Chapter 23 Holder in Due Course and Transferability

Holder

A person who is in possession of a negotiable instrument that is drawn, issued, or indorsed to him or to his order, or to bearer, or in blank (same rights as the assignee in a nonnegotiable contract)

In order for commercial paper to act as a substitute for money, the holder of a negotiable instrument must qualify as...

a holder in due course

Restrictive indorsement

An indorsement that contains some sort of instruction from the indorser

Special Indorsement

An indorsement that contains the signature of the indorser and specifies the person (indorsee) to whom the indorser intends the instrument to be payable. It creates order paper.

What is a "reasonable time" for presenting a check for payment?

Ninety Days

How is order paper negotiated

by delivery and indorsement

How is bearer paper negotiated

by delivery, indorsement is not necessary

Holder in Due Course (HDC)

A holder who takes an instrument for value, in good faith, and without notice that it is defective or overdue. An HDC takes a negotiable instrument free of all claims and most defenses that can be asserted against the transferor of the instrument. Only universal defenses may be asserted against an HDC.

Shelter principle

A principle that says 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 an instrument through a holder in due course. Holder cannot have notice of a defense or claim against the payment of the instrument to qualify for the shelter principle.

Demand Instrument

A purchaser cannot be an HDC if the instrument is acquired after demand or at an unreasonable length of time after its issue.

Allonge

A separate piece of paper attached to an instrument on which an indorsement is written

Blank Indorsement

An indorsement that does not specify a particular indorsee. It creates bearer paper.

Nonrestrictive Indorsement

An indorsement that has no instructions or conditions attached to the payment of funds

Qualified indorsement

An indorsement that includes the notation "without recourse" or similar language that disclaims liability of the indorser. Protects only the indorser who wrote an indorsement on the instrument- subsequent indorsers must do the same.

Indorsement for deposit or collection

An indorsement that makes the indorsee the indorser's collecting agent- "For deposit only"

Indorsement in trust (Agency indorsement

An indorsement that states that it is for the benefit or use of the indorser or another person. An indorsee who does not comply with the instructions of a restrictive indorsement is liable to the indorser( not the representative agency) for all losses that occur because of such noncompliance.

Unqualified Indorsement

An indorsement whereby the indorser promises to pay the holder or any subsequent indorser the amount of the instrument if the maker, drawer, or acceptor defaults on it. An unqualified indorser is liable on the check

Time Instrument

An instrument that specifies a definite date for payment of the instrument. It is called an overdue time instrument if not paid by the date. Debt-payable in installments- if an installment payment is not paid, it is overdue.

Blank Qualified Indorsement

Bearer paper that can be further negotiated by delivery without indorsement

How is negotiation accomplished?

By placing an indorsement on the instrument

Taking in good faith requirement

Holder must take an instrument in good faith to qualify as an HDC. Good faith means honesty in fact in the conduct or transaction concerned. The good faith test is subjective.

Taking without notice of defect requirement

If a holder has notice of these things, he or she cannot be an HDC. -It is overdue -It has been dishonored -It contains an unauthorized signature or has been altered -There is a claim to it by another person -There is a defense against it

Assignment for a negotiable instrument

Occurs when the instrument is transferred but the transfer fails to qualify as a negotiation. The transferee is an assignee rather than a holder.

What if the name is misspelled?

The payee or indorsee can indorse the instrument using the misspelled name, the correct name, or both.

Assignment

The transfer of rights under a nonnegotiable contract. The transferor is the assignor, and the transferee is the assignee. Any defenses to the enforcement of the contract that could have been raised against the assignor can also be raised against the assignee.

Payable jointly

Uses the word and; both persons' indorsements are necessary to negotiate the instrument

Payable in the alternative

Uses the word or; either person's indorsement signature alone is sufficient to negotiate the instrument

Dishonored Instrument

When it is presented for payment and payment is refused. A holder who knows that an instrument has been dishonored cannot qualify as an HDC.

Virgule

a slash mark- payable in the alternative

To qualify as an HDC, one must...

be the holder of a negotiable instrument that was taken 1. for value 2. in good faith 3. without notice that it is overdue, dishonored, or encumbered in any way 4. bearing no apparent evidence of forgery, alterations, or irregularity

indorsee

if the indorsement names a payee- this person is the indorsee

Special Qualified Indorsement

order paper that can be negotiated by indorsement and delivery

Taking for value requirement

the holder must have given value for the negotiable instrument to qualify as an HDC Value has been given if the holder: Performs the agreed-upon promise Acquires a security interest in or lien on the instrument Takes the instrument in payment of or as security for an antecedent claim Gives a negotiable instrument as payment Gives an irrevocable obligation as payment

Indorser

the person who indorses an instrument

Indorsement

the signature of a signer that is placed on an instrument to negotiate it to another person. The signature may appear alone, name an individual to whom the instrument is to be paid, or be accompanied by other words

Negotiation

the transfer of a negotiable instrument by a person other than the issuer to a person who thereby becomes a holder. An HDC has greater rights because he or she is not subject to some of the defenses that could otherwise have been raised against the transferor.

Does a payee who does not have knowledge of claims or defenses against the instrument qualify as an HDC?

yes