Transferability and Holder in Due Course


Negotiable instruments can be transferred to others by negotiation or by assignment.


Transfer by negotiation creates a holder, who at the very least receives the rights of a previous possessor.
A holder in due course (HDC) acquires more rights in the instrument than the previous possessor. This means defenses that can be raised against the transferor may or may not be able to be raised against the transferee.

Two Ways to Negotiate

Negotiating Order Instruments endorsement and delivery required.
Negotiating Bearer Instruments—delivery only.

  • Converting Order to Bearer and vice versa.
  • Converting Order Instruments to Bearer Instruments, and Vice Versa.

  • Must be done at the time of negotiation.


Signature with or without additional words or comments:

  • Blank Indorsements.
  • Special Indorsements.
  • Qualified Indorsements.
  • Restrictive Indorsements.

Miscellaneous Indorsement Problems

Misspelled Names. Indorsement should generally be identical to name on instrument.

  • Misspelled name OK.
  • Instruments Payable to Legal Entities.

  • Negotiable by authorized representative of the entity.
  • Alternative or Joint Payees.

  • In the alternative – either may indorse.
  • Jointly – both must indorse.
  • Case 25.1: GMAC v. Abington Casualty (1992).

    Holder vs. HDC

    Holder is one in possession of order or bearer paper and the instrument is drawn or indorsed to the holder.
    Holder in Due Course (HDC) results if the holder also meets the following requirements:

    • Takes for Value.
    • Takes in Good Faith.
    • Takes without Notice of a Defense to Payment.

    HDC: Taking for “Value”

    No value if gift or inheritance. Not the same as consideration.
    Holder can take for value by:

    • Performing the instrument’s promise.
    • Acquiring a security interest or other lien in the instrument.
    • Taking instrument in payment for an antecedent debt.
    • Giving a negotiable instrument as payment.
    • Giving irrevocable commitment as payment.

    HDC: Taking in “Good Faith”

    Good faith is honesty in fact and the observance of reasonable commercial standards of fair dealing.”
    Only applies to holder, not transferor.
    Case 25.2: Maine Family Federal Credit Union v. Sun Life Assurance (1999).

    HDC: “Taking With Notice”

    Holder takes the instrument with notice if he knows/has reason to know:

    • Instrument is overdue.
    • Instrument has been dishonored.
    • Actual knowledge or any suspicious event.
    • That a claim or defense exists.
    • So irregular, incomplete, or bears such evidence of forgery.
    • Case 25.3: Travelers Casualty and Surety v. Wells Fargo Bank (2002).

    Holder through an HDC

    “Shelter Principle”: Person is not an HDC but derives title through HDC.
    Limitations on the shelter principle: no fraud, illegality, claim or defense.

    HDC in International Context

    Good Faith and Protected-Holder Status.
    UN approved Convention on International Bills of Exchange and International Promissory Notes (CIBN)
    CIBN affords Greater Protection for Protected Holders. .posttext h4 { margin-bottom: 5px; }


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Papoo Parmar

I am so simple and Like to do any special in my life in short way.

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