Lecture on Negotiable Instruments

Introduction

• Negotiable instruments tell a story from issuance to payment.
• Issuance: Issuer transfers negotiable instrument to payee.
• Payment: Instrument presented to issuer.
• Negotiation: Process of transferring negotiable instruments (promissory notes or checks) and creating a holder.

Holder and Rights

• Holder receives all rights of previous possessor.
• Two negotiation methods:
  1. Order Instrument
  2. Bearer Instrument

Negotiating Order Instruments

• Requires endorsement (signature) and delivery.
  • Endorsement authenticates right to transfer.
  • Historically, delivery meant physical transfer.
  • Modern methods allow delivery without physical paper.

Negotiating Bearer Instruments

• Requires only delivery, no endorsement needed.

Endorsements

• Definition: Signature with or without additional words or comments.
• Endorser: Transfers note or draft by signing and delivering.
• Endorsee: Person to whom check or promissory note is endorsed and delivered.

Types of Endorsements

1. Blank Endorsement

   • Just a signature; no specific endorsee or restrictions.
   • Converts document into a bearer instrument, negotiable by delivery.

2. Special Endorsement

   • Signature plus identification of endorsee.
   • Converts bearer document into an order instrument.

3. Qualified Endorsement

   • Used by endorser who wishes to avoid liability.
   • Includes phrase like "without recourse."
   • Financial institutions dislike due to reduced liability.

4. Restrictive Endorsement

   • Endorsee must comply with specific instructions.
   • Includes conditional endorsements (dependent on event) but maintains negotiability.
   • Common: "For deposit only" or "For mobile deposit only."

Effect of Endorsements

• Can convert instruments between order and bearer status.
• Order Instrument to Bearer: Check endorsed in blank becomes bearer.
• Bearer to Order: Special endorsement identifies endorsee.

Examples

• Blank Endorsement: Check to Jesse Arnold, signed in blank, becomes bearer.
• Bearer to Order Conversion: Special endorsement negotiates to named endorsee (e.g., "pay to the order of John Smith").

Conclusion

• Be familiar with different endorsements: blank, special, qualified, restrictive.
• Important for tests to identify specific endorsement types.
• Questions? Reach out to the lecturer.