*Fraud in factum is a type of fraud that occurs when misrepresentation causes one to enter into a

transaction without accurately realizing the risks, duties, or obligations incurred. Fraud in factum
occurs when a legal instrument actually executed differs from the one intended for execution by the
person who executes it as s/he is induced to sign the instrument without reasonable opportunity to
learn of its fraudulent character or essential terms. For example, a blind person signing a mortgage
when misleadingly told that it is just a letter. Generally, fraud in the factum voids the instrument
under state law and is a real defense against even an holder in due course.

Fraud in factum is also termed as fraud in the execution or fraud in the making.

*This can be when the maker or drawer of a negotiable instrument, such as a promissory note or
check, is induced to sign the instrument without a reasonable opportunity to learn of its fraudulent
character or essential terms. Determination of whether an act constitutes fraud in the factum
depends upon consideration of all relevant factors. Fraud in the factum usually voids the instrument
under state law and is a real defense against even an holder in due course.

Contrast this with the situation where a trusted employee signs a check without permission. The
employer must still honor the check despite the fact that the check was a fraudulent negotiable
instrument. Here, the employer had a reasonable opportunity to avoid the obligation by restricting
access to the checks.

Fraud in the factum is often contrasted with fraud in the inducement.

Fraud in the factum is a legal defense, and occurs where A makes/signs an agreement, but either does
not realize that it is supposed to be a contract, or does not understand the nature/content of the
agreement, because of some false information that B gave to A. For example, suppose John tells his
mother that he is taking a college course on handwriting analysis, and for his homework he needs her
to read and sign a pretend deed. If Mom signs the deed believing what he told her, and John tries to
enforce the deed, Mom can plead "fraud in the factum."

Fraud in the inducement is an equitable defense, and occurs when A enters into an agreement,
knowing that it is supposed to be a contract and (at least having a rough idea) what the agreement is
about, but the reason A signed/made the agreement was because of some false information that B
gave to A. For example, suppose John tells his mother to sign a deed giving him her property, Mom
refuses at first, but then John falsely tells her that the bank will foreclose on the property unless she
signs it over to him. If Mom signs the deed because of this statement from John, and John tries to
enforce the deed, Mom can plead "fraud in the inducement."

Fraud in the Inducement is when a party intentionally deceives a person into executing a decision that
would benefit the other party at their own expense. An example would be is someone encouraged
another party to deed away their property telling them that they would receive tax benefits when in
reality the decision would make that person worse off financially.

fraud in execution: real defense (didnt know it was NI)

fraud in inducement: personal defense (knows its NI but deceived as to value/terms)

there are 4 rights of a holder not in due course, the first 2 is the same rights of a HIDC wherein he
may sue on the instrument in his own name, he may receive payment and if the payment is in due
course the instrument is discharged.

The remaining 2 which is

3. He holds the instrument subject to the same defenses as if it were non-negotiable

4. But a holder not in due course who derives his title from a holder in due course and who
isnt a party himself to any fraud or illegality affecting the instrument, has all the rights of
such former holder in respect of parties prior to the latter.