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

2024
Views:

475

Pages:

2
Author:

bratrochanter

Key Points on Liability of Parties in Negotiable Instruments 1. Signature and Liability: o Parties signing negotiable instruments must indicate their representative status. For instance, if an agent or officer signs without specifying they act on behalf of a company, they may be personally liable. o Proper signature formatting (e.g., “Swimwear, Inc. by Kim Darby, President”) clarifies the company, not the individual, is liable. 2. Marion T, LLC v. Northwest Metals Processors, Inc.: o Background: Northwest Metals Processors, represented by Troy Reed, failed to pay Marion T for salvaging services. Reed, as the sole shareholder, issued checks knowing there were insufficient funds. o Civil Liability: Indiana law, following the UCC, exempts agents from personal liability if they sign checks on behalf of a company without indicating their agency, provided the corporate account is identifiable. o Criminal Liability: Although protected in civil cases, Reed faced criminal charges under Indiana law for knowingly issuing worthless checks. Criminal law holds individuals personally accountable for fraudulent acts, regardless of agency status. 3. Presentment and Dishonor of Notes: o The holder of a note (the person expecting payment) must present it for payment at its due date. If the maker (the person who issued the note) fails to pay, the note is “dishonored.” o Indorsers (those who transfer the note) are secondarily liable; the holder can pursue payment from them if the maker defaults, provided they receive notice of the dishonor. 4. Unauthorized Signatures: o Unauthorized signatures are not binding on the party whose name was signed but are binding on the forger. If a check is signed fraudulently, the forger is liable to pay, not the person whose name was misused. 5. Contractual Liability of Signers: o Primary Liability: Makers and acceptors (those who promise to pay) are primarily responsible for paying. o Secondary Liability: Drawers and indorsers are only liable if the instrument is properly presented, dishonored, and timely notice of dishonor is given. o Accommodation Parties: Individuals who co-sign to guarantee payment for others are liable depending on their role (e.g., as makers or indorsers). 6. Transfer and Presentment Warranties: o Transfer Warranties: Those transferring negotiable instruments promise authenticity, absence of alteration, and entitlement to enforce the instrument. Presentment Warranties: Holders presenting for payment warrant they are entitled to payment, and the instrument is valid. 7. Bank’s Role in Check Payments: o Banks have an obligation to pay checks if sufficient funds are available. If a check is dishonored due to insufficient funds, holders may seek payment from the drawer or indorsers after providing notice of dishonor. o Conclusion: This chapter outlines the liability complexities for parties involved in negotiable instruments, focusing on the importance of correct signatures, agency, and distinctions between civil and criminal liability. The law, including the UCC, generally aims to shield agents in civil cases if proper procedures are followed, while criminal law enforces personal accountability for fraud, reflecting nuanced protections and responsibilities within commercial transactions.