Chapter 29 TRANSFER OF NEGOTIABLE INSTRUMENTS & WARRANTIES OF PARTIES

Transfer of Negotiable Instruments Negotiable instruments can be transferred by assignment or negotiation. Effect of Transfer: Assignment: transferee has the rights of the assignor, but nothing more. Negotiation: When an instrument is transferred so that the transferee becomes a holder, (or in some cases, a holder in due course) giving him protection from certain defenses.

Assignment v. Negotiation Contract Assignment Assignee Assignor Promisor Defenses Available Holder in Due Course Negotiable Instruments - Negotiation Payee Maker Limited Defenses

Negotiation of Commercial Paper Transfer of commercial paper Is it order paper? No yes Paper was negotiated to a bearer (bearer paper) No yes Did the indorser name an indorsee? No Is the paper indorsed and delivered? yes Paper was negotiated to a named indorsee (order paper) No negotiation took place

How Negotiation Occurs: Bearer Instruments Order 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.

How Negotiation Occurs: Order Instruments Blank Indorsement: Indorser merely signs an instrument If the last indorsement is a blank indorsement, the instrument is bearer paper, which may be negotiated by change of possession alone.

How Negotiation Occurs: Order Instruments 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.

How Negotiation Occurs: Order Instruments 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.

How Negotiation Occurs: Order Instruments 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.

Blank Indorsement INDORSE HERE x Alan Parker ______________ _________________ __________________ DO NOT WRITE, STAMP, OR SIGN BELOW THIS LINE RESERVED FOR FINANCIAL INSTITUTION USE*

Special Indorsement x Marcia L. Diaz _____________ INDORSE HERE Pay to Tom Houlton x Marcia L. Diaz _____________ __________________ DO NOT WRITE, STAMP, OR SIGN BELOW THIS LINE RESERVED FOR FINANCIAL INSTITUTION USE*

Qualified Indorsement INDORSE HERE Without recourse x Diana Morris ______________ __________________ DO NOT WRITE, STAMP, OR SIGN BELOW THIS LINE RESERVED FOR FINANCIAL INSTITUTION USE*

Restrictive Indorsement INDORSE HERE For deposit only x E.L. Martin ______________ __________________ DO NOT WRITE, STAMP, OR SIGN BELOW THIS LINE RESERVED FOR FINANCIAL INSTITUTION USE*

Problems in Negotiation 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.

Hypothetical Billy Buyer Check for $2764.53 drawn on Fidelity Federal Sally Seller Billy Buyer Check for $2764.53 drawn on Fidelity Federal Theft by Tim Thief Forges Sally Seller’s signature Takes check to Corner Check Cashing Co. Cashes/gives money to Tim First Bank Deposits check in its bank account Forwards for payment Fidelity Federal Sally has notified Fidelity of theft. Fidelity refuses payment. Liability goes back to CCCCo. They should have checked ID.

“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 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.)

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.

Warranties in Negotiation 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.