Colorado § 4-3-302 - Holder in due course.

§ 4-3-302. Holder in due course.

(a) Subject to subsection (c) of this section and section 4-3-106 (d) "holder in due course" means the holder of an instrument if:

(1) The instrument when issued or negotiated to the holder does not bear such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity; and

(2) The holder took the instrument (i) for value, (ii) in good faith, (iii) without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series, (iv) without notice that the instrument contains an unauthorized signature or has been altered, (v) without notice of any claim to the instrument described in section 4-3-306, and (vi) without notice that any party has a defense or claim in recoupment described in section 4-3-305 (a).

(b) Notice of discharge of a party, other than discharge in an insolvency proceeding, is not notice of a defense under subsection (a) of this section, but discharge is effective against a person who became a holder in due course with notice of the discharge. Public filing or recording of a document does not of itself constitute notice of a defense, claim in recoupment, or claim to the instrument.

(c) Except to the extent a transferor or predecessor in interest has rights as a holder in due course, a person does not acquire rights of a holder in due course of an instrument taken (i) by legal process or by purchase in an execution, bankruptcy, or creditor's sale or similar proceeding, (ii) by purchase as part of a bulk transaction not in ordinary course of business of the transferor, or (iii) as the successor in interest to an estate or other organization.

(d) If, under section 4-3-303 (a)(1), the promise of performance that is the consideration for an instrument has been partially performed, the holder may assert rights as a holder in due course of the instrument only to the fraction of the amount payable under the instrument equal to the value of the partial performance divided by the value of the promised performance.

(e) If (i) the person entitled to enforce an instrument has only a security interest in the instrument and (ii) the person obliged to pay the instrument has a defense, claim in recoupment, or claim to the instrument that may be asserted against the person who granted the security interest, the person entitled to enforce the instrument may assert rights as a holder in due course only to an amount payable under the instrument which, at the time of enforcement of the instrument, does not exceed the amount of the unpaid obligation secured.

(f) To be effective, notice must be received at a time and in a manner that gives a reasonable opportunity to act on it.

(g) This section is subject to any law limiting status as a holder in due course in particular classes of transactions.

Source: L. 94: Entire article R&RE, p. 853, § 1, effective January 1, 1995.

Editor's note: This section is similar to former § 4-3-302 as it existed prior to 1994.

Cross references: For the effect of the "Uniform Consumer Credit Code" on holder in due course, see § 5-3-303.

ANNOTATION

I. General Consideration.

III. Payee May Be H.D.C.

IV. When Not H.D.C.

I. GENERAL CONSIDERATION.

Law reviews. For note, "Judicial Limitations on Holder in Due Course Claims", see 42 U. Colo. L. Rev. 439 (1971).

Annotator's note. The following annotations include cases decided under former provisions similar to this section.

Applied in Hollemon v. Murray, 666 P.2d 1107 (Colo. App. 1982); La Junta State Bank v. Travis, 727 P.2d 48 (Colo. 1986).

II. HOLDER IN DUE COURSE.

A. In General.

B. For Value.

C. In Good Faith.

D. Without Notice.

E. Facts Not Constituting Notice.

F. Recordation Not Notice.

G. Opportunity to Act.

A. In General.

It is axiomatic that in order for one to be a holder in due course he must first be a holder. Walter E. Heller & Co. v. Mesa Bldg. Prods. Co., 233 F. Supp. 434 (D. Colo. 1964).

All presumptions under this section are in favor of the holder of an instrument. Civic Fin. Co. v. Meintzer, 137 Colo. 572, 328 P.2d 379 (1958).

Person can qualify as holder in due course through constructive possession. Person was holder in due course of check deposited into its bank account by authorized agent of another person despite fact that agent wrote check for own benefit. Physical possession of check was not required. Georg v. Metro Fixtures Contractors, Inc., 178 P.3d 1209 (Colo. 2008).

A payee on an instrument who deals directly with the drawer or issuer is not typically entitled to assert the rights of a holder in due course. Flatiron Linen, Inc. v. First Amer. State Bank, 1 P.3d 244 (Colo. App. 1999), rev'd on other grounds, 23 P.3d 1209 (Colo. 2001).

Allegation that payee was "holder in due course" is not a mere conclusion of law insufficient to state a claim for relief. Blake v. Samuelson, 34 Colo. App. 183, 524 P.2d 624 (1974).

Burden of proof is on holder where title is defective. When it is shown that the title of any individual who has negotiated a promissory note is defective, the burden is on the holder to prove that he acquired the title as a holder in due course. Delaney v. Brownwood, 73 Colo. 83, 213 P. 578 (1923).

Assignee of negotiable instrument suing thereon need not plead specific facts from which his assignor derives the status of a holder in due course. Blake v. Samuelson, 34 Colo. App. 183, 524 P.2d 624 (1974).

When a directed verdict may be entered. Where there is not sufficient evidence before the jury to contradict plaintiff's testimony that he is a holder in due course, a directed verdict is right. Neal v. Wilson County Bank, 83 Colo. 118, 263 P. 18 (1927). See Miller v. Farmers' Bank & Trust Co., 82 Colo. 373, 260 P. 112 (1927).

Where bank acquired a single promissory note from a trust, transaction could not be considered a bulk purchase under subsection (3)(c) because the successor organization did not acquire a substantial part of the paper held by the predecessor organization; and since it was not a bulk transaction, the purchase did not preclude the bank from becoming a holder in due course. First Nat. Bank v. Lohman, 827 P.2d 583 (Colo. App. 1992).

If the signers on a note are able to prove close connectedness between the original payee of the note and an assignee thereof, then such relationship effectively invalidates the assignee's claim to a holder in due course status and allows the defenses available against the payee also to be asserted against the assignee. Stotler v. Geibank Indus. Bank, 827 P.2d 608 (Colo. App. 1992).

Where bank acquired a single promissory note from a trust, transaction could not be considered a bulk purchase under subsection (3)(c) because the successor organization did not acquire a substantial part of the paper held by the predecessor organization; and since it was not a bulk transaction, the purchase did not preclude the bank from becoming a holder in due course. First Nat. Bank v. Lohman, 827 P.2d 583 (Colo. App. 1992) (decided under former § 4-3-302 (3)(c)).

If the signers on a note are able to prove close connectedness between the original payee of the note and an assignee thereof, then such relationship effectively invalidates the assignee's claim to a holder in due course status and allows the defenses available against the payee also to be asserted against the assignee. Stotler v. Geibank Indus. Bank, 827 P.2d 608 (Colo. App. 1992).

The fact that an assignor and an assignee of a negotiable instrument are corporate siblings or have a corporate parent-subsidiary relationship is not enough to establish as a matter of law a close connection barring holder in due course status. There must be some other indicia that the related corporation knew or should have known that the instrument was infirm. Deutsche Bank Trust Co. Ams. v. Samora, 2013 COA 81, 321 P.3d 590.

Applied in Terrell v. Walter E. Heller & Co., 165 Colo. 463, 439 P.2d 989 (1968).

B. For Value.

A bank does not become a holder for value merely by giving credit. Atkinson v. Englewood State Bank, 141 Colo. 436, 348 P.2d 702 (1960). See Delaney v. Brownwood, 73 Colo. 83, 213 P. 578 (1923).

Where a promissory note is given as collateral for a debt, the pledgee is a holder in due course for value, and he does not lose that character where the debt which is secured still exceeds the amount of the note although partly paid. Fredericksen v. City Nat'l Bank, 70 Colo. 553, 203 P. 659 (1922).

Negotiable instrument in form of a check shows prima facie consideration and therefore, payee's assignee, alleging in his suit on the check that payee was a holder in due course, is not required to allege facts which, if proven, would show that the maker was indebted to payee. Blake v. Samuelson, 34 Colo. App. 183, 524 P.2d 624 (1974).

C. In Good Faith.

Proof of payment of full value by holder raises a presumption of good faith, which, if not overcome, entitles him to judgment. Delaney v. Brownwood, 73 Colo. 83, 213 P. 578 (1923).

The "good faith" standard is a subjective one. Under a subjective standard, an absence of knowledge is not equivalent to a lack of good faith. Money Mart Check Cashing Center, Inc. v. Epicycle Corp., 667 P.2d 1372 (Colo. 1983).

If a note is taken by indorsement under circumstances which impute knowledge of infirmities in it so that the taking of it amounts to bad faith, the transferee is not a holder in due course. McClellan v. Morris, 71 Colo. 304, 206 P. 575 (1922).

Suspicions and surmises cannot be made to take the place of evidence, and to defeat the note, there must be evidence of actual knowledge of such facts that the action of the indorsee in taking the note constituted bad faith. Hukill v. McGinnis, 70 Colo. 455, 202 P. 110 (1921); Neal v. Wilson County Bank, 83 Colo. 118, 263 P. 18 (1927).

Bad faith must be shown. An indorsee of a check is presumed to have received it in good faith, and it will not be invalidated in the hands of such indorsee by suspicious circumstances attending its indorsement unless the circumstances are sufficient to show that it was taken in bad faith. Wedge Mines Co. v. Denver Nat'l Bank, 19 Colo. App. 182, 73 P. 873 (1903).

Bad faith in fact, or mala fides, is the opposite of good faith and consists in guilty knowledge, or willful ignorance, showing a vicious or evil mind. Burnham Loan & Inv. Co. v. Sethman, 64 Colo. 189, 171 P. 884 (1918); Hendrickson v. Alpert, 159 Colo. 463, 412 P.2d 433 (1966).

Such as corporate president who indorses corporation check to himself. A president of a corporation who in such capacity indorses to himself a note payable to the corporation does not thereby become a holder in due course free from the defenses of the maker against the corporation. Denver Suburban Homes & Water Co. v. Fugate, 63 Colo. 423, 168 P. 33 (1917).

Knowledge of obtaining notes by false representations. Where a bank buys and discounts a note with knowledge that the indorser has obtained other similar notes by means of false representations, this constitutes evidence of bad faith so that the bank is not a holder in due course. Platte Valley State Bank v. Burge, 73 Colo. 296, 215 P. 149 (1923).

Knowledge of fraud. In an action to obtain the return of a promissory note obtained by fraud, where the person obtaining the note had knowledge of such facts, his action in taking the instrument amounted to bad faith, and therefore he is not a holder in due course. Myers v. Griffith, 108 Colo. 218, 115 P.2d 397 (1941).

In order to defeat a recovery on the ground of fraud in an action on a promissory note by one who acquired it for a consideration before maturity, the burden is on defendant to prove that at the time plaintiff acquired the note, he had actual knowledge of the fraud or knowledge of such facts that his action in taking the instrument amounted to bad faith. Abley v. Davies, 84 Colo. 398, 270 P. 880 (1928).

One who cashes a check without knowledge of adverse facts is a holder in due course and entitled to recovery from the drawer. Levitt v. Kerrigan, 109 Colo. 129, 122 P.2d 246 (1942).

"Good faith" unaffected by payee's account level. In the case of a bank cashing a check, if the bank establishes that the check was taken without notice of dishonor or of any other defense, this is sufficient to establish "good faith". The issue of good faith, to establish that the bank is a holder in due course, is unaffected by the fact that the payee's account is low or overdrawn at the time the check is cashed. Vail Nat'l Bank v. J. Wheeler Constr. Corp., 669 P.2d 1038 (Colo. App. 1983).

D. Without Notice.

One who has knowledge of all the facts of a transaction is not a holder in due course free from the equities of the maker against the original payee, even though he holds the note for valid consideration as a subsequent indorsee. Reiter v. Pollard, 75 Colo. 203, 225 P. 222 (1924).

One offered negotiable paper fair upon its face, and not due, is under no duty to inquire of the maker as to its validity. Burnham Loan & Inv. v. Sethman, 64 Colo. 189, 171 P. 884 (1918).

If there is nothing on the face of a negotiable instrument, or in the written indorsement or assignment, to notify the assignee that the instrument was originally given upon an illegal consideration (gambling debts excepted) or obtained through fraud, the assignee who pays value therefor, and takes the same in good faith before maturity, may recover as against the maker. And this fact is true even though such assignee be in possession of facts or circumstances sufficient to arouse suspicion in the mind of a person of ordinary prudence and though he is guilty of negligence in not first following up such information for the purpose of discovering the fraud or illegality to which the suspicious circumstances may point. This rule is founded upon commercial necessity, for the untrammeled circulation of these instruments is a matter of supreme importance in the vast field of mercantile transactions; drafts, bills of exchange and other negotiable instruments take the place of money, and circulate almost as freely. Hence, to hold that each assignee must, before accepting them, inquire into each and every suspicious circumstance bearing upon the original execution, or pointing to possible defenses in a suit between the original parties, would produce serious inconveniences to the commercial world. Hukill v. McGinnis, 70 Colo. 455, 202 P. 110 (1921); Hendrickson v. Alpert, 159 Colo. 463, 412 P.2d 433 (1966).

Even though bearing no revenue stamps. A promissory note, otherwise in due form, is complete and regular upon its face although it bears no revenue stamps, since the absence of revenue stamps is no notice to an indorsee of a promissory note of any infirmity in the instrument or defect in the title of the person negotiating it, is not a suspicious circumstance, and is no evidence that the note was taken in bad faith. Metro. State Bank v. McNutt, 73 Colo. 291, 215 P. 151 (1923).

Whether an instrument is complete and regular on its face is questionable where an officer of a payee bank testifies that in 90 to 100 percent of similar cases where instruments are signed blank, they are filled in when delivered to the bank. Atkinson v. Englewood State Bank, 141 Colo. 436, 34 P.2d 702 (1960).

Tests other than "actual knowledge" may be used in resolving the issue of whether an endorsee of a promissory note is a holder in due course including whether the holder had in his possession facts from which he had reason to know of the defenses "at the time in question". The critical time for such notice is when the party comes into possession of the note as a holder. Salter v. Vanotti, 42 Colo. App. 448, 599 P.2d 962 (1979).

Duty to inquire as to possible defenses. Where an instrument is regular on its face there is no duty on the part of a check cashing service to inquire as to possible defenses, unless circumstances of which the holder has knowledge are of such a nature that the failure to inquire reveals a deliberate desire to evade knowledge because of a fear that investigation would disclose the existence of a defense. Money Mart Check Cashing Center, Inc. v. Epicycle Corp., 667 P.2d 1372 (Colo. 1983).

When inquiry required. If the purchaser has actual knowledge of facts which would apprise him of possible irregularities some inquiry is required by the notice provisions of the UCC. Salter v. Vanotti, 42 Colo. App. 448, 599 P.2d 962 (1979).

Refusal to investigate. The protection afforded a holder in due course cannot be used to shield one who simply refuses to investigate when the facts known to him suggest an irregularity concerning the commercial paper he purchases. Salter v. Vanotti, 42 Colo. App. 448, 599 P.2d 962 (1979).

Party held to have notice of defense sufficient to deny status as holder in due course. Ackmann v. Merchants Mtg. & Trust Corp., 659 P.2d 697 (Colo. App. 1982).

Party held to have notice of defense sufficient to deny status as holder in due course. See Ackmann v. Merchants Mtg. & Trust Corp., 659 P.2d 697 (Colo. App. 1982), rev'd on other grounds sub nom. Kopeikin v. Merchants Mortg. & Trust Corp., 679 P.2d 599 (Colo. 1984).

Instrument must be acquired before maturity. One of the essentials to constitute a holder in due course is that the instrument must have been acquired before maturity. First Nat'l Bank v. Lewis, 57 Colo. 124, 139 P. 1102 (1914).

One who acquires a note after its maturity is not a holder in due course. See Vigil v. Pacheco, 95 Colo. 405, 36 P.2d 766 (1934).

Certified check not mature before presentment. A check certified to the payee by the bank on which it is drawn as accepted payable at the same bank does not mature until presented to such bank for payment, and a purchaser by indorsement before such presentment is a holder in due course, but not after maturity. Citizens' Nat'l Bank v. First Nat'l Bank, 66 Colo. 426, 182 P. 12 (1919).

Record supported the trial court's finding that the bank had no notice of any offset against the promissory note where the note was current in its payments at the time of the transfer, the maker of the note made another payment thereon subsequent to the transfer to the bank, and the note itself did not specify any offset against it. First Nat. Bank v. Lohman, 827 P.2d 583 (Colo. App. 1992).

E. Facts Not Constituting Notice.

The fact that a promissory note is indorsed without recourse is not in itself sufficient to put a purchaser on inquiry. Omaha Steel Works v. Martin, 78 Colo. 560, 243 P. 619 (1926).

Knowledge that pledgor of note was treasurer of payee. Purchaser's knowledge, at the time of accepting a note, that the pledgor thereof was treasurer of the payee is not any evidence of bad faith on the part of the purchaser and insufficient to warrant any inference thereof where in pledging the note the pledgor exercised no function of treasurer. Burnham Loan & Inv. Co. v. Sethman, 64 Colo. 189, 171 P. 884 (1918).

Where director-purchaser relies on corporation's agents. The purchaser of a current note from an industrial corporation payee is not individually charged with knowledge of false representations made by agents of the corporation in procuring the note merely because he is a director in the corporation. Dodo v. Stocker, 74 Colo. 95, 219 P. 222 (1923).

F. Recordation Not Notice.

Constructive notice given by the recordation of instruments does not impute such knowledge as is contemplated by this section. Metro. State Bank v. McNutt, 73 Colo. 291, 215 P. 151 (1923).

G. Opportunity to Act.

An organization is charged with notice of infirmities relating to the procurement of a note when its principal officer obtains it, in which case, it is not entitled to protection as a holder in due course. Reserve Bldg. & Loan Ass'n v. Jamison, 108 Colo. 503, 119 P.2d 621 (1941).

When a company learns that its checks used in gambling by one of its employees have been paid by the bank, it cannot disaffirm and recover from the bank except by prompt action. Nat'l Surety Co. v. Stockyards Nat'l Bank, 84 Colo. 563, 272 P. 470 (1928).

III. PAYEE MAY BE H.D.C.

Title of payee of promissory note is defective when he negotiates it fraudulently or in breach of trust. Delaney v. Brownwood, 73 Colo. 83, 213 P. 578 (1923).

IV. WHEN NOT H.D.C.

A trustee in bankruptcy is not a bona fide purchaser for value but takes a note subject to all defenses the maker may have against the payee. Investors' Fin. Co. v. Bodnar, 87 Colo. 498, 289 P. 599 (1930).