CP: Transferees as Holders in Due Course Flashcards
What are the three characteristics of a Holder in Due Course (HDC)?
The holder takes the instrument (i) for value, (ii) in good faith, (iii) without notice that it is overdue, has been dishonored, or is subject to any defense or claim.
What does the “for value” element mean?
It means that the HDC can’t be a donee. They must have paid for the instrument. It can even be from a past payment/service.
Is a promise to pay “for value” for purposes of getting HDC status?
No - a promise is not sufficient to qualify the holder as an HDC.
Is the good faith standard objective or subjective?
Good faith is a subjective standard - “the rule of the pure heart and empty head”
Is the notice requirement a subjective or objective standard?
It’s an objective standard - did the holder know or have reason to know that the instrument was invalid for some reason?
If a payment is overdue, and the holder has notice when he takes, can the holder be an HDC?
No - overdue payment means holder cannot be an HDC if there was notice.
When is a holder deemed on constructive notice that payment is overdue?
When the face of the instrument says the due date is in the past when holder takes the instrument. He should have known; the holder bought too late to be an HDC.
If the holder knew or should have known the principal is in arrears at the time she obtained the instrument, can she be an HDC?
No - if the taker is on notice that the principal being in arrears, he cannot be an HDC.
If the holder knew or should have known that the interest payments are in arrears at the time of taking, can he be an HDC?
Yes - a holder who takes with notice that the interest payments are in arrears can still qualify as an HDC.
If the instrument is stamped “PAID” or “VOID”, is the holder on notice?
Yes - holder will not be an HDC if he bought the instrument with big VOID stamps all over it.
Must a holder pay the transferor if the he committed fraud?
No - the holder’s interest is voidable because fraud is a defense to enforcement of a promise to pay.
If a commercial paper is lost or stolen from the true owner, can a transferee ever be an HDC?
Yes - if the transferee did not have notice or reason to know about the theft or loss.
If a fiduciary has breached his fiduciary duty by transferring the instrument, can the transferee be an HDC?
Only if the transferee didn’t know or have reason to know that the transferor was breaching a fiduciary duty.
Does the shelter rule apply to a transferee of a negotiable instrument?
Yes - just like in property (BFP) - if a transferee takes from an HDC (by purchase or gift), they are sheltered in the status of HDC even if they, personally, wouldn’t qualify as an HDC.
