Chapter 23 Holder in Due Course and Transferability

Introduction to Holder in Due Course and Transferability Negotiable instruments can be transferred to subsequent parties by negotiation Accomplished by placing indorsement on instrument 23-2 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Transfer of a Nonnegotiable Contract by Assignment Assignment: The transfer of rights under a nonnegotiable contract The transferor is the assignor The transferee is the assignee Nonnegotiable contract: A contract that lacks one or more of the requirements to be a negotiable instrument 23-3 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Transfer of a Negotiable Instrument by Negotiation Negotiation: The transfer of a negotiable instrument by a person other than the issuer to a person who thereby becomes a holder An HDC acquires greater rights than the transferor He or she is not subject to some of the defenses that could otherwise have been raised against the transferor 23-4 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Transfer of a Negotiable Instrument by Negotiation Order Paper: An instrument that is payable to a specific payee or indorsed to a specific indorsee Negotiated by: Delivery Indorsement Bearer Paper: An instrument that is not payable to a specific payee or indorsee Negotiated by delivery Indorsement not necessary 23-5 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Case 23.1: Bearer Paper Case Gerber & Gerber, P.C. v. Regions Bank 266 Ga.App. 8, 596 S.E.2d 174, Web 2004 Ga. App. Lexis 206 (2004) Court of Appeals of Georgia Issue Has Regions Bank properly accepted the blank- indorsed bearer cashier’s checks from Stafford? 23-6 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Transfer of a Negotiable Instrument by Indorsement Indorsement: The signature (and other directions) written by or on behalf of the holder somewhere on an instrument The signature may: Appear alone Name an individual to whom the instrument is to be paid Be accompanied by other words 23-7 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Transfer of a Negotiable Instrument by Indorsement Indorsements are required to negotiate order paper Indorsements are not required to negotiate bearer paper Allonge: A separate piece of paper attached to an instrument on which an indorsement is written 23-8 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Types of Indorsements 23-9 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Types of Indorsements Misspelled or Wrong Name Payee or indorsee can indorse the instrument in the misspelled name, correct name, or both Multiple Payees or Indorsees Payable jointly Both persons must indorse Payable in the alternative One indorsement is sufficient 23-10 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Holder In Due Course Holder: A person who is in possession of a negotiable instrument that is drawn, issued, or indorsed to him or to his order, or to bearer, or in blank Has the same rights as an assignee of an ordinary nonnegotiable contract Subject to all the claims and defenses that can be asserted against the transferor 23-11 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Holder In Due Course Holder in due course (HDC): A holder who takes a negotiable instrument for value, in good faith, and without notice that it is defective or overdue An HDC takes a negotiable instrument free of all claims Only universal defenses may be asserted against an HDC An HDC can acquire greater rights than a transferor 23-12 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Requirements for HDC Status The person must be the holder of a negotiable instrument that was taken For value In good faith Without notice that it is overdue, dishonored, or encumbered in any way Bearing no apparent evidence of forgery, alterations, or irregularity 23-13 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Requirements for HDC Status Taking for value requirement Holder must have given value for instrument Performs the agreed-upon promise Acquires a security interest in or lien on the instrument Takes the instrument in payment of or as security for an antecedent claim Gives a negotiable instrument as payment Gives an irrevocable obligation as payment 23-14 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Requirements for HDC Status Taking in good faith requirement Good faith: Honesty in fact in the conduct or transaction concerned Good faith test does not apply to the transferor of an instrument 23-15 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Requirements for HDC Status Taking without notice of defect requirement: A UCC requirement that says a person cannot qualify as an HDC if he or she has notice that the instrument is defective in the following ways: It is overdue It has been dishonored It contains an unauthorized or altered signature There is a claim to it by another person There is a defense against it 23-16 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Requirements for HDC Status Shelter Principle: A principle that says a holder who does not qualify as a holder in due course in his or her own right becomes a holder in due course if he or she acquires an instrument through a holder in due course 23-17 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Requirements for HDC Status Rules to qualify as HDC under the shelter principle: The holder does not have to qualify as an HDC in his or her own right The holder must acquire the instrument from an HDC or be able to trace the title back to an HDC The holder must not have been a party to a fraud or an illegality affecting the instrument The holder cannot have notice of a defense or claim against the payment of the instrument 23-18 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 23-19 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.