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Know Your Methods of Taking for Value

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.

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