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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.
• Discussion: 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 Martin’s right to payment of the instrument? What are Darlene’s rights?