Holders in Due Course

Question 1

What does being a HDC affect?

Answer 1

It affects the HDC’s liability on the instrument and the claims or defenses that may be asserted against him.

Question 2

How many steps are involved in determining whether a person is an HDC

Answer 2

Two-steps

1. Determine whether the person is a “holder” and
2. Determine whether the person holds in “due course”

Question 3

What is a “holder”?

Answer 3

There are three requirements:

1. The transferee must have possession, and
2. the instrument must be payable either to bearer or to the person in possession.
3. The instrument must be free of forgeries of those necessary to the chain of title.

Question 4

How does a “holder” become one in “due course”?

Answer 4

An HDC is one who takes the instrument:

1. For value;
2. In good faith; and
3. Without notice that:
   
   1. The instrument is overdue or has been dishonored, of there is an uncured default with respect to payment of another instrument issued as part of the same series;
   2. The instrument contains an unauthorized signature or has been altered;
   3. There is a claim to the instrument; or
   4. Any party has a defense or claim in recoupment (a claim that reduces the amount payable) on the instrument

Question 5

What constitutes “value”?

Answer 5

1. performance of the agreed consideration;
2. acquisition by the holder of a lien or a security interest in the instrument other than a lien obtained by judicial proceeding;
3. taking the instrument as payment of or security for an antecedent debt;
4. trading a negotiable instrument for another instrument; or
5. giving the instrument in exchange for the incurring of an irrevocable obligation to a third party by the person taking the instrument

Question 6

Is an executory promise “value”?

Answer 6

No. an executory promise (promise to give value in the future) is NOT value unless it is an irrevocable obligation to a third party

Question 7

Is an antecedent debt “value”?

Answer 7

Yes. Taking an instrument in payment of or as collateral for a preexisting indebtedness amounts to the giving of value

Question 8

Does the value given need to be equivalent to face amount?

Answer 8

No. An instrument purchased for less than its face value is said to be purchased “at a discount”

Question 9

What if one pays less than the agreed-upon value?

Answer 9

That person will become a partial HDC in proportion to the percentage of the value paid.

Question 10

Is the time when value is given important?

Answer 10

Yes, because whether one takes an instrument in good faith and without notice is measured at the time the instrument is negotiated OR at the time value is given; whichever is later

Question 11

What does good faith mean?

Answer 11

It means honesty in fact and the observance of reasonable commercial standards of fair dealing.

Question 12

How is honesty in fact measured?

Answer 12

It is subjective (that is what the actor actually believed) NOT a reasonable person standard.

Question 13

How is the standard of fair dealing measured?

Answer 13

It is objective, the actor must proceed fairly in light of the facts and commercial standards

Question 14

What constitutes notice?

Answer 14

It can be actual knowledge (a subjective standard) and reason to know from the facts surrounding the transaction (an objective standard)

Question 15

The purchaser has notice that an instrument is overdue if she has reason to know…

Answer 15

1. Any part of the principal amount is overdue or there is an uncured default in payment of another instrument in the same series;
2. acceleration of the instrument has been made;
3. demand has been made or more than a reasonable time has elapsed after issue (a check becomes overdue 90 days after its date)

Question 16

What is a claim to the instrument?

Answer 16

A claim is a defense to the obligation of payment. Thus, the holder cannot have notice that another has a property or possessory right in the instrument or its proceeds

Question 17

When and how must notice be received?

Answer 17

To be effective, notice must be received at such time and in such manner as to give a reasonable opportunity to act on it.

Question 18

What are facts that do NOT constitute notice?

Answer 18

• Date or lack thereof;
• executory promise;
• accommodation party;
• incomplete instrument;
• fiduciary negotiated;
• default on interest or other instrument;
• public filing/recording;
• puchase at a discount;
• notice of discharge of a party

Question 19

What transactions automatically preclude HDC status?

Answer 19

Where an instrument is taken by:

1. Legal process or purchase at a creditor’s sale or similar proceeding;
2. Acquiring it as a successor in interest to an estate or other organization; or
3. Purchasing it as part of a bulk transaction not in the regular course of business

Question 20

At what point/time is HDC status determined?

Answer 20

Whether a holder qualifies as an HDC is an issue determined at the moment the instrument is negotiated to the holder AND she gives value therefor, whichever occurs later

Question 21

What is the shelter rule?

Answer 21

A transferee will acquire whatever rights her transferor had. Subject to the fraud/illegality exceptions, this rule allows any transferee to “step into the shoes” of the HDC who formerly held the instrument and to obtain the rights of an HDC, even though she doesn’t meet the other requirements.

Question 22

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