Holder in Course

8/3/2019 Holder in Course

http://slidepdf.com/reader/full/holder-in-course 1/22

.

PowerPoint Slides to AccompanyPowerPoint Slides to Accompany

BUSINESS LAWBUSINESS LAW

EE--Commerce and Digital LawCommerce and Digital Law

International Law and EthicsInternational Law and Ethics55thth EditionEdition

by Henry R. Cheesemanby Henry R. Cheeseman

Slides developed by

Les Wiletzky

Wiletzky and Associates, Puyallup, WA

Chapter 24

Holder in Due Course andLiability

Chapter 24

Holder in Due Course andLiability



24 - 2.

IntroductionIntroduction

If payment is not made on a negotiableIf payment is not made on a negotiable

instrument when it is due, the holder can useinstrument when it is due, the holder can use

the court system to enf orce the instrument.the court system to en

f orce the instrument.

Various parties, including both signers andVarious parties, including both signers and

nonnon--signers, may be liable on it.signers, may be liable on it.

Accommodation parties (i.e., guarantors) can Accommodation parties (i.e., guarantors) can

also be held liable.also be held liable.



24 - 3.

Holder Versus Holder In Due CourseHolder Versus Holder In Due Course

Holder Holder

A person who is in A person who is in

possession of apossession of a

negotiable instrumentnegotiable instrument

that is drawn, issued,that is drawn, issued,

or indorsed to him or or indorsed to him or

his order, or to bearer,his order, or to bearer,

or in blank.or in blank.

Holder in Due CourseHolder in Due Course

(HDC)(HDC)

A person who takes a A person who takes a

negotiable instrumentnegotiable instrument

f or value, in good f aith,f or value, in good f aith,

and without notice thatand without notice that

it is def ective or isit is def ective or is

overdue.overdue.



24 - 4.

Requirements for HDC StatusRequirements for HDC Status

To qualif y as an HDC, the transf eree must meet theTo qualif y as an HDC, the transf eree must meet the

requirements established by the UCC.requirements established by the UCC.

The person must be theThe person must be the holder holder of a negotiableof a negotiable

instrument that was taken:instrument that was taken:

1.1. For valueFor value

2.2. In good faithIn good faith

3.3. Without notice that it is overdue, dishonored, or Without notice that it is overdue, dishonored, or encumbered in any way, andencumbered in any way, and

4.4. Bearing no apparent evidence of forgery, alterations, or Bearing no apparent evidence of forgery, alterations, or

irregularityirregularity



24 - 5.

Holder in Due CourseHolder in Due Course

NegotiableNegotiable

InstrumentInstrument

NegotiableNegotiable

InstrumentInstrument

1.1. Holder Holder

2.2. Takes a negotiableTakes a negotiableinstrumentinstrument

3.3. For valueFor value

4.4. In good faithIn good faith

5.5. Without notice of Without notice of defectdefect

6.6. The instrument bearsThe instrument bearsno apparent evidenceno apparent evidenceof forgery, alterations,of forgery, alterations,or irregularityor irregularity

Maker or Maker or

Drawer Drawer Payee or Payee or

Bearer Bearer

Holder inHolder in

DueDue

CourseCourse

(HDC)(HDC)



24 - 6.

Acquiring HDC Status Under the Shelter Acquiring HDC Status Under the Shelter

PrinciplePrinciple A holder who does not qualif y as a holder in A holder who does not qualif y as a holder in

due course in his or her own right becomes adue course in his or her own right becomes a

holder in due course if

he or she acquires theholder in due course if

he or she acquires theinstrument through a holder in due course.instrument through a holder in due course.

This is called theThis is called the shelter principleshelter principle..



24 - 7.

Acquiring HDC Status Under the Shelter Acquiring HDC Status Under the Shelter

PrinciplePrinciple(continued)(continued)

To qualif y as an HDC under the shelter To qualif y as an HDC under the shelter

principle, the f ollowing rules apply:principle, the f ollowing rules apply:

The holder does not have to qualify as an HDC in his or

The holder does not have to qualify as an HDC in his or her own right.her own right.

The holder must acquire the instrument from an HDC or The holder must acquire the instrument from an HDC or

be able to trace his or her title back to an HDC.be able to trace his or her title back to an HDC.

The holder must not have been a party to a fraud or The holder must not have been a party to a fraud or illegality affecting the instrument.illegality affecting the instrument.

The holder cannot have notice of a defense or claimThe holder cannot have notice of a defense or claim

against the payment of the instrument.against the payment of the instrument.



24 - 8.

Signature Liability of PartiesSignature Liability of Parties

A person cannot be held contractually liable A person cannot be held contractually liable

on a negotiable instrument unless his or her on a negotiable instrument unless his or her

signature appears on the instrument.signature appears on the instrument.

The signatures on a negotiable instrumentThe signatures on a negotiable instrument

identif y those who are obligated to pay it.identif y those who are obligated to pay it.

If it is unclear who the signer is, parolIf it is unclear who the signer is, parol

evidence can identif y the signer.evidence can identif y the signer.



24 - 9.

Signature DefinedSignature Defined

Any name, word, or mark used in lieu of a Any name, word, or mark used in lieu of a

written signature.written signature.

Any symbol that is: Any symbol that is: Handwritten, typed, printed, stamped, or Handwritten, typed, printed, stamped, or

made in almost any other manner, andmade in almost any other manner, and

Executed or adopted by a party toExecuted or adopted by a party to

authenticate a writingauthenticate a writing



24 - 10.

Signers of instruments sign in manySigners of instruments sign in manydifferent capacities, including:different capacities, including:

A maker of notes and A maker of notes and

certif icates of depositcertif icates of deposit

A drawer of dra

f ts and A drawer o

f dra

f ts and

checkschecks

A drawee who certif ies A drawee who certif ies

or accepts checks andor accepts checks and

draf tsdraf ts

An indorser who An indorser who

indorses an instrumentindorses an instrument

An agent who signs on An agent who signs onbehalf of othersbehalf of others

An accommodation An accommodation

partyparty



24 - 11.

Signature LiabilitySignature Liability (continued)(continued)::Primary LiabilityPrimary Liability

Makers of promissory notes and certif icatesMakers of promissory notes and certif icates

of deposit haveof deposit have primary liabilityprimary liability f or thef or the

instrument.instrument.

Upon signing a promissory note, the maker Upon signing a promissory note, the maker

unconditionally promises to pay the amountunconditionally promises to pay the amount

stipulated in the note when it is due.stipulated in the note when it is due.

Makers are absolutely liable to pay theMakers are absolutely liable to pay the

instrument, subject only to certain realinstrument, subject only to certain real

def enses.def enses.



24 - 12.

Signature LiabilitySignature Liability (continued)(continued)::Secondary LiabilitySecondary Liability

Drawers of checks and draf ts and unqualif iedDrawers of checks and draf ts and unqualif ied

indorsers of negotiable instruments haveindorsers of negotiable instruments have

secondary liabilitysecondary liability on the instrument.on the instrument.

This liability is similar to that of a guarantor of This liability is similar to that of a guarantor of

a simple contract.a simple contract.

It arises when the party primarily liable on theIt arises when the party primarily liable on the

instrument def aults and f ails to pay theinstrument def aults and f ails to pay the

instrument when due.instrument when due.



24 - 13.

Signature LiabilitySignature Liability (continued)(continued)::Accommodation PartyAccommodation Party

A party who signs an instrument and lends A party who signs an instrument and lends

his or her name (and credit) to another partyhis or her name (and credit) to another party

to the instrument.to the instrument.

The accommodation party is obliged to payThe accommodation party is obliged to pay

the instrument in the capacity in which he or the instrument in the capacity in which he or

she signs.she signs.

Accommodation Maker Accommodation Maker ± ± primarily liableprimarily liable

Accommodation Indorser Accommodation Indorser ± ± secondarily liablesecondarily liable



24 - 14.

Warranty Liability of PartiesWarranty Liability of Parties

The lawThe law impl i esimpl i es certain warranties oncertain warranties on

transf erors of negotiable instruments.transf erors of negotiable instruments.

W

arranty liability is imposed whether or notW

arranty liability is imposed whether or notthe transf eror signed the instrument.the transf eror signed the instrument.

There are two types of implied warranties:There are two types of implied warranties:

Trans

f er W

arrantiesT

ransf er W

arranties Presentment WarrantiesPresentment Warranties



24 - 15.

Transfer WarrantiesTransfer Warranties

Transfer Transfer ± ± Any passage of an instrument Any passage of an instrument

other than its issuance and presentment f or other than its issuance and presentment f or

payment.payment.

Transfer WarrantiesTransfer Warranties ± ± any of the f ollowingany of the f ollowing

f ive implied warranties:f ive implied warranties:

1.1. The transferor has good title to the instrument or isThe transferor has good title to the instrument or is

authorized to obtain payment or acceptance on behalf authorized to obtain payment or acceptance on behalf of one who does have good title.of one who does have good title.

2.2. All signatures are genuine or authorized. All signatures are genuine or authorized.



24 - 16.

Transfer WarrantiesTransfer Warranties (continued)(continued)

3.3. The instrument has not been materially altered.The instrument has not been materially altered.

4.4. No defenses of any party are good against theNo defenses of any party are good against the

transferor.transferor.5.5. The transferor has no knowledge of any insolvencyThe transferor has no knowledge of any insolvency

proceeding against the maker, the acceptor, or theproceeding against the maker, the acceptor, or the

drawer of an unaccepted instrument.drawer of an unaccepted instrument.



24 - 17.

Presentment WarrantiesPresentment Warranties

Any person who Any person who presentspresents a draf t or check f or a draf t or check f or payment or acceptance makes the f ollowingpayment or acceptance makes the f ollowingwarranties to a drawee or acceptor who payswarranties to a drawee or acceptor who pays

or accepts the instrument in good f aith:or accepts the instrument in good f aith:1.1. The presenter has good title to the instrument or isThe presenter has good title to the instrument or is

authorized to obtain payment or acceptance of the personauthorized to obtain payment or acceptance of the person

who has good title.who has good title.

2.2. The instrument has not been materially altered.The instrument has not been materially altered.

3.3. The presenter has no knowledge that the signature of theThe presenter has no knowledge that the signature of the

maker or drawer is unauthorized.maker or drawer is unauthorized.



24 - 18.

DefensesDefenses

The creation of negotiable instruments mayThe creation of negotiable instruments may

give rise to a def ense against its payment.give rise to a def ense against its payment.

T

here are two general types of de

f enses:

There are two general types o

f de

f enses:

Real Def ensesReal Def enses

Personal Def ensesPersonal Def enses

A A holder in due course (HDC)holder in due course (HDC) takes thetakes theinstrument f ree f rom personal def enses butinstrument f ree f rom personal def enses but

not real def enses.not real def enses.



24 - 19.

Real DefensesReal Defenses

Real DefensesReal Defenses EffectEffect

1.1. MinorityMinority

2.2. Extreme duressExtreme duress3.3. Mental incapacityMental incapacity

4.4. IllegalityIllegality

5.5. Discharge in bankruptcyDischarge in bankruptcy

6.6. Fraud in the inceptionFraud in the inception7.7. ForgeryForgery

8.8. Material alterationMaterial alteration

Real defenses can be raisedReal defenses can be raised

against a holder in due courseagainst a holder in due course



24 - 20.

Personal DefensesPersonal Defenses

Personal DefensesPersonal Defenses EffectEffect

1.1. Breach of contractBreach of contract

2.2. Fraud in the inducementFraud in the inducement

3.3. Mental illness that makes a contractMental illness that makes a contractvoidable instead of voidvoidable instead of void

4.4. Illegality of a contract that makes theIllegality of a contract that makes the

contract voidable instead of voidcontract voidable instead of void

5.5. Ordinary duress or undue influenceOrdinary duress or undue influence6.6. Discharge of an instrument by paymentDischarge of an instrument by payment

or cancellationor cancellation

Personal defenses cannotPersonal defenses cannot

be raised against a holder inbe raised against a holder in

due coursedue course



24 - 21.

DischargeDischarge

Actions or events that relieve certain parties Actions or events that relieve certain parties

f rom liability on negotiable instruments.f rom liability on negotiable instruments.

There are three methods o

f discharge:

There are three methods o

f discharge:

1.1. Payment of the instrumentPayment of the instrument

2.2. CancellationCancellation

3.3.Impairment o

f the right o

f recourse

Impairment o

f the right o

f recourse



24 - 22.

Impairment of the Right of RecourseImpairment of the Right of Recourse

Certain parties (Certain parties (holders, indorsers,holders, indorsers,

accommodation partiesaccommodation parties) are discharged) are discharged

f rom liability on an instrument i

f the holder:

f rom liability on an instrument i

f the holder:

1.1. Releases an obligor f rom liability, or Releases an obligor f rom liability, or

2.2. Surrenders collateral without the consent of Surrenders collateral without the consent of

the parties who would benef it by itthe parties who would benef it by it

Documents

Holder in Course