What are the requirements for holder in due course?

To qualify as a HDC, the holder of the commercial paper must meet the following requirements:

Value – The holder must take the instrument for value. This means that the holder must provide money or goods for the instrument. The transfer cannot be a gift or inheritance.

Good Faith – The holder must receive the instrument in good faith. This means that the holder cannot have the intent to defraud anyone in receiving the instrument. It is easy to imagine any number of schemes in which a transferor would try to manipulate the law by transferring an instrument to a holder with a greater right to repayment.

Unaware of Defenses – The holder cannot have notice that there is a valid defense to enforcement of the instrument. This is generally deemed to be actual notice, but constructive notice from the situation could disqualify the individual as well.

HDC status is determined at the time that the holder receives the instrument. If the holder meets the above requirement at the moment when she takes possession, she is a HDC. It does not matter if afterwards she learns of a potential defense. Each of the elements for HDC status is discussed separately.