Section 26 Notice of Claims, Defenses, or Dishonor

• Library: Commercial Law 2007

To qualify as a holder in due course under UCC Article 3, a holder must take the instrument without notice of any claim to the instrument, including a claim of a property or possessory right in the instrument or its proceeds or a claim to rescind a negotiation and recover the instrument or its proceeds. Sections 400.3-302(a)(2)(v) and 400.3-306, RSMo 2000. The holder must also take the instrument without notice of any claim or defense in recoupment, including:

• any defense of the obligor based on

• the obligor’s infancy, to the extent it is a defense to a simple contract

• “duress, lack of legal capacity, or illegality of the transaction which, under other law, nullifies” the obligor’s obligation

• “fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms”; or
• discharge of the obligor in insolvency proceedings

• any defense of the obligor under Article 3 or available in an action on a simple contract, including want or failure of consideration (seeKreutz v. Wolff, 560 S.W.2d 271 (Mo. App. E.D. 1977)); or

• any claim in recoupment of the obligor against the original payee if the claim arose from the transaction that gave rise to the instrument.

Sections 400.3-302(a)(2)(vi) and 400.3-305(a), RSMo 2000; Local Acceptance Co. v. Kinkade,361 S.W.2d 830 (Mo. banc 1962) (status of a holder in due course of a note is negated if a party takes with notice of any infirmity in the instrument or defect in the title); People’s Bank of Ava v. Rankin,30 S.W.2d 638 (Mo. App. S.D. 1930) (purchaser of negotiable note may be defeated by showing his knowledge of fraud or failure of consideration). Mere notice of the existence of a fiduciary relationship or...