HOLDER IN DUE COURSE Holder in due course is a favored status, and the party obtaining that status is immune from most defenses that may be raised. Requirements for Holder-in-Due-Course Status. To become a holder-in-due course, the transferor of an instruments must satisfy two sets of requirements. Must have obtain the instrument through the process of negotiation. 3-201. Must satisfy the requirements of 3-302. Must take for value. What constitutes value. May transfer as a gift qualify as value? 3-303. Would consideration for contract always constitute value under 3-303? Promise must be performed. 3-303(a)(1). Would release from an existing claim constitute value? Under 3-303(a)(3). Must have taken the instrument in good faith. 3-302(a)(2)(ii). How is good faith defined, Compare 1-201(20) with 3-103(a)(6). Implicated in long term business relationship where financier purchases payment obligations created by its client-seller. Courts have ruled that the relationship is so close that financier acts in bad faith when it attempts to claim holder-in-due course status. Some courts rely on the “close connection” doctrine to rule that the parties are, in a sense, one and the same.

HOLDER IN DUE COURSE Holder must take without notice. Is notice different from knowledge? See 1-202. What must a party establish to prove that the alleged holder-in-due course has notice of to defeat the status. That the instrument is overdue or has been dishonored or that there is an uncured default. 3-302(a)(2)(iii). Without notice that instrument contains unauthorized signature or has been altered. 3-302(a)(2)(iv). Without notice that a party has a defense of claim n recoupment (contract claims) under 3-305(a).

HOLDER IN DUE COURSE Rights of Holder in Due Course The holder-in-due course take free of most defenses Under 3-305(a), a holder take subject to the defenses listed in that provision The holder-in-due course, on the other hand, under 3-305(b), takes free of substantially all of the defenses listed in 3-305(a). Except the “real defenses.” Infancy is the first real defense. 3-305(a)1)(i). The second real defense is duress, lack of legal capacity, or illegality of the transaction which, under other lall, nullifies the obligation of the obligor. 3-305(a)(1)(ii). The third real defense is that of fraud that induces the obligator to sign the instrument with niether knowledge nor reasoable opportunity to learn of its character or essential terms. 3-305(a)(1)(iii). The fourth real defense is that of discharge in insolvency proceedings. 3-305(a)(1)(iv). State Street Bank & Trust Co. Strawser. Payment and Discharge Defense of payment and discharge could potentially affect both the party claiming holder-in-due course status and the party claiming that they have either paid the obligation or has been discharged of the obligation. Under 3-305(a), a holder take subject to the defenses listed in that

HOLDER IN DUE COURSE Payment and Discharge Defense of payment and discharge could potentially affect both the party claiming holder-in-due course status and the party claiming that they have either paid the obligation or has been discharged of the obligation. For example, under an installment loan obligation, the maker will continue to make payment until the balance has been paid in full. Does the fact that a holder is aware that the installment debtor has continued to pay during the life of the loan prevent obtaining the holder-in-due course status? See 3-605(b)(2) Under 3-302(b) Does notice of discharge notice of a defense so that holder cannot become a holder-in-due course? Under 3-302(b), notice of discharge, other than in an insolvency proceeding, is not notice of a defense. Notice of a discharge is effective against a person who became a holder-in-due course with notice of the discharge. 3-302(b). Would a holder-in-due course without notice of discharge be bound by the discharge? Under 3-601(b), the answer is no. Transferee Without Holder-in-due Course Status May a party gain rights of a holder-in-due course without obtaining the status of a holder-in-due course. See 3-203.