Opinion ID: 1895319
Heading Depth: 1
Heading Rank: 4

Heading: Effect of Fraud Defense

Text: [¶ 37] Having failed to persuade the jury that it was a holder in due course, the Credit Union is subject to any defense of the Guerrettes or Sun Life that would be available if the person entitled to enforce the instrument were enforcing a right to payment under a simple contract, 11 M.R.S.A. § 3-1305(1)(b), or any claim of a property or possessory right in the instrument or its proceeds. 11 M.R.S.A. § 3-1306. Generally, fraud, such as that perpetrated by Paul Richard and Steven Hall, may be the basis for both a valid defense, see Silber v. Muschel, 190 A.D.2d 727, 593 N.Y.S.2d 306, 307 (1993), and a valid claim to the instrument itself. See generally Bowling Green, Inc. v. State St. Bank & Trust Co., 307 F.Supp. 648, 651-52 (D.Mass.1969), aff'd, 425 F.2d 81 (1st Cir.1970). [¶ 38] Fraud is an affirmative defense to a contract. See M.R. Civ. P. 8(c). To prevail on their fraud defense, the Guerrettes were required to prove, by clear and convincing evidence, that a fraudulent or material misrepresentation induced them to transfer the proceeds of their father's life insurance policy, in the form of the Sun Life checks, to Steven Hall and Paul Richard. In addition, they were required to prove they were justified in relying on the fraudulent misrepresentation. See Kuperman v. Eiras, 586 A.2d 1260, 1261 (Me.1991). The parties' stipulation that Hall and Richard fraudulently induced the Guerrettes to invest the checks in their company, HER, Inc., is sufficient to satisfy the Guerrettes' burden on this issue. The Guerrettes are not liable to the Credit Union for their indorsement of the Sun Life checks.
[¶ 39] Sun Life, however, may not raise the fraud as a defense to its liability on the instrument. Section 3-1305(3) provides generally that: in an action to enforce the obligation of a party to pay [an] instrument, the obligor may not assert against the person entitled to enforce the instrument a defense, claim in recoupment or claim to the instrument (section 3-1306) of another person. 11 M.R.S.A. § 3-1305(3). Accordingly, a defense to liability on an instrumentsuch as fraud in the underlying transactionraised by one party to an action may not be raised by another party to the action as its own defense to liability. Section 3-1305(3) provides, however, that the other person's claim to the instrument may be asserted by the obligor if the other person is joined in the action and personally asserts the claim against the person entitled to enforce the instrument. Id. Therefore, only if the Guerrettes have made a claim to the instrument and are parties to the proceeding may Sun Life assert the fraud in defense of its own liability. See 11 M.R.S.A. 3-1305(3); First Nat'l Bank of Nocona v. Duncan Sav. & Loan Ass'n, 656 F.Supp. 358, 366 (W.D.Okla. 1987), aff'd, 957 F.2d 775 (10th Cir.1992). [¶ 40] The Guerrettes, however, made no claim that they were entitled to possession of the instruments held by the Credit Union. [25] Instead, they merely argued that they were not liable as indorsers of the checks held by the Credit Union as a result of the fraud. The issue of fraud was therefore raised by the Guerrettes as a defense to their liability as indorsers of the instruments. See Louis Falcigno Enters., Inc. v. Massachusetts Bank & Trust Co., 14 Mass.App.Ct. 92, 436 N.E.2d 993, 993-94 (1982). The Superior Court erred when it held that the issue of fraud had been raised as a claim to the instruments. [¶ 41] Therefore, Sun Life may not raise the fraud against the Guerettes as a defense to its own liability. Because Sun Life raises no other relevant defenses, it is liable to the Credit Union as the drawer of the instruments, see 11 M.R.S.A. § 3-1414(2)(a), and we vacate that portion of the Superior Court's judgment finding that Sun Life was not liable to the Credit Union. The entry is Judgment in favor of Daniel, Joel, and Claire Guerrette and against Maine Family Federal Credit Union affirmed. Judgment in favor of Sun Life Assurance Company of Canada and against Maine Family Federal Credit Union vacated and remanded for further proceedings consistent with the opinion herein.