Question

THIS IS A BUSINESS LAW QUESTION!

Explain in detail the effect of negotiability on holder in due course status and the effect of the Federal Trade Commission Rule on a Holder in Due Course.

Answer 1

The effect of negotiability on the holder in due course:

A holder is a person in possession of an instrument payable to a bearer or the identified person possessing it. A simple holder is just an assignee who acquires assignees rights and assignees liabilities too. A holder in due course gets an instrument free of claims and defenses by previous possessors. The holder in this position can use the instrument like money and free from worry of any liabilities.

Under “section 3-302” of the uniform commercial code (UCC) to be a holder in due course (HDC) the transferee must fulfill the following requirements:

• Must hold a negotiable instrument
• He would have taken it at a value, in good faith, without notice that it is overdue or has been dishonored, is subject to valid claim, that there is an uncured default with respect to the payment of another instrument issued in the same series or it contains an unauthorized signature or has been altered.
• There is no reason to question its authenticity on account of any evidence of forgery, alteration or irregularity.

The HDC can use the instrument freely and know of any wrong with the instrument. Then the HDC is paid on it.

Negotiation is delivery by any other person other than the drawer to any person who becomes the holder of the instrument.

As a holder, the person can enforce section 3-201-(a), 3-301 and is entitled to use it as bearer instrument (because he is the holder of the instrument), order instrument (which includes endorsements and multiple payees), and a remitter transaction (a person who purchases the instrument)

The effect of the federal trade commission rule on a holder in due course:

The FTC Formulated in 1976 enacted a trade regulation rule that abolished the HDC for consumer credit transactions. FTC has a rule “ Preservation of consumer claims and defenses” 16 code of federal regulations section 433. It states the creditor becomes a holder and stands in the shoes of the seller. The rule states the seller should provide notice in any consumer credit contract that the debtor can raise defenses against any purchaser of the paper instrument. It also prohibits the seller to take any finance unless the contract with the finance includes such a notice “ notice of defense”. It is that the consumers claim against the seller will not be void because of the transfer of the paper. This gives the holder sufficient notice to prevent him from becoming an HDC.

This rule will not apply only to consumer transactions. This means the HDC is invalid in the case of consumer credit contracts. It is valid in all other business transactions.