Brief Fact Summary. Appellant, Kaw Valley State Bank & Trust (the “appellant”), held two notes and two security agreements to construction equipment purchased by the appellee, John Riddle (the “appellee”). The trial court determined that the appellant was not a holder in due course of one of the notes because the construction equipment secured by the note was never delivered to the appellee.
Synopsis of Rule of Law. A holder in due course is one that purchases an instrument for value, in good faith and without notice. A valid holder in due course takes subject to any and all defenses that can be raised against the original party.
Issue. Is the appellant the holder in due course on the note dated May 11, 1971 and as such entitled to payment of the note?
Held. No, the judgment of the trial court was affirmed. The appellant did not sustain its burden of proving that it was a holder in due course. A holder in due course is one that takes the instrument (1) for value, (2) in good faith, and (3) without notice. “Good faith” is defined in K. S. A. 84-1-201 (19) as “honesty in fact in the conduct or transaction concerned.” A person has ‘notice’ of a fact when “(a) he has actual knowledge of it; or (b) he has received a notice or notification of it; or (c) from all the facts and circumstances known to him at the time in question he has reason to know that it exists.” There was no evidence in the case that indicated that the appellant acted dishonestly or “not in good faith” when it purchased the note of May 11, 1971. However, as to “notice of defense” the court found from all the facts and circumstances known to the appellant at the time in question it had reason to know a defense existed. The court found that the appellant had notice o
f a defense because appellant did not notify Riddle that it was the holder of the note. According to the court, “It delivered Riddle’s coupon book to Co-Mac as if it were the obligor or was authorized as its collection agent for this transaction. Throughout the period from May 11, 1971, to February 25, 1972, Kaw Valley received and credited the monthly payments knowing that payments were being made by Co-Mac and not by Riddle. Then when Riddle’s loans were consolidated, the May 11, 1971 transaction was not included by Kaw Valley, either by oversight or by intention, as an obligation of Riddle. Co-Mac occupied a close relationship with Kaw Valley and with its knowledge and consent acted as its agent in collecting payments on notes held by Kaw Valley. The working relationship existing between Kaw Valley and Co-Mac was further demonstrated on February 24, 1972, when the $ 5,000.00 balance due on one of Riddle’s notes was cancelled when it was shown that the machinery for which the note w
as given had previously been returned to Co-Mac with the understanding that no further payments were due.”
Discussion. “A holder of an instrument is a holder in due course if he takes the instrument subject to the defenses of want or failure of consideration, nonperformance of any condition precedent, nondelivery or delivery for a special purpose.” It was undisputed in this case that appellee received no consideration after executing the note because the machinery was never delivered. Therefore, even if the appellant was a holder in due course, the appellee’s defense is a bar to recovery.