Is Davis a holder in due course, or if not, does he have the rights of a holder in due course? Explain.

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Is Davis a holder in due course, or if not, does he have the rights of a holder in due course? Explain.

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Adams, by fraudulent representations, induced Barton to purchase one hundred shares of the capital stock of the Evermore Oil Company. The shares were worthless. Barton executed and delivered to Adams a negotiable promissory note for $5,000, dated May 5, in full payment for the shares, due six months after date. On May 20, Adams indorsed and sold the note to Cooper for $4,800. On October 21, Barton, having learned that Cooper now held the note, notified Cooper of the fraud and stated he would not pay the note. On December 1, Cooper negotiated the note to Davis who, while not a party, had full knowledge of the fraud perpetrated on Barton. Upon refusal of Barton to pay the note, Davis sues Barton for $5,000. Is Davis a holder in due course, or if not, does he have the rights of a holder in due course? Explain.

Explanation & AnswerSolution by a verified expert

Explanation

Individual A fraudulently sold the shares to Individual B. The promissory note issued by Individual B was sold to Individual C and Individual C bought it for value and in good faith without doubting if the note is fraudulent. It makes Individual C a holder in due course. The same document was then negotiated to Individual D, transferring all the rights of holder in due course to Individual D, under the rights of the shelter rule. Individual B cannot use the defense that the initial transaction was done by a fraudulent representation by Individual A since Individual D has the rights of a holder in due course and all personal defenses are invalid. If Individual D did not have the rights transferred to them, Individual B could have used the personal defenses, which is not the case here.

Verified Answer

Individual D is not a holder in due course. Individual C is the holder in due course. Since Individual C negotiated the promissory note to Individual D, it makes Individual D a transferee, who gets all the rights of the transferor according to the shelter rule. In effect, Individual D has the rights of a holder in due course. If the note was not transferred to Individual D, the rights also would not have been transferred.

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