Commercial Paper

A holder is an individual who is in possession of an instrument that is either payable to him or her as the payee, endorsed to him or her, or payable to the bearer. Those who obtain instruments after the payee are holders if such instrument is either payable to the bearer or endorsed properly to their order. The party in possession is not considered to be the holder in a case in which a necessary endorsement has been forged.

According to law, a holder may either be an ordinary holder or a holder in due course, who has preemptive rights to payment. An ordinary holder becomes a holder in due course upon taking an instrument subject to the reasonable belief that it will be paid and that there are no legal reasons why payment will not occur.

In more technical terms, to be a holder in due course, the party must take the paper for value, in GOOD FAITH, and absent the notice that it is overdue, has been dishonored, or is subject to an adverse claim. Such notice of problems affecting the validity of the instrument exists if the party either is specifically informed about something or otherwise has reason to believe in the existence of a problem.

A holder takes a paper for value when the holder has imparted something of value, such as property or services, in exchange for the value of the paper, as evidenced by its terms. In such a case, the individual becomes the holder for value.

If a paper is used in satisfaction of or as security for the repayment of a debt, even though the debt might not be due when the paper is taken, the instrument is taken for value. In addition, value is given when one commercial paper is traded for another.

A person who receives a check or other type of negotiable instrument as a gift is an ordinary holder as opposed to a holder in due course, since no consideration that is bargained-for value has been exchanged by the parties. A holder in due course has greater legal rights concerning protection for enforcement of the provisions for payment of a negotiable instrument than does an ordinary holder.

For an individual to be a holder in due course, the negotiable instrument must be taken in good faith that it represents a valuable legal right. There must be honesty in the transaction, but the determination of whether or not good faith is present is totally subjective.

Frequently, a due date is clearly specified on the face of the document. A holder is presumed to have knowledge of the terms appearing on the paper. If an individual is presented with a note on May 15 that is payable on May 1, he or she is regarded as having knowledge that it is overdue. A person is legally considered to have knowledge that a demand instrument is overdue if he or she accepts it after being informed that a demand for payment has previously been made and refused or if a reasonable period of time has elapsed since its issuance. Ordinarily, 30 days after the date on which a check was issued is a reasonable time period within which its presentation to a bank for payment should occur. An individual who accepts a check that is more than 30 days old is assumed to be doing so with the knowledge that it is overdue.

An instrument that has been dishonored ordinarily has that fact indicated on its face. For example, a check might be stamped "insufficient funds," "account closed," or "payment stopped." An individual who accepts such a document possessing knowledge of its dishonor cannot be a holder in due course. A person cannot be a holder in due course if he or she takes an instrument subject to his or her knowledge that a claim exists against it, such as when it has been stolen or transferred as a result of FRAUD.