Hammer bought a tool set from Weekend Projects, Inc and signed a consumer credit contract promising to pay for the tool set in 12 monthly installments. Weekend promptly negotiated the instrument to its affiliate Easy Finance Co in exchange for a
discounted payment. Easy Finance gave value for the instrument, in good faith, and without knowledge of any defects or claims against the instrument. The tool set was defective and therefore Hammer stopped making the monthly payments. Easy Finance sues Hammer for the balance due on the instrument. Can Hammer raise this personal defense (breach of implied warranty of merchantability) against Easy Finance? Discuss.
Yes, Hammer can raise this personal defense against Easy Finance even if Easy Finance can claim the status of a holder in due course. The Federal Trade Commission issued a rule to protect consumers in consumer credit sales where a consumer borrows money from a lender to purchase goods and services from a seller who is affiliated with the lender. The instrument is required to contain a specific notice stating that any holder of the instrument is subject to all claims and defenses of the purchaser/debtor. Failure to include the notice can subject the seller to a fine. A consumer credit transaction is one in which the consumer buys a product or services on credit for her own personal/family use.
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