Chapter 20: Issue, Transfer, and Discharge of Negotiable Instruments 1

Chapter 20: Issue, Transfer, and Discharge of Negotiable Instruments 1

CHAPTER 20

Issue, Transfer, and Discharge of Negotiable Instruments

KEY POINTS IN THE CHAPTER

The first transfer of the instrument to the payee by the maker or drawer is called an issue. The payee may demand payment on the instrument or pass it on, generally by negotiation to a holder; the original payee is also a holder. By means of the issue, the payee becomes a holder and is thereby entitled to collect payment on the instrument or trans it (pass it on) to a third party. A transfer is best made by negotiation because the third party (who takes possession of the instrument) becomes a holder like the original payee and could, under certain circumstances, gain special privileges. In order to gain these special privileges, the holder would need to meet the requirements of a holder in due course.
An order instrument (one payable “to the order of” a named payee) may be negotiated only by endorsement (a signature) and delivery. Negotiation in this manner may continue until the holder in possession decides to present the instrument to the party responsible for payment.
A bearer instrument (payable to anyone in possession) may be negotiated by delivery alone. An endorsement is not necessary. After negotiation, the transferee becomes a holder.
There are four basic endorsements: blank, special, restrictive, and qualified.
A blank endorsement, consisting only of the signature of the endorser, makes the instrument payable to bearer. A special endorsement specifies the person to whom the endorser intends to make the instrument payable; a restrictive endorsement requires the endorsee to comply with instructions stated in the endorsement regarding what is to be done with the money stated on the face of the instrument. “For deposit only” is the restrictive endorsement most frequently used; a qualified endorsement allows a person to transfer the instrument but to disclaim any liability if the instrument is not paid by the maker or drawee when due.
A negotiable instrument can be discharged in five ways: payment, alteration, the statute of limitations, bankruptcy, and cancellation.

TRUE- FALSE QUESTIONS

Indicate whether each statement below is true or false by circling T or F in the column on the left.

1.TFA payee of a negotiable instrument can transfer that instrument to someone by negotiation.

2.TFAn endorsement that limits the liability ordinarily undertaken by an endorser is called a restrictive endorsement.

3.TFAn endorsement that states the name of the person to whom the instrument is being transferred is a special endorsement.

4.TFA check payable to “Cash” must be negotiated by endorsement and delivery.

5.TFThe purpose of an endorsement is to transfer ownership of a negotiable instrument.

6.TFNegotiation is a special form of transfer, which makes a person who takes the instrument a holder.

7.TFA person who has a negotiable instrument containing a blank endorsement can legally change the endorsement to a special endorsement.

8.TFA blank endorsement makes the instrument payable to the bearer.

9.TFThe use of a qualified endorsement makes an instrument nonnegotiable.

10.TFMarking a promissory note “void” is one way of canceling the instrument.

11.TF“For deposit only” is a special endorsement.

12.TFAn instrument with a blank endorsement can be transferred from one person to another by delivery alone, without further endorsement.

13.TFBearer paper can be negotiated by voluntary delivery alone.

14.TFAn instrument with a blank endorsement should not be mailed because if the instrument is lost, anyone can collect without proving ownership of the instrument.

15.TFA special endorsement must contain the word order or bearer.

MULTIPLE-CHOICE QUESTIONS

Circle the letter of the best answer.

1.Barbara Allen endorses her paycheck “For deposit only—Barbara Allen.” This endorsement is

a.blank.

b.restrictive.

c.special.

d.qualified.

2.Which of the following endorsements by Walter Bly, the payee of a check, makes the check payable to bearer?

a.Walter Bly.

b.Pay to the order of Herb Winthrop, (signed) Walter Bly.

c.Pay to Herb Winthrop, (signed) Walter Bly.

d.Pay to Herb Winthrop or Order, (signed) Walter Bly.

3.Varden wanted to make a bank deposit by mail. The safest endorsement for her to use on checks deposited this way is a(n)

a.special endorsement.

b.blank endorsement.

c.qualified endorsement.

d.restrictive endorsement.

4.Barron negotiated a check that she received from Cleary by making the following endorsement: “Pay to the order of Blythe Love—Jane Barron.” Legally, Love now can negotiate this check by

a.delivery only.

b.endorsement only.

c.either endorsement or delivery.

d.both endorsement and delivery.

5.To be valid, an endorsement

a.must be typed.

b.must be handwritten.

c.can be typed or handwritten.

d.must be printed.

CASE PROBLEMS

Read the case problems below. For each problem, answer yes or no, and then explain your answer in the space provided.

1.Falvo made a check payable to “Cash” and gave the check to Gamber. Gamber left the check on his desk while he attended a meeting. When Gamber returned, he discovered that the check had been stolen. Did the thief receive the check by negotiation?

______

2.Freeman’s house was burglarized, and several checks were stolen, one of which was made out to “Cash.” The thief who stole the check passed it on to another party. Did the transfer by the thief to the other party constitute a negotiation of the check?

______

SHORT-ANSWER QUESTIONS

Answer each of the following questions in the space provided.

1.James Tuttle wrote a check drawn on the Friendly Trust Bank, payable to Rachel Fellows in the amount of $500. Fellows owed $500 to Timothy Blanchard, so she endorsed the check and gave it to Blanchard.

a.Who is the drawer? ______

b.Who is the drawee? ______

c.Who is the payee? ______

d.Who is the endorser? ______

e.Who is the endorsee? ______

2.Identify each type of endorsement in the illustrations below.

a.______/
b.______/
c.______/