1. TRANSFERABILITY AND HOLDER IN DUE COURSE
CHAPTER 23
TRANSFERABILITY
AND HOLDER IN
DUE COURSE
© 2010 Pearson Education, Inc., publishing as Prentice-Hall

2. Transfers
Negotiable instruments can be transferred to subsequent parties by negotiation.
Accomplished by placing indorsement on instrument

3. Transfer by Negotiation
Methods of Transfer
Transfer by Negotiation
Transfer of a negotiable instrument by a person other than the issuer to the holder.
Holder acquires at least the rights of the transferor.
Transfer by Assignment
Transfer of rights of transferor (assignor) to transferee (assignee) under a nonnegotiable contract.

4. Transfer by Negotiation
Order Paper
Negotiated by delivery with necessary indorsement.
Bearer Paper
Negotiated by delivery.
Risk if paper is lost or stolen.
Instruments can be converted between order and bearer paper repeatedly until paid.

5. Converting Order and Bearer Paper

6. Indorsement
Signature (and other directions) written by or on behalf of the holder somewhere on the instrument.
Signature may:
Appear alone
Name an individual to whom the instrument is to be paid, or
Be accompanied by other words.

7. Types of Indorsements (1 of 2)
Type of Indorsement
Description
Blank
Does not specify a particular indorsee.
This indorsement creates bearer paper.
Special
Specifies the person to whom the indorser intends the instrument to be payable.
This indorsement creates order paper.
Unqualified
Does not disclaim or limit liability.
The indorsee is liable on the instrument if it is not paid by the maker, acceptor, or drawer.

8. Types of Indorsements (2 of 2)
Type of Indorsement
Description
Qualified
Disclaims or limits the liability of the indorsee. There are two types:
1. Special qualified indorsement
2. Blank qualified indorsement
Non-restrictive
No instructions or conditions attached to the payment of funds
Restrictive
Conditions or instructions restrict indorsee’s rights. Four types:
1. Conditional indorsement
2. Indorsement prohibiting further indorsement
3. Indorsement for deposit or collection
4. Indorsement in trust

9. Indorsements (continued)
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 must indorse.
Payable in the alternative.
Only one indorsement required.
E.g., “Pay to Shou Kang or Min-Wer Chin,” or “Pay to Susan Wirth/Fred Gray.”

10. Holder in Due Course (HDC)
A person in possession of a negotiable instrument that is drawn, issued, or indorsed to him or his order, or to bearer, or in blank.
Holder in Due Course (HDC)
A person who takes a negotiable instrument for value, in good faith, and without notice that it is defective or is overdue.

11. Requirements for HDC Status
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, and
Bearing no apparent evidence of forgery, alterations, or irregularity.

12. Taking for Value Holder must have given value for instrument
Performs agreed-upon promise
Acquires security interest or lien
Takes in payment of or as security for antecedent claim
Gives instrument as payment
Gives an irrevocable obligation as payment

13. Taking in Good Faith
“Honesty in fact” in the conduct or transaction concerned.
Examine holder’s actual, subjective belief.
May be inferred from circumstances.
E.g., holder who acquired instrument from stranger at deep discount under suspicious circumstances can be regarded as having not acted in good faith.
E.g., holder who acquired stolen instrument but did not know it was stolen acted in good faith.

14. Taking Without Notice of Defect
That it is overdue.
That it has been dishonored.
That it contains an unauthorized signature or has been altered or forged.
Red Light Doctrine
That there is a claim against it by another.
That there is any defense against it.
Payees usually not HDCs because they are usually aware of defenses.

15. Exhibit 23-7: Holder in Due Course

16. Shelter Principle
Holder who does not qualify as HDC becomes HDC if he or she acquires instrument through an HDC.
Must not have been party to fraud or illegality.
Must not have notice of defense or claim against instrument.