HOLDERS AND HOLDERS IN DUE COURSE

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HOLDERS AND HOLDERS IN DUE COURSE
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HOLDERS

• Person who acquires paper by negotiation or who
  is otherwise a holder
• Paper drawn or issued to him or one in possession
  of a bearer instrument

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HOLDERS IN DUE COURSE

• Special holder of instrument
• Analogous to a buyer in the ordinary course of
  business
• HIDC takes the instrument free of most defenses
  and claims to it on the part of third parties

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HIDC - Requirements

• HOLDER for
• VALUE who takes the instrument in
• GOOD FAITH (objective) who has
• NO NOTICE that the instrument is overdue,
  dishonored or there is a defense or claim to it

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VALUE

• Cash
• Taking for a past debt or as security for a debt
• In exchange for a negotiable instrument
• Irrevocable commitment to a third party

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NOT VALUE

• Value only to the extent the agreed consideration
  has been paid
• E.g., to extent a depositor withdraws money from
  bank on a check (FIFO method used)
• Promise of future performance is not value

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NO NOTICE

• Holder cannot have notice the instrument is
  OVERDUE or has been DISHONORED
• Acceleration of instrument
• Principal is overdue (not just interest)
• Check - 30 days after issuance

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NO NOTICE

• Holder cannot have notice of a DEFENSE or CLAIM
  to the instrument by a third party
• Instrument has visible or obvious signs of
  forgery or material alteration
• Knowledge that the instrument has been stolen or
  maker is incapacitated

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Rights of a Holder in Due Course

• Holder in due course takes the instrument free of
  any PERSONAL defenses
• Holder in due course is subject to any REAL
  defenses

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Shelter Rule

• Holder who acquires instrument from an HIDC has
  rights of an HIDC since transferee acquires all
  rights of transferor
• Exception for laundering of instrument

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Real Defenses

• Infancy
• Incapacity where the contract is void
• Fraud in the execution
• Bankruptcy or other discharge holder has notice
  of
• Forgery
• Material alteration partial defense

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Personal Defenses

• Breach of contract or nonperformance of
  condition
• Defense where the contract is only voidable
• Fraud in the inducement misrepresentation that
  induces a party to enter into a contract
• Lack or failure of consideration
• Unauthorized completion of an instrument

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Exception to HIDC rules

• Consumer credit transactions under FTC rule
• FTC rule requires instruments given in
  connection with consumer credit transaction to
  contain notice preserving defenses against
  holders of the instrument
• Holders do not have rights of HIDC mere
  assignees