Through negotiation, an instrument is transferred in such a form that the transferee becomes a holder. At the very least, a holder receives the rights of the previous possessor. Unlike an assignment, a transfer by negotiation allows a holder to potentially receive more rights in the instrument than the prior possessor had. A holder who receives these greater rights is known as a holder in due course. It is essential to first understand how a person becomes a holder before examining the qualifying requirements for holder in due course status.

Holder

Generally, a person becomes a holder of a negotiable instrument if they acquire it through the rules of negotiation. A person is considered a holder of a bearer instrument if they are in possession of that instrument. According to Article 725, the criterion for being a holder of a bearer instrument is the sole fact of presentment. Both possession and the fact of presentment imply that a person will be able to present an instrument to the drawee or maker as long as they physically hold the instrument.

If the instrument is an order instrument, a person becomes a holder if they have it in their possession and their name is specified on it as either a payee or an endorsee. For example, a person named Gebeyehu is the holder of a bill issued as "pay to Gebeyehu Mola or order" because his name is specified and he is that person. If Gebeyehu then endorses it "pay to Fatuma or order," Fatuma becomes the holder upon taking possession because she is the specified endorsee.

The Commercial Code determines the holder of an order instrument by looking for an uninterrupted series of endorsements, as seen in Articles 724, 751, and 847. While possession is not explicitly mentioned in these specific articles, it is an implied requirement because one cannot be a holder without actually possessing the paper.

A series of endorsements reflects the history of negotiation and must remain uninterrupted. If an endorsement is forged or unauthorized, the series is considered broken. For example, if a bill is endorsed from X to Kelemua, and then Kelemua endorses it to Kebebush, the chain is intact. However, if an instrument is endorsed to Tesfaye, but the next signature is by an outsider like Zinabu who was never an endorsee, the chain is interrupted. In that case, the person receiving it from Zinabu cannot qualify as a holder.

An exception exists if the last endorsement is in blank. A blank endorsement converts an order instrument into a bearer instrument, allowing it to be negotiated through delivery alone. Under Articles 724, 751, and 847, the last possessor of an instrument that was previously endorsed in blank is presumed to be a holder.

For the purpose of determining liability, a person who acquires an instrument that was last endorsed in blank is presumed to have acquired it through that specific endorsement. For instance, if a cheque moves from Tibebu to Tewodros and then to Ayelu through special endorsements, but Ayelu signs it in blank before delivering it to Hana, the instrument becomes a bearer paper. If Hana then delivers it to Thomas, Thomas is presumed to have acquired it via Ayelu's blank endorsement. This presumption creates a legal relationship that makes Ayelu liable to Thomas as an endorser.

Holder in Due Course

A holder in due course is a special type of holder who acquires unique legal protections. The primary advantage of this status is that the holder takes the instrument free of personal defenses and claims. This means they can often collect payment even if there were underlying disputes or issues between the original parties to the instrument.

To qualify as a holder in due course, a person must meet specific legal requirements. While the Commercial Code does not provide a single, exhaustive list of these requirements in one place, Article 718 establishes that the person must acquire the instrument in due course and in accordance with the rules of negotiation. Furthermore, Articles 717, 752, and 849 highlight the necessity of good faith and the absence of knowledge regarding previous defects or defenses. These provisions emphasize the protections afforded to those who take commercial paper honestly and without notice of existing legal problems.