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Limit Holder in Due Course Status

28. Can you limit holder in due course status?

In some situations, it is possible for the issuer of a note to limit the ability of anyone to whom the note is transferred to become a holder in due course. The Federal Trade Commission allows such a limitation for notes used in sales of goods. The note must have the proper language in the legend or footnoted that the paper may be subject to applicable defenses and a possessor is not a holder in due course. This action preserves the ability of the maker of the note to assert any defenses to payment (particularly those arising in the underlying agreement) against a later transferee of the note.

•    Note: This is generally not available for drafts.

•    Discussion: Why do you think the FTC allows for the limitation of HDC status? Do you think that placing a legend is sufficient to protect the interests of a purchaser of an instrument? Why or why not?

•    Practice Question: Carrie is the issuer of a note used to pay for commercial goods. She is not certain about the contract and wants to limit the note being negotiated to a holder in due course. What are her options?

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