chapter 22 negotiation and holders in due course / holders by due negotiation davidson, knowles...

CHAPTER 22CHAPTER 22NEGOTIATION AND HOLDERS NEGOTIATION AND HOLDERS IN DUE COURSE / HOLDERS IN DUE COURSE / HOLDERS

BY DUE NEGOTIATIONBY DUE NEGOTIATION

CHAPTER 22CHAPTER 22NEGOTIATION AND HOLDERS NEGOTIATION AND HOLDERS IN DUE COURSE / HOLDERS IN DUE COURSE / HOLDERS

BY DUE NEGOTIATIONBY DUE NEGOTIATION

DAVIDSON, KNOWLES & FORSYTHE DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles Business Law: Cases and Principles

in the Legal Environmentin the Legal Environment (8 (8thth Ed.) Ed.)

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BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.

© 2004 West Legal Studies in Business© 2004 West Legal Studies in BusinessA Division of Thomson LearningA Division of Thomson Learning

TRANSFERTRANSFERTRANSFERTRANSFER

Negotiable instruments are intended to Negotiable instruments are intended to “flow” through the commercial world.“flow” through the commercial world.

In order to “flow,” the instrument needs to In order to “flow,” the instrument needs to be transferred from person to person.be transferred from person to person.

Form determines rights that can be asserted Form determines rights that can be asserted by each person gaining possession of the by each person gaining possession of the negotiable instrument.negotiable instrument.

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TRANSFERTRANSFERTRANSFERTRANSFERUCC defines transfer as delivery by any UCC defines transfer as delivery by any

person other than issuer for the purpose of person other than issuer for the purpose of giving the person receiving the instrument giving the person receiving the instrument the right to enforce the instrument.the right to enforce the instrument.

Transfer, by negotiation or not, confers on Transfer, by negotiation or not, confers on the transferee the rights possessed by the transferee the rights possessed by transferor.transferor.

Includes rights of a holder in due course Includes rights of a holder in due course (HDC) if transferor has those rights. (HDC) if transferor has those rights.

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TRANSFERTRANSFERTRANSFERTRANSFER

Transfer of negotiable instrument treated as Transfer of negotiable instrument treated as assignment of a contract right.assignment of a contract right.

Transferee receives any and all rights of the Transferee receives any and all rights of the transferor.transferor.

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NEGOTIATIONNEGOTIATIONNEGOTIATIONNEGOTIATION

““Something more” needed to protect the Something more” needed to protect the possessor of the commercial paper. possessor of the commercial paper.

Facilitate free flow of commercial paper Facilitate free flow of commercial paper through commercial channels.through commercial channels.

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Defined as:Defined as:– Transfer of possession.Transfer of possession.– Whether voluntary or involuntary.Whether voluntary or involuntary.– Of an instrument by a person other than the Of an instrument by a person other than the

issuer to a person who becomes a holder.issuer to a person who becomes a holder.

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Except for:Except for:– Negotiation by a remitter.Negotiation by a remitter.– If instrument is payable to an identified person.If instrument is payable to an identified person.– Negotiation requires transfer of possession of Negotiation requires transfer of possession of

the instrument and indorsement by holder.the instrument and indorsement by holder.– Instrument is payable to bearer.Instrument is payable to bearer.– May be negotiated by transfer of possession May be negotiated by transfer of possession

alone.alone.

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INDORSEMENTSINDORSEMENTSINDORSEMENTSINDORSEMENTSDefined as:Defined as:

– A signature, other than that of maker, drawer, A signature, other than that of maker, drawer, or acceptor or other words.or acceptor or other words.

– For the purpose of negotiating the instrument, For the purpose of negotiating the instrument, restricting payment of the instrument, or restricting payment of the instrument, or incurring indorser’s liability on the instrument.incurring indorser’s liability on the instrument.

Not an indorsement if circumstances Not an indorsement if circumstances unambiguously indicate signature was made unambiguously indicate signature was made for a purpose other than indorsement.for a purpose other than indorsement.

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INDORSEMENTSINDORSEMENTSReasons for indorsing an instrument:Reasons for indorsing an instrument:

– Affect negotiation. (tell holder)Affect negotiation. (tell holder) Another indorsement is needed to negotiate the Another indorsement is needed to negotiate the

instrument further.instrument further. No further indorsements are needed.No further indorsements are needed. Instrument has been restricted to some special Instrument has been restricted to some special

channel of commerce.channel of commerce.

– Affect liability.Affect liability. Admit/agree to honor the contract of indorsement.Admit/agree to honor the contract of indorsement. Expressly deny any liability on indorsement Expressly deny any liability on indorsement

contract.contract.

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INDORSEMENTSINDORSEMENTSINDORSEMENTSINDORSEMENTS

Special Indorsement:Special Indorsement:– Specifies party to whom instrument is to be Specifies party to whom instrument is to be

paid.paid.– To whose order it is to be paid.To whose order it is to be paid.– Party specified will have to indorse it before it Party specified will have to indorse it before it

can be negotiated further.can be negotiated further.

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Blank Indorsements:Blank Indorsements:– Does not state an party to whom instrument is Does not state an party to whom instrument is

to be paid.to be paid.– Mere signature by holder.Mere signature by holder.– Negotiable by transfer of possession.Negotiable by transfer of possession.– Blank indorsement converted into a special Blank indorsement converted into a special

indorsement by writing above signature of indorsement by writing above signature of indorser.indorser.

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INDORSEMENTSINDORSEMENTSINDORSEMENTSINDORSEMENTSRestrictive Indorsement:Restrictive Indorsement:

– Prohibits any further negotiation of instrument.Prohibits any further negotiation of instrument.– Contains a condition restricting further negotiation.Contains a condition restricting further negotiation.– Contains words that indicate it is to be deposited or Contains words that indicate it is to be deposited or

collected.collected.– Restrict payment or negotiation may be disregarded Restrict payment or negotiation may be disregarded

by indorsee, no effect on rights or liabilities of by indorsee, no effect on rights or liabilities of indorsee.indorsee.

– Restricting instrument to banking channels is a Restricting instrument to banking channels is a valid restriction.valid restriction.

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Qualified Indorsements:Qualified Indorsements:– Denies contract liability.Denies contract liability.– Indorser includes such words as “without Indorser includes such words as “without

recourse” having legal effect of telling later recourse” having legal effect of telling later holders that the qualifying indorser will not holders that the qualifying indorser will not repay them if the instrument is dishonored.repay them if the instrument is dishonored.

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HOLDERHOLDERHOLDERHOLDERRole is important in negotiable instruments.Role is important in negotiable instruments.Holder takes an instrument by negotiation. Holder takes an instrument by negotiation. Which gives holder all rights the transferor Which gives holder all rights the transferor

possessed.possessed.Holder also acquires personal rights beyond Holder also acquires personal rights beyond

those conferred with transfer.those conferred with transfer.Normally acquires contractual and warranty Normally acquires contractual and warranty

rights.rights.

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HOLDERHOLDERHOLDERHOLDEREssential element before party can become Essential element before party can become

a holder in due course.a holder in due course.Defined as:Defined as:

– Person in possession of negotiable instruments, Person in possession of negotiable instruments, drawn, issued, or indorsed to holder, to his/her drawn, issued, or indorsed to holder, to his/her order, to the bearer, or in blank.order, to the bearer, or in blank.

Receives original issue from maker or Receives original issue from maker or drawer or receives negotiation through drawer or receives negotiation through indorsement and/or delivery.indorsement and/or delivery.

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HOLDERHOLDERHOLDERHOLDER

Holder has right to transfer, negotiate, Holder has right to transfer, negotiate, discharge, or enforce instrument in holder’s discharge, or enforce instrument in holder’s own name.own name.

Holder is subject to any defenses on the Holder is subject to any defenses on the instrument that a maker or drawer can instrument that a maker or drawer can assert.assert.

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HOLDER IN DUE COURSEHOLDER IN DUE COURSEHOLDER IN DUE COURSEHOLDER IN DUE COURSETo overcome even one defense on To overcome even one defense on

instrument available to maker or drawer, instrument available to maker or drawer, holder needs to acquire holder in due course holder needs to acquire holder in due course (HDC) status.(HDC) status.

Burden of proof to establish (HDC) lies Burden of proof to establish (HDC) lies with person claiming status.with person claiming status.

To establish holder in due course status: To establish holder in due course status: – for value, in good faith, and without notice of for value, in good faith, and without notice of

defenses or defects.defenses or defects.

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HOLDER IN DUE COURSEHOLDER IN DUE COURSEHOLDER IN DUE COURSEHOLDER IN DUE COURSE““For Value.”For Value.”

– Methods involve actual performance by holder:Methods involve actual performance by holder: Instrument issued or transferred for a promise of Instrument issued or transferred for a promise of

performance, to extent promise has been performed. performance, to extent promise has been performed. Transferee acquires a security interest other than a Transferee acquires a security interest other than a

lien obtained in a judicial proceeding.lien obtained in a judicial proceeding. Taking an instrument as security for, or in payment Taking an instrument as security for, or in payment

of, an existing debt.of, an existing debt. Taking an instrument in exchange for another Taking an instrument in exchange for another

negotiable instrument.negotiable instrument. Issued or transferred in exchange for an irrevocable Issued or transferred in exchange for an irrevocable

obligation of a third party.obligation of a third party.

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HOLDER IN DUE COURSEHOLDER IN DUE COURSEHOLDER IN DUE COURSEHOLDER IN DUE COURSE

““In Good Faith.”In Good Faith.”– Defined as “honesty in fact and the observation Defined as “honesty in fact and the observation

of reasonable commercial standards of fair of reasonable commercial standards of fair dealing.”dealing.”

– Holder needs to show “observed reasonable Holder needs to show “observed reasonable commercial standards” to establish good faith. commercial standards” to establish good faith.

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HOLDER IN DUE COURSEHOLDER IN DUE COURSEHOLDER IN DUE COURSEHOLDER IN DUE COURSE““Without Notice” of Defenses or Defects.Without Notice” of Defenses or Defects.

– Holder takes instrument without notice of any Holder takes instrument without notice of any defenses or defects.defenses or defects.

– Notice is present if reasonable person would:Notice is present if reasonable person would: Know that there was a defense or a defect.Know that there was a defense or a defect. Or be suspicious and would make further inquiry Or be suspicious and would make further inquiry

before accepting the instrument. before accepting the instrument.

– UCC provides notice must be received at a time UCC provides notice must be received at a time and manner that give reasonable opportunity to and manner that give reasonable opportunity to act.act.

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HOLDER IN DUE COURSEHOLDER IN DUE COURSE

Without Notice of Defenses or Defects.Without Notice of Defenses or Defects.– Facts That Are Considered Notice:Facts That Are Considered Notice:

Instrument is incomplete;Instrument is incomplete; Missing signature;Missing signature; Missing amount;Missing amount; Missing date on time and demand instrument;Missing date on time and demand instrument; Visibly altered or bears visible evidence of forgery;Visibly altered or bears visible evidence of forgery; Irregular on its face; orIrregular on its face; or Taking an overdue instrument.Taking an overdue instrument.

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HOLDER IN DUE COURSEHOLDER IN DUE COURSEWithout Notice of Defenses or Defects Without Notice of Defenses or Defects (Cont’d)(Cont’d)

– Facts That Are Not Considered Notice:Facts That Are Not Considered Notice: Instrument was antedated or postdated;Instrument was antedated or postdated; Instrument issued or negotiated for an executory Instrument issued or negotiated for an executory

promise, unless holder has notice of defenses to the promise, unless holder has notice of defenses to the promise; promise;

Any party has signed as an accommodation party;Any party has signed as an accommodation party; A formerly incomplete instrument was completed;A formerly incomplete instrument was completed; Any person negotiating the instrument is or was a Any person negotiating the instrument is or was a

fiduciary; orfiduciary; or Default on an interest payment on the instrument.Default on an interest payment on the instrument.

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EFFECT OF HDC STATUSEFFECT OF HDC STATUSEFFECT OF HDC STATUSEFFECT OF HDC STATUS

HDC is a preferred legal position.HDC is a preferred legal position.HDC takes an instrument free of personal HDC takes an instrument free of personal

defenses.defenses.HDC subject to real defenses.HDC subject to real defenses.Any defense, whether personal or real, may Any defense, whether personal or real, may

be used to negate right to be paid of a mere be used to negate right to be paid of a mere holder.holder.

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EFFECT OF HDC STATUSEFFECT OF HDC STATUSEFFECT OF HDC STATUSEFFECT OF HDC STATUSPersonal Defenses.Personal Defenses.

– Affects the agreement for which the instrument Affects the agreement for which the instrument was issued.was issued.

– Types:Types: Failure of consideration;Failure of consideration; Fraud In the inducement (personal defense);Fraud In the inducement (personal defense); Duress;Duress; Breach of warranty; orBreach of warranty; or Non-delivery.Non-delivery.

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EFFECT OF HDC STATUSEFFECT OF HDC STATUSEFFECT OF HDC STATUSEFFECT OF HDC STATUS Real Defenses.Real Defenses.

– Questions the legal validity of the instrument.Questions the legal validity of the instrument.– Negotiable instrument voided by operation of Negotiable instrument voided by operation of

law.law.– No one can enforce it.No one can enforce it.– Maker or drawer must establish defense as real.Maker or drawer must establish defense as real.– Failure to do so will normally leave a valid Failure to do so will normally leave a valid

personal defense.personal defense.

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EFFECT OF HDC STATUSEFFECT OF HDC STATUSReal Defenses.Real Defenses.

– Types:Types:Infancy (minority);Infancy (minority);Duress, Lack of Legal Capacity, or Illegality;Duress, Lack of Legal Capacity, or Illegality;Fraud;Fraud;Discharge in Insolvency;Discharge in Insolvency;Forgery; orForgery; orMaterial Alternation.Material Alternation.

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SHELTER PROVISIONSHELTER PROVISION

Assignee takes same rights as assignor; Assignee takes same rights as assignor; Same is true of negotiable instrument.Same is true of negotiable instrument.

Once an HDC is involved with the Once an HDC is involved with the instrument, every subsequent holder can instrument, every subsequent holder can assert the rights of an HDC without having assert the rights of an HDC without having to prove his status.to prove his status.

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STATUTORY LIMITATIONSSTATUTORY LIMITATIONSSTATUTORY LIMITATIONSSTATUTORY LIMITATIONS

Federal Trade Commission rules require a Federal Trade Commission rules require a transaction involving consumer credit that transaction involving consumer credit that the holder or holder in due course is subject the holder or holder in due course is subject to all personal and real defenses which to all personal and real defenses which could be raised against the transferor.could be raised against the transferor.

The effect of this FTC rule is to make even The effect of this FTC rule is to make even a HDC subject to any defenses available a HDC subject to any defenses available against the payee, a tremendous protection against the payee, a tremendous protection for the consumer.for the consumer.

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HOLDER BY DUE NEGOTIATIONHOLDER BY DUE NEGOTIATIONHOLDER BY DUE NEGOTIATIONHOLDER BY DUE NEGOTIATION

Document of title duly negotiated when:Document of title duly negotiated when:– Person purchases instrument in good faith.Person purchases instrument in good faith.– Purchaser takes document without notice of any Purchaser takes document without notice of any

defense against or claim to the goods or defense against or claim to the goods or documents. documents.

Makes recipient of document a holder by Makes recipient of document a holder by due negotiation (HDN).due negotiation (HDN).

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HOLDER BY DUE NEGOTIATIONHOLDER BY DUE NEGOTIATIONHOLDER BY DUE NEGOTIATIONHOLDER BY DUE NEGOTIATION

Holder by due negotiation is assured the Holder by due negotiation is assured the following rights:following rights:– Title to document;Title to document;– Title to goods;Title to goods;– All rights under laws of agency or estoppel; andAll rights under laws of agency or estoppel; and– Obligation of issuer to hold or deliver Obligation of issuer to hold or deliver

according to terms of the document and free of according to terms of the document and free of any claims.any claims.

chapter 22 negotiation and holders in due course / holders by due negotiation davidson, knowles...

Documents

instrument needs

knowles forsythe business

west legal studies

contract of indorsement

indorsement contract

division of thomson

negotiation davidson

identified person