Define: Holder In Due Course

A holder in due course refers to a person or entity who acquires a negotiable instrument, such as a promissory note or check, in good faith, for value, and without notice of any defects or problems with the instrument. In other words, a holder in due course is someone who takes possession of a negotiable instrument under circumstances that indicate they have a legitimate right to enforce it.

To qualify as a holder in due course, the individual or entity must meet specific requirements outlined in the relevant laws or statutes governing negotiable instruments. Typically, these requirements include taking possession of the instrument for value, acquiring it before it becomes due, and having no knowledge of any defects, such as forgery, fraud, or illegality, associated with the instrument.

Being a holder in due course confers certain legal rights and protections. For example, a holder in due course generally has the right to enforce payment of the instrument against the parties obligated to pay, even if there are defences or disputes between those parties. Additionally, a holder in due course typically takes the instrument free from certain claims or defences that could have been asserted against the original holder.

Overall, the concept of a holder in due course plays a significant role in commercial transactions involving negotiable instruments, providing certainty and reliability in the transfer of financial instruments and promoting commerce and trade.

Holder in due course, or (HDC) is a term used in law to refer to an innocent party who purchases a negotiable instrument for value without any apparent defect in the instrument nor any notice of dishonour (Black’s Law Dictionary 2nd Pocket ed. 2001 pg. 322).

An HDC must purchase for value, meaning that he or she must pay for the property rather than simply being the beneficiary of a gift, although the value does not have to be 100% of the market value.

Depending on the laws of the relevant jurisdiction, when a party sells a negotiable instrument with a non-apparent defect to an HDC, such as by selling them an instrument upon which another has a claim, that HDC takes good title to the property despite the competing claims of the other party unless the other party has a real defence, such as lack of capacity or fraud in the factum. Other parties with a claim to ownership will have a cause of action against the party who sold the negotiable instrument to the HDC. Most states in the USA have codified into law Uniform Commercial Code Article § 3-302 defining an HDC and § 3-305 protecting the HDC from most claims by other parties.

This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

This glossary post was last updated: 29th March 2024.