Holder In Due Course (HDC)

I.     General - A Holder in Due Course (HDC) is basically a highly refined type of bona fide purchaser who takes free of most defenses of prior parties to the instrument and free of conflicting title claims to the instrument itself.

II.         HDC Requirements - The following five conditions must be met:

            A.        He must be a Holder (as defined in UCC 1-201 (20))

            B.         Of a negotiable instrument who took it

            C.        For Value

            D.        In Good Faith

            E.         Without Notice that it:

                        1.         Was overdue

                        2.         Had been dishonored

                        3.         Is subject to any defenses or claim against it by anyone else.

III.   Holder Requirement - Only a holder can be an HDC, and a Holder must meet the two conditions set forth in UCC 1-201 (20).

A.    A Holder has certain rights - the important one being that it entitles the person so qualified to become an HDC.

            B.         A Holder must: per 10201  (20)

                        1.         Have possession

2.    Of an instrument . . . "drawn, issued or endorsed to him or to his order or to bearer or in blank."

IV.  Negotiable Instrument Requirements - per UCC 3-102 (1) (e) an instrument is defined, for Article 3 purposes, to be a "negotiable instrument"; and UCC 3-104 (1) defines a negotiable instrument to be a writing that:

            A.        Must be signed by the Maker or Drawer.  (see 1-201 (39) definition of "signed")

            B.         Is an unconditional promise.  (see UCC 3-1 or for exceptions)

            C.        Must be an order or direction to pay.

            D.        Must be a sum certain (see 3-106)

            E.         Must be payable either:

                        1.         On Demand (see UCC 3-108)

                        2.         At a definite time (see UCC 3-109)

            F.         Must be payable either:

                        1.         On order (see UCC 3-110)

                                                            or

                        2.         To Bearer (see UCC 3-111)

            G.        Must not contain anything else except what is listed above.

V.        Value Requirement - set forth in UCC 3-303

A.    Note:  Value as defined in UCC 3-303, 4-208, and 4-209 has a different meaning in Article 3 and 4 than it does in other UCC articles.

1.    Under 3-303, an executory promise is not itself value but under 1-201 (44), an executory promise constitutes value.

2.    Value and consideration are different, as a negotiable instrument needs consideration and lacking it may make it unenforceable.  But consideration not value as defined here for purposes of qualifying for and HDC status.

3.    "Value" is looked at only when one is determining if a holder qualifies for HDC status.

            B.         Per UCC 3-303, an HDC takes an instrument for value:

1.    To the extent that the agreed consideration has been performed, i.e. so if giving one-half of the consideration, the party would take for value one-half of the instrument.

                        2.         If he acquires a security interest in the instrument.

3.    If he acquires a lien on the instrument (except a lien acquired by law would not be valued as defined herein).

4.    If he took the instrument in payment or as security for a pre-existing claim against any person - whether or not the claim is due.

5.    When he gives a negotiable instrument for it or makes an irrevocable commitment to a third party, i.e. a check issued to another.

C.    Exceptions - There are special instrument for a purchaser held to be a SUCCESSOR TO A PRIOR HOLDER EVEN THOUGH HE PAYS FOR THE INSTRUMENT and is not considered to be an HDC as set forth in UCC 3-302 (3).  These exceptions apply when the holder does not qualify as an HDC, i.e.:

1.    Purchase of the instrument at a judicial sale (execution sale, bankruptcy or takes under a legal process).

                        2.         By acquiring it in taking over an estate i.e. administrator.

3.    By purchasing as part of a bulk transaction, i.e. corporation buys assets of predecessor.

4.    Note:  If some prior holder was an HDC, then the purchaser will also become an HDC as a matter of law.  Thus, these exceptions may not apply.

VI.       There are special rules where banks can become an HDC under UCC 4-208 and 4-209.