TriColor purchased an industrial stamping machine from Vicy, Inc TriColor paid for the machine with a negotiable note. The note was payable to the order of Vicy, Inc Vicy, Inc indorsed the note and gave it to CCLoans to satisfy a debt. CCLoans knew
nothing about the contract between TriColor and Vicy, Inc CCLoans indorsed the note and gave it to Great River Youth Club as a charitable donation. When Great River Youth Club presented the note for payment on its due date, TriColor refused to pay, claiming that the stamping machine was defective. (A) Is Great River Youth Club a holder in due course? (B) Will TriColor be able to avoid liability to Great River Youth Club on the basis that the machine was defective?
(A) Great River Youth Club is not a holder in due course. A requirement of a holder in due course is that the holder must give value for the instrument. Great River Youth Club did not give value for the note. It was a gift to the organization.
(B) TriColor will not be able to successfully raise the defense that the machine was defective. Even though Great River Youth Club is not a holder in due course, it is a holder with the rights of a holder in due course. CCLoans was a holder in due course and since Great River Youth Club took the note through CCLoans, Great River Youth Club is a holder with the rights of a holder in due course under the shelter rule. Consequently, TriColor can only raise real defenses to payment on the note. The defense that the machine was defective, a breach of contract, is a personal defense. TriColor will have to pay the amount of the note to Great River Youth Club.
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