Another major requirement for a negotiable instrument and being a holder in due course is that the holder take without notice.
Here, commercial law is set up to prevent any individuals from knowingly obtaining negotiable instruments which might contain a flaw in them that would later cause problems for the holder in obtaining payment for those instruments. If the holder knew that the instruments bore such flaws at the time he or she obtained those instruments, then under commercial law he or she is no longer entitled to any kind of protection if another holder cannot obtain adequate payment later on.
The only way that a holder would be entitled to such protection would be if the holder had obtained status as a holder in due course under commercial law, which would require that holder received no notice warning of any possible such problems nor any such notice with enough time to take necessary action on the notice.
Commercial law provides for methods under which such notice could be presented to a potential new party to a negotiable instrument, which would then invalidate that party’s claims of being a holder in due course. These types of notice include financial statements and notices of debt.
Additionally, any notice regarding a defense that a prior party to the negotiable instrument might be making against paying off the negotiable instrument would suffice under commercial law as sufficient notice to prevent the recipient party from being a holder in due course. Knowledge of any such defense would inherently warn the new recipient that the negotiable instrument was being contested and would therefore result in a forfeiture of any exemption from such a defense under commercial law.
While this element of becoming a holder in due course is included in order to prevent any fraudulent dealings on the part of the new holder, the problem is that this clause can again be manipulated by the intermediary holder.
If one party issues a promissory note to a second, and then that second party sells the promissory note to the third, then the second party who might have all the notice necessary to remove the holder in due course status from the third party might not present such information in order to keep that party as a holder in due course and make the third party more likely to purchase the promissory note.
Thus, although this statute would prevent a party that has certain information from acting illegitimately even in the face of such information, it still allows for some manipulation of commercial laws.