How is Negotiable Instrument Negotiated?
What is Negotiation of a Negotiable Instrument?
Written by Jason Gordon
Updated at April 6th, 2023
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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 present. 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.
Next Article: Transfer of a Negotiable Instrument Back to: COMMERCIAL PAPER
Discussion Question
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?
Related Topics
- Commercial Paper (Intro)
- What is Commercial Paper?
- Negotiable Instrument
- What are the common types of commercial paper?
- Promissory Note
- Cashier's Check
- Convenience Check
- Certified Check
- Substitute Check
- Bill of Exchange
- Bank Draft Definition
- Sight Draft Definition
- Bankers Acceptance
- Who is a Holder of a negotiable instrument?
- Commercial Paper Funding Program
- What is Negotiability and why is it important?
- What is required for commercial paper to be negotiable?
- Sum Certain (Contracts)
- Inflation Adjustment Clause
- When does commercial paper contain an Unconditional promise to pay?
- Backup Line of Credit
- What is Payable on Demand or Payable on Time?
- What is Order Paper and Bearer Paper?
- Bearer Form
- How is a payee identified on the negotiable instrument?
- What rules does the court apply in determining negotiability?
- How is commercial paper negotiated to a holder?
- What is Transfer of a negotiable instrument?
- What is Indorsement of a negotiable instrument?
- What are the various types of indorsement?
- Bank Endorsement
- Blank Endorsement
- Accommodation Endorsement
- How does a holder receive payment on a negotiable instrument?
- Who is potentially liable on (or obligated to pay) a negotiable instrument?
- When is an individual liable for a representative signing a negotiable instrument?
- What rules apply if a holder loses a negotiable instrument?
- When is payment of a negotiable instrument overdue?
- What effect does a negotiable instrument have on the underlying obligation?
- What is a holder in due course?
- What are the requirements for a holder to become a holder in due course?
- Receive an instrument for value?
- Receive an instrument in good faith?
- Receive an instrument without notice of a valid defense?
- How does discharge of the Underlying Obligation affect a holder in due course?
- What is the Shelter Rule?
- Can you limit a transferee from becoming a holder in due course?
- Personal Defenses?
- Real Defenses?
- What is a Claim in Recoupment?
- What are the rights of a holder in due course if the instrument involves a consumer transaction?
- What happens if a negotiable instrument is Forged?
- What happens if a negotiable instrument is Stolen?
- Guaranty or Guarantee
- Letter of Guarantee
- Personal Guarantee
-
What is the role of a Guarantor or Surety of a negotiable instrument?
-
Surety
- Cosign
- Accommodation Paper Definition
- Secondary Liability
- Avalize Definition
- What is an Accord & Satisfaction?
- What is primary and secondary liability on an instrument?
- What is Drawer or Maker Liability for a negotiable instrument?
- What is Transferor Warranty of a negotiable instrument?
- What is Indorser Warranty of a negotiable instrument?
- What is Presentment Warranty of a negotiable instrument?
- What is a warrantors liability for a dishonored note or draft?
- What is the time limitation for warranty of a negotiable instrument?
- When are the warranties of a negotiable instrument discharged?
