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Exam 26: Liability of Parties

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Question 1

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Parties with secondary liability unconditionally promise to pay the instrument.

A) True
B) False

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Question 2

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a. Discuss primary liability on a note; on a check. b. What is secondary liability? What must be done before a person with secondary liability can be sued? Who has secondary liability on a note? Who has secondary liability on a check? c. How does contractual liability on the instrument differ from warranty liability?

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a. If a person is primarily liable on a negotiable instrument then that person is absolutely required to pay the instrument, subject to certain real defenses. The maker is primarily liable on a note. A drawee who promises to pay by certifying a check, or accepting it as presented (thus becoming an acceptor), is primarily liable on a check. b. Secondary liability is contingent liability. It does not arise unless the primarily liable party has defaulted on an instrument. A drawer is liable if the drawee dishonors the instrument. Indorsers are liable subject to the conditions of dishonor and notice of dishonor. An indorser has secondary liability on a note. The drawer and unqualified indorsers have secondary liability on a check. c. Contractual liability is imposed on those who sign or have an agent sign an instrument, unless they disclam liability. Warranty liability is not subject to the conditions of proper presentment, dishonor, and notice of dishonor. It arises upon transfer or presentment. Warranty liability is not based on signature, but may be imposed on signers and nonsigners.

Question 3

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Mark gives a bearer note for $50 to Joe in exchange for an excellent dinner at Joe's restaurant. Joe delivers the note to Sue for $50 and Sue takes it to Mark to be paid. If Mark says the note was originally written for only $5, what can Sue do?

An accommodation party is a direct beneficiary of the value received from lending her credit on an instrument.

In Cohen v. Disner the court found that Disner was not liable on the check because he had no enforceable obligation to pay, the check was drawn by him in a representative capacity, and the holder had notice that Disner's signature was in the capacity of an agent.

Arthur is the payee of a negotiable promissory note on which Brian is the maker. Arthur indorses the note in blank and delivers it to Clark, who then transfers it to David without indorsement. David presents it to Brian for payment when it becomes due, but Brian claims he signed the note based upon fraud in the inducement and refuses to pay. a. Who is primarily liable on the instrument? Who is secondarily liable on the instrument? b. Who has warranty liability? Why? Explain. c. From whom can David try to collect now that Brian refuses to pay?

An acceptor should always indicate on the instrument the amount accepted.

Franz signs a $1,000 note payable to ABC Bank. To help Franz get the loan approved, Amy also signs the note as an accommodation maker. Amy:

First Bank returns a check because it lacks a necessary indorsement. This action constitutes a dishonor of the check.

When a severe weather warning has been declared, a delay in notice of dishonor is excused to the reasonably diligent holder who was prevented from posting the notice.

Presentment for payment is one step necessary to charge an indorser with the obligation to pay.

Indorsers of all instruments incur primary liability on the instrument.

An obligation to pay a negotiable instrument subject to conditions precedent is known as:

Conversion of an instrument will occur if:

Warranties on presentment are the same regardless of who is the payor or acceptor.

An unauthorized signature may bind a principal who allowed the signature to be made through his own negligence.

The maker is the primary party on every note.

An unauthorized signature cannot be ratified by the person whose name appears on the instrument.

Zoron Company purchased a truck from Ace Motors. The sales personnel at Ace know that Anton Green is an executive at Zoron. To pay for the truck, Anton delivered a $26,000 note to Ace and signed it "Anton Green, Agent." In this case:

Parties that are usually secondarily liable for an instrument are: