Business Law chapter 23

Taking Where There Is No Evidence of Forgery, Alteration, or Irregularity (requirements for being a holder in due course)(4)

a holder does not qualify as an HDC if at the time the instrument was issued or negotiated to the holder, it bore apparent evidence of forgery or alteration or was otherwise so irregular or incomplete so as to call into question its authenticity

blank qualified indorsement

creates bearer paper that can be further negotiated by delivery without indorsement

Nonrestrictive indorsements

do not have any instructions or conditions attached to the payment of the funds.

blank indorsement

does not specify a particular indorsee. It may consist of just a signature(Order paper that is indorsed in blank becomes bearer paper. As mentioned earlier, bearer paper can be negotiated by delivery; indorsement is not required. Thus, a lost bearer paper can be presented for payment or negotiated to another holder.)

holder in due course (HDC)

has greater rights because he or she is not subject to some of the defenses that could otherwise have been raised against the transferor.

Negotiation

transfer of a negotiable instrument by a person other than the issuer.

assignor (transferor)

a party who transfers the right to receive performance under a contract

assignment (

the transfer of rights under a contract, nonnegotiable contract is transferred

Multiple Payees or Indorsees

1- an instrument is payable jointly using the word( and both persons' indorsements are necessary to negotiate the instrument.)(The indorsement signature of only one of the named persons is not sufficient to negotiate the instrument.) 2- If the instrument is payable in the alternative (using the word or, either person's indorsement signature alone is sufficient to negotiate the instrument.) 3- virgule—a slash mark (/)—is used, courts have held that the instrument is payable in the alternative(that is, the instrument is treated as if the / is an "or." Thus, if a virgule is used, either person may individually negotiate the instrument.)

value has been given if the holder does the following [UCC 3-303]:

1-Performs the agreed-on promise 2-Acquires a security interest in or lien on the instrument 3-Takes the instrument in payment of or as security for an antecedent claim 4-Gives a negotiable instrument as payment 5-Gives an irrevocable obligation as payment (If a person promises to perform but has not yet done so, no value has been given, and that person is not an HDC.) (Example Karen executes a note payable to Fred for $3,000 for goods she purchased from him. Fred transfers the note to Amy who pays $2,500 for the note. Amy has given value for the negotiable instrument and therefore meets this qualification for HDC status.)

shelter principle.

A holder who does not qualify as a holder in due course in his or her own right becomes a holder in due course if he or she acquires the instrument through a holder in due course.

Indorsement in trust(agency endorsement)(types of restrictive indorsements)(2)

An indorsement can state that it is for the benefit or use of the indorser or another person. (Checks are often indorsed to attorneys, executors of estates, real estate agents, and other fiduciaries in their representative capacity for the benefit of clients, heirs, or others)(The indorser is not personally liable on the instrument if there is a proper trust or agency indorsement.)

Indorsement for deposit or collection( types of restrictive indorsements)(1)

An indorser can indorse an instrument so as to make the indorsee his collecting agent (often done when an indorser deposits a check or another instrument for collection at a bank. Words such as for collection, for deposit only, and pay any bank create this type of indorsement. Banks use this type of indorsement in the collection process.)

Converting Order and Bearer Paper

An instrument can be converted from order paper to bearer paper and vice versa many times until the instrument is paid

bearer instrument (bearer paper)

An instrument that is not payable to a specific payee or indorsee negotiated by delivery; indorsement is not necessary [UCC 3-201(b)].( Substantial risk is associated with the loss or theft of bearer paper.)(if Carmen delivers the check to an innocent third party, Ida. Ida is a holder and may qualify as a holder in due course (HDC) with all the rights in the check [UCC 3-302]. If the holder, Ida, is an HDC, she can deposit the check in her account, and Mary's checking account will be debited $1,500. Peter's only recourse is to recover the $1,500 from Carmen, the thief.)

order instrument ( order paper)

An instrument that is payable to a specific payee or indorsed to a specific indorsee (Sam takes the check to a local store, signs his name on the back of the check (indorsement), gives the check to the cashier (delivery), and receives cash for the check. Sam has negotiated the check to the store. Delivery and indorsement have occurred.)

Gerber & Gerber, P.C. v. Regions Bank

Cynthia Stafford worked as a real estate closing secretary for Gerber & Gerber, P.C. (G&G), a law firm. The law firm acted as a trustee for the closing of real estate transactions. ( The court of appeals held that Regions Bank was not negligent in accepting the blank-indorsed bearer cashier's checks from Stafford and placing the money in Stafford's personal account. The court of appeals upheld the trial court's grant of summary judgment to Regions Bank.)

overdue time instrument.

If a time instrument is not paid on its expressed due date, it becomes overdue the next day. (When an instrument is not paid when due, there is some defect to its payment.)

indorsee

If the indorsement names a payee

allonge

If there is no room on the instrument, the indorsement may be written on a separate piece of paper(must be affixed (e.g., stapled, taped) to the instrument [UCC 3-204(a)].)

To qualify as a holder in due course (HDC)

The person must be the holder of a negotiable instrument that was taken (1) for value (2) in good faith (3) without notice that it is overdue, dishonored, or encumbered in any way; and (4) bearing no apparent evidence of forgery, alterations, or irregularity [UCC 3-302]

holder

The person to whom the instrument is transferred, receives at least the rights of the transferor and may acquire even greater rights than the transferor if he or she qualifies as a holder in due course (HDC)

indorser.

The person who indorses an instrument

Misspelled or Wrong Name

Where the name of the payee or indorsee is misspelled in a negotiable instrument, the payee or indorsee can indorse the instrument using the misspelled name, the correct name, or both.

non negotiable contract

a contract that lacks one or more of the requirements to be a negotiable instrument

assignee(transferee)

a party to whom a right to receive performance under a contract has been transferred( acquires only the rights that the assignor possessed)(ny defenses to the enforcement of the contract that could have been raised against the assignor can also be raised against the assignee)

Taking Without Notice of Defect(requirements for being a holder in due course)(3)

a person cannot qualify as an HDC if he or she has notice that the instrument is defective in any of the following ways [UCC 3-302(a)(2)]: It is overdue. It has been dishonored. It contains an unauthorized signature or has been altered. There is a claim to it by another person. There is a defense against it.

holder

a person in possession of an instrument that is payable to a bearer or an identified person who is in possession of an instrument payable to that person [UCC 1-201(20)]. (r is subject to all the claims and defenses that can be asserted against the transferor)

unqualified indorsement

an indorsement is a promise by the indorser to pay the holder or any subsequent indorser the amount of the instrument if the maker, drawer, or acceptor defaults on it

qualified indorsement

an indorsement that includes the notation "without recourse" or similar language that disclaims liability of the indorsement (protects only the indorser who wrote an indorsement on the instrument. A qualified indorsement is often used by persons who sign instruments in a representative capacity.)

unqualified endorsement to an instrument

an indorser who signs an unqualified indoresement to an instrument (this person has secondary liability on negotiable instruments)

time instrument

an instrument with an express due date

special indorsement

contains the signature of the indorser and specifies the person (indorsee) to whom the indorser intends the instrument to be payable [UCC 3-205(a)](Words of negotiation (e.g., "pay to the order of . . .") are not required for a special indorsement. Words such as "pay Emily Ingman" are sufficient to form a special indorsement. A special indorsement creates order paper. As mentioned earlier, order paper is negotiated by indorsement and delivery.)

special qualified indorsement

creates order paper that can be negotiated by indorsement and delivery.

restrictive indorsement.

estricts the indorsee's rights in some manner. An indorsement that purports to prohibit further negotiation of an instrument does not destroy the negotiability of the instrumen

taken in good faith (requirements for being a holder in due course)(2)

honesty in fact in the conduct or transaction concerned [UCC 1-201(19)]. Honesty in fact is a subjective test that examines the holder's actual belief. A holder's subjective belief can be inferred from the circumstances. (Note that the good faith test applies only to the holder. It does not apply to the transferor of an instrument.) (A thief steals a negotiable instrument and transfers it to Harry. Harry does not know that the instrument is stolen. Harry meets the good faith test and qualifies as an HDC.)

Negotiating Order Paper

negotiated by delivery with the necessary indorsement [UCC 3-201(b)]. Thus, for order paper to be negotiated there must be delivery and indorsement.

holder in due course (HDC)

takes a negotiable instrument free of all claims and most defenses that can be asserted against the transferor of the instrument.(Only universal defenses—and not personal defenses—may be asserted against an HDC. Thus, an HDC can acquire greater rights than a transferor.) (. John could not assert Shannen's fraudulent conduct against enforcement of the note by Patricia because this type of fraud is a personal defense that cannot be raised against an HDC. Therefore, Patricia could enforce the note against John. John's only recourse would be against Shannen, if she could be found.)

Taking for Value (requirements for being a holder in due course)(1)

the holder must have given value for the negotiable instrument in order to qualify as an HD

indorsement

the signature of a signer (other than as a maker, a drawer, or an acceptor) that is placed on an instrument to negotiate it to another person. (The signature may (1) appear alone, (2) name an individual to whom the instrument is to be paid, or (3) be accompanied by other words [UCC 3-204(2)].) required to negotiate order paper, but they are not required to negotiate bearer paper (usually placed on the reverse side of the instrument, such as on the back of a check)

qualified indorser

those who disclaim liability and are not secondarily liable on negotiable instruments they endorse(does not guarantee payment of the instrument if the maker, drawer, or acceptor defaults on it)

dishonored instrument

when it is presented for payment and payment is refused. (A person who takes a check that has been marked by the payer bank "payment refused—not sufficient funds" cannot qualify as an HDC.)