What is a holder in due course?

If certain conditions are met, a holder of a negotiable instrument may further elevate her rights to enforcement (receive payment) of the negotiable instrument. That is, the holder of a negotiable instrument is elevated to a higher status than that of a simple holder if she qualifies as a holder in due course (HDC).

Recap: As discussed above, the holder of an instrument is someone who possesses and is entitled to receive payment of an instrument. A holder may be the original recipient (issuee) of the instrument from the maker or drawer; or the issuee may transfer or negotiate the instrument to a third party who becomes holder. Recall that negotiation requires voluntary or involuntary transfer of the instrument and, if the instrument is order paper, indorsement by the payee. (A forger of paper cannot be a holder, while a thief of bearer paper can be a holder). An instrument is more valuable to the holder if it is negotiable.

What are the Benefits of Being a Holder in Due Course?

Qualifying as a holder in due course (HDC) makes the negotiable instrument more valuable to the holder, as a HDC has a stronger right to payment of the instrument than an ordinary holder. If a holder is not a HDC, her rights in the instrument are the same as the original payee of the instrument prior to transfer. That is, her right to payment of the instrument depends upon the relationship between the issuer and the original payee. Upon receipt of the instrument, she inherits the rights of the original payee along with whatever claims and defenses that the maker or drawer has against the original payee arising out of the contract. HDC status makes the holder immune from these defenses at the time of presenting the instrument. HDC benefits are as follows:

• The payor of the instrument is estopped (stopped from) denying the validity of the instrument or asserting any personal defenses to payment of the instrument.
• The instrument may be purged of any defects that are not apparent to the holder in due course.
• The holder in due course may assert her right to payment against any prior indorsers or immediate transferor of the instrument if the instrument is dishonored (not payed) upon presentment.
• Liability of transferors or indorsers of a negotiable instrument is discussed separately.

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?