chapter iii - antonin scalia law school

NEGOTIABILITY: THE DOCTRINE AND ITS APPLICATION IN U.S. COMMERCIAL LAW

52

CHAPTER III

ENFORCEMENT

Assuming that the paper meets the formal requirements of being a negotiable instrument, what more, ifanything, is necessary for it to be entitled to the special prerogatives associated with negotiation? More specifi-cally, who should be entitled to claim such rights? Anyone who physically holds the paper? That, in a sense, is thecharacteristic of currency. Should the powerful ability inherent in currency to abstract oneself from underlyingtransactions be associated with mere possession? Is such a rule possible or desirable for commercial paper?

U.C.C. Article 3 and its predecessor, the Uniform Negotiable Instruments Act, as well as case law, havefixed on the concept of the holder as a mechanism to answer this question. The feasibility of this answer isexplored in Part I, BECOMING A HOLDER.

Should anyone who has properly come into possession of the paper and so, is a holder, be entitled toexercise the extraordinary rights associated with negotiability? The answer to this question, as it has developed,focuses not only on the proper formal transfer of the paper but on the holder�s relationship to the paper, knowl-edge of circumstances surrounding the paper and transactions with which it is tied, and what was exchanged forthe paper. Part II, IN DUE COURSE, addresses the substantive and procedural issues connected with thisstatus.

After all this, what good is it to be a holder in due course anyway? Part III treats the DEFENSES whicha holder in due course cuts off and those to which it is subject.

The remaining parts consider special problems touching upon negotiation--IV. SHELTER and V. THEIMPACT OF BANK INSOLVENCY.

Peacock v. Rhodes2 Dougl. 634, 1781

Peacock against Rhodes and Another. Tues-day, 8th May, 1781. A bill of exchange with a blankindorsement, being stolen and negotiated, an innocentindorsee shall recover upon it against the drawer. [Re-ferred to, London and South-Western Bank v.Wentworth, 1880, 5 Ex. D. 102.]

In an action upon an inland bill of exchange,which was tried before Willes, Justice, at the last SpringAssizes for Yorkshire, a verdict, by consent, was foundfor the plaintiff, subject to the opinion of the Court on aspecial case, stating the following facts:

�The bill was drawn at Halifax, on the 9th ofAugust, 1780, by the defendants, upon Smith, Payne, &

Smith, payable to William Ingham, or order, 31 daysafter date, for value received. It was indorsed by Wil-liam Ingham, and was presented by the plaintiff foracceptance and payment, but both were refused, ofwhich due notice was given by the plaintiffs to the de-fendants, and the money demanded of the defendants.The plaintiff, who was a mercer at Scarborough, re-ceived the bill from a man not known, who called him-self William Brown, and, by that name, indorsed the billto the plaintiff, of whom he bought cloth, and other ar-ticles in the way of the plaintiff�s trade as a mercer, inhis shop at Scarborough, and paid him that bill, the valuewhereof the plaintiff gave to the buyer in cloth and otherarticles, and cash, and small bills. The plaintiff did notknow the defendants, but had before, in his shop, re-

CHAPTER 3: ENFORCEMENT

53

ceived bills drawn by them, which were duly paid.William Ingham, to whom the bill was payable, indorsedit; John Daltry received it from him, and indorsed it;Joseph Fisher received it from John Daltry; and it wasstolen from Joseph Fisher, at York, (without any indorse-ment or transfer thereof by him,) along with other billsin his pocket-book, whereof his pocket was picked,before the plaintiff took it in payment as aforesaid. Theplaintiff declared as indorsee of Ingham.�

Wood, for the plaintiff, argued, that the bill wastaken, by Peacock, in the ordinary course of business,and there was no pretence that he had notice that it hadbeen obtained unfairly. If he had, he admitted that hecould not recover. A bill indorsed by the payee, is to beconsidered to all intents as cash, unless he chooses torestrain its currency, which he may do by a special in-dorsement, as �Pay the contents to William Fisher�.1

The very object in view, in making negotiable securi-ties, is, that they may serve the purposes of cash. Thecase of Miller v. Race,2 although the question therearose upon a bank-note, establishes the principle juststated. If this bill had not been stolen, but lost, the ownermight have maintained trover against the finder, but stillthe bona fide holder would have been entitled to re-cover upon it. This was determined, with respect to anote upon a banker payable to A. or bearer, in the caseof Grant v. Vaughan.3 Here, the bill was indorsedblank, but that was the same thing in effect, as if it hadbeen made payable to the bearer. A blank indorsementis an indorsement to all the world; to any body whoshall happen to be the bearer. There was a case ofFrancis v. Mott, directly in point to the present, triedbefore Lord Mansfield, two or three years ago. There,a bill with blank indorsements, had been picked out ofthe holder�s pocket, at Manchester races. Being of-fered in payment to a house at Manchester, who didnot know the persons whose names appeared upon it,they sent to enquire about their credit, and finding themresponsible, gave a valuable consideration for it, andsent it to their correspondent at London. He carried itto the drawee for acceptance, who detained it, and saidit was stolen; upon which the house at Manchesterbrought an action against the drawer. The Attorney-General was for the defendant, and Mr. Dunning forthe plaintiff. The Attorney-General attempted to shew,that the defendants knew the bill had been unfairly ob-tained, and, having failed in that proof, he gave up the

cause, and the plaintiff recovered. The argument onthe part of the present defendants, would extend to allcases of fraud and imposition, as well as theft, and wouldstop the currency of bills of exchange, because it wouldrender it necessary for every indorsee to insist uponproof of all the circumstances, and the manner in whichthe bill came to the indorser. As the negligence, in thiscase, was on the part of the person who lost the bill, theloss ought to fall upon him; not upon the plaintiff.

Fearnly, for the defendants.--The cases on thissubject are all modern, but all of them establish a dis-tinction between bank notes, or banker�s cash notespayable to bearer, and indorseable bills or notes. Thetwo first sorts only are considered as cash. No casethat I have found is exactly in point to that before theCourt. In Price v. Neale,4 which was the case of aforged bill, that had been accepted, and paid to the de-fendant in the course of trade, your Lordship held, thatthe acceptor, having given credit to it by his acceptance,should not recover back what he had paid to a bonafide holder; but, in the present case, there was not ac-ceptance. Walmsley v. Child,5 before Lord Hardwicke,was upon cash notes payable to bearer. Lord Holt makesthe distinction between bills and cash notes, in Tassell& Lee v. Lewis.6 So, in Hodges v. Steward, bills pay-able to bearer, and bills payable to order, are distin-guished.7 Every indorsement of a bill of exchange isconsidered as a new bill. This was laid down by yourLordship in Heylin v. Adamson;8 and, in Miller v. Race,a bill is considered as being only a security or documentfor a debt. The case of The Executors of Devallar v.Herring,9 seems exactly in point for the defendants. Itis there laid down, that, if the indorsee of a promissorynote lose it, and the finder pay it away in the course oftrade, the indorsee may maintain trover against the per-son to whom it has been so paid. The arguments frominconvenience are in favour of the defendants. No manis obliged to take a bill of exchange in payment. Atrade should not, in prudence, take a bill, unless he knowthe person from whom he receives it. But if the lawwere as contended for on the part of the plaintiff, thetemptations to theft would be increased.

Lord Mansfield told Wood, he need not reply,and delivered the opinion of the Court, as follows:

Lord Mansfield.--I am glad this question wassaved, not for any difficulty there is in the case, but


54

because it is important that general commercial pointsshould be publicly decided. The holder of a bill of ex-change, or promissory note, is not to be considered inthe light of an assignee of the payee.10 An assigneemust take the thing assigned, subject to all the equity towhich the original party was subject. If this rule ap-plied to bills and promissory notes, it would stop theircurrency. The law is settled, that a holder, coming fairlyby a bill or note, has nothing to do with the transactionbetween the original parties; unless, perhaps, in the singlecase (which is a hard one, but has been determined,) ofa note for money won at play.11 I see no differencebetween a note indorsed blank, and one payable tobearer. They both go by delivery, and possession provesproperty in both cases. The question of mala fides wasfor the consideration of the jury. The circumstances,that the buyer and also the drawers were strangers tothe plaintiff, and that he took the bill for goods on whichhe had a profit, were grounds of suspicion, very fit fortheir consideration. But they have considered them,and have found it was received in the course of trade,and, therefore, the case is clear, and within the prin-ciple of all those Mr. Wood has cited, from that of Miller

v. Race, downwards, to that determined by me at NisiPrius.

The postea to be delivered to the plaintiff.1Vide Ancher v. The Bank of England, infra, p. 637.2B.R.H. 31 Geo. 2, 1 Burr. 452.3B.R.T. 4 Geo. 3, 3 Burr. 1516.4B.R.M. 3 Geo. 3, 3 Burr. 1354.5Canc. 11 Dec. 1749, 1 Vez. 341.61 Ld. Raym. 743.7B.R.W. & M. 1 Salk. 1258B.R.M. 32 Geo. 2, 2 Burr. 669, 674.9Scacc. T. 9 G. 1, 9 Mod. 44, 47.10So, in Collins v. Martin, 1 B. & P. 648, it was held thatbills of exchange, wrongfully pledged by one banker toanother, could not be recovered in trover from the lat-ter by the party who had deposited them with the former,for the purpose of receiving them and placing them tohis account; the banker with whom they were pledgednot being privy to the circumstances under which theywere placed in the others hands.11Vide Lowe v. Waller, T. 21 Geo. 3, infra, 736.

A. BECOMING A HOLDER: NEGOTIATIONSection 3-201, 3-206 (prior Section 3-202)

Love v. L K & P, Ltd.920 S.W.2d 474 (Tex. App. 1996)

Bank�s assignee brought action againstborrowers to collect on notes issued by purchasers ofborrowers� land to borrowers and given by borrowersto bank as collateral. Parties cross-moved forsummary judgment. The 82nd District Court,Robertson County, Robert Stem, J., granted partialsummary judgment in favor of assignee on all issuesexcept for value of property securing notes, andborrowers appealed. The Court of Appeals held that:(1) collateral transfer agreement showed intent togive bank security interest, not to indorse notes, and(2) failure of assignee to request notes� indorsementprevented liability. UCC Sections Cited: § 3-201(1),(2), (3), § 3-401.

Reversed and rendered.

Before CUMMINGS and VANCE, JJ.

OPINIONL K & P, Limited (L K & P) brought this suit

against Raymond Love, Jr. and his sister MarieNickle as transferors of two unindorsed promissorynotes. L K & P also sued Raymond�s wife, Georgia,and Marie�s husband, Keith, based upon spousalliability. Raymond, Marie, Georgia, and Keith will becollectively referred to as Appellants. Both sidesmoved for summary judgment; the court deniedAppellants� motion and granted L K & P a partialsummary judgment holding Appellants liable to somedegree on the notes.

We conclude that a person who does not signan instrument is not liable as an indorser and that thecourt erred in granting judgment in favor of L K & Pand in denying Appellants� motion for summaryjudgment. Therefore, we will reverse the judgment


55

and render the judgment that the court should haverendered granting Appellants� motion for summaryjudgment.

BACKGROUNDOn December 7, 1985, Marie and Raymond

sold 71.4 acres of land in Robertson County to Robertand Betty Krus. The Kruses executed two RealEstate Lien Notes, one to Raymond and one toMarie, each in the amount of $58,772.50 (the Krusnotes). The payment of the notes was secured by arecorded Deed of Trust covering the property.

At the time of the sale, the 71.4-acre tractwas encumbered by a lien in favor of the FirstNational Bank of Navasota (the Bank), whichsecured a promissory note made by Raymond andMarie in the amount of $125,000. In exchange forthe Bank�s releasing its lien on the property, Raymondand Marie transferred the Krus notes and Deed ofTrust to the Bank as security for the $125,000 note(the collateral transfer). Although Raymond andMarie signed the �Collateral Transfer of Note,� theydid not indorse either of the Krus notes.

The Federal Deposit Insurance Corporation(FDIC) was appointed receiver of the Bank when itwas declared insolvent. Raymond and Marie�s notewas in default, and on September 25, 1991, the FDICforeclosed on the collateral, i.e. the two Krus notesand the Deed of Trust securing them. JamesMcCullough purchased the collateral at the foreclo-sure sale for $51,501 and assigned them to L K & P.Because the Krus notes were also in default, L K &P foreclosed upon the 71.4 acres, selling the propertyto McCullough at the foreclosure sale for $51,501. LK & P then instituted this suit against the Appellantsto collect the balance due on the notes. [Robert Krushad filed for bankruptcy and was not named in thesuit. Betty Krus was a defendant and a summaryjudgment was rendered against her, but she did notappeal.]

Both sides moved for summary judgment. LK & P asserted that it was entitled to haveRaymond�s and Marie�s unqualified indorsements,and therefore was entitled to judgment. Raymondand Marie contended that they could not be liable as

indorsers on instruments they had not signed. L K &P�s motion also sought judgment against Raymond�sand Marie�s respective spouses, Georgia and Keith,based upon spousal-liability rules. Tex.Fam.CodeAnn. § 5.61 (Vernon 1993). Georgia and Keithcountered that they could not be liable on the Krusnotes, even if their spouses are liable on the notes,because their separate property andsole-management community property is not subjectto the contractual liability of their spouses. Id.

The court granted a partial summary judg-ment in favor of L K & P on all issues except for thevalue of the property securing the two Krus notes.After the parties stipulated to the amount of credit tobe allowed for the value of the 71.4 acres, the courtsigned a final judgment and this appeal followed.

Appellants raise eight points of error. How-ever, finding merit to points one, two, and eight, weneed not address the others. First, Appellants con-tend that the court erred in granting a summaryjudgment against Georgia and Keith, the spouses.Second, they contend that the court erred in grantingsummary judgment against Raymond and Mariebecause they did not indorse the Krus notes. In theireighth point, they assert that the court erred in failingto grant their motion for summary judgment.

STANDARD OF REVIEWA party is entitled to a summary judgment if

there is no genuine issue as to any material fact andhe is entitled to judgment as a matter of law.Tex.R.Civ.P. 166a(c). Because competing motionsfor summary judgment were filed and one wasgranted and the other denied, we will review bothmotions and render judgment for the party whosemotion should have been granted. Novak v. Stevens,596 S.W.2d 848, 849 (Tex.1980).

RAYMOND�S AND MARIE�S LIABILITY ONTHE KRUS NOTES

Because Appellants� first point (spousalliability) is dependent upon their second, we beginwith point two: that the court erred in holdingRaymond and Marie liable on the Krus notes in theabsence of their signatures. To prove its entitlementto summary judgment and to collect on the four notes,


56

L K & P had to conclusively establish: (1) the note inquestion; (2) the party sued signed the note; (3) theplaintiff is the owner or holder of the note, and (4) acertain balance is due and owing on the note. Bean v.Bluebonnet Sav. Bank F.S.B., 884 S.W.2d 520, 522(Tex.App.-Dallas 1994, no writ).

The contested element is the second one.Each side points to the Krus notes and the absenceof, or right to, indorsements thereon in support of itsargument that it has established its right to a summaryjudgment. L K & P asserts that Raymond and Marieare liable on the Krus notes because (1) they trans-ferred the Krus notes to the Bank in exchange for theBank�s releasing the lien on the land, (2) the instru-ment was not payable to bearer, and (3) there was noagreement as to the extent of recourse the Bankwould have against Raymond and Marie on the Krusnotes. TEX.BUS. & COM.CODE ANN. § 3.201(c);UCC Sec. 3-201. (Vernon 1994). [See UCC Sec. 3-203] Raymond and Marie claim that they did notindorse the notes and, therefore, have conclusivelynegated the second element. Id. § 3.401.

At the time of Raymond and Marie�s collat-eral transfer of the Krus notes, section 3.201 pro-vided:

Unless otherwise agreed any transfer for value ofan instrument not then payable to bearer gives thetransferee the specifically enforceable right to havethe unqualified indorsement of the transferor.Negotiation takes effect only when the indorsementis made and until that time there is no presumptionthat the transferee is the owner. Id. § 3.201(c).

L K & P asserts that it has shown its entitle-ment to have unqualified indorsements from Raymondand Marie under section 3.201, and that it has there-fore established its right to judgment on the Krusnotes. We disagree for two reasons.

OTHER AGREEMENT NEGATES ENTITLE-MENT TO ENDORSEMENT

First, the summary judgment evidenceconclusively established that there was anotheragreement. Id. The Collateral Transfer of Note,executed by Raymond, Marie, and the Bank at the

time of the transfer of the two notes and the Deed ofTrust, stated that Raymond and Marie �hereinaftercalled �Debtor� ... hereby TRANSFERS, ASSIGNS,AND CONVEYS unto [the Bank], hereinafter called�Secured Party � ... the promissory note[s] (hereincalled COLLATERAL and in which Debtor grants toSecured Party a Security Interest ) and all liens,rights, titles, equities and interests securing thesame.� (Emphasis added).

L K & P asserts in its brief that �neither thenotes or the collateral transfer give any indication ofany agreement between Appellants and the Bank thatthe notes were to be transferred with anything but anunqualified indorsement, and Appellants testified therewere no agreements between them and the Bank.�We disagree. First, Raymond and Marie testified bydeposition that there were no agreements with theBank other than the Collateral Transfer of Note.Second, the language of the collateral transferdocument conclusively establishes an agreementcontrary to one requiring Raymond�s and Marie�sunqualified indorsements on the Krus notes. Marieand Raymond �transfer[ed], assign[ed], andconvey[ed]� the Krus notes to the Bank. One whotransfers a security interest in an instrument �vests inthe transferee such rights as the transferor hastherein.� Id. § 3.201(a); UCC § 3-201(b). Plainly,the notes were transferred to the Bank for security,and the Bank obtained whatever rights Raymond andMarie possessed against the Kruses. Id. However,the transfer of the security interest did not createliability on the Krus notes for Raymond and Marie.See id. Their liability was on the $125,000 note theymade in favor of the Bank.

In Osburn v. Smart, the case relied upon by LK & P in which the court imposed liability upon atransferor without his indorsement, there was noevidence of a collateral transfer or any other agree-ment; Osburn involved the �sale� of a note inexchange for real property. Osburn v. Smart, 58S.W.2d 1073, 1074 (Tex.Civ.App.-Fort Worth 1932,writ dism�d). Therefore, Osburn is distinguishablefrom these facts.


57

LACK OF INDORSEMENT PREVENTSLIABILITY

Second, even if there was no agreementotherwise, and L K & P was entitled to Raymond�sand Marie�s indorsements on the Krus notes, there isno summary judgment evidence that it ever requestedthey do so. Tex.Bus. & Com.Code Ann. § 3.201(c);UCC § 3-201. L K & P cites Osburn in support ofits argument that it is entitled to judgment againstRaymond and Marie even in the absence of theirindorsements. Osburn, 58 S.W.2d at 1080 (onrehearing).

As noted, the facts of Osburn are distinguish-able from those before us now. Furthermore, wedecline to follow Osburn and rely instead upon theplain language of the Business and Commerce Codeand the rationale set forth in Estrada v. River OaksBank & Trust Co., 550 S.W.2d 719, 728(Tex.Civ.App.-Houston [14th Dist.] 1977, writ ref�dn.r.e.).

In Estrada, George Lewis obtained a loanfrom River Oaks Bank and pledged four notes, madeby Dr. William Estrada and payable to Lewis, ascollateral. A collateral transfer was executed, butLewis did not indorse any of the Estrada notes.Lewis and Estrada defaulted, and the bank sued themboth.

The bank sued Lewis, both in his capacity asmaker of his note and as indorser of the Estradanotes, but the court entered summary judgmentagainst Lewis only as maker of his note. The courtentered summary judgment against Estrada as themaker of the collaterally transferred notes. OnlyEstrada appealed.

Estrada differs from the case before usbecause the payee/transferor was not involved in thatappeal; however, we agree with the court�s reason-ing in Estrada in its interpretation of section 3.201(c):

River Oaks had the specifically enforceableright to have the unqualified indorsement of Lewis onthe Estrada notes. [citation omitted]. For reasonsunknown to this court, River Oaks had Lewis signonly the collateral assignment.... Neglecting to

acquire the transferor�s indorsement on an instrumentintroduces a needless element of uncertainty intocommercial transactions which should be consum-mated with utmost care. Id.

Because the bank in Estrada failed to obtainLewis� indorsement, the court held that it was anassignee rather than a holder in due course of theEstrada notes. Id. As such, it took the notes subjectto any defenses Estrada had against Lewis. Id.Necessary to the court�s holding was its refusal topresume an indorsement even though the assignee,the bank, had the right to have an indorsement. Seeid.

Applying the Estrada holding to this case, thefailure of the owners of the Krus notes to obtainindorsements from Raymond and Marie on the notesleft L K & P in the position of suing Raymond andMarie on an instrument they did not sign. FollowingEstrada, we will not read in an indorsement wherenone exists. See id.

The code dictates that a person is not liableon an instrument if he or she did not sign it. Tex.Bus.& Com.Code. Ann. § 3.401(a). We must give effectto the plain language of the statute, and the evidenceis undisputed that neither Raymond nor Marie in-dorsed either of the Krus notes. Moreno v. SterlingDrug, Inc., 787 S.W.2d 348, 352 (Tex.1990).

For the foregoing reasons, we hold that thecourt erred in rendering judgment against Raymondand Marie on the Krus notes. Appellants� secondpoint is sustained.

SPOUSAL LIABILITYHaving sustained point two, we briefly

discuss point one-that the court erred in holding thespouses of Marie and Raymond liable on the notesbased on spousal liability. Georgia�s and Keith�sliability hinged upon the liability of Raymond andMarie. See Tex.Fam.Code Ann. § 5.61. Becausewe held that the court erred in rendering summaryjudgment against Raymond and Marie, we must alsohold that the court erred in holding Georgia and Keithliable. Appellants� first point is sustained.


58

APPELLANTS� MOTION FOR SUMMARYJUDGMENT

The signatures of Raymond and Marie do notappear on the instrument being sued upon; we heldabove that the right to have an indorsement is not theequivalent of having an indorsement. Therefore,Raymond and Marie conclusively negated one of theelements to L K & P�s right to recovery-the signatureof the party being sued-and have established theirright to summary judgment. Randall�s Food Markets,Inc. v. Johnson, 891 S.W.2d 640, 644 (Tex.1995);Bean, 884 S.W.2d at 522. The court erred in failingto grant summary judgment in favor of Raymond andMarie. Furthermore, the court erred in failing to

grant the motion for summary judgment as it relatedto Keith and Georgia as the basis for their liability-theliability of their spouses-was conclusively negated.Id.; Tex.Fam.Code Ann. § 5.61. Point eight issustained.

Having sustained points one, two, and eight, we willrender the judgment that the court below should haverendered: L K & P�s motion for summary judgmentis denied; Appellants� motion for summary judgmentis granted. L K & P shall take nothing fromRaymond, Georgia, Marie, or Keith by way of its suit.

Humberto Decorators, Inc. v. Plaza National Bank180 N.J. Super. 170, 434 A. 2d 618

(N.J. Super Ct. App. Div. 1981)

KING, J. A. D.

Defendant appeals from a judgment of$28,205.09 plus prejudgment interest based on a find-ing that it was negligent in paying a cashier�s checkissued from the proceeds of a Small Business Adminis-tration (SBA) guaranteed loan without the endorsementof plaintiff-payee. Defendant alleges that the judge erredin finding that plaintiff had standing to bring this actionas a third-party beneficiary of the loan agreement be-tween defendant and Restaurant Argentino Tango, Inc.(Tango) of which plaintiff was a creditor. Defendantcontends that it was not negligent in paying the checkbecause the check had not been delivered to plaintiffand therefore Tango, as owner of the check, retainedthe right to cancel and did cancel the check when itdeposited the unendorsed document in its account.

In November 1972 plaintiff, a general contract-ing firm, was asked by Tice, Tango�s owner, to reno-vate the restaurant. Plaintiff prepared a contract whichquoted a price of $27,415 and required that the work bepaid for by 50 interest-bearing promissory notes.

After plaintiff completed the work plaintiff�sprincipal, Hernandez, agreed to allow Tice to pay withmoney he would receive from an SBA guaranteed loanfor which he was applying. As a result plaintiff did not

draw any promissory notes. However, plaintiff did pre-pare statement as evidence of Tango�s indebtedness toit which was submitted to defendant bank in conjunc-tion with Tice�s application for the loan.

On July 13, 1973 defendant closed the loan withTango and issued the proceeds thereof in severalcashier�s checks payable to Tango�s creditors, includ-ing plaintiff. Defendant gave plaintiff�s check to Ticeto deliver. Plaintiff asked Tice for the check severaltimes thereafter and also inquired of defendant as towhen the check would be issued. Plaintiff never re-ceived the check. The check was subsequently depos-ited in Tango�s account at defendant bank, which hon-ored the check even though it had not been endorsed.About 1 1/2 years after the check was honored, Tangodeclared bankruptcy.

Defendant bank was properly held liable toplaintiff. When the cashier�s check was honored bythe bank without plaintiff�s endorsement there was acommon law conversion of the proceeds. �Receivingthe funds without a proper endorsement and creditingthe funds to one not entitled thereto constitutes a con-version of the funds.� Salsman v. National Commu-nity Bank of Rutherford, 102 N.J. Super. 482, 492(Law Div. 1968), aff�d 105 N.J. Super. 164 (App. Div.


59

1969). A proper negotiation of the instrument requiredthe payee�s endorsement. �Negotiation takes effect onlywhen the indorsement is made....� N.J.S.A. 12A:3-201(3). �If the instrument is payable to order it is nego-tiated by delivery with any necessary indorsement.�N.J.S.A. 12A:3-201(1).

Under the Uniform Commercial Code an in-strument is converted when it is paid on a forged en-dorsement. N.J.S.A. 12A:3-419(1)(1). Gast v. Ameri-can Gas Co. of Reading, 99 N.J. super. 538 (App.Div. 1968); see Salsman, supra at 492. We perceiveno legal difference between payment of an instrumenton a forged endorsement and payment on no endorse-ment by the payee at all. Although the Code does notspecify that payment without endorsement constitutesa conversion, we are free to so find under the generalprinciples of the common law. Unless displaced by theCode, �the principles of law and equity, including thelaw merchant,� supplement its provisions. N.J.S.A.12A:1-103. For other authorities holding that paymenton a missing endorsement is equivalent to payment upona forged endorsement and therefore a common lawconversion, see Federal Deposit Ins. Corp. v. Ma-rine Nat�l Bank, 431 F.2d 341 (5 Cir. 1970);Berkheimer�s Inc. v. Citizens Valley Bank, 270 Or.807, 529 P.2d 903 (1974); Peoples Nat, Bank v. Ameri-can Fidelity Fire Ins., Md. App., 386 A.2d 1254 (Ct.Sup. App. 1978); see, also, Gillespie v. Riley Man-agement Corp., 59 Ill. 2d 211, 319 N.E. 2d 753 (Sup.Ct. 1974). Nor was Tango�s improper negotiation ofthe check a surrender of the instrument for cancella-tion. Cf. N.J.S.A. 12A:3-6.5(1)(b); In reKirschenbaum, 44 N.J. Super. 391, 398 (App. Div.),certif. den. 25 N.J. 51 (1975).

Further, we reject defendant�s contention thatthe cashier�s check was not delivered to plaintiff. Thereis no doubt that defendant bank had the intention oftransferring title to the check and creating an enforce-able obligation when it surrendered control of the in-strument by giving it to Tice for delivery to the plaintiff.�The matter of intention is vital to delivery.� Manna v.Perozzi, 44 N.J. super. 227, 235 (App. Div. 1957).Supporting this conclusion that Tice was acting as agentof the payee plaintiff and not of defendant bank whenhe accepted the check are the facts that (1) plaintiffagreed to forbear and wait for the proceeds of the SBAloan in lieu of the notes called for under the contractbetween plaintiff and Tango; (2) plaintiff assisted Tangoin its loan application by submitting a statement of in-debtedness to defendant bank, and (3) plaintiff lookedto Tice for delivery of its portion of the loan proceeds.Once the check had been constructively delivered toplaintiff its ownership rights vested and it had standingto sue as payee. Salsman v. National CommunityBank, supra, at 495; see 5B Michie, Banks and Bank-ing, @ 251 at 506 (1973); Anderson�s Uniform Com-mercial Code (2 ed. 1971), @ 3-102:4 at 586-587.

Defendant also contends that the judge erredin determining that plaintiff was entitled to $28,205.09because there was no evidence of a debt in that sumand because plaintiff had received partial payment fromTango. The record adequately supports the finding ofthe trial judge that the face amount of the check repre-sented Tango�s actual indebtedness to plaintiff. Wewill not disturb a finding adequately supported by cred-ible evidence in the record. Rova Farms Resort v.Investors Inc. Co., 65 N.J. 474, 483-484 (1974).

Affirmed.


60

QUESTIONS

1. Any difference in the principal case if the funds were actually received by Humberto?

2. Was there a forged endorsement? What is the effect of a forged endorsement?

3. Same result under revised Article 3?

4. The instrument reads: �Pay to the order of X.� [X is a specific person.] How can the instrument benegotiated so that Y can be a holder?

5. How can the instrument be negotiated so that only Y can be holder?

6. Any difference in Questions 3 and 4 if X is not a specific person?

7. Does the following endorsement compromise negotiability?

Pay to bearer

/s/ X?

What about �pay to Y�?

/s/ X?

8. Which endorsement is safest:

Blank?

Special?

Qualified?

Restrictive?

Anomalous?

9. Is it necessary to be a holder to enforce rights related to an instrument? How does the Revised Articletreat this subject?

10. What if the check in Humberto contained the forged indorsement of Humberto in blank and was pur-chased by an innocent party? Would that person be a holder?


61

Fairfax Bank & Trust Co. v. Crestar Bank442 S.E.2d 651 (Va. 1994)

Stolldorf handed the check to Mark R.Wines, owner of Chantilly Fleet Service. Wines alsoowned Atlantic Towing, Inc., which had an accountwith appellant Fairfax Bank & Trust Company.

On June 15, Wines presented the check fordeposit to Fairfax Bank�s Centreville branch with thefollowing printed, stamped indorsement:

�Pay To The Order OfFairfax Bank & Trust Company

Fairfax, Va. 22030056004979

For Deposit OnlyAtlantic Towing, Inc.

05100542"

Because of the improper indorsement,Fairfax Bank refused the deposit and returned thecheck to Atlantic Towing. Upon Wines�s request,Fairfax Bank then opened a new account in the nameof Chantilly Fleet Service.

On June 15, after Wines had handwritten�CFS� just below Atlantic Towing�s indorsement,Fairfax Bank accepted Crestar�s check for depositinto the Chantilly Fleet Service account. At the sametime, Wines deposited into the account another checkfor $100.00. Wines was allowed to draw a$20,000.00 check on that account the same day.

Fairfax Bank placed the Crestar check intothe federal reserve system. Upon presentment,Crestar paid the check and Fairfax Bank was cred-ited with $20,000.00.

Crestar�s borrower, Stolldorf, failed to makethe first payment due July 30 on the loan. Crestarfiled no collection action against him nor did it attemptto enforce its lien rights under the security agree-ment.

On August 14, 1989, Crestar returned itscheck to Fairfax Bank requesting �proper� indorse-ment of the payee �or refund.� Fairfax Bank then

Payor bank brought suit against depositorycollecting bank seeking recovery on check for, interalia, breach of warranty of good title. The CircuitCourt, Fairfax County, Richard J. Jamborsky, J.,entered judgment in favor of payor bank, and deposi-tory collecting bank appealed. The Supreme Court,Compton, J., held that: (1) indorsement on check that�payee agrees to record a first lien in favor of� payorbank was conditional and restrictive with respect topayee; (2) indorsement was not restrictive withrespect to depository collecting bank since it hadnothing to do with bank collecting process; and (3)even assuming that warranty of good title wasapplicable, depository collecting bank did not breachwarranty. Reversed and final judgment.

COMPTON, Justice.

In this dispute between banks, we deal withthe effect of a check�s indorsement, which is restric-tive as to the payee, upon the warranties a depositarybank makes to a payor bank in the check collectionprocess.

The basic facts are undisputed. In June1989, Robert M. Stolldorf applied to appellee CrestarBank at its Chantilly branch for a loan to purchase aused 1988 Mercedes Benz automobile owned byChantilly Fleet Service, a sole proprietorship. OnJune 15, Stolldorf executed a note and securityagreement for $25,649.28 in which he agreed that theloan was to be secured by the automobile.

On the same day, Crestar issued its cashier�scheck in the amount of $20,000 payable to the orderof �Chantilly Fleet Service,� and handed it to Stolldorffor delivery to the payee. Crestar placed the follow-ing legend on the reverse of the check by stamp, withthe italicized portions completed by hand:

�By endorsing this check, the payee agrees to recorda first lien in favor of Crestar Bank,P.O. Box 179, Alexandria, Virginia 22313Security Agreement Dated 6-15-89In The Amount Of $25,649.28 �


62

had Wines place the following handwritten indorse-ment on the check just below the otherindorsements:�pay to the order Chantilly FleetService Mark R. Wines� Fairfax Bank returned thecheck to Crestar.

Subsequently, Crestar returned the check toFairfax Bank, demanding payment of $20,000.00.When this demand was refused, Crestar filed thisaction by motion for judgment against Fairfax Bankseeking recovery of that amount on the theories ofbreach of warranty, lack of consideration, and �unjustenrichment.� In responsive pleadings, Fairfax Bank,admitting that the legend placed by Crestar on thereverse of the cashier�s check was a �restrictiveindorsement,� denied it was indebted to Crestar.

Following a September 1991 bench trial, thecourt below, in a letter opinion, ruled in favor ofFairfax Bank. In the course of the opinion, the courtfound that Fairfax Bank �eventually obtained thecorrect endorsement from Mark Wines, sole propri-etor of Chantilly Fleet Service,� and that the check�spayee, Chantilly Fleet Service, �received the fundsfrom the check.�

Crestar filed a motion for reconsideration.The trial court granted the motion and, in anotherletter opinion, found in favor of Crestar. The courtruled that Fairfax Bank �failed to comply with therestrictive endorsement, and, thus breached itswarranty of presentment.� The court did not alter itsprevious findings on the correctness of the lastindorsement or on the receipt of the funds by thepayee. We awarded Fairfax Bank this appeal fromthe January 1993 order entering judgment in favor ofCrestar for $20,000.00.

On appeal, Fairfax Bank claims that�Crestar�s loss was not occasioned by anything in thecheck collection process,� but that �Crestar simplymade a bad loan, and rather than attempting to collectfrom its borrower,� it seeks recovery from thedepositary bank. Fairfax Bank argues that when thetrial court ruled there had been a failure to complywith the �restrictive indorsement� resulting in abreach of the warranty of presentation, the courtmisconstrued relevant sections of the Uniform

Commercial Code (U.C.C.).

In view of the trial court�s ruling that FairfaxBank breached its warranty of title because it failedto comply with the �restrictive indorsement,� twoissues arise. First, was the indorsement restrictive asto the depositary bank (Fairfax Bank) requiring thedepositary bank to police a contract between thepayor bank (Crestar) and the payee (Chantilly FleetServices)? Second, did the trial court erroneouslyexpand the warranty of title of the depositary bankbeyond that contemplated by the U.C.C.?

On the first issue, Code § 8.3-205, dealingwith restrictive indorsements, was effective at thetime of this dispute. That section has been replacedby § 8.3A-206. Acts 1992, ch. 693. As pertinent, §8.3-205 provided that an indorsement is restrictive if itis conditional, or �includes the words �for collection,��for deposit,� �pay any bank,� or like terms signifying apurpose of deposit or collection.�

Here, the indorsement stated, �By endorsingthis check, the payee agrees to record a first lien infavor of Crestar Bank.� This indorsement is condi-tional and �restrictive� because it imposes a limitationon the payee. The indorsement, however, is not�restrictive� in the context of the check collectionprocess. Former Code § 8.3-206(1) (now §8.3A-206) provided: �No restrictive indorsementprevents further transfer or negotiation of the instru-ment.�

As related to the check collection process,the indorsement is merely a contract between Crestarand Chantilly Fleet Services, see United VirginiaBank v. Dick Herriman Ford, Inc., 215 Va. 373, 375,210 S.E.2d 158, 160 (1974), to which Fairfax Bankwas not a party. In effect, Crestar said to the payee,�If you want your money, you must record a first lienin our favor.� The payee ultimately indorsed thecheck. There was an offer (the legend on the backof the check), acceptance of the offer (indorsement),and consideration (lien in favor of Crestar and moneyto the payee). See Oroweat Employees Credit Unionv. Stroupe, 48 N.C.App. 338, 269 S.E.2d 211, 214-15(1980); 5 Ronald A. Anderson, Uniform CommercialCode § 3-205.5 (1984).


63

The terms of Crestar�s legend, �the payeeagrees to record a first lien,� are not similar to the §8.3-205 terms �for collection,� �for deposit,� �pay anybank,� or �like� terms relating to the function that adepositary bank performs in the check collectionprocess. In other words, the indorsement contains nolanguage relating to the purpose of deposit or collec-tion so as to impose a duty on the depositary bankunder the U.C.C.; **654 the contract was whollyindependent of the collection process. In essence,the trial court erroneously placed a burden on thedepositary bank to assure that the payee compliedwith the payor bank�s contract.

On the second issue, because of the trialcourt�s error with regard to the first issue, it neces-sarily follows that the court erroneously expandedFairfax Bank�s warranty of title beyond that contem-plated by former Code § 8.4- 207. That section wasrepealed effective January 1, 1993; present Code §8.4-207.1 corresponds with it. As pertinent, theformer section provided that a collecting bank(Fairfax Bank) obtaining payment of an item war-rants to the payor bank (Crestar), which pays in goodfaith, that the collecting bank �has a good title to theitem or is authorized to obtain payment ... on behalfof one who has a good title.� § 8.4-207(1)(a).

Fairfax Bank, although contending that the §8.4-207 warranty is inapplicable because no forgedor invalid indorsement is involved here, argues thateven if the section applies to these facts there hasbeen no breach of warranty. We agree.

The term �good title,� within the meaning of§ 8.4-207(1)(a), is not analogous to the concept of

title in property law. Instead, the term �means onlythat a collecting bank is warranting that it is present-ing a check whose indorsements appear to be genu-ine.� North Carolina Nat�l Bank v. Hammond, 298N.C. 703, 260 S.E.2d 617, 623 (1979). The termcarries �a specialized construction limiting good titleto the apparent validity of the chain of indorsements.�Id. In other words, the warranty of �good title� is ��nothing more than an assurance that no one hasbetter title to the check than the warrantor, andtherefore, that no one is in a position to claim title asagainst the warrantee, as the payee or other owner ofa genuine check could do if his endorsement wereforged.� � Perini Corp. v. First Nat�l Bank, 553 F.2d398, 415 (5th Cir.1977) (quoting Aetna Life andCasualty Co. v. Hampton State Bank, 497 S.W.2d 80,84 (Tex.Civ.App.1973)).

Thus, assuming the warranty of good title isapplicable here, an issue we do not decide, no party inthis case could claim a better title than Fairfax Bank.Chantilly Fleet Services could not; it actually re-ceived the funds, according to the trial court�s findingof fact. And, there is no claim that Wines�s signatureas sole proprietor of Chantilly Fleet Service wasforged. Accordingly, Crestar did not suffer any lossrelated to the indorsement of its check (even assum-ing, as Crestar argues, that the last indorsement wassomehow defective) because Chantilly Fleet Servicescould not make a claim against either Crestar orFairfax Bank.

Consequently, the judgment in favor ofCrestar will be reversed and final judgment will beentered here in favor of Fairfax Bank dismissingCrestar�s action. Reversed and final judgment.

1. IN DUE COURSESection 3-302; 3-307

Like a fine wine, the concept of the holder in due course must be savored to be appreciated. Conceptu-ally, it represents a radical departure from traditional norms embodied in the statement: Nemo dat quod nonhabet. Here we have someone receive and exercise rights which his or her transferor did not possess.

It is from this lofty pinnacle that the full implications of negotiability can be glimpsed. 3-a/


64

Who is worthy of such an honor? He (or she) who takes the appropriate paper in the appropriatemanner. 3-b/

Codified in Part 3 of UCC Article 3, the requirements of holder in due course status represent a curiousamalgam of common law, statute, and case law interpretation.

2. VALUESection 3-302(1)(a); 3-303

Saka v. Mann Theaters94 Nev. 137, 575 P.2d 1335, 24 U.C.C. Rep. Serv.

(Callaghan) 174 (Nev. 1978)

tified that Saka offered to even make periodic paymentson the check. The check was never made good andrespondent initiated suit.

The central question is whether the trial courtproperly found appellant liable on the check.

Saka contends that he is not liable for two rea-sons. First, he argues respondent was not a holder indue course, and, second, appellant did not receive anyconsideration from respondent upon which to base in-dividual liability. He claims that Mann Theatres wasnot a holder in due course because it did not take theinstrument �for value� as required by NRS 104.3302.His argument is that because the check was tenderedand accepted for the second week�s showing of thefilm, Mann Theatres merely gave an executory prom-ise to give value. Korzenik v. Supreme Radio, Inc.,197 N.E.2d 702 (Mass. 1964). The underling policyreason is that when a transferee becomes aware of adefense, he need not enforce the instrument but mayelect to rescind the transaction based upon the breach.Korzenik, supra. Nevertheless, one is considered aholder in due course to the extent he has performedsuch �executory promise.� Coventry Care, Inc. v.United States, 366 F.Supp. 497 (W.D.Pa. 1973). Here,testimony indicated that respondent had already begunperformance when notified that the check did not clear.For this reason alone, respondent qualified as a holderin due course. This determination is dispositive of theappeal, and we find it unnecessary to discuss the issueof want of consideration.

The judgement of the lower court is affirmed.

By the Court, MANOUKIAN, J.

An agreement was reached by respondent andAffinity Pictures whereby respondent was to rent oneof its theaters to Affinity to exhibit a film for two weeks.Appellant was one of the producers of the film. Therental fee was $10,884 or $5,442 for each seven dayperiod. Appellant Saka tendered to Boulevard The-atre, the theater within the Mann Theatre chain whichwas rented, two checks each for $5,442. One checkwas honored, but the second check did not clear. Re-spondent sued for the amount of the dishonored checkand prevailed in the district court. The material factsinvolving the tendered check were sharply disputed andthe trial judge chose to believe respondent�s version ofthe case.

Testimony was proffered that in June of 1974,Saka had contacted a Mark Rosen of Mann Theatresregarding the rental of Boulevard Theatre. One monthlater in July, Rosen met with several parties in Los An-geles and was given two checks drawn by Saka. Ap-pellant contends that he wrote the two checks at therequest of an officer of Affinity Pictures who statedthat the money was needed to cover the rental fees forthe theater.

Rosen testified that he contacted Saka duringthe first week of the film exhibition concerning the re-turned check and that Saka stated that a temporaryhold had been placed on the account which would belifted in a matter of days. Rosen, following assurancesby Saka that the check would be later honored, permit-ted the film to be shown the second week. Rosen tes-


65

QUESTIONS

1. Why were there two checks? Were there units of performance?

2. Was there consideration sufficient to support a contract in the principal case?

3. Would delivery of the checks after the two week period have impacted the result?

4. In light of the rule that an executory promise does not constitute value, how can transferring anegotiable instrument be value? Until honored, isn�t a negotiable instrument merely an executory promise?

5. Payee deposited check in Depositary Bank which permitted withdrawal of full amount the nextday and Payee withdrew the funds. In the meantime, however, drawer, stopped payment and Depositary Bankdemanded reimbursement from Payee. Not having received the funds from the insolvent payee, DepositaryBank brought an action on the check against the Drawer. Drawer filed a general demurrer and asserted that theBank was not a holder in due course.

6. Most banks deal in fluid accounts rather than the static situation indicated above. In this typicalaccount, when does the bank have a security interest as to the $1,000 item deposited on 1/10?

DATE TRANSACTION

1/10 opening balance: $5001/10 +1,0001/11 - 3001/12 - 4001/13 - 2001/14 + 3001/15 - 2001/16 - 200

3. IN GOOD FAITH & WITHOUT NOTICESection 3-302(2)(ii),(iii)

Hartford National Bank & Trust Co. v. Credenza119 Conn. 368, 177 A. 132 (1935)

BANKS, Justice

This is an action by the payee of a promissorynote for $5,000, dated February 3, 1931, and payablefour months after date, against the maker, Credenza,and an indorser before delivery, Champ. The trial courtrendered judgment against both defendants, and the de-fendant Credenza alone appealed. The defense of theappellant is that his execution of the note, which hesigned for the accommodation of the indorser, Champ,

was procured by the misrepresentations of the latter,and that the plaintiff did not take the paper in good faithand without notice of its infirmities, and was not, there-fore, a holder in due course.

The following facts appear from the finding,which is not subject to any material corrections. OnFebruary 3, 1931, the defendant Champ, who was thena depositor in the plaintiff bank, sought from it a loan of$5,000, and was given a blank form of note upon which


66

an officer of the bank wrote in the date, maturity date,name of the payee, and the amount of the note.Champ�s wife took this paper to Credenza, who wasChamp�s stepfather and an illiterate Italian sixty yearsof age and in ill health, told him that she and her hus-band wanted to get a little money from the bank, thatthe paper was a note which her husband had sent overfor him to sign, and that an officer of the bank wouldalso sign it. Credenza, who was unable to read or write,affixed his mark to the note relying upon these repre-sentations, and Mrs. Champ signed her name as a wit-ness to the mark. On March 9, 1931, Champ, havingindorsed the note, presented it at the bank which dis-counted it, crediting his account with the amount of thenote less discount fees. Prior to the maturity date ofthe note Champ checked out the entire amount of thebalance so credited to his account. At the time the notewas discounted an officer of the bank learned uponinquiry that one Louis Credenza owned real estate inHartford, but was not personally familiar with the sig-nature of Mrs. Champ or Credenza, and no officer ofthe bank made any attempt, prior to discounting the note,to verify such signatures other than through the defen-dant Champ. At the time the note was discounted, thechecking account of Champ at the bank was overdrawnin the sum of $1,521.29. Credenza signed the note with-out asking to have it read to him on the erroneous as-sumption that it was a note for a few hundred dollarsonly. Some time after signing the note he learned fromChamp that the bank had loaned the latter $5,000, andconsulted an attorney who, on or about the date of thematurity of the note, informed an officer of the bankthat Credenza claimed that he did not know that he hadsigned a note for so large an amount. The bank had noknowledge of this claim prior to that date. The notewas not paid upon maturity, and notice was duly mailedto both defendants. It is not claimed that the plaintiff,as payee of the note, could not be a holder in due course,or that it is not a holder for value.

The court having found that the appellant wasinduced to sign the note by false representations, theplaintiff conceded that there was an infirmity in the in-strument which cast upon it the burden of showing thatit acquired title to it as a holder in due course. GeneralStatutes, §4376. To prove this it must show that whenit took the note it had no notice of such infirmity. Gen-eral Statutes, § 4369. To constitute such notice the

plaintiff must have had actual knowledge of the infir-mity, or knowledge of such facts that its action in takingthe note amounted to bad faith. General Statutes, §4373. It is not claimed that the plaintiff had actual knowl-edge of the infirmities in the note, but appellant doescontend that it was chargeable with knowledge of suchfacts that its action is discounting the note amounted tobad faith. The contention that the plaintiff was charge-able with such knowledge is based upon the propositionthat the facts detailed in the finding imposed upon theplaintiff an active duty to make inquiry as to the cir-cumstances of the execution of the note by the appel-lant, which inquiry, if made, would have disclosed theinfirmity in the note.

The doctrine of notice as it affects the goodfaith of transactions generally does not apply to nego-tiable instruments. No duty rests upon the purchaser tomake inquiry as to the purpose for which the paperwas given, the responsibility of the maker or indorser,or the existence of possible defenses. Suspiciouscircumstances sufficient to put a prudent man on in-quiry and negligent failure to make such inquiry will notnecessarily bar a recovery by the holder. The test isnot whether the plaintiff was negligent in acquiring thepaper, but whether he acted in good faith. It is not thefailure to inquire but the dishonest purpose which es-tablishes bad faith. Mack v. Starr, 78 Conn. 184, 186,G1 A. 472; Rockville National Bank v. Citizens� GasLight Co., 72 Conn. 576, 45 A. 361; Standard CementCo. v. Windham National Bank, 71 Conn. 668, 685,42 A. 1006; City National Bank of Auburn v. Mason,192 Iowa 1048, 186 N. W. 30; Moore v. Potomac Sav-ings Bank, 160 Va. 597, 607, 169 S.E. 922, 91 A. L. R.1133; Brannon�s Negotiable Instruments Law (5thEd.) p. 572; 2 Joyce, Defenses to Commercial Paper(2d Ed.) §694; 3 R. C. L. 1071-1075.

The facts known to the plaintiff at the time itdiscounted this note were not such as to impose upon itthe duty to make inquiry as to the circumstances underwhich the appellant executed the note. That the notewas presented for discount a month after its date, by adepositor of the bank whose account was overdrawn,and that the officer of the bank was not familiar withthe signature of Mrs. Champ as witness to the appellant�smark, would not justify, much less require, a conclusionthat the act of the plaintiff in discounting the note with-


67

out further inquiry amounted to bad faith. The mostthat the appellant could claim, in any event, would bethat whether the action of the plaintiff in discountingthe note amounted, under the circumstances, to bad faithwas a question of fact for the trier. Williams & Co.,Inc. v. Wiltz, 106 Conn. 147, 137 A. 759. The trialcourt has found that the plaintiff acted in good faith,and the subordinate facts fully support the finding.

There is no error. In this opinion, the otherJudges concurred.

QUESTIONS

1. Are there any suspicious circumstances of which the bank should have been aware? Do theseconstitute bad faith?

2. Is the test of good faith objective or subjective? Which is more rigorous? What is the signifi-cance of the standard of good faith under the proposed revision? Reflect on the following statement from FirstNational Bank v. Anderson, 5 Bucks Co. L. Rep. 287, 7 Pa. D. & C.2d 661, 1 U.C.C. Rep. Serv. 238 (Ct.Comm. Pleas, Bucks Cty, Pa. 1956):

Although these cases are decided under the Uniform Negotiable Instruments Act, we find noprovision in the Commercial Code making any change in the good faith concept. True, section 1-201defines good faith as being honesty in fact and under section 3-302 good faith includes the observance byreasonable commercial standards of any business in which the holder may be engaged. No evidencewas presented, however, indicating that the failure to make inquiry of the payee or the maker of the noteas to the satisfactory completion of the contract was in any sense a divergence from common banking orcommercial practice. On the contrary, if a holder of an instrument were required to investigate in eachinstance whether the contract had been completed satisfactorily before accepting it, the burden placedon the free flow of negotiable paper would be almost insurmountable.

Virginia v. Ruth Wills1995 WL 1055979 (Cir. Va. 1995)

As you know this case is before the court onthe defendant�s motion that the case be dismissed assettled. The issue concerns whether defendant�scheck in the amount of $7,000.00 cashed by plaintiffwith the notation, �Negotiation of this check shall bein full/final settlement of all claims,� on the reverseside in the area reserved for endorsements, is anaccord and satisfaction.

Melvin R. Hughes, Jr., Judge.

Plaintiff, Commonwealth of Virginia ex relMedical College of Virginia Hospitals, etc. (MCV)instituted this case by filing a motion for judgment onSeptember 23, 1992. The claim is asserted againstRuth Wills (Wills) defendant, a widow, for medicalservices rendered to her and her deceased husbandwho died while a patient at MCV. The amountclaimed to be due in the motion for judgment is$17,862.33, comprising charges from 1988 to 1992.


68

The parties had various contacts and negotia-tions on the case up to July, 1994 when the check inquestion was sent by defense counsel to plaintiff�scounsel along with a draft order dismissing the case.While the check was cashed plaintiff�s counselrefused to endorse the tendered dismissal order. [Thecheck was cashed before counsel knew of its exist-ence and before she received the draft order fordismissal.]

Counsel had previously negotiated an exten-sion of time to file a grounds of defense, discussedthe sale of certain real property in the decedent�sestate so that the sale proceeds could be used to paya portion of the amount claimed in the lawsuit andagreed that defendant would apply for indigent statusto reduce the charges. There were also discussionsover whether Wills was responsible for all thecharges.

In July, 1993, after the real property had beensold, Wills offered to settle the matter with thepayment of $7,000.00. According to MCV this offerwas rejected. A year later, July, 1994, defendanttendered the $7,000.00 check with the draft order fordismissal. Defense counsel says he sent the checkthen because his attempts to discuss matters furtherwith plaintiff�s counsel by telephone were unsuccess-ful. He states he made calls repeatedly to counsel butdid not get any return.

Issues of accord and satisfaction by use of anegotiable instrument are determined bysec.8.3A-311, under Title 3A of the Uniform Com-mercial Code, governing negotiable instruments. Thissection provides that an accord and satisfaction byuse of a negotiable instrument can be shown if thedebtor proves,

(1) the instrument was tendered in good faith as fullsatisfaction of the claim.

(2) the amount of the claim was subject to a bonafide dispute.

(3) the claimant obtained payment of the instrument.

In its pertinent parts sec. 8.3A-311 provides:

Section 8.3A-311. Accord and satisfaction by useof instrument. -- (a) If a person against whom aclaim is asserted proves that (i) that person in goodfaith tendered an instrument to the claimant as fullsatisfaction of the claim, (ii) the amount of theclaim was unliquidated or subject to a bona fidedispute, and (iii) the claimant obtained payment ofthe instrument, the following subsections apply.

(b) Unless subsection (c) applies, the claim isdischarged if the person against whom the claim isasserted proves that the instrument or an accompa-nying written communication contained a conspicu-ous statement to the effect that the instrument wastendered as full satisfaction of the claim.

(c) Subject to subsection (d), a claim is not dis-charged under subsection (b) if either of thefollowing applies:

(1) The claimant, if an organization, proves that (i)within a reasonable time before the tender, theclaimant sent a conspicuous statement to theperson against whom the claim is asserted thatcommunications concerning disputed debts, includ-ing an instrument tendered as full satisfaction of adebt, are to be sent to a designated person, office,or place, and (ii) the instrument or accompanyingcommunication was not received by that designatedperson, office, or place . . .

(2) . . .

(d) A claim is discharged if the person againstwhom the claim is asserted proves that within areasonable time before collection of the instrumentwas initiated, the claimant, or an agent of theclaimant having direct responsibility with respect tothe disputed obligation, knew that the instrumentwas tendered in full satisfaction of the claim. (1992,c. 693).

Section 8.3A-311 is new in Virginia as of1993. Before the section became effective Virginiafollowed the majority view regarding accord andsatisfaction under the Uniform Commercial Code.Before passage of � 8.3 A-311 the UCC had �noeffect on the doctrine of accord and satisfaction,


69

which requires the replacement of the old agreementwith a new contract of compromise (citations omit-ted)�. John Grier Const. Co. v. Jones Welding &Repair, Inc., 238 Va. 270, 274 (1989).

With the passage of sec. 8.3A-311 if a debtorcan show the three elements noted above, the claimis discharged if the person against whom the claim isasserted proves that the instrument or an accompany-ing written communication contained a writtencommunication contained a conspicuous statement tothe effect that the instrument was tendered in fullsatisfaction of the claim, according to the (b) part ofsec. 8.3A-311. Debtors no longer have to show anagreement between the parties as required by JohnGrier. Now the negotiation of an instrument with a�conspicuous statement� is sufficient to discharge thedebt unless subsection (c) applies. There is no doubtthat the writing on this check was a conspicuousstatement.

The third of the predicates for discharge isnot in controversy. MCV did obtain payment of theinstrument. The first requirement, �good faith�, isdefined under the UCC as not only honesty in fact,but the observance of reasonable commercial stan-dards of fair dealing. See sec. 8.01-103(a)(4). Thecourt is not ready to conclude that Wills has satisfiedthis element due to the length of time that elapsedsince the parties� last negotiations (one year) and

because there is a question between them overwhether the $7,000.00 offer made a year earlier wasrejected. If the offer was rejected it may not beappropriate to send a check for that amount hopingthat it would be cashed through inadvertence so Willscould claim discharge. Further it is not clear fromcounsel�s representations whether up to the parties�last contact before the check came a year later,issues over what portion of the bill Wills was respon-sible for had been resolved. Thus, there is no evi-dence to support a finding of the second listedpredicate as well, that the amount was subject to abona fide dispute. (Wills had suggested that some ofthe charges may not have been incurred during themarriage.)

Failing to prove two of the three requisitepoints there is no accord and satisfaction in favor ofWills. Otherwise, Wills has not shown that thepayment was in full satisfaction for the debt as�expressly accepted� by the creditor pursuant to Va.Code sec. 11-12. Atkins v. Boatwright, 204 Va. 450,451 (1963).

For the foregoing reasons, the court rejectsWills� contention of an accord and satisfaction in thiscase. There is no proof that the check was offered ingood faith and that there was a bona fide dispute.Ms. Harris-Lipford should provide a suitable sketchfor order which notes defendant�s exceptions.

QUESTIONS

1. Did the cases treated in the previous section address the issue of good faith or notice of claim or de-fense? What is the difference?

2. What is the effect of conducting a credit check? In Alfred Williams & Co. v. Wiltz, 137 A. 759 (Conn.1927), the purchaser of several lots of trade acceptances obtained them at substantial discounts of up to 50 percent. The particular lot in question had a $4,000 face value and was purchased for $2,679.26. At the time ofpurchase, the purchaser received a positive credit report on the party obligated.

Is there a basis to argue that the purchaser was not a holder in due course?

3. Is there value given where its performance is defective?


70

American State Bank of Pierre v.Northwest South Dakota Production Credit Association

404 N.W.2d 517 (S.D. S.Ct. 1987)

ment with Hunt, it refused Fort Pierre�s demand, choos-ing instead to assert holder in due course (hereafterHDC) status. Fort Pierre sued to recover the amountof check 19074.

The trial court declared check 19074 invalid: it lackedconsideration because check 19331 replaced it. None-theless, since PCA held the check as an HDC, the courtruled it was not subject to the defense of lack of con-sideration; PCA�s telephone call to Fort Pierre was�commercially reasonable,� nullifying PCA�s notice thecheck was overdue.

To be an HDC under SDCL 57A-3-302, a party musttake the instrument for value, in good faith, and withoutnotice that it is overdue, or dishonored, or of any de-fense against or claim to it by any person. WesternBank v. RaDEC Constr. Co., 382 N.W.2d 406 (S.D.1986). The fact that PCA was a payee does not dis-qualify it as an HDC. SDCL 57A-3-302(2). If a partyfails to qualify as an HDC, then under SDCL 57A-3-306 he takes the instrument subject to:(a) All valid claims to it on the part of any person; and(b) All defenses of any party which would be availablein an action on a simple contract; and(c) The defenses of want or failure of consideration,nonperformance of any condition precedent, nondeliv-ery, or delivery for a special purpose (@ 57A-3-408). .. .

The holder of an instrument has the burden ofproving that he is an HDC when defenses or claimsare shown. SDCL 57A-3-307. PCA took check 19074for value and in good faith, but knew it was a year old;therefore, the only issue is whether PCA had noticecheck 19074 was overdue. Under SDCL 57A-3-304(3):

The purchaser has notice that an instrument isoverdue if he has reason to know

(a) . . .(b) . . .(c) That he is taking a demand instrument after de-mand has been made or more than a reasonable lengthof time after its issue. A reasonable time for a check

OPINION: KONENKAMP, Circuit Judge.

This is an appeal from a judgment declaring NorthwestSouth Dakota Production Credit Association (PCA) aholder in due course of a check issued by Fort PierreLivestock Auction, Inc. (Fort Pierre). We reverse.

On October 25, 1983, in payment for cattle sold at auc-tion, Fort Pierre issued check number 19074 for$31,730.23 to its customer, Gene Hunt, naming as addi-tional payees Cheyenne River Sioux Tribe SuperiorCourt and PCA. Later Fort Pierre discovered it hadmiscounted the cattle and so it issued check 19331 datedOctober 31, 1983, for $36,343.95 to Hunt and the otherpayees. This check was meant to replace check 19074,but no notation to that effect was written on it. FortPierre did not ask Hunt to return check 19074, but at-tempted to issue a stop payment order. Its bank has norecord of such order.

Neither check emerged for a year. Then on October26, 1984, a PCA representative met with Hunt to ar-range repayment of a huge delinquent loan. At thismeeting Hunt agreed, among other things, to give PCAchecks 19074 and 19331 in exchange for the forgive-ness of his remaining debt. PCA did not know one checkreplaced the other or that Fort Pierre attempted to stoppayment on check 19074.

After obtaining the checks, PCA�s agent telephoned FortPierre�s manager and told him �a couple of old [Hunt]checks were going to be deposited.� The manager, inturn, called Fort Pierre�s bank (American State Bank)and warned it to not accept the checks without full en-dorsements. The bank dutifully refused to accept onecheck because it had stamped, not handwritten, endorse-ments, but eventually, with the proper endorsements,both checks cleared through Fort Pierre�s account.

Upon discovering in January 1985 that its bank haddebited its account for both checks, Fort Pierre informedPCA that one check was meant to replace the otherand demanded repayment for check 19074. AlthoughPCA still had an opportunity to renegotiate its agree-


71

drawn and payable within the states and territories ofthe United States and District of Columbia is presumedto be thirty days. (Emphasis added.)

This presumption is rebuttable (SDCL 57A-1-201-(31))and we can envision instances where a delay of morethan thirty days may be legitimate in the ordinary courseof commerce,1 but PCA offered no justification for ayear�s delay. At the trial, PCA�s representative testi-fied he obtained the year-old check when Hunt simplypulled it out of his briefcase and handed it to him.

PCA concedes that it knew the check was ayear old, but argues its telephone call to Fort Pierrewarning of its imminent deposit of old Hunt checks alongwith Fort Pierre�s apparent acquiescence overcomesthe presumed notice that check 19074 was overdue.Can notice cease to be effective once it occurs? TheUCC drafters expressly avoided this question. UCC 1-201, Official Comment 25. Since the UCC does notdetermine the time and duration under which noticeceases to be effective, the matter is left for the courtsto resolve. SDCL 57A-1-103; Farmers Elev. Co. ofElk Point v. Lyle, 90 S.D. 86, 238 N.W.2d 290 (1976).

When a holder has no notice of a defect in aninstrument at the time it comes into his hands, laterevents will not alter his HDC status. SDCL 57A-3-304(6); McCook County Nat�l Bank v. Compton, 558F.2d 871 (8th Cir. 1977), cert. denied 434 U.S. 905(1977). If knowledge acquired after the taking of aninstrument is immaterial, then logically, a holder withnotice that an instrument is overdue at the time it is

taken should not be able to undo that notice except inthe most extraordinarycircumstances. Cf. Graham v.White-Phillips Co., 296 U.S. 27, 56 S.Ct. 21, 80 L.Ed.20 (1935); First Nat�l Bank of Odessa v. Fazzari,223 N.Y.S.2d 483 (1961) (forgotten notice). WhenPCA�s agent called Fort Pierre he made no mention ofthe check numbers, their amounts or dates, and FortPierre�s manager made no comment which would leadthe agent to believe the checks were not overdue, butonly acknowledged the agent�s intention to deposit them.

PCA�s warning to Fort Pierre that it was aboutto deposit Hunt�s �old checks� was insufficient to ne-gate what was plainly visible on the check�s face: ayear-old date.2 Since it had notice that check 19074was overdue PCA was not a holder in due course. Thetrial court�s finding to the contrary was clearly errone-ous.

Reversed.

All the justices concur.

1 A bank may honor a customer�s check more than sixmonths old if it acts in good faith. SDCL 57A-4-404.

2 �Doubtless the message on the face of an instrumentthat most often deprives the holder of holder in duecourse status is that the instrument is overdue.� Whiteand Summers, Uniform Commercial Code 565 (2d ed.1980).

QUESTION

Bank purchased notes for value and brought an action against defaulting Maker who established that thedebt on which they are based, arising from a negligence judgment, has been paid in full to the payee. The payee,the attorney representing the injured party in the negligence action, is named on the notes as trustee (as in �pay tothe order of X as attorney for y�). The attorney negotiated the notes to Bank to pay off outstanding personaldebts. Maker moves for summary judgment. What result? /3-d


72

B. DEFENSESSection 3-305; 3-306

Assuming that one has established holder in due course status, what good is it? What defenses may becut off?

1. FRAUD

What, after all, is fraud? Does it require intent? Does it depend on the context?

Moore v. Southern Discount Company107 Ga. App. 868, 132 S.E. 2d 101 (Ct. App. 1963)

�Fraud as a defense against holder of negotiable instru-ments is divided into two types: fraud in the inception,or factum, which is a defense against a holder in duecourse; and fraud in the inducement, or procurement,which is not available against a holder in due course.The courts generally have limited fraud as a defenseagainst holders in due course to the situation where aperson reasonably, and without negligence, affixes hissignature or mark to an instrument not knowing or in-tending to create a negotiable instrument . . .� The lat-ter situation does not obtain here because the defen-dant testified he intended to sign a $250 promissory note.

Although the rule was criticized in no uncer-tain terms and said to be in need of legislative changeshortly after its first judicial pronouncement, Bealle v.Southern Bank, 57 Ga. 274, supra, it remains today,and we are bound by it. Apparently (though we makeno ruling now on the matter), the rule would bekept in force by the Uniform Commercial Code. CodeAnn. @ 109A-3 - 305(2). But, compare Ga. L. 1962,p. 429 with Ga. L. 1963, p. 206. No attempt wasmade to show fraud in the procurement of the note bythe plaintiff here, and therefore a verdict was properlydirected for it as no other defense was presented.

Eberhardt, Judge.

This is a suit on a note executed in favor ofGeorgia Termite & Pest Control, Inc., which note wassubsequently transferred to plaintiff. Plaintiff is admit-tedly a holder in due course. In addition to a generaldenial, the defendant filed a plea of �fraud in the pro-curement� in that the defendant read over a note for$250 presented to him by the agent of the Pest ControlCompany, that as he prepared to sign the note the agentinquired about the style of the defendant�s furniture andknocked over a lamp to distract the defendant, and,when the defendant reached to catch the lamp, the agentsubstituted a note for $433.92, which the defendantsigned without reading further. Proof of this defensewas offered and the jury found for the defendant.Plaintiff�s motion for judgment n.o.v. was granted andthe exception is to that judgment.

3. The main question in the case is whether ornot the defense of fraud in the procurement or induce-ment is an available defense against a holder in duecourse. The late Professor E. Byron Hilley aptly pre-sented the status of the law in the following from 3EGL 315, Bills & Notes, @ 46 (footnotes omitted):

Burchett v. Allied Concord Financial Corp.74 N.M. 575, 396 P. 2d 186 (1964)

Carmody, J.Plaintiffs-appellees filed separate complaints to

have certain notes and mortgages held by defendant-appellant cancelled and declared void. The cases wereconsolidated below and on this appeal, which is fromthe judgments voiding the instruments.

The facts, except for one small detail, are thesame. It seems that a man named Kelly representedhimself as selling Kaiser aluminum siding for a firmnamed Consolidated Products of Roswell. None of theparties knew Kelly, nor had they seen him before. Ineach case, Kelly talked to the husband and wife


73

(appellees) at their homes, offering to install aluminumsiding on each of their houses for a certain price inexchange for the appellees� allowing their houses to beused for advertising purposes as a �show house,� in or-der to further other sales of aluminum siding. Kelly toldboth of the families that they would receive a $100 crediton each aluminum siding contract sold in a specifiedarea in Clovis, and that this credit would be applied to-ward the contract debt, being the cost of the installationof the siding on the appellees� houses. The appelleeswere assured, or at least understood, that by this methodthey would receive the improvements for nothing. Fol-lowing the explanation by Kelly, both families agreed tothe offer and were given a form of a printed contract toread. While they were reading the contract, Kelly wasfilling out blanks in other forms. After the appellees hadread form of the contract submitted to them, they signed,without reading, the form or forms filled out by Kelly,assuming them to be the same as that which they hadread and further assuming that what they signed pro-vided for the credits which Kelly assured them theywould receive. Needless to say, what appellees signedwere notes and mortgages on the properties to coverthe cost of the aluminum siding, and contracts contain-ing no mention of credits for advertising or other sales.

One additional fact occurred in the case of theappellees Beevers. A few days after the original sign-ing, Kelly again approached Mr. Beevers at his homeand told him that the television and newspaper authori-zation that he had previously executed had been de-stroyed and he needed another one. Mr. Beevers, againwithout reading what was submitted, signed the addi-tional form. Kelly then went to Mrs. Beevers� place ofemployment and she also signed the same without anyexamination, in view of Kelly�s representations and herobservation that her husband had already signed theform. The instrument was the promissory note.

Within a matter of days after the contracts weresigned, the aluminum siding was installed, although inneither case was the job completed to the satisfactionof appellees. Sometime later, the appellees receivedletters from appellant, informing them that appellant hadpurchased the notes and mortgages which had beenissued in favor of Consolidated Products and thatappellees were delinquent in their first payment. Uponthe receipt of these notices, appellees discovered that

mortgages had been recorded against their property andthey immediately instituted these proceedings.

Suit was actually brought not only against theappellant but also against James T. Pirtle, doing busi-ness under the name of Consolidated Products, ShirleyMcVay, a notary public in Roswell, and Kelly. No ser-vice was obtained upon Kelly, and the other parties tothe proceedings below did not appeal because the judg-ment merely voided the notes and mortgages. In bothcases, the trial court found that the notes and mort-gages, although signed by the appellees, were fraudu-lently procured. The court also found that the appellantpaid a valuable consideration for the notes and mort-gages, although at a discount, and concluded as a mat-ter of law that the appellant was a holder in due course.The findings in both of the cases are substantially thesame, with the exception that the court found in theBurchett case that the Burchetts were not guilty ofnegligence in failing to discover the true character ofthe instruments signed by them. There is no compa-rable finding in the Beevers case.

�

The trial court�s decisions are grounded upontwo propositions, (1) that the acknowledgments on themortgages were nullities and therefore that the mort-gages were not subject to record, and (2) that fraud intheir inception rendered the notes and mortgages voidfor all purposes.. . .

We observe that the inclusion of subsection(2)(c) in s 3-305 of the Uniform Commercial Code wasan attempt to codify or make definite the rulings of manyjurisdictions on the question as to the liability to a holderin due course of a party who either had knowledge, ora reasonable opportunity to obtain the knowledge, ofthe essential terms of the instrument, before signing.Many courts were in the past called upon to determinethis question under the Uniform Negotiable InstrumentsLaw. Almost all of the courts that were called upon torule on this question required a showing of freedomfrom negligence, in order to constitute a good defenseagainst a bona fide holder of negotiable paper.

One of the clearest statements of the rule un-der the Negotiable Instruments Law, which has received


74

widespread approval, appears in United States v.Castillo (D.N.M.1954), 120 F.Supp. 522, as follows:

�Although a holder in due course holds an in-strument such as the instant one free from any defectof title, and free from defenses available to prior par-ties among themselves insofar as a voidable instrumentis concerned, where fraud in the inception is present,such as here, such fraud makes the instrument an ab-solute nullity and not merely voidable. However, to com-pletely invalidate the enforceability of a negotiable prom-issory note the fraud perpetrated must be such as toinduce the maker of the note to execute the same un-der the mistaken belief that the instrument being signedis something other than a promissory note and mustcome about as a direct result of misrepresentation onthe part of the payee or his agent. Naturally, the makercannot be guilty of negligence in signing a written in-strument and then defend upon the ground of lack ofknowledge where in the exercise of reasonable pru-dence the attempted fraud could be discovered; and,generally it is no defense to the enforcement of an ob-ligation like the instant one to insist that a fraud hasbeen wrought where the maker does not take the careto read the instrument being signed, inasmuch as suchan omission generally constitutes negligence. If suchwere not the general rule, where a person is of averageintelligence and is qualified to read, then every nego-tiable instrument would be clouded with the possibledefense that the maker did not read the instrument priorto signing it. However, the failure to read an instrumentis not negligence per se but must be considered in lightof all surrounding facts and circumstances with par-ticular emphasis on the maker�s intelligence and literacy.�

We recognize that, in Castillo, the UnitedStates District Court for New Mexico found the instru-ment to be void, and properly so under the facts of thatcase. It is worthy of note, however, that the rule withrespect to negligence has been applied in rejecting thedefense of the maker in the Pennsylvania decisionssubsequent to that state�s adoption of the Uniform Com-mercial Code, First National Bank of Philadelphiav. Anderson, 1956, 7 Pa.Dist. & Co.R.2d 661, and Eq-uitable Discount Corp. v. Fischer, 1957, 12 Pa.Dist.& Co.R.2d 326... The reason for the rule, both as itwas applied under the Negotiable Instruments Law andas is warranted under the Uniform Commercial Code,

is that when one of two innocent persons must sufferby the act of a third, the loss must be borne by the onewho enables the third person to occasion it. We be-lieve that the test set out in Comment No. 7 above quotedin a proper one and should be adhered to by us. (Bygiving approval to this Comment, we do not in any sensemean to imply that we thereby are expressing generalapproval of all the Comments to the various sections ofthe Uniform Commercial Code.) Thus the only ques-tion is whether, under the facts of this case, the misrep-resentations were such as to be a defense as against aholder in due course.

The facts and circumstances surrounding eachparticular case, both under the Negotiable InstrumentsLaw and the Uniform Commercial Code, require anindependent determination. See United States v.Castillo, supra; United States v. Tholen (N.D.Iowa1960), 186 F.Supp. 346; First National Bank of Phila-delphia v. Anderson, supra; Equitable DiscountCorp. v. Fischer, supra. Applying the elements of thetest to the case before us, Mrs. Burchett was 47 yearsold and had a ninth grade education, and Mr. Burchettwas approximately the same age, but his education doesnot appear. Mr. Burchett was foreman of the sanita-tion department of the city of Clovis and testified thathe was familiar with some legal documents. BothBurchetts understood English and there was no show-ing that they lacked ability to read. Both were able tounderstand the original form of contract which wassubmitted to them. As to the Beevers, Mrs. Beeverswas 38 years old and had been through the ninth grade.Mr. Beevers had approximately the same education,but his age does not appear. However, he had beenworking for the same firm for about nine years andknew a little something about mortgages, at least to theextent of having one upon his property. Mrs. Beeverswas employed in a supermarket, and it does not appearthat either of the Beevers had any difficulty with theEnglish language and they made no claim that they wereunable to understand it. Neither the Beevers nor theBurchetts had ever had any prior association with Kellyand the paper were signed upon the very day that theyfirst met him. There was no showing of any reasonwhy they should rely upon Kelly or have confidence inhim. The occurrences took place in the homes ofappellees, but other than what appears to be Kelly�s�chicanery,� no reason was given which would warranta reasonable person in acting as hurriedly as was done


75

in this case. None of the appellees attempted to obtainany independent information either with respect to Kellyor Consolidated Products, nor did they seek out anyother person to read or explain the instruments to them.As a matter of fact, they apparently didn�t believe thiswas necessary because, like most people, they wantedto take advantage of �getting something for nothing.�There is no dispute but that the appellees did not haveactual knowledge of the nature of the instruments whichthey signed, at the time they signed them. Appellanturges that appellees had a reasonable opportunity toobtain such knowledge but failed to do so, were there-fore negligent, and that their defense was precluded.

We recognize that the reasonable opportunityto obtain knowledge may be excused if the maker placesreasonable reliance on the representations. The diffi-culty in the instant case is that the reliance upon therepresentations of a complete stranger (Kelly) was notreasonable, and all of the parties were of sufficient age,intelligence, education, and business experience to knowbetter. In this connection, it is noted that the contractsclearly stated, on the same page which bore the signa-ture of the various appellees, the following:

�No one is authorized on behalf of this com-pany to represent this job to be �A SAMPLE HOMEOR A FREE JOB.�

The conduct of the Beevers in signing

the additional form some weeks after the initial trans-action, without reading it, is a graphic showing of negli-gence. This, however, is merely an added element andit is obvious that all of the parties were negligent insigning the instruments without first reading them un-der the surrounding circumstances. See First NationalBank of Philadelphia v. Anderson, supra, which heldthat the mere failure to read a contract was not suffi-cient to allow the maker a defense under s 3-305 of theUniform Commercial Code. In our opinion, the appelleeshere are barred for the reasons hereinabove stated.

�

The finding of the trial court that Burchetts werenot guilty of negligence is not supported by substantialevidence and must fall. We determine under these factsas a matter of law that both the Burchetts and theBeevers had a reasonable opportunity to obtain knowl-edge of the character or the essential terms of the in-struments which they signed, and therefore appellantas a holder in due course took the instruments free fromthe defenses claimed by the appellees.

�

The judgments will be reversed and the causeis remanded to the district court with directions to dis-miss appellees� complains. It is so ordered. NOBLEand MOISE, JJ., concur.

Town North National Bank v. Broaddus569 S.W. 2d 489 (Tex. 1978)

Sears McGee, Justice

Town North National Bank, hereinafter re-ferred to as the Bank, brought suit against LarryBroaddus, Terrell C. Taylor, and Charles W. Curtis,seeking to recover on a promissory note. Curtis wassubsequently dismissed without prejudice because hewas a defendant in bankruptcy proceedings. The trialcourt thereafter granted the Bank a summary judgmentagainst Broaddus and Taylor. The court of civil ap-peals reversed and remanded. 558 S.W.2d 909. Wereverse the judgment of the court of civil appeals andaffirm that of the trial court.

Broaddus and Taylor were co-makers, alongwith Curtis, on a promissory note to the Bank in theprincipal amount of $8,900. The note was executed onJanuary 10, 1975, and became due on July 9, 1975. Itprovided for interest at the rate of 10 percent per an-num. In September, 1975, a partial payment of $1,900was made to the Bank which reduced the principal bal-ance to $7,000. At that time, the due date on the notewas extended to October 9, 1975. On November 25,1975, the Bank demanded payment in full. Except fora subsequent partial payment of interest, the makersmade no further payments, thereby leaving a balanceof $7,231.02.


76

The Bank brought suit upon the note and movedfor a summary judgment. In conjunction therewith, oneof the Bank�s officers, William Hudson, filed an affida-vit in which he stated that he was competent to testifyto every statement made therein and that the facts statedin the affidavit were within his personal knowledge andwere true and correct. Attached to the affidavit was acopy of the note. Hudson stated in the affidavit that atrue and correct copy of the note was attached andincorporated for all purposes. In this connection, werecently held that a photographic copy of a promissorynote is attached to an affidavit in which the affiantswears that the attached note is a true and correct copyof the original note, then the note is a sworn copy withinthe meaning of Rule 166-A(e) of the Texas Rules ofCivil Procedure and is proper summary judgment evi-dence. The Life Insurance Co. of Virginia v. Gar-Dal, Inc., S.W.2d, 21 Tex. Sup. Ct. J. 489 (July 12,1978).

Broaddus and Taylor responded to the Bank�smotion for summary judgment with an answer and affi-davits which they contended, in conjunction with otherinstruments on file, raised genuine, material fact ques-tions and issues with respect to their liability to the Bank.Each of them executed an affidavit which stated thatHudson, as agent for the Bank, explained to them thatCurtis would have sole responsibility for payment ofthe note, the proceeds of which were to be used topurchase two cows, and that the Bank would not lookto either of them for repayment. After reviewing theaffidavits of all the parties, the trial court determinedthat there was an absence of a genuine issue of anymaterial fact and rendered summary judgment on theBank�s behalf.

The court of civil appeals reversed and re-manded on the ground that the affidavits of Broaddusand Taylor raised a fact question as to fraud in the in-ducement of the promissory note. Referring to DallasFarm Machinery Co. v. Reaves, 158 Tex. 1, 307S.W.2d 233 (1957), the court noted that there is an ex-ception to the parol evidence rule which permits extrin-sic evidence to show fraud in the inducement of a writ-ten sales contract. Section 3.306(2) of the TEX. BUS.& COMM. CODE ANN. (1968) makes this rule appli-cable to actions on promissory notes, where, as we havehere, the holder of the note is not a holder in due course.1

The court of civil appeals then cited as determinativeof this case the decisions of Berry v. Abilene SavingsAssociation, 513 S.W.2d 872 (Tex. Civ. App. - Eastland1974, writ ref�d n.r.e.) and Viracola v. Dallas Inter-national Bank, 508 S.W.2d 472 (Tex. Civ. App.--Waco1974, writ ref�d n.r.e.). Under the facts of those cases,it was held that the application of section 3.306(2) wasproper and parol evidence was admissible to show thatthe maker of a note was induced by the false and fraudu-lent representations of the payee to sign the promissorynote. While we recognize the validity of the rule an-nounced in those decisions, we do not believe that Berryand Viracola are controlling under the facts of this case.. . .

The question thus presented is whether, in asuit by one not a holder in due course against the makerof a promissory note, the parol evidence rule prohibitsthe admission of extrinsic evidence showing that themaker was induced to sign the note by the payee�s rep-resentations that the maker would not incur liability onthe note. We hold that the allegations of fact in theinstant case, even if true, do not constitute fraud in theinducement so as to support an exception to the parolevidence rule.

In reaching this result, we have examined manyTexas decisions concerning fraud in the inducement ofpromissory notes. From a study of these decisions, itappears that one rule prevails when there is only a rep-resentation to a maker, or surety, by the payee that hewill not be liable; on the other hand, a different ruleprevails in the instance where something more than justthat representation is involved.

We begin our discussion of the issue presentedwith an examination of the authorities we consider tobe controlling in this case. In these decisions there was,in essence, only a representation by the payee to a makeror surety that he would not be liable on the note. SeeLanius v. Shuler, 77 Tex. 24, 13 S.W. 614 (1890);Mitcham v. London, 110 S.W.2d 140 (Tex. Civ. App.--Austin, 1937, no writ); Dean v. Allied Oil Co., 261S.W.2d 900 (Tex. Civ. App.--Waco 1953, writ dism�d);Jones v. Hubbard, 302 S.W.2d 493 (Tex. Civ. App.--Waco 1957, writ ref�d n.r.e.); Howeth v. Davenport,311 S.W.2d 480 (Tex. Civ. App.--San Antonio 1958,writ ref�d n.r.e.); Fisher v. Howard, 389 S.W.2d 482


77

(Tex. Civ. App.--Dallas 1965, no writ); McPherson v.Johnson, 436 S.W.2d 930 (Tex. Civ. App.--Amarillo1968, writ ref�d n.r.e.); Texas Export DevelopmentCorp. v. Schleder, 519 S.W.2d 134 (Tex. Civ. App.--Dallas 1974, no writ). The rule from these cases is,quite clearly, that a negotiable instrument which is clearand express in its terms cannot be varied by parol agree-ments or representations of a payee that a maker orsurety will not be liable thereon. As was stated by thecourt in Dean v. Allied Oil Co., supra, at 902:

�But even had defendants offered proof underproper pleadings that plaintiff had induced defendantsto sign the note by a false representation--that he wouldnot be personally liable thereon--or made an agreementor had an understanding to that effect, and had the juryso found, it still would avail defendants nothing. Anunconditional written instrument cannot be varied orcontradicted by parol agreements or by representationsof the payee that the maker would not be held liableaccording to the tenor of the instrument.�

The decisions of Mitcham v. London, supra,and Howeth v. Davenport, supra, offer further insightinto the question before us. In Mitcham, the court stated:

�As we understand appellee�s contention uponthis issue, it is that the fraud consisted in making theagreement not to hold the note as a personal obligationagainst him with the then present intention not to per-form that agreement.... The promise here complainedof as being intended not to be performed was a collat-eral one in parol at variance with the written contractentered into, and one proof of which the law does notadmit. If fraud could be predicated upon such promiseand intention, then any collateral parol agreement mightbe asserted to contradict, vary, or even abrogate anywritten contract, under the guise of a fraudulent intentnot to perform such collateral parol agreement. Thepractical effect would be to destroy the parol evidencerule altogether.� Mitcham v. London, 119 S.W.2d at142.

Or, in the words of another court, a promissorynote would be reduced to a �meaningless scrap of pa-per.� Howeth v. Davenport, 311 S.W.2d 480, 482 (Tex.Civ. App.--San Antonio 1958, writ ref�d n.r.e.).

The reasoning behind these cases was recentlyexpressed in an opinion by the Dallas Court of CivilAppeals where it was noted that �[a] party to a writtenagreement [promissory note] is charged as a matter oflaw with knowledge of its provisions unless he can dem-onstrate that he was tricked into its execution.� TexasExport Development Corp. v. Schleder, 519 S.W.2d134, 139 (Tex. Civ. App. - Dallas 1974, no writ). Theobligation of a maker who signs an instrument is clearlyset out by the Uniform Commercial Code.See TEX.BUS. & COMM. CODE ANN. @ 3.413 (1968). Werewe to deviate from the holdings of Schleder and casessimilar to it by permitting extrinsic evidence of the typesought to be shown in this instance, the result would beuncertainty and confusion in the law of promissory notes.Therefore, under the facts of this case, we hold thatthe mere representation by a payee to the maker thatthe maker will not be liable on the note does not consti-tute fraud in the inducement so as to be an exception tothe parol evidence rule.2

In reaching its decision that parol evidence wasadmissible in this case, the court of civil appeals placedprimary reliance on Berry v. Abilene Savings Asso-ciation, 513 S.W.2d 872 (Tex. Civ. App.--Eastland1974, writ ref�d n.r.e.) and Viracola v. Dallas Inter-national Bank, 508 S.W.2d 472 (Tex. Civ. App.--Waco1974, writ ref�d n.r.e.). It is true that the rule to betaken from those two decisions is that when there hasbeen a representation by the payee to the maker of anote that the maker will not be liable thereon, extrinsicevidence of fraud in the inducement is to be permitted.A careful reading of Berry and Viracola, however, re-veals that some sort of trick, artifice, or device wasemployed by the payee in addition to his representationto the maker that he would not be liable. In our re-search, this element of trickery or deception was foundto be common to the other Texas decisions involvingpromissory notes in which fraud in the inducement wasrecognized as an exception to the parol evidence rule.See generally Farnsworth v. Dolch, 488 S.W.2d 531(Tex. Civ. App.--Waco 1972, writ ref�d n.r.e.); Costellov. Sample, 470 S.W.2d 446 (Tex. Civ. App.--Waco1971, writ ref�d n.r.e.); Lee v. First Nat�l Bank, 254S.W. 394 (Tex. Civ. App.--Beaumont 1923, no writ).

For example, Berry v. Abilene Savings Asso-ciation, supra, involved the situation of a college stu-


78

dent who signed a $5,000 note made payable to theWestern Commercial Savings & Loan Association.Abilene Savings Association subsequently acquired thenote after it was mature and sought to collect on thenote by way of suit. Abilene Savings Association movedfor and was granted a summary judgment. In opposi-tion to the motion for summary judgment, Berry filedan affidavit to support his allegations that he was in-duced to sign the note by false and fraudulent repre-sentations made to him by one Claude McAden, presi-dent of Western Commercial Savings & Loan Asso-ciation, and one Fred Newman, Berry�s employer.

The detailed affidavit filed by Berry revealedthat McAden and Newman were neighbors; thatNewman needed the $5,000 loan, but due to certainrestrictions and technicalities, Western CommercialSavings & Loan could not loan the money directly toNewman; that a scheme was devised whereby Berrywould take out the loan and turn over the proceeds toNewman; that McAden told Berry several times thathe would not be liable on the note and only Newmanwould be looked to for payment on the note; thatMcAden told Berry that he knew that he was a collegestudent, had neither money nor property and, undernormal circumstances, would have never made such aloan to him; that Berry was under a great deal of pres-sure from McAden and his employer, Newman, to signthe note; and that he signed the note, received the money,and then turned the proceeds over to Newman. Basedon the affidavit, the court of civil appeals reversed andremanded the trial court�s judgment because it held thatthere was a genuine material issue of fact concerningfraud in the inducement.

The Viracola v. Dallas International Bank,supra, decision is equally as illustrative. Viracola waspresident of the American Panel Corporation. At thattime the company was involved in negotiations for itssale to a buyer in Alabama. In order to support thecompany�s operations during the negotiations, the com-pany borrowed $9,000 from the Bank and made a noteto it for that amount. The Bank eventually sued to col-lect on the note. The trial court granted a summaryjudgment on behalf of the Bank.

In opposition to the Bank�s motion, Viracolafiled an affidavit which essentially set out the above

facts and then went on to state that Viracola signed thenote on behalf of the corporation in his capacity as presi-dent; that soon thereafter, the Bank requested Viracolato co-sign the note individually and to pledge his Ameri-can Panel stock with the Bank �only to assure the Bankthat the note would be paid in full first from the pro-ceeds of the sale before any distribution of funds wasmade to other creditors and stockholders�; that Viracolawas assured by the Bank that �if the sale was not final-ized� the stock would be returned to him and his indi-vidual liability on the note would end; that on this basishe pledged the stock and co-signed the note; that thesale ultimately fell through and the Bank returned thestock to him; that at a later date the Bank pursued anaction on the note against Viracola despite the agree-ment. As in Berry, the court of civil appeals reversedand remanded holding that a genuine material issue offact existed with reference to the fraudulent induce-ment of the note.

Therefore, from our review of Berry andViracola, we believe that implicit within their holdingsthat extrinsic evidence is permissible to show fraud inthe inducement of a note is the requirement there be ashowing of some type of trickery, artifice, or deviceemployed by the payee in addition to the showing thatthe payee represented to the maker he would not beliable on such note. Applying that standard to the factsbefore us, we find no such showing by the respondents.The affidavits offered by Broaddus and Taylor in oppo-sition to the Bank�s motion for summary judgment indi-cate only that the Bank made representations toBroaddus and Taylor that they would not be liable onthe note, which, even if correct, would be insufficientunder our discussion. Consequently, we do not considerthe Berry v. Abilene Savings Association, supra, andViracola v. Dallas International Bank, supra, deci-sions as being dispositive of this case.

To be entitled to a summary judgment, the mo-vant has the burden of establishing that there exists nomaterial fact issue and that he is entitled to judgment asa matter of law. Mitchell v. Baker Hotel, 528 S.W.2d577 (Tex. 1975); Gibbs v. General Motors Corp., 450S.W.2d 827 (Tex. 1970); Swilley v. Hughes, 488 S.W.2d64 (Tex. 1972). By way of pleadings and proper sum-mary judgment proof, Town North National Bank dem-onstrated as a matter of law that it was entitled to sum-


79

mary judgment. In opposition to this, Broaddus andTaylor asserted the affirmative defense of fraud in theinducement. In order to avoid a summary judgment infavor of the plaintiff-Bank, it was their burden as de-fendants to show the existence of an issue of fact withrespect to their affirmative defense. See The Life In-surance Co. of Virginia v. Gar-Dal, Inc., S.W.2d, 21Tex. Sup. Ct. J. 489 (July 12, 1978); Hudnall v. TylerBank & Trust Co., 458 S.W.2d 183 (Tex. 1970); Kuperv. Schmidt, 161 Tex. 189, 338 S.W.2d 948 (1960); GulfColorado & Santa Fe Ry. v. McBride, 159 Tex. 442,322 S.W.2d 492 (1958). To meet this requirement,Broaddus and Taylor offered an affidavit in which itwas averred that an officer of the Bank represented tothem that they would not be held liable on the note, thatonly Curtis would be looked to for payment of the note.Rule 166-A(e) of the Texas Rules of Civil Procedure(Supp. 1978) requires that supporting and opposing af-fidavits, among other things, �shall set forth such factsas would be admissible in evidence.� This rule has beeninterpreted to mean that the affidavits must set forthsuch facts as would be admissible in evidence at a trial.See Phagan v. State, 510 S.W.2d 655 (Tex. Civ. App.--Fort Worth 1974, writ ref�d n.r.e.); Mason v. Mid-Continent Supply Co., 374 S.W.2d 922 (Tex. Civ.App.--Fort Worth 1964, writ ref�d n.r.e.); Dickey v.Bird, 366 S.W.2d 859 (Tex. Civ. App.--Amarillo 1963,writ ref�d n.r.e.). Because of our previous holding thatthe facts in their affidavit upon which they rely to es-tablish fraud in the inducement are barred by the parolevidence rule, Broaddus and Taylor are, in effect, inthe position of having offered no summary judgmentproof to meet the burden imposed upon them to showthe existence of a genuine issue as to a material fact.

Consequently, the trial court properly granted summaryjudgment in favor of Town North National Bank.

Accordingly, the judgment of the court of civilappeals is reversed and that of the trial court is affirmed.

1 Section 3.306 provides:

�Unless he has the rights of a holder in duecourse any person takes the instrument subject to

(1) ...

(2) all defenses of any party which would beavailable in an action on a simple contract;...�

2 The tendency of the courts of this state toadhere to such a strict approach is further illustrated bythe following decisions: see Kuper v. Schmidt, 161 Tex.189, 338 S.W.2d 948 (1960); Lassiter v. Boxwell Broth-ers, Inc., 362 S.W.2d 884 (Tex. Civ. App.--Amarillo1962, no writ); Dewey v. C.I.T. Corp., 374 S.W.2d 298(Tex. Civ. App.--Amarillo 1963, writ ref�d n.r.e.);Johnson v. Packaging Corp. of America, 375 S.W.2d780 (Tex. Civ. App.--Fort Worth 1964, no writ);Roseborough v. Phillips, 389 S.W.2d 593 (Tex. Civ. App.--Dallas 1965, no writ). See generally Martin v. CoastalStates Gas Producing Co., 417 S.W.2d 91 (Tex. Civ.App.--Eastland 1967, no writ). Although no allegationsof fraud are involved in them, the cases are neverthe-less persuasive to the extent that they demonstrate theunwillingness of the courts to release a maker fromliability on a note solely on a representation to him by apayee that he will not be looked to for payment.

QUESTIONS

1. Do you agree with the court in distinguishing Viracola and Berry from Broaddus?

2. Resolve the following case on cross motions for summary judgment. /3-i

�The facts, which are not in dispute, outline the following sequence of events. On March 23, 1976, theRobinsons purchased the automobile in question and obtained a loan from respondent in the amount of $2,802.72,payable in 24 monthly installments. As evidence of their indebtedness, appellants executed a note payable torespondent and also executed a security agreement granting a lien over the automobile. A record designating thebank as their first lienholder was entered on the certificate of title of the South Carolina Motor Vehicle Division.


80

In explanation of the clerical error asserted by the bank, a bank officer by way of affidavit stated:

That sometime during the month of March, 1977, . . . the Plaintiff [Respondent], its agents, servants any[sic] employees, unintentionally and inadvertently by mistake marked said note and security agreement �Paid andSatisfied� and released said lien upon the certificate of title to said motor vehicle and sent the said note andsecurity agreement and certificate of title to said motor vehicle to the Defendant [Appellants], all of which . . .was done through inadvertent and unintentional error . . . .

The circumstances of the respondent�s unintentional act are not contradicted by appellants. It is stipu-lated that the appellant paid on the indebtedness until July, 1977, at which time they ceased making monthlypayments. Appellants further admit that they have failed to pay the remaining indebtedness, upon which thepresent suit is predicated, and characterize the alleged discharge by respondent as gratuitous.

The only issue before us is whether the respondent�s clerical error can be construed as a discharge ofappellants� indebtedness on the automobile pursuant to § 36-3-605(1)(b). This section of the Uniform Commer-cial Code provides in pertinent part: �The holder of an instrument may even without consideration discharge anyparty. . . by renouncing his rights by a writing signed and delivered or by surrender of the instrument to the partyto be discharged.�

How is it possible for the plaintiff here to meet the requirements of Section 3-307(1)? /3j

2. ILLEGALITY

Pacific National Bank v. Hernreich398 S.W.2d 221 (Ark. 1966)

OPINION: Jim Johnson, Justice.

This appeal involves two apparently conflicting Arkan-sas statutes.

Appellee George Hernreich, operator of a jew-elry store in Fort Smith, executed three promissory notespayable to W. F. Sebel Co., Inc., a foreign corporation.Sebel Company, a wholesaler of diamond jewelry, wasnot qualified to do business in Arkansas. Hernreichhad been doing business with Sebel Company for twodecades prior to this litigation. The testimony reflectsthat this was their manner of doing business: SebelCompany�s salesman, Sam Leibson, with his entire stockof diamond jewelry, would call on Hernreich at his FortSmith store. Hernreich would select and receive dia-mond jewelry from Leibson�s stock. Hernreich wouldsign one or more promissory notes representing thepurchase price of the jewelry, which notes Leibsonwould then forward to Sebel Company�s home officein Los Angeles. (Unknown to Hernreich, Sebel Com-pany would then discount the notes with appellant, Pa-

cific National Bank.) As Hernreich sold the diamondjewelry, he apparently put the money aside toward pay-ment of the promissory note on that jewelry, and if hesold less than the amount of the note, shortly before thenote was due Sebel Company sent him their check forthe difference (i.e., if Hernreich had given a note for$5,000 and sold only $4,000, Sebel Company would sendHernreich its check for $1,000.). When each note wasdue and sent to a Fort Smith bank for payment,Hernreich would pay the note with the proceeds of whathe had sold and Sebel Company�s check.

On February 20 and March 14, 1963, appelleeexecuted three notes totaling $10,611.70, due in threeto five months. These notes were sent to Sebel Com-pany by Leibson and negotiated to appellant bank a fewdays later. Shortly thereafter Sebel, the principal ownerof Sebel Company, died and the corporation was dis-solved. When the notes became due and were pre-sented for payment at a Fort Smith bank, appellee re-fused to pay them.


81

Appellant filed suit against appellee in SebastianCircuit Court on January 9, 1964, for the principal sumplus interest and costs, alleging that appellant was theholder in due course of the notes and entitled to judg-ment. Appellee answered, admitting execution of thenotes, denying that appellant was a holder in due course,and alleged that Sebel Company was a California cor-poration not qualified to do business in Arkansas andwas, therefore, without power to enter into an enforce-able contract in Arkansas, and asked for summary judg-ment dismissing the complaint. After depositions andthe affidavit of appellant�s vice president were taken,appellant filed a motion for summary judgment allegingthat there was no genuine issue of fact and that appel-lant was entitled to judgment as a matter of law. Thetrial court granted appellee�s motion for summary judg-ment, from which comes this appeal.

Appellant contends that a holder in due courseis entitled to summary judgment against the maker ofnegotiable notes under the undisputed facts, even thoughthe payee was a non-qualified foreign corporation, andthe trial court erred in granting appellee�s motion forsummary judgment and overruling appellant�s.. . .

For affirmance of the trial court, appellee citesArk.Stat.Ann. @ 64-1202 (Repl. 1957):

�Any foreign corporation which shall fail tocomply with the provisions of this act, and shall do busi-ness in this State, shall be subject to a fine of not lessthan $1,000, to be recovered before any court of com-petent jurisdiction, and all such fines so recovered shallbe paid into the general revenue fund of the county inwhich the cause of action shall accrue, and it is herebymade the duty of the prosecuting attorneys to institutesaid suits in the name of the State, for the use and ben-efit of the county in which the suit is brought, and suchprosecuting attorney shall receive as his compensationone-fourth of the amount recovered, and as an addi-tional penalty, any foreign corporation which shall failor refuse to file its articles of incorporation or certifi-cate as aforesaid, cannot make any contract in the Statewhich can be enforced by it either in law or in equity,and the complying with the provisions of this act afterthe date of any such contract, or after any suit is insti-tuted thereon, shall in no way validate said contract.�

The legislature has in the past encouraged freenegotiability of commercial paper and early passed theUniform Negotiable Instrument Law. This was fairlyrecently replaced with the Uniform Commercial Code,of which @ 85-3-305, supra, is a part. On the otherhand, the legislature passed the highly penal statute, @64-1202, supra, on foreign corporations to protect ourcitizenry.

In Dean J. S. Waterman�s fine article, �NotesPayable to an Unlicensed Foreign Corporation,�(5 Law School Bull. 12), he concluded: � . . . , Arkansasis perhaps the sole jurisdiction which denies to holdersin due course the right to recover from the maker un-der a statute on unlicensed foreign corporations, suchas ours, which does not declare the instrument void.�

The cases cited by appellee deal with attemptedenforcement of assigned contracts of unlicensed for-eign corporation, even Hogan v. Intertype Corpora-tion, 136 Ark. 52, 206 S.W. 58, on which DeanWaterman relied for his conclusion. It is settled lawthat assignees can receive no better rights than theirassignors had. The strong language in the Hogan caseis excellent--but it is dicta. Thus it is apparent that thisis really the first time this court has had occasion to ruledirectly on the question presented.

To reverse this case and permit enforcementof the notes here sued on would in effect repeal ourpenal statute prohibiting unlicensed foreign corporationsfrom doing business in this state. Weighing the possiblehampering of negotiability of commercial paper madein Arkansas against permitting fly-by-night foreign cor-porations to prey unimpededly on our citizens, we con-clude that the better rule is that expressed in the Hogancase dicta:

�It was necessarily the intention of the Legis-lature to render any paper growing out of a transactionof this character defective so that it could not fall intothe hands of an innocent purchaser and be enforced inthis State. . . . [The] notes evidenced a contract madeby the corporation in violation of the statute laws of thisState. The defect was inherent in the notes. . . , andtherefore a subsequent purchaser must take notice ofthe defect.�


82

The effect of this adoption is to render a trans-action of this kind not merely unenforceable but voidab initio. Accordingly, there can be no holder in duecourse here of a negotiable instrument arising out ofthis illegal transaction.

Affirmed.

DISSENT BY: McFADDIN

DISSENT: ED. F. McFADDIN, Justice, dissenting. Ivote to reverse the Circuit Court judgment because Iam of the opinion that the appellant should prevail; andhere are the reasons for my vote.

W. F. Sebel, Inc. was a nondomesticated for-eign corporation. Under Ark.Stat.Ann. @ 64-1202(Repl. 1957) the notes that Hernreich executed to Sebelwere not void. Rather, Sebel, as a nondomesticated for-eign corporation, was denied the right to use the Ar-kansas State Courts to collect the notes. Sebel couldhave enforced the notes in the United States DistrictCourt in Arkansas if the jurisdictional amounts had beengreat enough. Citizens Bank v. Shaw, 293 F. 63;1 andPellerin v. Hogue, 219 F.Supp. 629. In WaxahachieMedicine Co. v. Daly, 122 Ark. 451, 183 S.W. 741, wesaid:

�Our court has held that the failure of a foreigncorporation to comply with the requirements of the stat-utes prescribing conditions upon which foreign corpo-rations may enter and do business within the State didnot render its contracts void, . . . �

All our statute (§ 64-1202) does is to deny tothe nondomesticated foreign corporation the right to usethe Arkansas State Courts. If the Legislature hadwanted to make the notes void it could have done so inappropriate language, just as usurious notes are void,even in the hands of a bona fide holder.

Since the notes were not void, then, underArk.Stat.Ann. @ 85-3-305 (Add. 1961), the appellant,as the conceded bona fide holder (for value beforematurity and without notice), took the notes free of theclaim of voidability that Hernreich could have madeagainst Sebel Co. The statute just cited says that theholder in due course � . . . takes the instrument free

from . . . (2) all defenses of any party to the instrumentwith whom the holder has not dealt except . . . (b) . . .illegality of the transaction as renders the obligation ofthe party a nullity.� That the notes were not a nullity isshown by Citizens Bank v. Shaw, supra; so, under theplain wording of our statute (a part of the Uniform Com-mercial Code adopted in 1961), these notes are enforce-able in the hands of the appellant. This point is madecrystal clear in the comment following Ark.Stat.Ann.@ 85-3-305 (Add. 1961) wherein, in speaking of para-graph (b) of subsection (2), as above quoted, the com-ment says:

�5. Paragraph (b) of subsection (2) is new. Itcovers mental incompetence, guardianship, ultra viresacts or lack of corporate capacity to do business, anyremaining incapacity of married women, or any otherincapacity apart from infancy. Such incapacity is largelystatutory. Its existence and effect is left to the law ofeach state. If under the local law the effect is to ren-der the obligation of the instrument entirely null and void,the defense may be asserted against a holder in duecourse. If the effect is merely to render the obligationvoidable at the election of the obligor, the defense is cutoff.�

When the Legislature adopted the UniformCommercial Code with this comment before it, the lawhad been settled at that time that notes such as thesewere not null and void, but merely voidable; and thecomment says that, under such circumstances, �thedefense is cut off.�

The Majority Opinion quotes from DeanWaterman�s article which appeared in Volume 5 of theLaw School Bulletin in December 1936. DeanWaterman there says:

�As pointed out, Arkansas is perhaps the solejurisdiction which denies to holders in due course theright to recover from the maker under a statute on un-licensed foreign corporations, such as ours, which doesnot declare the instrument void.�

Since 1936 the Arkansas Legislature hasadopted the Uniform Commercial Code; and the logi-cal effect of that adoption is to remove Arkansas from�the sole jurisdiction,� and put Arkansas with the greatweight of authority in other jurisdictions. This is par-


83

ticularly important in matters of commercial paper.

The Majority Opinion concedes that the Hogancase was the case of an assignee, and admits that wehave no case in Arkansas directly in point. Here is thelanguage in the Majority Opinion:

�Thus it is apparent that this is really the firsttime this court has had occasion to rule directly on thequestion presented.�

In view of the adoption of the Uniform Com-mercial Code, as above quoted, and in the light of thecases in all other jurisdictions, I am thoroughly of theopinion that the appellant had the right to maintain this

suit in the State courts.The Majority Opinion is reading something into the lawthat is not there, because it is in effect saying that thenotes are absolutely void; and that is not whatArk.Stat.Ann. @ 64-1202 (Repl. 1957) says.

For the reasons herein stated, I respectfullydissent.

1 This case thoroughly establishes that notes like thosein question are not void. The case has been cited inOckenfels v. Boyd, 297 F. 614 (8th Cir.); Shaw v. Citi-zens Bank, 10 F.2d 315 (8th Cir.); and in annotations in132 A.L.R. 473 and 133 A.L.R. 1179.

QUESTION

Resolve this case. See Harold B. Osborn and Starboard Associates, Inc. v. Chicaro Development Cor-poration, 294 S.C. 129; 363 S.E.2d 108; 6 U.C.C.R. Serv. 2d (Callaghan) 153 (Ct. App. 1987).

Chicaro Development Corporation and Everett A. Knight (the defendants) executed a promissory notepayable to Francis Weber for $200,000 which was secured by a purchase money mortgage on propertylocated in Florida which they bought from Weber. Weber assigned the note and mortgage to Harold S.Osborn and Starboard Associates, Inc., (the plaintiffs) in payment of a real estate commission for the sale ofthe property to the defendants. In this action, the plaintiffs sued the defendants on the note. The defendantsdenied the assignment of the note and alleged that the debt was unenforceable under Florida law because thedebt was a real estate commission payable to a person not licensed in Florida as a real estate broker. Theappealed order held that the defendant had no standing to assert the defense of the illegality of the transfer byWeber of the note to the plaintiff. We affirm.

The pertinent Florida statute provides:

No salesman shall collect any money in connection with any real estate brokerage transaction, whetheras a commission, deposit, payment, rental, or otherwise, except in the name of the employer and with theexpress consent of the employer; and no real estate salesman, whether the holder of a valid and currentlicense or not, shall commence or maintain any action for a commission or compensation in connectionwith a real estate brokerage transaction against any person except a person registered as his employer atthe time the cause of action is alleged to have arisen.

Fla. Stat. Ann. Section 475.42(1)(d) (West 1966).

Florida case law holds that the Florida real estate licensing statutes, Fla. Stat. Ann. Section475.001 et seq. (West Supp. 1987) render void as against the public policy of the State of Florida allcontracts for the payment of commissions to the unlicensed real estate salesman. Paris v. Hilton, 352So.2d 534 (D.C.A. Fla. 1977).

Based upon the above statute and case law, defendants argue on appeal that the assignment ofthe promissory note is void as being a promise to pay a real estate commission to an unlicensed salesman.


84

3. OTHER DEFENSES

In re Van Buren Plaza, L.L.C.United States Bankruptcy Court, 200 B.R. 384 (Calf. C.D. 1996)

Chapter 11 debtor brought adversary pro-ceeding for disallowance of creditor�s claim underCalifornia law of accord and satisfaction, based oncreditor�s prior conduct in cashing check whichdebtor had specifically denominated as being in �fullpayment� of obligations between parties. TheBankruptcy Court, John J. Wilson, J., held that: (1)commission owing to creditor for successfully negoti-ating reduction in debtor�s tax liability was subject ofbona fide dispute, of kind which could be resolvedthrough accord and satisfaction; (2) creditor�sconduct in sending letter to debtor denying that checkrepresented full payment was sufficient to permitcreditor to invoke statutory exception to Californialaw of accord and satisfaction.

Judgment for creditor.

John J. Wilson, Bankruptcy Judge.

At issue before the court is California�s lawon accord and satisfaction. Debtor Van Buren Plaza,LLC, (the �Debtor�) seeks an order disallowing theclaim filed by Ironstone Group, Inc. (�Ironstone�) onthe ground that accord and satisfaction had beenreached resolving Ironstone�s claim, whereas Iron-stone contends that the parties never settled the claimby an accord and satisfaction under California law.

I. STATEMENT OF FACTSOn June 26, 1992, the Debtor entered into a

contract with Ironstone, according to which Ironstonewould perform services related to reducing theamount of real property taxes the Debtor owed onthe property located at 560 Van Burden Boulevard,Riverside, California (the �Property�) for the 1992assessment year and prior years. The Debtor agreedto pay Ironstone 35% of any tax savings that Iron-stone was able to generate. Ironstone performedunder the contract by contesting and negotiating the1991 and then the 1992 real property value assess-ment with the County Assessor and by appealing the

1991 and 1992 tax assessment to the County Board.On May 20, 1994, the Debtor sent a letter to

Ironstone explaining the Debtor�s understanding thatIronstone would charge for only one year of savingsfor the tax assessments on the Property. In the letter,the Debtor described a conversation between Iron-stone and the Debtor�s principal in which Ironstonesaid that the Debtor should sign the contract becauseIronstone needed a signed contract in order tonegotiate a further reduction of the tax assessmentwith the assessor�s office. The Debtor signed thecontract with the understanding that it would only becharged for the tax assessments for one year.

Pursuant to the agreement, Ironstone wasable to secure a tax savings of $15,188.28 for the1991 tax year and $17,329 for the 1992 tax year. OnJune 20, 1994, the Debtor issued a check to Ironstonein the amount of $4,977, which was the exact amountdue to Ironstone for the 1991 tax assessment. On theback of the check, the Debtor printed �Payment infull for all services to date. Ref. invoice 03-1721 &03-1792.�

Before depositing the check on July 15, 1994,Ironstone forwarded to the Debtor a letter containingthe following language:

We have received payment on your account forinvoice No. 03-1721. We accept this payment,however, we do not agree that it is payment in full.As stated in your 1992 Tax Engagement Agree-ment, the fee for our services will be 35% of anytax savings we are able to generate, The originalterms of this Engagement Agreement are stillbinding.

After receiving no response from the Debtorto Ironstone�s letter, Ironstone deposited the check aspayment for the 1991 invoice and Ironstone believedthat payment was still due on the 1992 invoice.

On January 10, 1995, the Debtor filed apetition under Chapter 11, and on May 17, 1995,Ironstone filed a timely proof of claim for $7,646.17.


85

II. DISCUSSIONThe three issues in this case are: (1) what is

the applicable law in California on accord and satis-faction?; (2) whether there was a bona fide disputeover an unliquidated claim; (3) whether the conductbetween the parties was sufficient to constitute anaccord and satisfaction of the claim.

In 1951, the Supreme Court of Californiaestablished the rule of law in California for conditionalchecks issued to settle a disputed claim. Potter v.Pacific Coast Lumber Co. of California, 37 Cal.2d592, 234 P.2d 16 (1951). Specifically, the court foundthat when a debtor issues a check in full satisfactionof a claim, the retention and use of such a checkconstitutes an accord and satisfaction. Id. at 597, 234P.2d 16. A creditor�s protest against accepting thecheck as payment in full is immaterial, because thecreditor only has two choices, either accept or rejectthe check in accordance with the conditions. Id. InPotter, a dispute arose between a buyer and a sellerover the proper deductions of costs by the buyer onthe sale of three separate carloads of lumber. Afterreceiving the shipment from the seller, the buyer senta check to the seller for the shipments with thebuyer�s deductions noted on the invoice sent with thecheck. At the top of each invoice, the buyer wrotewords to the effect that accepting the checks wouldbe in full settlement of the three sales contractsbetween the two parties. The seller cashed thechecks and then later wrote to the buyer seekingadditional payments. The court held that cashing thecheck constituted an accord and satisfaction of theclaim since seller had but two choices, either acceptthe check as payment in full or reject the check. Id.at 603, 234 P.2d 16.

In 1987, however, a creditor�s options when itreceives a conditional check increased. The Califor-nia legislature changed the existing law on accord andsatisfaction by enacting Civil Code Section 1526.Red Alarm, Inc. v. Waycrosse, Inc., 47 F.3d 999,1003 (9th Cir.1995). In relevant part, Section 1526provides:

(a) Where a claim is disputed or unliquidated and acheck or draft is tendered by the debtor in settle-ment thereof in full discharge of the claim, and thewords �payment in full� or other words of similar

meaning are notated on the check or draft, accep-tance of the check or draft does not constitute anaccord and satisfaction if the creditor protestsagainst accepting the tender in full payment bystriking out or otherwise deleting that notation or ifthe acceptance of the check or draft was inadvert-ent or without knowledge of the notation. Cal.Civ.C. § 1526(a).

Little case law exists interpreting this statute.To date, only two cite the statute: Red Alarm andArmco, Inc. v. Glenfed Financial Corp., 720 F.Supp.1129 (D.N.J.1989). The language in the statuteprovides a party receiving a conditional check withnew alternatives besides either accepting the check infull settlement of the claim or rejecting the check. Acreditor can simply cross out the words equivalent to�payment in full,� or can otherwise communicate tothe debtor that the check is being accepted but not infull satisfaction of the claim. As a policy matter,Section 1526(a) prevents a debtor from making apayment on a debt, which is clearly a minimumamount owed to the creditor, that forces the creditorinto a compromise of other legal entitlements. RedAlarm, at 1003.

Therefore, the Debtor�s objection toIronstone�s claim must be evaluated in light of bothcase law and Section 1526(a). Before an accord andsatisfaction can be established, there must be anunliquidated claim or a bona fide dispute between theparties. To determine whether a bona fide disputeexists, the test in whether the dispute was honest orfraudulent. B & W Engineering Co. v. Beam, 23Cal.App. 164, 171, 137 P. 624; 1 C.J.S. at 32(b), pp.515-517. In this case, the Debtor contends that abona fide dispute exists between the parties based onthe letter where the Debtor describes a conversationbetween the Debtor and Ironstone establishing thatthe Debtor signed the contract with the understandingthe Debtor would be charged for the tax assessmentsfor only one year. A fair reading of the letter indi-cates the Debtor had an honest belief that it did notowe money for the 1992 tax assessment.

In its opposition to the Debtor�s objection toclaim, Ironstone argues that no bona fide disputeexisted between the parties and that the letter submit-


86

ted by the Debtor is hearsay. However, Ironstonenever properly objected to the admission of the letterinto evidence by filing a formal objection pursuant tothe Local Rule 111(1)(k). Ironstone offers no evi-dence to contradict the letter and relies exclusively onthe terms of the contract. Without further evidence,Ironstone has not refuted the Debtor�s assertion.Thus, Debtor has established that a bona fide disputeexists between the parties.

Since a bona fide dispute exists between theparties, it is necessary to determine whether the factsof this case fall within the provisions of section1526(a), in effect allowing Ironstone to cash theconditional check while still preserving its right toresolve the disputed claim in the future.

Section 1526(a) was intended to limit accordand satisfaction to circumstances where the creditorclearly expressed an intent to settle the disputedclaim. It dealt with the creditor�s dilemma, where itmight decide that �a bird in the hand is worth two inthe bush, [and] may feel compelled to accept partialpayment, even when the creditor believes the disputeis not bona fide.� Scott Burnham, �Accord andSatisfaction in California: a Trap for the Unwary,� 30Santa Clara L.Rev. 473, 481-2 (1990). When acreditor receives a conditional check, Section 1526(a)allows the creditor to communicate its express intentnot to enter into an accord and satisfaction �bystriking out or otherwise deleting� the notation�payment in full,� or similar words.

In the statute itself, the legislature did notindicate what the words �otherwise deleting� meanwithin the context of Section 1526(a)�s phrase �... ifthe creditor protests against accepting the tender infull payment by striking out or otherwise deleting thatnotation ...� A literal interpretation might hold that thestatute does not apply in cases where an oral state-ment, separate communication, or accompanying

letter, rather than the check itself, communicates thatthe creditor wishes to reject the debtor�s offer tosettle the claim. But it would seem strange to limitthe statute to simply striking out the phrase �paymentin full� or otherwise deleting the notation by liquidpaper or an eraser, and render ineffective any othermeans of communicating an intent not to enter into anaccord and satisfaction, such as a creditor sending aletter to a debtor.

In this case, Ironstone clearly expressed its intentnot to enter into an accord and satisfaction with theDebtor. Ironstone sent a letter to the Debtoraccepting the payment for the 1991 tax assessmentbut rejecting the check as full satisfaction of theentire claim. This court finds in this case that theterm �otherwise delete� is broad enough to includeIronstone�s letter to the Debtor because it clearlyindicates that Ironstone�s acceptance of the checkdid not constitute an accord and satisfaction of thedisputed claim. Since Ironstone has established thatit clearly communicated its intent not to enter intoan accord and satisfaction, it has satisfied Section1526.

III. CONCLUSIONBased on the foregoing, the court finds that a

bona fide dispute existed between the parties. Fur-ther, the court finds no accord and satisfaction wasreached between Ironstone and the Debtor. TheDebtor�s objection to Ironstone�s claim is thereforeoverruled, and Ironstone�s claim against Debtor�sestate is allowed as a general unsecured claim in theamount of $7,646.71.

This memorandum of decision contains thisCourt�s findings of fact and conclusions of law.Counsel for Ironstone shall lodge and serve a pro-posed order consistent with this memorandum ofdecision.


87

[Debtor on promissory note brought postaccelerationaction against bank, alleging, inter alia, breach ofcontract and negligence. The Supreme Court heldthat the statutory requirement that a bank act in goodfaith in accelerating note was not applicable to�default-type� acceleration condition. This appealarises from two separate suits filed on by JerryCermack (Cermack) and Container EngineeringCorporation (Container) against The Peoples Bankand Trust Company (Peoples Bank) alleging, interalia, that Peoples Bank breached its obligation ofgood faith under the U.C.C. The lower court held forthe plaintiffs. The Supreme Court reversed.]. . .FACTS

Container first became a customer ofPeoples Bank in 1973 and during the next fifteenyears, Peoples Bank loaned money to Container andCermack. Most prominent among the loans toContainer was Peoples Bank�s loan made under astate-sponsored Industrial Revenue Note Programthat enabled Container to finance the construction ofits current facility.

In 1985, Container received an inquiry fromGilson Brothers Company, Inc., as to whetherContainer could manufacture shipping crates for

Gilson. Cermack, short of the necessary operatingcapital needed to take on this new account, contactedPeoples Bank about getting a loan so that Containercould take on the account. After discussing theGilson account and the capital that would be requiredby Container to undertake it, Peoples Bank declinedto give Container a capital loan. However, PeoplesBank extended a $140,000 line of credit onContainer�s accounts receivable.

In 1987, Container sought additional operatingcapital from Peoples Bank to help it land a newaccount. Container was faced with cash flowproblems and needed additional capital to take on thenew account. Jerry Cermack, Container�s president,met with three of the officers from Peoples Bank athis plant and discussed with them his need foradditional capital and a restructuring of his existingdebt with Peoples Bank.

Peoples Bank agreed to restructureContainer�s existing debt and loan Container anadditional $25,000 to fund its acquisition of the newaccount if Container agreed to reduce its operatingexpenses by $35,000 per year. On March 19, 1987,Peoples Bank sent Cermack a letter setting forth theterms of the proposed loan agreement. In turn,

QUESTIONS1. Does the court's decision follow UCC 3-311 and 1-207(2)?

2. What would you advise a client who came to you with a check bearing the legend on the back: �Indorse-ment of this instrument constitutes payment in full of all debts and obligations owed by drawer to payee, being fullaccord and satisfaction?� /3-f

3 How does the Revision handle this issue?

The following case, The Peoples Bank and Trust Co. v. Cermack, is provided to explore the application of anacceleration clause. An acceleration clause may be included in a negotiable instrument to render an obligation,which is not normally due, immediately due and payable. Two types of these clauses are: 1) �upon default� and 2)�at will� or �upon security� (see UCC sec. 1-208). Consider the facts of the following case to determine if thebank�s actions were simply an acceleration upon default by Cermack and the engineering company. Consider ifthe bank�s delayed action in demanding payment in full caused this to be �at will� acceleration.

The Peoples Bank and Trust Co. v. Cermack658 So.2d 1352 (Miss. 1995)


88

Cermack sent Peoples Bank a letter on March 20,1987, proposing how Container would comply withthe Bank�s condition precedent found in paragraph�A� of the March 19, 1987, loan agreement. PeoplesBank refused to accept Cermack�s March 20, 1987,proposal for reducing Container�s operating expense,and on March 23, 1987, Cermack submitted a pro-posal for cutting operating costs that was acceptableto Peoples Bank. On May 4, 1987, after both sidesagreed to the conditions set forth in the loan agree-ment, Cermack signed the agreement.

In addition to the requirement in the loanagreement that Container cut its operating costs by$35,000 per year (II.A.), the loan agreement alsoprovided that:

D. Container Engineering, Inc. will not incuradditional indebtness [sic] without the prior consentof The Peoples Bank & Trust Company.

The two promissory notes signed in conjunc-tion with the loan agreement provided:

DEFAULT AND ACCELERATION: TheBorrower shall be in Default upon the occurrenceof any one or more of any of the following events:... (5) Borrower fails to keep any promise underany agreements intended to secure the repaymentof this Promissory Note; (emphasis added).

On March 31, 1988, Container purchasedtwo new Navistar International trucks at an approxi-mate cost of $165,000 without seeking approval fromPeoples Bank. Cermack first gave Peoples Banknotice of its purchase of the two trucks when itsubmitted its quarterly financial statement to PeoplesBank on or about April 26, 1988. Peoples Bankreceived the quarterly statement but did not notice thejournal entry that indicated that Cermack had in-curred new debt and purchased the new trucks.Peoples Bank learned that Cermack had bought thetrucks during July of 1988. At this point, PeoplesBank decided to wait and see what effect the pur-chase of the new trucks would have on Cermack�scash flow situation during the second quarter. Uponreceiving and reviewing the second quarter report,Peoples Bank determined that the truck purchasesworsened Cermack�s cash flow problems. In Augustof 1988, armed with the fact that Cermack had

breached his loan agreement with Peoples Bank, andthat this breach had worsened Container�s precariouscash flow situation, Peoples Bank decided to acceler-ate Cermack�s outstanding debts.

On September 7, 1988, Peoples Bank gavenotice to Cermack that he had violated Section II,Paragraph D of the March 19, 1987, loan agreement(Cermack incurred new indebtedness without firstgaining Peoples Banks approval) and that PeoplesBank intended to accelerate the two loans evidencedby the promissory notes dated April 28, 1987. There-fore, Cermack would have to satisfy its $176,543.54indebtedness to Peoples Bank. Peoples Bank alsocancelled Cermack�s revolving line of credit. Therevolving loan on the accounts receivables wasself-liquidating and would not require that Containeracquire additional financing to satisfy this debt. [FN3]

Initially the September 7, 1988, letter requiredthat Cermack satisfy his existing debt by October 8,1988. However, after a September 15, 1988, meetingbetween Cermack and Peoples Bank, the bankagreed to extend the call of the loans for an additionalthirty days. In a subsequent letter dated November 2,1988, Peoples Bank granted Cermack a ninety-dayextension to find new financing. Peoples Bank nevertook any affirmative steps to foreclose againstCermack. In fact, at the time Cermack �sold� hisproperty, he was still operating under an extension oftime that Peoples Bank had granted him to find newfinancing.

Cermack and his accountant attempted toobtain financing for his debts from the Small BusinessAdministration and other banks. However, neitherthe Small Business Administration nor any of thebanks Cermack approached would lend Cermack theneeded money. In April of 1989, Cermack �sold� hisbuilding and land to David Megginson and GayleKinsey under a lease/buyback deal for approximately$300,000.00. Cermack paid off the $176,543.54 debtto Peoples Bank and used the remaining funds tofinance the operation of his business.


89

DISCUSSION. . .

In Black v. The Peoples Bank and TrustCompany, 437 So.2d 26 (Miss.1983), this Courtdiscussed Section 75-1-208 (1972), and held thatwhere the creditor accelerated the debtor�s obliga-tions because it felt �insecure,� it was for the jury todecide whether the creditor�s decision to acceleratethe debtor�s debt was made in good faith. In Black,we quoted Commercial Credit Co. v. Cain, 190 Miss.866, 1 So.2d 776 (1941), and stated: �Cain was thefirst case to adopt this standard by holding that acreditor �may proceed upon such circumstances ofpresently apparent danger as would furnish probablecause for the belief that the security is unsafe whenviewed in good faith by a man of reasonable pru-dence.� � Black, 437 So.2d at 29, quoting Cain, 190Miss. at 871, 1 So.2d at 777.

However, Peoples Bank argues thatMiss.Code Ann. § 75-1-208 (Section 1-208 of theUniformCommercial Code) does not apply to actionsunder a �default- type� acceleration clause. Weagree. A �default-type� acceleration is one that isconditioned upon the occurrence of an event which iswithin the control of the debtor. Matter of SuttonInvestments, Inc., 46 N.C.App. 654, 266 S.E.2d 686,690 (1980).

In Bowen v. Danna, 276 Ark. 528, 637S.W.2d 560 (1982), the Arkansas Supreme Courtheld that Ark.Stat.Ann. § 85-1-208 (the equivalent toour Miss.Code Ann. § 75-1-208 (1972)) is inappli-cable where the right to accelerate is conditionedupon the occurrence of an event, such as the lapse ofrequired insurance coverage, which is in the completecontrol of the debtor. Bowen, 637 S.W.2d at 564.See also Hickmon v. Beene, 6 Ark.App. 272, 640S.W.2d 812, 813 (1982).

Likewise, the North Carolina Court ofAppeals has also addressed the issue of whetherUniform Commercial Code Section 1-208 is appli-cable when a note and or deed of trust contains adefault-type acceleration clause. Matter of SuttonInvestments, Inc., 46 N.C.App. 654, 266 S.E.2d 686(1980). In Sutton, the debtor breached an expressagreement found in his deed of trust. Accordingly,

the creditor declared the entire amount of the indebt-edness due under authority in the deed of trust thatpermitted acceleration for any breach of the agree-ments contained therein.

On appeal the debtor argued that thecreditor�s lack of good faith precluded him under G.S.25-1-208 from further action. The Sutton court held:

This contention is without merit. The statute reliedupon is that portion of the Uniform CommercialCode which imposes a good faith requirement uponthe exercise of a secured creditor�s option toaccelerate �at will� or �when he deems himselfinsecure.� �These clauses are clearly distinguishedfrom the default-type clauses ... where the right toaccelerate is conditioned upon the occurrence of acondition which is within the control of the debtor�... the right of acceleration upon whichRichardson�s rights depend in the present case isconditioned upon the occurrence of an event withinthe complete control of the debtor, i.e., compliancewith the terms and conditions contained in the Noteand the Deed of Trust. (emphasis added).

Id., 266 S.E.2d at 690. See also Mechanics Sav.Bank v. Tucker, 178 Conn. 640, 425 A.2d 124, 127(1979); Don Anderson Enterprises, Inc. v. Entertain-ment Enterprises, Inc., 589 S.W.2d 70(Mo.App.1979).

After a lengthy review of how variousjurisdictions, both state and federal, have interpretedtheir equivalent to our Miss.Code Ann. § 75-1-208(1972), we find that the interpretation of UniformCommercial Code Section 1- 208 (the model for ourMiss.Code Ann. § 75-1-208 (1972)) found in Bowenv. Danna, 276 Ark. 528, 637 S.W.2d 560 (1982), andMatter of Sutton Investments, Inc., 46 N.C.App. 654,266 S.E.2d 686 (1980), is the most logical and work-able. Accordingly we hold that Miss.Code Ann. §75-1-208 (1972) is inapplicable to situations where acreditor, under the terms of its contract with thedebtor, has accelerated its debtor�s outstandingobligations after the occurrence of an event that wasin the complete control of the debtor, i.e., where thecreditor accelerates indebtedness because the debtorfails to comply with the terms and conditions con-tained in the promissory note, deed of trust or loan


90

agreement. Bowen, 637 S.W.2d at 564; SuttonInvestments, Inc., 266 S.E.2d at 690.

In the case sub judice, we note that Cermack didnot comply with the terms and conditions containedin the loan agreement and promissory notes.Nonetheless, we also note that Peoples Bank didnot immediately accelerate Cermack�s indebted-ness upon learning of Cermack�s breach of the loanagreement. Instead, Peoples Bank waited approxi-mately two months after learning of Cermack�sbreach before accelerating Cermack�s outstandingindebtedness. Therefore, it could be argued thatthis delay in accelerating Cermack�s indebtednessindicated that Peoples Bank accelerated theoutstanding debt not because of the breach, butbecause Peoples Bank deemed itself �insecure.�

If Peoples Bank accelerated Cermack�sindebtedness because they felt insecure and not

because of Cermack�s breach of contract, thenMiss.Code Ann. § 75-1- 208 (1972) would apply. If,however, Peoples Bank accelerated Cermack�s debtsolely because of Cermack�s breach of the contract,then the terms contained within the four corners ofthe loan agreement and promissory note wouldcontrol. Because of other flaws in the jury instruc-tions, it is not necessary for us to decide whether thebank�s acceleration was due to Cermack�s breach ofthe loan agreement and promissory notes or becausePeoples Bank deemed itself insecure.. . .

Accordingly, for the above stated reasons, itis the decision of this Court that the jury�s verdicts beset aside and that this case is reversed and remandedfor a new trial or other disposition not inconsistentwith this opinion.

EXERCISES

1. After Rose Tepper was adjudicated incompetent in December 1982, the guardian discovered a checknaming her as payee in the amount of $6,068 drawn by Citizens Federal S & L on Jefferson National Bank anddated Jan. 4, 1974. When the check was presented on Dec. 12, 1982, payment was refused and Citizens indi-cated that it would neither honor nor refund the instrument. Accordingly, the guardian filed an action againstCitizens on July 12, 1983.

What non-substantive defenses are available to Citizens? Are they sound? /3-g

2. The following Complaint was filed as an objection to a claim in probate proceedings in a Florida Estate.Assume that statute of limitations in Maryland was twelve (12) years and in Florida five (5). Also assume that theU.C.C. was in full force in Maryland but that Florida had adopted a provision providing that actions on notesaccrued upon demand. Would the result be the same under the proposed revision? Are there any defenses apparent on the face of the complaint itself?

Complaint

Plaintiff, OLIVE S. RUDDEROW, sues Defendant FIRST NATIONAL BANK OF CLEARWATER,as Personal Representative of the Estate of Normal L. Ingalls, Deceased, alleges:

ALLEGATIONS COMMON TO ALL COUNTS

1. This is an action for damages that exceeds $2,500.00.


91

2. On May 5, 1979, Norman L. Ingalls (hereinafter referred to as �Decedent�) died. Letters ofadministration were issued to Defendant First National Bank of Clearwater on May 8, 1979, and the first Noticeof administration was published on May 19, 1979. On July 10, 1979, Plaintiff filed with the Court a claim on theestate, the basis of which is the subject of this Complaint. On September 12, 1979, an objection to this claim wasfiled by Defendant.

3. At all relevant times, Decedent and Plaintiff were residents of Maryland.

4. Plaintiff is obligated to pay her attorneys a reasonable fee.

COUNT I

5. On March 1, 1965, Decedent executed, sealed and delivered a promissory note, a copy beingattached as Exhibit �A�, to Plaintiff.

6. On July 10, 1979, Plaintiff made a written demand for payment on the note in the form of a claimon the Estate of Norman L. Ingalls.

7. Defendant failed to pay the amount due on the note with interest from March 1, 1965.

8. Defendant owes Plaintiff $83,333.33 that is due on the note with interest from March 1,1965.

COUNT II

9. On March 1, 1965, Decedent executed, sealed, and delivered to Union Trust Company of Mary-land in Baltimore, Maryland, a promissory note, a copy being attached as Exhibit �B�.

10. Plaintiff executed the note as an accommodation party.

11. On November 1, 1974, Plaintiff paid Union Trust Company of Maryland, which was still holdingthe note, the amount due on the instrument.

12. Section 3-415 of the Maryland Uniform Commercial Code provides that Plaintiff has a right ofrecourse on the instrument against Decedent for the amount Plaintiff paid.

13. Defendant owes Plaintiff $112,583.45 with interest from November 1, 1974, under such right ofrecourse.

COUNT III

14. Plaintiff realleges paragraphs 8, 9, and 10.

15. By paying the amount due on the instrument, Plaintiff was subrogated to the rights of UnionTrust Company of Maryland, which was the holder of the note.

16. Defendant owes Plaintiff $112,583.45 plus interest from the date of November 1, 1974.


92

COUNT IV


18. Decedent�s execution and delivery of the note to which Plaintiff was an accommodation party,created an implied contract by Decedent to indemnify Plaintiff any amounts that she might be required to pay tosatisfy the note.

19. Defendant owes Plaintiff $112,583.45 plus interest from the date of Plaintiff�s payment of theamount due on the instrument.

COUNT V


21. Plaintiff paid the money to Union Trust Company of Maryland at the request of Decedent withan understanding that Decedent would repay the money to Plaintiff.

22. A contract is implied by law to require Defendant to repay $112,583.45, with interest sinceNovember 1, 1974, to Plaintiff; alternatively, Plaintiff is entitled to restitution of said sums because otherwiseDefendant would be unjustly enriched.

WHEREFORE, Plaintiff demands judgment for damages, costs and attorney�s fees.

[Complaint was filed 9/20/1979]

EXHIBIT A

$ 83,333.34 Middletown, MD, March 1, 1965

On Demand , after date, the undersigned jointly and severally promise to Pay to MIDDLETOWN VALLEYBANK, MIDDLETOWN, MARYLAND, or order, Eighty-three thousand three hundred thirty-thre dolars and34/100-- Dollars for value received, with interest from date, above payable at Middletown Valley Bank,Middletown, MD.

And I, we or either or any of us, whether makers, guarantors or endorsers, jointly and severally, hereby authorize any attorneyof record to confess judgment, to be entered by the proper official, at any time after maturity for the amount of principal andinterest then do hereunder, with costs of suit and Attorney's fees of ten percent on said amount so confessed and hereby waivepresentment, demand of payment, proteset and notice of non payment and all exemptions.

Due _________ _____________ (SEAL)No. _________ /s/ Norman L. Ingalls (SEAL)O. __________ _____________ (SEAL)


93

OPINION BY: DUHE

The record discloses the following undisputed factsnecessary to resolve this matter:

Northlake Federal Savings & Loan Associa-tion (�Northlake�) agreed to lend L & B Jackson�sLanding, a Louisiana partnership in Commendam,(�Partnership�) $ 2,528,000 to acquire and operate anapartment complex. Partnership was formed by thesale of limited partnership interests for a minimum of $60,000; $ 1,800 of this amount was paid in cash and thebalance of $ 58,200 was represented by the limited part-ners� promissory notes to the order of Partnership.Northlake�s loan to Partnership was secured byPartnership�s promissory note, a collateral mortgage onthe apartment complex, pledge and assignment oftwenty-seven specifically enumerated limited partnernotes held by Partnership, and a guaranty of the limitedpartners� notes by Latter & Blum, Inc., a real estatefirm.

After closing the Northlake-Partnership loanand acquiring the complex, appellants Newell, Levy,Terral, and others became limited partners in Partner-ship and gave Partnership their promissory notes.

Partnership defaulted on the Northlake note and

filed for relief under Chapter 11 of the Bankruptcy Code.Several months later, the Federal Savings & Loan In-surance Corporation (�FSLIC�) was appointed receiverof Northlake. Northlake/FSLIC and Partnership com-promised Partnership�s debt to Northlake/FSLIC (sub-ject to approval of the Bankruptcy Court) by agreeingthat all limited partner notes of Partnership would beassigned by it to Northlake and Northlake would re-lease all claims against Partnership, its apartment com-plex, and its general partners other than claims on cer-tain promissory notes not at issue here. A joint motionfor approval of the compromise was filed and granted,and the bankruptcy court ordered Partnership to de-liver to Northlake/FSLIC �possession, ownership, cus-tody and control of all promissory notes payable to Debtorand pledged to Northlake.� Several months later the president of one of the gen-eral partners of Partnership found ten additional prom-issory notes of Partnership�s limited partners (includingthe notes of Newell, Levy, and Terral) in Partnership�sfile. After consultation with the president of the othergeneral partner and with Partnership�s counsel, andbelieving that the ten notes were subject to the originalpledge and assignment agreement and intended to bepart of the settlement with Northlake/FSLIC, he deliv-

3. Mortgage payments due on the 15th were regularly late. The note provided that a one monthdefault would entitle the holder to accelerate the entire balance.

To pay the December 1982 payment, the mortgagor sent a check on Jan. 13, 1983, which was postdatedJan. 20, 1983. The holder retained the check until Jan. 20, 1983 and then deposited it.

On the 20th, the mortgagee�s attorney mailed a notice of foreclosure to the mortgagor indicating exerciseof the option to accelerate.

The mortgagor then brought an action to enjoin foreclosure. Judgment was entered for defendant andplaintiff appeals. What result? /3-h

4. Can enrollment for military service affect a defense? See, Soldiers and Sailors Civil ReliefAct of 1940, 50 U.S.C.S. 520 (1993), provided in the supplement.

C. SHELTERPrior Sections 3-201, 3-307(3); New Section 3-203(b)

Newell v. Oxford Mgmt..912 F.2d 793, 14 U.C.C.R. Serv. 2d (Callaghan) 144 (1990)


94

ered the ten notes to Northlake/FSLIC. Partnership thennotified the limited partners, including appellants herein,of the assignment and delivery of their notes toNorthlake/FSLIC. Later the bankruptcy court dismissed Partnership�sChapter 11 proceeding in its entirety. Meanwhile thenotes of Newell, Levy, and Terral had become due andNorthlake/FSLIC demanded payment. Payment wasnot made. The balance remaining due on Partnership�sdebt to Northlake/FSLIC was in excess of $ 2,500,000and the district court granted summary judgment in fa-vor of Northlake/FSLIC and against Newell, Levy, andTerral for the amounts due on their notes.

The district court found that the undisputed factsshowed that appellants�notes were included in the origi-nal pledge agreement and that, in the alternative,Northlake/FSLIC was at least a transferee underLa.Rev.Stat.Ann.Title 10:3-201 (West 1989); and noneof the defenses available against a transferee pursuantto La.Rev.Stat.Ann. 10:3-306 (West 1989) were appli-cable. Appellants contend that their notes were not specifi-cally included by description in or delivery with the origi-nal pledge agreement and are, therefore, excluded; andthat Northlake/FSLIC is neither a transferee nor a holdernor a holder in due course. As a result appellants con-tend Northlake/FSLIC is only a possessor of their notesand cannot recover thereon.

Finding that the district court was correct andthat no issues of fact exist, that as a matter of lawNorthlake/FSLIC is a transferee pursuant to Title 10:3-201 of the La.Rev.Stat., and that no defenses outlinedin Title 10:3-306 are urged, we affirm. This holdingmakes it unnecessary to consider appellants� other ar-guments.

DISCUSSION

Summary judgment is appropriate underFed.R.Civ.P. 56 if the record discloses �that there is nogenuine issue as to any material fact and that the mov-ing party is entitled to a judgment as a matter of law.�In reviewing the summary judgment, we apply the samestandard of review as did the district court. Waltmanv. International Paper Co., 875 F.2d 468, 474 (5thCir. 1989); Moore v. Mississippi Valley State Univ.,871 F.2d 545, 548 (5th Cir. 1989). The pleadings, depo-sitions, admissions, and answers to interrogatories, to-

gether with affidavits, must demonstrate that no genu-ine issue of material fact remains. Celotex Corp. v.Catrett, 477 U.S. 317, 322-23, 106 S. Ct. 2548, 2552,91 L. Ed. 2d 265, cert. denied, 484 U.S. 1066, 108 S.Ct. 1028, 98 L. Ed. 2d 992 (1986). To that end we must�review the facts drawing all inferences most favor-able to the party opposing the motion.� Reid v. StateFarm Mut. Auto. Ins. Co., 784 F.2d 577, 578 (5th Cir.1986). Where the record taken as a whole could notlead a rational trier of fact to find for the nonmovingparty, there is no genuine issue for trial. MatsushitaElectric Indus. Co. v. Zenith Radio Corp., 475 U.S.574, 587, 106 S. Ct. 1348, 1356, 89 L. Ed. 2d 538, cert.denied, 481 U.S. 1029, 107 S. Ct. 1955, 95 L. Ed. 2d527 (1986); see Boeing Company v. Shipman, 411 F.2d365, 374-75 (5th Cir. 1969) (en banc). La.Rev.Stat.Ann. Title 10:1-201 (West 1989) defines�holder� as � a person who is in possession of . . . aninstrument . . . drawn [or] issued . . . to him or hisorder.� Appellants� notes were drawn to the order ofPartnership. It was therefore a �holder.� That same section defines �delivery� as �voluntarytransfer of possession.� The undisputed evidence showstransfer of possession of appellants� notes and the sevenothers by Partnership to Northlake/FSLIC after approvalof the compromise by the bankruptcy court. ThusNorthlake/FSLIC became, at minimum, a transferee ofthe notes.

La.Rev.Stat.Ann. Title 10:3-201 (West1989) provides that �transfer of an instrument vests inthe transferee such rights as the transferor has therein.�Thus Northlake/FSLIC acquired all rights of Partner-ship in the notes, including the right to collect when due.Transfer for value is not required. La.Rev.Stat.Ann.10:3-201, Comment,paragraph 1. Neither is endorsement required. Vidrinev. Carmouche, 422 So.2d 1327 (La. Ct. App. 1982).Appellants do not contest the validity of their notes, northat they are due and payable, nor the amounts duethereunder. Therefore, there is no issue of material factthat Northlake/FSLIC became transferee of appellants�notes when the notes were delivered to it and was en-titled to judgment thereon as a matter of law when thenotes became due and owing and were not paid. Hav-ing so held, we find it unnecessary to address appel-lants� other contentions.

The judgment of the district court is AFFIRMED.


95

Strickler v. Marx436 S.E.2d 447 (Va. 1993)

In November 1981, defendant Strickler, afarmer living in the Charlottesville area, performedautomobile repair work for Davis. Davis oweddefendant money from an earlier incident in whichDavis was convicted of larceny from defendant anddefendant was awarded a money judgment againsthim.

During 1981, defendant occasionally ad-vanced funds to Davis to meet his payroll at the endof a week so that Davis could stay in business andrepay defendant the prior obligation. In the fall of1981, defendant often left Charlottesville on week-ends to officiate college football games. On theseweekends, defendant would give Davis a personalcheck, signed and payable to A- 1, and allow Davis tofill in the amount needed to meet the payroll. Daviswould cash the check and repay defendant after theweekend. These transactions resulted in Davis fillingin the checks for $200.00 to $300.00.

On November 27, 1981, a Friday, defendantleft Charlottesville to officiate a game. He gaveDavis a signed check payable to the order of �A-1Body Shop,� completed except for the amount, anddrawn on defendant�s account at National Bank andTrust Company. When defendant returned on thefollowing Monday, Davis asked for another check toreplace the first check, stating �he messed the checkup, but the bank give him the money, but he had toreplace the check.� On that day, November 30,1981, defendant gave Davis another signed checkpayable to the order of �A-1 Car Body Shop,�completed except for the amount, and drawn ondefendant�s account at National Bank.

Davis filled in the amount of $4,860.00 on thefirst check and the amount of $6,980.00 on thesecond check. He presented the checks toAlbemarle Bank & Trust Company, where he had anaccount, after indorsing each, �Pay To The Order ofAlbemarle Bank & Trust Co. Charlottesville, Va. ForDeposit Only Chuch [sic] Davis Body Shop.� Appar-ently, Davis was given immediate credit for thechecks.

Assignee of drawee of check sued drawer,seeking recovery of amount of checks with interest.The Circuit Court, City of Charlottesville, Jay T.Swett, J., entered judgment for assignee and appealwas taken. The Supreme Court, Compton, J., heldthat assignee was not a �holder� within meaning ofthe Uniform Commercial Code, and was not entitledto recovery. Reversed; final judgment for drawee.

The dispositive question in this appeal iswhether, under the circumstances of this case, thetransferee of two checks qualified as a �holder,�within the meaning of the Uniform Commercial Code(U.C.C.), so as to entitle the transferee to recover onthe instruments. [This appeal is decided under thepre-1993 version of the applicable statutes and thecases interpreting those statutes.]

In March 1991, appellee James H. Marx, Sr.,filed a motion for judgment against appellant MaynardStrickler seeking recovery in the amount of $11,840with interest. This sum represents the total of twochecks made in November 1981 by the defendantand eventually transferred to the plaintiff.

Following a July 1992 bench trial, the courtbelow, in a letter opinion, ruled in favor of the plain-tiff. We awarded the defendant an appeal from theOctober 1992 order entering judgment in favor of theplaintiff in the amount claimed.

The facts relating to the dispositive questionare not in dispute. In 1981, the plaintiff, a resident ofAlexandria, provided financing for a business enter-prise conducted in Charlottesville by one Charles W.Davis, also known as Chuck Davis. Prior to hisassociation with Davis, the plaintiff had incorporatedEnergy Technology Corporation. Davis operated A-1Body Shop, also known as A-1 Car Body Shop, oneof the entities falling under the corporate umbrella ofEnergy Technology Corporation. The plaintiff andDavis were also associated in another corporationthat plaintiff had created, which was engaged in theused car rental business in Charlottesville.


96

The checks subsequently were dishonored byNational Bank and returned to Albemarle Bankbecause defendant had insufficient funds in hisNational Bank account to pay them. Defendantroutinely maintained a balance in that account of nomore than $500.00. Because Davis had withdrawnthe funds from his Albemarle account, the subsequentcharge by Albemarle Bank resulted in an overdraft onDavis�s account.

In December 1981, plaintiff learned, eitherfrom Davis or Albemarle Bank, that the two checkshad �bounced.� Subsequently, plaintiff and Davisexecuted a note payable to Albemarle Bank forapproximately $15,000 to cover the amount of thechecks plus other sums owed the bank by A-1. Theplaintiff, who had no prior legal obligation to the bank,executed the note to protect his interest as a creditorof Davis�s business.

In the spring of 1983, plaintiff paid the notewithout any contribution from Davis and AlbemarleBank delivered the dishonored checks to plaintiff. Inaddition to Davis�s original indorsement, the checkscarried the indorsement, �Pay Any Bank, P.E.G.� byAlbemarle Bank. No other indorsement, except thatof the Federal Reserve System, appears on thechecks.

In the meantime, defendant learned of theresulting overdrafts by notice from National Bank.He contacted Davis to find out �what was going on.�Davis stated that the funds had been used to payA-1�s bills and �some outstanding debts in gambling.�Davis told defendant, �I will take care of it ... rightnow.� Based on this representation, and afterverifying with Albemarle Bank that �Mr. Davis andMr. Marx had taken care of it,� defendant took nofurther action. Subsequently, defendant realized thatAlbemarle Bank had obtained judgments against himin the amounts of the checks. These judgments weremarked satisfied when plaintiff paid the amount of thenote to Albemarle Bank.

In 1985, A-1�s business failed. The plaintifftestified that he �got an assignment of the assets ofA-1� from the trustee in bankruptcy. No writtenassignment was presented in evidence nor was there

testimony of the details of such assignment.

Subsequently, this action ensued againstdefendant only. The whereabouts of Davis is un-known. In the motion for judgment, plaintiff allegedthat he �is the assignee and transferee of all assets,including claims and causes of actions, of EnergyTechnology Corporation, trading as A-1 Car BodyShop and A-1 Body Shop.� Reciting that defendant�drew, uttered and delivered� the checks, which were�returned marked �insufficient funds,� � and not paidby defendant�s bank, plaintiff asked for judgmentagainst defendant. The broad allegations of themotion for judgment were narrowed at trial.

At trial, the parties and the court agreed thatthe central issue in the case was whether the plaintiffqualified as a �holder� under the U.C.C. For ex-ample, plaintiff�s counsel stated that �we concedehe�s not a holder in due course ... he�s a holderbecause he gave value. I think that a creditor thatgets a cause of action on a check [has] given value.So, I think he�s a holder.� In addition, plaintiff�scounsel stated: �He�s a holder for value though, YourHonor, and we think that that puts the burden on Mr.Strickler to establish defenses.� Also, at the conclu-sion of the evidence, the trial judge stated that the�turning point� in the case is whether plaintiff is �aholder of these two checks, and is [in] a valid positionto seek to collect.� The judge further said, �It�ssimply a matter of law under the Uniform Commer-cial Code, whether or not Mr. Marx can collect onthese two checks.� The defendant took the positionthat plaintiff was not a �holder.� Alternatively,defendant asserted that even if the plaintiff was a�holder,� defendant had established the defenses oflack of consideration and material alteration of theinstruments.

The trial court, in ruling for the plaintiff,implicitly decided that the plaintiff was a �holder,�although the court did not discuss the issue in theletter opinion. Instead, the court discussed its rulingsthat defendant had failed to prove lack of consider-ation or material alteration. We do not reach thequestion whether defendant established those de-fenses because we conclude that the trial court erredin ruling that the plaintiff was a �holder.�


97

Under the provisions of the U.C.C. effectiveat the time of this controversy, the right of a party topayment of an instrument depended �upon his statusas a holder. Code § 8.3-301.� Lambert v. Barker,232 Va. 21, 24, 348 S.E.2d 214, 216 (1986). (§8.3-301 has been replaced by § 8.3A- 301.) TheU.C.C. defined �Holder � as �a person who is inpossession of ... an instrument ... drawn, issued orindorsed to him or to his order or to bearer or inblank.� Former Code § 8.1-201(20) (now amended).�A transferee may become a holder of order paperonly by �negotiation,� that is, by indorsement anddelivery, and the indorsement must be by or on behalfof a person who is himself a holder.� Becker v. Nat�lBank & Trust Co., 222 Va. 716, 720, 284 S.E.2d 793,795 (1981) (interpreting former Code § 8.3-202(1)now, with changes, § 8.3A-201). �A transfer of anorder instrument without a necessary indorsement isnot a negotiation.� Virginia Comment to former Code§ 8.3- 202(1), citing Citizens Bank and Trust Co. v.Chase, 151 Va. 65, 69, 144 S.E. 464, 465 (1928).

In the present case, we hold that the plaintiffwas not a �holder� of the checks, which were orderpaper, because they had not been indorsed to him orto his order or to bearer or in blank. The checkscarried Davis�s indorsement to Albemarle Bank andAlbemarle Bank�s indorsement, �Pay Any Bank,P.E.G.� According to former Code § 8.4-201(2),�After an item has been indorsed with the words �payany bank� or the like, only a bank may acquire therights of a holder (a) until the item has been returnedto the customer initiating collection; or (b) until theitem has been specially indorsed by a bank to a

person who is not a bank.� (The form of §8.4-201(2) has been amended.) The plaintiff, astransferee of the checks, did not qualify as a �holder�under either (a) or (b).

At trial, the plaintiff argued that he was a�holder� simply because he received an �assignment�of A-1�s assets. Becker demonstrates that thisargument has no merit. In that case, we focused onwhether a bank was a �holder� when the instrumentshad been transferred by mere assignment. We heldthat because the entity that transferred notes to thebank took them by mere assignment and not throughindorsement, the entity was not a �holder� and thuscould not �negotiate� the notes so as to permit itstransferee, the bank, to qualify as a �holder.� 222 Va.at 721, 284 S.E.2d at 795-96.

Here, as the defendant argues, the essentialcomponents of negotiation were not fulfilled byproper indorsements on the instruments. Simpledelivery of the checks to the plaintiff did not give*390 him the status of a �holder,� entitling him to theremedies of the U.C.C. The so-called �assignment�did not suffice as a substitute for indorsement. �Anindorsement must be written by or on behalf of theholder and on the instrument or on a paper so firmlyaffixed thereto as to become a part thereof.� FormerCode § 8.3-202(2) (now repealed).

Consequently, the judgment in favor of theplaintiff will be reversed and final judgment will beentered here in favor of the defendant.

D. NEGOTIATION BY CONTRACT

Becker v. National Bank & Trust Co.222 Va. 716, 284 S.E. 2d 793 (1981)

CARRICO, Chief Justice.

In this case involving the Uniform CommercialCode, National Bank and Trust Company (the Bank)sought recovery below on six promissory notes executedrespectively by each of six couples (collectively, theMakers).1 The Bank held the notes as collateral for aloan made to United Leasing Corporation (United) and

instituted the present action against the Makers uponUnited�s default.

The parties agreed to submit the case to the trialcourt upon discovery depositions and pretrial briefs.Ruling that the Bank was a holder in due course en-titled to recover on the notes, the court entered a sepa-rate judgment against each set of makers.2 We granted


98

the Makers an appeal.

The record shows that, in 1972, Dr. Sven Ebbessoninduced six of his colleagues in the medical field to joinhim in a cattle venture. The venture consisted of a cor-poration known as Solhem Farm, Inc., with Ebbessonas president and major shareholder, and a partnershipknown as Polled Exotics Limited Partnership (Polled),with Ebbesson as general partner and his six colleaguesas limited partners.

To commence the business, Ebbesson negotiatedwith Edward Shield, president of United, to have Unitedpurchase cattle and lease them to Polled. As collateralto insure performance of the lease obligations, Polledtransferred to United seven promissory notes, eachexecuted by a different partner and his wife and madepayable to the order of Polled.3 The transfer to Unitedwas evidenced by a separate assignment agreementand not by any writing entered upon, or attached to, thenotes themselves.

Shield, on behalf of United, negotiated with theBank for a loan to purchase the cattle to be leased toPolled. As collateral, United transferred to the Bankthe cattle lease executed by Polled and the seven prom-issory notes United had received from Polled.

After the Bank�s loan to United was closed, thecattle operation commenced and the Makers beganpaying United the annual installments due on their notes.Ultimately, the cattle venture suffered financial reverses,and the Makers undertook an investigation of the op-eration. Thereafter, the Makers ceased paying the notesand instituted a fraud action against Polled in the UnitedStates District Court for the Western District of Vir-ginia. Finding that the notes had been procured fromthe Makers by fraud, the District Court declared thenotes void ab initio as between the Makers and Polled.The Bank was not a party to this proceeding.4

Following cessation of the Makers� payments,United defaulted on its loan obligation to the Bank. TheBank obtained judgment against United for the balancedue on the debt and, failing to secure satisfaction ofthat judgment, brought the present action against theMakers.

On appeal, the focal point of the controversy be-tween the parties is a provision contained in each of thenotes executed by the Makers. The provision reads:

The makers of this Note agree that Polled Exot-ics Limited Partnership, or its assignees, may freelyassign or negotiate this Note in whole or in part fromtime to time without notice to the makers; however, ifthe makers of this Note are given notice of such anassignment or negotiation, the makers agree to acknowl-edge receipt thereof in writing.

Section 1-102(3) of the Uniform CommercialCode (Va.Code Section 8.1-102(3)) provides that �[t]heeffect of provisions of this act may be varied by agree-ment.� The Official Comment to this Section reads inpart: 2. Sub Section (3) states affirmatively at theoutset that freedom of contract is a principle of the Code:�the effect� of its provisions may be varied by �agree-ment.� The meaning of the statute itself must be foundin its text, including its definitions, and in appropriateextrinsic aids; it cannot be varied by agreement .... Thusprivate parties cannot make an instrument negotiablewithin the meaning of Article 3 except as provided inSection 3-104; nor can they change the meaning ofsuch terms as �bona fide purchaser,� �holder in duecourse,� or �due negotiation,� as used in this Act. Butan agreement can change the legal consequences whichwould otherwise flow from the provisions of the Act.

In reaching the conclusion that the Bank was aholder in due course not subject to the fraud defensesof the Makers, the trial court held that the parties had�contract[ed] as to the effect of the Commercial Code�sprovisions� by providing for the assignment of the notes�without suffering the usual effect of loss of negotiabil-ity.� Thus, the court found, United had the �capacity tonegotiate the notes� to the extent that the Bank be-came a holder in due course.

The Makers contend that by allowing the disputedprovision of the notes to stand, the trial court has per-mitted the parties to vary the meaning of such U.C.C.terms as �due negotiation� and �holder in due course.�This is the very sort of change that the U.C.C. prohib-its, the Makers insist, and, hence, the trial court�s find-ings are erroneous.


99

On the other hand, the Bank contends that thedisputed provision did not change �any concept or defi-nition� of the U.C.C. The Bank argues that the �lan-guage of the Notes only varied the legal consequenceof lost negotiability which would otherwise have attendedan assignment of the Notes to United Leasing.� TheBank maintains that, since this type of variance is al-lowed by the U.C.C., the trial court properly held Unitedwas authorized to negotiate the notes so as to permitthe Bank to become a holder in due course. We agreewith the Bank that by allowing United, a mere assignee,to negotiate the notes, the disputed provision varied thelegal consequences ordinarily attending an assignment.We do not agree, however, that only legal consequenceswere altered; we believe the provision also changedconcepts or definitions of the U.C.C. contrary to thepreviously quoted Official Comment. In pertinent part,Section 3-202 of the U.C.C. provides:

(1) Negotiation is the transfer of an instrumentin such form that the transferee becomes a holder. Ifthe instrument is payable to order it is negotiated bydelivery with any necessary indorsement; if payable tobearer it is negotiated by delivery.

(2) An indorsement must be written by or onbehalf of the holder and on the instrument or on a paperso firmly affixed thereto as to become a part thereof.In Section 1-201(20), a holder is defined as �a personwho is in possession of ... an instrument ... issued orindorsed to him or to his order or to bearer or in blank.�And, in Section 3-302, a holder in due course is de-fined as a �holder who takes the instrument� underspecified conditions.

These Section s provide that, before a transfereeof a promissory note can become a holder in due course,he must first qualify as a holder. A transferee maybecome a holder of order paper only by �negotiation,�that is, by indorsement and delivery, and the indorse-ment must be by or on behalf of a person who is him-self a holder.

Without the disputed provision, it is clear that, be-cause United took the notes by mere assignment andnot through the indorsement of Polled, United was nota holder. Thus, United could not �negotiate� the notes

so as to permit its transferee, the Bank, to qualify as aholder. Therefore, to the extent that the disputed provi-sion purported to authorize United, as a mere assignee,to negotiate the notes, the provision necessarily changedthe meaning of the terms �holder� and �due negotia-tion� and, hence, of the term �holder in due course.�

When the provision is given its obvious importrelative to the order paper in question, it attempts toequate a �holder� with a mere possessor and to make�due negotiation� synonymous with delivery accompa-nied only by assignment. Correspondingly, the provi-sion attempts to convert the meaning of �holder in duecourse� to one who possesses order paper by assign-ment. But the U.C.C. does not permit this sort of alter-ation of the meaning of the inviolable terms �due nego-tiation� and �holder in due course.� We hold, therefore,that the judgments entered against the Makers are er-roneous. Accordingly, we will reverse the judgmentsand remand the case for further proceedings not incon-sistent with the views expressed in this opinion. Re-versed and remanded.

1 The Makers are Donald P. Becker and Patricia A.Becker, Harold F. Young and Mary T. Young, FrederickS. Vines and Marguerite B. Vines, David Yashon andMyrna D. Yashon, Walter W. Whisler and Jeanette C.Whisler, and John A. Jane and Noella Jane.

2 The amounts of the judgments ranged from $14,874.66to $20,525.15.

3 The note executed by Ebbesson and his wife is notinvolved in this appeal. The others who executed prom-issory notes are listed in footnote 1.

4 The Makers state in their brief that the United StatesBankruptcy Court for the Western District of Virginiafound that United had procured the cattle lease fromPolled by fraud. The Makers state also that the Bankwas not a party to this proceeding.


100

QUESTIONS

1. Would the result be different if Polled had indorsed the notes?

2. What were the parties attempting to achieve by the controverted provision in the note? Could suchan end be achieved? Can it be achieved under the revised Article 3?

3. Is it possible to create negotiability by agreement for an instrument which fails to comply with newSection 3-104(1) or prior Section 3-805?

4. Is the following certificate negotiable?

[The interest warrant annexed to the certificate read: �Warrant for interest due Dec. 1, 1920, upon $1,000principal amount of bonds of above issue, specified in the certificate No. M19349 issued by the undersignedunder date of June 18, 1920, payable to bearer at the offices of the undersigned but only after receipt by theundersigned from the kingdom of Belgium of moneys for the payment of such interest and also only in case thesaid certificate be not surrendered before Dec. 1, 1920. The holder of this warrant is bound by the provisions inrespect thereof contained in said certificate. J. P. Morgan & Co.�]6

NOTE

For a useful review of the matters addressed in this Chapter, see National Union Fire Insurance Company ofPittsburgh, PA. v. Jerry D. Alexander and Margaret F. Alexander, 728 F. Supp. 192(S.D. N.Y. 1989).

ENDNOTES

3-a/ In the introduction to Chapter 7 of his casebook on Property, Alger provides a useful historical perspectiveon bona fide purchase.

One of the fundamental doctrines of the common law, and one which as a starting point in thelaw of property should always be borne in mind, is that when dealing with what are regarded as beinghistorically common law property interests, a person can transfer no greater interest of this kind in thesubject matter than he has. The result of this point of view is that common law property interests in achattel (or in land) belonging to a person other than the transferor are unaffected by a gift, bequest, orsale of the chattel (or land). This is true although the person to whom the transfer was made acted ingood faith and even paid a valuable consideration.1 While this is the normal point of view there arecertain qualifications thereon that should be noted.

The first of these is the doctrine of purchase in market overt. This is an old English rule, thesubstance of it being that if a person in good faith purchases an article at open and public sale, generallywith the further requirement that it be on a certain prescribed day or days and in a prescribed placedevoted to sales of articles of the kind in question, he thereby becomes owner of the article and the

1. The possibility of extinguishing the interest of a �cestul que trust� or any other equitable interest inchattels or land by a sale to a bona fide purchaser is discussed in the courses dealing with Real Property andTrusts.


101

former owner has lost all his property therein even though he neither consented to the sale nor wasnegligent in guarding his property.2 The doctrine of market overt as a means of acquiring ownership hasnever been recognized in this country.3

A second and important exception to the rule is that relating to money, either paper money orcoins. The reason for the exception is, of course, to facilitate commerce. If a person who took moneyin good faith in an ordinary commercial transaction should be held to take it at his peril with a consequentresultant loss if the title to it was traceable to a thief it might seriously impair the functional value ofcurrency, although the complete uniformity of metallic currency and the practice of not noting the num-bers of paper currency except in very unusual cases render the possibility largely theoretical. Thisexception to the common law rule is now definitely established and even though the piece of currency isin fact identifiable, as by a number or some mark, the person who takes it in good faith and for valueacquires complete ownership. An interesting case involving a coin minted for memorial purposes, al-though also usable as currency, which was bought as a curio, is Moss v. Hancock4 in which the courtheld that since it was taken not as currency but as a chattel the ordinary common law rule applied to it.

The principle applicable to money also applies to commercial paper, but the developments of thisaspect of the matter is taken up in courses dealing with banking and commercial paper.

Another exception, illustrated by the case which follows, arises when the vendee of a chattelhas acquired legal ownership but has done so by fraudulent means. In such case, the vendor has thepower to rescind the sale and regain ownership. If however, the fraudulent vendee sells to a bona fidepurchaser, who pays full value and does not know about the earlier fraud, then the latter may hold thegoods even against the defrauded owner. The question is dealt with in more detail in the course in Sales.

Another exception to the general rule involves an idea not peculiar to property law, generallyreferred to as estoppel. An example, as applied to the field of chattels, would be the case of an owner ofa chattel who delivers it to a bailee, gives him all the indicia of ownership and knowingly allows him to actwith the chattel as though it were his own, with the result that the bailee wrongfully sells it to a purchaserwho buys in good faith. Such a purchaser could maintain his ownership as against the bailor.

It has already been noted in some of the preceding chapters of this Part, that the presence orlack of good faith has a bearing upon the property interests of the parties involved.

3-b/ In his brief summary from Gilmore �The Commercial Doctrine of Good Faith Purchase�, 8 Yale L.J.1 (June1954) with footnotes deleted, Grant Gilmore capsulizes the principal tenets of the doctrine of negotiability.

�Negotiable� and �negotiability� are words rarely, if ever, defined. They mean not one but many things.The principal attributes of negotiability are these:

(1) The paper must be freely assignable; no restraints on alienation will be tolerated.

2. See the Case of Market-Overt, 5 Co.Rep. 83b, 77 Eng.Reprint 180, 1503; Clayton v. LeRoy, [1911] 2K.B. 1031.

3. Leslie v. Wm. Kelley Milling Co., 100 Kan. 146, 197 P. 1094, 1921; Dame v. Baldwin, 8 Mass. 318, 1812;Ward v. Carey, 200 Mich. 217, 166 N.W. 952, 1018; DeBates v. Searls, 52 S.D. 603, 219 N.W. 559, 1028, notedin 27 Mich. L. Rev. 218, 1928.

4. Moss v. Hancock, [1899] 2 Q.B. 111. The generally accepted theory is that the thief himself does nothave legal title, but that he has the power to transfer legal title. For the theory that the thief of money ornegotiable paper payable to bearer has legal title see 19 Harvard L. Rev. 33. 1903.


102

(2) The debt claim is �merged� into the paper evidencing the claim; thus the paper must be treated inmany situations as if it were the claim itself:

a) Transfer of the claim can only be made by physical delivery of the paper, completed byevidence of the transferor�s intent to transfer which is customarily given by his indorsement onthe paper itself;b) Discharge of the debt evidenced by the paper can be made only by payment to (or cancella-tion by) the holder--the person physically in possession;c) Creditors of a holder can assert their claims against the paper (as part of the debtor�s assets)only by getting possession of it through appropriate legal process, and not by serving garnish-ment order on the obliger;d) The situs of the debt is where the paper is.

(3) In pursuing his claim against the obligor, the holder receives the benefit of a series of presumptionswhich cast on the defendant the greater part of the burden of proof normally carried by plaintiffs incontract actions.(4) On default by the obligor, the holder has an automatic right of recourse against prior indorsers.(5) As to �purchase in good faith, without notice and for value�:

a) a purchaser is �in good faith� as long as he is �subjectively� honest at the time he takes thepaper: he is under no duty of inquiry; he may even have �forgotten� relevant information; he ismerely required not to be actively in bad faith;b) a purchaser is not put on notice by anything not contained in the paper itself; he is not subjectto constructive notice from public recordation or to limitations contained in collateral agreementsunless the limitations are actually known to him;c) a purchaser has �given value� if he has given any consideration sufficient to support a simplecontract; moreover a pre-existing debt constitutes value.

(6) Any holder even though he took the instrument in bad faith, with notice of defenses, after maturity andwithout giving value, has all the rights of a prior holder in due course from whom his title derives (pro-vided only that he himself is not a party to any fraud or illegality affecting the instrument).(7) A holder in due course, or a holder whose title is derived from such a holder, holds the instrument freeboth of equities or prior owners of the instrument, and of defenses of the obligor except the so-called�real� defenses. The real defenses, which are nowhere defined in the Negotiable Instruments Law,cover essentially the cases where there never was a claim against the obligor on the instrument: forgery,insanity or other lack of capacity to contract, and duress.

3-c/ For explanation of this rule, see First National Bank of Waukesha v. Motors Acceptance Corp., 15Wis. 2d 44, 112 N.W.2d 381 (1961).

3-d/ See Maber, Inc. v. Factor Cab Corp., 19 A.D.2d 500, 244 N.Y.S.2d 768 (N.Y. App. 1963).

3-e/ The following excerpt from S.E.C. v. Capital Gains Bureau, 375 U.S. 180 (1963) provides an indicationof the expansiveness to which the notion of fraud is subject. How does this approach to fraud compare to thatapplied in criminal cases?

The content of common-law fraud has not remained static as the courts below seem to haveassumed. It has varied, for example, with the nature of the relief sought, the relationship between theparties, and the merchandise in issue. It is not necessary in a suit for equitable or prophylactic relief toestablish all the elements required in a suit for monetary damages.

�Law had come to regard fraud . . . as primarily a tort, and hedged about with


103

stringent requirements, the chief of which was a strong moral, or rather im-moral element, while equity regarded it, as it had all along regarded it, as aconveniently comprehensive word for the expression of a lapse from the highstandard of conscientiousness that it exacted from any party occupying a cer-tain contractual or fiduciary relation towards another party.�5

�Fraud has a broader meaning in equity [than at law] and intention to defraud orto misrepresent is not a necessary element.�6

�Fraud, indeed, in the sense of a court of equity properly included all acts,omissions and concealments which involve a breach of legal or equitable duty,trust, or confidence, justly reposed, and are injurious to another, or by which anundue and unconscientious advantage is taken of another.�7

Nor is it necessary in a suit against a fiduciary, which Congress recognized the investment adviser to be,to establish all the elements required in a suit against a party to an arm�s-length transaction. Courts haveimposed on a fiduciary an affirmative duty of �utmost good faith, and full and fair disclosure of allmaterial facts,�8 as well as an affirmative obligation �to employ reasonable care to avoid misleading�9 hisclients. There has also been a growing recognition by common-law courts that the doctrines of fraudand deceit which developed around transactions involving land and other tangible items of wealth are ill-suited to the sale of such intangibles as advice and securities, and that, accordingly, the doctrines must beadapted to the merchandise in issue.10 The 1909 New York case of Ridgely v. Keene, 134 App. Div.647, 119 N.Y. Supp. 451, illustrates this continuing development. An investment adviser who, like re-spondents, published an investment advisory service, agreed, for compensation, to influence his clients tobuy shares in a certain security. He did not disclose the agreement to his client but sought �to excuse hisconduct by asserting that . . . he honestly believed that his subscribers would profit by his advice . . . .�The court, holding that �his belief in the soundness of his advice is wholly immaterial,� declared the actin question a �palpable fraud.�

We cannot assume that Congress, in enacting legislation to prevent fraudulent practices byinvestment advisers, was unaware of these developments in the common law of fraud. Thus, even if we

5. Hanbury, Modern Equity (8th ed. 1962), 643. See Letter of Lord Hardwicke to Lord Kames, dated June30, 1759, printed in Parkes, History of the Court of Chancery (1828), 508, quoted in Snell, Principles of Equity(25th 3d. 1960), 496:

�Fraud is infinite, and were a Court of Equity once to lay down rules, how farthey would go, and no farther, in extending their relief against it, or to definestrictly the species of evidence of it, the jurisdiction would be cramped, andperpetually eluded by new schemes which the fertility of man�s invention wouldcontrive.�

6. De Funiak, Handbook of Modern Equity (2d ed. 1965), 235.

7. Moore v. Crawford, 130 U.S. 122, 128, quoting 1 Story, Equity Jur. § 187.

8. Prosser, Law of Torts (1955), 534-535 (citing cases). See generally Keeton, Fraud--Concealment andNon-Disclosure, 15 Texas L. Rev. 1.

9. 1 Harper and James, The Law of Torts (1956), 541.

10. See generally Shulman, Civil Liability and the Securities Act, 43 Yale L.J. (1933).


104

were to agree with the courts below that Congress had intended, in effect, to codify the common law offraud in the Investment Advisers Act of 1940, it would be logical to conclude that Congress codified thecommon law �remedially� as the courts had adapted it to the prevention of fraudulent securities transac-tions by fiduciaries, not �technically� as it has traditionally been applied in damage suits between partiesto arm�s-length transactions involving land and ordinary chattels.

The foregoing analysis of the judicial treatment of common-law reinforces our conclusion thatCongress, in empowering the courts to enjoin any practice which operates �as a fraud or deceit� upon aclient, did not intend to require proof of intent to injure and actual injury to the client. Congress intendedthe Investment Advisers Act of 1940 to be construed like other securities legislation �enacted for thepurpose of avoiding frauds�11 not technically and restrictively, but flexibly to effectuate its remedialpurposes.

3-e/ There has been no little controversy over whether or not an indorsement under protest or with reservationsneutralizes an accord and satisfaction. Cases reading Section 1-207 to alter an attempted accord and satisfactioninclude Miller v. Jung, 361 So. 2d 788 (Fla. Dist. Ct. App. 1978); Contra: Fritz v. Marantette, 404 Mich. 329,273 N.W.2d 425 (1978); Jahn v. Burns, 593 P.2d 828 (Wy. 1979). See generally, Del Duca, Handling �FullPayment� Checks, 13 U.C.C.L.J. 195 (1980).

Even retention by the creditor of a check without negotiation may work an accord and satisfaction insome jurisdictions.

Seidman v. Chicago Eye Shield Co., 267 Ill. App. 77 (1932). The issue then arises as to what is a reasonablelength of time.

Other jurisdictions reject the conclusion that retention of a check, even for as long as eight months,results in accord and satisfaction. Kelly v. Kowalsky, 186 Conn. 618, 442 A.2d 1355 (1982); Work ClothesRental Service Co. v. Dupont Manufacturers, Inc., 262 So. 2d 807 (La. Ct. App. (1972).

Before the U.C.C. Section 1-207 debate is relevant there must, of course, exist a genuine dispute on anunliquidated claim, King Metal Products, Inc. v. Workman�s Compensation Board, 20 A.D.2d 565, 245 N.Y.S.2d882 (1963). See generally, Annotation, 42 A.L.R. 4th 117 (1985). For an excellent analysis of this issue, seeRosenthal, Discord and Dissatisfaction: Section 1-207 of the Uniform Commercial Code, 78 Colum. L.Rev. 48 (1978).

3-g/ See Tepper v. Citizens Federal Savings & Loan Assn., 38 U.C.C. Rep. Serv. 528 (Callaghan) (Fla.Dist. Ct. App. 1984).

3-h/ Grumet v. Bristol, 39 U.C.C. Rep. Serv. 1383 (Callaghan) (N.H. 1984).

3-i/ Peoples Bank v. Robinson, 25 U.C.C. Rep. Serv. (Callaghan) 799, 249 S.E.2d 784 (S.C. 1978). Seealso Richardson v. First Nat�l Bank, 37 U.C.C. Rep. Serv. (Callaghan) 1207, 660 S.W.2d 678 (Ky. App. 1983);Mid-Eastern Electronics, Inc. v. First National Bank of Southern Maryland, 455 F.2d 141 (4th Cir. 1970).

11. 3 Sutherland, Statutory Construction (3d ed. 1943), 382 et seq. (citing cases). See Note, 38 N.Y.U. L.Rev. 985: Comment, 30 U. of Chi. L. Rev. 121, 131-147.


105

3-j/ See Hamilton Watch Employees Federal Credit Union v. Retallack, 5 U.C.C. Rep. Serv. (Callaghan)739 (Pa. Ct. Comm. Pl. 1967).

3-k/ In 1986, 138 banks were declared insolvent by the FDIC. Whenever possible, Purchase and Assumptionor �P & A� agreements are used in which the failed bank is purchased. The FDIC often transfers some assetsto itself in its corporate capacity and seeks to realize on these assets. The effect of such a transfer upon the legalrelationship of the parties can be dramatic. Regarding the impact of federal law generally in this area, see Ballen,The Federalization of Articles 3 and 4, 19 U.C.C.L.J. 34. (1986).

chapter iii - antonin scalia law school

Documents