Chapter 31 Transfer of Negotiable Instruments Twomey Business

Contract Assignment [31 -1] Contracts/Consumer (FTC Rules) Assignor Promisor Defenses Good Assignee Negotiable Instruments - Negotiation Negotiable Instruments Payee Maker Limited Defenses (c) 2000 West Legal Studies HDC Chapter 31 2

Indorsements Order and Bearer Paper [31 -2] (c) 2000 West Legal Studies Chapter 31

Types of Indorsements [31 -3] (c) 2000 West Legal Studies Chapter 31 4

Effect of Forged Indorsements [31 -4] Billy Buyer Check for $2764. 53 drawn on Fidelity Federal Theft by Tim Thief Sally Seller Forges Sally Seller’s signature Takes Check to Corner Check Cashing Co. First Bank Fidelity Federal (c) 2000 West Legal Studies Cashes/gives money to Tim Deposits check in its bank account Forwards for payment • Sally has notified Fidelity of forgery. • Fidelity refuses payment. • Liability goes back to CCC. They could check ID. Chapter 31 5

Transfer of commercial paper Is it order paper? Negotiation of Commercial Paper No No Yes Is the paper indorsed and delivered? Paper was negotiated to a bearer (bearer paper) Yes Did the indorser name an indorsee? yes No No negotiation took place (c) 2000 West Legal Studies Paper was negotiated to a named indorsee (order paper) Chapter 31 6

The Defenses to Payment under Negotiable Instruments (c) 2000 West Legal Studies Chapter 31

Blank Indorsement INDORSE HERE x Alan Parker DO NOT WRITE, STAMP, OR SIGN BELOW

Special Indorsement INDORSE HERE x Pay to Tom Houlton Marcia L. Diaz DO NOT

Qualified Indorsement INDORSE HERE x Without recourse Diana Morris DO NOT WRITE, STAMP, OR

Restrictive Indorsement INDORSE HERE x For deposit only E. L. Martin DO NOT WRITE,

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. (c) 2000 West Legal Studies Chapter 31 12

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. (c) 2000 West Legal Studies Chapter 31 13

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. (c) 2000 West Legal Studies Chapter 31 14

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. (c) 2000 West Legal Studies Chapter 31 15

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. (c) 2000 West Legal Studies Chapter 31 16

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. (c) 2000 West Legal Studies Chapter 31 17

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. (c) 2000 West Legal Studies Chapter 31 18

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. (c) 2000 West Legal Studies Chapter 31 19