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23.1TransferandNego a onofCommercialPaper

LEARNINGOBJECTIVES

1.Understandwhatatransferofcommercialpaperis.
2.Recognizetherightsandliabili esoftransfereesandtheliabili esoftransferors.
3.Knowhowatransferbecomesanego a onpayabletoorderortobearer.

Deni ons,Rights,andLiabili es

Transfermeansphysicaldeliveryofanyinstrumentnegotiableornotintendingtopasstitle.
Section3203(a)oftheUniformCommercialCode(UCC)providesthataninstrumentistransferred
whenitisdeliveredbyapersonotherthanitsissuerforthepurposeofgivingtothepersonreceiving
deliverytherighttoenforcetheinstrument.

Nego a onandHolder

Section3201(a)oftheUCCdefinesnegotiationasatransferofpossession,whethervoluntaryor
involuntary,ofaninstrumenttoapersonwhotherebybecomesitsholderifpossessionisobtained
fromapersonotherthantheissueroftheinstrument.AholderisdefinedinSection1201(2)asa
personwhoisinpossessionofaninstrumentdrawn,issued,orindorsedtohimorhisorderorto
bearerorinblank(inblankmeansthatnoindorsementisrequiredfornegotiation).Theoriginal
issuingormakingofaninstrumentisnotnegotiation,thoughaholdercanbethebeneficiaryofeithera
transferoranegotiation.TheOfficialCommentto3201(a)ishelpful:

Apersoncanbecomeholderofaninstrumentwhentheinstrumentisissuedtothatperson,orthe
statusofholdercanariseastheresultofaneventthatoccursafterissuance.Negotiationistheterm
usedinarticle3todescribethispostissuanceevent.Normally,negotiationoccursastheresultofa
voluntarytransferofpossessionofaninstrumentbyaholdertoanotherpersonwhobecomesthe
holderasaresultofthetransfer.Negotiationalwaysrequiresachangeinpossessionoftheinstrument
becausenobodycanbeaholderwithoutpossessingtheinstrument,eitherdirectlyorthroughanagent.
Butinsomecasesthetransferofpossessionisinvoluntaryandinsomecasesthepersontransferring
possessionisnotaholder.[S]ubsection(a)statesthatnegotiationcanoccurbyaninvoluntarytransfer
ofpossession.Forexample,ifaninstrumentispayabletobeareranditisstolenbyThieforisfoundby
Finder,ThieforFinderbecomestheholderoftheinstrumentwhenpossessionisobtained.Inthiscase
thereisaninvoluntarytransferofpossessionthatresultsinnegotiationtoThieforFinder.Uniform
CommercialCode,Section3201,OfficialComment.

Inotherwords,toqualifyasaholder,apersonmustpossessaninstrumentthatrunstoher.An
instrumentrunstoapersonif(1)ithasbeenissuedtoheror(2)ithasbeentransferredtoherby
negotiation(negotiationisthepostissuanceeventcitedinthecomment).Commerciallyspeaking,
thestatusoftheimmediatepersontowhomtheinstrumentwasissued(thepayee)isnotvery
interestingthethingofinterestiswhethertheinstrumentispassedonbythepayeeafterpossession,
throughnegotiation.Yes,thepayeeofaninstrumentisaholder,andcanbeaholderinduecourse,but
thecruxofnegotiableinstrumentsinvolvestakinganinstrumentfreeofdefensesthatmightbeclaimed
byanybodyagainstpayingontheinstrumentthepayeewouldknowofdefenses,usually,soasthe
commentputsituseoftheholderinduecoursedoctrinebythepayeeofaninstrumentisnotthe
normalsituation.[r]ather,theholderinduecourseisanimmediateorremotetransfereeofthe
payee.UniformCommercialCode,Section3302,Comment4.

LiabilityofTransferors

WediscussliabilityinChapter25"LiabilityandDischarge".However,abriefintroductiontoliability
willhelpinunderstandingthetypesofindorsementsdiscussedinthischapter.Therearetwotypesof
liabilityaffectingtransferors:contractliabilityandwarrantyliability.

ContractLiability

Personswhosigntheinstrumentthatis,makers,acceptors,drawers,indorsershavesigneda
contractandaresubjecttocontractliabilities.Drafts(checks)andnotesare,afterall,contracts.Makers
andacceptorsareprimarypartiesandareunconditionallyliabletopaytheinstrument.Drawersand
indorsersaresecondarypartiesandareconditionallyliable.Theconditionscreatingliabilitythatis,
presentment,dishonor,andnoticearediscussedinChapter25"LiabilityandDischarge".

WarrantyLiability

Thetransferorscontractliabilityislimited.Itappliesonlytothosewhosignandonlyifcertain
additionalconditionsaremetand,aswillbediscussed,canevenbedisclaimed.Consequently,aholder
whohasnotbeenpaidoftenmustresorttoasuitbasedononeoffivewarranties.Thesewarrantiesare
impliedbylawUCC,Section3416,detailsthem:
(A)Apersonwhotransfersaninstrumentforconsiderationwarrantsallofthefollowingtothe
transfereeand,ifthetransferisbyindorsement,toanysubsequenttransferee:

(1)Thewarrantorisapersonentitledtoenforcetheinstrument.

(2)Allsignaturesontheinstrumentareauthenticandauthorized.

(3)Theinstrumenthasnotbeenaltered.

(4)Theinstrumentisnotsubjecttoadefenseorclaiminrecoupmentofanypartywhichcanbeasserted
againstthewarrantor.

(5)Thewarrantorhasnoknowledgeofanyinsolvencyproceedingcommencedwithrespecttothe
makeroracceptoror,inthecaseofanunaccepteddraft,thedrawer.

Breachofoneofthesewarrantiesmustbeprovenattrialifthereisnogeneralcontractliability.

LiabilityofTransferees

Thetransfereetakesbyassignmentasanassignee,thenewowneroftheinstrumenthasonlythose
rightsheldbytheassignor.Claimsthatcouldbeassertedbythirdpartiesagainsttheassignorcanbe
assertedagainsttheassignee.Anegotiableinstrumentcanbetransferredinthissensewithoutbeing
negotiated.Apayee,forexample,mightfailtomeetalltherequirementsofnegotiationinthatevent,
theinstrumentmightwindupbeingmerelytransferred(assigned).Whenallrequirementsof
negotiabilityandnegotiationhavebeenmet,thebuyerisaholderandmay(ifaholderinduecourse
seeChapter24"HolderinDueCourseandDefenses")collectontheinstrumentwithouthavingto
proveanythingmore.Butiftheinstrumentwasnotproperlynegotiated,thepurchaserisatmosta
transfereeandcannotcollectifdefensesareavailable,evenifthepaperitselfisnegotiable.

HowNego a onIsAccomplished

Negotiationcanoccurwitheitherbearerpaperororderpaper.

Nego a onofInstrumentPayabletoBearer

Aninstrumentpayabletobearerbearerpapercanbenegotiatedsimplybydeliveringittothe
transferee(seeFigure23.1"NegotiationofBearerPaper"recallthatLornaLoveistheproprietorof
atennisclubintroducedinChapter22"NatureandFormofCommercialPaper"):bearerpaperrunsto
whoeverisinpossessionofit,evenathief.Despitethissimplerule,thepurchaseroftheinstrument
mayrequireanindorsementonsomebearerpaperanyway.Youmayhavenoticedthatsometimesyou
arerequestedtoindorseyourowncheckwhenyoumakeitouttocash.Thatisbecausetheindorsement
increasestheliabilityoftheindorseriftheholderisunabletocollect.Chungv.NewYorkRacing
Association(Section23.4"Cases")dealswithissuesinvolvingbearerpaper.

Figure23.1 NegotiationofBearerPaper

Nego a onofInstrumentPayabletoOrder

Negotiationisusuallyvoluntary,andtheissuerusuallydirectspaymenttoorderthatis,to
someonesorder,originallythepayee.Orderpaperisthisnegotiableinstrumentthatbyitstermis
payabletoaspecifiedpersonorhisassignee.Ifitistocontinueitscoursethroughthechannelsof
commerce,itmustbeindorsedsigned,usuallyonthebackbythepayeeandpassedontothe
transferee.ContinuingwiththeexampleusedinChapter22"NatureandFormofCommercialPaper",
Rackets,Inc.(thepayee)negotiatesLornaLovescheck(Lornaistheissuerordrawer)drawntothe
orderofRacketswhenanagentofRacketssignsthecompanysnameonthereverseofthecheckand
passesittotheindorsee,suchasthebankorsomeonetowhomRacketsowedmoney.(Acompanys
signatureisusuallyarubberstampformeredeposit,butanagentcansignthecompanynameand
directtheinstrumentelsewhere.)Thetransfereeisaholder(seeFigure23.2"NegotiationofOrder
Paper").HadRacketsneglectedtoindorsethecheck,thetransferee,thoughinphysicalpossession,
wouldnotbeaholder.IssuesregardingindorsementarediscussedinSection23.2"Indorsements".

Figure23.2 NegotiationofOrderPaper

K E Y TA K E AWAY

Atransferisthephysicaldeliveryofaninstrumentwiththeinten ontopass tletherighttoenforce

it.Ameretransfereestandsinthetransferorsshoesandtakestheinstrumentsubjecttoalltheclaims
 anddefensesagainstpayingitthatburdeneditwhenthetransferordeliveredit.Nego a onisa
specialtypeoftransfervoluntaryorinvoluntarytoaholder.Aholderisapersonwhohasan
instrumentdrawn,issued,orindorsedtohimorhisorderortobearerorinblank.Iftheinstrumentis
orderpaper,nego a onisaccomplishedbyindorsementanddeliverytothenextholder;ifitisbearer
paperorblankpaper,deliveryaloneaccomplishesnego a on.Transferorsincurtwotypesofliability:
thosewhosigntheinstrumentarecontractuallyliable;thosewhosignorthosewhodonotsignare
liabletothetransfereeinwarranty.

EXERCISES

1.Whatisatransferofcommercialpaper,andwhatrightsandliabili eshasthetransferee?
2.Whatisanego a onofcommercialpaper?
3.Whatisaholder?
4.Howisbearerpapernego ated?
5.Howisorderpapernego ated?

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