How does a transferee qualify as a HOLDER IN DUE COURSE?

Question 1

A holder in due course (HDC) is a holder who takes the instrument–

• 3 factors to get HDC
• 2 exceptions where you can never get HDC

Answer 1

1- for value; and
2- in good faith; and
3- w/o notice that it is overdue OR has been dishonored OR is subject to any defense or claim [aka w/o notice of a problem w/ the instrument]

EXCEPTIONS-
Even though the holder ma satisfy the requirements that he take for value, in good faith, and w/o notice, he still does not become a HDC of an instrument if he
- (i)purchased it at judicial sale or took it under legal process;
- (ii) acquires the instrument in taking over an estate; or
- (iii) purchases the instrument as part of a bulk transaction not in the regular course of business of the transferor
- BUT remember shelter rule may save them!!

Question 2

Article 3 “Value” differs from Contract “Consideration” in 2 important ways:

Answer 2

1- a mere promise is NOT value
ex- Mike Piazza indorses and delivers his paycheck to Roger Clemens. In return, Roger promises not to pitch at Mike’s head for the next year. –> not value, Roger could never qualify as a HDC

2- old value is good value
ex- Carrie indorses and delivers her paycheck to Aidan, to pay him for the furniture that he made for her last year. –> Aidan have given value and could possibly be a HDC

Question 3

Def: Good Faith

Answer 3

Good faith means honesty in fact

this is a SUBJECTIVE test, sometimes referred to as the rule of the pure heart and the empty head

Question 4

What does it mean to say a holder takes “without notice” ??

Answer 4

The holder must acquire the instrument without notice that it is overdue, has been dishonored or is subject to any defense or claim. The notice requirement imposes an OBJECTIVE test. It asks, did the holder KNOW OR HAVE REASON TO KNOW that there was a problem with the instrument?

Question 5

Notice that fiduciary has negotiated the isntrument in breach of his or her fiduciary duty?

ex- John Doe buys a speedboat for his personal use. He pays Dealer by indorsing and delivering to
Dealer a check payable to John Doe, Pitt, Damon LLP. Could dealer qualify as a holder in due course?

Answer 5

YES– if dealer DID NOT ACTUALLY KNOW of the breach. THIS IS THE ONLY TIME THAT THE STANDARD IS ONE OF ACTUAL KNOWLEDGE! DOESN’T MATTER THAT DEALER HAD REASON TO KNOW THERE WAS A PROBLEM!

Question 6

The Holder in Due Course & the Shelter Rule

Answer 6

ROL- a transferee acquires whatever rights her transferor had. In other words, the transferee takes shelter in the status of her transferor.

• This rule allows a transferee “to step into the shoes” of a HDC transferor, even though she otherwise clearly fails to meet the requirements of due course holding. Thus, transferee has all the rights of a HDC even though transferee is a donee (no value), or otherwise fails to qualify (no good faith or had notice of a problem)