MODULE 25 COMMERCIAL PAPER 193

5. Federal law standardizes endorsements on checks--endorser should turn check over and
sign in
designated area
6. Purpose is to avoid interference with bank's endorsements
7. Endorsements placed outside this area do not destroy negotiability but may delay clearing pro-

cess.
8. If check has statement that it is nonnegotiable, check is still negotiable
a. This is not true of other negotiable instruments whereby such statement destroys negotiability
9. Holder in Due Course
10. Concept of holder in due course (also called HDC) is very important for CPA exam purposes. A
HDC is entitled to payment on negotiable instrument despite personal defenses that maker or drawer
of instrument may have
11. Recall that an assignee of contract rights receives only rights that assignor had (i.e., assignee takes

subject to all defenses that couldhave been asserted against assignor)

12. Likewise, an ordinary holder of a negotiable instrument has same rights as assignee
13. To be holder in due course, a taker of instrument must
14. Be a holder of a properly negotiated negotiable instrument
15. Give value for instrument
(1) Holder gives value if s/he
(a) Pays or performs agreed consideration
1] An executory promise (promise to give value in the future) is not value until per-
formed
(b) Takes as a satisfaction of a previous existing debt
(c) Gives another negotiable instrument
(d) Acquires a security interest in the instrument (e.g., the holder takes possession of the in-
strument as collateral for another debt)
(2) A bank takes for value to the extent that credit has been given for a deposit and withdrawn
(a) FIFO method is used to determine whether it has been withdrawn (money is considered to
be withdrawn from an account in the order in which it was deposited)
(3) Value does not have to be for full amount of instrument;
(a) Purchase at a discount is value for full face amount of instrument provided HDC took in
good faith (i.e., as long as not too large a discount)
EXAMPLE: Purchase of a $1,000 instrument in good faith for $950 is consideredfull value, but
purchase of the same instrument for $500 is not considered full value when market conditions show that
the discount is excessive.
EXAMPLE: Handy purchases a negotiable note that has aface value of $1,000. She gives $600 in cash
now and agrees to pay $350 in one week. Handy has given value only to the extent of $600 and thus can
qualify as a HDC for $600. Once she pays the remaining $350, she qualifies as a HDC for the full
$1,000. Note that even though she paid only $950, she has HDC status for the entire $1,000 because it
was a reasonable discount.
16. Take in good faith
(1) Good faith defined as honesty in fact and observance of reasonable commercial standards of
fair dealing
17. Take without notice that it is overdue, has been dishonored, or that any person has a defense or
claim to it
(1) Holder has notice when s/he knows or has reason to know (measured by objective "reasonable
person" standard)
(2) Overdue
EXAMPLE: H acquires a note or draft that is three weeks past the due date on the instrument.
(a) Instrument not overdue if default is on payment of interest only
(b) Domestic check, although payable on demand, is overdue ninety days after its date