Opinion ID: 1895319
Heading Depth: 3
Heading Rank: 1

Heading: Honesty in Fact

Text: [¶ 18] Prior to the changes adopted by the Legislature in 1993, the holder in due course doctrine turned on a subjective standard of good faith and was often referred to as the pure heart and empty head standard. See M.B.W. Sinclair, Codification of Negotiable Instruments Law: A Tale of Reiterated Anachronism, 21 U. TOL. L.REV. 625, 654 (1990); see also Seinfeld v. Commercial Bank & Trust Co., 405 So.2d 1039, 1042 (Fla.Dist.Ct.App.1981) (noting that the U.C.C. seem[s] to protect the objectively stupid so long as he is subjectively pure at heart). That standard merely required a holder to take an instrument with honesty in fact to become a holder in due course. [17] [¶ 19] Courts interpreting this language have routinely declared banks to be holders in due course, notwithstanding the failures of these banks to investigate or hold otherwise negotiable instruments, when they took the instruments with no knowledge of any defects, defenses, or stop payment orders. See, e.g., UAW-CIO Local #31 Credit Union v. Royal Ins. Co., 594 S.W.2d 276, 279 (Mo.1980) (en banc); Bank of New York v. Asati, Inc., 15 UCC Rep.Serv.2d (CBC) 521, 1991 WL 322989 (N.Y.Sup.Ct. July 8, 1991). This approach has been understood to promote the negotiability of instruments, particularly checks, in the stream of commerce. Rejecting a contrary approach, one court put it bluntly: The requirement urged by defendant would bring the banking system to a grinding halt. A stop payment order issued by the drawer to the drawee which is unknown to the paying-collecting bank cannot fasten upon the paying bank any legal disability; particularly it cannot reduce the status of the collecting bank to a mere assignee of the instrument or a holder of a non-negotiable instrument, or a mere holder of a negotiable instrument. Mellon Bank, N.A. v. Donegal Mutual Ins. Co., 29 UCC Rep.Serv. (CBC) 912, 1980 WL 98414 (Pa. Ct. C.P. Alleghany County, Jan. 8, 1980). [¶ 20] Although courts were often urged to engraft an objective reasonableness standard onto the concept of honesty in fact, most refused to do so. [18] Their refusals recognized that: [T]he check is the major method for transfer of funds in commercial practice. The maker, payee, and endorsers of a check naturally expect it will be rapidly negotiated and collected.... The wheels of commerce would grind to a halt [if an objective standard were adopted]. Bowling Green, Inc. v. State St. Bank & Trust, 425 F.2d 81, 85 (1st Cir.1970). [¶ 21] Moreover, under the purely subjective standard, a bank was not expected to require the presence of offsetting collected funds in the customers' account in order to give value on newly deposited checks: A bank's permitting its customers to draw against uncollected funds does not negate its good faith. Asati, Inc., 15 UCC Rep. Serv.2d at 521; accord Vail Nat'l Bank v. J. Wheeler Constr. Corp., 669 P.2d 1038, 1039-40 (Colo.Ct.App.1983); Flagship Bank of Orlando v. Central Florida Coach Lines, Inc., 33 UCC Rep.Serv. (CBC) 613, 1981 WL 138010 (Pa. Ct. C.P. Luzerne County, Oct. 13, 1981); Mellon Bank, 29 U.C.C. Rep.Serv. at 912; Central Bank & Trust Co. v. First Northwest Bank, 332 F.Supp. 1166, 1170 (E.D.Mo.1971), aff'd, 458 F.2d 511 (8th Cir. 1972); Citizens Nat'l Bank of Englewood v. Fort Lee Sav. & Loan Ass'n, 89 N.J.Super. 43, 213 A.2d 315, 319 (Law Div.1965). [¶ 22] Application of the honesty in fact standard to the Credit Union's conduct here demonstrates these principles at work. It is undisputed that the Credit Union had no knowledge that Richard obtained the Sun Life checks by fraud. Nor was the Credit Union aware that a stop payment order had been placed on the Sun Life checks. The Credit Union expeditiously gave value on the checks, having no knowledge that they would be dishonored. In essence the Credit Union acted as banks have, for years, been allowed to act without risk to holder in due course status. The Credit Union acted with honesty in fact. [¶ 23] Thus, had the matter at bar been decided before the Legislature's addition of the objective component of good faith, there can be little question that the Credit Union would have been determined to have been a holder in due course. Because it took the instruments without notice of any possible dishonor, defect, fraud, or illegality, it could have given value immediately and yet have been assured of holder in due course status. See Mellon Bank, 29 UCC Rep.Serv. at 912; Industrial Nat'l Bank of Rhode Island v. Leo's Used Car Exchange, Inc., 362 Mass. 797, 291 N.E.2d 603, 606 (1973); New Bedford Inst., 634 N.E.2d at 925; Triffin, 716 A.2d at 611. Today, however, something more than mere subjective good faith is required of a holder in due course.