Comprehensive Volume, 18 th Edition Chapter 33: Rights of Holders, Defenses, and Issues of Their Liability

Types of Parties The party claiming rights to an instrument can be either an assignee or a holder. An assignee is a third party to whom contract rights have been transferred. A holder is someone in possession of an instrument that is payable to that person. A holder can be either an ordinary holder or a holder in due course. Any holder has the rights given through the document, the same as an assignee. A holder in due course has protection from defenses against payment of the instrument.

Transfers paper to holder through holder in due course Transferee must have given value for the paper acted honestly in acquiring the paper (in good faith) ignorance of paper’s being overdue or dishonored ignorance of defenses and adverse claims Holders Transferee: acquired paper through proper negotiation Transfer paper and rights To be holder in due course and receive protection from certain defenses Holder or Assignee: the only person who may demand payment bring suit for collection give a discharge or release from liability cancel the liability of another party

Holders in Due Course To be a holder in due course, the holder must give value for the instrument, and take it in good faith, without notice that the paper is overdue or dishonored, and without notice of defenses and adverse claims. Those persons who become holders of the instrument after a holder in due course are given the same protection as the holder in due course through the shelter provision, provided they are not parties to any fraud or illegality affecting the instrument.

Importance of HDC Status A holder in due course is not subject to these limited defenses when they demand payment or bring suit on the instrument: ordinary contract defenses, incapacity unless it makes the instrument void, fraud in the inducement, prior payment or cancellation, nondelivery of an instrument, conditional delivery, duress consisting of threats, unauthorized completion, and theft of a bearer instrument.

Universal Defenses Universal defenses may be asserted against any plaintiff, including a holder in due course. Universal defenses include: fraud as to the nature or essential terms of the paper, forgery or lack of authority, duress depriving control, infancy, illegality that makes the instrument void, and alteration (partial defense)

Classifications of Defenses HDC Defenses Fraud in the Inducement Misrepresentation Lack of Consideration Original Defense Warranty Breach Breach of Contract Mixed Duress Real/Universal Incapacity Illegality Fraud in Factum Bankruptcy Lack of Payment Forgery* *Watch exceptions

Federal Trade Commission Rule The Federal Trade Commission rule on consumer credit contracts limits the immunity of a holder in due course from defenses of consumer buyers against their sellers.