4-3-305. Defenses and claims in recoupment.
Statute text
(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.
History
Source: L. 94: Entire article R&RE, p. 856, 1, effective January 1, 1995.
Annotations
OFFICIAL COMMENT
1. Subsection (a) states the defenses to the obligation of a party to pay the instrument. Subsection (a)(1) states the "real defenses" that may be asserted against any person entitled to enforce the instrument.
Subsection (a)(1)(i) allows assertion of the defense of infancy against a holder in due course, even though the effect of the defense is to render the instrument voidable but not void. The policy is one of protection of the infant even at the expense of occasional loss to an innocent purchaser. No attempt is made to state when infancy is available as a defense or the conditions under which it may be asserted. In some jurisdictions it is held that an infant cannot rescind the transaction or set up the defense unless the holder is restored to the position held before the instrument was taken which, in the case of a holder in due course, is normally impossible. In other states an infant who has misrepresented age may be estopped to assert infancy. Such questions are left to other law, as an integral part of the policy of each state as to the protection of infants.
Subsection (a)(1)(ii) covers mental incompetence, guardianship, ultra vires acts or lack of corporate capacity to do business, or any other incapacity apart from infancy. Such incapacity is largely statutory. Its existence and effect is left to the law of each state. If under the state law the effect is to render the obligation of the instrument entirely null and void, the defense may be asserted against a holder in due course. If the effect is merely to render the obligation voidable at the election of the obligor, the defense is cut off.
Duress, which is also covered by subsection (a)(ii), is a matter of degree. An instrument signed at the point of a gun is void, even in the hands of a holder in due course. One signed under threat to prosecute the son of the maker for theft may be merely voidable, so that the defense is cut off. Illegality is most frequently a matter of gambling or usury, but may arise in other forms under a variety of statutes. The statutes differ in their provisions and the interpretations given them. They are primarily a matter of local concern and local policy. All such matters are therefore left to the local law. If under that law the effect of the duress or the illegality is to make the obligation entirely null and void, the defense may be asserted against a holder in due course. Otherwise it is cut off.
Subsection (a)(1)(iii) refers to "real" or "essential" fraud, sometimes called fraud in the essence or fraud in the factum, as effective against a holder in due course. The common illustration is that of the maker who is tricked into signing a note in the belief that it is merely a receipt or some other document. The theory of the defense is that the signature on the instrument is ineffective because the signer did not intend to sign such an instrument at all. Under this provision the defense extends to an instrument signed with knowledge that it is a negotiable instrument, but without knowledge of its essential terms. The test of the defense is that of excusable ignorance of the contents of the writing signed. The party must not only have been in ignorance, but must also have had no reasonable opportunity to obtain knowledge. In determining what is a reasonable opportunity all relevant factors are to be taken into account, including the intelligence, education, business experience, and ability to read or understand English of the signer. Also relevant is the nature of the representations that were made, whether the signer had good reason to rely on the representations or to have confidence in the person making them, the presence or absence of any third person who might read or explain the instrument to the signer, or any other possibility of obtaining independent information, and the apparent necessity, or lack of it, for acting without delay. Unless the misrepresentation meets this test, the defense is cut off by a holder in due course.
Subsection (a)(1)(iv) states specifically that the defense of discharge in insolvency proceedings is not cut off when the instrument is purchased by a holder in due course. "Insolvency proceedings" is defined in Section 1-201(22) and it includes bankruptcy whether or not the debtor is insolvent. Subsection (2)(e) of former Section 3-305 is omitted. The substance of that provision is stated in Section 3-601(b).
2. Subsection (a)(2) states other defenses that, pursuant to subsection (b), are cut off by a holder in due course. These defenses comprise those specifically stated in Article 3 and those based on common law contract principles. Article 3 defenses are nonissuance of the instrument, conditional issuance, and issuance for a special purpose (Section 3-105(b)); failure to countersign a traveler's check (Section 3-106(c)); modification of the obligation by a separate agreement (Section 3-117); payment that violates a restrictive indorsement (Section 3-206(f)); instruments issued without consideration or for which promised performance has not been given (Section 3-303(b)), and breach of warranty when a draft is accepted (Section 3-417(b)). The most prevalent common law defenses are fraud, misrepresentation or mistake in the issuance of the instrument. In most cases the holder in due course will be an immediate or remote transferee of the payee of the instrument. In most cases the holder-in-due-course doctrine is irrelevant if defenses are being asserted against the payee of the instrument, but in a small number of cases the payee of the instrument may be a holder in due course. Those cases are discussed in Comment 4 to Section 3-302.
Assume Buyer issues a note to Seller in payment of the price of goods that Seller fraudulently promises to deliver but which are never delivered. Seller negotiates the note to Holder who has no notice of the fraud. If Holder is a holder in due course, Holder is not subject to Buyer's defense of fraud. But in some cases an original party to the instrument is a holder in due course. For example, Buyer fraudulently induces Bank to issue a cashier's check to the order of Seller. The check is delivered by Bank to Seller, who has no notice of the fraud. Seller can be a holder in due course and can take the check free of Bank's defense of fraud. This case is discussed as Case #1 in Comment 4 to Section 3-302. Former Section 3-305 stated that a holder in due course takes free of defenses of "any party to the instrument with whom the holder has not dealt." The meaning of this language was not at all clear and if read literally could have produced the wrong result. In the hypothetical case, it could be argued that Seller "dealt" with Bank because Bank delivered the check to Seller. But it is clear that Seller should take free of Bank's defense against Buyer regardless of whether Seller took delivery of the check from Buyer or from Bank. The quoted language is not included in Section 3-305. It is not necessary. If Buyer issues an instrument to Seller and Buyer has a defense against Seller, that defense can obviously be asserted. Buyer and Seller are the only people involved. The holder-in-due-course doctrine has no relevance. The doctrine applies only to cases in which more than two parties are involved. Its essence is that the holder in due course does not have to suffer the consequences of a defense of the obligor on the instrument that arose from an occurrence with a third party.
3. Subsection (a)(3) is concerned with claims in recoupment which can be illustrated by the following example. Buyer issues a note to the order of Seller in exchange for a promise of Seller to deliver specified equipment. If Seller fails to deliver the equipment or delivers equipment that is rightfully rejected, Buyer has a defense to the note because the performance that was the consideration for the note was not rendered. Section 3-303(b). This defense is included in Section 3-305(a)(2). That defense can always be asserted against Seller. This result is the same as that reached under former Section 3-408.
But suppose Seller delivered the promised equipment and it was accepted by Buyer. The equipment, however, was defective. Buyer retained the equipment and incurred expenses with respect to its repair. In this case, Buyer does not have a defense under Section 3-303(b). Seller delivered the equipment and the equipment was accepted. Under Article 2, Buyer is obliged to pay the price of the equipment which is represented by the note. But Buyer may have a claim against Seller for breach of warranty. If Buyer has a warranty claim, the claim may be asserted against Seller as a counterclaim or as a claim in recoupment to reduce the amount owing on the note. It is not relevant whether Seller is or is not a holder in due course of the note or whether Seller knew or had notice that Buyer had the warranty claim. It is obvious that holder-in-due-course doctrine cannot be used to allow Seller to cut off a warranty claim that Buyer has against Seller. Subsection (b) specifically covers this point by stating that a holder in due course is not subject to a "claim in recoupment * * * against a person other than the holder."
Suppose Seller negotiates the note to Holder. If Holder had notice of Buyer's warranty claim at the time the note was negotiated to Holder, Holder is not a holder in due course (Section 3-302(a)(2)(iv)) and Buyer may assert the claim against Holder (Section 3-305(a)(3)) but only as a claim in recoupment, i.e. to reduce the amount owed on the note. If the warranty claim is $1,000 and the unpaid note is $10,000, Buyer owes $9,000 to Holder. If the warranty claim is more than the unpaid amount of the note, Buyer owes nothing to Holder, but Buyer cannot recover the unpaid amount of the warranty claim from Holder. If Buyer had already partially paid the note, Buyer is not entitled to recover the amounts paid. The claim can be used only as an offset to amounts owing on the note. If Holder had no notice of Buyer's claim and otherwise qualifies as a holder in due course, Buyer may not assert the claim against Holder. Section 3-305(b).
The result under Section 3-305 is consistent with the result reached under former Article 3, but the rules for reaching the result are stated differently. Under former Article 3 Buyer could assert rights against Holder only if Holder was not a holder in due course, and Holder's status depended upon whether Holder had notice of a defense by Buyer. Courts have held that Holder had that notice if Holder had notice of Buyer's warranty claim. The rationale under former Article 3 was "failure of consideration." This rationale does not distinguish between cases in which the seller fails to perform and those in which the buyer accepts the performance of seller but makes a claim against the seller because the performance is faulty. The term "failure of consideration" is subject to varying interpretations and is not used in Article 3. The use of the term "claim in recoupment" in Section 3-305(a)(3) is a more precise statement of the nature of Buyer's right against Holder. The use of the term does not change the law because the treatment of a defense under subsection (a)(2) and a claim in recoupment under subsection (a)(3) is essentially the same.
Under former Article 3, case law was divided on the issue of the extent to which an obligor on a note could assert against a transferee who is not a holder in due course a debt or other claim that the obligor had against the original payee of the instrument. Some courts limited claims to those that arose in the transaction that gave rise to the note. This is the approach taken in Section 3-305(a)(3). Other courts allowed the obligor on the note to use any debt or other claim, no matter how unrelated to the note, to offset the amount owed on the note. Under current judicial authority and non-UCC statutory law, there will be many cases in which a transferee of a note arising from a sale transaction will not qualify as a holder in due course. For example, applicable law may require the use of a note to which there cannot be a holder in due course. See Section 3-106(d) and Comment 3 to Section 3-106. It is reasonable to provide that the buyer should not be denied the right to assert claims arising out of the sale transaction. Subsection (a)(3) is based on the belief that it is not reasonable to require the transferee to bear the risk that wholly unrelated claims may also be asserted. The determination of whether a claim arose from the transaction that gave rise to the instrument is determined by law other than this Article and thus may vary as local law varies.
4. Subsection (c) concerns claims and defenses of a person other than the obligor on the instrument. It applies principally to cases in which an obligation is paid with the instrument of a third person. For example, Buyer buys goods from Seller and negotiates to Seller a cashier's check issued by Bank in payment of the price. Shortly after delivering the check to Seller, Buyer learns that Seller had defrauded Buyer in the sale transaction. Seller may enforce the check against Bank even though Seller is not a holder in due course. Bank has no defense to its obligation to pay the check and it may not assert defenses, claims in recoupment, or claims to the instrument of Buyer, except to the extent permitted by the "but" clause of the first sentence of subsection (c). Buyer may have a claim to the instrument under Section 3-306 based on a right to rescind the negotiation to Seller because of Seller's fraud. Section 3-202(b) and Comment 2 to Section 3-201. Bank cannot assert that claim unless Buyer is joined in the action in which Seller is trying to enforce payment of the check. In that case Bank may pay the amount of the check into court and the court will decide whether that amount belongs to Buyer or Seller. The last sentence of subsection (c) allows the issuer of an instrument such as a cashier's check to refuse payment in the rare case in which the issuer can prove that the instrument is a lost or stolen instrument and the person seeking enforcement does not have rights of a holder in due course.
5. Subsection (d) applies to instruments signed for accommodation (Section 3-419) and this subsection equates the obligation of the accommodation party to that of the accommodated party. The accommodation party can assert whatever defense or claim the accommodated party had against the person enforcing the instrument. The only exceptions are discharge in bankruptcy, infancy and lack of capacity. The same rule does not apply to an indorsement by a holder of the instrument in negotiating the instrument. The indorser, as transferor, makes a warranty to the indorsee, as transferee, that no defense or claim in recoupment is good against the indorser. Section 3-416(a)(4). Thus, if the indorsee sues the indorser because of dishonor of the instrument, the indorser may not assert the defense or claim in recoupment of the maker or drawer against the indorsee.
Annotations
ANNOTATION
Annotations
Analysis
I. General Consideration.
II. Free From All Claims.
III. Defenses and Exceptions.
A. In General.
B. Duress.
C. Illegality.
D. Misrepresentation.
IV. Conditions Precedent and Delivery.
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).
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).
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).
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).
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).
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).