## Facts

- Anthony Maggio bought a limited-partnership interest and, as part of the purchase price, signed a noninterest-bearing promissory note for $55,000 due October 31, 1990.
- Notes like Maggio’s were used to finance limited-partnership offerings and were later transferred in the secondary market.
- Northwestern National Insurance Co. (NNIC) became the holder of Maggio’s note in 1988 after a series of transactions, paying about 50% of the note’s face amount.
- When the note matured, Maggio refused to pay the full $55,000, asserting defenses tied to alleged wrongdoing in the sale of the partnership investment (including fraud in the inducement).
- NNIC sued in federal district court to collect on the note.
- The district court entered judgment for NNIC, finding NNIC was a holder in due course and therefore took the note free of Maggio’s asserted defenses.
- Maggio appealed to the Seventh Circuit.

## Issues

1. Whether, under Arizona’s version of U.C.C. Article 3, NNIC qualified as a holder in due course of Maggio’s promissory note despite acquiring it at a 50% discount.
2. Whether the discounted price and surrounding circumstances supplied notice of Maggio’s defenses, or showed lack of good faith, sufficient to defeat holder-in-due-course status.
3. If NNIC was a holder in due course, whether Maggio’s fraud-in-the-inducement defense to the underlying partnership purchase could still be asserted against NNIC.

## Decision

- The Seventh Circuit affirmed the district court’s judgment for NNIC.
- The court held NNIC was a holder in due course of the note under Arizona law.
- Buying the note for half of face value still constituted taking “for value” and did not, by itself, show bad faith or notice of defenses.
- Because NNIC was a holder in due course, Maggio’s fraud-in-the-inducement defense was not enforceable against NNIC on the instrument.

## Legal Principles

- A transferee is a holder in due course if it takes a negotiable instrument for value, in good faith, and without notice of claims or defenses as defined by U.C.C. § 3-302 (as adopted by the governing state law).
- Paying a substantial discount from face amount can be “value” and does not automatically establish notice of defenses or lack of good faith.
- “Notice” requires information connecting the instrument (or the transaction involving that instrument) to a claim or defense; generalized concern about risk in a market or deal type is not enough without more.
- Fraud in the inducement of the underlying transaction is a personal defense and is cut off against a holder in due course.
- In a federal diversity case, the governing state’s commercial-law rules control, and federal courts look to binding state authority rather than treating state-court dicta as controlling.

## Conclusion

The Seventh Circuit held that NNIC’s purchase of Maggio’s $55,000 limited-partnership note at a 50% discount did not, without specific warning signs tied to the note, defeat good faith or supply notice of defenses under Arizona’s U.C.C.; as a holder in due course, NNIC could enforce the note free of Maggio’s fraud-in-the-inducement defense.


Northwestern National Insurance Co. v. Maggio, 976 F.2d 320, UCC Rep. Serv. 2d 808 (1992)