Business Law Chapter 28 Homework An agent signs both his name and his principal’s name

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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

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