Negotiation- Becoming a Holder Flashcards
*Basic Idea
*parties only have rights in the paper (e.g. right to enforce) if it is properly negotiated
to become a holder in due course, one must first become a holder (requirement: (i) person in possession of instrument (ii) with right to enforce it)
person becomes holder through a transfer that qualifies as a “negotiation”
*parties only have rights in the paper if it is properly negotiated
Steps needed to negotiate an instrument depend on whether the instrument is payable to bearer (person in possession) or order (specific person named)
*Transfer of Bearer Instruments
bearer instruments are negotiated merely by transferring possession of the instrument (e.g. Joe gives to Susan a bearer note)
*Transfer of Order Instruments
instrument to an identified person (e.g. John Smith, as payee) is negotiated by transferring possession along with the identified person’s endorsement (e.g John may negotiate check payable to his order by endorsing the check and then delivering it to transferee)
*if person or persons properly indorse a check, then it becomes bearer paper and any person in possession can deposit it (even if its stolen since it just needs possession to be a holder).
*Transfer of Order Instruments
Payee’s Indorsement (i.e. signature)
right to enforce will not pass unless the payee’s indorsement is authorized and valid.
in most cases, forging the payee’s name breaks the chain of title and no subsequent possessors of the instrument can qualify as holders.
*Transfer of Order Instruments
Multiple Payees
If instrument jointly payable (“pay to the order of Joe AND Susan”), then each payee must endorse.
If instrument is severally payable (“pay to the order of Joe OR Susan), then any one payee may endorse.
*Transfer of Order Instruments:
Effect of Transferring an Order Instrument Without indorsement
It transfers possession but is NOT a negotiation.
Rights of transferee without endorsement: until obtaining endorsement, possessor does not have the status as a holder, but if she paid value, she can sue to compel endorsement
same as above if the the instrument is due and the holder wants to get paid
once obtain transferor’s endorsement, transferee gets full title (i.e. becomes a holder and gets right to enforce and possess)
Transfer of Order Instruments:
Rules for Banks
depository bank that takes an instrument for collection becomes a holder if the customer was a holder at time of delivery.
Transfer of Order Instruments:
Endorsement of Partial Interests
endorsement that attempts to convey less than the complete amount of the instrument (e.g. “pay half to Chad”) is not a negotiation and the transferee does not become a holder.
However, endorsement of the remaining balance of a partially paid note is a negotiation.
*Types of indorsements:
Special indorsement
special indorsement names a particular person as endorsee (e.g. “Pay John Smith, [signed] Peter Payee)
indorsee (e.g. John Smith) must sign in order for the instrument to be further negotiated.
Words of negotiation (such as “pay to the order of”) are not required for endorsements.
*Types of indorsements:
Blank indorsement
signature that is not accompanied by the naming of a specific indorsee (i.e. the indorser merely signs his own name, probably the way most people sign checks)
blank indorsements create bearer paper, which then may be negotiated by delivery alone
- forgery of indorsements
Forgery typically cuts the chain of title off so that future people with possession of the instrument are not actually holders.
Except:
Drawer: Forgery of the drawer’s name does not break the chain of title, and thus subsequent transferees may qualify as holders. This is because the forgery operates as the genuine signature of the forger.
Forgery of indorsement
of names not necessary to the chain of title does not prevent later takes from being holders
Multiple Endorsements
if an instrument has been endorsed several times, the last endorsement controls
Qualified Endorsements
an endorsement with the words “without recourse” is a qualified endorsement and limits the contractual liability imposed on endorsers
Restrictive Endorsements
any other language added to an endorsement creates a restrictive endorsement.
Restrictive endorsements are generally ineffective to limit transfer or negotiation (e.g. a check endorsed to “pay Pete payee only” may be further negotiated to anyone) or to condition payment (e.g. a check endorsed “pay John if he fixes my car” may be further negotiated even if he has not fixed the car.
BUT, instrument requiring bank collection (e.g. “for deposit”, “for collection”) must be paid consistently with the endorsement by any person or the first bank into which the instrument is deposited.
Anomalous Endorsements
endorsement made by a person who is not a holder of the instrument, usually for accommodation (suretyship p) purposes.
Anomalous endorser becomes liable on the instrument
