Know Your Methods of Taking for Value
In order to qualify as a holder in due course (HDC), a holder must have taken the promissory note or other form of negotiable instrument for value. There are a number of different ways in which a would-be HDC could have taken a promissory note for value. These include: ensuring that the promise for which the promissory note was negotiated is fulfilled; obtaining a security interest or a lien on the promissory note or negotiable instrument; obtaining the promissory note or negotiable instrument as payment of or security for a preexisting claim; obtaining the promissory note or negotiable instrument as payment or in exchange for another negotiable instrument; or exchanging an irrevocable obligation as payment for the promissory note or negotiable instrument.
The first possible method of taking a promissory note for value would require the would-be HDC to complete any promises he or she made in exchange for the promissory note. Until such promises are fulfilled, the promissory note would not have been taken for value and the would-be HDC would simply be a holder without the protection offered by being a holder-in-due-course. A simple promise to perform services at a later point is not enough to give one HDC status, and offering such a promise at the moment of exchange would not imply taking the promissory note or negotiable instrument for value.
The second method for taking a promissory note or other negotiable instrument for value would require the would-be HDC to obtain a security interest, or other lien, in the instrument. A security interest, as defined in Article 1 of the Uniform Commercial Code, is a way of ensuring that the beneficiary of the interest, who in this case would also be the recipient of the promissory note, and the would-be HDC, has some right to property secured by the security interest, such that the property can be used to settle the debt. In other words, security interests and liens take a form similar to the common understanding of “collateral,” under which the party owed a debt is able to hold property of the debtor in order to settle the debt. Since a security interest would provide value such that the exchange would be equal, the introduction of a security interest in the negotiable instrument would change a holder’s status into that of an HDC.
The third method of taking a negotiable instrument for value would require the HDC obtaining a negotiable instrument, like a promissory note, as a settlement for an antecedent claim. An exchange characterized in this fashion would simply involve the transferor negotiating the promissory note to the recipient in order to settle a debt owed by the transferor to the recipient. If this is the case and the value of the note is such that it settles the debt and the promissory note is accepted by the recipient, then the recipient would have HDC status, at least in terms of taking the negotiable instrument for value.
The fourth method of taking a promissory note or other negotiable instrument for value would involve taking the negotiable instrument in exchange for another negotiable instrument of some kind. This would involve exchanging one type of negotiable instrument for another of equal value in order to obtain the payable amount more easily. As an example, if one person had a promissory note from another ensuring payment of $300 in 8 months, then the holder of that note could negotiate it to a new recipient in exchange for a check of $200 and $100 in cash. Because the check is a negotiable instrument (and, technically, so is the cash), this would constitute an exchange of one negotiable instrument for another of equal value. This would then give the new recipient of the promissory note HDC status.
The fifth method of taking a negotiable instrument for value would involve an irrevocable obligation on the part of the recipient of the promissory note or other negotiable instrument to a third party. This is similar to some of the other forms of exchange that could give a recipient HDC status, as it involves an exchange of a promise to perform a service in exchange for the value of the promissory note or negotiable instrument exchanged.