Business Law and the Regulation of Business Chapter 26: Holder in Due Course By Richard A. Mann & Barry S. Roberts

Topics Covered in this Chapter A.Requirements of a Holder in Due Course B.Holder in Due Course Status C.The Preferred Position of a Holder in Due Course D.Limitations upon Holder in Due Course Rights

No Rights of Transferees Negotiable instrument? Holder? Value given? Good faith? Without notice? Acquires rights of a HOLDER IN DUE COURSE Yes Acquires rights of an ASSIGNEE Transferor a holder in due course? Acquires rights of a HOLDER Yes No

Stolen Bearer Paper Drawer Poe Hardware Store Owner GrocerThief order paper blank indorsement forged indorsement Grocer is a holder in due course because he (1) Was a holder of a negotiable instrument, (2) Gave value, (3) Took in good faith, (4) Took without notice, and (5) Took without reason to question it authenticity.

Stolen Order Paper Poe Thief Grocer Order Paper Stolen Forged Poe’s Indorsement Grocer is not a holder because the instrument does not have all necessary indorsements; therefore, he cannot be a holder in due course. Drawer

Effects of Alterations Incomplete InstrumentsComplete Instrument Altered? Fraudulent? Assented to? Party precluded? Holder may not enforce at all Holder may enforce according to original terms No part is discharged Holder may enforce according to original terms HDC may enforce as completed HDC may enforce according to original terms No Yes

Material Alteration M PA B versus M PA Illustration 1 Illustration 2 B=HDC $2,000 B = H $2,000$20, note for $2,000 negotiates $1,900 (1,2) $19,000 raises note to $20,000

M PT versus M P Illustration 4 T=HDC $4,000 0 blank check authorized for $2,000 fraudulently completed for $4,000 (3) Material Alteration (cont.) $4,000 T = H

M PT versus M P Illustration 5 T=HDC $4,000 T = H $4,000 blank check authorized for $2,000 in good faith completed for $4,000 (4) $4,000 Material Alteration(cont.) $2,000

Defenses Against Holders and Holders in Due Course Defenses Against Holders and Holders in Due Course Holder Holder in Due Course Personal Defenses All other defenses Real Defenses 1. Minority 2. Void obligations 3. Fraud in the execution 4. Discharge in insolvency proceedings 5. Discharge of which holder has notice 6. Forgery 7. Material alteration not available

Rights of Holder in Due Course under FTC Rule Issuer personal nonconsumer defense Payee HDC personal consumer defense real consumer or nonconsumer defense Payee HDC Payee HDC Issuer