Professional Documents
Culture Documents
by Henry R. Cheeseman
Introduction
If payment is not made on a negotiable instrument when it is due, the holder can use the court system to enforce the instrument. Various parties, including both signers and nonnon-signers, may be liable on it. Accommodation parties (i.e., guarantors) can also be held liable.
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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.
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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:
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
1.
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1. 2. 3. 4. 5. 6.
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To qualify as an HDC under the shelter principle, the following rules apply:
The holder does not have to qualify as an HDC in his or her own right. The holder must acquire the instrument from an HDC or be able to trace his or her title back to an HDC. The holder must not have been a party to a fraud or illegality affecting the instrument. The holder cannot have notice of a defense or claim against the payment of the instrument.
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Signature Defined
Any name, word, or mark used in lieu of a written signature. Any symbol that is:
Handwritten, typed, printed, stamped, or made in almost any other manner, and Executed or adopted by a party to authenticate a writing
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A maker of notes and certificates of deposit A drawer of drafts and checks A drawee who certifies or accepts checks and drafts
An indorser who indorses an instrument An agent who signs on behalf of others An accommodation party
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Transfer Warranties
Transfer Any passage of an instrument other than its issuance and presentment for payment. Transfer Warranties any of the following five implied warranties: 1. The transferor has good title to the instrument or is authorized to obtain payment or acceptance on behalf of one who does have good title. 2. All signatures are genuine or authorized.
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transferor.
5. The transferor has no knowledge of any insolvency
proceeding against the maker, the acceptor, or the drawer of an unaccepted instrument.
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Presentment Warranties
Any person who presents a draft or check for payment or acceptance makes the following warranties to a drawee or acceptor who pays or accepts the instrument in good faith:
The presenter has good title to the instrument or is authorized to obtain payment or acceptance of the person who has good title. 2. The instrument has not been materially altered. 3. The presenter has no knowledge that the signature of the maker or drawer is unauthorized.
1.
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Defenses
The creation of negotiable instruments may give rise to a defense against its payment. There are two general types of defenses:
A holder in due course (HDC) takes the instrument free from personal defenses but not real defenses.
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Real Defenses
Real Defenses 1. Minority 2. Extreme duress 3. Mental incapacity 4. Illegality 5. Discharge in bankruptcy 6. Fraud in the inception 7. Forgery 8. Material alteration Effect Real defenses can be raised against a holder in due course
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Personal Defenses
Personal Defenses 1. 2. 3. 4. 5. 6. Breach of contract Fraud in the inducement Mental illness that makes a contract voidable instead of void Illegality of a contract that makes the contract voidable instead of void Ordinary duress or undue influence Discharge of an instrument by payment or cancellation Effect Personal defenses cannot be raised against a holder in due course
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Discharge
Actions or events that relieve certain parties from liability on negotiable instruments. There are three methods of discharge:
1. Payment of the instrument 2. Cancellation 3. Impairment of the right of recourse
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Certain parties (holders, indorsers, (holders, accommodation parties) are discharged parties) from liability on an instrument if the holder:
1. Releases an obligor from liability, or 2. Surrenders collateral without the consent of the parties who would benefit by it
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