What Is a Holder in Due Course?

A negotiable instrument is generally an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order (U.C.C.

§ 3-104; State Security Check Cashing, Inc. v. American General Financial Services, 409 Md. 81 (2009)). To qualify, the promise or order must meet specific criteria (U.C.C. § 3-104; State Security Check Cashing, Inc. v. American General Financial Services, 409 Md. 81 (2009)):

• It must be payable to bearer or to order when it is first issued or comes into possession of a holder (U.C.C. § 3-104; State Security Check Cashing, Inc. v. American General Financial Services, 409 Md. 81 (2009)).
• It must be payable either on demand or at a definite time (U.C.C. § 3-104; State Security Check Cashing, Inc. v. American General Financial Services, 409 Md. 81 (2009)).
• It cannot state any other instruction or undertaking by the person promising or ordering payment to perform any act beyond paying money, though it may contain certain permitted powers, such as an undertaking to protect collateral, an authorization to confess judgment or dispose of collateral, or a waiver of legal protections designed for an obligor's advantage (U.C.C. § 3-104; State Security Check Cashing, Inc. v. American General Financial Services, 409 Md. 81 (2009)).

An instrument is classified as a "note" if it takes the form of a promise, and a "draft" if it takes the form of an order. A "check" is a specific type of draft (excluding documentary drafts) that is payable on demand and drawn on a bank, and it also includes cashier's checks and teller's checks. An instrument can still be a check even if its face describes it using another term, such as a "money order" (U.C.C. § 3-104; Ag Venture Financial Services, Inc. v. Montagne (In re Montagne), 418 B.R. 809 (2009)). However, except for checks, any promise or order will not be treated as an instrument if it bears a conspicuous statement at issuance or first possession stating explicitly that it is not negotiable or not governed by the relevant commercial article.

The holder of an instrument qualifies as a "holder in due course" only if specific requirements are met (State Security Check Cashing, Inc.

v. American General Financial Services, 409 Md. 81 (2009); U.C.C. § 3-302). First, when the instrument is issued or negotiated to the holder, it must not display apparent evidence of forgery or alteration, nor should it be so irregular or incomplete that its authenticity is called into question (U.C.C. § 3-302; Wells Fargo Bank Na v. Ferruggio Ins. Servs. of La Inc., 358 F. Supp. 3d 887 (2019)). Second, the holder must take the instrument under the following conditions (U.C.C. § 3-302; Wells Fargo Bank Na v. Ferruggio Ins. Servs. of La Inc., 358 F. Supp. 3d 887 (2019)):

• For value (U.C.C. § 3-302; Wells Fargo Bank Na v. Ferruggio Ins. Servs. of La Inc., 358 F. Supp. 3d 887 (2019)).
• In good faith (U.C.C. § 3-302; Wells Fargo Bank Na v. Ferruggio Ins. Servs. of La Inc., 358 F. Supp. 3d 887 (2019)).
• Without notice that the instrument is overdue, has been dishonored, or is part of a series with an uncured payment default (U.C.C. § 3-302; Wells Fargo Bank Na v. Ferruggio Ins. Servs. of La Inc., 358 F. Supp. 3d 887 (2019)).
• Without notice that the instrument contains an unauthorized signature or has been altered (U.C.C. § 3-302; Wells Fargo Bank Na v. Ferruggio Ins. Servs. of La Inc., 358 F. Supp. 3d 887 (2019)).
• Without notice of any claim to the instrument (U.C.C. § 3-302; Wells Fargo Bank Na v. Ferruggio Ins. Servs. of La Inc., 358 F. Supp. 3d 887 (2019)).
• Without notice that any party has a defense or claim in recoupment (U.C.C. § 3-302; Wells Fargo Bank Na v. Ferruggio Ins. Servs. of La Inc., 358 F. Supp. 3d 887 (2019)).

An obligor's obligation to pay an instrument may be subject to defense (Wells Fargo Bank Na v.

Ferruggio Ins. Servs. of La Inc., 358 F. Supp. 3d 887 (2019)). For instance, an obligor's duty to pay can be modified, supplemented, or nullified by a separate agreement made between the obligor and the person entitled to enforce the instrument, provided the instrument was issued or the obligation incurred in reliance on that agreement or as part of the same transaction (Wells Fargo Bank Na v. Ferruggio Ins. Servs. of La Inc., 358 F. Supp. 3d 887 (2019)). Such a separate agreement serves as a defense to the obligation (Wells Fargo Bank Na v. Ferruggio Ins. Servs. of La Inc., 358 F. Supp. 3d 887 (2019)).

However, the rights of a holder in due course to enforce payment are subject only to a restricted list of defenses (Wells Fargo Bank Na v. Ferruggio Ins. Servs. of La Inc., 358 F. Supp. 3d 887 (2019)). The broader defense of a separate modifying agreement under the rules is not effective against a holder in due course (Wells Fargo Bank Na v. Ferruggio Ins. Servs. of La Inc., 358 F. Supp. 3d 887 (2019)).