CHAPTER
TWENTY
Issue, Transfer, and
Discharge of Negotiable
Instruments
The Issue and Transfer of
Negotiable Instruments
• The functions of a negotiable instrument
include:
• Substitute for cash,
• Credit device, and
• Record-keeping device.
• To serve as a substitute for cash, ownership
of the instrument must be transferred to a
different party.
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The Issue and Transfer of
Negotiable Instruments
• Circulation of Negotiable Instrument begins
when with the transfer of the instrument for
value to the payee.
– This action is referred to as the “issue”.
– Upon issue of the instrument the payee
becomes the “holder” and is entitled to collect
payment on the instrument, or
– The payee may transfer the instrument to a
third party.
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The Issue and Transfer of
Negotiable Instruments
– If the transfer of the instrument is by
assignment the third party does not become a
holder.
• If the person receiving the instrument is not a holder they
only obtain the same rights as held by the assignor
(payee)
• Subject to any claims and defenses that maybe asserted
against the assignor.
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The Issue and Transfer of
Negotiable Instruments
– If the transfer of the instrument is by
negotiation the third party who takes
possession of the instrument becomes a
holder.
– A negotiation is a special form of transfer the
importance of which lies in that the transferee
becomes a holder.
– This may allow the third party to become a
“holder in due course” (discussed in Chapter
21).
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Negotiation of Order Instruments
• Negotiation of an order instrument is
transferring ownership of the instrument.
• After an order instrument has been issued, a
transfer of ownership (or negotiation) takes
place only by:
– Transfer of physical possession of the
instrument, and
– A endorsement or signature that customarily
appears on the back of the instrument.
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Negotiation of Bearer Instruments
• A bearer instrument’s ownership can be
transferred by transferring possession.
– A check made payable to “Cash” is considered
a bearer instrument, and anyone in
possession can cash the check.
• An endorsement signature is not necessary in this
circumstance.
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Endorsements
• Endorsements can take on different forms, and those
forms affect the ownership transfer:
– Blank endorsement – specifies no particular endorsee
and may be negotiated by signature and delivery alone.
– Special endorsement – specifies the person to whom or
to whose order the instrument is payable.
– Restrictive endorsement – usually signifies a purpose of
deposit or collection.
– Qualified endorsement – when the instrument is endorsed
“without recourse,” the person making the transfer is
trying to limit his or her liability on the instrument.
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Discharge of Negotiable
Instruments
• Payment – when the party liable to pay the
note or draft makes payment of the
instrument in full to the holder, normally all
parties on the instrument are discharged from
their liability.
– Payment is the usual manner in which liability on a
negotiable instrument is discharged.
• If the negotiable instrument is altered in a
significant and fraudulent way, the obligation
of any party on the instrument is discharged.
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Discharge of Negotiable
Instruments
• Statute of Limitations – if the instrument is not
paid on time
– The statue of limitations starts to run and
– If suit is not brought with in the statutory time
period the instrument will be discharged.
• Bankruptcy – if a party to negotiable
instrument goes bankrupt the instrument is
discharged.
• Cancellation – any act that indicates the
underlying obligation is ended.
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