## Facts

- James Earl Sullivan and Norma Jean Sullivan contracted with Memory Swift Homes, Inc. to build a prefabricated dwelling (Mar. 26, 1963).
- The Sullivans executed a negotiable promissory note for $18,224.64, secured by a mortgage on their real property and the planned improvement (Apr. 9, 1963).
- Memory Swift negotiated the note and assigned the mortgage to United Dealers Corporation the same day.
- After United acquired the note and before it later negotiated the note onward, the Sullivans gave United written certifications that the foundation was properly installed, framing was sufficiently nailed, and work was performed in a workmanlike manner.
- United later negotiated the note to a bank with recourse (June 25, 1963); the bank later transferred the note back to United for value without recourse (Apr. 25, 1966).
- The Sullivans made installment payments beginning in August 1963 but eventually defaulted; their last payment in April 1966 covered an installment due in August 1965.
- United sued to collect on the note and foreclose the mortgage.
- The Sullivans asserted that Memory Swift built the house defectively and argued United was not a holder in due course, seeking to use contract-related defenses to defeat enforcement.

## Issues

1. Whether United qualified as a holder in due course of the negotiable note under Kentucky’s UCC.
2. Whether United had notice, at the time it took the note, of defenses or claims arising from the contractor’s alleged defective performance sufficient to defeat holder-in-due-course status.
3. Whether the Sullivans could assert breach-of-contract/failure-of-consideration defenses against United’s suit on the note and foreclosure.

## Decision

- The Court of Appeals of Kentucky affirmed judgment for United.
- United was a holder in due course because it took the note for value, in good faith, and without notice of defenses or claims at the time of acquisition.
- United’s frequent financing relationship with the contractor did not, without more, establish bad faith or notice.
- Knowledge that construction had not yet begun when the note was acquired was consistent with ordinary construction financing and did not constitute notice of a defense.
- The Sullivans’ written certifications of satisfactory work supported the finding that United lacked notice of defects and acted in good faith.
- Because United was a holder in due course, the Sullivans’ contract-based defenses against the contractor were not assertable against United.

## Legal Principles

- A holder in due course takes a negotiable instrument for value, in good faith, and without notice that it is overdue, dishonored, or subject to a defense or claim.
- “Notice” requires actual knowledge or knowledge of facts indicating bad faith; mere suspicion or circumstances that might prompt inquiry do not alone defeat holder-in-due-course status.
- Holder-in-due-course status is determined at the time the instrument is taken; later-developed disputes or defects do not retroactively supply notice.
- A holder in due course takes free of personal defenses such as breach of the underlying contract and failure of consideration, though real defenses may still apply.

## Conclusion

The court held that the finance company was a holder in due course of the homeowners’ construction note, so alleged defective performance by the contractor could not be used as a defense to the company’s collection and foreclosure action.


Sullivan v. United Dealers Corp., 486 S.W.2d 699 (Ky. Ct. App. 1972)