Quiz 21: Holder in Due Course and Liability of Parties


Transfer of warranty: Transfer of warranty refers to passing the duties and responsibilities connected with the issue of making payments and receipts of a negotiable instrument. In this regard the person who passes on the liability is referred to as the transferor and the person who accepts the responsibility is termed as transferee. The transferor will be acquiring liability in the form of signatures on the cheques and for breaching the implied warranty. Facts: Person DC is an authorized distributor of M Company. DC used a make purchase credit line which was repaid when the tools were sold. M authorized DC to deposit the check which was payable in M to his account. In this regard M's controller had issued a letter to M's bank stating that DC is authorized to make deposits. After a few years, When M's products were stolen from DF's inventory, the insurance company paid a check payable to M and DF. DF indorsed the check and deposited it into his account. M sued Bank P for not checking the proper indorsements. Outcome: In this case, P bank cannot be held liable for making the payment to DF without checking for proper indorsements. This is because Company M transferred the responsibility of collecting the payments to DF. Company M also notified the bank about the transfer of responsibility to DF wherein he was allowed to deposit checks payable to M in his account. Thus M Company cannot blame P bank or not checking for proper indorsements. Thus, it can be concluded that Bank P is not liable for making the payments.

Yes, bank A breached its warranty of good title. The check was payable to two payees. The company, however, accepted the check with only one of the payee's endorsement and credited the same to payee's account. Therefore, it breached a presentment warranty of good title as it negotiated the improperly indorsed check. A warranty of good title implies an assurance that nobody but only the warrantor has better title to a check. It means that the check presented contains all required genuine endorsements. When a check is made payable to more than one payee jointly, it can only be negotiated, or enforced by all of the joint payees. Thus, the payment of the check did not discharge the defendant's liability because it was a depository bank, and it paid the check with the terms that were not consistent with the restricted endorsement. The absence of indorsement by the joint payee indicates the defendant's dominion and control over the check inconsistent with the rights of the non-signing payee's.

Liability of a Co-Maker: A Co-maker is the person who signs a promissory note or signs a security agreement along with another party. The co-maker can be held principally liable for non-payment of the loan. The co-maker is also termed as the co-guarantor. Facts: A Credit Company G offered a line of credit to Mrs. and Mr. H to buy products. The line of credit offered them a loan up to $ 50, 000. In order to utilize the line of credit the H's signed an agreement together. The agreement stated specifically that the line of credit can be used till it reached the limit of $ 50,000 and then they have to clear the loan to utilize the credit. Mr. H took the loan and after few months Mrs. H notified G that they are divorced and she will not be responsible for the loan taken by her husband. When H failed to clear the loan, G sued both of them. Outcome: As stated above a co-maker is principally liable for the non-payment of debt. In this case, Mrs. H is the co maker of the agreement and she signed the security agreement as a co-Guarantor and thus she is responsible for making the payment to G. Thus, she has to pay the principal amount along with the interest also. Mrs. H failed to act ethically by denying responsibility for the loan because she signed the surety agreement as a co-maker. Thus, she did not act ethically in the case.

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