Holders & Holders in Due Course

Looks like Article 3 is fair game for the October 13th Florida Bar Exam. It has shown up rarely on the exam and when it has it's been important to understand (among some other topics) the topics of negotiability as well as "holder in due course" status. 

Although every holder in due course is a holder, not ever holder is a holder in due course. 

A holder is a person in possession of an instrument with the right to enforce the instrument. For a person to qualify as a holder, there must be a transfer to that person that qualifies as a negotiation. And so determining whether a person is a holder requires determining whether the instrument transferred to that person was negotiable. And, like so much else, there are elements.

For an instrument to be negotiable requires that it's signed and in writing. Further, there must be a promise or order to pay a fixed amount of money that is either payable to order or payable to bearer. It must be payable on demand or at a definite time and it must not state any unauthorized undertaking or instruction by the person promising or ordering payment. 

You'll want to memorize these elements. In doing so you can then determine whether the instrument is negotiable. If it is and it's negotiated (transferred) to another, the other will become a holder of the instrument.  There are nuances to each of these elements but one to especially keep in mind is the requirement that the instrument state a fixed amount of money. Requiring payment in something other than money (even if stated in the alternative such as "$30,000 or the keys to my new car") will render the instrument non-negotiable.

Once you've determined that a negotiable instrument has been negotiated to a holder of the instrument, the next step is to determine if that holder is a holder in due course. "Due course" requires that the holder take the instrument for value, in good faith, and without notice. 

Value: Any of the following will constitute value: performance of agreed consideration; acquisition by the holder of a lien or a security interest in the instrument (other than a judicial lien); taking the instrument as payment of or security for an antecedent debt; trading a negotiable instrument for another negotiable instrument; or giving the instrument in exchange for incurring an irrevocable obligation to a third-party.

Good faith: To be a holder in due course, the holder must take the instrument in good faith which means honesty in fact (a subjective rather than an objective test) with observance to reasonable commercial standards (an objective test).

Notice: For "due course" status, the holder must purchase the instrument without notice (actual notice or reason to know) that the instrument is overdue or that there are unauthorized signatures or alterations on the instrument. In addition, there must be no notice as to other claims on the instrument or as to defenses that might be raised regarding payment (infancy, duress, etc.). 

It's essential to understand the significance of "holder in due course" status. A holder in due course can enforce an instrument subject only to real defenses. In other words, a holder in due course need not worry about personal defenses. Simply put, it's easier for a holder in due course to collect. 

Whether an obligated party will be forced to pay depends on whether the holder of the instrument is a holder in due course. If the holder is not a holder in due course, the obligated party may assert any contract defenses to payment, both real and personal. But if the holder is a holder in due course, then the holder in due course will be shielded from those personal defenses; the obligated party will be limited to asserting real defenses only.