Chapter 25




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




[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 August 1, 2004

                            (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




          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.





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.




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.






                  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.










        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:  Cary owes D $2,000 on a past due account.  If Cary negotiates a $2,000 note signed by Gordon to D and D accepts it to discharge the debt, D has given value for the instrument.)


(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: 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.



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.