Holder In Due Course Meaning

A holder in due course is any person who holds a document such as a contract, promissory note, or bank check in good faith and in exchange for value.

Author: Brad Nakase, Attorney

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In commercial law, a holder, in due course, is the person who received a valuable document in a value-for-value exchange without reason to doubt that the terms of the document will be honored. The “holder” is simply the assignee who acquires the assignor’s rights in the document. A recipient of a document – a negotiable instrument – cannot become a holder in due course if she is aware that there are some valid defenses that the payor may assert against payment of the instrument.

What do eggs have to do with a holder in due course? See answer below.

In this article, our Los Angeles business attorney discusses holder in due course as follows:

1. What are required elements to be a holder in due course?

2. What is an example of a holder in due course?

3. How does a holder in due course work in real word situations?

To be a holder in due course, the person must satisfy the required elements:

The holder took the instrument;
The holder gave value in exchange for the document e.g. money.
The holder took the document in good faith,
The holder did not have notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series,
The holder did not have notice that the instrument contains an unauthorized signature or has been altered,
The holder did not have notice of any claim to the instrument described in Section 3-306, and (vi) without notice that any party has a defense or claim.

There cannot be any clear proof of forgery or unauthenticated action of the negotiable document, or instrument.

What is an example of a holder in due course?

Example 1: Bank of America loan Bobby $100,000 for a mortgage on a home; Bobby signs a promissory note to repay the $100,000. Bank of America then sold the promissory note (document) to Chase Bank. Bobby will need to repay the mortgage to Chase Bank. Chase Bank is the holder in due course.

Example 2: Sarah sold a car to Dan for $10,000. The parties signed a contract whereby Dan would make a $1,000 monthly payment. After the parties signed the contract, Sarah assigned the contract to her mother, Mrs. Mom, in exchange for a year’s supply of fresh eggs from her hens. Mrs. Mom is the holder in due course of the contract. Dan will need to make payments to Mrs. Mom.

How does a holder in due course work in real word situations?

Under the Uniform Commercial Code (UCC), the holder, in due course, has the right to sue for monetary damages in their name. A typical situation when this occurs is when a holder is in charge of collecting a third-party check for the issuance of payment.

Example 1: A bank may sell its rights to collect money from its customer who holds a credit card issued by the bank. The debt buyer is the holder in due course and sues the debtor for the money.

Example 2: Dr. Nelson has a patient who did not pay $10,000. Dr. Nelson sold the debt to Get Rich LLC for $100. Get Rich LLC then sues the patient in court because Get Rich is the holder in due course.

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