Close-Connectedness Doctrine Law & Legal Definition


Close-Connectedness Doctrine is a judicially created doctrine used by some courts to deny an assignee of a negotiable note holder-in-due-course status if the assignee is too closely connected to the original holder-mortgagee.

The close-connectedness doctrine teaches that a transferee does not take an instrument in good faith and is therefore not a holder in due course when there are sufficient facts to indicate the transferee, by virtue of its unusually close relationship with the transferor, has reason to know, or should have known, of infirmities in the underlying transactions from which the instrument originated.

There are five factors commonly taken into account in determining whether the transferee of a negotiable instrument is so closely connected to the original payee and the underlying transaction that the transferee cannot be found to have taken the instrument in good faith: (1) Drafting by the transferee of forms for the transferor; (2) approval or establishment or both of the transferor's procedures by the transferee (e.g., setting the interest rate, approval of a referral sales plan); (3) an independent check by the transferee on the credit of the debtor or some other direct contact between the transferee and the debtor; (4) heavy reliance by the transferor upon the transferee (e.g., transfer by the transferor of all or substantial part of his paper to the transferee) and; (5) common or connected ownership or management of the transferor and transferee. [Vitols v. Citizens Banking Co., 10 F.3d 1227 (6th Cir. Ohio 1993)]