Chapter 32
Rights of Holders, Defenses,
and Liability Issues
Twomey, Business Law and the
Regulatory Environment (14th Ed.)
Holders [32-1]
Transfer paper
and rights
Transferee:
acquired paper through
proper negotiation
To be holder in due
course and receive
protection from
certain defenses
(c) 2000 West Legal Studies
Holder or Assignee:
the only person who may
• demand payment
• bring suit for collection
• give a discharge or release from liability
• cancel the liability of another party
Transfers paper to holder
through holder in due course
Transferee must have
• given value for the paper
• acted honestly in acquiring the paper
(in good faith)
• ignorance of paper’s being overdue
or dishonored
• ignorance of defenses and
adverse claims
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Classifications of Defenses [32-2]
HDC Defenses
Real/Universal
Incapacity
Personal
Mixed
Fraud in the
Inducement
Duress
Illegality
Misrepresentation
Fraud in Factum
Lack of Consideration
Bankruptcy
Original Defense
Lack of Payment
Warranty Breach
Forgery*
Breach of Contract
*Watch exceptions
(c) 2000 West Legal Studies
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Parties to an Instrument [32-3]
Promissary Note
Draft
Primary Party Maker
Secondary
Party
Acceptor
(drawee becomes
acceptor after
signifying in writing
on the draft
willingness to pay)
Guarantor of Payment Guarantor of
Payment
Unqualified Indorser Unqualified
Indorser
Drawer
(c) 2000 West Legal Studies
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The Defenses to Payment under
Negotiable Instruments
UNIVERSAL
(Available against
Assignees, Holders, and
Holders in Due Course)
•Fraud as to the Nature of
the Instrument
•Forgery
•Unauthorized Signature
•Incapacity (Declaration)
•Illegality
•Alteration
•Consumer Credit
Contracts with FTC
Notice
(c) 2000 West Legal Studies
LIMITED
(Available against Assignees,
and Holders but not against
Holders in Due Course)
•Fraud in the Inducement
•Misrepresentation
•Lack of Consideration
MIXED
(Circumstances Vary
the Availability)
•Duress
•Incapacity
•Breach of Warranty
•Cancellation
•Failure of Delivery
•Unauthorized Completion
•All Ordinary Contract
Defenses
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Notice:
Any holder of this consumer credit
contract is subject to all claims and
defenses which the debtor could
assert against the seller of goods or
services obtained with the proceeds
hereof. Recovery hereunder by the
debtor shall not exceed amounts paid
by the debtor hereunder.
(c) 2000 West Legal Studies
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Chapter 32 Summary
A holder of a negotiable instrument can be either
an ordinary holder or a holder in due course. The
ordinary holder has the same rights that an
assignee would have. Holders in due course and
holders through a holder in due course are
protected from certain defenses. To be a holder
in due course, a person must first be a holder;
that is, the person must have acquired the
instrument by a proper negotiation.
(c) 2000 West Legal Studies
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Chapter 32 Summary [2]
The holder must then also take for value, in
good faith, without notice that the paper is
overdue or dishonored, and without notice of
defenses and adverse claims. Those persons who
become holders of the instrument after a holder
in due course are given the same protection as
the holder in due course through the shelter
provision, provided they are not parties to any
fraud or illegality affecting the instrument.
(c) 2000 West Legal Studies
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Chapter 32 Summary [3]
The importance of being a holder in due course or a
holder through a holder in due course is that those
holders are not subject to certain defenses when they
demand payment or bring suit on the instrument. These
defenses are limited defenses and include ordinary
contract defenses, incapacity unless it makes the
instrument void, fraud in the inducement, prior
payment or cancellation, nondelivery of an instrument,
conditional delivery, duress consisting of threats,
unauthorized completion, and theft of a bearer
instrument.
(c) 2000 West Legal Studies
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Chapter 32 Summary [4]
Universal defenses may be asserted against any
plaintiff whether that party is an assignee, an
ordinary holder, a holder in due course, or a holder
through a holder in due course. Universal defenses
include fraud as to the nature or essential terms of
the paper, forgery or lack of authority, duress
depriving control, infancy, illegality that makes the
instrument void, and alteration. Alteration is only a
partial defense; the favored holder may enforce the
instrument according to its original terms.
(c) 2000 West Legal Studies
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Chapter 32 Summary [5]
The Federal Trade Commission rule on consumer
credit contracts limits the immunity of a holder in
due course from defenses of consumer buyers
against their sellers. Immunity is limited in
consumer credit transactions if the notice specified
by the FTC regulation is included in the sales
contract. When a notice preserving consumer
defenses is stated in a negotiable instrument, no
subsequent person can be a holder in due course.
(c) 2000 West Legal Studies
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