why do holders in due course not have personal defense

The policy of the law of commercial paper requires that a purchaser (holder in due course) be unaffected by any defenses between the immediate parties; but the policy of the law in other fields runs at times counter to those considerations and exerts a pressure that causes the negotiable principle to yield.

Full Answer

What are the defenses to the holder in due course rule?

Holder in Due Course Is Not Subject to Personal Defenses. An HDC is not subject to the obligor’s personal defenses In negotiable-instrument law, defenses that are not good against a holder in due course.. But a holder who is not an HDC is subject to them: he takes a negotiable instrument subject to the possible personal claims and defenses of numerous people.

What is a holder in due course status?

This concept of holder in due course can be translated into real-world situations. According to the Uniform Commercial Code (UCC), the holder in due course is the current owner. They have the right to sue for monetary damages in their own name. A common situation when this occurs is when a holder is in charge of collecting a third-party check for the issuance of payment. …

Can a payee be a holder in due course?

The fact that an instrument is not supported by a consideration is no defense against a holder in due course. A person who as a holder in due course acquires an instrument may assume that it is supported by a consideration, and that defense, though it might have been successfully interposed against the original party to the transaction, cannot be interposed as against …

What are personal defenses to avoid payment to an ordinary holder?

Public filing or recording of a document does not of itself constitute notice of a defense, claim in recoupment, or claim to the instrument. (c) Except to the extent a transferor or predecessor in interest has rights as a holder in due course, a person does not acquire rights of a holder in due course of an instrument taken (i) by legal process or by purchase in an execution, bankruptcy, …

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 the requirement of a holder in due course?

One of the requirements of the holder in due course is that the instrument must be taken for value. This means that the transfer of the document must have been for its value. In contrast, it cannot be accepted as a gift. There are five different methods in which the holder in due course can accept the document as a source of value:

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 ...

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.

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 there be evidence of additional ownership claims?

There cannot be any evidence of additional ownership claims.

What is a defense of payment before an instrument is overdue?

A defense of payment before an instrument is overdue is a personal defense only and not good against a holder in due course.

What happens if an agent purports to bind his principal upon paper which the payee knows he

If an agent purports to bind his principal upon paper which the payee knows he has no authority to bind his principal upon , a holder in due course has generally no right to hold such principal.

What happens if a partner binds a partnership?

If a partner purports to bind the partnership upon negotiable paper and lacks real or apparent power to do so, a holder in due course (ignorant of the lack of authority in the specific instance) may hold the partners if it is a trading concern, and if not a trading concern may hold the partners if a course of trade has been established on which in the specific instance the holder relies.

What is the lack of authority of an agent known to payee?

Lack Of Authority Of Agent Known To Payee. If an agent purports to bind his principal upon paper which the payee knows he has no authority to bind his principal upon, a holder in due course has generally no right to hold such principal.

What is the rule of agency?

As a general rule of the law of agency, a person is not bound by the act of another unless he assents to be bound either by prior authorization or subsequent ratification; or unless he has apparently assented by what he has done or said. If an agent have actual or apparent power to bind his principal upon negotiable paper, as far as the immediate party is concerned, certainly in that case, no right would be lost by transfer to a holder in due course. If as to the immediate party there is no representation by the principal of authority in the agent, so that such party could not hold the principal, generally a holder in due course could not hold the principal.

What happens if a person is led into a bargain by fraudulent representations?

If a person has been led into a bargain by fraudulent representations, which would entitle him to avoid the contract and defend against the payment of any instrument therein as far as the right of the other party to the contract is concerned, a transfer to a holder in due course cuts off such defense.

Can a defense be interposed against the original party?

A person who as a holder in due course acquires an instrument may assume that it is supported by a consideration, and that defense, though it might have been successfully interposed against the original party to the transaction, cannot be interposed as against him.111

What happens if a payee is a holder in due course?

A Payee Who Is A Holder in Due Course May Be Subject to Personal Defenses Arising from Unauthorized Acts or Promises by an Agent

What is terns in due course?

terns wherein a payee may be a holder in due course. As the Cases. indicate, factual similarity to the comment two hypothetical situations. is but the beginning of the inquiry for determining if a payee who is a. holder in due course has "dealt with" the obligor.

What is a person in Section 1 201(30)?

7. Section 1-201(30) defines "person" as including an individual or an organiza-. tion. "Organization" includes a corporation, government or governmental subdivision. or agency, business trust, estate, trust, partnership or association, two or more persons.

What is a party as a debtor?

party as a debtor, or an obligor-one who promises or engages to per-

What does dealer mean in a national concern?

dealer or a national concern generally involves "dealing with" another

Do third parties have to deal with another's property?

While third parties are not required to " deal with " another's

Is a trustee a fiduciary?

comment a. Trustees, executors, and guardians are fiduciaries but not agents if they

What is personal defense?

Personal defenses will protect the defending party from payment to ordinary holders, but which will not penetrate the rights of a holder in due course (HDC). In other words, personal defenses will often protect the defender from the first party to hold a negotiable instrument after it is issued, but if that instrument is then transferred ...

Why would a maker claim that the other party broke the warranty?

A maker or issuer of a negotiable instrument could claim that the other party broke warranty in some fashion in order to avoid making a payment on the negotiable instrument involved.

What happens when you void a voidable negotiable instrument?

When one of the involved parties chooses to void such a voidable negotiable instrument, then it would be the equivalent of mounting a personal defense against claims to payment on that instrument, instead of a universal defense against such claims. Doing so would not protect against claims from an HDC, however.

What happens if the seller has already deposited a negotiable instrument with a bank?

Of course, if the seller had already deposited the negotiable instrument with a bank, for example, then that bank would likely have holder in due course status and the buyer would still have to pay off the instrument. This is because lack of consideration will not protect the defending party from needing to pay to an HDC.

What is the defense of a negotiable instrument?

This type of defense is also referred to as fraud in the inducement, or ordinary fraud. A defending party can mount this defense if he or she issues a negotiable instrument based on false or fraudulent information given to him or her by the receiving party. For example, if one party is selling a car to another and claims that the car is like new and has very few miles on its odometer, then the buying party may issue a negotiable instrument based on that information.

What is voidable in law?

A voidable item, on the other hand, is void only at the discretion of one of the involved parties.

What is lack of consideration?

A lack of consideration might also involve a situation in which the consideration offered by one party becomes unavailable for some reason. For example, if the seller’s goods never actually reach the buyer, perhaps because they are stolen along the way, or the boat they are being shipped on sinks, then the buyer would have a defense under lack of consideration to avoid paying the negotiable instrument he or she had offered to the seller.

What chapter is defenses against holder in due course?

prev: Chapter 12. Defenses Against Holder In Due Course. A. Defenses Not Available Against Holder In Due Course-Personal Defenses

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 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.

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 the policy of commercial paper?

The policy of the law of commercial paper requires that a purchaser (holder in due course) be unaffected by any defenses between the immediate parties; but the policy of the law in other fields runs at times counter to those considerations and exerts a pressure that causes the negotiable principle to yield. In this chapter the so-called real ...

What happens if a statute declares an instrument void?

If the statute declares the instrument void, it becomes so to all purposes and can give no rights to any one. The chief case in which an instrument is declared void as to everyone is the case of an instrument executed as a part of a gambling transaction.123

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;

Why is being a holder in due course important?

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. These requirements are mostly there so as to prevent the status of being a holder in due course from being overly abused by parties seeking to perpetrate fraud and protect themselves from any lawsuits or defenses.

What is the purpose of the holder in due course doctrine?

The holder in due course (HDC) doctrine is designed to protect holders from culpability in situations where they performed no wrongdoing, but might be affected by another party’s attempt at a defense because they hold the negotiable instruments being contested. But HDC doctrine has been violated a number of times, as it has been turned to fraudulent purposes.

What is the requirement for a holder in due course?

A further requirement for gaining status as a holder in due course is that the current holder must have taken the negotiable instrument without notice as to any of the myriad forms of wrongdoing or warning that might have clued that holder in to the fact that the negotiable instrument was not fully supported or was inauthentic.

What is a holder in due course?

Another requirement for being considered a holder in due course under commercial law is that the holder must have taken the negotiable instrument in good faith. This is one of the more important requirements for being considered a holder in due course, not in the sense of legality, but in the sense of the intent of HDC doctrine.

What is the requirement for a given holder to be deemed a holder in due course?

One of the requirements for a given holder to be deemed a holder in due course is for he or she to have taken the negotiable instrument in question for value, instead of as a gift or otherwise without making equal compensation to the party from which the holder received the negotiable instrument.

Why would banks have acquired promissory notes in good faith?

Because the banks, then, would have acquired those promissory notes in good faith and would fulfill all the other important elements of being holders in due course, they would be protected when the low-income customers would be unable to pay off those debts. Even if those low-income customers attempted a defense based on the fact ...

Can a party take a negotiable instrument in good faith?

A party cannot have taken the negotiable instrument in good faith if that party has strong reason to suspect that the negotiable instrument has somehow been made inauthentic or manipulated illegitimately. For instance, if the would-be holder perceives that the instrument has a seemingly forged signature, then that would-be holder has a duty not ...