Maine Family F.C.U. v. Sun Life
Case Date: 03/03/1999
Court: Supreme Court
Docket No: 1999 ME 43
Download as PDF Back to Opinions page MAINE SUPREME JUDICIAL COURT Reporter of Decisions Decision: 1999 ME 43 Docket: Cum-98-324 Argued: November 4, 1998 Decided: March 3, 1999 Panel:WATHEN, C.J., and RUDMAN, SAUFLEY, and ALEXANDER, JJ. MAINE FAMILY FEDERAL CREDIT UNION v. SUN LIFE ASSURANCE COMPANY OF CANADA et al. SAUFLEY, J. [¶1] We are called upon here to address the concept of "holder in due course" as defined by recent amendments to the negotiable instruments provisions of the Maine Uniform Commercial Code. We conclude that, pursuant to those amendments, the Superior Court (Cumberland County, Calkins, J.) did not err when it entered a judgment based on the jury's finding that the Maine Family Federal Credit Union was not a holder in due course. Because we find, however, that Sun Life Assurance Company was not entitled to raise a third party's defense of fraud to its liability as drawer of the instruments, we vacate that portion of the judgment entered in favor of Sun Life and against the Credit Union. I. Facts [¶2] Daniel, Joel, and Claire Guerrette are the adult children of Elden Guerrette, who died on September 24, 1995. Before his death, Elden had purchased a life insurance policy from Sun Life Assurance Company of Canada, through Sun Life's agent, Steven Hall, and had named his children as his beneficiaries. Upon his death, Sun Life issued three checks, each in the amount of $40,759.35, to each of Elden's children.{1} The checks were drawn on Sun Life's account at Chase Manhattan Bank in Syracuse, New York.{2} The checks were given to Hall for delivery to the Guerrettes. [¶3] The parties have stipulated that Hall and an associate, Paul Richard, then fraudulently induced the Guerrettes to indorse the checks in blank and to transfer them to Hall and Richard, purportedly to be invested in "HER, Inc.," a corporation formed by Hall and Richard.{3} Hall took the checks from the Guerrettes and turned them over to Richard, who deposited them in his account at the Credit Union on October 26, 1995.{4} The Credit Union immediately made the funds available to Richard. [¶4] The Guerrettes quickly regretted having negotiated their checks to Hall and Richard, and they contacted Sun Life the next day to request that Sun Life stop payment on the checks. Sun Life immediately ordered Chase Manhattan to stop payment on the checks.{5} Thus, when the checks were ultimately presented to Chase Manhattan for payment, Chase refused to pay the checks, and they were returned to the Credit Union. [¶5] The Credit Union received notice that the checks had been dishonored on November 3, 1995, the sixth business day following their deposit.{6} By that time, however, Richard had withdrawn from his account all of the funds represented by the three checks. The Credit Union was able to recover almost $80,000 from Richard, but there remained an unpaid balance of $42,366.56, the amount now in controversy. [¶6] The Credit Union filed a complaint against Sun Life alleging that Sun Life was liable as drawer of the instruments, and that Sun Life had been unjustly enriched at the Credit Union's expense. Although it could have done so, the Credit Union did not originally seek any recovery from the Guerrettes. Sun Life, however, filed a third-party complaint against Daniel Guerrette and Paul Richard, whose signatures appeared on the back of one of the checks.{7} The Credit Union then filed a cross-claim against third- party defendants Guerrette and Richard, alleging that they were liable as indorsers of the checks,{8} and Daniel Guerrette filed cross-claims against the Credit Union and against Sun Life. Finally, Sun Life eventually filed third- party complaints against Joel and Claire Guerrette. [¶7] The Credit Union moved for summary judgment. The Superior Court held, as a matter of law, that Daniel Guerrette had raised a "claim of a property or possessory right in the instrument or its proceeds," 11 M.R.S.A. § 3-1306 (1995), and therefore that Sun Life was entitled to assert that claim as a "defense" against the Credit Union. See 11 M.R.S.A. § 3-1305(3) (1995).{9} The court found, however, that a genuine issue of material fact remained as to whether the Credit Union had acted in "good faith" when it gave value for the checks--a fact relevant to determining whether the Credit Union was a holder in due course. See 11 M.R.S.A. § 3-1302(1)(b)(ii) (1995). Accordingly, the court denied the Credit Union's motion for summary judgment, and the matter proceeded to trial. [¶8] At trial, the only issue presented to the jury was whether the Credit Union had acted in "good faith" when it gave value for the checks, thus entitling it to holder in due course status.{10} At the close of evidence, the Credit Union made a motion for a judgment as a matter of law, which the Superior Court denied. The jury found that the Credit Union had not acted in good faith and therefore was not a holder in due course. Therefore, the Superior Court entered judgment in favor of Sun Life, Daniel, Joel, and Claire, and against the Credit Union. The court denied the Credit Union's renewed motion for judgment as a matter of law and motion to amend the judgment, and the Credit Union filed this appeal. II. Obligations of the Parties [¶9] At the heart of the controversy in this case is the allocation of responsibility for the loss of the unpaid $42,366.56, given the fact that Paul Richard and Steven Hall, the real wrongdoers, appear to be unable to pay. Maine, like the other forty-nine states, has adopted the Uniform Commercial Code. Under the Maine U.C.C., Articles 3-A and 4 deal with "Negotiable Instruments" and "Bank Deposits and Collections." See 11 M.R.S.A. §§ 3-1101, 4-101 (1995). It is these statutes that govern the parties' dispute. [¶10] Pursuant to Article 4 of the Maine U.C.C., the Credit Union, as a depositary bank, is a "holder" of the instruments,{11} see 11 M.R.S.A. § 4-205(1) (1995),{12} making it a "person entitled to enforce" the instrument under Article 3-A. See 11 M.R.S.A. § 3-1301(1) (1995). Upon producing an instrument containing the valid signature of a party liable on the instrument, a person entitled to enforce the instrument is entitled to payment, unless the party liable proves a defense or claim in recoupment, see 11 M.R.S.A. § 3-1308(2) (1995), or a possessory claim to the instrument itself. See 11 M.R.S.A. § 3-1306. [¶11] Because their signatures appear on the backs of the checks, Daniel, Joel, and Claire are "indorsers" of the checks. See 11 M.R.S.A. § 3-1204(1), (2) (1995). As indorsers, they are obligated to pay the amounts due on each dishonored instrument "[a]ccording to the terms of [each] instrument at the time it was indorsed." 11 M.R.S.A. § 3-1415(1)(a) (1995).{13} This obligation is owed "to a person entitled to enforce the instrument or to a subsequent indorser who paid the instrument under this section." Id. [¶12] As drawer of the checks, Sun Life is obligated to pay each dishonored instrument "[a]ccording to its terms at the time it was issued." 11 M.R.S.A. § 3-1414(2)(a) (1995). Again, this obligation is owed to a person entitled to enforce the instrument or to an indorser who paid the draft under section 3-1415. See 11 M.R.S.A. § 3-1414(2) (1995). Chase Manhattan, as drawee of these checks, was not obligated to accept them for payment, see 11 M.R.S.A. § 3-1408 (1995), and therefore has not been made a party to this action. [¶13] Unless the Credit Union is a holder in due course, its right to enforce the obligations of the drawer and indorsers of the instruments is subject to a variety of defenses, including all those defenses available "if the person entitled to enforce the instrument[s] were enforcing a right to payment under a simple contract." See 11 M.R.S.A. § 3-1305(1)(b) (1995). In addition, its right to enforce is subject to any claims in recoupment, see 11 M.R.S.A. § 3-1305(1)(c) (1995), or claims to the instruments themselves. See 11 M.R.S.A. § 3-1306. If, however, the Credit Union establishes that it is a "holder in due course," it is subject to only those few defenses listed in section 3-1305(1)(a). See 11 M.R.S.A. § 3-1305(2) (1995). None of those specific defenses is applicable here. Thus, the Credit Union argues that because it is entitled as a matter of law to holder in due course status, it is entitled to enforce the instruments against the Guerrettes and Sun Life. III. Holder in Due Course A. Burden of Proof and Standard of Review [¶14] A holder in due course is a holder who takes an instrument in good faith, for value, and without notice of any claims or defenses. See 11 M.R.S.A. § 3-1302(1) (1995). Once the persons who may be liable on the instruments have raised a recognized defense to that liability, the burden is on the holder to prove by a preponderance of the evidence that it is a holder in due course. See New Bedford Inst. for Sav. v. Gildroy, 634 N.E.2d 920, 925 (Mass. App. Ct. 1994).{14} If it fails in that proof, the persons otherwise liable on the instruments may avoid liability if they prove a defense, claim in recoupment, or possessory claim to the instrument. See 11 M.R.S.A. §§ 1305(1)(b), 3-1308(2). [¶15] The issue of whether a party is a holder in due course is usually one of fact, although "where the facts are undisputed and conclusive, [a court] can determine . . . holder in due course status as a matter of law." See Triffin v. Dillabough, 716 A.2d 605, 611 (Pa. 1998). In this case, the Superior Court declined to decide the holder in due course issue as a matter of law, and submitted the question to the jury. The jury found that the Credit Union was not a holder in due course, implicitly because the Credit Union did not act in good faith. [¶16] The Credit Union argues that the court erred in failing to find, as a matter of law, that it was a holder in due course. "We review the denial of a motion for judgment as a matter of law 'to determine if any reasonable view of the evidence and those inferences that are justifiably drawn from that evidence supports the jury verdict.'" Larochelle v. Cyr, 1998 ME 52, ¶ 6, 707 A.2d 799 (quoting Davis v. Currier, 1997 ME 199, ¶ 3, 704 A.2d 1207). The question before us, therefore, is whether any reasonable view of the evidence, along with any justifiable inferences therefrom, can possibly support the jury's conclusion that the Credit Union did not act in good faith and therefore was not a holder in due course. Alternatively stated, the question is whether the evidence compelled a finding that the Credit Union was a holder in due course. If there is any rational basis for the jury's verdict, we must affirm the judgment. B. Good Faith [¶17] We therefore turn to the definition of "good faith" contained in Article 3-A of the Maine U.C.C.{15} In 1990, the National Conference of Commissioners on Uniform State Law recommended substantial changes in the U.C.C. The Maine Legislature responded to those recommendations in 1993 by repealing the entirety of Article 3 and enacting a new version entitled Article 3-A, which contains a new definition of "good faith." While the previous version of the good faith definition only required holder to prove that it acted with "honesty in fact," the new definition provides: "Good faith" means honesty in fact and the observance of reasonable commercial standards of fair dealing. 11 M.R.S.A. § 3-1103(1)(d) (1995) (emphasis added). Because the tests are presented in the conjunctive, a holder must now satisfy both a subjective and an objective test of "good faith."{16} 1. Honesty in Fact [¶18] Prior to the changes adopted by the Legislature in 1993, the holder in due course doctrine turned on a subjective standard of good faith and was often referred to as the "pure heart and empty head" standard. See M.B.W. Sinclair, Codification of Negotiable Instruments Law: A Tale of Reiterated Anachronism, 21 U. Tol. L. Rev. 625, 654 (1990); see also Seinfeld v. Commercial Bank & Trust Co., 405 So.2d 1039, 1042 (Fla. Dist. Ct. App. 1981) (noting that the U.C.C. "seem[s] to protect the objectively stupid so long as he is subjectively pure at heart"). That standard merely required a holder to take an instrument with "honesty in fact" to become a holder in due course.{17} [¶19] Courts interpreting this language have routinely declared banks to be holders in due course, notwithstanding the failures of these banks to investigate or hold otherwise negotiable instruments, when they took the instruments with no knowledge of any defects, defenses, or stop payment orders. See, e.g., UAW-CIO Local #31 Credit Union v. Royal Ins. Co., 594 S.W.2d 276, 279 (Mo. 1980) (en banc); Bank of New York v. Asati, Inc., 15 UCC Rep. Serv. 2d (CBC) 521 (N.Y. Sup. Ct. July 8, 1991). This approach has been understood to promote the negotiability of instruments, particularly checks, in the stream of commerce. Rejecting a contrary approach, one court put it bluntly: The requirement urged by defendant would bring the banking system to a grinding halt. A stop payment order issued by the drawer to the drawee which is unknown to the paying-collecting bank cannot fasten upon the paying bank any legal disability; particularly it cannot reduce the status of the collecting bank to a mere assignee of the instrument or a holder of a non- negotiable instrument, or a mere holder of a negotiable instrument. Mellon Bank, N.A. v. Donegal Mutual Ins. Co., 29 UCC Rep. Serv. (CBC) 912 (Pa. Ct. C.P. Alleghany County, Jan. 8, 1980). [¶20] Although courts were often urged to engraft an objective reasonableness standard onto the concept of "honesty in fact," most refused to do so.{18} Their refusals recognized that: "[T]he check is the major method for transfer of funds in commercial practice. The maker, payee, and endorsers of a check naturally expect it will be rapidly negotiated and collected . . . . The wheels of commerce would grind to a halt [if an objective standard were adopted]." Bowling Green, Inc. v. State St. Bank & Trust, 425 F.2d 81, 85 (1st Cir. 1970). [¶21] Moreover, under the purely subjective standard, a bank was not expected to require the presence of offsetting collected funds in the customers' account in order to give value on newly deposited checks: "A bank's permitting its customers to draw against uncollected funds does not negate its good faith." Asati, Inc., 15 UCC Rep. Serv. 2d at 521; accord Vail Nat'l Bank v. J. Wheeler Constr. Corp., 669 P.2d 1038, 1039-40 (Colo. Ct. App. 1983); Flagship Bank of Orlando v. Central Florida Coach Lines, Inc., 33 UCC Rep. Serv. (CBC) 613 (Pa. Ct. C.P. Luzerne County, Oct. 13, 1981); Mellon Bank, 29 U.C.C. Rep. Serv. at 912; Central Bank & Trust Co. v. First Northwest Bank, 332 F. Supp. 1166, 1170 (E.D. Mo. 1971), aff'd, 458 F.2d 511 (8th Cir. 1972); Citizens Nat'l Bank of Englewood v. Fort Lee Sav. & Loan Ass'n, 213 A.2d 315, 319 (N.J. Super. Ct. Law Div. 1965). [¶22] Application of the "honesty in fact" standard to the Credit Union's conduct here demonstrates these principles at work. It is undisputed that the Credit Union had no knowledge that Richard obtained the Sun Life checks by fraud. Nor was the Credit Union aware that a stop payment order had been placed on the Sun Life checks. The Credit Union expeditiously gave value on the checks, having no knowledge that they would be dishonored. In essence the Credit Union acted as banks have, for years, been allowed to act without risk to holder in due course status. The Credit Union acted with honesty in fact. [¶23] Thus, had the matter at bar been decided before the Legislature's addition of the objective component of "good faith," there can be little question that the Credit Union would have been determined to have been a holder in due course. Because it took the instruments without notice of any possible dishonor, defect, fraud, or illegality, it could have given value immediately and yet have been assured of holder in due course status. See Mellon Bank, 29 UCC Rep. Serv. at 912; Industrial Nat'l Bank of Rhode Island v. Leo's Used Car Exchange, Inc., 291 N.E.2d 603, 606 (Mass. 1973); New Bedford Inst., 634 N.E.2d at 925; Triffin, 716 A.2d at 611. Today, however, something more than mere subjective good faith is required of a holder in due course. On to part two. |