38. What is “indorser warranty” of a negotiable instrument?
An indorser of an instrument makes warranties to the maker or drawer of an instrument and to subsequent holders of the instrument. Assurances to the marker or drawer include:
• Good Title – She has good title to the instrument,
• Forgery – She has no knowledge of forgery, and
• Materially Altered – The instrument is not materially altered.
An indorser warrants to a subsequent holder that:
• Good Title – She has good title,
• Signatures – All signatures are genuine,
• Alterations – The instrument is not materially altered,
• Defenses – There are no known defenses against payment of the instrument, and
• Insolvency – There is no knowledge of the maker or drawer’s bankruptcy.
Liability for a failure of these assurances is known as “indorser liability”. The difference between indorser warranties and transferor warranties is that any good-faith holder of the note may enforce these warranties against any indorser. Recall, transfer warranties are limited to the immediate transferor. Indorser warranties make the indorser (signor) of an instrument secondarily liable to a holder. That is, the indorser is liable to pay an instrument that has been dishonored. An indorser who pays the instrument is left to seek reimbursement from a prior indorser or anyone who transferred the instrument to her.
• Note: Indorser liability can be disclaimed by the indorser at the time of indorsement. Generally, the disclaimer must be noted on the instrument. Disclaimer is not available for checks. The maker or drawer of a note or draft does not incur indorser liability or transferor liability. These individuals are primarily liable on the instrument.
• Discussion: Why do you think the UCC allows a holder of a dishonored instrument to seek payment from any prior indorser? Is this situation fair to a prior indorser? Why or why not? Why do you think these protections are necessary given the existence of transferor warranties?
• Practice Question: Victor is the holder of a note drawn by Russ and payable to “Victor or order”. Victor signs the instrument and negotiates it to “Waylon or order”. Waylon later signs the instrument and negotiates it to Yvonne. Yvonne presents the note to Russ for payment and it is dishonored? Yvonne does not want to sue Russ to enforce the instrument. What are her options for seeking payment of the instrument?