Home Liability

Liability

An Overview of Different Liability

An Overview of Different Liability

Signature Liability
If a party has attached his or her signature to a negotiable instrument, then that party is making him or herself liable for that instrument to some extent. A signature need not be the general conception of a signature, which is a hand-written name.
A signature could also be a stamp of a hand-written name or just some form of seal, or it could even be a thumbprint. As long as that signature can be shown to legitimately represent the signing party’s attachment to the negotiable instrument, it is a signature and the signing party would then become liable to a greater or lesser extent to the negotiable instrument in question. 
A signing party might become the party with primary liability after signing. The primarily liable party is that party which must make payment on the negotiable instrument when it is presented. Generally, the primarily liable party is the maker, issuer, or acceptor of the instrument, and this can change depending on signatures. For instance, an acceptor would have to stamp or otherwise mark the instrument to officially assume primary liability as an acceptor. 
Most other parties, including drawers and endorsers, will have secondary liability. If the primarily liable party fails to pay the negotiable instrument, then the secondarily liable party will have to pay instead. Exactly which secondarily liable party is required to pay will vary depending upon the circumstances of the negotiable instrument. 
There are other forms of signature liability as well, allowing for different functions. An accommodation party, for instance, would be a party making itself secondarily liable to a negotiable instrument for the sake of providing validity to that instrument. Also, unauthorized signatures will change the nature of liability for parties associated with a negotiable instrument. To find out more about signature liability and how it affects signers of a negotiable instrument, click the link.


Warranty Liability
Warranty liability is the type of liability incurred by any party that takes certain actions with regard to a negotiable instrument. Unlike signature liability, which requires the active acceptance of liability on the part of the signer along with notifications of the liable parties when such liability is being called into play, warranty liability is generally a much “quieter” form of liability requiring no such active acceptance. 
Warranty liability can be incurred when a party either transfers a negotiable instrument or when it presents a negotiable instrument for payment. Both types of warranty liability revolve around the idea that the party taking the action is making certain warranties regarding the negotiable instrument at the time of submission.
As an example, when a party transfers a negotiable instrument to a new party, that party is making the basic warranty that he or she has the right to do so. If he or she does not have the right to transfer the negotiable instrument, then he or she would be in violation of that unspoken warranty and the transferee might seek damages against the transferor as a result.
Similarly, when a party presents a negotiable instrument for payment, he or she is making the warranty that he or she has the power to do so which, again, if untrue, would allow the party to whom the negotiable instrument is presented to seek damages against the presenter. 
These warranties are important to know and understand for any taking action with regard to a negotiable instrument, especially because some such warranties do not require active knowledge of wrongdoing on the part of the actor in order to make that actor liable for damages. Follow the link for more information on these different kinds of warranty liability.

Secondary Signature Liability Defined

Secondary Signature Liability Defined

Secondary Signature Liability  
There are three conditions for drawers or endorsers to be made to pay for a given negotiable instrument under secondary liability, all of which must be met for the secondarily liable party to be required to pay.
The first requirement is that the instrument must have been presented for payment in a proper and timely fashion. If the instrument was not presented for payment from an acceptor or issuer according to the basic rules of negotiable instruments, then the secondary liability of drawers and endorsers cannot come into play.
The second requirement is that the negotiable instrument must have been dishonored by the primarily liable party. This means, specifically, that the primarily liable party failed to pay for the instrument in accordance with the rules of dishonoring a negotiable instrument as listed in the Uniform Commercial Code.  
Secondary liability, though undesirable from the point of view of drawers or endorsers, is important from the point of view of holders of negotiable instruments. For such a holder, if the primarily liable party dishonors the instrument, then it would be difficult to obtain restitution for that instrument were it not for secondary liability.
Drawers and endorsers are subject to secondary liability to ensure that, in the event of some kind of fraudulent action, there will still be parties held accountable for paying the negotiable instrument. 
Of course, there are methods of protection for drawers and endorsers as well in the case of fraudulent action in which those drawers or endorsers may not have been involved. Furthermore, there are ways for drawers or endorsers to ensure that any secondary liability they might have in the instrument is null and void.
By implementing a qualified endorsement, using the terms “without recourse” in the endorsement, endorsers might protect themselves from secondary liability, instead transferring that secondary liability to the next appropriate party.

Understand Signature Liability Before Signing!

Understand Signature Liability Before Signing!

When any given party affixes his or her signature to a negotiable instrument, that party may be inviting some level of liability for the costs incurred by the instrument. This is because signatures bear the weight of law behind them and affixing a signature to a negotiable instrument is essentially a form of endorsement for the negotiable instrument. 
Most of the time, such signatures fill a clear and differentiated role with regard to the negotiable instrument. For instance, the signature of the drawer fills a different role than the signature of the payee on a check, and any endorsements made with addenda or other notations will likely specify the exact form of relationship between the signer and the overall negotiable instrument.

Primary

The signer who holds primary liability for the negotiable instrument is usually the maker, issuer, or acceptor of that instrument. Holding such primary liability means that the party in question is primarily responsible for the payment of the negotiable instrument. Any claims of payment on the negotiable instrument will, by definition, come to the party holding primary liability for that instrument first and will only reach any other party on the condition that the primary liability holder does not or cannot make payment on the negotiable instrument. In this case, the primary liability holder would be dishonoring the negotiable instrument by failing to pay it. 
There are ways in which the primary liability holder could actually avoid dishonoring the negotiable instrument while still avoiding payment for that instrument. But the situations in which such an act is possible are highly specific, and in general, the primary liability holder will have to make payment when the holder of the negotiable instrument presents it for payment, assuming that it is presented for payment in a timely, appropriate fashion. For drafts, as there are three parties involved, the party holding primary liability for the draft will be the drawee, from whom payment is ordered by the drawer for the payee.
For promissory notes, on the other hand, the party holding primary liability for the note will be the issuer or maker of the note, as a promissory note is a promise from the issuer to pay another party. For more information on primary liability and exactly what it entails, follow the link.
Secondary

Secondary liability is the “next line of defense” after primary liability. When a given negotiable instrument has been dishonored by the party holding primary liability, the parties holding secondary liability become liable for payment on the instrument. For drafts, the secondary party is normally the drawer of the draft, taking up liability after the draft was dishonored by the drawee. For promissory notes, on the other hand, there is often no clear secondarily liable party, however, as the only party to the note may be the original issuer. 
If there are any endorsers of a draft or a promissory note, then moving up the line of these endorsers will provide the next parties holding secondary liability, assuming that there are no defenses such parties can mount so as to protect themselves from any such liability. Some examples of such defenses include any status as a holder in due course, or qualified endorsements of the negotiable instrument which would pass liability on to the next endorser in the chain. 
In order for secondary liability to be called on, certain specific requirements must have been fulfilled, including a requirement to notify the secondarily liable party in a reasonable amount of time, such that the party might be able to take necessary action with regard to the negotiable instrument in question.
Secondary liability might seem to be potentially unfair, as the secondarily liable parties will often have performed no wrong and essentially are being made liable because of the primarily liable parties’ faults. But secondary liability is necessary to protect the interests of the parties purchasing or paying negotiable instruments, as without such secondary liability, the instruments might be sold and then never paid off.
Furthermore, secondarily liable parties might possibly have legal recourse to obtain some form of monetary restitution from the primarily liable party. To learn more about secondarily liable parties and the requirements for transferring liability to them, click the link.

Accommodation Party
An accommodation party is a special form of party to a negotiable instrument. Generally, accommodation parties are only involved with those negotiable instruments that are loans of some kind, such as promissory notes.
The point of an accommodation party’s signature on a negotiable instrument is to lend credence to the validity and trustworthiness of that instrument. Essentially, the accommodation party is backing up the negotiable instrument to which he or she is affixing his or her signature, ensuring that if the primarily liable party defaults on the payment of the negotiable instrument, then the accommodation party will be held liable for the payment. 
The accommodation party is thus willingly becoming a secondarily liable party to the negotiable instrument. The reason for doing this is generally as a favor to the primarily liable party. If a given individual were to attempt to obtain a loan, but the loaning party decided that this individual was unlikely to successfully pay back the loan, then the loan might be denied. But with the assistance of an accommodation party, the loaning party would have some level of assurance that the loan would, eventually, be paid off. Then, the loaning party might be able to secure the loan. 
Accommodation parties are thus getting very little out of signing onto a loan in this fashion; they certainly cannot make any money from such a practice. In the event that an accommodation party would become liable for the promissory note or other negotiable instrument which the party signed, that party would eventually be able to seek restitution from the primarily liable party, and therefore, theoretically at least, might not be risking anything by becoming an accommodating party. To learn more about accommodating parties and their role in transactions surrounding negotiable instruments, click the link.

Authorized Agents
Just as for almost any other legal proceeding, a given party to a negotiable instrument can nominate a duly authorized agent to act in that party’s stead. Such an agent could, in fact, sign negotiable instruments on behalf of the authorizing party.
The question then immediately arises as to who would be liable in such an instance, as the authorized agent would be the one actually affixing his or her signature to the negotiable instrument, but he or she would be doing so on the behalf of a different party. 
The Uniform Commercial Code provides for such instances with a clause which holds that as long as the agent is acting demonstrably on the behalf of another party, then the agent cannot be held liable for the negotiable instrument, while the authorizing party will be treated as if it had directly affixed its own signature to the negotiable instrument.
The authorized agent might, however, become liable for putting its signature on a negotiable instrument if the authorized agent fails to successfully identify the authorizing party, as identifying the authorized party is necessary for determining what party is then secondarily liable for the negotiable instrument. 
Authorized agents may also sometimes have limits to their power, and those limits might further affect whether or not they are held liable for their signatures upon negotiable instruments. Additionally, authorized agents can take certain measures on their own initiative to protect themselves from any liability. For more information on the relationship between authorized agents and negotiable instruments, follow the link.

Unauthorized Signatures
Though authorized signatures are legitimate and useful under the Uniform Commercial Code, unauthorized signatures are problematic. An unauthorized signature on a negotiable instrument designed to illegitimately make that instrument payable is a form of forgery, and therefore, is a criminal offense. 
The Uniform Commercial Code does not focus on prosecution of criminal offenders, however, and instead focuses on protecting parties involved with such an unauthorized signature on a negotiable instrument. As such, the Uniform Commercial Code actually provides for unauthorized signatures to be ratified, if they are on a negotiable instrument which a third party either bought or paid for in good faith without any knowledge of that forgery.
In such an instance, the third party would be a holder in due course and would thus be protected from any defense against paying the negotiable instrument. The result is that a bank which cashes a check with an unauthorized, forged signature, could still use the check to add to its own funds regardless of any defense mounted by the victim of the forgery. 
Any other form of unauthorized signature is considered ineffectual, however, and if such a forgery is discovered, it would nullify transactions made with that negotiable instrument. Furthermore, regardless of the ratification of a negotiable instrument bearing a forged signature, the party perpetrating the forgery will not be held exempt of the criminal or civil liability incurred by its actions. To find out more about unauthorized signatures and how they might affect negotiable instruments, click the link.

What are Transfer Warranties?

What are Transfer Warranties?

Any time a given party transfers ownership of negotiable instruments to another party, the transferor makes a warranty of certain elements of the negotiable instrument, such that he or she can be held accountable for those elements.
This is true independent of most other forms of liability, which would require a signature or certain conditions such as appropriate presentment of the negotiable instruments, dishonor of those instruments, or notice of dishonor for those instruments. The warranties that arise specifically from the act of transferring the negotiable instrument are called transfer warranties.
There are six different types of transfer warranties, each of which is made when the transferor attempts to transfer any negotiable instruments. The first transfer warranty is that the transferor warrants that he or she is a person entitled to enforce the instrument. The transferor, by transferring any negotiable instruments, is establishing the transfer warranty that he or she is the holder of those instruments or otherwise has the rights of a holder with regard to those instruments.
If the transferor does not actually hold these rights, then the transferor is violating this first transfer warranty with regard to any negotiable instruments that he or she might try to transfer.
The second transfer warranty is that the transferor warrants that all signatures on the negotiable instrument are both authentic and authorized. In other words, simply by transferring negotiable instruments to another party, the transferor is warranting that there are no forged signatures on the negotiable instrument.
Theoretically, the party might not know if there are any unauthentic or forged signatures on the instrument. However, in general, this transfer warranty means that the transferee will be able to seek damages against the transferor if the negotiable instruments being transferred bear forged signatures regardless of the knowledge of that transferor. Although, in that case, the transferor would likely be able to obtain damages from the transferor who originally negotiated the instrument to him or her.
The third transfer warranty is that the negotiable instrument in question has not been altered in any significant or fraudulent fashion. This would include such alterations as attempting to change the amount for which the negotiable instrument is worth.
The fourth transfer warranty is that the transferor warrants that there is no claim of recoupment or defense against payment of the negotiable instrument. If the transferor is a holder in due course and is immune to any such claims, he or she would be able to transfer the negotiable instruments under this transfer warranty. As in the second transfer warranty, having no knowledge of such defenses or claims is not sufficient for protecting oneself from liability under this transfer warranty. 
The fifth transfer warranty is that the transferor warrants a lack of knowledge as to any insolvency proceedings being made against the maker, acceptor, or drawer of the negotiable instrument being transferred. Insolvency proceedings would involve any one of those parties being unable to pay off its debts fully and would, therefore, cast doubt upon any negotiable instruments of those parties. In this case, it is acceptable if the transferor simply lacks knowledge of such proceedings.
The sixth transfer warranty deals primarily with remotely made negotiable instruments, such as those instruments that might be made over the phone or, in today’s world, over the Internet. The sixth transfer warranty is that for any negotiable instrument or transaction conducted remotely, the transferor has authorization to have drawn that instrument for that amount from the person on whose account the instrument was drawn.
This warranty is primarily in place to prevent those who sell items over the phone or the Internet from charging consumers fraudulently. Any remotely made negotiable instrument, such as an agreement to pay made over the phone, is warranted as having been made for the amount listed when that instrument is transferred to, say, a bank.

Watch Out for Unauthorized Signatures!

Watch Out for Unauthorized Signatures!

While it is certainly a crime to use a forgery signature on a negotiable instrument in order to defraud the bank or other institution, the Uniform Commercial Code (UCC) actually is designed to ratify such unauthorized signatures. This is because the UCC is designed to protect the bank in the case of forgery, as opposed to prosecuting the forger. 
If the unauthorized signature is ratified, then it is so that the bank, which takes the negotiable instrument with the forgery signature in good faith, completely fulfilling the requirements for being termed a holder in due course, is protected from any repercussions surrounding the forged signature. In other words, the ratification of a forgery is only for the protection of the party “who in good faith pays the instrument or takes it for value.”
The UCC specifically has, as one of the provisions under Article 3, the statement that regardless of ratification of the forgery signature, the forger is still subject to whatever civil or criminal liability he or she might have brought upon him or herself through violating other laws. In other words, just because the bank is protected for having taken a check with an unauthorized signature does not mean that the culpable party is safe from charges of forgery. 
The UCC protection of the bank might, however, leave the victim of such forgery liable for whatever payment was made with the negotiable instrument bearing the forgery signature. This is because, under the UCC, if the bank did take the negotiable instrument in good faith without being aware of the forgery, the bank will likely have status as a holder in due course, and therefore, will be exempt of any defense that the original issuer of the check might make against paying the negotiable instrument.
Thus, that party will still have to pay the bank whatever funds were deposited. The victim will, however, likely be able to seek reparations or restitution for those lost funds from the thief or forger in either criminal or civil court, separate from any regulations from the UCC about forgery or forgery signatures.
In all cases in which the forgery is relatively obvious, however, the bank would have a responsibility to not accept the negotiable instrument with the forgery upon it. If the court could reasonably construe that the receiving party should have had doubt as to the authenticity of the forgery signature, then the bank could not obtain holder in due course status, and as such, the victim would not be held liable for any funds paid from the bank for the negotiable instrument.

Understanding Warranty Liability In Depth

Understanding Warranty Liability In Depth

Along with any liability that might be incurred by putting one’s signature on a negotiable instrument, a given party might incur liability simply by taking certain actions with regard to that instrument. This liability does not need any official confirmation from notices or other documents, and in fact, arises from the acts taken themselves. Any party anticipating some form of action with a negotiable instrument should be aware of these liabilities, as a damaged party might seek damages from the acting party for having breached one of these warranties, even though the acting party did not have an awareness that these warranties were in place. 

Transfer Warranties
Whenever any party transfers a negotiable instrument, that transferor makes certain warranties regarding that instrument. These warranties are designed to protect the transferee from any wrongdoing or fraudulent action on the part of the transferor with the side effect that in some instances the transferor could be held accountable for the actions of prior transferors in regard to the most recent transferee. In other words, the transferee could seek damages from the transferor even though the transferor himself took no wrong action because of the warranties which the transferor made through the act of transference alone. 
These warranties are also set up because no transferee can pursue damages for warranty violations from transferors further down the line of transference; each transferee can only pursue damages from his or her direct transferor. The transfer warranties include, among others, warranties to the effect that the transferor bears authority to enforce the negotiable instrument, that the signatures on the instrument are all authentic and authorized, and that the instrument has not been altered improperly. For more information on these transfer warranties and their exact stipulations, click the link.

Presentment Warranties
Presentment warranties crop up only when a negotiable instrument is presented for payment or acceptance, and as such, primarily presentment warranties surround draft negotiable instruments. In the same way that the transferor makes warranties to the transferee, the presenter of a negotiable instrument makes warranties to the presentee. As the presentee is likely the drawee of the draft, or another party that will make payment upon the negotiable instrument to the presenter, these warranties are designed to protect the paying party from any potential for fraud or damage. 
These liabilities are somewhat less stringent than transfer warranties, if only because most fraudulent actions will require some form of transference before the negotiable instrument is actually presented. Those forms of fraud that would go straight to presentment are defended against with presentment warranties. 
Presentment warranties include warranties to the effect that the presenter is officially authorized to enforce the instrument he or she is presenting for payment, that the instrument has not been improperly or illegitimately altered, and that the signature of the drawer on the negotiable instrument is legitimate. Follow the link to learn more about presentment warranties and how the presenter might be held liable for damages.

Know the Types of Presentment Warranties

Know the Types of Presentment Warranties

When a negotiable instrument is presented for payment, the
presenter is inherently making certain presentment warranties to the party to
whom the presenter is presenting the negotiable instrument. For example, if
someone were to present a check to a bank for payment on the check, that
person would be making certain presentment warranties about that check. The
presenter holds liability for each of these presentment warranties. Should
the drawee discover that the warranties were broken, it may seek damages
from the presenter.

There are three main presentment warranties, each of which puts a
certain level of liability upon the presenter. The first presentment warranty is that the presenter, at the time of presentment if not at the present time,
was authorized to enforce the presented draft. This could also mean that the
presenter was authorized to act as an agent for the party that was actually
authorized to enforce the draft. In other words, this means that at the time of
presentment, the presenter is accepting liability for the fact that he or she
was, in fact, the current holder of that negotiable instrument.  

The
presenter must have had right to that negotiable instrument with the ability
to receive payment upon it. If the presenter did not have this right, then the
presenter is accepting liability for such a breach of warranty. This warranty
would also make the presenter liable if any of the endorsements leading up to
the endorsement that gave the presenter holdership turn out to be forgeries or
unauthorized in some fashion. In such a case, the presenter would not have
the authority to enforce the draft.

The second of the presentment warranties is that the draft has not been
altered. This warranty simply establishes that if the draft has been
substantially and wrongfully altered in some way, the presenter is
accepting liability for any damages incurred because of such alterations.
Alterations include changing the value of the draft, changing the parties
from whom the draft is drawn, or changing the instructions and endorsements of
prior endorsers. Any of these would put liability on the current presenter.

The third of the presentment warranties is that the presenter does not
know at the time of presentment that the signature of the draft’s drawer is
unauthorized, meaning that either the signature is not unauthorized, or that
the presenter does not know that it is unauthorized. This warranty ensures that
the presenter is not a party to any fraud or forgery in the very formation of the
draft. If the signature of the drawer is unauthorized, then the presenter does
not necessarily hold liability for that unauthorized signature. Only if the
presenter holds knowledge of that unauthorized signature does the presenter
assume liability.

Most of the time, the party attempting to recoup losses and seek damages
based on violation of presentment warranties will be the drawee to whom the
draft is presented for payment. The payee would likely be the presenter of the
draft, and therefore, would hold liability for each of the presentment
warranties. The drawee seeking reparations would be entitled to the
amount of money it lost in paying the draft with any money that it did
actually receive from the drawer decreasing this amount, as well as to any
expenses it lost in the pursuit of reparations and any interest that the
drawee might have lost as a result of the violation of the presentment
warranties.

Primary Liability At A Glance

Primary Liability At A Glance

Primary Negotiable Instrument Signature   

Primary liability is the most severe type of liability, as it requires the liable makers, issuers, or acceptors to pay off the negotiable instrument with very few options for recourse. Should the makers, issuers, or acceptors held primarily liable fail to pay for the negotiable instrument, then they are said to have dishonored that instrument. This dishonoring of a negotiable instrument is based on the refusal of payment at legitimate presentation of the negotiable instrument, be it a promissory note or a draft. 
The next step in the procedure would be to send the makers or issuers of such dishonored negotiable instruments a notice of dishonor such that they would be informed of the dishonoring of the instrument. Without such a notice, they cannot be held liable for the dishonoring of the instrument.
There are some actions which might, at first glance, appear to be indicative of violations of primary liability, but these actions are actually defensible for the makers, issuers, and acceptors of instruments that perform such actions. A reasonable amount of delay in payment, for instance, would not be construed as a violation of primary liability as long as it is clear that payment is forthcoming.
Furthermore, demanding that the holder present proper identification or that the holder will attach his or her signature to the instrument or a receipt for the instrument is also acceptable. Rejecting an instrument which does not have proper endorsement is also acceptable so long as that instrument is sent back to the party attempting to turn the instrument in.
Primary liability as a term refers to the fact that any holder of a negotiable instrument seeking payment on that instrument must first seek it from the party with primary liability. For an accepted check, for instance, the primarily liable party is the bank and not the maker or issuer of the check. As such, the holder would have to go to the bank to seek payment first.
Only if the primarily liable party cannot pay for the instrument can the holder attempt to make a demand against a secondarily liable party, such as the makers or issuers of checks.