Holders in Due Course Flashcards
*Basic idea
if a negotiable instrument is negotiated to a holder in due course, the HDC takes free of most defenses.
Determining who is HDC is thus an important process.
Two-step process:
(1) Is the person a holder (see prior deck)?
(2) is the person a holder in due course?
Holder
[see prior slide deck]
person in possession of the instrument with the right to enforce it.
Instrument must be payable to bearer or to the person in possession and free of forgery.
*Holder Due Course Requirements
*memorize
Holder must take:
(i) for value;
(ii) in good faith; and
(iii) without notice
*Value:
What constitutes value?
- performance of agreed consideration
- acquisition by the holder of a lien or a security interest in the instrument (other than a judicial lien)
- taking the instrument as payment of or security for an antecedent debt
- trading a negotiable instrument for another negotiable instrument
- giving the instrument in exchange for incurring an irrevocable obligation to a third person by the person taking the instrument
- executory promise (promise whose terms will be filled in future) is not “value” unless it is an irrevocable obligation to a third party.
Value:
Amount Paid
Value given in exchange for instrument need not be equivalent to the face amount of the instrument
Purchase at a discount: instrument purchased at a discount (e.g. $1k promissory note purchased for $900) is sold for full value as long as the full price agreed upon has been given. (e.g. purchaser would be holder in due course for full value: $1k)
vs.
Partial Failure of Consideration: if holder pays only part of what he agrees to pay (e.g pays $450 for agreed upon price of $900 for $1k promissory note), then he is a HDC only in proportion to the consideration paid and the amount on instrument (e.g. purchaser would be holder in due course for value of $500- half of the instrument since he paid half consideration)
Value:
Bank Deposits
bank becomes holder for value to the extent that it:
(i) permits withdrawals of the amount credited to depositor’s account (“using first money in, first money out rule);
(ii) applies the instrument to cover an overdraft or previous advance against the instrument; or
(iii) makes the credit from the deposit of the instrument available to the consumer for withdrawal.
*Good Faith
honesty in fact (subjective test) and observance of reasonable commercial standards (objective test)
*Without Notice
Notice includes both actual notice and constructive notice
Without Notice:
Facts Constituting Notice
- instrument overdue if: (i) any part of the principal is overdue, (ii) an acceleration has been made, or (iii) more than a reasonable amount of time has expired since the issue of a demand instrument (for checks, 90 days)
- known unauthorized signature or alteration
- known claims to the instrument
- notice of defenses or claims in recoupment
Without Notice:
Facts Not Constituting Notice
- instrument is antedated, post-dated, or undated
- instrument was issued in return for executory promise, unless the purchaser has notice that a defense or claim has arisen from the terms thereof
- any party signed for accommodation
- an incomplete instrument has been completed, unless the purchaser has notice of improper completion
- there has been a default in the payment of interest
- instrument was sold at discount
Transactions Precluding HDC Status
holder does not become HDC of an instrument taken by:
(a) legal process or purchase at a judicial sale
(b) acquiring it as a successor in interest to an estate or other organization
(c) purchasing it as part of a bulk transaction not in the regular course of business of the transactor
Time at which HDC Status Is Determined
Determined at the moment the instrument is negotiated to the holder or when she gives value, whichever occurs later.
Payees as HDCs
payee might qualify as holder in due course, but generally is subject to a drawer or maker’s defenses because the payee has dealt with the drawer or maker.
*Successors to HDCs:
Shelter Rule
a transferee acquires whatever rights her transferor had and thus is said to take “shelter” in the status of her transferor.
Exception: No HDC given to persons who were parties to fraud or illegality affecting the instrument
Successors to HDCs:
HDC Rights and Remote Transferees
once a person qualifies as an HDC, all subsequent transferees will acquire the same HDC rights, unless they are transferees after the holder failed to obtain HDC rights because she was a party to fraud or illegality.
