Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning Chapter 30 Liability of the Parties under Negotiable Instruments Twomey Jennings Anderson’s Business Law and the Legal Environment, Comprehensive 20e Anderson’s Business Law and the Legal Environment, Standard 20e Business Law: Principles for Today’s Commercial Environment 2e

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 2 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. Parties to Negotiable Instruments: Rights and Liabilities

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 3 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. Holder vs. Holder in Due Course

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 4 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 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 Holder in Due Course

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 5 To be a holder in due course, the holder must: –give value for the instrument, –take it in good faith, –without notice that the paper is overdue or dishonored, and –in ignorance of defenses and adverse claims. HDC Status

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 6 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. HDC Status

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 7 Special Status of HDC 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 8 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) Defenses to Payment

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 9 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

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 10 Liability Issues Primary Party: holder or HDC must go to first to obtain payment. –Maker: note or CD. –Drawee: draft. Secondary Parties: holder/HDC turns to when primary party is unable to pay.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 11 Liability Issues Presentment: occurs when holder/HDC requests payment according to terms of instrument. Dishonor: primary party gives notice that it will not pay the instrument. –Holder/HDC must then seek payment from secondary parties.