Opinion
No. 91 CVF 11203.
Decided October 16, 1992.
Frederick S. Corns, for plaintiff.
Stephen A. Fallis, for defendant.
This case is one of first impression in Ohio. The facts are not in dispute.
On October 11, 1989, Ahmed Azodi, d.b.a. Continental Sports Cars, attempted to purchase a car from Shah Shaltouki. Azodi tendered a $9,800 check drawn on his bank account at Bank One to Shaltouki. When Shaltouki failed to produce a title to the car, Azodi stopped payment on the check.
Five days later, on October 16, Shaltouki negotiated and deposited the check into his account with the plaintiff, National City Bank, Akron ("NCB"). On that same day, NCB paid out at least $7,000 to cover a check drawn on Shaltouki's account. NCB did not post the Azodi check until October 17, resulting in a $7,357.64 overdraft in the Shaltouki account at the close of business on October 16. The bank's computers recorded the Azodi check deposit allowing payments out of the account without a "posting" taking place.
On October 17, NCB posted Azodi's check. The following day, NCB unilaterally closed Shaltouki's account, retaining $7,357.64 of the $9,800 check to cover the overdraft. Subsequently, NCB received notice that Bank One would not honor the $9,800 check from Azodi because of his stop payment order.
Plaintiff instituted this action for recovery of the $7,357.64 claiming it is a holder in due course and entitled to repayment of sums it expended in reliance on the $9,800 check without regard to the dispute between Azodi and Shaltouki. To establish its status as a holder in due course, plaintiff must show that it possesses an instrument endorsed to it, which instrument was taken for value, in good faith and without notice that it has been dishonored. See R.C. 1301.01(T) and 1303.31. If plaintiff is a holder in due course, it takes the instrument free of any claims against it, notwithstanding the stop payment order.
Defendant's arguments are two: that plaintiff did not take for value because it allowed the $7,000 overdraft and was in an overdraft position prior to the posting of Azodi's check and, second, that plaintiff did not act in good faith.
Conclusions of Law
Defendant's argument that plaintiff did not take the check for value fails. R.C. 1303.32(A) and 1304.14(A) establish the parameters for finding that value has been given. Read together, these statutes provide that when a bank accepts an item for deposit and credits the amount to its customer's account, value has been given. See GFD Ent., Inc. v. Nye (1988), 37 Ohio St.3d 205, 525 N.E.2d 10. Thus, the court finds that plaintiff has proven the element of value.
At least three extrajurisdictional state supreme courts have held that a depository bank is a holder in due course of a check on which the drawer has issued a stop payment order. In each instance the bank sought recourse against the drawer when it could not enforce a judgment against the payee. Frantz v. First Natl. Bank of Anchorage (Alaska 1978), 584 P.2d 1125; Money Mart Check Cashing Ctr. v. Epicycle (Colo. 1983), 667 P.2d 1372; Western Bank v. RaDEC Constr. Co. (S.D. 1986), 382 N.W.2d 406.
In order to prevail in cases of this type, the defendant drawer must establish that the depository bank failed to exercise good faith in paying out in reliance on the "stopped" check. Here, Azodi argues that NCB failed to act in good faith in crediting Shaltouki's account and summarily closing it prior to receipt of the stop payment notice.
"Good faith" in this context means "honesty in fact," which also requires that plaintiff act without notice of a claim or defense. A party may have notice if it has actual knowledge or actual notice or has reason to know of a claim or defense. See R.C. 1301.01, the Ohio definitional section of the Uniform Commercial Code.
No Ohio cases appear to have addressed the issues raised in the out-of-state cases cited earlier. A careful examination of the facts in these cases, an examination of the policy behind the holder-in-due-course doctrine and a balance of the equities is necessary for a proper decision.
In Frantz, supra, the drawer issued a check as partial payment for building a house. The depository bank accepted the check, used part of it to cover overdrafts in the payee's account and paid out part in cash. The day after the check was cashed, the drawer issued a stop payment order. The court held that as a holder in due course the depository bank could recover the overdrafts and cash from the drawer.
The bank was prepared to dishonor the overdrafts in its customer's account before the check from Frantz was deposited. The court held that extending immediate credit on the check instead of waiting did not constitute a breach of good faith because the bank had no reason to believe the check would not be honored. A history of overdrafts in the payee's account or of plans to leave the state did not constitute notice of defenses. As to the check written by Frantz, the court noted that the drawer did not demonstrate that the bank had notice of any defenses to the check and held that:
"[K]nowledge of a depositor's financial problems does not impart notice of a defense to a check issued to him by a third party." Frantz, supra, 584 P.2d at 1128.
In Money Mart Check Cashing, supra, a former employee received a final paycheck to which he was not entitled and cashed it at a check cashing service. The employer stopped payment on the check and the check cashing company sought reimbursement from the former employer. The court held that the check cashing company was a holder in due course, and it had no duty to inquire as to whether or not the check was good before cashing it. The fact that the holder cashed it without knowing of the stop payment order did not compel a finding of lack of good faith because absence of knowledge is not equivalent to lack of good faith. Since there was absolutely nothing to distinguish the payroll check in question from any of the many other checks cashed by the company, to require that the company verify it and all of the payroll checks it cashed would be unrealistic and burdensome.
Finally, in Western Bank, supra, a contractor purchased carpet. He was aware that his supplier was having difficulties purchasing carpet and on the check wrote that "Payee must prove clear title to material." The supplier deposited the check in his account which had a small $36 overdraft and withdrew the remaining funds. Subsequently, the contractor stopped payment on his check. The supplier became insolvent and the bank sought recovery from the contractor as a holder in due course. The court held that the notation on the check was not notice of a possible defense and ruled in favor of the bank.
Long Island Natl. Bank v. Zawada (1970), 34 A.D.2d 1016, 312 N.Y.S.2d 947, while not a supreme court case, is particularly instructive. There, the bank allowed its customer to withdraw a large sum against a check deposited that day. The check was issued for the purchase of an automobile which ultimately Zawada never received. Zawada stopped payment but was held liable to the plaintiff-holder in due course. The Zawada court also noted that numerous overdrafts did not establish that the bank failed to act in good faith.
There are cases which have held that depository banks failed to act in good faith and, thus, were not holders in due course. The court notes that, in those cases, evidence was presented to suggest check-kiting schemes of which the bank was aware, e.g., Community Bank v. Ell (1977), 278 Or. 417, 564 P.2d 685; First State Bank Trust Co. v. George (Tex.Civ.App. 1974), 519 S.W.2d 198, or evidence showed a close relationship between the bank and the payee under unusual circumstances, e.g., Oklahoma Natl. Bank v. Equitable Credit Finance Co. (Okla. 1971), 489 P.2d 1331; Cty. Trust Co. v. Pascack Valley Bank Trust Co. (1966), 93 N.J. Super. 252, 225 A.2d 605. In this case, there was no evidence adduced to indicate that the plaintiff bank suspected or should have suspected any irregularity in defendant's check.
The mere existence of an overdraft in the payee's account does not prove that the plaintiff failed to act in good faith. Nor does the fact that the bank closed its customer's account indicate that it had notice of the fact that the check was to be dishonored or that Azodi had problems with Shaltouki.
The holder-in-due-course doctrine as expressed in UCC 3-302 is designed to facilitate title transfer and circulation of checks and other negotiable instruments. Its purpose is to avoid the necessity of investigating possible defects and defenses in the many negotiable instruments which enter the stream of commerce.
Further, the thrust of Article 4 of the UCC and Regulation cc of the Federal Reserve Board is to encourage prompt payment of checks without unnecessary holds or other delays. If banks do not credit or cash checks promptly, they face potential sanctions from state and/or federal regulators.
The defendant in this case has strong equitable arguments on his side. He took prompt action to stop payment on the check as soon as he suspected that the payee did not have good title to the car. If the bank is a holder in due course without claims or defenses and the defendant must reimburse the bank, he in essence is being held responsible for the payee's overdrafts of which he did not know and which he did not cause.
Nonetheless, what defendant did do is put a negotiable instrument into the stream of commerce without knowing for certain that Shaltouki, the seller of the car, had good title. Having done so, defendant is bound by the rules of the Uniform Commercial Code which, for policy reasons stated above, protects those who qualify as holders in due course. On these facts, a stop payment order does not overcome the depository bank's status as a holder in due course.
Conclusion
The court finds that NCB was a holder in due course when it deposited Azodi's check. It took the instrument for value and with the good faith that it would be honored. The court finds for NCB and against Azodi in the amount of $7,357.64. The court exercises its discretion and does not award interest and costs. See Valley Bank of Nevada v. JER Mgt. Co. (1986), 149 Ariz. 415, 719 P.2d 301.
The court also finds third-party defendant Shaltouki in default and awards Azodi judgment against him in the amount of $7,357.64.
So ordered.