Holder in Due Course Flashcards
What is a holder in due course?
A holder who takes the instrument:
1) for value;
2) in good faith; AND
3) without notice that it is overdue, has been dishonored, or is subject to any defense or claim.
The holder must give value for the instrument to qualify as a HIDC.
How is value different from consideration?
A mere promise is NOT value.
Past value is good value (e.g. services provided last year).
What does “in good faith” mean?
Honesty in fact (a subjective test) and the observance of reasonable commercial standards of fair dealing (an objective test)
The holder must acquire the instrument without notice that it is overdue, has been dishonored, or is subject to any defense/claim.
The notice inquiry is an objective test, asking whether the holder…
Knew or had reason to know of the problem.
When does a holder have notice that the instrument is overdue?
Examples?
When he knew or had reason to know that the instrument should already have been paid.
EX: the instrument recites that it is payable at a definite time and the holder acquires the instrument after that time
EX: the holder had notice that a payment (or several) on the principal is in arrears
Can a holder who takes with notice that an interest payment is in arrears nevertheless qualify as a HIDC?
Yes.
When does a holder have notice of a defense/claim against the enforcement of the instrument?
1) When the appearance of the instrument gives notice (e.g. the instrument is stamped PAID or VOID)
2) When the holder has notice that obligation of any party is voidable (e.g. due to misrepresentation, fraud, etc.)
3) When the holder has notice of a competing claim to the negotiable instrument (e.g. due to prior theft).
4) When the holder has notice that a fiduciary has negotiated the instrument in brach of his/her fiduciary duty.
How does the Shelter Rule apply to a HIDC?
Under the Shelter Rule, a transferee acquires whatever rights her transferor had, and thus can step into the shoes of a HIDC, even if she otherwise fails to meet the requirements (e.g. because she is a donee).
