Problem 104: Desert Paradise, Inc.

(DP), initiated a scam in which hundreds of middle-class people signed promissory notes in order to invest in the supposed development of a retirement community to be built in the Southwest. Desert Paradise, the payee on all of these notes, sold them in bulk to ONB. Rather than indorsing its name hundreds of times of each of the notes, DP had its endorsement printed on a separate sheet of paper, which it then folded into each note, not connecting it and any way other than the fold. DPs officials absconded with the money and left the desert untouched. ONB demanded payment from the makers of the notes, and when they tried to raise defenses of breach of K and fraud, ONB claimed to be a holder in due course, so as to take free of these defenses. Is ONB even a holder? See 3-204(a) and the OC 1 (last paragraph). A separate paper used for endorsements is called an allonge, and the last sentence of 3-204(a) says that it must be affixed to the instrument. What does affixed mean? Would a paper clip do the trick? A staple? Answer: Is ONB a Holder? No ONB is not a holder because in order to be a holder an indorsement must take place. In order for an indorsement to take place: (a) "Indorsement" means a signature, other than that of a signer as maker, drawer, or acceptor, that alone or accompanied by other words is made on an instrument for the purpose of (i) negotiating the instrument, (ii) restricting payment of the instrument, or (iii) incurring indorser's liability on the instrument, but regardless of the intent of the signer, a signature and its accompanying words is an indorsement unless the accompanying words, terms of the instrument, place of the signature, or other circumstances unambiguously indicate that the signature was made for a purpose other than indorsement. For the purpose of determining whether a signature is made on an instrument, a paper affixed to the instrument is a part of the instrument. Adams v. Madison Realty & Dev., Inc., 853 F.2d 163- The court reversed, holding that the loose indorsement sheets accompanying defendant bank's notes were not physically attached to the instruments in any way, and, thus, patently failed to comply with the explicit Code prerequisite. It was essential to establish that the person who demands payment of a negotiable note is the duly qualified holder. Folding the paper was not enough to affix the document. Lamson v. Commercial Credit Corp., 187 Colo. 382- stapling the indorsement to the checks made the indorsement a permanent attachment, as required to "affix" the indorsement and make it valid. Thus, plaintiff was a holder of the checks and was entitled to payment, as defendant failed to establish any defense to payment.

Problem 105: When Laura Lawyer's briefcase was stolen, it contained her monthly paycheck from the law firm for which she worked, made payable to her order. She had not indorsed it. The thief who stole the briefcase forged her name to the back of the paycheck and transferred it to an innocent party, Cornucopia Grocery. When the latter tried to cash the check at the drawee bank, the bank alerted Laura, and she arrived at the bank immediately. Can she retrieve the check from Cornucopia Grocery? See 3-306 and 3-420. Answer: Here the instrument was payable to Laura an identifiable person it is required that possession be transferred and indorsement must occur, which means one must sign the instrument. Laura did not sign the instrument and therefore did not indorse it. Secondly, in order to claim the instrument, is subject to the claim of property or possessor right in the instrument since Cornucopia was not a holder or a holder in due course. 3-201(b) Negotiation Except for negotiation by a remitter, if an instrument is payable to an identifiable person, negotiation requires transfer of possession of the instrument and its indorsement by the holder. 3-306. CLAIMS TO AN INSTRUMENT. A person taking an instrument, other than a person having rights of a holder in due course, is subject to a claim of a property or possessory right in the instrument or its proceeds, including a claim to rescind a negotiation and to recover the instrument or its proceeds. A person having rights of a holder in due course takes free of the claim to the instrument. Problem 106: Assume that on receiving her paycheck, Laura Lawyer had signed her name to the back of the instrument, which then was blown out a window and landed at the feet of a criminal, Harry Thief. Harry took the check down to Cornucopia Grocery and told the manager that he (Harry) was Lance Lawyer, Laura's father, and asked the manager to cash it for him. The manager made Harry indorse the instrument , so Harry wrote ''Lance Lawyer'' under Laura's indorsement. Is Cornucopia Grocery a holder? Answer: Yes, because Laura had endorsed the paper before losing it, making it a blank indorsement in turn making it bearer(possession) paper. It made the Thief a holder, and because Cornucopia took the instrument it is also a holder and can enforce the instrument. 3-205. SPECIAL INDORSEMENT; BLANK INDORSEMENT; ANOMALOUS INDORSEMENT.

(a) If an indorsement is made by the holder of an instrument, whether payable to an identified person or payable to bearer, and the indorsement identifies a person to whom it makes the instrument payable, it is a "special indorsement." When specially indorsed, an instrument becomes payable to the identified

person and may be negotiated only by the indorsement of that person. The principles stated in Section 3110 apply to special indorsements.

(b) If an indorsement is made by the holder of an instrument and it is not a special indorsement, it is a "blank indorsement." When indorsed in blank, an instrument becomes payable to bearer and may be negotiated by transfer of possession alone until specially indorsed.