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CHAPTER 25
DEFENSES
Answers to Learning Objectives
(Page 293)
1. The chief advantage of being a holder in due course of a negotiable instrument is that limited
defenses are not effective against such a holder.
Lesson Outline
1. The defenses that may be raised against the holder are those which the defendant may raise against
the person with whom the defendant dealt.
2. A plaintiff who is an ordinary holder is subject to all defenses that the defendant possesses against
g. Theft
4. Universal defenses are those that can be raised regardless of who is being sued or who is suing and
are the following:
a. Minority
b. Forgery
c. Fraud as to the nature of the instrument or its material terms
d. Discharge in bankruptcy proceedings
Comments on Cases
(p. 295) The court pointed out that the Carmichael’s defense of fraud in the inducement would be
effective against AMC, the original lender. In re Carmichael, 443 B.R. 698 (Bankr. E.D.
Pennsylvania)
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(p. 295) The court held that a check payable to a party and deposited in that party’s account makes it the
“owner” of the check under the UCC. Therefore Freestyle had constructive possession of this
instrument and qualified as a holder and therefore as a holder in due course. Georg v. Metro
Fixtures Contractors, Inc., 178 P.3d 1209 (Colo.)
Super. Ct. Ch. Div.)
(p. 298) The court stated that an instrument that contained an apparent erasure or alteration in the name
of the payee called into question its authenticity. In that case Rich’s could not be a holder in due
course. Hartsock v. Rich’s Employees Credit Union, 632 S.E.2d 476 (Ga. Ct. App.)
Answers to Questions
(Page 299)
1. A limited defense is a defense that is not effective against a holder in due course. A universal
defense is effective against all holders including a holder in due course.
2. Fraud in the execution of the instrument occurs when a person knows a commercial paper is being
executed and knows its essential terms but is persuaded or induced to execute it because of false
5. A thief may not normally pass good title; however, when a thief conveys an instrument to a holder
in due course such a holder acquires good title.
6. When an instrument has been forged the forger is liable on the instrument to a holder in due course.
7. The defense of fraud as to the nature of the instrument and its essential terms is unavailable to
competent individuals who negligently fail to read or give reasonable attention to the details of the
documents they sign.
Answers to Case Problems
(Page 299)
1. No. The court stated that the creation and presentment for payment of the checks had been criminal
acts by third parties. Since the transaction was nullified by state law, the defense of illegality was
valid even against a holder in due course. E & G Food Corp. v. Cumberland Farms, Inc., 2011
4. Rorem asserted a limited defense. Such a defense would not have been effective against a holder in
due course, but it would be effective against Coblentz as the payee of the note. Coblentz v. Rorem,
128 Wash. App. 1009 (Wash. Ct. App.)
5. No. Since the obligation for the securities was voidable rather than void, the securities were not
illegal under the UCC. Since the securities were not “illegal” National Union as was not deprived
of holder in due course status. National Union Fire Insurance Co. of Pittsburg, PA v. Pachnanda,
685 N.Y.S.2d 174 (N.Y. App. Div.)
Answers to Summary Cases for Part Five
(Page 302)
1. No. The court said that Kesler was a holder in due course since he had given value (loaned money
to Bauer) and took the checks in good faith and without knowledge of any problem with them.
2. No. Since the check was never delivered to Jenkins, she never had possession of it. She had no
interest in the check, never became a holder or a person entitled to enforce it.
3. No. Since the check was postdated, the court held that JCNB did not follow reasonable commercial
standards in cashing it. It was required to examine the check and an examination would disclose it
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($27,182.41), in good faith, and without notice of Hunt’s failure-of-consideration defense, thus
entitling it to holder-in-due-course status.
7. Yes. The check was payable to both Lunsford and GreenPoint so the indorsement of both were
needed to negotiate the check. Since GreenPoint had not indorsed the check it was improper for
Tri-County to pay it.
8. Yes. An instrument payable to two persons must have the indorsement of both in order to negotiate
it. Since there was only one indorsement CFX is liable.