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CHAPTER 24
LIABILITIES OF PARTIES AND
HOLDERS IN DUE COURSE
Answers to Learning Objectives
1. A person with primary liability may be called upon to carry out the specific terms indicated on the
paper. The only condition is that the paper must be due. For a party to be held secondarily liable,
except for drawers of checks or banks that have accepted a draft, there must be presentment,
dishonor, and notice of dishonor.
Lesson Outline
1. The law of negotiable instruments imposes liability upon parties to negotiable instruments based
upon the nature of the paper, the role of the party, and the satisfaction of certain requirements of
conduct by the holder. There are two basic liabilities: contractual and warranty.
4. Presentment is not necessary when the maker, drawee, or acceptor has died, has been declared
insolvent, cannot be located, or has waived the right to presentment. Presentment is also excused if
the secondary party knows that the draft or note will not be paid or has no reason to believe that the
paper will be honored.
5. Dishonor occurs when presentment is made and acceptance or payment is refused or cannot be
obtained within the prescribed time.
6. A party must be notified of dishonor in order to be held secondarily liable. The requirement that a
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d. The instrument is not subject to a defense or claim of any party that can be asserted against the
transferor.
e. The transferor has no knowledge of relevant insolvency proceedings.
11. In order to enjoy the immunity accorded to a holder in due course, one must obtain a negotiable
instrument under three conditions:
a. The holder must take the instrument in good faith and for value.
b. The holder must have no knowledge that the instrument is overdue or that it has been
dishonored.
c. At the time of the negotiation, the holder must have had no notice of any defense against or
claim to the instrument.
15. A holder who has not qualified as a holder in due course may have the protections of holder
in due course status by being a holder through a holder in due course.
16. The FTC has promulgated a rule limiting the rights of a holder in due course of an instrument
executed by a buyer in a consumer transaction.
Comments on Cases
(p. 281) Catron, the court said, was an attorney who entered into the loan agreement at arm’s-length and
executed the promissory note with notice of its provisions. He defaulted on his payments
numerous times, and withdrew the collateral securing the bank’s interest. It could not be said the
bank’s actions in accelerating the note were arbitrary or surprising and therefore unconscionable.
Catron v. Citizens Union Bank, 229 S.W.3d 54 (Ky. App.)
(p. 285) The court explained that since Scharf did not take the check in good faith he was not a holder in
due course. In this state a holder who was not a holder in due course was subject to the defenses
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of the drawer of a cashier’s check and Scharf could not recover. Transcontinental Holding Ltd.
v. First Banks, Inc., 299 S.W.3d 629 (Mo. Ct. App.)
(p. 288) The court pointed out that the shelter principle that was applied in this case was to protect the
holder in due course, Wilmington, by making the note more marketable. It is easier to sell a
note when the new holder gains holder in due course status. Anderson v. Burson, 9 A.3d 870
(Md. Ct. Spec. App.)
(p. 289) The court pointed out that the consumer-debtors’ recovery is only limited to the amounts they
have paid under the contracts. Beemus v. Interstate Nat. Dealer Services, Inc., 823 A.2d 979
(Pa. Super.)
Answers to Questions
(Page 289)
1. Imposition of liability on parties to negotiable instruments under the UCC depends on the nature of
the paper; the role of the party as maker, acceptor, indorser, or transferor; and the satisfaction of
certain requirements of conduct by the holder of the instrument.
held secondarily liable.
5. For a proper presentment, the instrument should be presented to the correct person, in a proper and
timely manner.
6. Dishonor of a negotiable instrument occurs when a presentment is made and a due acceptance or
payment is refused or cannot be obtained within the prescribed time.
7. According to the UCC notice of dishonor must be given by a bank by midnight of the next
banking day following the day on which it receives notice of dishonor. All other holders
must give notice within 30 days following the day on which notice of dishonor is received.
10. For a holder to be a holder in due course the holder must take the instrument in good faith and for
value, have no notice the instrument is overdue or has been dishonored, and have had no notice at
the time the instrument is negotiated of any defense against or claim to the instrument.
11. A purchaser of demand paper on which demand for payment has been made and refused can be a
holder in due course if the purchaser had no notice of the demand.
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Answers to Case Problems
(Page 290)
1. Yes. The court stated that the Bank had sent the check back on Friday by means of established
procedures. It further stated that the Bank had no control over when the Fed or any other receiving
institution marks a check received. Whooping Creek Const., LLC v. Bartow County Bank, 713
S.E.2d 871 (Ga. Ct. App.)
4. No. The court pointed out that while the FTC rule applied in this case, the notice required by the
FTC rule also limited a creditor’s liability by providing that “[r]ecovery hereunder by the debtor
shall not exceed amounts paid by the debtor hereunder.” The FTC-mandated notice in the Reagans’
loan contract limited their monetary recovery against the bank to the amount paid by them under the
contract. Reagans v. MountainHigh Coachworks, Inc., 881 N.E.2d 245 (Ohio)
5. Yes. The court noted that a paying bank, or drawee, that pays a draft in good faith may recover
damages against the presenting bank for breach of the presentment warranty. It said the law
addressed Wachovia’s good faith at the time of presentment, not Wachovia’s acts, or failure to act,
subsequent to presentment. While Asia Bank’s telephone calls should have prompted Wachovia to
investigate the check, the calls came after the check was presented and paid. Wachovia Bank, N.A.
v. Federal Reserve Bank of Richmond, 338 F.3d 318 (4th Cir.)
8. No. The court said that because the name on the account and indorsement were substantially
similar to the names of the payees on the checks, Bank One had no way to know the checks were
forged and stolen and so took them in good faith. Since Auto-Owners entrusted Wulf with
responsibility for the checks and they were indorsed in a name so similar to the payee’s name Bank
One was not liable. Auto-Owners Ins. Co. v. Bank One, 852 N.E.2d 604 (Ind. App.)