Chapter 32 - Negotiation and Holder in Due Course

CHAPTER 32

NEGOTIATION AND HOLDER IN DUE COURSE

LEARNING HINTS

1. Negotiation is the process by which rights to a negotiable instrument pass from one person to another. If an instrument is payable to a specific person, that person negotiates the instrument by indorsing it and transferring it to a holder. If an instrument is bearer paper, the instrument can be negotiated simply by transferring it, without indorsement.

2. To indorse an instrument, the signature of the holder must be added to the instrument. Indorsement occurs when the holder signs the instrument in order to negotiate it, restrict payment on the instrument or to incur liability on the instrument.

3. There are four kinds of indorsement: special indorsement; blank indorsement; restrictive indorsement; and qualified indorsement. Describe the requirements for and meaning of each.

4. A person who qualifies as a holder in due course of a negotiable instrument gets special rights. What are some examples of those rights?

5. A holder in due course holds an instrument payable to “bearer” or payable to him. Thus if the check is made payable to the order of John Smith, John Smith is a holder. If he endorses the check payable “to the order of Jane Smith” and actually transfers the instrument to Jane, Jane then becomes a holder.

6. Explain the 11 requirements to be a holder in due course and the rules that apply to each requirement.

7. Describe the Federal Trade Commission rule designed to protect consumers against operation of the holder in due course rule. What requirements does the rule impose, and how does it benefit consumers?

CHAPTER OUTLINE AND KEY CONCEPTS

  1. Learning Objectives
  1. Negotiation
  2. Nature of Negotiation
  3. Formal Requirements for Negotiation

1. Order paper

2. Bearer paper

  1. Nature of Indorsement
  2. Wrong or Misspelled Name
  3. Checks Deposited without Indorsement

  1. Transfer of Order Instrument

1. Example: Town of Freeport v. Ring, 727 A.2d 901 (Maine Sup. Jud. Ct. 1999)

  1. Indorsements
  2. Effects of an Indorsement
  3. Kinds of Indorsements

1.Special Indorsement

2.Blank Indorsement

3.Restrictive Indorsement

  1. Indorsements for deposit
  2. Indoresements for collection
  3. Indorsements for the benefit of someone other than the payee

d. Example: Lehigh Presbytery v. Merchants Bancorp, Inc., 17 UCC Rep. 2d 163 (Penn. Super. Ct. 1991)

4.Qualified Indorsement

a. “Without Recourse”

  1. Rescission of Indorsement
  1. Holder in Due Course
  2. A holder in due course gets special rights. She takes a negotiable instrument free of all personal defenses, claims to the instrument, and claims in recoupment either of the obligor or of a third party. A holder in due course does not take an instrument free of real defenses.
  3. General Requirements
  4. Holder

1. Example: Golden Years Nursing Home, Inc. v. Gabbard, 682 N.E.2d 731(Ohio Ct. App. 1996)

  1. Value
  2. Good Faith
  3. Overdue or Dishonored (no notice of either)

1. Overdue Instruments

2. Dishonored Instruments

  1. Notice of Unauthorized Signature or Alteration
  2. Notice of Claims

1. Notice of Breach of Fiduciary Duty

2. Notice of Defenses and Claims in Recoupment

  1. Irregular and Incomplete Instruments

1.Example: New Randolph Halstead Currency Exchange, Inc. v. Regent Title Insurance Agency, LLC, 73 UCC Rep.2d 341 (App. Ct. Ill. 2010)

  1. Shelter Rule

  1. Rights of a Holder in Due Course
  2. Claims and Defenses Generally
  3. Importance of Being a Holder in Due Course
  4. Real Defenses

1. Minority or infancy

2. Incapacity

3. Duress

4. Illegality

5. Fraud in the essence (or fraud in the factum)

6. Discharge in bankruptcy

7. Example: General Credit Corp. v. New York Linen Co., Inc., 46 UCC Rep.2d 1055 (New York Civ. Ct., Kings County 2002)

8. Other defenses

a. Forgery

b. Alteration of a completed instrument

c. Discharge

  1. Personal Defenses

1. Lack or failure of consideration

2. Breach of contract, including breach of warranty

3. Fraud in the inducement of any underlying contract

4. Incapacity

5. Illegality

6. Duress

7. Unauthorized completion or alteration of the instrument

8. Nonissuance of the instrument, conditional issuance, and issuance for a special purpose

9. Failure to countersign a traveler’s check

10. Modification of the obligation by a separate agreement

11. Payment that violates a restrictive indorsement

12. Breach of warranty when a draft is accepted

  1. Claims to the Instrument
  2. Claims in Recoupment
  1. Changes in the Holder in Due Course Rule For Consumer Credit Transactions
  2. Consumer Disadvantages
  3. State Consumer Protection Legislation
  4. Federal Trade Commission Regulation

1. Example: Music Acceptance Corp. v. Lofing, 39 Cal. Rptr. 159 (Cal. Ct. App. 1995)

32-1