List the defenses to assert against a holder in due course
The
holder in due course doctrine makes a commercial paper of agreement almost as
transferable as cash. The creation of valid instrument may give rise to defense
against their payment. There are generally two types of defenses: Real defenses
and persona defenses. The personal defense cannot be raised against HDC, its
only raise real defense. The
HDC should honestly pay for the instrument and not know of anything wrong with
it.
If the instrument is overdue and not paid then HDC can use the court system to enforce
system.
Real
defenses can be raise against HDC and HDC cannot be able to recover the instrument
if it is proven. Some of real defense are:
Infancy
or minority: it is negotiable to the extent that it
is defect to some extent. In some states, an infant who misrepresents his age
is estopped from asserting infancy as a defense to a breach of contract. They
must pay reasonable value of an instrument.
Extreme
duress: extreme duress are real defenses and it is
negotiable instrument as we assume extreme duress are done in the pressure by some
other. It usually result of force and violence. For example promissory note
signed at gunpoint are enforceable as it done on pressure.
Mental
incapacity: the person who are not mentally capable
to enter into the contract shouldn’t be consider as authorized person for
establishing instrument. The person who are mentally sick or incapable should
not issue a negotiable instrument, and it is void from its inception.
Adjudicated mental incompetence can raise against holder or HDC.
Illegality:
if an instrument is arises out of an illegal transaction and if the law
declares the instrument void it is real defense. While establishing an instrument
it must be done under state law otherwise it will not be negotiable instrument.
Bankruptcy:
makers, and subsequent indorses are not liable to an HDC if they have been
discharged in bankruptcy. Thus discharge in bankruptcy is a real defenses
against the enforcement of negotiable instrument by a HDC or holder.
Fraud
in inception: it is occur when someone signing a negotiable
instrument thinking that is something else. It can be enforcement instrument by
holder. If employee saying, “This is
a receipt for goods we received a little while ago.” Boss signs it. But in
actual it is not a receipt; it is promissory note. In this case the note is
void.
Material
alteration: an instrument that has been material
altered cannot be enforced by an ordinary holder. Material or fraudulent
alteration means either (1) an unauthorized change in an instrument that
purports to modify in any respect the obligation of a party or (2) an
unauthorized addition of words or numbers or other change to an incomplete
instrument relating to the obligation of a party (Schmitz, 2012) . So
during the contract don’t leave instruments lying around with blanks that could
be filled in.
An
HDC is not subject to the obligor’s personal defenses. But a
holder who is not an HDC is subject to them: thus they can be raise against
enforcement of a negotiable instrument by an ordinary holder.
In
general, the personal defenses include breach of simple contract: lack of
consideration; failure of consideration; duress, undue influence, discharge if
instrument by payment or cancellation and misrepresentation that does not
render the transaction void; breach of warranty; unauthorized completion of an
incomplete instrument; prior payment. When a wrongdoer makes a false statement
to another person to lead that person to enter into the contract with the
wrongdoer thus those instrument are negotiable against original holder. Some of
other personal defenses are non adjucated mental illness, illegality of
contract that makes voidable.
Summary:
Real
defenses can be arise against HDC and holder in following condition:
·
Infancy
·
extreme duress
·
mental incapacity
·
illegality
·
bankruptcy
·
fraud in inception
·
forgery
·
material alteration
Personal
defenses cannot be raise against holder in due course. It can be raise against
only original holder.
- · breach of simple contract
- · lack of consideration
- · failure of consideration
- · mental illness that makes contract voidable
- · discharge if instrument by payment or cancellation
- · illegality that makes contract voidable
- · duress or undue influence
- · misrepresentation
References
Cheeseman, H. R. (2006). Holder in Due course and
Liabilty . In Contemporary Business and Online Commerce Law (pp.
413-419). Upper Saddle River, New jersery: Pearson Education Inc.
Schmitz, A.
(2012, Dec 29). Holder in Due Course and Defenses. In Legal Aspects of
Commercial Transactions (Chapter 24). Customary Creative Commons.
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