Commercial Paper

An individual who signs an instrument is either primarily or secondarily liable for payment. Primary liability is extended to the person who is expected to pay first, and the individual who is legally responsible to pay upon the failure of the first party to do so is secondarily liable.

The maker of a promissory note is primarily liable, since that person is the individual who has originally promised to pay. He or she must meet this obligation when payment becomes due unless he or she has a valid defense or has been discharged of the debt.

The drawer of a check or draft is secondarily liable, since that individual does not make an unconditional promise to pay the instrument. He or she expects the bank to pay and promises to pay the amount of the instrument only upon notification of dishonor, a refusal by the drawee to accept the paper when properly presented for payment. This might occur, for example, if the bank refuses to pay a check due to insufficient funds in the drawer's checking account or because he or she has notified the drawee to stop payment.

The drawee of a draft or check has primary liability to the holder, an individual who has lawfully acquired possession and is entitled to payment, upon acceptance of the instrument by the drawee. A draft is accepted for payment when the acceptance is indicated by the drawee

on the face of the document. Certification of an instrument, such as a check, is its acceptance by a bank guaranteeing that payment will be forthcoming. A drawee is liable to the drawer if the drawee refuses to pay a draft or check that is properly drawn and presented because such action constitutes a noncompliance of the drawee's contractual obligation to the drawer.

Any person who places his or her unqualified endorsement on a commercial paper incurs secondary liability for its payment. Such liability occurs when the individual who has the primary duty to pay defaults on his or her obligation.

A maker or drawer is not relieved from payment of an instrument endorsed with the payee's name when an imposter manages to have a paper issued to himself or herself by the maker or drawer; when an individual signing on the behalf of the maker or drawer plans that the payee shall have no interest in the paper, for example, the case of a check being made out to a fictitious payee; and when the agent or employee of the maker or drawer designates the name of a payee with the intent that the named party will actually have no interest in the instrument. In the last two instances, the failure of the employer to use reasonable care in choosing and supervising employees makes the employer personally responsible for all losses that arise from his or her NEGLIGENCE. Many employers guard against such risks by taking out fidelity insurance policies to cover losses that might occur through employee misconduct.