TITLE 11 COMMERCIAL CODE

Section 3. Negotiable Instruments, 11-3-101 through 11-3-605.

ARTICLE 3 NEGOTIABLE INSTRUMENTS

11-3-305. Defenses and claims in recoupment.

Except as stated in subsection (b) of this Code 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:
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.
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 paragraph (1) of subsection (a) of this Code section, but is not subject to defenses of the obligor stated in paragraph (2) of subsection (a) of this Code section or claims in recoupment stated in paragraph (3) of subsection (a) of this Code section against a person other than the holder.
Except as stated in subsection (d) of this Code 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 of another person pursuant to Code Section 11-3-306, 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.
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 Code 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.

Infancy of the obligor to the extent it is a defense to a simple contract;

Duress, lack of legal capacity, or illegality of the transaction which, under other law, nullifies the obligation of the obligor;

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

Discharge of the obligor in insolvency proceedings;

(Code 1981, §11-3-305, enacted by Ga. L. 1996, p. 1306, § 3.)

JUDICIAL DECISIONS

Illegality referred to in former subsection (2)(b).

- Among those defenses available even against holder in due course, former subsection (2)(b) of this section referring to "such . . . illegality of the transaction as renders the obligation of the party a nullity" refers to those defects which render instrument void, not merely voidable. Citizens Nat'l Bank v. Brazil, 141 Ga. App. 388, 233 S.E.2d 482 (1977); Milligan v. Gilmore Meyer Inc., 775 F. Supp. 400 (S.D. Ga. 1991) (decided under former Code Section11-3-305); Dal-Tile Corp. v. Cash N' Go, Inc., 226 Ga. App. 808, 487 S.E.2d 529 (1997);.

Bank not liable for bookkeeper's embezzlement.

- A bank was properly granted summary judgment in a suit brought by a company seeking reimbursement for money its bookkeeper embezzled as the bank was a holder in due course and had paid the checks presented by the bookkeeper as it was authorized under a certificate of resolution; there was no bad faith shown on the part of the bank in paying the items presented by the bookkeeper. Dalton Point, L.P. v. Regions Bank, Inc., 287 Ga. App. 468, 651 S.E.2d 549 (2007).

Holder in due course status irrelevant.

- Whether or not a bank was a holder in due course of a check made payable to a payee who never received possession of the check before an endorsement was forged on the check was irrelevant to the payee's right to recover against the bank, because the bank's status as a holder in due course or not did not change the fact that the payee had no right to recover. Jenkins v. Wachovia Bank, Nat'l Ass'n, 309 Ga. App. 562, 711 S.E.2d 80 (2011).

Taking without notice of forgery.

- On plaintiff commercial checking account customer's suit against defendant, its employee embezzler's depository bank, alleging the embezzler deposited checks made payable to the embezzler into the embezzler's personal account, because those checks contained no indications of forgery, the depository bank's failure to verify signatures was not evidence that it acted without "honesty in fact" as a holder in due course under O.C.G.A. §§ 11-3-302(a)(2) and11-3-306; because the depository bank had no actual notice of the embezzlement scheme or that the checks contained unauthorized signatures, no material issue of fact existed as to the notice requirement set forth under O.C.G.A. §§ 11-3-302(a)(2)(iii)-(vi) and11-3-305. Ownbey Enters. v. Wachovia Bank, N.A., 457 F. Supp. 2d 1341 (N.D. Ga. 2006).

Cited in Union Planters Nat'l Bank v. Crook, 225 Ga. App. 578, 484 S.E.2d 327 (1997); Southtrust Bank v. Parker, 226 Ga. App. 292, 486 S.E.2d 402 (1997); Fedeli v. UAPA Ag. Chem., Inc., 237 Ga. App. 337, 514 S.E.2d 684 (1999); Consumer Solutions Fin. Servs. v. Heritage Bank, 300 Ga. App. 272, 684 S.E.2d 682 (2009).

RESEARCH REFERENCES

8C Am. Jur. Pleading and Practice Forms, Duress and Undue Influence, § 1.

U.L.A.

- Uniform Commercial Code (U.L.A.) § 3-305.

ALR.

- What constitutes "dealing" under UCC § 3-305(2), providing that holder in due course takes instrument free from all defenses of any party to instrument with whom holder has not dealt, 42 A.L.R.5th 137.

Duress, incapacity, illegality, or similar defense rendering obligation a nullity as affecting enforceability of negotiable instrument against holder in due course under UCC § 3-305(a)(1)(ii), 89 A.L.R.5th 577.

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