Holder in Due Course - Consumer Transactions - Explained
How does Being a Holder in Due Course Affect Instrcuments used in Consumer Sales?
Written by Jason Gordon
Updated at April 6th, 2023
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What are the rights of a holder in due course if the underlying transaction is a consumer transaction?
There is a broad exception to the heightened rights afforded a holder in due course if the instrument is issued pursuant to a consumer transaction. This situation generally arises when a consumer of a good signs a note promising to pay the debt arising from purchase of the good. It may not be fair to force a consumer who writes a note to have to pay a third-party, holder in due course if the underlying contract is breached. As such, the Federal Trade Commission and some states require consumer credit contracts (and sometimes consumer promissory notes) to contain the designation consumer paper. This designation makes the instrument non-negotiable. As such, no one can be a holder in due course under the UCC.
Note: If the language is omitted, a holder of the note can be an HDC, but the original seller of the note can be subject to fine.
Next Article: Forged Negotiable Instrument - Holder Status Back to: COMMERCIAL PAPER
Discussion Question
Do you agree with granting an exception to negotiability of consumer paper? Do you think the label, consumer paper is sufficient notice to a holder that the paper is non-negotiable?
Practice Question
Carter owns a store selling personal lawn equipment. Winston purchases a lawn mower for his personal use. He signs a promissory note as consideration for the mower. Carter wants to liquidate some of his accounts receivable and sell the promissory note from Winston. Can you explain to him the rules that apply in this situation?
Related Topics
- Commercial Paper (Intro)
- What is Commercial Paper?
- Negotiable Instrument
- What are the common types of commercial paper?
- Promissory Note
- Cashier's Check
- Convenience Check
- Certified Check
- Substitute Check
- Bill of Exchange
- Bank Draft Definition
- Sight Draft Definition
- Bankers Acceptance
- Who is a Holder of a negotiable instrument?
- Commercial Paper Funding Program
- What is Negotiability and why is it important?
- What is required for commercial paper to be negotiable?
- Sum Certain (Contracts)
- Inflation Adjustment Clause
- When does commercial paper contain an Unconditional promise to pay?
- Backup Line of Credit
- What is Payable on Demand or Payable on Time?
- What is Order Paper and Bearer Paper?
- Bearer Form
- How is a payee identified on the negotiable instrument?
- What rules does the court apply in determining negotiability?
- How is commercial paper negotiated to a holder?
- What is Transfer of a negotiable instrument?
- What is Indorsement of a negotiable instrument?
- What are the various types of indorsement?
- Bank Endorsement
- Blank Endorsement
- Accommodation Endorsement
- How does a holder receive payment on a negotiable instrument?
- Who is potentially liable on (or obligated to pay) a negotiable instrument?
- When is an individual liable for a representative signing a negotiable instrument?
- What rules apply if a holder loses a negotiable instrument?
- When is payment of a negotiable instrument overdue?
- What effect does a negotiable instrument have on the underlying obligation?
- What is a holder in due course?
- What are the requirements for a holder to become a holder in due course?
- Receive an instrument for value?
- Receive an instrument in good faith?
- Receive an instrument without notice of a valid defense?
- How does discharge of the Underlying Obligation affect a holder in due course?
- What is the Shelter Rule?
- Can you limit a transferee from becoming a holder in due course?
- Personal Defenses?
- Real Defenses?
- What is a Claim in Recoupment?
- What are the rights of a holder in due course if the instrument involves a consumer transaction?
- What happens if a negotiable instrument is Forged?
- What happens if a negotiable instrument is Stolen?
- Guaranty or Guarantee
- Letter of Guarantee
- Personal Guarantee
-
What is the role of a Guarantor or Surety of a negotiable instrument?
-
Surety
- Cosign
- Accommodation Paper Definition
- Secondary Liability
- Avalize Definition
- What is an Accord & Satisfaction?
- What is primary and secondary liability on an instrument?
- What is Drawer or Maker Liability for a negotiable instrument?
- What is Transferor Warranty of a negotiable instrument?
- What is Indorser Warranty of a negotiable instrument?
- What is Presentment Warranty of a negotiable instrument?
- What is a warrantors liability for a dishonored note or draft?
- What is the time limitation for warranty of a negotiable instrument?
- When are the warranties of a negotiable instrument discharged?