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

Problem 5: Partial Payment and Holder in Due Course Status Facts: Halbert advanced $8,000 in cash and promised to cancel a $12,000 debt to Axe for a $20,000 check from Horton. When presented, the check was dishonored due to insufficient funds. Analysis: Under UCC §3-303(a), partial performance (here, $8,000) establishes value to that extent. Halbert is a holder in due course (HDC) for $8,000 since he gave value, took the instrument in good faith, and lacked notice of any defenses. However, his promise to cancel the $12,000 debt was unfulfilled, so he is not an HDC for that portion. Thus, Halbert’s HDC rights apply only up to $8,000. Problem 6: Guardian Misusing Funds Facts: Charles Alcombrack deposited a check payable to him in his guardianship capacity into personal accounts and used most of the funds for personal purposes. A new guardian, Smith, sued the bank to recover the funds. Analysis: Olympic Bank is unlikely to qualify as an HDC. The check was payable in a fiduciary capacity, and under UCC §3-307, the bank had notice of fiduciary obligations. The bank’s acceptance of the check into personal accounts, despite the restrictive designation, breaches its duty. This negligence disqualifies it from HDC protection, and it may be liable for conversion. Problem 7: Stop Payment and Holder in Due Course Facts: First Services Title stopped payment on three checks issued for a fraudulent real estate transaction. Firstar Bank paid the checks to Davis, who was not a party to them, despite multiple suspicious factors. Analysis: Firstar Bank cannot claim HDC status because it ignored clear irregularities (e.g., multiple indorsements in the same handwriting, “for deposit only” markings). Under UCC §3-302, such facts prevent good faith acquisition and constitute notice of possible defenses. Thus, Firstar Bank cannot enforce the checks as an HDC. Problem 8: Altered Promissory Note Facts: The Hennes signed a note for $100, payable in four installments, but Rich Plan altered it to $843.37 over 36 installments. Nationwide Acceptance, a finance company, claims HDC status after acquiring the note. Analysis: Under UCC §3-302(a), Nationwide cannot qualify as an HDC if the note contains apparent alterations. Visible alterations place a duty on the holder to investigate authenticity. The fraudulent modifications invalidate HDC status, and the Hennes can assert a real defense of alteration (UCC §3-305). Problem 9: Fraud in the Factum Facts: The Hutchinsons were tricked into signing what they believed was a demonstration form. It was actually a promissory note later transferred to Reading Trust, an HDC. Analysis: Fraud in the factum occurs when a party is misled about the nature of the instrument signed (UCC §3-305(a)(1)). The Hutchinsons can use this as a real defense, valid even against an HDC like Reading Trust, as they lacked knowledge of the instrument's true purpose. Problem 10: FTC Clause and Consumer Defense Facts: The de la Fuentes signed a promissory note for aluminum siding, which violated state law. The note included the FTC's mandatory notice clause and was assigned to Home Savings. Analysis: The FTC rule allows consumers to assert defenses against any holder, even an HDC. Home Savings, though claiming HDC status, is subject to the de la Fuentes’ defenses, including the illegality of the contract under state law. The FTC clause prevents Home Savings from avoiding these defenses. Online Inquiry: State Law on Gambling Debts To determine whether your state voids instruments issued for gambling debts: 1. Search your state’s statutes online via its legislative website or platforms like FindLaw. 2. Look under sections related to Contracts or Gambling Laws for specific provisions about the enforceability of gambling-related instruments. For example, in some states (e.g., Nevada), gambling debts are enforceable due to the state's gaming industry regulations. Conversely, states like California may void such instruments.