Negotiation - Becoming a Holder Flashcards
What is “negotiation”?
The process specified by Article 3 for transferring a negotiable instrument.
What is the code’s definition of negotiation?
- Negotiation is a transfer of possession of an instrument, whether voluntary or involuntary, by a person other than the issuer to a person who thereby becomes its holder;
- A holder is a person in possession of the instrument if the instrument is payable to bearer; if the instrument is payable to an identified person, that person is the holder as soon as she gets possession.
In simplified terms, who is a holder?
A person in possession of an instrument with a right to enforce it. Holder status (and the right to enforce an instrument) and what is needed for negotiation depend on whether the instrument is bearer paper or order paper.
How are bearer instruments negotiated?
A negotiable instrument that is issued as bearer paper or subsequently converted into bearer paper is negotiated simply by transferring possession of the instrument. Once the transferee has possession, she technically qualifies as a holder
(example: drawer writes a check payable to “cash” which makes the check a bearer instrument. If Drawer transfers the check to Grocer, Grocer becomes a holder.)
How is an “order instrument” negotiated?
An instrument that is payable to an identified person is negotiated by transferring possession of the instrument along with the indorsement of the identified person.
(Example: Dan Drawer writes a check payable to the order of Paula Payee. Upon receiving the check, Paula qualifies as a holder. If Paula subsequently wishes to negotiate the check, she must indorse it and deliver possession to her transferee, who will then also qualify as a holder.
Must the payee’s indorsement be valid in the negotiation of an order instrument?
Generally, the right to enforce an order instrument will not pass unless the payee’s indorsement is authorized and valid.
Is a genuine signature obtained by fraud or from infant effective?
Yes. A signature is effective for the purpose of negotiation even if it is made by an infant or anyone else without legal capacity, obtained by mistake, fraud or other illegality, part of an illegal transaction, or made in breach of duty
Are all necessary signatures required?
Yes. The right to enforce an instrument will pass only if all necessary signatures of all payees and special indorsees are on the instrument.
May an instrument be made payable to more than one payee?
Yes. IF the names are connected by an “and,” the instrument is payable to them jointly, and any subsequent negotiation is effective only if all indorse the instrument.
However, if the names are connected by or or and or the instrument is payable to the payees severally, and the valid indorsement of any one of them is sufficient to pass the right to enforce to a subsequent transferee.
The delivery of an order instrument without indorsement may be effective to transfer possession but it does NOT
constitute a negotiation until the indorsement is made
What are the rights of a transferee WITHOUT indorsement?
Unless and until he obtains the indorsement, the transferee does NOT have the status of a holder, and certainly cannot qualify as an HDC.
- Therefore, he cannot negotiate the instrument.
What rights DOES the transferee without indorsement have?
- If the transferee paid value for the instrument, he has a specifically enforceable right to the unqualified indorsement of the transferor (he would have to sue in equity for a decree ordering the transferor to indorse
- If the instrument is due, the transferee can bring suit to enforce it even though it lacks an indorsement
- However, he would have to prove his ownership rights in the instrument (that he was entitled to the missing indorsement)
How does a depository bank (a bank in which an item is first deposited) become a holder?
A depositary bank that takes an instrument for collection becomes a holder of the instrument if the customer was a holder at the time of delivery, even if the customer has not indorsed the instrument
