ME FAM. FED. CREDIT v. SUN LIFE ASSUR.

• Decision Date: 03 March 1999
• Citation: 727 A.2d 335,1999 ME 43
• Parties: MAINE FAMILY FEDERAL CREDIT UNION v. SUN LIFE ASSURANCE COMPANY OF CANADA et al.
• Court: Maine Supreme Court

727 A.2d 335

1999 ME 43

MAINE FAMILY FEDERAL CREDIT UNION v. SUN LIFE ASSURANCE COMPANY OF CANADA et al.

Supreme Judicial Court of Maine.

Argued November 4, 1998.

Decided March 3, 1999.

Daniel L. Cummings (orally), Norman, Hanson & DeTroy, Portland, for plaintiff.

Seth W. Brewster (orally), James G. Goggin, Verrill & Dana, LLP, Portland, for defendant Sun Life Assurance.

Elliott L. Epstein (orally), Isaacson & Raymond, P.A., Lewiston, for defendants Daniel, Joel, and Claire Guerrette.

Gretchen L. Jones, Maine Credit Union League, Portland, for amicus curiae.

Before WATHEN, C.J., and RUDMAN, SAUFLEY, and ALEXANDER, JJ.

SAUFLEY, J.

[¶ 1] We are called upon here to address the concept of "holder in due course" as defined by recent amendments to the negotiable instruments provisions of the Maine Uniform Commercial Code. We conclude that, pursuant to those amendments, the Superior Court (Cumberland County, Calkins, J.) did not err when it entered a judgment based on the jury's finding that the Maine Family Federal Credit Union was not a holder in due course. Because we find, however, that Sun Life Assurance Company was not entitled to raise a third party's defense of fraud to its liability as drawer of the instruments, we vacate that portion of the judgment entered in favor of Sun Life and against the Credit Union.

I. Facts

[¶ 2] Daniel, Joel, and Claire Guerrette are the adult children of Elden Guerrette, who died on September 24, 1995. Before his death, Elden had purchased a life insurance policy from Sun Life Assurance Company of Canada, through Sun Life's agent, Steven Hall, and had named his children as his beneficiaries. Upon his death, Sun Life issued three checks, each in the amount of $40,759.35, to each of Elden's children.¹ The checks were drawn on Sun Life's account at Chase Manhattan Bank in Syracuse, New York.² The checks were given to Hall for delivery to the Guerrettes.

[¶ 3] The parties have stipulated that Hall and an associate, Paul Richard, then fraudulently induced the Guerrettes to indorse the checks in blank and to transfer them to Hall and Richard, purportedly to be invested in "HER, Inc.," a corporation formed by Hall and Richard.³ Hall took the checks from the Guerrettes and turned them over to Richard, who deposited them in his account at the Credit Union on October 26, 1995.⁴ The Credit Union immediately made the funds available to Richard.

[¶ 4] The Guerrettes quickly regretted having negotiated their checks to Hall and Richard, and they contacted Sun Life the next day to request that Sun Life stop payment on the checks. Sun Life immediately ordered Chase Manhattan to stop payment on the checks.⁵ Thus, when the checks were ultimately presented to Chase Manhattan for payment, Chase refused to pay the checks, and they were returned to the Credit Union.

[¶ 5] The Credit Union received notice that the checks had been dishonored on November 3, 1995, the sixth business day following their deposit.⁶ By that time, however, Richard had withdrawn from his account all of the funds represented by the three checks. The Credit Union was able to recover almost $80,000 from Richard, but there remained an unpaid balance of $42,366.56, the amount now in controversy.

[¶ 6] The Credit Union filed a complaint against Sun Life alleging that Sun Life was liable as drawer of the instruments, and that Sun Life had been unjustly enriched at the Credit Union's expense. Although it could have done so, the Credit Union did not originally seek any recovery from the Guerrettes. Sun Life, however, filed a third-party complaint against Daniel Guerrette and Paul Richard, whose signatures appeared on the back of one of the checks.⁷ The Credit Union then filed a cross-claim against third-party defendants Guerrette and Richard, alleging that they were liable as indorsers of the checks,⁸ and Daniel Guerrette filed cross-claims against the Credit Union and against Sun Life. Finally, Sun Life eventually filed third-party complaints against Joel and Claire Guerrette.

[¶ 7] The Credit Union moved for summary judgment. The Superior Court held, as a matter of law, that Daniel Guerrette had raised a "claim of a property or possessory right in the instrument or its proceeds," 11 M.R.S.A. § 3-1306 (1995), and therefore that Sun Life was entitled to assert that claim as a "defense" against the Credit Union. See 11 M.R.S.A. § 3-1305(3) (1995).⁹ The court found, however, that a genuine issue of material fact remained as to whether the Credit Union had acted in "good faith" when it gave value for the checks—a fact relevant to determining whether the Credit Union was a holder in due course. See 11 M.R.S.A. § 3-1302(1)(b)(ii) (1995). Accordingly, the court denied the Credit Union's motion for summary judgment, and the matter proceeded to trial.

[¶ 8] At trial, the only issue presented to the jury was whether the Credit Union had acted in "good faith" when it gave value for the checks, thus entitling it to holder in due course status.¹⁰ At the close of evidence, the Credit Union made a motion for a judgment as a matter of law, which the Superior Court denied. The jury found that the Credit Union had not acted in good faith and therefore was not a holder in due course. Therefore, the Superior Court entered judgment in favor of Sun Life, Daniel, Joel, and Claire, and against the Credit Union. The court denied the Credit Union's renewed motion for judgment as a matter of law and motion to amend the judgment, and the Credit Union filed this appeal.

II. Obligations of the Parties

[¶ 9] At the heart of the controversy in this case is the allocation of responsibility for the loss of the unpaid $42,366.56, given the fact that Paul Richard and Steven Hall, the real wrongdoers, appear to be unable to pay. Maine, like the other forty-nine states, has adopted the Uniform Commercial Code. Under the Maine U.C.C., Articles 3-A and 4 deal with "Negotiable Instruments" and "Bank Deposits and Collections." See 11 M.R.S.A. §§ 3-1101, 4-101 (1995). It is these statutes that govern the parties' dispute.

[¶ 10] Pursuant to Article 4 of the Maine U.C.C., the Credit Union, as a depositary bank, is a "holder" of the instruments,¹¹ see 11 M.R.S.A. § 4-205(1) (1995),¹² making it a "person entitled to enforce" the instrument under Article 3-A. See 11 M.R.S.A. § 3-1301(1) (1995). Upon producing an instrument containing the valid signature of a party liable on the instrument, a person entitled to enforce the instrument is entitled to payment, unless the party liable proves a defense or claim in recoupment, see 11 M.R.S.A. § 3-1308(2) (1995), or a possessory claim to the instrument itself. See 11 M.R.S.A. § 3-1306.

[¶ 11] Because their signatures appear on the backs of the checks, Daniel, Joel, and Claire are "indorsers" of the checks. See 11 M.R.S.A. § 3-1204(1), (2) (1995). As indorsers, they are obligated to pay the amounts due on each dishonored instrument "[a]ccording to the terms of [each] instrument at the time it was indorsed." 11 M.R.S.A. § 3-1415(1)(a) (1995).¹³ This obligation is owed "to a person entitled to enforce the instrument or to a subsequent indorser who paid the instrument under this section." Id.

[¶ 12] As drawer of the checks, Sun Life is obligated to pay each dishonored instrument "[a]ccording to its terms at the time it was issued." 11 M.R.S.A. § 3-1414(2)(a) (1995). Again, this obligation is owed to a person entitled to enforce the instrument or to an indorser who paid the draft under section 3-1415. See 11 M.R.S.A. § 3-1414(2) (1995). Chase Manhattan, as drawee of these checks, was not obligated to accept them for payment, see 11 M.R.S.A. § 3-1408 (1995), and therefore has not been made a party to this action.

[¶ 13] Unless the Credit Union is a holder in due course, its right to enforce the obligations of the drawer and indorsers of the instruments is subject to a variety of defenses, including all those defenses available "if the person entitled to enforce the instrument[s] were enforcing a right to payment under a simple contract." See 11 M.R.S.A. § 3-1305(1)(b) (1995). In addition, its right to enforce is subject to any claims in recoupment, see 11 M.R.S.A. § 3-1305(1)(c) (1995), or claims to the instruments themselves. See 11 M.R.S.A. § 3-1306. If, however, the Credit Union establishes that it is a "holder in due course," it is subject to only those few defenses listed in section 3-1305(1)(a). See 11 M.R.S.A. § 3-1305(2) (1995). None of those specific defenses is applicable here. Thus, the Credit Union argues that because it is entitled as a matter of law to holder in due course status, it is entitled to enforce the instruments against the Guerrettes and Sun Life.

III. Holder in Due Course

A. Burden of Proof and Standard of Review

[¶ 14] A holder in due course is a holder who takes an instrument in good faith, for value, and without notice of any claims or defenses. See 11 M.R.S.A. § 3-1302(1) (1995). Once the persons who may be liable on the instruments have raised a recognized defense to that liability, the burden is on the holder to prove by a preponderance of the evidence that it is a holder in due course. See New Bedford Inst. for Sav. v. Gildroy, 36 Mass.App.Ct. 647, 634 N.E.2d 920, 925 (1994).¹⁴ If it fails in that proof, the persons otherwise liable on the instruments may avoid liability if they prove a defense, claim in recoupment, or possessory claim to the instrument. See 11 M.R.S.A. §§ 3-1305(1)(b), 3-1308(2).

[¶ 15] The issue of whether a party is a holder in due course is usually one of fact, although "where the facts are undisputed and conclusive, [a court] can determine... holder in due course status as a matter of law." See Triffin v. Dillabough, 552 Pa. 550, 716 A.2d 605, 611 (1998). In this case, the Superior Court declined to decide the holder in due course issue as a matter of law, and submitted the question to the jury. The jury found that the Credit Union was not a holder in due...