Limit Holder in Due Course Status - Explained
Signaling Limits to Others
Written by Jason Gordon
Updated at September 26th, 2021
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Table of Contents
Can you limit holder in due course status?Discussion QuestionPractice QuestionAcademic ResearchCan 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.
Next Article: Personal Defenses to a Negotiable Instrument Back to: COMMERCIAL PAPER
Related Topics
- 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?
Discussion Question
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?