The Requirement of Good Faith for Becoming a Holder in Due Course - Research Paper Example

Problems could arise in a situation whereby the holder seeking payment out of a negotiable instrument comes to learn that a certain defense to the payment exists. The same could happen when the holder learns that another party has a previous claim to the same instrument (PSTCC.edu). In this regard, the person seeking the payment is required to have legal rights of being a holder in due course. A holder in due course takes negotiable instruments free of any prevailing claims as well as most of the other parties’ defenses. Usually, real defenses defeat payments to all holders with holders in due course inclusive. Besides, personal defenses have the capability of asserting against ordinary holders very successfully (PSTCC.edu).

The HDC doctrine was implemented by the Article of the Uniform Commercial Code (Maggs 1). The Article also governs some negotiable instruments like promissory notes and checks. The doctrine asserts that “a party who acquires a negotiable instrument in good faith, for value, and without notice of certain facts, and who also meets some additional requirements, takes the instrument free of competing claims of ownership and most defenses to payment” (Maggs 1). In this regard, the HDC doctrine may therefore relieve a party that is acquiring a note or check from such worries that someone else could own the instrument or the instrument maker would have certain legal grounds that could be used for the refusal to pay it.
Good faith is a Requirement for becoming HDC
The doctrine of good faith is one of the various requirements for one to become a holder in good faith. In this regard, the holder is required to take the instrument, in question, “in good faith.” Good faith here is used to imply “honesty in fact and the observance of reasonable

commercial standards of fair dealing” (Maggs). A holder taking part in fraudulent schemes can be considered to be lacking good faith under such standards. A good instance is a case where a check-cashing service acts in bad faith by taking an indorsed check from an individual suspected to have stolen the instrument (Maggs 2).

Good faith typically comprises a sincere belief or even motive with no aspects of malice or the need to defraud other individuals. It is used in various areas of law although it has a higher and special importance in Commercial Law. In this case, a good faith purchaser for a given value is usually protected by “the Uniform Commercial Code,” adopted by every state. Section 1-201 and 2-403 require that “a merchant may keep possession of goods that were bought from a seller who did not have title to the goods if the merchant can show he or she was a good faith purchaser for value” (Hill N. and Hill T.). A person achieves such protection if he/she is a merchant who has demonstrated honesty in the course of conducting the transaction of concern and has observed some reasonable commercial standards regarding fair dealing in the particular trade (Hill N. and Hill T.). On the other hand, buyers meet such requirements when the purchases had proceeded within the ordinary business course. Given a situation whereby the purchase happened under unusual or even suspicious circumstances, it might be concluded that the buyer did not have good faith. Read More