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Holder in Due Course: Definition and Real life Scenario

Updated on August 11, 2012

Scenario: Suppose that you go to your bank and write a check on your account payable to cash for $500. The teller gives you the cash without asking you to endorse the check. After you leave, the teller slips the check into his pocket. Later, the teller delivers it (without an endorsement) to his friend Carol in payment for a gambling debt. Carol takes your check to her bank, endorses it, and deposits the money.

In this scenario, Carol would be a good example of a Holder in Due Course. What separates her from being merely a Holder, is that she took the negotiable instrument in good faith, for value and was without notice of its defectiveness.

Good faith means that Carol acted honestly in the acquisition of the note, even though the teller did not. The fact that she was unaware of how the teller got the money also allows her to be a Holder in Due Course. If she was aware of the teller’s thievery, she would be a mere holder and would not have the legal enforcement on her side. Carol also has already given the teller something of value, thus creating value. So even though the check was written out and cashed without endorsement, Carol has every right to cash the check if the three above mentioned stipulations are covered. The original check writer would have the option to go after the teller, however she would have no legal action to prosecute Carol, nor would Carol have a legal obligation to pay the money back because it is rightfully hers.

The difference between a holder and a holder in due course, is the person’s right to the money. As long as they receive it in good faith, of value and with no knowledge of any defectiveness of the negotiable instrument, they have legal rights to the check or other negotiable instrument.


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