Lesson 18: Liability and Defenses

Get ready, law students! This lesson will make liability and defenses on negotiable instruments as entertaining as binge-watching a courtroom drama.

Welcome to Lesson 18 of our series on Article 3: Negotiable Instruments. In this lesson, we will delve into the liability and defenses associated with negotiable instruments. Don't worry, we’ll keep it as simple and entertaining as possible!

1. Liability on Negotiable Instruments

Understanding liability is crucial for anyone dealing with negotiable instruments. The types of liability include:

  • Primary Liability: The party primarily liable is unconditionally obligated to pay the instrument.
  • Secondary Liability: The party secondarily liable is obligated to pay only if the primary party defaults.
Note: Makers of notes and acceptors of drafts are primarily liable, while endorsers and drawers are secondarily liable. Think of it like a loan: the person who takes out the loan is primarily responsible, and the cosigner is secondarily responsible if the borrower defaults.

2. Types of Defenses

Defenses can be raised to avoid liability on a negotiable instrument. These are categorized as:

  • Real Defenses: Valid against all holders, including a holder in due course (HDC).
  • Personal Defenses: Valid only against holders who are not HDCs.

Real Defenses

Some common real defenses include:

  • Forgery
  • Fraud in the execution
  • Material alteration
  • Discharge in bankruptcy

Personal Defenses

Some common personal defenses include:

  • Lack of consideration
  • Non-delivery of the instrument
  • Unauthorized completion

3. Liability Flow Diagram

The following diagram illustrates the flow of liability in negotiable instruments:

graph LR A["Drawer"] --> B["Drawee"] B --> C["Payee"] C --> D["Holder"] D --> E["Holder in Due Course"] E --> F["Endorser"]

4. Practical Insights

It's crucial to understand both the liabilities and the defenses available to parties involved in negotiable instruments. This knowledge aids in both drafting and negotiating such instruments effectively.

Further Reading

For more detailed information, consider reading the related lessons:

For an in-depth understanding of the Uniform Commercial Code, you can also check out Uniform Commercial Code in a Nutshell on Amazon.

For more general information on the Uniform Commercial Code, you might also find the following lessons helpful:

References

For additional authoritative resources, check:

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