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

2024
Views:

411

Pages:

2
Author:

bratrochanter

Summary: Liability of Parties in Negotiable Instruments and Warranties 1. Transfer Warranties: o Overview: A person transferring a negotiable instrument for consideration makes five key warranties: 1. Right to Enforce: The warrantor is entitled to enforce the instrument. 2. Authentic Signatures: All signatures are genuine or authorized. 3. No Alterations: The instrument has not been altered. 4. No Defenses Against It: The instrument is not subject to any defenses or claims. 5. No Knowledge of Insolvency: The warrantor knows of no insolvency proceedings against any party obligated on the instrument. o Case Example: In Bank One, N.A. v. Streeter, Streeter deposited altered checks into his bank account, breaching the warranty of entitlement to enforce and non-alteration. The court found Streeter liable despite his lack of knowledge of the alteration, as the transfer warranty applies regardless of the transferor’s awareness of the alteration. 2. Presentment Warranties: o Overview: When an unaccepted draft is presented to the drawee, the presenter warrants that: 1. They are authorized to enforce the instrument. 2. The draft has not been altered. 3. They have no knowledge that the drawer’s signature is unauthorized. o Effect of Presentment Warranties: These warranties ensure that the party paying or accepting a draft (like a drawee bank) is protected from fraud or error on part of the presenter or any previous transferor. If a presenter breaches these warranties, the drawee may recover the amount paid. 3. Payment or Acceptance by Mistake: o If a bank mistakenly pays a check over a stop-payment order, forged signature, or insufficient funds, it can typically recover the payment unless it was made to a party acting in good faith and for value. 4. Operation of Warranties in Common Scenarios: o Scenario 1: If a stolen promissory note with a forged indorsement is transferred, the person who unknowingly took it from the thief and then transferred it to a final holder is liable under warranty rules. o Scenario 2: For altered checks, the presenter is responsible if the check was altered without the drawer’s consent, even if the presenter did not alter it personally. This holds them accountable for ensuring the authenticity of the check's value. This summary emphasizes the importance of transfer and presentment warranties in negotiable instruments. These warranties offer a structured recourse system, typically allowing parties to pursue those closest to the original wrongdoer.