Chapter 25
TRANSFERABILITY- Indorsements
HOLDER IN DUE
COURSE
This section is basically about the
rights of persons who acquire transferred instruments from others, and who
received them via assignment or negotiation, usually for value paid.
• Assignment: Under general contract principles, a negotiable instrument may be transferred to an assignee, who
then holds the instrument with all the rights of
the assignor.
• Negotiation: Transfer of an instrument in such a form
that the transferee becomes a holder, who has at least the same rights in the
instrument as the transferor, and may have more
rights than the transferor!
·
• Negotiating Order Instruments: An order instrument may be negotiated by the payee to a third party
by an indorsement by the payee in favor of the third party. For example, “pay to the order of Sammy
Taylor”
• Negotiating
Bearer Instruments: Unlike an order instrument, a bearer instrument
need not be indorsed to transfer the payee’s rights to the transferee. All that is required is delivery to the new bearer. In other words, I give you a $5 bill- you now
own the $5 and what it represents. Same idea if I gave you a bearer instrument,
it’s just like cash. All it takes is the
“delivery”
INDORSEMENTS
[Yes, this is how it is spelled “legally,”
and I know you
are used to seeing it spelled as
“endorsements”- just go with the flow]. -
In general, an
indorsement is required
whenever an order
instrument is to be negotiated.
• Indorsement:
A signature, with or without additional
words or statements (e.g., “for deposit only,” “payable to Jane Smith,”
“payable from acct. # 000001,” etc.), made by the indorser in order to
transfer his or her rights to
the indorsee.
·
•Blank Indorsement: An indorsement that
specifies no
particular indorsee
and can consist of a mere signature.
For
example, “(signed) Sammy Taylor”
Technically,
this is a blank, unqualified, and nonrestrictive indorsement.
·
• Special Indorsement: An indorsement that indicates the
specific person to whom the indorser intends to make the instrument payable -- i.e., the indorsee.
For
example, “Pay to William Hunter,
(signed)
Sammy Taylor”
Technically, this
is a special, unqualified, and nonrestrictive indorsement.
·
• Qualified Indorsement: An indorsement which disclaims any contract
liability on
the instrument (e.g., “without recourse”).
NOTE: Without recourse means the indorser
assumes no responsibility to pay the instrument if it is dishonored.
For
example: “Pay to Allison Jones, without recourse.
(signed) Sammy Taylor
·
Technically,
this is a special, qualified and nonrestrictive indorsement.
·
• Restrictive Indorsement: Any indorsement on a negotiable
instrument that requires the indorsee to comply
with certain instructions regarding the funds involved.
For
example: “For deposit Only
(signed)
Sammy Taylor
Technically, this is a blank,
unqualified and restrictive indorsement.
• Indorsement Prohibiting Further Indorsement: An indorsement calling for
payment only to a designee.
For
example: “Pay any bank or banker”
• Conditional
Indorsement: An indorsement that makes payment of the instrument
dependent on the occurrence of some event specified in the indorsement.
For
example: Pay to Sammy Taylor if he completes work by
(signed)
Mary Factor
While this
restriction seems to destroy negotiability, the UCC says a person paying for
value can disregard the condition without liability. UCC 3-206.
• Trust
Indorsement (a.k.a., agency indorsement): An indorsement to a person who is to hold
or use the funds for the benefit of the indorser or a third party.
Pay
to Sammy Taylor
As
agent for Coole Dudee
signed)
Coole Dudee
Or
Pay
to Ellen Cook
In
trust for Sammy Taylor
(signed)
Sammy Taylor
These indorsements allow funds
to be transferred to the named person but are to be kept on behalf of (i.e., in
trust for)the indorser.
• Indorsements by
Agents or Officers: A check made payable to a corporation, partnership,
estate, or other legal entity may be negotiated or indorsed on behalf of the entity
by any authorized representative of the entity.
HOLDER IN
DUE COURSE
Here we are talking about a party’s
right (not the original party to the arrangement) to his or her payment of a check,
draft, note or certificate of deposit.
DEFINITION OF HOLDER:
A holder is a person who
is in possession of the instrument that is either a bearer instrument or made payable
to a specified person (i.e., obtained via a transfer in most cases). The “holder” normally
is subject to any defenses
that could be asserted against the transferor.
Contrast:
DEFINITION OF HOLDER IN DUE COURSE:
• A Holder in Due Course (HDC) is a holder who:
(1) acquires a negotiable
instrument for value,
(2) in
good faith, and
(3)
without notice that the instrument
(a) is overdue,
(b) has been dishonored (not paid),
(c) is subject to a valid claim or defense
by any person,
(d) is
part of a series against at least one instrument of which exists uncured
default,
(e) contains alterations or
unauthorized signatures, or
(f) is so irregular or incomplete as to call into question
its authenticity.
REQUIREMENTS FOR HDC STATUS- IN DETAIL
HDC: FOR VALUE
• A
holder can take an instrument for value in the following ways:
(1) Performing
the promise for which the instrument was issued or transferred;
(2) Acquiring
a security interest or other lien in the instrument, excluding liens
obtain by judicial process;
(3) Taking
an instrument in payment of, or
as security for, an antecedent debt;
(Consider:
(4) Giving
a negotiable instrument as payment;
(Consider: Martin has issued
a $500 promissory note to Paula. The note is due in 6 months. Paula needs cash now. She negotiates the note to Susan, who gives
her $200 cash today and a check (a negotiable instrument) for the balance of
$300. She has given value)
(5)
or
Giving an irrevocable commitment (a note) as payment.
Exceptions to
HDC Status
You don’t get HDC status if you have obtained the
instrument via:
(1) Purchase at a judicial sale or by other legal process (why? You
know something is amiss);
(2) Acquisition when taking over an estate; and
(3) Purchase as part of a bulk
transfer. (large transfer of a huge amount of
inventory)
If
so obtained, there cannot be a HDC status. This
is an abnormal, as opposed to normal, transaction.
GOOD FAITH,
NOTICE,
AND “SHELTER”
• Good Faith: Article 3 of the U.C.C. defines “good
faith” as “Honesty in fact and the observance of reasonable commercial
standards for fair dealing.”
Good faith applies only to the HOLDER!
We
are not concerned if the transferor acted in good faith or
not.
We are concerned, however, with the holder
(transferee) TAKING
WITHOUT NOTICE.
• Notice
is given whenever the holder:
(1) has actual knowledge of a
defect;
(2) has received notice
of the defect (e.g., letter from bank identifying serial number of stolen
checks); or
(3) has reason to know that
a defect exists, given all of the facts and circumstances known at the
time.
Notice includes:
·
knowing the instrument is overdue, (explained below)
·
has been dishonored,
·
there is an uncured defect,
·
that it has been altered, or
·
so irregular that it is obviously not authentic.
Overdue:
Demand instrument: considered overdue
if they take the instrument and know that demand has been made or takes the instrument
an unreasonable length of time after its date (usually 90 days for a check).
Time
instrument: considered overdue any time after its expressed due
date.
Dishonored
Instruments:
The instrument is dishonored when the party
to which the instrument is presented refuses to pay it.
Notice
of claims or defenses:
Incomplete
instrument:
Knowledge of claims or
defenses is imputed to the holder if it is obvious there are problems with the instruments: for example, if the instrument is incomplete
or irregular (changed). However, an
omission of a date is generally permissible (for example, on a check).
Compare: you ask M to
go to the bookstore with a signed but incomplete check to buy a book. The cost of the book is $55, but M fills out
the check outside the sight of the cashier for $95. The bookstore has no
knowledge in this case, as the cashier saw a properly completed
instrument for $95. Here, the
unauthorized completion is not sufficient to block HDC status.
Irregular
instrument: Differences between
handwriting on a check is not enough in most cases. Lot’s of people have other people fill out the
check other than the signature, particularly elderly folks.
Also, Postdating or antedating is not
enough.
COMPARE: obvious
forgery of a signature; evidence of improper changing of amounts. Notice that a “careful”
forgery (i.e., not obvious) can go undetected under reasonable exam, and
therefore the purchaser of the instrument may qualify for HDC status.
Shelter Principle:
A person who does not qualify as
an HDC can, nonetheless, acquire the rights and privileges of an HDC if he or
she derives his or her title to the instrument through an HDC.
Consider: M and C conspire to defraud Loser.
Loser is induced to give
C a negotiable instrument payable to C’s order.
C
specially indorses the instrument for value to Unwitting, a HDC.
M & C
split the proceeds.
Unwitting negotiates the
note for value to M.
Here, M cannot become a HDC since he was part of the fraud.
CONTRAST: If M
had not been part of the original fraud but
had been aware of the possible defense, M would
have become a HDC although otherwise he would not have so qualified by himself.