University:
Indiana University Bloomington
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

394

Pages:

2
Author:

bratrochanter

Summary: Holder in Due Course (HDC) Requirements and Defenses Key Requirements for HDC Status 1. Must Be a Holder The person must possess a negotiable instrument that is payable either to bearer or to an identified person who is the holder. 2. Must Take for Value The holder must have provided value for the instrument, such as: o Paid or performed the agreed consideration. o Acquired a security interest or lien. o Accepted the instrument as payment for an antecedent debt. o Given another negotiable instrument for it. o Made an irrevocable commitment to a third party. 3. Must Take in Good Faith The holder must act honestly and follow reasonable commercial standards. 4. Must Take Without Notice of Defects The holder must not be aware of: o Overdue or dishonored instruments. o Unauthorized signatures or alterations. o Claims or defenses against the instrument. o Any other defect affecting its enforceability. 5. Instrument Must Appear Authentic The instrument should not show visible signs of forgery, irregularities, or incompleteness. Real vs. Personal Defenses Real Defenses (Effective Against HDCs) 1. Minority or Incapacity: If the maker/drawer lacks legal capacity. 2. Duress or Illegality: Situations where the instrument is void. 3. Fraud in the Factum: The signer is misled about the nature of the document. 4. Discharge in Bankruptcy: The obligation is legally discharged. 5. Forgery and Material Alteration: Forged signatures or unauthorized changes. Personal Defenses (Not Effective Against HDCs) 1. Failure of Consideration: Goods or services not delivered as promised. 2. Breach of Contract/Warranty: Disputes over the underlying agreement. 3. Fraud in the Inducement: Deception related to the transaction, not the instrument itself. 4. Non-issuance or Conditional Issuance: Instrument was improperly issued or delivered. 5. Claims in Recoupment: Offsets related to the original transaction. Case Example: General Credit Corp. v. New York Linen In this case, the court ruled in favor of General Credit Corp., a holder in due course. General Credit purchased a check from a seller who later delivered fewer goods than agreed. The buyer, New York Linen, issued a stop-payment order. However, as an HDC, General Credit was entitled to enforce the check despite the buyer’s claim of failure of consideration. The court emphasized that personal defenses like breach of contract or failure of consideration do not affect an HDC's rights. Consumer Protection Modifications The HDC rule can disadvantage consumers in credit transactions. For instance, if a defective product is purchased using a promissory note, and the seller negotiates the note to an HDC, the consumer may still be obligated to pay the HDC. However, various consumer protection laws have modified this rule to protect consumers in certain contexts, particularly in cases of fraud or defective goods.