For value;
In good faith;
Without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series;
Without notice that the instrument contains an unauthorized signature or has been altered;
Without notice of any claim to the instrument described in Code Section 11-3-306; and
Without notice that any party has a defense or claim in recoupment described in subsection (a) of Code Section 11-3-305.
(Code 1981, §11-3-302, enacted by Ga. L. 1996, p. 1306, § 3.)
Law reviews.- For article supporting the retention of waiver of defense clauses in credit card agreements, see 10 Ga. St. B.J. 17 (1973). For article discussing judicial activism in cases involving claims and defenses under the Uniform Commercial Code, see 17 Ga. L. Rev. 569 (1983). For article, "The Holder in Due Course Doctrine as a Default Rule," see 32 Ga. L. Rev. 783 (1998). For note, "Pyramid Marketing Plans and Consumer Protection: State and Federal Regulation," see 21 J. of Pub. L. 445 (1972). For note discussing whether a holder in due course takes free of claims of violations of the usury laws, see 12 Ga. L. Rev. 814 (1978). For note, "Negotiable Promissory Notes Containing Time and Demand Provisions: The Need for Consistent Interpretation," see 19 Ga. L. Rev. 717 (1984). For comment on Pendley v. Credit Equip. Corp., 92 Ga. App. 658, 89 S.E.2d 567 (1955), see 18 Ga. B.J. 495 (1956). For comment on Geiger Fin. Co. v. Graham, 123 Ga. App. 771, 182 S.E.2d 521 (1971), see 8 Ga. St. B.J. 400 (1972). For comment on Perini Corp. v. First Nat'l Bank, 553 F.2d 398 (5th Cir. 1977), see 27 Emory L.J. 393 (1978).
JUDICIAL DECISIONSANALYSIS
General Consideration
Editor's notes.
- In light of the similarity of the issues dealt with under the provisions, decisions under former Code 1933, §§ 14-305, 14-502, 14-505, 14-507, and 14-508, and former Code Section 11-3-302 are included in the annotations for this section.
Holder in due course status defined.
- A holder in due course is one who, in good faith and for value, has taken an instrument that is complete and regular upon its face before it was due, and without notice of any previous dishonor, and who, at the time of taking, had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. Equitable Disct. Corp. v. Guest, 103 Ga. App. 258, 118 S.E.2d 864 (1961) (decided under former Code 1933, §§ 14-502 and 14-507).
The 1996 amendments of the UCC definitions of "good faith" and "holder in due course" (O.C.G.A. §§ 11-3-103 and11-3-302) did not apply retroactively to transactions before their effective date; rather, the definitions in former Code section § 11-2-201 and the former version of this section applied. Choo Choo Tire Serv., Inc v. Union Planters Nat'l Bank, 231 Ga. App. 346, 498 S.E.2d 799 (1998).
Endorsement required.
- No one can be a holder in due course of an instrument payable to a named payee or order, without endorsement of payee. Davis v. National City Bank, 46 Ga. App. 194, 167 S.E. 191 (1932) (decided under former Code 1933, § 14-502).
Requisites for payee.
- Although payee may be holder in due course, this does not mean payee is per se a holder in due course; for the payee must meet all requisites outlined in this section. Hall v. Westmoreland, Hall & Bryan, 123 Ga. App. 809, 182 S.E.2d 539 (1971) (decided under former Code Section11-3-302).
Payee could be a holder in due course, provided that it met the requirements set out in O.C.G.A. § 11-3-302. Stebbins v. Ga. Power Co., 252 Ga. App. 261, 555 S.E.2d 906 (2001).
Rights of original payee.
- Original payee of note, as party to transaction for sale of securities, of which the note is but a part, is limited in claim on the note to rights of one not a holder in due course. Morris v. Durbin, 123 Ga. App. 383, 180 S.E.2d 925 (1971) (decided under former Code Section11-3-302).
Possession as prima facie case of ownership.
- Possession of negotiable instrument establishes prima facie case of ownership. James Talcott, Inc. v. Allahabad Bank, Ltd., 444 F.2d 451 (5th Cir.), cert. denied, 404 U.S. 940, 92 S. Ct. 280, 30 L. Ed. 2d 253 (1971) (decided under former Code Section11-3-302).
Party can establish status as holder of instruments sued on by producing them in evidence. James Talcott, Inc. v. Allahabad Bank, Ltd., 444 F.2d 451 (5th Cir.), cert. denied, 404 U.S. 940, 92 S. Ct. 280, 30 L. Ed. 2d 253 (1971) (decided under former Code Section11-3-302).
Proof of possession by production of instrument entitles holder to recover on it unless opposing party establishes defense. James Talcott, Inc. v. Allahabad Bank, Ltd., 444 F.2d 451 (5th Cir.), cert. denied, 404 U.S. 940, 92 S. Ct. 280, 30 L. Ed. 2d 253 (1971) (decided under former Code Section11-3-302).
Possession by payee after maturity.
- Evidence tending to show possession of note by payee after maturity may rebut presumption that holder, who is the transferee, is a holder in due course. Griffin v. Blackshear Bank, 66 Ga. App. 821, 19 S.E.2d 325 (1942) (decided under former Code 1933, § 14-502).
To constitute bad faith by a purchaser of a negotiable instrument before maturity, the purchaser must have acquired it with actual knowledge of its infirmity, or with a belief based on facts or circumstances as known to the purchaser that there was a defense, or the purchaser must have acted dishonestly. Citizens & S. Nat'l Bank v. Johnson, 214 Ga. 229, 104 S.E.2d 123 (1958) (decided under former Code 1933, § 14-502); Commercial Credit Equip. Corp. v. Reeves, 110 Ga. App. 701, 139 S.E.2d 784 (1964);(decided under former Code 1933, § 14-502).
Repurchase by prior holder with notice.
- Sale under a power does not technically come within former subsection (3)(a) of this section, but under former Code section § 11-3-201(1) prior holder with notice of defense or claim against the instrument cannot improve that position by repurchase. Northside Bldg. & Inv. Co. v. Finance Co. of Am., 119 Ga. App. 131, 166 S.E.2d 608 (1969) (decided under former Code Section11-3-302).
Repurchase at judicial sale.
- Status of one against whom a defense might have been urged in a prior capacity will not improve by interposing a holder in due course, but in same vein one with rights of holder in due course, and who has not otherwise lost such rights, does not diminish status by purchasing at judicial sale although one may not by virtue of such purchase alone become a due course holder. Finance Co. of Am. v. Wilson, 115 Ga. App. 280, 154 S.E.2d 459 (1967).
Bank as holder in due course.
- Where check is deposited and credited to depositor's account and depositor is allowed to draw against it, the bank is presumed to be holder in due course and in spite of express conditions in deposit contract making bank a mere agent for collection, where there are other facts, namely, that draft was endorsed in blank and bank thereafter paid checks drawn by endorser against such deposit, making bank at least a pledgee, if not absolute owner of the draft, and placing it on same footing as a purchaser. Southern Fruit Distribs., Inc. v. Citizens' Bank, 44 Ga. App. 832, 163 S.E. 261 (1932); Pike v. First Nat'l Bank, 99 Ga. App. 598, 109 S.E.2d 620 (1959) (decided under former Code 1933, § 14-502).
No matter what the deposit agreement was initially, when bank did in fact credit deposit to its customer, and thereafter permit customer to withdraw funds before collection, the bank became a holder for value of the check as to amount withdrawn, so as to be able to enforce payment against drawer thereof. Pike v. First Nat'l Bank, 99 Ga. App. 598, 109 S.E.2d 620 (1959) (decided under former Code 1933, § 14-502).
A bank is not guardian of business activities of its depositors, and there was nothing in record which would have required the bank, in exercise of due diligence, to check on behalf of loan company and ascertain that its lien was paid off from funds deposited therein on a particular date. Pike v. First Nat'l Bank, 99 Ga. App. 598, 109 S.E.2d 620 (1959) (decided under former Code 1933, § 14-502).
Even if payee does not personally endorse an instrument, a bank is holder of that instrument as long as it was issued to the bank. Pazol v. Citizens Nat'l Bank, 110 Ga. App. 319, 138 S.E.2d 442 (1964) (decided under former Code Section11-3-302).
A bank never became a holder in due course where a check made payable jointly to the bank's customer and a third party was never endorsed by the third party before deposit in the bank. Citizens & S. Nat'l Bank v. Sun Belt Elec. Constructors, Inc., 64 Bankr. 377 (Bankr. N.D. Ga. 1986) (decided under former Code Section 11-3-302).
Bank was not a holder in due course of a certificate of deposit owned by company A which was indorsed to the bank as security for a loan to company B by an officer who had authority to indorse but not to pledge certificate as security so company B had no interest in the certificate and the bank did not take for value. Bank S. v. Midstates Group, Inc., 185 Ga. App. 342, 364 S.E.2d 58 (1987) (decided under former Code Section11-3-302).
Where a bank had credited a seller's account with the amount of a buyer's check and subsequently, the buyer issued a stop-payment order on the check but, by the time the bank received notification, the seller had spent almost all of the buyer's check, the bank was not merely a holder of the buyer's check but was a holder in due course. Dempsey v. Etowah Bank, 204 Ga. App. 49, 418 S.E.2d 418 (1992) (decided under former Code Section11-3-302).
Where a fact question remained as to whether a bank accused of negligently accepting stolen checks for deposit and conversion acted in good faith in receiving forged checks, it could not achieve status as a holder in due course. Gerber & Gerber, P.C. v. Regions Bank, 266 Ga. App. 8, 596 S.E.2d 174 (2004).
Trial court did not err in granting summary judgment to a bank and a credit union, on claims of conversion, civil conspiracy and for attorney fees and punitive damages, as: (1) no probative evidence existed that the buyer received delivery of the check, and thus, it never became a holder of the instrument at issue or entitled to enforce it; (2) no evidence was presented that the bank and credit union acted in concert against the buyer; (3) no evidence of misconduct or bad faith on the part of the bank or the credit union was presented; but, the trial court properly found that a genuine issue of material fact existed as to whether the bank and the credit union were holders in due course. Hartsock v. Rich's Emples. Credit Union, 279 Ga. App. 724, 632 S.E.2d 476 (2006).
Trial court did not err in granting a bank summary judgment on the bank's claims against an automobile seller for enforcement of drawer and signer obligations under the Georgia Uniform Commercial Code (UCC), O.C.G.A. § 11-3-414(b), and for a violation of the bad check statute, O.C.G.A. § 13-6-15, because there was no genuine issue of material fact as to whether the bank was a holder in due course of the check; the bank was entitled to enforce the drawer and signer obligations imposed upon the seller because the bank was the "holder" of the check pursuant to § 11-3-414(b), and since the bank was the depository bank, and the amount of the check was deposited to the customer's account, the bank became the holder of the instrument when the bank received the check for collection. Consumer Solutions Fin. Servs. v. Heritage Bank, 300 Ga. App. 272, 684 S.E.2d 682 (2009).
Lessee's responsibilities.
- A lessee cannot ignore the notice of assignment of the lease signed or disregard responsibilities under the lease because the machine leased does not operate correctly. Houser v. Tilden Fin. Corp., 166 Ga. App. 710, 305 S.E.2d 440 (1983) (decided under former Code Section11-3-302).
Right of maker to stop payment.
- Drawee bank being agent of maker, the latter is entitled as a matter of right to stop payment of any check drawn on such bank at any time before presentment to it for payment. This right cannot be exercised in a way and manner that would prejudice rights of holders in due course without incurring liability of maker on the instrument to such holders. Stewart v. Western Union Tel. Co., 83 Ga. App. 532, 64 S.E.2d 327 (1951) (decided under former Code 1933, § 14-507).
Cited in Coastal Plains Trucking Co. v. Thomas County Fed. Sav. & Loan Ass'n, 224 Ga. App. 885, 482 S.E.2d 493 (1997); Dal-Tile Corp. v. Cash N' Go, Inc., 226 Ga. App. 808, 487 S.E.2d 529 (1997); Fedeli v. UAPA Ag. Chem., Inc., 237 Ga. App. 337, 514 S.E.2d 684 (1999); Provident Bank v. Morequity, Inc., 262 Ga. App. 331, 585 S.E.2d 625 (2003).
Holder
Definition of holder is similar to definition under former law.
- Assertion that Uniform Commercial Code definition of holder departs from that of Uniform Negotiable Instruments Law is refuted by Official Code Comment § 1-201:1(20) which describes the definitions as "similar." West v. FDIC, 149 Ga. App. 342, 254 S.E.2d 392, aff'd, 244 Ga. 396, 260 S.E.2d 89 (1979) (decided under former Code Section11-3-305).
Bank not liable for bookkeeper's embezzlement.
- A bank was properly granted summary judgment in a suit brought by a company seeking reimbursement for money its bookkeeper embezzled as the bank was a holder in due course and had paid the checks presented by the bookkeeper as it was authorized under a certificate of resolution; there was no bad faith shown on the part of the bank in paying the items presented by the bookkeeper. Dalton Point, L.P. v. Regions Bank, Inc., 287 Ga. App. 468, 651 S.E.2d 549 (2007).
Drawee bank.
- Bank, as drawee of check, is not holder of the instrument so as to become beneficiary of provisions under the Uniform Commercial Code relating to a holder and holder in due course. West v. FDIC, 149 Ga. App. 342, 254 S.E.2d 392, aff'd, 244 Ga. 396, 260 S.E.2d 89 (1979).
Payee of draft is a holder subject to any defense available to drawer. Harford Mut. Ins. Co. v. Barfield, 105 Ga. App. 266, 124 S.E.2d 294 (1962) (decided under former Code Section11-3-305).
Original payee.
- Original payee of note, as party to transaction for sale of securities, of which note is but a part, is limited in claim on the note to rights of one not a holder in due course. Morris v. Durbin, 123 Ga. App. 383, 180 S.E.2d 925 (1971) (decided under former Code Section11-3-305).
Claims
A "claim" is more than a mere "defense" as indicated by this section. Fulton Nat'l Bank v. Delco Corp., 128 Ga. App. 16, 195 S.E.2d 455 (1973) (decided under former Code Section11-3-305).
Defenses Generally
Immunity of holder fixed at time of negotiation.
- Immunity of holder in due course from defenses available to prior parties, such as want or failure of consideration, becomes fixed at time the instrument is negotiated and subsequent acts of maker short of making payment in full or being adjudicated a bankrupt cannot enhance, diminish or in any way affect right of holder in due course to enforce payment of the instrument free of defenses relative to its consideration. Credit Equip. Corp. v. Pendley, 97 Ga. App. 868, 104 S.E.2d 718 (1958) (decided under prior law).
Absence or failure of consideration are matters of defense in a suit on notes as against any person not a holder in due course. However, the instant that a negotiable instrument is negotiated to a holder in due course defense relative to its consideration is precluded. Credit Equip. Corp. v. Pendley, 97 Ga. App. 868, 104 S.E.2d 718 (1958) (decided under former Code 1933, §§ 14-305, 14-507, and 14-508).
Bank's defenses as holder for value.
- Where a bank had credited a seller's account with the amount of a buyer's check and subsequently, the buyer issued a stop-payment order on the check but, by the time the bank received notification, the seller had spent almost all of the buyer's check, the bank was not merely a holder of the buyer's check but was a holder in due course and subject only to the defenses enumerated in subsection (2). Dempsey v. Etowah Bank, 204 Ga. App. 49, 418 S.E.2d 418 (1992) (decided under former Code Section11-3-305).
Good faith of bank in issue.
- In a case under the former version of this section on the issue of a bank's status as a "holder in due course," evidence that the bank may have acted in bad faith when it accepted deposits to the account of an overdrawn depositor and failed to place a hold on the account precluded summary judgment for the bank. Choo Choo Tire Serv., Inc v. Union Planters Nat'l Bank, 231 Ga. App. 346, 498 S.E.2d 799 (1998).
Nonsignature.- If defendant can prove at trial that defendant did not sign the document at issue, defendant will have a valid defense even against a holder in due course. Massey-Ferguson Credit Corp. v. Wiley, 655 F. Supp. 655 (M.D. Ga. 1987) (decided under former Code Section 11-3-305).
"Fraud in the factum."- "Fraud in the factum" is the only type fraud available under the Uniform Commercial Code as a defense against a holder in due course; mere allegations of misrepresentation are not sufficient to prove "fraud in the factum" to withstand plaintiff's motion for summary judgment. Massey-Ferguson Credit Corp. v. Wiley, 655 F. Supp. 655 (M.D. Ga. 1987).
The only type of fraud assertable against a holder in due course under former paragraph (2)(c) is fraud in factum. Fraud in the inducement, which does not go to the essence of the agreement but merely induces the party to enter the agreement, would not have the same effect because it would render the instrument merely voidable and capable of transfer. Milligan v. Gilmore Meyer Inc., 775 F. Supp. 400 (S.D. Ga. 1991) (decided under former Code Section 11-3-305).
Fraud which induces one to enter into contract resulting in execution of negotiable instrument is a good defense to action on instrument by original payee. Johnston v. Dollar, 83 Ga. App. 219, 63 S.E.2d 408 (1951) (decided under former Code 1933, § 14-505).
Party-to-the-transaction rule.
- For a discussion of the party-to-the-transaction rule as a defense to the holder in due course status, see Design Eng'g, Constr. Int'l, Inc. v. Cessna Fin. Corp., 164 Ga. App. 159, 296 S.E.2d 195 (1982) (decided under former Code Section11-3-305).
Unavailable defenses.
- Where negotiable notes are given in renewal of trade acceptances in hands of holder in due course, defense of failure of consideration is not available to maker against such holder, regardless of whether maker was aware of that defense when notes were made. Credit Equip. Corp. v. Pendley, 97 Ga. App. 868, 104 S.E.2d 718 (1958) (decided under former Code 1933, §§ 14-305 and 14-507).
An assignee given the rights of a holder in due course of security agreements takes the instruments free of personal defenses such as failure or lack of consideration, breach of warranty, unconscionability and fraud in the inducement of the contract. Massey-Ferguson Credit Corp. v. Wiley, 655 F. Supp. 655 (M.D. Ga. 1987) (decided under former Code Section 11-3-305).
Rule that defenses of fraud in inducement or procurement is not available against holders in due course is kept in force by Uniform Commercial Code. Moore v. Southern Disct. Co., 107 Ga. App. 868, 132 S.E.2d 101 (1963) (decided under former Code Section11-3-305).
In general, defense of want or failure of consideration is available only against one who does not have rights of a holder in due course. Ashburn Bank v. Childress, 120 Ga. App. 632, 171 S.E.2d 768 (1969) (decided under former Code Section11-3-305).
Failure of consideration is a personal defense and is ineffective against a holder in due course. Massey-Ferguson Credit Corp. v. Wiley, 655 F. Supp. 655 (M.D. Ga. 1987) (decided under former Code Section 11-3-305).
Defense involving post-transfer transaction between payee and maker.
- Conditional sale contract and promissory note in hands of a holder in due course is not subject to defense involving transaction between payee and maker, entered into after transfer of note to holder in due course, unless such holder was party to transaction and released maker from the obligation. Peoples Loan & Fin. Co. v. Ledbetter, 69 Ga. App. 729, 26 S.E.2d 671 (1943) (decided under former Code 1933, § 14-502).
Notice
Holder taking without notice as collateral for security.
- Holder of instrument as collateral security, who takes without notice, stands upon same footing as innocent purchaser without notice. Veal v. Jenkins, 58 Ga. App. 4, 197 S.E. 328 (1938) (decided under former Code 1933, § 14-507).
Good faith.
- On plaintiff commercial checking account customer's suit against defendant, its employee embezzler's depository bank, alleging the embezzler deposited checks made payable to the embezzler into the embezzler's personal account, because those checks contained no indications of forgery, and because the evidence indicated, at most, that the depository bank may have been negligent due to the fact that the bank's screening system failed to detect the forgery scheme, but it did not indicate that the bank acted in an unfair or dishonest manner, and nothing showed that the bank's failure to investigate the embezzler's account activity was dishonest or unfair, and thus was not honest in fact or did not conform to reasonable commercial standards of fair dealing in accepting the checks, the checking account customer could not prevail in showing a lack of good faith under O.C.G.A. § 11-3-302(a)(2)(ii). Ownbey Enters. v. Wachovia Bank, N.A., 457 F. Supp. 2d 1341 (N.D. Ga. 2006).
Purchaser with notice purchasing from transferor without notice.
- Purchaser of negotiable note, although with notice of an equity as between maker and original payee, is protected in title if purchased from one who previously purchased it from original payee without notice of any infirmity in the note. Veal v. Jenkins, 58 Ga. App. 4, 197 S.E. 328 (1938) (decided under former Code 1933, § 14-507).
Taking without notice of maker's defense of failure of consideration.
- Where, on trial of action upon check against maker who had stopped payment, evidence demands finding that the check, on day it was drawn, was negotiated to plaintiff as payment on an existing indebtedness owed by payee to the plaintiff, in good faith, without notice of maker's defense of failure of consideration, finding was demanded that plaintiff holder was a holder in due course and entitled to recover full amount of the check. Kemp Motor Sales, Inc. v. Statham, 120 Ga. App. 515, 171 S.E.2d 389 (1969) (decided under former Code Section11-3-302).
Taking with notice instrument is overdue.
- Holder in due course status denied to one taking instrument with notice it is overdue. Northside Bldg. & Inv. Co. v. Finance Co. of Am., 119 Ga. App. 131, 166 S.E.2d 608 (1969) (decided under former Code Section11-3-302).
Taking without notice of forgery.
- On plaintiff commercial checking account customer's suit against defendant, its employee embezzler's depository bank, alleging the embezzler deposited checks made payable to the embezzler into the embezzler's personal account, because those checks contained no indications of forgery, the depository bank's failure to verify signatures was not evidence that it acted without "honesty in fact" as a holder in due course under O.C.G.A. §§ 11-3-302(a)(2) and11-3-306; because the depository bank had no actual notice of the embezzlement scheme or that the checks contained unauthorized signatures, no material issue of fact existed as to the notice requirement set forth under O.C.G.A. § 11-3-302(a)(2)(iii), (iv), (v), (vi). Ownbey Enters. v. Wachovia Bank, N.A., 457 F. Supp. 2d 1341 (N.D. Ga. 2006).
Purchaser who acquires note after default of an installment is not holder in due course, but takes instrument with notice of its dishonor, and subject to any defense or equity which could be pleaded as against original payee. Browning v. Rewis, 152 Ga. App. 45, 262 S.E.2d 174 (1979) (decided under former Code Section11-3-302).
Deed to land to secure debt and note executed in connection therewith may be transferred and assigned. A purchaser who acquires such note after default as to one of its installments is not a holder in due course, but takes the instrument with notice of its dishonor, and subject to any defense or equity which could be pleaded as against the original payee. Verner v. McLarty, 213 Ga. 472, 99 S.E.2d 890 (1957), overruled on other grounds, Ward v. Watkins, 219 Ga. 629, 135 S.E.2d 421 (1964) (decided under former Code 1933, §§ 14-502 and 14-508).
Usury on face of note.
- Maker of note cannot ordinarily plead failure of consideration against innocent holder in due course, but usury on face of note would show that holder was not a holder in due course. Gray v. American Bank, 122 Ga. App. 442, 177 S.E.2d 207, appeal dismissed, 122 Ga. App. 443, 177 S.E.2d 208 (1970) (decided under former Code Section11-3-302).
Purchaser with notice taking from transferor without notice.
- Purchaser of negotiable note, although with notice of an equity as between maker and original payee, is protected in title if the purchase is from one who previously purchased it from original payee without notice of any infirmity in the note. Veal v. Jenkins, 58 Ga. App. 4, 197 S.E. 328 (1938) (decided under former Code 1933, § 14-507).
Actions
Burden of showing status as holder.
- In suit on negotiable instruments, burden is initially on party suing to show first that one is a holder of the instruments sued on. James Talcott, Inc. v. Allahabad Bank, Ltd., 444 F.2d 451 (5th Cir.), cert. denied, 404 U.S. 940, 92 S. Ct. 280, 30 L. Ed. 2d 253 (1971) (decided under former Code Section11-3-302).
When burden of proving one is holder in due course shifts.
- Production of instrument entitles a holder to recover on it unless defendant establishes a defense, and burden of proving that one is a holder in due course does not shift to holder until it is shown that a defense exists. James Talcott, Inc. v. Allahabad Bank, Ltd., 444 F.2d 451 (5th Cir.), cert. denied, 404 U.S. 940, 92 S. Ct. 280, 30 L. Ed. 2d 253 (1971) (decided under former Code Section11-3-302).
Defense of fraud in the factum.- Under Uniform Commercial Code, defense of fraud in inducement cannot be asserted against a holder in due course. There is no protection against a defense of fraud in the factum, however. FDIC v. Willis, 497 F. Supp. 272 (S.D. Ga. 1980) (decided under former Code Section 11-3-302).
Under defense of fraud in the factum, the fraud which defendants attempt to show must be in the factum, or within the loan instrument itself. Such a defense fails, however, where essential terms of note are correct; fact that the instrument incorrectly reflects that loan was secured does not affect validity of underlying transaction. FDIC v. Willis, 497 F. Supp. 272 (S.D. Ga. 1980) (decided under former Code Section 11-3-302).
Party-to-the-transaction rule.
- For a discussion of the party-to-the-transaction rule as a defense to the holder in due course status, see Design Eng'g, Constr. Int'l, Inc. v. Cessna Fin. Corp., 164 Ga. App. 159, 296 S.E.2d 195 (1982) (decided under former Code Section11-3-302).
Before the "party-to-the-transaction rule" may be asserted as a defense against a holder in due course, there must be evidence showing that the assignee was an "original party" to the underlying transaction or that the assignee exercised sufficient "control" of the underlying transaction to authorize a finding that the assignee was, in reality, a party to the original transaction. GECC v. Smith, 183 Ga. App. 897, 360 S.E.2d 443, cert. denied, 183 Ga. App. 906, 360 S.E.2d 443 (1987) (decided under former Code Section11-3-302).
Motion to dismiss denied.
- Regarding requirement of former subsection (1)(c) of this section, fact that copy of a check attached as exhibit to petition bears a date more than one year prior to time instrument was alleged to have been transferred to plaintiff bank does not subject petition to general demurrer (now motion to dismiss) on ground that petition shows bank had notice the check was overdue. Pazol v. Citizens Nat'l Bank, 110 Ga. App. 319, 138 S.E.2d 442 (1964) (decided under former Code Section11-3-302).
Allegation that plaintiff bank gave credit for check prior to receiving knowledge or notice of dishonor and without notice of defense against or claim to it on part of any person is sufficient as against a general demurrer (now motion to dismiss) to allege compliance with requirement of former subsection (1)(c) of this section of a holder in due course. Pazol v. Citizens Nat'l Bank, 110 Ga. App. 319, 138 S.E.2d 442 (1964) (decided under former Code Section11-3-302).
Setoff.
- Where holder of promissory note other than payee named, who has received same in dishonor, institutes suit thereon against maker, the latter may set off to extent of amount due on the note, any sum which may be due from payee to maker which is in any way connected with the debt sued on or the transaction out of which it sprang. Srochi v. Kamensky, 118 Ga. App. 182, 162 S.E.2d 889 (1968), later appeal, 121 Ga. App. 518, 174 S.E.2d 263 (1970) (decided under former Code Section11-3-302).
Illegality determined by law of forum.
- This section leaves determination of what transactions are illegal to statute law of forum. Middle Ga. Livestock Sales v. Commercial Bank & Trust Co., 123 Ga. App. 733, 182 S.E.2d 533 (1971) (decided under former Code Section11-3-305).
Holder in due course of check given for stolen property.
- Holder in due course for value of check given by innocent maker for purchase of cattle which turned out to have been stolen may not recover value of such check from maker. Middle Ga. Livestock Sales v. Commercial Bank & Trust Co., 123 Ga. App. 733, 182 S.E.2d 533 (1971) (decided under former Code Section11-3-305).
Holders Not in Due Course Generally
Provisions qualified by O.C.G.A. § 13-7-7. - The broad language of this section is qualified by the restrictive provisions of O.C.G.A. § 13-7-7, limiting defenses to demands in some way connected with the debt sued on or the transaction out of which it sprang. Srochi v. Kamensky, 121 Ga. App. 518, 174 S.E.2d 263 (1970) (decided under former Code Section11-3-306).
Rights of original payee.
- Original payee of note, as party to transaction for sale of securities, of which note is but a part, is limited in claim on the note to rights of one not a holder in due course. Morris v. Durbin, 123 Ga. App. 383, 180 S.E.2d 925 (1971) (decided under former Code Section11-3-306).
Purchaser acquiring note after default in an installment.
- A deed to land to secure debt and note executed in connection therewith may be transferred and assigned. A purchaser who acquires such note after default as to one of its installments is not a holder in due course, but takes instrument with notice of its dishonor, and subject to any defense or equity which could be pleaded as against original payee. Verner v. McLarty, 213 Ga. 472, 99 S.E.2d 890 (1957), overruled on other grounds, Ward v. Watkins, 219 Ga. 629, 135 S.E.2d 421 (1964) (decided under former Code 1933, §§ 14-502 and 14-508).
Purchaser who acquires note after default in an installment is not a holder in due course, but takes with notice of its dishonor, and subject to any defense or equity which could be pleaded as against original payee. Browning v. Rewis, 152 Ga. App. 45, 262 S.E.2d 174 (1979) (decided under former Code Section11-3-306).
Liability of drawer.
- While drawer of check has right to stop payment of it at any time before it has been certified or paid by drawee, drawer remains liable unless the drawer has a defense good against the holder. Tidwell v. Bank of Tifton, 115 Ga. App. 555, 155 S.E.2d 451 (1967) (decided under former Code Section11-3-306).
Drawer is liable to holder absent existence of defense good against the latter. Bob's Radio Serv., Inc. v. F.P. Plaza, Inc., 125 Ga. App. 133, 186 S.E.2d 552 (1971) (decided under former Code Section11-3-306).
Bank carrying an account with another bank has right to stop payment on its check, however, it remains liable for value of the item unless legal and valid defense is available to it. Fulton Nat'l Bank v. Delco Corp., 128 Ga. App. 16, 195 S.E.2d 455 (1973) (decided under former Code Section11-3-306).
Possession.
- Although the corporation met the requirements for being a holder in due course to the extent that it took the promissory note regarding the mortgage for value, in good faith, and without notice of any claim to the instrument, the corporation was not a holder in due course because it was not in possession of the promissory note at the time it purchased the mortgage; since it was not in possession, it failed to achieve holder-in-due-course status and the bank's security interest prevailed. Provident Bank v. Morequity, Inc., 262 Ga. App. 331, 585 S.E.2d 625 (2003).
Holders Not in Due Course - Claims
Word "claim" descends from the law merchant and indicates certain rights in instrument on which suit is based rather than mere reasons why alleged debtor is not liable for the fund. It is, however, to some extent broader than concept of legal title to instrument. Fulton Nat'l Bank v. Delco Corp., 128 Ga. App. 16, 195 S.E.2d 455 (1973) (decided under former Code Section11-3-306).
Scope of claims covered by this section.
- Valid claims under this section include not only claims of legal title, but all liens, equities or other claims of right against the instrument or its proceeds, as well as claims to rescind prior negotiation and to recover instrument or its proceeds. Fulton Nat'l Bank v. Delco Corp., 128 Ga. App. 16, 195 S.E.2d 455 (1973) (decided under former Code Section11-3-306).
Claims of third party defending action on behalf of defendant drawee bank.
- If third party claims ownership in uncashed check as well as ownership of fund represented by it, then it is a third-party claim available to defendant drawee bank, the party prima facie liable if third party is defending action on its behalf. Fulton Nat'l Bank v. Delco Corp., 128 Ga. App. 16, 195 S.E.2d 455 (1973) (decided under former Code Section11-3-306).
Holders Not in Due Course - Defenses
Immunity of holder fixed at time of negotiation.
- Immunity of holder in due course from defenses available to prior parties, such as want or failure of consideration, becomes fixed at time the instrument is negotiated and subsequent acts of maker short of making payment in full or being adjudicated a bankrupt cannot enhance, diminish or in any way affect right of holder in due course to enforce payment of the instrument free of defenses relative to its consideration. Credit Equip. Corp. v. Pendley, 97 Ga. App. 868, 104 S.E.2d 718 (1958) (decided under former Code 1933, §§ 14-305 and 14-507).
Absences or failure of consideration are matters of defense in a suit on notes as against any person not a holder in due course. However, the instant that a negotiable instrument is negotiated to a holder in due course defense relative to its consideration is precluded. Credit Equip. Corp. v. Pendley, 97 Ga. App. 868, 104 S.E.2d 718 (1958) (decided under former Code 1933, §§ 14-305, 14-507, and 14-508).
Defenses outlined in former paragraph (c) all relate to creation of valid obligation and not to restrictions upon existing ones. Tatum v. Bank of Cumming, 135 Ga. App. 675, 218 S.E.2d 677 (1975) (decided under former Code Section11-3-306).
Defense of payment in full.
- One acquiring promissory note who is not a holder in due course is subject to defense of payment in full. Northside Bldg. & Inv. Co. v. Finance Co. of Am., 119 Ga. App. 131, 166 S.E.2d 608 (1969) (decided under former Code Section11-3-306).
Payment of installment to payee without notice of prior transfer of instrument.
- Where maker pays installment to payee without notice that payee had no authority to accept payment, in a suit by transferee, maker can set up the payment as a defense even though transferor had not remitted it to transferee. Northside Bldg. & Inv. Co. v. Finance Co. of Am., 119 Ga. App. 131, 166 S.E.2d 608 (1969) (decided under former Code Section11-3-306).
Fraud which induces a party to enter into contract resulting in execution of negotiable instrument is a good defense to action on instrument by original payee. Johnston v. Dollar, 83 Ga. App. 219, 63 S.E.2d 408 (1951) (decided under former Code 1933, § 14-508).
Defense of failure of consideration generally.
- In general, defense of want or failure of consideration is available only against one who does not have rights of a holder in due course. Ashburn Bank v. Childress, 120 Ga. App. 632, 171 S.E.2d 768 (1969) (decided under former Code Section11-3-306).
Absence or failure of consideration is a defense only as against one not a holder in due course, and inadequacy of consideration does not prevent holder of a note from enjoying protection of a bona fide holder. Commercial Credit Equip. Corp. v. Reeves, 110 Ga. App. 701, 139 S.E.2d 784 (1964) (decided under former Code 1933, § 14-305).
Necessary allegations in plea of failure of consideration.
- Defendant's plea of failure of consideration must allege facts showing affirmatively that plaintiff is not a holder in due course. Henry v. A.L. Zachry Co., 93 Ga. App. 536, 92 S.E.2d 225 (1956) (decided under former Code 1933, § 14-305).
Partial failure of consideration is a defense pro tanto against one not a holder in due course of a negotiable instrument. Lanier v. Waddell, 83 Ga. App. 423, 64 S.E.2d 79 (1951) (decided under former Code 1933, § 14-305).
Limitation on defense of setoff.
- Defense of setoff is available but it was apparently intention of legislature to limit this defense to demands in some way connected with debt sued on, or transaction out of which it sprang. Srochi v. Kamensky, 118 Ga. App. 182, 162 S.E.2d 889 (1968), later appeal, 121 Ga. App. 518, 174 S.E.2d 263 (1970) (decided under former Code Section11-3-306).
Setoff by maker of connected debts of payee.
- Where holder of promissory note, other than payee therein named, who has received same in dishonor, institutes suit thereon against maker, latter may set off to extent of amount due on the note, any sum which may be due from payee to maker which is in any way connected with the debt sued on or the transaction out of which it sprang. Srochi v. Kamensky, 118 Ga. App. 182, 162 S.E.2d 889 (1968), later appeal, 121 Ga. App. 518, 174 S.E.2d 263 (1970) (decided under former Code Section11-3-306).
Holders Not in Due Course - Parol Evidence
Admissibility of evidence.
- Where consideration for contract is so expressed as to make it one of its conditions, a party may not under guise of inquiring into its consideration alter terms of instrument by parol, but parol evidence is otherwise admissible to show lack or failure of consideration. The same is true on defense of conditional delivery. Kelley v. Carson, 120 Ga. App. 450, 171 S.E.2d 150 (1969) (decided under former Code Section11-3-306).
RESEARCH REFERENCES
Am. Jur. 2d.
- 11 Am. Jur. 2d, Banks, § 970. 11 Am. Jur. 2d, Bills and Notes, §§ 189, 207 et seq., 247, 251, 264, 268, 272, 288, 299. 12 Am. Jur. 2d, Bills and Notes, § 683. 15A Am. Jur. 2d, Commercial Code, § 58. 50 Am. Jur. 2d, Letters of Credit, and Credit Cards, §§ 3, 5, 10, 19. 68A Am. Jur. 2d, Secured Transactions, §§ 14, 55, 826, 926-930.
C.J.S.- 10 C.J.S., Bills and Notes, § 169 et seq.
U.L.A.- Uniform Commercial Code (U.L.A.) § 3-302.
ALR.
- Right of purchaser of stolen bonds, 1 A.L.R. 717; 85 A.L.R. 357; 102 A.L.R. 28.
Crediting the proceeds of negotiable paper to holder's deposit account as constituting bank a holder in due course, 6 A.L.R. 252; 59 A.L.R.2d 1173.
Breach of agreement to return a note to maker as fraud which casts upon an endorsee the burden of showing his bona fide character, 6 A.L.R. 1667.
Absence of revenue stamp as affecting bona fides of purchaser of bill or note, 6 A.L.R. 1701; 21 A.L.R. 1125.
Effect of fraud in the inception of a bill or note to throw upon a subsequent holder the burden of proving that he is a holder in due course, 18 A.L.R. 18; 34 A.L.R. 300; 57 A.L.R. 1083.
Memoranda or notations on paper as affecting one's character as a holder in due course, 34 A.L.R. 1377.
Renewal of note after notice of defenses as destroying bona fide character of holder, 35 A.L.R. 1294.
Effect on bona fides of purchaser of promissory note of fact that there is interest due and unpaid upon it, 40 A.L.R. 832.
Validity and effect of note payable to maker without words of negotiability, 42 A.L.R. 1067; 50 A.L.R. 426.
One taking bill or note as a gift or in consideration of love and affection as a holder for value or in due course protected against defenses between prior parties, 48 A.L.R. 237.
Endorsee of bill or note based on executed consideration who knows of circumstances which might result in rescission as between original parties, as a holder in due course, 59 A.L.R. 1026.
Character as holder in due course of concern which takes paper from its dealers or agents, 61 A.L.R. 694.
Maturity of one or more of series of notes as affecting status of purchaser as holder in due course, 64 A.L.R. 457.
Exchange of negotiable paper as supporting status as holder in due course of one who at time of exchange had no notice of infirmity or defect in paper received, 69 A.L.R. 408.
Endorsement without recourse as affecting character of endorsee or subsequent holder as holder in due course, 77 A.L.R. 487.
Taking negotiable paper as collateral security for or in payment of preexisting indebtedness as sustaining one's character as holder in due course under Uniform Negotiable Instruments Act, 80 A.L.R. 670.
High rate of discount upon sale of negotiable paper as affecting one's status as holder in due course, 91 A.L.R. 1139.
Possession of bill or note as essential to maintain action thereon as "holder," 102 A.L.R. 460.
Maturity of one or more of installments of note payable in installments as affecting status of purchaser as holder in due course, 170 A.L.R. 1029.
Bills and notes: indication of alteration as affecting transferee's character as holder in due course, 171 A.L.R. 798.
Crediting proceeds of negotiable paper to depositor's account, as constituting bank a holder in due course, 59 A.L.R.2d 1173.
Notice which has been forgotten as affecting status as holder in due course, 89 A.L.R.2d 1330.
Payee as holder in due course, 2 A.L.R.3d 1151; 42 A.L.R.5th 137; 67 A.L.R.3d 144; 78 A.L.R.3d 1020; 88 A.L.R.3d 1100; 97 A.L.R.3d 798; 97 A.L.R.3d 1114; 23 A.L.R.4th 855; 36 A.L.R.4th 212; 45 A.L.R.5th 389.
Fraud in the inducement and fraud in the factum as defenses under UCC sec. 3-305 against holder in due course, 78 A.L.R.3d 1020.
What constitutes unconditional promise to pay under Uniform Commercial Code sec. 3-104(1)(b), 88 A.L.R.3d 1100.
Construction and application of UCC sec. 3-403(2) dealing with personal liability of authorized representative who signs negotiable instrument in his own name, 97 A.L.R.3d 798.
Who is holder of instrument for "value" under UCC sec. 3-303, 97 A.L.R.3d 1114.
Payee's right of recovery, in conversion under UCC sec. 3-419(1)(c), for money paid on unauthorized indorsement, 23 A.L.R.4th 855.
What constitutes taking instrument in good faith, and without notice of infirmities or defenses, to support holder-in-due-course status, under UCC § 3-302, 36 A.L.R.4th 212.
Liability of bank for diversion to benefit of presenter or third party of proceeds of check drawn to bank's order by drawer not indebted to bank, 69 A.L.R.4th 778.