What are CLAIMS, PERSONAL DEFENSES, and REAL DEFENSES?

Question 1

Claim

HDC takes free from claims

Answer 1

• A right to a negotiable instrument b/c of superior ownership.
• if a negotiable instrument is duly negotiated to a holder in due course (or a subsequent transferee taking shelter in HDC status), the HDC (or sheltered transferee) defeats the superior owner

Question 2

Personal Defenses

HDC takes free from personal defenses

Answer 2

every defense available in ordinary contract actions, except those classified as “real defenses”

EXAMPLES:

• lack of consideration
• unconscionability
• waiver
• estoppel
• fraud in the INDUCEMENT

Question 3

Real Defenses

(HDC takes SUBJECT to these!!)

MAD FIFI4

Answer 3

• Material Alteration
• Duress
• Fraud In the FACTUM
• Incapacity
• Illegality
• Infancy
• Insolvency

Question 4

“Material Alteration” as a real defense

Answer 4

• a change in the terms of the instrument
• however, if maker was negligent (ex- left space in front of 100 so it was easily changeable to 2,100), he is ESTOPPED from raising material alteration as a defense

Question 5

Difference btw “Fraud in the Factum” (real defense) and “Fraud in the Inducement” (personal defense)

Answer 5

Fraud in the Factum

• assertable against an HDC
• means that there has been a lie about the instrument
• ex: Luciano, who cannot read English, signs a promissory note after his lawyer tells him that it is a credit application.

Fraud in the Inducement

• ineffective against an HDC
• no lie about what the instrument is; the signer knows what they are signing
• ex: A sells B a ring, telling her that it is an antique. After paying for the ring by check, B discovers that it is a fake. If the check is now held by an HDC, B’s defense cannot be asserted.