Holder in Due Course

Good-faith holder who has taken a negotiable instrument for value, without Notice that it was overdue or had been Dishonored or that there was any defense against or Claim to it. In property law, the innocent buyer or holder in due course is referred to as a bona fide purchaser.

Party who becomes the good faith holder of a Negotiable Instrument (such as a check, note, or draft), for value received, without knowledge of any claims against it, or that the instrument was dishonored when presented for payment, or in any way defective. Under the Uniform Commercial Code, the body of law governing legal contracts, the person holding a check endorsed by another is the presumed legal owner, and can sue in his or her own name. A person accepting a Third Party Check is a holder in due course, and holds legal title to the instrument, regardless of any prior claims. By contrast, a good faith buyer of an asset does not necessarily acquire title; for example, an innocent buyer of a stolen car never gains title to the car.

A bank acquiring installment loan contracts, as a holder in due course, from a retailer or other lender, can be held liable in some cases for any claims by the original borrower against the seller of the note. This is the Federal Trade Commission's holder in due course rule, intended to prevent abusive credit practices. The rule, issued in 1976, says the holder of a note must honor warranties of the original seller. This means a consumer cannot be required to make payments in situations where the seller of the note refused to honor a manufacturer's guarantee on merchandise that turned out to be defective, or the seller refused to perform work, such as home improvements, financed by an installment note.