Part 7- Credit, Chapter 32: Negotiation and Holder in Due Course, Doc 2 - Edubirdie

University:
Indiana University Bloomington
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

475

Pages:

2
Author:

bratrochanter

Summary: Indorsements and the Role of Holders in Due Course Types and Effects of Indorsements An indorsement transfers rights in a negotiable instrument. It serves three main purposes: 1. Negotiation: Allows transfer of the instrument. 2. Liability: Establishes potential liability for payment. 3. Control: Influences future negotiations or payments. Key types of indorsements: 1. Special Indorsement: Specifies a new payee (e.g., "Pay to Sam Smith"). 2. Blank Indorsement: Only the indorser’s signature; converts the instrument to bearer paper, negotiable by delivery alone. 3. Restrictive Indorsement: Specifies how the instrument can be used (e.g., “For Deposit Only”). Restrictive indorsements must be followed; banks are liable if they violate them, as shown in Lehigh Presbytery v. Merchants Bancorp, Inc.. 4. Qualified Indorsement: Includes “Without Recourse,” disclaiming the indorser’s liability if the instrument is dishonored. Negotiation and Transfer   Negotiation: Transfer of possession of a negotiable instrument. o For order paper, negotiation requires an indorsement and delivery. o For bearer paper, only delivery is required. Incomplete or Missing Indorsements: A transferee without an indorsement may demand it but cannot enforce the instrument or negotiate it until the indorsement is supplied. Holder in Due Course (HDC) An HDC enjoys enhanced protections:   HDC Requirements: The holder must: 1. Take the instrument for value. 2. Act in good faith. 3. Have no notice of defects or defenses. HDC Protections: Takes the instrument free from personal defenses (e.g., breach of warranty, failure of consideration). Only real defenses (e.g., forgery, fraud in the execution, duress) can be asserted against an HDC. Key Cases and Scenarios 1. Town of Freeport v. Ring: A check payable to Ring required his indorsement for negotiation. Without it, the Town could not enforce the check, highlighting the importance of proper indorsements. 2. Lehigh Presbytery v. Merchants Bancorp: The bank failed to follow restrictive indorsements, misapplying funds. The court held the bank liable, emphasizing the importance of honoring restrictions. Conclusion Indorsements play a critical role in the negotiation and enforceability of negotiable instruments. Proper negotiation and HDC status protect holders from most defenses, promoting the free transfer of instruments as substitutes for money. However, restrictive indorsements and statutory protections like the FTC rule ensure accountability, particularly in consumer transactions.

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Part 7- Credit, Chapter 32: Negotiation and Holder in Due Course, Doc 2

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