Commercial Paper- Proper Transfer - Holder in Due Course Flashcards
Why does proper transfer matter?
In order to be duly negotiated and ensure the transferee is a holder, the instrument must be properly transfered.
What is proper transfer when “payable to order”?
When payable to the order of a specific payee, it is negotiated by delivery of the instrument to the payee.
Any further negotiation requires that the payee indorses the instrument and deliver it to the transferee. [Indorsement must be authorized and valid]
What is a proper transfer when “payable to bearer”?
If the instrument is payable to bearer, indorsement is not required.
What is a special indorsement?
A special indorsement is on that names as particular person as “indorsee.”
The indorsee must sign in order for the instrument to be further negotiated.
Only indorsee can transfer properly.
What is a blank indorsement?
A blank indorsement is one that does not name a specific indorsee. It may be negotiated by delivery alone.
Anyone can pick it up and transfer.
What is a restrict indorsement?
The restrictive indorsement contains a restriction.
Proper transfer can only occur if restriction is fulfilled.
How does a transferee qualify as a holder in due course?
Proper transfer + meet this requirement.
A holder in due course is a holder who takes the instrument:
(1) For value;
(2) in Good faith
(3) Without notice that it is overdue or has been dishonored or is subject to any defense or claim.
What is “for value” for purposes of HDC?
Holder must give value for the instrument.
A mere promise is not value.
Old value is GOOD VALUE.
What does “in good faith” mean for purposes of HDC?
Good faith means honesty in fact and the observance of reasonable commercial standards of fair dealing (objective test).
What standard applies to “without notice” requirement?
Objective standard (know or reason to know - Holder must acquire the instrument without notice that it is overdue, has been dishonored, or is subject to any defense or claim.
What is overdue and thus no HDC?
Overdue = should have already been paid.
Watch out for:
Payable at definite time
Principal in arrears
But can qualify if interest is just in arrears.
When does a transferee have notice of any defense or claim against the negotiable instrument’s enforcement?
(i) Appearance of instrument give notice [PAID or VOID on face of instrument]
(ii) Notice that obligation of any party is voidable.
(iii) Notice of a competing claim to the negotiable instrument.
(iv) Notice that fiduciary has negotiated the instrument in breach of his or her fiduciary duty.
What is the shelter rule for a HDC?
A transferee acquires whatever right her transfer had.
A transferee steps into the shoes of HDC even though the transferee fails to meet the requirements of the HDC. [i.e donee or someone who fails to meet requirements.]
What is the benefit of being a HDC?
An HDC takes the instrument free from claims, free from personal defense and subject only to real defense.
A claim = right to a negotiable instrument b/c of superior ownership
Personal defenses = Every defense available in ordinary contract action, such as lack of consideration, unconscionability, waiver, estoppel, fraud in the inducement.
What are the real defenses that an HDC takes subject to?
MAD FIFI4
Material Alteration [change in the terms of the instrument] –> negligence is a defense to material alteration
Duress
Fraud in Factum
Incapacity
Illegality
Infancy
Insolvency
