Eldon's Super Fresh Stores, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 43682

• Decision Date: 27 April 1973
• Docket Number: No. 43682,43682
• Citation: 296 Minn. 130,207 N.W.2d 282
• Parties: , 12 UCC Rep.Serv. 490 ELDON'S SUPER FRESH STORES, INC., Appellant, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Defendant and Third-Party Plaintiff, Respondent, v. William DREXLER, Third-Party Defendant, Respondent.
• Court: Minnesota Supreme Court

Page 282

207 N.W.2d 282

296 Minn. 130, 12 UCC Rep.Serv. 490

ELDON'S SUPER FRESH STORES, INC., Appellant, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Defendant and Third-Party Plaintiff, Respondent, v. William DREXLER, Third-Party Defendant, Respondent.

No. 43682.

Supreme Court of Minnesota.

April 27, 1973.

Syllabus by the Court

Under the circumstances of this case, namely, where (1) a bank check was delivered to the payee by the drawer's agent with the drawer's consent and knowledge, (2) the check itself contained no restrictions or designations as to its use, and (3) the payee, a stock brokerage firm, had no trading account with, or indebtedness to, the drawer, the payee took the check without notice of the drawer's claims. Thus, the payee became a holder in due course of the instrument.

William J. Nierengarten, Austin, for appellant.

Doherty, Rumble & Butler, Frank Claybourne, and Bruce E. Hanson, St. Paul, for Merrill Lynch, etc.

William Drexler, pro se.

Heard before KNUTSON, C.J., and OTIS, ROGOSHESKE, and OLSON, JJ.

O. RUSSELL OLSON, Justice. ^*

Plaintiff, drawer of a check payable to defendant Merrill Lynch, Pierce, Fenner & Smith, Inc., appeals from a summary judgment entered in favor of defendant. The appeal raises the issue of whether the payee was, as a matter of law, a holder in due course and thus not subject to the drawer's claim that the check, possession of which it gave to its agent, was wrongfully delivered to defendant-payee in payment of the agent's own personal obligation to defendant rather than for the benefit of plaintiff-drawer.

Eldon's Super Fresh Stores, Inc. (hereafter Eldon's) is a closely held corporation headquartered in Faribault, Minnesota, and engaged in the retail grocery business. Merrill Lynch, Pierce, Fenner & Smith, Inc. (hereafter Merrill Lynch) is a national stock brokerage firm with offices in St. Paul, Minnesota. William E. Drexler was the attorney for and corporate secretary of Eldon's and the personal attorney of Eldon Prinzing, the corporation's president and sole shareholder.

The relevant facts are not in dispute. From January 1968 through January 1970, Drexler maintained a trading account in his name with Merrill Lynch by which he purchased and sold stock at various times. Eldon's, on the other hand, maintained no trading account with Merrill Lynch at any time relevant herein. On August 12, 1969, Drexler purchased 100 shares of Clark Oil & Refining Company stock through his stockbroker at Merrill Lynch for $41.50 per share. A confirmation statement was mailed to Drexler by the stockbroker, and Drexler then mailed the $4,150 check here involved, together with the confirmation statement, to Merrill Lynch in payment for the stock purchase. The check was drawn by the corporation, Eldon's Super Fresh Stores, Inc., on the Security National Bank and Trust Company of Faribault Minnesota, and

contained corporate identification as follows: 'ELDON'S

SUPER FRESH STORES, INC. FAMOUS FOR FRESH FRUITS &

VEGETABLES DBA PRINZING'S MARKETS (PHONE

AND AREA CODE NUMBERS)

FARIBAULT, MINNESOTA'

The check, in the exact amount of the purchase price of the 100 shares of stock (not including commission charge of $39.75) and payable to Merrill Lynch, was dated August 12, 1969, and signed for the corporation by E. C. Prinzing, its president. The check contained no other designation or directive as to its use. On August 15, 1969, Merrill Lynch accepted the check in payment of Drexler's stock purchase, treating Drexler as the remitter. Pursuant to its customary practice with Drexler, Merrill Lynch retained custody of the Clark Oil & Refining Company stock certificate together with five other stock certificates previously purchased for him embodying shares in various other corporations. Five of the six stock certificates were ultimately delivered to Drexler in November 1969. There was no communication between Drexler and Merrill Lynch except the stock purchase order for Drexler's personal account on August 12, the mailing of the confirmation statement of Drexler, and the receipt by Merrill Lynch on August 15 of the check and confirmation statement. Drexler sold the stock to his brother in December 1970. Drexler was in 1969 an attorney duly licensed to practice law in Minnesota although he has since that date been disbarred. There was no communication between Eldon's and Merrill Lynch until November 1970, 15 months after the issuance of the check, at which time Eldon's inquired of Merrill Lynch relative to the stock certificate and asserted a claim to its ownership.

Additional facts bearing on the claim of Eldon's, but not material to the determination of whether Merrill Lynch was a holder in due course, reveal a dispute between Eldon's and Drexler as to whether the check was delivered to Drexler in payment of legal services or whether it was delivered by Eldon Prinzing to Drexler as agent of Eldon's to purchase the corporate stock for Eldon's. The resolution of that issue is not before the court on this appeal. The record establishes that Merrill Lynch had no knowledge of that dispute and assumed that Drexler had received the check as remitter to use for his own purpose in paying for stock. If he did not have such right, then Merrill Lynch is subject to plaintiff's claim unless it took as a holder in due course.

The narrow issue, therefore, is whether under the recited factual circumstances Merrill Lynch, as payee of the check, was a holder in due course. Since defendant, as payee, took as a holder and obviously took for full value, decision turns on whether the payee, which received the check from the drawer's agent who in turn had received possession with the drawer's consent, took it 'without notice * * * of any defense against or claim to it on the part of any person,' Minn.St. 336.3--302(1)(c), and thus became a holder in due course free of any claim of the drawer that the delivery to the payee was wrongful.

The trial court succinctly characterized Eldon's claims as follows:

'The thrust of Plaintiff's argument is that the third-party check itself was 'notice' to Merrill Lynch; that Merrill Lynch should have contacted Plaintiff upon receipt of the check and made a full inquiry as to the agreements or understandings between Plaintiff and Drexler, and that Merrill Lynch had no right to assume that Drexler was acting properly.'

The law governing checks is now codified in Article 3 of the Uniform Commercial Code (hereafter U.C.C.), Minn.St. 336.3--101 to .3--805. Article 3 is entitled 'Commercial Paper' and is the successor to the Uniform Negotiable Instruments Law (N.I.L.) Minn.St.1961, §§ 335.01 to--.80. By § 336.3--102(1) (e) the word 'instrument' for purposes of Article 3 means 'negotiable instrument' as defined in § 336.3--104. That section embodies the traditional requirements for negotiable checks, drafts, and notes.

Section 336.3--102(1)(a) defines 'issue' as 'the first delivery of an instrument to a holder or a remitter.' Section 336.1--201(20), which contains general definitions for the U.C.C., defines 'holder' as 'a person who is in possession of * * * an instrument * * * drawn, issued or endorsed to him or to his order or to bearer or in blank.' The facts in this case are undisputed that Eldon's, the drawer of the check, placed the check in the hands of its agent, Drexler, for the purpose of delivery to the payee, Merrill Lynch.

It follows from those facts and those two code definitions (while somewhat circular) of 'issue' and 'holder' that Merrill Lynch was a holder of the instrument. We are not concerned in this case with the additional question of whether Drexler was a 'holder' such that the delivery of the instrument by him to the payee, Merrill Lynch, constituted a 'negotiation' which in return would bring into play the provisions of § 336.3--304(2) and (4)(e) and § 336.3--202(1). For the purposes of this case then, we treat the instrument as 'issued' to Merrill Lynch, the payee and the holder (without deciding whether there was a negotiation of the check to the payee). ¹

We next consider the requirements for a 'holder' to become a 'holder in due course' (hereafter HDC).

Minn.St. 336.3--302 sets out the requirements for being a HDC of negotiable instruments as follows:

'(1) A holder in due course is a holder who takes the instrument

(a) for value; and

(b) in good faith; and

(c) 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.

'(2) A payee may be a holder in due course.' (Italics supplied.)

The U.C.C. has thus made it clear that a payee may be a HDC. § 336.3--302(2). ² A payee who fulfills the requirements of § 336.3--302(1) acquires the rights of a HDC as set forth in § 336.3--305 with respect to the unknown claims or defenses of parties with whom he has not dealt even though he has become a holder as payee by delivery from a remitter or the drawer's agent rather than by negotiation from a prior holder. This was not clear under the N.I.L., and there were conflicting decisions on the point. However, precode Minnesota case law clearly established that a payee could be a HDC under the N.I.L. See Western Surety Co. v. Friederichs, 241 Minn. 492, 63 N.W.2d 565 (1954).

The first requirement of a HDC, taking 'for value,' is now codified in Minn.St. 336.3--303. The parties concede it is not in issue in this case.

The second requirement, the element of 'good faith,' is now defined in Minn.St. 336.1--201(19) as follows:

"Good faith' means honesty in fact in the conduct or transaction concerned.'

In Minnesota Code Comment to § 336.1--201(19), 21A M.S.A. 75, Professor Stanley V. Kinyon indicates this good-faith test is a subjective rather than an objective test. The test requires honesty of intent rather than absence of circumstances which would put an ordinarily prudent holder on inquiry in order to constitute good faith. Cf. Jeanette Frocks, Inc. v. First Produce State...