978-0134004006 Chapter 23 Lecture Note

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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

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

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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.

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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.