Printable Format84-3-302. Holder in due course. (a) Subject to subsection (c) and K.S.A. 84-3-106(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 (A) for value, (B) in good faith, (C) 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, (D) without notice that the instrument contains an unauthorized signature or has been altered, (E) without notice of any claim to the instrument described in K.S.A. 84-3-306, and (F) without notice that any party has a defense or claim in recoupment described in K.S.A. 84-3-305(a).
(b) Notice of discharge of a party, other than discharge in an insolvency proceeding, is not notice of a defense under subsection (a), 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 (1) by legal process or by purchase in an execution, bankruptcy or creditor's sale or similar proceeding, (2) by purchase as part of a bulk transaction not in ordinary course of business of the transferor, or (3) as the successor in interest to an estate or other organization.
(d) If, under K.S.A. 84-3-303(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 (1) the person entitled to enforce an instrument has only a security interest in the instrument and (2) 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.
History: L. 1991, ch. 296, § 28; February 1, 1992.
Revisor's Note:
Former section 84-3-302 was repealed by L. 1991, ch. 296, § 111 and the number reassigned to the current text.
KANSAS COMMENT, 1996
This section is identical to the 1995 Official text except that lower case Roman numerals have been replaced by capital letters. It is largely derived from the former 84-3-302 and 84-3-304. Historical case and statutory references may be obtained from the 1965 or 1983 bound Volume 7 of the Kansas Statutes Annotated.
Paragraph (a)(1) regarding notice of alteration or forgery is taken from the former 84-3-304(a), and substantially restates that section.
Paragraph (a)(2) deals with "value," defined in 84-3-303, and "good faith," defined in 84-3-103(4), which now includes the requirement of "observance of reasonable commercial standards of fair dealing," in contrast to the general definition in 84-1-201(19). These standards will vary according to the context of the individual transaction. See 84-3-103 Official Comment 4. "Without notice" essentially means without notice of any defenses, which are described in subparagraph (C),(D) and (E) and in 84-3-304 (overdue instruments), 84-3-305 (defenses and claims in recoupment), 84-3-306 (dealing with claims to an instrument) and 84-3-307 (notice of breach of a fiduciary duty, which should be read in conjunction with 84-3-206(d) dealing with indorsements to fiduciaries).
Subsection (b) provides that notice of discharge of a person does not prevent a transferee from having holder in due course status, if the discharge is not the result of a defense to payment. Thus there can be a holder in due course after a party's name has been stricken. In contrast, if a defense is the basis of a claim of discharge, notice of the defense will prevent holder in due course status.
The code no longer directly addresses the issue of whether a payee can be a holder in due course. As Official Comment 4 makes clear, a payee who meets the requirements of 84-3-302 may be a holder in due course. This will generally be where the issuer's defense is not related to the conduct of the payee, but instead arises from the actions of a third party.
Subsections (d) and (e). Subsection (d) clarifies the calculation of recovery where the claimant is a partial holder in due course because not all of the agreed upon consideration has been paid, and the defendant only has a defense. The holder can assert holder in due course status only to the extent of the actual performance of consideration, over the value of the agreed consideration times the face value of the instrument. Thus if the holder has paid $30 of an agreed consideration of $90 for an instrument with a face value of $100, the holder is a holder in due course to the extent of $33 (30/90 X $100). To preserve the obligor's defense, while still protecting the holder in due course, the holder's collection should be allocated against the portion of payment to which there is no defense. Thus, if the obligor had a defense to $80 of the payment above, the defense would protect payment only of $66, and the partial holder in due course would recover $33.
Subsection (e) deals with the extent to which a secured party may enforce an instrument owned by the debtor ("the person who granted the security interest") against an obligor with a defense, and limits it to the amount of the debt, if the obligor has a defense against the debtor.
Subsection (g). It should be emphasized that the Kansas Uniform Consumer Credit Code obliterates holder in due course status with respect to notes or installment contracts evidencing transactions for personal, family or household purposes. See K.S.A. 16a-3-404 (assignment of dealer paper) and K.S.A. 16a-3-405 ("all in the family" loans). See also Kansas Comment, 1995 to these UCCC sections. In short, although the holder in due course doctrine is still alive and well in Kansas for some limited consumer transactions such as bank checks and some commercial credit transactions, the doctrine has been severely limited in recent years both by statute and federal regulations.
Law Review and Bar Journal References:
"Education of Attorneys on Appeal and/or Cross Appeal," James Oliver, 78 J.K.B.A. No. 3, 21 (2009).
CASE ANNOTATIONS
1. Consumer protection act (50-623 et seq.) inapplicable to negotiable instruments law; drawer liable to subrogee of holder in due course. First Nat'l Bank v. Jones, 17 K.A.2d 269, 270, 271, 839 P.2d 535 (1992).
2. Whether demand for payment on letter of credit was nonconforming relieving bank of obligation to pay examined. Brul v. MidAmerican Bank & Trust Co., 820 F.Supp. 1311, 1314 (1993).
3. Whether UCC (84-1-201 et seq.) provisions control over specific requirements of cash-basis law (10-1101 et seq.) examined. U.S.D. No. 207 v. Northland Nat'l Bank, 20 K.A.2d 321, 332, 887 P.2d 1138 (1994).
4. Cited; subsection (d) of 84-3-302 does not apply when holder in due course has fully completed its performance. Hurst Enterprises v. Crawford, 40 K.A.2d 1018 to 1022, 197 P.3d 882 (2008).