Comprehensive Volume, 18th Edition

Chapter 32: Transfer of Negotiable Instruments and Warranties of Parties

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3232

Assignment vs. Negotiation

Negotiable instruments can be transferred by assignment or negotiation.

When an instrument is assigned, the transferee has the rights of the transferor, but nothing more.

When an instrument is transferred by negotiation, the transferee becomes a holder, (or in some cases, a holder in due course) giving him protection from certain defenses.

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3232Holder in Due Course

Negotiable Instruments - Negotiation

PayeeMaker

Contract Assignment

Assignee

AssignorPromisor

Defenses Available

Limited Defenses

Assignment vs. Negotiation

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Order vs. BearerOrder instruments are negotiated by an indorsement and delivery by the person to whom it is then payable. Bearer instruments are negotiated by delivery alone. The order or bearer character of an instrument is determined by the face of the instrument, as long as the instrument is not indorsed.

If the instrument has been indorsed, the character is determined by the last indorsement.

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3232Paper was

negotiated to anamed indorsee

(order paper)

No negotiationtook place

Transfer of commercial paper

Negotiation of Commercial Paper

Paper was negotiated to a bearer

(bearer paper)

No

yes

Did the indorser

name anindorsee?

No

Is thepaper

indorsed anddelivered?

yes

Is itorder

paper? No

yes

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Types of IndorsementsIf an indorser merely signs an instrument, the indorsement is called a blank indorsement.

If the last indorsement is a blank indorsement, the instrument is bearer paper, which may be negotiated by change of possession alone.

A special indorsement consists of the signature of the indorser and words specifying the person to whom the indorser makes the instrument payable.

If the last indorsement is a special indorsement, the instrument is order paper and may be negotiated only by an indorsement and delivery.

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Types of Indorsements (cont’d)

A qualified indorsement destroys the liability of the indorser to answer for dishonor of the paper.

The phrase “without recourse” indicates a qualified indorsement.

A restrictive indorsement specifies the purpose of the instrument or its use.

The phrase “for deposit only” is an example of a restrictive indorsement.

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Types of Indorsements (cont’d)

Bank indorsements are made by “any agreed method which identifies the transferor bank.”Instruments written to multiple payees (A & B) must be indorsed by both; those with alternative payees (A or B) may be indorsed by either one or both.An instrument may be written to an officeholder (“Treasurer”); may be indorsed by person holding that office.

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Blank Indorsement

INDORSE HERE

x Alan Parker ______________ _________________ __________________

DO NOT WRITE, STAMP, OR SIGN BELOW THIS LINERESERVED FOR FINANCIAL INSTITUTION USE*

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Special Indorsement

INDORSE HERE

Pay to Tom Houltonx Marcia L. Diaz _____________ __________________ __________________

DO NOT WRITE, STAMP, OR SIGN BELOW THIS LINERESERVED FOR FINANCIAL INSTITUTION USE*

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Qualified Indorsement

INDORSE HERE

Without recoursex Diana Morris ______________ __________________ __________________

DO NOT WRITE, STAMP, OR SIGN BELOW THIS LINERESERVED FOR FINANCIAL INSTITUTION USE*

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Restrictive Indorsement

INDORSE HERE

For deposit onlyx E.L. Martin ______________ __________________ __________________

DO NOT WRITE, STAMP, OR SIGN BELOW THIS LINERESERVED FOR FINANCIAL INSTITUTION USE*

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Special Situations

An indorsee may indorse an instrument with a misspelled name with the correct spelling, the incorrect spelling or both.

If the holder of an instrument fails to indorse it, there is no negotiation, regardless of the parties’ intent.

A forged or unauthorized indorsement is not valid.

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Cashes/gives money to Tim

Effect of Forged Indorsements

• Sally has notified Fidelity of theft.• Fidelity refuses payment.• Liability goes back to CCCCo. They

should have checked ID.

Sally Seller

Billy Buyer

Check for $2764.53 drawn on Fidelity Federal

Theft by Tim ThiefForges Sally Seller’s signatureTakes check to

Corner CheckCashing Co.

Forwards for payment

FidelityFederal

First Bank

Deposits check in its bank account

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The Imposter Rule A possessor of an instrument with a forged or unauthorized indorsement cannot be a holder and the payer remains liable to the rightful payee. The impostor rule makes these exceptions. The payer is not liable if:

The indorser impersonates the rightful payee.

The maker of the instrument never intends the named payee (called a “dummy payee”) to benefit from the transaction (as in embezzled funds directed to a false account.)

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Incapacity or Misconduct

A negotiation is effective even though (1) it is made by a minor, (2) it is an act beyond the powers of a corporation, (3) it is obtained by fraud, or (4) the negotiation is part of an illegal transaction.

However, the transferor may be able to set aside the negotiation under general legal principles apart from the UCC.

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Warranties

The warranties of the unqualified indorser who receives consideration are as follows:

(1) the transferor is entitled to enforce;

(2) all signatures are genuine and authorized;

(3) the instrument has not been altered;

(4) the instrument is not subject to any defense or claim that can be asserted against transferor; and

(5) the transferor has no knowledge of any insolvency proceedings against a maker, an acceptor, or the drawer of an unaccepted draft.