Stolen Negotiable Instrument and Holder Status - Explained
What happens when a Negotiable Instrument is Stolen?
Written by Jason Gordon
Updated at September 26th, 2021
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Table of Contents
What is the result if a negotiable instrument is stolen?Discussion QuestionPractice QuestionAcademic ResearchWhat is the result if a negotiable instrument is stolen?
A negotiable instrument made out to a specific individual is order paper. If the instrument is stolen, the thief can only transfer it by altering or forging the payees signature. As such, a transferee of stolen, forged order paper is not a holder or holder in due course and therefore does not take free of the payor's defenses. Bearer paper, on the other hand, may be transferred by anyone in possession of the instrument. A thief can negotiate stolen bearer paper to a holder. A holder of the paper would be subject to a payor's personal defenses or a claim by a payee that the instrument was stolen. In contrast, a holder in due course of stolen bearer paper takes the instrument free of the claims of the payor that it was stolen.
Note: Special rules apply when the theft of the negotiable instrument is carried about by an agent (such as an employee) of the payor. If an agent misappropriates an instrument, the principal may be liable on the instrument based upon the authority of the agent. The principal has a claim to the instrument or its proceeds against the agent and subsequent takers unless a subsequent transferee is a holder in due course.
Next Article: Guarantor or Surety of a Negotiable Instrument Back to: COMMERCIAL PAPER
Related Topics
- 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?
Discussion Question
How do you feel about the ability of a HDC who receives an instrument from a holder to enforce the instrument? Why does it matter whether the thief is also a forger? Should the interests of the payor be balanced against the interest of the HDC in this situation? Why or why not?
Practice Question
Eric executes a promissory note payable to Amanda or order. Tommy steals the note and endorses Amanda's name. He then sells the note to Max, who is unaware of the forgery. What is Eric's obligation to pay the instrument? What rights does Amanda have? What are Maxs rights?
