MANGMT 3540 1st Edition Lecture 19 Outline of Last Lecture I. Commercial PaperII. Two Types of Negotiable InstrumentsIII. Six Requirements for negotiabilityIV. Negotiation – Legal TransferV. IndorsementOutline of Current Lecture VI. Rules of IndorsementsVII. Holder in Due CourseVIII. Defenses Against a holder in due courseCurrent LectureI. Rules of IndorsementsA. Indorsement requiredi. Indorsement is required for transfer if instrument payable to a named payee or indorseeB. Indorsement not requiredi. 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 payeesThese 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 Bii. Either may indorse to negotiateD. Multiple payees-joint payeesi. Pay A and Bii. Both must indorse to negotiate: provides protection for maker or drawerE. Indorser liabilityi. Indorsers are typically secondary liable on the instrument1. That is, liable if drawer or maker doesn’t pay2. 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 holderb. What are you? Payee and indorserc. What is Barney? Drawerd. What is Barney’s Bank? draweeii. If you simply indorse it, you’re liableF. Five types of Indorsementi. Blank indorsements1. Holder signs name without naming an indorsee2. Instrument becomes a bearer instrument regardless of what it wasbefore: delivery alone negotiatesii. Special indorsement1. Made payable to specific (named) person (indorsee) (Pay Bart Simpson s/ John Swenson)2. Can convert a bearer instrument to an order instrument by specialindorsementiii. Qualified indorsements1. Indorser signs words “without recourse”2. Indorser is now generally not liable if the instrument is not paidiv. Restrictive indorsements: restricts rights of indorsee (new holder) – Threetypes:1. Conditional indorsement (pay X if X delivers goods)2. “For deposit only” – restricts bank to acting as collection agent3. Trust indorsement: to John in trust for Philip-restricts indorsee to using funds solely for beneficiary’s benefitv. Forged indorsements- after a forged indorsement1. The forger has primary liability on the instrument rather than the maker or drawer2. The person who received the instrument from the forger bears theloss if the forger does not payII. Holder in Due CourseA. Definitioni. A holder who takes the instrument ii. For value1. E.g. pay $ or provide services (not by gift)iii. In good faith1. Honestly believes instrument regular or ordinary2. Inadequate consideration destroys good faithiv. Without notice of defenses1. E.g. that there is a dispute as to payment; the instrument is overdue, illegal or altered; or demand has already been madeB. Common law transferee (or ordinary holder)i. A common law transferee (of a contract) took no right or defense greater than the transferor hadIII. Defenses Against a holder in due courseA. Defenses against a holder in due coursei. Defenses are limited: an HDC has rights beyond those the transferor hadii. 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 ofconsideration2. 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 holderB. An H.D.C. is subject to Real Defenses:i. Fraud in the execution, duressii. Incapacity, illegalityiii. Forgery or alterationiv. Discharge in