What is a Holder in Due Course?

A holder in due course is someone who has taken good faith possession of a negotiable instrument. The holder in due course is often considered innocent of any claims against the negotiable instrument and prior holders because he or she has not been notified of any problems with the instrument. There are some important legal implications behind this concept and it has been a subject of litigation in some cases. The law surrounding transfer of negotiable instruments varies between nations and cases and people who are unclear on the specifics of a particular situation may want to consult a lawyer.

In order to be considered a holder in due course, someone must exchange value of some kind for the negotiable instrument. In a simple example of how this might work, a consumer might obtain a residential mortgage from a bank. The bank in turn could sell the mortgage to another bank. The new bank becomes the holder in due course because it exchanged something of value for the mortgage. It is now the legal owner of the mortgage and can take action against the debtor in its own name if the debtor defaults or fails to fulfill the terms of the mortgage.

One historic problem with the concept of the holder in due course is that it was sometimes used abusively. Initially, people were absolved of any liability related to the negotiable instrument when they could demonstrate that they obtained it in good faith and were not aware of problems. This was used by unscrupulous individuals who would do things like make a loan on a bad car and then turn around and sell the loan. The debtor has no legal recourse because the holder in due course could refuse to provide support or services, arguing that it did not know the circumstances. This practice has been challenged as unfair, and now there are some circumstances in which someone who acquires a negotiable instrument can be held responsible for misdeed of the prior owner.

It is important to note that the law surrounding negotiable instruments differs from the law surrounding property. If someone acquires a negotiable instrument in good faith, he or she is the legal owner, whether or not there are problems with the instrument such as a claim against it. On the other hand, someone who acquires property with an unclear title, such as stolen party, may do so in good faith but still does not retain ownership of the property once the problem is uncovered.