Also known as: holder in due course status · HDC status · holder in due course · HDC
Written by attorneys · grounded in primary & secondary sources — see below
A status under Article 3 of the Uniform Commercial Code conferred on a holder of a negotiable instrument who takes the instrument for value, in good faith, and without notice of claims or defenses. The status entitles the holder to enforce the instrument free of most personal defenses and to take priority over earlier security interests even if perfected.
Hazel Hoffman purchased a negotiable promissory note from a municipal contractor through an online platform. She paid full face value by wire transfer on the same day and had no prior dealings with the contractor or its secured lender. When the city later faced competing claims, Hoffman's status allowed her to collect the full amount free of the lender's perfected security interest in the contractor's accounts.
Hector Hernandez bought a promissory note from a seller of home appliances under a financing arrangement. The finance company that later sought to enforce the note had supplied the contract forms and maintained an ongoing relationship with the seller. Because of that close connection, the court held that the finance company could not claim holder-in-due-course status and remained subject to the buyer's defense of failure of consideration.
Select any source to read its text and confirm it supports the definition.
Article 9 does not limit the rights of a holder in due course of a negotiable instrument. The holder takes priority over an earlier security interest even if perfected. Filing of a financing statement does not constitute notice to the holder.
Supporting sources
If the instrument contains a statement required by law that the rights of a holder are subject to claims or defenses the issuer could assert against the original payee, there cannot be a holder in due course of that instrument.
Supporting sources
An obligor may assert against a person without holder-in-due-course status any defense, claim in recoupment, or claim to the instrument of another person if that person is joined in the action. The obligor is not obliged to pay if the instrument is lost or stolen and the person seeking enforcement lacks holder-in-due-course rights.
Supporting sources
…N. J. S. 12A:3-306(c). In the field of negotiable instruments, good faith is a broad concept. The basic philosophy of the holder in due course status is to encourage free negotiability of commercial paper by removing certain anxieties of one who takes the paper as an innocent purchaser knowing no reason why the paper is not as sound as…