Theories Of Liability Article 3 Probs

Front 1

PROBLEM 124
Aunt Fran was unable to pay the annual rent on her hat shop, so She asked the landlord, Simon Mustache, to accept instead a promissory note from her to him for the amount of the rent, the note to be due three months in the future. Simon took the note and immediately discounted it with a localbank. A week later (and before the note matured), Simon brought suit against Aunt Fran for nonpayment of the rent (the underlying obligation being the lease agreement). Can she defend by saying that the note somehow suspended his right to sue on the underlying obligation?

Back 1

A. ISSUE: Can Aunt Fran defend by saying that the note somehow suspended Simon’s right to sue on the underlying obligation?

B. RULE:
a. § 3-310(b)(2) and (3). Unless otherwise agreed and except as provided in subsection (a), if a note or an uncertified check is taken for an obligation, the obligation is suspended to the same extent the obligation would be discharged if an amount of money equal to the amount of the instrument were taken, and the following rules apply
i. (2) In the case of a note, suspension of the obligation continues until dishonor of the note or until it is paid. Payment of the note results in discharge of the obligation to the extent of the payment.
ii. (3) Except as provided in paragraph (4), if the check or note is dishonored and the obligee of the obligation for which the instrument was taken is the person entitled to enforce the instrument, the obligee may enforce either the instrument or the obligation. In the case of an instrument of a third person which is negotiated to the obligee by the obligor, discharge of the obligor on the instrument also discharges the obligation.

C. ANALYSIS:, The answer is yes. The common law doctrine of merger stated that once an instrument was offered and accepted in satisfaction of an underlying obligation, the obligation merged with the instrument, and until the instrument was dishonored the underlying obligation was suspended (unavailable as a cause of action). This doctrine is codified in §3-310 (b) , which you should read carefully. Note that under §3-310(b)(1) and (2) actual payment of a check or a note discharges the underlying obligation, but until then that obligation is suspended. Once the instrument is dishonored, subsection (b) (3) divorces the underlying contract from the instrument and separate causes of action then exist for both.

Front 2

PROBLEM 125
Suppose in the last Problem Aunt Fran had paid her rent by giving a cashier’s check to Simon. The check was drawn by Octopus National Bank (ONB) on itself (the very definition of a cashier’s check-see §3-104(g)). Simon took the check down to ONB and was dismayed to discover that the bank had failed and was now closed. He returned to Aunt Fran and demanded the rent money. What should she tell him? See §3-310(a)

Back 2

A. ISSUE: What should Anunt Fran tell Simon when the ONB failed?
B. RULE:
a. § 3-310(a) Unless otherwise agreed, if a certified check, cashier's check, or teller's check is taken for an obligation, the obligation is discharged to the same extent discharge would result if an amount of money equal to the amount of the instrument were taken in payment of the obligation. Discharge of the obligation does not affect any liability that the obligor may have as an indorser of the instrument.
b. § 3-310 OFFICIAL COMMENT 2. Subsection (a) deals with the case in which a certified check, cashier's check or teller's check is given in payment of an obligation. In that case the obligation is discharged unless there is an agreement to the contrary. Subsection (a) drops the exception in former Section 3-802 for cases in which there is a right of recourse on the instrument against the obligor. Under former Section 3-802(1)(a) the obligation was not discharged if there was a right of recourse on the instrument against the obligor. Subsection (a) changes this result. The underlying obligation is discharged, but any right of recourse on the instrument is preserved.
C. ANALYSIS: She hould tell him to sue the bank because the underlying obligation has been discharged and the bank is the one who is liable.

Front 3

PROBLEM 126
When Aunt Fran (from Problem 124) told Simon that she was not liable for the rent as long as the note was outstanding, he got it back from the bank and tore it up. May he now sue her for the rent even though the note has not yet matured? See §§3-604, 3-310(b)(4), 3-309; Peterson v. Crown Fin. Corp., 661 F.2d 287,32 U.c.c. Rep. Servo 497 (3d Cir. 1981) (creditor’s subjective intent irrelevant). See also Annat., 59 A.L.R.4th 617. If the cancellation had been a clerical error,what result?

Back 3

A. ISSUE:
a. May he now sue her for the rent even though the note has not yet matured?
b. If the cancellation had been a clerical error,what result?

B. RULE:
a. § 3-604(a)(ii) A person entitled to enforce an instrument, with or without consideration, may discharge the obligation of a party to pay the instrument (i) by an intentional voluntary act, such as surrender of the instrument to the party, destruction, mutilation, or cancellation of the instrument, cancellation or striking out of the party's signature, or the addition of words to the instrument indicating discharge, or (ii) by agreeing not to sue or otherwise renouncing rights against the party by a signed record.
i. § 3-310(b)(4) If the person entitled to enforce the instrument taken for an obligation is a person other than the obligee, the obligee may not enforce the obligation to the extent the obligation is suspended. If the obligee is the person entitled to enforce the instrument but no longer has possession of it because it was lost, stolen, or destroyed, the obligation may not be enforced to the extent of the amount payable on the instrument, and to that extent the obligee's rights against the obligor are limited to enforcement of the instrument.
b. A rule from Gloor case: Mistaken cancellation by bank of its promissory note and accompanying discharge of its lien on payor's automobile that secured such note was of no effect and did not result in the discharge of note or release of lien, and, thus, payor's return of certificate of title with the mistakenly released lien in exchange for bank's alleged promise to cancel his debt and make him a new loan did not constitute consideration such that payor had an enforceable contract requiring bank to issue the new loan; payor was only doing what he was legally obligated to do when he returned certificate of title.

C. ANALYSIS:
a. No. Once he destroyed the instrument by tearing it up he cannot sue on either the underlying obligation or on the noted because he destroyed it and they both were merged.
b. The note is not discharged and he can sue on the note.

Front 4

The Maker’s Obligation

Back 4

 The maker of a promissory note is absolutely liable on the instrument; a maker’s liability has no technical implied conditions to it. The same thing is true of a bank that issues a cashier’s check. This “primary” liability is codified in §3-412 (where both the maker of a promissory note and the bank issuing a cashier’s check are lumped together as issuers).4 If there is more than one maker, those who sign are presumed to be jointly and severally liable to the rest of the world (meaning that they can be sued individually or as a group), but they have a right to contribution from their comakers if they are forced to pay more than their share.

Front 5

PROBLEM 127
Winkin, Blinkin, and Nod signed the following promissory note: .
Oct. 1, 2010 $3,000
On or after six months from date, we promise to pay to the order of Grimms National Bank, the sum of three thousand dollars ($3,000). We, along with all sureties and subsequent indorsers, waive all rights to presentment, notice of dishonor, and protest, and all parties hereto agree to any extension of time granted by the holder to the makers.

-Wilber Winkin -Barney Blinkin -Harry Nod

Grimms National Bank indorsed the note in blank and discounted it to Andersen Finance Co. When the note matured, Andersen sued only Winkin, demanding the entire amount. May he defend on the basis that Andersen should have sued all three of them, since the note contains the words “we promise to pay”? If Andersen wins, can Winkin sue Blinkin for $2,000? $l,000?

Back 5

A. ISSUE:
a. May he defend on the basis that Andersen should have sued all three of them, since the note contains the words “we promise to pay”?
b. If Andersen wins, can Winkin sue Blinkin for $2,000? $l,000?
B. RULE:
a. § 3-116(a) Except as otherwise provided in the instrument, two or more persons who have the same liability on an instrument as makers, drawers, acceptors, indorsers who indorse as joint payees, or anomalous indorsers are jointly and severally liable in the capacity in which they sign.
b. § 3-116(b) Except as provided in Section 3-419(f) or by agreement of the affected parties, a party having joint and several liability who pays the instrument is entitled to receive from any party having the same joint and several liability contribution in accordance with applicable law.
c. § 3-116(c) Discharge of one party having joint and several liability by a person entitled to enforce the instrument does not affect the right under subsection (b) of a party having the same joint and several liability to receive contribution from the party discharged.
C. ANALYSIS:
a. No. They are jointly and severally liable so they can sue only one if they choose too.
b. Winkin could Blinkin for contribution of his part of the note, so $1,000..

Front 6

The Indorser’s Obligation

Back 6

 Once the payee signs the back of the instrument, the payee automatically incurs the obligation the law imposes on an indorser. In fact, per §3-204(a), anyone who signs an instrument in an ambiguous capacity is conclusively presumed to assume this liability. This obligation is described in §3-415, which you should read carefully. Note that unlike the obligation of a maker, the indorser’s obligation is secondary, in that there are certain technical conditions that must be met before the indorser can be sued on the §3-415 obligation: the instrument must have first been presented to the maker (if it is a note) or to the drawee (if it is a draft), there must have been a dishonor (by the maker or drawee), and in certain circumstances §3-503 requires that the indorser be given notice of dishonor. These three rights (presentment, dishonor, and notice of dishonor) are discussed ad nauseam in the 3-500 sections of the Code.

Front 7

PROBLEM 128
Billy Bigelow wrote out a check payable to the order of Enoch Snow to pay for some carnival equipment. Snow cashed the check at Bascombe Drug Store, indorsing his name on the back. Bascombe Drug Store then indorsed the check and deposited it in its account at Jordan State Bank. This bank also indorsed the check and then presented it to the drawee bank, Rodgers National Bank, which dishonored it because Bigelow had no money in his account, marking it “NSF” (“Not Sufficient Funds”). The check was returned to Jordan State Bank. You are the bank’s attorney, and it calls you with three questions:
A. ISSUE:
a. (1) Bascombe Drug Store has suddenly gone out of business and there is no money in its account. Can Jordan State Bank sue Enoch Snow and, if so, on what theory? Read §3-415(a) carefully.
b. (2) If Jordan State Bank sues Snow, may he raise his defenses (say, that the drugstore had failed to pay him any money when he indorsed it over to them), or is the indorser liability found in §3-415 strict liability?
c. (3) If the bank does recover from Snow, will he have to pay the whole amount or do the indorsers divide up the indorsement liability and share it proportionately? Cf. §§3-116, 3-205(d).

Back 7

B. RULE:
a. § 3-415(a)(ii) Subject to subsections (b), (c), (d), (e) and to Section 3-419(d), if an instrument is dishonored, an indorser is obliged to pay the amount due on the instrument (i) according to the terms of the instrument at the time it was indorsed, or (ii) if the indorser indorsed an incomplete instrument, according to its terms when completed, to the extent stated in Sections 3-115 and 3-407. The obligation of the indorser is owed to a person entitled to enforce the instrument or to a subsequent indorser who paid the instrument under this section.
b. Same
c. § 3-116.OFFICIAL COMMENT 2. Indorsers normally do not have joint and several liability. Rather, an earlier indorser has liability to a later indorser. But indorsers can have joint and several liability in two cases. If an instrument is payable to two payees jointly, both payees must indorse. The indorsement is a joint indorsement and the indorsers have joint and several liability and subsection (b) applies. The other case is that of two or more anomalous indorsers. The term is defined in Section 3-205(d). An anomalous indorsement normally indicates that the indorser signed as an accommodation party. If more than one accommodation party indorses a note as an accommodation to the maker, the indorsers have joint and several liability and subsection (b) applies.
i. § 3-205.(d) “Anomalous indorsement” means an indorsement made by a person who is not the holder of the instrument. An anomalous indorsement does not affect the manner in which the instrument may be negotiated.
ii. OFFICIAL COMMENT 3. The only effect of an “anomalous indorsement,” defined in subsection (d), is to make the signer liable on the instrument as an indorser. Such an indorsement is normally made by an accommodation party. Section 3-419.
iii. § 3-116(a) Except as otherwise provided in the instrument, two or more persons who have the same liability on an instrument as makers, drawers, acceptors, indorsers who indorse as joint payees, or anomalous indorsers are jointly and severally liable in the capacity in which they sign.

C. ANALYSIS:
a. Yes. They can sue him on the theory of indorser obligation.
b. Since it was bearer paper, the bank was a holder, and since they meet the elements of HDC, he can only raise real defenses.
c. They are anamolous indorsers and thus deemed to be co-surties and have only proportionate liability to one another under 3-116(a).

Front 8

1. When does the Drawee of a draft have liability on an instrument?

Back 8

a. When they Sign it or indorse it.
b. EXAM TIP: I Recall that a drawee cannot have any liability unless and until she signs the instru- li ment. Thus, a holder generally cannot torce a drawee to payout on a dratt. However, I once the drawee signs the instrument, she becomes an acceptor and incurs acceptor (primary) liability

Front 9

What is acceptance and who is the acceptor?

Back 9

c. “Acceptor” defined: An acceptor is a drawee who becomes liable on the instrument by signing thereon.

d. “Acceptance” defined: Acceptance is the drawee’s signed agreement to honor the draft as presented. It may consist of the drawee’s signature alone, written on the draft. If the draft is a check, the drawee bank’s acceptance is called “certification.” [U.C.C. §3-409(c)]

e. Purpose of acceptance: Acceptance by the drawee creates an acceptor’s obligation (below) to honor the draft when presented for payment. Following acceptance, the acceptor returns the draft to the holder who has presented it, and it may then be further negotiated. Once it contains the obligation of the acceptor, the draft has greater commercial worth and is more easily sold. For this reason, parties frequently make a presentment for acceptance on both checks and nonbank drafts, with a subsequent presentment for payment.

i. Example: Elton wants to buy a piano from neighbor John, but John will not sell unless Elton’s personal check is certified. Elton draws a check payable to John and presents it to his own bank for certification (acceptance). After the bank certifies the check, the bank returns the check to Elton, who gives it to John in return for the piano.

ii. Example: Buyer orders 1,000 widgets from Seller, asking 90 days after delivery in which to pay. Seller draws up a draft with Buyer listed as the drawee and stating, “Pay to bearer 90 days after sight.” When the widgets are delivered to Buyer, Seller presents Buyer with the draft and asks her to sign it (thus becoming an acceptor). Buyer does so, and this presentment for acceptance starts the running of the 90-day period. During the next 90 days, the accepted draft can be negotiated to new holders and presented to Buyer for payment at the end of the period.
f. Characteristics of acceptor’s obligation: The acceptor’s signature on a draft creates primary liability identical with that of the maker of a promissory note (supra, §279). In other words, the acceptor promises to pay the instrument according to its terms at the time accepted (or, if then incomplete, as subsequently completed).

Front 10

2. Can the Payee on a check sue the Drawee bank?

Back 10

a. Normally No, payee cant sue drawee bank. BUT there is one way, Can sue under Drawer obligation. (Look at Drawee Liab. And Drawer Obligation)
b. Special agreements with drawer: If the drawee agrees with the drawer to deliver a check or its proceeds to the payee, the payee becomes a third-party beneficiary of this promise and may sue to enforce it. [livingston Industries, Inc. v. Walker Bank & Trust Co., 565 P.2d 1117 (Utah 1977). Intended recipient of cashier's check brought action against bank which paid check to another party. The Third District Court, Salt Lake County Stewart M. Hanson, J., granted summary judgment for bank, and appeal was taken. The Supreme Court, Hall, J., held that evidence raised substantial issues of fact as to relationship of customer which instructed bank to forward cashier's check to plaintiff and not to other party and bank which, contrary to its agreement, delivered cashier's check to other party and not plaintiff and consequences of bank's failure to follow such instructions, precluding summary judgment for bank.]
c. Liability in tort: Similarly, oral statements by officials of a drawee bank assuring the payee that a check will clear can create liability for negligence [Faulkner v. Hill• side Bank & Trust Co., 526 S.W.2d 274 Architect, who accepted a lost $15,000 cashier's check containing a forged endorsement in exchange for a set of architectural plans, brought suit to recover against bank, which had issued check, on theory that architect had relied on bank's negligent verification of check. The 14th District Court, Dallas County, Fred S. Harless, J., instructed verdict for bank, and architect appealed. The Court of Civil Appeals, James, J., held that issues whether bank was negligent in its failure to inform architect that check was a lost instrument and whether such negligence was a proximate cause of architect's damages were for jury.] or fraud [Union Bank v. Safanie, 427 P.2d 146. held that bank which orally promised to pay check of drawer whose account did not contain sufficient funds to cover check was liable to promisees where recovery was not sought on promise to pay drawer's debt or because of acceptance of check but because of tortious act.]

Front 11

3. When is someone liable on an instrument?

Back 11

a. Indorser Liability (when they sign it)
b. Maker Liability (3-412)
c. Drawer Liability
d. Accomidation Liability

Front 12

4. What are the conditions that must be met before the indorser can be sue?

Back 12

a. Presentment
b. Demand Payment
c. Dishonor
d. Notice of Dishonor (§3-503)

Front 13

How do you waive Notice of Dishonor?

Back 13

a. By the terms of the instrument

Front 14

6. What is an accommodation party? What is an accommodated party?

Back 14

a. Accomidation Party: The person signing for purposes of liability.
b. Accomidated Party: Person gaining benefit from accomidation parties signature.

Front 15

7. In what capacities does an accommodation party sign an instrument?

Back 15

a. Whatever capacity is demanded. It depends on the relationship between the indorser and the principle. In most cases its drawer or maker liability.?

Front 16

8. What kind of indorsement is made as an “accommodation party”

Back 16

a. Anomolous indorsement
b. § 3-205.(d) “Anomalous indorsement” means an indorsement made by a person who is not the holder of the instrument. An anomalous indorsement does not affect the manner in which the instrument may be negotiated.
i. OFFICIAL COMMENT 3. The only effect of an “anomalous indorsement,” defined in subsection (d), is to make the signer liable on the instrument as an indorser. Such an indorsement is normally made by an accommodation party. Section 3-419.
ii. Example: A promissory note is signed by the maker and made payable to the order of Clark Kent. On the back of the note at the top is the signature of Bruce Wayne, followed by Clark Kent’s signature. The Kent signature would normally be at the top, since Kent is the payee. Hence, the “Bruce Wayne” signature means that Wayne signed as an accommodation indorser. [See u.c.c. §3-419(c)]

Front 17

9. If the accommodation party pays on the instrument, can he go after the Principal Obligor on the note? If so, how?

Back 17

a. Yes. He can go after through the right of reimbursement. (look in article 3 for this)
b. § 3-419(f) An accommodation party who pays the instrument is entitled to reimbursement from the accommodated party and is entitled to enforce the instrument against the accommodated party. In proper circumstances, an accommodation party may obtain relief that requires the accommodated party to perform its obligations on the instrument. An accommodated party that pays the instrument has no right of recourse against, and is not entitled to contribution from, an accommodation party.
i. OFFICIAL COMMENT 5. Subsection (f) like former Section 3-415(5), provides that an accommodation party that pays the instrument is entitled to enforce the instrument against the accommodated party. Since the accommodation party that pays the instrument is entitled to enforce the instrument against the accommodated party, the accommodation party also obtains rights to any security interest or other collateral that secures payment of the instrument. Subsection (f) also provides that an accommodation party that pays the instrument is entitled to reimbursement from the accommodated party.
ii. Reimbursement: Upon paying the principal’s debt to the creditor, the surety may sue the principal for reimbursement. This right is also codified in U.c.c. section 3-419(e).

Front 18

10. Can an accommodated party that pays on the instrument sue the accommodation party?

Back 18

a. No because he is principally obligated.
b. Surety not liable to principal: The surety is not liable to the accommodated person, regardless of the place in which the surety has signed the instrument. [U.C.C. §3-419(e)] This section likewise codifies the right of reimbursement on the instrument-again, regardless of the order in which the parties have signed.
c. Example: “Hot Check” Harry wants to buy an auto, but Honest John Used Cars will not accept his check. Harry then persuades his friend “Good Natured” Gloria to write the check for him, payable to Honest John. Harry signs as an indorser, and obtains the car. When Honest John tries to cash Gloria’s check, it bounces. If Honest John collects the amount of the check from Gloria, she may seek reimbursement from Harry even though check drawers may not usually sue the indorsers on their U.C.C. section 3-415 obligations (i.e., because indorsers sign subsequent to drawers). Similarly, if Honest John collected the money from Harry, Harry would have no right to sue Gloria on her drawer’s obligation (although indorsers usually have this right). Both of these results occur because Gloria was in fact a surety for Harry, even though Harry signed as the indorser of her check. [See Gibbs Oil Co. v. Collentro & Collentro, Inc., 252 N.E.2d 217 (Mass. 1969)]
d. EXAM TIP: Remember that although an accommodation party is never liable to the party accommodated, he is liable to other parties in the capacity in which he signed (e.g., maker, indorser, etc.).

Front 19

11. Are indorsers who sign on a note jointly and severally liable? §3-116

Back 19

a. Yes if they sign as joint indorsers.

b. No if the sign as an independent indorser.

c. § 3-116. Joint and Several Liability; Contribution.

i. (a) Except as otherwise provided in the instrument, two or more persons who have the same liability on an instrument as makers, drawers, acceptors, indorsers who indorse as joint payees, or anomalous indorsers are jointly and severally liable in the capacity in which they sign.

ii. (b) Except as provided in Section 3-419(f) or by agreement of the affected parties, a party having joint and several liability who pays the instrument is entitled to receive from any party having the same joint and several liability contribution in accordance with applicable law.

d. Joint payees: If the instrument is made payable to joint payees (“Pay to the order of John and Mary Doe”) and they both indorse the instrument, they are preslimed to be co-sureties and liable to each other only for their respective shares. However, the law presumes that they are both “jointly and severally liable” to the rest of the world, meaning that they can be sued together or each individually for the full amount of the instrument.

e. Anomalous indorsers: Similarly, if there are multiple anomalous indorsers (see supra, §130), they are deemed to be co-sureties and have only proportionate liability to one another. For example, both Brother and Sister become sureties on Dad’s promissory note, both signing on the back; if Brother is forced to pay the note, he could only get reimbursement from Sister for her share, and not the entire amount. [U.C.C. §3-116(a)]

Front 20

12. Who is jointly and severally liable? What does that mean?

Back 20

a. Maker: means a person who signs or is identified in a note as a person undertaking to pay.

b. Drawer: means a person who signs or is identified in a draft as a person ordering payment.

c. Acceptor: means a drawee who has accepted a draft.

i. "Drawee" (not joint and severally liable.) means a person ordered in a draft to make payment

d. Anamoulous indorser: "Anomalous indorsement" means an indorsement made by a person who is not the holder of the instrument. An anomalous indorsement does not affect the manner in which the instrument may be negotiated.

e. Joint and Several Liability: they can be sued together or each individually for the full amount of the instrument.

Front 21

What are the "real defenses" ?

Back 21

Alteration
Discharge in insolvency
discharge known to the HDC
duress
forgery
fraud in the factum
illegality
incapacity to contract
infancy
surteyship

Front 22

What are the 5 types of indorsements?

Back 22

Remember that there are five types of indorsements: (i) special (names a particular person as indorsee); (ij) blank (does not name a particular person as indorsee); (iii) qualified (limits liability by the words "without recourse"); (iv) restrictive (limits payment); and (v) anomalous (made by a person who is not a holder for suretyship purposes).

Front 23

§ 3-412: Obligation of Issuer:

Back 23

a) This section applies only to:
1. Notes
and 2. Cashier's Checks
and 3. Other Drafts drawn on the Drawer (i.e., Teller/Bank Checks)

b) Applicable Terms of Payment: The Issuer of the above drafts is obliged to pay the Instrument according to the terms of the Draft at the time it was:

(i) Issued, or if it was not issued, when the Holder first took possession
or (ii) Completed (to the extent stated in § 3-115 and § 3-407) — if the Issuer Signed an Incomplete Instrument

c) This obligation is owed to:
i) A Person Entitled to Enforce the Instrument
and ii) An Indorser who paid the Instrument (under § 3-415)

Front 24

Obligation of Drawer

Back 24

(a) Scope: This section does not apply to:
1. Cashier's Checks
Or 2. Other Drafts drawn on the Drawer

(b) Obligation to Pay for Dishonored Draft (uncertified)
1) If an Unaccepted Draft is dishonored, the Drawer is obliged to pay the Draft, according to its terms at the time it was: (i) Either: a) Issued — if the Draft was issued Or b) First possessed by a Holder — if the Draft was not issued Or (ii) Completed (to the extent stated in § 3-115 and § 3-407) —if the Drawer Signed an Incomplete Instrument

2) This obligation is owed to: i) A Person Entitled to Enforce the Draft and ii) An Indorser who paid the Draft (under § 3-415)

(c) Discharge of Drawer: If a Draft is Accepted by a Bank, the Drawer is discharged (regardless of when or by whom acceptance was obtained).

(d) Dishonored Draft Accepted by a Non-Bank: The Drawer has the same obligation (to pay the Draft) as an Indorser (under § 3 415(a) and (c)) if:
1) The Draft is accepted by a non-Bank. and 2) It is dishonored by the Acceptor.

(e) Disclaimer of Liability:
1. The Drawer will not be liable under (b) if: a) The Draft either: 1) States that it is drawn "without recourse" or 2) Otherwise disclaims the Drawer's liability (to pay the Draft) and b) The Draft is not a Check
2. A disclaimer of the liability under (b) is not effective if the Draft is a Check.

(f) Discharge of Obligation:
1. The Drawer may discharge its obligation to pay a Check by assigning its rights against the Drawee (with respect to the funds) to the Person Entitled to Enforce the Check.
2. The Drawer may do this only to the extent the Drawer is deprived of funds, when:
(i) Either:a) A Check is not presented for Payment within 30 Days after its date or b) A Check is not given to a Depositary Bank for
collection within 30 Days after its date and (ii) The Drawee suspends payments after the 30 Day period expires (without paying the Check) and (iii) Because of the suspension of payments, the Drawer is deprived of funds maintained with the Drawee to cover the Payment of the Check (e.g., Bank is insolvent)

Front 25

§ 3-401: Signature

Back 25

§ 3-401: Signature:
(a) Liability on an Instrument:
A Person will be liable on an Instrument only if: (i) The Person has Signed the Instrument. or (ii) A Representative has Signed it for the Person (and such signature is binding on the represented Person under § 3-402).

(b) Method of Signature:
A signature may be made by:
(i) Any of the following means: a) Manually or b) By use of a machine or device and (ii) The use of: a. A name (including a trade or assumed name) Or b. Any of the following if they are executed or adopted by a Person with a present intention to authenticate a writing: 1) Word Or 2) Mark Or 3) Symbol

Front 26

§ 3-415: Obligation of Indorser

Back 26

§ 3-415: Obligation of Indorser:
(a) Obligation to Pay for Dishonored Draft:

1) If an Instrument is dishonored, an Indorser is obliged to pay the amount due on the Instrument, according to the its terms at the time it was: (i) Indorsed Or (ii) Completed (to the extent stated in § 3-115 and § 3-407), if the Indorser Indorsed an Incomplete Instrument

2)This obligation is owed to: i) A Person Entitled to Enforce the Instrument Or ii) A subsequent Indorser who paid the Instrument (under this section)

3) This subsection is subject to subsections (b), (c), (d), (e), and Section 3-419(d).
(b) Disclaimer of Liability: The Indorser is not liable under (a) if the Indorsement either: 1) States that it is made "without recourse" Or 2) Otherwise disclaims the Indorser's liability (to pay the Instrument).

(c) Discharge Without Notice of dishonor: The Indorser's liability (under (a)) will be discharged if: 1) Notice of dishonor is required (as per § 3-503) and 2) Such notice is not given to an Indorser.

(d) Discharge by Acceptance: The Indorser will be discharged of liability (under (a)) if a Bank accepts a Draft after an Indorsement is made.

(e) Discharge for Checks: The liability (under (a)) of the Indorser will be discharged if: a) The Draft Indorsed is a Check.
and b) Either: 1) The Check is not presented for Payment within 30 days after Indorsement. or 2) The Check is not given to a Depositary Bank for collection within 30 days after Indorsement.'

Front 27

§ 3-413: Obligation of Acceptor:

Back 27

(a) Applicable Terms of Payment:
1. The Acceptor of a Draft must pay the Draft, according to its terms at the time the Draft was: (i) Accepted — even if the Acceptance states that the Draft is payable "as originally drawn" (or has equivalent terms) or (ii) As Varied — if the Acceptance varies the terms of the Draft (see § 3-410) or (iii) As Completed (to the extent stated in § 3-115 and § 3-407) — if the Draft was accepted while incomplete

2. This obligation is owed to: i) The Drawer or a Person Entitled to Enforce the Draft or ii) An Indorser who paid the Draft (under § 3-414 or § 3-415)

(b) Exceptions
1) Amount Stated: The Acceptor must pay the amount so stated on the Draft if the Acceptance of the Draft (or certification of a Check) specifically states the amount Accepted or Certified.
2) Holder in Due Course: The Acceptor must pay the amount of the Instrument at the time it was taken by an HDC if: (i) The Certification or Acceptance does not state an amount. and (ii) The amount of the Instrument is subsequently raised. and (iii) The Instrument is then negotiated to an HDC.

Front 28

§ 3-403: Unauthorized Signature:

Back 28

(a) Unauthorized Signature Ineffective: An Unauthorized signature is ineffective unless:
1) Otherwise provided in Article 3 or 4

2) The signature is effective to impose liability upon the signer in favor of a Person who in Good Faith:
a) Takes it for Value or b) Pays the Instrument

3) "Ratification": The Unauthorized signature may be retroactively adopted by the Person whose name is Signed. • Ratification may be found from conduct or express statements.

(b) Multi-Person Signatures: If an organization requires more than one signature to constitute the organization's authorized signature, the signature is deemed unauthorized if any of the required signatures are absent.

(c) Liability: Civil or criminal liability for persons making Unauthorized signatures is not affected by any provision of this Article which makes the Unauthorized signature effective for the purposes of this Article

Front 29

§ 3-404: Impostors; Fictitious Payees:

Back 29

(a) Impostor's Indorsement Effective: 1) An Indorsement of an Instrument by any Person in the name of the Payee is effective, as if it were the Payee, in favor of a Person who: a) Pays the Instrument or b) Takes it for Value or Collection 2) This rule applies if an Impostor (by use of mail or otherwise) a) Induces the Issuer of an Instrument to Issue the Instru¬ment to either: 1) The Impostor himself or 2) A Person acting in concert with the impostor and b) Causes the Issuer to do so by impersonating either the:
1) Payee of the Instrument
2) A Person authorized to act for the payee

(b) Unintended or Fictitious Payee:
A. Scope—These rules apply if: (i) A Person whose intent determines to whom an Instru-ment is payable (see § 3-110(a) or (b)) does not intend the Person identified as payee to have any interest in the Instrument. or (ii) The Person identified as payee is a fictitious Person.

B. Rules of Unintended or Fictitious Payee (These apply until the instrument is negotiated by special Indorsement):
(1) Any Person in possession of the Instrument is considered its holder.
(2) An Indorsement (made by anyone) in the name of the payee stated in the Instrument is effective as the Payee's Indorsement in favor of a Person who, in Good Faith: a) Pays the Instrument Or b) Takes it for Value or Collection.

(c) Intended Payee: An Indorsement is made in the name of a Payee (under (a) and (b)) if:
(i) It is made in a name substantially similar to that of the Payee. Or (ii) The Instrument is deposited in a Depositary Bank Account in a name substantially similar to that of the Payee (whether or not Indorsed).
(d) Failure to Use Ordinary Care
1) A Person paying or taking for Value or collection an Instrument (to which (a) or (b) applies) will be liable on the Instrument if:
a) He fails to use Ordinary Care when paying or taking the Instrument for Value or collection. and b) His failure to use Ordinary Care substantially contributes to the loss resulting from Payment of the Instrument. and c) A Person suffers damages as a result.

2) Such Person will be liable only to the extent of the amount lost as a result of the failure to use Ordinary Care.

Front 30

§ 3-405: Employer's Responsibility for Fraudulent Indorsement by Employee:

Back 30

(a) Definitions — the following definitions apply to this section:
(1) "Employee" — includes an independent contractor and Employee of an independent contractor retained by the employer
(2) "Fraudulent Indorsement" — (i) For Instruments payable to employer — a forged Indorse¬ment purporting to be that of the employer or (ii) For Instruments where employer is Issuer — a forged Indorsement purporting to be that of the Person identi¬fied as the payee (3) "Responsibility" a)"Responsibility" includes the authority to: (i) Sign or Indorse instruments on behalf of the employeror (ii) Process instruments received by the employer for a) Bookkeeping purposes Or b) Deposit to an Account or c) Other disposition Or (iii) Prepare or process instruments for Issue in the employer's name Or (iv) Supply information determining the names or addresses of the payees of instruments (which were to be issued by the employer) or (v) Control disposition of instruments to be issued in the employer's name Or (vi) Act otherwise with respect to instruments in a responsible capacity b) "Responsibility" does not include authority that merely allows an employee to have access to instruments or blank/incomplete Instrument forms that are being stored, transported, or are part of incoming or outgoing mail, or have similar access.

(b) Rights and Liabilities:
1) A Fraudulent Indorsement will be effective (as the Indorsement of the Person to whom the Instrument is payable) as against a Person who in Good Faith pays the Instrument or takes it for Value or Collection if: a) The Employer entrusted the employee with a "responsibility" specified in (3). or b) The responsible employee (or someone working with such employee) makes a Fraudulent Indorsement. or c) The Indorsement is made in the name of the Person to whom the Instrument is payable.

2) Failure to Use Due Care:
a) If the Person paying or taking for Value or collection the Instrument fails to use Ordinary Care in paying or taking the Instrument for Value or collection, he will be liable to anyone suffering as a result if it substantially contributes to the loss resulting from the fraud. b) Such Person will be liable only for the amount lost as a result of its failure to use Ordinary Care.

(c) "Made in the Name of the Payee" A forged Indorsement made under (b) will be considered to have been made in the name of the Person to whom the Instrument is payable if: (i) It is made in a name substantially similar to the name of that Person. or (ii) The Instrument is