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How is Negotiable Instrument Negotiated

11. How is commercial paper negotiated to a holder?

“Negotiation” means that an instrument has been transferred (either voluntarily or involuntarily) to the holder by someone other than the issuer. If an individual acquires paper by a method other than negotiation, she is a “transferee” and not a “holder” of the paper. The paper is negotiated upon:

•    transfer of possession, and

⁃    Note: The transferee may become a holder upon transfer. A holder must be entitled to enforce the instrument. This excludes individuals who forge a signature on order paper. They do not legally become a holder because the signature (a required element of negotiation of order paper) is not proesent. A thief or finder of bearer paper, however, may become a holder.

•    indorsement (signature) by the holder.

⁃    Note: Indorsement is not generally required for bearer paper, as the holder is not necessarily named on the instrument.

The holder of the instrument has the right to force the transferor to indorse the instrument. This is very important for purposes of enforcement and liability if the instrument is not paid when validly presented by a subsequent holder. That is, the indorser may be liable for paying an instrument that is dishonored when presented.

•    Discussion: Can you think of a type of transfer that does not constitute negotiation of order paper? What about bearer paper?

•    Practice Question: Linda writes a check drawn on First Bank and transfers it to Faye. Faye indorses the check and makes it payable to “Clyde”. The check is stolen from the mail. The thief indorses the instrument in Clyde’s name to make it bearer paper. Is the thief a holder of the instrument? Why or why not?


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