American Underwriting Corp. v. Rhode Island Hospital Trust Co.

• Citation: 303 A.2d 121,111 R.I. 415
• Decision Date: 20 April 1973
• Docket Number: No. 1694-A,1694-A
• Parties: , 12 UCC Rep.Serv. 698 AMERICAN UNDERWRITING CORPORATION v. RHODE ISLAND HOSPITAL TRUST COMPANY. ppeal.
• Court: United States State Supreme Court of Rhode Island

Page 121

303 A.2d 121

111 R.I. 415, 12 UCC Rep.Serv. 698

AMERICAN UNDERWRITING CORPORATION v. RHODE ISLAND HOSPITAL TRUST COMPANY.

No. 1694-Appeal.

Supreme Court of Rhode Island.

April 20, 1973.

Pucci, Zito & Goldin, Samuel A. Olevson, Providence, for plaintiff

Charles J. McGovern, Providence, for defendant.

OPINION

ROBERTS, Chief Justice.

This is an appeal from a judgment entered in the Superior Court for the defendant, the Rhode Island Hospital Trust Company (hereinafter referred to as the bank or Hospital Trust) in a suit on an endorsement of a draft by the plaintiff, American Underwriting Corporation (hereinafter referred to as American Underwriting).

While in this case the facts are not in dispute, the factual situation is highly unusual. A proper understanding of the case requires a detailed explanation of the financial procedures pursuant to which drafts similar to the one under consideration here are issued.

American Underwriting, a finance company, provides relatively low-rate automobile financing. The company makes its loans through a 'draft acceptance system.' Blank draft forms are placed with 400 to 500 dealers in New England, who are generally insurance agents or automobile clubs. These dealers find the customers for American Underwriting and in return receive a small percentage of the loan as commission. When the dealer has a prospect for an auto loan, he prepares a financial statement on the borrower and a security agreement covering the automobile that is to be the collateral for the loan. These documents are forwarded to American Underwriting for review. Concurrently, the dealer prepares a draft. On the face of the draft he fills in the amount of the loan, the name of the borrower, and the description of the automobile that is to be the security. On the back of the draft, an endorsement is prepared to be signed by the present owner of the automobile or the present security holder therein. The endorsers, by accepting payment of the draft, agree to furnish to American Underwriting title to the automobile for which the draft is issued, and said title is encumbered by the amount of the loan.

Once the draft is prepared it is given to the borrower, who signs it and then endorses the draft to the owner of the car or owner of a security interest in the car. Such owner, who may be a car dealer, a bank, or a finance company, also endorses the draft and sends it through banking channels to the First National Bank of Boston for acceptance. The First National Bank of Boston notifies American Underwriting of receipt of the draft, and American Underwriting reviews the information gathered by the dealer and determines whether or not to make the loan. If American Underwriting accepts the loan, it issues a check to the First National Bank of Boston for the amount of the draft. This money ultimately reaches the car dealer, bank, or finance company, as the case may be, who thereupon releases the automobile to the borrower.

With this background, we can turn to the draft issued in this case. Brody S. Merritts owned a Mustang that was financed by Hospital Trust. In June, 1968, the loan was in default, and the bank had repossessed the car and stored it with Dunne Ford Sales. Miss Merritts desired to purchase a 1968 Javelin from Stadium Motors, but she needed to retrieve her Mustang for purposes of a trade-in. She went to the Automobile Club of Rhode Island (hereinafter referred to as AAA) and obtained a draft of American Underwriting in the amount of $2,300, which stated that it was secured by a 1968 Javelin. She took the draft to Thomas F. Flynn, who was collection manager in the installment loan department of the bank, in an effort to redeem her car.

Mr. Flynn told her that he could not accept the draft because it referred to a different car. He asked her where she had obtained the draft, and she told him the AAA gave it to her. Mr. Flynn called the AAA and spoke to Kenneth G. Wood, who had issued the draft. Mr. Flynn explained that the bank held Miss Merritts' Mustang and knew nothing of a Javelin. Mr. Wood told Mr. Flynn that he was aware of the discrepancy, but Miss Merritts was going to trade the Mustang in on the Javelin. In such circumstances, he indicated that it was proper for the bank to process the draft.

Mr. Flynn obtained the bank's endorsement on the draft, and it was forwarded to the First National Bank for acceptance. American Underwriting approved the draft, and Hospital Trust subsequently received $2,300 in proceeds from the draft. The money was applied to Miss Merritts' account to pay off the $2,050.77 loan on the Mustang and a $56 personal loan. Miss Merritts received in cash the balance of $193.16.

The deal then ceased to proceed according to plan. Miss Merritts never bought the Javelin but rather took her Mustang and kept it. Moreover, she failed to make and payments to American Underwriting on her $2,300 loan. American Underwriting contacted Hospital Trust, and at that point it first learned that the bank never had an interest in the Javelin. Apparently, the AAA had never forwarded to American Underwriting the information obtained in the conversation between Mr. Flynn and Mr. Wood. American Underwriting sued Hospital Trust, who in turn brought a third-party action against Miss Merritts. The plaintiff sought recovery from Hospital Trust for its failure to deliver the security interest in the Javelin which plaintiff claims it agreed to do when it endorsed the draft.

The case was tried to a Superior Court Justice sitting without a jury. Mr. Donovan, resident manager of American Underwriting, Mr. Flynn from the bank, and Mr. Wood of the AAA testified. These witnesses developed elaborately the relationship of American Underwriting and AAA, and they also described in great detail the circumstances of the loan to Miss Merritts. The evidence disclosed no dispute as to the essential facts of the case. Upon deliberation, the trial justice rendered judgment for defendant, Rhode Island Hospital Trust Company. He found that an agency relationship existed at the time of the transaction between American Underwriting and the AAA. The AAA had authority to gather information, to prepare the drafts, and to transmit that information accurately and properly to American Underwriting. In his opinion, the AAA's transaction with Miss Merritts was for the purpose of enabling her to purchase the Javelin from Stadium Motors. In order to effectuate that transaction, it was necessary for Miss Merritts to liquidate her obligation to Hospital Trust and retrieve her Mustang.

The trial justice further found that the AAA was fully aware of the Hospital Trust's security interest in the Mustang and thus the AAA placed the Hospital Trust's name on the back of the draft in a position as an endorser in order to implement the transaction by paying off the money owed on the Mustang. He further charged American Underwriting with the knowledge of its agent, the AAA. Therefore, when American Underwriting approved the acceptance of the draft, it was reasonable for the Hospital Trust to conclude that the principal was acting in full light of the information which had been transmitted to its agent. The trial justice ultimately concluded that, upon payment of the draft, Hospital Trust was justified in releasing the Mustang to Miss Merritts and did not violate any obligation owed to American Underwriting.

The plaintiff in its brief made no strong challenge to the trial justice's finding that AAA was its agent. However, such a finding is essentially a factual determination, and whereas plaintiff fails to point out, and our review of the evidence fails to disclose, that the trial justice was clearly wrong, we will not disturb his finding as to the extent of the agency relationship between American Underwriting and the AAA. Mello v. Coy Real Estate Co., 103 R.I. 74, 234 A.2d 667 (1967); Abilheira v. Faria, 102 R.I. 214, 229 A.2d 758 (1967). However, plaintiff makes two contentions which we shall consider at length.

First, it argues that commercial paper is not subject to verbal modification. Secondly, plaintiff contends, even if such modification were permissible, AAA had neither actual nor apparent authority to verbally modify the draft.

The plaintiff asserts that the absence of a parol evidence rule in the chapter of the Uniform Commercial Code dealing with commercial paper implies that parol evidence is strictly forbidden to modify a negotiable instrument. We cannot agree. A review of the comments to the Uniform Commercial Code leads to a contrary conclusion. General Laws 1956...