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84-3-305. Defenses and claims in recoupment. (a) Except as stated in subsection (b), the right to enforce the obligation of a party to pay an instrument is subject to the following:

(1) A defense of the obligor based on (A) infancy of the obligor to the extent it is a defense to a simple contract, (B) duress, lack of legal capacity, or illegality of the transaction which, under other law, nullifies the obligation of the obligor, (C) fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms, or (D) discharge of the obligor in insolvency proceedings;

(2) a defense of the obligor stated in another section of this article or a defense of the obligor that would be available if the person entitled to enforce the instrument were enforcing a right to payment under a simple contract; and

(3) a claim in recoupment of the obligor against the original payee of the instrument if the claim arose from the transaction that gave rise to the instrument; but the claim of the obligor may be asserted against a transferee of the instrument only to reduce the amount owing on the instrument at the time the action is brought.

(b) The right of a holder in due course to enforce the obligation of a party to pay the instrument is subject to defenses of the obligor stated in subsection (a)(1), but is not subject to defenses of the obligor stated in subsection (a)(2) or claims in recoupment stated in subsection (a)(3) against a person other than the holder.

(c) Except as stated in subsection (d), in an action to enforce the obligation of a party to pay the instrument, the obligor may not assert against the person entitled to enforce the instrument a defense, claim in recoupment, or claim to the instrument (K.S.A. 84-3-306) of another person, but the other person's claim to the instrument may be asserted by the obligor if the other person is joined in the action and personally asserts the claim against the person entitled to enforce the instrument. An obligor is not obliged to pay the instrument if the person seeking enforcement of the instrument does not have rights of a holder in due course and the obligor proves that the instrument is a lost or stolen instrument.

(d) In an action to enforce the obligation of an accommodation party to pay an instrument, the accommodation party may assert against the person entitled to enforce the instrument any defense or claim in recoupment under subsection (a) that the accommodated party could assert against the person entitled to enforce the instrument, except the defenses of discharge in insolvency proceedings, infancy and lack of legal capacity.

History: L. 1991, ch. 296, § 31; February 1, 1992.

KANSAS COMMENT, 1996

This section is identical to the 1995 Official text except that lower case Roman numerals have been replaced by capital letters. It is largely derived from the former 84-3-305 and 84-3-306. Historical case and statutory references may be obtained from the 1965 or 1983 bound Volume 7 of the Kansas Statutes Annotated.

Subsection (a). The defenses listed in paragraph (1) are the "real" defenses which are valid even against a holder in due course. Subparagraph (A), infancy, and (B), duress, lack of capacity and illegality, leave the characterization of the obligation on the instrument as void or voidable to local law. If a prior party has one of these defenses, they are valid and can be asserted under the procedure described in 84-3-308.

Kansas statutory law would usually be clear. See, e.g., K.S.A. 10-1119 (check "void" under "cash basis" law). See U.S.D. No. 207 v. Northland National Bank, 20 K.A.2d 321, 887 P.2d 1138 (1994), where the court held that the failure of the contract to make the disclosures required by the cash basis law voided the contract. Other Kansas decisional law is not quite so clear. It would seem to treat incapacity as only making the instrument voidable, and so a holder in due course may cut off the defense. First National Bank v. Kallash, 135 K. 73, 9 P.2d 670 (1932). The same result seems to obtain in cases involving duress, Fritchen v. Mueller, 132 K. 491, 297 P. 409 (1931); Graves v. O'Brien, 111 K. 320, 207 P. 198 (1922). In cases involving illegality, many provisions of the KUCCC (KSA 16a) and the Federal Trade Commission will deny the holder in due course any right to enforce the instrument. Other relevant decisions include Merriam v. West, 114 K. 131, 216 P. 1102 (1923); see Hutchins v. Stanley, 88 K. 739, 129 P. 1180 (1913).

Kansas decisional law would seem to be in accord on the possibility of fraud in the factum as a real defense in subparagraph (a)(1)(C), the decision in Ort v. Fowler, 31 K. 478, 2 P. 580 (1884), being a good example of facts not satisfying the defense because of the failure of the maker to satisfy a standard of conduct comparable to that required by this subsection.

Subparagraph (a)(1)(D) restates the rule of the Federal Bankruptcy Code, 11 U.S.C. § 524.

The former nonuniform 84-3-305(f), referring, and deferring, to K.S.A. 58-2321, has been repealed. The Kansas decision in Allen v. Waddle, 111 K. 690, 208 P. 551 (1922), holding that K.S.A. 58-2321 is applicable to a negotiable note secured by a real estate mortgage, so that the defense of payment to the original mortgagee or, if the mortgage has been assigned, to the last assignee of record, is good against a holder in due course of the note who failed to record the mortgage assignment, might survive the repeal of this section of the Code, since it is the more explicit provision. On the other hand, the 1991 repeal is the most recent legislative action.

Paragraphs (a)(2) and (3) refer to "personal" defenses, which are valid against a mere holder, but not a holder in due course, as provided in subsection (b). These defenses also include any defenses which are provided for in other sections of the code, such as material alteration (84-3-407).

Subsection (c). This provision is essentially the same as the former 84-3-306(d), and generally prohibits the use of a third person's rights, or jus tertii. The burden of proving one is a holder, or has those rights is on the possessor of the instrument (84-3-308), and the end of this subsection restates that rule.

Subsection (d). This provides the primary situation when the rights of a third party can be asserted by an obligor, namely an accommodation party (surety or guarantor) can assert many of the rights and defenses of the party accommodated, the true primary debtor in the transaction. Many times accommodation parties are required by the creditor because of the lack of capacity of the party accommodated, such as being a minor, or because the creditor is concerned about possible bankruptcy. These defenses are not available to the secured party. Other defenses, such as the party accommodated failing to receive the full consideration bargained for is a defense which the accommodation party can assert. In addition the accommodation party can assert any defenses it has, such as impairment of collateral by the creditor.

For the leading Kansas decision refusing to find holder in due course status because of the close connection between assignor and assignee, see Kaw Valley State Bank v. Riddle, 219 K. 550, 549 P.2d 927 (1976).

Revisor's Note:

Former section 84-3-305 was repealed by L. 1991, ch. 296, § 111 and the number reassigned to the current text.

CASE ANNOTATIONS

1. Consumer protection act (K.S.A. 50-623 et seq.) inapplicable to negotiable instruments law; drawer liable to subrogee of holder in due course. First Nat'l Bank v. Jones, 17 Kan. App. 2d 269, 270, 271, 839 P.2d 535 (1992).

2. Whether RTC as mortgagee's receiver qualified as hold in due course under federal common law examined. Resolution Trust Corp. v. Davies, 824 F. Supp. 1002, 1013 (1993).

3. Whether holder in due course immune to defense that transaction is illegal and nullified by other law examined. U.S.D. No. 207 v. Northland Nat'l Bank, 20 Kan. App. 2d 321, 332, 887 P.2d 1138 (1994).

4. Cited; whether previously filed but undiscovered financing statement acts as notice to assignee for K.S.A. 84-9-206 waiver provision purposes examined. Benedictine College v. Century Office Products, 853 F. Supp. 1315, 1321 (1994).

5. Whether RTC qualified as holder in due course of financial instruments acquired in bulk transfer between itself and savings and loan examined. Resolution Trust Corp. v. A.W. Associates, Inc., 869 F. Supp. 1503, 1509 (1994).

6. Assignee of second mortgages could enforce challenged note allegedly in violation of KUCCC (K.S.A. 16a-5-102 et seq.). Pilcher v. Direct Equity Lending, 189 F. Supp. 2d 1198, 1211 (2002).


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