Transfer warranties

84-3-416. Transfer warranties. (a) A person who transfers an instrument for consideration warrants to the transferee and, if the transfer is by endorsement, to any subsequent transferee that: (1) The warrantor is a person entitled to enforce the instrument; (2) all signatures on the instrument are authentic and authorized; (3) the instrument has not been altered; (4) the instrument is not subject to a defense or claim in recoupment of any party which can be asserted against the warrantor; (5) the warrantor has no knowledge of any insolvency proceeding commenced with respect to the maker or acceptor or, in the case of an unaccepted draft, the drawer; and (6) if the instrument is a demand draft, creation of the instrument according to the terms on its face was authorized by the person identified as drawer. (b) A person to whom the warranties under subsection (a) are made and who took the instrument in good faith may recover from the warrantor as damages for breach of warranty an amount equal to the loss suffered as a result of the breach, but not more than the amount of the instrument plus expenses and loss of interest incurred as a result of the breach. (c) The warranties stated in subsection (a) cannot be disclaimed with respect to checks. Unless notice of a claim for breach of warranty is given to the warrantor within 30 days after the claimant has reason to know of the breach and the identity of the warrantor, the liability of the warrantor under subsection (b) is discharged to the extent of any loss caused by the delay in giving notice of the claim. (d) A cause of action for breach of warranty under this section accrues when the claimant has reason to know of the breach. (e) If the warranty in subsection (a)(6) is not given by a transferor under applicable conflict of law rules, then the warranty is not given to that transferor when that transferor is a transferee. History: L. 1991, ch. 296, § 53; L. 2005, ch. 58, § 4; July 1. KANSAS COMMENT, 1996 This section is identical to the 1995 Official Text. This section is derived from the former 84-3-417(2) with many modifications. Historical case and statutory references can be obtained from the 1965 and 1983 bound volume 7 of the Kansas Statutes Annotated. The transfer warranties govern all transfers for consideration except the final delivery to the final payor. The final payor receives only the presentment warranties. A warranty liability is liability off the instrument. The obligations of the parties "on the instrument" are covered by 84-3-412 through 84-3-415, and 84-3-419 (accommodation parties). If the transfer is made with an indorsement, the transfer warranties inure to the benefit of all later takers of the instrument except, again, the final payor. "Transfer" is defined in 84-3-203(a) to encompass all deliveries of the instrument after the initial issue. A wrongful issuer is liable under 84-3-401(a). The warranty covers the fact that (1) the transferor is in proper possession of the instrument, entitled to enforce it. The major function of this warranty is that there are no unauthorized indorsements. There is a considerable overlap with the warranty in 84-3-416(a)(2). It also covers any other situations where they would not be entitled to enforce the instrument, but they would be rare. It is not a warranty that the enforcement of the instrument is proper, only that they are entitled to enforce it. See 84-3-301. If the drawer or prior owner is precluded from claiming an unauthorized signature (84-3-404 through 84-3-407), the transferor may assert that fact. The second warranty is that (2) all signatures are genuine or authorized. This is a broader warranty in some aspects than the above. It will include the signature of the issuer, the maker, drawer, an acceptor or an accommodation party ("anomalous indorser," 84-3-205(d), 84-3-419(c)). Thus if there is a forged indorsement on order paper, both the 84-3-416(a)(1) and (a)(2) warranties are breached, but if there is a forged drawer's signature, only (a)(2) is breached. If a bearer instrument is stolen, however, only (a)(1) is breached. The warranty against alteration, (a)(3), will serve to cover the damages between the original amount on the instrument and the altered amount. Thus, a holder in due course of a check raised from $5.00 to $500.00 can recover $5.00 from the drawer (84-3-407(b)) and the other $495.00 from each transferor after the alteration, if the transfer was for consideration and by indorsement. Subsection (a)(4) warrants against any defense or claim in recoupment. It operates if any party has a defense to payment against any later holder. It serves much the same function as a warranty of quiet enjoyment in real property deeds. If a defense is raised, the holder can recover from the holder's transferor. Finally, (a)(5) is a warranty against the real defense of discharge of the issuer or acceptor. This warranty is not absolute, it covers only knowledge of insolvency. In summary, a transferor for consideration is essentially warranting that the instrument is good and enforceable. If the transfer is by indorsement, these warranties flow to all later takers except the ultimate payor. Damages for breach of warranty are the loss suffered. In addition the drawee is entitled to compensation for expenses, which might include attorney fees and interest. In most cases the warranties can be disclaimed, but the Official Comments indicate that the disclaimer of warranties must be explicit and mention warranties. A "without recourse" indorsement is no longer sufficient. Warranties can not be disclaimed on checks. Note that the warranties given by this section are parallel to those given under 84-4-207 when a check is going through the bank collection system. Revisor's Note: Former section 84-3-416 was repealed by L. 1991, ch. 296, § 111 and the number reassigned to the current text.