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Chapter 28
LIABILITY OF PARTIES
I. Contractual Liability
A. Signature
1. Authorized Signatures
2. Unauthorized Signatures
a a. Ratification of Unauthorized Signature
b. Negligence Contributing to Forged Signature
B. Liability of Primary Parties
1. Makers
2. Acceptors
C. Liability of Secondary Parties
1. Drawers
2. Indorsers
3. Effect of Acceptance
4. Disclaimer of Liability by Secondary Parties
5. Conditions Precedent to Liability
a. Dishonor
b. Notice of Dishonor
b c. Presentment and Notice of Dishonor Excused
6. Liability for Conversion
D. Termination of Liability
1. Payment
2. Tender of Payment
3. Cancellation and Renunciation
II. Liability Based on Warranty
A. Warranties on Transfer
1. Entitlement to Enforce
2. Authentic and Authorized Signatures
3. No Alteration
4. No Defenses
5. No Knowledge of Insolvency
B. Warranties on Presentment
1. Drawees of Unaccepted Drafts
a. Entitled to Enforce
b. No Alteration
c. Genuineness of Drawer's Signature
2. All other Payors
Cases in This Chapter
Mark Line Industries, Inc. v. Murillo
Modular Group, Ltd.
Cohen v. Disner
Messing v. Bank of America, N.A.
Davis v. Watson Brothers Plumbing, Inc.
Travelers Indemnity Co. v. Stedman
Chapter Outcomes
After reading and studying this chapter, the student should be able to:
Explain contractual liability, warranty liability, and liability of conversion.
Explain the liability of makers, acceptors, drawers, drawees, indorsers,
and accommodation parties.
Identify and discuss the condition precedents to the liability of secondary
TEACHING NOTES
*** Chapter Outcome ***
Explain contractual liability, warranty liability, and liability of conversion.
I. CONTRACTUAL LIABILITY
Makers of promissory notes and acceptors (drawee on acceptance) of drafts are
A. SIGNATURE
This term is broadly defined to include any name, word, or mark — handwritten,
typed, printed, or any other form, intended to authenticate the instrument.
Authorized Signatures
Although agents may sign negotiable instruments on behalf of their principal,
they must do so in such a manner that their representative capacity is disclosed
and the identity of the principal is given. Otherwise, the agent becomes
personally liable on the instrument.
The most common incorrect forms of signatures by agents and the liability that
results from each are:
1. An agent signs only his own name to an instrument.
2. An authorized agent indicates that he is signing as a representative but
does not disclose the name of his principal.
3. An agent signs both his name and his principal’s name but does not
indicate that he is an agent, making them appear as co-makers.
In all three situations, the agent is liable on the instrument only to a holder in
due course without notice that the agent was not intended to be liable. Because
CASE 28-1
MARK LINE INDUSTRIES, INC. v. MURILLO MODULAR
Moody, J
Plaintiffs Mark Line Industries, Inc., Mark Line Industries, Inc. of Pennsylvania, and Mark Line
Industries of North Carolina, LLC (collectively "Mark Line") filed an amended complaint
against defendants Murillo Modular Group, Ltd. ("MMG") and Salvador V. Murillo ("Murillo").
The complaint alleges that defendants failed to pay the balances due on two promissory notes
that they had given to Mark Line.)
* * *
The first promissory note, dated September 18, 2009, was for $3,802,532.00. The terms
of the note provided that it would mature on the date of whichever was sooner — November 15,
2009, or upon the date(s) when certain conditions were satisfied. Mark Line alleges that
defendants did not pay the balance due by November 15, 2009.
The second note, also dated September 18, 2009, was for $743,297.50. The terms of this
note also provided that it would mature on the date of whichever was sooner—November 15,
2009, or upon the date(s) when certain conditions were satisfied. Mark Line claims that
defendants did not pay the balance by November 15, 2009. Line alleges that it received a
payment of $79,549.51 on this note on January 10, 2010. Of this payment, $14,175.47 was
applied towards accrued interest and the remaining $65,374.04 was applied to reduce the
remaining principal balance.
Both notes include the following explanation for "Maker/Borrower":
At the end, both notes state:
IN WITNESS WHEREOF, the Maker/Borrower understands that it is liable for all
obligations arising under this Note and has caused the same to be signed and delivered as
of the date first written above.
The form of signature then says "Murillo Modular Group, Ltd, Maker/Borrower."
Murillo's signature appears above the signature block, "By: Salvador Murillo, Owner" on the
first note and "By: Salvador Murillo, Partner" on the second note. Nick Mackie has also signed
the first note as "owner" and the second note as "partner." The notes then say "Accepted: Mark
Line" and are signed by "L. Michael Arnold, CEO."
* * *
[The parties have agreed to dismiss, without prejudice, the claim against Murillo for failure
to pay the balance on the second promissory note. The defendants argue that the first promissory
note for $3,802,532.00 shows only that Murillo signed the note in his representative capacity for
MMG—not that he signed it in his individual capacity. They argue that Murillo is not
individually liable because the "form of his signature shows unambiguously" that he signed as a
representative of MMG.]
Mark Line's pleadings show two different plausible theories for Murillo's individual liability
for the note. First, under [UCC 3-402(a)], Murillo may be liable on the promissory note as a
matter of contract law. This part of the statute provides:
If a person acting, or purporting to act, as a representative signs an instrument by signing
either the name of the represented person or the name of the signer, the represented person is
[UCC 3-402(a).] So, for example, if Person A agreed to have Person B act as his representative
as a matter of agency law, and Person B signed his own name or Person A's name to an
instrument, Person A is bound to the instrument as a matter of contract law. This is because as the
authorized representative of Person A, Person B's signature is an authorized signature of Person
A.
The promissory note at issue states that MMG, Murillo, and Mackie are "collectively and
severally the ‘Maker or Makers or Borrower’ through Murillo Modular Group, Ltd.".) The
phrase "through Murillo Modular Group, Ltd." could mean that MMG was authorized to act on
behalf of Murillo for this note, so that MMG was acting as Murillo's representative on the
promissory note and Murillo was the represented person. In this way, Murillo could still be liable
Second, Murillo may be liable on the note under [UCC 3-402(b)]. [UCC 3-401(a)] states that
a person is not liable on an instrument unless he has signed the instrument or his agent or
representative has signed the instrument. [UCC 3-402(b)(1)] provides that a representative
signing his name to an instrument as an authorized signature of a represented person is not liable
on an instrument if the "form of the signature shows unambiguously that the signature is made
on behalf of the represented person." [UCC 3-402(b)(1).] If the form of signature "does not show
unambiguously that the signature is made in a representative capacity," "the representative is
In this case the form of signature is ambiguous. * * * The U.C.C. provides three examples of
when the form of signature is ambiguous. One example of this is when the agent signs as an
agent, but fails to identify the represented person. UCC § 3-402 cmt. 2. That is similar to the
situation as alleged here because the form of signature does not clearly identify MMG as the
represented party. The note identifies MMG as the "Maker/Borrower" in the form of signature.
However, the note defines "Maker/Borrower" as MMG, Murillo, and Mackie "through Murillo
Modular Group." It then says that the "Makers/Borrowers shall be jointly and severally liable." It
Murillo's alleged signature and "By: Nick Mackie, Owner" with Mackie's alleged signature. It
could be argued that if they were signing only in their representative capacities for MMG, only
one of them would have needed to sign the note. So this also causes some ambiguity in the form
of signature.
Unauthorized Signatures
Includes forgeries and signatures by an agent who lacks the proper authority.
Unauthorized signatures will impose liability on the signer regardless of whose
name appears on the instrument.
Rati)cation of Unauthorized Signature — Makes the signature valid and
relieves the actual signer from liability for the instrument, but not from action by
the person whose name was forged.
*** Chapter Outcome ***
Explain the liability of makers, acceptors, drawees, drawers, indorsers, and accommodation
parties.
B. LIABILITY OF PRIMARY PARTIES
The maker of a note is primarily liable while there is no primary liability on a
draft or check unless it is accepted by the drawee.
Makers
Their obligation is to pay the instrument according to its terms at the time of
issuance or, if incomplete, according to its terms at completion.
Acceptors
A drawee has no liability until she becomes an acceptor. An acceptance must be
written on the instrument — normally vertically across the face of the draft.
CASE 28-2
MESSING v. BANK OF AMERICA, N.A.
Court of Appeals of Maryland, 2003
373 Md. 672, 821 A.2d 22, 50 U.C.C. Rep.Serv.2d 1
http://scholar.google.com/scholar_case?case=15792173749697893031&q=821+A.2d+22&hl=en&as_sdt=2,10
Harrell, J.
[Messing had a check in the amount of $976 from Toyson J. Burruss, the drawer. Instead of
depositing the check into his bank account, Messing presented the check for payment at Mr.
Burruss’ bank, Bank of America, the drawee. The teller, by use of a computer, confirmed the
availability of funds on deposit, and placed the check into the computer’s printer slot. The
computer stamped certain data on the back of the check, including the time, date, amount of the
check, account number, and teller number. The computer also placed a hold on the amount of
$976 in the customer’s account. The teller gave the check back to the Messing, who indorsed it.
The teller then asked for Messing’s identification. He presented his driver’s license and a major
credit card. The teller took the indorsed check from Messing and manually inscribed the driver’s
license information and certain credit card information on the back of the check.
At some point during the transaction, the teller counted out $976 in cash. She asked whether
Rather than take the check to his own bank and deposit it there, or return it to Burruss,
Messing filed an action against Bank of America in the Circuit Court for Baltimore City.
Messing claimed that the Bank had violated the Maryland Uniform Commercial Code (UCC)
and had violated his personal privacy when the teller asked him to place an “inkless” thumbprint
on the face of the check at issue.
Acceptance under §3–409(a).
* * *
Under the UCC, a check is simply an order to the drawee bank to pay the sum stated, signed
by the makers and payable on demand. Receipt of a check does not, however, give the recipient a
right against the bank. The recipient may present the check, but if the drawee bank refuses to
honor it, the recipient has no recourse against the drawee.
* * *
Absent a special relationship, a non-customer has no claim against a bank for refusing to
honor a presented check. [Citation.] * * * It is also well settled that a check does not operate as
an assignment of funds on deposit, [citation], and the bank only becomes obligated upon
acceptance of the instrument. * * *
Once a bank accepts a check, under §3–409, it is obliged to pay on the check under §3–413.
Thus, the relevant question in terms of any rights Petitioner had against the Bank turns not on the
reasonableness of the thumbprint identification, but rather upon whether the Bank accepted the
check when presented as defined by §3–409. As will be seen infra, the question of the
* * *
“Reasonable Identification” under §3–501(b)(2)(ii) and “Dishonor” under §3–502
We now turn to the issue of whether the Bank’s refusal to accept the check as presented
constituted dishonor under §3–501 and §3–502 as Petitioner contends. Petitioner’s argument that
Bank of America dishonored the check under §3–502(d) fails because that section applies to
dishonor of an accepted draft. We have determined * * * that Bank of America never accepted
the draft. Nevertheless, the question remains as to whether Bank of America dishonored the draft
under §3–502(b), * * *.
The question is whether requiring a thumbprint constitutes a request for “reasonable
identification” under §3–501(b)(2)(ii). If it is “reasonable,” then under §3–501(b)(3)(ii) the
* * *
Nowhere does the language of §3–501(b)(2) suggest that “reasonable identification” is
limited to information [Respondent] can authenticate at the time presentment is made. Rather, all
that is required is that the “person making presentment must * * * give reasonable
identification.” §3–501(b)(2). While providing a thumbprint signature does not necessarily
confirm identification of the checkholder at presentment—unless of course the drawee bank has
a duplicate thumbprint signature on file—it does assist in the identification of the checkholder
should the check later prove to be bad. It therefore serves as a powerful deterrent to those who
might otherwise attempt to pass a bad check. That one method provides identification at the time
of presentment and the other identification after the check may have been honored, does not
prevent the latter from being “reasonable identification” for purposes of §3–501(b)(2).
* * *
In short, when a bank cashes a check over the counter, it assumes the risk that it may suffer
losses for counterfeit documents, forged indorsements, or forged or altered checks. Nothing in
the Commercial Law Article forces a bank to assume such risks. [Citation]; §3–408. To the
extent that banks are willing to cash checks over the counter, with reasonable identification, such
willingness expands and facilitates the commercial activities within the State. * * *
Because the reduction of risk promotes the expansion of commercial practices, * * * we
conclude that a bank’s requirement of a thumbprint placed upon a check presented over the
* * *
Judgment of the Court of Special Appeals affirmed.
C. LIABILITY OF SECONDARY PARTIES
The liability of indorsers and drawers is triggered by the failure of a person
primarily liable on the instrument to pay after dishonor.
Drawers
A drawer orders the drawee to pay and is only liable if the drawee fails to pay an
instrument. Under Rev. Article 3, liability is generally contingent upon dishonor
and does not require notice of dishonor:
• Drawer of an unaccepted draft — obligated to pay upon dishonor, according
to its terms at the time it was issued (except with incomplete instruments:
see Chapter 28).
Indorsers
An indorser promises that upon dishonor and notice that the instrument was
dishonored, she will pay it according to its terms at the time of indorsement or
