BLS 112 Chapter 26: Chapter 26

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Business Law and Society
BLS 112
S U N Y Ulster

Chapter 26: Transferability & Holder in Due Course I. Negotiation  Negotiation: transfer of an instrument in such form that the transferee becomes a holder o Holder receives rights of previous possessor and possibly MORE ▪ Receive greater rights  “Holder in Due Course” o Differs from Assignment  assignee only has rights that assignor has  Negotiating Order Instruments o Contains name of payee capable of indorsing; “Pay to the Order of __" o Requires DELIVERY and INDORSEMENT o If a transfer fails to qualify as negotiation (does not meet requirements), it is treated as an assignment ▪ Ex. Not signing (indorsing) the back of a check  Negotiating Bearer Instruments o “Payable to Bearer”  negotiated by delivery, NO INDORSEMENT need o Greater risk of loss from theft than order instruments o Ex. Check payable to “Cash” II. Indorsements  Indorsement: signature with or without additional words or statements o Indorser  person who transfers note/draft by signing & delivering it o Indorsee  person to whom check is indorsed & delivered to  4 main categories: 1. Blank Indorsement: does not specify particular indorsee; can consist of mere signature [UCC 3-250(b)] ▪ Converts order instrument to bearer instrument 2. Special Indorsement: contains signature of the indorser & names the indorsee ▪ Instrument is an order instrument ▪ Convert Blank indorsement to Special indorsement to avoid risk of loss from theft (bearer instrument  order instrument) 3. Qualified Indorsement: negotiation “without recourse”; use if indorser does not wish to be liable on instrument ▪ Unqualified Indorsements  indorser guarantees payment of instrument in addition to transferring title to it ▪ The Effect of Qualified Indorsements • Often used by agents acting in representative capacity o Ex. Check to insurance agent  insurance company • If dishonored, holder cannot recover from agent who indorsed “without recourse” ▪ Special vs. Blank Qualified Indorsements • Either situation, instrument still transfers title, can be negotiated • Special Qualified Indorsement  order instrument • Blank Qualified Indorsement  bearer instrument 4. Restrictive Indorsements: requires the indorsee to comply with certain instructions regarding the funders involved but does not prohibit further negotiation of instrument ▪ Indorsements to pay only a named payee • Ex. “Pay to Julie Diaz only, [signed]” • Does not destroy negotiability • Same legal effect as special indorsement ▪ Conditional Indorsements • Payment depends on occurrence of some event specified • Ex. “Pay to Keenan Barton if he completes renovation of my kitchen by June 1, 2015, [signed]” • Conditional Indorsement differs from Conditional language o Conditional Indorsement  negotiable o Conditional Language  not negotiable (must contain unconditional promise to pay to negotiate) ▪ Indorsements for Deposit or Collection • “For deposit only” and “For collection only” lock instrument into bank collection process o Only bank can acquire rights of holder until item has been specially indorsed by bank to person ▪ Trust (Agency) Indorsements: indorsements to persons rdo are to hold or use funds for benefit of indorser or 3 party • Legal rights are transferred to original indorsee • Ex. “Pay to Steph Malik as agent for Raj Gupta, [signed]” • Fiduciary Restrictions (mandated by relationship involving trust & loyalty) do not reach beyond original indorsee o How Indorsements can convert Order Instruments to Bearer Instrum
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