Chapter 23 Transferability and Holder in Due Course
61) How does the definition of value for purposes of holder in due course differ from the definition of consideration? Why do you think there is a difference? Should there be a difference? Answer: An unfulfilled promise qualifies as consideration, but is not considered value given under Article 3 of the UCC. This is because a holder has not actually performed the promise, and thus has lost nothing yet, and therefore does not need the protections that a holder in due course receives. Diff: 2 Skill: Ethics and Policy
62) Why is fraud in the inducement treated as a personal defense and fraud in the inception treated as a real defense? Is this distinction justifiable? On what grounds? Answer: The assumption is that the victim of fraud in the inducement is in the best position to avoid the fraud by knowing the other party, verifying claims, and so forth before entering into the contract. The same might apply to fraud in the inducement, but the law treats fraud in the inducement as a real defense. Diff: 2 Skill: Ethics and Policy
63) What is the purpose and effect of eliminating the holder in due course provisions for consumer credit transactions? Will doing so raise the cost of borrowing for these consumers? Answer: The holder in due course rule allowed a merchant to sell defective merchandise to a consumer on credit, then sell the note to a holder in due course who would be entitled to collect from the consumer even though the merchandise was defective. This change might make the promissory notes of a seller's customers less valuable when trying to sell them to other parties. Diff: 2 Skill: Ethics and Policy
64) Paul Painter agreed to paint Harry Homeowner's house for $5,000. Paul never planned to actually paint the house, but made a habit of entering into contracts, taking partial or complete payment in advance, and never doing the work. Paul got his friend, Beth, to talk to Harry about how competent and honest Paul was, and explain that Harry should not be concerned about the quality of work or paying Paul in advance. Harry wrote Paul a $3,000 check 1 week before the painting was to be started. Paul transferred the check to Allison in exchange for Allison's car, which was worth $2,800. Before Allison had a chance to deposit the check, there were several news stories about Paul and all the fraud he had been committing. Allison then transferred the check to Beth, who then transferred it to Cathy. Beth gave Allison value for the check, and Cathy gave Beth value. Explain the applicability of the shelter principle in this situation. Answer: Assuming that Allison is a holder in due course (HDC), Allison can pass on the rights of an HDC to persons who would not qualify on their own as an HDC. Beth could not get Allison's HDC rights because she was a party to Paul's fraud. Cathy could acquire Allison's HDC rights so long as she did not know of the defense to the instrument. Diff: 3 Topic: Requirements for HDC Status Skill: Factual Application
65) A check is drawn "payable to Tami Thomas, M.D., in trust for Cathy Wilson." Dr. Thomas indorses the check to a computer store in payment for a computer that she personally purchased. The computer store as indorsee has not adhered to the instructions on the check. Who is the computer store liable to and why? Answer: The computer store is liable to Cathy Wilson for any losses that arose because of its noncompliance with the restrictive indorsement in trust as indicated on the check. This type of indorsement is sometimes referred to as a trust indorsement or an agency indorsement. Diff: 3 Topic: Requirements for HDC Status Skill: Factual Application
Chapter 24 Liability, Defenses, and Discharge
71) How does the definition of value for purposes of holder in due course differ from the definition of consideration? Why do you think there is a difference? Should there be a difference?