blaw ch 26 - Transferability and Holder in Due Course

assignment (contract law)

an assignment is a transfer of rights under a contract

gives assignee only those rights that the assignor had prior to the assignment

negotiation(UCC)

negotiation = the transfer of an instrument where the transferee (person to whom the instrument is transferred) becomes a “holder”

transfer in negotiation can make it possible for a holder to receive more rights in the instrument than the prior possessor had

• holder who receives greater rights is known as a holder in due course

whether assignment or negotiation is used to transfer a negotiable instrument to others depend on whether the instrument is an order instrument or bearer instrument

• if transfer fails to meet 1 or more negotiation requirements it is treated as an assignment

• order instrument - negotiation requires both delivery and necessary indorsements

• bearer instrument - negotiated by delivery alone

indorsements

indorsement = a signature placed on an instrument for the purpose of transferring ownership rights in the instrument

• often written on back of instrument

• or on separate paper if no room that is affixed to the instrument

indorser - person who transfers an instrument for the purpose of transferring ownership rights in the instrument

indorsee - person to whom a negotiable instryment is transferred by indorsement

categories for indorsements

1. blank

2. special

3. qualified

4. restrictive

blank indorsement

an indorsement that specifies no particular indorsee and can consist of a mere signature

• order instrument that is indorsed in blank becomes a bearer instrument and can be negotiated by delivery alone

special indorsement

indicates the specific person to whom the indorser intends to make the instrument payable (indorsee)

• holder may convert a blank indorsement to a special indorsement by writing, above the signature of an indorser, words identifying the indorsee

qualified indorsements

unqualified indorsement - generally, an indorser, merely by indorsing, guarantees payment of the instrument in addition to transferring title to it

qualified indorsement - an indorsement on a negotiable instrument in which the indorser disclaims any contract liability on the instrument

• “without recourse” is commonly used to create qualified indorsement

  • often used by persons acting in an representative capacity

restrictive indorsements

an indorsement on a negotiable instrument that requires the indorsee to comply with certain instruction regarding the funds involved. it does not prohibit further negotiation of the instrument.

most common type:

• indorsement for deposit or collection

  • “for deposit only” and “for collection only” lock the instrument into the bank collection process

holder in due course (HDC)

whether a holder is entitled to obtain payment will depend on whether they are a holder in due course (HDC)

ordinary holder - when an instrument is transferred, an ordinary holder obtains only those rights that the transferror had in the instrument

HDC - takes an instrument free of most of the defenses and claims that could be asserted against the transferor

• receives a higher level of protection from defenses and claims asserted by other parties

• must meet certain requirements

requirements for HDC status

basic requirements for attaining HDC status is that an HDC must be a holder of a negotiable instrument and have taken the instrument

1. for value

2. in good faith

3. without notice that it is defective

taking for value (requirements for HDC status)

• an HDC must have given value for the instrument

• although a promise to give value in the future is a valid consideration to support a contract it does not constitute sufficient value to make the promisor an HDC

• exceptions: in a few situations, the holder may pay value for the instrument but not acquire HDC status

  • purchase at a judicial sale(bankruptcy or creditor’s sale) - not HDC

  • acquired as a result of taking over a trust or estate (as administrator) - not HDC

  • part of corporate purchase of assets - not HDC

taking in good faith (requirements for HDC status)

the 2nd requirement for HDC status is that the holder must take the instrument in good faith

• holder must have acted honestly in the process of acquiring the instrument and believe the instrument is not defective

• good faith requirement only applies to holder

  • it is immaterical whether the trannsferor acted in good fait

  • therefore you can take a negotiable instrument from a theif and become and HDC if acquired for value in good faith and without suspicion

taking without notice (requirements for HDC status)

a person cannot be an HDC if they know or have reason to know that the instrument is defective in any of the following ways

1. it is overdue

2. it has been dishonored (refusal to pay)

3. it is part of a series in which at least one instrument has an uncured (uncorrected) default

4. it contains unauthorized signature or has been altered

5. there is a defense against the instrument or a claim to the instrument

6. the instrument is so incomplete or irregular as to call into question its authenticity

notice can be actual, received, or “have reason to know”

holder through an HDC (shelter principle)

shelter principle - the principle that the holder of a negotiable instrument who cannot qualify has an HDC, but who derives through an HDC, acquires the rights of an HDC

• purpose: by extending the benefits of HDC status, the shelter principle promotes the marketability and free transferability of negotiable instruments

• legal theory: the transferee of an instrument receives at least the rights of the transferor

limitiations

• if a holder participated in fraud or illegality affecting the instrument, that holder is not allowed to improve their status by repurchasing the instrument from a later HDC

• a holder who had notice of a claim or defense against an instrument cannot gain HDC status by later reaquiring the instrument from an HDC