Question

Reggie Bluiett worked at the Silver Slipper Gambling Hall and Saloon. She received her weekly paycheck made out to her from the Silver Slipper. She indorsed the check in blank and left it on her dresser at home; she planned to deposit the check later to her bank. Fred Watkins broke into Bluiett's house and stole her check. Watkins took the check to the local auto store, where he bought two tires at a cost of $71. He obtained the balance of the check in cash.

1. Could the auto store qualify as a holder in due course? Why or why not?
2. Would the auto store have any legal advantage if it were a holder in due course? Explain.
3. How could Ms. Bluiett have indorsed her check to avoid this problem?

Answer 1

1. To qualify as the holder in due course, the auto store must qualify the following requirements:
   1. The holder must take the check in value i.e. in exchange of some goods or service. The auto store provided tires in return of the check.
   2. The holder must have received the instrument in good faith. The auto store had received the instrument in good faith as they didn’t intend to fraud Watkins to receive the check
   3. The holder must have the instrument before its maturity. The auto store received the check within its validity period.
   4. The holder must check the instrument to check its validity. The auto store must have checked the check before accepting.

As the auto store qualify all the above requirements, they qualify as the holder in due course.

2.The auto store will have legal advantage, as it was the holder in due course of the check. The following are the rights of a holder in due course:

1. The holder in due course gets better title than the transferor in case the instrument meets any kind of damages
2. The holder gets privilege for whole amount entered in the check provided the check had a stamp affixed
3. All prior parties remain liable to holder in due course

3.To avoid this problem, Ms. Bluiett could have crossed the check so that the check could have been drawn only in her account. The physical bearer of the check has no advantage in such case.