First State Bank & Trust Co. of Edinburg v. George

• Decision Date: 31 December 1974
• Docket Number: No. 892,892
• Citation: 16 UCCRep.Serv. 160,519 S.W.2d 198
• Parties: 16 UCC Rep.Serv. 160 FIRST STATE BANK & TRUST COMPANY OF EDINBURG, Texas, Appellant, v. Mike E. GEORGE et al., Appellees.
• Court: Texas Court of Appeals

Page 198

519 S.W.2d 198

16 UCC Rep.Serv. 160

FIRST STATE BANK & TRUST COMPANY OF EDINBURG, Texas, Appellant, v. Mike E. GEORGE et al., Appellees.

No. 892.

Court of Civil Appeals of Texas Corpus Christi.

Dec. 31, 1974.

Rehearing Denied Feb. 13, 1975.

Mitchell O. Sawyer, Kelley, Looney, Alexander & Hiester, Edinburg, for appellant.

O. C. Hamilton, Jr., Ewers, Toothaker, Ewers, Abbott, Talbot, Hamilton & Jarvis, McAllen, for appellees.

OPINION

BISSETT, Justice.

This is a suit to recover $57,971.47 because payment was stopped on six checks. The First State Bank & Trust Company of Edinburg, Texas, hereinafter called 'Bank', instituted suit against Mike E. George and wife, Letha K. George, hereinafter called 'Georges', to recover damages for six checks signed by the Georges, payable to the order of Joe Davis and deposited in accounts owned by Davis, upon which payment was subsequently stopped. Trial was to a jury, which returned a verdict in favor of the Georges. Judgment was entered on the jury's verdict. The Bank has appealed.

During the early part of October, 1968, Joe Davis, who was a director of the Bank from the mid 1950's until January, 1969, approached the Georges for money and received six checks from them in the total amount of $151,000.00. The checks, which were drawn on the First National Bank of McAllen, were deposited by Davis in two accounts in the Bank, as follows:

$27,000.00, deposited 10/14/68 in Davis Gin Company account;

$28,000.00, deposited 10/15/68 in Santa Cruz Cattle Co. account;

$26,000.00, deposited 10/15/68 in Santa Cruz Cattle Co. account;

$22,000.00, deposited 10/16/68 in Davis Gin Company account;

$25,000.00, deposited 10/16/68 in Santa Cruz Cattle Co. account;

$23,000.00, deposited 10/17/68 in Santa Cruz Cattle Co. account.

Contemporaneously with the issuance of the aforesaid checks to Davis by the Georges, Davis issued his checks to them in the corresponding total of $151,000.00.

Credit was given immediately by the Bank to Davis on the Georges' checks, even before they had been presented to the First National Bank of McAllen, the payee bank. On October 15, 1968, Mr. Bascum Spiller, President of the First National Bank of McAllen, informed the Georges that he had called the Edinburg Bank, appellant herein, regarding certain checks signed by Joe Davis and payable to the Georges, which were insufficient in that Davis did not have enough money in his accounts to cover said checks. The Georges stopped payment on the $27,000.00, $28,000.00, and $26,000.00 checks on October 21, 1968, and on the $22,000.00, $25,000.00 and $23,000.00 checks on October 22, 1968. The checks were later charged back by the Bank to the respective accounts of Davis.

Sometime after the Bank had been notified that payment had been stopped on the six checks, Mr. Tom East borrowed $150,000.00 from the Bank. He loaned Davis $150,000.00 so that he could take care of the overdrafts at the Bank. Davis deposited $150,000.00 in the Santa Cruz Cattle Co. account on October 24, 1968, and on the same day also deposited $13,000.00 and $4,000.00 in that account. After charging back the six checks and other checks not here involved, the Bank's records showed that the accounts in which the Georges' checks were deposited were still overdrawn in the amount of $57,971.47. Suit was instituted against the Georges for recovery of that sum of money on the theory that by advancing money against the checks drawn by the Georges prior to notice of their dishonor as a collecting bank, the Bank became a holder in due course of said checks, and was therefore entitled, as a matter of law, to recover the $57,971.47. The Georges, in their answer, in addition to a general denial, alleged that at the time the checks were deposited by Davis in the Bank and before any withdrawals were made against the money in the accounts that the bank had actual notice that payment had been stopped on the checks, and that the checks were in fact paid to the Bank when Davis borrowed $150,000.00 and deposited that sum of money in the Bank for the specific purpose of taking care of the overdrawn accounts.

The jury, in response to special issues, found that at the time the checks in question were deposited, the Bank did not receive the same in good faith; that the Bank had notice of a claim or defense to them on the part of the Georges; that the Bank received full payment or satisfaction on the checks; that Davis was kiting checks during the month of October, 1968; that Davis obtained the Georges' checks in exchange for kited checks; that the Bank had knowledge that the checks in question were exchanged for kited checks at the time said checks were deposited; that Mike George did not have knowledge that such checks obtained by Joe Davis were in exchange for the kited checks; and that it was understood between the Bank and Davis that the deposits or any of them made by Davis on October 24, 1968 were for the specific purpose of covering the Mike George checks in question.

The Bank, in its point of error No. 1, asserts that the trial court erred in failing to grant its motion for judgment non obstante veredicto in connection with the $27,000.00 check, because the undisputed evidence revealed that the bank was a holder of such check, that it did not receive notice of the stop payment order until after the check had been deposited in the bank and the funds disbursed to Davis, or made available for his immediate use, and because the undisputed evidence further established that it did not recoup any of the funds represented by such check from Davis.

In points nos. 5, 6, 7, and 8, the contentions are made: that the trial court erred in submitting Special Issue 5 because it failed to inform the jury that a bona fide loan transaction would not be included within the definition of 'check kiting' (Point 5); that it erred in submitting Special Issues 6 and 7 because such issues were predicated upon an affirmative answer to Special Issue 5, and constituted error for the same reason urged against the submission of Special Issue 5 (Point 6); that it erred in submitting Special Issue 9 and because it inquired into whether any of a group of deposits were made for the purpose of paying the Georges' checks, and did not inquire as to whether any particular one of the deposits were for such purpose (Point 7); and that it erred in submitting Special Issue No. 10 for the reason that the issue did not inquire about a factual matter, but inquired of the jury as to a legal conclusion (Point 8).

Since points 1, 5, 6, 7, and 8 are each directed only to the $27,000.00 check, which was dated and deposited on October 14, 1968, we will limit our discussion to that check only insofar as those points are concerned. In the discussion that follows, we deem it necessary to set out Special Issues 5, 9 and 10.

If a bank is found to be a holder in due course, then to that extent it takes the instrument free of all defenses of any party to the instrument with whom it has not dealt. Tex.Bus. & Comm.Code Ann . § 3.305(b) (1968), V.T.C.A. A bank, in order to fall within the category of holder in due course, must take the instrument for value; in good faith; and 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.

Good faith is defined in Tex.Bus. & Comm.Code Ann. § 1.201(19) (1968) to mean 'honesty in fact in the conduct or transaction concerned'. The test is not diligence or negligence; and it is immaterial that the bank may have had notice of such facts as would put a reasonably prudent person on inquiry which would lead to discovery, unless the bank had actual knowledge of facts and circumstances, that would amount to bad faith. Riley v. First State Bank, Spearman, 469 S.W.2d 812 (Tex.Civ.App.--Amarillo 1971, writ ref'd n.r.e.); Richardson Company v. First Nat. Bank in Dallas, 504 S.W.2d 812 (Tex.Civ.App.--Tyler 1974, writ ref'd n.r.e.). In the instant case, there was testimony that Mr. Shrader should have known that Davis was kiting checks at the time in question, and that by looking at the accounts involved, any banker could see that check kiting was going on during October, 1968.

As to the question of notice, Tex.Bus. & Comm.Code Ann. § 1.201(25) (1968) is controlling and states:

'(25) A person has 'notice' of a fact when

(A) he has actual knowledge of it; or

(B) he has received a notice or notification of it; or

(C) From all the facts and circumstances known to him at the time in question he had reason to know that it exists.' (Emphasis added.)

The Bank's knowledge of the facts and circumstances surrounding the transactions, the special treatment it gave Davis, one of its then directors, the fact that it provided immediate credit on the checks which Davis deposited to his accounts, and the close relationship between certain bank officers and Davis, collectively, establish that the bank had actual notice of the check kiting by Davis. The Bank failed to carry the burden of establishing that it took the check in good faith and without any notice of a defense to the same. It was not a holder in due course. As a result, it took the check subject to all defenses that the Georges would have had, including that of check kiting and want or failure of consideration. Tex.Bus. & Comm.Code Ann. § 3.306 (1968).

As already noted, the Georges stopped payment on the check on October 21, 1968. Their action was made known to the Bank on that day. The deposit of $150,000.00, which Davis said was made possible by a loan from Mr. East, was made on October 24, 1968. The actual bookkeeping entry by the Bank which reflected the charge back was not made until November 18, 1968. During that interval numerous checks were paid out of the account to third parties. After the charge back, the Davis Santa Cruz Cattle Co. account had a deficit of $72,507.39. The account was made current by an entry on November 18, 1968 for $72,507.39, which...