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Holder in Due Course

Sharon owes Irma $500.00 for a small loan Irma gave to Sharon six months ago. Sharon has just received a check made payable to her from the Ajax Company, for work Sharon performed for Ajax. She endorses the check and writes on the back of the check, "Pay to the Order of Irma." She gives the check to Irma in payment of her indebtedness to Irma. Sharon tells Irma to hurry up and cash the check, because she (Sharon) thinks Ajax might want the check back when it finds out Sharon didn't complete all the work she was supposed to finish for Ajax. Irma doesn't have time to get to the bank so she puts the check on her kitchen table and forgets about it. In the meantime, Ajax does discover that Sharon had not completed the work for Ajax as originally thought, and it puts a stop payment on the check it gave to Sharon. A few days later, Irma gets around to depositing the check, but it is dishonored by her bank because of the stop payment order. In the meantime, Sharon has left town. Irma wonders if she can now bring a claim against Ajax for the $500.00 because of her possible rights as a holder in due course of the check. She asks your opinion on the matter. What is your answer to Irma? Give the legal reason for your answer?

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No, Irma cannot bring a claim against Ajax. The claim will be rejected. For Irma to be a holder in due course, she must have taken the debt ...

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This solution gives you a detailed discussion on holder in due course.