Are You Taking in Good Faith?

Taking in good faith is a requirement for a given holder of a negotiable instrument to be considered a holder in due course (HDC), and is one of the simultaneously more moral elements of the Uniform Commercial Code. It is also one of the more debatable and troublesome elements. This is because an HDC who takes goods or negotiable instruments in good faith cannot be held accountable for those goods or instruments.

The HDC can retain those goods and instruments even if it can be shown that they were transferred to the HDC from a party that did not obtain them in good faith. This is designed to protect the HDC from culpability for theft or other actions which it did not actually take, but profited from indirectly through a transaction in good faith.

For a given party to be dealing in good faith, that party must exhibit a clear intent to perform a legitimate transaction without any knowledge of the potential illegitimacy of the goods or negotiable instruments being sold by another party.

If the party did bear any knowledge of the illegitimacy of the negotiable instrument or had any reason to suspect the overall legitimacy of the transaction, then it could not be held as an HDC, as it would not have been dealing in good faith. The only way for a given party to obtain status of dealing in good faith is for that party to have genuinely had no idea that there was any illegitimacy in the negotiable instruments.

As an example, if a given party attempting to purchase or otherwise obtain a negotiable instrument was presented with the desired negotiable instrument and it clearly seemed to feature a forged signature or other means of falsification, then a party dealing in good faith would be obligated not to go through with the deal. If the party did go through with the deal and purchase an obviously falsified negotiable instrument, that party would be forfeiting any status as an HDC.

The good faith of any given party can be taken advantage of, however. This is the primary means for manipulating the HDC doctrine for deceptive gain. A party which is sold a negotiable instrument in good faith could not be held responsible for the previous illegitimate dealings of the seller, and as a result, the HDC doctrine would kick in, insulating the buying party from any repercussions, while the seller is no longer involved with the negotiable instrument and cannot be sued for any form of restitution. That seller would likely not have been dealing in good faith when the seller originally obtained the negotiable instrument, either through theft or through deception.

But there is no way for the buyer to know that unless the deceptive practices are clearly obvious or the situation is all too suspicious. For example, if someone steals a check out of someone else's wallet and cashes it at a bank, then, assuming that the signatures on the check are not obviously forged, it will be very difficult for the bank to determine that the check is illegitimate. The bank will, thus, honor the check when presented.

NEXT: Being a Holder Through the HDC