State v. Family Bank of Hallandale

• Decision Date: 01 July 1993
• Docket Number: No. 79449,79449
• Citation: 623 So.2d 474
• Parties: 18 Fla. L. Weekly S409, 18 Fla. L. Weekly S504, 20 UCC Rep.Serv.2d 1273, 21 UCC Rep.Serv.2d 665 STATE of Florida, Petitioner, v. FAMILY BANK OF HALLANDALE, etc., Respondent.
• Court: Florida Supreme Court

Page 474

623 So.2d 474

18 Fla. L. Weekly S409, 18 Fla. L. Weekly S504,

20 UCC Rep.Serv.2d 1273, 21 UCC Rep.Serv.2d 665

STATE of Florida, Petitioner, v. FAMILY BANK OF HALLANDALE, etc., Respondent.

No. 79449.

Supreme Court of Florida.

July 1, 1993.

Rehearing Denied Sept. 23, 1993.

Robert A. Butterworth, Atty. Gen. and Kimberly J. Tucker, Deputy General Counsel, Tallahassee, for petitioner.

Robert L. Hinkle of Aurell Radey Hinkle Thomas & Beranek, Tallahassee, for respondent.

McDONALD, Justice.

We review State v. Family Bank of Hallandale, 593 So.2d 581 (Fla. 1st DCA1992), because of conflict with Town of Bithlo v. Bank of Commerce, 92 Fla. 975, 110 So. 837 (1926). We have jurisdiction pursuant to article V, section 3(b)(3), Florida Constitution. The issues are whether state warrants are negotiable instruments and whether a holder of a state warrant is entitled to prejudgment interest on the amount of the warrant. We quash the opinion under review and hold that state warrants are not negotiable instruments and that the award of prejudgment interest was improper.

The Department of Transportation awarded a contract to Ted's Sheds, Inc., for several metal buildings to be used at various service plazas on the Florida Turnpike. Ted's Sheds provided a Ft. Lauderdale address during the bidding process. When the buildings were delivered, the State received an invoice from Ted's Sheds, Inc., listing its address as Bonita Springs, Florida. The State approved the invoices for payment and, on February 5, 1987, the Comptroller issued a warrant for $16,932 payable to the order of Ted's Sheds and sent it to the Ft. Lauderdale, Florida, address listed on the original bid.

On February 12, 1987, Ted's Sheds of Broward, Inc., presented the original warrant to Seminole National Bank. ¹ The warrant was endorsed "Ted's Sheds of Broward, Inc.," and was credited by the bank. Sometime thereafter, the agents of Ted's Sheds, Inc., in Bonita Springs stated that they had not received the warrant and requested a duplicate warrant. It was then discovered that there were two Ted's Sheds, one in Ft. Lauderdale known as "Ted's Sheds of Broward, Inc.," and one in Bonita Springs, known as "Ted's Sheds, Inc." These separate legal entities shared common corporate officers. On February 19, 1987, the Comptroller placed a stop payment order on the original warrant, issued a duplicate warrant to Ted's Sheds, and mailed it to Ted's Sheds, Inc., in Bonita Springs. Subsequently, the Federal Reserve Bank of Miami returned the original warrant to the bank indicating that payment had been stopped by the state treasurer.

The bank initiated this action some fourteen months after the original warrant was returned. In the intervening time, Ted's Sheds of Broward, Inc., was involuntarily dissolved. The bank argued that it had no knowledge of the stop payment order and asserted that it was a "holder in due course" entitled to reimbursement by the State of Florida on the theory that state warrants are negotiable instruments. The State maintained that state warrants are not negotiable instruments under the Uniform Commercial Code (UCC or Code), and, thus, the bank was not entitled to repayment of these funds by the people of the State of Florida. The trial court entered summary judgment in favor of the bank as holder for value of a state warrant. On appeal, the district court affirmed and held (1) the prevailing party in an action against the state is entitled to prejudgment interest, and (2) a state warrant is a negotiable instrument unless indicated otherwise.

I.

A brief examination of the meaning and use of warrants is desirable before addressing the issues in this case. In connection with state funds, the term "warrant" has a well-defined meaning. Warrants are devices, prescribed by law, for drawing money from the state treasury. They are orders issued by the official whose duty it is to pass on claims to the treasurer to pay a specified sum from the treasury for the persons and purposes specified. District of Columbia v. Cornell, 130 U.S. 655, 9 S.Ct. 694, 32 L.Ed. 1041 (1889); Wyatt v. State, 257 Ala. 90, 57 So.2d 366 (1952); Town of Bithlo; see also In re Advisory Opinion to Governor, 94 Fla. 967, 114 So. 850 (1927). A warrant is not an order to pay absolutely, rather it is generally prima facie evidence of indebtedness payable out of a particular fund or appropriation. Wall v. Monroe County, 103 U.S. (13 Otto) 74, 26 L.Ed. 430 (1880); National Surety Co. v. State Trust & Sav. Bank, 119 Tex. 353, 29 S.W.2d 1027, 1030 (1930) ("[A city warrant] is but prima facie evidence that the city is indebted to the payee in the amount stated in the instrument."). Warrants have been regarded as negotiable in the restricted sense of the term in that they have the quality of easy or simple transferability. Monroe County. But, in fact, there is much pre-Code authority that a warrant possesses all of the qualities of negotiable paper but one, i.e., unlike negotiable paper, it is open to any defense which might have been made to the claim in the hands of the original holder. First Nat'l Bank v. School Dist. No. 15, 173 Minn. 383, 217 N.W. 366 (1928). Thus, warrants drawn for ordinary governmental expenses are licenses authorizing payment and are not intended to have all the qualities of commercial paper. Warrants do not represent a pledge of the general credit of the issuing body, but are instruments authorized for convenience in conducting ordinary business and as a means of anticipating revenue.

A warrant is best characterized as a chose in action, payable when funds are available for its purpose. This Court has held that there is a "vast distinction" between warrants and bonds. Marshall v. State ex rel. Sartain, 88 Fla. 329, 332, 102 So. 650, 651 (1924). A bond is basically an acknowledgement of indebtedness and a promise to pay, while a warrant is an order or direction to pay. The most noteworthy distinction between the two instruments is that a bond generally constitutes an absolute order to pay, while warrants generally are an order to pay out of a particular fund. Also, before the adoption of the Uniform Commercial Code, the point of distinction most often emphasized by the courts was the negotiability of bonds and the nonnegotiability of warrants. Littlejohn v. Littlejohn, 195 Ala. 614, 71 So. 448 (1916); Neugass v. City of New Orleans, 72 La.Ann. 163, 7 So. 565 (1890); Adams v. McGill, 146 S.W.2d 332, 334 (Tex.Civ.App.1940) ("A bond is a negotiable instrument, while a warrant is nonnegotiable. A warrant is subject at all times to the defenses it would be subject to were it in the hands of the original payee--not so with a negotiable bond.").

Prior to the adoption of the Uniform Commercial Code in Florida, warrants issued by sovereign governmental entities were expressly declared nonnegotiable for public policy reasons. Town of Bithlo; Marshall. This position has been so firmly established that until the instant case Town of Bithlo and Marshall were the only instances where this Court considered this issue. Under the pre-Code law, the Uniform Negotiable Instruments Law (NIL) governed the negotiability of commercial paper. Chs. 674-676, Fla.Stat. (1965). During this stage, the law was clear, and there was no question as to the nonnegotiability of state treasury warrants. See, e.g., Annotation, Negotiability of County, Municipal School, State, or Town Warrants, 36 A.L.R. 949 (1925). The general rule regarding warrants under pre-Code law expressly provided that a warrant drawn by a proper officer on the state treasury was not a negotiable instrument in the sense of the law merchant. 81A C.J.S. States Sec. 246 (1977); accord 64 Am.Jur.2D Public Securities and Obligations Sec. 22 (1972). There are several reasons for this rule under the Uniform Negotiable Instruments Law; primarily, warrants are paid out of a particular fund and, therefore, are not unconditional. However, even though some warrants may have been in negotiable form under the NIL, Florida was among several jurisdictions that, because of public policy reasons, followed the rule that government warrants are not to be regarded as negotiable commercial paper so as to be free of all legal and equitable defenses of the particular governmental entity when in the hands of a holder in due course. Town of Bithlo; Marshall.

In its simplest terms, the public policy holding state warrants to be nonnegotiable instruments is the state's way of protecting the public treasury from crookedness and shady deals by dishonest officials. Warrants serve the dual purpose of safeguarding the public treasury and protecting the treasurer as to payments made in compliance therewith. State v. Kimball, 96 N.H. 377, 77 A.2d 115 (1950). "[W]arrants, because of the nature of their creation, the purposes for which issued, the informal manner of their issue, the danger of mistakes, fraud, want of consideration, etc., are not given the protection of negotiable instruments." Petters & Co. v. Town of Rock River, 37 Wyo. 225, 260 P. 674, 677 (1927). In Petters, the court held that the policy of allowing the government to assert defenses against a holder of a warrant must outweigh any innocent purchaser notions; otherwise a few dishonest officials could bankrupt an entire town. "It would overwhelm municipalities with ruin to hold that such warrants or orders have the qualities of negotiable paper, especially that quality which protects an innocent holder for value from defenses of which he has no notice, actual or constructive." 2 John F. Dillon, Municipal Corporations Sec. 856 at 1295 (5th ed. 1911).

Warrants drawn for ordinary governmental expenses are not intended to have the qualities of commercial paper. They are instruments authorized for conveniently conducting ordinary governmental business. This is supported as much by the reason behind the purpose of these instruments as by consideration of the lack of power, inherent...