Requirements for HDC Status. In the fall of 1980, the Williams Brothers Asphalt Paving Co contracted with two local communities in Michigan to resurface some of their streets. During the course of the jobs, Williams incurred debts to its supplier,

Question

Rieth-Riley Construction Co, in the amount of $45,960. When the work was completed, Williams received a total of $188,433 from the two communities and deposited the funds into its checking account at First Security Bank. Although the amount owed to Rieth-Riley ($45,960) was to have been set aside by the communities in a special trust (Michigan Builders Trust Fund), it was not. Williams owed a secured debt to First Security Bank and so immediately paid to the bank the entire amount it had received. The payment was in the form of checks drawn on Williams's checking account at the bank and made payable to the bank's order. Williams later filed for bankruptcy, and Rieth-Riley sought to get its money from the bank, contending that Williams Brothers had no right to the $45,960 still owed to Rieth-Riley and thus could not negotiate it to the bank (via the checks Williams Brothers had made payable to the bank). Is the bank a holder in due course in this instance?

Answer 1

Requirements for HDC status
The court held that the bank was a holder in due course (HDC) and thus the supplier was not entitled to recover the payments. Under the UCC, an HDC takes an instrument free from all claims to it on the part of any person. An HDC is a holder who takes an instrument for value, in good faith, and without notice of a claim against it by any person. The central issue in determining whether the bank was an HDC was whether the bank had taken the checks "for value." Under UCC 3-303, a holder takes an instrument for value "when he takes the instrument in payment of or as security for an antecedent claim against any person whether or not the claim is due." The bank gave Williams value for the money it received by extinguishing a preexisting debt owed to the bank by Williams. The bank also accepted Williams's checks in good faith and did not know some of the money it was receiving from Williams belonged to Rieth-Riley, nor should it have known this. The bank was thus an HDC. (This case was decided under the unrevised Article 3, but the result would likely be the same under the revised Article 3.)