Holder in Due Course

Question 1

Elements to become HDC

Answer 1

1) Holder

2) Due Course

Question 2

Elements to become a holder

Answer 2

1) possession

2) good title: free from forgeries, missing signatures of payee and any special indorsements, properly negotiated

Question 3

Effect of Forged indorsement

Answer 3

1) breaks the chain of title
2) no party who takes an instrument with a forged indorsement can become a holder or HDC
3) all subsequent negotiations improper

Question 4

Elements of Due Course

Answer 4

1) for value (consideration, doesn’t just have to be $)
2) in good faith: honesty in fact and observance of reasonable commercial standards of fair dealing
3) without knowledge or notice at time instrument acquired (objective test) of
a) alteration
b) unauthorized signature
c) overdueness
d) dishonor
e) defense

Question 5

Shelter Rule

Answer 5

1) a transferee acquires whatever rights her tranferor enjoyed
2) someone who is sheltered acquires the rights of an HDC
3) BUT will not apply is the transferee is a party to fraud or illegality affecting the instrument

Question 6

Special Transactions precluding HDC status

Answer 6

1) purchase at judicial sale
2) acquiring by taking over an estate
3) purchasing as part of a bulk transaction not in the regular course of business (sale of entire business)

Question 7

Real Defenses: FAIDS, HDC still liable

Answer 7

1) Forgery: but forgery of names necessary to title (payee, special indorsee) prohibits proper negotiation and thus precludes later HDC
2) Fraud in the Factum (real fraud): switched document
3) Alteration: someone changed the terms
4) Incapacity: under 18, adjudicated insanity
5) Illegality (usury): interest rate is illegal, but note may still be enforceable but only according to legal terms
6) duress
7) discharge in insolvency
8) discharge with notice
9) Suretyship with notice: HDC knows a prior party signed instrument as a surety
10) statute of limitations

Question 8

Statute of Limitations

Answer 8

1) Note: 6 years form the due date or demand payment

2) Draft or Check: earlier of 3 years after dishonor or 6 years after issue

Question 9

Personal Defenses, HDC not liable

Answer 9

1) failure of consideration
2) breach of contract
3) fraud in the inducement