Deck 23: Negotiation and Discharge

Question 1

By making an indorsement what do all indorsers except qualified indorsers agree to?

Answer 1

An indorser excluding qualified indorser are willing to pay instrument's face amount to subsequent hole only if primary party gets instrument from the holder and they refuse to pay back.
The notice of this default must be to indorser by the holder. The notice can be given by any means including oral notice before midnight of the full third business day.

Question 2

How does an indorsement "without recourse" affect the indorser's warranty liability?

Answer 2

Restrictive Indorsement:
A restrictive indorsement is an indorsement on a negotiable instrument that is conditional and requires the indorsee comply with certain instructions regarding the funds involved.An indorsement that states "without recourse" is restrictive, and destroys the liability of the indorser for the face of the instrument and does not affect warranties. In order to exclude warranties, the indorser muse clearly write "without warranties" on the instrument.

Question 3

What does a person who negotiates a bearer instrument by delivery alone warrant?

Answer 3

Bearer Instrument:
Under UCC § 3-201 , an instrument payable to bearer is negotiated by delivery alone. It is only indorsed when presented for payment, not when being negotiated. A promise to pay the bearer states that it is payable to the bearer or the order of the bearer, does not state a payee or is payable to the order of cash.
A transferee might require an indorsement on bearer paper because it does not state a payee and anyone can cash it. In order to avoid potential litigation in the future, it is best to have the original holder, as well as each subsequent holder of the bearer paper indorse it to establish a chain of holders and the current rightful holder.
A person who negotiates a bearer instrument by delivery alone does not guarantee payment but is liable to the immediate transferee as a warrantor of the legitimacy of the instrument, title, prior party capacity, and validity of the instrument.

Question 4

How may a negotiable instrument be discharged?

Question 5

Ronnie Gilley Properties, LLC (Gilley), wrote a check to Cile Way Properties, LLC (Cile), for $100,000. When Cile deposited the check in its bank, it was misencoded in the amount of $1,000. As a result, only $1,000 was credited to Cile's account and debited from Gilley's account. Was the obligation discharged?

Question 6

What is an indorsement?

Question 7

Daniel Manley executed a note for $420,000 secured by a mortgage to Independent National Bank (Independent). Manley's father, Thomas Manley, guaranteed payment of the note. Wachovia Small Business Capital (Wachovia) obtained the note as a result of a merger with Independent. There was default on the note. At trial, Thomas testified that he had taken $375,000 in $100 bills to Wachovia and requested a receipt. He said the Wachovia employee had told him a receipt would be mailed to him after the amount was verified, but he never received one. Three months later, Daniel received the original note in the mail in a Wachovia envelope. The note was stamped "Paid." Wachovia had no record of a $375,000 cash payment or of the normal audit procedures it followed when a note was paid. The Manleys argued that Wachovia's stamping "Paid" on the note and mailing it to Daniel discharged the note. Was it discharged?

Question 8

Why might a transferee require an indorsement on bearer paper?

Question 9

Howard Turner borrowed $85,000 from Fidelity Mortgage (Fidelity) and executed a mortgage to secure the loan. Turner died six months later, and the note went into default. HSBC Bank USA, N.A. (HSBC) sued Jamie Thompson, the daughter and administratrix of Turner's estate. HSBC produced copies of the note and mortgage and two separate, loose documents each titled "allonge." The first stated, "Pay to the order of ____" and was signed on behalf of Delta Funding Corp. The second stated, "Pay to the order of Delta Funding Corp." and was signed on behalf of Fidelity. Were the alleged allonges adequate to negotiate the note to Delta?

Question 10

If an instrument is to be indorsed, where must the indorsement be found?

Question 11

Marian Gass executed a note and mortgage in favor of Option One Mortgage Corporation. The note was negotiated and ultimately EMC Mortgage Corporation (EMC) began foreclosure proceedings after Gass missed payments. Gass challenged EMC's standing to pursue foreclosure on the basis that the original note was "robo-signed" by individuals without authority, and that EMC never actually had possession of the note. Further, the evidence of indorsement consisted of an alleged allonge, which was obviously not proven to be attached to the note which was not produced in court. Did EMC have the right to enforce the note?

Question 12

Does an irregularity in the name of a party to an instrument destroy negotiability?

Question 13

Chester Crow signed a note for a loan from First National Bank (FNB). The note was due in ninety days, but Crow could not pay the full amount when due. Several years later, Premier Bank, the successor to FNB, returned three payments to Crow with a cover letter that called the payments "overpayments." It then issued an IRS Form 1099-C (Cancellation of Debt) to Crow, with these notations: "Date canceled:... ; Amount of debt canceled: $7,991.00." The 1099-C resulted in a negative tax impact for Crow. At the same time, Premier sold the note and three dozen others having a total face value of $600,000 and indorsed: "without recourse, representation or warranty of any kind" to Credit Recoveries Inc. (CRI) for $1,500. Four months later, CRI demanded that Crow pay his note. Crow wrote CRI that Premier had "returned a refund check for the last payment." Four years later, after no contact, CRI again demanded that Crow pay the note. Crow replied that Premier had issued the 1099-C. CRI sued Crow. Had Premier cancelled the debt?

Question 14

When there are multiple payees on an instrument, how can one know whether all must indorse or only one need indorse the instrument to negotiate it?

Question 15

Patricia Woodberry executed a promissory note to SouthStar Funding, LLC secured by a mortgage on her home. Two years later, she filed for bankruptcy and listed Structured Asset Investment Loan Trust, 2005-8 (ASC) as a creditor. In the bankruptcy proceedings, the court had to decide whether ASC was actually a party with an interest in the bankruptcy case. It was, if it was the holder of the note. ASC had possession of the note, and there was an attachment to the original note entitled "Allonge to Note," containing the statement: "Pay to the order of without recourse." Woodberry argued that ASC did not have an interest in the case. Was ASC the holder of the note?

Question 16

Name four kinds of indorsements, and give an example of the proper use of each one.