The Holder's Status in Case of a Broken Chain of Endorsement

Entrance

Negotiable instruments (bills of exchange, promissory notes, and checks), which are one of the secure and fast payment methods in commercial life, are regulated by special provisions in the Turkish Commercial Code (TTK). The most important feature of these instruments is their negotiability. Thanks to their negotiability, the instrument can change hands many times and be used as a secure payment instrument in commercial relations.

The most important tool in ensuring the validity of a promissory note the chain of endorsements. The chain of endorsements shows all transfers and signatures from the first holder to the last holder of the note. However, in practice, interruptions in the chain of endorsements, or "broken endorsements," can occur. A break in the chain of endorsements has significant consequences for the holder's ability to exercise their rights arising from the note.

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The Concept of Turnover and its Legal Basis

What is turnover?

• Turkish Commercial Code Articles 681 et seq. regulate endorsements.
• Endorsement is a written statement that transfers the rights arising from a promissory note.
• The endorsement is written on the back or an addendum of the promissory note and includes the endorser's signature.

Chain of Sales

• For a promissory note to be valid, the endorsements must be continuous.
• The chain of endorsements proves who the holder is and the validity of the transfer.

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Disruption in the Chain of Sales

Definition

A broken chain of endorsements means a disruption in the sequence of endorsements on the promissory note. In other words, there is a discrepancy in name or signature between one endorsement and the next.

Examples

• An endorsement made without writing the holder's name when transferring a promissory note from one endorser to another.
• Endorsement made with an unauthorized or forged signature.
• The endorsement was made to the wrong person or under a different name.

Legal Significance

• The discontinuity makes it difficult for the holder to prove their ownership rights .
• The debtor may raise the break in the chain of endorsements as a defense.

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The Pregnant Woman's Status

1. Burden of Proof of Ownership of the Holder

• According to Article 686 of the Turkish Commercial Code, the holder must prove an uninterrupted chain of endorsements.
• If there is a break in the bond, the holder is not considered the legitimate holder on the bond.

2. The Status of a Holder Acting in Good Faith

• If the holder acquired the instrument in good faith, they can benefit from the good faith protection under the Turkish Commercial Code.
• However, if the discontinuous endorsement is clear and evident, the claim of good faith does not bind the debtor.

3. Impact on Enforcement Proceedings

• Enforcement proceedings specific to negotiable instruments cannot be initiated based on a promissory note with a broken endorsement.
• The holder's claim may be dismissed, or they must file a claim for debt according to general provisions.

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Debtor's Right to Defense

1. Absolute Defenses

The debtor may raise the following defenses, regardless of whether the holder is acting in good faith:

• The signature is forged.
• The promissory note is invalid.
• Lack of legal capacity.

2. Relative Defenses

The debtor can only raise personal defenses against the initial parties. However, in the case of a broken endorsement, these defenses may be expanded.

3. Disconnected Endorsement Def

• A broken endorsement allows the debtor to claim that the holder is illegitimate.
• The debtor may be released from the payment obligation.

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Disconnected Endorsement in Light of Supreme Court Decisions

• The 11th Civil Chamber of the Supreme Court of Appeals, Case No. 2016/3241 E., Decision No. 2017/5432 K.:
  “A promissory note with a break in the chain of endorsements cannot be subject to enforcement proceedings specific to negotiable instruments.”
• The 19th Civil Chamber of the Supreme Court of Appeals, Case No. 2018/4213 E., Decision No. 2019/6547 K.:
  “The holder must prove an uninterrupted chain of endorsements on the promissory note. A break in the chain eliminates the debtor's payment obligation.”
• Supreme Court Grand Chamber, Case No. 2021/2312 E., Decision No. 2022/1432 K.:
  “In the case of a broken endorsement, the claim of good faith provides limited protection. A clear and obvious break binds even the holder acting in good faith.”

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Problems Encountered in Practice

1. Confusion Between Unauthorized Endorsement and Disconnected Endorsement
   • An endorsement made with an unauthorized signature is sometimes seen as the same concept as a broken endorsement.
2. Rejection Decisions in Enforcement Proceedings
   • The holder is rejected in the bill of exchange proceedings due to the broken endorsement and is forced to resort to general provisions.
3. Good Faith Debates
   • Whether the holder is acting in good faith results in different decisions in the courts.
4. Risks in International Trade
   • Incomplete endorsements on bills acquired by foreign holders create a crisis of confidence in practice.

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Strategic Importance

From the perspective of the pregnant woman

• A broken endorsement increases the risk of the holder being unable to collect the debt.
• It is mandatory to examine the chain of endorsements before taking over the promissory note.

From the Debtor's Perspective

• The debtor can be relieved of their payment obligation by raising the incomplete endorsement as a defense.

From the Cirantas' Perspective

• Endorsers must carefully sign and record their signatures for the valid transfer of the promissory note.

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Proposed Solutions

1. Control of the Turnover Chain
   • The holder must ensure the chain of transmission is unbroken before taking possession of the promissory note.
2. Electronic Turnover Systems
   • The risk of broken endorsements can be reduced with the use of digital signatures and electronic bills of exchange.
3. Unity in Judicial Precedents
   • Supreme Court rulings need to be made clearer and more predictable.
4. Education and Awareness
   • Traders should be made aware of the importance of the sales chain.

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Conclusion

A broken chain of endorsements is one of the most critical problems with negotiable instruments. The continuity of the chain is essential for proving the holder's right of ownership. In the case of a broken endorsement, the holder cannot pursue legal action specific to negotiable instruments and must resort to general legal provisions.

Supreme Court rulings also show that a broken chain of endorsements limits the protection even for a bona fide holder. For the sake of commercial security, parties should be careful in this regard.

Consequently, the status of the holder in the case of a broken endorsementremains a critical issue that directly affects both the limits of the holder's rights and the debtor's defense possibilities.