978-1285770178 Lecture Note BL ComLaw 1e IM-Ch13 Part 2

CHAPTER 13: TRANSFERABILITY AND HOLDER IN DUE COURSE 11

whole or in part.

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whole or in part.

ENHANCING YOUR LECTURE—

 HOW CAN YOU AVOID PITFALLS

WHEN WRITING AND INDORSING CHECKS?

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As a businessperson (or as a consumer), you will certainly be writing and receiving checks. Both activities

can involve pitfalls.

CHECKS DRAWN IN BLANK

The danger in signing a blank check is clear. Anyone can write in an unauthorized amount and cash the

check. Although you may be able to assert lack of authorization against the person who filled in the

unauthorized amount, subsequent holders of the properly indorsed check may be able to enforce the check

as completed. While you are haggling with the person who inserted the unauthorized figure and who may not

be able to repay the amount, you will also have to honor the check for the unauthorized amount to a

subsequent holder in due course.

CHECKS PAYABLE TO “CASH”

It is equally dangerous to write out and sign a check payable to “cash” until you are actually at the bank.

Remember that checks payable to “cash” are bearer instruments. This means that if you lose or misplace the

check, anybody who finds it can present it to the bank for payment.

CHECKS INDORSED IN BLANK

Just as a check signed in blank or payable to cash may be dangerous, a negotiable instrument with a

blank indorsement also has dangers; as a bearer instrument, it is as easily transferred as cash. When you

make a bank deposit, therefore, you should sign (indorse) the back of the check in blank only in the presence

of a teller. If you choose to sign it ahead of time, make sure you insert the words “For deposit only” before you

sign your name. As a precaution, you should consider obtaining an indorsement stamp from your bank. Then,

when a check is received payable to your business, you can indorse it immediately. The stamped

indorsement will indicate that the check is for deposit only to your business account specified by the number.

CHECKLIST FOR THE USE OF NEGOTIABLE INSTRUMENTS

1. A good rule of thumb is never to sign a blank check.

2. Another good rule of thumb is never to write and sign a check payable to “cash” until you are actually at

the bank.

3. Be wary of indorsing a check in blank unless a bank teller is simultaneously giving you a receipt for your

deposit.

4. Consider obtaining an indorsement stamp from your bank so that when you receive checks you can

immediately indorse them “For deposit only” to your account.

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whole or in part.

TEACHING SUGGESTIONS

1. The concept of negotiability is often confusing to students because it refers to the process by which in–

struments are transferred from one party to another. Ask the class to discuss the process by which negotiable

instruments are transferred. Ask students to play the roles of different parties to a transaction and indorse a

check in different ways (to create different indorsements—blank, special, qualified, unqualified, restrictive or

unrestrictive) and follow the progress of the check, pointing out the various conditions imposed by each

indorsement, as well as when an order instrument is converted into a bearer instrument and vice versa.

2. Ask the students to compare the concept of value in commercial law with that of consideration in contract

law. Not all consideration is value. The extraordinary protection conferred on an HDC is given only when an

individual has parted with something that has real economic worth. Although a promise to do something is

valid consideration in contract law, it is not value for purposes of determining HDC status unless it is a formal

promise such as another negotiable instrument given in exchange. Ask the students to consider whether

some things that are not consideration can be value (such as antecedent obligations or debts).

3. When considering whether a specific party is an HDC, students might find it helpful to divide the question

into two parts: (1) the party must first be a holder, and (2) if the party is a holder, he or she must be in dues

course. To qualify as an HDC, all of the requirements must, of course, be met.

Cyberlaw Link

Is there any part of the HDC concept that would need to be changed to adapt it to an electronic

payment system?

occurring in a particular way after the instrument has been issued even though, strictly speaking, negotiation occurs at

the first delivery of a negotiable instrument to a holder when the maker or drawer issues the instrument. Unlike a

transfer by assignment which transfers only the rights of the previous possessor, a transfer by negotiation may make

it possible for the holder to receive more rights in the instrument than were possessed by the prior holder. In any

event, it is important to identify whether an instrument is an order instrument or a bearer instrument because this

whole or in part.

3. What is the difference between qualified and unqualified indorsements? A qualified indorsement is one

which contains words disclaiming the indorser’s contractual liability (but not warranty liability) on the instrument. A

signature followed by the words “without recourse” is a qualified indorsement. An unqualified indorsement contains no

such words and, as a result, does not avoid contractual liability arising from the indorsement.

adverse claims to it. Alternatively stated, an HDC can normally acquire a higher level of immunity to defenses against

payment on the instrument or claims of ownership to the instrument by other parties.

5. How can a holder take an instrument for value? Under UCC 3–303(a), a holder can take an instrument for

value by (1) performing the promise for which the instrument was issued or transferred, (2) acquiring a security

3–302(c) specifies the following situations: (1) purchase at a judicial sale (for example, a bankruptcy sale) or by taking

under legal process, (2) acquisition when taking over an estate (as administrator), and (3) purchase as part of a bulk

transfer (as when a corporation buys the assets of another corporation). In these situations, the UCC limits the rights

of the holder to those of an ordinary holder.

ing HDC status? A person will not be afforded HDC protection if he or she acquires an instrument knowing, or having

reason to know, that it is defective because [UCC 3–302(a)(2)(iii), (iv), (v), (vi)]: (1) it is overdue, (2) it has been

dishonored, (3) there is an uncured (uncorrected) default with respect to another instrument issued as part of the

same series, (4) the instrument contains an unauthorized signature or has been altered, (5) there is a defense against

the instrument, or claim to the instrument, or (6) the instrument is so irregular or incomplete as to call into question its

whole or in part.

(2) receipt of a notice about a defect; or (3) reason to know that a defect exists, given all the facts and circumstances

are permissible, because these do not call into question the validity of the instrument. Any irregularity on the face of

an instrument that calls into question its validity or terms of ownership, or creates an ambiguity as to the party to pay,

will bar HDC status [UCC 3–302(a)(1)]. For example, visible evidence of a forgery of a maker’s or drawer’s signature

or alterations to material elements of a negotiable instrument will disqualify a purchaser from HDC status.

should consider the purposes served by this rule, as well as whether some alternative rule might be more appropriate.

EXPLANATIONS OF SELECTED FOOTNOTES IN THE TEXT

summary judgment in the bank’s favor. J & D and Hyatt appealed. In Hyatt Corp. v. Palm Beach National Bank, a

state intermediate appellate court affirmed. UCC 3–110(d) provides, “If an instrument payable to two or more persons

is ambiguous as to whether it is payable to the persons alternatively, the instrument is payable to the persons

alternatively.” Under the previous version of this provision, if an ambiguity existed as to whether multiple payees were

intended as joint or alternative payees, they were deemed joint payees, but an amendment “reverse[d] the prior rule.”

If a stacked payee designation was considered unambiguous and payable jointly before the amendment

of this provision of the UCC, should that same payee designation be considered unambiguous after the

amendment? Not according to the court in the Hyatt case, which found “this position untenable because it ignores the

shift in presumption brought about by the UCC revision. With the statutory presumption removed, the same stacked

whole or in part.

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CHAPTER 13: TRANSFERABILITY AND HOLDER IN DUE COURSE 19

order instrument. As with any order instrument, further negotiation requires indorsement and delivery.

2. Ben contracts with Amy to fix her roof. Amy writes Ben a check, but Ben never makes the repairs.

Carl knows Ben breached the contract, but cashes the check anyway. Can Carl become an HDC? Why

or why not? No. Carl cannot become an HDC. A party who takes an instrument with knowledge of one

defense that the maker or drawer has against payment on the instrument prevents the party from attaining

HDC status as to all defenses. The party does not satisfy the requirement for HDC status that he or she must

take the instrument without notice.

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