Case Title: A.C.E., Inc. v. Inland Mortgage Company and West Star Financial Corporation

Citation: 

Docket Number: 

State: arkansas

Court: Arkansas Supreme Court

Date: 1998-05-14T00:00:00Z

Document:
A.C.E., INC. v. INLAND MORTGAGE COMPANY and
West Star Financial Corporation

97-907                                             ___ S.W.2d ___

                    Supreme Court of Arkansas
                 Opinion delivered May 14, 1998


1.   Banks & banking -- drawer discharged when draft accepted by
     bank -- "check" defined. -- Uniform Commercial Code  3-
     414(c), codified in Arkansas at Arkansas Code Annotated
     section 4-3-414(c), provides that if a draft is accepted by a
     bank, the drawer is discharged regardless of when or by whom
     acceptance was obtained; under Ark. Code Ann.  4-3-104(3)(f),
     "check" means, in part, a draft, other than a documentary
     draft, payable on demand and drawn on a bank.

2.   Banks & banking -- case relied upon by appellant inapplicable
     -- appellant had possession of check and opportunity to
     endorse it. -- Appellant's reliance on a Massachusetts case
     was misplaced where the case cited was factually and
     significantly distinguishable; there, the appellant sued under
     UCC  3-116(b), which requires that, if an instrument is
     payable to joint payees, it may be negotiated, discharged, or
     enforced only by all of them; the Massachusetts court held
     that liability on the instrument or underlying obligation did
     not discharge the drawer, because one payee had not indorsed
     the check; the decision hinged on UCC  3-116(b), which
     expressly prohibits the discharge of an instrument except by
     all payees; however in that instance, and unlike the facts
     here, the appellant never had possession of the check or the
     opportunity to indorse it.

3.   Banks & banking -- appellant delivered possession of check to 
     other joint payee -- under Ark. Code Ann.  4-3-414(c) 
     appellee's underlying obligation on debt was discharged when
     payment was made on the check. -- Where appellant contractor
     payee originally possessed the check but delivered it to the
     homeowner for whom the repairs had been made, who was the
     other joint payee, appellant was not entitled to enforce the
     instrument under Ark. Code Ann.  4-3-309(a) (Repl. 1991)
     because appellant was in possession of the instrument and
     entitled to enforce it when loss of possession occurred, and
     the loss of possession was the result of a transfer by the
     appellant; accordingly, under  4-3-414(c), appellee's
     underlying obligation on the debt was discharged when payment
     was made on the check.  

4.   Banks & banking -- conversion of instrument -- court's
     dismissal proper -- conversion could not lie against appellee.
     -- Under Arkansas Code Annotated section 4-3-420(a) (Repl.
     1997), an instrument is converted if it is taken by transfer
     from a person not entitled to enforce the instrument or a bank
     makes or obtains payment with respect to the instrument for a
     person not entitled to enforce the instrument or receive
     payment; here, appellee could not have converted the
     instrument since it did not take the check by transfer from
     the second joint payee after it came into his possession;
     appellee's liability on the check was for the underlying
     obligation the check was based upon, which was discharged when
     the check was paid.  

5.   Banks & banking -- negligence alleged against appellee --
     appellee's failure to timely stop payment on check did not
     inure to appellant's benefit. -- Appellee's alleged negligence
     in failing to timely stop payment on the check does not inure
     to appellant's benefit in a suit against appellee, but instead
     would be a defense the bank might use as a defendant to the
     extent appellee's negligence contributed to the loss.  

     Appeal from Pulaski Circuit Court; Marion Humphrey, Judge;
affirmed.
     Griffin Smith, for appellant.
     Wilson & Associates, P.A., by:  Randall S. Bueter, for
appellee.

     Tom Glaze, Justice.  
     This case involves the interpretation of statutory provisions
under the Uniform Commercial Code.  Because the application of
these Code provisions is in issue, we first address the facts that
led to this litigation and appeal.
     Bilal Badar owned a house in Little Rock, Arkansas mortgaged
to West Star, and the mortgage was serviced by Inland Mortgage
Corporation (Inland).  The house was damaged by fire, and
afterwards, A.C.E., Inc.(ACE), performed the repairs.  Inland
supervised the repairs and distributed the insurance proceeds
required for their payment.
     Inland issued its last insurance check in the amount of
$3,800.00 on July 11, 1996, payable to Badar and ACE as joint
payees, and ACE received the check on July 15, 1996.  On that
July 15 date, ACE's agent, Sandi Ganus, handed the check to Badar
and asked him to indorse it, since the proceeds were owed to ACE
for repairs.  Badar, however, put the check in his pocket, and
refused to return it to Ganus.  ACE had not yet indorsed the check.
     Ganus has claimed throughout this litigation that she called
Inland on the morning of July 16, 1996, and told Inland's agent,
Laure Eck, what Badar had done.  Ganus says she recommended that
Inland stop payment of the check.  The record reflects that the
check was paid by the payor bank -- First Commercial Bank -- on
July 18, 1996, and the back of the check reflects "A.C.E., Inc."
and a signature difficult to decipher, but which appears to be
Badar's.  John Giuffre, an Inland supervisor in the company's
hazard insurance section, averred Inland's records showed that ACE
contacted it concerning the check on July 19, 1996, but by that
time, the check had already been cashed.  
     On August 21, 1996, ACE filed suit against Inland and Badar,
and alleged the following:  (1)  ACE had immediately (on July 15 or
16, 1996) requested Inland to stop payment on the check and Inland
refused to comply; (2) Inland refused ACE's demand for payment; and
(3) Inland's and Badar's actions constituted a conversion of the
check.  Alternatively, ACE asserts it had no agency relationship
with Badar, so Inland's delivering the check to ACE as joint payee,
and the bank's cashing the check bearing ACE's forged indorsement,
did not discharge the underlying debt to ACE.     
     On October 30, 1996, ACE moved for summary judgment on the
basis that the forged indorsement did not discharge the underlying
obligation.  In its argument, ACE relied solely on the holding in
a Massachusetts case, General Motors Acceptance Corporation v.
Abington Casualty Insurance Co., 413 Mass. 583,