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Home -> Essel R. Dillavou -> Principles Of Business Law -> CHAPTER V

Principles Of Business Law - CHAPTER V

1. CHAPTER I

2. CHAPTER II

3. CHAPTER III

4. BOOK I CHAPTER I

5. CHAPTER II

6. CHAPTER III

7. CHAPTER IV

8. CHAPTER V

9. CHAPTER VI

10. CHAPTER VII

11. CHAPTER VIII

12. BOOK II CHAPTER I

13. CHAPTER II

14. CHAPTER III

15. CHAPTER IV

16. BOOK III CHAPTER I

17. CHAPTER II

18. CHAPTER III

19. CHAPTER IV

20. CHAPTER V

21. CHAPTER VI

22. CHAPTER VII

23. CHAPTER VIII

24. CHAPTER IX

25. CHAPTER X

26. BOOK IV CHAPTER I

27. CHAPTER II

28. CHAPTER III

29. CHAPTER IV

30. CHAPTER V

31. CHAPTER VI

32. CHAPTER VII

33. CHAPTER VIII

34. CHAPTER IX

35. CHAPTER X

36. CHAPTER XI

37. CHAPTER XII

38. CHAPTER XIII

39. BOOK V CHAPTER I

40. CHAPTER II

41. CHAPTER III

42. BOOK VI CHAPTER I

43. CHAPTER II

44. CHAPTER III

45. CHAPTER IV

46. CHAPTER V

47. BOOK VII CHAPTER I

48. CHAPTER II

49. CHAPTER III

50. CHAPTER IV

51. BOOK VIII CHAPTER I

52. CHAPTER II

53. CHAPTER III







CHAPTER V
HOLDERS AND HOLDERS IN DUE COURSE

Sec. 55. Who is a holder. As defined by the Negotiable In-
struments Act a holder means the payee or indorsee of a bill or
note, who is in possession of it, or the bearer thereof. A person in
possession of a negotiable instrument may occupy two very dif-
ferent positions. A holder may be in no better position than the
assignee of any simple contract right. That is, he may be subject
to any personal defenses which the maker or drawer or other par-
ties prior to him may have against the payee. Again he may be a
holder free from such personal defenses, where his rights against
the primary party or other prior parties are superior to those pos-
sessed by the former holder or owner of the instrument. Such
holder is said to be a holder in due course. The canadian law requires that
a holder in such a position satisfy very definite requirements.
Such a holder must be a holder for value, a purchaser before ma-
turity, and a purchaser in good faith that is, one who takes the
instrument complete and regular on its face and without knowledge
of any defects in the title or of any infirmity in the instrument.

Requirements for the Holder in Due Course

Sec. 56. Must be a holder for value. Although a contract
generally is not enforceable against a person unless he receives some
consideration for his promise, the same cannot be said for a nego-
tiable instrument. Such an instrument may be negotiable and cir-
culate even though the party issuing it obtains nothing, but, before
payment can be demanded of him, someone must have given value
for the instrument. A holder for value, thus, is one who has given
some value for a negotiable instrument. Value as defined here
means any consideration which will support a simple contract, or
any antecedent debt. That is, one who receives a negotiable in-
strument in settlement of a previous indebtedness becomes a holder
for value.

A holder who purchases an instrument for less than its face value
becomes a holder for value to the full amount of the instrument,
but, if the discount is exceedingly large, it may, along with other
factors, be evidence of bad faith on the part of the holder. 1 One
does not become a holder for value merely by promising to pay for
an instrument, but only when he has parted with value for it. Be-

1 Ham v. Merritt, 1912, 150 Ky. 11, 149 S.W. 1131; p. 603.

171



172 NEGOTIABLE INSTRUMENTS

cause of this fact, a bank which discounts, or accepts for deposit or
collection, commercial paper and credits the account of the owner
does not become a holder for value until the depositor checks out
part or all of the particular item of deposit. At that moment, the
bank becomes a holder for value, and, in determining whether the
item arising from the discounted paper has been checked against,
the courts apply the "first in, first out" theory. 2

In other cases, as well, the courts hold that a mere promise to pay
for negotiable paper does not make one a holder for value. Unless
payment has been made at the time the holder learns of a defense,
his rights are no better than those of the party from whom he ac-
quired the paper. If the promise to pay is negotiable in form, how-
ever, the purchaser immediately becomes a holder for value. For
example, a drawer who issues his check for a negotiable note be-
comes a holder for value even before the check is cashed. He is
not obligated to take steps for the recovery of his check in an at-
tempt to protect the maker of the note which he has acquired.
Where the holder has paid only a portion of the consideration
which he has agreed to pay and then learns of a defense against the
instrument, he is a holder for value only to the extent of the amount
paid prior to the time he receives notice of the defense. He should
at that point refrain from paying the balance of the contract price.

One who receives a negotiable instrument as collateral security
for another indebtedness is a holder for value only to the extent of
the lien. 3

Sec. 57. Must be a purchaser before maturity. A holder in
due course must be a holder who has purchased the paper before
it is due. The lawyer presumes that every person under a duty will
perform on the date that performance is due, and, if such person
fails to perform that is, fails to pay the instrument it is pre-
sumed that he has some defense or valid reason for not performing.
Consequently, a purchaser of overdue paper would be charged with
the knowledge that some defense must exist. Where an instru-
ment is payable on a fixed date, any purchaser thereafter would not
be a holder in due course.

If the instrument is payable on demand, it is said to be overdue
an unreasonable length of time after issue. What is a reasonable
or an unreasonable time is determined by a consideration of the
nature of the instrument, the usage of the trade or business, and all
the circumstances and facts involved in each particular case. It is



2 People's State Bank v. Miller, 1915, 185 Mich. 565, 152 N.W. 257; p. 603.
8 John Davis & Co. v. Bedgesoff et al., 1930, 155 Wash. 127, 283 Pac. 665; p. 604.
4 State and City Bank and Trust Co. v. Hedrick et al., 1930, 198 N.C. 374, 151 S.E.
723; p. 605. , , .



HOLDERS AND HOLDERS IN DUE COURSE 173

impossible to state the precise period of time after which a check
may be said to be overdue. The conclusion in each case is deter-
mined by due consideration of the special circumstances surround-
ing the parties and the transaction. The retention of a check by a
holder for a considerable time, without presentment, is unusual;
and this circumstance is sufficient to put a party taking it upon in-
quiry as to whether any defenses exist against it. It has been held,
in particular cases, that a check is not overdue, so as to let in de-
fenses existing between the drawer and the payee, when it is pur-
chased the same day it is issued, two days, four days, eleven days,
twenty-four days, 5 and up to two and one-half months after issue,
although under normal conditions a check would certainly be con-
sidered stale before it had been outstanding two and one-half
months.

Where the instrument is due upon a fixed date, but subject to an
early maturity by reason of an accelerating clause, the instrument
would not be overdue until the option to mature the paper had
been exercised by the holder. And even though this rule were true,
a holder would be a holder in due course ; occupying the position of
a purchaser of paper before maturity, unless he had knowledge that
the option to declare the paper due had been exercised. A past
due installment, however, bars one from becoming a holder in due
course as effectively as if the entire instrument were past due.
Past due interest, on the other hand, does not impart notice of any
defect in the instrument.

Sec. 58. Must be a purchaser in good faith. A holder in due
course must be a purchaser who takes the instrument complete and
regular upon its face ; that is, if mere inspection of the instrument
will show its defect, such as erasures, alterations, blank spaces, 6 or
other infirmities, a purchaser of such instrument cannot be said to
be a taker of such instrument complete and regular upon its face.
But the courts almost uniformly agree that a postdated check
which passes to a bona fide purchaser before the date stated is
complete and regular. The purchaser of a postdated check may be
a holder in due course if he fulfills the other requirements. A
holder, to be one in good faith, must also be a person who takes the
instrument without knowledge of any facts relative to defects in
the title, that is, rights and defenses that the primary party or other
persons may have against the instrument. But if the purchaser
knows, or is in a position where he ought to know, that the paper
was secured from the maker by fraud, he would not be a good-faith
purchaser; or, if a purchaser had knowledge that his transferor oi

5 Anderson v. Elem, 1922, 111 Kan. 713, 208 Pac. 573; p. 606.

6 In re Estate Pbilpott, 1915, 169 Iowa 555, 151 N,W, 825; p. 607,



174 NEGOTIABLE INSTRUMENTS

bearer paper was a thief or a finder, he would be charged with
knowledge of the defect in the title and of the rights of the true
owner, and would not be a good-faith taker. Mere suspicion is not
sufficient, but a holder who suspects defects in title to such an ex-
tent that he fears investigation lest a defense be disclosed is not a
purchaser in good faith.

Likewise a taker of corporation negotiable paper given to pay the
personal debts of an officer of the corporation, the particular officer
having signed the paper for the corporation, is a bad-faith taker,
because the face of the instrument represents that the creditor has
appropriated the corporation's money to the payment of the indi-
vidual's debt. On the other hand, where corporation paper is pay-
able to the order of an officer of the corporation or to a third party
and is indorsed by the payee, officer, or third party and transferred
in payment of the officer's individual debt, the transaction on its
face does not represent that corporation money is appropriated to
pay the corporate officer's debt. Therefore, the creditor may be a
good-faith taker, although the result may be dependent on the sur-
rounding circumstances.

Sec. 59. Payee may be a holder in due course. Under the
Uniform Negotiable Instruments Act, a holder means the payee or
indorsee of a bill or note, who is in possession of it, or the bearer
thereof. If, therefore, a payee can satisfy the requirements of a
holder for value before maturity and in good faith, such payee
should be a holder in due course. Although the courts are in seri-
ous conflict on the question as to whether a payee may be a holder
in due course, most jurisdictions sustain this position. Since the
payee of the instrument usually deals directly with the primary
party, he ordinarily has knowledge of any defects that the primary
party might have, and for this reason cannot be a holder in due
course. However, if the payee receives the paper complete and
regular upon its face from an agent of the primary party under cir-
cumstances where he would not be put on guard as to the creation
or purpose of the instrument, he satisfies the requirements for a
holder in due course. 7 For example, A signs his name to an instru-
ment complete, except for the amount, payable to the order of P,
and directs his agent to fill in the amount for a specified sum. The
agent, in violation of this authority, completes the instrument for
a sum larger than that authorized and delivers it to P, complete
and regular upon its face. P is not immediate to A in the transac-
tion and has no knowledge of the unauthorized act of A's agent in
completing the instrument. Since the instrument was given by A
in payment of a preexisting debt to P, it is given for value. There-

7 Liberty Trust Co. v. Tilton, 1914, 217 Mass. 462, 105 N.E. 605; p. 608,



HOLDERS AND HOLDERS IN DUE COURSE 175

fore, P has satisfied all the requirements of a holder in due course,
and should be free from the defense of unauthorized completion by
the agent of A.

Sec. 60. A holder from a holder in due course. A holder who
gets his title from a holder in due course and who is not a party to
any fraud or illegality affecting the instrument has all the rights of
a holder in due course, although such holder may not satisfy all the
requirements of a holder in due course. When negotiable paper
has passed through the hands of a holder in due course, its negotia-
bility has been permanently established, in that all the personal de-
fenses of the primary party have been cut off. 8 For example, A
fraudulently induces B to create a promissory note for $100, pay-
able to A. B, therefore, has a defense of fraud against A. A ne-
gotiates this note to C, a taker for value before maturity and in
good faith. (7, the holder in due course of the note, is now free
from jB's defenses. C gives the note by negotiation, after maturity,
to D, who has knowledge of the fraud perpetrated upon B by A,
but who took no part therein. Although D has purchased the in-
strument after maturity and with knowledge of an outstanding de-
fense, he nevertheless takes the instrument free from B's defense.
Since D derived his title through C, a holder in due course, and was
not a party to the fraud, he has all the rights that the holder in due
course, C, had.

Likewise, if Z)'s position was that of a transferee of an unindorsed
order paper from C, a holder in due course, he would have all the
rights that C had, because he is an assignee from a holder in due
course.

Sec. 61. Reacquirer. Where an instrument is negotiated to a
person who formerly held the same, such holder is a reacquirer, and
he may reissue or further negotiate the instrument. He is not,
however, entitled to enforce payment against any intervening per-
sons to whom he was liable. The courts generally construe this
rule also to apply in certain cases to the acceptor or maker of an in-
strument. That is, if the acceptor or maker reacquires before ma-
turity, he may reissue it ; but if he reacquires it at or after maturity,
such reacquisition amounts to discharge of the instrument. For
example, A, a holder of paper, but not one in due course, negotiates
to B, a holder in due course. B negotiates back to A. It would
appear that A, having taken title from a holder in due course, would
have all the rights of a holder in due course ; but since A is a reac-
quirer, he is remitted to his former rights as a holder and does not
occupy the position of a holder in due course merely by having pur-
chased from a holder in due course. However, if A had been a

8 Miles v. Dodson, 1912, 102 Ark. 422, 144 S.W. 908; p. 609.



176 NEGOTIABLE INSTRUMENTS

holder in due course in the first instance, he would occupy that
position when he reacquired the instrument.

Review Questions and Problems

1. Is consideration an essential element of a negotiable instrument?

2. Will the preexisting debt furnish ample consideration to support a
negotiable instrument? Is it sufficient to make one a holder in due
course?

3. Who is a holder of a negotiable instrument? Is there any differ-
ence between a holder and a holder in due course? If so, of what does
the difference consist?

4. Name the requisites of a holder in due course.

5. A obtains from D a check in payment of a carload of flour. The
flour is not as represented and D stops payment of the check at the drawee
bank. In the meantime A has deposited the check in his bank, the bank
having no knowledge of the fraud. Is the bank in which the check has
been deposited a holder in due course?

6. H received a check by indorsement from P in payment of some
jewelry. At the time he received the check it had been issued some sixty
days. Was H a holder in due course? When must a purchaser obtain
a negotiable instrument in order to be a holder in due course?

7. What is meant by a purchaser in good faith? May one be a holder
in due course of an instrument which shows erasures and alterations on
its face?

8. D signed some checks in favor of her grocer and handed them to
her husband to deliver to the payee. The husband delivered them to
the payee, but told him that the checks were to be applied upon his own
bill. The grocer credited the account of the husband. Is the grocer a
holder in due course of the check in payment of the husband's account or
will he be compelled to credit D's account?

9. F, a holder in due course of a check, transfers it to H, who has
knowledge of a defense to the check. Is H a holder in due course?
Would the result be the same if the transfer took place beyond a reason-
able time after the check was issued?

10. Who is a reacquirer of commercial paper? If he formerly held the
paper other than as a holder in due course, may he become a holder in
due course by purchasing it from a holder in due course?

11. P sold a $1,000 negotiable note to H for $300 and indorsed it with-
out recourse. H gave his check in payment, but before it had been
cashed, M, the maker, notified H of a defense against the note. How
much, if any, will H be able to collect on the note from Ml

12. A held a check for $200 made payable to the order of -A, agent of
P. He indorsed the check to H in payment of a personal indebtedness.
If P later claims the proceeds of the check, may H maintain that he took
the instrument in good faith and so became a holder in due course?




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