Okla. Stat. tit. 12A § 3-302

Current through Laws 2024, c. 363.

Section 3-302 - Holder in Due Course

(a) Subject to subsection (c) of this section and subsection (d) of Section 3-106 of this title, "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 3-306 of this title, and (vi) without notice that any party has a defense or claim in recoupment described in subsection (a) of Section 3-305 of this title.

(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 paragraph (1) of subsection (a) of Section 3-303 of this title, 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.

Okla. Stat. tit. 12A, § 3-302

Laws 1961, p. 108, § 3-302; Amended by Laws 1991, SB 25, c. 117, § 53, eff. 1/1/1992.

Oklahoma Code Comment

1. Subsection (a)(l) is similar to the old Negotiable Instruments Law previously found, in part, at 48 O.S. § 122, which contained a provision requiring that to be negotiable, an instrument must be complete and regular on its face. Under subsection (a)(l), the taker of an irregular, incomplete instrument is not a person who should be protected against defenses of the obligors. The irregularity or incompleteness, however, must indicate that the instrument may not be what it purports to be.

2. This Section also makes it clear that the payee of an instrument may be a holder in due course. That was not the case under pre-Code law. See First State Bank of Booker, Tex. v. First Nat'l Bank of Beaver, Okla., 319 F.2d 338 (10th Cir. 1963) (applying Oklahoma law). Although the language that a payee may be a holder in due course was omitted from Section 3-302 in the 1992 revisions, there was no intent to change the present law. "Holder" is defined in sub section 1-201(20) as "the person in possession if the instrument is payable to bearer or, in the case of an instrument payable to an identified person, if the identified person is in possession." Under sub section 3-105(a) , "issue" means the first delivery of an instrument by a maker or drawer for the purpose of giving rights in the instrument. A payee is a person to whom an instrument is issued and, thus, is a holder of the instrument. The payee could be a holder in due course if the requirements of this Section are met. See Eldon's Super Fresh Stores, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 296 Minn. 130, 207 N.W.2d 282 (1973).

3. Subsection (d) verifies that a holder may be a holder in due course to the extent the holder gives value in the form of a partially performed promise of performance. In such instance, the holder is a holder in due course to the extent of the fraction of the amount payable under the instrument which is equal to the value of any partial performance, divided by the value of the full performance promised.

4. Subsection (g) for the first time subordinates the holder in due course doctrine to state consumer law. Subsection (g) subjects the rights of a holder in due course under Section 3-302 to "any law limiting status as a holder in due course in particular classes of transactions." Official Comment 7 indicates this provision refers to the "large body of state statutory and case law restricting the use of the holder in due course doctrine in consumer transactions as well as some business transactions." No Oklahoma case has restricted holder in due course rights in a business transaction. Further, while the so called "close connectedness" doctrine (see Unico v. Owen, 50 N.J. 101, 232 A.2d 405 (1967)) was argued in Timeplan Corp. v. Fuxa, 9 U.C.C. Rep. Serv. 262, 42 Okla. B.J. 1217 (Okla. Ct. App. 1971), the Court did not deal with the argument on procedural grounds.

However, Oklahoma law does address holder in due course rights in consumer transactions. In the case of a consumer credit sale or consumer lease, as defined in 14A O.S. §§ 2-104 and 2-106, a seller or lessor may not take a negotiable instrument other than a check as evidence of the buyer's or lessor's obligation. A violation of those sections can result in severe monetary sanctions. See 14A O.S. § 5-202(1); Circle v. Jim Walter Homes, Inc., 535 F.2d 583 (10th Cir. 1976), on remand, 470 F.Supp. 39 (W.D. Okla. 1979), aff'd, 654 F.2d 688 (10th Cir. 1981), Bill Brown Motors, Inc. v. Crane, 589 P.2d 708 (Okla. Ct. App. 1978). Further, a holder of the instrument in violation of those sections is not a holder in good faith (and thus will not be a holder in due course under the UCC) if the holder takes the instrument with notice that it is issued in violation of the prohibition. See 14A O.S. § 2-403.

The same result will be true if the seller or lessor attempts to avoid a violation when taxing a negotiable instrument by inserting a "waiver of defenses" clause in the parties' agreement. In some circumstances, an agreement by the buyer or lessee not to assert claims or defenses against an assignee would be enforceable under 14A O.S. § 2-204. However, in consumer credit sales (but not in consumer leases, per 14A O.S. § 2-204, 12A O.S. 5 2A-407(3), and 16 C.F.R. part 433 ), the governing consumer protection law is the Federal Trade Commission's Holder in Due Course Regulations, 16 C.F.R. part 433 . Those Regulations require a seller, to avoid committing an unfair or deceptive act or practice under Section 5 of the FTC Act, to place a provision in a consumer credit contract, in at least 10-point type, stating that any holder of the contract is subject to all claims and defenses which the debtor could assert against the seller of goods or services obtained pursuant to the contact. In addition, the FTC Regulations require a seller to refuse to accept the proceeds of any purchase money loan unless a similar provision is included in the consumer credit contract made in connection with the purchase money loan. Guidelines to the FTC Regulations further explain the circumstances under which the provision must be included in the lender's contract.

Sub section 3-106(d) prevents the required FTC provision from otherwise destroying the negotiability of the instrument, which would exclude the instrument from coverage under Article 3 at all.

5. Another issue in today's regulatory arena concerns the holder in due course rights of federal agencies such as the FDIC or RTC. Official Comment 4 to Section 3-102 recognizes that if the United States is a party to an instrument, then absent a specific federal statute or regulation, the government's rights and duties are governed by federal common law and not by state law (i.e., not by the WCC). If the party is a federal financial institution insurance agency, the federal common law rule of D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447(1942) , protects the agency, when it acquires the assets of a failed institution, against diminishment in value of the institution's assets by reason of undisclosed arrangements between the obligor and the institution. Thus, even though the agency would not be a holder in due course under the UCC as a result of sub section 3-302(c)(ii) (which denies bolder in due course status when the instrument is taken by purchase as part of a bulk transaction not in the ordinary course of the transferor's business), nevertheless the agency, under the federal rule, may acquire somewhat similar rights because, for example, a secret agreement not to enforce a note would not be valid against the agency. The codification of the D'Oench, Duhme rule at 12 U.S.C. §§ 1823(e) and 1787(p)(2) , and the subsequent extremely broad interpretation of the scope of such statutes in Langley v. FDIC, 484 U.S. 86(1987) , has further conferred a status akin to that of a holder in due course on federal financial institution insurance agencies.

Finally, starting with FDIC v. Rockelman, 460 F.Supp. 999 (E.D. Wis. 1978), a string of opinions has specifically conferred what can be described as "super" holder in due course status on such agencies as an extension of the federal policy begun in D'Oench, Duhme, enabling the agencies to avoid all personal-type defenses. ``Super" status exists because not only is the state law limitation on bulk acquisitions ignored, other state law conditions to holder in due course status also may be ignored, such as the requirements of an indorsement, that the instrument not be overdue, and a lack of notice. See Campbell Leasing Inc. v. FDIC, 901 F.2d 1244 (5th Cir. 1990); FDIC v. Leach, 772 F.2d 1262 (6th Cir. 1985); FDIC v. Wood, 758 F.2d 156 (6th Cir.), cert. denied, 474 U.S. 944(1985) .

Recent cases have likewise protected institutions taking good assets from the federal agency, when the acquiring institution later brings an action to enforce the instrument and a defense is asserted. In essence, the federal common law has embraced the "shelter" doctrine of sub section 3-203(b) . See Bell & Murphy and Assocs. v. Interfirst Bank Gateway, N.A., 894 F.2d 750 (5th Cir.), cert. denied, 498 U.S. 895(1990) .

6. Generally, knowledge of the following does not give the holder notice of a defense or claim, thereby defeating holder in due course status: (a) the instrument is antedated or postdated (see former 48 O.S. § 32); (b) the instrument was issued or negotiated in return for an executory promise or separate agreement, unless the holder has notice that a defense or claim arises therefrom (see Prentice v. First Nat? Bank of Roff, 101 Okla. 232, 224 P. 963 (1924)); any party has signed for accommodation (see UCC §§ 3-605(h) and 3-419(c)); (c) an incomplete instrument has been completed, unless the holder has notice of improper completion (see UCC §§ 3-407 and 3-417 and prior 48 O.S. §§34 to 36); (d) any person negotiating the instrument is or was a fiduciary (see UCC § 3-307); or (e) there has been default in payment of interest on the instrument or in payment of any other instrument, except one of the same series (see Hobart M. Cable Co. v. Bruce, 135 Okla. 170, 274 P 665 (1928)).