Future Business Leaders of America (FBLA) Business Law Practice Exam

What characterizes a holder in due course?

1. A holder who takes an instrument for value, in good faith, with knowledge of defects

2. A holder who takes an instrument for value, in good faith, and without notice of defects

3. A holder who is an agent of the original owner

4. A holder who pays less than the market value for an instrument

The correct answer is: A holder who takes an instrument for value, in good faith, and without notice of defects

A holder in due course is characterized by specific qualities that provide them with certain legal protections and rights regarding negotiable instruments, such as checks or promissory notes. The correct answer identifies that a holder in due course takes an instrument for value, in good faith, and without notice of any defects. Taking an instrument for value means that the holder has given something of worth in exchange for the instrument, which establishes a legitimate interest in it. The requirement of good faith indicates that the holder acts honestly and sincerely when acquiring the instrument. Importantly, not having notice of defects means that the holder is unaware of any issues, such as claims or defenses that could invalidate the instrument. This absence of knowledge is crucial because it protects the holder from being challenged on the instrument's validity due to defects that they are not privy to. This combination of characteristics ensures that holders in due course can enforce the instrument free from certain claims by prior parties, thus promoting the stability and reliability of negotiable instruments in commerce. Such protections encourage people to engage in financial transactions without fear that they will inherit prior complications. The other options do not encompass all three critical aspects of taking the instrument: value, good faith, and lack of knowledge of defects, which are essential to the