Holder in Due Course Status Flashcards
What is the process for determining HDC status?
(1) Is the person a holder?
(2) Does the person hold in due course?
* Burden on person claiming HDC status
What is a holder?
A person in possession of an instrument with the right to enforce it
What does “due course” require?
The holder must take for value, in good faith, and without notice
When is HDC status important?
When the obligor raises a defense to payment–HDC can obtain better rights than the transferror
What are the requirements to become a holder in good course?
(1) Instrument must be negotiable
(2) Party must be a holder (i.e., possession + good title)
(3) Authenticity of instrument must not be apparently questioned
(4) Holder must pay value (e.g., performance of consideration, acquisition by holder of lien, taking as payment of antecedent debt, trading negotiable instrument for another)
(5) Must take in good faith (honesty in fact + reasonable commercial standards)
(6) Must take without notice at the time of instrument acquisition
* Actual knowledge or reason to know from all the facts and circumstances surrounding the transaction
What are facts that constitute notice?
(1) An instrument is overdue, meaning:
* Any part of the principal is overdue (overdue interest not notice)
* Acceleration has been made
* More than reasonable time has elapsed after issuance of a demand instrument
(2) Instrument dishonored (e.g., check bounced)
(3) Unauthorized signature or alteration
(4) Claim of third party to the instrument
(5) Defenses or claims in recoupment
What is the shelter rule?
When the transferee gets the rights of HDC by shelter
* A transferee acquires whatever rights their transferor had
* If HDC transfers instrument, transferee and subsequent transferees get HDC’s rights
What is the exception to the shelter rule?
No HDC rights are given to persons who were parties to fraud or illegality
