Harpeth Fin. Servs. LLC v. Pinson
| Decision Date | 27 May 2021 |
| Docket Number | No. M2019-02106-COA-R3-CV,M2019-02106-COA-R3-CV |
| Citation | 630 S.W.3d 926 |
| Parties | HARPETH FINANCIAL SERVICES LLC v. Jim Clay PINSON, Jr. et al. |
| Court | Tennessee Court of Appeals |
John Roaten Cheadle, Jr. and Mary Barnard Cheadle, Nashville, Tennessee, for the appellant, Harpeth Financial Services LLC.
Kimberly Reed-Bracey Johnson, Goodlettsville, Tennessee, for the appellee, Flora E. Morris.
W. Neal McBrayer, J., delivered the opinion of the court, in which Frank G. Clement, Jr., P.J., M.S., and Andy D. Bennett, J., joined.
A collecting bank sued the drawer of a check, claiming that the drawer stopped payment on the check with fraudulent intent. The general sessions court, as well as the circuit court on de novo appeal, ruled in favor of the drawer. The bank argues that, because it was a holder in due course, the drawer was still liable on the check despite the stop-payment order. And it seeks an award of interest, court costs, attorney's fees, and treble damages from the drawer, contending that the proof showed the drawer acted with fraudulent intent. We affirm the dismissal of the claim based on the drawer's alleged fraudulent intent, but we vacate the dismissal of any claim based on the drawer's obligation on the check.
A customer of Harpeth Financial Services LLC wanted to cash a check. The check, signed by Flora E. Morris and payable to "Jim Tinson Elec Ser," was for $3,000. Harpeth asked the customer for his identification and Ms. Morris's phone number. The customer identified himself as Jimmy Clay Pinson, Jr. and provided a phone number. But when Harpeth called the number, there was no answer. When Harpeth asked for another number to reach Ms. Morris, Mr. Pinson could not provide one. So Mr. Pinson left without cashing the check.
He returned less than ten minutes later, providing the same phone number for Ms. Morris as before. But this time, Harpeth got an answer when it called. Harpeth supposedly reached Ms. Morris and verified the check, as well as Ms. Morris's identity. Harpeth then cashed the check, giving Mr. Pinson the $3,000. When Harpeth later tried to collect on the check from Ms. Morris's bank, the check was returned, showing a stop-payment request.
Harpeth sued both Mr. Pinson and Ms. Morris in general sessions court. Harpeth claimed Ms. Morris fraudulently stopped payment on her check after validating it. See Tenn. Code Ann. § 47-29-101(a) (2013) (). From Ms. Morris, Harpeth sought the $3,000 face amount of the check plus interest, treble damages, court costs, and attorney's fees. See id. § 47-29-101(a)(1)-(2), (a)(4)-(5), (d).
Mr. Pinson was never served, and he is not a party to this case. For her part, Ms. Morris claimed that she hired a man named Jim Tinson to perform electrical work at her property. Ms. Morris wrote the check to "Jim Tinson Elec Ser" on a Saturday. In exchange, Mr. Tinson was supposed to complete the work the following Monday. But he did not show.
Believing she had been defrauded, Ms. Morris claimed she stopped payment on the check two days before Mr. Pinson cashed it. She insisted that she was justified in doing so and that Harpeth did not verify the check with her. She argued that, if Harpeth had contacted her bank before taking the check, Harpeth would have been aware of the fraud and the stop-payment request. In Ms. Morris's view, Harpeth assumed the risk of taking the check and paying Mr. Pinson.
After a hearing, the general sessions court dismissed Harpeth's claim against Ms. Morris. Harpeth then appealed to circuit court for a new trial. See id. § 27-5-108(a)(1), (c) (Supp. 2020) (). After a bench trial, the circuit court likewise dismissed Harpeth's claim. The court reasoned that the check was payable to "Jim Tinson Elec Ser." Yet Harpeth paid the check to a "Jimmy Clay Pinson, Jr." By failing to pay the "actual payee," Harpeth acted "at its own peril" and thus was "responsible for the loss." See McCann Steel Co. v. Third Nat'l Bank , 47 Tenn.App. 287, 337 S.W.2d 886, 891 (1960) ().
On appeal, Harpeth argues that it was a holder in due course of Ms. Morris's check. Ms. Morris had the right to stop payment on the check. See Tenn. Code Ann. § 47-4-403(a) (2001) (). But if Harpeth was a holder in due course, Ms. Morris remained liable on the check. See id. cmt. 7 ).
A "holder in due course" is defined by statute. See id. § 47-3-302(a) (2001). Whether the facts established in the trial court "satisfy the statutory standard" is a mixed question of law and fact. See Pullman-Standard v. Swint , 456 U.S. 273, 289 n.19, 102 S.Ct. 1781, 72 L.Ed.2d 66 (1982) (). Cases "that involve mixed questions of law and fact are subject to de novo review." State v. Burns , 6 S.W.3d 453, 461 (Tenn. 1999).
The burden falls on the party claiming holder in due course status to prove the statutory requirements of that status. Braswell v. Tindall , 200 Tenn. 629, 294 S.W.2d 685, 688 (1956). The first requirement is that the party be a "holder." See Tenn. Code Ann. § 47-3-302(a) ; see also 5A DAVID FRISCH , ANDERSON ON THE UNIFORM COMMERCIAL CODE § 3-302:9 (3d. ed.), Westlaw (database updated Dec. 2020) (recognizing, "[i]n a suit on commercial paper, the burden is initially on the plaintiff to show that the plaintiff is the holder of the instrument sued upon"). A holder is a person "[i]n possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession[.]" Tenn. Code Ann. § 47-1-201(b)(21)(A) (Supp. 2020).
The parties do not dispute that Harpeth is in possession of Ms. Morris's check and that it is a negotiable instrument. See id. § 47-3-104(c), (f) (Supp. 2020) (). But the check was payable only to the order of "Jim Tinson Elec Ser," not to Harpeth. See id. § 47-3-109(b) (2001).
A check may become payable to bearer if it is "indorsed in blank." Id. §§ 47-1-201(b)(5), -3-109(c). The trial court ruled that, because Mr. Pinson was not the actual payee of the check, Harpeth could not recover from Ms. Morris, relying on our decision in McCann Steel Co. v. Third National Bank , 47 Tenn.App. 287, 337 S.W.2d 886 (1960). Implicit in the court's reliance on McCann Steel Co. is a determination that Mr. Pinson was not only the wrong payee, but also not a proper indorser on behalf of Jim Tinson Elec Ser. See McCann Steel Co. , 337 S.W.2d at 891 ().
We disagree. In her answer to the civil warrant filed in general session court, Ms. Morris did not specifically deny either the authenticity of Mr. Pinson's signature or his authority to indorse the check. So "the authenticity of, and authority to make," his signature were deemed admitted. Tenn. Code Ann. § 47-3-308(a) (Supp. 2020). More importantly, Ms. Morris complained that Mr. Pinson "took [her] check on a Saturday and allegedly [i]ndorsed it, cashed it, and did not return to do any of the work for a period of near four years as he had promised." According to her, Mr. Pinson " ‘took the money and ran’ " without calling or reappearing "to make any amends or refunds."
The person or entity to whom a check "is initially payable is determined by the intent of the person ... signing as ... the issuer of the instrument." Id. § 47-3-110(a) (2001). This is true "even if that person is identified in the [check] by a name or other identification that is not that of the intended person." Id. By her answer, Ms. Morris acknowledged her intent was to pay Mr. Pinson, although her check was made payable to "Jim Tinson Elec Ser." When a check "is payable to a holder under a name that is not the name of the holder, [i]ndorsement may be made by the holder in the name stated in the instrument or in the holder's name or both." Id. § 47-3-204(d) (2001). In other words, Mr. Pinson properly indorsed Ms. Morris's check in his own name.1
Ms. Morris argues that, even if her check was properly indorsed by Mr. Pinson, Harpeth did not take the check in good faith. To be a holder in due course, the holder must have taken the instrument, here a check, "in good faith." Id. § 47-3-302(a)(2). Good faith "means honesty in fact in the conduct or transaction concerned." Id. § 47-1-201(b)(20). "Honesty in fact," in turn, means "an absence of a ‘knowing or reckless disregard of a customer's rights.’ " The Bank/First Citizens Bank v. Citizens & Assocs. , 82 S.W.3d 259, 264 (Tenn. 2002) (quoting Glazer v. First Am. Nat'l Bank , 930 S.W.2d 546, 549 (Tenn. 1996) ). A party acts in good faith "unless [its] conduct amounts to dishonesty and bad faith." McConnico v. Third Nat'l Bank , 499 S.W.2d 874, 881 (Tenn. 1973).
"Honesty in fact" is a subjective standard in Tennessee. The Bank/First Citizens Bank , 82 S.W.3d at 264. Ms. Morris's argument relies on a standard that incorporates ...
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