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Warranty Liability Negotiable Instrument – Time Limitations

41. Is there a time limitation for exercising warranties on negotiable instruments?

The holder of an instrument must make a warranty claim to a warrantor within 30 days of notice of dishonor of the instrument. Failure to give this notice within 30 days may relieve the warrantor from liability for any losses incurred as a result of the failure of the claimant to give timely notice.

•    Example: Emily is the holder of a draft drawn on ABC Financial. She received the draft from Clayton. Emily transfers the draft to Doug. The draft is subsequently transferred multiple times. Eventually, Easton presents the draft for payment. ABC pays the draft and then learns that Easton was not validly entitled to payment. ABC seeks to recoup the money paid from Easton, the presenter of the draft. When Easton and other transferors cannot be found, ABC attempts to enforce the instrument against Emily. ABC waits longer than 30 days to give Emily notice of its claim. This delay caused Emily to not be able to recover from Clayton, who she recently paid money she owed. She would have been able to offset the amount owed if she had been given timely notice. Her obligation to pay ABC on presentment warranty may be discharged due to her loss caused by ABC’s delay in providing notice of its presentment claim.

•    Discussion: Why do you think the UCC allows for a discharge of liability on a presentment claim for losses incurred because of late notification from a claimant seeking to enforce the instrument based upon warranty? What objectives are being served? Do you agree with this principle? Why or why not?

•    Practice Question: Tim presents a draft created by Stacy and drawn upon First Credit Union. Tim acquired the draft from Elvis. First Credit Union pays Tim and then learns that Tim was not entitled to payment. First Credit Union is able to recover from Tim on the basis of presentment warranty. Tim seeks to recover from Elvis based upon transferor and presentment warranties. Tim fails to give Elvis notice of his claim within 30 days of learning of the First Credit Union’s dishonor. What does this mean for Tim and Elvis’ rights?

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