Holder in Due Course - Receive Instrument in Good Faith
Unaware of any Defenses to the Instrument
Written by Jason Gordon
Updated at April 6th, 2023
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What does it mean to receive an instrument in good faith?
Receiving an instrument in good faith means acting in accordance with reasonable commercial standards and honesty in fact (no fraudulent intent in receiving the instrument). A holder must meet two tests to determine if good faith is present:
Subjective Test - Did the holder believe the transaction was completed without the intent to defraud or deceive?
Objective Test - Would a reasonable person believe the transaction to be commercially reasonable?
Note: The determination of good faith looks only at the recipient of the instrument in the transfer. The intent of the transferor is not considered in determining whether the recipient becomes a holder in due course. Some courts have held that a transferee lacks good faith when she is closely associated with the transferor.
Next Article: Holder in Due Course - Notice of a Valid Defense Back to: COMMERCIAL PAPER
Discussion Question
How do you feel about the good faith requirement for establishing HDC status? Do you think a subjective and objective test is adequate to identify good faith? Why or why not? Should the intent of the transferor be evaluated in this determination? Why or why not?
Practice Question
Darlene contracts with Gayle to provide design services. Darlene issues a promissory note to Gayle in the amount of $10,000 to pay for the services. Gayle owes about $1,500 to Martin. She transfers the instrument to Martin in full payment of her debt. Martin is aware that Gayle is not an honest business woman, but he accepts the promissory note. Gloria later leaves town without performing the services for Darlene. Martin presents the instrument for payment. What are Martins right to payment of the instrument? What are Darlene's rights?
Related Topics
- Commercial Paper (Intro)
- What is Commercial Paper?
- Negotiable Instrument
- What are the common types of commercial paper?
- Promissory Note
- Cashier's Check
- Convenience Check
- Certified Check
- Substitute Check
- Bill of Exchange
- Bank Draft Definition
- Sight Draft Definition
- Bankers Acceptance
- Who is a Holder of a negotiable instrument?
- Commercial Paper Funding Program
- What is Negotiability and why is it important?
- What is required for commercial paper to be negotiable?
- Sum Certain (Contracts)
- Inflation Adjustment Clause
- When does commercial paper contain an Unconditional promise to pay?
- Backup Line of Credit
- What is Payable on Demand or Payable on Time?
- What is Order Paper and Bearer Paper?
- Bearer Form
- How is a payee identified on the negotiable instrument?
- What rules does the court apply in determining negotiability?
- How is commercial paper negotiated to a holder?
- What is Transfer of a negotiable instrument?
- What is Indorsement of a negotiable instrument?
- What are the various types of indorsement?
- Bank Endorsement
- Blank Endorsement
- Accommodation Endorsement
- How does a holder receive payment on a negotiable instrument?
- Who is potentially liable on (or obligated to pay) a negotiable instrument?
- When is an individual liable for a representative signing a negotiable instrument?
- What rules apply if a holder loses a negotiable instrument?
- When is payment of a negotiable instrument overdue?
- What effect does a negotiable instrument have on the underlying obligation?
- What is a holder in due course?
- What are the requirements for a holder to become a holder in due course?
- Receive an instrument for value?
- Receive an instrument in good faith?
- Receive an instrument without notice of a valid defense?
- How does discharge of the Underlying Obligation affect a holder in due course?
- What is the Shelter Rule?
- Can you limit a transferee from becoming a holder in due course?
- Personal Defenses?
- Real Defenses?
- What is a Claim in Recoupment?
- What are the rights of a holder in due course if the instrument involves a consumer transaction?
- What happens if a negotiable instrument is Forged?
- What happens if a negotiable instrument is Stolen?
- Guaranty or Guarantee
- Letter of Guarantee
- Personal Guarantee
-
What is the role of a Guarantor or Surety of a negotiable instrument?
-
Surety
- Cosign
- Accommodation Paper Definition
- Secondary Liability
- Avalize Definition
- What is an Accord & Satisfaction?
- What is primary and secondary liability on an instrument?
- What is Drawer or Maker Liability for a negotiable instrument?
- What is Transferor Warranty of a negotiable instrument?
- What is Indorser Warranty of a negotiable instrument?
- What is Presentment Warranty of a negotiable instrument?
- What is a warrantors liability for a dishonored note or draft?
- What is the time limitation for warranty of a negotiable instrument?
- When are the warranties of a negotiable instrument discharged?
