Legal Definitions - due-course holder

The term due-course holder is an alternative name for a holder in due course. It refers to a person or entity that has acquired a negotiable instrument, such as a check, a promissory note, or a certificate of deposit, under specific conditions that grant them a special legal status and enhanced protections.

To qualify as a due-course holder, the party must meet several criteria:

• They must be in possession of the negotiable instrument.
• They must have given something of value for it (e.g., money, goods, services, or another promise).
• They must have acquired the instrument in good faith, meaning honestly and without knowledge of any problems.
• They must have acquired it without notice of any defects, such as the instrument being overdue, dishonored, forged, altered, or subject to any claims or defenses by another party.

The significance of being a due-course holder is that this status allows the holder to enforce the instrument against the original issuer or previous endorsers, even if those parties have certain defenses (like breach of contract or fraud) that they could have used against the person who originally transferred the instrument. Essentially, it protects innocent third parties who acquire these instruments in the normal course of business, promoting the free flow of commerce.

Examples:

• Example 1: Business Transaction with a Check

  Imagine Acme Construction writes a check for $5,000 to Supply Depot Inc. for building materials. Before depositing the check, Supply Depot Inc. uses it to pay a debt they owe to their advertising agency, Creative Marketing Solutions, by endorsing the check over to them. Creative Marketing Solutions accepts the check, believing it to be valid and having no knowledge of any issues between Acme Construction and Supply Depot Inc. If Acme Construction later discovers the building materials were defective and tries to stop payment on the check, Creative Marketing Solutions would likely be considered a due-course holder. Because they took the check for value (payment for advertising services), in good faith, and without notice of the dispute over the materials, they can still demand payment from Acme Construction, even though Acme Construction might have a valid defense against Supply Depot Inc.

• Example 2: Promissory Note for Equipment Purchase

  Tech Innovations LLC purchases specialized machinery from Industrial Gear Co. and, instead of paying cash, issues a promissory note for $50,000, promising to pay the amount in six months. Industrial Gear Co., needing immediate capital, sells this promissory note to Capital Finance Bank for $48,000. Capital Finance Bank reviews the note, sees no irregularities, and has no reason to suspect any problems with the machinery or the original transaction. Two months later, Tech Innovations LLC discovers a major defect in the machinery and wants to refuse payment. However, Capital Finance Bank, having acquired the note for value, in good faith, and without notice of the machinery defect, is a due-course holder. This status allows Capital Finance Bank to demand payment from Tech Innovations LLC, regardless of the dispute between Tech Innovations LLC and Industrial Gear Co. over the faulty equipment.