Ch. 26 Transferability and Holder in Due Course Flashcards
Once issued, a negotiable instrument can be transferred to others by what or what?
- By assignment
- By negotiation
Define assignment.
- Transfer of rights under a contract
Under contract law principles, a transfer of assignment to an assignee gives the assignee what rights?
- Only those rights that the assignor possessed
When an instrument is transferred by negotiation, the UCC provides that the transferee (person to whom instrument is transferred) becomes a what?
Holder
Unlike an assignment, a transfer by negotiation can make it possible for a holder to receive what?
More rights in the instrument than the prior possessor had
A holder who receives greater rights is known as what?
Holder in due course
Transfer by negotiation creates a holder who at the very least receives what?
At the very least receives the rights of the previous possessor
The two methods of negotiating an instrument so that the receiver becomes a holder depend on whether the instrument is a what or what?
- Order instrument
- OR bearer instrument
What is an order instrument?
- Contains the name of a payee capable of indorsing
- E.g. “Pay to the order of Jamie Fowler”
Id the indorsement and delivery:
Goodseal takes his paycheck to the bank, signs his name on the back, gives it to the teller, and receives cash.
- Indorsement: signs name on back
- Delivery: gives to teller
If an instrument is an order instrument, how is it negotiated?
- Negotiated by delivery with any necessary indorsements
Negotiating order instruments requires both what and what?
- Delivery AND
- Indorsement
Whenever a transfer fails to qualify as a negotiation b/c it fails to meet one or more of the requirements of a negotiable instrument, how is it treated as?
As an assignment
If an instrument is payable to bearer, it is negotiable by what?
Delivery (indorsement not necessary)
The use of bearer instruments involve greater risk of what than the use of order instruments?
- Greater risk of loss or theft
What is required whenever an order instrument is negotiated?
Indorsement
What is an indorsement?
- A signature with or w/o additional words or statements (most often written on back of instrument itself)
If there is no room on the instrument to indorse, what can be done?
- Indorsement can be written on a separate piece of paper
- Called an allonge
- That is firmly affixed to the instrument (such as w/ staples)
Is a paper firmly attached to the instrument a part of the instrument?
YES
What do you call a person who transfers a note or a draft by signing (indorsing) it and delivering it to another person?
Indorser
What do you call the person to whom a check is indorsed and delivered?
Indorsee
What are the four main categories of indorsements?
- Blank
- Special
- Qualified
- Restrictive
Can a single indorsement have characteristics of more than one category?
YES (categories not mutually exclusive)
What is a blank indorsement?
- Does not specify particular indorsee
- Can consist of a mere signature
An order instrument indorsed in blank becomes a what?
Bearer instrument (and can be negotiated by delivery alone…in other words anybody can cash it)
Rita Chou indorses in blank a check payable to her order and then loses it on the street. If Schaefer finds the check, he can sell it to Duncan for value w/o indorsing it.
Does this constitute a negotiation?
- YES
- This constitutes a negotiation b/c Schaefer has made delivery of a bearer instrument (which was an order instrument until it was indorsed in blank)
What was the key question in the In re Bass case?
Does an instrument that requires indorsement for negotiation need to contain the written signature of an individual’s name?
How does the UCC define signature?
- Broadly
- “Any symbol executed or adopted w/ present intention to adopt or accept a writing”
Does the UCC limit a signature to a long form writing of an individual person’s name?
No
What is a special indorsement?
- Contains the signature of the indorser
- AND identifies the person to whom the indorser intends to make the instrument payable (names the indorsee)
“Pay to the order of Russell Caly” followed by signature of indorser.
When an instrument is indorsed in this way, what type of instrument is it?
Order instrument
What is a qualified indorsement?
- Disclaims liability associated with an unqualified indorsement
Generally, an indorser, merely by indorsing, impliedly promises to do what?
- Pay the holder, or any subsequent indorser, the amount of the instrument in the event that the drawer or maker defaults on the payment
What is an unqualified indorsement?
- Indorser is guaranteeing payment of instrument in addition to transferring title to it
What notation is commonly used to create a qualified indorsement?
“without recourse”
Qualifiied indorsements are often used by whom?
Persons acting in representative capacity (e.g. insurance agents)
A special qualified indorsement includes what?
- Names of indorsee
- AND the words “w/o recourse”
- AND signature of indorser
A special indorsement makes an instrument an order instrument and requires what?
- An indorsement PLUS delivery for negotiation
A blank qualified indorsement makes the instrument a bearer instrument and requires what for negotiation?
- Only delivery is required for negotiation
What is a restrictive indorsement?
- Requires indorsee to comply w/ certain instructions regarding the funds involved but does not prohibit further negotiation of the instrument
Are the effects of a conditional indorsement which appear on the back of an instrument different from the effect of conditional language that appears on the face of an instrument?
YES
An instrument has conditional language on its face. Is it negotiable?
NO (b/c it doesn’t meet the requirement that a negotiable instrument must contain an unconditional promise to pay)
What are trust indorsements?
Indorsements to person who are to hold or use the funds for the benefit of the indorser or a third party
What are trust indorsements also known as?
Agency indorsements
The method used for negotiation depends on the character of the instrument when?
At the time the negotiation takes place
A payee or indorsee whose name is mispelled can indorse with what?
- Misspelled name
- OR correct name
- OR both
What is the usual practice for indorsement for misspelled names?
- Indorse with the name as it appears on the instrument
- Followed by the correct name
Does an instrument payable to two or more persons “in the alternative” require the indorsement of all parties?
NO (just one of the payees indorsement is suffice)
If an instrument is made payable to two or more persons “jointly”, who must sign?
All of the payees’ indorsements are necessary for negotiation
When a drawer gives one alternative or joint payee a check, does it have an obligation to make sure that the funds are allocated or distributed among the joint payees?
NO (payee who has possession of the checks holds it for the benefit of all the payees)
A holder is normally subject to the same defenses that could be asserted against the transferor. Is a HDC subject to the same defenses that could be asserted against the transferor?
NO (HDC takes an instrument free of most of the defenses and claims that could be asserted against the transferor)
What are the requirements for HDC status?
An HDC must first be a holder of a negotiable instrument and must have taken the instrument
(1) for value
(2) in good faith
(3) w/o notice that it is defective (such as when instrument is overdue, dishonored, irregular, or incomplete)
Does a person who receives an instrument as a gift or inherits it meet the requirements for HDC status?
NO (has not met requirement of value)
How does the UCC define good faith?
“Honesty in fact and the observance of reasonable commercial standards of fair dealing”
What was the key question in the Georg v. Metro Fixtures Contractors, Inc. case?
Whether a check had been accepted in good faith
A holder in due course must meet what five conditions?
(1) Be a holder
(2) of a negotiable instrument who took it
(3) for value
(4) in good faith
(5) w/o notice of certain problems w/ the instrument
To be a holder, what two conditions must one meet?
(1) he must have possession
(2) of an instrument drawn, issued, or indorsed to him
When is an instrument dishonored?
When the party to whom the instrument is presented refuses to pay it
