Holder in Due Course vs. Subject to Defenses
Whether the foreclosing party took the Note free of the borrower's defenses — or subject to them.
Overview
The holder in due course (HDC) doctrine determines whether the party holding the promissory note takes it FREE of the borrower's defenses and claims. Under UCC Article 3, a holder in due course takes the instrument: (1) for value, (2) in good faith, (3) without notice that it is overdue, has been dishonored, or is subject to any defense or claim. If the foreclosing party is an HDC, the borrower cannot assert personal defenses (fraud in the inducement, failure of consideration, breach of contract) against it — only 'real defenses' (infancy, duress, illegality, fraud in the factum, discharge in bankruptcy). However, most mortgage notes in foreclosure are HELD BY THE ORIGINAL LENDER (not an HDC because the lender is not a 'holder in due course' — they're the originator) or were transferred through securitization in a way that gives the transferee NOTICE of defenses.
Legal Definition
Under UCC § 3-302, a holder in due course takes an instrument: (1) for value (paid consideration), (2) in good faith (honesty in fact and observance of reasonable commercial standards), and (3) without notice of: (a) the instrument is overdue or has been dishonored, (b) unauthorized signature or alteration, (c) claims to the instrument, or (d) defenses or claims in recoupment. An HDC takes free of all personal defenses (fraud in the inducement, failure of consideration, breach of contract, etc.) but is still subject to 'real defenses' (UCC § 3-305(a)(1): infancy, duress, lack of legal capacity, illegality, fraud in the factum, discharge in insolvency proceedings).
When This Defense Applies
Asserted when: the foreclosing party claims to be an HDC (to defeat the borrower's defenses); the borrower argues the foreclosing party is NOT an HDC (because it took the note after default, with notice of defenses, or as part of a bulk transfer without due diligence); or the borrower asserts REAL defenses that survive even against an HDC (fraud in the factum — the borrower didn't know they were signing a mortgage).
Common Foreclosure Scenarios
The loan was originated by FlyByNight Mortgage with fraudulent income inflation — FlyByNight immediately sold the loan to Wall Street Trust; the Trust claims HDC status (no knowledge of the fraud); the borrower argues the Trust had constructive notice (the loan was part of a bulk transfer of subprime loans with known underwriting defects)
The Note was transferred while it was already in default — under the UCC, a purchaser who takes an instrument with notice that it is overdue CANNOT be an HDC; the borrower asserts all defenses against the purchaser
The borrower proves FRAUD IN THE FACTUM: the borrower was told they were signing an insurance form (not a mortgage) — this is a REAL defense good even against an HDC
Burden of Proof
The party claiming HDC status (typically the foreclosing plaintiff, or the party seeking to avoid the borrower's defenses) bears the burden of proving HDC status by a preponderance of the evidence. If the plaintiff fails to prove HDC status, they take subject to all the borrower's defenses. The borrower bears the burden of proving any affirmative defense (fraud, failure of consideration, etc.).
Court Considerations
In modern foreclosure litigation, HDC analysis is often secondary to standing — courts first ask 'does the plaintiff own the note?' (standing) before asking 'does the plaintiff hold it as an HDC?' (defenses). Key issues: (1) if the note was transferred AFTER the borrower defaulted (the loan was in default), the transferee had notice (the default is apparent from the records) and CANNOT be an HDC, (2) securitization trusts often took loans in bulk without individual due diligence — this does NOT constitute 'good faith' under the UCC's objective standard, (3) the original lender is NEVER an HDC (it originated the loan and necessarily has knowledge of any origination fraud).
Homeowner Strategies
Determine when the loan was transferred relative to the default — if the note was sold after you defaulted, the purchaser cannot be an HDC
If the plaintiff claims HDC status, demand evidence: what did they pay for the Note? What due diligence did they perform? When did they acquire it?
Assert personal defenses (fraud in the inducement, predatory lending, TILA violations) — the plaintiff must prove HDC status to defeat these; they often cannot
If you have facts supporting fraud in the factum (you didn't know you were signing a mortgage), this is a real defense — assert it as a complete defense even against an HDC
Related Court Documents
Related Court Procedures
Frequently Asked Questions
What's the difference between a holder and a holder in due course?+
A HOLDER is simply the person in possession of the note (indorsed to them or in blank). A HOLDER IN DUE COURSE is a holder who ALSO took the note: for value, in good faith, and without notice of defenses. A mere holder takes subject to all defenses (including personal defenses). Most foreclosing plaintiffs are mere holders, not HDCs — they acquired the note through bulk securitization transfers that fail the HDC requirements.
Can a securitization trust be a holder in due course?+
Generally, NO. Securitization trusts acquired mortgages in bulk (thousands at a time) with no individual review of each loan. This fails the 'good faith' requirement under the UCC (which requires actual good faith — honesty in fact and observance of reasonable commercial standards). Courts have repeatedly held that bulk securitization transferees are not HDCs. Additionally, many securitizations occurred after the loans were already in default, giving the trust notice that the instruments were overdue.
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