Opinion ID: 419152
Heading Depth: 1
Heading Rank: 1

Heading: holder in due course status3

Text: 10 The district court held that plaintiff was not a holder in due course because it took the instrument with notice that it was overdue. 4 The court based its holding on two grounds. The first was that plaintiff came into possession of the certificate in June 1978, more than twenty months after the October 12, 1976 maturity date of the instrument. The court stated that in June 1978, plaintiff had notice of the maturity date and had reason to know that [the certificate] was overdue. 5 538 F.Supp. at 716. 11 In reaching its conclusion, the court held that a certificate of deposit is overdue once it matures. Such a characterization may be accurate as to some negotiable instruments, but the district court failed to consider whether there is a difference between certificates of deposit and other negotiable instruments. Such a distinction has been recognized, for example, in the application of the statute of limitations. 12 A long line of authority holds that for the purpose of determining when the limitations period begins to run, a certificate of deposit, in contrast to a simple promissory note, is not considered due until a demand for payment has been made. See, e.g., Whitlock v. Bank of Maryville, 612 S.W.2d 481 (Tenn.Ct.App.1980); In re Gardner's Estate, 228 Pa. 282, 77 A. 509 (1910) (cited with approval in Delaware Study Comment to Sec. 3-122); see generally Annot., 23 A.L.R. 7 (1923), supplemented by, Annot., 128 A.L.R. 157 (1940). Delaware law has adopted this position through section 3-122, which provides that a cause of action against the obligor of a demand or time certificate of deposit accrues upon demand. (Emphasis added.) 13 The principle that a certificate of deposit is not due until demand has also been applied in cases involving holders in due course where the issue is whether the holder took a demand certificate without notice that it was overdue. See National Surety Co. v. Allen, 243 Mass. 218, 137 N.E. 533 (1922). In the case at hand, determination of whether the mere passage of the payable date of the certificate makes the instrument overdue requires examination of considerations overlooked by the trial court. The Delaware distinction between certificates of deposit and other negotiable instruments with respect to the statute of limitations is a significant factor which should be reviewed together with the commercial understanding on the use of time certificates of deposit. Entry of summary judgment based only on the payable date was error. 14 As the second basis for holding plaintiff had notice that the instrument was overdue, the district court reasoned that once the certificate matured, it became the equivalent of a demand instrument and thus subject to section 3-304(3)(c). That subsection provides that a purchaser has notice that an instrument is overdue if he has reason to know ... that he is taking a demand instrument ... more than a reasonable length of time after its issue. 15 In determining as a matter of law that the twenty-month period here was unreasonable, the court relied upon the pre-Code case of Easley v. East Tennessee National Bank, 138 Tenn. 369, 198 S.W. 66 (1917), which held that negotiating a demand certificate of deposit more than a year after issuance constituted an unreasonable length of time. 16 The circumstances in Easley, however, must be taken into account. There, the certificate represented the savings of a decedent who apparently lost or mislaid the document. When the widow sought to recover the money from the bank, it declined to pay until she could furnish an indemnity bond, a condition she could not meet. 6 The widow argued, and the court agreed, that if someone else had acquired the instrument, he could not be a holder in due course free of defenses because negotiation would not have occurred in a reasonable time after issue. The court's decision, therefore, was necessary to protect the bank so that the widow could recover the funds unquestionably due her. 17 The Tennessee court reasoned that the purpose of a time deposit ordinarily is to procure interest on the money deposited. Since, by the terms of the instrument, interest stopped accruing twelve months after issuance, and since demand certificates are [u]sually renewed after the cessation of interest, the court concluded that one could not take the instrument after this period and still assert holder in due course status. 18 However, a more recent decision from Tennessee describes the difference between a certificate of deposit and a demand note, and recites purposes other than the earning of interest which induce bank deposits. The court in Whitlock v. Bank of Maryville, 612 S.W.2d 481 (Tenn.Ct.App.1980), recognized that a deposit is a transaction peculiar to the banking business and a certificate is distinct from a promissory note. 19 Bank deposits are not merely loans. The primary purpose of a general deposit is to protect the fund, and some of the incidental purposes thereof are the convenience of checking and transacting large business interests without keeping and handling large sums of money. Id. at 484 (quoting Elliott v. Capital City State Bank, 128 Iowa 275, 103 N.W. 777, 778 (1905)); see also State v. Northwestern National Bank of Minneapolis, 219 Minn. 471, 18 N.W.2d 569, 579 (1945) (Deposit is a transaction peculiar to the business of banking.... [B]ank is not required to hunt up depositor and pay him ... as an ordinary lender is bound to do with his creditor.). 20 The Code has also acknowledged the unique characteristics of certificates of deposit and has made special provisions for them. For example, in defining the accrual of a cause of action against the maker, the action on a demand note accrues upon its date, or if no date is stated, on the date of issue, and in the case of a time instrument on the day after maturity. Sec. 3-122(1). As noted previously, however, section 3-122(2) specifically singles out certificates of deposit and states that the cause of action of a demand or time certificate of deposit accrues upon demand. 21 The Official Comment of this Code section explains the reason for the distinction. Unlike demand notes, which do not require presentment to charge the maker, banking custom and expectation is that demand will be made before liability is incurred by the bank on a certificate of deposit. An additional reason [is] that such certificates are issued with the understanding that they will be held for a considerable time which in many instances exceeds the period of the statute of limitations. Unif. Commercial Code Sec. 3-122 Official Comment 1, 2 U.L.A. 120 (1977). 22 The Delaware Study Comment to section 3-122 adds that [t]his rule recognizes that while certificates of deposit constitute negotiable instruments, depositors are nevertheless inclined to think of them merely as receipts for money deposited in a savings account. Cf. Sec. 8-305, Delaware Study Comment (1975) (corporate debentures and other investment securities, unlike drafts or checks, are not ordinarily intended for immediate liquidation). 23 In this case, no analysis of the circumstances surrounding the issuance and acquisition of the certificate was used to substantiate the conclusion that the time lapse was unreasonable as a matter of law. We conclude that the district court should have examined such circumstances as the nature of the instrument, trade usage and custom, the use of the certificate as collateral for an obligation of somewhat indefinite duration, statements made by Candy or INA to plaintiff about the certificate, the fact that the instrument bore interest only until October 1976, and INA's retention of the document as late as June 1978 with no apparent concern for whether interest accrued. See Jennings v. Imperial Bank, 87 Cal.App.3d 896, 152 Cal.Rptr. 15 (1978) (maturity of certificate of deposit relates only to the question of interest); Easley, 138 Tenn. at 371, 198 S.W. at 67; Secs. 1-204(2), 3-503(2); Annot., 10 A.L.R.3d 1199 (1966); see also National Mechanics Bank v. Schmelz National Bank, 136 Va. 33, 116 S.E. 380, 382 (1923) (certified check held pending performance of contract and negotiated immediately after performance was not negotiated an unreasonable length of time after issue). 24 To the extent that the record does not contain adequate evidence to properly evaluate these factors, supplementation may be necessary. This is particularly true of trade usage and custom with respect to certificates of deposit since the Code's specific reference to certificates is limited. 25 Section 3-304(3)(c), applicable to demand instruments, provides that a purchaser has notice that a demand instrument is overdue if he has reason to know that he is taking it more than a reasonable length of time after its issue. Because this provision is limited to demand instruments, it does not by its terms apply to the case at bar. However, since a time certificate of deposit may not be overdue in the absence of a demand, the rationale behind the reasonable length of time provision in section 3-304(3)(c) would apply to such a certificate of deposit. 26 Although correctly recognizing that the reasonable period of time question was a relevant issue, the district court erred in determining that point as a matter of law. Only after development and consideration of all the factors noted above and others which might be relevant, can it be determined whether an unreasonable time had elapsed. In the circumstances of this case, the issue was a disputed factual one which could not be resolved on summary judgment. On the record presented here it cannot be said whether twenty months was an unreasonable time. Resolution of the issue must await further proceedings in the district court. We intimate no view as to what conclusion the district court should reach. 27 If it is determined that plaintiff was a holder in due course, then even if defendant bank is able to establish payment as a defense, it would not foreclose recovery by plaintiff. Sec. 3-305. 7