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178
“A negotiable bill or note is a courier without luggage.”
Chief Justice Gibson
I. Teacher to Teacher Dialogue
Because negotiable instruments are meant to be a substitute for money, a comparison to
money is useful. If someone hands the student an obviously fake dollar bill, should the law
protect the taker? What if, however, the taker had no realistic way of knowing the history of who
simply collapse like a house of cards.
The second objective of this chapter revolves around the life cycle of a negotiable instrument
and how that cycle comes to an end. Here I reach back into the student’s recent exposure to
contract law. Back in contracts, we talked about how most contracts came to an end by way of the
So, too, does the law of negotiable instruments create obligations, which are subject to the
purview of the courts in case of problems. These obligations are created out of the signatures of
the parties and the warranties imposed on them by the UCC. I remind my students that negotiable
instruments are, in reality, special forms of transferable contracts. As such, the rules of transfer
will the UCC protect that third-party, and when will it not? Because any discussion of negotiable
instruments is interwoven with their role as a substitute for money, a comparison with money
may be useful. If someone hands you a dollar that is clearly a photocopy of currency, should you
accept it in lieu of currency? Or should you be put on notice that there is a problem and act
HOLDER IN DUE COURSE AND
TRANSFERABILITY
23
Holder in Due Course and Transferability
see and not get ambushed by potential lawsuits lurking in the bushes. The law of assignment
simply does not cut off enough history and often allows third-party takers of documents to be
struck with legal entanglements that were not of their making.
The HDC concept allows for a fundamental shift in the law in that, where its elements are in
Commission (FTC). In the area of consumer credit transactions, the FTC has stepped in by
preempting the HDC rule. The law of contract under this rule subjects the HDC of consumer
II. Chapter Objectives
1. Describe how negotiable instruments are indorsed and transferred.
2. Describe how order and bearer paper are negotiated.
III. Key Question Checklist
Was the transfer of this instrument in compliance with the UCC rules of negotiation?
Is this taker a holder?
Was there a taking for value?
IV. Text Materials
Negotiable instruments are transferred by indorsements to a holder in due course (HDC).
Transfer of a Nonnegotiable Contract by Assignment
Chapter 23
A transferor/assignor transfers/assigns their rights to a transferee/assignee, who acquires the same
Transfer of a Negotiable Instrument by Negotiation
Negotiation occurs when a negotiable instrument is transferred by someone other than the issuer.
Negotiating Order Paper – Order paper is payable to a specific payee or indorsed to a specific
indorsee.
Negotiating Bearer Paper – Bearer papers have no specific payee or indorsees named, and are
negotiated by delivery.
Case 23.1 Bearer Paper: Gerber & Gerber, P.C. v. Regions Bank
596 S.E.2d 174, 2004 Ga. App. Lexis 206 (2004), Court of Appeals of Georgia
Facts: Stafford stole cashier’s checks totalling $180k from G&G where she was employed over a
two-year period. She pled guilty and claimed to have spent the monies. G&G sued Regions Bank
to recover for the checks paid to Stafford, claiming that it was negligent in accepting the blank-
Stafford?
Decision: Yes.
Reason: The holder of an instrument is a person entitled to enforce the instrument, even though
the person is in wrongful possession of the instrument.
Case Questions
can be easily transferred to others.
Contemporary Environment: Converting Order and Bearer Paper
Instruments can be converted between order and bearer paper any number of times before being
Transfer of a Negotiable Instrument by Indorsement
Indorsements always contain the signature of the indorser, and may contain the name of the
Types of Indorsements
Holder in Due Course and Transferability
Special Indorsement – Special indorsements contain both the signature of the indorser and the
name of the indorsee.
Qualified Indorsement – Usually, each subsequent indorser is presumed to be liable if the maker
Restrictive Indorsement – Most indorsements are nonrestrictive, and have no instructions or
Multiple Payees or Indorsees – If the word “and” is used, both persons’ names will be required
to negotiate the instrument; however, if either the word “or” or a slash mark is used, either party
may indorse and negotiate the instrument.
Holder in Due Course
might be asserted.
Requirements for HDC Status
To qualify as an HDC, the holder must be taken for value, in good faith, without notice of defects,
Taking for Value Requirement – In order to be an HDC, the holder must have performed an
agreed-upon promise, acquired a security interest or lien on the instrument, have taken the
was taken in good faith.
Taking Without Notice of Defect Requirement – The holder must not have any notice that the
instrument is overdue, has been dishonored, has been altered, or that there is a claim or defense
against it.
Chapter 23
presented for payment and refused.
No Evidence of Forgery, Alteration, or Irregularity – A holder cannot qualify as an HDC if
the negotiable instrument bears obvious evidence of forgery, alterations, or any irregularity.
Shelter Principle – A holder may qualify as a holder in due course if they acquire the instrument
through a holder in due course.
V. Key Terms and Concepts
written.
Assignee—The party to whom the right has been transferred.
Assignment—The transfer of contractual rights by the obligee to another party.
Demand instrument—An instrument payable on demand.
Dishonored instrument—An instrument that is presented for payment and payment is refused.
Good faith—Honesty in fact in the conduct or transaction concerned. The good faith test is
subjective.
somewhere on the instrument.
Indorsement for deposit or collection—An indorsement that makes the indorsee the indorser’s
collecting agent (e.g., for deposit only).
No evidence of forgery, alteration, or irregularity requirement—A requirement that says a
holder cannot become an HDC to an instrument that is apparently forged or altered or is so
otherwise irregular or incomplete as to call into question its authenticity.
Nonnegotiable contract—Fails to meet the requirements of a negotiable instrument and,
to the payment of the funds.
Order paper—Order paper is negotiated by (1) delivery and (2) indorsement.
Holder in Due Course and Transferability
becomes overdue the next day.
Payable in the alternative—If the instrument is payable in the alternative using the word “or,”
either person’s indorsement signature alone is sufficient to negotiate the instrument.
Payable jointly—If an instrument is payable jointly using the word “and,” both persons’
indorsements are necessary to negotiate the instrument.
indorser.
Shelter principle—A principle that says a holder who does not qualify as a holder in due
course in his or her own right becomes a holder in due course if he or she acquires an
instrument through a holder in due course.
Special indorsement—An indorsement that contains the signature of the indorser and
qualify as an HDC if he or she has notice that the instrument is defective in certain ways.
Time instrument—An instrument payable (1) at a fixed date, (2) on or before a stated date,
(3) at a fixed period after sight, or (4) at a time readily ascertainable when the promise or
order is issued.
defaults on it.
Unqualified indorser—An indorser who signs an unqualified indorsement to an instrument.
