Claims and Defenses on Negotiable Instruments

Question 1

An HDC takes an instrument free from…

Answer 1

Personal defenses and claims. He is only subject to “real defenses”

Question 2

What is a “claim”?

Answer 2

A claim is an affirmative right to a negotiable instrument because of superior ownership.

Question 3

What are the so-called “real” defenses?

Answer 3

1. Forgery;
2. Fraud in the Factum (real fraud);
3. Alteration of the Instrument;
4. Incapacity to Contract;
5. Infancy;
6. Illegality;
7. Duress;
8. Discharge in insolvency proceedings;
9. Statute of Limitations;
10. Discharges KNOWN to HDC

Question 4

What is a mnemonic to remember the real defenses?

Answer 4

FAIDS (FFAIIIDDDS)

Fraud in the factum;

Forgery;

Alteration of the instrument;

Infancy;

Illegality;

Incapacity to Contract;

Discharge in Insovency;

Duress;

Discharge known to HDC;

Statute of Limitations.

Question 5

Does forgery of names necessary to title preclude HDC status?

Answer 5

Yes. If the name of the payee or any special indorsee is unauthorized (i.e. forged or signed by a nonagent), no subsequent taker can be an HDC.

Question 6

If the person whose name was forged ratifies the unauthorized signature/is estopped from denying it, can subsequent takers qualify as HDCs?

Answer 6

Yes, provided they can also meet the other requirements.

Question 7

Fraud in the Factum (Real Fraud)

Answer 7

Real fruad is assertable against an HDC and is defined as “fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms

Question 8

Is there a requirement of excusable ignorance?

Answer 8

Even where the D was unaware that he was signing a negotiable instrument, fraud in the factum cannot be asserted if he failed to take reasonable steps to ascertain the nature of the transaction.

Question 9

What is alteration of the instrument?

Answer 9

A change in the terms of the instrument.