Ch 26: Transferability and Holder in Due Course

Once issued, negotiable instruments can be transferred to other by either:

Assignment
Negotiation

transfer of rights under a contract to an assignee

assignment

Within assignment, the assignee can only receive

rights that the assignor had prior to the assignment

the transfer of an instrument in such a way that the transferee (person to whom the instrument is transferred) becomes a holder

negotiation

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

negotiation

A 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 depends on whether the instrument is a:

bearer or order instrument

contains the name of the payee capable of indorsing

order instruments

Negotiating order instruments require both:

delivery and indorsement

What is an example of an order instrument?

cashing a check at the bank (endorse and deliver it)

an instrument that is payable to bearer and is negotiated by delivery (by transfer into another persons possession)

bearer instruments

for bearer instruments, unlike order instruments, ___ is not necessary

endorsement

a signature placed on an instrument for the purpose of transferring ownership rights in the instrument; most often written on the back of the instrument

indorsement

If there is no room for endorsement, it can be written on a separate piece of paper called a ___, that must be firmly affixed to the instrument

allonge

a person who transfers an instrument by signing (indorsing) it and delivering it to another person

indorser

person to whom a negotiable instrument is transferred by indorsement

indorsee

What are the 4 main categories of indorsement

Blank
Special
Qualified
Restrictive

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

blank indorsement

an order instrument that is indorsed in blank becomes a:

bearer instrument

an indorsement on an instrument that indicates the specific person to whom the indorser intends to make the instrument payable- that is, it names the indorsee

special indorsement

a holder may convert a blank indorsement into a ___ by writing, above the signature of the indorser, words identifying the indorsee

special indorsement

An indorsement on a negotiable instrument in which the indorser disclaims any contract liability on the instrument; generally, an indorser impliedly promises to pay the holder the amount of the instrument in the event the original drawer defaults on the payment (later)

qualified indorsement

the notation ___ is commonly used to create a qualified indorsement

without recourse

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

restrictive indorsement

What is an example of restrictive indorsement?

For Deposit Only

often, whether a holder is entitled to obtain payment will depend on whether they are a:

Holder in Due Course (HDC)

When an instrument is transferred, an ordinary holder obtains ONLY:

those rights that the transferor had in the instrument and the same defenses that could be asserted

a holder who acquires a negotiable instrument for value, in good faith, and without notice that the instrument is overdue, that it has been dishonored, that any person has a defense against it or a claim to it, or that the instrument contains unauthorized signatures, alterations, or is so irregular or incomplete as to call into question its authenticity

Holder in Due Course (HDC)

takes an instrument free of most of the defenses and claims that could be asserted against the transferor; therefore, receives a higher level of protection from defenses and claims asserted by other parties

Holder in Due Course (HDC)

the basic requirements for attaining HDC status is that an HDC must be a holder of a negotiable instrument and must have taken the instrument: (3)

For value
In good faith
Without notice that is is defective (overdue/ dishonored/ irregular/ incomplete)

According the the ___ requirement of the HDC, a person who receives an instrument as a gift or inherits it has NOT met the requirement of ___

For Value

In any situation where not all the requirements are met for HDC, the person normally becomes a __ and does not possess the rights of an HDC

ordinary holder

A holder takes an instrument for value if they have done any of the following: (5)

Performed the promise for which the instrument was issued or transferred
Acquiring a security interest or other lien in the instrument (excluding lien obtained by a judicial proceeding)
Taken the instrument in payment of or as security for a preexisting condition
Given a negotiable instrument as payment
Given an irrevocable commitment (such as letter of credit) as payment

a preexisting claim

antecedent claim

taking an instrument in satisfaction of an ___ is taking the instrument for value

antecedent claim

Although a promise to give value in the future is valid consideration to support a contract, it does not constitute:

sufficient value to make a promisor a HDC

In a few situations, the holder may pay for the instrument but not acquire HDC status if the instrument is: (3)

Purchased at a judicial sale (bankruptcy or creditors sale)
Acquired as a result of taking over a trust or estate (as administrator)
Acquired as part of a corporate purchase of assets

What is meant by taking the instrument in good faith?

Holder must have acted honestly in the process of acquiring the instrument

UCC3 definition- honesty in fact and the observance of reasonable commercial standards of fair dealings

good faith

The good faith requirement applies only to the ___

holder

A person cannot be a HDC if they know or have reason to know that the instrument is defective in any of the following ways: (6)

Overdue
Dishonored
Part of a series in which at least one instrument has an uncured (uncorrected) default
Contains an unauthorized signature or has been altered
There is a defense against the instrument or a claim to the instrument
Instrument is so incomplete or irregular as to call its authenticity into question

A person is considered to have notice in any of the following circumstances: (3)

Person has actual knowledge of the defect
Person has received a notice or notification about the defect (such a letter from bank identifying serial numbers of stolen bearer instruments)
Person has reason to know that a defect exists, given all the facts and circumstances known at the time in question

A purchasers knowledge of certain facts, such as insolvency proceedings against the maker or drawer of the instrument, does not constitute:

notice that the instrument is defective

What constitutes notice that an instrument is overdue depends on whether it is a ___ or instrument

Demand or Time

A purchaser has notice that a demand instrument is overdue in two situations: When a person takes a demand instrument… (2)

Knowing that demand already has been made
An unreasonable length of time after its date

Normally, a time instrument is overdue on:

the day AFTER its due date

Anyone who takes a time instrument after the due date is on:

notice that it is overdue

If an instrument states that it is payable in 30 days, counting begins

the day after the instrument is dated

a series of notes issued at the same time with successive maturity dates is overdue when:

any note in series is overdue

If the principal is to be paid in installments, the default or nonpayment of any one installment will make the instrument:

overdue until the default is cured

Cured also means

corrected

An instrument does not become overdue if there is a default on payment of ___ only

interest

an instrument is ___ when the party to whom the instrument is presented refuses to pay

dishonored

If a holder knows or has reason to know that an instrument has been dishonored, the holder is:

on notice and cannot claim HDC status

A holder cannot become a HDC if they have notice of any claim to the instrument or defense against it. A person has notice if:

Claims or defenses are apparent on instrument face
Purchaser had reason to know from facts surrounding the transaction

A purchaser cannot become a HDC of an instrument so incomplete on its face that an element of negotiability is lacking, such as

Amount not filled in
If there are minor omissions (like date) that do not call into question the validity of the instrument ARE permissible

When a person accepts an instrument that has been completed without knowing that is was incomplete when issued, that person can be an HDC, even if

instrument is completed in an unauthorized mannoer

Any irregularity on the face of an instrument that calls into question its validity or ownership will bar HDC status. Ex:

OBVIOUS forgery (reasonable person can tell)

If there is a GOOD forgery, the holder can become :

HDC

The following will not by itself make an instrument irregular:

Difference between handwriting used in body and signature of a check (think secretary writes the check and boss signs)
Antedating or postdating a check
Stating the amount in digits but failing to write out the numbers

The principle that the holder of a negotiable instrument who cannot qualify as a holder in due course (HDC), but who derives their title through an HDC, acquires the rights of an HDC

Shelter principle

The ___ extends the benefits of HDC status and is designed to aid the HDC in readily disposing of the instrument; by extending these benefits, it promotes the marketability and free transferability of negotiable instruments

shelter principle

What are the limits to the shelter principle? (2)

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 the instrument cannot gain HDC status by later reacquiring the instrument from an HDC