Lei signs a 30-day note payable to Yuan Appliances Inc. for $500 and gives it to Yuan as payment for a washing machine. When Yuan asks Lei for payment, she refuses to pay because the washing machine does not work properly. Yuan informs a bank about Lei's refusal to pay and then negotiates the note to the bank. Which of the following statements is true of this case?
A) The bank is not a holder in due course of the note.
B) The bank is a holder in due course of the note.
C) A dishonored instrument always makes the indorser the holder.
D) Yuan is the holder in due course.

Question

Quizplus · Accepted Answer

In order to qualify as a holder in due course, a person must take a negotiable instrument before he has notice that it has been dishonored. As the bank knew of Lei's refusal to pay before negotiating with Yuan Appliances Inc., it is not a holder in due course.

Lei Signs a 30-Day Note Payable to Yuan Appliances Inc