Legal Definitions - due-course holder

Definition: A due-course holder is a person who has received a negotiable instrument in good faith, has paid for it, and has no knowledge that it has been dishonored or is overdue. The instrument must also be complete and regular on its face.

According to the UCC § 3-302, a due-course holder takes the instrument free of all claims and personal defenses, but subject to real defenses. This means that if the instrument is later found to be invalid or fraudulent, the due-course holder is still protected and can collect on it.

Example: John buys a car from a dealership and finances it through a bank. The bank becomes a due-course holder of the promissory note that John signed to pay for the car. If John later tries to dispute the validity of the note, the bank is still protected as a due-course holder and can collect on the debt.

Explanation: In this example, the bank is a due-course holder because they received the promissory note in good faith, paid for it, and had no knowledge that it was invalid or fraudulent. Even if John tries to dispute the note later, the bank is still protected and can collect on the debt because they are a due-course holder.