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Unformatted text preview: Chapter 27: Transfer BUL 3350 - Chapter 27 1 Topics Covered in this Chapter
A. Negotiation B. Indorsements BUL 3350 - Chapter 27 2 Transfer Transfer Transfer – of an instrument is a delivery (a Transfer delivery voluntary transfer of possession) by a nonissuer for the purpose of giving the recipient the right to enforce the instrument. recipient Negotiation – is a special transfer that may Negotiation allow the transferee to take free of personal defenses. It is “a transfer of possession, whether voluntary or involuntary, of an instrument by a person other than the issuer to a person who thereby becomes its holder” (negotiation cannot occur unless the document is in negotiable form). is
BUL 3350 - Chapter 27 3 Negotiation Negotiation Holder – is a person in possession of a bearer instrument, or if the instrument is payable to an identified person, a holder is the person in possession if the identified person is in possession. if Negotiation of Bearer Paper – transferred by mere Negotiation possession. possession. Negotiation of Order Paper – transferred by Negotiation possession and indorsement by all parties. Negotiation of Order Paper - requires a VALID VALID indorsement by the person to whose order the instrument is payable. (Imposter rule and fictitious payee rule are exceptions whereby Order paper can be negotiated without a valid indorsement). negotiated
BUL 3350 - Chapter 27 4 Negotiation Negotiation Rescission of Negotiation or other remedies may be available under other law. However, they may not be asserted against an HDC or a person who paid in good faith and without knowledge of facts that are the basis for such a remedy. for
• Negotiation is effective (but subject to rescission or other Negotiation remedies) even if it was obtained from/by minor, fraud, duress, mistake, etc… mistake, • Example – Assume X issues an instrument payable to the Example order of A. A has been adjudicated as an incompetent, but A nevertheless negotiates the instrument to B. A’s lack of capacity is a basis for rescission. But, if B further negotiates the instrument to C, an HDC, before rescission of the original transaction, the instrument cannot be recovered by A from C. transaction,
BUL 3350 - Chapter 27 5 Bearer Paper
Issuer Payee Bearer Instrument I P
Lost Instrument Finder F $ B
Transferee (may be a holder in due course) BUL 3350 - Chapter 27 6 Negotiation of Bearer Negotiation and Order Paper and Bearer Paper Possession Holder Order Paper 1) Possession 2) All necessary indorsements BUL 3350 - Chapter 27 7 Negotiation Rules The Impostor Rule – Example: The • Imposter, falsely representing himself as Ron Real. Imposter, • Imposter induces Drawer (who believes the imposter is Ron Real a Imposter respected businessman) to loan him $10,000. • Drawer draws a check payable to the order of Ron Real and delivers Drawer it to the imposter. • Imposter forges Ron Real’s signature to the order check and presents Imposter it to the drawee for payment. • The drawee pays it. The • After drawee paid the check, Drawer denies the drawee’s right of After reimbursement upon the grounds that the drawee did not pay in in accordance with his order/check. • Drawer argues that he ordered payment to Ron Real or to Ron Real’s Drawer order. Ron Real did not order payment to anyone (his signature was forged). • Therefore, the drawee would not acquire a right of reimbursement Therefore, against Drawer. against Does Drawer have to reimburse drawee?
BUL 3350 - Chapter 27 8 Negotiation Rules The Impostor Rule – an indorsement of an The impostor (i.e. forgery) or of any other person in the name of the named payee is effective IF is IF the impostor has induced the maker or drawer to issue the instrument to him using the name of the payee. of BUL 3350 - Chapter 27 9 Negotiation Rules The Fictitious Payee Rule – Example The Example
• Employer gives Employee authority to write checks to pay Employer Employer’s debts. • Employee writes a check for $2,000 to MakeBelieve, a Employee fictitious payee. fictitious • Employee takes and indorses in MakeBelieve’s name (forge’s Employee the fictitious payee’s signature) to Employee. • Employee cashes the check at Employer’s bank (drawee). • Drawee argues it can debit Employer’s account because Drawee Employee’s signature in MakeBelieve’s name is effective against Employer. • Employer must bear the risk of the unscrupulous employee. Employer Is Drawee correct? Is
BUL 3350 - Chapter 27 10 Negotiation Rules The Fictitious Payee Rule – Example The Example • Employer/Drawer’s employee falsely tells the Emloyer/Drawer Employer/Drawer’s that money is owed to Leon. that • Employer writes a check payable to the order of Leon and Employer hands it to the agent/employee for deliver to Leon. hands • Employee/agent forges Leon’s name to the check and obtains Employee/agent payment from the Employer’s Bank/drawee. payment • Drawer denies the bank/drawee’s claim to reimbursement Drawer • Drawer argues that the bank did not comply with her order; Drawer that the bank did not make payment either to Leon or as ordered by Leon; • Leon’s signature was forged and the bank paid in accordance Leon’s with the scheme of the faithless agent and not in compliance with the Employer/drawer’s order. with Is Drawer correct? Is
BUL 3350 - Chapter 27 11 Negotiation Rules The Fictitious Payee Rule – Example The Example
• Employee has a job involving posting amounts of Employee checks payable to her employer. checks • Employee steals some of the checks and forges her Employee employer’s indorsement. employer’s • Employer refuses to reimburse drawee bank. • Drawee Bank argues that the indorsement is Drawee effective as the employer’s indorsement because the employee’s duties included processing checks for bookeeping purposes. for Is Drawee correct? Is
BUL 3350 - Chapter 27 12 Negotiation Rules The Fictitious Payee Rule – an indorsement The by any person in the name of the named payee is effective if an agent of the maker or drawer has supplied her with the name of the payee for fraudulent purposes. for BUL 3350 - Chapter 27 13 Indorsement Indorsement Definition – signature on the instrument of a payee, drawee, accommodation party, or holder. payee, Blank Indorsement –specifying no indorsee and Blank specifying making the instrument bearer paper. making BUL 3350 - Chapter 27 14 Indorsement Indorsement Special Indorsement – one identifying an Special indorsee to be paid and making the instrument order paper.
• are the words “pay to order or bearer” required in an are indorsement? indorsement? • Can a holder of an instrument with a blank Can indorsement protect himself by converting the blank indorsement to a special indorsement by writing over the signature od the indorser words identifying the person to whom the instrument is payable? For example: On the back of a negotiable instrument appears the blank indorsement “Sally Seller.” Harry Holder, who receives the instrument from Seller, inserts above Seller’s signature “Pay Harry Holder”. Did Harry Holder’s actions convert the bearer instrument into order paper? 27 instrument BUL 3350 - Chapter 15 Indorsement Indorsement Unrestrictive Indorsement – one that does not Unrestrictive attempt to restrict the rights of the indorsee. attempt Restrictive Indorsement – one attempting to Restrictive limit the rights of the indorsee. limit BUL 3350 - Chapter 27 16 Indorsements
Indorsement 1. “John Doe” 2. “Pay to Richard Roe, John Doe” 3. “Without recourse, John Doe” Type of Indorsement Blank Special Blank Interest Transferred Liability of Indorser Nonrestrictive Unqualified Nonrestrictive Unqualified Nonrestrictive Qualified 4. “Pay to Richard Roe in trusts for John Doe, without recourse, John Doe” Special 5. “For collection only, without recourse, John doe” 6. “Pay to XYZ Corp., on the condition that it delivers goods ordered this date, John Doe” Blank Restrictive Restrictive Qualified Qualified Special Nonrestrictive (revised Article 3) Unqualified BUL 3350 - Chapter 27 17 Restrictive Indorsement Indorsements for Deposit or Collection – Indorsements effectively limit further negotiation to those consistent with the indorsement. consistent Indorsements in Trust – effectively require Indorsements the indorsee to pay or apply all funds in accordance with the indorsement. accordance Indorsements with Ineffective Restrictions – Indorsements include conditional indorsements and indorsements attempting to prohibit further negotiation. negotiation.
BUL 3350 - Chapter 27 18 Types of Indorsements
Unqualified Indorsement – one that Unqualified imposes liability on the indorser. imposes Qualified Indorsement – without Qualified recourse, one that limits the indorser's liability. liability. BUL 3350 - Chapter 27 19 Placement of Indorsement
Pay to the order of 1242 Fe .1 b 1997 17-7000 2910 LEADING EDGE Bo Barte b n
Harris Trust and Savings Bank Chicago, Illinois $500.00
DOLLARS FiveHundre andno d /100 TRAILIING EDGE i
For HARRIS BANK |:291070001|: 202820211110” ‘1242 Reserved for indorsement by the bank at which the check is deposited. BACK
Indorsement must be in black or blue ink and must be within 1 1/2 inches from the trailing edge so as not to interfere with indorsements from the bank.
BUL 3350 - Chapter 27 20 ...
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- Spring '11
- Business Law