Class Slides for EC 204 Spring 2006 To Accompany Chapter 13.
Slides developed by Les Wiletzky Wiletzky and Associates Copyright © 2006 by Pearson Prentice-Hall....
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Transcript of Slides developed by Les Wiletzky Wiletzky and Associates Copyright © 2006 by Pearson Prentice-Hall....
Slides developed byLes WiletzkyWiletzky and Associates Copyright © 2006 by Pearson Prentice-Hall. All rights reserved.
PowerPoint Slides to AccompanyCONTEMPORARY BUSINESS
ANDONLINE COMMERCE LAW
5th Editionby Henry R. Cheeseman
Chapter 20Holder in Due Course and Liability
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Introduction
If payment is not made on a negotiable instrument when it is due, the holder can use the court system to enforce the instrument
Various parties, including both signers and non-signers, may be liable on it
Accommodation parties (i.e., guarantors) can also be held liable
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Holder Versus Holder In Due Course
HolderHolder A person who is in
possession of a negotiable instrument that is drawn, issued, or indorsed to him or his order, or to bearer, or in blank
HolderHolder A person who is in
possession of a negotiable instrument that is drawn, issued, or indorsed to him or his order, or to bearer, or in blank
Holder in Due Course Holder in Due Course (HDC)(HDC)
A person who takes a negotiable instrument for value, in good faith, and without notice that it is defective or is overdue
Holder in Due Course Holder in Due Course (HDC)(HDC)
A person who takes a negotiable instrument for value, in good faith, and without notice that it is defective or is overdue
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Requirements for HDC Status To qualify as an HDC, the transferee must meet
the requirements established by the UCC The person must be the holderholder of a negotiable
instrument that was taken:
1. For value2. In good faith3. Without notice that it is overdue, dishonored, or
encumbered in any way, and4. Bearing no apparent evidence of forgery, alterations, or
irregularity [UCC 3-302]
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Holder in Due Course (HDC)
Negotiable Negotiable InstrumentInstrument
Negotiable Negotiable InstrumentInstrument
1.1. HolderHolder
2.2. Takes a negotiable Takes a negotiable instrumentinstrument
3.3. For valueFor value
4.4. In good faithIn good faith
5.5. Without notice of Without notice of defectdefect
6.6. The instrument bears The instrument bears no apparent evidence no apparent evidence of forgery, alterations, of forgery, alterations, or irregularityor irregularity
Maker or Maker or DrawerDrawer
Payee or Payee or BearerBearer
Holder in Holder in Due Due
Course Course (HDC)(HDC)
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Holder in Due Course:Taking for Value Value has been given for a negotiable
instrument if the holder:1.1. Performs the agreed-upon promise2.2. Acquires a security interest or lien on the instrument3.3. Takes the instrument in payment of or as security for an
antecedent claim4.4. Gives a negotiable instrument as payment5.5. Gives an irrevocable obligation as payment
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Holder in Due Course:Taking in Good Faith A holder must take the instrument in good
faith to qualify as an HDC Good faithGood faith means honesty in fact in the
conduct or transaction It is the holder’s subjective belief that can
be inferred from the circumstances
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Holder in Due Course:Taking Without Notice of Defect A person cannot qualify as an HDC if he
or she has notice that the instrument is defective in any of the following ways:1.1. It is overdue2.2. It has been dishonored3.3. It contains an unauthorized signature or has been
altered4.4. There is a claim to it by another person5.5. There is a defense against it
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Holder in Due Course: No Evidence of Forgery, Alteration, or Irregularity A holder cannot become an HDC to an
instrument that is apparently forged, or altered, or is so otherwise irregular or incomplete as to call into question its authenticity
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Signature Liability of Parties A person cannot be held contractually
liable on a negotiable instrument unless his or her signature appears on the instrument
The signatures on a negotiable instrument identify those who are obligated to pay it
If it is unclear who the signer is, parol evidence can identify the signer
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Signature Defined
Any name, word, or mark used in lieu of a written signature
Any symbol that is: Handwritten, typed, printed, stamped, or
made in almost any other manner; and Executed or adopted by a party to
authenticate a writing
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Signers of instruments sign in many different capacities, including: A maker of notes and
certificates of deposit A drawer of drafts
and checks A drawee who
certifies or accepts checks and drafts
A maker of notes and certificates of deposit
A drawer of drafts and checks
A drawee who certifies or accepts checks and drafts
An indorser who indorses an instrument
An agent who signs on behalf of others
An accommodation party
An indorser who indorses an instrument
An agent who signs on behalf of others
An accommodation party
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Agent’s Signatures
AgentAgent – A person who has been authorizedauthorized to sign a negotiable instrument on behalf of another person
PrincipalPrincipal – A person who authorizes an agent to sign a negotiable instrument on his or her behalf
Unauthorized SignatureUnauthorized Signature – A signature made by a purported agent without authority from the purported agent
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Signature Liability: Primary Liability Makers of promissory notes and certificates
of deposit have primary liabilityprimary liability for the instrument
Upon signing a promissory note, the maker unconditionally promises to pay the amount stipulated in the note when it is due
Makers are absolutely liable to pay the instrument, subject only to certain real defenses
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Signature Liability: Secondary Liability Drawers of checks and drafts and
unqualified indorsers of negotiable instruments have secondary liabilitysecondary liability on the instrument
This liability is similar to that of a guarantor of a simple contract
It arises when the party primarily liable on the instrument defaults and fails to pay the instrument when due
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Signature Liability:Accommodation Party A party who signs an instrument and
lends his or her name (and credit) to another party to the instrument
The accommodation party is obliged to pay the instrument in the capacity in which he or she signs Accommodation MakerAccommodation Maker – primarily liable Accommodation IndorserAccommodation Indorser – secondarily liable
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Warranty Liability of Parties The law impliesimplies certain warranties on
transferors of negotiable instruments Warranty liability is imposed whether or
not the transferor signed the instrument There are two types of implied warranties:
Transfer Warranties Presentment Warranties
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Transfer Warranties (1 of 2)
TransferTransfer – Any passage of an instrument other than its issuance and presentment for payment
Transfer WarrantiesTransfer Warranties – any of the following five implied warranties:
1. The transferor has good title to the instrument or is authorized to obtain payment or acceptance on behalf of one who does have good title
2. All signatures are genuine or authorized
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Transfer Warranties (2 of 2)
3. The instrument has not been materially altered
4. No defenses of any party are good against the transferor
5. The transferor has no knowledge of any insolvency proceeding against the maker, the acceptor, or the drawer of an unaccepted instrument
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Presentment Warranties
Any person who presentspresents a draft or check for payment or acceptance makes the following warranties to a drawee or acceptor who pays or accepts the instrument in good faith:
1. The presenter has good title to the instrument or is authorized to obtain payment or acceptance of the person who has good title
2. The instrument has not been materially altered3. The presenter has no knowledge that the
signature of the maker or drawer is unauthorized
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Defenses
The creation of negotiable instruments may give rise to a defense against its payment
There are two general types of defenses: Real Defenses Personal Defenses
A holder in due course (HDC)holder in due course (HDC) takes the instrument free from personal defenses but not real defenses
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Real Defenses
Real Defenses Effect
1. Minority2. Extreme duress3. Mental incapacity4. Illegality5. Discharge in bankruptcy6. Fraud in the inception7. Forgery8. Material alteration
Real defenses can be raised against both holders and holders in due course
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Personal Defenses
Personal Defenses Effect
1. Breach of contract2. Fraud in the inducement3. Mental illness that makes a contract
voidable instead of void4. Illegality of a contract that makes the
contract voidable instead of void5. Ordinary duress or undue influence6. Discharge of an instrument by
payment or cancellation
Personal defenses cannot be raised against a holder in due course
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HDC Status Eliminated with Respect to Consumer Credit Transactions The Federal Trade Commission (FTC) has adopted
a rule that eliminates HDC statuseliminates HDC status with regard to negotiable instruments that arise out of certain consumer credit transactions
Sellers of goods and services are prevented from separating the consumer’s duty to pay the credit and the seller’s duty to perform
Thus, both personalpersonal andand realreal defensesdefenses can be raised against an HDC
The Federal Trade Commission (FTC) has adopted a rule that eliminates HDC statuseliminates HDC status with regard to negotiable instruments that arise out of certain consumer credit transactions
Sellers of goods and services are prevented from separating the consumer’s duty to pay the credit and the seller’s duty to perform
Thus, both personalpersonal andand realreal defensesdefenses can be raised against an HDC
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Discharge
Actions or events that relieve certain parties from liability on negotiable instruments
There are three methods of discharge:1. Payment of the instrument
2. Cancellation
3. Impairment of the right of recourse
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Impairment of the Right of Recourse Certain parties (holders, indorsers,
accommodation parties) are discharged from liability on an instrument if the holder:
1. Releases an obligor from liability; or
2. Surrenders collateral without the consent of the parties who would benefit by it