defenses Flashcards
general rule of HDC defenses
A HDC can enforce an instrument subject only to REAL DEFENSES
A HDC takes FREE of PERSONAL defenses and claims.
= whether an obligated party such as a maker, drawer, or indorser will be forced
to pay depends on whether
(1) the holder is an HDC
AND
(2) on the nature of the obligated party’s defenses.
IF NOT HDC = obligated party may assert any of the ordinary contract defenses, such as failure of consideration.
If the holder IS HDC = obligated party is limited to so-called real defenses.
real defenses [these may be asserted against an HDC]
FF AA II DD SS
(1) FORGERIES
— no subsequent taker can be an HDC when the signature or the payee or any special endorsee was forged because no one can obtain he right to enforce necessary to qualify as a holder
(2) FRAUD IN THE FACTUM
[REAL FRAUD - NOT FRAUD IN THE INDUCEMENT]
– obligor signs the instrument (a) without knowledge of the instrument’s character or essential terms
and
(b) without reasonable opp to learn of the instrument’s character or essential terms
(3) ALTERATIONS [changing terms that maker or drawer inserted]
— HDC can only recover original amount
— different from unauthorized completion [filling in blanks left by maker or drawer]
(4) ADJUDICATED INCAPACITY
[court declared]
(5) INFANCY
[minors]
(6) ILLEGALTIY if it renders the underlying transaction void - not merely voidable
(7) DURESS
[extreme duress = gun to the head]
(8) DISCHARGE by insolvency proceeding or otherwise known discharge
[discharge of debt in any proceeding intended to liquidate or rehabilitate a person’s estate]
or
[discharge of which they had notice]
(7) STATUTE OF LIMITATIONS
(a) three years
– actions on unaccepted drafts, against issuers/acceptors of chairs checks, certified checks, actions for conversion, actions for breach of warranty, actions to enforce other article 3 rights
(b) six years
– notes payable at a definite time or on demand
– certificates of deposit
(c) 10 years
– if no demand for payment is made on the maker of a note payable on demand or at a definite time, an action to enforce the note is barred if no interest or principal has been paid on the note for 10 years
(9)SURETYSHIP DEFENSES [accommodation]
– by signing the instrument, the accommodation party incurs liability without being a direct beneficiary. If a HDC knows of this, they take subject to the surety’s defenses by (1) extension of due date, (2) material modification of the obligation, or (3) impairment of collateral
personal defenses [HDC takes free]
(1) Lack of consideration
(a) failure of consideration - nonperformance
– HDC prevails against a K defense such as nondelivery of goods or nonperformance of services
EX: Mary signs a promissory note for $1,000 and gives it to Paula in exchange for a computer. Paula never delivers the computer. When the note is due, Henry demands payment and can demonstrate that he meets all the requirements of a holder in due course. Mary will be required to pay Henry even though she never received the computer because failure of consideration is a personal defense.
*normally, negotiable instruments must be supported by consideration, but the obligation of a surety on the instrument may be enforced regardless of whether they receive consideration.
(2) breach of warranty
(3) fraud in the inducement
– party is misled to execute the instrument, but knew what they were signing
(4) claims or defenses of another generally cannot be used unless you are an accommodation party
– theft exception = payor must raise defense of theft, if known
example of how a hDC is a perfect claimant
Dan issues a check for $500 to Paul who promptly indorses the check in blank and places it in the front seat of his car. The check blows out of the car and into the hands of Evans. Evans sells the check to Heather, who qualifies as an HDC. Paul finds out that Heather has the check and demands that Heather return it to him. Heather may keep the check because she is an HDC. Even a true owner (Paul) can’t recover an instrument from an HDC. Note that if Paul had used a special or for deposit only indorsement, Heather wouldn’t be a holder (much less an HDC), and Paul would be able to recover the check.
