A Pop Quiz for Trustees and Their Counsel: What is the difference between a good-faith purchaser for value (BFP) and a holder in due course?

by Charles E. Rounds, Jr.
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§8.45 What Is the Difference Between a Good-Faith Purchaser for Value (BFP) and a Holder in Due Course?
[Excerpted from Loring and Rounds: A Trustee’s Handbook (2013)]
Fifty years ago had a trustee asked his lawyer “What is the difference between a good-faith purchaser for value and a holder in due course?” the lawyer might not have had the precise answer in his head but he would have been able to find it readily somewhere in the notes that he had taken back in law school. He certainly would have had the gist of the answer in his head before hitting the books. It is unfortunate that the days are long gone when the American law school supplied its graduates with the basic doctrinal tools needed to begin the long and difficult process of becoming complete lawyers. Navigating at the intersection of law and equity (as the question requires one do), forget it. See generally my Bricks Without Straw: The Sorry State of American Legal Education (http://www.jdsupra.com/legalnews/bricks-without-straw-the-sorry-state-of-58384/) and  Unintended Consequences of De-Contextualizing Contracts (http://www.jdsupra.com/legalnews/law-schools-no-longer-adequately-equip-t-30477/). As to the answer to the trustee's question, that may be found in Section 8.45 of Loring and Rounds: A Trustee’s Handbook (2013), which section is reproduced below.
As one learned commentator has noted: “The doctrine that an innocent taker of money for value acquires a perfect title, and that a holder in due course of a negotiable instrument obtains a title free of all equities, is a separate rule which often affects trustees in the administration of trusts but it should be kept distinct from the bona fide purchaser rule in equity.”1 A holder in due course is like a BFP in that each has to have paid value2 and each has to have had lack of notice that the transfer might be in derogation of the legal or equitable property rights of others.3 There are some critical differences, however:
  • The BFP is an equitable concept while the holder in due course is a legal one that is now generally codified, at least in the United States.4 See Article 3 of the Uniform Commercial Code, versions of which have been enacted into law in most if not all the states.
  • Cancellation of an antecedent (pre-existing) debt owed by the transferor to the transferee can satisfy the holder in due course value requirement but not, with some exceptions, the BFP value requirement.5
  • In a case where trust property is transferred for value to a third party in breach of trust and the third party is to pay the funds to the trustee personally, it is unlikely that the third party would qualify as a BFP,6 whereas, if the property were a negotiable instrument, a third party who pays value and who has no actual knowledge of the breach would likely qualify as a holder in due course.7
For more on the concept of the holder in due course and how it differs from the BFP, the reader is referred to Section 8.3.6 of this handbook. Section 8.15.63 of this handbook is devoted to a general discussion of the concept of the BFP.
1 Bogert, Trusts & Trustees §883 (The Rule of Negotiability). See generally§8.3.6 of this handbook (negotiable instruments and the duty of third parties to inquire into the trustee’s authority) (the holder in due course is a legal construct while the BFP is a creature of equity). See generally§8.15.63 (doctrine of bona fide purchase; the BFP).
2 See generally §8.15.63 of this handbook (doctrine of bona fide purchase; the BFP); U.C.C. §3-302 (Holder in Due Course).
3 See generally §8.15.63 of this handbook (doctrine of bona fide purchase; the BFP); U.C.C. §3-302 (Holder in Due Course). See also U.C.C. §3-307 (Notice of Breach of Fiduciary Duty).
4 See Dearman v. Trimmier, 26 S.C. 506, 2 S.E. 501, 504 (1887).
5 5 Scott & Ascher §29.3.7 (Satisfaction of Antecedent Debt as Value). See, e.g., Dearman v. Trimmier, 26 S.C. 506, 2 S.E. 501, 504 (1887).
6 See generally §8.15.63 of this handbook (doctrine of bona fide purchase; the BFP).
7 U.C.C. §3-307 (Notice of Breach of Fiduciary Duty).

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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