Legal Definitions - transfer warranty

A transfer warranty is a legal guarantee made by a person who transfers a negotiable instrument, such as a check, promissory note, or draft, to another party for value. These warranties are implied by law and are designed to protect the transferee (the person receiving the instrument) by assuring them of certain facts about the instrument and the transfer itself. They essentially ensure that the instrument is legitimate and that the transferor has the right to transfer it without certain undisclosed problems.

Key aspects typically covered by a transfer warranty include assurances that:

• The transferor is entitled to enforce the instrument.
• All signatures on the instrument are authentic and authorized.
• The instrument has not been altered.
• The instrument is not subject to any defense or claim against the transferor that could be asserted by any party.
• The transferor has no knowledge of any insolvency proceedings against the maker, acceptor, or drawer of the instrument.

Here are some examples illustrating how transfer warranties apply:

• Example 1: Depositing a Client Check

  Imagine Sarah, a freelance graphic designer, receives a check for $3,000 from her client, "Innovate Marketing Solutions," as payment for her services. Sarah endorses the check and deposits it into her business bank account. When Sarah deposits the check, she, as the transferor, implicitly makes transfer warranties to her bank (the transferee). These warranties include an assurance that the check is not forged, that the amount has not been altered, and that she is entitled to enforce it. If, for instance, the check later turns out to be a sophisticated counterfeit, Sarah's bank can hold her accountable based on her breach of the transfer warranty that all signatures are authentic and the instrument has not been altered. This protects the bank from losses incurred due to a fraudulent instrument.

• Example 2: Selling a Promissory Note

  Consider Mark, who holds a promissory note from his friend, Emily, representing a personal loan. Mark decides to sell this note to an investor, Lisa, for a discounted amount. When Mark transfers the promissory note to Lisa, he provides transfer warranties to her. These warranties assure Lisa that Mark is entitled to enforce the note, that Emily's signature on the note is authentic, and that the note has not been altered. If it later comes to light that Emily's signature was forged, Lisa could pursue a claim against Mark for breach of the transfer warranty regarding authentic signatures, even if Mark was unaware of the forgery. This protects Lisa's investment by ensuring the validity of the instrument she purchased.

• Example 3: Cashing a Payroll Check

  Suppose David receives his bi-weekly payroll check from his employer. He takes the check to a check-cashing service to get immediate cash. When David endorses and presents the check to the check-cashing service, he (the transferor) makes transfer warranties to the service (the transferee). These warranties assure the service that the check is legitimate, that his employer's signature is authorized, and that the check has not been altered. If the check-cashing service later discovers that the check was altered (e.g., the amount was fraudulently increased), they could seek recourse from David based on his breach of the transfer warranty against alteration, even if David himself did not alter the check. This mechanism helps the check-cashing service recover funds lost due to a defective instrument.