Question

Sally has a note form Alice for $1000.00 for the sale of a personal watercraft that Alice did not pay when due. Alice told Sally that she did not plan to pay at all because the watercraft has never worked right and that she has been stranded more than once in the middle of the lake. Alice accused Sally of intentionally misrepresenting the condition of the watercraft. Sally talks Bill into buying the note for $800.00. Sally tells Bill that Alice did not pay when the note was due and about her other complaints. Sally tells Bill that, nevertheless, he should not be concerned because Alice cannot assert any defenses against him. Is Sally right and why or why not? In your answer discuss the requirements of qualifying as a holder in due course.

Answer 1

Sally is not legally and ethically right.

Firstly, Sally committed a material representation by not stating the exact condition of the watercraft. Alice has the right to terminate the agreement to pay or honor $1000, however, Alice would need to return watercraft. In case Alice knew the exact condition of watercraft, she may not have bought it in the first place.

Secondly, Sally again committed a material representation by selling Bill the buying note for $800. Alice does have a legal defense against Sally and that extends to Bill when Bill buys the note.

Sally has committed fraud on two occasions - one by selling Alice a faulty watercraft and second by selling bill the buying note on pretext Alice doesn't have defense against Bill.