Warranty Liability

Question 1

Transfer Warranties

Answer 1

Any person who transfers an instrument for consideration warrants to the transferee and, if the transfer is by indorsement, to all later transferees and holders who take the instrument in good faith [UCC 3-416]—

a) The transferor is entitled to enforce the instrument.
b) All signatures are authentic and authorized.
c) The instrument has not been altered.
d) The instrument is not subject to a defense or claim that can be asserted against the transferor.
e) The transferor has no knowledge of any insolvency proceedings against the maker, the acceptor, or the drawer of the instrument.

Question 2

To Whom Transfer Warranties Run

Answer 2

• Order paper: to any subsequent holder who takes the instrument in good faith.
• Bearer paper: only to the immediate transferee [UCC 3-416(a)].

Question 3

Presentment Warranties

Answer 3

Any person who obtains payment or acceptance of an instrument warrants to any other person who in good faith pays or accepts the instrument [UCC 3-417(a), (d)]—

a) The person obtaining payment or acceptance is entitled or authorized to enforce the instrument (that is, there are no missing or unauthorized indorsements).
b) The instrument has not been altered.
c) The person obtaining payment or acceptance has no knowledge that the signature of the issuer of the instrument is unauthorized.

Question 4

Cases where Presentment and Transfer Warranties Do Not Apply

Answer 4

It is assumed, for example, that a drawer or a maker will recognize his or her own signature and that a maker or an acceptor will recognize whether an instrument has been materially altered.