## Facts

- Homeowners G. Michael Turman and Carolyn Turman contracted with Ward’s Home Improvement, Inc. (Ward) to construct a home on the Turmans’ property.
- As part of the transaction, the Turmans executed a deed-of-trust note for $107,500 payable to Ward, secured by a deed of trust on the property.
- Ward later transferred the note to Robert Pomerantz by assignment.
- Ward did not indorse the note and did not place any additional notation on the instrument reflecting the transfer.
- Ward failed to complete construction of the home.
- After Ward’s failure to perform, Pomerantz demanded payment from the Turmans on the note and asserted that he was a holder in due course, so the Turmans’ contract-based defenses could not be asserted against him.
- The Turmans resisted payment, asserting defenses arising from Ward’s failure to complete the construction contract (including failure of consideration).

## Issues

1. Does a transferee of an instrument payable to order become a “holder” when the instrument is transferred by assignment but without the payee’s indorsement?
2. If the transferee is not a “holder,” can the transferee claim holder-in-due-course status under UCC Article 3?
3. If the transferee is not a holder in due course, may the makers assert against the transferee defenses that would be available against the original payee based on the payee’s nonperformance of the related construction contract?

## Decision

- The court held that transferring an order instrument without the payee’s indorsement is not a negotiation and does not make the transferee a “holder.”
- Because the transferee was not a holder, he could not be a holder in due course.
- The transferee took the note as an assignee and therefore took subject to the Turmans’ defenses arising out of Ward’s failure to complete the construction contract.
- The court rejected the transferee’s attempt to enforce the note free of those defenses.

## Legal Principles

- An instrument payable to an identified person is negotiated only by transfer of possession plus the identified person’s indorsement; a separate assignment document does not substitute for an indorsement.
- “Holder” status under Article 3 requires possession of the instrument and, for an order instrument, a chain of valid indorsements to the person in possession.
- Holder-in-due-course protection is available only to a “holder” as defined by Article 3; a nonholder transferee cannot claim holder-in-due-course rights without proper negotiation.
- A non-holder-in-due-course assignee generally takes the instrument subject to defenses and claims that could be asserted against the original payee, including defenses based on failure of consideration or breach of the underlying transaction.

## Conclusion

Because Ward transferred the deed-of-trust note to Pomerantz by assignment without indorsing the order instrument, Pomerantz did not become a holder and therefore could not qualify as a holder in due course; as an assignee, he was subject to the Turmans’ defenses based on Ward’s failure to complete the home construction.


Turman v. Ward's Home Improvement, 26 U.C.C. Rep. Serv. 2d 175 (1995)