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NO. 4-00-1005

IN THE APPELLATE COURT

OF ILLINOIS

FOURTH DISTRICT

JUSTICE MYERSCOUGH delivered the opinion of the court:

Plaintiffs, Charles Harder and Marsha Harder, filed acomplaint against defendant First Capital Bank (Bank) seekingrelief for its negligent payment of two checks that did notcontain the indorsement of all parties listed as payees. TheMcLean County trial court dismissed their complaint with prejudice pursuant to section 2-619 of the Code of Civil Procedure(Code) (735 ILCS 5/2-619 (West 1998)). Plaintiffs' motion forreconsideration was denied, and this appeal followed. DefendantsEmergency Damage Control of Central Illinois (EDC) and JamesHughbanks (Hughbanks) are not part of this appeal.

I. BACKGROUND

Following fire damage to plaintiffs' home in 1998,plaintiffs contracted with EDC, owned by Hughbanks, for homerepairs, restoration services, and storage services designed torid their furniture and personal property of smoke damage andsmell. As of the filing of the complaint in November 1999, EDChad failed to complete the repairs and cleaning services, and EDChad failed to return items taken for the purpose of cleaning.

In April 1999, without plaintiffs' knowledge or consent, Hughbanks, acting on behalf of EDC, obtained possession oftwo checks from plaintiffs' insurer, St. Paul Insurance. Thechecks were dated April 6, 1999, and were for the sums of $30,476and $8,862. The $30,476 check was made payable as follows:

EMERGENCY DAMAGE CONTROL CHARLES AND MARSHA HARDER

BANK OF PONTIAC

The $8,862 check was made payable as follows:

EMERGENCY DAMAGE CONTROL CHARLES AND MARSHA HARDER

Plaintiffs neither indorsed these checks nor authorized anyone toindorse them on their behalf.

On or about April 13, 1999, Hughbanks presented thechecks for payment to defendant bank, where Hughbanks maintainedan account. The checks were indorsed by Hughbanks alone, anddefendant credited the sums to EDC's account. EDC then failed tocomplete the work it was contracted to perform and refused toreturn unearned portions of the insurance funds.

Plaintiffs' complaint alleged in count I conversion andnegligence by defendant because the checks were made payable inthe conjunctive and not the disjunctive and, therefore, requiredthe signatures of all parties listed as payees. Count II stateda cause of action against EDC; and count III was directed againstEDC and Hughbanks. Defendant filed an answer and affirmativedefenses, which are not included in the record. However, basedupon plaintiffs' motion to strike and response to affirmativedefenses, its appears defendant argued the checks were ambiguousand the bank owed no duty to plaintiffs. The trial court alloweddefendant's first affirmative defense asserting ambiguity of thechecks, but the second affirmative defense regarding duty wasstricken.

Defendant filed a motion to dismiss pursuant to section2-619 of the Code (735 ILCS 5/2-619 (West 1998)), which the trialcourt granted in July 1999. Plaintiffs filed a motion to reconsider, which was denied, and this appeal, directed only to countI, followed pursuant to a Rule 304(a) finding (155 Ill. 2d R.304(a)) by the trial court.

II. ANALYSIS

Plaintiffs asserted claims of conversion and negligenceagainst defendant for its payment of two checks, which plaintiffsargue were to be paid jointly with indorsements required from alllisted payees. We affirm the trial court.

A. Standard of Review

The standard of review for rulings on motions todismiss for failure to state a cause of action and for involuntary dismissal is de novo. Bodine Electric of Champaign v. Cityof Champaign, 305 Ill. App. 3d 431, 440, 711 N.E.2d 471, 477-78(1999). A dismissal pursuant to section 2-619 is proper wherethe claim asserted against a defendant "is barred by otheraffirmative matter[s] avoiding the legal effect of or defeatingthe claim." 735 ILCS 5/2-619(a)(9) (West 1998). In conductingthe de novo review, the appellate court will examine the complaint and all evidentiary material before the trial court at thetime of entry of the order, construing the evidence and drawingall reasonable inferences in the light most favorable to theplaintiff. Vala v. Pacific Insurance Co., 296 Ill. App. 3d 968,970-71, 695 N.E.2d 581, 582-83 (1998).

B. Ambiguity of Checks

Plaintiffs argued that the intent of the person signingthe check determines to whom a check is payable. Moreover,plaintiffs argued where the intent of the signer must be discerned, additional information either actually known or apparentfrom the instrument is relevant to a determination of the personor persons to whom an instrument is payable. Plaintiffs assertedthat the face of the checks gave additional evidence regardingthe purpose for which the checks were written. For example, thechecks were drawn on the account of an insurance company, and oneof the checks listed Bank of Pontiac as an additional payee. Therefore, plaintiffs argued these suspicious facts put defendanton notice that the checks in question listed multiple payees fora reason, which thereby created a duty of inquiry by defendant.

Section 3-110(a) of the Uniform Commercial Code (UCC)provides that "[t]he person to whom an instrument is initiallypayable is determined by the intent of the person *** signing as*** the issuer of the instrument." 810 ILCS 5/3-110(a) (West1998). The UCC comment to section 3-110(a) states this issueusually arises in a dispute over the validity of an indorsementof a payee. The UCC comment further provides an example where acheck is made payable to the common name of "John Smith." Thecomments state that, without section 3-110(a), it would not bepossible by name alone to identify which "John Smith" was payable, and further identification or the intention of the drawerwould need to be determined. Pursuant to section 3-110(a),however, the name alone is sufficient as the intention of thedrawer controls. See 810 ILCS Ann. 5/3-110, Comment 1 (Smith-Hurd 1998).

In the instant case, there is no issue whether theindorsing party was an intended payee or whether the EDC thatindorsed the check was the EDC identified as a payee. Further,although plaintiffs argue that this provision should apply to thedetermination of whether a check is payable jointly or in thealternative, their argument is unsupported by the language of thestatute or committee comments. Plaintiffs offer no case law insupport of their argument.

Plaintiffs further argue that these checks could not beconsidered ambiguous as a matter of law. Plaintiffs assert thatthe checks at issue in the instant case clearly contained theword "and" ("Charles and Marsha Harder") as directive language,and the context of the transaction indicating plaintiffs werejoint payees with EDC was evident on the face of the checks. Therefore, plaintiffs argue, the checks clearly required thesignature of both plaintiffs in addition to EDC. Moreover,plaintiffs argue it was not reasonable to accept defendant'sinterpretation of the checks because the consequence would bethat EDC could cash the checks without the indorsement of eitherplaintiff, but neither plaintiff could cash the checks withoutthe indorsement of the other.

As set forth above, section 3-110(d) of the UCC provides that if a check payable to two or more persons is ambiguousas to whether it is payable jointly or alternatively, then it ispayable alternatively. 810 ILCS 5/3-110(d) (West 1998). The UCCcomment offers the example of ambiguity as an instrument payableto "X and/or Y," which, in accordance with section 3-110(d), ispayable in the alternative. The UCC comment further explainsthat in dealing with ambiguities, the "persons dealing with theinstrument should be able to rely on the indorsement of a singlepayee." 810 ILCS Ann. 5/3-110, Comment 4 (Smith-Hurd 1998).

In addition to the UCC comment, Illinois case law hasaddressed the issue of ambiguity under facts similar to theinstant case in Meng v. Maywood Proviso State Bank, 301 Ill. App.3d 128, 702 N.E.2d 258 (1998). In Meng, the plaintiffs purchasedthree cashier's checks from the defendant bank, which were madepayable to multiple parties. The payees were listed on thechecks with no grammatical indicators, each payee's name waslisted on a separate line. The plaintiffs filed a complaintasserting, in part, that the checks with multiple payees and nodirectives were unambiguous and, therefore, required the indorsement of all payees. After considering the language in section 3-110(d) of the UCC, the court held that "as a matter of law, ***the designation of two payees on a cashier's check is ambiguouswhere no directives are stated on the check to determine themanner of payment." Meng, 301 Ill. App. 3d at 136, 702 N.E.2d at264; see also Dimmitt & Owens Financial, Inc. v. USA Glass &Metal, Inc., No. 97 C 7821, slip op. at 2-3, ___ F3d ___, ___(N.D. Ill. 1998).

We recognize that the checks in Meng were cashier'schecks, which are meant to operate as cash; however, we find theruling as to ambiguity applicable in the instant case. Regardless of the type of instrument used to make payment, a holder indue course is entitled to negotiate and enforce an instrument. See 810 ILCS 5/3-201, 3-301 (West 1998). This requires banks todetermine if a party to any instrument is a holder in due course and further requires consideration of whether the instrument ispayable jointly or in the alternative. Therefore, the considerations in Meng regarding whether an ambiguity exists in aninstrument with no grammatical directives are appropriatelyapplicable to the instant case irrespective of the fact that twodifferent instruments are at issue. Meng noted that the multiplepayee provision, section 3-110, became effective in 1992, replacing another section, and that the current section shifts thepresumption to pay on an instrument to in the alternative ratherthan jointly. Meng, 301 Ill. App. 3d at 136, 702 N.E.2d at 264. Applying Meng to the instant facts, we agree with the trial courtand find the checks were ambiguous as a matter of law and,therefore, were payable in the alternative with the indorsementof any single payee.

Plaintiffs, however, argue that such a ruling willresult in an illogical interpretation of the statute insofar as EDC could solely indorse the check, but both plaintiffs would berequired to indorse the check to negotiate it. While we do notfind any Illinois case law addressing this issue, other jurisdictions have addressed it and determined that the language "A and Bor C" requires the signatures of A and B jointly or C alone to benegotiated. See Leinert v. Sabine National Bank, 541 S.W.2d 872(Tex. Civ. App. 1976); Internal Revenue Service v. Gaster, 42F.3d 787 (3d Cir. 1994). Likewise, we do not find it illogicalto require the signatures of two payees who are identifiedjointly on a check and still only require the signature of onepayee listed as an alternative single payee.

We must determine whether these checks--without anygrammatical connector between the listen payees--were payablejointly or in the alternative. Having already found the checksin the instant case were ambiguous and payable in the alternative, we have, in essence, inserted "or" where there was nogrammatical connector between the payees. Therefore, the twochecks made payable to "Charles and Marsha Harder [or] EmergencyDamage Control [or] Bank of Pontiac" could be negotiated with theindorsement of EDC or Bank of Pontiac or Charles and MarshaHarder. Likewise, the check made payable to "Emergency DamageControl [or] Charles and Marsha Harder" required the indorsementof EDC or Charles and Marsha Harder. Such an interpretation isconsistent with Leinert and Gaster, and it is consistent withgeneral rules of construction, as argued by plaintiffs, whichrequire every word to have meaning and allow none to be renderedmeaningless. See Illinois Republican Party v. Illinois StateBoard of Elections, 188 Ill. 2d 70, 84, 720 N.E.2d 231, 239(1999) (Freeman, C.J., dissenting).

C. Negligence

Plaintiffs also argue that the trial court erred indismissing the complaint because defendant could be held liablefor negligent payment, even if the checks in question wereambiguous. Plaintiffs argue that if defendant's policies andprocedures would have allowed the present check to slip throughregardless of the language used on the check, then defendant'sactions could amount to a breach of duty to plaintiffs, regardless of ambiguity. See Wilder Binding Co. v. Oak Park Trust &Savings Bank, 173 Ill. App. 3d 34, 527 N.E.2d 354 (1988), rev'd,135 Ill. 2d 121, 552 N.E.2d 783 (1990); See also Gillespie v.Riley Management Corp., 59 Ill. 2d 211, 319 N.E.2d 753 (1974).

We find Wilder and Gillespie distinguishable from theinstant case. In Wilder, the plaintiff's bookkeeper had forgedchecks on the company account, and the defendant bank had cashedthem using an automatic check-sorting device. All of the checkswere for amounts less that $1,000, and the automatic check-sorting machine separated all checks less than $1,000 and paidthem automatically. This device was widely used to process largedaily volumes of checks. Wilder, 173 Ill. App. 3d at 37, 527N.E.2d at 355-56.

During the trial, an official from the defendant bankadmitted that no checks under $1,000 were reviewed by sight orany other method that would reveal the possibility of an unauthorized or forged signature. In finding the defendant bank negligent, the court stated "[s]ince the bank has an absolute duty notto pay unauthorized drafts, such payment, even in good faith,violates the duty to pay only those items which are 'properlypayable.'" Wilder, 173 Ill. App. 3d at 41, 527 N.E.2d at 358. The court further found that the use of the automatic check-sorting machine completely ignored the customer's signature as acriterion for accepting drafts, which, as a matter of law, was alack of ordinary care. Wilder, 173 Ill. App. 3d at 40-41, 527N.E.2d at 358.

In Gillespie, the plaintiff paid Riley $25,000 asearnest money for the construction of an apartment building. Theearnest money was to be placed in an escrow account requiring theplaintiff's signature for withdrawal, but Riley's presidentpurchased a cashier's check payable to Riley and the plaintiffinstead. Riley's president explained that he took this action toavoid the charges of maintaining an escrow account and assuredthe plaintiff that both payees' signatures were required tonegotiate the check. Thereafter, Riley's president returned tothe defendant bank where he purchased the original cashier'scheck and requested two new cashier's checks in exchange for theone in his possession. The defendant bank exchanged the onecashier's check jointly payable to plaintiff and Riley for twocashier's checks payable to Riley alone. Gillespie, 59 Ill. 2dat 213, 319 N.E.2d at 755.

In finding that the defendant bank had a duty toinquire into the nature of the transaction concerning wrongdoing,delivery, and the lack of plaintiff's indorsement, the court setforth in detail the unusual circumstances that raised a duty ofinquiry. Those facts included the following: there was only a$13,000 balance in Riley's account prior to the deposit of theplaintiff's earnest money; the defendant bank would not issue theoriginal cashier's check until the plaintiff's earnest moneycheck had cleared; the $25,000 cashier's check was issued jointlyto the plaintiff and Riley; Riley's president returned a monthlater and requested two new checks payable only to Riley; theplaintiff did not indorse the original cashier's check; and thedefendant bank requested Riley's president write "not used forpurpose issued" on back of original cashier's check. Gillespie,59 Ill. 2d at 219, 319 N.E.2d at 758. The court further discussed the significance of cashier's checks and how, once delivered, they cannot be revoked or countermanded. Gillespie, 59Ill. 2d at 218-19, 319 N.E.2d at 757. Based upon these facts,the court found there was a duty to inquire, and the defendantbank's failure to inquire resulted in conversion.

While we find defendant's payment of the three checksin the instant case created an unfortunate result for plaintiffs,it did not constitute the crime of conversion. This is a factualdistinction from both Wilder and Gillespie, where the honoring ofthe instruments by the banks did result in a crime; therefore, inthose cases, a negligence count was allowed to stand against thebanks. In the instant case, however, we have found that thechecks were properly paid upon the indorsement of only EDC, andwe are unpersuaded that plaintiffs should be allowed to maintaina negligence action in an attempt to have defendant found negligent for its payment of properly indorsed and payable checks. Such a result would be illogical.

III. CONCLUSION

For the reasons set forth above, we affirm the trialcourt.

Affirmed.

McCULLOUGH, P.J., and KNECHT, J., concur.