HDC

Copyright © 2004 by Prentice-Hall. All rights reserved.

PowerPoint Slides to AccompanyPowerPoint Slides to AccompanyBUSINESS LAWBUSINESS LAW

E-Commerce and Digital Law E-Commerce and Digital Law International Law and EthicsInternational Law and Ethics

55thth Edition Editionby Henry R. Cheesemanby Henry R. Cheeseman

Slides developed byLes WiletzkyWiletzky and Associates, Puyallup, WA

Chapter 24Holder in Due Course and Liability

24 - 2Copyright © 2004 by Prentice-Hall. All rights reserved.

IntroductionIntroduction If payment is not made on a negotiable If payment is not made on a negotiable

instrument when it is due, the holder can use instrument when it is due, the holder can use the court system to enforce the instrument.the court system to enforce the instrument.

Various parties, including both signers and Various parties, including both signers and non-signers, may be liable on it.non-signers, may be liable on it.

Accommodation parties (i.e., guarantors) can Accommodation parties (i.e., guarantors) can also be held liable.also be held liable.


Holder Versus Holder In Due CourseHolder Versus Holder In Due Course

HolderHolder A person who is in A person who is in

possession of a possession of a negotiable instrument negotiable instrument that is drawn, issued, that is drawn, issued, or indorsed to him or or indorsed to him or his order, or to bearer, his order, or to bearer, or in blank.or in blank.

Holder in Due Course Holder in Due Course (HDC)(HDC)

A person who takes a A person who takes a negotiable instrument negotiable instrument for value, in good faith, for value, in good faith, and without notice that and without notice that it is defective or is it is defective or is overdue.overdue.


Requirements for HDC StatusRequirements for HDC Status To qualify as an HDC, the transferee must meet the To qualify as an HDC, the transferee must meet the

requirements established by the UCC.requirements established by the UCC. The person must be the The person must be the holderholder of a negotiable of a negotiable

instrument that was taken:instrument that was taken:1.1. For valueFor value2.2. In good faithIn good faith3.3. Without notice that it is overdue, dishonored, or Without notice that it is overdue, dishonored, or

encumbered in any way, andencumbered in any way, and4.4. Bearing no apparent evidence of forgery, alterations, or Bearing no apparent evidence of forgery, alterations, or

irregularityirregularity


Holder in Due CourseHolder in Due Course

Negotiable Negotiable InstrumentInstrument

Negotiable Negotiable InstrumentInstrument

1.1. HolderHolder2.2. Takes a negotiable Takes a negotiable

instrumentinstrument3.3. For valueFor value4.4. In good faithIn good faith5.5. Without notice of Without notice of

defectdefect6.6. 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)


Acquiring HDC Status Under the Shelter Acquiring HDC Status Under the Shelter PrinciplePrinciple A holder who does not qualify as a holder in A holder who does not qualify as a holder in

due course in his or her own right becomes a due course in his or her own right becomes a holder in due course if he or she acquires the holder in due course if he or she acquires the instrument through a holder in due course.instrument through a holder in due course.

This is called the This is called the shelter principleshelter principle..


Acquiring HDC Status Under the Shelter Acquiring HDC Status Under the Shelter Principle Principle (continued)(continued)

To qualify as an HDC under the shelter To qualify as an HDC under the shelter principle, the following rules apply:principle, the following rules apply:

The holder does not have to qualify as an HDC in his or The holder does not have to qualify as an HDC in his or her own right.her own right.

The holder must acquire the instrument from an HDC or The holder must acquire the instrument from an HDC or be able to trace his or her title back to an HDC.be able to trace his or her title back to an HDC.

The holder must not have been a party to a fraud or The holder must not have been a party to a fraud or illegality affecting the instrument.illegality affecting the instrument.

The holder cannot have notice of a defense or claim The holder cannot have notice of a defense or claim against the payment of the instrument.against the payment of the instrument.


Signature Liability of PartiesSignature Liability of Parties A person cannot be held contractually liable A person cannot be held contractually liable

on a negotiable instrument unless his or her on a negotiable instrument unless his or her signature appears on the instrument.signature appears on the instrument.

The signatures on a negotiable instrument The signatures on a negotiable instrument identify those who are obligated to pay it.identify those who are obligated to pay it.

If it is unclear who the signer is, parol If it is unclear who the signer is, parol evidence can identify the signer.evidence can identify the signer.


Signature DefinedSignature Defined Any name, word, or mark used in lieu of a Any name, word, or mark used in lieu of a

written signature.written signature. Any symbol that is:Any symbol that is:

Handwritten, typed, printed, stamped, or Handwritten, typed, printed, stamped, or made in almost any other manner, andmade in almost any other manner, and

Executed or adopted by a party to Executed or adopted by a party to authenticate a writingauthenticate a writing


Signers of instruments sign in many Signers of instruments sign in many different capacities, including:different capacities, including: A maker of notes and A maker of notes and

certificates of depositcertificates of deposit A drawer of drafts and A drawer of drafts and

checkschecks A drawee who certifies A drawee who certifies

or accepts checks and or accepts checks and draftsdrafts

An indorser who An indorser who indorses an instrumentindorses an instrument

An agent who signs on An agent who signs on behalf of othersbehalf of others

An accommodation An accommodation partyparty


Signature Liability Signature Liability (continued)(continued)::Primary LiabilityPrimary Liability Makers of promissory notes and certificates Makers of promissory notes and certificates

of deposit have of deposit have primary liabilityprimary liability for the for the instrument.instrument.

Upon signing a promissory note, the maker Upon signing a promissory note, the maker unconditionally promises to pay the amount unconditionally promises to pay the amount stipulated in the note when it is due.stipulated in the note when it is due.

Makers are absolutely liable to pay the Makers are absolutely liable to pay the instrument, subject only to certain real instrument, subject only to certain real defenses.defenses.


Signature Liability Signature Liability (continued)(continued)::Secondary LiabilitySecondary Liability Drawers of checks and drafts and unqualified Drawers of checks and drafts and unqualified

indorsers of negotiable instruments have indorsers of negotiable instruments have secondary liabilitysecondary liability on the instrument. on the instrument.

This liability is similar to that of a guarantor of This liability is similar to that of a guarantor of a simple contract.a simple contract.

It arises when the party primarily liable on the It arises when the party primarily liable on the instrument defaults and fails to pay the instrument defaults and fails to pay the instrument when due.instrument when due.


Signature Liability Signature Liability (continued)(continued)::Accommodation PartyAccommodation Party A party who signs an instrument and lends A party who signs an instrument and lends

his or her name (and credit) to another party his or her name (and credit) to another party to the instrument.to the instrument.

The accommodation party is obliged to pay The accommodation party is obliged to pay the instrument in the capacity in which he or the instrument in the capacity in which he or she signs.she signs. Accommodation MakerAccommodation Maker – primarily liable – primarily liable Accommodation IndorserAccommodation Indorser – secondarily liable – secondarily liable


Warranty Liability of PartiesWarranty Liability of Parties The law The law impliesimplies certain warranties on certain warranties on

transferors of negotiable instruments.transferors of negotiable instruments. Warranty liability is imposed whether or not Warranty liability is imposed whether or not

the transferor signed the instrument.the transferor signed the instrument. There are two types of implied warranties:There are two types of implied warranties:

Transfer WarrantiesTransfer Warranties Presentment WarrantiesPresentment Warranties


Transfer WarrantiesTransfer Warranties Transfer –Transfer – Any passage of an instrument Any passage of an instrument

other than its issuance and presentment for other than its issuance and presentment for payment.payment.

Transfer Warranties –Transfer Warranties – any of the following any of the following five implied warranties:five implied warranties:

1.1. The transferor has good title to the instrument or is The transferor has good title to the instrument or is authorized to obtain payment or acceptance on behalf authorized to obtain payment or acceptance on behalf of one who does have good title.of one who does have good title.

2.2. All signatures are genuine or authorized.All signatures are genuine or authorized.


Transfer Warranties Transfer Warranties (continued)(continued)

3.3. The instrument has not been materially altered.The instrument has not been materially altered.

4.4. No defenses of any party are good against the No defenses of any party are good against the transferor.transferor.

5.5. The transferor has no knowledge of any insolvency The transferor has no knowledge of any insolvency proceeding against the maker, the acceptor, or the proceeding against the maker, the acceptor, or the drawer of an unaccepted instrument.drawer of an unaccepted instrument.


Presentment WarrantiesPresentment Warranties Any person who Any person who presentspresents a draft or check for a draft or check for

payment or acceptance makes the following payment or acceptance makes the following warranties to a drawee or acceptor who pays warranties to a drawee or acceptor who pays or accepts the instrument in good faith:or accepts the instrument in good faith:

1.1. The presenter has good title to the instrument or is The presenter has good title to the instrument or is authorized to obtain payment or acceptance of the person authorized to obtain payment or acceptance of the person who has good title.who has good title.

2.2. The instrument has not been materially altered.The instrument has not been materially altered.3.3. The presenter has no knowledge that the signature of the The presenter has no knowledge that the signature of the

maker or drawer is unauthorized.maker or drawer is unauthorized.


DefensesDefenses The creation of negotiable instruments may The creation of negotiable instruments may

give rise to a defense against its payment.give rise to a defense against its payment. There are two general types of defenses:There are two general types of defenses:

Real DefensesReal Defenses Personal DefensesPersonal Defenses

A A holder in due course (HDC)holder in due course (HDC) takes the takes the instrument free from personal defenses but instrument free from personal defenses but not real defenses.not real defenses.


Real DefensesReal Defenses

Real DefensesReal Defenses EffectEffect1.1. MinorityMinority2.2. Extreme duressExtreme duress3.3. Mental incapacityMental incapacity4.4. IllegalityIllegality5.5. Discharge in bankruptcyDischarge in bankruptcy6.6. Fraud in the inceptionFraud in the inception7.7. ForgeryForgery8.8. Material alterationMaterial alteration

Real defenses can be raised Real defenses can be raised against a holder in due courseagainst a holder in due course


Personal DefensesPersonal DefensesPersonal DefensesPersonal Defenses EffectEffect1.1. Breach of contractBreach of contract2.2. Fraud in the inducementFraud in the inducement3.3. Mental illness that makes a contract Mental illness that makes a contract

voidable instead of voidvoidable instead of void4.4. Illegality of a contract that makes the Illegality of a contract that makes the

contract voidable instead of voidcontract voidable instead of void5.5. Ordinary duress or undue influenceOrdinary duress or undue influence6.6. Discharge of an instrument by payment Discharge of an instrument by payment

or cancellationor cancellation

Personal defenses cannot Personal defenses cannot be raised against a holder in be raised against a holder in due coursedue course


DischargeDischarge Actions or events that relieve certain parties Actions or events that relieve certain parties

from liability on negotiable instruments.from liability on negotiable instruments. There are three methods of discharge:There are three methods of discharge:

1.1. Payment of the instrumentPayment of the instrument2.2. CancellationCancellation3.3. Impairment of the right of recourseImpairment of the right of recourse


Impairment of the Right of RecourseImpairment of the Right of Recourse

Certain parties (Certain parties (holders, indorsers, holders, indorsers, accommodation partiesaccommodation parties) are discharged ) are discharged from liability on an instrument if the holder:from liability on an instrument if the holder:

1.1. Releases an obligor from liability, orReleases an obligor from liability, or2.2. Surrenders collateral without the consent of Surrenders collateral without the consent of

the parties who would benefit by itthe parties who would benefit by it

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