Flashcards in Benefits of Holder in Due Course status Deck (6)
What is the general rule for holders in due course (and subsequent transferees who take shelter in that status)?
A HIDC takes the instrument free from claims, free from personal defenses, and subject only to real defenses.
What is a claim (in this context)?
A right to a negotiable instrument because of superior ownership.
If a negotiable instrument is duly negotiated to a holder in due course, the HIDC defeats the superior owner (akin to a Bona Fide Purchaser)
What are personal defenses?
Every defense available in an ordinary contract action, including lack of consideration, unconscionability, waiver, estoppel, inducement, misrepresentation, etc.
A HIDC takes subject to what real defenses?
1) Material Alteration
3) Fraud in the Factum
What is a material alteration?
A change in the terms of the instrument
EX: Maker writes check for $100. Payee changes the amount to $2,100 and sells to HIDC. Maker is liable only for $100, unless he was negligent (e.g. leaving blanks on a check), in which case he is estopped from raising material alteration as a defense.