What term describes the obligation to pay a negotiable instrument only if someone else refuses to pay or accept the instrument?

What term describes the obligation to pay a negotiable instrument only if someone else refuses to pay or accept the instrument?

• A. Personal defense
• B. Real defense
• C. Warehouse receipt
• D. Secondary liability

Answer: (D)

Secondary liability is the obligation to pay a negotiable instrument only after the primary obligor refuses to pay or accept. This typically applies to indorsers or accommodation parties who sign to guarantee payment; they are liable only if the maker or acceptor/drawee dishonors the instrument. The holder must first pursue the primary party, and only then can sue the secondary liable party. If the primary obligor pays or accepts, the secondary party has no duty. This concept contrasts with defenses like personal or real defenses, which relate to defenses against payment, and with independent documents like a warehouse receipt that are unrelated to the instrument’s liability structure.

Secondary liability is the obligation to pay a negotiable instrument only after the primary obligor refuses to pay or accept. This typically applies to indorsers or accommodation parties who sign to guarantee payment; they are liable only if the maker or acceptor/drawee dishonors the instrument. The holder must first pursue the primary party, and only then can sue the secondary liable party. If the primary obligor pays or accepts, the secondary party has no duty. This concept contrasts with defenses like personal or real defenses, which relate to defenses against payment, and with independent documents like a warehouse receipt that are unrelated to the instrument’s liability structure.