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Chapter 25 Transferability and Holder in Due Course

Chapter 25 Transferability and Holder in Due Course. §1: Transfer By Negotiation. Transfer by negotiation creates a holder, who at the very least receives the rights of a previous possessor. AND

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Chapter 25 Transferability and Holder in Due Course

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  1. Chapter 25 Transferability and Holder in Due Course

  2. §1: Transfer By Negotiation • Transfer by negotiation creates a holder, who at the very least receives the rights of a previous possessor. AND • A holder in due course (HDC) acquires more rights in the instrument than the previous possessor. This means defenses that can be raised against the transferor may or may not be able to be raised against the transferee.

  3. Two Ways to Negotiate • Negotiating Order Paper—endorsement and delivery required. • Negotiating Bearer Paper—delivery only. • Converting Order to Bearer and vice versa.

  4. §2: Indorsements • Signature with or without additional words or comments: • Blank Indorsements. • Special Indorsements. • Qualified Indorsements. • Restrictive Indorsements.

  5. §3: Miscellaneous Indorsement Problems • Indorsement should be identical to name on instrument. • Misspelled name OK. • Made to two or more people. • In the alternative - either may indorse. • Jointly - both must indorse. • Agents or Officers.

  6. § § 4-5: Holder vs. HDC • Holder is one in possession of ORDER OR BEARER PAPER. • Holder in Due Course (HDC) results if the holder also meets the following requirements: • Takes for Value. • Takes in Good Faith. • Takes without Notice.

  7. § 6: HDC: Taking for “Value” • No value if gift or inheritance. Not the same as consideration. • Holder can take value by: • Performing the instrument’s promise. • Acquiring a security interest or other lien in the instrument. • Taking instrument in payment for an antecedent debt. • Giving a negotiable instrument as payment. • Giving irrevocable commitment as payment.

  8. HDC: Taking in “Good faith” • Good faith is honesty in fact and the observance of reasonable commercial standards of fair dealing.” • Only applies to holder, not transferor.

  9. HDC: “Taking Without Notice” • Holder takes the instrument without notice if he knows/has reason to know: • Instrument is overdue. • Instrument has been dishonored. • Actual knowledge or any suspicious event. • That a claim or defense exists. • So irregular, incomplete, or bears such evidence of forgery.

  10. §7: Holder through an HDC • “Shelter Principle”: Person is not an HDC but derives title through HDC. • Limitations on the shelter principle: no fraud, illegality, claim or defense.

  11. Case 25.1: GMAC v. Abington(Indorsements) • FACTS: • Abington Casualty Insurance issued a policy to Azevedo to cover his Jeep. GMAC held a security interest in the vehicle, and the policy named GMAC as the beneficiary. When the Jeep was damaged, Abington issued a check payable jointly “to the order of Azevedo and G.M.A.C.” • The check was delivered to Azevedo, who indorsed it and cashed it without the indorsement of GMAC. GMAC never received the funds. GMAC sued Abington in a Massachusetts state court. The trial court dismissed the action, and GMAC appealed.

  12. Case 25.1: GMAC v. Abington(Indorsements) • HELD: FOR GMAC. • The delivery of a negotiable instrument to one joint payee operates as a delivery to all joint payees, but the drawer’s underlying obligation is not discharged when one of the payees cashes a check without the other’s indorsement. • Every payee must indorse an instrument before it can be negotiated, transferred, or discharged; thus “delivery of the instrument to one payee does not jeopardize the rights of the other payees.” “[A] negotiable instrument cannot be discharged by the actions of only one payee.”

  13. Case 25.2: Maine Family Federal Credit v. Sun Life Assurance(Taking in Good Faith) • FACTS: • When Guerrette died, Sun Life issued checks to each of Guerette’s children drawn on Sun Life’s account at Chase Bank. • The checks were given to Steven Hall, a Sun Life agent. Hall and Richard fraudulently induced the Guerrette’s to indorse the checks in blank. • Richard deposited the checks in his account at the MFFCU which immediately made the funds available to Richard, who withdrew all the money before the stop payment was issued. • MFFCU sued Sun Life, Guererettes and Richard.

  14. Case 25.2: Maine Family Federal Credit v. Sun Life Assurance(Taking in Good Faith) • HELD: FOR GUERRETTES. • In relation to the Guerrettes, the MFFCU was not a holder in due course. • The court vacated the judgment in favor of Sun Life and against the Credit Union, however, on other grounds, and remanded. • “A reasonable commercial standard of fair dealing would require the placing of a hold on the uncollected funds for a reasonable period of time. • In giving value under these circumstances, the Credit Union did not act according to commercial standards that were reasonably structured to result in fair dealing.

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