Okla. Stat. tit. 12A § 3-305
Okla. Stat. tit. 12A, § 3-305
Oklahoma Code Comment
1. The rights of a holder in due course are subject to the defenses of subsection (a)(l) but not to the defenses of subsections (a)(2) and (a)(3). Subsection (a)(2) includes the defense of failure of consideration.
2. The defenses of illegality and fraud in subsection (a)(l) are illustrated by Hotel Riviera, Inc. v. First National Bank & Trust Co. of Oklahoma City, Okla., 768 F.2d 1201 (10th Cir. 1985) (applying Oklahoma law). Pemberton, a bank customer, forged the indorsement on two checks issued by his employer to two customers and deposited the checks in his bank account. Pemberton drew on the bank account to purchase a cashier's check in a sum less than the face amount of the two checks. Pemberton then flew to Las Vegas, Nevada, to gamble at the Hotel Riviera's casino. To finance his effort, Pemberton offered the cashier's check to the hotel in exchange for credit given in the casino. The casino took the cashier's check with no knowledge of Pemberton's fraud in procuring it.
Under subsection (a)(l), in order to constitute a real defense, first, the illegality must nullify the obligor's obligation. In Riviera, Pemberton's bank was the obligor and not Pemberton. Thus, the illegality-that is, the gambling debt-may have nullified Pemberton's indorsement (under Nevada law), but it did not nullify the bank's obligation. Second, the fraud that induces the obligor, the bank in this instance, to sign the instrument must be with "neither knowledge nor reasonable opportunity to learn of the character of its essential terms." Here, the Bank clearly knew it was issuing a cashier's check, a negotiable instrument. In addition, the court found the bank had a reasonable opportunity to verify the forged indorsements and, thus, to discover the fraud in the inducement to issue the cashier's check, which is not a sub section 3-305(a)(1) defense.
For cases involving the execution of promissory notes by illiterate persons without an understanding they were signing such notes, see Harber v. Lincoln, 175 Okla. 221, 51 P. 2d 967 (1935), and First Nat'l Bank of Watonga v. Wade, 27 Okla. 102,111 P. 205 (1910), which are in contrast to the Riviera case. In Bank of Watonga, for example, an illiterate woman was fraudulently induced to execute a promissory note and mortgage, believing she was executing her last and will and testament and power of attorney. In that case, the woman, being illiterate, "neither had knowledge nor reasonable opportunity to learn of the character" of the promissory note.
Other cases regarding the enforcement of promissory notes where real defenses were asserted are Harvey v. Thomas, 150 Okla. 106, 300 P. 772 (1931) (defenses of fraud and lack of consideration); Samuels Shoe Co. v. Frensley, 151 Okla. 196, 3 P.2d 216 (1931) (defense of duress); Daniels v. Bunch, 69 Okla. 113, 172 P. 1086 (1918) (defenses of illegality, usury and lack of consideration); and First Nat? Bank of Maud v. McKown, 73 Okla. 310, 176 P. 245 (1918) (defenses of illegality and lack of consideration).
3. Changes in other sections of Article 3 also will affect results under Section 3-305 . Under Section 3-104, a negotiable instrument is "an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges" (emphasis added), if the instrument also meets the other requirements of Section 3-104. Under sub section 3-112(b), the amount or rate of interest may be stated or described in the instrument or may require reference to information contained in the instrument. Therefore, the requirement of fixed amount applies only to principal and not to interest, and a variable rate note is a negotiable instrument. The Oklahoma Supreme Court, without the benefit of the 1992 UCC revisions, reached an outcome in accord with the revisions in Goss v. Trinity Savings & Loan Association, 813 P.2d 492 (Okla. 1991). Sub section 3-112(b) however, is broader than Goss, in that the rate can be an intra-bank rate and the note will still be negotiable.
The Tenth Circuit, however, had earlier reached a different result in Doyle v. Trinity Savings & Loan Association, 869 F.2d 558 (lOth Cir. 1989) (applying Oklahoma Law). The issue in that case was the defense of fraud against FNMA. FNMA argued that it was a holder in due course and enticed to enforce a note and mortgage despite prior unauthorized alterations. The court, however, found that FNMA was not a holder in due course because the note was not a negotiable instrument since the interest rate was deaf to an external index. The court reasoned that the amount payable could not be determined from the instrument itself, and thus there was no promise to pay a sum certain. On rehearing, the court re evaluated its position and held that FNMA was a holder in due course if FNMA took the note without notice of the alterations, despite the fact that the note contained a variable interest rate. Doyle, 940 F.2d 592 (10th Cir. 1991) (relying on Goss ), aff'd after remand, _ F.2d _ 1993 W.L 260139 (July 15 1993). The latter result is consistent with the 1992 UCC revisions, which clarify that a variable-rate instrument is, indeed, negotiable. Thus, the defenses and claims available to a holder in due course under Section 3-305 are available to a holder in due course of a variable rate instrument.
4. Sub section 3-305(a)(3) refers to claims in recoupment. Claims in recoupment must arise out of the same transaction or occurrence as the plaintiff's claim and are in the nature of a set-off. Dickson v. Joy, 188 Okla. 597, 112 P.2d 355, 357 (1941). Claims in recoupment also may arise when one has been sued by a federal agency, such as the FDIC, when by statute and by bringing suit there has been a partial waiver of sovereign immunity. In such instance, a claim in recoupment may be asserted as a set-off if: (a) the claim arises out of the same transaction or occurrence which is the subject of the agency's claim; and (b) the claimant seeks the same relief as is sought by the agency. See Frederick v. United States, 386 F.2d 481, 488 (5th Cir. 1967). Claims in recoupment are compulsory to the extent they are asserted as counterclaims. See Fed. R. Civ. P. 13(a) and 12 O.S. § 2013(a).
Claims in recoupment also may be present in actions involving Truth-in-Lending violations. See Truth in Lending Act § 130(e), 15 U.S.C. § 1640(e). In Stephens v. Household Finance Corp., 566 P.2d 1163 (Okla. 1977), Household filed an action on a promissory note, and Stephens counterclaimed for damages for nine separate disclosure violations. The issue in the opinion related to the statute of limitations concerning the assertion of the counterclaim. The court found that a former Oklahoma statute (12 O.S. § 273), tolling the statute of limitations for counterclaims or defenses arising out of the same transaction as the plaintiff's claim until the statute on the plaintiff's claim runs, applied to the counterclaim. Implicit in the court's finding that the statute of limitations had been tolled was a finding that the Truth-in-Lending violations arose out of the same transaction as Household's claim on the promissory note. Consequently, following Stephens, Truth-in-Lending violations may be asserted as a claim in recoupment to an action on a promissory note or check: See also 14A O.S. § 5-202 where the disclosure claim arises from the Oklahoma Uniform Consumer Credit Code.
5. Subsection (c), concerning claims of a person other than the obligor on the instrument as a defense, is illustrated by First National Bank of Nocona v. Duncan Savings & Loan Association 656 F. Supp. 358 (W.D. Okla. 1987), aff'd, 957 F.2d 775 (lOth Cir. 1992). In that action, a money order was issued by Duncan Savings for the benefit of McAffrey Funeral Home but payable to the plaintiff's order. The drawer bank, Duncan Savings, at McAffrey's request, issued a stop-payment order on the money order so that when the plaintiff presented it for payment, payment was refused. The court found that the drawer bank could not assert the defenses of its customer, the remitter, to escape liability to the plaintiff, the payee and holder. Subsection (c) confirms this result. But see UCC § 3-602.
6. Under subsection (d), regarding accommodation parties, the limitation to assert the defenses of insolvency, infancy and lack of legal capacity is in accord with general surety and guaranty law in Oklahoma. See 15 O.S. §§ 328, 329, 335, 373, 377 and 378.