There are some defenses good even against a holder in due course. They are called real defenses. They are, at least generally, defenses of an unusual character, not those going to the merits of a transaction, but rather to its nature as a legal act.
Real defenses consist of infancy, acts that would make a contract void (such as duress), fraud in the execution, forgery, and discharge in bankruptcy. A 1976 trade regulation rule of the Federal Trade Commission abolishes the holder-in-due-course rule for consumer transactions.
What Is a Real Defense? A real defense that can be used by someone who is the defendant in a civil case regarding payment for a negotiable instrument, which is a document promising payment that can be held at the value of that payment.
of the plaintiff." A personal defense, however, is "founded upon the agreement or conduct of a particular person in regard to the instrument which renders it inequitable for him, though holding the legal title, to enforce it against the defendant."
One of the strengths of a real defense is that it can be used against an ordinary holder or a holder in due course. An ordinary holder is the original person an instrument was issued to, while a holder in due course is someone who has purchased or otherwise legally acquired an instrument.
As a general rule, a holder in due course takes a negotiable instrument subject to any claims that could be asserted to the instrument by any person. Fraud and misrepresentation are examples for personal defenses. Lack or failure of consideration is a real defense.
Universal (real) Defenses: Absolute defenses to liability on a negotiable instrument that are valid against all holders, including HDCs and other holders with the rights of HDCs.
Failure of consideration is a personal defense and lack of consideration is a real defense. They are personal defenses which cannot be used against holders in due course. They are personal defenses which cannot be used against holders in due course.
Does bankruptcy dismiss you from your debt? Personal defenses are defenses that can be used against a holder but no a holder in due course of a negotiable instrument. The most common personal defenses are breach of contract, failure or lack of consideration, fraud in the inducement, lack of delivery, and payment.
Holder in Due Course Is Subject to Real Defenses Unauthorized signature (forgery) (UCC, Section 3-401(a)) Bankruptcy (UCC, Section 3-305(a)) Infancy (UCC, Section 3-305(a)) Fraudulent alteration (UCC, Section 3-407(b) and (c))
-- To enumerate the categories of real defenses, they are: (1) forgery; (2) execution without authority; (3) a species of fraud, sometimes referred to as fraud in the execution or in the inception-akin to forgery; (4) some kinds of duress; (5) material alteration; (6) non-delivery of an incomplete instrument; (7) ...
Ordinarily, when an individual is sued on a negotiable paper, he or she will try to defend his or her right to refuse payment. Certain defenses, known as real defenses, are valid against ordinary holders as well as holders in due course, whereas personal defenses are only valid against ordinary holders.
Theft of the Instrument - Someone who steals a negotiable instrument may qualify as holder of the instrument. The payor may assert a defense against payment to a holder. Note: A forger does not qualify has a holder.
A real defense is a justification for a maker or drawer not to honor a negotiable instrument even if it has been transferred to a holder in due course (or "HDC") because it makes the instrument “void” according to Uniform Commercial Code §3-305 comment 1, thus the defense can't be "cut off" by the transfer to an HDC.
Holder in Due Course (HDC) A holder who acquires a negotiable instrument for value, in good faith, and without notice that the instrument is overdue, that it has been dishonored, that any person has a defense or claim against it, or in any way question its authenticity. Indorsee.
The UCC provides that to be an HDC, a person must be a holder of paper that is not suspiciously irregular, and she must take it in good faith, for value, and without notice of anything that a reasonable person would recognize as tainting the instrument.