© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Chapter 23: Transferability and Holder in Due Course Chapter 23: Transferability and Holder in Due Course

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Transfers Negotiable instruments can be transferred to subsequent parties by negotiation. –Done by placing endorsement on instrument

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Transfer by Assignment or Negotiation Transfer by Assignment The transfer of rights under a contract. It transfers the rights of the transferor ( assignor ) to the transferee ( assignee ). Transfer by Negotiation The transfer of a negotiable instrument by a person other than the issuer. The person to whom the instrument is transferred becomes the holder.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Transfer by Negotiation Order Paper –Negotiated by delivery with necessary indorsement Bearer Paper –Negotiated by delivery Instruments can be converted between order and bearer paper many times

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Indorsement The signature (and other directions) written by or on behalf of the holder somewhere on the instrument. The signature may: –Appear alone –Name an individual to whom the instrument is to be paid, or –Be accompanied by other words

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Types of Indorsements (1 of 2) Type of Indorsement Description BlankDoes not specify a particular indorsee. This indorsement creates bearer paper. SpecialSpecifies the person to whom the indorser intends the instrument to be payable. This indorsement creates order paper. UnqualifiedDoes not disclaim or limit liability. The indorsee is liable on the instrument if it is not paid by the maker, acceptor, or drawer.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Types of Indorsements (2 of 2) Type of Indorsement Description QualifiedDisclaims or limits the liability of the indorsee. There are two types: 1. Special qualified indorsement 2. Blank qualified indorsement NonrestrictiveNo instructions or conditions attached to the payment of funds RestrictiveConditions or instructions restrict the indorsee’s rights. There are four types: 1. Conditional indorsement 2. Indorsement prohibiting further indorsement 3. Indorsement for deposit or collection 4. Indorsement in trust

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Indorsements (continued) Misspelled or Wrong Name - Payee or indorsee can indorse the instrument in the misspelled name, correct name or both Multiple Payees or Indorsees –Payable jointly –Payable in the alternative –Virgule Either party may indorse and negotiate

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Holder Versus Holder In Due Course Holder A person who is in possession of a negotiable instrument that is drawn, issued, or indorsed to him or his order, or to bearer, or in blank. Holder in Due Course (HDC) A person who takes a negotiable instrument for value, in good faith, and without notice that it is defective or is overdue.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Requirements for HDC Status To qualify as an HDC, the transferee must meet the requirements established by the UCC. The person must be the holder of a negotiable instrument that was taken: 1. For value 2. In good faith 3. Without notice that it is overdue, dishonored, or encumbered in any way, and 4. Bearing no apparent evidence of forgery, alterations, or irregularity

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Taking for Value Holder must have given value for instrument –Performs agreed upon promise –Acquires security interest or lien –Takes in payment of or as security for antecedent claim –Gives instrument as payment –Gives an irrevocable obligation as payment

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Taking in Good Faith Good faith means honesty in fact in the conduct or transaction –Subjective –Applies only to holder

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Taking Without Notice of Defect Must not be aware of any defects, including: Being overdue. That it has been dishonored. That it contains an unauthorized signature. –Red light doctrine That there is a claim against it by another. That there is any defense against it. That there is evidence of alteration or forgery.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Holder in Due Course Holder in Due Course (HDC) Payee or Bearer Maker or Drawer Maker or Drawer Holder Takes a negotiable instrument For value In good faith Without notice of defect The instrument bears no apparent evidence of forgery, alterations, or irregularity Negotiable Instrument