Donna notwithstanding her defense of failure of consideration? What will be the bank’s cause of action?

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Donna notwithstanding her defense of failure of consideration? What will be the bank’s cause of action?

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Donna gives Peter a check for $3,000 in return for a desktop computer. The check is dated December 2. Peter transfers the check for value to Howard on December 14, and Howard deposits it in his bank on December 20. In the meantime, Donna has discovered that the computer is not what was promised and has stopped payment on the check. If Peter and Howard disappear, may the bank recover from Donna notwithstanding her defense of failure of consideration? What will be the bank’s cause of action?

Explanation & AnswerSolution by a verified expert

Explanation

Individual H deposited the check in the bank and the bank accepted the check for value and in good faith, unaware of the allegations made over it by Individual D. It makes the bank a holder in due course. The bank can recover from Individual P, if Individual P and Individual H disappear, even if Individual D pleads on the grounds of failure of consideration. It is because the defense of Individual D is personal in nature, which is ineffective against a holder in due course. If the bank knew of Individual D's allegation of failure of consideration and still accepted the check, the status of holder in due course is going to be lost; this makes the defenses of Individual D valid.

Verified Answer

The bank can recover from Individual D since the bank has taken the instrument for value, without notice to the defenses or claims against it. It makes the bank a holder in due course, making the personal defenses of Individual D irrelevant. If the bank did know about the argument against the check from Individual D and still accepted the check, the bank would not have been a holder in due course.

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