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The holder in due course is a concept that refers to the party who holds an important, and often negotiable, document.3 min read

To understand how leverage works and what it has to do with the time value of money, let’s look at the example of three people who have $100,000 to invest in real estate. Person A bought a $100,000 investment property.

1. Overview of the Holder in Due Course Concept
2. Requirements for Being a Holder in Due Course
3. What Are the Different Ways of Taking for Value?

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.

Overview of the Holder in Due Course Concept

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.

In this role, the holder can treat the document, or instrument, as a source of money or payment method.

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.

However, the holder in due course is not always owed the assets. A person who unknowingly purchases a stolen car does not get the title to the car. There are some protections against this rule. In order to prevent poor credit practices, the Federal Trade Commission (FTC) does hold temporary retailers or lenders responsible for claims from the original buyer.

In summary, the FTC requires that the holder in due course honors all original warranties. They may not be required to issue monetary payment, but they are required to complete all warranty improvements and repairs.

Requirements for Being a Holder in Due Course

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.
• The document must have been accepted for its value.
• It must have been accepted in good faith.
• When accepted, the holder must not be aware of any default.
• It cannot have an unauthorized signature or have been altered in any way.
• There cannot be any evidence of additional ownership claims.
• There cannot be any current disagreements over it.

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These requirements prevent the instrument from becoming a tool of fraud.

What Are the Different Ways of Taking for Value?

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:

• 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.
• 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. 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.

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 and requirements they must follow to accept the instrument. If you need help with the holder in due course requirements, you can post your legal job on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

In commercial law, a holder in due course is someone who accepts 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. Even if one of these parties passed the instrument in bad faith or in a fraudulent transaction, a holder in due course may retain the right to enforce it.

=The rights of a holder in due course of a negotiable instrument are qualitatively, as matters of law, superior to those provided by ordinary species of contracts:

• The rights to payment are not subject to set-off, and do not rely on the validity of the underlying contract giving rise to the debt (for example if a cheque was drawn for payment for goods delivered but defective, the drawer is still liable on the cheque).
• No notice need be given to any party liable on the instrument for transfer of the rights under the instrument by negotiation. However, payment by the party liable to the person previously entitled to enforce the instrument 'counts' as payment on the note until adequate notice has been received by the liable party that a different party is to receive payments from then on. [U.C.C. §3-602(b)]
• Transfer free of equities—the holder in due course can hold better title than the party he obtains it from (as in the instance of negotiation of the instrument from a mere holder to a holder in due course)
• Negotiation often enables the transferee to become the party to the contract through a contract assignment (provided for explicitly or by operation of law) and to enforce the contract in the transferee-assignee’s own name. Negotiation can be affected by endorsement and delivery (order instruments), or by delivery alone (bearer instruments). In addition, the rights and obligations accruing to the transferee can be affected by the rule of derivative title, which does not allow a property owner to transfer rights in a piece of property greater than his own.

Limitations[edit]

The rule can be considered inequitable to consumers. As a response to this, the U.S. Federal Trade Commission promulgated Rule 433, formally known as the 'Trade Regulation Rule Concerning Preservation of Consumers' Claims and Defenses', which 'effectively abolished the [holder in due course] doctrine in consumer credit transactions'.^[1] In 2012, the FTC reaffirmed the regulation.^[2]

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References[edit]

1. ^Commercial Paper: Holder in Due Course & DefensesArchived 2012-11-28 at the Wayback Machine.
2. ^'FTC Opinion Letter Affirms Consumers' Rights under the Holder Rule'. web.archive.org. 2012-05-14. Retrieved 2019-05-22.

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