This section is from the book "The Law Of Contracts", by William Herbert Page. Also available from Amazon: Commercial Contracts: A Practical Guide to Deals, Contracts, Agreements and Promises.
Before the Negotiable Instruments Law was enacted, a person who held a negotiable instrument free from defenses which might be made as against the original payee, was generally known as the bona fide holder. The bona fide holder was usually defined as one who took in good faith, for a valuable consideration, in the usual course of business, before maturity, and without notice of a defense against the instrument or of the dishonor thereof.1 The Negotiable Instruments Law does not use the term "bona fide holder," but instead it uses the term "holder in due course." It provides that "a holder in due course is a holder who has taken the instrument under the following conditions: (1) that it is complete and regular upon its. face; (2) that he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; (3) that he took it in good faith and for value; (4) that at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it."2 This section of the Negotiable Instruments Law seems to be declaratory of the pre-existing common law, except that on the one hand it omits the requirement that transfer must be in the usual course of business, and on the other hand, it calls the holder "a holder in due course," and not a "bona fide holder.'
1 England. Grant v. Vaughan, 3 Burr. 1516.
United States. Goodman v. Simonds, 61 U. S. (20 How.) 343, 15 L. ed. 934.
Arkansas. Morehead v. Harris, 121 Ark. 634, 182 S. W. 521; JohnBon v. Harrison, 177 Ind. 240, 39 L. R. A. (N.S.) 1207, 97 N. E. 930.
Kentucky. American National Bank v. Madison, 144 Ky. 152, 38 L. R. A. (N.S.) 597, 137 8. W. 1076.
Minnesota. Robinson v. Smith, 62 Minn. 62, 64 N. W. 90; Pennington County Bank v. First State Bank, 110 Minn. 263, 26 L. R. A. (N.S.) 849, 125 N. W. 119.
Ohio. Selser v. Brock, 3 O. S. 302.
Wisconsin. Burnham v. Merchants' Exchange Bank, 92 Wis. 277, 66 N. W. 510.
2 Section 52 of the Negotiable Internments Law.
For a discussion of this definition, see:
Arizona. Ellis v. First National Bank, 19 Ariz. 464, 172 Pac. 281.
Idaho. Southwest National Bank v. Lindsley, 29 Ida. 343, 158 Pac. 1082.
Iowa. Higby v. Bahrenfuss, 180 Ia. 316, 163 N. W. 247.
Kentucky. Eichberg v. Board of Education, 165 Ky. 814, 178 S. W. 1075.
Nebraska. Fisher v. O'Hanlon, 93 Neb. 529, L. R. A. 1918C, 727, 141 N. W. 157.
Oklahoma. Hodgins v. Northwestern Finance Co., 46 Okla. 95, 148 Pac. 717; Lambert v. Smith, 53 Okla. 606, 157 Pac. 909; Critser v. Steeley, - Okla. - , 162 Pac. 795.
Oregon. Everding v. Toft, 82 Or. I, 150 Pac. 757, 160 Pac. 1160.
Virginia. Ratcliffe v. Costello, 117 Va. 563, 85 S. E. 469.
Notice of one defect does not prevent a holder from taking without notice of other defects; and accordingly he may be a bona fide holder as against defects of which he did not have notice.3 Notice of the fact that a note is given for a patent right does not prevent the holder from taking such note free from the defense of payment.4 One who has notice that an instrument is obtained by fraud or bad faith, is not, however, a bona fide holder, although he does not know the means by which such fraud was perpetrated.5
The maker may estop himself from claiming notice, by expressly promising to pay the transferee, thereby inducing him to accept the note.6