Schnitger v. Backus

• Decision Date: 18 March 1974
• Docket Number: No. 1558--I,1558--I
• Citation: 519 P.2d 1315,10 Wn.App. 754
• Parties: , 14 UCC Rep.Serv. 750 Joyce SCHNITGER a/k/a Joyce Backus, Appellant, v. Gerald BACKUS et al., Defendants, Seattle First National Bank, Respondent.
• Court: Washington Court of Appeals

Page 754

10 Wn.App. 754

519 P.2d 1315, 14 UCC Rep.Serv. 750

Joyce SCHNITGER a/k/a Joyce Backus, Appellant, v. Gerald BACKUS et al., Defendants, Seattle First National Bank, Respondent.

No. 1558--I.

Court of Appeals of Washington, Division 1.

March 18, 1974.

Rehearing Denied June 18, 1974.

Barnet, Robben, Blauert & Pease, Paul W. Robben, Seattle, for appellant.

Anderson, Hunter, Carlson & Dewell, Thomas R. Collins, Everett, for respondent.

CALLOW, Judge.

Joyce Backus Schnitger and Gerald Backus were divorced in 1966. Under the decree of divorce, Mr. Backus was to pay child support to his former wife. He neglected to do so over a period of time and became $2,300 in arrears.

In June 1970, Mr. Backus was employed by Walter Sanford to operate Sanford's fishing boat. Within a little more than a month, Mr. Backus and Mr. Sanford delivered fish to Nelbro Packing Co., Inc.; and in July 1970, Mr. Backus went to Nelbro Packing and exercised, as a boat captain for Mr. Sanford, a right to draw on sums due from Nelbro, Nelbro being authorized to make such disbursements. He drew more than was due, however, in obtaining from Nelbro a check in the sum of $5,000. On July 20, 1970, Mr. Backus deposited this $5,000 in his personal account at the Lynnwood branch of Seattle First National Bank and in the next 4 days wrote checks in the sum of $2,463.38. Mr. Sanford then discovered the right to draw had been overreached (the total sum due Backus being $4,393.35), informed Nelbro Packing, and payment was stopped on the $5,000 check. The Lynnwood branch of Seattle First National Bank honored the stop payment, charged the amount to the account of Backus, and an overdraft resulted in his account.

Prior to July 29, 1970, the Seattle First National Bank notified both Backus and Nelbro Packing of the stop payment and of the claim of the bank against the check. On July 29, 1970, Seattle First National Bank released the $5,000 check to Backus for return and reissuance by Nelbro Packing. The receipt signed by Backus recited 'For purpose of obtaining re-issue.' The check was returned to Nelbro Packing who then reissued a $2,500 check to Backus and retained the balance due him.

Mr. Backus did not redeposit the $2,500 check in his account at the Lynnwood branch of Seattle First National Bank; and on July 31, 1970, Mrs. Schnitger caused a writ of garnishment to be issued under the cause number of the divorce action. This was served upon Mr. Sanford to recover the past due support money owing from Backus. Mr. Sanford answered this writ stating that he owed Backus $4,393.35 and the he, Sanford, was withholding from that amount the sum of $2,300. On September 9, 1970, Mrs. Schnitger also caused a writ of garnishment to be issued and served upon Nelbro Packing as a garnishee defendant. Nelbro Packing answered alleging that an indebtedness of $2,500 to Sanford existed subject to any right or claim of Seattle First National Bank for any offset due to it as a result of the overdraft. On December 9, 1970, Seattle First National Bank intervened claiming a security interest in any funds due to Backus. Motions for summary judgment were filed by all parties, and judgment was entered on behalf of Seattle First National Bank. The summary judgment provided that the bank be granted the sum of $2,472.38 on its claim in intervention against Nelbro Packing and discharged Nelbro Packing as garnishee defendant upon payment of that sum into court.

The chronology that follows may assist in understanding the succession of events which affects the rights and priorities of the parties. The dates set forth reflect the sequence of the garnishments as supported by the record.

July 17, 1970 A $5,000 check is issued by Nelbro to Backus.

July 20, 1970 Backus deposits the $5,000 check in the depositary bank.

July 20, 1970 The payor bank receives a notice of stop payment.

July 20--24, 1970 Backus writes checks against his account in the depositary bank.

July 24, 1970 The depositary bank receives the $5,000 check back marked 'Payment Stopped.' This is the first notice to the depositary bank of the stop payment against the check.

July 29, 1970 The depositary bank released the $5,000 check to Backus for 're-issue.'

July 31, 1970 A writ of garnishment is issued by Schnitger against Backus as the defendant with Sanford as the garnishee defendant.

August 2, 1970 Sanford answers the garnishment stating that $4,393.35 is due Backus from which $2,300 has been deducted as the exemption to which Backus is entitled.

August 5, 1970 Backus returns the $5,000 check to Nelbro. Nelbro reissues a $2,500 check to Backus and retains $2,500.

September 3, 1970 Judgment for Schnitger is entered against the garnishee defendant Sanford for $2,300.

September 9, 1970 A writ of garnishment is issued by Schnitger against Sanford and Nelbro as garnishee defendants.

September 28, 1970 Nelbro answers the September writ of garnishment reciting that $2,500 has been paid Sanford and that a $2,500 indebtedness to Sanford is held subject to Nelbro's right to offset the same against any lien or claim of the depositary bank.

The issue presented is whether Seattle First National Bank lost its right against the check of Nelbro Packing when it released the check to Mr. Backus for reissuance.

A line of Washington cases has held that a bank, which receives a deposited check for collection and honors the depositor's checks drawn against the credit of the deposited check exhausting the depositor's balance, thereby becomes a holder in due course as to the deposited check. In Old Nat'l Bank of Spokane v. Gibson, 105 Wash. 578, 179 P. 117, 6 A.L.R. 247 (1919), the maker had given a check to the payee who deposited it in his account in Old National, the depositary bank. Thereafter, the payee wrote check against his entire balance in the bank including the credit derived through the deposit of the check. The deposited check was returned later to the bank with the notation that payment had been stopped by the maker. Old National Bank then demanded payment of the amoun of the check from the maker. When payment was refused, the bank commenced action against the maker. The court held that by making advances on the credit of the deposited check the bank became a holder in due course to the extent of such advances, notwithstanding the fact that it might still have claimed the right to charge the check back to the depositor. The court found the bank to have become the owner of the check and to have a lien against the instrument to the extent of the value given. Recovery was granted against the maker. The rule has been followed in Maury v. Toledo Logging Co., 163 Wash. 563, 1 P.2d 896 (1931); Commercial Bank & Trust Co. v. Minshull, 137 Wash. 224, 242 P. 29 (1926) and Vickers v. Machinery Warehouse & Sales Co., 111 Wash. 576, 191 P. 869 (1920).

The citing of ancient tomes may give an appearance of scholarly demean but in rapidly changing technical areas such propensities should not be indulged unless the reference demonstrates that the rule in question is well reasoned and has stood the test of time. The quotation from State Planters Bank v. Courtesy Motors, Inc., 250 N.C. 466, 109 S.E.2d 189 (1959) is justified under that criterion to illustrate the rule as it existed under the common law and was codified under the Negotiable Instruments Law.

(The statute) . . . provides that 'where value has at any time been given for the instrument the holder is deemed a holder for value in respect to all parties who became such prior to that time.' In Bank of Sutton v. Skidmore, 113 W.Va. 25, 167 S.E. 144, 146, the Court said in respect to a statute similar to (the NIL statute) . .. 'This rule also antedates the N.I.L. Lord Ellenborough said in 1807 that when paper was left with a banker for collection, he became an agent, but, 'If the banker discount the bill or advance money upon the credit of it that alters the case he then acquires the entire property in it, or has a lien on it pro tanto for his services (sic).' Giles v. Perkins, 9 East, 12, 14.' In our copy of English Reports, Full Reprint, 103, p. 477, 478, (King's Bench Book 32), the last word in the quotation from Giles v. Perkins reads Advance instead of Services.

See also Lowrance Motor Co. v. First Nat'l Bank of Auburn, 238 F.2d 625, 59 A.L.R.2d 1164 (5th Cir. 1956); Pike v. First Nat'l Bank of Rome, 99 Ga.App. 598, 109 S.E.2d 620 (1959); Ledwell v. Shenandoah Milling Co., 215 N.C. 371, 1 S.E.2d 841 (1939).

The legal relationships existing under the NIL under the circumstances presented continue to be the same under the Uniform Commercial Code. In Universal C.I.T. Credit Corp. v. Guaranty Bank & Trust Co., 161 F.Supp. 790 (D.Mass.1958), the problem was presented under the NIL in Massachusetts prior to the effective date of the Commercial Code in that state. The court concluded that when a check endorsed without restriction was received for deposit and the bank, before collecting the check, allowed the depositor to draw an amount equivalent to his previous balance plus the amount of the uncollected check, the bank was a holder for value as to the uncollected check. The opinion observed that a check is merely an order to a bank to make payment in the manner set forth, and the customer has the right to revoke the order before it is carried out. The court found that the depositary bank did not become a holder for value of the checks merely by taking them for collection; but when it went beyond granting provisional credit and allowed the depositor to draw on the credit, a lien was created in favor of the bank for any debt due by virtue of the advances. Therefore, the bank became a holder in due course to the extent of its advances. The majority rule was expressed as raising a presumption that where a bank advances credit to a customer on his drawings after the customer has deposited a check without restrictive endorsement with the bank for collection,...