P: Did you see that story in the Weekly Law Review about the case that was filed to collect on a promissory note?
J: No, I haven’t had a chance to read it yet.
P: Well, the woman in the story, Gloria Tavares, was cheated out of a ring worth at least $100 000, and she’s one of my mother’s friends! I just read it this morning.
J: Really? Wow—what happened?
P: Apparently, Gloria had gone to a jeweler named Jim McNabb, to get a new setting for her huge emerald ring. McNabb agreed to sell her the resetting and do the work for $10 000. She signed a promissory note in that amount made payable to McNabb.
J: And then?
P: Evidently, he sold the ring to a collector for $100 000. Then he just closed up shop and disappeared.
J: No kidding! That’s terrible. So how did this become an action to collect on a promissory note?
P: McNabb sold the note to the Salem Savings Bank for $8 500.
J: He discounted the note?
P: Yeah, he got $8 500 for a $10 000 note. That’s a pretty good discount! I’m surprised the bank didn’t realize something was up.
J: Hmm. So, before filing this action, the bank must have presented—what’s her name?
P: Gloria Tavares.
J: Yeah, they must have presented Mrs Tavares with a proper demand for payment after the payment date had passed.
P: That’s called a 'presentment' under the UCC, right?
J: Yeah, I don’t think I’ve come across one of those since law school. So what happened after she received the presentment for payment?
P: She refused to repay the loan, and sent the bank notice of her intent to dishonor1 the promissory note. Her attorney is quoted as saying that the bank was overreaching.
J: Overreaching? Why? Is he claiming the bank gained some unfair advantage over her?
P: Yeah. He’s claiming they took advantage of her by seeking to collect on the note even though the underlying transaction was fraudulent.
J: Okay, so the bank’s conduct was overreaching because they gained an unfair advantage. It sounds like Mrs Tavares is going to raise some type of fraud defense2.
P: Yeah, it looks that way. But the question is what kind of fraud? There are two types under Article 3: fraud in the factum and fraud in the inducement. I don't think fraud in the factum would work here, because that type of fraud would have to involve a false statement about the promissory note itself. There was no fraud in the promissory note. It was just a standard form promissory note. The fraud occurred in the underlying sales transaction—Gloria’s original purchase of the resetting for the ring.
J: Right. That sounds like fraud in the inducement. McNabb obviously misrepresented the terms of the sale. He lied when he said he’d reset the ring. And that misrepresentation was clearly made to induce her to enter into the transaction.
P: Unfortunately, fraud in the inducement alone is often not a complete defense to a collection action like this one. But it’s too soon to predict the outcome; Gloria hasn’t even filed her answer to the complaint yet.
J: Yeah, you’re right. So, shall we go get a quick cup of coffee before we head back upstairs?
P: Sure. Let’s go.