why do holders in due course have real defense

Because being a holder in due course offers a significant amount of protection from the actions of other parties in the chain of negotiations for a given negotiable instrument, there are a number of requirements which must be fulfilled in order for a party to qualify as a holder in due course.

Full Answer

What is a holder in due course?

The holder in due course is really the crux of the concept of commercial paper and the key to its success and importance. What the holder in due course gets is an instrument free of claims or defenses by previous possessors.

What are real defenses?

Real Defenses Defined A real defense is one good against any one whether holder in due course or not. There are some defenses good even against a holder in due course. They are called real defenses.

What does “in due course” mean?

What the holder in due course gets is an instrument free of claims or defenses by previous possessors. A holder with such a preferred position can then treat the instrument almost as money, free from the worry that someone might show up and prove it defective.

What are the defenses to a due course claim?

Holders in due course are not immune from all defenses. A real, as opposed to a personal, defense may be asserted against the HDC. Personal defenses include fraud in the inducement, failure of consideration, nonperformance of a condition precedent, and the like.

What are defenses to a holder in due course?

UCC Article 3 codifies the real defenses, listing them as (1) infancy, (2) duress, (3) legal incapacity, (4) illegality of the transaction, (5) fraud that induced the obligor to sign the instrument without knowledge of its character or essential terms (often called “fraud in the factum”), and (5) discharge in ...

Is a holder in due course immune to all defenses?

A holder in due course takes a negotiable instrument free of all defenses that could be asserted by any party to the instrument. As a general rule, a holder in due course takes a negotiable instrument subject to any claims that could be asserted to the instrument by any person.

What are real defenses and its importance?

A real defense is a justification for a maker or drawer not to honor a negotiable instrument even if it has been transferred to a holder in due course (or "HDC") because it makes the instrument “void” according to Uniform Commercial Code §3-305 comment 1, thus the defense can't be "cut off" by the transfer to an HDC.

What is the purpose of holder in due course status?

In commercial law, a holder in due course is someone who takes a negotiable instrument in a value-for-value exchange without reason to doubt its legitimacy. A holder in due course acquires the right to make a claim for the instrument's value against its originator and intermediate holders.

What is real defense in law?

Real defenses are good against any holder, including an HDC. These are infancy, void obligations, fraud in the execution, bankruptcy, discharge of which holder has notice, unauthorized signatures, and fraudulent alterations.

Which of the following defenses do not apply to holders in due course?

Does bankruptcy dismiss you from your debt? Personal defenses are defenses that can be used against a holder but no a holder in due course of a negotiable instrument. The most common personal defenses are breach of contract, failure or lack of consideration, fraud in the inducement, lack of delivery, and payment.

What are real defense examples?

Real defenses are good against any holder, including an HDC. These are infancy, void obligations, fraud in the execution, bankruptcy, discharge of which holder has notice, unauthorized signatures, and fraudulent alterations.

What is the difference between real defense and personal defense?

Certain defenses, known as real defenses, are valid against ordinary holders as well as holders in due course, whereas personal defenses are only valid against ordinary holders.

Which of the following is a real defense in a negotiable instrument?

-- To enumerate the categories of real defenses, they are: (1) forgery; (2) execution without authority; (3) a species of fraud, sometimes referred to as fraud in the execution or in the inception-akin to forgery; (4) some kinds of duress; (5) material alteration; (6) non-delivery of an incomplete instrument; (7) ...

What are the defenses that are limited if a holder of a negotiable instrument claims they are a holder in due course?

Duress, mental incapacity, or illegality that renders the obligation void (UCC, Section 3-305(a)) Fraud in the execution (UCC, Section 3-305(a)) Discharge of which the holder has notice when he takes the instrument (UCC, Section 3-601)

What is a holder in due course?

The holder in due course is a concept that refers to the party who holds an important, and often negotiable, document. This document is sometimes referred to as an instrument because it is often an instrument of payment. This might include a bank note, draft, or check. The holder is temporarily the owner of the document that holds value.

What is due course in law?

The holder in due course is in a unique position with protection against others. In order to prevent this power from becoming abusive; they are still required to follow these rules: There cannot be any clear proof of forgery or unauthenticated action of the negotiable document, or instrument.

What happens if one party accepts an instrument but does not complete their end of the deal?

If one party accepts the instrument but does not complete their end of the deal, they are not the true holder of the item. There are two exceptions to this executory promise rule: If the instrument is given in exchange for a negotiable item. If the instrument is transferred from an irrevocable obligation to a third party.

What happens if you transfer an instrument of payment to a third party?

If the instrument is transferred from an irrevocable obligation to a third party. Additionally, the holder in due course must accept the payment in good faith. If there is any evidence of fraud or foul play, the holder in due course should not accept the instrument of payment. The holder in due course has specific rules ...

Who is the holder of a document?

At some point, the document is negotiated and used as a useful commercial tool. The holder is referred to as the assignee. They are in possession of the assignor's rights and liabilities. The holder is in a very important role. They are responsible for the document that is free of claims from other owners.

Can a lien be accepted after accepting an instrument?

The holder in due course fulfilled a promise after accepting the instrument. The holder can also accept the instrument through means of a lien through a court ruling or bankruptcy sale. The holder could collect the instrument to eliminate preexisting debt.

Can a holder trade an instrument for another?

The holder could trade the instrument for another item of equal value. The holder can accept the instrument as an obligation to a third party. It is important to note that until both sides have fulfilled their obligations, the instrument is not considered to be of value.

What is a real defense?

A real defense is one good against any one whether holder in due course or not. There are some defenses good even against a holder in due course. They are called real defenses. They are, at least generally, defenses of an unusual character, not those going to the merits of a transaction, but rather to its nature as a legal act.

What is the uniform act?

The uniform act provides that where an instrument is altered and has come into the hands of a holder in due course , although the alteration is a good defense against him, he may yet recover on the instrument according to the original tenor. Sec. 94. Fraud Going To The Execution.

What is an alteration if it is not made with guilty intent?

If not made with guilty intent yet still purposely it is nevertheless an alteration and the maker cannot be made liable upon the instrument as changed. The alteration must be material in order to give the promissor any defense. The statute declares that "Any alteration which changes: 1. The date; 2.

Is personal incapacity to contract a defense?

Personal incapacity to contract is a defense good against any holder. An insane person117 or a minor118 can plead his defense against even a holder in due course. Sec. 92. Forgery. Forgery is a real defense. Very clearly a person can set up that an instrument sued on is not an instrument made by him or by his authority;

Is a gambling consideration void?

By statute in many jurisdictions it is declared that if an instrument is founded upon certain illegal considerations, as for instance, a gambling consideration, it shall be utterly void. In such cases the instrument is of no effect even in the hands of an innocent purchaser for value.

Can a holder of an altered instrument recover on it?

But a holder of an altered instrument may recover on it according to its original tenor. (1) Material alteration a real defense. If a material alteration is made with guilty intent, it amounts to a forgery, and the same rules apply as in the section above.