BUSINESS LAW

TEXT AND CASES

Fourteenth Edition

CLARKSON MILLER CROSS  

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 Transfer by negotiation creates a holder,
who receives the rights of a previous
possessor.
 There are two methods of negotiation so
that the receiver becomes a holder,
depending on whether the instrument is
an order or bearer instrument. 

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  Negotiating Order Instruments:
Requires both indorsement and
delivery (by transfer into another
person’s possession).
 Negotiating Bearer Instruments:
Delivery only. Indorsement is not
necessary.

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 Indorsement: Signature with or without
additional words or comments.
 Indorser: A person who transfers a note or
a draft by signing (indorsing) it and
delivering it to another person.
 Indorsee: The person to whom the check is
indorsed and delivered. 

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 Blank Indorsements: Does not specify a
particular indorsee and may consist of a
mere signature. It becomes a bearer
instrument and can be negotiated by delivery
alone [UCC 3–205(b)].
 CASE 26.1 IN RE BASS (2013).

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 Special Indorsements: Contains signature
and identifies indorsee (payee). When an
instrument is indorsed in this way, it is an
order instrument.

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 Qualified Indorsements: Used by an
indorser who does not wish to be liable on
the instrument.

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 Qualified Indorsements:
 Effect of Qualified Indorsements:
Qualified indorsements are often used by
persons acting as agents.
 If the instrument is dishonored, the holder
cannot recover from the agent who
indorsed “without recourse” unless the
indorser breached one of the transfer
warranties. 8
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 Qualified Indorsements:
 Special versus Blank Indorsements: A
qualified indorsement can be
accompanied by a special or a blank
indorsement. In either situation, the
instrument still transfers title and can
be further negotiated.
• SEE GREEN TREE SERVICING, LLC V. BRANDT (2015).
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 Restrictive Indorsements:
 Requires indorsee to comply with
certain instructions regarding funds.
 Indorsements to Pay only a Named
Payee: If holder gives value, this type of
restrictive indorsement has the same
legal effect as a special indorsement. 

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 Restrictive Indorsements:
 Conditional Indorsements: Occurs when
payment depends on the occurrence of
some event specified in the indorsement.
 Indorsements for Deposit or Collection:
A common restrictive indorsement that
makes the indorsee (almost always a
bank) a collecting agent of the indorser
[UCC 3–206(c)].  11
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 Restrictive Indorsements:
 Trust (Agency) Indorsements:
Indorsements to persons who are to hold
or use the funds for the benefit of the
indorser (or a third party) [UCC 3–
206(d),(e)].
 Original indorsee has a fiduciary duty to
use the funds only for the benefit of the
indorser.
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 How Indorsements Can Convert Order
Instruments to Bearer Instruments and Vice
Versa: This depends on the character of the
instrument at the time negotiation takes place.
 An instrument payable to the order of a
named payee and indorsed in blank becomes
a bearer instrument.
 A bearer instrument can be converted into an
order instrument through indorsement.
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© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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 Miscellaneous Indorsement Problems:
 Misspelled Names: Indorsement should
generally be identical to name on
instrument. Misspelled names are OK.
 Instruments Payable to Legal Entities:
Negotiable by authorized representative
of the entity such as an estate,
partnership, or organization.
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  Miscellaneous Indorsement Problems:
 Alternative or Joint Payees:
• Payable to two or more parties in the
alternative: Any payee may indorse.
• Payable to two or more parties
jointly: All payees must indorse. 

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 Miscellaneous Indorsement Problems:
 If the Instrument Is Ambiguous: In this
situation, “the instrument is payable to
the persons alternatively” [UCC 3–
110(d)]. 

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 Miscellaneous Indorsement Problems:
 Suspension of the Drawer’s Obligation:
When a drawer gives one alternative or
joint payee a check, the drawer’s
obligation on the check to other payees is
suspended [UCC 3–310(b)(1)]. The drawer
has no obligation to make sure that the
funds are allocated or distributed among
the joint payees.
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 Holder versus HDC:
 When an instrument is transferred, an
ordinary holder obtains only those rights
that the transferor had in the instrument
and has the same status as an assignee.
 A holder normally is subject to the same
defenses that could be asserted against
the transferor. 
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 Holder versus HDC:
 A holder in due course (HDC) meets
certain acquisition requirements and
receives a higher level of protection from
defenses and claims asserted by other
parties.
 She/he takes an instrument free of most
of the defenses and claims that could be
asserted against the transferor.  20
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 Requirements for HDC Status: An HDC
must be a holder of a negotiable
instrument and must have taken the
instrument
 for value,
 in good faith, and
 without notice that it is defective. 

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 Requirements for HDC Status:
 Taking for Value: No value for
instrument if gift or inheritance which is
not the same as consideration.
 Holder can take for value by:
• Performing the instrument’s promise.
• Acquiring a security interest or other
lien in the instrument. 
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 Requirements for HDC Status:
 Taking for Value:
• Taken the instrument in payment of, or as
security for, a preexisting obligation (or
antecedent claim).
• Given a negotiable instrument as payment.
• Given an irrevocable commitment (such as
a letter of credit) as payment.
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 Requirements for HDC Status:
 Taking for Value:
• Value Is Distinguishable from
Consideration: If a person promises to
perform or give value in the future, that
person is not an HDC. A holder takes an
instrument for value only to the extent
that the promise has been performed
[UCC 3–303(a)(1)].
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 Requirements for HDC Status:
 Taking for Value:
• Exceptions: The holder may pay for the
instrument but not acquire HDC status
when that instrument was purchased at a
judicial sale or acquired as a result of
taking over a trust or estate or as part of a
corporate purchase of assets [UCC 3–
302(c)]. 25
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 Requirements for HDC Status:
 Taking in Good Faith: The holder must
take the instrument in good faith
(“honesty in fact and observance of
reasonable commercial standards of fair
dealing”) [UCC 3–103(a)(4)].
• Only applies to holder, not transferor.
 SEE CASE 26.3 GEORG V. METRO FIXTURES
CONTRACTORS, INC. (2008).
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 Requirements for HDC Status:
 Taking without Notice: Holder cannot be an
HDC if he knows/has reason to know that the
instrument is defective because:
• It is overdue.
• It has been dishonored.
• It is part of a series in which at least one
instrument has an uncured (uncorrected)
default.  27
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 Requirements for HDC Status:
 Taking without Notice:
• Instrument contains an unauthorized
signature or has been altered.
• There is a defense against the instrument
or a claim to the instrument.
• Instrument is so incomplete or irregular as
to call into question its authenticity.
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 Requirements for HDC Status:
 Taking without Notice: Under UCC 1–
201(25), a person is considered to have
notice if:
• The person has actual knowledge of the
defect.
• The person has received a notice or
notification about the defect. 
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 Requirements for HDC Status:
 Taking without Notice:
• The person has reason to know that a
defect exists, given all the known facts and
circumstances at the time in question.
• Holder must have received the notice “at a
time and in a manner that gives a
reasonable opportunity to act on it” [UCC
3–302(f)]. 30
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  Requirements for HDC Status:
 Taking without Notice:
• Overdue Demand Instruments.
• Overdue Time Instruments.
• Dishonored Instruments.
• Notice of Claims or Defenses.
• Incomplete Instruments.
• Irregular Instruments. 
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  “Shelter Principle”: A person who does
not qualify to be an HDC but who
derives her title through an HDC can
acquire the rights and defenses of an
HDC.
 Purpose of the Shelter Principle:
Extends benefits of HDC and allows HDC
to dispose of instrument. 
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 Limitations on the Shelter Principle:
 If a holder participated in fraud or
illegality affecting the instrument or had
notice of a claim or defense against an
instrument, that holder is not allowed
to improve her/his status by
repurchasing the instrument from a
later HDC [UCC 3–203(b)].
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