home | authors | books | about

Home -> Essel R. Dillavou -> Principles Of Business Law -> CHAPTER IV

Principles Of Business Law - CHAPTER IV

1. CHAPTER I

2. CHAPTER II

3. CHAPTER III

4. BOOK I CHAPTER I

5. CHAPTER II

6. CHAPTER III

7. CHAPTER IV

8. CHAPTER V

9. CHAPTER VI

10. CHAPTER VII

11. CHAPTER VIII

12. BOOK II CHAPTER I

13. CHAPTER II

14. CHAPTER III

15. CHAPTER IV

16. BOOK III CHAPTER I

17. CHAPTER II

18. CHAPTER III

19. CHAPTER IV

20. CHAPTER V

21. CHAPTER VI

22. CHAPTER VII

23. CHAPTER VIII

24. CHAPTER IX

25. CHAPTER X

26. BOOK IV CHAPTER I

27. CHAPTER II

28. CHAPTER III

29. CHAPTER IV

30. CHAPTER V

31. CHAPTER VI

32. CHAPTER VII

33. CHAPTER VIII

34. CHAPTER IX

35. CHAPTER X

36. CHAPTER XI

37. CHAPTER XII

38. CHAPTER XIII

39. BOOK V CHAPTER I

40. CHAPTER II

41. CHAPTER III

42. BOOK VI CHAPTER I

43. CHAPTER II

44. CHAPTER III

45. CHAPTER IV

46. CHAPTER V

47. BOOK VII CHAPTER I

48. CHAPTER II

49. CHAPTER III

50. CHAPTER IV

51. BOOK VIII CHAPTER I

52. CHAPTER II

53. CHAPTER III







CHAPTER IV
NEGOTIATION

Sec. 46. In general. Negotiation is the transferring of an in-
strument from one person to another in such manner as to convey
title and to constitute the transferee the holder thereof. If the
instrument is payable to bearer, it is negotiated by delivery; if it is
payable to order, it is negotiated by the indorsement of the holder
and by delivery. Thus A may negotiate a check payable to his
order by indorsing it "Pay to the order of 5, (signed) A" and by
delivering it to B. Negotiation is not the exclusive method of
transferring the property in a negotiable instrument. In the above
illustration A, by delivery without indorsement, might have trans-
ferred the property in the check to J3, but such a transfer would not
have given B a title free from any equities the drawer might have
had against A. In the latter case, B would not be a holder of the
instrument.

The indorsement, in the case of order paper, must be written on
the instrument itself; or if no space is available on the instrument
itself, it may be placed on a paper firmly attached thereto. Such a
paper is called an allonge. The signature of the indorser, with or
without additional words, is a sufficient indorsement. Thus, a
statement that the indorser "hereby assigns the within instrument"
is usually held to constitute an indorsement and negotiation unless
language is used which clearly indicates a different intention. 1

The indorsement must be for the entire instrument; that is, A
cannot indorse to B $50 out of a $100 check; he must indorse the
whole amount to B or the negotiation is invalid. Likewise, where
A purports to transfer the instrument to B and also to C, severally,
this transfer does not operate as a negotiation ; but a negotiation to
B and C jointly is valid. Both B and C must indorse, unless the
one indorsing has the authority to indorse for the other. In case
part of an instrument has been paid, it may be indorsed as to the
residue.

It should be remembered that indorsement is necessary for ne-
gotiation only in the case of order paper. The forms of indorse-
ment that appear upon order paper are of several types and create
different rights and liabilities between the parties. The Uniform
Negotiable Instruments Act states that the indorsements may be



'Farnsworth v. Burdick, 1915, 94 Kan. 749, 147 Pac. 863; p. 599.

16?



166 NEGOTIABLE INSTRUMENTS

either in blank, special, qualified, conditional, or restrictive. These
types of indorsements will be briefly considered in turn.

Negotiation by Indorsement

Sec. 47. Blank indorsement. A blank indorsement consists
of the indorsees name written on the instrument or the paper at-
tached thereto for that purpose, and is the form of indorsement
most generally used. This indorsement changes order paper to
bearer paper when it is the only or last indorsement. For example,
a check, on its face, payable to "Henry Smith or order," if indorsed
"Henry Smith," carries a blank indorsement. By this indorsement,
coupled with delivery, Henry Smith has relinquished all rights that
he had to the instrument, without directing that it be paid to any
particular person. Consequently, any person who bears the paper
or has possession thereof may recover on the same, regardless of
how he received it. A thief or a finder could, by delivery, pass title
to the instrument or could present the instrument for payment to
the primary party, and, if payment were made, the primary party
would be protected against the real owner.

A person receiving an instrument indorsed in blank may protect
himself by changing the indorsement from blank to a special in-
dorsement.

Sec. 48. Special indorsement. By this form of indorsement
the indorser designates a certain indorsee to whom the instrument
is payable. It is not necessary that the indorsement contain the
words "or order." Since the indorser specially names a person who
is to receive payment of the instrument, the paper continues order
paper and such special indorsee must indorse the paper if further
negotiation of the instrument is made. The following is an exam-
ple of a special indorsement: "Pay to William H. Lee." This is
equivalent to "Pay to the order of William H. Lee."

Sec. 49. Qualified indorsement. A qualified indorsement is so
named because it qualifies or limits the liability of the indorser.
By indorsing an instrument with a blank or special indorsement,
the indorser attaches liability to himself conditional upon the fail-
ure of the primary party to pay. Each indorsement of this char-
acter adds additional security to the instrument. There are many
situations, however, in which the holder of negotiable paper would
not care to assume this liability; that is, where the solvency of the
primary party is doubtful; or where the holder of the paper is a
mere trustee for others entitled to the beneficial interest, such as
the trustees in trust deeds used as securities for loans. Liability is
avoided, in part, by the indorser under such conditions through use
of a qualified indorsement which includes the words "without re-



NEGOTIATION 167

course," or any words of similar import. These words mean "not
to be liable as an indorser." The effect of such indorsement re-
lieves the indorser of his conditional liability. That is, the in-
dorser, in effect, assumes the liability of an assignor. It must be
noted, however, that words of assignment used in an indorsement
do not necessarily make the indorser a qualified one. It is held by
a majority of the courts that the language, "I hereby assign the
within instrument to A" is a special unqualified indorsement. 2
This type of indorsement does not affect the negotiability of the
instrument; neither does it prevent a holder from becoming a
holder in due course.

Sec. 50. Conditional indorsement. A conditional indorsement
is a special indorsement with added words creating a condition
which must happen before the special indorsee is entitled to pay-
ment. This condition is binding, between the indorser and subse-
quent purchasers, but the primary party on the paper may dis-
regard such condition and pay the holder, whoever he may be,
whether or not the condition has been met. Until the condition is
met, any holder who receives the proceeds of the paper holds the
same as a trustee for the conditional indorser. Consequently, any
person who takes the paper after such a conditional indorsement
is charged with knowledge of the condition. The following is an
example of such indorsement: "Pay to the order of L. P. Simpson
upon the delivery of one Ford car No. 79643 on June 3, 1947."

Sec. 51. Restrictive indorsement. There are often many sit-
uations in which the holder of negotiable paper may desire to part
with the possession of his paper, and yet at the same time reserve
to himself the right of the proceeds of the paper. It has been
noted that by blank and special indorsements not only the posses-
sion of the paper but also the right to the proceeds of the paper is
passed to the indorsee, with power to transfer both possession and
right to the proceeds. Under a restrictive indorsement, only pos-
session of the paper is transferred. Consequently, this type of in-
dorsement restricts further negotiation of the instrument, and
either makes the indorsee an agent of the indorser or invests title
in the indorsee in trust for or to the use of some other person. The
indorsee has the right, however, to receive payment of the instru-
ment, or to sue on the same, and may transfer such rights as he has
to another indorsee if a right of transfer has been given.

The following are examples of restrictive indorsement: "Pay to
K. Schmidt only." Such an indorsement prohibits any further ne-
gotiation of the instrument, in that K. Schmidt is the only person
entitled to receive payment. "Pay to the First National Bank in Champaign for collection only." This indorsement constitutes the
First National Bank in Champaign an agent of the indorser and
passes possession of the paper to the indorsee, who, upon collection
of the money, holds it as an agent of the indorser. This last type
of indorsement is in general use among banks for the collection of
negotiable paper. But the indorsement "Pay to the order of any
bank or banker/' in general use among banks, for the purpose
of forwarding an instrument for collection through intermediary
banks, is by some courts held not a restrictive indorsement because
"There is nothing on the face of this indorsement which prohibits
the further negotiation of the instrument, or constitutes the in-
dorsee the agent of the indorser, or vests title in the indorsee in
trust for the use of some other person ; and hence, by the most ele-
mentary principles of statutory construction, the plain meaning of
the language must be observed, and it must be held that the in-
dorsement was not restrictive." Some courts state, and the uni-
form bank collection code provides, that such an indorsement is
restrictive and equivalent to an indorsement for collection only, as
illustrated above, and that title remains in the indorsing bank.

A restrictive indorsee receives no better right in the instrument
than that possessed by his indorser unless he is made a trustee for
a third party. In the latter case, he may become a holder in due
course.

Sec. 52. Transfer of unindorsed order paper. Negotiation of
bearer paper is accomplished by delivery, whereas negotiation of
order paper is accomplished by indorsement and delivery. How-
ever, this difference does not mean that order paper may not be
transferred without indorsement. An instrument may be trans-
ferred without the indorsement of the payee or the special indorsee.
The person who receives the paper, however, cannot be called an
indorsee, but is properly designated as a transferee of unindorsed
order paper. This transferee occupies the same position and has
only such title as the transferor had. His position is somewhat
superior to that of the assignee of a simple contract, in that he has
the additional right to have the indorsement of the transferor. In
the absence of a different understanding, a transferee appears to
have the right to an unqualified indorsement. Such transferee,
therefore, may become a holder in due course at the time he re-
ceives the indorsement, if he has received no knowledge of defenses
prior to such indorsement. 3 By a regular indorsement the indorsee
receives a better title than the indorser. A transferee, however, re-
ceives only such title as the transferor had.

Karsner v. Cooper, 1922, 195 Ky. 8, 241 S.W. 346; p. 601.



NEGOTIATION 169

Sec. 53. Indorsement of bearer paper. Bearer paper is nego-
tiated by delivery, and requires no indorsement. Whether nego-
tiable paper is bearer paper is determined either at its origin, or
when the only or the last indorsement of order paper is in blank.
Under Section 40 of the Negotiable Instruments Act, an instru-
ment payable to bearer, indorsed specially, may nevertheless be
further negotiated by delivery; but the person indorsing specially
is liable as an indorser only to such holders as make title through
his indorsement. For example, Brown, the holder of White's note,
payable to bearer, negotiates it to Smith by special indorsement
"Pay to Smith, (signed) Brown. " Smith negotiates the note to
Dorsey by delivery. Dorsey becomes the holder of the note, being
bearer thereof, but he obtains no right against the indorser Brown,
because his title was not made through Brown but by delivery from
Smith. If Smith had indorsed the note to Dorsey, Dorsey might
have looked for payment not only from White, the maker, but also
from Brown and Smith, the indorsers. Thus, it is generally said
of a negotiable instrument: Once bearer paper on its face, always
bearer paper ; but order paper is order or bearer depending upon the
last indorsement.

Sec. 54. Surrender to the drawee not negotiation. It is cus-
tomary for a holder, when presenting a check or other bill of ex-
change to the drawee for payment, to write his name across the
back of the instrument. Such writing is not an indorsement, and
the transfer of the instrument from the holder to the drawee for
payment and discharge is not a negotiation. A negotiable instru-
ment, when transferred from one person to another by delivery or
indorsement, is a sale of the instrument, thus enabling it to pass
as money. The passing of an instrument from the holder to the
drawee, on the other hand, is a surrender of the instrument for dis-
charge, and is not a negotiation. Therefore, no indorsement is nec-
essary to entitle the holder to receive payment. If the drawee re-
fuses payment because of the failure of the holder to indorse, the
drawee breaches a contract with the drawer, because the drawee by
his contract has promised to pay any person ordered by the drawer
to be paid. A person signing his name on an instrument before
surrender to the drawee has no liability as an indorser, because the
drawee does not occupy the position of a holder. The drawee,
however, becomes a holder if he purchases the bill before maturity
with intention further to negotiate it. In the absence of this sit-
uation, the signature upon a bill of exchange before surrender to
the drawee for payment merely acts as a receipt for money so far
as the drawee is concerned.



170 NEGOTIABLE INSTRUMENTS

Review Questions and Problems

1. Name the two methods of negotiating commercial paper. May only
a part of a negotiable paper be transferred? Must the indorsement ap-
pear on the instrument?

2. What is a blank indorsement? What is its effect? Should such an
indorsement be used where the instrument is to be retained some time by
the indorsee? How may it be changed?

3. How is a qualified indorsement effected? What is its purpose?

4. A takes a note to his bank for collection. What type of indorse-
ment should he use in order adequately to protect his interest?

5. P transfers to H negotiable order paper without indorsement. May
H enforce payment of the instrument against the maker? What right
has H against his transferor?

6. Is it necessary to indorse bearer paper in order to pass good title?
To whom is such an indorser liable?

7. A takes a check made payable to his order to the drawee bank and
demands payment. The bank asks him to indorse it and he refuses. Is
the bank under a duty to pay without the indorsement? What is the
effect of an indorsement under such circumstances?




© Art Branch Inc. | English Dictionary