Legal Memorandum: Defenses and Claim in Recoupment in MN

Issue: In Minnesota, if the real-estate agent discloses false financial information to the banker, which the banker knows is false but the homeowner does not, and the false information is used to issue the loan, can the homeowner avoid the debt? That is, can collusion between the agent and the lender allow the homeowner to escape liability?

Area of Law: Banking & Finance Law, Litigation & Procedure, Real Estate Law
Keywords: The holder of the instrument; Holder in due course
Jurisdiction: Minnesota
Cited Cases: 137 N.W.2d 205; 272 Minn. 234; 485 N.W.2d 332
Cited Statutes: Minn. Stat. § 336.3-301, § 336.3-305, 336.3-305(a), 336.3-306, 336.3-302(a), § 336.3-302(a)(2)(ii), 336.3-305(a)(2), § 336.3-305(a)(1), § 336.3-305(f), § 336.3-302(g)
Date: 07/01/2006

Article 3 of the Uniform Commercial Code provides the law relating to promissory notes.  The statutes relating to enforcement of a note begins by defining the term “person entitled to enforce” an instrument.  The term includes “the holder of the instrument,” which in this case would be the bank; the term also includes “a nonholder in possession of the instrument who has the rights of the holder,” which may include the collection agency, if the note was not actually transferred to the agency.  See Minn. Stat. § 336.3-301.  The term “holder” is not defined.  

The key question is whether the bank is a “holder in due course.”  A holder in due course generally takes an instrument free of the payor’s defenses.  See Minn. Stat. § 336.3-305.  A “holder” is a “holder in due course” if—

(1) the instrument when issued or negotiated to the holder does not bear such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity; and

(2) the holder took the instrument (i) for value, (ii) in good faith, (iii) without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series, (iv) without notice that the instrument contains an unauthorized signature or has been altered, (v) without notice of any claim to the instrument described in section 336.3-306, and (vi) without notice […]

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