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Postdated Check and Holder in Due Course Right: Check and Funds Transfer Case

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David was concerned about his brother-in-law, Gerald. Gerald lost his job over two years ago, and he was not trying very hard to find a new job. David decided to help Gerald out when Gerald could not meet his mortgage last month. Sarah, Gerald's wife and David's sister, had been trying to make the monthly payments. However, last month, Sarah told David that she just did not have the money. David did not want to see Gerald and Sarah lose their home. Therefore, he gave them the payment, $2,200, in cash. In return, Gerald gave David a postdated check for this month. Gerald and Sarah assured David that David could deposit the check because sufficient funds were available. Instead, David signed the check over to Dan whom David owed $2,200 for personal services. When Dan presented the check to the drawee bank, the bank refused to cash it due to insufficient funds. Dan claimed that David still owed him the $2,200. David refused to pay claiming this was improper because he was protected as a holder in due course.

Is David correct? If so, what are his defenses?

Will Dan be successful? Discuss why or why not.

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Solution Summary

This is an issue concerning holder in due course (HIDC) right and how it applies. The solution is discussed in 328 words with three references.

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Is David correct? If so, what are his defenses?

No. Having issued the check to Dan, the rights as holder in due course now belongs to Dan not anymore to David. Dan is now clothed with a Holder in Due Course (HIDC) right.
'Holder in Due Course is anyone who accepts a check for payment' (www.safechecks.com).

Note that 'An HIDC can assign, sell, give, or otherwise transfer its rights to another party, who becomes the new HIDC with the same legal rights as the original Holder' (www.safechecks.com).

It can be seen from the case that David issued the check to Dan in good faith, but he should face the consequences ...

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