How is a negotiable instrument DULY NEGOTIATED? (aka what makes the transfer proper?)

Question 1

NOTE: Due negotiation or “duly negotiated” means that there has been a proper transfer of the instrument. If the instrument has been properly transferred, the transferee is a holder and may be eligible to be a holder in due course. By contrast, if the instrument has been improperly transferred, the transferee is not a holder and cannot qualify as a holder in due course.

Answer 1

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Question 2

Due Negotiation (proper transfer) of a “Payable to order” Instrument-

Answer 2

• When the instrument is payable to the order of a specific payee, it is negotiated/properly transferred by delivery of the instrument to that payee.
• Any further due negotiation/proper transfer requires that the PAYEE INDORSE the instrument and DELIVER it to the transferee. The indorsement must be authorized and valid.

Question 3

Due Negotiation (proper transfer) of a “Payable to bearer” or “Pay to cash” Instrument

Answer 3

• indorsement is not required to duly negotiate (aka properly transfer) this type of Instrument

Question 4

Types of Indorsements

Answer 4

Every indorsement must be either:

(1) Special or Blank; AND
(2) Restricted or Unrestricted

Question 5

The Special Indorsement

Answer 5

The special indorsement is one that names a particular person as “indorsee.” The indorsee must sign in order for the instrument to be further negotiated.

ex- John indorses his paycheck, “Pay to Chris, /s/ John.” Chris is indorsee. Chris must sign his name on the back in order to cash it. If someone else signs Chris’ name and cashes it at the grocery, the grocer is NOT a HOLDER.

Question 6

The Blank Indorsement

Answer 6

The blank indorsement is one that does not name a specific indorse. It may be negotiated by delivery alone.

ex- Bobby Donnell indorses his paycheck by signing his name on the back and delivers it to Elinor, who loses it. Jimmy finds it and cashes it at the Grocery. The Grocery is now a holder. This is a good transfer.

Question 7

The Restrictive Indorsement

Answer 7

• indorsement contains a restriction

ex- Bobby Donnell indorses his check, “For deposit only, Bobby Donnell.” Lucy steals the check from Bobby and cashes it at Stupid Bank. Is Bank a holder? NO– bank didn’t pay attention to the restriction. Bobby can recover from the bank in conversion.