Holder in Due Course - Case Study Example

Holder in Due Course Parties making payment for goods or services can use various financial instruments to settle their obligations (Mann & Roberts, 2013). However, the holder of these instruments can transfer the rights to the instruments to a third party who then makes obtains the due from the drawer or maker of the instruments. In such a case the transferee has the superior claim to the holder of the instrument upon satisfied the requirements of a holder in due course. The holder in due course must acquire the instrument in good faith for a value and free from the defense and claims the holder was subject to (Horvath et al., 2009). This study explores the case study involving Any Kind Stores in order to establish whether they qualified to be a holder in due course and whether the court ruling in the case was fair. In the case study, Talcott sent a check for $5700 on January 15th to Guarino, who presented it to Stuart Any Kind Store for cash. In this case Guarino was the holder or bearer of the check. Upon confirmation of the validity of the check from the drawer, the check was approved for cashing of $5700 check. Any Kind cashed the Guarino’s check after deducting the service fee of 3 percent or a value equivalent to $171. In order for the holder to qualify as the holder in due course they must have obtained the instrument in good faith (Mann & Roberts, 2013). In this case Any Kind Store became the holder in due course of the $5700 check after paying the value of the check to the holder. Any Kind Store was the proprietor of a negotiable instrument which they had taken for value and in good faith. They had given a consideration equivalent to the face value of the check less a 3% discount charges to the holder of the check in accordance with the requirements for the holder in due course. When Guarino presented the second check for cashing to Any Kind Stores, the accountant called upon the person who had approved the first check in order to approve for the payment. They called Talcott the drawer to confirm the validity of the check. The drawer approved the $5,700 check for payment after which Any Kind cashed for the holder. In this regard, Any Kind became the holder in due course since they had exercised appropriate care to ensure the check was valid and without defect. However, they did not make inquiry to about the validity of the $10,000 check of which they had already cashed for Guarino. On 19th January 2000 Talcott was informed by Rivera that Guarino was a cheat and a thief ad that made him react by authorizing his bank not to pay a $5,700 check. Also, Talcott’s daughter called Any Kind Store to stop the payment for the $5,700. That caused Any Kind to sue Talcott and Guarino on the basis of being a holder in due course. However, the court declared that Any Kind had a valid argument in the case involving $5,700 check, but had not taken appropriate precaution concerning the $10,000 check. The court’s decision was fair and reasonable because Any Kind had not acted in rationally. Although they had taken the instrument for value and in good faith upon payment for consideration, they failed to make inquiry about the first check even after realizing the chances of fraud cases (Horvath et al., 2009). Furthermore, Any kind Store had made taken appropriate steps to obtain approval of the check from the drawer. However, they had confirmed the approval of $5700 check and never mentioned anything about the $10,000 check. Under Uniform Commercial Code Sec. 1-201(20) the holder in due course must take all necessary precautions to ensure the instrument is free of any claim by another party and that the authorization is made by the drawer. However, in this case the alleging holder in due course did not take appropriate steps to establish the authenticity of the $10,000 check. Therefore, it can be concluded that Any Kind Store was a holder in due course of $5700 check, but not for $10,000 check. This is because a holder in due course should pay for the instrument with honesty and unaware of any defect in the title having taken all necessary precaution to establish the existence of any such defect. The Uniform Commercial Code Sec. 3-302(2) stipulates the essence of without notice as a requirement for qualification to be a holder in due course (Mann & Roberts, 2013). It reduces unfairness of a holder of a commercial instrument of enforcing a defective instrument subject to defenses or claims or where the instrument was dishonored. The code also establishes various types of notices, and they are not limited to an unequivocal statement (Mann & Roberts, 2013). It is apparent that a person can construe a notice from the prevailing circumstances. Therefore, despite the fact that Any Kind had an opportunity to inquire about the validity of the first check the moment they learnt that Guarino was a cheat and thief they avoided raising the issue to the drawer and instead concentrated on the second check. Since they avoided raising the issue of $10,000 check, it would be unfair for the court to hold the drawer responsible for the value of that check. They should have raised suspicion about the authenticity of the instrument due to forgery, alteration or any other form of irregularity. Furthermore, the drawer did not mention anything about the $10,000 check and indeed the drawer canceled the payment for the second check only. Therefore, it is apparent that the court acted fairly by recognizing the Any Kind as holder in due course of the second check because there was sufficient evidence that they had done all they could to establish the validity of the check. Since they did not take necessary precaution in regard to the first check, it is apparent that the drawer may not have been aware of its existence (Mann & Roberts, 2013). Therefore, the Court could have acted unfairly if they allowed Any Kind to be the holder in due course. This could cause severe consequences to the drawer because the holder in due course would claim for the payment of the full value of the instrument. Additionally, the notice must be issued in a manner and at the time that can enable the relevant parties to take appropriate action. "The holder in due course is a person who takes an instrument for value and in good faith without a notice that any the instrument is either overdue, has been dishonored, a notice has been issued regarding the alteration or unauthorized signature, devoid of notice of any unsettled default in regard to the payment of that instrument or the absence of any claim or defense in recoupment" (Mann & Roberts, 2013). The doctrine protects the interest of the purchaser of debt in circumstance where the purchaser is allotted the right to collect the debt payment. Therefore, Any Kind did not raise any concern about the first check in time to enable Talcott carry out investigation of the matter or disapprove the transfer of the instrument (Mann & Roberts, 2013). Any Kind was a holder in due course of a $5,700 check, but not for the $10,000 check. In conclusion, Any Kind Store was awarded a just hearing by the court regarding the position as a holder in due course. The holder in due course must meet several requirements including acquiring the instruments in good faith, for the value and without notice. The essence of determining the fulfillment of being a holder in due course is to ensure the purchaser of an instrument does not take advantage of the transferor of instrument. The purchaser of such an instrument should make the adequate evaluation of the circumstance besieging the performance in order to establish the presence of defects of claims against the instruments. References Beatty, J. & Samuelson, S. (2013). Business Law and the Legal Environment, Standard Edition. USA: Cengage Learning. Horvath, A., Villafranco, J. & Calkins, S. (2009). Consumer Protection Law Developments. USA: American Bar Association. Mann, R. & Roberts, B. (2013). Business Law and the Regulation of Business, (11th Ed.). USA: Cengage Learning. Read More