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Q: Business Law - promissory notes, fraud, bankruptcy ( Answered 5 out of 5 stars,   3 Comments )
Question  
Subject: Business Law - promissory notes, fraud, bankruptcy
Category: Business and Money
Asked by: tyeebuh45-ga
List Price: $20.00
Posted: 08 Dec 2005 16:25 PST
Expires: 07 Jan 2006 16:25 PST
Question ID: 603420
I am writing in regards to a few business law related questions. 
There is a brief summary below followed by three questions i would
like answered about the summary.

1.  A Holder in What?  Oliver agreed to purchase a 1937 Ford Model T
for $50,000 from Morton.  Oliver gave Morton a down payment of $10,000
and a 90-day negotiable promissory note for $40,000 as payment for the
purchase price.  As part of the purchase negotiations, Morton gave
Oliver a certificate of authenticity certifying to the age and
origination of the auto.  The certificate was forged, and the auto was
not an original Model T but a well reproduced fake.  As soon as he
received the promissory note, Morton negotiated it to Harrison who
purchased it in good faith for $29,500, giving Morton $5,000 in cash
and an oral promise to pay the balance within 15 days.  Within 10 days
of the sale, Oliver learned of the fraud.  Since Morton left town
shortly after receiving the cash from Harrison, Harrison never paid
the balance of the purchase price for the note. When Harrison
presented the note to Oliver on its due date, Oliver refused to pay
based on Morton's fraudulent acts.

  a. Assume that Morton cannot be found.  Harrison sues Oliver for
payment of the note.  What will be the result?

b. Assume that before Harrison learns of Morton's fraudulent acts,
Harrison gives Oliver's promissory note to his nephew as a graduation
present.  When nephew presents it to Oliver for payment, Oliver
refuses to pay because he just learned about the fraud.  Nephew sues
Oliver for payment of the note.  What will be the result?

c. Assume that Oliver files for Chapter 7 bankruptcy before his
promissory note becomes due and payable.  What will Harrison?s
position be with respect to collecting the payment due under the note?
Answer  
Subject: Re: Business Law - promissory notes, fraud, bankruptcy
Answered By: weisstho-ga on 09 Dec 2005 19:57 PST
Rated:5 out of 5 stars
 
Tyeebuh-45 ? Don?t ya just hate these commercial transaction
questions?  My least favorite course in law school.

BUT, thanks for asking the question and allowing me the chance to
review Article 3 of the UCC.

Let me take each of your three questions and provide a specific
answer, and then I will make some general comments at the end:

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

A.  HARRISON SUES OLIVER FOR PAYMENT OF THE NOTE.  WHAT WILL BE THE RESULT?

Harrison prevails and collects $40,000 upon maturity of the 90-day promissory note.

MORTON the car salesman sells OLIVER a fake Model T, taking a 90-day
promissory note for $40,000 payable to MORTON and $10,000 cash.
Morton is holding the Note because of Issuance.

MORTON discounts the Note to HARRISON for $29,500:  $5,000 in cash and
a promise to pay the balance, $24,500 in 15 days.  HARRISON took the
Note without knowledge of the underlying transaction.
Harrison takes by way of Negotiation and is Holder in Due Course (HDC)
? Harrison Gave Value / No Notice / Good Faith. This is why the
professor states ?10 days? because of the 15 day promise-to-pay which,
would have created a default and affected the rights of a down-stream
holders.

The Shelter Rule of 3-203(b):  Transfer of an instrument, whether or
not the transfer is a negotiation, vests in the transferee [Harrison]
any right of the transferor [Morton] to enforce the instrument,
including any right as a holder in due course, but the transferee
[Harrison] cannot acquire rights of a holder in due course by a
transfer, directly or indirectly, from a holder in due course if the
transferee [Harrison] engaged in fraud or illegality affecting the
instrument.

A ?holder in due course,? defined in UCC 3-302, means a holder of an
instrument when (a) there is not apparent forgery or alteration or
other question of authenticity, and (b) holder took the note for
value, in good faith, and without notice that the instrument is
overdue or has been dishonored or defaulted upon. Harrison is HDC,
Nephew is not.

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

B. ASSUME THAT BEFORE HARRISON LEARNS OF MORTON'S FRAUDULENT ACTS,
HARRISON GIVES OLIVER'S PROMISSORY NOTE TO HIS  NEPHEW AS A GRADUATION
PRESENT.  WHEN NEPHEW PRESENTS IT TO OLIVER FOR PAYMENT, OLIVER
REFUSES TO PAY BECAUSE HE JUST LEARNED ABOUT THE FRAUD.  NEPHEW SUES
OLIVER FOR PAYMENT OF THE NOTE.  WHAT WILL BE THE RESULT?

Nephew Prevails ? Oliver is liable for $40,000. 

HARRISON then endorsed the Note in blank and gave it to his NEPHEW for
his graduation.
Note is now a Bearer Instrument - Nephew is Sheltered by Harrison?s
HDC status, but he is not HDC since he did not give value.

Is NEPHEW HDC?
NO, Nephew did not give value. But, Nephew is Sheltered by Harrison?s
HDC status (as against Oliver only) and Nephew then has the rights of
an HDC.  Nephew can sue Oliver since the Nephew?s rights were
derivative of Harrison?s.

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

C.   ASSUME THAT OLIVER FILES FOR CHAPTER 7 BANKRUPTCY BEFORE HIS
PROMISSORY NOTE BECOMES DUE AND PAYABLE.  WHAT WILL HARRISON?S
POSITION BE WITH RESPECT TO COLLECTING THE PAYMENT DUE UNDER THE NOTE?

OLIVER refuses to pay and files for bankruptcy.  When Oliver files for
bankruptcy he is insulated from all collection activity - ?you can?t
even call him on the phone.? 11 U.S.C.  362(a)(6).

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

A Holder in Due Course (HDC) is not subject to any claims to the
instrument, and nobody can take an instrument away from an HDC. HDC is
free from most defenses.

There are ?Real? and ?Personal? Defenses:

Real Defenses are good against a HDC and are in 3-305:  
1.  Obligor was an infant when instrument was signed;
2.  Duress, lack of legal capacity, or illegality if it makes the
transaction a ?nullity? (void not voidable);
3.  Mental incapacity - must make instrument absolutely void;
4.  Discharge of the obligor in insolvency proceedings;
5.  Fraud in the factum. Essential fraud. Person who signed the
instrument did not know what they were signing, and did not have a
real opportunity to know what he/she was signing. Example: rock star
signing autographs in the crowd, and someone sticks a promissory note
in the papers, which he signs - Fraud in the Factum;
6.  Alteration is effective against the HDC only as to the original amount; 
7.  Forgery - since you did not sign it, you are not liable.However,
the forger is liable as if he had signed his own name. (3-403).
Forgery of the payee or special endorsee - No one after the forgery
can be a HDC.

Personal Defenses are not good against HDC.
    Everything else:
    Mistake
    Theft
    Impossibility
    Unconscienability
    Instrument already paid

I hope this is exactly what you need. If there is anything else,
please ask for clarification and I will be glad to add to this. Good
luck,

Weisstho-ga

Search Strategy:

Nasty Law School Notes
UCC Article 3
Holder in Good Faith
Shelter
tyeebuh45-ga rated this answer:5 out of 5 stars
thank you you were very helpful

Comments  
Subject: Re: Business Law - promissory notes, fraud, bankruptcy
From: myoarin-ga on 10 Dec 2005 06:29 PST
 
Unless that was a typo, Oliver should have been on his guard at being
offered a "1937" Model T.  They were produced from 1908 to 1927.

Hehe! Myoarin
Subject: Re: Business Law - promissory notes, fraud, bankruptcy
From: weisstho-ga on 10 Dec 2005 16:18 PST
 
Darn!!

Well, in that case we will have to revert to the Uniform Sales Act
which changes things dramatically!

You always bring something relevant to the conversation, myoarin. 

Good to see you about.

Tom
Subject: Re: Business Law - promissory notes, fraud, bankruptcy
From: myoarin-ga on 10 Dec 2005 17:19 PST
 
Sometimes, Tom. You didn't see my latest miscalculation here.
I expect that this is a typo, either in the question or in the source
doc, but the paper speaks for itself, as with negotiable instruments.
Having once spent a year or so handling bills of exchange, I think the
law concerning negotiable instruments is rather charming with its
roots in early international trade and evolved practices with
endorsements, the development of banknotes, etc., most of which I have
forgotten.
Cheers, Myoarin

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