1. Chapter 29 TRANSFER OF NEGOTIABLE INSTRUMENTS & WARRANTIES OF PARTIES

2. 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.

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

4. 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

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

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

11. 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*

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

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*

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.

15. Hypothetical Billy Buyer Check for $2764.53 drawn on Fidelity Federal
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.
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.

16. “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.)

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.

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.