Transfer of Instruments

Question 1

List the three kinds of restrictive indorsements that can be used on negotiable instruments.

Answer 1

1. ) Conditional
2. ) Prohibitive
3. ) For deposit or collection

Question 2

Define “value.”

Answer 2

It is different from consideration. The seller gives value if the seller receives a note from the buyer who already owes money for goods delivered but has not paid. First in, first out (FIFO) concept for banks and giving value on deposited checks (i.e., a bank gives value when it allows customer to draw on the funds).

Question 3

Define “holder in due course.”

Answer 3

A holder who takes possession of a negotiable instrument for present value, in good faith and without notice of any defense or claims to ownership of the instrumen

Question 4

Define “holder.”

Answer 4

A party in possession of an instrument. To be a holder of bearer paper requires delivery. To be a holder of order paper requires delivery and proper indorsement

Question 5

Describe the concept of qualified indorsement

Answer 5

Usually includes words “without recourse” or similar words

Question 6

How are bearer instruments negotiated

Answer 6

By delivery

Question 7

When does a demand instrument become overdue?

Answer 7

After an unreasonable amount of time has lapsed or on the day after the day a demand for payment is made

Question 8

What is the legal effect of a blank indorsement?

Answer 8

1. )Converts an order instrument into a bearer instrument.
2. )For transfer with consideration, warranties are extended to all subsequent holders.
3. )Blank indorser has a secondary liability to pay all subsequent holders

Question 9

Describe the shelter rule

Answer 9

Any holder who cannot qualify as a holder in due course (HDC) but took the instrument through a HDC has the same rights as if a HDC

Question 10

What is the legal effect of a special indorsement?

Answer 10

1. )Converts the bearer into an order or continues order instrument.
2. )Transfer with consideration extends transfer warranties to all subsequent holders.
3. )Indorser has a secondary liability to pay all subsequent holders

Question 11

What is the legal effect of a restrictive indorsement (“For Deposit Only”)?

Answer 11

1. )Does not prohibit further negotiation

2. )Except for conditional indorsement, liability to subsequent holders is limited to restriction being met

Question 12

True or False: If the holder is not a holder in due course for failure to give value, the holder can ship through to another, take back for value, and step up to the holder in due course classification.

Answer 12

This is a true statement. However, the holder cannot ship through and eliminate knowledge of a problem on the instrument.

Question 13

How are order instruments negotiated?

Answer 13

By delivery plus indorsement

Question 14

When does a check become overdue?

Answer 14

More than 90 days after its date

Question 15

Describe the concept of blank indorsements

Answer 15

These indorsements specify no particular person to receive payment

Question 16

When does a time instrument become overdue?

Answer 16

If taken one minute after the due date

Question 17

Describe the concept of special indorsements

Answer 17

Indorsement specifies a person to whom payment or to whose order payment is to be made

Question 18

List the criteria for becoming a holder in due course (HDC) of a negotiable instrument

Answer 18

1. )Must be a holder
2. )Must take the instrument for value
3. )Must take in good faith
4. )Must take without notice that the instrument is overdue, has previously been dishonored, or of any claim or defense on the part of any person

Question 19

What is the legal effect of a qualified indorsement?

Answer 19

1. )Disclaims contract signature liability

2. )Still extends transfer warranties to all subsequent holders