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What is a Holder in Due Course?

The Uniform Commercial Code provides standardized rules adopted in all states that have incorporated the UCC into their own statewide regulations. Among the provisions set forth in the UCC are rules protecting the purchasers of debts and protecting those who are assigned the right to receive debt payments.  bank-check-scanning-2-1259527

The rules protecting the inheritors or purchasers who are assigned the right to receive debt payments from an original creditor are called the Holder in Due Course (HDC) doctrine. Understanding the holder in due course doctrine is essential for anyone in business who either takes on debt or who assumes a debt and seeks to collect upon it. The California business law attorneys at Brown & Charbonneau, LLP can provide legal assistance understanding what the Holder in Due Course doctrine means within the context of the Uniform Commercial Code and can help you to understand both rights and obligations under this doctrine.

What is a Holder in Due Course?

The Uniform Commercial Code establishes the holder in due course doctrine in Article 3, which is the Article dealing with negotiable instruments. Article 3, Part 3 covers issues related to the enforcement of debt, and section 3-302 sets forth the legal definition of a holder in due course.

Under UCC Section 3-302, a holder in due course who is entitled to protection of the law and vested with the right of debt collection must have purchased the right to collect on the debt (or been assigned the right to collect) while acting in good faith. The holder must have a check or another negotiable instrument, which was taken in exchange for value.

The holder in due course must not have had notice the debt had been dishonored or that there was an “uncured default” with respect to payment. There must have been no notice the signature on the debt instrument was altered or that it was void; and must not have had notice that any party had a defense or a claim in recoupment. In other words, the holder in due course must not have had any reason to suspect a problem with the negotiable instrument.

The rules protecting the rights of a holder in due course to collect on debt are very important to facilitating business transactions. These rules make it possible for checks to move from bank to bank without worrying the check writer will try to assert a defense challenging the validity of the right to collect on the debt. When a check is written to someone who subsequently deposits the check, for example, the depository bank becomes the holder in due course.

Creditors must be aware of the protections the rules provide to holders in due course. Any business who collects payment by check or who otherwise acquires a negotiable instrument and wishes to use the legal system to enforce debt must also understand the rules established by the Uniform Commercial Code. California business law attorneys at Brown & Charbonneau, LLP can provide legal representation with the holder in due course provisions of the UCC as well as with understanding the other requirements and rights the Uniform Commercial Code creates. Call for a consultation 714-505-3000