TRANSFER OF INSTRUMENTS

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: The payee may
negotiate an order instrument to a third party by an
indorsement by the payee in favor of the third party.

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.

Converting Instruments: The proper method of
negotiation depends on the nature of the instrument at
the time of negotiation. Thus, an order instrument can
be converted into a bearer instrument by, e.g., indorsing
the instrument in blank. Likewise, a bearer instrument
can be converted into an order instrument by, e.g.,
indorsing it in such a way as to identify a particular
payee.
Ch. 25: Negotiable Instruments: Transferability and Holder in Due Course - No. 1
West’s Business Law (9th ed.)
INDORSEMENTS

Indorsement: A signature, with or without additional words
or statements (e.g., “for deposit only,” “payable to Jane
White,” “payable from acct. # 000001,” etc.), made by the
indorser in order to transfer her rights to the indorsee.

Allonge: A piece of paper firmly attached to an
instrument on which transferees can make indorsements
when there is no room on the instrument itself for their
indorsement.

Blank Indorsement: An indorsement that specifies no
particular indorsee and can consist of a mere
signature.

Special Indorsement: An indorsement that indicates the
specific indorsee to whom the indorser intends to make
the instrument payable (e.g., “pay to the order of X”).

Qualified Indorsement: An indorsement which
disclaims any contract liability on the instrument (e.g.,
“without recourse”).

Qualified indorsements are often used by indorsers
acting in a representative capacity, the effect of
which is to relieve the indorser from personal
liability on the indorsement.
Ch. 25: Negotiable Instruments: Transferability and Holder in Due Course - No. 2
West’s Business Law (9th ed.)
RESTRICTIVE INDORSEMENTS

Restrictive Indorsement: Any indorsement on a negotiable
instrument that requires the indorsee to comply with certain
instructions regarding the funds involved.

Indorsement Prohibiting Further Indorsement: An
indorsement calling for payment only to a designee.

Conditional Indorsement: An indorsement that makes
payment of the instrument dependent on the occurrence
of some event specified in the indorsement.

Indorsement for Deposit or Collection: An
indorsement that makes the indorsee a collecting agent
of the indorser, prohibiting further negotiation except by
a bank or financial institution engaged in collection
activities.

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.
Ch. 25: Negotiable Instruments: Transferability and Holder in Due Course - No. 3
West’s Business Law (9th ed.)
MISCELLANEOUS INDORSEMENT ISSUES

Misspelled Name: As a general rule, an indorsement should
be identical to the name appearing on the instrument.
However, when the indorser’s name is misspelled on the
instrument, she may indorse it
(1) as it (incorrectly) appears,
(2) as it should (correctly) appear, or
(3) both.




Payable to an Entity: An instrument payable to, e.g., a
corporation or estate requires the indorsement of an
authorized representative of the entity.
Payable in the Alternative: An instrument payable to two or
more persons in the alternative (e.g., “Pay to Bob or Jill”)
requires the indorsement of only one of the payees.
Jointly Payable: On the other hand, an instrument payable to
two or more persons jointly (e.g., “Pay to Bob and Jill”)
requires the indorsement of both of the payees.

If it is unclear whether an instrument is payable to two
or more persons jointly or in the alternative, courts will
construe it as being payable in the alternative.
Ch. 25: Negotiable Instruments: Transferability and Holder in Due Course - No. 4
West’s Business Law (9th ed.)
HOLDER IN DUE COURSE: AN OVERVIEW

Holder in Due Course (HDC): 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,
(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.
Ch. 25: Negotiable Instruments: Transferability and Holder in Due Course - No. 5
West’s Business Law (9th ed.)
HDC: VALUE AND GOOD FAITH

A holder can take an instrument for value by
(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,
(4) giving a negotiable instrument as payment, or
(5) giving an irrevocable commitment as payment.

Exceptions: A holder does not take for value by purchasing
or otherwise acquiring the instrument
(1) at a judicial sale or by other legal process,
(2) when taking over an estate, or
(3) as part of a bulk transfer.


Good Faith: “Honesty in fact and the observance of
reasonable commercial standards for fair dealing.”
Ch. 25: Negotiable Instruments: Transferability and Holder in Due Course - No. 6
West’s Business Law (9th ed.)
HDC: NOTICE

The holder has notice of a defect whenever she has
(1) actual knowledge of the defect,
(2) received notice of the defect (e.g., letter from bank
identifying serial number of stolen checks), or
(3) reason to know that a defect exists, given all of the facts
and circumstances known to her at the time.

Claims or Defenses: Knowledge of claims or defenses may
be imputed to the holder if they are apparent on the face of
the instrument or if the holder otherwise had reason to
know them from the facts surrounding her purchase of it.
Ch. 25: Negotiable Instruments: Transferability and Holder in Due Course - No. 7
West’s Business Law (9th ed.)
HDC: DEFECTS


Overdue Instruments





A demand instrument is overdue if an unreasonable
length of time has passed after its issue.
A time instrument is overdue after the due date shown
on its face.
A series of notes with successive maturity dates is
overdue when any note in the series is overdue.

Dishonor: A holder who takes an instrument with actual or
constructive notice that a party to whom the instrument was
presented refused to pay it cannot claim HDC status.

Incompleteness: A purchaser cannot become an HDC of an
instrument so facially incomplete as to lack one or more
elements required for negotiability.


Irregularities: Any irregularity on the face of the instrument
that calls into question its validity or ownership, or that
creates ambiguity as to the party to pay, will bar HDC status.
Ch. 25: Negotiable Instruments: Transferability and Holder in Due Course - No. 8
West’s Business Law (9th ed.)
HDC: SHELTER

Shelter Principle: A person who does not qualify as an HDC
can, nonetheless, acquire the rights and privileges of an HDC
if he derives his title to the instrument through an HDC.

However, a person who previously held the instrument
cannot improve his position by later reacquiring it from
an HDC if the former holder
(1) was a party to fraud or illegal activity affecting
the instrument, or
(2) had notice of a claim or defense against the
instrument.
Ch. 25: Negotiable Instruments: Transferability and Holder in Due Course - No. 9
West’s Business Law (9th ed.)
HDC STATUS IN THE GLOBAL CONTEXT

The 1988 U.N. Convention on International Bills of
Exchange and International Promissory Notes (CIBN)
(1) replaces HDC status with that of a protected holder
(2) who takes without knowledge of a fraud or other
defense against the instrument, and
(3) who is not required to give value for the instrument.

Shelter: The transfer of an instrument by a protected holder
gives any subsequent holder the same rights as the protected
holder.
Ch. 25: Negotiable Instruments: Transferability and Holder in Due Course - No. 10
West’s Business Law (9th ed.)