Carla sells Chad a stereo system and accepts a promissory note from Chad as payment. The note is due in six months and contains an agreement to pay Carla $2,500 at maturity. Carla, knowing that the stereo system is a piece of junk and that Chad will refuse to pay, sells the note to Earl for $10. May Earl be a holder in due process? Why or why not?
Yes this is class assignment I had 50 questions and only 3 I had a problem with the answers. I do thank you this is my last one
1 Answer from Attorneys
A holder in due process is defined by the Uniform Commercial Code (UCC). PA's version of the UCC is found in Title 13 of the PA statutes (13 PA CSA). Division 3 deals with notes and negotiable instruments which is what you have. The laws are online and can be accessed free of charge at the legislative website unless you are near a law library.
Below is the holder in due course statute. The focus is not on what Carla knows but on what Earl knows. A holder in due course (HIDC) is one who takes an instrument: (a) in good faith; (b) for value; and (c) without notice of any problems/claims/defenses.
So Earl is an HIDC if he paid $10 for the note, took the note and had no knowledge of any problems or defenses that Chad could assert or before any default. In 6 months, if the stereo is junk, that does not get Chad off the hook for not paying Earl. Chad has to pay the full value to Earl and Chad can go after Carla for selling him junk.
If Earl has any reason to know of the problems, then there is no good faith and Earl cannot avail himself of the HIDC defense. It does not matter that Earl only paid $10 for a $2500 note necessarily. Notes are discounted all of the time. Someone who deals with money (a banker) would be able to state if this is reasonable or not. If not, that might go towards Earl's lack of good faith and knowledge of the problems.
It would also depend on whether Chad, Carla and Earl are sophisticated businessmen or consumers. If Earl is a consumer and has no knowledge then it suggests he is an HIDC. If Earl is a savvy businessman and $10 is way too low and would put him on notice that something ain't right here, then maybe he is not an HIDC.
13 Pa.C.S.A. § 3302. Holder in due course
(a) Definition of “holder in due course”.--Subject to subsection (c) and section 3106(d) (relating to unconditional promise or order), “holder in due course” means the holder of an instrument if:
(1) the instrument when issued or negotiated to the holder does not bear such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity; and
(2) the holder took the instrument:
(i) for value;
(ii) in good faith;
(iii) without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series;
(iv) without notice that the instrument contains an unauthorized signature or has been altered;
(v) without notice of any claim to the instrument described in section 3306 (relating to claims to an instrument); and
(vi) without notice that any party has a defense or claim in recoupment described in section 3305(a) (relating to defenses and claims in recoupment).
(b) Notice of discharge.--Notice of discharge of a party, other than discharge in an insolvency proceeding, is not notice of a defense under subsection (a), but discharge is effective against a person who became a holder in due course with notice of the discharge. Public filing or recording of a document does not of itself constitute notice of a defense, claim in recoupment or claim to the instrument.
(c) When one does not acquire rights of holder in due course.--Except to the extent a transferor or predecessor in interest has rights as a holder in due course, a person does not acquire rights of a holder in due course of an instrument taken:
(1) by legal process or by purchase in an execution, bankruptcy or creditor's sale or similar proceeding;
(2) by purchase as part of a bulk transaction not in ordinary course of business of the transferor; or
(3) as the successor in interest to an estate or other organization.
(d) Limited right as holder in due course; partial performance.--If, under section 3303(a)(1) (relating to value and consideration), the promise of performance that is the consideration for an instrument has been partially performed, the holder may assert rights as a holder in due course of the instrument only to the fraction of the amount payable under the instrument equal to the value of the partial performance divided by the value of the promised performance.
(e) Limited right as holder in due course; security interest.--If:
(1) the person entitled to enforce an instrument has only a security interest in the instrument; and
(2) the person obliged to pay the instrument has a defense, claim in recoupment or claim to the instrument that may be asserted against the person who granted the security interest; the person entitled to enforce the instrument may assert rights as a holder in due course only to an amount payable under the instrument which, at the time of enforcement of the instrument, does not exceed the amount of the unpaid obligation secured.
(f) Manner of notice.--To be effective, notice must be received at a time and in a manner that gives a reasonable opportunity to act on it.
(g) Applicability of other law.--This section is subject to any law limiting status as a holder in due course in particular classes of transactions.
I hope my answers get an A.
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