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Transfer Warranty of Negotiable Instrument

37. What is “transferor warranty” of a negotiable instrument?

A transferor of a negotiable instrument warrants the following to the recipient of the instrument:

•    Good Title – The transferor has good title to the instrument;

•    Enforceability – The transferor is entitled to enforce the instrument;

•    Authorization – All signatures are authorized and authentic;

•    Alterations – There have been no alterations to the instrument;

•    Defenses – There are no defenses to enforcing the instrument; and

•    Solvency – The transferor does not know the payor to be insolvent.

Transfer warranties apply when the transferor transfers the instrument for consideration. The new holder only receives transfer warranties from an immediate transferor. Thus, a holder cannot enforce the instrument pursuant to transfer warranty against anyone who transferred the instrument without consideration or did not directly transfer the instrument to her.

•    Note: A payor bank of a draft does not receive transfer warranty, as the instrument is presented to the bank, rather than transferred. Presentment warranty is discussed separately.

•    Discussion: How do you feel about the warranties provided by the transferor of a negotiable instrument? Are these warranties adequate? Why or why not? Can you think of any other warranties that should be included? Why do you think these warranties are limited to situations where the instrument is transferred for value? Should these warranties apply to prior transferors (as apposed to the immediate transferor)?

•    Practice Question: Leena is the holder of a note. Leena transfers the note to Kate for $100. Kate then transfers the note to Jean for $110. What transfer warranties apply to each of the parties?

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