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1
CHAPTER 26
TRANSFERABILITY AND HOLDER IN DUE COURSE
ANSWERS TO QUESTIONS
AT THE ENDS OF THE CASES
CASE 26.1—CRITICAL THINKING
LEGAL ENVIRONMENT
Even though forged or unauthorized signatures on negotiable instruments are
uncommon, should U.S. Bank have had to prove that the indorsements on this note were
ECONOMIC
How does the presumption that an indorsement is legitimate “without unambiguous
evidence to the contrary” protect the transferability of a negotiable instrument? The
presumption that an indorsement is legitimate “without unambiguous evidence to the contrary”
2 UNIT FIVE: NEGOTIABLE INSTRUMENTS
CASE 26.2—LEGAL REASONING QUESTIONS
1. What evidence did the plaintiff offer to establish standing to enforce the note?
Explain. At trial, the plaintiff—AS Peleus, LLC—produced the original note, which contained a
2. What might have been the result if the assignments of the note had ended with the
indorsement on the fifth allonge? If the assignments of the note at issue had ended with the
indorsement on the fifth allonge, and no other facts were different, the result would likely have
3. If the series of indorsements on the note had ended with a blank indorsement, would
CHAPTER 26: TRANSFERABILITY AND HOLDER IN DUE COURSE 3
CASE 26.3—CRITICAL THINKING
WHAT IF THE FACTS WERE DIFFERENT?
Suppose that Demery had gone to work for a company not owned or managed by a
family member and had stolen funds from it to pay Georg. Would Georg then be the more
innocent party? Why or why not? That would make Freestyle’s case quite weak. Georg did
ETHICAL
Since Georg knew that Demery had previously embezzled funds from Freestyle when she
was an employee, shouldn’t he have been suspicious about the source of the funds that
Demery was using to repay Freestyle? Why did the court conclude that Freestyle acted in
good faith in accepting the check? Discuss. On the question of whether Freestyle took the
check in good faith, so as to qualify as a holder in due course, the court emphasized Demery’s
4 UNIT FIVE: NEGOTIABLE INSTRUMENTS
ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
1A. Method of negotiation
An instrument, such as a check, is delivered with necessary indorsements when it is properly
2A. Payable jointly or in the alternative
Under UCC 3-110, when two names appear on a check, it is presumed to be payable alter-
3A. Requirements of an HDC
The payees met the definition of an HDC: value was given, the checks were taken in good faith,
and there never was a reason to suspect a problem.
4A. Ruling
The checks were properly presented and paid to a holder in due course. Further, the plaintiffs
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
We should eliminate the status of holder in due course for those who possess
ANSWERS TO ISSUE SPOTTERS
AT THE END OF THE CHAPTER
1A. Kurt receives from Nabil a check that is made out “Pay to the order of Kurt.” Kurt
turns it over and writes on the back, “Pay to Adam. [Signed] Kurt.” What type of
CHAPTER 26: TRANSFERABILITY AND HOLDER IN DUE COURSE 5
indorsement is this? What effect does this indorsement have on whether the check is
considered an order instrument or a bearer instrument? Explain. “Pay to Adam. [Signed]
2A. Ben contracts with Amy to fix her roof. Amy writes Ben a check, but Ben never
makes the repairs. Carl knows Ben breached the contract, but cashes the check anyway.
ANSWERS TO BUSINESS SCENARIOS
AT THE END OF THE CHAPTER
26-1A. Indorsements
(a) “For rent paid. [Signed] Jordan” is a blank indorsement. The words for rent paid
(b) Negotiation is the transfer of an instrument in such form that the transferee be-
comes a holder [UCC 3–201(a)]. If the instrument is order paper, the transfer requires an
26-2A. Holder in due course
To qualify as a holder in due course, Emilio must be a holder [UCC 1–201(20)], take the in-
strument for value, take the instrument in good faith, and take the instrument without notice of
dishonor, claim, defense, or that it is overdue. Because Emilio has the status of a holder
6 UNIT FIVE: NEGOTIABLE INSTRUMENTS
negotiated to the holder does not bear such apparent evidence of forgery or alteration or is not
otherwise so irregular or incomplete as to call into question its authenticity.”
(a) The alterations from $9 to $90 were cleverly done, and thus we assume there was
26-3A. Negotiation
(a) On its issue, this check was a bearer instrument. Any instrument that does not
(b) The finder’s delivery of the check to the creditor was a valid negotiation. All that is
required for the negotiation of a bearer instrument is voluntary delivery.
ANSWERS TO BUSINESS CASE PROBLEMS
AT THE END OF THE CHAPTER
26-4A. Transfer and holder in due course
26–5A . BUSINESS CASE PROBLEM WITH SAMPLE ANSWER—Negotiation
A negotiable instrument can be transferred by assignment or by negotiation. An assignment is a
transfer of rights by contract. A transfer by assignment to an assignee gives the assignee only
those rights that the assignor possessed. Any defenses that can be raised against the assignor
can be raised against the assignee. When an instrument is transferred by negotiation, the
transferee becomes a holder. A holder receives at least the rights of the previous possessor.
CHAPTER 26: TRANSFERABILITY AND HOLDER IN DUE COURSE 7
26–6A. Indorsements
Yes, BAC can enforce the note. Under the UCC, the right to enforce an instrument and the
ownership of the instrument are two different concepts. The holder of a note is entitled to
enforce the instrument even if it is not the owner of the instrument or is in wrongful possession
of it. An instrument indorsed in blank can be transferred by delivery alone.
26–7A. Transfer by negotiation
Fannie Mae’s best response to Duong’s argument is that the indorsement was a blank
indorsement making the note payable to bearer. Thus, by coming into possession of the note,
Fannie Mae became its holder with the ability to enforce it. A bearer instrument is an instrument
that does not designate a specific payee. If an instrument is payable to bearer, it is negotiated
8 UNIT FIVE: NEGOTIABLE INSTRUMENTS
26–8A. Indorsements
Yes, the evidence offered by Nationstar Mortgage, LCC, established that the allonge was
sufficiently affixed to the note to prove Nationstar’s status as the holder of the note with the right
to enforce it. When an indorsement accompanies the transfer of a negotiable instrument, it is
most often written on the back of the instrument. If there is no room, the indorsement can be
written on a separate piece of paper—an allonge—that is affixed to the instrument and under
the UCC thereby made part of it. A blank indorsement does not specify a particular indorsee and
can consist of a mere signature.
In this problem, the Purificatos signed a note secured by their interest in certain real
property. The note was transferred through several parties to Aurora Loan Services. The
CHAPTER 26: TRANSFERABILITY AND HOLDER IN DUE COURSE 9
26-9A. A QUESTION OF ETHICS—Indorsements
(a) The indorsement on Interior’s checks was a restrictive indorsement, which re-
quired the recipient (here, Pan American Bank) to comply with the instructions (here, “Deposit
(b) Leparski’s acts were illegal and unethical. Of course, Interior might have thwarted
Leparski under the circumstances of this case by limiting his authority to receive and deposit
ANSWERS TO LEGAL REASONING GROUP ACTIVITY QUESTIONS
AT THE END OF THE CHAPTER
26–10A. Holder in due course
(a) The bank does qualify as a holder in due course (HDC) for the amount of $5,000.
To qualify as an HDC, under UCC 3–302, one must take the instrument for value, in good faith,
and without being put on notice that a defense exists against it, that it has been dishonored, or
that it is overdue. In this situation the bank has given full value for the instrument—$4,850
10 UNIT FIVE: NEGOTIABLE INSTRUMENTS
(b) The sale to a stranger in a bar for $500 creates an entirely different situation. One
of the requirements for the status of an HDC is that a holder take the instrument in good faith.
