Requirements for HDC Status. In February 2001, New York Linen Co, a party rental company, agreed to buy 550 chairs from Elite Products. On delivery of the chairs, New York Linen issued a check (dated February 27) for $13,300 to Elite. Elite's owner,

Question

Meir Shmeltzer, transferred the check to General Credit Corp, a company in the business of buying instruments from payees for cash. Meanwhile, after recounting the chairs, New York Linen discovered that delivery was not complete and stopped payment of the check. The next day, New York Linen drafted a second check, reflecting an adjusted payment of $11,275, and delivered it to Elite. A notation on the second check indicated that it was a replacement for the first check. When the first check was dishonored, General Credit filed a suit in a New York state court against New York Linen to recover the amount. New York Linen argued in part that General Credit was not a holder in due course because of the notation on the second check. In whose favor should the court rule? Why?

Answer 1

Requirements for HDC status
The court granted a summary judgment in favor of General Credit, holding that the plaintiff was a holder in due course and entitled to payment of the check. General Credit was a good faith purchaser that "took the instrument for value and claims to have all the rights and defenses of a holder in due course. . . . Thus any defense New York Linen had which related to its purchase of the chairs was not a defense against General Credit." New York Linen's "argument has no basis in fact. The plaintiff purchased the first check before the second check was drafted. . . . [T]here are no allegations that the plaintiff ever saw the second check, nor is there any logical reason to assume that they saw the second check. . . . To be a holder in due course, the purchaser of the instrument must take in good faith and with out notice. . . . The second check while it may have provided notice was not seen by General Credit" before it bought the first check. The court added that New York Linen could seek recovery for its double payment for the chairs from Elite and Schmeltzer.