1. Comprehensive Volume, 18 th Edition Chapter 32: Transfer of Negotiable Instruments and Warranties of Parties

2. 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.

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

4. Order vs. Bearer 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. If the instrument has been indorsed, the character is determined by the last indorsement.

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

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. 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.

7. 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.

8. 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.

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

10. 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*

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

12. 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*

13. 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.

14. 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 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

15. 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.)

16. 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.

17. 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.