Also known as: protected holders · holder in due course
Written by attorneys · grounded in primary & secondary sources — see below
A purchaser or holder of a negotiable instrument, document of title, or security who receives priority over an earlier security interest under the rules of Articles 3, 7, 8, or 12 of the Uniform Commercial Code.
Prairie Grain Co-op borrowed from Plains Bank and granted a perfected security interest in its warehouse receipts. The co-op later issued a negotiable warehouse receipt to a farmer who sold it for value to Harvest Commodities. Harvest took the receipt in good faith by due negotiation. When the co-op defaulted, Harvest claimed the grain represented by the receipt. Harvest prevails as a protected holder even though Plains Bank perfected first by filing.
Metro Skills Institute sold student promissory notes to Campus Funding under a forward flow agreement. Each note contained a required statutory statement that any holder took subject to claims the issuer could assert against the original payee. Campus Funding paid value and acted in good faith. Because of the statement on the notes, Campus Funding cannot qualify as a protected holder and remains subject to the issuer's defenses.
Select any source to read its text and confirm it supports the definition.
No. Article 9 expressly states that its priority rules do not limit the rights of a protected holder such as a holder in due course or a holder to whom a negotiable document of title has been duly negotiated. The protected holder takes priority over an earlier security interest, even if perfected.
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No. Filing under Article 9 does not constitute notice of a claim or defense to protected holders or purchasers. This rule preserves the free transferability of negotiable instruments and documents without requiring purchasers to search the filing records.
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The transferee must take the negotiable document by due negotiation, pay value, and act in good faith without knowledge of competing claims. Once these elements are met, the transferee qualifies as a protected holder whose rights prevail over an earlier perfected security interest.
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Yes. If the instrument contains a required statutory statement that the rights of a holder are subject to claims or defenses the issuer could assert against the original payee, the instrument cannot support holder-in-due-course status. The purchaser therefore cannot qualify as a protected holder.
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