Part 7- Credit, Chapter 32: Negotiation and Holder in Due Course, Doc 1 | Indiana University Bloomington - Edubirdie

University:
Indiana University Bloomington
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
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42

Pages:

2
Author:

bratrochanter

Analysis: Legal Issues in Rachel Allen's Case 1. Rights Obtained by Factors, Inc. When Fred endorsed and transferred the promissory note to Factors, Inc., he negotiated the instrument, making Factors its new holder. As a holder, Factors gained the right to enforce the note. If Factors meets the requirements of a Holder in Due Course (HDC) (i.e., acquired the note in good faith, for value, without notice of defenses or claims), it would enjoy certain protections, including immunity from most defenses that Rachel could assert against Fred. 2. Rachel’s Defenses Against Factors, Inc. Rachel could assert breach of contract (failure of consideration or warranty breach) as a defense against Fred. However, whether this defense is effective against Factors depends on whether Factors qualifies as an HDC: o HDC Status: If Factors is an HDC, Rachel’s defense of breach of warranty will likely fail because personal defenses like breach of contract cannot be asserted against an HDC. o Non-HDC: If Factors does not qualify as an HDC (e.g., it had notice of the car’s defects or the defense before acquiring the note), Rachel may assert her defense, potentially reducing or avoiding liability. 3. Impact of the FTC Clause If the promissory note included the FTC-required clause (“Holder of this consumer credit contract is subject to all claims and defenses...”), Factors, even as an HDC, would not be immune to Rachel’s defenses. This clause preserves consumers’ rights to assert claims like breach of warranty or fraud against any assignee of the note, ensuring that HDC protections do not override consumer rights in consumer credit transactions. Key Concepts and Legal Principles:   Negotiation and Holder in Due Course o Negotiation: Transfer of possession of a negotiable instrument by endorsement or delivery, creating a holder. o Holder in Due Course (HDC): A holder who takes an instrument for value, in good faith, and without notice of defects or defenses. An HDC is protected against most personal defenses but not real defenses (e.g., forgery, duress, fraud in execution). FTC Holder Rule In consumer credit transactions, the FTC rule limits HDC protections by ensuring consumers can assert defenses against note holders, even if those holders are HDCs. This rule aims to protect consumers from unfair practices in credit sales. Conclusion: Factors, Inc.’s rights and Rachel’s ability to assert defenses hinge on whether Factors qualifies as an HDC and whether the note includes the FTC clause. If Factors is an HDC and the FTC clause is absent, Rachel may be obligated to pay the full amount. Conversely, with the FTC clause or if Factors is not an HDC, Rachel could assert her defenses successfully.

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Part 7- Credit, Chapter 32: Negotiation and Holder in Due Course, Doc 1

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