University:
Indiana University Bloomington
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

120

Pages:

2
Author:

bratrochanter

Summary: Liability of Parties and Negotiable Instruments 1. Agent Liability in Signing Checks: o Agents (e.g., corporate officers) must sign checks in a way that clearly indicates their representative capacity to avoid personal liability. For instance, signing as "Kim Darby, President for Swimwear, Inc." establishes agency, while signing solely as "Kim Darby" risks personal liability. o Case Example: In Marion T, LLC v. Northwest Metals Processors, Inc., Troy Reed signed corporate checks without indicating his agency status, leading to liability issues. Indiana’s UCC protected Reed from civil liability, but he still faced criminal liability for check deception due to lack of indication of agency status on insufficient-fund checks. 2. Presentment and Dishonor of Notes: o Presentment involves the holder of a note requesting payment from the maker on the due date. If unpaid, the note is "dishonored." o Secondary Liability: Indorsers of the note become liable if the primary party defaults. The holder must notify indorsers of dishonor to enforce their obligation. 3. Unauthorized Signatures: o Unauthorized signatures do not bind the person named unless ratified later. If a forgery is made, like a stolen checkbook scenario, the forger may be liable, but not the person whose name was signed. o Ratification: If the represented person later accepts the unauthorized signature, it becomes binding as their own. 4. Contractual Liability and Presentment of Checks: o For checks, presentment can be for payment or certification. The drawer (person writing the check) is not liable if the drawee bank dishonors the check (e.g., due to insufficient funds), but is obligated to pay the holder if a claim arises. o Dishonor Notice: When a check is dishonored, the holder must notify indorsers or the drawer to activate their liability. 5. Transfer and Presentment Warranties: o Transfer Warranties: When transferring a negotiable instrument, the transferor guarantees (1) they are entitled to enforce the instrument, (2) signatures are valid, (3) the instrument has not been altered, (4) no defenses against it, and (5) no known insolvency issues of involved parties. o Presentment Warranties: Made by the presenter to the payor bank when a check is presented for payment, covering similar assurances to those under transfer warranties. 6. Timeliness and Duty of Care: o Presentment Timing: Holders should present an instrument on its due date. The reasonableness of timing may depend on local trade o practices or specific agreements, like payment upon crop sales in farming communities. Bank's Duty of Care: Banks are expected to process checks according to reasonable commercial standards. Failing to follow industry-standard practices can lead to liability, but if the bank has established a reasonable practice (e.g., checking only larger checks), it may be protected from liability on smaller checks it does not inspect. This guide highlights the allocation of liability among parties involved in the use of negotiable instruments, emphasizing the importance of correct signatures, prompt reporting, and adherence to established commercial practices.