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33-1 Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
P A R T
Commercial Paper
Negotiable Instruments Negotiation and Holder in Due Course Liability of Parties Checks and Electronic Transfers
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C H A P
E R
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Liability of Parties
Always do right. This will gratify some people, and astonish the rest. Mark Twain, Speech to Young Peoples Society (1901)
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Learning Objectives
Explain difference between primary and secondary liability List five warranties made to transfer negotiable instruments and three warranties made when presenting these for payment or acceptance Discuss three exceptions to normal liability rules
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A person who is secondarily liable is a contract guarantor and, under UCC Article 3, must pay the instrument only if the person who is primarily liable defaults on the obligation
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Indorser Liability
A person who indorses a negotiable instrument usually is secondarily liable
Indorsers are liable to each other in chronological order, from the last indorser back to the first
To trigger secondary liability, the instrument must be properly presented for payment or acceptance, the instrument must be dishonored, and notice of the dishonor must be given to the person secondarily liable
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Presentment of a Note
Since the maker of a note is primarily liable to pay it when due, dishonor occurs if the maker does not pay amount due when:
1) it is presented in the case of (a) a demand note or (b) a note payable at or through a bank on a definite date and presented on or after that date, or 2) if it is not paid on the date payable in the case of a note payable on a definite date (but not payable at or through a bank) [3502]
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Warranty Liability
Person who transfers negotiable instrument or presents it for payment may have liability for implied warranties of presentment or transfer
Bank One, N.A. v. Streeter: Person who deposited checks to his account on which the payees name had been altered breached transfer warranties and was not entitled to enforce the instruments
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Thought Questions
What steps would you take to make sure that fictitious payees and fraudulent indorsement did not occur in your business?
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