Question

1. A check drawn by Cullen for $500 is made payable to the order of Jordan and issued to Jordan for goods Jordan sold to Cullen. Jordan owes his landlord $500 in rent and transfers the check to his landlord with a special indorsement to the landlord. Determine whether the landlord is a holder in due course. Be sure to give the legal justification for your response.

1B. Determine whether the landlord in question #2 will be entitled to payment from Cullen if the following are true:

a. Cullen has been adjudged insane and only his guardian should be making contracts for him.

b. Cullen is a minor and is trying to disaffirm the contract.

Answer 1

Landlord is a holder in due course. The requirements for holder in due course are that the holder received the instrument for value, in good faith and without notice that it is defective. Here the landlord has acquired the instrument for value as it is given to him as a mean to pay the rent and the landlord has accepted the instrument in good faith. He is not aware that the instrument is void as it is passed to him by Jordan and not Cullen. The minority status of Cullen makes the instrument voidable and the adjudged insanity of Cullen makes it void. But landlord does not know about these and hence he becomes a holder in due course by fulfilling the requirements.

But the landlord will not be able to enforce the instrument and as it is void due to the fact that the instrument is issued by a person who is mentally incompetent declared by court. Mental incapacity is a universal defense for HDC though minority depends on state laws. The check is unenforceable by any holder or HDC if it is void from the beginning. Hence the landlord is not entitled for payment.