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Chapter 10: The Nature of Liability When a problem arises in connection with a negotiable instrument, four questions must

be asked o 1) What negotiable instrument labels do the parties bear (drawer, payee, drawee, maker, indorser, guarantor? o 2) What causes of action (contractual obligation, warranty, conversion, suits off the instrument) are available to each party? o 3) What defenses are available? o 4) Can liability be passed to someone else? I. The Underlying Obligation Problem 132 o Common Law Doctrine of Merger Once an instrument was offered and accepted in satisfaction of an underlying obligation, the obligation merged with the instrument, and until the instrument was dishonored the underlying obligation was suspended. Problem 133 o 3-301(a) She should tell him that the check is a cashiers check and therefore it is discharged just as if she had paid 3-310(a) Unless otherwise agreed a cashiers check taken for an obligation, the obligation is discharged to the same extent discharge would result if an amount of money equal to the amount of the instrument were taken in payment. Ward v. Federal Kemper Insurance Co. Instrument: Check o Drawer Kemper o Payee Ward o Drawee Citizens National Bank Ward never negotiated the check 3-409 A drawee is not liable on the instrument until he accepts it When the drawer draws a check on the drawee and delivers the check to the payee, the check is regarded as only a conditional payment of the underlying obligation. o Conditions: The check be presented and honored Until those conditions are met, no one is directly liable on the check itself Underlying obligation is suspended until those conditions are met If they are not met (dishonored) an action may be maintained either on the check or the obligation The drawer is only secondary liably on the check when he issues it. o The check was never dishonored so Kemper never became directly liable on the check nor was its underlying obligation ever discharged. Kemper took a business risk tha there may have been a HIDC Indorsers Obligation o Once the payee signs the back of an instrument, the payee automatically incurs the obligation the law imposes on an indorser Unlike the obligation of a maker, this obligation is secondary, certain conditions must be met before the indorser can be sued The instrument must have first been presented to the maker or drawer There must have been a dishonor o Some circumstances the indorser must be given notice of the dishonor Problem 137 Instrument Check o Drawer BB o Payee Enoch Snow 1

o Drawee RNB o Snow cashed the check at BCCS and indorsed his name BCCS indorsed the check and deposited it in its account at JSB JSB indorsed the check and presented it to the drawee (RNB) o RNB Dishonored it (NSF) Returned to JSB o

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