Chapter 32 Rights of Holders Defenses and Liability

Chapter 32 Rights of Holders, Defenses, and Liability Issues Twomey, Business Law and the Regulatory Environment (14 th Ed. ) (c) 2000 West Legal Studies Chapter 32

Holders [32 -1] Transfer paper and rights Transferee: acquired paper through proper negotiation To be holder in due course and receive protection from certain defenses (c) 2000 West Legal Studies Holder or Assignee: the only person who may • demand payment • bring suit for collection • give a discharge or release from liability • cancel the liability of another party Transfers paper to holder through holder in due course Transferee must have • given value for the paper • acted honestly in acquiring the paper (in good faith) • ignorance of paper’s being overdue or dishonored • ignorance of defenses and adverse claims Chapter 32 2

Classifications of Defenses [32 -2] HDC Defenses Real/Universal Incapacity Illegality Fraud in Factum Bankruptcy Lack of Payment Forgery* Personal Mixed Fraud in the Inducement Duress Misrepresentation Lack of Consideration Original Defense Warranty Breach of Contract *Watch exceptions (c) 2000 West Legal Studies Chapter 32 3

Parties to an Instrument [32 -3] (c) 2000 West Legal Studies Chapter 32 4

The Defenses to Payment under Negotiable Instruments UNIVERSAL (Available against Assignees, Holders, and Holders in Due Course) • Fraud as to the Nature of the Instrument • Forgery • Unauthorized Signature • Incapacity (Declaration) • Illegality • Alteration • Consumer Credit Contracts with FTC Notice (c) 2000 West Legal Studies LIMITED (Available against Assignees, and Holders but not against Holders in Due Course) • Fraud in the Inducement • Misrepresentation • Lack of Consideration MIXED (Circumstances Vary the Availability) • Duress • Incapacity • Breach of Warranty • Cancellation • Failure of Delivery • Unauthorized Completion • All Ordinary Contract Defenses Chapter 32 5

Notice: Any holder of this consumer credit contract is subject to all claims and defenses which the debtor could assert against the seller of goods or services obtained with the proceeds hereof. Recovery hereunder by the debtor shall not exceed amounts paid by the debtor hereunder. (c) 2000 West Legal Studies Chapter 32 6

Chapter 32 Summary A holder of a negotiable instrument can be either an ordinary holder or a holder in due course. The ordinary holder has the same rights that an assignee would have. Holders in due course and holders through a holder in due course are protected from certain defenses. To be a holder in due course, a person must first be a holder; that is, the person must have acquired the instrument by a proper negotiation. (c) 2000 West Legal Studies Chapter 32 7

Chapter 32 Summary [2] The holder must then also take for value, in good faith, without notice that the paper is overdue or dishonored, and without notice of defenses and adverse claims. Those persons who become holders of the instrument after a holder in due course are given the same protection as the holder in due course through the shelter provision, provided they are not parties to any fraud or illegality affecting the instrument. (c) 2000 West Legal Studies Chapter 32 8

Chapter 32 Summary [3] The importance of being a holder in due course or a holder through a holder in due course is that those holders are not subject to certain defenses when they demand payment or bring suit on the instrument. These defenses are limited defenses and include ordinary contract defenses, incapacity unless it makes the instrument void, fraud in the inducement, prior payment or cancellation, nondelivery of an instrument, conditional delivery, duress consisting of threats, unauthorized completion, and theft of a bearer instrument. (c) 2000 West Legal Studies Chapter 32 9

Chapter 32 Summary [4] Universal defenses may be asserted against any plaintiff whether that party is an assignee, an ordinary holder, a holder in due course, or a holder through a holder in due course. Universal defenses include fraud as to the nature or essential terms of the paper, forgery or lack of authority, duress depriving control, infancy, illegality that makes the instrument void, and alteration. Alteration is only a partial defense; the favored holder may enforce the instrument according to its original terms. (c) 2000 West Legal Studies Chapter 32 10

Chapter 32 Summary [5] The Federal Trade Commission rule on consumer credit contracts limits the immunity of a holder in due course from defenses of consumer buyers against their sellers. Immunity is limited in consumer credit transactions if the notice specified by the FTC regulation is included in the sales contract. When a notice preserving consumer defenses is stated in a negotiable instrument, no subsequent person can be a holder in due course. (c) 2000 West Legal Studies Chapter 32 11