Opinion ID: 2405567
Heading Depth: 1
Heading Rank: 1

Heading: The Bank as Holder in Due Course

Text: The trial court concluded that the investment notes were obtained by the fraud of Wilhelm and Allen, and so were not enforceable between the parties. [3] It held, however, that the bank was a holder in due course in accordance with the Uniform Commercial Code, § 400.3-302(1), RSMo 1986, and could enforce the notes it took as security. The investors argue that this ruling was legally erroneous. Section 400.3-302(1) reads as follows: (1) A holder in due course is a holder who takes the instrument (a) for value; and (b) in good faith; and (c) without notice that it is overdue or has been dishonored or of any defense against or claim to it on the part of any person. The investors contend that the bank was no more than an assignee of the notes, standing in the shoes of the payee-assignors, and not a holder. Even though the bank acquired these notes solely as collateral, not intending to enforce them unless the Wilhelm-Allen refinancing note went into default, the notes were properly endorsed and delivered so as to qualify the bank as a holder. Section 400.3-202(1), RSMo 1986. A pledgee may be a holder in due course. Batson v. Peters, 89 S.W.2d 46, 52 (Mo.1935); Patterson v. Fitzgibbon Discount Corp., 339 S.W.2d 301, 306 (Mo. App.1960); § 400.3-302, V.A.M.S., Uniform Commercial Code comment 4 (1965). Another requirement of being a holder in due course is that the holder take the instrument for value. Section 400.3-302(1)(a). The value requirement is met when the holder provides the agreed consideration or takes the instrument in payment of or as security for an antecedent claim. Section 400.3-303(a), (b) RSMo 1986; § 400.3-303, V.A.M.S., Uniform Commercial Code comment 5 (1965); Fitzgerald v. Barker, 96 Mo. 661, 10 S.W. 45 (1888). The refinancing transaction meets this requirement. The investors suggest that the bank should have the rights of a holder in due course only to the extent of $8,000, representing the new money in the Wilhelm-Allen refinancing in excess of the $142,000 of outstanding indebtedness. This argument, too, is unsound. It is true that a purchaser of a limited interest in an instrument, such as a pledgee in a security transaction, can be a holder in due course only to the extent of the interest purchased. Section 400.3-302(4), RSMo 1986; § 400.3-302, V.A.M.S., Uniform Commercial Code comment 4 (1965). It would be error, however, to limit the bank's interest in the notes to the $8,000 of new money. The bank's interest in the notes includes the consolidation of Wilhelm and Allen's existing indebtedness into the refinancing agreement. The bank also subordinated its first deed of trust on the Cole County farm. Suffice it to say that the bank had an interest in the notes, limited only by the outstanding balance of principal and interest due on the refinancing note. It makes no difference, furthermore, that the total value of the collateral may exceed the balance due on the indebtedness. The bank is entitled to select the collateral it will proceed against. The investors strongly argue that the bank had notice of infirmities in the investment notes sufficient to deny it status as a holder in due course, § 400.3-302(1)(c). Much of their argument seems to rely on evidence as to the knowledge of the responsible bank officer which the trial court did not have to accept. We of course take the evidence favorable to the judgment. Murphy v. Carron, 536 S.W.2d 30 (Mo. banc 1976). Taylor v. Atlas Security Co., 213 Mo. App. 282, 249 S.W. 746 (1923) is cited for the proposition that the bank, by reason of the discussions about the indebtedness of Wilhelm and Allen and their contemplated sale of limited partnership interests, should be considered a co-payee, rather than a holder, of the investment notes. The bank's knowledge that Wilhelm and Allen proposed to sell interests in property they owned did not impose a duty to inquire into the details of the transaction. Taylor is distinguishable, in that it involved an established course of dealing, in which all of an automobile dealer's commercial paper was immediately transferred to a finance company, so as to support a finding that the finance company was the effective payee. The transaction in this case is singular. The trial court was not obliged to accept the investors' contention. The investors point out that Marshall Boyce, the bank's officer who acted in the premises, knew that Wilhelm and Allen had obtained the investment notes in exchange for limited partnership interests in the Valley Property. The court of appeals found that this knowledge was sufficient to deprive the bank of holder in due course status, holding that they had dealt personally with partnership property. The contention is flawed. Wilhelm and Allen were the owners of the Valley Property. If they chose to sell shares in the property, in the form of limited partnership interests or otherwise, they were perfectly entitled to retain the proceeds for themselves. The court was not obliged to find that the investment notes were partnership property. See Ball v. Farley, 81 Ala. 288, 1 So. 253 (1887). This is so whether the consideration is given in cash or in the form of negotiable instruments. The investors suggest that the bank had a fiduciary obligation to them, requiring it to probe the details and fairness of the transaction underlying the investment notes. If we were to accept this contention we would reject the teachings of centuries, developed in the law merchant, the Negotiable Instruments Law (NIL), and the Uniform Commercial Code. Under this law a person who executes and delivers a negotiable instrument gives the payee the power to realize value on it by negotiating it to another, who is obliged to inquire only as to the genuineness of the instrument and the credit of the maker. The interests of commerce require that takers without notice of infirmities be able to accept the facial purport of negotiable instruments. Those who execute notes take the risk that there will be negotiation. It is finally argued that the bank may not recover because it failed to take the steps required to accelerate the maturity of the notes. The filing of the counterclaim seeking full payment is wholly sufficient as notice of acceleration. Spires v. Lawless, 493 S.W.2d 65, 73 (Mo.App.1973); 10 C.J.S. Bills and Notes § 251 at 750-51 (1938); Annot., 5 A.L.R.2d 968, 975 (1949).