What Does “Good Faith” Mean for Businesses Holding Negotiable Instruments?
Most businesses deal with negotiable instruments every day. Checks, notes, CD’s…all are vital components of how businesses negotiate payment for their goods and services. Accordingly, it is important that holders of these instruments attempt to establish themselves as “holders in due course” or HDC’s. This status provides important protections to the holder where liability on the instrument becomes an issue. The U.C.C. provides that an HDC must take the instrument (1) for value, (2) in good faith, and (3) without notice that the instrument is overdue, has been dishonored, contains an unauthorized signature, or is subject to a defense or claim of recoupment. U.C.C. §3-302.
As to the second element of HDC status, good faith, Tennessee has deviated from the U.C.C. in its definition. The U.C.C. states that “good faith” means honesty in fact and the observance of reasonable commercial standards and fair dealing. U.C.C. §1-201(b)(20). Note that use of “reasonable commercial standards” injects an element of objectivity into the test. By contrast, Tennessee law defines “good faith” as meaning only that a person acts with subjective “honesty in fact” in the conduct or transaction concerned. T.C.A. §47-1-201(19).
Liability on negotiable instruments is a frequent topic of litigation. The “good faith” distinction can be important when evaluating whether or not your business will be protected by HDC status for purposes of such liability.