[Anonymous]

Hey guys, this particular issue is really bugging me….. I am looking for a bit of clarification….

If you guys can help it would be very appreciated!

here it goes….

OK, so…(from wiley)

1. The general rule is that a transfer of a negotiable instrument to a HDC cuts off all personal defenses against a HDC

EXAMPLE: Art Dobbs negotiates a note to Mary Price in payment of a stereo. Mary negotiates this note to D. Finch who qualifies as a HDC. When Finch seeks payment, Dobbs points out that Price breached the contract by never delivering the stereo. Finch, as a HDC, still has the right to collect because breach of contract is a personal defense. Dobbs then has to seek recourse directly against Price.

*****b. EXCEPTION—HDC takes subject to all personal defenses of person with whom HDC directly dealt ******

Alright, so in the above…. Didn’t Finch(HDC) deal directly with MaryPrice??? Wouldn’t he then take subject to personal defenses against MaryPrice?? —> breach of contract – failure of consideration(stereo)

Just can’t wrap my head around this exception… Any help is appreciated! Thanks guys!

[Anonymous]

If Mary took the instrument knowing of any defenses, then those defenses can be raised against her.

It has to be taken for value (consideration), in good faith (didn't know any better), and without notice of any defenses against it.

[Anonymous]

Becker does not include this exception, but my interpretation would be that Finch dealt directly with Price, not Dobbs, so he would only take it subject to the personal defenses of Price (the person with whom he dealt). This is irrelevant because Finch is seeking payment from Dobbs, not Price. In other words, Dobbs cannot use personal defenses against Finch because they didn't deal directly with each other.

I think Becker chooses not to include this exception because it's typically useless. In order to become an HDC, one must act in good faith. If one acts in good faith, one will generally not commit acts which could be used against them as personal defenses. There are certainly some rare instances in which this could make a difference, but the likelihood of them showing up on the exam are slim.

[Anonymous]

Thanks Chris, appreciate it….

I'm also looking at defenses that Dobbs can raise against Finch(our HDC)?

Im confused b/c i thought Dobbs can raise a “personal defense” against Mary (breach)… and… Finch took note from Mary and directly dealt with her…..

so therefore…. does finch “also” take subject to this personal defense(breach), because he directly dealt with Mary? (thats this exception rule i keep seeing pop up)

its probably a minor point, but i know HDC questions can come in many different forms….

Thanks so much if you can help sort this out! I really appreciate it, just trying to be as prepared as possible…

[Anonymous]

CPA, thanks so much for your clarification. I was thinking a similar thing, but wasn't totally sure.

This line was the key to understanding…. ” In other words, Dobbs cannot use personal defenses against Finch because they didn't deal directly with each other. “

I cant even think of a situation where Price would need to exert a personal defense against the HDC(Finch)?…. especially since, as you noted, Finch is seeking payment ultimately from Dobbs…

I am glad to know this has a small likelihood of being tested.

Thanks so much for your answer… I have saved it and am including it in my HDC notes…

[Anonymous]

Oops I confused finch with Mary lol. Yeah I really didn't like this topic of REG.

The defenses that would work against an HDC are the “real” defenses that Wiley talks about.

[Author]

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