notice that there may be some adverse claim or defense. A person who acquires title to the instrument under such circumstances can be a holder but cannot be a holder in due course. For Example, buying a discounted note after its due date is notice that something may be wrong with the instrument.

(4) Ignorance of Defenses and Adverse Claims. Prior parties on an instrument may have defenses that entitle them to withhold payment from a holder of an instrument. For Example, the drawer of a check, upon demand for payment by the payee, could assert as a defense to payment that the merchandise the payee delivered under the terms of their underlying contract was defective. A person who acquires an instrument with notice or knowledge that there is a defense that a party may have or that there are claims of ownership of the instrument from different parties cannot be an HDC. In general, transferees who are aware of facts that would make a reasonable person ask questions are deemed to know what they would have learned if they had asked questions.13 Such knowledge and the failure to ask questions will cost them their special status of holder in due course; they remain simply holders.

Knowledge acquired by a holder after the instrument was acquired does not prevent the holder from being a holder in due course. The fact that a holder, after acquiring the instrument, learns of a defense does not work retroactively to destroy the holder’s character as an HDC.

© 2009 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Any Kind of Check Won’t Do

FACTS: In the 1990s, D. J. Rivera, a “financial advisor” and Salvatore Guarino, a cohort of Rivera, sold John G. Talcott, Jr., a 93-year-old Massachusetts resident, an investment of $75,000. The investment produced no returns.

On January 10, 2000, Rivera telephoned Talcott and talked him into sending him a check for $10,000 made out to Guarino, which was to be used for travel expenses to obtain a return on the

original $75,000 investment. Rivera received the check on January 11. Talcott spoke to Rivera on the morning of January 11. Rivera indicated that $10,000 was

more than what was needed for travel. He said that $5,700 would meet the travel costs. Talcott called his bank and stopped payment on the $10,000 check.

Guarino went to Any Kind’s Stuart, Florida, office (a place where he had established check- cashing privileges) on January 11 and presented the $10,000 check to Nancy Michael, a supervisor. Guarino showed Michael his driver’s license and the Federal Express envelope from Talcott in which he had received the check. Based on her experience, Michael believed the check was good; the Federal Express envelope was “very crucial” to her decision because it indicated that the maker of the check had sent it to the payee trying to cash the check. After deducting the 5 percent check cashing fee, Michael cashed the check and gave Guarino $9,500. The next day she deposited the check in the company’s bank.

13 Unr-Rohn, Inc. v Summit Bank, 687 NE2d 235 (Ind App 1997); but see contra view, Pero’s Steak and Spaghetti House v Lee, 90 SW3d 614 (Tenn 2002).

670 Part 4 Negotiable Instruments



C P AC P A (B) HOLDER THROUGH A HOLDER IN DUE COURSE. Those persons who become holders of the instrument after an HDC has held it are given the same protection as the HDC, provided they are not parties to any fraud or illegality that affects the instrument. This status of holder through a holder in due course is given in these circumstances even if the transferee from a holder in due course does not satisfy the requirements for holder-in-due-course status. This elevated or protected status is called Article 3’s “shelter rule,” and it allows a person who is not an HDC to hide under the “umbrella” with a holder in due course and be sheltered from claims and defenses as if actually being an HDC. For Example, a person who acquires an instrument as an inheritance from an estate does not give value and is missing one of the requirements for being a holder in due course. However, if the estate was an HDC, that status does transfer to the heir. Furthermore, suppose that Avery is a holder in due course of a $5,000 promissory note due May 31, 2009. Avery gives the note to his nephew Aaron for Aaron’s birthday on June 1, 2009. Aaron did not give value because the note was a gift, and he has taken the note as a holder after it has already become due. Nonetheless, because Avery was a holder in due course, Aaron assumes that status under Article 3’s shelter provision.

© 2009 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.


On January 15, 2000, Talcott sent a check for $5,700. On January 17, 2000, Guarino went into the Stuart Any Kind store and presented the $5,700 check to the teller, Joanne Kochakian. Kochakian noticed that Michael had previously approved the $10,000 check. She called Michael and told her about Guarino’s check. Michael instructed the cashier not to cash the check until she had contacted the maker, Talcott, to obtain approval. Talcott approved cashing the $5,700 check. There was no discussion of the $10,000 check. Any Kind cashed the second check for Guarino, from which it deducted a 3 percent fee.

On January 19, Rivera called Talcott to warn him that Guarino was a cheat and a thief. Talcott immediately called his bank and stopped payment on the $5,700 check. Talcott’s daughter called Any Kind and told it of the stop payment on the $5,700 check.

Any Kind filed suit against Guarino and Talcott, claiming that it was a holder in due course. The trial court entered judgment for Any Kind for only the $5,700 check. The court found that the circumstances surrounding the cashing of the $10,000 check were suspicious and should have put Any Kind on notice of a problem and that Any Kind was not a holder in due course of that check.

DECISION: The events and circumstances were sufficient to put Any Kind on notice of potential defenses. The circumstances of a person describing himself as a broker, receiving funds in the amount of $10,000, and negotiating the check for those funds at a $500 discount were sufficient to put Any Kind on inquiry notice that some confirmation or explanation should be obtained.

Any Kind should have approached the $10,000 check with additional caution, beyond the FedEx envelope, and should have verified it with the maker if it wanted to preserve its holder-in- due-course status. Affirmed. [Any Kind Checks Cashed, Inc. v Talcott, 830 So 2d 160 (Fla App 2002)]

holder through a holder in due course – holder of an instrument who attains holder-in-due-course status because a holder in due course has held it previous to him or her.

Chapter 30 Liability of the Parties Under Negotiable Instruments 671