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MGMT 212
Liability, Defenses, and Discharge (Ch. 26)
9
Management
Undergraduate 2
06/30/2009

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Term
Universal (Real) Defenses
Definition
Used to avoid payment to both H and HDC. // 1.) Forgery of Maker or Drawer Signature. 2.) Fraud in execution (tricked into signing). 3.) Material Alteration ($ amt or int rate changed). 4.) Discharge in Bankruptcy (Absolute Defense). 5.) Minority. 6.) Illegality. 7.) Mental Incapacity. 8.) Extreme Duress.
Term
Personal Defenses
Definition
Used to avoid payment to H, but HDC will defeat personal defenses. // 1.) Breach of contract or warranty. 2.) Lack or Failure of Consideration. 3.) Fraud in the inducement (ordinary fraud). 4.) Illegality. 5.) Mental Incapacity. 6.) Ordinary duress, discharge by payment or cancellation, unauthorized completion of incomplete instrument, nondelivery of instrument.
Term
Federal Limitations of the Rights of HDCs (Rule 433)
Definition
Rule attempts to prevent a consumer from being required to make payment for a defective product to a 3rd party who is an HDC of a promissory note that formed part of the contract with the dealer who sold the defective good.
Term
Two Types of Liability with Negotiable Instruments
Definition
Signature Liability, Warranty Liability
Term
Signature Liability (needs updating)
Definition
Signatures on the instrument (drawers, makers, indorsers). // Primary liability: maker, Acceptor (bank, other party). // Secondary Liability: after a.) the instrument is properly and timely presented, b.) the instrument is dishonored; and c.) notice of dishonor is timely given to those secondarily liable. Drawers and unqualified Indorsers are secondarily liable.
Term
Accommodation Party
Definition
A person who signs an instrument to lend his name to another party as credit (cosigner). 1.) If the Accommodation Party signs on behalf of the Maker, he is an Accommodation Maker. 2.) If the Accommodation Party signs on behalf of the Payee or other Holder, he is an Accommodation Indorser. 3.) Any indorsement not in the ordinary chain of title gives notice of its accommodation character. 4.) Accommodation Party is never liable to the part accommodated. 5.) If the Accommodation Party has to pay, he can sue the party accommodated to be reimbursed.
Term
Authorized Agent's Signature
Definition
Agent acts on behalf of Principal. Liability of the Principal: An authorized agent binds a principal on an instrument if the agent clearly names the principal in the signature. The agent may or may not add his own name. // "Aronson, by Binney, Agent." or "Aronson." // Liability of the Agent: When an agent signs his own name without naming the principal. When an agent signs both his name and the principal's name, but nothing on the instrument indicates the agency relationship. When the agent signs his name and the agency status, but does not name the principal.
Term
Warranty Liability (needs updating)
Definition
Everyone involved has this liability. // Transfer Warranties: if one transfers a negotiable instrument to another, transfer warranties are created. Warranties are made by any person who transfers an instrument for consideration (includes qualified and non-indorsers). Warranties are made to the transferee and, if the transfer is by indorsement, to all subsequent Holders who take in good faith.
Term
Discharge (3 types)
Definition
1.) Discharge by Payment: all parties are discharged when the party primarily liable pays the Holder in full. Payment by anyone else discharges only that person and subsequent parties. 2.) Discharge by Cancellation: H can discharge any party by cancellation. 3.) Discharge by Impairment of Recourse.
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