Indorsements

Question 1

Indorsements

Answer 1

Indorsements are signatures with or without additional words or statements that are required to negotiate an order instrument. Indorsements are usually written on the back of an instrument but can be written on a separate piece of paper (an allonge) affixed (stapled) to it [UCC 3-204(a)].

Question 2

Parties to Indorsements

Answer 2

Indorser - The person who indorses an instrument.

Indorsee - The person to whom the instrument is transferred.

Question 3

Blank Indorsement

Answer 3

A blank indorsement specifies no particular indorsee and can consist of a mere signature [UCC 3-205(b)]. Converts an order instrument to a bearer instrument.

Question 4

Special Indorsement

Answer 4

A special indorsement names the indorsee [UCC 3-205(a)]. No special words are needed. Converts a bearer instrument into an order instrument.

Question 5

Qualified Indorsement

Answer 5

This type of indorsement disclaims or limits contract liability (the notation “without recourse” is commonly used) [UCC 3-415(b)]. Often used by persons acting in a representative capacity. Does not guarantee payment, but does transfer title. (Most blank and special indorsements are unqualified, guaranteeing payment and transferring title). A special qualified indorsement makes an instrument order paper (and requires indorsement and delivery for negotiation). A blank qualified indorsement creates bearer paper (and requires only delivery).

Question 6

Restrictive Indorsements

Answer 6

1) Conditional Indorsement
2) Indorsement Prohibiting Further Indorsement
3) Indorsement for Deposit or Collection
4) Trust lndorsement (Agency indorsement)

Question 7

Conditional Indorsement

Answer 7

Specifying an event on which payment depends does not affect negotiability. A person paying or taking the instrument for value can disregard the condition [UCC 3-206(b)]. (Conditional language on the face of an instrument, however, does destroy negotiability.)

Question 8

Indorsement Prohibiting Further Indorsement

Answer 8

Does not destroy negotiability [UCC 3-206(a)]. Has the same effect as a special indorsement.

Question 9

Indorsement for Deposit or Collection

Answer 9

Making the indorsee (usually a bank) a collecting agent of the indorser (such as “For deposit only”) looks the instrument into the bank collection process [UCC 3-206(c)].

Question 10

Trust lndorsement (Agency indorsement)

Answer 10

An indorsement by one who is to hold or use the funds for the benefit of the indorser or a third party [UCC 3-206(d), (e)]. To the extent the original indorsee pays or applies the proceeds consistently with the indorsement, he or she is a holder and can become a holder in due course (HDC).

Question 11

Signature Liability

Answer 11

Every party (except a qualified indorser) who signs an instrument is primarily or secondarily liable to pay it when it is due.

Question 12

Primary Liability

Answer 12

Only makers and acceptors (a drawee who promises to pay an instrument when it is presented later for payment) are primarily liable—they are absolutely required to pay (subject to certain defenses) [UCC 3-305].

Question 13

Secondary Liability

Answer 13

Drawers and unqualified indorsers are secondarily liable—they pay only if a party who is primarily liable does not pay. A drawer pays if a drawee does not; an indorser pays if a maker defaults. Secondary liability is triggered by—

1) proper presentment,
2) dishonor, and
3) notice of dishonor.

Question 14

Proper and Timely Presentment

Answer 14

1) To the Proper Person - A note or CD is presented to the maker; a draft to the drawee for acceptance, payment, or both (whatever is required); a check to the drawee [UCC 3-501(a), 3-502(b)].
2) In the Proper Manner- Depending on the type of instrument [UCC 3—501(b)]:
A) any commercially reasonable means (oral, written, or electronic; but it is not effective until the demand is received);
B) a clearinghouse procedure used by banks; OR
C) at the place specified in the instrument.
3) Timely - Failure to present on time (within thirty days after its date, or for an indorser‘s liability. within thirty days after indorsement) is the most common reason for improper presentment [UCC 3-414(f), 3-415(e), 3-501(b)(4)].

Question 15

Dishonor

Answer 15

Occurs when payment or acceptance is refused or cannot be obtained within the prescribed time, or when required presentment is excused and the instrument is not accepted or paid [UCC 3- 502(e), 3-504].

Question 16

Proper Notice of Dishonor

Answer 16

On dishonor, to hold secondary parties liable, notice must be given within thirty days following the day on which a person receives notice of the dishonor (except a bank, which must give notice before midnight of the next banking day after receipt) [UCC 3-503].

Question 17

Unauthorized Signatures

Answer 17

An unauthorized signature does not bind the person whose name is forged.

Question 18

Two Exceptions to Unauthorized Signatures

Answer 18

1) An unauthorized signature is binding if’ the person whose name is signed ratifies it [UCC 3-403(a)]
2) A person can be barred, on the basis of negligence, from denying liability [UCC 3-115, 3-406, 4-401(d)(2)].

Question 19

Liability of an Unauthorized Signer

Answer 19

An unauthorized signature operates as the signature of the signer in favor of an HDC [UCC 3-403(a)].

Question 20

Special Rules for Unauthorized lndorsements

Answer 20

Generally, the loss falls on the first party to take the instrument. The loss falls on the maker or drawer in cases involving—

1) Imposters
2) Fictitious Payees

Question 21

Imposters

Answer 21

The indorsement of an imposter (one who induces a maker or drawer to issue an instrument in the name of an impersonated payee) can be effective against

Question 22

Fictitious Payees

Answer 22

The indorsement of a fictitious payee (one to whom an instrument is payable but who has no right to receive payment—often, dishonest employees issue such instruments or deceive employers into doing so) can result in the employer’s liability to an innocent holder [UCC 3-404(b)(2)].