Does a payor have any defenses to paying an instrument that is presented for payment by a holder in due course?

A holder in due course (HDC) has greater rights to enforce an instrument against the payor than does a mere holder of the instrument. The HDC is shielded from certain defenses against enforcement of an instrument. Generally, a payor may assert any number of personal and real defenses against enforcement of a note by a holder. The payor, however, can assert only real defenses, not personal defenses, against the holder in due course.

What are Personal Defenses to Payment of a Negotiable Instrument?

Personal defenses are generally defenses applicable to the underlying agreement or between the original parties to the underlying agreement. Common personal defenses are as follows:

Breach of Contract - Any party to a contract who breaches the agreement cannot enforce payment of a negotiable instrument issued as part of that agreement.

Failure of a Condition - Contracts may be subject to conditions precedent and subsequent. The occurrence or non-occurrence of which could discharge an individual from her obligations under a contract.

Lack or Failure of Consideration - If the underlying contract fails for lack of consideration it may constitute a defense to enforcement of an instrument. Further, if a promissory note is given as a gift, it may be a defense against later enforcement. Since a gift promissory note is a promise to make a future payment, the obligation itself is not supported by consideration. The gift is the underlying payment, rather than the promise of payment. As such, it may not be enforceable for lack of consideration.

Mistake - Bilateral and, in some cases, unilateral mistake in entering into a contract can affect enforceability of an agreement. This will serve as a defense against the enforceability of a negotiable instrument used as consideration for the agreement.

Waiver - If a party to the underlying agreement waives the obligation of the other party (the party issuing the negotiable instrument), it can serve as a defense to enforcement of the instrument by the holder.

Prior Payment - A note should be presented for payment, collected by the payor, and paid. If the note is paid, but not collected, it could fall into the hands of a subsequent holder. A subsequent holder of the instrument does not acquire the right of payment unless she qualifies as a holder in due course.

Theft of the Instrument - Someone who steals a negotiable instrument may qualify as holder of the instrument. The payor may assert a defense against payment to a holder.

Note: A forger does not qualify has a holder.

Unauthorized Completion - In some cases, a holder may be charged with completing or entering information on an instrument. Notably, if a holder receives blank or incomplete instrument and completes it in an unauthorized manner, this is a defense against that holder and any subsequent holder, unless she is a HDC.

Note: This does not include a forgery, which is a defense against an HDC.

Fraud in the Inducement - Fraud in the inducement is when a party defrauds the other party in order to have her enter into the agreement. This normally means providing information that is untrue or deceptive information, but the information is not the subject matter of the contract.

Related Topics

• Commercial Paper (Intro)
• What is Commercial Paper?
• Negotiable Instrument
• What are the common types of commercial paper?
• Promissory Note
• Cashier's Check
• Convenience Check
• Certified Check
• Substitute Check
• Bill of Exchange
• Bank Draft Definition
• Sight Draft Definition
• Bankers Acceptance 
• Who is a Holder of a negotiable instrument?
• Commercial Paper Funding Program
• What is Negotiability and why is it important?
• What is required for commercial paper to be negotiable?
• Sum Certain (Contracts)
• Inflation Adjustment Clause
• When does commercial paper contain an Unconditional promise to pay?
• Backup Line of Credit
• What is Payable on Demand or Payable on Time?
• What is Order Paper and Bearer Paper?
• Bearer Form
• How is a payee identified on the negotiable instrument?
• What rules does the court apply in determining negotiability?
• How is commercial paper negotiated to a holder?
• What is Transfer of a negotiable instrument?
• What is Indorsement of a negotiable instrument?
• What are the various types of indorsement?
• Bank Endorsement
• Blank Endorsement
• Accommodation Endorsement
• How does a holder receive payment on a negotiable instrument?
• Who is potentially liable on (or obligated to pay) a negotiable instrument?
• When is an individual liable for a representative signing a negotiable instrument?
• What rules apply if a holder loses a negotiable instrument?
• When is payment of a negotiable instrument overdue?
• What effect does a negotiable instrument have on the underlying obligation?
• What is a holder in due course?
• What are the requirements for a holder to become a holder in due course?
• Receive an instrument for value?
• Receive an instrument in good faith?
• Receive an instrument without notice of a valid defense?
• How does discharge of the Underlying Obligation affect a holder in due course?
• What is the Shelter Rule?
• Can you limit a transferee from becoming a holder in due course?
• Personal Defenses?
• Real Defenses?
• What is a Claim in Recoupment?
• What are the rights of a holder in due course if the instrument involves a consumer transaction?
• What happens if a negotiable instrument is Forged?
• What happens if a negotiable instrument is Stolen?
• Guaranty or Guarantee
• Letter of Guarantee
• Personal Guarantee
• What is the role of a Guarantor or Surety of a negotiable instrument?
  
• Surety 
  
• Cosign
• Accommodation Paper Definition
• Secondary Liability
• Avalize Definition
• What is an Accord & Satisfaction?
• What is primary and secondary liability on an instrument?
• What is Drawer or Maker Liability for a negotiable instrument?
• What is Transferor Warranty of a negotiable instrument?
• What is Indorser Warranty of a negotiable instrument?
• What is Presentment Warranty of a negotiable instrument?
• What is a warrantors liability for a dishonored note or draft?
• What is the time limitation for warranty of a negotiable instrument?
• When are the warranties of a negotiable instrument discharged?