Question

Sally Strands placed an advertisement offering to sell her old styling chair for $500. The next week, David the Dentist read the advertisement and later visited Sally about purchasing the chair. Because Dentist did not have enough cash to make the purchase, he offered Sally $50 in cash and a $500 IOU. Sally accepted this offer and Dentist gave Sally a signed note which read:

I, David the Dentist, promise to pay Sally Strands $500 on or before January 1, 2020.

/s/ David the Dentist, 09/15/19

Sally decided to go to her favorite watering hole to celebrate the sale. She ordered a drink from Sam Malone who owned the bar. Sam refused to serve Sally because Sally had an overdue bar tab of $400. Sally said to Sam: "I have a $500 IOU from David the Dentist. How about I give it to you and we forget about the bar bill?" Sam agreed, and Sally wrote on the back of the note: "Pay to the order of Sam Malone" and handed the note to Sam.

That night, Sam gathered the day's receipts, including the note, locked the doors of the bar, and headed for his car. When Sam approached his car, Thief jumped out from behind it. Thief demanded that Sam hand over the bar receipts. Sam did as he was told.

When Thief got home and sorted the loot, he noticed the note. He took the note to his cousin, Dan Scalper, who agreed to pay Thief $100 in exchange for it. Thief signed Sam’s name on the back of the note and gave it to Dan. On January 1, 2020, Dan presented the note to Dentist for payment. David the Dentist refused to pay.

Discuss the status, rights, and obligations of the parties.

Answer 1

If Dan is a holder in due course, the dentist would be liable to pay.

Dan would be a holder of the IOU in due course if all the following conditions are satisfied:

a. Dan obtained the instrument bona fide, i.e without knowledge of the fact that the title of the endorser was defective

b. Dan had obtained the instrument before its maturity

c. The promissory note was supported by consideration, i.e., there was a debt due between Thief and Dan

d. The note appeared to be otherwise regular on its face.

If all the four conditions are met, then Dan is a holder in due course, and every prior party to the instrument would be liable till it is duly discharged.

As the Dentist is the maker of the note, he is primarilly liable to pay. If he defaults, Sally Strands would be liable. If Sally defaults, Sam Malone is liable. The fact that it was stolen from him does not make his liability to the holder in due course any less. He can pay Dan and then recover from Thief. Dan can also make Thief liable, as he had received the note from him.