Book Opener

Kristina learned that the brakes had not been relined and stoppedpayment on the check. David, however, had indorsed the checkin blank and had given it to Eugene, a holder in due course.Eugene could collect the full $1,200 from Kristina. Even thoughKristina was defrauded, she cannot use that defense against aholder in due course because fraud in the inducement is apersonal defense.Real DefensesSome defenses can be used against holders in due course. Thesedefenses are known as real defenses (also called universal defenses).No one is required to pay an instrument when there is a real defense.Real defenses include infancy and mental incompetence, illegality,duress, fraud as to the essential nature of the transaction, bankruptcy,unauthorized signature, and alteration (see Figure 26.2).Example 5. The Easy Loan Company issued a $5,000 check onan automobile loan. John Bates altered the check to $8,000,indorsed it, and presented it for payment to an out-of-town bank.When the check was returned to Easy’s own bank for collection,the bank refused to honor the check, noting the alteration. If thebank that cashed the check sued Easy Loan Co., Easy would haveREAL DEFENSESEveryone, includingholders in duecourse, is subject toreal defenses. Whatis another name fora real defense?Figure 26.2DefenseInfancy and mentalincompetenceIllegalityDuressFraud as to the essentialnature of the transactionBankruptcyUnauthorized signatureMaterial alterationMost Common Real DefensesDescriptionThe maker or drawer of the instrument was a minor ormentally incompetent.The underlying contract for which the instrument was issuedwas illegal.The instrument was drawn against the will of the maker ordrawer because of threats of force or bodily harm.A false statement was made to the maker or drawer aboutthe nature of the instrument being signed.An order for relief was issued by the federal court that endedall of the debtor’s outstanding contractual obligations.Someone wrongfully signed another’s name on an instrumentwithout authority to do so.The amount of the instrument or the payee’s name waschanged wrongfully after the instrument was originally drawnby the maker or drawer.566 Unit 5: Using Your Purchasing Power