Article 3 — Negotiable Instruments · Section 3-302
UCC § 3-302 outlines the requirements for a holder in due course of a negotiable instrument, providing protection from certain defenses and claims.
Source: U.C.C. § 3-302
A person takes an instrument for value if they acquire it: (1) for a promise of payment to be made in the future, (2) as security for a preexisting claim, (3) by payment in cash or by taking an assignment of a payment obligation, or (4) in exchange for another instrument. A holder in due course is a holder who takes an instrument: (1) for value, (2) in good faith, (3) without notice of any other party's claim to the instrument or defenses against it, and (4) before the instrument is overdue.
UCC § 3-302 defines who qualifies as a holder in due course, which is someone who has taken possession of a negotiable instrument under specific conditions. Being a holder in due course helps protect that person from certain legal defenses that could affect the enforceability of the instrument.
A holder who has taken an instrument under prescribed conditions, thus gaining certain protections against defenses that could be raised by prior parties.
Consideration given for the instrument, which may include cash, a promise of future payment, or security for a preexisting obligation.
Example 1
A bank receives a promissory note in exchange for a loan, fulfilling the value requirement for a holder in due course.
Example 2
A person purchases a negotiable instrument from someone without knowing it has been previously modified; they are likely to be considered a holder in due course.