A person to whom negotiable paper is negotiated may have a right to enforce it according to its tenor notwithstanding his predecessor in title had no such right to enforce it, provided, the negotiation has been made under certain circumstances, and if made under those circumstances, the holder is said to be a holder in due course.
We have seen at the outset that the purpose of having a law of negotiable paper is to permit an obligation to pay money to be separated from the transaction of which it was originally a part and negotiated as an independent obligation in itself, the floating, uncontradic-table word of the party who gave it that he will pay according to the tenor to any one who holds it at maturity. We have seen that if a debt is not drawn in negotiable form it may be assignable, but in that event the assignment confers no higher right than the assignor has. But in the law of negotiable paper a transferee may reach a plane of greater protection. He cares not what may have been the original transaction, or whether there may be defenses of fraud, breach of contract, failure or lack of consideration, uncredited payment, set-off and the like. These are not available against him and that which he has secured stands enforceable against the debtor pursuant to its terms. But this is true only in case the acquirer took paper negotiable in form which was complete and regular on its face, gave value therefor, obtained his title before the instrument was overdue, and had no knowledge or notice of the defect in his transferor's title. If he did acquire under those circumstances he is known as a holder in due course, and then has the peculiar protection of the law of negotiable paper. Now it is quite apparent that if the party liable on the paper has no defense; if it is a debt he must pay if not transferred then no policy demands that limitations be imposed upon the transfer. Therefore if there are no defenses that could be made against any one, we are not concerned whether a purchaser acquires as a holder in due course or not. He may acquire an overdue instrument, may have it as a gift; and of course has no knowledge or notice of any defense, for our hypothesis is that there is none.
Example 34. A gives B a promissory note in payment of a contract to be performed by B. B breaks the contract. B negotiates the note to C. To escape being subject to this defense C must have acquired the note under the circumstances that make him a holder in due course.
Example 35. A borrows money from B and gives his promissory note therefor. B negotiates this note to C. As A has no defense against any one, it is useless to inquire whether or not C acquired as a holder in due course. All that interests A is whether C is really the legal owner. C may have acquired the paper by way of gift and may have taken long after maturity. This is immaterial.
In the present chapter we shall inquire under what circumstances one must obtain paper in order to be a holder in due course. In making that inquiry we shall assume that there are defenses available against the party from whom the paper was acquired, and therefore available against this taker unless he is a holder in due course.
In order to claim the peculiar advantages of the law merchant, the holder must be a holder in due course, that is, he must have acquired (1) paper complete and regular on its face; (2) for value; (3) in good faith and (4) before the paper was overdue.
It is essential that all these circumstances exist to make one a holder in due course. They are discussed in order.
A holder in due course is one who has acquired an instrument complete and regular on its face.
Manifestly one cannot be a holder in due course unless he acquires an instrument negotiable in form, and if it is incomplete or irregular when he obtains it, if in fact it does not lack negotiability, it at least imposes upon him the necessity of inquiry.
Example 36. A note was made payable "four............
after date." In A's hands it was subject to the defense of failure of consideration. A sold it to B, who acquired it for value, before it was overdue and without notice of the defense. Held that because of the irregularity or incompleteness B was not a holder in due course and was subject to the defense.82
82. In re Philpott's Estate, 169 la. 555, 151 N. W. 825.