Legal Definitions - due course, payment in

Payment in Due Course

"Payment in due course" refers to the act of settling a debt represented by a formal financial document, such as a check or a promissory note, under specific conditions. For a payment to be considered "in due course," it must be made at or after the date the payment is due, to the person who legally holds the document, and the person making the payment must do so honestly and without knowing of any reason why the holder shouldn't be paid. When these conditions are met, the debt is fully satisfied, and the financial document is no longer valid for demanding further payment.

Here are some examples to illustrate this concept:

• Example 1: Rent Check

  Maria writes a check for her monthly rent, due on the 1st, to her landlord, Mr. Rodriguez. Mr. Rodriguez deposits the check on the 5th, and the funds are successfully transferred from Maria's account to his. Maria made the payment to the rightful holder (Mr. Rodriguez) after the due date, and she had no reason to believe Mr. Rodriguez was not entitled to the rent. This transaction is considered a payment in due course, fulfilling Maria's rental obligation for that month.

• Example 2: Business Loan Repayment

  A small business, "GreenTech Solutions," borrowed $100,000 from "Community Bank" and issued a promissory note stating the full amount, including interest, was due on June 30th. On July 3rd, GreenTech Solutions electronically transfers the full amount to Community Bank's account. Community Bank is the original lender and the legitimate holder of the promissory note. GreenTech Solutions made the payment after the maturity date, in good faith, and without any knowledge of issues regarding Community Bank's right to receive the money. This payment is in due course and extinguishes the promissory note.

• Example 3: International Trade Bill of Exchange

  An Australian company, "Outback Exports," ships goods to a buyer in Canada, "Maple Leaf Imports," and draws a bill of exchange on Maple Leaf Imports, payable in 90 days to "Global Trade Finance Bank" (who provided financing for the transaction). On the 90th day, Maple Leaf Imports transfers the agreed amount to Global Trade Finance Bank. Global Trade Finance Bank is the legitimate holder of the bill of exchange, and Maple Leaf Imports makes the payment on the due date, believing Global Trade Finance Bank is entitled to the funds. This constitutes payment in due course, fulfilling Maple Leaf Imports' obligation under the bill of exchange.