Question

A issued a note to B who did not deliver his promised consideration to A. B indorsed it to C, who is a holder in due course. C indorsed it to D who knew of the failure of consieration. Can D collect bfrom A?

A). No because D is not a holder in due course
B). No, although D acquired the rights of C, a holder in due course
C). No, because he knew of the failure of consideration
D). Yes, because he acquired the note for a consideration

Answer 1

The correct answer is B. D cannot collect from A even though D acquired the note from C, a holder in due course, because D knew of the failure of consideration which is a personal defense against the note enforceability.

Step-by-step explanation:

The correct answer is option B. No, although D acquired the rights of C, a holder in due course. The concept of a holder in due course is essential in understanding negotiable instruments.

A holder in due course, such as C in this scenario, is someone who has taken the instrument for value, in good faith, and without notice of any defect or claim. Since C was a holder in due course, he could enforce the note despite B's failure to deliver the promised consideration to A.

However, when D, who is not a holder in due course, acquires the note with knowledge of B's failure, D assumes the instrument subject to the defenses that could have been raised against C had C not been a holder in due course. The rights of a holder in due course are transferrable, but the knowledge of the failure of consideration is a personal defense which can be raised against D, thus preventing D from being able to collect from A.