194 MODULE 25 COMMERCIAL PAPER

(3) Defense or claim

(a) Obvious signs of forgery or alteration so as to call into question its authenticity
(b) Incomplete or irregular
(c) . If purchaser has notice of any party's claim or that all parties have been discharged
(4) There is no notice of a defense or claim if
(a) It is antedated or postdated
(b) S/he knows that v= has been a default in payment of interest
(5) But if one acquires notice after becoming a holder and giving value, s/he may still be a HDC ,
to the extent of the value given
(a) That is, once one is a HDC, acquiring notice does not end HDC status
3. Payee of a negotiable instrument may qualify as a HDC if meets all requirements
7. Rights of a Holder in Due Course (HDC)
8. The general rule is that a transfer of a negotiable instrument to a HDC cuts off all personal
defenses
against a HDC
9. Personal defenses are assertable against ordinary holders and assignees of contract rights to avoid
payment
EXAMPLE: Art Dobbs negotiates a note to Mary Price in payment of a stereo. Mary negotiates this note to D.
Finch who qualifies as a HDC. When Finch seeks payment, Dobbs points out that Price breached the contract by
never delivering the stereo. Finch, as a HDC, still has the right to collect because breach of contract is a personal
defense. Dobbs then has to seek recourse directly against Price.
10. EXCEPTION-HDC takes subject to all personal defenses of person with whom HDC directly
dealt
11. Some defenses are assertable against any party including a HDC-these defenses are called real (or
universal) defenses .
12. Types of personal defenses
13. Breach of contract
(1) Includes breach of warranty
14. Lack or failure of consideration
15. Prior payment
EXAMPiE: Maker of a negotiable note pays on the note but does not keep or cancel the note. A subsequent party
who qualifies as a HDC seeks to collect on this same note. Maker, having only a personal defense, must pay the
HDC even though it was paid previously.
d. Unauthorized completion
EXAMPLE: X signs a check leaving the amount blank. He tells Y to fill inthe amount necessary to buy a
typewriter. Yfills in $22,000 and negotiates the check to a HDC. The HDC may enforce the full amount of the
check against X.
16. Fraud in the inducement
(1) Occurs when person signs a negotiable instrument and knows what s/he is signing; however,
s/he was induced into doing so by intentional misrepresentation
17. Nondelivery
(1) Occurs when bearer instrument is lost or stolen
EXAMPLE: M issues a note that is bearer paper. It is stolen by T who sells it to a HDC. The HDC wins
against M.
18. Ordinary duress or undue influence
(1) Most types of duress are considered a personal defense unless they become very extreme and
thus are considered real defenses
EXAMPLE:' Signing a check based on fear of losing a real estate deal constitutes a personal defense.