Guaranty Federal Sav. Bank v. Horseshoe Operating Co.

Decision Date09 May 1990
Docket NumberC-7720,Nos. C-7559,s. C-7559
Citation793 S.W.2d 652
Parties11 UCC Rep.Serv.2d 571 GUARANTY FEDERAL SAVINGS BANK, Petitioner, v. The HORSESHOE OPERATING COMPANY, Respondent. INTERCONTINENTAL CONSOLIDATED COMPANIES, INC., Petitioner, v. UNIVERSITY SAVINGS ASSOCIATION and Petrolife, Inc., Respondents.
CourtTexas Supreme Court

HIGHTOWER, Justice.

Petitioners' and Respondent The Horseshoe Operating Company's motions for rehearing are overruled. The opinion of January 3, 1990 is withdrawn and the following is substituted.

These consolidated cases concern a savings and loan association's liability on its so-called "teller's check." A "teller's check" is a check drawn by a savings association on its account at another financial institution and made payable to the person designated by the customer purchasing the check. In each case, the customer delivered the teller's check to the designated payee, but later sought to stop payment. The savings association, as drawer of the check, timely requested its drawee institution to stop payment. The payee brought suit, not against the customer who remitted the check or against the drawee that refused payment, but against the savings association. In each case, the trial court granted summary judgment holding the savings association liable on the check. The courts of appeal, however, reached conflicting results.

In Guaranty Federal Savings & Loan Association v. The Horseshoe Operating Co., the Fifth Court of Appeals affirmed, holding that such checks are equivalent to cashier's checks or cash, and therefore not subject to countermand. As a result of this analysis, the court of appeals apparently deemed irrelevant all factual issues concerning the payee's possible status as a holder in due course and the savings association's possible defenses under the Texas Business and Commerce Code. 748 S.W.2d 519. In University Savings Association v. Intercontinental Consolidated Companies, the First Court of Appeals rejected the "cash equivalent" analogy, and concluded that the savings association, as a "customer" of a "bank," had a statutory right to stop payment on its check, and assert its own limited defenses to payment. Insofar as the savings association's customer intervened to assert its own claim to the instrument, its claims were also available as defenses to payment. Thus, the court of appeals held that there were relevant factual issues precluding summary judgment. 751 S.W.2d 657. For the reasons explained herein, we affirm the judgment of the First Court of Appeals in Intercontinental Consolidated Companies. We also affirm that portion of the judgment of the Fifth Court of Appeals in Guaranty Federal Savings & Loan Association concerning the severance of Horseshoe's action on the check against Guaranty Federal from Guaranty Federal's third party action, and otherwise reverse the judgment and remand the cause to the trial court.

The University Savings Case

Petrolife, Inc. (Petrolife) contracted to buy blending gasoline from Intercontinental Consolidated Companies, Inc. (ICC). Allegedly as part of an ongoing fraud, ICC promised to deliver the gasoline between November 7 and 10, 1986, if it received a check for $2,008,125, half the total purchase price. Petrolife purchased a check for that amount, payable to ICC, from University Savings Association (University Savings) by borrowing on the revolving line of credit Petrolife maintained at University Savings. University Savings drew the check on one of its accounts with the Federal Home Loan Bank of Little Rock (FHLB). 1 Petrolife delivered the check to ICC, but ICC never delivered the gasoline.

On November 12, after investigating ICC's failure to deliver the gasoline and discovering its alleged fraud, Petrolife requested University Savings to stop payment. University Savings, the drawer of the check, contacted FHLB, the drawee, and requested that payment be stopped. FHLB honored the request to stop payment. Subsequently, University Savings credited Petrolife's line of credit for the amount of the check. ICC ultimately brought suit on the check, not against FHLB, but against University Savings. Petrolife filed a plea in intervention which the trial court struck.

The Guaranty Federal Case

Alan Parmet opened an account at Guaranty Federal Savings and Loan Association (Guaranty Federal). 2 Later that day he used his new account to purchase a teller's check, referred to as an "official check" by Guaranty Federal, for $900,000. The payee on the check was designated as "Binnon & Co." Guaranty Federal drew the teller's check on its account at Citibank of New York. On the same day, Parmet cashed the check for gambling chips at "Binion's Horseshoe Casino" in Las Vegas. 3 The next morning, Parmet was at Guaranty Federal when it opened, seeking to stop payment on the teller's check. Guaranty Federal immediately called Citibank to request that payment be stopped on Guaranty Federal's check. Thus, when the casino credit manager called the Citibank number listed on the teller's check, he was told that payment had been stopped. Undaunted, the casino attempted to negotiate the check. The check was endorsed "Binnon & Co. Jack B. Binion. Pay to the order of the Horseshoe Club Operating Co."; below that, it was further restrictively endorsed "Pay to the Order of Valley Bank of Nevada Main Office For Deposit Only The Horseshoe Club Operating Co. Hotel General Account 2100322." The Horseshoe Operating Company (Horseshoe) brought suit on the check, not against Parmet and his alleged co-conspirators 4, or against Citibank, but against Guaranty Federal. Guaranty Federal brought a third party claim against Parmet and his alleged co-conspirators. The trial court severed Horseshoe's action on the check against Guaranty Federal from Guaranty Federal's third party action.

I.

The issues before this court are (1) whether a savings association which issues a teller's check may assert defenses (including its customers' defenses) to payment, (2) whether issues of material fact preclude the summary judgments, (3) whether the trial court in the University Savings case abused its discretion in striking Petrolife's plea in intervention, and (4) whether the trial court in the Guaranty Federal case abused its discretion in severing Horseshoe's action on the check from Guaranty Federal's third party action.

II.

Teller's checks have been described as "checks drawn by ... savings and loan associations on commercial banks with which they maintain checking accounts." Note, Personal Money Orders and Teller's Checks: Mavericks under the U.C.C., 67 COLUM.L.REV. 524, 540 (1967). A "teller's check" is an instrument used in the savings and loan industry and is analogous to a "bank draft" in the banking industry in which a "check" is drawn by a bank on an account maintained in another bank or financial institution. See Fulton Nat'l Bank v. Delco Corp., 128 Ga.App. 16, 195 S.E.2d 455 (1973).

ICC and Horseshoe argue that teller's checks are not subject to a stop payment order. As described above, a teller's check is a "check" drawn by a savings association (University Savings and Guaranty Federal) upon an account maintained in another bank or financial institution (FHLB and Citibank). The savings association is the drawer of the check and the other bank or financial institution is the drawee of the check. Neither ICC nor Horseshoe (as payees) sued the drawee that refused payment of the check.

A stop payment order is an order to the drawee not to pay the check. See generally Tex.Bus. & Com.Code Ann. § 4.403 (Vernon 1968). Among other things, it affects the drawee's liability to the payee. If ICC and Horseshoe sued the drawee because the drawee refused payment of the check on the basis of the stop payment order, the validity of the stop payment order would be germane. However, since ICC and Horseshoe sued the drawer of the check and not the drawee that refused payment, the validity of the stop payment order is beside the point. 5

III.

Although University Savings and Guaranty Federal stopped payment of the teller's checks, they remain liable on the checks and ICC and Horseshoe may pursue an action on the checks against them. See First National Bank v. McKay, 521 S.W.2d 661 (Tex.Civ.App.--Houston [1st Dist.] 1975, no writ); Tex.Bus. & Com.Code Ann. §§ 3.413, 3.802 (Vernon 1968). ICC and Horseshoe argue that University Savings and Guaranty Federal may not assert any defenses (including their customers' defenses) to payment of the teller's checks. We disagree. If ICC and Horseshoe are holders 6 and not holders in due course, they take the checks subject to all valid claims and many defenses. 7 Tex.Bus. & Com.Code Ann. § 3.306 (Vernon 1968). These include the claims and defenses of third persons who are willing to defend and intervene on behalf of the savings associations to assert their claims and defenses to the teller's checks. Tex.Bus. & Com.Code Ann. § 3.306(4) (Vernon 1968). 8 If ICC and Horseshoe are holders in due course, 9 they take the checks free from "all defenses of any party to the instrument with whom the holder has not dealt except" infancy, incapacity, duress, illegality of the transaction, fraud, discharge in insolvency, and any other discharge of which the holder has notice. Tex.Bus. & Com.Code Ann. § 3.305 (Vernon 1968). We hold that University Savings and Guaranty Federal may assert the applicable defenses to payment of the teller's checks.

Obviously, the status of ICC and Horseshoe as holders in...

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