1. Chapter 23 Holder in Due Course and Transferability

2. Introduction to Holder in Due Course and Transferability
Negotiable instruments can be transferred to subsequent parties by negotiation
Accomplished by placing indorsement on instrument
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3. 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
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4. 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
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5. 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
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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?
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7. 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
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8. 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
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Types of Indorsements
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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
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11. 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
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12. 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
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13. 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
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14. 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
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15. 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
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16. 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
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17. 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
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18. 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
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