LECTURE NOTES

Chapter 24: Holder in Due Course and Liability

Chapter Objectives
Define a holder and a holder in due course.
Identify and apply the requirements for becoming a holder in due course.
Describe the signature liability of makers, drawers, drawees, and accommodation parties.
Distinguish between primary and secondary liability on negotiable instruments.
List the transfer warranties and describe the liability of parties for breaching them.
List the presentment warranties and describe the liability of parties for breaching them.
Identify real defenses that can be asserted against a holder in due course.
Identify personal defenses that cannot be asserted against a holder in due course.
Describe how liability on a negotiable instrument is discharged.
Describe the Federal Trade Commission rule that prohibits the holder in due course rule in consumer transactions.

Holder and holder in due course

Requirements for becoming a holder in due course
To be a holder in due course of a negotiable instrument, the negotiable instrument must be taken:

Signature liability of makers, drawers, drawees, and accommodation parties
Signature liability means that a person cannot be held contractually liable on a negotiable instrument unless his or her signature appears on the instrument. A signature is any name, word, or mark used in lieu of a written signature. A signature may be handwritten, typed, printed, stamped, or made in almost any other manner and executed or adopted by a party to authenticate a writing.

Primary and secondary liability on negotiable instruments

Transfer warranties and liability of parties breaching them
Any of the following five warranties are transfer warranties:

Presentment warranties and liability of parties breaching them
Any person who presents a draft or check for payment or acceptance makes the following presentment warranties to a drawee or acceptor who pays or accepts the instrument in good faith:

Real defenses that can be asserted against a holder in due course
Real defenses are defenses that can be raised against both holders and holders in due course:

Personal defenses that cannot be asserted against a holder in due course
Personal defenses can be raised against enforcement of a negotiable instrument by an ordinary holder, but not against a holder in due course:

Discharge of liability on a negotiable instrument
Discharge is actions or events that relieve certain parties from liability on negotiable instruments. There three methods of discharge:

FTC and holder in due course
The Federal Trade Commission has adopted a rule that eliminates HDC status with regard to negotiable instruments arising out of certain consumer credit transactions. The rule equates the HDC of a consumer credit contract with the assignee of a simple contract.

Terms

Internet Links

PINs and Signatures and the Electronic Funds Transfer Code of conduct: http://www.law.usyd.edu.au/~alant/inchoate.html
Payroll Connect: http://www.payroll-connect.com/Articles/2002/January/HolderDueCourse.cfm
Cornell Legal Institute: http://www.law.cornell.edu/ucc/3/3-203.html