Colby fraudulently induces Dian to sign a note. Colby sells the note to Elen, who does not know of the fraud and takes the note for value and in good faith, and thus becomes an HDC. Elen sells the note to Fred, who sells the note back to Colby. Does Colby acquire Elen's HDC rights in the note?

Question

What will be an ideal response?

Answer 1

No. A person who does not qualify as an HDC but who acquires an instrument from an HDC or from someone with HDC rights receives the rights and privileges of an HDC. A holder who was a party to fraud affecting the instrument, however, knows of a defense against payment on it and cannot improve his or her status by buying it from a later HDC. Because of the fraud perpetrated on Dian, the signer of the note, Colby does not qualify as an HDC because he knows of a defense against payment on the note. Elen and Fred, both of whom apparently are not aware of the fraud, can become HDCs in the negotiation of the note to them. But Colby cannot improve his status by buying the note from either of them because he is aware of Dian's defense against payment.