Business Law and the Regulation of Business Chapter 26: Holder in Due Course

1. Business Law and the Regulation of BusinessChapter 26: Holder in Due Course By Richard A. Mann & Barry S. Roberts

2. Topics Covered in this Chapter A. Requirements of a Holder in Due Course B. Holder in Due Course Status C. The Preferred Position of a Holder in Due Course D. Limitations upon Holder in Due Course Rights

3. Rights of Transferees No Negotiable instrument? Acquires rights of an ASSIGNEE Yes No Holder? Yes No Value given? Yes Transferor a holderin due course? No Good faith? Yes No No Without notice? Yes Acquires rights ofa HOLDER Yes Acquires rights of a HOLDER IN DUE COURSE

4. Stolen Bearer Paper blank order Drawer Poe HardwareStore Owner paper indorsement Grocer forged Thief indorsement Grocer is a holder in due 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.

5. Stolen Order Paper Drawer Order Poe Paper Stolen Grocer is not a holder because the instrument does not have all necessary indorsements; therefore, he cannot be a holder in due course. Forged Poe’s Indorsement Grocer Thief

6. Effects of Alterations Incomplete Instruments Complete Instrument No No Altered? Holdermayenforce accordingtooriginalterms Holdermayenforceaccordingto originalterms Yes Nopart isdischarged No No Nopart isdischarged Fraudulent? Yes Yes Yes Assented to? No No Yes Yes Party precluded? No HDC may enforce according to original terms HDC may enforceas completed Holder may not enforce at all

7. M versus P A Illustration 1 B=HDC $2,000 $20,000 $2,000 B = H Illustration 2 0 0 $20,000 Material Alteration note for $2,000 negotiates $1,900 M (1,2) P A raisesnote to$20,000 $19,000 B

8. Material Alteration (cont.) fraudulentlycompleted for $4,000 blank check authorizedfor $2,000 M (3) P T M versus P T=HDC $4,000 $4,000 Illustration 4 T = H 0 $4,000

9. Material Alteration(cont.) in good faith completedfor $4,000 blank check authorizedfor $2,000 M (4) P T M versus P T=HDC $4,000 $4,000 Illustration 5 T = H $2,000 $4,000

10. Defenses Against Holders and Holders in Due Course Real Defenses1. Minority2. Void obligations3. Fraud in the execution4. Discharge in insolvency proceedings5. Discharge of which holder has notice6. Forgery7. Material alteration Holder Holderin DueCourse Personal DefensesAll other defenses notavailable

11. Rights of Holder in Due Course under FTC Rule personal Payee nonconsumer Issuer defense HDC personal Payee consumer Issuer defense HDC real Payee consumer or nonconsumer Issuer defense HDC