CHAPTER II

TRANSFER
1. DELIVERY AND ISSUANCE SEC 16 Delivery; When Effectual; When Presumed Delivery of the instrument means transfer of possession, actual or constructive, from one person to another without the initial delivery of the instrument from the maker to the payee, there can be no liability on said instrument. Delivery must be intended to give effect to the instrument The first delivery of the instrument complete in form, to a person who takes it as a holder, is called the ISSUE ! ISSU"#$E % T&E I#ST!U'E#T order) it is negotiated (y indorsement of the holder com'leted delivery% SEC 1*1% Definitions+ ,earer the 'erson in 'ossession of a (ill or note -hich is 'aya(le to (earer .older 'ayee or indorsee of a (ill or note -ho is in 'ossession of it) or the (earer thereof " negotiation is the transfer of a negotiable instrument made in such a manner that the transferee became a holder in due course capable of ac6uiring a better title to the instrument than that of his transferor. If an instrument is transferred without negotiation, transfer is a mere assignment.

(y

CASE: IN RE MARTENS ESTATE 'abel 'artens (onk is the daughter of the deceased. There was a note in her mother)s handwriting promising to pay her *+,,--, this was also signed by the mother .hen her mother died, she delivered an envelope to the lawyer and in the presence of the administrator, 'abel filed a claim based on the note against the administrator T!I"/ $ U!T0 denied the claim because the note was not delivered during the lifetime of the deceased Sec 1234 provides that every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto S$0 The note here sued upon could not be made the basis of valid claim unless there was a legal delivery of the same during the lifetime of the deceased. The deceased put the deeds in her safety deposit bo5 and retained the key. These facts do not show a legal delivery of the deed in 6uestion. TRIAL CT AFFIRMED IFO ESTATE 2. NEGOTIATION SEC 30 What Constitutes Negotiation !"#NS$E"% &f 'aya(le to (earer) it is negotiated (y delivery % &f 'aya(le to

3. METHODS OF NEGOTIATION "n instrument payable to order re6uires for its negotiation, first, an indorsement by the payee or present holder, and second, its delivery to the transferee or indorsee, who now becomes the holder. "n indorsement consists of the signature of the indorser usually at the back of the instrument. Significance of indorsement0 +. constitutes a transfer or sale of instrument to the indorsee or transferee 7. signifies agreement of the indorser to answer for the amount represented by the instrument in case of default of the maker or the party primarily liable. "n instrument payable to bearer can be negotiated by mere delivery. ne who negotiates by delivery, although he assumes liabilities of a seller or transferor of the note or bill, doesn)t warrant that he will pay in case the primary party fails to pay. 4. HOW INDORSEMENT MADE a. By si !a"#$% &! i!s"$#'%!" &$ &! a((&! % SEC 31% &ndorsement .o- /ade must (e -ritten on the instrument itself% signature of the indorser is sufficient

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CHAPTER II
"llonge 8indorsement in a separate paper9 is used only when there is no longer any room on the instrument for further indorsement. "llonge should be attached to the instrument. Indorsement should be made by the holder in the manner he was designated, otherwise, it is not valid indorsement. "fter that, he may sign his correct name.

CASE: CLAR) V THOM*SON The note in 6uestion is evidence of a mortgage by the husband where the wife was surety for the debt. The wife filed a complaint for the cancellation of the mortgage on her realty to secure their :t negotiable note. The note was payable to Thomspon or order. !espondent bought the note from Thompson. !espondent is arguing that it ac6uired the note by indorsement and he should be considered a holder in due course. The law re6uires that the indorsement must be written on the instrument itself or upon paper attached thereto indorsement made upon an allonge 8upon a slip of paper tacked and pasted on the instrument so as to become a part of it9 is allowed only when the back of the instrument was so covered by previous indorsements that added space was re6uired. In this case, there was no evidence that the note was pinned to the mortgage when they were transferred to respondent, but only when they were delivered to the payee a year ago. The S$ could not presume that such artificial fastening for temporary convenience still e5isted at the date of transfer SC: T+% "$a!s,%$ -as a '%$% assi !'%!". R%s.&!/%!" is !&" +&(/%$ i! /#% 0&#$s% 1. I! 0as% &, 2&i!" .ay%%s .here the instrument is payable or indorsed to ;" and (<, they are =oint payees and the indorsement of either " or ( only will not constitute a valid negotiation 8dapat silang 79 (ut where the instrument is payable to ;" or (<, the payees are merely in the alternative and either one may validly negotiate the same 0. I, !a'% is 'iss.%((%/ SE$ 2>. Indorsement where name is misspelled ? he may indorse the instrument as therein described and when he thinks fit, his proper signature.

CASE: YOUNG V HEMBREE &embree agreed to loan &orn and %aulkner to help them in their oil drilling &orn and %aulkner agreed to issue to him some trust stock &embree wrote a check with &orn and %aulkner il Trust as payee The ne5t day, &embree stopped payment in the check before &orn and %aulkner presented it to the bank. The same check was indorsed by /& &orn and delivered to @oung in part payment for the labor and materials @oung did not investigate and in 7 failed attempts to cash the check, he brought this action. T!I"/ $T0 !uled I% @oung. &embree appealed ISSUE0 . # @oung is a holder in due course In order to be a holder in due course, where the instrument is payable to the order, @oung must prove that the check was indorsed by payee. .hen the indorsement is not proved to be that of payee, or when there is no indorsement at all, plaintiff is not an innocent purchaser, but sub=ect to the defences that might have been interposed against the payee. @oung argues that the signature of /& &orn was sufficient indorsement

S$0 There is no evidence to show that &orn and %aulkner il Trust is the same entity as /& &orn The action here is on a check, upon which payment was stopped. The maker has right to stop payment. IFO H%'1$%%. Si!0% +% s"&..%/ .ay'%!"3 +% is !&" (ia1(% "& "+% i!s"$#'%!". 4. INDORSEMENT MUST BE OF ENTIRE INSTRUMENT

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CHAPTER II
SE$ >7 Indorsement must be of entire instrument ? The indorsemnt must be an indorsement of the entire instrument, "n indorsement which purports to transfer to the indorsee a part only of the amount payable, or which purports to transfer the instrument to 7 or more indorsees severally, doesn)t operate as a negotiation of the instrument. (ut where the instrument has been paid in part, it may be indorsed as to the residue. The purpose of the provision is to protect the obligors from more than + action on the instrument. If a bill for +-- is indorsed by the payee to " for ,- and ( for ,-, there is no valid negotiation since it purports to transfer to 7 persons severally. "t most, they are assignees and neither of them can sue without bringing in the other party. "n indorsement for ,- is also not valid encase it would only be a partial transfer .here a note payable by instalments, where some instalments have been paid, the instrument may still be negotiated for the remaining unpaid value. The provision does not prohibit a transaction where the indorsee pays the indorser less than the face amount of the instrument, this is called DIS$ U#T. If indorsement doesn)t comply with Sec >7, the transfer is not necessarily void. It remains valid not as a negotiation, but as mere assignment which sub=ects the holder to all defences on the instrument. %rank sets up his , counterclaims as set off against the debt for which the trustee is suing .....

T!I"/ $ U!T0 ISSUE0 . # %rank has any interest in the , notes

CASE: BLA)E V WEIDEN (lake as trustee in the bankruptcy of !. .eiden sued %rank .eiden to recover an overdraft in %rank)s salary account %rank was a stockholder in the bankrupt company %rank held , counterclaims on negotiable note each for *,,--given by the company to !obert, %rank)s father n !obert)s death but prior to the bankruptcy, $harles and &ermann 8e5ecutors of estate of !obert9 put on the back of each notes a form of indorsement, signed by the estate in the ff words0 Aay to order of $harles, &ermann and %rank, share alike, as tenants in common. $harles and &ermann filed proofs of claims on their purported share as indorsees

The law provides that0 the indorsement must be an indorsement of the entire instrument. an indorsement which purports to transfer to indorsee a part only of the amount payable, or which purports to transfer the instrument to 7 or more indorsees severally, doesn)t operate as a negotiation of the instrument. (ut where the instrument has been paid in part, it may be indorsed as to the residue. The !U/E is that when there has been a purported indorsement of the whole instrument, in separate part to 7 or more transferees, the purported indorsees take legal title to their several shares and may sue together, or any one or more may sue provided that all other indorsees are brought in as parties. In this case, %rank brought in the 7 other indorsees $ '' # /".0 law conformed with the custom of merchants which was that of a holder of a note could not apportion such personal contract, for he cannot make a man liable to 7 actions, where by the contract he is only liable to one. %rank as coBassignee of a nonBnegotiable chose in action had the right to maintain his counterclaim so long as he bought his coB assignees into the action. %rank had legal title to, and causes of action at law on his share of the notes 8ergo, he can setBoff9

HELD: B(a5% a!/ F$a!5s 0(ai' a$% '#"#a( a!/ F$a!56s 0(ai' is .$&7a1(% i! 1a!5$#."0y 8. )INDS OF INDORSEMENTS SEC 33% 0inds of &ndorsements restrictive or 2ualified or conditional S'ecial or in (lan1)

a. Basis &, 0(assi,i0a"i&! .here only the signature of the indorser appears, it is called (/"#C I#D !SE'E#T

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CHAPTER II
The classification of all indorsements into special and blank has to do with the future method of negotiation 8whether by indorsement and delivery or by delivery alone9 The classification of all indorsements into restrictive and non restrictive, has to do with the kind of title transferred. The difference between 6ualified and un6ualified indorsement lies in the scope of liability assumed by the indorser. The classification of indorsements into conditional and unconditional, has to do with the presence or absence of e5press limitations put by the indorser upon the primary obligors privileges of paying the holder. Sec 2- illustration0 " makes an instrument payable to bearer and delivers it to ( ( negotiates and delivers it to $ $ indorses it specially to D D indorses it specially to E E negotiates it to % by mere delivery The rules0 " person who negotiates by mere delivery is liable only to his immediate transferee. " special indorser is liable to subse6uent holders, uless the instrument is an originally bearer instrument, in which case he is liable only to those who take title through his indorsement "pplication of the rules0 ( is only liable to $ $ 8F9 is liable to D and E because they take title through his indorsement D is liable to E since the latter is the only one who takes through his indorsement E is liable to % "n indorsement in blank specifies no indorsee, it is payable to bearer and may be negotiated by delivery. " thief can be holder in due course. " blank indorsement may be converted into a special indorsement by writing over the signature of indorser in blank any contract consistent with the character of the indorsement. This will render the instrument negotiable by indorsement and delivery, unless it is a bearer instrument. "n instrument payable to order on its face may be converted into a bearer instrument by means of a blank indorsement, and may later be reconverted into an order instrument by a subse6uent special indorsement, the last indorsement always controlling the means of further negotiation. "n instrument payable to bearer on its face always remains a bearer instrument 8 may be further negotiated by delivery alone whether the last indorsement is a blank or special one

1. S.%0ia( a!/ B(a!5 i!/&$s%'%!"s SEC 34 S.%0ia( a!/ B(a!5 i!/&$s%'%!"s 9 S'ecial s'ecifies the 'erson to -hom) or to -hose order) the instrument is to (e 'aya(le; and the indorsement of such indorsee is necessary to the further negotiation of the instrument% #n indorsement in (lan1 s'ecifies no indorsee) and an instrument so indorsed is 'aya(le to (earer) and may (e negotiated (y mere delivery% SEC 30 &ndorsement of instrument 'aya(le to (earer When 'aya(le to (earer) is indorsed s'ecially) it may further negotiated (y delivery; (ut the 'erson indorsing s'ecially is lia(le as indorser to only such holders as ma1e title through his indorsement% SEC 34 ,lan1 indorsement; ho- changed to s'ecial indorsement (y -riting over the signature of the indorser in (lan1 any contract consistent -ith the character of the indorsement 7 forms of special indorsement0 +. A"@ T D and 7. A"@ T D or !DE! followed b the signature of indorser In special indorsement, the indorsement of the special indorsee is necessary for the further negotiation of the instrument. Instrument payable to bearer and specially indorsed0 EA"@ T D, 8sgd9 @). D)s signature is not necessary for further negotiation of the instrument 8Sec 2-, applies to bearer instrument9

0. :#a(i,i%/ i!/&$s%'%!"

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CHAPTER II
SEC 35 6ualified indorsement constitutes the indorser a mere assignor of the title to the instrument% &t may (e made (y adding to the indorser7s signature the -ords -ithout recourse% Such indorsement doesn7t im'air the negotia(le character of the instrument "n indorser by his indorsement impliedly enters into 7 contracts0 +. contract of sales or assignment of the instrument and 7. a contract to pay the instrument if the maker is unable to pay on maturity. If an indorser wants to relieve himself of either contract, he must e5pressly say so, by adding the words ;without recourse< above his signature 8this would rid him of the 7nd contract9. HELD: CA R%7%$s%/ CO*ELAND V BUR)E $opeland sued (urke and 'essengill upon the A# e5ecuted by 'essengill to (urke 8payee9 who transferred to $opeland by 'emo upon the back of the note in these words0 I transfer my right, title and interest in the same, JM Burke DIST!I$T $ U!T0 !U/ED I% (urke ISSUE0 . # the words constitute the (urke an indorser in due course and as such liable for the payment of the note . # (urke is a mere assignor S$0 Gualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by addinf to the signature0 ;without recourse< or nay words of similar import. Such indorsement does not impair the negotiable character of the instrument. " person placing his signature upon an instrument otherwise than as a maker, drawer or acceptor is deemed to be an indorser, unless he clearly indicated by appropriate words his intention to be bound in some other capacity. Special indorsement doesn)t destroy the negotiability of the note If (urke didn)t intend to be bound by this indorsement, he should have been e5plicit about it HELD: BUR)E IN AS UN:UALIFIED INDORSER THUS3 HE IS LIABLE HUTSON V RAN)IN !ankin e5ecuted a A#0 n or before 'ar +, he promises to pay to #orthwestern *+,+--. There was a notation on the back of the note0 %or value received, we hereby HU"!"#TEE payment within the note... 8sgd9 #orthwestern, Iolkmeier (efore the maturity of the note, &utson became the purchaser for value The amount of the note wasn)t paid so &utson filed a claim to recover / .E! $ U!T0

CASE: FAY V WHITE " A# was e5ecuted0 &arry .itte, Inc 8sgd by .itte, Ares9 promises to pay to the order of &arry .itte *7,,-- on #ov + (efore the maturity of the A#, &arry for a valuable consideration, indorsed the note0 assigning all his rights to !ichard %ray %ray brought the action vs .itte for nonBpaymeny $"0 .itte, by assignment of the note, became indorser without recourse. he wasn)t liable as an un6ualified indorser. Indorsement implies 7 things0 +. transfer of the note and 7. a promise to pay if the maker fails to do so. ISSUE0 . # .itte is a 6ualified indorser S$0 #o. The law provides that a person placing his signature upon an instrument otherwise as a maker, drawer or acceptor is deemed to be an indorser, unless he clearly indicates by appropriate words his intention to be vound in some other capacity. the words ;without recourse< must be used there was no such words in this indorsement It may be implied that with the use of the word ;assign< the payee considered himself not liable, buut implication is not permitted by the statute .ITTE IS "# U#GU"/I%IED I#D !SE! and as such he is liable upon nonBpayment

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CHAPTER II
SEC 39% Effect of restrictive indorsement) "ights of indorsee confers u'on the indorsee the right+ a% to receive 'ayment of the instrument% (% to (ring any action that the indorser could (ring c% to transfer his rights as such indorsee) -here the form of indorsement authori:es him to do so% #ll su(se2uent indorsees ac2uire only the title of the 1 st indorsee under the restrictive indorsement " restrictive indorsement either restricts the right of the indorsee to further negotiate the instrument or reserves beneficial interest therein in the indorser or in a >rd person. Illustrations0 +. Aay to D only 7. Aay to D for collection, Aay " for mu use, Aay " for my account >. Aay to D for @s use Aay to D for collection ? widely used form. $onstitutes the indorsee as agent to collect. D may receive payment on the instrument and may sue thereon in his own name. This indorsement doesn)t pass title, nor deprive the maker of any defences he may have Aay to D for @)s use is a restrictive indorsement which vests title of the indorsee in trust for the use of some other person

ISSUE0 . # the note is negotiable S$0.... &E/D0 :UDH'E#T "%%I!'ED D. C&!/i"i&!a( i!/&$s%'%!" "n indorser is liable to pay the instrument in 7 condition0 +. that due demand or presentment be made on the party primarily liable on the date of maturity and 7. that should the latter fail to pay such presentment, a notice of dishonour be sent to indorser. " conditional indorsement is one where an additional condition is anne5ed to the indorser)s liability. Such indorsement doesn)t affect the negotiability of the instrument bec the original promise remains unconditional. SEC3* Conditional &ndorsement a 'arty re2uired to 'ay the instrument may disregard the condition) and ma1e 'ayment to the indorsee or his transferee) -hether the condition has (een fulfilled or not% ,ut any 'erson to -hom an instrument so indorsed is negotiated) -ill hold the same) or the 'roceeds thereof) su(8ect to the rights of the 'erson indorsing conditionally. If an instrument on its face is payable on Dec +, is indorsed by the payee to " ;if he marries before he is 7,<, there is a valid but $ #DITI #"/ I#D !SE'E#T. Should " not fulfil the condition on or before Dec +, he cant compel the maker to pay him on that date. &owever, the maker, if he chooses, may disregard the condition and pay the holder

CASE WHITE V NATIONAL BAN) .hite filed a case for the sum of *4-,--- vs #ational (ank for nonBpayment Declaration contains +7 special counts, upon as many drafts drawn by Steward Silver !educing $o on Thomas Ahelps to the order of #ational (ank, and indorsed by (rownell to SI .hite $ircuit $ourt0 !uled that there arose out of the transaction no obligation on the part of the bank to pay the draft or return the money because of the words ;for account of 'iner)s national (ank< in the indorsement of (rownell. .hite bases his right to recover on 7 grounds0 + words are merely directory and capable of e5planation. The indorser 8F9 is liable in the usual manner 7. It is the custom of banks

%. R%s"$i0"i7% i!/&$s%'%!" SEC 36 When restrictive a% 'rohi(its further negotiation of the instrument (% constitutes the indorsee the agent of the indorser c% vests the title in the indorsee in trust for or to the use of some other 'erson (ut the mere a(sence of -ords im'lying 'o-er to negotiate doesn7t ma1e it restrictive

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CHAPTER II
S$0 The language of the indorsement is without ambiguity The plain meaning is that the acceptor of the draft is to pay it to the indorsee for the use of the indorser. It doesn)t purport to transfer title of paper and ownership of money when received That by the terms of the endorsement, .hite. became merely the agent of the bank for the collection of the money. &E/D0 IT IS " !EST!I$TIIE I#ST!U'E#T !emanded for new trial ;. INDORSEMENT TO OR BY COLLECTING BAN) " holder of a check may either cash it with the drawee bank, or may deposit it to his credit either in the drawee bank or in another bank. If the indorsement is ;for collection<, this is a restrictive indorsement where the bank is merely an agent for collection CASE: LEONARDI V CHASE this is an action by /eonardi)s vs $hase for the conversion of the proceeds of a check " check for *>,3,- made to the order of /eonardi was drawn on the (ank of 'anhattan was deposited by %lorence /eonardi with (ank of (ay (iscayne with this indorsement0 For deposit of Florence Leonardi and John Leonardi.< /eonardi)s had a account with (ank of (ay (iscayne $hecks amounting to *73k was mailed by bank of (iscayne to $hase with a cash remittance letter.... <. NEGOTIATION BY =OINT OR ALTERNATIVE *AYEES OR INDORSEES SEC 31 &ndorsemennt -here 'aya(le to ; or more 'ersons all must indorse unless the one indorsing has authority for the others% If the instrument is payable to the order of " and (, either as payees or indorsees, both must indorse in order for the transaction to operate as negotiation. " and ( will then be =ointly and severally liable and an action will lie against any of them individually. If one of them should pay, the pther is prima facie liable to contribute his share to the paying indorser. If only one indorses, his indorsee can have no right of action on the instrument bec this wouls be violating the rule against splitting of action If the =oint payees or =oint indorsees are partner, then the indorsement by one of the partners of his own name and that of his partner, who is a coBpayee or =oint indorsee with him, may constitute an indorsement by each of them, and this effect a valid negotiation..... If one of several =oint payees or =oint indorsees indorses his own name and, without authority from his coBobligee, indorses the latter)s name and delivers the instrument to a purchaser, such transaction doesn)t constitute a negotiation. (UT, one of two =oint payees, by indorsemnt and delivery of instrument to his coBpayee, may transfer full title to the latter. .here the instrument is payable to alternative payees, either one in possession of the instrument is the holder. he may negotiate the instrument alobe and transfer title to his transferor, without pre=udice to his obligation if any, to account to the other alternative payee

>. UNINDORSED INSTRUMENTS SEC 3* !ransfer -ithout indorsement; Effects Where the holder of an instrument 'aya(le to his order transfers it for value -ithout indorsing it) t8e transfer vests in the transferee such title as the transferor had therein) and the transferee ac2uires) in addition the right to have the indorsement of the transferor% ,ut for the 'ur'ose of determining -hether the transferee is a holder in due course) the negotiation ta1es effect as of the time -hen the indorsement is actually made% If his predecessor had legal title, the transferee of an unendorsed instrument ac6uires such, sub=ect however to the defences and e6uities available among prior parties. &e can sue in his own name but he cant be considered holder, nor is he a bearer The transferee of an unendorsed instrument may become holder by obtaining the indorsement of his transferor. It is only at his time that the instrument can be considered as having been negotiated.

CASE: SIM*SON V FIRST NATIONAL BAN) (ank loaned to 'rs :osephson *+,--FURBEE V FURBEE

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CHAPTER II
WHISTLER V FORSTER This is +-. $"#$E//"TI # % I#D !SE'E#TS SEC 35 stri1ing out indorsements !he holder may at any time stri1e out any indorsement -hich is not necessary to his title% &ndorser -hose indorsement is struc1 out and all indorsers su(se2uent to him are there(y relieved from lia(ility on the instrument% " holder must be able to trance his title to the instrument back to the original owner, the payee....

++. I#D !SE'E#T (@ "HE#T +7 A!ESU'ATI # "S T I#D !SE'E#TS

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