McGraw-Hill/Irwin

32-1 Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

P A R T

Commercial Paper

Negotiable Instruments Negotiation and Holder in Due Course Liability of Parties Checks and Electronic Transfers

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C H A P

E R

Negotiation and Holder in Due Course

Behind all its global responsibilities and impersonal style banking is still a people businessit may be the most personal business of all for it always depends on the original concept of credit, meaning trust. Anthony Sampson, The Moneylenders: Bankers in a Dangerous World (1981)

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Learning Objectives
Explain the process of transferring negotiable instruments from one person to another Distinguish order paper from bearer paper, and blank, special, restrictive, and qualified indorsements Identify and explain requirements for becoming a holder in due course
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Overview
Under UCC Revised Article 3, negotiation is the transfer of voluntary or involuntary possession of a negotiable instrument by a person (other than issuer) to another person who becomes its holder [3201]
Order paper: instrument is payable to the order of a specific payee Bearer paper: instrument is payable to bearer or to cash
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Indorsement
Indorsement is a signature that, alone or with other words, is made on an instrument for a specific purpose Signature may not be that of the maker, drawer, or acceptor Indorsement is required for negotiation except in the case of depositary banks
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Effects of Indorsement
Indorsement makes a person indorsing the item liable for payment if person primarily liable (e.g., maker of a note) does not pay The form or lack of indorsement may affect future attempts to negotiate the instrument

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Kinds of Indorsement
A special indorsement is the indorsers signature plus words indicating to whom, or to whose order, the instrument is payable An instrument is indorsed in blank if the indorser signs without specifying to whom the item is payable A restrictive indorsement specifies purpose of the indorsement or how the instrument must be used
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Holder in Due Course

A holder in due course takes a negotiable instrument free of all personal defenses, claims to the instrument, and claims in recoupment of the obligor or a third party A holder in due course does not take free of the real defenses regarding validity of the instrument or claims that develop after s/he becomes a holder

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Requirements for Holder in Due Course Status

Person must be a holder of a negotiable instrument, and take it (1) for value, (2) in good faith, (3) without notice of defects or evidence of apparent forgery or alteration that raises a question of authenticity
See Golden Years Nursing Home, Inc. v. Gabbard

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Overdue & Dishonored Instruments

If a negotiable instrument is payable on demand, it becomes overdue:
(1) day after demand for payment made; (2) 90 days after its date if a check; and (3) if other than a check, if outstanding for an unreasonable time for the instrument and trade practice [3304(a)]

A negotiable instrument has been dishonored when holder has presented it for payment (or acceptance) & payment (or acceptance) has been refused
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Notice of Claims
If a person taking a negotiable instrument would be on notice of adverse claim, alteration, forged signature, or irregularity, person is not a holder in due course
Cannot negotiate instrument But see New Randolph Halstead Currency Exchange, Inc. v. Regent Title Insurance Agency, LLC Potential defenses: fraud, duress, infancy, failure of consideration
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Holder in Due Course Claims & Defenses

Real defenses attack instruments validity and may be used as reasons against payment of negotiable instrument to any holder Personal defenses are legal reasons for avoiding or reducing a persons liability for payment and arise out of the transaction that issued the negotiable instrument
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Holder in Due Course Claims & Defenses

Claims to an instrument concern property or possessory rights in an instrument or its proceeds Claims in recoupment arise out of the transaction that gave rise to the instrument and offset, rather than prevent, liability

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Consumer Protection Issues

Holder in due course rules may harm consumers, thus some states and the Federal Trade Commission limited the holder in due course rule as it affects consumers FTC requires sellers who extend credit by note to include the following statement
NOTICE: ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE DEBTOR COULD ASSERT AGAINST THE SELLER OF THE GOODS OR SERVICES OBTAINED PURSUANT HERETO OR WITH THE PROCEEDS HEREOF. RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER.

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Commercial Paper Chart

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Thought Questions
What do you think of the FTC rule limiting the rights of a holder in due course in consumer transactions? Do you think the FTC rule achieves the underlying policy to protect consumers?

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