Collecting Negotiable Instruments Business & Personal Law Chapter 34

Holder in Due Course (H.D.C.) special status preferred in collections can collect on an instrument even when certain defenses are asserted

Requirements for H.D.C. Must be: (1) a holder who takes an instrument (2) for value, (3) in good faith, and (4) without notice.

Value This means that there was some consideration given.

Good Faith The UCC requires “honesty in fact” in the transaction. Whether the holder took in good faith is determined at the time of the transaction.

Without Notice Holder cannot have notice of any claim (i.e. argument of person claiming the instrument), of any defense to the instrument (i.e. a reason not to pay it), that the instrument is overdue, that the instrument has been dishonored.

Without Notice (cont’d) Visible evidence of forgery, alteration, incompleteness, or irregularity defeat the “without notice” requirement.

Holder through a H.D.C. any holder who takes the instrument from a holder in due course acquires all the rights of the H.D.C.

Defenses Personal defenses are not valid against a H.D.C. Real defenses are valid against anyone, including a H.D.C.

Personal Defenses breach of contract failure of consideration lack of consideration fraud in the inducement lack of delivery payment

Real Defenses material alteration infancy illegality duress fraud as to the essential nature of the instrument bankruptcy unauthorized signature

FTC Consumer Rule abolished the HDC rule for consumer credit contracts Consumers can use all defenses available against the seller.

The End