Holder in Due Course (HDC) Flashcards
Holder in Due Course (HDC)
A holder who meets certain requirements becomes a holder in due course (HDC), and takes an instrument free of all claims to it and most defenses against payment that could be successfully asserted against the transferor.
Requirements for HDC Status
To become an HDC, a person must be a holder and take an instrument—
1) For Value
2) In Good Faith
3) Without Notice
Value Requirement for HDC Status
A holder does not give value by receiving an instrument as a gift or inheriting it. A holder gives value by [UCC 3-303(a)]—
a) Performing a promise for which an instrument was issued or transferred.
b) Acquiring a security interest or other lien in the instrument (other than a lien obtained by a judicial proceeding).
c) Taking instrument in payment of, or as security for, an antecedent debt.
d) Giving a negotiable instrument as payment.
e) Giving an irrevocable commitment as payment.
Good Faith Requirement for HDC Status
A purchaser must honestly believe that an instrument is not defective and observe reasonable commercial standards. This applies only to the holder—a person who in good faith takes an instrument from a thief may become an HDC.
Notice Requirement for HDC Status
A holder must acquire an instrument without knowing, or having reason to know it is defective. Notice can be—
1) Actual knowledge of a defect,
2) receipt of notice about a defect, or
3) reason to know that a defect exists [UCC 1-201(25)].
Knowledge of certain facts is not notice [see UCC 3-302(b)]. Notice can be assumed if—
A) If a holder takes a demand instrument knowing demand was made or takes it an unreasonable time after its issue (ninety days for a check; other instruments depend on the circumstances [UCC 3-304(a)]).
B) If a holder takes an order instrument after its expressed due date [UCC 3-304(b)].
The Shelter Principle
A person who does not qualify as an HDC but who acquires an instrument from an HDC or from someone with HDC rights receives the rights and privileges of an HDC [UCC 3-203(b)]. This principle promotes the marketability and transferability of negotiable instruments.
Limitations on the Shelter Principle
A holder who was a party to fraud or illegality affecting an instrument or who, as a prior holder, had notice of a claim or defense cannot improve his or her status by repurchasing it from a later HDC [UCC 3-203(b)].
