Commercial Paper: Contract Liability

Front 1

Basis of liability: primary basis of contract liability on an instrument is a person's *signature

Back 1

Signatures by Agents:
1) Binding principal: follow general law
2) Binding agent: assume agent signs agent's name and that principal is bound

Key issue: Is agent personally liable?

Hint 1

Agent escapes personal liability if:
1) Principal identified in instrument; and
2) Signature unambiguously shows it made on behalf of principal

Front 2

Liability of agent if above 2 elements not satisfied
1) To holder in due course- agent is liable to holder in due course unless agent can prove that holder had notice of the representative nature of agent's signature
2) To non-holder in due course: agent's liable to non-holder in due course unless agent can prove that original parties didn't intend agent to be liable

Back 2

Special rule for checks: no liability if principal's name is on the check

Agent for drawer isn't personally liable if principal's name is on check (even if agent did not indicate agency capacity)

Hint 2

3) If Agent Not authorized

Actually, it's then a forgery; alleged agent is bound, but not purported principal.

Front 3

Maker of Note

1) Primary liability: no conditions precedent

Maker must pay instrument when it's due according to its terms at time when it was issued (or when incomplete instrument completed)

Back 3

2) Liable to Holder or Indorser who paid instrument

3) Maker may raise defenses; effectiveness depends on status of holder (e.g., HDC or not)

Front 4

Drawer of Draft

1) Drawer may not disclaim liability on a check but may disclaim liability on other drafts [can't include phrase 'without recourse']

Back 4

2) *Secondary liability

Drawer liable only after 2 conditions are first satisfied:
- presentment
- dishonor

Hint 4

Presentment: Noncompliance has low penalty for drawner, only helps you

Dishonor (check bounces): Drawee refuses to pay the instrument upon a proper presentment

Front 5

Indorser of Note or Draft

1) Liability disclaimer allowed [effective to pass title]
2) Order of Liability (multiple indorsements): indorsers are liable to each other in order of their signatures; sue prior indorsers for payment and liable to later indorsers

Back 5

3) Secondary Liability

Indorser liable only after 3 conditions are first satisfied:
1) presentment;
2) dishonor;
3) notice of dishonor (bc indorser couldn't know heck bounced)

Hint 5

a) Presentment to maker or drawee within 30 days of indorsement
b) dishonor (drawee didn't pay check because drawer did not have sufficient funds in the drawer's account to cover the check)
c) notice of dishonor to indorser w/in 30 days of the dishonor

Front 6

Drawee

1) Generally: Drawee makes no negotiable instruments contract. [didn't sign check, thus has no liability]

Back 6

2) Acceptance or Certification
- drawee may agree to pay draft by signing draft
- drawee has no obligation to accept a draft and can't be sued for failing to accept
- certification discharges the drawer

Hint 6

3) Final Payment

Once a drawee bank finally pays a check, contract actions (e.g., the drawer's and indorser's contracts) may no longer be pursued and the drawee bank may not recover on the check from the persons it paid unless there is a breach of a presentment warranty

Final payment occurs when drawee bank (1) pays item in cash or (2) doesn't revoke a provisional settlement by midnight deadline (midnight of next banking day after the banking day of receipt)

Front 7

4) Conversion (Tort) Liability if Drawee Pays on Forged Indorsement

Drawee who pays on forged indorsement is liable to the payee in conversion.

Person suing in conversion must have receipt of the instrument. No conversion action if check never reaches payee because it was lost in the mail.

Back 7

5) Payment of Checks after Drawer's Death

a) Drawee bank may continue to pay checks until it knows that drawer has died and has reasonabl opp to act on knowledge
b) Drawee bank may pay for no more than 10 days after drawer's death if bank knows of drawer's death. But, if someone claiming interest in account requests that drawee bank stop paying drawer's checks right away, drawee bank must comply.

Front 8

Accommodation Parties

Definition: co-signers, sureties, guarantors

A person who signs an instrument to lend his or her credit to another party but who doesn't receive any direct benefit (i.e., doesn't receive any of the borrowed money)

Back 8

Accomodated Party (principal/debtor/obligor)- person w/bad credit

Accommodation Party (surety/co-signer)- person w/good credit

Holder (creditor/obligee): person who wants payment assured

Hint 8

LIability in capacity in which accomodation party signs; no special contract.

Presumed to be a guaranty of payment.

Front 9

(accomodation partie)

4) Limiting liability to collection only

Accomodation party may include express language limiting contract to a guarantee of collection only. (must go after other first)

Back 9

5) Reimbursement: if accomodation party (surety) pays the instrument, accomodation party is entitled to reimbursement from the accomodated party (maker, indorser)

Hint 9

6) Demonstrating Accomodation Status (recognizing when accomodation parties are there)

- Express language
- Anomalous indorsement (indorsement by a person who was not the instrument holder- i.e, indorsement outside the chain of title, is notice of its accomodation character)