23.8 Business Ethics Anthony and Dolores Angelini entered into a contract with L

Question

23.8 Business Ethics Anthony and Dolores Angelini entered into a contract with Lustro Aluminum Products, Inc. (Lustro). Under the contract, Lustro agreed to replace exterior veneer on the Angelini home with Gold Bond Plasticrylic avocado siding. The cash price for the job was $3,600, and the installment plan price was $5,363.40. The Angelinis chose to pay on the installment plan and signed a promissory note as security. The note’s language provided that it would not mature until 60 days after a certificate of completion was signed. Ten days after the note was executed, Lustro assigned it for consideration to General Investment Corporation (General), an experienced home improvement lender. General was aware that Lustro (1) was nearly insolvent at the time of the assignment and (2) had engaged in questionable business practices in the past. Lustro never completed the installation of siding at the Angelini home. General, as a holder in due course, demanded payment of the note from the Angelinis. Who wins? General Investment Corporation v. Angelini, 278 A.2d 193, Web 1971 N.J. Lexis 263 (Supreme Court of New Jersey)

Explanation / Answer

When Anthony and Dolores Angelini entered into a contract with Lustro Aluminum Products Inc. they signed a promissory note with a security of $5,363.40. The key point in the note’s language stated that the promissory note wouldn’t mature for 60 days after the certificate of completion was signed.

Lustro, assigned General Investment Corporation after 10 days for consideration of the promissory note. The job was never completed at the Angelini’s home by Lustro, which meant that the note had never become due, nor can a certificate of completion be issued or any legal certificate for that matter. General isn’t able to collect from the Angelini’s because the work was never completed and General isn’t considered a holder of the note.

Angelini executed a promissory note for home improvements, which did not specify a commencement date. Angelini's contract provided that payments were to begin 60 days after completion of the work. The note was endorsed and delivered, together with the contract, General Investment, a finance company which regularly did business with the contractor and was familiar with its contracts.

The endorsement stated that work had been completed, but General Investment never made inquiry, and the work was allegedly never completed. In an action on the note, the lower courts granted judgment for General Investment. On appeal, the court reversed, holding that General Investment was not a holder in due course and was therefore subject to the defense of failure of consideration. General Investment did not take the note in good faith under N.J. Stat. Ann. § 12A:3-302, because the circumstances, including the fact that the contractor endorsed the note only 10 days after its execution, justified an inference that plaintiff willfully failed to inquire as to completion. In addition, the court held that under N.J. Stat. Ann. § 12A:3-119, General Investment took the note subject to the contract, and it therefore took with notice of a possible defense.

The judgment was reversed. General Investment was not a holder in due course because it did not take the note in good faith, and it took with notice of a possible defense of failure of consideration. The court remanded for determination of the validity of the defense.

Thus, Angelini wins.

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