Transferability and Holder in Due Course Chapter Introduction 25-1 Negotiation 25-1a Negotiating Order Instruments 25-1b Negotiating Bearer Instruments 25-2 Indorsements 25-2a Blank Indorsements 25-2b Special Indorsements 25-2c Qualified Indorsements 25-2d Restrictive Indorsements 25-2e How Indorsements Can Convert Order Instruments to Bearer Instruments and Vice Versa 25-3 Miscellaneous Indorsement Problems 25-3a Misspelled Names 25-3b Instruments Payable to Entities 25-3c Alternative or Joint Payees 25-4 Holder versus Holder in Due Course 25-4a Status of an Ordinary Holder 25-4b Status of a Holder in Due Course (HDC) 25-5 Requirements for HDC Status 25-5a Taking for Value 25-5b Taking in Good Faith 25-5c Taking without Notice 25-6 Holder through an HDC 25-6a The Purpose of the Shelter Principle 25-6b Limitations on the Shelter Principle Chapter Recap Page 1 of 25 Print Chapter 2010-8-30 ..
Chapter Introduction Once issued, a negotiable instrument can be transferred to others by assignment or by negotiation. Recall from Chapter 16 that an assignment is a transfer of rights under a contract. Under general contract principles, a transfer by assignment to an assignee gives the assignee only those rights that the assignor possessed. Any defenses that can be raised against an assignor can normally be raised against the assignee. This same principle applies when a negotiable instrument, such as a promissory note, is transferred by assignment to an assignee. Under the Uniform Commercial Code (UCC), negotiation is the transfer of an instrument in such form that the transferee (the person to whom the instrument is transferred) becomes a holder [UCC 3–201(a)]. A holder receives, at the very least, the rights of the previous possessor [UCC 3–203(b), 3–305]. Unlike an assignment, a transfer by negotiation can make it possible for a holder to receive more rights in the instrument than the prior possessor had [UCC 3–305]. A holder who receives greater rights is known as a holder in due course, a concept we discuss in this chapter. First, though, we look at the requirements for negotiation and examine the various types of indorsements that are used when order instruments are negotiated. Page 2 of 25 Print Chapter 2010-8-30 ..
25-1 25-1a 25-1b Negotiation Ask the Instructor Video: Negotiability and Transferability: Endorsing Checks: I thought bearer instruments didn't need endorsements. Why do banks always make you endorse checks made out to cash, which are bearer instruments? Negotiating Order Instruments Negotiating Bearer Instruments There are two methods of negotiating an instrument so that the receiver becomes a holder. The method used depends on whether the instrument is an order instrument or a bearer instrument. An order instrument contains the name of a payee capable of indorsing, as in "Pay to the order of Elliot Goodseal." If an instrument is an
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