PRESENTATION

Essentials and Legalities of Holder in Due Course & holder in Due Negotiation Instrument Act

Group Members: Vijay Kumar Nitin Raghav Babita Sharma Rahul Kumar

 Negotiable

instruments are intended to flow through the commercial world. In order to flow, the instrument needs to be transferred from person to person. Form determines rights that can be asserted by each person gaining possession of the negotiable instrument.

 UCC

defines transfer as delivery by any person other than issuer for the purpose of giving the person receiving the instrument the right to enforce the instrument. Transfer, by negotiation or not, confers on the transferee the rights possessed by transferor. Includes rights of a holder in due course (HDC) if transferor has those rights.

 Transfer

of negotiable instrument treated as assignment of a contract right. Transferee receives any and all rights of the transferor.

 Something

more needed to protect the possessor of the commercial paper. Facilitate free flow of commercial paper through commercial channels.

 Defined

as:

Transfer of possession. Whether voluntary or involuntary. Of an instrument by a person other than the issuer to a person who becomes a holder.

 Except

for:

Negotiation by a remitter. If instrument is payable to an identified person. Negotiation requires transfer of possession of the instrument and indorsement by holder. Instrument is payable to bearer. May be negotiated by transfer of possession alone.

 Defined

as:

A signature, other than that of maker, drawer, or acceptor or other words. For the purpose of negotiating the instrument, restricting payment of the instrument, or incurring indorsers liability on the instrument.

Not

an indorsement if circumstances unambiguously indicate signature was made for a purpose other than indorsement.

 Reasons

for indorsing an instrument:

Affect negotiation. (tell holder)

Another indorsement is needed to negotiate the instrument further. No further indorsements are needed. Instrument has been restricted to some special channel of commerce.

Affect liability.

Admit/agree to honor the contract of indorsement. Expressly deny any liability on indorsement contract.

 Special

Indorsement:

Specifies party to whom instrument is to be paid. To whose order it is to be paid. Party specified will have to indorse it before it can be negotiated further.

 Blank

Indorsements:

Does not state an party to whom instrument is to be paid. Mere signature by holder. Negotiable by transfer of possession. Blank indorsement converted into a special indorsement by writing above signature of indorser.

 Restrictive

Indorsement:

Prohibits any further negotiation of instrument. Contains a condition restricting further negotiation. Contains words that indicate it is to be deposited or collected. Restrict payment or negotiation may be disregarded by indorsee, no effect on rights or liabilities of indorsee. Restricting instrument to banking channels is a valid restriction.

 Qualified

Indorsements:

Denies contract liability. Indorser includes such words as without recourse having legal effect of telling later holders that the qualifying indorser will not repay them if the instrument is dishonored.

 The

" holder" of a promissory note, bill of exchange or cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto. Where the note, bill or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or destruction.

 Role

is important in negotiable instruments. Holder takes an instrument by negotiation. Which gives holder all rights the transferor possessed. Holder also acquires personal rights beyond those conferred with transfer. Normally acquires contractual and warranty rights.

 Essential

element before party can become a holder in due course. Defined as:

Person in possession of negotiable instruments, drawn, issued, or indorsed to holder, to his/her order, to the bearer, or in blank.

Receives

original issue from maker or drawer or receives negotiation through indorsement and/or delivery.

 Holder

has right to transfer, negotiate, discharge, or enforce instrument in holders own name. Holder is subject to any defenses on the instrument that a maker or drawer can assert.

 Means

any person who for consideration became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or indorsee thereof before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.

 To

overcome even one defense on instrument available to maker or drawer, holder needs to acquire holder in due course (HDC) status. Burden of proof to establish (HDC) lies with person claiming status. To establish holder in due course status:

for value, in good faith, and without notice of defenses or defects.

 For

Value.

Methods involve actual performance by holder:

Instrument issued or transferred for a promise of performance, to extent promise has been performed. Transferee acquires a security interest other than a lien obtained in a judicial proceeding. Taking an instrument as security for, or in payment of, an existing debt. Taking an instrument in exchange for another negotiable instrument. Issued or transferred in exchange for an irrevocable obligation of a third party.

 In

Good Faith.

Defined as honesty in fact and the observation of reasonable commercial standards of fair dealing. Holder needs to show observed reasonable commercial standards to establish good faith.

Without Notice of Defenses or Defects.

Holder takes instrument without notice of any defenses or defects. Notice is present if reasonable person would: Know that there was a defense or a defect. Or be suspicious and would make further inquiry before accepting the instrument. UCC provides notice must be received at a time and manner that give reasonable opportunity to act.

Without Notice of Defenses or Defects.

Facts That Are Considered Notice: Instrument is incomplete; Missing signature; Missing amount; Missing date on time and demand instrument; Visibly altered or bears visible evidence of forgery; Irregular on its face; or Taking an overdue instrument.

Without Notice of Defenses or Defects (Contd)

Facts That Are Not Considered Notice: Instrument was antedated or postdated; Instrument issued or negotiated for an executory promise, unless holder has notice of defenses to the promise; Any party has signed as an accommodation party; A formerly incomplete instrument was completed; Any person negotiating the instrument is or was a fiduciary; or Default on an interest payment on the instrument.

 HDC

is a preferred legal position. HDC takes an instrument free of personal defenses. HDC subject to real defenses. Any defense, whether personal or real, may be used to negate right to be paid of a mere holder.

Personal Defenses. Affects the agreement for which the instrument was issued. Types: Failure of consideration; Fraud In the inducement (personal defense); Duress; Breach of warranty; or Non-delivery.

Real Defenses. Questions the legal validity of the instrument. Negotiable instrument voided by operation of law. No one can enforce it. Maker or drawer must establish defense as real. Failure to do so will normally leave a valid personal defense.

Real Defenses. Types: Infancy (minority); Duress, Lack of Legal Capacity, or Illegality; Fraud; Discharge in Insolvency; Forgery; or Material Alternation.

 Assignee

takes same rights as assignor; Same is true of negotiable instrument. an HDC is involved with the instrument, every subsequent holder can assert the rights of an HDC without having to prove his status.

Once

 Federal

Trade Commission rules require a transaction involving consumer credit that the holder or holder in due course is subject to all personal and real defenses which could be raised against the transferor.
effect of this FTC rule is to make even a HDC subject to any defenses available against the payee, a tremendous protection for the consumer.

The

Document of title duly negotiated when: Person purchases instrument in good faith. Purchaser takes document without notice of any defense against or claim to the goods or documents. Makes recipient of document a holder by due negotiation (HDN).

Holder by due negotiation is assured the following rights: Title to document; Title to goods; All rights under laws of agency or estoppel; and Obligation of issuer to hold or deliver according to terms of the document and free of any claims.

Facts: The petitioner maintains a current account with Manila Banking Corp. He entrusts his checkbook and credit cards to his secretary. During the period 1980-81. His secretary was able to encash a total of 17 checks drawn against Manila Banking Corp. Ilusorio discovered these checks upon examination of his bank statements forwarded by the bank. And upon investigation, it was found out that his signatures was forged by his secretary on those 17 checks. Ilusorio demanded the return of amount by the drawee bank. The drawee bank contended negligence on the part of the petitioner.

Issue: Who should suffer the loss? Held: The SC held that Ilusorio was negligent. While it may be true that the signature of Ilusorio was forged by his secretary and that he did not authorized the encashment of these checks (claiming real defense of forgery on his part), Ilusorios previous conduct effectively precluded him from claiming forgery as a defense. The mere fact that these checks have been encashed for a period of almost two years, the petitioner should have detected the forgery. Further, the unusual degree of trust which he had accorded his secretary, such as unrestricted access to his credit cards an checkbooks amounts to negligence on his part and the proximate loss of his funds is attributable to this unusual degree of trust and confidence which he reposed to his secretary.

 Therefore:

General Rule drawee bank bears the loss because of Sec 62 of NIL. Exception Ilusorio case (negligence on the part of the drawer) Question: 1. How about if it is the signature of the endorser which is forged? Is the drawee bank still liable? 2. How about if the drawee bank has already paid the holder when it discovered the forged endorsement of the payee? Who bears the loss?

Answer:

No. The drawee bank should not be made liable. The collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior indorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the indorsements. As between the drawer and the drawee bank, the drawee bank should bear the loss. The drawee bank shall have recourse against the collecting bank because such collecting bank guarantees that all prior endorsements are genuine. The collecting bank then can go against the forger.

In cases involving a forged check, where the drawers is forged, drawer can recover from the drawee bank. No drawee bank has a right to pay a forged check. If it does, it shall have to recredit the amount of check to the account of the drawer. The liability chain ends with drawee bank whose responsibility it is to know the drawers signature since the latter is its customer. (Associated Bank vs CA, 252 SCRA 620). The endorser is liable on the instrument although the signature of the payee is forged because the endorser by his endorsement guaranteed that the instrument is genuine, therefore, impliedly, that the instrument is valid, otherwise, there would be nothing for the endorser to guarantee. (Republic vs Ebrada 65 SCRA 680).