How does the “shelter principle” embodied in the Negotiable Instruments Law operate to give the rights of a holder in due course to a holder who does not have the status of a holder in due course? Briefly explain.
Under the shelter principle, a person who does not qualify as a holder in due course can, nonetheless, acquire the rights and privileges of a holder in due course if he derives his title to the instrument through a holder in due course. However, a person who previously held the instrument cannot improve his position by later reacquiring it from a holder in due course if the former holder was a party to fraud or illegal activity affecting the instrument or had notice of a claim or defense against the instrument. (2008 Bar Question)