or L. R. Millison on the face of the checks
  and the endorsement on the back.

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• The scheme was discovered and Millison was
  convicted of embezzlement. Garmac brought suit
  against Boatmens Bank Trust, alleging that it
  wrongfully paid the altered checks.
• It settled with Garmac and then sued the State
  Bank of Oskaloosa, contending that it breached
  the UCC transfer warranties when it forwarded the
  altered checks for payment.

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SIGNATURE LIABILITY

• Primary Liability Secondary Liability
• Makers of promissory Drawers of checks and
• Notes and CDs drafts
• Acceptors of drafts and Endorsers of
  negotiable
• Checks instruments

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Secondary liability comes into play after

• Instrument is properly presented for payment
• Instrument is dishonored
• Notice of dishonor is timely given to person held
  secondarily liable

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PRESENTMENT

• Must be made to
• Proper person
• Proper manner
• Within a reasonable time

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Three methods of presentment

• by mail (not effective until received)
• through a clearinghouse
• at a place specified in the instrument
• If none, place of business or residence of party
  who is required to accept or pay

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LIABILITY OF PARTIES

• Makers Liability (unconditional promise to pay)
  primarily liable on note
• Drawee Liability (order to pay)
• Acceptors Liability Primarily liable
• Drawers Liability secondarily liable

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LIABILITY OF PARTIES

• Endorser's Liability
• Unqualified endorser secondarily liable
• Qualified endorsement
• No contract liability
• Not secondarily liable, although retains warranty
  liable

17
FIRST AMERICAN BANK OF VIRGINIA v LITCHFIELD
COMPANY OF SOUTH CAROLINA, INC.

• On 2/3/83, Litchfield Company drew a check
  payable to Jensen Farley Pictures, Inc. in the
  amount of 13,711.11, on its account with Bankers
  Trust of S.C. Litchfield sent the check to
  Jensen Farley, which negotiated the check on 9/1
  to First American Bank of Virginia with whom it
  had a checking account. First American gave
  Jensen Farley immediate credit on the check and
  forwarded it to Bankers Trust for payment.

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• Unknown to First American, Litchfield had given
  Bankers Trust an oral stop-payment order on the
  check. On 9/19, Jensen Farley withdrew most of
  the balance in its First American account it
  subsequently filed for bankruptcy. On 9/21,
  Bankers Trust returned the Litchfield check to
  First American marked payment stopped.
• First American then sued Litchfield, claiming
  that as a drawer of the check, it was liable to
  First American, a holder in due course of the
  check.

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Accommodation Party Liability

• Accommodation Party One who signs an
  instrument, in any capacity, for purposes of
  guaranteeing that a loan to another party will be
  paid.
• Accommodation Maker-primarily liable
• Accommodation Endorser-secondarily liable

20
BURKE v. BURKE

• Michael and Marilu Burke married in September of
  1971. Shortly after, Michael formed a
  partnership with a cousin to operate an auto
  dealership.
• In 1973, Michael decided to buy his cousin out.
  His father agreed to loan him 25,000, but only
  if Marilu co-signed the promissory note.
• The father prepared the note for 25,000, plus
  interest and took it to their home where they
  both signed it. Michaels father gave Michael a
  25,000 payable to MICHAEL ONLY. Marilu received
  no proceeds.
• Sometime later, Michael and Marilu divorced.
  Michael defaulted on the note. The father sued
  Marilu.
• Is she liable? Must she have received
  consideration?

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DISCHARGE FROM LIABILITY

• Discharge by payment
• Discharge by cancellation
• Discharge by reacquisition
• Discharge by impairment of recourse or collateral

22
LIABILITY ON A NEGOTIABLE INSTRUMENT Proper
presentment If accepted by Primary
Party Payment is made by Primary
Party Discharge (no secondary liability
arises) If dishonored (refusal to accept or pay
by primary party) Secondary Liability
activated Holder may Seek payment from prior
holders/endorsers (must give timely
notice) OR Proceed against maker or drawer on
instrument (should be HDC to defeat personal
defenses). OR Assert warranty rights against
prior endorsers (presentment and transfer
warranties are present even if endorsement is
qualified)
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PROBLEMS

• Pam knowingly sold defective goods to Dave. Dave
  gave Pam a check payable to bearer for the
  goods. Pam delivered the check to Bill who took
  it for value, in good faith, and without notice.
  Pam then repurchased the check form Bill and gave
  it to her husband, Hoover, as a gift. Hoover
  took the check in good faith and without notice.
  
• Hoover presented the check to the drawee bank,
  but it was dishonored because Dave had issued a
  stop payment order. Assume that prompt notice of
  dishonor was given to all parties.
• Discuss everyones potential contract and/or
  warranty liability, and the effect of the HDC
  rules.

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PROBLEMS

• On 1/3, Roger wrote a check to Holly in the
  amount of 1,000 as payment for a used car.
  Holly negotiated the check to the Springfield
  Deli in exchange for party supplies on 1/11. The
  Deli took the check in good faith and without
  notice. The Deli deposited the check in its
  account with the Springfield State Bank on 1/20.
  Springfield State presented it for payment to the
  drawee bank on 1/23. Roger had stopped payment
  on the check because the car was defective. The
  drawee bank dishonored the check.
• Discuss the parties liabilities.