BLT/4e CP 7-10

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Chapter 25

Transferability and Holder in Due Course

Case 25.1

Fla.App. 3 Dist.,2003.

Hyatt Corp. v. Palm Beach Nat. Bank

840 So.2d 300, 49 UCC Rep.Serv.2d 1039, 28 Fla. L. Weekly D393

Briefs and Other Related Documents

HYATT CORP. v. PALM BEACH NAT. BANK

District Court of Appeal of Florida,Third District.

The HYATT CORPORATION, Appellant,

v.

PALM BEACH NATIONAL BANK, et al., Appellees.

No. 3D02-1276.

Feb. 5, 2003.

LEVY, Judge.

Appellant/defendant the Hyatt Corporation appeals the lower court's Summary Final Judgment in favor of appellee/plaintiff Palm Beach National Bank. Plaintiff/Cross-Appellant, J & D Financial Corporation also appeals the Summary Final Judgment. We affirm.

J & D Financial Corporation is a factoring company. Skyscraper Building Maintenance, LLC, had a contract with Hyatt to perform maintenance work for various Hyatt hotels in South Florida. Skyscraper entered into a factoring agreement with J & D. As part of the factoring agreement, J & D requested Hyatt to make checks payable for maintenance services to Skyscraper and J & D. Of the many checks issued by Hyatt to Skyscraper and J & D, two were negotiated by the bank but endorsed only by Skyscraper. They were made payable as follows:

1. Check No. 1-78671 for $22,531 payable to:

J & D Financial Corp. Skyscraper Building Maint P.O. Box 610250 North Miami, Florida 33261-0250

2. Check No. 1-75723 for $21,107 payable to:

Skyscraper Building Maint J & D Financial Corp. P.O. Box 610250 North Miami, Florida 33261-0250

Only one of the payees, Skyscraper, endorsed these two checks. The bank cashed the checks. According to J & D, it did not receive the benefit of these two payments. J & D filed a complaint against Skyscraper and its principals on the guarantee, Hyatt and the bank. J & D sought damages against Skyscraper under the factoring agreement and separately against Hyatt and the bank for negotiation of the two checks. Hyatt answered and raised the bank's “fault” as an affirmative defense. The bank answered and raised Section 673.1101(4), Florida Statutes (1993) as an affirmative defense. The bank, Hyatt and J & D then moved for summary judgment on the issue of whether the bank properly negotiated the checks. It was uncontested that the bank had a duty to negotiate the checks only on proper endorsement, and if it did not, it would be liable. The bank argued that the checks were payable to J & D and Skyscraper alternatively, and thus the bank could properly negotiate the checks based upon the endorsement of either of the two payees. The bank further argued that the checks were drafted ambiguously as to whether they were payable alternatively or jointly, and thus under Section 673.1101(4), Florida Statutes, the checks would be construed as a matter of law to be payable alternatively.

Hyatt's position was that the checks were not ambiguous, were payable jointly and not alternatively, and thus under Section 673.1101, the checks could only be negotiated by endorsement of both of the payees. J & D similarly argued that the checks were payable jointly. The trial court granted Summary Judgment in favor of the bank, finding that Section 673.1101(4) precluded the bank's liability. Hyatt appealed. J & D filed a cross-appeal. The issue on appeal is whether or not a check payable to

*302 J & D Financial Corporation Skyscraper Building Maintenance

(stacked payees) is payable jointly to both payees requiring the endorsement of both, or whether it is ambiguous regarding whether the check was drafted payable alternatively, so that the bank could negotiate the check when it was endorsed by only one of the two payees.

In 1990, Article 3 of the UCC was revised, and the language of UCC Section 3-116 was added to UCC section 3-110 and became subsection (d). Revised UCC Section 3-110(d), which added language to follow former 3-116(a) and (b), states, “If an instrument payable to two or more persons is ambiguous as to whether it is payable to the persons alternatively, the instrument is payable to the persons alternatively.” The net effect of the amendment was to change the presumption. What was unambiguous before is now ambiguous. Turning to our jurisdiction, Florida has adopted the statutory revision to UCC 3-110 , with its enactment of Section 673.1101, Florida Statutes (1992). Section 673.1101(4) now provides the following:

(4) If an instrument is payable to two or more persons alternatively, it is payable to any of them and may be negotiated, discharged, or enforced by any or all of them in possession of the instrument. If an instrument is payable to two or more persons not alternatively, it is payable to all of them and may be negotiated, discharged, or enforced only by all of them. If an instrument payable to two or more persons is ambiguous as to whether it is payable to the persons alternatively, the instrument is payable to the persons alternatively.

§ 673.1101(4), Fla. Stat.

The issue under review has not reached Florida's appellate courts. However, two trial courts in Florida have addressed this issue in Bijlani v. Nationsbank of Florida, N.A., 25 UCC Rep. Serv.2d (CBC) 1165, 1995 WL 264180 (Fla.Cir.Ct.1995) and City First Mortgage Corp. v. Florida Residential Property & Casualty Joint Underwriting Ass'n., 37 UCC Rep. Serv.2d (CBC) 126, 1998 WL 1095082 (Fla. Miami-Dade County Ct.1998). We find the reasoning in both cases to be persuasive. In Bijlani, the appellee paid a check which did not have Bijlani's endorsement. The check was made payable to Bay Village Inc. Michael Bijlani & Ron Delo & Assoc 5411 Grenada Blvd Coral Gables, FL 33133

The trial court granted the bank's motion for summary judgment, stating that “The multiple payee designation on the check is ambiguous as to whether it is payable to ‘Bay Village Inc.’ ‘Michael Bijlani ...’ jointly or alternatively.” Holding that the bank was not liable, the trial court noted that the predecessor statute “provided that if an ambiguity existed as to whether multiple payees were intended as joint or alternative payees, they were deemed joint payees,” while the amended statute applicable to this case “reverses the prior rule.” Id. at 1166.

In City First Mortgage Corp. v. Florida Residential Property & Casualty Joint Underwriting Ass'n., 37 UCC Rep. Serv.2d (CBC) 126, 1998 WL 1095082 (Fla. Miami-Dade County Ct.1998), a Florida County Court reached the same conclusion. In City First Mortgage Corp., the bank paid a check which did not have City First Mortgage Corp.'s endorsement. The check was made payable to

BORIS LA ROSA ODALYS LA ROSA CITY FIRST MTG. CORP. ISAOA ATIMA

The county court granted First Union's Motion to Dismiss Complaint, stating that *303 the Complaint failed to state a cause of action against the bank. The court found that,

On its face, the Check is payable to two or more persons and, as a matter of law, the payee designation on the Check is ambiguous as to whether it is payable to the persons alternatively.

Id. at 127. The court cited to § 673.1101(4), Fla. Stat.

Although Florida appellate courts have not yet considered the issue at hand, other courts in the country have. See Dimmitt & Owens Financial, Inc. v. USA Glass & Metal, Inc., 1998 WL 852862 (N.D.Ill.1998) (the listing of names on the check did not contain the word “or” or “and”, thus the complete absence of any indication as to whether the check was intended to be payable alternatively or jointly, the court found that the check was ambiguous as to whether it was made payable to either payee alternatively and held the check could be paid to either payee individually); Harder v. First Capital Bank, 332 Ill.App.3d 740, 266 Ill.Dec. 770, 775 N.E.2d 610 (2002) (checks listing multiple payees without grammatical connectors except between names of two payees were ambiguous as to whether checks were payable jointly or in the alternative, and thus were payable in the alternative with endorsement of any payee listed singly or with endorsement of both payees that were listed together); Meng v. Maywood Proviso State Bank, 301 Ill.App.3d 128, 234 Ill.Dec. 92, 702 N.E.2d 258 (1998) (cashier's check which the named payee specially indorsed to make payable to two new payees was ambiguous where it did not include any language or markings, such as the word “and” or the word “or,” regarding whether the check was payable alternatively or jointly; thus, the check was payable alternatively); Allied Capital Partners, L.P. v. Bank One, Texas, N.A., 68 S.W.3d 51 (Tx.Ct.App.2001)(checks which listed two payees that were not connected by “and” or “or” were ambiguous as to whether they were payable to two payees jointly or alternatively, and thus bank complied with statute in treating ambiguous payees as alternate payees, and cashing checks on endorsement of only one payee).

For example, a case which has addressed this particular issue with almost identical facts to those before us is Allied Capital Partners, L.P. v. Bank One, Texas, N.A., 68 S.W.3d 51 (Tx.Ct.App.2001). In Allied, the checks were made payable to:

Complete Design Allied Capital Partners, LLP. 2340 E. Trinity Mills St. 300 Carrollton, Texas 75006

The debtor endorsed the checks and deposited them into a corporate bank account. The factor then sued the bank for conversion for payment on the debtor's endorsement.

On appeal from the adverse summary judgment, the factor cited pre-revision law. The Texas appellate court affirmed the summary judgment, stating: While it does appear that former section 3.116 would have required the checks in this case to be payable to and negotiable only by all of the payees listed, this is no longer the case ...

Allied Capital Partners, L.P. v. Bank One, 68 S.W.3d at 54. Under these facts, the court found that the check was unambiguous.

We conclude that based on the 1990 amendment to the Uniform Commercial Code, when a check lists two payees without the use of the word “and” or “or”, the nature of the payee is ambiguous as to whether they are alternative payees or joint payees. Therefore, the UCC amendment prevails and they are to be treated *304 as alternative payees, thus requiring only one of the payees' signatures. Consequently, the bank could negotiate the check when it was endorsed by only one of the two payees, thereby escaping liability.

The standard of review when reviewing the entry of summary judgment is de novo. Volusia County v. Aberdeen at Ormond Beach, L.P., 760 So.2d 126, 130 (Fla.2000). As the parties correctly point out, this is a case of first impression in Florida appellate courts. Section 3-116 of the 1952 UCC version provided that:

An instrument payable to the order of two or more persons

(a) if in the alternative is payable to any one of them and may be negotiated, discharged or enforced by any of them who has possession of it;

(b) if not in the alternative is payable to all of them and may be negotiated, discharged or enforced only by all of them.

U.C.C. § 3-116 (1952). Under this version of the UCC, it was presumed that an instrument made payable to two payees was payable jointly. See Allied Capital Partners, L.P. v. Bank One Texas, N.A., 68 S.W.3d 51, 55 (Tex.Ct.App.2001). Florida adopted this provision of the UCC in Section 673.116, Florida Statutes (1969).

Hyatt's position, in sum, is that if a stacked payee designation was considered unambiguous and payable jointly before the amendment of the applicable statute, that same payee designation is unambiguous after the amendment of the statute. However, based on the foregoing case law, we find this position untenable because it ignores the shift in presumption brought about by the UCC revision. With the statutory presumption removed, the same stacked payee designation that was unambiguous and payable jointly pre-1992 is now ambiguous and payable in the alternative. Thus, we hold that the trial court was correct in granting the Summary Final Judgment.

Affirmed.

Case 25.2

862 N.E.2d 716

Court of Appeals of Indiana.

Vernon GRAVES and Shirley F. Graves, Appellants-Plaintiffs,

v.

John Marvin JOHNSON, Jr., Tamara Renee Lynn Johnson and Westport Insurance Company, Appellees-Defendants.

No. 34A02-0607-CV-563.

March 16, 2007.

OPINION

DARDEN, Judge.


STATEMENT OF THE CASE

Vernon and Shirley Graves appeal the trial court's entry of summary judgment in favor of Westport Insurance Company (“Westport”). We affirm.

ISSUE

Whether the trial court erred in granting Westport's motion for summary judgment.

FACTS

The Graveses owned property, including a building and improvements (the “Property”), located in Kokomo. The Graveses leased the Property to John and Tamara Johnson, who operated their business, Johnson's Towing & Recovery (“Johnson's Towing”), on the Property. The Johnsons insured their business interest through Westport, with Johnson's Towing as the named insured. The insurance policy included commercial property, including the building located on the Property, and general liability coverage. The insurance policy contained the following provision: 4. Loss Payment a. In the event of loss or damage covered by this Coverage Form, at our option, we will either: (1) Pay the value of lost of damaged property; (2) Pay the cost of repairing or replacing the lost or damaged property ...; (3) Take all or any part of the property at an agreed or appraised value; or (4) Repair, rebuild or replace the property with other property of like kind and quality.... (App.84). On or about November 13, 2003, a fire destroyed the building and other improvements located on the Property. Westport hired Claims Management Services, Inc. (“CMS”) to investigate and adjust the Johnsons' claim. CMS hired Robert J. Davis to serve as its local adjuster. As the adjuster, Davis “was charged with meeting with the insured, ... accessing [sic] the damage, calculating an estimate for repair, and reaching an agreed price for repair ... with the contractor of the insured's choosing.” (App.194). Subsequently, Davis met with Vernon, who was acting as the contractor in charge of rebuilding the Property's building. Of the $126,000 that Vernon estimated it would cost to rebuild, Davis agreed that Westport would pay $98,000 pursuant to the insurance policy owned by the Johnsons, with Vernon's insurer paying the remainder. “Davis agreed to make three (3) progress payments to [Vernon][.]” (App.214). On December 15, 2003, Westport sent a letter to Johnson's Towing and copied Vernon on the letter. The letter provided, in pertinent part, as follows: We have now established that Mr. Vernon Graves is the owner of this building/premises, but he has not been listed as an additional insured under your property policy. The following excerpt from your property policy sets out the conditions of payment when loss or damage occurs. 4. Loss Payment a. In the event of loss or damage covered by this Coverage Form, at our option, we will either: (1) Pay the value of lost of damaged property; (2) Pay the cost of repairing or replacing the lost or damaged property ...; (3) Take all or any part of the property at an agreed or appraised value; or (4) Repair, rebuild or replace the property with other property of like kind and quality.... After conferring with an insurance attorney, we have decided to proceed under Paragraph 4.a. (2) of the Loss Payment section of the Policy. We have decided to proceed in this manner because your financial interest in the Covered Property is limited to the value of your leasehold interest in the property. Accordingly, we will pay for the cost of repairing/replacing the structure. We will make the payments under the Policy in the form of progress payments payable to you and the contractor that you select to perform the work. These payments would be distributed as co-payable installments, as each stage is completed.... [Westport] will not pay you directly for the damages sustained to the building, as you are not the owner. (App.191-92). On or about January 20, 2004, Westport issued a check in the amount of $30,000. Westport made the check payable to Johnson's Towing and Vernon and “delivered [the check] directly to [Vernon].” (App.215). Vernon voiced no objection and deposited the check into his account on or about February 5, 2004. “Thereafter, [Vernon] was paid $29,000 additional dollars for a subsequent progress payment.” (App.214). On or about February 17, 2004, Westport issued a check (the “Check”), made payable to Johnson's Towing and Vernon in the amount of $68,037.42, and tendered it to Johnson's Towing. The Johnsons allegedly forged Vernon's endorsement of the Check and either cashed or deposited the Check, failing to tender to Vernon the $38,178.23 due for construction costs. On April 11, 2005, the Graveses filed a complaint against the Johnsons FN1 and Westport. The complaint alleged the following against Westport:

FN1. The Johnsons filed for bankruptcy under Chapter 7 of Title 11 of the United States Bankruptcy Code on October 15, 2005, thereby automatically staying the Graveses' action against the Johnsons.

15. At all times relevant hereto, [Davis] acted as adjustor and agent for [Westport]. 16. At all times relevant hereto, Westport insured the premises ... against fire and other casualties on behalf of [the Johnsons], d/b/a Johnson's Towing.... 17. After the casualty loss, Westport entered into negotiations with [the Graveses], as owners of the subject property, for adjustment of the loss and payment for repair of the premises. 18. Westport agreed to pay the [Graveses] the sum of $98,000.00 of policy proceeds for repair of the premises. 19. Of said sum, $38,178.23 remains unpaid. (App.17-18). The Graveses sought judgment against Westport for the $38,178.23. Westport asserted as an affirmative defense that the Graveses' claim against it was “barred or reduced by payment.” (App.34). On October 26, 2005, Westport filed its motion for summary judgment and designated the following evidence: 1) the policy insuring Johnson's Towing; 2) the affidavit of Heather Holden, a claims adjuster for CMS; 3) the affidavit of Davis; 4) a copy of the letter dated December 15, 2003 and sent to Vernon and Johnson's Towing; 5) the first check tendered to Vernon; and 6) the Check. Westport asserted that Westport discharged its obligations to the Graves[es] once the Check was tendered to one of the co-payees, Johnson's Towing, endorsed with the signatures of Johnson's Towing and V. Graves, presented for payment by Johnson's Towing and honored and paid by the bank. (App.45). In support, Westport cited Indiana Code section 26-1-3.1-310(b)(1), which provides in relevant part as follows: [I]f a note or uncertified check is taken for an obligation, the obligation is suspended to the same extent the obligation would be discharged if an amount of money equal to the amount of the instrument were taken, and the following rules apply:... In the case of an uncertified check, suspension of the obligation continues until dishonor of the check or until it is paid or certified. Payment or certification of the check results in discharge of the obligation to the extent of the amount of the check. Westport argued that it was “not liable for the Graves[es]' failure to receive the money from the Check.” (App.45). The Graveses filed their response to Westport's motion for summary judgment on April 11, 2006. The Graveses designated as evidence the affidavit of Vernon. The Graveses argued that “[w]hether [the Graveses] had a direct contract with [Westport]” and “[w]hether delivery of a check to a third party constitute[d] payment under said contract,” precluded the granting of Westport's motion for summary judgment. (App.210). On May 10, 2006, Westport filed its reply, asserting that the Graveses' “designation of facts ... are not materially different than Westport's and do not create a question of fact that would preclude the entry of summary judgment on Westport's motion.” (App.228). Following a hearing on June 5, 2006, the trial court granted Westport's motion for summary judgment. Additional facts will be provided as necessary.

DECISION

When reviewing a grant or denial of summary judgment, our well-settled standard of review is the same as it was for the trial court: whether there is a genuine issue of material fact, and whether the moving party is entitled to judgment as a matter of law. Landmark Health Care Assocs., L.P. v. Bradbury, 671 N.E.2d 113, 116 (Ind.1996). Summary judgment should be granted only if the evidence sanctioned by Indiana Trial Rule 56(C) shows that there is no genuine issue of material fact and the moving party deserves judgment as a matter of law. Ind. T.R. 56(C); Blake v. Calumet Const. Corp., 674 N.E.2d 167, 169 (Ind.1996). For summary judgment purposes, a fact is “material” if it bears on ultimate resolution of relevant issues. Kreighbaum v. First Nat'l Bank & Trust, 776 N.E.2d 413, 419 (Ind.Ct.App.2002). “A genuine issue of material fact exists where facts concerning an issue which would dispose of the litigation are in dispute or where the undisputed facts are capable of supporting conflicting inferences on such an issue.” Scott v. Bodor, Inc., 571 N.E.2d 313, 318 (Ind.Ct.App.1991). Once the movant has carried his initial burden of going forward under Trial Rule 56(C), the nonmovant must come forward with sufficient evidence demonstrating the existence of genuine factual issues, which should be resolved at trial. Otto v. Park Garden Assocs., 612 N.E.2d 135, 138 (Ind.Ct.App.1993), trans. denied. If the nonmovant fails to meet his burden, and the law is with the movant, summary judgment should be granted. Id. The Graveses contend that summary judgment was improper because the designated evidence creates genuine issues of fact for trial, namely, “whether Westport's method of payment was agreed to by [Vernon],” and whether Vernon agreed to “payment by co-payable check.” Graveses' Br. 10. We disagree. In his affidavit, Davis averred to the following: 5. I was able to reach an agreed price for repair with the contractor, [Vernon]. 6. I never agreed, on behalf of Westport, to pay the Graves[es] the insurance proceeds. 7. I merely negotiated with [Vernon] as to the cost of repair.... 8. [Vernon], the owner of the [P]roperty and the general contractor performing the repairs, wanted the insurance proceeds paid directly to him.

* * *

11. I ... informed [Vernon] that he was not entitled to the proceeds directly from Westport since he was not an insured, loss payee or named additional insured on the insurance policy. 12. I informed [Vernon] that Johnson's Towing had to be named on the proceeds checks as co-payees since it was Westport's insured. (App.194-95). Furthermore, Holden, in her affidavit, declared that “CMS agreed to make the progress payments co-payable to both Johnson's Towing and the contractor of Johnson's Towing's choosing as indicated in [her] letter to Johnson's Towing and [Vernon] dated December 15, 2003.” (App.185). Westport designated the December 15 letter as evidence. In his affidavit, Vernon declared, in pertinent part, as follows: 9 .... Davis, on behalf of Westport, then agreed to pay me said $98,000 and hired me, as a general contractor.... 10. Davis agreed to make three (3) progress payments to me in the total sum of $98,000, which he agreed to pay based upon receipts and other documentation for all work and labor done. 11. Thereupon, Davis, on behalf of Westport, paid me $30,000 on account of the construction contract.

* * *

16. Despite demand, Westport has failed and refused to pay the balance of the contract in the amount of $38,178.23. 17. At all times relevant hereto, I had direct contact with Westport by and through their agent, Davis, and contracted directly with them for rebuilding at a fixed price. Westport directly agreed with me to pay said price.

* * *

19. At all times, Davis, on behalf of Westport, directly negotiated with me concerning construction and costs. The check payable for the first draw was delivered directly to me. 20. Checks for subsequent draws were not delivered to me and at no time did I receive or accept a check for subsequent draws.[ FN2]

FN2. Vernon also stated in his affidavit that he “was paid $29,000 additional dollars for a subsequent progress payment.” (App.214). Vernon, however, does not state whether this payment was in the form of a check from Westport, whether he was a payee or co-payee, or whether it was tendered directly to him by Westport.

21. The check for third and final payment was not delivered to me nor did I receive or accept it. 22. At no time did I agree that payment to any third party would constitute payment to me on the aforesaid contract. 23. At no time did I designate [the Johnsons] as my agent for the receipt of funds. 24. At no time did I agree the payment to anyone other than me would discharge the obligation under my direct contract with Westport. 25. As distinguished from the check for the previous progress payment, I never received or had possession and control of the check containing the $38,000 shortfall. (App.214-15). [1] As to method of payment, there is no dispute that Westport agreed to make progress payments to Vernon and agreed to make the payments by check. Furthermore, Vernon's affidavit does not dispute that Westport informed him that any check would be made payable to Vernon and Johnson's Towing, the named insured on the insurance policy. Vernon made no objection to the method of payment and acquiesced to it when he took the first check. We cannot say that Vernon's assertions that he 1) never “agree[d] that payment to any third party would constitute payment to [him],” 2) never designated the Johnsons “as [his] agents for the receipt of funds,” and 3) never “agree[d] that payment to anyone other than [him] would discharge” (App.215) Westport's obligation created a genuine issue of material fact where, as here, the issue is whether “delivery of a co-payable check to Johnson['s Towing] constitutes payment and, therefore, discharges Westport of its underlying obligation.” Graves' Br. 4. We find no dispute that Westport sent the Check in accordance with the terms it set forth to the Graveses and as agreed upon by the Graveses.FN3 Accordingly, we find the Graveses' argument that Westport breached its contract when it made the Check jointly payable to Johnson's Towing and Vernon unpersuasive.

FN3. We note that the Graveses did not allege that Westport was negligent in delivering the Check to Johnson's Towing.

[2] The Graveses also contend that the trial court erred in granting summary judgment to Westport as a matter of law. The Graveses argue that Westport did not discharge its obligation to them because they never received or took the Check.FN4 Again, we find this argument unpersuasive.

FN4. The Graveses also argue that Indiana Code section 26-1-3.1-310 does not apply because it only speaks to “an obligation, in other words a single obligation. Graves and Johnsons [sic] obligations were separate and distinct.” Graveses' Br. 6. We note that the Graveses did not raise this issue before the trial court. Issues not raised before the trial court on summary judgment cannot be argued for the first time on appeal and are waived. Dunaway v. Allstate Ins. Co., 813 N.E.2d 376, 387 (Ind.Ct.App.2004).

[3] [4] In determining whether an obligation is suspended as to all joint payees when a check is taken by one joint payee, we find Benchmark Bank v. State Farm Lloyds, 893 S.W.2d 649 (Tex.Ct.App.1994) instructive. In Benchmark, the court found that “[p]ayment to and possession by one joint payee is constructive possession by the other joint payee.” 893 S.W.2d at 651. We agree and find that where one joint payee takes and possesses a check, it suspends all obligations as to other joint payees not in actual possession of the check as “[t]he party possessing the draft holds the draft for the benefit of himself and the other payee.” Id.; cf. Parke State Bank v. Akers, 659 N.E.2d 1031, 1034 (Ind.1995) (“A party may be in constructive possession of property without having actual possession.”). [5] Furthermore, as to the actual discharge of a debt, “[i]t is well settled in Indiana law that once a check is paid, it extinguishes the debt for which it is presented.” Indiana Ins. Co. v. Margotte, 718 N.E.2d 1226, 1230 (Ind.Ct.App.1999); I.C. § 26-1-3.1-310(b)(1) (providing that “[p]ayment or certification of the check results in discharge of the obligation to the extent of the amount of the check”). Such debt is extinguished even where a jointly payable check is sent to one co-payee and that co-payee embezzles the funds. See Margotte, 718 N.E.2d at 1230; FN5 see also Benchmark, 893 S.W.2d at 651 (holding that a drawer's obligation is discharged as a matter of law where a draft, properly issued to joint payees, is delivered, honored and paid).

FN5. In Margotte, Indiana Insurance Company (“Indiana”) and the Margottes entered into a settlement agreement, whereby Indiana agreed to pay $400,000.00 to the Margottes and their attorney, Bradley Catt. Indiana sent the jointly payable check to Catt. Subsequently, Catt forged the Margottes' endorsements and embezzled the settlement proceeds. The Margottes sued Indiana, arguing it breached the settlement agreement by sending the settlement check to Catt.

The Graveses argue that Margotte is distinguishable from case because the “method of payment was agreed to by the” Margottes, and “[Catt] was the agent and attorney for the client,” and “[n]o such relationship exists here.” Graveses' Br. 7. As stated, the Graveses acquiesced to Westport's method of payment. Furthermore, this Court relied on Indiana Code section 26-1-3.1-310 in finding that payment of the settlement check extinguished Indiana's obligation and did not limit its holding to those cases involving an attorney-client relationship.

Affirmed.

Case 25.3

668 N.W.2d 830, 266 Wis.2d 685, 2003 WI App 186

Court of Appeals of Wisconsin.

MID WISCONSIN BANK, Plaintiff-Respondent,

v.

FORSGARD TRADING, INC. and Richard K. Forsgard, Defendants,

Lakeshore Truck & Equipment Sales, Inc., Defendant-Appellant.

No. 03-0123.

Submitted on Briefs June 16, 2003.

Opinion Filed July 22, 2003.

Before , C.J., and , P.J., and PETERSON, J.

PETERSON, J.

Lakeshore Truck and Equipment Sales, Inc., appeals from a summary judgment granted in favor of Mid Wisconsin Bank. Lakeshore argues Mid Wisconsin was not a holder in due course of a check written by Lakeshore because the bank did not take the check in good faith. We disagree and affirm the judgment.

BACKGROUND

On May 7, 2001, Lakeshore wrote a check to Forsgard Trading in the amount of $18,500. The check was drawn on a bank in Ironwood, Michigan. Forsgard deposited the check in its checking account at Mid Wisconsin Bank on May 8, 2001. The Bank gave Forsgard immediate credit on the deposit.

Richard Forsgard, the owner of Forsgard Trading, has fled to Sweden and is therefore beyond the reach of these proceedings. In this opinion, "Forsgard" refers to Forsgard Trading while Richard Forsgard will be referred to by his full name.

Also on May 8, Lakeshore issued a stop-payment order on the check. Mid Wisconsin received notice on May 16 that payment on the check had been stopped. The $18,500 was deducted from Forsgard's account. Due to checks written on and transfers from the account between May 8 and May 16, the deduction resulted in a negative balance in the account. There has been no further activity on the account and, as a result, Forsgard has not covered the stopped check.

Forsgard opened the checking account in July 1999. The account was overdrawn twenty-four times before this incident. On each of those occasions, however, Forsgard deposited money to cover the overdrafts when the Bank contacted the company.

Regarding deposits, Mid Wisconsin's agreement with Forsgard states, "Any items, other than cash, accepted for deposit (including items drawn 'on us') will be given provisional credit only until collection is final...."

Mid Wisconsin's practice is to give immediate credit on deposits, but its employees may place holds on checks. For example, it may hold funds if it has reasonable doubt about a check. Examples include the depositor's account being repeatedly overdrawn within the previous six months and more than $5,000 being deposited in one day. No holds were applied to Forsgard's deposit in this case.

On January 8, 2002, Mid Wisconsin commenced this action against Richard Forsgard, Forsgard Trading, and Lakeshore. Mid Wisconsin claimed it was a holder in due course and therefore Lakeshore, as the drawer of the check, was responsible for the bank's losses resulting from the stop-payment order. Mid Wisconsin moved for summary judgment against Lakeshore, which was granted. Lakeshore appeals.

STANDARD OF REVIEW

We review summary judgments independently, employing the same methodology as the trial court. . We affirm the trial court's decision granting summary judgment if the record demonstrates that there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. . Here, the facts are undisputed, so the only question is whether, as a matter of law, Mid Wisconsin was a holder in due course of the check.

All references to the Wisconsin Statutes are to the 2001-02 version unless otherwise noted.

DISCUSSION

Lakeshore claims Mid Wisconsin was not a holder in due course of the check Forsgard deposited. gives a holder in due course the right to recover from a drawer who places a stop-payment order on a check. According to , a holder in due course is one who takes an instrument for value and in good faith. There is no dispute Mid Wisconsin took the check for value. Lakeshore argues, however, that Mid Wisconsin did not take the check in good faith. defines good faith as "honesty in fact and the observance of reasonable commercial standards of fair dealing." Lakeshore concedes that Mid Wisconsin took the check with honesty in fact, but contends Mid Wisconsin did not observe reasonable commercial standards of fair dealing.

also lists other factors for determining whether a holder of an instrument is a holder in due course. Only the good faith element is disputed in this case.

First, Lakeshore contends that Mid Wisconsin's banking agreement with Forsgard did not allow it to give immediate credit, so that the Bank was not observing reasonable commercial standards when it granted the credit. The banking agreement states, "Any items, other then cash, accepted for deposit (including items drawn 'on us') will be given provisional credit only until collection is final...." Lakeshore contends that this means Mid Wisconsin could not grant immediate credit. Lakeshore misinterprets the agreement. In fact, Mid Wisconsin complied with the agreement. Mid Wisconsin gave Forsgard provisional credit, which the agreement allows. When Lakeshore stopped payment on the check, the Bank deducted the amount of the check from Forsgard's account. This also was in accordance with the agreement. However, Forsgard did not cover the negative balance that resulted from the deduction.

Next, Lakeshore maintains that under the circumstances, reasonable commercial standards of fair dealing should have led Mid Wisconsin to place a hold on the check instead of giving immediate credit. Lakeshore notes that Richard Forsgard was a foreign citizen, the check was drawn on an out-of-state account, the check was for greater than $5,000, and Forsgard's account had been overdrawn many times in the past.

To begin with, Wisconsin courts have approved of the practice of extending immediate credit on deposited checks. In , we determined that extending immediate credit is consistent with reasonable banking standards. We stated:

A non-cash deposit becomes available for withdrawal as of right only when final settlement is made for the item and a reasonable time for the bank to learn of the settlement has passed. Of course, a bank is free to give provisional credit for a deposit, retaining a right of charge-back if final settlement for the deposited item is not received.

(citations omitted).

Further, we are persuaded by the reasoning of the New Jersey Superior Court in a case with similar facts. In , a bank issued immediate credit on a check. The facts were more egregious because the account into which the check was deposited was overdrawn at the time of the deposit. The drawer placed a stop-payment order on the check, and argued that the Bank was not a holder in due course because it failed to act in good faith when it issued immediate credit.

The court concluded that the fact the account was overdrawn did not constitute bad faith. The court stated:

It would hinder commercial transactions if depository banks refused to permit the withdrawal prior to the clearance of checks. Apparently banking practice is to the contrary. It is clear that the Uniform Commercial Code was intended to permit the continuation of this practice and to protect banks who have given credit on deposited items prior to notice of a stop payment order....

Furthermore,

a depository bank may properly charge an account by honoring a check drawn by a depositor even though it creates an overdraft. It would be anomalous for a bank to lose its status as a holder in due course merely because it has notice that the account of its depositor is overdrawn.

These cases teach that extending immediate credit is not contrary to reasonable commercial standards of fair dealing. Moreover, it does not matter whether, as here, the account had been overdrawn previously. Mid Wisconsin's policy is to place holds on checks when it has reasonable doubt about the check based on the depositor's history. Here there was no reasonable doubt. Whenever Forsgard had been overdrawn previously, it always deposited funds to cover the overdraft when the bank alerted it to the problem. Mid Wisconsin had no reason to suspect there would be any problem if immediate credit was extended for this check. Consequently, we conclude that Mid Wisconsin observed reasonable commercial standards of fair dealing and therefore was a holder in due course. Under , Mid Wisconsin has the right to recover its losses from Lakeshore.

Lakeshore also argues that the right of a drawer to stop payment on a check should trump a bank's right to recover for its losses. However, Mid Wisconsin never challenged Lakeshore's right to stop payment on the check. Lakeshore was entitled to exercise its right to stop payment, but in doing so it must accept the consequences that result under .

Judgment affirmed.

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