Article 3 — Negotiable Instruments · Section 3-306
This section deals with the rights of a holder in due course and their protections concerning negotiable instruments.
Source: U.C.C. § 3-306
A person does not have the rights of a holder in due course if the instrument is obtained by fraud, illegally, or in bad faith. A holder in due course takes the instrument free from claims and defenses, except claims that the holder is aware of or those arising from the instrument's own terms.
UCC § 3-306 clarifies the conditions under which a holder in due course (HDC) may be denied protections. If the instrument was acquired through fraud, illegal means, or bad faith, the HDC does not have the full rights typically afforded.
A holder who takes an instrument for value, in good faith, and without notice of defects.
Example 1
A person buys a check from another who claims it to be legitimate, without knowing of any defects; the buyer may be a holder in due course.
Example 2
If an instrument was acquired through a fraudulent scheme, the holder cannot claim holder in due course privileges.