Ch. 27: Negotiable Instruments: Liability, Defenses, and Discharge – No. 9
Clarkson et al.’s Business Law (13th ed.)
Transfer Warranties: Any person who transfers an
instrument for consideration impliedly warrants that
proceedings against the maker, the acceptor, or the
Ch. 27: Negotiable Instruments: Liability, Defenses, and Discharge – No. 10
Clarkson et al.’s Business Law (13th ed.)
authorized to obtain payment or acceptance on behalf
of a person who is entitled to enforce the instrument;
(2) the instrument has not been altered; and
(3) she has no knowledge that the issuer’s signature is
unauthorized.
Ch. 27: Negotiable Instruments: Liability, Defenses, and Discharge – No. 11
Clarkson et al.’s Business Law (13th ed.)
UNIVERSAL DEFENSES – PT. I
Universal Defenses: Absolute defenses to liability on a
negotiable instrument that are valid against all holders,
including an HDC and a holder with an HDC’s rights.
Forgery: Forgery of a maker’s or drawer’s signature
obtained through fraud or deception is generally not
liable unless reasonable inquiry (in light of, among
other things, the signer’s age, experience, and
intelligence) would have revealed to the signer the
nature and terms of the instrument.
claims of an ordinary holder. Material alteration is
a partial defense against an HDC, only to the
extent of the alteration.
Ch. 27: Negotiable Instruments: Liability, Defenses, and Discharge – No. 12
Clarkson et al.’s Business Law (13th ed.)
UNIVERSAL DEFENSES – PT. II
Discharge in Bankruptcy: Discharge is an absolute
defense against the claims of any holder, including an
HDC.
Minority: Minority is a defense to liability on an
instrument to the same extent that it is a defense to
contract liability.
person previously adjudged to be mentally incompetent
is void ab initio and, therefore, unenforceable by any
holder, including an HDC.
Extreme Duress: Any instrument signed and issued
Ch. 27: Negotiable Instruments: Liability, Defenses, and Discharge – No. 13
Clarkson et al.’s Business Law (13th ed.)
PERSONAL DEFENSES – PT. I
Personal Defenses: Defenses that may excuse payment to an
ordinary holder, but not to an HDC or a holder with an
HDC’s rights.
stop payment.
Lack or Failure of Consideration: The absence of
consideration may constitute a defense in some cases.
defense against an ordinary holder, but not against an
HDC.
Ch. 27: Negotiable Instruments: Liability, Defenses, and Discharge – No. 14
Clarkson et al.’s Business Law (13th ed.)
not an HDC.
Other Personal Defenses:
(1) discharge by payment or cancellation;
(2) unauthorized completion of an incomplete
Clarkson et al.’s Business Law (13th ed.)
FEDERAL LIMITS ON HDC RIGHTS
FTC Rule 433 limits an HDC’s rights in an instrument
made in connection with a consumer credit
contract.
The purpose of Rule 433 is to protect consumers from
being forced to pay a third party for a defective good and
Ch. 27: Negotiable Instruments: Liability, Defenses, and Discharge – No. 16
Clarkson et al.’s Business Law (13th ed.)
DISCHARGE FROM LIABILITY
party (maker or drawer), and any indorsers prior to the paying
party, remain liable.
Intentional cancellation (e.g., writing “PAID” across the
face of the instrument) discharges the liability of all parties.
Material alteration may discharge the liability of any party
affected by the alteration.
A party reacquiring an instrument discharges all intervening
indorsers to subsequent holders who are not HDCs.
If a party’s right of recourse (i.e., reimbursement) or the
value of its collateral has been impaired, that party may be
discharged to the extent of the impairment.
Ch. 27: Negotiable Instruments: Liability, Defenses, and Discharge – No. 10
Clarkson et al.’s Business Law (13th ed.)
authorized to obtain payment or acceptance on behalf
of a person who is entitled to enforce the instrument;
(2) the instrument has not been altered; and
(3) she has no knowledge that the issuer’s signature is
unauthorized.
Ch. 27: Negotiable Instruments: Liability, Defenses, and Discharge – No. 11
Clarkson et al.’s Business Law (13th ed.)
UNIVERSAL DEFENSES – PT. I
Universal Defenses: Absolute defenses to liability on a
negotiable instrument that are valid against all holders,
including an HDC and a holder with an HDC’s rights.
Forgery: Forgery of a maker’s or drawer’s signature
obtained through fraud or deception is generally not
liable unless reasonable inquiry (in light of, among
other things, the signer’s age, experience, and
intelligence) would have revealed to the signer the
nature and terms of the instrument.
claims of an ordinary holder. Material alteration is
a partial defense against an HDC, only to the
extent of the alteration.
Ch. 27: Negotiable Instruments: Liability, Defenses, and Discharge – No. 12
Clarkson et al.’s Business Law (13th ed.)
UNIVERSAL DEFENSES – PT. II
Discharge in Bankruptcy: Discharge is an absolute
defense against the claims of any holder, including an
HDC.
Minority: Minority is a defense to liability on an
instrument to the same extent that it is a defense to
contract liability.
person previously adjudged to be mentally incompetent
is void ab initio and, therefore, unenforceable by any
holder, including an HDC.
Extreme Duress: Any instrument signed and issued
Ch. 27: Negotiable Instruments: Liability, Defenses, and Discharge – No. 13
Clarkson et al.’s Business Law (13th ed.)
PERSONAL DEFENSES – PT. I
Personal Defenses: Defenses that may excuse payment to an
ordinary holder, but not to an HDC or a holder with an
HDC’s rights.
stop payment.
Lack or Failure of Consideration: The absence of
consideration may constitute a defense in some cases.
defense against an ordinary holder, but not against an
HDC.
Ch. 27: Negotiable Instruments: Liability, Defenses, and Discharge – No. 14
Clarkson et al.’s Business Law (13th ed.)
not an HDC.
Other Personal Defenses:
(1) discharge by payment or cancellation;
(2) unauthorized completion of an incomplete
Clarkson et al.’s Business Law (13th ed.)
FEDERAL LIMITS ON HDC RIGHTS
FTC Rule 433 limits an HDC’s rights in an instrument
made in connection with a consumer credit
contract.
The purpose of Rule 433 is to protect consumers from
being forced to pay a third party for a defective good and
Ch. 27: Negotiable Instruments: Liability, Defenses, and Discharge – No. 16
Clarkson et al.’s Business Law (13th ed.)
DISCHARGE FROM LIABILITY
party (maker or drawer), and any indorsers prior to the paying
party, remain liable.
Intentional cancellation (e.g., writing “PAID” across the
face of the instrument) discharges the liability of all parties.
Material alteration may discharge the liability of any party
affected by the alteration.
A party reacquiring an instrument discharges all intervening
indorsers to subsequent holders who are not HDCs.
If a party’s right of recourse (i.e., reimbursement) or the
value of its collateral has been impaired, that party may be
discharged to the extent of the impairment.