HDCs and Liability for Dishonor

Question 1

When is HDC status relevant?

Answer 1

When instrument has been dishonored and maker or drawer raises a defense to payment

Question 2

Elements to become HDC

Answer 2

1. Holder
   a. Possession
   b. Good title
2. Due course
   a. For value
   b. In good faith
   c. Without knowledge or notice at time instrument acquired of forgeries, alteration, unauthorized signature, overdueness, dishonor, defenses (objective standard)

Question 3

Good faith

Answer 3

Honesty in fact and observance of reasonable commercial standards of fair dealing

Question 4

Good title

Answer 4

Free of forgeries or missing signatures of payee and any special indorsees; properly negotiated

Question 5

Shelter rule

Answer 5

Exception to due course requirements: Transferee takes whatever rights her transferor enjoyed, taking “shelter” in the status of transferor (as long as transferee not a party to fraud or illegality affecting the instrument)

Question 6

Special transactions precluding HDC status

Answer 6

1. purchasing instrument at judicial sale
2. Acquiring instrument by taking over an estate
3. Purchasing instrument as part of a bulk transaction not in the regular course of business

Question 7

Real Defenses

Answer 7

HDC subject to. Relate to instrument itself

1. Forgery
2. Fraud in the factum
3. Alteration (material)
4. Adjudicated insanity (or incapacity)
5. Infancy
6. Illegality
7. Duress
8. Discharge in insolvency; discharge with notice (extinguished as matter of law)
9. Suretyship with notice
10. Statute of limitations

Question 8

Statute of limitations

Answer 8

Measured from DUE date, not issue date
Notes: 6 years
Unaccepted draft (check): earlier of 3 years after dishonor or 6 years after issue

Question 9

Personal claims and defenses

Answer 9

HDC not subject to. Relating to underlying contract

Examples:

1. Failure of consideration
2. Breach of contract
3. Fraud in inducement

Question 10

Indorser liability (contract liability)

Answer 10

Secondary liability in event of dishonor if:

1. Presentment within 30-days (for checks)
2. Dishonor
3. Notice of dishonor (liability triggered by indorser signing instrument)

Qualified indorsement disclaims liability
Terminated when instrument is paid

Question 11

Transfer warranty liability (5 implied promises)

Answer 11

1. Good title
2. Genuine signatures (authentic and authorized)
3. No material alteration
4. No defenses
5. No knowledge of insolvency proceedings

Possession of instrument not needed to invoke, survives final payment of instrument. Strict liability except as to 5th