Chapter 26-transfer of negotiable instruments Flashcards
Requirements for an order instrument to be negotiated
1) an indorsement
2) delivery
Requirement for negotiation of bearer instrument
Delivery only
Assignment occurs when
1) a non-negotiable instrument is transferred to a third party or;
2) a negotiable instrument is transferred improperly to a third party
indorsement
a signature with or without additional words or comments
Allonge
an indorsement on a separate piece of paper
Four types of indorsements
1) blank
2) special
3) qualified
4) restrictive
Blank indorsement
does not specify an indorsee, makes it a bearer instrument
Special indorsement
identifies who the indorsee is, makes it an order instrument
Qualified indorsement
Indorser writes “without recourse” on the back, eliminating themselves from liability if the drawer defaults. Can be accompanied by a special or blank indorsement.
Restrictive indorsement
requires the indorsee to comply with certain instructions regarding the funds.
An indorsement to only pay a named person can still be negotiated, if the holder gives value for it, this indorsement is the same as a special indorsement.
Conditional indorsement
(type of restrictive indorsement) payment depends on the occurrence of some event specified in the indorsement.
Conditional language on the back of the instrument keeps the instrument negotiable, as opposed to the face.
A person taking the instrument for value can disregard the condition.
Indorsement for deposit or collection
Type of restrictive indorsement, makes the indorsee (bank) a collecting agent of indorser
Trust agency indorsements
(type of restrictive indorsement) indorsements to persons who are to hold or use funds for the benefit of the indorser.
Miscellaneous indorsement problems
1) Misspelled name
2) Instruments payable to legal entities
3) Alternative or joint payees
4) Suspension of drawer’s obligation
alternative or joint payee
Alternative: any payee may indorse
Joint: all payees must indorse
Stacked payees
when an instrument is ambiguous whether its joint or alternative
Misspelled name indorsement problem
A payee or indorsee can indorse with the misspelled or correct name
instruments payable to legal entities
Negotiable by authorized representatives
suspension of drawer’s obligation
Drawer delivers check to one alternative payee, he has no further obligation. No obligation to make sure funds are distributed to joint payees.
Holder in due course
a holder who meets certain acquisition requirements and therefore, receives a higher level of protection from defenses of other parties
HDC requirements
1) taken the negotiable instrument for value (not consideration)
2) In good faith
3) without notice that it is defective
A holder takes an instrument for value if the holder has done any of the following
1) performed the promise for which the instrument was issued or transferred
2) taken the instrument in payment of or as security for an existing obligation (an antecedent claim)
3) given a negotiable instrument as payment
In good faith HDC requirement
only applies to the holder
An instrument is defective if it’s
1) overdue
2) been dishonored
3) contains unauthorized signature or has been altered
4) there is a defense against the instrument or a claim to the instrument
5) instrument is so incomplete or irregular you question authenticity
A person is considered to have notice if
1) the person has actual knowledge of defect
2) the person has received notice about defect
3) Person has reason to know that a defect exists
Shelter principle
A person who doesn’t qualify on their own as an HDC, but received an instrument from an HDC acquires HDC status
Limitation to shelter principle
Can’t repurchase an instrument from an HDC to reacquire HDC status if your original HDC status was fraudulent.
