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Flashcards in Benefits of Holder in Due Course status Deck (6)
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What is the general rule for holders in due course (and subsequent transferees who take shelter in that status)?

A HIDC takes the instrument free from claims, free from personal defenses, and subject only to real defenses.


What is a claim (in this context)?

A right to a negotiable instrument because of superior ownership.

If a negotiable instrument is duly negotiated to a holder in due course, the HIDC defeats the superior owner (akin to a Bona Fide Purchaser)


What are personal defenses?

Every defense available in an ordinary contract action, including lack of consideration, unconscionability, waiver, estoppel, inducement, misrepresentation, etc.


A HIDC takes subject to what real defenses?


1) Material Alteration
2) Duress
3) Fraud in the Factum
4) Incapacity
5) Illegality
6) Infancy
7) Insolvency


What is a material alteration?

A change in the terms of the instrument

EX: Maker writes check for $100. Payee changes the amount to $2,100 and sells to HIDC. Maker is liable only for $100, unless he was negligent (e.g. leaving blanks on a check), in which case he is estopped from raising material alteration as a defense.


What is fraud in the factum?

How is it different from personal fraud?

A lie about the INSTRUMENT. (EX: L, who can't read English, signs a promissory note after his lawyer tells him it is a credit application. The note is unenforceable, even in the hands on the HIDC).

Personal fraud is a form of inducement. (EX: S. sells G a ring, telling her that it is an antique. After paying for the ring by check, G subsequently discovers that it is a fake. If the check is now held by a HIDC, G's defense cannot be asserted.