Shelter Doctrine Law and Legal Definition

Shelter doctrine is a principle of commercial law that any person or any later transferee to whom a holder in due course transfers commercial paper will succeed to the rights of the holder in due course. Therefore, generally the transferees of holders in due course are not subject to defenses against the payment of an instrument. The principle is named ‘shelter doctrine’ as the transferees ‘take shelter’ in the rights of the holder in due course. This doctrine ensures the free transferability of commercial paper.

The following are examples of case law on the doctrine:

The most common statement of the shelter doctrine is contained in the Uniform Commercial Code at § 8-301 of the Investment Securities Law and § 3-201 of the Negotiable Instrument Law. Section 3-201 provides, in pertinent part: (1) Transfer of an instrument vests in the transferee such rights as the transferor has therein, except that a transferee who has himself been a party to any fraud or illegality affecting the instrument or who as a prior holder had notice of a defense or claim against it cannot improve his position by taking from a later holder in due course.[ Simcox v. San Juan Shipyard, Inc., 754 F.2d 430, 444 (1st Cir. P.R. 1985)]

The shelter doctrine, whether directly or derivatively applied, has an exception for a prior holder who had notice of a defense or claim against the instrument. Such a holder cannot improve his position by taking from a later holder in due course.[Bisson v. Eck, 430 Mass. 406 (Mass. 1999)]