A person cannot become a holder through a holder in due course unless that person satisfies the requirements for holder in due course status.
True
False
The correct answer and explanation is:
Correct Answer: True
Explanation:
A holder in due course (HIDC) is a special category of a holder of a negotiable instrument who takes the instrument under certain conditions that provide protection against many defenses and claims that could be raised against previous holders. To become a holder in due course, a person must meet specific requirements, which include taking the instrument:
- For value: The person must have given something of value for the instrument, not just received it as a gift or inheritance.
- In good faith: The holder must act honestly and without knowledge of any problems or defects related to the instrument.
- Without notice of defects: The person must not be aware that the instrument is overdue, has been dishonored, or is subject to any claims or defenses, such as fraud or forgery.
If a person receives the instrument through a holder in due course, that person does not automatically become a holder in due course themselves. They must independently satisfy all the conditions required to gain the status of a holder in due course. This is because the privileges of a holder in due course, such as taking free of most defenses, depend on the holder’s own actions and circumstances, not just those of the previous holder.
Therefore, the principle means that the chain of holder in due course status cannot be passed simply by transfer. Each new holder who claims the status must meet the same legal requirements individually. If the new holder fails to meet these conditions, they are simply a regular holder and do not enjoy the additional protections of a holder in due course. This rule ensures that the negotiable instrument system maintains integrity and that protections for good faith holders are not extended to those who do not meet the legal standards.