M made a promissory note payable to P or bearer. P specially indorsed the note to A. A also specially indorsed it to B. X stole the note from B and delivered it to C without any indorsement. Who may be held liable to C?

M made a promissory note payable to P or bearer. P specially indorsed the note to A. A also specially indorsed it to B. X stole the note from B and delivered it to C without any indorsement. Who may be held liable to C?

• A. X only
• B. M and X only
• C. M and X
• D. M, P, A, and X

Answer: (C)

The key idea is how a negotiable instrument is transferred and who is liable to the holder. When an instrument is payable to someone or bearer, it can be transferred by delivery or by proper indorsement, depending on whether it is an order instrument (payable to a specific person) or a bearer instrument (payable to anyone who holds it). Here, the note starts as payable to P or bearer, so it could move by delivery. P then specially indorses to A, and A specially indorses to B, making the instrument an order instrument payable to B. A transfer to a third party now requires a valid indorsement; X cannot validly transfer the instrument to C by mere delivery since no indorsement accompanies it. C ends up in possession, but the chain of proper negotiation is broken. As a result, the maker remains liable on the note to the holder who presents it, and X—the thief who delivered it to C—is liable for theft or conversion. The indorsers (P, A, B) aren’t liable to C because the transfer to C did not occur through a proper indorsement, breaking the chain of negotiation. So, the maker can be held liable to C as the instrument’s obligation, and X, as the thief, is liable to C for the theft.

The key idea is how a negotiable instrument is transferred and who is liable to the holder. When an instrument is payable to someone or bearer, it can be transferred by delivery or by proper indorsement, depending on whether it is an order instrument (payable to a specific person) or a bearer instrument (payable to anyone who holds it).

Here, the note starts as payable to P or bearer, so it could move by delivery. P then specially indorses to A, and A specially indorses to B, making the instrument an order instrument payable to B. A transfer to a third party now requires a valid indorsement; X cannot validly transfer the instrument to C by mere delivery since no indorsement accompanies it. C ends up in possession, but the chain of proper negotiation is broken.

As a result, the maker remains liable on the note to the holder who presents it, and X—the thief who delivered it to C—is liable for theft or conversion. The indorsers (P, A, B) aren’t liable to C because the transfer to C did not occur through a proper indorsement, breaking the chain of negotiation.

So, the maker can be held liable to C as the instrument’s obligation, and X, as the thief, is liable to C for the theft.