holder in due course Flashcards
holder
person in possession of an instrument with the right to enforce it
instrument must be payable to the bearer or to the person in possession and free of forgery
steps to determine holder in due course status
(1) is the person a holder
(2) does the person hold in due course
burden of proof is on the claimant
elements of holder in due course
“no I hav girlfriend (gf) win (wn)
N I H A V G F W N
Negotiatble instrustment, holder, authenticity (not apparently questioned), Value (paid by holder), good faith, without notice
(1) instrument must be negotiable
(2) party must be a holder
– Possession + good title
–instrument must be payable to the bearer or to the person in possession and free of forgery
(3) authenticity of the instrument not apparently questioned
(4) holder must pay value for instrument to deserve special protection but value need not be equivalent to face value
– performance of agreed consideration
– acquisition by holder of a lien or sec interest [other than judicial lien]
— taking the instrument as payment of or security for an antecedent debt
– trading a negotiable instrument for another instrument [Calvin pays $500 for a promissory note with a face value of $550]
– giving the instrument in exchange for incurring irrevocable obligation to a third person by the person taking the instrument
— NOT gifts
— you are only HDC for the amount by which you have paid consideration for = [Teresa agrees to pay Harold $4,000 for a note payable for $5,000. However, she has only paid $2,000 at the time the maker refuses to pay. Teresa can qualify as a holder in due course for only $2,500 because Teresa has paid only one-half of the agreed-upon consideration and thus is a holder in due course for only one-half of the face value of the note.]
(5) good faith == honesty in fact [subjective] + observance of reasonable commercial standards [objective]
(6) holder takes without notice of certain things
– NOTICE = actual notice + reason to know from all facts and circumstances received at a time as to give a reasonable opportunity to act
(7) holder must not take by certain transactions
– no purchase at judicial sale
– not obtained by legal process
– no acquisition as successor to an estate
– no purchase as part of a bulk transaction not in regular course of business of transferor
when is HDC status relevant
when obligor raises defenses to payment
EXAMPLE: A note is negotiated to a holder. The maker of the note doesn’t want to pay because the product purchased with the note was defective. If the holder is a mere holder, they will lose to this defense. But if the holder is an HDC, they may have better rights than their transferor had and take free of this defective product defense and most other defenses.
time when HDC status determined
HDC status is determined at the moment the instrument is negoti- ated to the holder or when the holder gives value, whichever occurs later.
Thus, if the transferee acquires notice of a claim or defense prior to negotiation or the giving of value, they won’t qualify as an HDC.
EXAMPLE: Ben agrees to buy from Jerry for $2,500 a $3,000 bearer note due in 2 months. Jerry hands the note over to Ben (a negotiation, since this is a bearer note) and Ben agrees to give Jerry the $2,500 the follow- ing week (apparently, Jerry is a trusting soul). Before Ben pays Jerry, Ben hears that the maker of the note doesn’t want to pay on the note because it was given in exchange for a delivery of ice cream which was discovered to be spoiled on delivery. Ben pays Jerry anyway. Ben is not an HDC because he had notice of a defense before he gave value for the note.
are payees HDCs?
typically no
HDC must take without notice = what is notice?
EXAMPLES OF NOTICE:
instrument is overdue [principal, not interest]
– includes acceleration being made or more than a reasonable time having elapsed after issue of a demand instrument [90 days for checks]
instrument is dishonored
uncured default
unauthorized
signature or alteration
claims to the instrument
defense
claims in recoupment
FACTS NOT CONSTITUTING NOTICE:
instrument is post-dated or undated
instrument was issued in return for an executory promise, unless purchaser has notice that defense has arisen
party signed for an accommodation
incomplete instrument has been completed
any person negotiating the instrument was a fiduciary
default in payment of interest
public filing or recording of document like security agreement
instrument sold at a discount
notice of discharge of a party [unless insolvency proceeding]
shelter rule
A transferee acquires whatever rights their transferor had and so is said to take “shelter” in the status of their transferor. So, if an HDC transfers an instrument, their transferee and subsequent transferees get the HDC’s rights.
Once a person qualifies as an HDC, all subsequent transferees will acquire the same HDC rights, unless they are transferees after a holder failed to obtain HDC rights because they were a party to fraud or illegality.
EXAMPLE: Mary qualifies as an HDC of a promissory note. Mary then gives the note as a birthday present to Keith one month after the promissory note is due. Keith may assert Mary’s rights as an HDC against the maker even though Keith is not an HDC because he (1) didn’t pay value and (2) had notice the note was overdue.
EXCEPTION:
– no HDC rights are given to people who were parties to fraud or illegality affecting the instrument
– In other words, a person can’t obtain a negotiable instrument, such as a check, through fraud, sell it to an HDC, and then buy it back and succeed to the rights of the HDC.
HDC flowchart
(1) is person in possession of the instrument a holder?
— NO = not a HDC
— yes = go to 2
(2) did holder take the instrument for VALUE?
—- NO = not a HDC
– yes = go to 3
(3) did holder take the instrument in GOOD FAITH (honesty in fact and with reasonable commercial standards)?
– NO = not a HDC
— yES = go to 4
(4) did holder take the instrument without notice of any claims or defesens at the time the holder gave value AND took possession?
– NO = not HDC
– YES – HDC status!
