Michael Kane, Jr., sold Gerald Kroll, Jr., some cows. Gerald could not pay for the cows, so he arranged for his mother, Grace Kroll, to pay Kane. Gerald planned to repay his mother with $6,100, the proceeds from his expected sale of a load of hay. Grace issued a personal check to Kane in the amount of $6,100. However, the next day, Gerald told his mother he would not be able to repay her because the sale of hay fell through. Grace stopped payment on the check to Kane. When Kane presented the check to the bank, the bank refused to pay.

Kane filed suit against Grace to recover the $6,100. Grace argued that she had no legal obligation to repay Gerald’s debt and thus no obligation to pay Kane. Kane argued that he was a holder in due course and not subject to Grace’s defense of failure of consideration. The trial court held Kane was not a holder in due course because he did not prove he took the check in good faith and without notice of Grace’s defenses. Kane appealed.

JUDGE MYSE: Whether Kane is a holder in due course is an issue involving application of § 403.302. STATS., to undisputed facts. A holder must meet three requirements to be a holder in due course under § 403.302. STATS. The holder must take the instrument (1) for value; (2) in good faith; and (3) without notice that it is overdue or has been dishonored or of any defense against or claim to it on the part of any person. We examine each of these elements in turn.

First, a holder must take the instrument for value. Sec­tion 403.302(1)(a), STATS. Under § 403.303(2). STATS., a holder takes for value when he takes an instrument in pay­ment for an antecedent claim against any person. In this case. Kane took the instrument from Grace in payment of Gerald’s debt and thereby satisfied the requirement of § 403.302(1)(a).

Second, a holder must take the instrument in good faith, defined in § 401.201(19). STATS., as “honesty in fact in the conduct or transaction concerned.” The holder’s initial bur­den on the issues of notice and good faith is a slight one. As one commentator has noted:

The burden of proof of the allegations in the Complaint rests upon the plaintiff. It is not necessary, however, that the plaintiff allege in the complaint that good faith was an integral part of the transaction at each stage. That is an affirmative defense which must be raised by the defendant, if at all. [Russell A. Eisenberg, Good Faith Under The Uniform Commercial Code—A New Look At An Old Problem, 54 MARQ. L. REV. 1. 14 (1971) (emphasis and footnote omitted)].

In this case. Kane’s affidavit supports his contention that he accepted the check in good faith for the payment of Gerald’s antecedent debt. Moreover, none of the affidavits supplied by either party suggests evidence of bad faith on Kane’s part. In the absence of such evidence, we conclude Kane took the check in good faith as a matter of law.

Finally, the last requirement to become a holder in due course is that the holder take the instrument without notice that it is overdue or has been dishonored or of any defense against it or claim to it on the part of any person. Section 403.302(1)(c), STATS. The knowledge of the defense for purposes of determining holder in due course status must exist at the time of issue. Therefore, we must examine whether Kane had knowledge of any defense at the time he took the check.

Because the requirement that a holder show that it did not have knowledge of a defense or claim to the instrument involves proof of a negative fact, the burden of proof is a slight one. In this case, the facts in Kane’s affidavit suggest no knowledge of any claims or defenses, so the burden shifts to Grace to produce evidence that Kane had such knowledge. Grace argues that Kane was on notice that she had no preex­isting obligation to pay her son’s debt and that this constitutes knowledge of a defense. We disagree. Section 403.303(2), STATS., clearly allows a holder in due course to accept pay­ment from one person for payment of the debt of another.

Additionally, the fact that Grace, like any drawer, had the power to stop payment on the check does not constitute a defense that would prevent Kane from being a holder in due course. If it did, no holder would be a holder in due course because any drawer has the power to issue a stop payment order. Since Grace has not alleged that Kane had knowledge of any defense at the time he took the check, we hold that Kane met the requirement of 403.302(1)(c), STATS.

Because Kane took for value, in good faith, without knowledge of claims or defenses to the check, we conclude he was a holder in due course. As a holder in due course, Kane is not subject to Grace’s claimed failure of consider­ation. Therefore, the fact that Gerald broke his promise to repay Grace the day after the check was issued does not affect Kane’s status as a holder in due course.

Based upon the foregoing, we conclude that Kane was a holder in due course of the check and therefore not subject to Grace’s asserted defenses. Thus, the trial court erred by granting judgment dismissing Kane’s complaint. We reverse the judgment and remand to the trial court with directions to enter judgment in Kane’s favor.

REVERSED and REMANDED.

CRITICAL THINKING

How do rules of law play into the court’s reasoning? Are there ambiguities present in these rules of law?

ETHICAL DECISION MAKING

Think about the WPH process of ethical decision making. What is the ultimate purpose of the judge’s decision that Kane was a holder in due course? What value guided this conclusion?

COURT OF APPEALS OF WISCONSIN 538 N.W.2D 605 (1995)