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Business Law Definitions

Define the following terms:

  1. Holder in due course
  2. Negotiation
  3. Delivery
  4. Holder
  5. Effect of transfer (important)
  6. Indorsement
  7. Blank indorsement
  8. Special indorsement
  9. Indorsee
  10. Qualified indorsement
  11. Restrictive indorsement
  12. Correction of name by indorsement
  13. Bank indorsement
  14. Multiple payees and indorsements
  15. Alternative payees
  16. Agent or Officer indorsement
  17. Missing indorsement
  18. Forged or unauthorized indorsement
  19. Impostor rule
  20. When does the impostor rule apply?
  21. Impersonating payee
  22. Dummy payee
  23. Dummy payee supplied by employee
  24. Effect of Impostor Rule
  25. Limitations on Impostor Rule
  26. Effect of Incapacity or Misconduct on Negotiation
  27. Lost instruments
  28. Order instruments
  29. Bearer instruments
  30. What isn’t warranted?
  31. Beneficiary of implied warranties
  32. Disclaimer of warranties
  33. Notice of breach of warranty
  34. Qualified indorser
  35. Transfer by delivery


Holder in due course
a holder who has given value, taken in good faith without notice of dishonor, defenses, or that instrument is overdue, and who is afforded special rights or status.

the transfer of commercial paper by indorsement and delivery by the person to whom it is then payable in the case of order paper and by physical transfer in the case of bearer paper.

constructive or actual possession

someone in possession of an instrument that runs to that person (i.e., is made payable to that person, is indorsed to that person, or is bearer paper.

  • Effect of transfer (important)
    When a contract is assigned, the transferee has the rights of the transferor. The transferee is entitled to enforce the contract but, as assignee, has no greater rights than the assignor.
  • The assignee is in the same position as the original party to the contract and is subject to any defense that could be raised in a suit on an assigned contract.
  • When a negotiable instrument is transferred by negotiation, the transferee becomes the holder of the paper.
  • A holder who meets certain additional requirements may also be a holder in due course.
  • The status of holder in due course gives immunity from certain defenses that might have been asserted against the transferor.

Signature of the payee on an instrument.

Blank indorsement
an indorsement that does not name the person to whom the paper, document of title, or investment security is negotiated.

Special indorsement
an indorsement that specifies the person to whom the instrument is indorsed.

party to whom special indorsement is made.

Qualified indorsement
an indorsement that includes words such as “without recourse” that disclaims certain liability of the indorser to a maker or a drawee.

Restrictive indorsement
an indorsement that restricts further transfer, such as in trust for or to the use of some other person, is conditional, or for collection or deposit.

  • Correction of name by indorsement
    Under Article 3, a much simpler solution allows the payee or indorsee whose name is misspelled to indorse the wrong name, the correct name, or both.
  • The person giving or paying value or taking it for collection for the instrument may require both forms of the signature.
  • This correction of name by indorsement may be used only when it was intended that the instrument should be payable to the person making the corrective indorsement.

Bank indorsement
To simplify the transfer and collection of negotiable instruments from one bank to another, “any agreed method which identifies the transferor bank is sufficient for the item’s further transfer to another bank.” A bank could simply indorse with its Federal Reserve System number instead of using its name.

Multiple payees and indorsements
Ordinarily, one person is named as the payee in the instrument, but two or more payees may be named. In that case, the instrument may specify that it is payable to any one or more of them or that it is payable to all jointly.

Alternative payees
those persons to whom a negotiable instrument is made payable, any one of whom may indorse and take delivery of it.

  • Agent or Officer indorsement
    An instrument may be made payable to the order of an officeholder.
  • If an instrument is drawn in favor of an officer of a named corporation, the instrument is payable to the corporation, the officer, or any successor to such officer.
  • Any of these parties in possession of the instrument is the holder and may negotiate the instrument.

  • Missing indorsement
    When the parties intend to negotiate an order instrument but for some reason the holder fails to indorse it, there is no negotiation.
  • The transfer without indorsement has only the effect of a contract assignment.
  • If the transferee gave value for the instrument, the transferee has the right to require that the transferor indorse the instrument unqualifiedly and thereby negotiate the instrument

Forged or unauthorized indorsement
instrument indorsed by an agent for a principal without authorization or authority. NOT a valid indorsement.

  • Impostor rule
    The impostor rule provides three exceptions to the rule that a forged indorsement is not effective to validly negotiate an instrument.
  • If one of the three impostor exceptions applies, the instrument is still effectively negotiated, even though there may have been a forgery of an indorsement.
  • The impostor rule applies without regard to whether the drawee bank acted with reason-able care.

When does the impostor rule apply?
The impostor rule applies in cases where an indorser is impersonating a payee and in two cases where the indorser is a dummy payee.

Impersonating payee
The impersonation of a payee in the impostor rule exception includes impersonation of the agent of the person who is named as payee. For Example, if Jones pretends to be the agent of Brown Corporation and thereby obtains a check pay-able to the order of the corporation, the impostor exception applies.

  • Dummy payee
    Another impostor scenario arises when the preparer of the instrument intends that the named payee will never benefit from the instrument.
  • Such a “dummy” payee may be an actual or a fictitious person.
  • This situation arises when the owner of a checking account wishes to conceal the true purpose of taking money from the account at the bank.
  • The account owner makes out a check purportedly in payment of a debt that in fact does not exist.

  • Dummy payee supplied by employee
    The third impostor situation arises when an agent or employee of the maker or the drawer has supplied the name to be used for the payee, intending that the payee should not have any interest in the paper.
  • This last situation occurs when an employee fraudulently causes an employer to sign a check made to a customer or another person, whether existing or not.
  • The employee does not intend to send it to that person but rather intends to forge the latter’s indorsement, cash the check, and keep the money.

Effect of Impostor Rule
When the impostor rule is applicable, any person may indorse the name of the payee. This indorsement is treated as a genuine indorsement by the payee and cannot be attacked on the ground that it is a forgery. This recognition of the fictitious payee’s sig-nature as valid applies even though the dummy payee of the paper is a fictitious person.

Limitations on Impostor Rule
The impostor rule does not apply when there is a valid check to an actual creditor for a correct amount owed by the drawer and someone later forges the payee’s name. The impostor rule does not apply in this situation even if the forger is an employee of the drawer. Even when the unauthorized indorsement of the payee’s name is effective by virtue of the impostor rule, a person forging the payee’s name is subject to civil and criminal liability for making such an indorsement. For the impostor rule to apply, the holders or the takers of the instrument must show that they took the instrument (1) in good faith and (2) for payment or collection.

Effect of Incapacity or Misconduct on Negotiation
A negotiation is effective even though

  • (1) it was made by a minor or any other person lacking capacity;
  • (2) it was an act beyond the powers of a corporation;
  • (3) it was obtained by fraud, duress, or a mistake of any kind; or
  • (4) the negotiation was part of an illegal transaction or was made in breach of duty.

Lost instruments
The liability on lost instruments depends on who is demanding payment from whom and on whether the instrument was order or bearer paper when it was lost

Order instruments
If the lost instrument is order paper, the finder does not become the holder because the instrument has not been indorsed and delivered by the person to whom it was then pay-able. The former holder who lost it is still the rightful owner of the instrument

Bearer instruments
If the lost instrument is in bearer form when it is lost, the finder, as the possessor of a bearer instrument, is the holder and is entitled to enforce payment.

  • What isn’t warranted?
    The implied warranties stated here do not guarantee that payment of the instrument will be made.
  • Similarly, the holder’s indorsement of a check does not give any warranty that the account of the drawer in the drawee bank contains funds sufficient to cover the check.
  • However, implied warranties do, for example, promise that the signatures on the instrument are not forged. Likewise, they promise that no one has altered the amount on the instrument.
  • The warranties are not warranties of payment or solvency. They are simply warranties about the nature of the instrument.
  • A holder may not be paid the amount due on the instrument, but if the lack of payment results from a forgery, the holder has rights against those who transferred the instrument with a forged signature.

Beneficiary of implied warranties
The implied warranties of the unqualified indorser pass to the transferee and any subsequent transferees. There is no requirement that subsequent transferees take the instrument in good faith to be entitled to the warranties. Likewise, the transferee need not be a holder to enjoy warranty protection

Disclaimer of warranties
Warranties may be disclaimed when the instrument is not a check. A disclaimer of war-ranties is ordinarily made by adding “Without warranties” to the indorsement.

Notice of breach of warranty
To enforce an implied warranty of an indorser, the party claiming under the warranty must give the indorser notice of the breach. This notice must be given within 30 days after the claimant learns or has reason to know of the breach and the identity of the indorser. If proper notice is not given, the warranty claim is reduced by the amount of the loss that could have been avoided had timely notice been given.

Qualified indorser

The warranty liability of a qualified indorser is the same as that of an unqualified indorser.

A qualified indorsement means that the indorser does not assume liability for the payment of the instrument as written. However, a qualified indorsement does not eliminate the implied warranties an indorser makes as a transferor of an instrument.

  • Transfer by delivery
    When the negotiable instrument is negotiated by delivery without indorsement, the warranty liability of the transferor runs only to the immediate transferee.
  • In all other respects, the warranty liability is the same as in the case of the unqualified indorser.

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