A holder in due course (HDC) is an individual who obtains a negotiable instrument through a value-for-value exchange, without any knowledge or suspicion that the instrument may be overdue, dishonored, or subject to any defenses or claims (Uniform Commercial Code (UCC) § 3-302).
Key Facts
- Definition: A holder in due course is someone who takes a negotiable instrument in a value-for-value exchange without reason to doubt that the instrument will be paid.
- Rights of a holder in due course: The rights of a holder in due course are qualitatively superior to those provided by ordinary contracts. These rights include:
- Payment rights not subject to set-off and not relying on the validity of the underlying contract.
- No notice requirement for transfer of rights under the instrument by negotiation.
- Transfer free of equities, allowing the holder in due course to hold better title than the party from whom they obtained the instrument.
- Ability to enforce the contract in the transferee-assignee’s own name through negotiation.
- Limitations: The rule of holder in due course can be considered inequitable to consumers. In response to this, the U.S. Federal Trade Commission promulgated a rule that effectively abolished the holder in due course doctrine in consumer credit transactions.
Rights of a Holder in Due Course
The rights of an HDC are superior to those of ordinary contract holders (UCC § 3-306). These rights include:
- Payment rights not subject to set-offHDCs are entitled to payment regardless of any defenses or claims that the issuer or previous holders may have against each other.
- No notice requirement for transfer of rightsHDCs do not need to notify any party liable on the instrument that they have acquired the rights under the instrument through negotiation.
- Transfer free of equitiesHDCs can hold better title to the instrument than the party from whom they obtained it.
- Enforcement in own nameHDCs can enforce the contract in their own name through negotiation.
Limitations
The HDC rule can be considered unfair to consumers. In response, the U.S. Federal Trade Commission (FTC) promulgated Rule 433, which effectively abolished the HDC doctrine in consumer credit transactions. The FTC reaffirmed this regulation in 2012.
Sources
FAQs
What is a holder in due course?
A holder in due course (HDC) is someone who takes a negotiable instrument in a value-for-value exchange without reason to doubt that the instrument will be paid.
What are the rights of a holder in due course?
The rights of a holder in due course are superior to those of ordinary contract holders. These rights include:
- Payment rights not subject to set-off
- No notice requirement for transfer of rights under the instrument by negotiation
- Transfer free of equities
- Ability to enforce the contract in the transferee-assignee’s own name
What are the limitations of the holder in due course rule?
The holder in due course rule can be considered inequitable to consumers. In response to this, the U.S. Federal Trade Commission promulgated a rule that effectively abolished the holder in due course doctrine in consumer credit transactions.
Who qualifies as a holder in due course?
To qualify as a holder in due course, a person must:
- Take the instrument for value
- Take the instrument in good faith
- Take the instrument without notice of any overdue, dishonored, or uncured default
- Take the instrument without notice of any unauthorized signature or alteration
- Take the instrument without notice of any claim to the instrument
- Take the instrument without notice of any defense or claim in recoupment
What is the purpose of the holder in due course rule?
The purpose of the holder in due course rule is to protect innocent purchasers of negotiable instruments. The rule encourages the free flow of commerce by making it easier for people to accept negotiable instruments as payment.
What are some examples of negotiable instruments?
Examples of negotiable instruments include checks, promissory notes, and drafts.
What are the defenses that can be asserted against a holder in due course?
There are few defenses that can be asserted against a holder in due course. These defenses include:
- Forgery
- Fraud in the execution
- Illegality
- Discharge in insolvency proceedings