Chapter 29 TRANSFER OF NEGOTIABLE INSTRUMENTS & WARRANTIES OF PARTIES

1. Chapter 29TRANSFER OF NEGOTIABLEINSTRUMENTS & WARRANTIESOF 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 Assignor Promisor Assignee Negotiable Instruments - Negotiation Payee Maker Holder in Due Course Defenses Available Limited Defenses

4. Negotiation of Commercial Paper 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

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 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 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 • 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.