Next Article: Forged Negotiable Instrument – Holder Status
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What are the rights of a holder in due course if the underlying transaction is a consumer transaction?
There is a broad exception to the heightened rights afforded a holder in due course if the instrument is issued pursuant to a consumer transaction. This situation generally arises when a consumer of a good signs a note promising to pay the debt arising from purchase of the good. It may not be fair to force a consumer who writes a note to have to pay a third-party, holder in due course if the underlying contract is breached. As such, the Federal Trade Commission and some states require consumer credit contracts (and sometimes consumer promissory notes) to contain the designation “consumer paper”. This designation makes the instrument non-negotiable. As such, no one can be a holder in due course under the UCC.
• Note: If the language is omitted, a holder of the note can be an HDC, but the original seller of the note can be subject to fine.
• Discussion: Do you agree with granting an exception to negotiability of consumer paper? Do you think the label, “consumer paper” is sufficient notice to a holder that the paper is non-negotiable?
• Practice Question: Carter owns a store selling personal lawn equipment. Winston purchases a lawn mower for his personal use. He signs a promissory note as consideration for the mower. Carter wants to liquidate some of his accounts receivable and sell the promissory note from Winston. Can you explain to him the rules that apply in this situation?