Chapter 20

Holder in Due Course Defenses and Liabilities Analysis of Chapter 20 I have highlighted the basic concepts of Chapter 20 because it is a hard chapter. You must know this chapter and the other two chapters inside and out before taking the exam. Let me know if I can help you understand anything else. Analysis of this chapter: Do we have the right type of instrument (Draft, Check, Prom. Note, Cert. of Dep.? (Chapter 19) No – then contract law applies Yes – then move to the next question. Do we have a negotiable instrument (writing, signed, sum certain, etc.)? (Chapter 19) No – then contract law applies. Yes – then move to the next question. Has the instrument been transferred properly (all necessary endorsements present)? (Chapter 19) No- then contract law applies. Yes – then move to the next question. Who can the holder collect the $$ from? (Chapter 20) The holder (party in possession of the instrument) looks to see who he can collect the $ from. The holder can use the signature liability theory or the warranty liability theory whichever is easiest. Each type has its pros and cons. Signature liability is easy because all you have to do is prove the defendant’s signature is on the instrument. Signature liability is difficult because the holder has to present the instrument on a timely basis, once it is dishonored, then give notice of the dishonorment on a timely basis. If the holder misses these deadlines, then the signature liability is not available. Warranty liability does not have the same critical deadlines, but you have to be able to prove breach of the specific warranties which are merely promises. If an endorser signs “without recourse” then the holder can not pursue this party under either type of liability if the instrument is a note, CD, or draft. “Without recourse” removes signature liability on a check, but not transfer warranties. Once the holder decides who he can sue, next question is whether the defendant has a defense and if what type of a defense. What type of defense? Real or Personal? If the defense is a real or universal then the defendant can raise this defense whether the plaintiff is a holder or a holder-in-due course. If the defense is a personal defense, then we must continue to see if the holder is a HDC. Then we ask Did the holder give value? Did the holder take the instrument in good faith? Did the holder take the instrument without knowledge of defect or problems with the instrument? More Help: Once you have determined that Article 4 applies and that the instrument was properly transferred, then start by looking at who has liability on the instrument. We have two liability theories: signature liability and warranty liability. Signature liability happens when someone signs an instrument unless it is an endorsement “without recourse”. Signature liability requires us to understand primary and secondary liability. Makers and Acceptors have primary liabilities. Endorser and Drawers have secondary liability. Make sure you understand these terms and that secondary liability becomes effective only after there has been proper and timely presentment, dishonorment, and notice of dishonorment to someone who has secondary liability. Warranties are implied promises and if any of the promises are broken, then there has been a breach of one or more warranties. Again “without recourse” removes transfer warranties unless the instrument is a check. After you have determined who has liability, then look to see if liable person has a defense to raise against the holder who is coming after him or her for payment. If there are no defenses to raise on the underlying contract, then it does not matter whether any one is an HDC or not. The liable person has to pay on the instrument. If there is a defense to be raised, then you must proceed to determine what kind of defense the liable person has to raise. If it is a real defense, then again we don’t need to determine whether the holder is an HDC or not. It is only if the defense is a personal defense that we proceed to determine whether the holder is more than just a holder and in fact is a HDC and immune to personal defenses. A holder in due course is someone who takes the instrument for value, without notice of defects or overdue, and in good faith. You must understand all of these terms and concepts. I hope this helps to understand these difficult concepts. Let me know if you still are having trouble understanding this chapter.