BLS 112 Chapter 27: Chapter 27

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Business Law and Society
BLS 112
S U N Y Ulster

Chapter 27: Liability, Defenses, and Discharge I. Signature Liability  Key to liability on negotiable instrument is a SIGNATURE o Signature: any name, word, mark, or symbol that is executed or adopted by a person  Primary Liability = unconditional; person is required to pay instrument o Maker  unconditional promise to pay note according to terms (has the obligation to pay) o Acceptor  drawee (ex. Bank) that promises to pay instrument when it is presented later for payment  Secondary Liability = contingent liability; triggered by a dishonor o Parties are secondary liable only if: ▪ Instrument is properly & timely presented • Party depends on type of instrument: o Note or CD  maker for payment o Draft  drawee for acceptance/payment o Check  drawee (bank) for payment • Presentment by any commercially reasonable means (oral, written, or electronic) ▪ Instrument is DISHONORED • Dishonor: party responsible for paying refuses to do so (cannot be obtained within prescribed time) • Exceptions: o Presentment made after established cutoff hour (bank can postpone payment to next day) o Holder refuses to exhibit instrument, give reasonable ID, or sign receipt for payment o Instrument is returned due to lack of proper indorsement ▪ Timely notice of dishonor is given to secondary liable party • Any reasonable manner (oral, written, electronic) • Given by bank  before midnight deadline • Given by non-bank  within 30 days following dishonor  Accommodation Party: one who signs an instrument for purpose of lending his/her name as credit to another party on the instrument o Banks require a “cosigner” to secure against non-payment ▪ Parent = accommodation party, Child = accommodated party o Accommodation Makers: accommodation signs on behalf of the maker & is primarily liable on instrument o Accommodation Indorser: accommodation party signs on behalf of payee or other holder (usually to make instrument more marketable) & is secondary liable  Authorized Agents’ Signatures o Agent: person who agrees to represent or act for another (Principal) o Can sign negotiable instruments (must be authorized) ▪ All corporations act through their agents o Liability of Principal ▪ Authorized agent binds principle by clearly naming the principal in the signature ▪ If agent ONLY signs his/her name, the will be primarily liable o Liability of Agent ▪ Agent is held personally liable if • Agent signs name with no indication of agency status • Agent signs in both agent & principal’s name with no indication of agency status • Agent indicates agency status but fails to name principal ▪ Must sign in representative capacity o Checks signed by agents ▪ If an agent signs his/her own name on check that is payable from account of principal, agent will not be personally liable  Unauthorized Signatures o Arise in 2 situations ▪ Person forgets another person’s name on instrument ▪ Agent who lacks authority signs on behalf of principal o General Rule: unauthorized signature is wholly inoperative & will not bind person whose name is signed or forged ▪ Exceptions • Ratification: principal ratifies (affirms) signature  bound • Negligence: if forgery could have been prevented o Holder is in Due Course ▪ Person who forges a check or signs an instrument without authorization can be held personally liable for payment by HDC  Special Rules for Unauthorized Indorsements o Forged/Unauthorized  burden falls on 1 party to take instrument o Imposter Rule: ▪ Focus is on maker or drawer intent (they believe imposter is named payee  not unauthorized) ▪ Comparative Negligence applies (bank does not exercise ordinary care  drawer can recover portion of loss from bank) o Fictitious Payee: person/firm that does not exist OR identifiable party who will not acquire interest in instrument ▪ Payee’s indorsement not treated as forgery  loss falls on maker/drawer ▪ Typical incidents: • Dishonest employee deceives employer into signing • Dishonest employee or agent has authority to issue instrument on behalf of employer II. Warranty Liability  Important when holder cannot hold party liable on his/her signature  Not subject to conditions of proper presentment, dishonor, or notice  Attempt to shift liability back to wrongdoer  Transfer Warranties: made by person who transfers instrument for consideration o 5 transfer warranties: ▪ Transferor is entitled to enforce instrument ▪ All signatures are authentic & authorized ▪ Instrument has not bee
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