Legal Definitions - payment in due course

Payment in due course refers to a payment made by someone who owes money (the debtor) on a formal promise to pay (a negotiable instrument, such as a check or a promissory note). For a payment to be considered "in due course," it must meet specific conditions:

• It must be made to the person who legitimately holds the instrument and is entitled to receive the payment.
• It must be made on or after the date the payment is due (the maturity date).
• Crucially, the person making the payment must do so honestly (in "good faith") and without any knowledge or reason to believe that the person receiving the payment is not the rightful owner or does not have a valid claim to the money.

When a payment is made in due course, it legally fulfills the obligation represented by the negotiable instrument, and the instrument is considered discharged.

Examples:

• Scenario 1: Repaying a Personal Loan
  Maria borrowed $2,000 from her friend, Liam, and gave him a promissory note stating she would repay the full amount by October 1st. On October 5th, Maria writes a check for $2,000 payable to Liam and hands it to him. She has no reason to suspect that Liam is not the rightful owner of the promissory note or that he shouldn't receive the payment.

  Explanation: This is a payment in due course because Maria (the debtor) made the payment via a check (a negotiable instrument) to Liam (the legitimate holder of the promissory note) on October 5th (after the October 1st maturity date). She acted in good faith, believing Liam was entitled to the payment, and had no notice of any defect in his right to receive it. Her payment legally discharges the promissory note.

• Scenario 2: Business Invoice Payment
  "Tech Solutions Inc." owes its software vendor, "CodeCrafters LLC," $5,000 for a licensing fee. The invoice specifies that payment is due by November 30th. On November 30th, Tech Solutions Inc. issues an electronic payment (which functions similarly to a check in this context) for $5,000 directly to CodeCrafters LLC's bank account. Tech Solutions Inc. has always paid CodeCrafters LLC this way and has no information suggesting that CodeCrafters LLC is not the correct entity to receive the funds.

  Explanation: This constitutes a payment in due course. Tech Solutions Inc. (the debtor) made the payment (a form of negotiable instrument discharge) to CodeCrafters LLC (the legitimate holder) on the maturity date. They acted in good faith, assuming CodeCrafters LLC was the rightful recipient, and had no reason to suspect otherwise. The payment legally satisfies the debt for the software license.

• Scenario 3: Mortgage Installment
  Sarah has a mortgage loan from "First National Bank," which is documented by a promissory note. Her monthly mortgage payment of $1,500 is due on the 1st of each month. On December 2nd, Sarah makes her December payment through the bank's online portal. She has always made payments to First National Bank and has no reason to believe that any other entity is entitled to receive this payment.

  Explanation: Sarah's payment is a payment in due course. She (the debtor) made the payment (which discharges a portion of the promissory note) to First National Bank (the legitimate holder) on December 2nd (after the December 1st maturity date for that specific installment). She acted in good faith, believing First National Bank was the correct party to receive the payment, and had no notice of any defect in their right to collect. This payment legally satisfies her obligation for that month's installment.