MANGMT 3540 1st Edition Lecture 19 Outline of Last Lecture I Commercial Paper II Two Types of Negotiable Instruments III Six Requirements for negotiability IV Negotiation Legal Transfer V Indorsement Outline of Current Lecture VI Rules of Indorsements VII Holder in Due Course VIII Defenses Against a holder in due course Current Lecture I Rules of Indorsements A Indorsement required i Indorsement is required for transfer if instrument payable to a named payee or indorsee B Indorsement not required i If payable to bearer or indorsed in blank indorsement not required but transferee may request that transferor sign it Physical delivery negotiates a bearer instrument C Multiple payees alternative payees These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute i Pay A or B ii Either may indorse to negotiate D Multiple payees joint payees i Pay A and B ii Both must indorse to negotiate provides protection for maker or drawer E Indorser liability i Indorsers are typically secondary liable on the instrument 1 That is liable if drawer or maker doesn t pay 2 E g Barney Rubble delivers a check to you you indorse it to Fred Flinstone Bank dishonors check If Barney doesn t pay Fred you do a What is Fred The holder b What are you Payee and indorser c What is Barney Drawer d What is Barney s Bank drawee ii If you simply indorse it you re liable F Five types of Indorsement i Blank indorsements 1 Holder signs name without naming an indorsee 2 Instrument becomes a bearer instrument regardless of what it was before delivery alone negotiates ii Special indorsement 1 Made payable to specific named person indorsee Pay Bart Simpson s John Swenson 2 Can convert a bearer instrument to an order instrument by special indorsement iii Qualified indorsements 1 Indorser signs words without recourse 2 Indorser is now generally not liable if the instrument is not paid iv Restrictive indorsements restricts rights of indorsee new holder Three types 1 Conditional indorsement pay X if X delivers goods 2 For deposit only restricts bank to acting as collection agent 3 Trust indorsement to John in trust for Philip restricts indorsee to using funds solely for beneficiary s benefit v Forged indorsements after a forged indorsement 1 The forger has primary liability on the instrument rather than the maker or drawer 2 The person who received the instrument from the forger bears the loss if the forger does not pay II Holder in Due Course A Definition i A holder who takes the instrument ii For value 1 E g pay or provide services not by gift iii In good faith 1 Honestly believes instrument regular or ordinary 2 Inadequate consideration destroys good faith iv Without notice of defenses 1 E g that there is a dispute as to payment the instrument is overdue illegal or altered or demand has already been made B Common law transferee or ordinary holder i A common law transferee of a contract took no right or defense greater than the transferor had III Defenses Against a holder in due course A Defenses against a holder in due course i Defenses are limited an HDC has rights beyond those the transferor had ii An H D C is typically free of personal defense to payment such as 1 Breach of contract or warranty Fraud in the inducement failure of consideration 2 Exception Even an HDC is subject to defenses of a consumer in a consumer credit transaction a credit obligation because of sales of consumer goods or services the HDC has only the same rights as the original holder B An H D C is subject to Real Defenses i Fraud in the execution duress ii Incapacity illegality iii Forgery or alteration iv Discharge in bankruptcy