Also known as: holder in due course status · HDC status · holder in due course · HDC
Written by attorneys — see sources 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.
In November 1962, Jean Owen responded to a newspaper advertisement by Universal Stereo Corporation offering 140 stereophonic record albums for $698 on installment, with a free Motorola stereo record player. A representative visited the Owens' home, and on November 6, 1962, Mr. and Mrs. Owen signed a retail installment contract for the albums and player, along with a promissory note for the time balance of $819.72 payable in 36 monthly installments of $22.77 to Universal Stereo Corporation. The contract and note were assigned and endorsed to Unico, a New Jersey partnership formed specifically to finance Universal Stereo Corporation's sales. Under their August 24, 1962 agreement, Unico provided financing secured by assignment of customer contracts and notes, imposed credit standards, required recording of contracts, and exercised significant control over Universal's operations, including the right to inspect records and deal directly with customers upon default. Owen received the record player and the initial 12 albums but no further deliveries despite continued payments for 12 months totaling $303.24 with the $30 deposit. When Universal became insolvent and ceased deliveries, Mrs. Owen stopped payments. In July 1964, Unico's attorney contacted the Owens demanding payment on the note. The District Court entered judgment for Owen after finding Unico was not a holder in due course of the note. The Appellate Division affirmed, and the Supreme Court of New Jersey granted certification to review the matter.
View caseArticle 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.
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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.
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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.
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