Power Point Slides to Accompany BUSINESS LAW ECommerce
Power. Point Slides to Accompany BUSINESS LAW E-Commerce and Digital Law International Law and Ethics 5 th Edition by Henry R. Cheeseman Chapter 24 Holder in Due Course and Liability Slides developed by Les Wiletzky and Associates, Puyallup, WA Copyright © 2004 by Prentice-Hall. All rights reserved.
Introduction u If payment is not made on a negotiable instrument when it is due, the holder can use the court system to enforce the instrument. u Various parties, including both signers and non-signers, may be liable on it. u Accommodation parties (i. e. , guarantors) can also be held liable. Copyright © 2004 by Prentice-Hall. All rights reserved. 24 - 2
Holder Versus Holder In Due Course Holder u 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) u A person who takes a negotiable instrument for value, in good faith, and without notice that it is defective or is overdue. Copyright © 2004 by Prentice-Hall. All rights reserved. 24 - 3
Requirements for HDC Status u u 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: 1. For value In good faith Without notice that it is overdue, dishonored, or encumbered in any way, and 4. Bearing no apparent evidence of forgery, alterations, or irregularity 2. 3. Copyright © 2004 by Prentice-Hall. All rights reserved. 24 - 4
Holder in Due Course Maker or Drawer Negotiabl e Instrume nt Payee or Bearer Negotiabl e Instrume nt Copyright © 2004 by Prentice-Hall. All rights reserved. Holder in Due Course (HDC) 1. 2. Holder 3. 4. For value 5. Without notice of defect 6. The instrument bears no apparent evidence of forgery, alterations, or irregularity 24 - 5 Takes a negotiable instrument In good faith
Acquiring HDC Status Under the Shelter Principle u. 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 the instrument through a holder in due course. u This is called the shelter principle. Copyright © 2004 by Prentice-Hall. All rights reserved. 24 - 6
Acquiring HDC Status Under the Shelter Principle (continued) u To qualify as an HDC under the shelter principle, the following rules apply: n n 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. Copyright against the payment the instrument. 24 - 7 © 2004 by Prentice-Hall. All rights of reserved.
Signature Liability of Parties u. A person cannot be held contractually liable on a negotiable instrument unless his or her signature appears on the instrument. u The signatures on a negotiable instrument identify those who are obligated to pay it. u If it is unclear who the signer is, parol evidence can identify the signer. Copyright © 2004 by Prentice-Hall. All rights reserved. 24 - 8
Signature Defined u Any name, word, or mark used in lieu of a written signature. u Any symbol that is: Handwritten, typed, printed, stamped, or made in almost any other manner, and n Executed or adopted by a party to authenticate a writing n Copyright © 2004 by Prentice-Hall. All rights reserved. 24 - 9
Signers of instruments sign in many different capacities, including: u A maker of notes and certificates of deposit u An indorser who indorses an instrument u A drawer of drafts and checks u An agent who signs on behalf of others u A drawee who certifies or accepts checks and drafts u An accommodation party Copyright © 2004 by Prentice-Hall. All rights reserved. 24 - 10
Signature Liability (continued): Primary Liability u Makers of promissory notes and certificates of deposit have primary liability for the instrument. u Upon signing a promissory note, the maker unconditionally promises to pay the amount stipulated in the note when it is due. u Makers are absolutely liable to pay the instrument, subject only to certain real defenses. Copyright © 2004 by Prentice-Hall. All rights reserved. 24 - 11
Signature Liability (continued): Secondary Liability u Drawers of checks and drafts and unqualified indorsers of negotiable instruments have secondary liability on the instrument. u This liability is similar to that of a guarantor of a simple contract. u It arises when the party primarily liable on the instrument defaults and fails to pay the instrument when due. Copyright © 2004 by Prentice-Hall. All rights reserved. 24 - 12
Signature Liability (continued): Accommodation Party u. A party who signs an instrument and lends his or her name (and credit) to another party to the instrument. u The accommodation party is obliged to pay the instrument in the capacity in which he or she signs. Accommodation Maker – primarily liable n Accommodation Indorser – secondarily liable n Copyright © 2004 by Prentice-Hall. All rights reserved. 24 - 13
Warranty Liability of Parties u The law implies certain warranties on transferors of negotiable instruments. u Warranty liability is imposed whether or not the transferor signed the instrument. u There are two types of implied warranties: Transfer Warranties n Presentment Warranties n Copyright © 2004 by Prentice-Hall. All rights reserved. 24 - 14
Transfer Warranties u u 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. Copyright © 2004 by Prentice-Hall. All rights reserved. 24 - 15
Transfer Warranties (continued) 3. The instrument has not been materially altered. 4. No defenses of any party are good against the transferor. 5. The transferor has no knowledge of any insolvency proceeding against the maker, the acceptor, or the drawer of an unaccepted instrument. Copyright © 2004 by Prentice-Hall. All rights reserved. 24 - 16
Presentment Warranties u 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: 1. 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 Copyright © 2004 by Prentice-Hall. All rights reserved. 24 - 17
Defenses u The creation of negotiable instruments may give rise to a defense against its payment. u There are two general types of defenses: Real Defenses n Personal Defenses n u. A holder in due course (HDC) takes the instrument free from personal defenses but not real defenses. Copyright © 2004 by Prentice-Hall. All rights reserved. 24 - 18
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 Copyright © 2004 by Prentice-Hall. All rights reserved. 24 - 19
Personal Defenses 1. Breach of contract 2. Fraud in the inducement 3. Mental illness that makes a contract voidable instead of void 4. Illegality of a contract that makes the contract voidable instead of void 5. Ordinary duress or undue influence 6. Discharge of an instrument by payment or cancellation Effect Personal defenses cannot be raised against a holder in due course Copyright © 2004 by Prentice-Hall. All rights reserved. 24 - 20
Discharge u u Actions or events that relieve certain parties from liability on negotiable instruments. There are three methods of discharge: 1. 2. 3. Payment of the instrument Cancellation Impairment of the right of recourse Copyright © 2004 by Prentice-Hall. All rights reserved. 24 - 21
Impairment of the Right of Recourse u Certain parties (holders, indorsers, accommodation parties) are discharged 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 Copyright © 2004 by Prentice-Hall. All rights reserved. 24 - 22
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