Hotel Riviera, Inc. v. First Nat. Bank and Trust Co. of Oklahoma City, Okl.

• Decision Date: 29 July 1985
• Docket Number: No. 83-2092,83-2092
• Citation: 768 F.2d 1201
• Parties: 41 UCC Rep.Serv. 363 HOTEL RIVIERA, INC., a Nevada Corporation, Appellant, v. FIRST NATIONAL BANK AND TRUST COMPANY OF OKLAHOMA CITY, OKLAHOMA, a National Banking Association, Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1201

768 F.2d 1201

41 UCC Rep.Serv. 363

HOTEL RIVIERA, INC., a Nevada Corporation, Appellant, v. FIRST NATIONAL BANK AND TRUST COMPANY OF OKLAHOMA CITY OKLAHOMA, a National Banking Association, Appellee.

No. 83-2092.

United States Court of Appeals Tenth Circuit.

July 29, 1985.

Robert D. Nelon of Andrews, Davis, Legg, Bixler, Milsten & Murrah, Oklahoma City, Okl., for appellant.

George W. Dahnke of Hastie & Kirschner, Oklahoma City, Okl., for appellee.

Before McKAY and MOORE, Circuit Judges, and BROWN, ^* District Judge.

JOHN P. MOORE, Circuit Judge.

This is an appeal from the denial of a motion for reconsideration of the trial court's order granting summary judgment to the appellee. The underlying action was brought to enforce payment of a cashier's check issued by the appellee, First National Bank and Trust Company of Oklahoma City, Oklahoma (Bank), and endorsed by the payee to the appellant, Hotel Riviera, Inc. (Hotel). When the check was presented for payment, the Bank dishonored it having discovered the check had been paid for with forged instruments. In the trial court, the Bank argued the Hotel was not a holder in due course, thereby permitting the Bank to assert the personal defense of failure of consideration. The trial court allowed the defense, entered judgment for the Bank, and denied the Hotel's motion for rehearing, 580 F.Supp. 122. We reverse.

The question presented is whether the Hotel, as endorser without knowledge of the underlying fraud of the purchaser of the cashier's check, is subject to the Bank's defense. Even though the Hotel agrees it is not a holder in due course because it accepted the endorsement of the cashier's check in satisfaction of a gambling debt, the issue turns upon the nature of a cashier's check and consideration of whether the Hotel is otherwise an innocent party to the transaction.

The record shows that the cashier's check was issued to Richard K. Pemberton, a Bank customer, who deposited to his own account two checks drafted by his employer and ostensibly issued to two of the employer's customers. Prior to deposit, Pemberton forged the endorsements of the customers. Pemberton's bank account was initially credited with the amount of the forged checks, $480,000, and then debited with the amount of the cashier's check, $250,000.

After being issued the cashier's check, Pemberton flew to Las Vegas, Nevada, where he set out to gamble at the Hotel's casino. To finance this effort, Pemberton offered the check to the Hotel in exchange for credit in the casino. Though the Hotel had a policy against acceptance of checks without verification, it eventually agreed to a late night acceptance of this check conditioned upon certain requirements irrelevant here. As soon as possible the next day, and while Pemberton was still in the casino, a Hotel employee called the Bank to verify the check. The Hotel was informed that the name of the payee, the amount of the check, and its number were accurate. The Hotel was also told that there were no outstanding stop orders and that the check had not been reported lost or stolen. With this verification, on January 6, the Hotel deposited the cashier's check in its own bank for collection.

On January 8, the Bank was notified of Pemberton's forged endorsements of his employer's checks and of the resultant dishonor of those checks by the employer's bank. Then, in turn, the Bank dishonored the cashier's check, prompting this suit.

Our analysis hinges on the nature of a cashier's check. We note that although there is some judicial disparity in the perception of instruments of this genre, we have said that a cashier's check is an indebtedness of a bank which is accepted--as that term is applied by the Uniform Commercial Code (U.C.C. or Code)--upon its issuance. Anderson, Clayton & Co. v. Farmers National Bank of Cordell, 624 F.2d 105 (10th Cir.1980). Accordingly, the issuing bank's liability on the instrument is governed by the Code. Anderson, Clayton & Co. v. Farmers National Bank of Cordell, supra; State of Pennsylvania v. Curtiss National Bank of Miami Springs, Florida, 427 F.2d 395 (5th Cir.1970).

Under most circumstances, acceptance by a bank constitutes a promise to honor the check upon presentment, U.C.C. Sec. 3-410; Okla.Stat. tit. 12A, Sec. 3-410 (1963); but we and other courts have recognized an exception to that general rule. Although not specifically provided in the Code, banks have been allowed to countermand cashier's checks when presented by a holder who has participated in some act of fraud which has led to or caused the original issuance of the cashier's check. Anderson, Clayton & Co. v. Farmers National Bank, supra; TPO Inc. v. FDIC, 487 F.2d 131 (3d Cir.1973); Lawrence, Making Cashier's Checks and Other Bank Checks Cost-Effective: A Plea for Revision of Articles 3 and 4 of the Uniform Commercial Code, 64 Minn.L.Rev. 275 (1980). Underlying this exception is the unassailable equity that no one should profit from fraudulent acts. Yet, that equity has never been applied in the context of this case.

The question we face here is whether the endorsee who neither participated in nor knew of the fraudulent procurement of the cashier's check should bear the burden of the fraudulent actor. The Bank argues for the affirmative because the check was endorsed in payment of a gambling debt, rendering the endorsement void under the laws of Nevada. See Sea Air Support, Inc. v. Herrmann, 613 P.2d 413 (Nev.1980). Assuming only for the sake of argument the contention is sound, the Hotel's concession that it is not a holder in due course moots the point. However, it is arguable whether Nev.Rev.Stat. Sec. 1.030 (1957), which makes gambling...