Community Bank v. Ell
| Decision Date | 20 July 1977 |
| Citation | 564 P.2d 685,278 Or. 417 |
| Parties | , 21 UCC Rep.Serv. 1349 The COMMUNITY BANK, an Oregon Corporation, Appellant, v. Roy ELL, dba Ell Motor Company, Respondent. |
| Court | Oregon Supreme Court |
[278 Or. 418-A] Ferris F. Boothe, of Black, Kendall, Tremaine, Boothe & Higgins, Portland, argued the cause and filed the briefs for appellant.
Leslie M. Roberts, of Kell, Alterman & Runstein, Portland, argued the cause and filed the brief for respondent.
This is an action to recover on four checks totaling $78,610. Plaintiff, Community Bank, is the holder of the checks, which were drawn by defendant Ell. The checks were drawn to the order of R. L. Jones and were deposited by Jones in his checking account at the Community Bank. Community presented the checks to Ell's bank for payment. In the meantime, however, Ell had stopped payment on the checks and his bank returned them unpaid to Community. This action followed.
Defendant Ell admitted the issuance of the checks and admitted having stopped payment on them. He contended, however, that he had a defense against Jones which he could assert in an action on the checks by Community unless it was a holder in due course. He also contended that Community was not a holder in due course and, as a result, took the checks subject to that defense.
Community contended that as a matter of law Ell had no defense against it as the holder of any of the checks because, if Ell had a defense against Jones, it was merely a setoff arising out of other transactions and was not available as a defense against a transferee of the checks. Community also contended that, as a matter of law, it was a holder in due course because it took the checks for value, in good faith, and without notice of any defenses and that, as such, it took the checks free of defenses which could be asserted against a mere holder.
The trial court ruled that Ell had, as a matter of law, a defense that could be asserted unless Community was a holder in due course and submitted to the jury the questions whether Community took the checks in good faith and without notice of any defense against them. The jury returned a general verdict finding fo Ell and against Community on each of the four checks. Community appeals.
We hold that the trial court did not err in refusing to hold, as contended by Community, that as a matter of law, Ell had no defenses against the checks within the meaning of ORS 73.3060(2), or in refusing to withdraw the issue of Community's good faith from the jury. We conclude, however, that, as also contended by Community, the trial court did err in submitting to the jury the question whether the bank had notice of a defense against the checks within the meaning of ORS 73.3020(1)(c) and that because of this error, the case must be
remanded for a new trial. Ell did not fail, as a matter of
law, to establish a defense to the four checks.
This action is governed by the provisions of ORS ch. 73 (Art. 3 of the Uniform Commercial Code). ORS 73.3070 provides:
'* * *
'(2) When signatures are admitted or established, production of the instrument entitles a holder to recover on it unless the defendant establishes a defense.
'(3) After it is shown that a defense exists a person claiming the rights of a holder in due course had the burden of establishing that he or some person under whom he claims is in all respects a holder in due course.'
ORS 73.3060 provides in relevant part:
'Unless he has the rights of a holder in due course any person takes the instrument subject to:
'* * *
'(2) All defenses of any party which would be available in an action on a simple contract; * * *.
'* * *' It is not disputed that Community is the holder of the checks in question or that they were signed by Ell. Community was, therefore, entitled to recover on the checks without regard to its statuts as a holder in due course unless Ell established a defense. If, however, a defense was shown to exist, Community could not recover unless it carried the burden of establishing that it was a holder in due course of these checks.
The defense which Ell claims is that a number of checks which Jones gave him, as payment for various loans, were dishonored. Community contends that Ell's claims on account of those dishonored checks arose out of separate and distinct transactions; that they would constitute merely a right of setoff, and that a setoff may not be asserted as a defense in an action by the transferee of a negotiable instrument even though the transferee is not a holder in due course. It requested the court to direct a verdict in its favor on the ground that Ell's claims against Jones did not, as a matter of law, constitute a 'defense' to any of the checks.
[2,3] Ell contends, however, that a set-off is a 'defense' within the meaning of ORS 73.3060(2). He contends, in the alternative, that his claim is one of recoupment and may be asserted against a transferee who is not a holder in due course, even if a setoff may not. 1
The Uniform Commercial Code does not define 'defense' as it is used in this section. The Official Comments to UCC 3--306 (ORS 73.3060) indicate that the language with which we are concerned was intended as a restatement of the first sentence of § 58 of the Uniform Negotiable Instruments Law. 2 ULA 124 (Master ed. 1968). That sentence read:
'In the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were nonnegotiable.'
Although that provision was in force in Oregon until it was replaced by ORS 73.3060(2) upon the enactment of the Uniform Commercial Code, this court never had occasion to consider its applicability to claims of setoff or recoupment. The cases from other jurisdictions are not uniform. The weight of authority under both the Uniform Commercial Code and the earlier Uniform Negotiable Instruments Law appears to hold, however, that the law of setoff within the particular jurisdiction controls and that neither the UNIL nor the UCC was intended to change that law. 2
ORS 80.020, which is not a part of the Uniform Commercial Code and which has been in effect since 1862, provides:
'In the case of An assignment of a thing in action, an action or suit by the assignee Is without prejudice to any set-off or other defense existing at the time of, or before notice of the assignment; but this section does not apply to a negotiable instrument transferred in good faith and upon good consideration before due.' (Emphasis added)
We construe this provision as making available the 'defense' of setoff in an action by the transferee of a negotiable instrument, unless the transferee is a holder in due course. 3 The setoff or other defense, 4 to be available as a defense in an action by a transferee, must exist at the time of or before the drawer of a check receives notice of the transfer or assignment of the check, as by deposit in a bank.
To determine whether Ell as the obligor had such a defense to the four checks, and at the appropriate time, we must consider the evidence in more detail.
Jones was in the business of wholesaling used cars. He obtained a significant portion of his financing through a 'flooring' arrangement with Ell. That is, Ell would advance money to Jones for periods of 30 days. As security for these advances, Jones would deliver to Ell the documents of title to specific automobiles which served as collateral and would execute a trust receipt. Ell gave his checks to Jones when making these advances.
When a car covered by a trust receipt was sold, or within 30 days if sooner, Jones would repay the loan to Ell, plus a 'flooring fee,' with his check and Ell would release the title to the automobile and make an appropriate notation on the trust receipt. At Ell's request, Jones gave him a separate check for the repayment of each loan secured by an individual automobile.
Jones and Ell did business in this fashion almost daily for a considerable period. It was quite common for Jones to repay several loans by giving Ell his checks in appropriate amounts and, on the same day, to 'floor' several additional vehicles with Ell and to receive Ell's check or checks as advances.
Jones maintained his checking account with Community. Because of the financing pattern which we have described, an examination of the records of his account would have disclosed that a significant portion of Jones' daily bank deposits consisted of checks written by Ell and that a significant portion of the checks written by Jones were payable to Ell.
During the same period Community permitted Jones to maintain his account in a 'potential overdraft' position. That is, each morning Jones or his bookkeeper would call the bank to determine the amount which would be necessary to cover the checks drawn on his account which had come into the bank on the previous day. Later in the day Jones would make a deposit sufficent to cover those checks. The bank would credit the deposit immediately and the checks would be paid. The amount of this daily potential overdraft varied during 1973 from approximately $40,000 to more than $100,000.
On Thursday, December 13, 1973, Mr. Shideler, a vice-president of Community Bank, was requested by its president to investigate Jones' account in connection with a request by Jones for a larger line of credit. Mr. Shideler, upon detailed examination of the account on Friday, December 14, discovered the above pattern of large daily potential overdrafts and also noted that much of the activity in Jones' account consisted of checks received from Ell and checks written to Ell. This situation had, he testified, the indications of a 'check-kiting' operation in progress. That same day he called the matter to the attention of Mr. Brokenshire, the president of the bank.
Mr. Brokenshire and other bank personel discussed and...
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