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Chapter 18 Negotiability, Transferability, and Liability

Chapter 18 Negotiability, Transferability, and Liability. Learning Objectives. What requirements must an instrument meet to be negotiable? What are the requirements for attaining the status of a holder in due course (HDC)?

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Chapter 18 Negotiability, Transferability, and Liability

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  1. Chapter 18Negotiability, Transferability, and Liability

  2. Learning Objectives • What requirements must an instrument meet to be negotiable? • What are the requirements for attaining the status of a holder in due course (HDC)? • What is the key to liability on a negotiable instrument? What is the difference between signature liability and warranty liability? • Certain defenses are valid against all holders, including HDC’s. What are these defenses called? Name four defenses that fall within this category. • Certain defenses can be used to avoid payment to an ordinary holder of a negotiable instrument but are not effective against an HDC. What are these defenses called? Name four defenses that fall within this category.

  3. Articles 3 and 4 of the UCC • A “negotiable instrument” is a signed writing containing an unconditional promise to pay an exact sum of money. • History of negotiable instruments began in England “bills of exchange” so that merchants were able to exchange money while keeping their money safe in the banks. • Today--UCC Article 3.

  4. Types of Instruments • Drafts and Checks are ORDERS to pay. • Three parties: Drawer, Drawee and Payee. • Checks (cashier’s, teller’s and traveler’s) are drafts on a bank. • Trade acceptances seller is drawer and payee. • CASE 18.1Flatiron Linen, Inc. v. First American State Bank (2001).

  5. Types of Instruments • Promissory Notes are PROMISES to pay. • Two party instruments: • Maker (Promisor) and • Bearer (Promisee). • Certificates of deposit (CDs): two party instruments. • CASE 18.2United States v. Durbin (1999).

  6. Requirements for Negotiability • (1) Writing signed by the maker or the drawer. • (2) Unconditional promise or order to pay a fixed amount of money. • (3) Payable on demand or at a definite time. • Acceleration and Extension clauses. • Be payable to order or to bearer, unless it is a check.

  7. Transfer of Instruments • By Assignment. • Transferee is an Assignee. • By Negotiation. • Transfer in which the transferee becomes a holder. • Negotiating Order Instruments. • Negotiating Bearer Instruments.

  8. Holder vs. Holder in Due Course • A holder (assignee) is generally subject to the same defenses that the assignor is subject to. • A holder in due course (HDC) takes the instrument FREE of most of the defenses and claims that could be asserted against the transferor.

  9. Requirements for HDC Status • A Holder in Due Course must: • Take for Value: • Performance. • Payment for preexisting debt. • Irrevocable commitment. • Take in Good Faith (honesty in fact). • CASE 18.3Mid Wisconsin Bank v. Forsgard Trading, Inc. (2003). • Taking Without Notice (of any defect).

  10. Holder Through an HDC • The “Shelter” Principle: Holder, who does not qualify as an HDC, can acquire the rights and privileges of an HDC. • Depends upon whether holder can ‘trace’ her title back to HDC. • Limitations: • Reacquired instruments. • Fraud or illegality.

  11. Signature Liability • Every party who signs a negotiable instrument is either primarily or secondarily liable for payment. • Primary Liability (only makers and acceptors are primarily liable). • Secondary Liability (contingent liability): • Proper and Timely Presentment. • Dishonor. • Proper Notice.

  12. Signature Liability • Accommodation Parties. • Signs for the purpose of lending her name as credit for another party. • Agents’ Signatures. • If authorized, can bind the principal. • If unauthorized (forgery) signature is void. • Unauthorized Indorsements. • Imposters and Fictitious Payees.

  13. Warranty Liability • Transferors make certain implied warranties on instruments they are transferring: Transfer and Presentment. • Transfer Warranties (if consideration): • Transferor has the right to enforce the instrument • All signatures are authentic and authorized • Instrument has not been altered. • Instrument is not subject to a defense or claim. • Transferor has no knowledge of insolvency.

  14. Warranty Liability • Presentment Warranties protect the person to whom the instrument is presented: • Person obtaining payment has the right to enforce the instrument. • Instrument has not been altered. • Person accepting has no knowledge that instrument is unauthorized.

  15. Universal Defenses • Universal (Real) Defenses to Avoid Liability by ALL Holders, including HDC: • Forgery. • Fraud in the Execution. • Material Alteration. • Discharge in Bankruptcy. • Infancy (Minor). • Illegality. • Mental Incapacity. • Extreme Duress.

  16. Personal Defenses • Personal (limited ) Defenses (only holders, not HDC): • Breach of Contract or Warranty. • Lack or Failure of Consideration. • Fraud in the Inducement. • Illegality (voidable). • Mental Incapacity. • Discharge by Payment/Non-Delivery.

  17. Discharge From Liability • All parties are liable when primary party pays the holder the amount in full. • Intentional cancellation discharges the liability of all parties. • Can occur when right of recourse is impaired.

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