Ch. 9 Holders in Due Course

To qualify as a holder?

1) The instrument must be technically negotiable; and 2) Must have been technically negotiated into the hands of its current possessor

What is a "Holder in Due Course"?

A holder who took an instrument: 1) For Value, 2) In good faith, 3) Without notice that the instrument is overdue or has been dishonored or that there is an uncured default w/r/t payment of another instrument issued as part of the same series, 4) Without notice that the instrument contains an unauthorized signature or has been altered, 5) Without notice of any claim to the instrument described in Section 3-306, and 6) Without notice that any party has a defense or claim in recoupment described in Section 3-305(a).

If an instrument is issued for value, the instrument is also issued for?

Consideration.

The drawer or maker of an instrument has a defense if the instrument is issued without?

Consideration.

The moment value is given without notice, the status as a HDC generally is?

Definitely and irrevocably fixed.

Who has the burden of establishing HDC status?

Holder

Real defenses may be asserted against HDC?

Infancy Duress, Lack of legal capacity, Illegality, Fraud in the Factum Bankruptcy Mental incapacity

The holder-in-due-course doctrine applies only to cases in which?

More than two parties are involved.

Can a Gift of an instrument create HDC status in the done?

Never

In order to be a HDC, the possessor of the instrument must?

Qualify as a holder

A claim in recoupment may be asserted against a transferee of the instrument only to?

Reduce the amount owing on the instrument at the time the action is brought.

If the person claiming the signature is valid proves the signature is valid after its validity was denied in the pleadings?

The burden shifts to D to show a defense or claim in recoupment

One is not liable on an instrument unless? This is relevant to what defense?

They signed it. Forgery

The Shelter Rule?

Transfer of an instrument vests in the transferee any right of the transferor to enforce the instrument, including any right as a HDC, but the transferee cannot acquire rights of a HDC by a transfer from a HDC if the transferee engaged in fraud or illegality affecting the instrument.

To become a HDC, the owner of the instrument must be?

A bona fide purchaser who has given value for the instrument in good faith, without notice regarding problems with the instrument.

A named payee becomes a holder on issuance of the instrument without the necessity of?

A negotiation

Holder must take through a chain of indorsements that is?

Free of forgeries affecting the title.

Federal agencies acquire HDC status as a matter of federal law when?

Taking over failed financial institutions.

A holder will be less likely to fit the role of a good faith purchaser for value the more that?

The holder knows about the underlying transaction, and particularly the more he controls or participates or becomes involved in it

A HDC is not subject to a claim in recoupment against a person other than?

The holder.

If the forgery is of a name necessary to a valid negotiation?

There can be no HDC following the forgery b/c no later transferee will qualify as a holder.

An instrument is issued or transferred for value if?

1) The instrument is issued or transferred for a promise of performance, to the extent the promise has been performed; 2) The transferee acquires a security interest or other lien in the instrument other than a lien obtained by judicial proceeding; 3) The instrument is issued or transferred as payment of, or as security for, an antecedent claim against any person, whether or not the claim is due; 4) The instrument is issued or transferred in exchange for a negotiable instrument; or 5) The instrument is issued or transferred in exchange for the incurring of an irrevocable obligation to a third party by the person taking the instrument

An obligor may refuse payment if doing so would violate the terms of?

A restrictive indorsement.

To be effective, notice to a purchaser must be received at such time and in such manner as to?

Give a reasonable opportunity to act on it.

For the purpose of achieving the status of HDC, the depositary bank gives value to the extent that?

It acquires a Security Interest in the item in question. A bank acquires a SI in items deposited with it to the extent that the provisional credit given the customer on the item is withdrawn.

Art. 3 defenses include?

Non-issuance of the instrument, Conditional issuance, and Issuance for a special purpose, Failure to countersign a traveler's check, Modification of the obligation by a separate agreement, Payment that violates a restrictive indorsement, Instruments issued without consideration or for which promised performance has not been given, Breach of warranty when a draft is accepted.

Notice, in order to prevent one from being a HDC means?

Notice at the time of the taking or at the time the instrument is negotiated, and not notice arising subsequently.

If D shows a defense or claim in recoupment?

P is subject to the defense/claim unless he is a HDC.

Jus Tertii means?

Rights of another Asserting Jus Tertii is generally prohibited.

Primary attribute of a HDC?

The ability to enforce the instrument free from the usual legal excuses that could be raised in an ordinary contracts action.

If the validity of a signature is denied in the pleadings, the burden of establishing validity is on? In other words? But the signature is presumed to be authentic and authorized unless?

The person claiming validity. P must prove the signature is invalid. The action is to enforce the liability of the purported signer and the signer is dead or incompetent at the time of trial of the issue of validity of the signature.

Presumption with respect to the validity of a signature?

There's a presumption that a signature is genuine.

Discharge is not effective against a person with HDC rights unless? This doesn't apply to?

They had notice of the discharge at the time of acquisition. Does not apply to discharge in bankruptcy.

Most common personal defenses?

Want of consideration Failure of consideration

What is a claim in recoupment?

An obligor's counterclaim against the original payee of a negotiable instrument, arising from the transaction originally giving rise to the instrument.

In an action to enforce an instrument, the obligor may not assert against the PETE a defense, claim in recoupment, or claim to the instrument of?

Another person (Jus Tertii).

Holder of the instrument includes these PETEs?

Anyone in possession of the instrument pursuant to a valid negotiation: 1) Someone who gets holder rights under the Shelter Rule 2) Rightful owner of a lost instrument 3) Defendant in a successful restitution action

To be an HDC the instrument when issued or negotiated to the holder?

Does not bear such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity.

HDC is not subject to these defenses but will be subject to these?

HDC is not subject to personal defenses or claims in recoupment. HDC is subject to real defenses.

An HDC is subject to these defenses not these?

HDC is subject to real defenses not personal defenses.

Buyer issues note to Seller. Seller fraudulently promises to deliver goods to Buyer. Seller negotiates note to Holder. Holder will not be subject to defense of fraud if?

He's a HDC without notice of the fraud.

If the validity of signatures is admitted or proved and there is compliance with 3-308(a), P producing the instrument is entitled to payment if P proves? Unless D proves? If D does prove that? Exception?

He's entitlement to enforce the instrument under Section 3-301. A defense or claim in recoupment. The right to payment of P is subject to the defense or claim. P proves that he has rights of a HDC which are not subject to the defense or claim.

Can things that happen after value is given destroy HDC status once achieved?

No

Bankruptcy is a real defense even without _______? Explain?

Notice Discharge in bankruptcy is always a real defense, regardless of what the subsequent holder knows or doesn't know at the time of acquisition of the instrument.

What is "Recoupment"?

The legal ability to subtract from any payment due the amount the person trying to collect the debt happens to owe the debtor.

Whether someone qualifies as a HDC is measured at what moment?

The moment he gave value for the instrument

Unless the fraud meets this test, the defense is cut off by a holder in due course?

The test of the defense is that of excusable ignorance of the contents of the writing signed. The party must not only have been in ignorance, but must also have had no reasonable opportunity to obtain knowledge.

Extraordinary transactions in which the transferee is statutorily denied HDC status?

1) By legal process or by purchase in an execution, bankruptcy, or creditor's sale or similar proceeding, 2) By purchase as part of a bulk transaction (extraordinary sale of all inventory) not in ordinary course of business of the transferor, or 3) As the successor in interest to an estate or other organization.

Too-Closely Connected test (a method for denying HDC status, which also goes to good faith)?

1) Is the buyer-transferee the alter-ego of the seller-transferor? Do they have the same officers, same personnel, same location? 2) Who drafted the original promissory note? 3) Is the buyer-transferee mentioned in the note? 4) Does the seller transferor sell paper to other buyers, or is the buyer-transferee the only market? 5) Did the buyer-transferee get involved in the transaction by which the note was created? Did it, for instance, conduct a credit investigation of the maker? 6) Did the buyer-transferee have some knowledge of the seller transferor's poor past performance of similar contracts?

Exceptions to the prohibition of Jus Tertii?

1) Just Tertii may be asserted if the other person is joined in the action and personally asserts the claim against the PETE. 2) Jus tertii may be asserted against a non-HDC if the obligor proves that the instrument is a lost or stolen instrument so that the current possessor is not the true owner. 3) Accommodation parties are permitted to raise the defenses of their principals, but indorsers are not permitted to raise the defenses their principals!

Procedural issues in an action with respect to a forged instrument?

1) Presumption that the signature is valid unless denied in the pleading, 2) If denied in the pleadings, P must prove the signature is invalid, 3) If P proves, the burden shifts to D to show a defense or claim in recoupment, 4) If D shows, P is subject to the defense/claim unless he is a HDC.

What claims and defenses may be asserted against a Non-HDC?

All claims and both real and personal defenses including: All defenses available against a HDC, Art. 3 defenses, Common law contract defenses, Claims in Recoupment if holder is the original payee of the instrument and the claim arose from the transaction that gave rise to the instrument. Claims of a property or possessory right in the instrument or its proceeds, including a claim to rescind a negotiation and to recover the instrument or its proceeds.

Why does a drawee bank not qualify as a holder (when it takes the check for payment)?

Because the process by which the drawee bank acquires the instrument is not a negotiation, but a mere surrender for payment (presentment).

If an instrument is issued for a promise of performance, the issuer has a defense to the extent performance of the promise is?

Due and the promise has not been performed.

If an action to enforce the instrument is brought against a person as the undisclosed principal of a person who signed the instrument as a party to the instrument, P has the burden of?

Establishing that D is liable on the instrument as a represented person under 3-402(a).

When can Illegality be used against HDC: Majority rule? Minority rule?

Majority: only when an obligation is made entirely null and void under local law; if it is only made voidable, illegality will not be available as a defense against an HDC. Minority: When an obligation is made voidable or void under local law.

Is it sufficient to overcome the presumption that a signature is genuine if you take the stand and deny the signature?

No, mere denial is not sufficient to establish that the signature is not valid. The evidence does not need to be sufficient to require a directed verdict in its favor but it must be enough to support its denial by permitting a finding in its favor.

Why can a payee normally not be an HDC? This payee can qualify as a HDC? Why?

Normally, payee is so involved in the underlying transaction that he has notice of problems affecting payment obligations and thus cannot be a HDC. 3rd party payee who has no knowledge of the underlying transaction. He can be an HDC because he has no notice of the defects.

When an instrument is so incomplete as to call its validity into question, a purchaser of that instrument is?

On notice of the possibility of a claim against it (3-302(a)(1) - so irregular or incomplete).

Is forgery a real or personal defense? Therefore?

Personal defense. A forged signature is effective only to make the forger liable.

On reacquisition, a holder is? Thus if one used to be a HDC, on reacquiring the instrument, he would?

Remitted to his former rights as regards all prior parties. Get that status back vis-à-vis parties prior to his first holding.

In an action w/r/t an instrument, the authenticity of, and authority to make, each signature on the instrument is admitted unless? In other words?

Specifically denied in the pleadings. There's a presumption that the signature is valid unless denied in the pleading.

When a previous holder reacquires the instrument, he has the power to?

Strike the intervening indorsements

If you're an HDC you are?

Superplaintiff and fee of almost any defense.

Is the defense of usury is available for use against a HDC of the promissory note?

Yes