Negotiation and Transfer Flashcards
When is an instrument negotiable?
(1) unconditional
(2) promise or order to pay
(3) a fixed amount of money
(4) to order or bearer
(5) payable on demand or at a definite time
(6) in a writing
(7) signed by the maker or drawer
Does inclusion of interest affect the requirement that a negotiable instrument be for a “fixed amount” of money?
The principle has to be fixed, but interest can be included though variable.
What is an example of an amount of money that is not sufficiently “fixed” and would destroy negotiability?
A share of profits
What does “unconditional” require for an instrument to be negotiable?
Payment cannot be contingent on any condition and cannot be subject to terms not on the instrument
What is a “holder in due course”?
- a holder
- who purchased an instrument
- in good faith
- for value
- without notice of problems with the instrument
What does the “without notice” requirement for holder in due course status include?
the holder must not have notice that the instrument is:
- overdue
- has been dishonored
- contains evidence of forgery, alteration, or irregularities
- or of competing claims or defenses
What does the “good faith” requirement for holder in due course status mean?
honesty in fact and observance of commercial standards of fair dealing
What does the “for value” requirement of holder in due course status include?
“for value” if the holder:
- bought and paid for the instrument
- took the instrument as payment for a debt
- acquired a security interest in the instrument
Not “for value” if:
- gift transfer
- found the instrument
- stole the instrument
- promises to pay for the instrument
- only partial consideration was given
What is the close connection doctrine?
If a holder has a close connection with a payee and its business practices and has reason to know of a defense, then the holder is not a holder in due course.
When does notice of a breach of fiduciary duty require?
A holder is not a holder in due course if:
(1) the holder has knowledge of breach of fiduciary duty, and
(2) the holder and knows the instrument was issued or used for the personal benefit of the fiduciary
What is the significance of holder in due course status?
A holder in due course takes free from “claims” and “personal defenses”:
CLAIMS = right to the instrument because of superior ownership
PERSONAL DEFENSES = defenses available in contract actions:
- fraud or mistake in the inducement
- lack of consideration
- unconscionability
- waiver
- estoppel
What defenses can be raised against a holder in due course?
“Real defenses” can be raised even against a holder in due course:
- Fraud in the Factum
- Forgery
- Material Alternation
- Duress (note made under duress)
- Infancy
- Illegality
- Adjudicated insanity
- Bankruptcy
- Suretyship defenses
- Statute of limitations
What is the Shelter Doctrine?
Under the Shelter Doctrine, if a holder in due course transfers an instrument, then the transferee is vested with the rights that hte holder in due course had and is immune from personal defenses.
