Opinion ID: 2831372
Heading Depth: 2
Heading Rank: 1

Heading: Payment of Charges under Section 55.007

Text: The applicability of section 55.007 of the Hospital Lien Statute forms the crux of the parties’ dispute. That section, which addresses the effect of a hospital lien on the validity of a release of the underlying cause of action to which the lien has attached, provides in pertinent part: (a) A release of a cause of action . . . to which a lien under this chapter may attach is not valid unless: (1) the charges of the hospital or emergency medical services provider claiming the lien were paid in full before the execution and delivery of the release; (2) the charges of the hospital or emergency medical services provider claiming the lien were paid before the execution and delivery of the release to the extent of any full and true consideration paid to the injured individual by or on behalf of the other parties to the release; or (3) the hospital or emergency medical services provider claiming the lien is a party to the release. 4 Id. § 55.007(a). The satisfaction of one of the three options in section 55.007(a) is thus a condition to the validity of the release. In this case, it is undisputed that the Hospital’s charges for treating Gil and Hernandez were not and have not been paid in full, and that the Hospital was not a party to the releases of the patients’ causes of action against Benavidez. See id. § 55.007(a)(1), (3). The parties dispute only whether the Hospital’s charges were “paid . . . to the extent of any full and true consideration paid to [Gil and Hernandez],” such that the releases were valid under section 55.007(a)(2). State Farm argues that, by issuing settlement checks to the patients and the Hospital as copayees, and delivering those checks to the patients, State Farm made a good-faith effort to pay the Hospital’s charges “to the extent of any full and true consideration” paid to Gil and Hernandez. State Farm contends that it effectively “paid” the Hospital, even though the Hospital was never notified that the claims had been settled, never endorsed the checks, and never received any compensation for the patients’ treatment costs. The Hospital argues that, having never received any actual compensation for the services it rendered to Gil and Hernandez, it was not, in fact, “paid” in the sense that section 55.007 requires. Because this case involves State Farm’s use of negotiable instruments to satisfy its underlying obligations, we turn to the Uniform Commercial Code (UCC), as codified in the Texas Business and Commerce Code, to evaluate the parties’ dispute. See TEX. BUS. & COM. CODE § 3.102. The issue may be framed as follows: whether issuance of a draft made out jointly to two nonalternative payees, one of whom presented the draft for payment without the endorsement of the other, discharges the drawer’s obligation to the payee whose endorsement was not obtained. The 5 court of appeals addressed a similar issue involving a forged endorsement in Benchmark Bank v. State Farm Lloyds, and State Farm relies heavily on that case. 893 S.W.2d 649 (Tex. App.—Dallas 1994, no writ). In Benchmark, the drawer issued drafts to nonalternative copayees (Benchmark and the Calderons) and delivered the drafts to the Calderons, who forged Benchmark’s endorsement and presented the drafts for payment. Id. at 650. The court of appeals held that (1) possession of the draft by one joint payee constitutes constructive possession by the other, and (2) Benchmark had no further recourse against the drawer after the drafts were honored and paid. Id. at 651. As discussed below, while we agree with the court’s first holding, we disagree with its conclusion that the copayee had no further recourse against the drawer. First, we hold that State Farm’s delivery of the drafts to Gil and Hernandez constitutes constructive delivery of the drafts to the other copayee, the Hospital. TEX. BUS. & COM. CODE § 3.420 cmt. 1. However, that does not end our analysis. The UCC instructs that “an instrument is paid to the extent payment is made by or on behalf of a party obliged to pay the instrument, and to a person entitled to enforce the instrument.” Id. § 3.602(a). And the UCC explains that, when a draft is issued to nonalternative copayees, one copayee acting alone is not entitled to enforce, and thus may not discharge, the instrument. Specifically, the statute provides: “If an instrument is payable to two or more persons not alternatively, it is payable to all of them and may be negotiated, discharged, or enforced only by all of them.” Id. § 3.110(d). The Comment to this section of the Code further clarifies: If an instrument is payable to X and Y, neither X nor Y acting alone is the person to whom the instrument is payable. Neither person, acting alone, can be the holder of the instrument. The instrument is “payable to an identified person.” The “identified 6 person” is X and Y acting jointly. . . . Thus, . . . X or Y, acting alone, cannot be the holder or the person entitled to enforce or negotiate the instrument because neither, acting alone, is the identified person stated in the instrument. Id. cmt. 4. Applying these principles, the Massachusetts Supreme Judicial Court, addressing the same issue presented here, reached the opposite conclusion of the Benchmark court. In General Motors Acceptance Corp. v. Abington Casualty Insurance Co. (GMAC), an automobile insurer issued a check jointly payable to its insured and to the company that held a security interest in the insured’s vehicle. 602 N.E.2d 1085, 1086 (Mass. 1992). The insured presented the check without the lienholder’s endorsement and received full payment. Id. The lienholder sued the insurer—but not the insured or the payor bank3—for recovery of the insurance proceeds, claiming that the insurer’s underlying obligation to a copayee was not discharged when another copayee cashed a check without the proper endorsements. Id. at 1086–87. Agreeing with the lienholder, the court held that, although delivery to one copayee constitutes delivery to the other, “[o]bligations on a negotiable instrument . . . do not end with delivery to a payee.” Id. at 1087. Citing Massachusetts’ analogous UCC provisions, the court noted that the insured copayee could not have become a holder of the draft without the lienholder’s endorsement and that, “[w]ithout payment to a holder, the liabilities of the parties to the check are not discharged.” Id. at 1088. The court ultimately concluded: “[T]o protect the rights of all joint payees as well as the integrity of the commercial paper itself, we hold that payment of a check to one copayee without the endorsement of the other copayee does not 3 Under the UCC, “payor bank” means a bank that is the drawee of a draft. TEX. BUS. & COM. CODE § 4.105(3). A “drawee” is a person ordered in the draft to make payment. Id. § 3.103(a)(4). 7 discharge the drawer of either his liability on the instrument or the underlying obligation.” Id. at 1088. Guided by a well-respected legal treatise in evaluating the opposing holdings in GMAC and Benchmark, we conclude that the approach adopted in GMAC is “representative of the better view.” 28 WILLISTON ON CONTRACTS § 72:36 (4th ed. 2003); see also Restatement (Second) of Contracts § 299 (1981) (noting that the UCC creates an exception for negotiable instruments to the general rule that tender of performance to any joint obligee discharges a promisor’s liability to all). The court recognized in GMAC that holding otherwise would result in “no assurance that all the joint payees would receive payment” and would dissolve any distinction between drafts made out to alternative copayees and drafts made out to nonalternative copayees. 602 N.E.2d at 1088. Other jurisdictions have cited GMAC with approval and adopted its reasoning. See State ex rel. N.D. Housing Fin. Agency v. Ctr. Mut. Ins. Co., 720 N.W.2d 425, 429–30 (N.D. 2006) (holding that forged endorsement by nonalternative copayee did not discharge drawer’s obligation to other copayee); Crystaplex Plastics, Ltd. v. Redevelopment Agency of City of Barstow, 92 Cal. Rptr. 2d 197, 203–04 (Ct. App. 2000) (payee could maintain cause of action against drawer under UCC after copayee cashed check with forged endorsement). We join these jurisdictions and hold that delivery of a check to one copayee constitutes constructive delivery to all. However, because payment to one nonalternative copayee without the endorsement of the other is not payment to a “holder,” it does 8 not discharge the drawer of either his liability on the instrument or his underlying obligation.4 GMAC, 602 N.E.2d at 1088. State Farm argues that the Hospital’s preferred course is to sue the payor bank that improperly paid the instruments lacking the Hospital’s endorsement. While the Hospital could have attempted to pursue the payor bank for relief directly,5 its failure to do so does not affect State Farm’s obligations under the UCC. That more efficient avenues of recovery may exist for a wronged copayee does not alter our analysis of whether the Hospital was “paid” in accordance with the UCC and the Hospital Lien Statute.6 Accordingly, given that (1) State Farm issued the settlement checks payable to the patients and the Hospital as nonalternative copayees, (2) State Farm delivered the checks to the patients without notifying the Hospital, (3) the Hospital did not endorse the checks, and (4) the patients nevertheless deposited the checks, we hold that State Farm’s actions did not constitute payment to a “holder” under the UCC, and therefore State Farm was not discharged of its underlying obligations. In turn, State Farm has not shown that “the charges of the hospital . . . claiming the lien were paid before the execution and delivery of the release [of the injured individual’s cause of 4 We do not address this holding’s applicability to copayees in an agency relationship, as that scenario is not presented. See Kenerson v. FDIC, 44 F.3d 19, 23 (1st Cir. 1995) (holding that common law rule of agency relieved drawer of liability where one payee forged endorsement of copayee); see also GMAC, 602 N.E.2d at 1087 (noting that the copayees in that case were “not in an agency relationship”). 5 A drawee that makes payment “for a person not entitled to enforce the instrument or receive payment” may be liable in conversion. TEX. BUS. & COM. CODE § 3.420; see also Sw. Bank v. Info. Support Concepts, Inc., 149 S.W.3d 104, 105 (Tex. 2004). 6 As to State Farm’s rights under the UCC, we note that a drawee may not charge its customer’s account on an instrument that is not properly authorized. TEX. BUS. & COM. CODE § 4.401(a); see also id. § 3.420 cmt. 1; Tex. Stadium Corp. v. Sav. of Am., 933 S.W.2d 616, 622 (Tex. App.—Dallas 1996, writ denied). 9 action] to the extent of any full and true consideration paid to the injured individual by or on behalf of the other parties to the release.” TEX. PROP. CODE § 55.007(a)(2). As a result, State Farm was not entitled to summary judgment on this ground.