Chapter 31 Transfer of Negotiable Instruments

1. Chapter 31Transfer of Negotiable Instruments Twomey, Business Law and the Regulatory Environment (14th Ed.)

2. Contract Assignment[31-1] Contracts/Consumer (FTC Rules) Assignor Promisor Defenses Good Assignee NegotiableInstruments - Negotiation Negotiable Instruments Payee Maker Limited Defenses HDC Chapter 31

3. IndorsementsOrder and Bearer Paper[31-2] Chapter 31

4. Types of Indorsements[31-3] Chapter 31

5. Effect of Forged Indorsements [31-4] Billy Buyer Check for $2764.53 drawn on Fidelity Federal Theft by Tim Thief Forges Sally Seller’s 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 Chapter 31

6. Transfer of commercial paper No No Yes Yes yes No Paper was negotiated to a named indorsee (order paper) 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 Chapter 31

7. The Defenses to Payment under Negotiable Instruments Chapter 31

8. Blank Indorsement INDORSE HERE x Alan Parker DO NOT WRITE, STAMP, OR SIGN BELOW THIS LINE RESERVED FOR FINANCIAL INSTITUTION USE* Chapter 31

9. 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* Chapter 31

10. Qualified Indorsement INDORSE HERE Without recourse x Diana Morris DO NOT WRITE, STAMP, OR SIGN BELOW THIS LINE RESERVED FOR FINANCIAL INSTITUTION USE* Chapter 31

11. 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* Chapter 31

12. 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. Chapter 31

13. 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. Chapter 31

14. 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. Chapter 31

15. 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. Chapter 31

16. 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. Chapter 31

17. 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. Chapter 31

18. 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. Chapter 31

19. 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. Chapter 31