CHAPTER 25: TRANSFER AND HOLDER
IN DUE COURSE
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TOPICS COVERED CHAPTER 25:
TRANSFER & HOLDER IN DUE COURSE
A. Negotiation.
B. Indorsement.
C. Holder in Due Course.
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NEGOTIATION
 Holder – possessor of an instrument
with all necessary indorsements.
 Shelter Rule – transferee gets rights
of transferor. 
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NEGOTIATION
 Negotiation of Bearer Paper –
transferred by mere possession.
 Negotiation of Order Paper –
transferred by possession and
indorsement by all parties.
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BEARER PAPER
Payee
Issuer
Bearer
I
Instrument
P
Lost
Instrument
Finder
F
B
$
Transferee
(may be a holder
in due course)
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NEGOTIATION OF BEARER
AND ORDER PAPER
Bearer
Paper
Possession
Holder
Order
Paper
1) Possession
2) All necessary
indorsements
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NEGOTIATION
 Negotiation of Order Paper.
• The Impostor Rule: Indorsement of an
impostor in the name of the named payee
is effective IF the impostor has induced
the maker or drawer to issue the
instrument to him using the name of the
payee. THE HYATT CORPORATION V. PALM
BEACH NATIONAL BANK (2003).
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NEGOTIATION
 Negotiation of Order Paper.
• The Fictitious Payee Rule – an
indorsement by any person in the name
of the named payee is effective if an
agent of the maker or drawer has
supplied her with the name of the payee
for fraudulent purposes.
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NEGOTIATION
 Negotiation of Order Paper.
• Negotiations Subject to Rescission, are
effective even if:
• Made by an infant, a corporation
exceeding its powers, or person without
capacity.
• Obtained by fraud, duress, or mistake.
• Made in breach of duty or illegal
transaction.
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INDORSEMENT
 Definition – signature of a payee,
drawee, accommodation party, or
holder.
 Blank Indorsements –specifying no
indorsee and making the instrument
bearer paper.
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INDORSEMENT
 Special Indorsements.
• Identifying an indorsee to be paid and
making the instrument order paper.
 Restrictive Indorsements.
• Attempt to limit the rights of the
indorsee. 
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INDORSEMENT
 Indorsements for Deposit or
Collection.
• Effectively limit further negotiation to
those consistent with the indorsement.
• STATE OF QATAR V. FIRST AMERICAN BANK OF
VIRGINIA (1995). 
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INDORSEMENT
 Indorsements for Deposit or
Collection.
• Indorsements in Trust.
• Indorsements with Ineffective
Restrictions.
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INDORSEMENT
 Qualified and Unqualified
Indorsements.
• Indorsements in Trust – effectively require the
indorsee to pay or apply all funds in
accordance with the indorsement.
• Indorsements with Ineffective Restrictions –
include conditional indorsements and
indorsements attempting to prohibit further
negotiation.
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INDORSEMENT
 Formal Requirements of
Indorsements.
• Place of Indorsement: on the
instrument, or on a separate piece of
paper (allonge).
• Incorrect or Misspelled Indorsements.
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PLACEMENT OF INDORSEMENT
1242
FRONT
2009
Bob Barten
$500.00
TRAILIING EDGE
Five Hundred and no/100

HARRIS
BANK
17-7000
2910
DOLLARS
Harris Trust and
Savings Bank
Chicago, Illinois
For
|:291070001|: 202820211110” ‘1242
Reserved for
indorsement by the
bank at which the check
is deposited.
BACK
Indorsement must be in black or blue ink and must be within 1 1/2 inches from the
trailing edge so as not to interfere with indorsements from the bank.
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LEADING EDGE
Pay to the
order of
Feb.1
INDORSEMENT
Indorsement
Type of
Indorsement
Interest
Transferred
Liability of
Indorser
1. “John Doe”
Blank
Nonrestrictive Unqualified
2. “Pay to Richard Roe, John Doe”
Special
Nonrestrictive Unqualified
3. “Without recourse, John Doe”
Blank
Nonrestrictive Qualified
4. “Pay to Richard Roe in trusts for
John Doe, without recourse, John
Doe”
Special
Restrictive
Qualified
5. “For collection only, without
recourse, John doe”
Blank
Restrictive
Qualified
Special
Nonrestrictive
(revised
Article 3)
Unqualified
6. “Pay to XYZ Corp., on the
condition that it delivers goods
ordered this date, John Doe”
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HOLDER IN DUE COURSE
 A holder in due course must:
• Be a Holder (possession) of an
instrument and all necessary
indorsements.
• Take for Value.
• KORZENICK V. SUPREME RADIO, INC. 1964).
• Differs from contractual consideration and
consists of any of these: 
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HOLDER IN DUE COURSE
 A holder in due course must:
• Take for Value.
• timely performance of legal consideration
(which excludes executory promises);
• acquisition of a security interest in or a lien
on the instrument;
• taking the instrument in payment of or as
security for an antecedent debt; 
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HOLDER IN DUE COURSE
 A holder in due course must:
• Take for Value.
• giving a negotiable instrument; or
• giving an irrevocable commitment to a third
party. 
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HOLDER IN DUE COURSE
 A holder in due course must:
• Take in Good Faith.
• Honesty in fact and observance of
reasonable standards of fair dealing.
• ANY KIND OF CHECKS CASHED, INC. V. TALCOTT
(2002). 
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HOLDER IN DUE COURSE
 A holder in due course must:
• Take Without Notice.
• Notice an Instrument Is Overdue – time
paper is overdue after its stated date;
demand paper is overdue after demand is
made or after it has been outstanding for
an unreasonable period of time. 
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HOLDER IN DUE COURSE
 A holder in due course must:
• Take Without Notice.
• Notice an Instrument Has Been Dishonored
– dishonor is the refusal to pay or accept an
instrument when it becomes due.
• Notice an Instrument Has Been Forged or
Altered. 
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HOLDER IN DUE COURSE
 A holder in due course must:
• Take Without Notice.
• Notice of a Claim or Defense – a defense
protects a person from liability, while a
claim is an assertion of ownership. 
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HOLDER IN DUE COURSE
 A holder in due course must:
• Without Reason to Question Its
Authenticity .
• Instrument cannot bear such apparent
evidence of forgery or alteration or
otherwise be so irregular or incomplete as
to call into question its authenticity.
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HOLDER IN DUE COURSE STATUS
 A Payee May Be a Holder in Due
Course.
• The payee's rights as a holder in due
course are limited to defenses of
persons with whom he has not dealt.
• WATSON COATINGS, INC. V. AMERICAN
EXPRESS TRAVEL RELATED SERVICES, INC.
(2006).
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HOLDER IN DUE COURSE STATUS
 The Shelter Rule.
• The transferee of an instrument
acquires the same rights that the
transferor had in the instrument.
• TRIFFIN V. CIGNA INSURANCE CO. (1997).
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HOLDER IN DUE COURSE
 Real Defenses –available against all
holders, including HDC’s, include:
• Infancy.
• Void Obligations.
• Fraud in the Execution.
• Discharge in Insolvency Proceedings. 
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HOLDER IN DUE COURSE
 Real Defenses.
• Discharge of Which the Holder Has
Notice.
• Unauthorized Signature.
• Fraudulent Alteration.
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HOLDER IN DUE COURSE
 Personal Defenses – all other
defenses that might be asserted in
the case of any action for breach of
contract.
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DEFENSES AGAINST HOLDERS AND
HOLDERS IN DUE COURSE
Holder
Real Defenses
1. Minority
2. Void obligations
3. Fraud in the execution
4. Discharge in insolvency proceedings
5. Discharge of which holder has notice
6. Forgery
7. Material alteration
Personal Defenses
All other defenses
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Holder
in Due
Course
not
available
HOLDER IN DUE COURSE
 The preferential position of a holder
in due course has been severely
limited by a Federal Trade
Commission rule that applies to
consumer credit contracts.
 Under this rule, a transferee of
consumer credit contracts cannot
take as a holder in due course.
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RIGHTS OF HOLDER IN DUE
COURSE UNDER FTC RULE
nonconsumer
Issuer
personal
defense
Payee
HDC
consumer
Issuer
personal
defense
Payee
HDC
consumer or
nonconsumer
Issuer
real
defense
Payee
HDC
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.