Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning Chapter 29 Transfers of Negotiable Instruments and Warranties of Parties Twomey Jennings Anderson’s Business Law and the Legal Environment, Comprehensive 20e Anderson’s Business Law and the Legal Environment, Standard 20e Business Law: Principles for Today’s Commercial Environment 2e

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 2 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. Transfer of Negotiable Instruments

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 3 Definition of Negotiation Negotiation means “transfer of possession … of an instrument by a person other than the issuer to a person who thereby becomes a holder.” Holder: transferree in possession of an instrument that runs to her.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 4 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 5 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 Instruments

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 6 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 7 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 8 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 9 Blank Indorsement INDORSE HERE x Alan Parker ______________ _________________ __________________ DO NOT WRITE, STAMP, OR SIGN BELOW THIS LINE RESERVED FOR FINANCIAL INSTITUTION USE*

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 10 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*

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 11 Qualified Indorsement INDORSE HERE Without recourse x Diana Morris ______________ __________________ DO NOT WRITE, STAMP, OR SIGN BELOW THIS LINE RESERVED FOR FINANCIAL INSTITUTION USE*

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 12 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*

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 13 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 14 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.) Quasi Forgeries: The “Imposter” Rule

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 15 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 16 Lost Instruments Liability depends on who is demanding payment and whether the instrument is an order or bearer paper when lost. –Order Instruments: finder does not become the holder because the instrument has not been indorsed. –Bearer Instruments: finder is the holder and entitled to enforce payment.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 17 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;

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 18 Warranties in Negotiation The warranties of the unqualified indorser who receives consideration are as follows (cont’d): –(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.