negotiation

Question 1

who is a holder

Answer 1

person with

(1) possession of the negotiable instrument

(2) good title [which depends on the words of negotiability

Question 2

holder status flow chart

Answer 2

when a payee, instead of getting the money, transfers the instrument to a third party [for a purchase, gift, or as a deposit] in a way that qualifies as a negotiation, the third party becomes a holder

(1) Does the person have possession of the instrument?
— NO = person is not a holder
— YES [go to 2]

(2) is the instrument a bearer instrument?
— YES = person is a holder and thus can negotiate the instrument
— NO [go to 3]

(3) is the person in possession the named payee?
— YES = person is a holder and can thus negotiate the instrument
— NO = go to 4

(4) are all necessary signatures on the instrument and are they genuine [signatures of payee and any special endorsee]
— YES = person is a holder and can thus negotiate the instrument
—- NO = person not a holder

Question 3

steps needed to negotiate a bearer instrument

Answer 3

transfer possession of the instrument

**note that when you indorse order paper and do not name a new person to whom the instrument is payable [i.e. indorse a check] that instrument is converted to bearer paper and can be negotiated by transfer alone

Question 4

steps to negotiate order instruments

Answer 4

[quick definition] “endorsement” = signature on a negotiable instrument by someone other than the maker, drawer, or acceptor, normally on the back of it

IN GENERAL – order instruments are negotiated by = (1) possession + (2) necessary endorsements

[MAIN TYPE OF ORDER INSTRUMENT]
negotiation of an instrument that is payable to a specific identifiable payee is negotiated by =
transfer possession + payee’s indorsement
[ex: check payable to John is negotiated by his signing the check and delivering it to a transferee]
** note that this blank endorsement makes it bearer paper

(2) payee’s indorsement is authorized and valid

— if no endorsement, you may transfer possession, but there is no negotiation and transferee does not have holder status

Question 5

types of endorsements and their effects

Answer 5

(1) blank endorsement =
— signature that is not accompanied by the naming of a specific endorsee
— indorsee signed his own name
= creates bearer paper and negotiations may be made by delivery alone

(2) special endorsements
— payee’s signature + new person to whom instrument is payable
— check is order paper
— further negotiation will need the new pay’s endorsement

(3) restrictive endorsement
— ineffective to limit transfer or negotiation or condition payment unless it includes words that require bank collection
= “pay Pete only” may be further negotiated to anyone
but
“for deposit at ___” must be payed accordingly