Question

David made a promissory note in the amount of $75,000 in favor of Katelyn on July 1, 2018, to be due in nine months. In exchange for a loan, Katelyn granted the Nevada Bank (Bank) a security interest in this note on August 1, 2018. Bank’s security interest in the note attached against Katelyn. Bank did not take possession of the note. On August 15, 2018, Katelyn negotiated the note to Tom for $70,000, and Katelyn promptly spent this money gambling. Tom had no reason to know or suspect that Katelyn had granted a security interest in the note to the Bank and took the instrument in good faith. If Katelyn defaults on her loan and does not pay Bank, which party is entitled to the $75,000 note and why?

A. David is entitled to the note because David is the maker.

B. Tom is entitled to the note because Tom is a holder in due course.

C. Tom is entitled to the note because Tom is a creditor.

D. Nevada Bank is entitled to the note because it took a security interest in the note.

Answer 1

Analysis of the Whole Scenario and passing of Promissory Note of $ 75 K is

David ( Maker) ------- Katelyn ( Receiver of 75K $) --------- Pledged as Security against Katlyen Loan in Bank ( Bank Owns Interest but Did not tale possession of the same) -------- Katlyen negotaiated against Sum of $ 70 K to Tom( Holder not Holder in Due Course)

Here Tom is marked as Holder and Not holder in Due course becasue he has received the instrument before maturity and in Good Faith.

Option A is not avlid as per the entitlement of the Instrument, Secondly Option D, Security mark is not shown on instrument as well as possession is not taken thereof. simply updating in its own sysytem is not sufficient act in this behalf. Option B, Tom is not holder in due course as explained above.

Hence Option C: Tom is entitled to the note because Tom is a creditor. is correct Option.