Chapter 31 Transfer of Negotiable Instruments

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Chapter 31Transfer of Negotiable Instruments

• Twomey, Business Law and the Regulatory
  Environment (14th Ed.)

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Contract Assignment 31-1
Contracts/Consumer (FTC Rules)
Assignor
Promisor
Defenses Good
Assignee
Negotiable Instruments - Negotiation
Negotiable Instruments
Payee
Maker
Limited Defenses
HDC
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IndorsementsOrder and Bearer Paper 31-2
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Types of Indorsements 31-3
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Effect of Forged Indorsements 31-4
Billy Buyer
Check for 2764.53 drawn on Fidelity Federal
Theft by Tim Thief Forges Sally Sellers
signature Takes Check to
Sally Seller
Corner Check Cashing Co.
Cashes/gives money to Tim
Deposits check in its bank account
First Bank
Forwards for payment

• Sally has notified Fidelity of forgery.
• Fidelity refuses payment.
• Liability goes back to CCC. They could check ID.

Fidelity Federal
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Negotiation of Commercial Paper
Is it order paper?
Paper was negotiated to a bearer (bearer paper)
Is the paper indorsed and delivered?
Did the indorser name an indorsee?
No negotiation took place
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The Defenses to Payment under Negotiable
Instruments
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Blank Indorsement
INDORSE HERE x Alan Parker DO
NOT WRITE, STAMP, OR SIGN BELOW THIS
LINE RESERVED FOR FINANCIAL INSTITUTION USE
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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
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Qualified Indorsement
INDORSE HERE Without recourse x
Diana Morris DO NOT WRITE, STAMP,
OR SIGN BELOW THIS LINE RESERVED FOR FINANCIAL
INSTITUTION USE
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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
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Chapter 31 Summary

• Negotiable instruments can be transferred by
  assignment or negotiation. Typically, negotiable
  instruments are transferred by negotiation. When
  a negotiable instrument is assigned, the
  transferee has the rights of the transferor. The
  transferee under an assignment is entitled to
  enforce the instrument as a contract, but the
  assignee-transferee has no greater rights than
  the assignor-transferor.

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Chapter 31 Summary 2

• The assignee is subject to any defense that could
  be raised in a suit on an assigned contract. When
  a negotiable instrument is transferred by
  negotiation, the transferee becomes the holder of
  the instrument. If such a holder becomes a holder
  in due course, the holder will be immune to
  certain defenses. Negotiation is the transferring
  of a negotiable instrument in such a way as to
  make the transferee the holder.

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Chapter 31 Summary 3

• 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.

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Chapter 31 Summary 4

• A number of different kinds of indorsements can
  be made on negotiable instruments. When an
  indorser merely signs the 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.

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Chapter 31 Summary 5

• If the last indorsement is a special indorsement,
  the instrument is order paper and may be
  negotiated only by an indorsement and delivery. A
  qualified indorsement destroys the liability of
  the indorser to answer for dishonor of the paper
  by the maker or the drawee. A restrictive
  indorsement specifies the purpose of the
  instrument or its use.

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Chapter 31 Summary 6

• A forged or unauthorized indorsement is no
  indorsement, and the possessor of the instrument
  cannot be a holder. The impostor rule makes three
  exceptions to this rule. 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.

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Chapter 31 Summary 7

• However, the transferor may be able to set aside
  the negotiation under general legal principles
  apart from the UCC. The negotiation cannot be set
  aside if the instrument is held by a person
  paying the instrument in good faith and without
  knowledge of the facts on which the rescission
  claim is based.

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Chapter 31 Summary 8

• The warranties of the unqualified indorser who
  receives consideration are as follows (1) the
  transferor is entitled to enforce the instrument
  (2) all signatures on the instrument are genuine
  and authorized (3) the instrument has not been
  altered (4) the instrument is not subject to any
  defense or claim of any party that could be
  asserted against the transferor and (5) the
  transferor has no knowledge of any insolvency
  proceedings against a maker, an acceptor, or the
  drawer of an unaccepted draft.