Transcript Chapter 024 - Holder in Due Course & Liability

PowerPoint Slides to Accompany
BUSINESS LAW
E-Commerce and Digital Law
International Law and Ethics
5th Edition
by Henry R. Cheeseman
Chapter 24
Holder in Due Course and
Liability
Slides developed by
Les Wiletzky
Wiletzky and Associates, Puyallup, WA
Copyright © 2004 by Prentice-Hall. All rights reserved.
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.

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Holder Versus Holder In Due Course

Holder
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
(HDC)
 A person who takes a
negotiable instrument
for value, in good faith,
and without notice that
it is defective or is
overdue.
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Requirements for HDC Status


To qualify as an HDC, the transferee must meet the
requirements established by the UCC.
The person must be the holder of a negotiable
instrument that was taken:
For value
2. In good faith
3. Without notice that it is overdue, dishonored, or
encumbered in any way, and
4. Bearing no apparent evidence of forgery, alterations, or
irregularity
1.
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Holder in Due Course
Maker or
Drawer
Negotiable
Instrument
Payee or
Bearer
Negotiable
Instrument
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Holder in
Due
Course
(HDC)
1.
Holder
2.
Takes a negotiable
instrument
3.
For value
4.
In good faith
5.
Without notice of
defect
6.
The instrument bears
no apparent evidence
of forgery, alterations,
or irregularity
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Acquiring HDC Status Under the Shelter
Principle
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 the
instrument through a holder in due course.
 This is called the shelter principle.

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Acquiring HDC Status Under the Shelter
Principle (continued)

To qualify as an HDC under the shelter
principle, the following rules apply:




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 his or her title back to an HDC.
The holder must not have been a party to a fraud or
illegality affecting the instrument.
The holder cannot have notice of a defense or claim
against the payment of the instrument.
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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.

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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

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Signers of instruments sign in many
different capacities, including:

A maker of notes and
certificates of deposit

An indorser who
indorses an instrument

A drawer of drafts and
checks

An agent who signs on
behalf of others

A drawee who certifies
or accepts checks and
drafts

An accommodation
party
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Signature Liability (continued):
Primary Liability
Makers of promissory notes and certificates
of deposit have primary 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.

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Signature Liability (continued):
Secondary Liability
Drawers of checks and drafts and unqualified
indorsers of negotiable instruments have
secondary 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.

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Signature Liability (continued):
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 Maker – primarily liable
 Accommodation Indorser – secondarily liable

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Warranty Liability of Parties
The law implies 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

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Transfer Warranties


Transfer – Any passage of an instrument
other than its issuance and presentment for
payment.
Transfer 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.
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Transfer Warranties (continued)
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.
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Presentment Warranties

Any person who presents 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:
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 altered.
3. The presenter has no knowledge that the signature of the
maker or drawer is unauthorized.
1.
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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) takes the
instrument free from personal defenses but
not real defenses.
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Real Defenses
Real Defenses
1. Minority
2. Extreme duress
3. Mental incapacity
4. Illegality
5. Discharge in bankruptcy
6. Fraud in the inception
7. Forgery
8. Material alteration
Effect
Real defenses can be raised
against a holder in due course
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Personal Defenses
Personal Defenses
1. Breach of contract
2. Fraud in the inducement
3. Mental illness that makes a contract
voidable instead of void
4. Illegality of a contract that makes the
contract voidable instead of void
5. Ordinary duress or undue influence
6. Discharge of an instrument by payment
or cancellation
Effect
Personal defenses cannot
be raised against a holder in
due course
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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
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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
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