Amos Flight Operations, Inc. v. Thunderbird Bank

• Decision Date: 25 September 1975
• Docket Number: No. 11710,11710
• Citation: 540 P.2d 1244,112 Ariz. 263
• Parties: , 17 UCC Rep.Serv. 1233 AMOS FLIGHT OPERATIONS, INC., an Arizona Corporation, Donald L. Amos and Howard W. Bollman, dba Zonic Air Freight Lines, Appellants, v. THUNDERBIRD BANK, Appellee.
• Court: Arizona Supreme Court

Page 1244

540 P.2d 1244

112 Ariz. 263, 17 UCC Rep.Serv. 1233

AMOS FLIGHT OPERATIONS, INC., an Arizona Corporation, Donald L. Amos and Howard W. Bollman, dba Zonic Air Freight Lines, Appellants, v. THUNDERBIRD BANK, Appellee.

No. 11710.

Supreme Court of Arizona, In Division.

Sept. 25, 1975.

Rehearing Denied Nov. 18, 1975.

Holman & Lewis by James R. Holman, Tempe, for appellants.

Jennings, Strouss & Salmon by Timothy W. Barton and M. Byron Lewis, Phoenix, for appellee.

CAMERON, Chief Justice.

This is an appeal from a judgment entered in favor of Thunderbird Bank, appellee. Jurisdiction is taken pursuant to Rule 47(e)(5) of the Rules of the Supreme Court.

We must answer the following matters on appeal:

1. Did the bank have a right to rescind the $150,000 time certificate of deposit?

2. Was the bank damaged and therefore entitled to judgment against the plaintiffs on the counterclaim?

3. Was the bank entitled to attorney's fees?

The following facts are necessary for a determination of the matter on appeal. Amos Flight Operations, Inc., Donald L. Amos and Howard W. Bollman, dba Zonic Air Freight Lines, needed funds to continue the operation of their air freight business. They entered into negotiations with Roy S. Stuhley and Glen Cole to sell a 40% Interest in the business for $150,000. It was evidently the intention of Amos and Bollman to use this money to finance the further operations of the Zonic Air Freight Lines. It was agreed that Stuhley and Cole, who lived in California and allegedly represented persons who were to purchase the 40% Interest in Zonic, would arrange the deposit of the $150,000 in the Bank of California to the account of the Thunderbird Bank and Zonic Air Freight Lines. It was also agreed that Stuhley and Cole were to receive $15,000 for their services in securing these funds. The following letter was then given to the Thunderbird Bank:

'Dear Mr. Overbey:

'We the undersigned will transfer $150,000.00 to the account of Zonic Air Freight Lines for the purchase of a Time Certificate of Deposit in an equal amount with interest at the rate of 7% Per annum, payable semiannually from the date of the certificate until the maturity of 36 months. The above investment is made in exchange for purchase of 40% Interest in Zonic Air Freight Lines.

* * *

* * *

'It is my understanding that Zonic Air Freight Lines will secure a $100,000.00 loan pledging the $150,000.00 certificate as collateral. Additionally, they will purchase $13,500.00 Time Certificates of Deposit for further interest payment.

'It is my understanding that you are entering into the loan with the $150,000.00 as collateral without making a feasibility or profitability study with the loan based solely on the pledged collateral on the Time Certificate of Deposit.

'If I may be of any further assistance, please contact me immediately.

Roy S. Stuhley /s/

Glen Cole /s/

Donald L. Amos, President /s/

Approved: /s/ E. R. Overbey

(Thunderbird Bank)'

On the same day Overbey, on behalf of the Thunderbird Bank, sent Stuhley, in California, the following letter:

'Dr. Mr. Stuhley:

'As in accordance with your request dated August 3, 1970, we wish to advise you that the Thunderbird Bank will accept the sum of $150,000 drawn on the account of Zonic Air Freight Lines (said account carried with this bank) for the purchase of a Time Certificate of Deposit for said amount to mature at the end of thirty-six months with semi-annual interest payments. Interest payments will be paid by the bank at the rate of 7% Per annum with said interest to be made payable to Zonic Air Freight Lines.

Sincerely,

E. R. Overbey'

The Bank of California was a correspondent bank for the Thunderbird Bank and Thunderbird Bank maintained an account with the Bank of California. On 4 August 1970, according to an employee of the California Bank, Roy S. Stuhley came into the Southern California headquarters of the Bank of California to ask if the Bank of California would accept for deposit to the account of the Thunderbird Bank the amount of $150,000. An officer of the California bank telephoned an officer of the Thunderbird Bank and it was concluded that this could be done and that the Thunderbird Bank was expecting such a transaction. Stuhley did not deposit the amount of $150,000 though the Thunderbird Bank was under the impression that the amount had in fact been deposited. As a result the Thunderbird Bank reflected on its records a transfer of funds to its account with the Bank of California for the credit of Zonic Air Freight. On the next day Amos and Bollman met with Overbey. A checking account was opened in the name of Zonic with the deposit of $25 and the account was credited with the sum of $150,000.

On 6 August 1970, Zonic purchased from the bank a $150,000 time certificate of deposit. It was purchased with a check drawn on the Zonic account previously credited with the same amount. The check was posted to the Zonic account and stamped 'paid' on Friday, 7 August 1970.

On Monday, 10 August 1970, Amos and Bollman, dba Zonic, obtained from the bank a loan of $100,000 secured by a pledge of the $150,000 time certificate of deposit. The bank then credited the Zonic account with the amount of $100,000.

Amos and Bollman then issued a Zonic check to the bank in the amount of $13,500 to purchase six time certificates of deposit, each in the amount of $2,250, issued in the name of Zonic. The check was posted and marked 'paid.'

On the same day Amos and Bollman issued another check drawn on Zonic's account for $15,000 payable to Roy S. Stuhley. The check was cashed at the Bank of California on the same day. Two more checks on Zonic's account were issued. One check for $6,153.98 was given to the bank to pay off a lien held by the bank on a Shinn airplane which had been previously sold by Amos Flight to one John Hale. This check was stamped 'paid' on the day it was issued. Another check in the sum of $2,057.33 payable to the Continental Bank was negotiated by the Continental Bank and not repaid.

On 13 August 1970 the bank was notified that the $150,000 had not, in fact, been deposited in the Bank of California. Amos was so advised. The bank worked with Amos and Bollman and contacted Mr. Stuhley in an attempt to get the deposit into the Bank of California. Negotiations were unsuccessful and on 18 August 1970 the bank notified Amos and Bollman that the bank had rescinded all transaction relating to the $150,000 time certificate of deposit and the $100,000 loan. The checks issued were dishonored and Zonic's account was reduced to a balance of $1.00.

Plaintiffs, Amos Flight Operations, Inc., Amos and Bollman, dba Zonic Air Freight Lines, instituted this action against the bank. The complaint consisted of four claims for relief:

1. for the sum of $13,500 plus interest, the amount represented by the six $2,250 time certificates of deposit;

2. for the amount of $150,000 for conversion of and dishonor of the $150,000 time certificate of deposit;

3. for $50,000 attorney's fees; and

4. for damages for refusing to release the lien on the Shinn airplane.

The bank advanced the affirmative defense of failure of consideration and mu tual mistake of fact. The bank also counterclaimed as follows:

1. Count 1 for damages in excess of $16,035.53 resulting in the failure to transfer the $150,000 to the account of Zonic. This includes the amount of $15,000 paid to Stuhley and the $2,057.33 check to the Continental Bank less setoff and credits;

2. Counts 2, 3, 4, and 5 were claims against Bollman for indebtedness due the bank on promissory notes; and

3. Count 6 was a claim against all plaintiffs for $16,035.53 as and for the sum remaining due on the $100,000 promissory note. This is the same amount as asked for in Count 1.

The matter was tried to the court without a jury. Judgment was entered in favor of the Thunderbird Bank and against plaintiffs on all allegations in plaintiffs' complaint. Judgment was entered in favor of the bank on counts one through five of its counterclaim. Judgment was entered in favor of plaintiffs and against the bank on Count 6 of its counterclaim. From this judgment plaintiffs appeal.

COULD THE BANK RESCIND?

We are faced at the outset with plaintiffs' contention that the issues of this case are governed by the Uniform Commercial Code as found in A.R.S. Chapter 14. Plaintiffs assert that want or failure of consideration or other equitable defenses are not proper defenses to the bank's liability because under the Uniform Commercial Code a bank is liable to a payee for the face amount of a time certificate of deposit if the payee has not been guilty of fraud or inequitable conduct. A.R.S. § 44--2556(B).

This might be true if the plaintiffs (payees) were holders in due course which they are not. A.R.S § 44--2532 of the Uniform Commercial Code states:

'A. A holder in due course is a holder who takes the instrument:

1. For value; And

2. In good faith; And

3. Without notice that it is overdue or has been dishonored or of any defense against or claim to it on the part of any person.

'B. A payee may be a holder in due course.' (Emphasis ours)

And A.R.S. § 44--2533 states:

'A holder take the instrument for value:

'1. To the extent that the agreed consideration has been performed or that he acquires a security interest in or a lien on the instrument otherwise than by legal process; or

'2. When he takes the instrument in payment of or as security for an antecedent claim against any person whether or not the claim is due; or

'3. When he gives a negotiable instrument for it or makes an irrevocable commitment to a third person.'

A.R.S. § 44--2536(3) provides that a person who is not a holder in due course takes an instrument subject to: all defenses of any party which would be available in an action on a simple contract as well as the defense of want or failure of consideration; non-performance of any condition precedent. Plaintiffs were not holders in due course...