What happens when an instrument is offered and accepted in lieu of an underlying obligation?
The obligation merges** with the instrument, and the **underlying obligation is suspended
Payment** of the instrument **discharges** the **instrument** and the **obligation
If the instrument is dishonored**, the party issuing the instrument is **liable** on **both** the **instrument** and the **obligation** (but plaintiff is limited to only **one recovery)
NOTE: the following will discharge** an **underlying obligation
- cashier’s check (bank=drawer and drawee)
- teller’s check (bank1=drawer; bank2=drawee)
- certified check (check accepted by the bank on which it is drawn)
NOTE: if the party indorses** the instrument and becomes **obligated** on it, discharge but **right of recourse on the instrument against the party
What is a note’s maker’s contract liability?
Maker is obligated to pay the instrument according to its terms at the time it was issued
If multiple makers, joint and severally liable
What is an indorser’s contract liability?
Obligated to pay according to the terms of the instrument at the time of the indorsement
NOTE: those signing later in time can get complete reimbursement from those signing prior in time.
- indorsers are secondarily liable**–liable only after the instrument has been 1) **presented to the maker/drawee** within a reasonable time; 2) that **party has dishonored** the instrument AND 3) **notice of dishonor** has been given to the indorser within **30 days following the day on which dishonor occurs
NOTE: when there has been an anomalous indorsement, indorsers are jointly and severally liable
- e.g., joint payees; accommodations
NOTE: checks
- must be presented within 30 days after the indorsement
- notice of dishonor must be given 1) by a bank before its midnight deadline (midnight of next banking day); or 2) within 30 days by any other person following the day on which received notice
NOTE: these defenses are not effective against a holder in due course
Is waiver of presentment and dishonor notices permissible?
Yes.
They may also be wholly excused or permissibly delayed in the following circumstances:
- repudiation of the obligation
- death
- insolvency
- cannot be found with reasonable diligence
- drawer has instructed drawee not to pay
- circumstances beyond the control of the person giving notice of dishonor plus reasonable diligence afterwards
What is a qualified indorsement and what is its effect?
Indorsement: “Peter Payee, without recourse”
If the check is dishonored and appropriate notice is given, no liability as an indorser
What is the drawer’s contract liability?
Obligated to pay the draft according to its terms when the drawer signed the instrument.
- secondarily liable** after **presentment** and **dishonor
- excused from contractual liability due** to **delay** in **presentment** only if the **drawee bank has become insolvent** during the delay and **no insurance to cover loss
NOTE: a drawer is generally not entitled to notice of dishonor
- will or should know of the dishonor on her own because of her relationship with the drawee
What is the drawee’s contract liability?
Drawee is not liable** on an instrument **because never signed the instrument
NOTE: drawee would be liable** if it was a **certified check
- accepted the obligation
Define an accommodation party.
Signs** the **instrument** in **any capacity** for the **purpose of lending his name to another party for it
- Liable in the capacity in which she signed
- if liable, may get complete reimbursement from the original maker
- accommodation party is not liable to the party accommodated
- alterations to the instrument without the accommodation party’s consent relieves the accommodation party to the extent that can prove the alteration caused her loss
- accommodation party may defend using any of the defenses that the party accommodated could raise except: 1) insolvency; 2) infancy; or 3) lack of legal capacity
In what instances does “collection guaranteed” impose liability on the signor?
Execution of judgment** against the other party has been returned **unsatisfied
The other party is insolvent or in insolvency proceedings
The other party cannot be served with process
Otherwise apparent** that **payment cannot be obtained from the other party
When is an agent personally liable for signing an instrument?
“Jane Doe, President.”
- parol evidence permissible except as against an HDC who takes without notice
- likely a close call, but not liable
“Jane Doe.”
- parol evidence permissible except as against an HDC who takes without notice
- likely liable
NOTE: as long as the agent is authorized to sign** for the principal, then the **principal can be bound to the instrument
NOTE: if agent signs her name to a principal’s check, no liability if it is drawn on the principal’s account and indicates the identity of the principal
