© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW Twomey Jennings 1 st Ed. Twomey & Jennings BUSINESS LAW Chapter 28 Transfers of Negotiable Instruments and Warranties of Parties Chapter 28 Transfers of Negotiable Instruments and Warranties of Parties

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW Twomey Jennings 1 st Ed. 2 Transfer of Negotiable Instruments Negotiable instruments can be transferred by assignment or negotiation. 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. Negotiable instruments can be transferred by assignment or negotiation. 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.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW Twomey Jennings 1 st Ed. 3 Holder in Due Course Negotiable Instruments - Negotiation Payee Maker Contract Assignment Assignee Assignor Promisor Defenses Available Limited Defenses Assignment vs. Negotiation

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW Twomey Jennings 1 st Ed. 4 Order vs. 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. 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. SMS Financial v ABCO Homes (1999) Who is the holder of the note?

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW Twomey Jennings 1 st Ed. 5 Paper was negotiated to a named indorsee (order paper) No negotiation took place Transfer of commercial paper Negotiation of Commercial Paper Paper was negotiated to a bearer (bearer paper) No yes Did the indorser name an indorsee? No Is the paper indorsed and delivered? yes Is it order paper? No yes

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW Twomey Jennings 1 st Ed. 6 Types of Indorsements If 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. If 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. Town of Freeport v Ring (1999) Was the check indorsed properly?

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW Twomey Jennings 1 st Ed. 7 Types of Indorsements 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. 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.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW Twomey Jennings 1 st Ed. 8 Types of Indorsements 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. 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.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW Twomey Jennings 1 st Ed. 9 Types of Indorsements 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. 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. Allied Capital Partners L.P. v Bank One, Texas, N.A. (2001) Factoring in the Complete Picture on Indorsements.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW Twomey Jennings 1 st Ed. 10 Blank Indorsement INDORSE HERE x Alan Parker ______________ _________________ __________________ DO NOT WRITE, STAMP, OR SIGN BELOW THIS LINE RESERVED FOR FINANCIAL INSTITUTION USE*

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW Twomey Jennings 1 st Ed. 11 Special Indorsement INDORSE HERE Pay to Tom Houlton x Marcia L. Diaz _____________ __________________ DO NOT WRITE, STAMP, OR SIGN BELOW THIS LINE RESERVED FOR FINANCIAL INSTITUTION USE*

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW Twomey Jennings 1 st Ed. 12 Qualified Indorsement INDORSE HERE Without recourse x Diana Morris ______________ __________________ DO NOT WRITE, STAMP, OR SIGN BELOW THIS LINE RESERVED FOR FINANCIAL INSTITUTION USE*

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW Twomey Jennings 1 st Ed. 13 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*

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW Twomey Jennings 1 st Ed. 14 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. 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.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW Twomey Jennings 1 st Ed. 15 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 $ drawn on Fidelity Federal Theft by Tim Thief Forges Sally Seller’s signature Takes check to Corner Check Cashing Co. Forwards for payment Fidelity Federal First Bank Deposits check in its bank account

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW Twomey Jennings 1 st Ed. 16 Quasi-Forgeries: 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.) 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.) Getty Petroleum Corp. v American Express (1997) The Slick Oil Company Employee.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW Twomey Jennings 1 st Ed. 17 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. 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.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW Twomey Jennings 1 st Ed. 18 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. 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.