One of the most common Article 3 lawsuits involves someone who has purchased a negotiable instrument, demanded payment from the person obligated on it, has been refused payment and then sues the obligor.
A Helpful Example
Assume that Sally Seller agrees to sell her car to Billy Buyer for $1,500. Billy is to take delivery of the car immediately, but has thirty days to pay Sally the $1,500. Once the contract is signed and Billy receives the car, Sally has a right against Billy to recover $1,500 in thirty days. If Sally demands payment from Billy, Billy can raise any defenses that might exist to the contract (e.g., fraud, failure of consideration, duress, statute of frauds, etc.). If these defenses are established Sally will not recover from Billy.
If Sally assigns her right to the $1,500 obligation to John and John brings the lawsuit against Billy, the same rule applies, (i.e. that all defenses that Billy has against Sally can be raised against John). An
assignee of a chose in action takes only those rights that the assignor has to transfer and takes
them subject to any defenses that might exist.
However, Article 3 cuts off most of the defenses available to Bill if:
(1) Billy's obligation to Sally is in the form of a negotiable instrument written so as to meet the requirements of U.C.C. §3-l04; and
(2) if John is a holder in due course under U.C.C. §3-302.
The defenses that are not cut off are those listed in §3-305 and §3-601.
(1) Is the instrument negotiable (§3-104)?
(2) Is the plaintiff a holder in due course (§3-302)?
(3) What is the liability of the defendant?
(4) Is the defense raised one that is cut off? (§§3-305, 3-306, 3—601)