Chapter 28

Chapter 28 - Chapter 28: Chapter Holder in Due Course...

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Unformatted text preview: Chapter 28: Chapter Holder in Due Course Holder BUL 3350 - Chapte 28 1 Topics Covered in this Chapter A. Requirements of a Holder in Due Requirements Course B. Holder in Due Course Status B. C. The Preferred Position of a Holder The in Due Course in D. Limitations upon Holder in Due Limitations Course Rights Course BUL 3350 - Chapte 28 2 Requirements of a Holder in Due Course Holder – a person who has possession of an instrument and all necessary indorsements. instrument Value – differs from contractual consideration Value and consists of any of the following: and • timely performance of legal consideration (which timely excludes executory promises); excludes • acquisition of a security interest in or a lien on the acquisition instrument; instrument; • taking the instrument in payment of or as security taking for an antecedent debt; for • giving a negotiable instrument; or • giving an irrevocable commitment to a third party BUL 3350 - Chapte 28 3 Requirements of a Holder in Due Course Lack of Notice • Notice an Instrument Is Overdue – time paper is Notice overdue after its stated date; demand paper is overdue after demand is made or after it has been outstanding for an unreasonable period of time outstanding • Notice an Instrument Has Been Dishonored – dishonor is the refusal to pay or accept an instrument when it becomes due instrument • Notice an Instrument Has Been Forged or Notice Altered Altered • Notice of a Claim or Defense – a defense protects Notice a person from liability, while a claim is an assertion of ownership of BUL 3350 - Chapte 28 4 Requirements of a Holder in Due Course Good Faith – honesty in fact and the Good observance of reasonable commercial standards of fair dealing. standards Without Reason to Question Its Without Authenticity – instrument cannot bear such apparent evidence of forgery or alteration or otherwise be so irregular or incomplete as to call into question its authenticity. authenticity. BUL 3350 - Chapte 28 5 Stolen Bearer Paper order blank Drawer paper Poe indorsement Hardware Store Owner Grocer is a holder in due indorsement course because he (1) Was a holder of a negotiable instrument, (2) Gave value, (3) Took in good faith, (4) Took without notice, and (5) Took without reason to question it authenticity. BUL 3350 - Chapte 28 Grocer forged Thief 6 Stolen Order Paper Drawer Order Paper Poe Stolen Forged Poe’s Indorsement Grocer is not a holder because the instrument does not have all necessary indorsements; therefore, he cannot be a holder in due course. Thief Grocer BUL 3350 - Chapte 28 7 Rights of Transferees Negotiable instrument? Yes No No Acquires rights of an ASSIGNEE Holder? Yes Value given? Yes No No Good faith? Yes Transferor a holder in due course? No Without notice? Yes No Yes Acquires rights of a HOLDER IN DUE COURSE BUL 3350 - Chapte 28 Acquires rights of a HOLDER 8 Holder in Due Course Status Holder A Payee May Be a Holder in Due Payee Course – the payee's rights as a holder Course in due course are limited to defenses of persons with whom he has not dealt persons The Shelter Rule – the transferee of an The instrument acquires the same rights that the transferor had in the instrument the BUL 3350 - Chapte 28 9 Preferred Position of a HDC Preferred Real Defenses –available against all holders, available including holders in due course; includes: including • • • • • • • Infancy Void Obligations Fraud in the Execution Discharge in Insolvency Proceedings Discharge of Which the Holder Has Notice Unauthorized Signature Fraudulent Alteration Personal Defenses – all other defenses that Personal might be asserted in the case of any action for breach of contract breach BUL 3350 - Chapte 28 10 Defenses Against Holders and Holders in Due Course Holders Real Defenses 1. Minority 2. Void obligations 3. Fraud in the execution 4. Discharge in insolvency proceedings 5. Discharge of which holder has notice 6. Forgery 7. Material alteration Holder Holder in Due Course Personal Defenses All other defenses BUL 3350 - Chapte 28 not available 11 Effects of Alterations Incomplete Instruments Holder may enforce according to original terms No No Complete Instrument Altered? Yes No No part is discharged Fraudulent? Yes No Yes Yes Assented to? No Yes No part is discharged Holder may enforce according to original terms Party precluded? No Yes HDC may enforce as completed HDC may enforce according to original terms 12 Holder may not enforce at all BUL 3350 - Chapte 28 Material Alteration (1,2) M note for $2,000 P negotiates $1,900 $19,000 A raises note to $20,000 B versus Illustration 1 Illustration 2 M P A $20,000 $20,000 B=HDC $2,000 $2,000 B=H 0 0 BUL 3350 - Chapte 28 13 Material Alteration (cont.) (3) M blank check authorized for $2,000 P fraudulently completed for $4,000 T versus Illustration 3 M P T=HDC $4,000 $4,000 T=H 0 $4,000 BUL 3350 - Chapte 28 14 Material Alteration (cont.) (4) M blank check authorized for $2,000 in good faith P completed for $4,000 T versus Illustration 4 M P T=HDC $4,000 $4,000 T = H $2,000 $4,000 BUL 3350 - Chapte 28 15 Limitations on Rights of HDC The preferential position of a holder in The due course has been severely limited by a Federal Trade Commission rule that applies to consumer credit contracts. Under this rule, a transferee of consumer credit contracts cannot take as a holder in due course. in BUL 3350 - Chapte 28 16 Rights of Holder in Due Course Rights under FTC Rule under nonconsumer Issuer personal defense Payee HDC consumer Issuer personal defense Payee HDC consumer or nonconsumer Issuer real defense Payee HDC BUL 3350 - Chapte 28 17 ...
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