Slides developed by Les Wiletzky Wiletzky and Associates Copyright © 2006 by Pearson Prentice-Hall....

Slides developed byLes WiletzkyWiletzky and Associates Copyright © 2006 by Pearson Prentice-Hall. All rights reserved.

PowerPoint Slides to AccompanyCONTEMPORARY BUSINESS

ANDONLINE COMMERCE LAW

5th Editionby Henry R. Cheeseman

Chapter 20Holder in Due Course and Liability

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 20 - 2

Introduction

If payment is not made on a negotiable instrument when it is due, the holder can use the court system to enforce the instrument

Various parties, including both signers and non-signers, may be liable on it

Accommodation parties (i.e., guarantors) can also be held liable


Holder Versus Holder In Due Course

HolderHolder A person who is in

possession of a negotiable instrument that is drawn, issued, or indorsed to him or his order, or to bearer, or in blank

HolderHolder A person who is 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 Holder in Due Course (HDC)(HDC)

A person who takes a negotiable instrument for value, in good faith, and without notice that it is defective or is overdue

Holder in Due Course Holder in Due Course (HDC)(HDC)

A person who takes a negotiable instrument for value, in good faith, and without notice that it is defective or is overdue


Requirements for HDC Status To qualify as an HDC, the transferee must meet

the requirements established by the UCC The person must be the holderholder of a negotiable

instrument that was taken:

1. For value2. In good faith3. Without notice that it is overdue, dishonored, or

encumbered in any way, and4. Bearing no apparent evidence of forgery, alterations, or

irregularity [UCC 3-302]


Holder in Due Course (HDC)

Negotiable Negotiable InstrumentInstrument

Negotiable Negotiable InstrumentInstrument

1.1. HolderHolder

2.2. Takes a negotiable Takes a negotiable instrumentinstrument

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 bears The instrument bears no apparent evidence no apparent evidence of forgery, alterations, of forgery, alterations, or irregularityor irregularity

Maker or Maker or DrawerDrawer

Payee or Payee or BearerBearer

Holder in Holder in Due Due

Course Course (HDC)(HDC)


Holder in Due Course:Taking for Value Value has been given for a negotiable

instrument if the holder:1.1. Performs the agreed-upon promise2.2. Acquires a security interest or lien on the instrument3.3. Takes the instrument in payment of or as security for an

antecedent claim4.4. Gives a negotiable instrument as payment5.5. Gives an irrevocable obligation as payment


Holder in Due Course:Taking in Good Faith A holder must take the instrument in good

faith to qualify as an HDC Good faithGood faith means honesty in fact in the

conduct or transaction It is the holder’s subjective belief that can

be inferred from the circumstances


Holder in Due Course:Taking Without Notice of Defect A person cannot qualify as an HDC if he

or she has notice that the instrument is defective in any of the following ways:1.1. It is overdue2.2. It has been dishonored3.3. It contains an unauthorized signature or has been

altered4.4. There is a claim to it by another person5.5. There is a defense against it


Holder in Due Course: No Evidence of Forgery, Alteration, or Irregularity A holder cannot become an HDC to an

instrument that is apparently forged, or altered, or is so otherwise irregular or incomplete as to call into question its authenticity


Signature Liability of Parties A person cannot be held contractually

liable on a negotiable instrument unless his or her signature appears on the instrument

The signatures on a negotiable instrument identify those who are obligated to pay it

If it is unclear who the signer is, parol evidence can identify the signer


Signature Defined

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

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

made in almost any other manner; and Executed or adopted by a party to

authenticate a writing


Signers of instruments sign in many different capacities, including: A maker of notes and

certificates of deposit A drawer of drafts

and checks A drawee who

certifies or accepts checks and drafts

A maker of notes and certificates of deposit

A drawer of drafts and checks

A drawee who certifies or accepts checks and drafts

An indorser who indorses an instrument

An agent who signs on behalf of others

An accommodation party

An indorser who indorses an instrument

An agent who signs on behalf of others

An accommodation party


Agent’s Signatures

AgentAgent – A person who has been authorizedauthorized to sign a negotiable instrument on behalf of another person

PrincipalPrincipal – A person who authorizes an agent to sign a negotiable instrument on his or her behalf

Unauthorized SignatureUnauthorized Signature – A signature made by a purported agent without authority from the purported agent


Signature Liability: Primary Liability Makers of promissory notes and certificates

of deposit have primary liabilityprimary liability for the instrument

Upon signing a promissory note, the maker unconditionally promises to pay the amount stipulated in the note when it is due

Makers are absolutely liable to pay the instrument, subject only to certain real defenses


Signature Liability: Secondary Liability Drawers of checks and drafts and

unqualified indorsers of negotiable instruments have secondary liabilitysecondary liability on the instrument

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

It arises when the party primarily liable on the instrument defaults and fails to pay the instrument when due


Signature Liability:Accommodation Party A party who signs an instrument and

lends his or her name (and credit) to another party to the instrument

The accommodation party is obliged to pay the instrument in the capacity in which he or she signs Accommodation MakerAccommodation Maker – primarily liable Accommodation IndorserAccommodation Indorser – secondarily liable


Warranty Liability of Parties The law impliesimplies certain warranties on

transferors of negotiable instruments Warranty liability is imposed whether or

not the transferor signed the instrument There are two types of implied warranties:

Transfer Warranties Presentment Warranties


Transfer Warranties (1 of 2)

TransferTransfer – Any passage of an instrument other than its issuance and presentment for payment

Transfer WarrantiesTransfer Warranties – any of the following five implied warranties:

1. The transferor has good title to the instrument or is authorized to obtain payment or acceptance on behalf of one who does have good title

2. All signatures are genuine or authorized


Transfer Warranties (2 of 2)

3. The instrument has not been materially altered

4. No defenses of any party are good against the transferor

5. The transferor has no knowledge of any insolvency proceeding against the maker, the acceptor, or the drawer of an unaccepted instrument


Presentment Warranties

Any person who presentspresents a draft or check for payment or acceptance makes the following warranties to a drawee or acceptor who pays or accepts the instrument in good faith:

1. The presenter has good title to the instrument or is authorized to obtain payment or acceptance of the person who has good title

2. The instrument has not been materially altered3. The presenter has no knowledge that the

signature of the maker or drawer is unauthorized


Defenses

The creation of negotiable instruments may give rise to a defense against its payment

There are two general types of defenses: Real Defenses Personal Defenses

A holder in due course (HDC)holder in due course (HDC) takes the instrument free from personal defenses but not real defenses


Real Defenses

Real Defenses Effect

1. Minority2. Extreme duress3. Mental incapacity4. Illegality5. Discharge in bankruptcy6. Fraud in the inception7. Forgery8. Material alteration

Real defenses can be raised against both holders and holders in due course


Personal Defenses

Personal Defenses Effect

1. Breach of contract2. Fraud in the inducement3. Mental illness that makes a contract

voidable instead of void4. Illegality of a contract that makes the

contract voidable instead of void5. Ordinary duress or undue influence6. Discharge of an instrument by

payment or cancellation

Personal defenses cannot be raised against a holder in due course


HDC Status Eliminated with Respect to Consumer Credit Transactions The Federal Trade Commission (FTC) has adopted

a rule that eliminates HDC statuseliminates HDC status with regard to negotiable instruments that arise out of certain consumer credit transactions

Sellers of goods and services are prevented from separating the consumer’s duty to pay the credit and the seller’s duty to perform

Thus, both personalpersonal andand realreal defensesdefenses can be raised against an HDC

The Federal Trade Commission (FTC) has adopted a rule that eliminates HDC statuseliminates HDC status with regard to negotiable instruments that arise out of certain consumer credit transactions

Sellers of goods and services are prevented from separating the consumer’s duty to pay the credit and the seller’s duty to perform

Thus, both personalpersonal andand realreal defensesdefenses can be raised against an HDC


Discharge

Actions or events that relieve certain parties from liability on negotiable instruments

There are three methods of discharge:1. Payment of the instrument

2. Cancellation

3. Impairment of the right of recourse


Impairment of the Right of Recourse Certain parties (holders, indorsers,

accommodation parties) are discharged from liability on an instrument if the holder:

1. Releases an obligor from liability; or

2. Surrenders collateral without the consent of the parties who would benefit by it

Slides developed by Les Wiletzky Wiletzky and Associates Copyright © 2006 by Pearson Prentice-Hall....

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