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

2024
Views:

453

Pages:

2
Author:

bratrochanter

This chapter focuses on the liability of parties involved in negotiable instruments, such as promissory notes and checks, under the Uniform Commercial Code (UCC). Liability may arise from signatures on negotiable instruments, actions taken concerning them, or specific conditions and issues like negligence. Key issues covered include the liability assumed through indorsement, handling fraudulent alterations, and the consequences of forged indorsements. Types of Liability on Negotiable Instruments 1. Primary Liability: Primarily liable parties, such as the maker of a promissory note or an acceptor (e.g., a bank that certifies a check), are responsible for payment on the instrument according to its original terms. For instance, if the maker signs an incomplete note, they are liable for it once completed, provided it’s completed as authorized. 2. Secondary Liability: Secondary liability is contingent, depending on the refusal (or dishonor) of payment or acceptance by the primarily liable party. This liability, which applies to drawers and indorsers, is activated only if the instrument is dishonored and the party with secondary liability is notified within a reasonable time. 3. Contractual Liability: When individuals sign a negotiable instrument in different capacities (e.g., as maker, drawer, or indorser), they assume contractual liability. Article 3 of the UCC provides the contractual terms that apply. Obligations of Different Parties     Makers: Primarily liable for fulfilling the terms of a promissory note, makers owe payment to any party legally entitled to enforce the instrument or any indorser who has already paid on the instrument. Drawers: The drawer is liable if the drawee (usually a bank) dishonors the check. Drawers must pay according to the check’s terms at issuance or at first possession by a holder. Drawees: Typically, drawees (banks) are not liable unless they certify or accept the instrument. However, if a drawee wrongfully refuses payment despite sufficient funds, the drawer may sue. Indorsers: Generally secondarily liable, indorsers must pay if the primary payer defaults, provided the instrument was presented, dishonored, and notice was given. Indorsers can disclaim liability with a qualified indorsement, such as “without recourse.” Case Example: Harrington v. MacNab The case illustrates that without a formal acceptance or certification, a drawee (or equivalent, like Merrill Lynch) holds no liability to the check’s payee. In this case, the court denied a payee’s claim against Merrill Lynch, ruling that a drawee’s oral assurance of funds availability does not create liability. The UCC requires formal acceptance (certification) to establish a drawee’s contractual liability, emphasizing the protection of established commercial practices. Ethical Considerations The chapter also explores the ethics of using a qualified indorsement to avoid liability, particularly in cases where an indorser doubts the primary party’s ability to pay. Using “without recourse” may limit the indorser’s liability but raises ethical concerns about transferring potential risk to another party without full disclosure. In sum, this chapter underscores the complexities of liability in negotiable instruments, shaped by the UCC’s rules and ethical considerations in financial transactions.