Ch. 26 Transferability and Holder in Due Course

Question 1

Once issued, a negotiable instrument can be transferred to others by what or what?

Answer 1

• By assignment

- By negotiation

Question 2

Define assignment.

Answer 2

• Transfer of rights under a contract

Question 3

Under contract law principles, a transfer of assignment to an assignee gives the assignee what rights?

Answer 3

• Only those rights that the assignor possessed

Question 4

When an instrument is transferred by negotiation, the UCC provides that the transferee (person to whom instrument is transferred) becomes a what?

Answer 4

Holder

Question 5

Unlike an assignment, a transfer by negotiation can make it possible for a holder to receive what?

Answer 5

More rights in the instrument than the prior possessor had

Question 6

A holder who receives greater rights is known as what?

Answer 6

Holder in due course

Question 7

Transfer by negotiation creates a holder who at the very least receives what?

Answer 7

At the very least receives the rights of the previous possessor

Question 8

The two methods of negotiating an instrument so that the receiver becomes a holder depend on whether the instrument is a what or what?

Answer 8

• Order instrument

- OR bearer instrument

Question 9

What is an order instrument?

Answer 9

• Contains the name of a payee capable of indorsing

- E.g. “Pay to the order of Jamie Fowler”

Question 10

Id the indorsement and delivery:

Goodseal takes his paycheck to the bank, signs his name on the back, gives it to the teller, and receives cash.

Answer 10

• Indorsement: signs name on back

- Delivery: gives to teller

Question 11

If an instrument is an order instrument, how is it negotiated?

Answer 11

• Negotiated by delivery with any necessary indorsements

Question 12

Negotiating order instruments requires both what and what?

Answer 12

• Delivery AND

- Indorsement

Question 13

Whenever a transfer fails to qualify as a negotiation b/c it fails to meet one or more of the requirements of a negotiable instrument, how is it treated as?

Answer 13

As an assignment

Question 14

If an instrument is payable to bearer, it is negotiable by what?

Answer 14

Delivery (indorsement not necessary)

Question 15

The use of bearer instruments involve greater risk of what than the use of order instruments?

Answer 15

• Greater risk of loss or theft

Question 16

What is required whenever an order instrument is negotiated?

Answer 16

Indorsement

Question 17

What is an indorsement?

Answer 17

• A signature with or w/o additional words or statements (most often written on back of instrument itself)

Question 18

If there is no room on the instrument to indorse, what can be done?

Answer 18

• Indorsement can be written on a separate piece of paper
• Called an allonge
• That is firmly affixed to the instrument (such as w/ staples)

Question 19

Is a paper firmly attached to the instrument a part of the instrument?

Answer 19

YES

Question 20

What do you call a person who transfers a note or a draft by signing (indorsing) it and delivering it to another person?

Answer 20

Indorser

Question 21

What do you call the person to whom a check is indorsed and delivered?

Answer 21

Indorsee

Question 22

What are the four main categories of indorsements?

Answer 22

• Blank
• Special
• Qualified
• Restrictive

Question 23

Can a single indorsement have characteristics of more than one category?

Answer 23

YES (categories not mutually exclusive)

Question 24

What is a blank indorsement?

Answer 24

• Does not specify particular indorsee

- Can consist of a mere signature

Question 25

An order instrument indorsed in blank becomes a what?

Answer 25

Bearer instrument (and can be negotiated by delivery alone...in other words anybody can cash it)

Question 26

Rita Chou indorses in blank a check payable to her order and then loses it on the street. If Schaefer finds the check, he can sell it to Duncan for value w/o indorsing it. Does this constitute a negotiation?

Answer 26

- YES - This constitutes a negotiation b/c Schaefer has made delivery of a bearer instrument (which was an order instrument until it was indorsed in blank)

Question 27

What was the key question in the In re Bass case?

Answer 27

Does an instrument that requires indorsement for negotiation need to contain the written signature of an individual's name?

Question 28

How does the UCC define signature?

Answer 28

- Broadly | - "Any symbol executed or adopted w/ present intention to adopt or accept a writing"

Question 29

Does the UCC limit a signature to a long form writing of an individual person's name?

Answer 29

No

Question 30

What is a special indorsement?

Answer 30

- Contains the signature of the indorser | - AND identifies the person to whom the indorser intends to make the instrument payable (names the indorsee)

Question 31

"Pay to the order of Russell Caly" followed by signature of indorser. When an instrument is indorsed in this way, what type of instrument is it?

Answer 31

Order instrument

Question 32

What is a qualified indorsement?

Answer 32

- Disclaims liability associated with an unqualified indorsement

Question 33

Generally, an indorser, merely by indorsing, impliedly promises to do what?

Answer 33

- Pay the holder, or any subsequent indorser, the amount of the instrument in the event that the drawer or maker defaults on the payment

Question 34

What is an unqualified indorsement?

Answer 34

- Indorser is guaranteeing payment of instrument in addition to transferring title to it

Question 35

What notation is commonly used to create a qualified indorsement?

Answer 35

"without recourse"

Question 36

Qualifiied indorsements are often used by whom?

Answer 36

Persons acting in representative capacity (e.g. insurance agents)

Question 37

A special qualified indorsement includes what?

Answer 37

- Names of indorsee - AND the words "w/o recourse" - AND signature of indorser

Question 38

A special indorsement makes an instrument an order instrument and requires what?

Answer 38

- An indorsement PLUS delivery for negotiation

Question 39

A blank qualified indorsement makes the instrument a bearer instrument and requires what for negotiation?

Answer 39

- Only delivery is required for negotiation

Question 40

What is a restrictive indorsement?

Answer 40

- Requires indorsee to comply w/ certain instructions regarding the funds involved but does not prohibit further negotiation of the instrument

Question 41

Are the effects of a conditional indorsement which appear on the back of an instrument different from the effect of conditional language that appears on the face of an instrument?

Answer 41

YES

Question 42

An instrument has conditional language on its face. Is it negotiable?

Answer 42

NO (b/c it doesn't meet the requirement that a negotiable instrument must contain an unconditional promise to pay)

Question 43

What are trust indorsements?

Answer 43

Indorsements to person who are to hold or use the funds for the benefit of the indorser or a third party

Question 44

What are trust indorsements also known as?

Answer 44

Agency indorsements

Question 45

The method used for negotiation depends on the character of the instrument when?

Answer 45

At the time the negotiation takes place

Question 46

A payee or indorsee whose name is mispelled can indorse with what?

Answer 46

- Misspelled name - OR correct name - OR both

Question 47

What is the usual practice for indorsement for misspelled names?

Answer 47

- Indorse with the name as it appears on the instrument | - Followed by the correct name

Question 48

Does an instrument payable to two or more persons "in the alternative" require the indorsement of all parties?

Answer 48

NO (just one of the payees indorsement is suffice)

Question 49

If an instrument is made payable to two or more persons "jointly", who must sign?

Answer 49

All of the payees' indorsements are necessary for negotiation

Question 50

When a drawer gives one alternative or joint payee a check, does it have an obligation to make sure that the funds are allocated or distributed among the joint payees?

Answer 50

NO (payee who has possession of the checks holds it for the benefit of all the payees)

Question 51

A holder is normally subject to the same defenses that could be asserted against the transferor. Is a HDC subject to the same defenses that could be asserted against the transferor?

Answer 51

NO (HDC takes an instrument free of most of the defenses and claims that could be asserted against the transferor)

Question 52

What are the requirements for HDC status?

Answer 52

An HDC must first be a holder of a negotiable instrument and must have taken the instrument (1) for value (2) in good faith (3) w/o notice that it is defective (such as when instrument is overdue, dishonored, irregular, or incomplete)

Question 53

Does a person who receives an instrument as a gift or inherits it meet the requirements for HDC status?

Answer 53

NO (has not met requirement of value)

Question 54

How does the UCC define good faith?

Answer 54

"Honesty in fact and the observance of reasonable commercial standards of fair dealing"

Question 55

What was the key question in the Georg v. Metro Fixtures Contractors, Inc. case?

Answer 55

Whether a check had been accepted in good faith

Question 56

A holder in due course must meet what five conditions?

Answer 56

(1) Be a holder (2) of a negotiable instrument who took it (3) for value (4) in good faith (5) w/o notice of certain problems w/ the instrument

Question 57

To be a holder, what two conditions must one meet?

Answer 57

(1) he must have possession | (2) of an instrument drawn, issued, or indorsed to him

Question 58

When is an instrument dishonored?

Answer 58

When the party to whom the instrument is presented refuses to pay it