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Chapter 29 TRANSFER OF NEGOTIABLE INSTRUMENTS & WARRANTIES OF PARTIES PowerPoint Presentation
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Chapter 29 TRANSFER OF NEGOTIABLE INSTRUMENTS & WARRANTIES OF PARTIES. 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.

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transfer of negotiable instruments
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.
assignment v negotiation
Assignment v. Negotiation

Contract Assignment

Assignor

Promisor

Assignee

Negotiable Instruments - Negotiation

Payee

Maker

Holder in Due Course

Defenses Available

Limited Defenses

negotiation of commercial paper
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

how negotiation occurs bearer instruments
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.
how negotiation occurs order instruments
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.
how negotiation occurs order instruments7
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.
how negotiation occurs order instruments8
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.
how negotiation occurs order instruments9
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.
blank indorsement
Blank Indorsement

INDORSE HERE

x Alan Parker ______________

_________________

__________________

DO NOT WRITE, STAMP, OR SIGN BELOW THIS LINE

RESERVED FOR FINANCIAL INSTITUTION USE*

special indorsement
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*

qualified indorsement
Qualified Indorsement

INDORSE HERE

Without recourse

x Diana Morris ______________

__________________

__________________

DO NOT WRITE, STAMP, OR SIGN BELOW THIS LINE

RESERVED FOR FINANCIAL INSTITUTION USE*

restrictive indorsement
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*

problems in negotiation
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.
hypothetical
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.
imposter rule
“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.)
incapacity or misconduct
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.
warranties in negotiation
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.