Comprehensive Volume, 18th Edition

Chapter 33: Rights of Holders, Defenses, and Issues of Their Liability

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Types of PartiesThe 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.

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Transfers paper to holderthrough 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 throughproper negotiation

Transfer paperand rights

To be holder in duecourse and receiveprotection fromcertain 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

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Holders in Due CourseTo 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.

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Importance of HDC StatusA 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.

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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)

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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

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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.