Georg v. Metro Fixtures Contractors, Inc.

• Decision Date: 17 March 2008
• Docket Number: No. 07SC26.,07SC26.
• Citation: 178 P.3d 1209
• Parties: Clinton GEORG and Freestyle Sports Marketing, Inc., Petitioners v. METRO FIXTURES CONTRACTORS, INC., Respondent.
• Court: Colorado Supreme Court

178 P.3d 1209

Clinton GEORG and Freestyle Sports Marketing, Inc., Petitioners v. METRO FIXTURES CONTRACTORS, INC., Respondent.

No. 07SC26.

Supreme Court of Colorado, En Banc.

March 17, 2008.

Quinn & Coles, P.C., D. Bruce Coles, Denver, Colorado, Attorneys for Petitioners.

Solomon Pearl Blum Heymann & Stich LLP, Bruce E. Rohde, Denver, Colorado, Attorneys for Respondent.

Justice HOBBS delivered the Opinion of the Court.

We granted certiorari in this case to address an issue of first impression in Colorado regarding whether under sections 4-1-201(b)(20) and 4-3-302, C.R.S. (2007), Colorado's codification of the Uniform Commercial Code ("UCC"), a person can be a holder of a negotiable instrument entitled to holder in due course status under a theory of constructive possession of a negotiable instrument.¹ The court of appeals partially reversed the trial court's grant of summary judgment in favor of Freestyle Sports Marketing, Inc. ("Freestyle"), ruling that Freestyle was not a holder in due course because it was not a holder who had actual possession of the negotiable instrument at issue in this action.

We hold that, under the facts of this case, Freestyle had constructive possession of the check and qualified as a holder in due course under sections 4-3-302 and 4-3-306, C.R.S. (2007), of Colorado's UCC. Accordingly, we reverse the judgment of the court of appeals and remand with directions that the court of appeals return this case to the district court for entry of judgment in favor of Freestyle.

I.

Freestyle employed Cassandra Demery as a bookkeeper for several years before it discovered that Demery had embezzled over $200,000 for personal use and had failed to pay, on Freestyle's behalf, approximately $240,000 in state and federal employment taxes. Freestyle terminated Demery's employment, demanded that she repay Freestyle, and threatened to notify the authorities if she did not.

After leaving Freestyle, Demery went to work as a bookkeeper at Metro Fixtures Contractors, Inc. ("Metro"), a company owned by her parents. Demery's bookkeeping position at Metro included balancing the accounting books, invoicing customers, and paying outstanding bills on behalf of the company. In her position as bookkeeper, Demery wrote a check from Metro's bank account and made it payable to Freestyle in the amount of $189,000. Demery wrote "for deposit only" on the back of the check as well as Freestyle's account number, filled out a deposit form, and deposited the check in Freestyle's bank account.

Demery then informed Clinton Georg, Freestyle's president, by phone, that she had obtained a loan from her family to repay Freestyle and had deposited the funds into Freestyle's account. After Demery's phone call, Georg called his bank and confirmed the deposit of the funds into Freestyle's account. Georg subsequently used the deposited funds for payment of Freestyle's delinquent employment taxes.

After two years, Metro uncovered the transaction instigated by Demery and filed suit against Georg and Freestyle claiming theft, conversion, aiding and abetting a breach of fiduciary duty, conspiracy, and unjust enrichment. Metro alleged that it had not given Demery a loan or permission to write and deposit a check in the amount of $189,000 into Freestyle's bank account.

Freestyle moved for summary judgment, contending that it qualified as a holder in due course under sections 4-3-302 and 4-3-306. The trial court agreed that Freestyle was a holder in due course and granted the motion.

Metro appealed and the court of appeals partially reversed. The court of appeals held that Freestyle could not have been a holder in due course because it was not a holder with actual possession of the check. Freestyle then appealed to us arguing that it had constructive possession of the instrument when the check was deposited at its bank.

II.

We hold, under the facts of this case, that Freestyle had constructive possession of the check and qualified as a holder in due course under sections 4-3-302 and 4-3-306 of Colorado's UCC.

A. Standard of Review

Under C.R.C.P. 56(c), summary judgment may be granted if there is no genuine contested issue of material fact and the moving party is entitled to judgment as a matter of law. We review a grant of summary judgment de novo. Aspen Wilderness Workshop, Inc. v. Colo. Water Conservation Bd., 901 P.2d 1251, 1256 (Colo.1995).

With regard to whether Freestyle was a holder in due course by constructive possession of the check, the trial court found that no contested material facts were in dispute and that Freestyle was a holder in due course under the applicable provisions of Colorado's UCC.

The court of appeals accepted the trial court's finding that no contested issue of material fact existed. However, the court of appeals partially set aside the trial court's judgment in favor of Freestyle, reasoning that Freestyle lacked actual possession of the check and therefore did not qualify as a holder in due course.

If Freestyle is a holder in due course under section 4-3-306, it takes free of Metro's claims. Flatiron Linen, Inc. v. First Am. State Bank, 23 P.3d 1209, 1212 (Colo. 2001) (discussing the availability of defenses to the payment of negotiable instruments under the UCC and the different defenses for a holder in due course and a holder not in due course); La Junta State Bank v. Travis, 727 P.2d 48, 51 (Colo.1986) (noting that a holder in due course takes the instrument free from all claims to it).

Thus, whether Freestyle qualifies for holder in due course status under sections 4-1-201(b)(20) and 4-3-302, by constructive possession of the check, is a question of law that we review de novo. See Evans v. Romer, 854 P.2d 1270, 1274-75 (Colo.1993). When a Colorado statute is patterned after a model code, as the Colorado statute is on the UCC, we may draw upon available persuasive authority in reaching our decision. See West v. Roberts, 143 P.3d 1037, 1041 (Colo.2006) (citing Szaloczi v. John R. Behrmann Revocable Trust, 90 P.3d 835, 838-39 (Colo.2004)).

B. Holder in Due Course

The Colorado General Assembly adopted Colorado's UCC in 1965. Id. at 1044. Section 4-1-103, C.R.S. (2007), states that the purposes of Colorado's UCC are to: (1) simplify, clarify, and modernize the law governing commercial transactions; (2) permit continued expansion of commercial transactions; and (3) make uniform the law among jurisdictions. The statute controls when it displaces preexisting principles of law and equity. See § 4-1-103(b), C.R.S. (2007); see also Clancy Sys. Int'l, Inc. v. Salazar 177 P.3d 1235, 1237 (Colo.2008).

A check is a negotiable instrument. See § 4-3-104, C.R.S. (2007). The holder in due course doctrine is designed to encourage the transfer and usage of checks and facilitate the flow of capital. James J. White & Robert S. Summers, Uniform Commercial Code § 17-1, 150 (4th ed.1995). An entity may qualify as a holder in due course even if the instrument at issue may have passed through the hands of a thief. Id. at § 17-3, 152-53. ("The holder in due course is one of the few purchasers in Anglo-Saxon jurisprudence who may derive a good title from a chain of title that includes a thief in its links.")

A holder in due course must meet five conditions: (1) be a holder;² (2) of a negotiable instrument³ who took it; (3) for value;⁴ (4) in good faith;⁵ (5) without notice of certain problems with the instrument.⁶ Id. at § 17-2, 151-52.

To be a holder one must meet the two conditions in section 4-1-201(b)(20): (1) he or she must have possession (2) of an instrument drawn, issued, or indorsed to him or her. Id. at § 17-3, 152. Possession is an element designed to prevent two or more claimants from qualifying as holders who could take free of the other party's claim of ownership. 6 William D. Hawkland & Lary Lawrence, Uniform Commercial Code Series, § 3-301:3 (1999). With rare exceptions, those claiming to be holders have physical ownership of the instrument in question. White & Summers, supra, at § 17-3, 152.

An otherwise authorized signature on a negotiable instrument is not converted into an unauthorized forgery when an agent, authorized to sign negotiable instruments in his principal's name, abuses that authority by negotiating the instrument to a holder in due course for the agent's own personal benefit. Willey v. Mayer, 876 P.2d 1260, 1265 (Colo. 1994) (holding that when an agent has actual authority to sign a negotiable instrument but acts with an improper purpose or without authorization in transferring an instrument to a third party, the principal is liable on the instrument to a holder in due course); see also § 4-3-402, C.R.S. (2007); Grease Monkey Int'l, Inc. v. Montoya, 904 P.2d 468, 474 (Colo.1995).

C. Constructive Possession

Section 4-4-201(a), C.R.S. (2007), states that a collecting bank "is an agent or sub-agent of the owner of the item." Further, the statute states, "This provision applies regardless of the form of indorsement or lack of indorsement...." Id. A check payable to a party and deposited in that party's account makes the party the "owner" of the check under the UCC. See Mercantile Bank & Trust Co. v. Hunter, 31 Colo.App. 200, 501 P.2d 486, 487 (1972). Further, the White & Summers treatise on the UCC speaks to a collecting bank as an agent for the owner's possession:

Sometimes the one claiming to be a holder in due course will not have possession of the instrument at the time of the suit. When a collecting bank holds the check, the solution is simple, for section 4-201 makes that bank the agent of the owner of the check. Under traditional analysis, the agent's possession would be the owner's possession and thus the owner would have "possession."

§ 17-3, 153 (emphasis added).

Thus, there are circumstances wherein requiring actual physical possession of the instrument would be problematic and constructive possession applies. Hawkland & Lawrence, supra, at § 3-301:3.⁷...