## Facts

- A construction-equipment dealer, Co-Mac, regularly sold discounted retail installment notes and security agreements to Kaw Valley State Bank & Trust Company.
- On May 11, 1971, contractor John H. Riddle signed a note and security agreement to Co-Mac for specified construction equipment.
- The equipment was not delivered; Riddle and Co-Mac later agreed to substitute different equipment and to destroy the May 11 paperwork.
- Co-Mac did not destroy the May 11 documents; instead, it assigned them to Kaw Valley, while later completing a separate sale of substitute equipment under new paperwork.
- It was stipulated that none of the equipment described in the May 11 instruments was ever delivered to Riddle.
- Co-Mac, not Riddle, made payments to Kaw Valley on the May 11 note, keeping it current and delaying Riddle’s discovery.
- In February 1972, Riddle, Co-Mac, and Kaw Valley executed a renewal note consolidating seven specified notes; the May 11 note was not presented and was not included.
- In March 1972, Kaw Valley informed Riddle it held the May 11 security agreement; Riddle denied receiving the referenced equipment and believed the papers had been destroyed.
- Riddle had also granted Planters State Bank & Trust Company a blanket security interest in his construction equipment, creating a priority dispute if Kaw Valley’s May 11 security interest was effective.

## Issues

1. Whether Kaw Valley took the May 11, 1971 note as a holder in due course, cutting off Riddle’s defense of failure of consideration.
2. Whether a security interest under the May 11, 1971 security agreement attached when the described equipment was never delivered to Riddle.
3. If no holder-in-due-course status or no attachment existed, what effect that had on Kaw Valley’s claimed lien relative to Planters’ blanket security interest.

## Decision

- The Kansas Supreme Court affirmed the trial court.
- Kaw Valley was not a holder in due course of the May 11, 1971 note.
- Because the equipment was never delivered, there was a total failure of consideration, and Riddle could assert that defense against Kaw Valley.
- No security interest attached under the May 11 security agreement because Riddle never acquired rights in the described collateral; Kaw Valley therefore had no enforceable lien under that agreement and no priority based on it.

## Legal Principles

- A holder in due course must take an instrument for value, in good faith, and without notice of claims or defenses; absent that status, the transferee takes subject to personal defenses such as failure of consideration.
- Failure of consideration is a defense where the promised goods are not delivered and the maker receives no value for the note.
- Under Article 9 attachment requirements, a security interest does not attach unless value is given, an agreement exists, and the debtor acquires rights in the collateral; if the debtor never receives the goods, no lien attaches.
- A renewal or consolidation instrument affects only the obligations it includes; it does not ratify or cure an undisclosed and defective prior note not incorporated into the renewal.

## Conclusion

The court held that the bank-assignee could not enforce the undisclosed May 11 note because it lacked holder-in-due-course status and the buyer proved a total failure of consideration; for the same reason, no security interest attached under the May 11 security agreement, leaving the bank without an enforceable lien based on that transaction.


Kaw Valley State Bank & Trust Co. v. Riddle, 549 P.2d 927 (Kan. 1976)