## Facts

- A homeowner sought to have a house built on her Delaware lot after responding to a seller’s advertisement for a pre-cut home.
- She signed a purchase order and credit application, paid a deposit, and later was presented with multiple financing and construction-related documents reflecting a $3,250 installment obligation.
- The documents included a mortgage, judgment bond and warrant, promissory note, construction contract, and affidavits; at least one affidavit represented that work was completed and paid for when no work had begun.
- The homeowner expressed that she did not understand the documents and asked to consult an attorney; the seller’s representative discouraged counsel and urged immediate signing to begin work on time.
- After she signed, the seller assigned the note and related papers to an affiliated finance company, which paid $2,250 for the $3,250 note.
- Construction failed after a bulldozer damaged the partially completed structure; the builder abandoned the project, and the homeowner paid to demolish the unsafe remains and secure the site.
- The finance company sued to enforce the note and foreclose the mortgage, asserting holder-in-due-course status to cut off defenses.
- Evidence showed extensive integration between seller and finance company: common ownership under a parent, overlapping management, finance-company-prepared forms, advance credit pre-approval, and the finance company’s business derived largely from seller-originated transactions.

## Issues

1. Whether the assignee finance company qualified as a holder in due course of the promissory note, thereby taking free of the homeowner’s defenses arising from the home-construction transaction.
2. Whether the finance company’s close involvement with the seller and origination of the transaction required treating it as a party to the transaction and subjecting it to the same defenses as the seller.

## Decision

- The Delaware Supreme Court reversed the judgment for the finance company and remanded.
- The court held the finance company was not a holder in due course under a party-to-the-transaction (close-connectedness) limitation.
- Because of the finance company’s substantial operational and corporate connection to the seller and the transaction, the homeowner could assert against the finance company defenses that would have been available against the seller, including fraud, misrepresentation, and failure of consideration.

## Legal Principles

- Holder-in-due-course protection may be denied where the assignee finance company is so closely connected with the seller and the origination of the installment sale that it is, in practical effect, a party to the transaction.
- A finance company that supplies transaction forms, pre-approves sales credit, and operates under common ownership/management with the seller may be treated as a transaction participant rather than an arm’s-length purchaser of paper.
- The party-to-the-transaction limitation reflects a balance between negotiability of instruments and protecting installment buyers from overreaching and defective performance in consumer sales.
- When holder-in-due-course status is denied under this doctrine, the buyer’s personal defenses to the underlying sale may be asserted against the assignee.

## Conclusion

The court concluded that the finance company’s structural and operational integration with the seller prevented it from claiming holder-in-due-course immunity, so the homeowner was entitled to litigate fraud and failure-of-consideration defenses against the assignee on the note and mortgage.


Jones v. Approved Bancredit Corp., 256 A.2d 739 (Del. 1969)