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Liability for Warranties of Negotiable Instrument

LIABILITY AND WARRANTIES FOR NEGOTIABLE INSTRUMENTS

There are two main types of liability on a negotiable instrument – primary and secondary liability. The maker of a note and drawee of a draft are primarily liable to pay the instrument. Parties who later sign, transfer, or present an instrument may be secondarily liable to pay the instrument. Secondary liability is conditioned upon the note or draft being dishonored upon presented for payment to the primarily liable party. When a payor dishonors an instrument, the holder may seek payment from third parties who previously signed or transferred that instrument. The ability to receive payment from previous signors and transferors is based upon theories of warranty. These individuals, in certain circumstances, warrant to later transferees or holders that the instrument is valid and payable.

•    Discussion: What do you think about the system of primary and secondary liability on a negotiable instrument? Why do you think the UCC allows for secondary liability? How does the affect the liquidity and value of the instrument?

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