24 terms

How Is A Negotiable Instrument Properly Transferred

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Due Negotiation or "Duly Negotiated"
Means there has been a proper transfer

*Transferee is a holder and he may be eligible to be a HOLDER IN DUE COURSE.
Payable To Order
When the instrument is payable to the order of a specific payee, it is negotiated by "Delivery of the instrument to that payee"

any further negotiation requires that the payee "indorse the instrument and deliver to the transferee
Indorsement Must Be Authorized And Valid
Paula Abdul loses her paycheck, payable to her order. Simon finds it, signs Paula's name on the back and cashes it at Randy's music shop. Is Randy a holder?

NO, this is a bad transfer. The instrument was payable to order, and therefore the payee (PA) had to indorse it. She never did. Thus, Randy can never be a HDC (Holder in due course)
Payable To Bearer
If the instrument is payable to bearer, Indorsement is not required.

PA loses her paycheck, payable to bearer. Simon finds it at Randy's music shop. Is Randy a holder?

YES
Special Indorsement
One that names a PARTICULAR PERSON as "indorsee," The indorsee MUST SIGN in order for the instrument to be further negotiated

*BD indoreses his paycheck, "pay to helen Gamble, /s/ BD." Helen is the INDORSEE. Helen loses the chick. Jimmy finds it, signs Helen's name on the back and cashes it at Gullible Grocery. Is GC a holder?

NO, it's a bad transfer. Helen never indorsed the check
The Blank Indorsement
One that does NOT have a SPECIFIC INDORSEE. It may be negotiated by delivery alone

BD indorses his paycheck by signing his name on the back and delivers it to Elinor, who loses it. Jimmy finds it and cashes it at Gulliable Grocery. Is Gullible Grocery a holder?

Yes, this is a good transfer
The Restrictive Indorsement
Contains a condition

BD indorses his chick, "For deposit only, BD." Lucy steals the check from BD and cashes it at stupid Bank. Is Bank a holder?

NO, BD can recover from Bank in conversion
For Value
The holder must GIVE VALUE for the instrument.

Note that giving value does NOT mean giving CONSIDERATION, which is a K principal
A Mere Promise Is Not Value
MP indorses and delivers his paycheck to RC. In return, RC promises not to pitch at MP's head for the next year.

This is not value. A promise isn't enough. Thus, RC could never qualify as a HDC
Old Value Is Good Value
Carrie indorses and delivers her paycheck to Aidan, to pay him for the furniture that he made for her last year.

Aidan has given value. Thus, Aidan could qualify as a HDC if the remaining elements are met
HDC Is A Holder Who Takes The Instrument
1. For value
2. In good faith
3. Without notice that is it overdue or has been dishonored or is subject to any defense claims
Good Faith
Honesty in fact
Without Notice
Ask did the holder have reason to know of the problem or knew of the problem
Payable At Definite Time
The instrument reads that it is payable on Jan 1, 2010. Holder buys the instrument on Jan 5, 2010. Holder is not a HDC

She bought to late
Principal In Arrears
If the holder had notice that a payment or more of principal is in arrears, he or she cannot qualify was a HDC
Interest In Arrears
If holder takes with notice that one or more payments of INTEREST are in arrears he can nonetheless qualify as a HDC
When Appearance Of the Instrument Gives Notice
The instrument is stamped on its face "PAID" or "VOID." Nonetheless, Phoebe buys it.

Cannot be an HDC- Those words should of told her something is wrong
Notice That Obligation Of Any Party Is Voidable
Aidan sells a chair to Charloette. he misrepresents to her that it is an antique. Charlotte signs and delivers to Aidan a negotiable note for 4k for the chair. Aidan indorses the note and sells the note to Samantha
Two Part Question
1. As between Aidan and Charlotte, Charlotte's obligation is to pay is VOIDABLE

Charlotte has a defense to enforcement of her promise to pay because Aidan defrauded Charlotte.

2. Could Samantha qualifies as a holder in due course? YES, if she did not have notice or reason to know of Charlotte defense
Notice Of A Competing Claim To The Negotiable Instrument
If the instrument is lost by or stolen from the true owner, the transferee could still qualify as a holder in due course if the instrument has been duly negotiated and the transferee did not have notice or reason to know of the theft or loss
Example
Larry steals a check payable to cash from Carrie and sells it to Dave. Carrie discovers the theft and confronts Dave. Who is entitled to the negotiable Instrument?

Dave, if the instrument was properly transferred and Dave did not have NOTICE or reason to know of the theft
Notice That Fiduciary Has Negotiated The Instrument In Breach Of His Or Her Fiduciary Duty
Brad Pitt buys a speedboat for his personal use. He pays Dealer by indorsing and delivering to Dealer a check payable to the Brad Pitt Fan Club.

Could dealer qualify as a HDC?

Yes, if dealer did not ACTUALLY KNOW of the breach. This is the only time that the standard is one of ACTUAL KNOWLEDGE
HDC/Shelter Rule
Allows Transferee "to step into the shoes" of the HDC, even though she otherwise clearly fails to meet the requirements of due course holding. Thus, transferee has all the rights of a HDC even though transferee is a DONEE or OTHERWISE FAILS TO QUALIFY
Example
Phil, a holder in due course of a negotiable instrument, makes a gift of the instrument to Alan, Alan is a mere DONEE. Even though he doesn't deserve it, Alan qualifies as a HDC because of THE SHELTER RULE