Chapter 32: Transfer of Negotiable Instruments and Warranties of Parties

1. 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 holderinduecourse) giving him protection from certain defenses.

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

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. Transfer of commercial paper Paper was negotiated to a bearer (bearer paper) No Is it order paper? No Did the indorser name an indorsee? Is the paper indorsed and delivered? yes yes yes No Paper was negotiated to a named indorsee (order paper) No negotiation took place Negotiation of Commercial Paper

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

10. INDORSE HERE Pay to Tom Houlton x Marcia L. Diaz _____________ __________________ __________________ DO NOT WRITE, STAMP, OR SIGN BELOW THIS LINE RESERVED FOR FINANCIAL INSTITUTION USE* Special Indorsement

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

12. INDORSE HERE For deposit only x E.L. Martin ______________ __________________ __________________ DO NOT WRITE, STAMP, OR SIGN BELOW THIS LINE RESERVED FOR FINANCIAL INSTITUTION USE* Restrictive Indorsement

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. 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 Fidelity Federal Effect of Forged Indorsements • Sally has notified Fidelity of theft. • Fidelity refuses payment. • Liability goes back to CCCCo. They should have checked ID.

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.