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Understanding Negotiable Instrument Requirements

Requirements

An ordinary holder of a negotiable instrument must have taken the instrument for value, taken in good faith, and taken without having any notice.

A holder will only be labelled as a holder in due course if he or she also takes the instrument in good faith. Good faith, as defined under Article 2 of the Uniform Commercial Code, is that the current holder must have taken the negotiable instrument in a fair deal with honesty in order to become a holder in due course.

This means that a bank which takes a negotiable instrument, such as a check, from a thief who stole that instrument could become a holder in due course, as the bank would be taking the instrument in good faith regardless of the fact that the thief did not take the instrument in good faith. So long as the current holder has obtained the negotiable instrument in fair, honest, and unsuspicious circumstances, he or she will have been dealing in good faith.

The final set of requirements for becoming a holder in due course, which are concerned with the idea that the would-be holder in due course did not receive notice as to the questionable nature of the negotiable instrument in any significant fashion, all revolve around the underlying idea of what it means to have notice.

If the would-be holder in due course did not have any knowledge of the problem at the time of negotiation, did not receive any letter or other form of missive informing him or her of the problem, and did not have any reason to suspect that a problem would exist, then the holder could not be said to have had notice of the problem.

Furthermore, according to Article 3 of the Uniform Commercial code, even should the would-be holder in due course receive some form of the above information shortly after having made a deal for a negotiable instrument, he or she might not be held to have had notice sufficient to prevent him or her from being labelled as a holder in due course if he or she did not receive the information early enough to take the necessary action.

NEXT: Violations of the Holder in Due Course Doctrine

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