Question

Tom gave celebrity Lynnetta Landau a blank sheet of paper and asked her to sign her autograph on it. Then, without Lynetta's knowledge, Tom wrote a promissory note made payable to him for $3,000 above her signature. This kind of fraud is known as fraud:

a. as to the essential nature of the transaction, which may not be used as a defense against a holder in due course.
b. as to the essential nature of the transaction, which may be used as a defense against a holder in due course.
c. in the inducement, which may not be used as a defense against a holder in due course.
d. in the inducement, which may be used as a defense against a holder in due course.

Answer 1

In law, Tom's action constitutes 'fraud as to the essential nature of the transaction,' which serves as a valid defense against a holder in due course because the signatory was misled about the transaction's fundamental nature.

Step-by-step explanation:

The scenario described involves Tom committing a type of fraud by adding a promissory note above Lynnetta Landau's signature without her knowledge. This act of deceit falls under fraud as to the essential nature of the transaction, which refers to a situation where one party is misled about the basic character of the transaction itself. In this case, Lynnetta was duped into signing what she thought was a mere autograph request, not a financial obligation. This type of fraud can be used as a defense against a holder in due course. A holder in due course is a party who has obtained a negotiable instrument, like a promissory note, in good faith and for value, and who is typically protected from defenses available against the original parties. However, fraud as to the essential nature of the transaction is a real defense that can invalidate the instrument even against a holder in due course.