Commercial Paper: Rights Of Holder In Due Course

Front 1

Subject to 11 "Real Defenses"

1) Infancy of obligor is a real defense to the extent it's a defense to a simple contract under state law

2) Duress which voids obligation

3) Lack of legal capacity making obligation void

4) Illegality making obligation void

Back 1

5) Fraud in the execution (also called fraud in the factum)
- signer lacked knowledge of instrument's character or essential terms; and
- signer lacked reasonable opportunity to learn of instrument's character or essential terms

Thus, person lacked intent to sign order or promise to pay--> "excusable ignorance" test (you signed something w/o knowing what it was is not enough)

Courts will look at a variety of factors such as signer's intelligence, education, business experience, ability to read/understand English (subjective)

Hint 1

6) Discharge in insolvency (bankruptcy)

7) Omission of Required Consumer Protection Language
TX and/or federa law requires certain instruments in consumer transactions to contain language stating that a transferee remains subject to claims or defense that the issuer could assert against original payee. If an instrument doesn't contain this language, instrument's treated as if it actually contained that language and thus issuer may assert against an HDC all claims and defenses that would have been available if the instrument had included the required language

Front 2

8) SOL
- 6 years from due date (not issue date)
- Unaccepted draft (e.g., a check): earlier of 3 years after dishonor or 10 yrs after issue

Back 2

*** reread**
9) Payment to former holder

Liablity of a person obligated ot pay on an instrument may be discharged by payment to a person who was formerly entitled to enforce the note unless the obligated party has received a proper notification that the note was transferred and that payment is to be made to new holder (transferee)

Notification adequate only if signed by transferor or transferee, reasonably identifies transferred note, and provides address at which payments subsequently are to be made

Defense of payment to a person who's no longer entitled to enforce is effective against an HDC; but HDC can prevent this defense from being effective by providing proper notice

Hint 2

10) Alteration

11) Unauthorized Signatures & Forgeries

Front 3

If counsel invokes "the Rule" re excluding witnesses from the courtroom, court should also admonish each witness as to:

Back 3

1) Those persons with whom the court determines the witness may talk to about the case before trial ends; and

2) Those persons the court determines the witness may not talk to.

If the admonishment is given and a witness violates it; the witness may be held in contempt