Issue, Transfer, and Discharge of Negotiable Instruments CHAPTER TWENTY.

Issue, Transfer, and Discharge of Negotiable Instruments

CHAPTERTWENTY

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The Issue and Transfer of Negotiable Instruments

• The functions of a negotiable instrument include:

• Substitute for cash,

• Credit device, and

• Record-keeping device.

• To serve as a substitute for cash, ownership of the instrument must be transferred to a different party.



• Circulation of Negotiable Instrument begins when with the transfer of the instrument for value to the payee.

– This action is referred to as the “issue”.

– Upon issue of the instrument the payee becomes the “holder” and is entitled to collect payment on the instrument, or

– The payee may transfer the instrument to a third party.



– If the transfer of the instrument is by assignment the third party does not become a holder.

• If the person receiving the instrument is not a holder they only obtain the same rights as held by the assignor (payee)

• Subject to any claims and defenses that maybe asserted against the assignor.



– If the transfer of the instrument is by negotiation the third party who takes possession of the instrument becomes a holder.

– A negotiation is a special form of transfer the importance of which lies in that the transferee becomes a holder.

– This may allow the third party to become a “holder in due course” (discussed in Chapter 21).


Negotiation of Order Instruments

• Negotiation of an order instrument is transferring ownership of the instrument.

• After an order instrument has been issued, a transfer of ownership (or negotiation) takes place only by:

– Transfer of physical possession of the instrument, and

– A endorsement or signature that customarily appears on the back of the instrument.


Negotiation of Bearer Instruments

• A bearer instrument’s ownership can be transferred by transferring possession.

– A check made payable to “Cash” is considered a bearer instrument, and anyone in possession can cash the check.

• An endorsement signature is not necessary in this circumstance.


Endorsements

• Endorsements can take on different forms, and those forms affect the ownership transfer:– Blank endorsement – specifies no particular endorsee

and may be negotiated by signature and delivery alone.

– Special endorsement – specifies the person to whom or to whose order the instrument is payable.

– Restrictive endorsement – usually signifies a purpose of deposit or collection.

– Qualified endorsement – when the instrument is endorsed “without recourse,” the person making the transfer is trying to limit his or her liability on the instrument.


Discharge of Negotiable Instruments

• Payment – when the party liable to pay the note or draft makes payment of the instrument in full to the holder, normally all parties on the instrument are discharged from their liability.– Payment is the usual manner in which liability on a

negotiable instrument is discharged.

• If the negotiable instrument is altered in a significant and fraudulent way, the obligation of any party on the instrument is discharged.


Discharge of Negotiable Instruments

• Statute of Limitations – if the instrument is not paid on time– The statue of limitations starts to run and

– If suit is not brought with in the statutory time period the instrument will be discharged.

• Bankruptcy – if a party to negotiable instrument goes bankrupt the instrument is discharged.

• Cancellation – any act that indicates the underlying obligation is ended.

Issue, Transfer, and Discharge of Negotiable Instruments CHAPTER TWENTY.

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