Colorado § 4-3-305 - Defenses and claims in recoupment.

§ 4-3-305. Defenses and claims in recoupment.

(a) Except as stated in subsection (b) of this section, 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 (i) infancy of the obligor to the extent it is a defense to a simple contract, (ii) duress, lack of legal capacity, or illegality of the transaction which, under other law, nullifies the obligation of the obligor, (iii) 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 (iv) 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) of this section, but is not subject to defenses of the obligor stated in subsection (a)(2) of this section or claims in recoupment stated in subsection (a)(3) of this section against a person other than the holder.

(c) Except as stated in subsection (d) of this section, 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 (section 4-3-306) 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) of this section 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.

Source: L. 94: Entire article R&RE, p. 856, § 1, effective January 1, 1995.

ANNOTATION

I. General Consideration.

II. Free From All Claims.

IV. Conditions Precedent and Delivery.

I. GENERAL CONSIDERATION.

Law reviews. For note, "Judicial Limitations on Holder in Due Course Claims", see 42 U. Colo. L. Rev. 439 (1971).

Annotator's note. The following annotations include cases decided under former provisions similar to this section.

A purchaser in good faith of a negotiable instrument before maturity and for value which is valid on its face may recover as against the maker. Civic Fin. Co. v. Meintzer, 137 Colo. 572, 328, P.2d 379 (1958).

Defendant has not established a defense as to the amount in dispute where the notes and foreclosure documents were properly admitted and were sufficient to establish the amount at issue. Smith v. Weindrop, 833 P.2d 856 (Colo. App. 1992).

Where the holder of a note acquires it after maturity, he holds it subject to every defense which the maker might have against a suit on it by the payee. First Nat'l Bank v. Lewis, 57 Colo. 124, 139 P. 1102 (1914).

A setoff is properly allowed. First Nat'l Bank v. Lewis, 57 Colo. 124, 139 P. 1102 (1914).

Defenses cannot destroy legal effect of note. A purchaser after maturity of a promissory note takes it subject to any defense the maker has against the payee, though such defenses may not destroy the legal effect of the note as such at the time it was made. Cooper v. German Nat'l Bank, 9 Colo. App. 169, 47 P. 1041 (1897).

Where fraud as a "real" defense is not available. Where fraud as a "real" defense (that is, fraud which is effective even as to a holder in due course) is not available, misrepresentations as to the character of the instrument signed is available only if the holder is not a holder in due course. Atkinson v. Englewood State Bank, 141 Colo. 436, 348 P.2d 702 (1960).

Right to immediate possession. While a showing of fraud, misrepresentation, or mistake may constitute a defense to payment, it does not establish the right to immediate possession, a necessary prerequisite to establishing a claim for conversion. Commercial Credit Corp. v. Univ. Nat'l Bank, 590 F.2d 849 (10th Cir. 1979).

Fraudulent representations in obtaining signature on a note-contract held a sufficient defense as against a holder not in due course. See Atkinson v. Englewood State Bank, 141 Colo. 436, 348 P.2d 702 (1960).

The defenses available in a contract action pursuant to this section are those defenses to the contract between the original payee and the co-makers and not those defenses grounded in contract solely between the co-makers. Armstrong v. Armstrong, 714 F. Supp. 451 (D. Colo. 1989).

Maker of check could not assert for itself as underlying obligor a third-party's defense of payoff, since "the claim of any third person to the instrument is not otherwise available as a defense to any party liable thereon unless the third person himself defends the action for such party". Lamson v. Commercial Credit Corp., 187 Colo. 382, 531 P.2d 966 (1975).

Applied in Condado Aruba Caribbean Hotel, N.V. v. Tickel, 39 Colo. App. 51, 561 P.2d 23 (1977); Salter v. Vanotti, 42 Colo. App. 448, 599 P.2d 962 (1979); Ackmann v. Merchants Mtg. & Trust Corp., 645 P.2d 7 (Colo. 1982); Meyers v. B.J. Johanningmeier, 735 P.2d 206 (Colo. App. 1987); Cole v. Farner, 749 P.2d 970 (Colo. App. 1987).

II. FREE FROM ALL CLAIMS.

An agent for collection cannot bind a holder in due course as principal by any collateral agreement concerning the note, such as releasing a joint maker upon his partial payment of the principal. Torbit v. Heath, 11 Colo. App. 492, 53 P. 615 (1898).

Bank not precluded by stop payment order. Where a bank credits the amount of a check deposited with it to the payee's account and permits him to draw against it, but payment is stopped by the maker, the bank can recover from the maker any amounts paid thereon, it being an innocent owner holding for value and without any notice of any defect in the instrument. Bromfield v. Cochran, 86 Colo. 486, 283 P. 45 (1929).

III. DEFENSES AND EXCEPTIONS.

A. In General.

B. Duress.

C. Illegality.

D. Misrepresentation.

A. In General.

Lack of consideration not a defense. The maker of a promissory note may not defend in an action against him by a bona fide holder in due course on the ground that the assignment to the holder was without consideration. Asiatic Tunnel Co. v. Stephenson, 63 Colo. 301, 165 P. 773 (1917).

One cannot avoid liability on a note even if it be conceded that there was a breach of contract between him and the original holder of the notes where one proves that he is a holder in due course and acquired the notes for value long before maturity without knowledge of any infirmity in the notes until after he had acquired them. Neal v. Wilson County Bank, 83 Colo. 118, 263 P. 18 (1927).

When duty to inquire as to defenses exists. Where an instrument is regular on its face there is no duty on the part of a check cashing service to inquire as to possible defenses, unless circumstances of which the holder in due course has knowledge are of such a nature that the failure to inquire reveals a deliberate desire to evade knowledge because of a fear that investigation would disclose the existence of a defense. Money Mart Check Cashing Ctr., Inc. v. Epicycle Corp., 667 P.2d 1372 (Colo. 1983).

The defense of fraudulent inducement is unavailable against a holder in due course and summary judgment was properly entered for holder of note. Stotler v. Geibank Indus. Bank, 827 P.2d 608 (Colo. App. 1992).

Maker's claim in her affidavit that she was deceived as to the nature of the document when she signed it is akin to asserting a claim of fraud in the factum and is a real defense which, if proved, defeats the rights of holder to collect under the note. Stotler v. Geibank Indus. Bank, 827 P.2d 608 (Colo. App. 1992).

Purported maker may raise forgery as a defense to an obligation on an instrument held by a party claiming holder-in-due-course status. Liberty Mortg. Corp. v. Fiscus, 2016 CO 31, 379 P.3d 278.

Failure of a seller of land in a development to timely provide a HUD report to the buyer and the forgery of a buyer's signature can, in certain circumstances, provide a defense on a note against an assignee who might otherwise be a holder in due course. Stotler v. Geibank Indus. Bank, 827 P.2d 608 (Colo. App. 1992).

If the signers on a note are able to prove close connectedness between the original payee of the note and an assignee thereof, then such relationship effectively invalidates the assignee's claim to a holder in due course status and allows the defenses available against the payee also to be asserted against the assignee. Stotler v. Geibank Indus. Bank, 827 P.2d 608 (Colo. App. 1992).

B. Duress.

Threat of sending husband to penitentiary is duress. Where a wife, who is old and in poor health, executes a note under a threat to send her husband, who is even older than she, to the penitentiary, there is duress which voids the note; and such duress is a continuing one which is not waived by the execution of a renewal of such note. Union Nat'l Bank v. Wright, 79 Colo. 574, 247 P. 453 (1926).

Refusal to release deed of trust is not duress. The declaration of a creditor that he would not release a deed of trust on a debtor's property unless the debtor signed a promissory note does not constitute duress in law. Marquart v. Clark, 109 Colo. 62, 121 P.2d 885 (1942).

C. Illegality.

Defense based on gaming is good. No assignment of any negotiable paper where the whole or any part of the consideration thereof arises out of any gaming transaction offsets the statutory defense of the person executing such, as it is absolutely null and void, even in the hands of an innocent purchaser for value. W. Nat'l Bank v. State Bank, 18 Colo. App. 128, 70 P. 439 (1902).

One indorsing and assigning a negotiable instrument in another state in payment of a gambling loss cannot defend an action on such as against an innocent purchaser for value before maturity notwithstanding the gaming statute where the law which prevails in the state where the assignment was made permits such to be good in the hands of an innocent purchaser, provided the law of the state concerned is not so shocking to the moral sense of the community so as to make an exception to the rule that in suits on contracts the "lex loci" controls. Sullivan v. German Nat'l Bank, 18 Colo. App. 99, 70 P. 162 (1902).

D. Misrepresentation.

Answer alleging fraud states a defense. In an action upon an accepted bill of exchange by an indorsee thereof, an answer setting forth fraud on the part of the drawer and payee and that the indorsee is not a holder in good faith but a mere agent of the drawer for collection states a defense. Johnson County Sav. Bank v. Gregg, 51 Colo. 358, 117 P. 1003 (1911).

Which is a jury question. The issue whether a note was induced by fraud is a question for the jury. Atkinson v. Englewood State Bank, 141 Colo. 436, 348 P.2d 702 (1960).

In an action on a renewal note where the defense is fraudulent representations in procurement of the original note, the renewal note itself is evidence tending to show waiver of the fraud, but it still must be shown that the note was renewed with the intention of waiving the fraud. First Nat'l Bank v. Navins, 70 Colo. 491, 202 P. 702 (1921).

Fraud held not a defense as against holder in due course. See Metro. State Bank v. McNutt, 73 Colo. 291, 215 P. 151 (1923); Abley v. Davies, 84 Colo. 398, 270 P. 880 (1928).

IV. CONDITIONS PRECEDENT AND DELIVERY.

Law reviews. For note, "Conditional Delivery of Negotiable Instruments in Colorado", see 13 Rocky Mt. L. Rev. 248 (1941).

Ordinarily a promissory note is prima facie evidence of an obligation enforceable as to its legal import, but while in the hands of the payee, the way is always open to the maker to prove circumstances showing that it never was made or delivered with the intention that it should be binding at all events; and he may not be foreclosed from establishing, if he can, that in effect it was no contract at all. McCaffrey v. Mitchell, 98 Colo. 467, 56 P.2d 926, 57 P.2d 900 (1936).

This section permits the payor of a note to show that he delivered it conditionally or for a special purpose only, and not for the purpose of transferring the property in the instrument, where the note is in the hands of the original payee who brings suit on it. Divine v. W. Slope Fruit Growers' Ass'n, 27 Colo. App. 368, 149 P. 841 (1915).

As between the immediate parties to a promissory note, delivery may be shown to be conditional or for a special purpose. Wheelock v. Hondius, 74 Colo. 400, 222 P. 404 (1924); Rock River Inv. Co. v. Mtn. Fin. Corp., 94 Colo. 539, 31 P.2d 914 (1934).

Delivery may be shown by oral testimony. Wheelock v. Hondius, 74 Colo. 400, 222 P. 404 (1924); Rock River Inv. Co. v. Mtn. Fin. Corp., 94 Colo. 539, 31 P.2d 914 (1934).

Since the parol evidence rule permits the reception of oral testimony of a contemporaneous oral agreement to show conditional delivery. Wheelock v. Hondius, 74 Colo. 400, 222 P. 404 (1924).

There is nothing in the negotiable instrument law, nor in the statute of frauds, that requires a contract of conditional delivery to be in writing; this fact being so, it of course may rest in parol. Norman v. McCarthy, 56 Colo. 290, 138 P. 28 (1914).

Parol evidence has not the effect to contradict or vary the terms of a writing, but merely shows the want of an element essential to its character as a contract — to wit, unconditional delivery. Norman v. McCarthy, 56 Colo. 290, 138 P. 28 (1914); Denison Clay Co. v. Pennock, 95 Colo. 20, 32 P.2d 189 (1934).

Parol evidence has not the effect to show that note is not to be paid at all. See Wheelock v. Hondius, 74 Colo. 400, 222 P. 404 (1924); Denver Indus. Corp. v. Kesselring, 90 Colo. 295, 8 P.2d 767 (1932).

The oral agreement constituting delivery must be contemporaneous with, and not prior to, the physical delivery of the instrument. Wheelock v. Hondius, 74 Colo. 400, 222 P. 404 (1924); Rock River Inv. Co. v. Mtn. Fin. Corp., 94 Colo. 539, 31 P.2d 914 (1934). See Hall v. Farmers' Bank, 74 Colo. 165, 220 P. 237 (1923).

One who executes a promissory note payable to a principal and delivers it to his agent cannot defend on the note as to a collateral agreement with the agent for conditional payment in the absence of showing authorization of the agent. McIntosh-Huntington Co. v. Rice, 13 Colo. App. 393, 58 P. 358 (1899).

As burden of proof on asserting party. That the delivery of a promissory note was conditional must be established by the party who asserts it when pleaded. Hickman-Lunbeck Grocery Co. v. Hager, 75 Colo. 554, 227 P. 829 (1924).

Evidence of entire agreement is admissible. When a transaction involving the giving of a promissory note is questioned, evidence disclosing the entire agreement is always admissible. McCaffrey v. Mitchell, 98 Colo. 467, 56 P.2d 926, 57 P.2d 900 (1936).

Though defense of conditional delivery cannot be aided by allegations of want of consideration. Hickman-Lunbeck Grocery Co. v. Hager, 75 Colo. 554, 227 P. 829 (1924).

Where a defendant who assumed and agreed to pay the promissory note of another contends that the plaintiff is bound by a contemporaneous oral agreement as to the time and manner of payment so as to bring the case within an exception to the parol evidence rule, such a question of conditional delivery of a written instrument is not within the meaning of this section which is quite different from the question of the assumption of the note, and hence the contention is to be rejected. Index Shale Oil Co. v. Wheeler, 81 Colo. 402, 255 P. 982 (1927).

Where a promissory note is delivered upon parol condition that it shall be without effect in certain event, and the event specified occurs, no action lies thereon by the payee against the maker. Sayre v. Leonard, 57 Colo. 116, 140 P. 196 (1914).

Temporary security for a loan. Where a promissory note is in the hands of the corporation payee, named therein, the maker may defeat an action thereon by showing under proper averment that he subscribed the paper solely to enable the corporation to pledge it temporarily with a bank as security for a loan, that the loan was in fact made, and the note afterwards restored to the corporation. Divine v. W. Slope Fruit Growers' Ass'n, 27 Colo. App. 368, 149 P. 841 (1915), modifying Cooper v. German Nat'l Bank, 9 Colo. App. 169, 47 P. 1041 (1897).

Where a condition has not been performed. In an action upon an instrument by payee against the drawer, the drawer may, under this section, show by parol that the instrument was delivered upon a condition which has not been performed and which has become impossible of performance. Norman v. McCarthy, 56 Colo. 290, 138 P. 28 (1914).

Being signed by another. Promissory notes signed and delivered under an express agreement and condition that they are not to become obligatory until signed by another person also are void at the option of the maker in the hands of the original payee, and a "quia timet" action will lie for delivery up and cancellation of the notes. Dygert v. Clem, 26 Colo. App. 286, 143 P. 823 (1914).

Where payment is to be paid from dividends. In an action by an assignee after maturity, upon a note where a corporation was the payee, a parol agreement made contemporaneous with the execution of the note to the effect that the note would be paid from the maker's share in the dividends of the corporation, and not otherwise, is a complete defense to the action. George v. Williams, 27 Colo. App. 400, 149 P. 837 (1915).

Where a bank check is given under condition that drawer "made collections to pay it", the condition not being fulfilled, judgment is properly given for defendant. Miller v. Maxwell, 82 Colo. 540, 261 P. 1116 (1927).

Condition of prescribed purchase for maker gives negotiation right. The delivery of a note which is conditioned on an agreement that the payee will use the proceeds thereof in making a prescribed purchase for the maker carries with it the right of negotiation without which it would be valueless. Greenless v. Chezik, 68 Colo. 521, 190 P. 667 (1920).

An indorsee for value can recover against the maker even though he had knowledge of the conditions of the delivery. Greenless v. Chezik, 68 Colo. 521, 190 P. 667 (1920).

Even a purchaser for value cannot take negotiable paper freed from conditions attached of which he knows. Weicker v. Bromfield, 34 F.2d 377 (10th Cir. 1929).

Latter special indorsement superseded restrictive indorsement. Where a depository bank specially indorsed a check to the plaintiff, who became a holder in his own right, payment by the maker to the plaintiff was not contrary to a restrictive indorsement "pay any bank", because the latter special indorsement superseded the restrictive indorsement and such action by the depository bank was the equivalent of a constructive cancellation. Thus, any satisfaction to the ensuing holder was not inconsistent with the terms of the previous restrictive indorsement. Lamson v. Commercial Credit Corp., 187 Colo. 382, 531 P.2d 966 (1975).