Opinion ID: 526764
Heading Depth: 2
Heading Rank: 3

Heading: whether schwegmann bank is a holder in due course

Text: 11 Louisiana has adopted article three of the Uniform Commercial Code (UCC) governing the rights of parties holding negotiable instruments. See La.Rev.Stat. Secs. 10:3-101 to 10:3-806. We apply Louisiana law in this diversity case but we also look for guidance to other jurisdictions that have adopted the identical UCC sections. See Bricks Unlimited, Inc. v. Agee, 672 F.2d 1255, 1258 (5th Cir.1982) (holding that it was unnecessary to decide whether to apply Louisiana or Mississippi negotiable instrument law since both states had adopted the identical UCC provisions). 12 La.Rev.Stat. Sec. 10:3-305 provides that a holder in due course takes the negotiable instrument free from all claims to it and all defenses except those enumerated in the section. Section 10:3-302 provides that: 13 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 a defense or claim to it on the part of any person. 14 It is undisputed that Schwegmann Bank is the legal holder of the Simmons note. However, Simmons contests the bank's good faith and lack of notice of his alleged defenses. 15 Schwegmann Bank responds that Simmons's pleadings are insufficient to establish a defense on the note to withstand summary judgment. We do not need to adjudicate Simmons's defenses against Quinn-L if it sought to collect on the note, because the critical issue is whether Simmons has raised a material fact question regarding Schwegmann's good faith and notice of those defenses when it acquired the note. 16 In Louisiana, there is conflicting authority on whether in good faith and notice [of] ... a defense are to be determined on the basis of Schwegmann's subjective or objective knowledge and conduct. Schwegmann relies on two Louisiana appellate court cases which hold that the good faith inquiry is entirely subjective and that the notice of defenses inquiry is essentially subjective, i.e., that the holder did not intentionally abstain from investigation to avoid notice of potential defenses. Republic of Texas Savings Assoc. v. First Republic Life Insurance Co., 417 So.2d 1251, 1255 (La.App. 1st Cir.1982), cert. denied, 422 So.2d 161 (1982); Arthur Dooley & Son of Louisiana, Inc. v. Johnson, 422 So.2d 1270, 1274-75 (La.App. 5th Cir.1982), writ denied, 429 So.2d 152 (1983). 17 Simmons cites Asian Int'l, Ltd. v. Merrill Lynch, Pierce, Fenner and Smith, Inc., 435 So.2d 1058, 1062 (La.App. 1st Cir.1983) which holds that [g]ood faith is determined on a reasonableness standard, in that the facts must be such as would necessarily put a reasonable person on inquiry to ascertain the true facts. This language in Asian Int'l creates an apparent ambiguity in Louisiana law concerning whether the test for good faith of a holder in due course is subjective or objective. We are persuaded, however, that Asian Int'l either used loose language or incorrectly interpreted Louisiana's UCC on this point. 1 Because Republic of Texas and Arthur Dooley seem to apply the current UCC definitions of good faith and notice more rigorously than Asian Int'l, we therefore adhere to our prior decision in Bricks Unlimited, which holds, consistently with these two cases, that the identical good faith provision of Louisiana and Mississippi law did not impose a duty of inquiry. 672 F.2d 1255, citing General Investment Corp. v. Angelini, 58 N.J. 396, 278 A.2d 193, 197 (1971) (no duty to inquire unless the circumstances reveal a deliberate desire to evade knowledge because of a belief or fear that investigation would disclose a defense [or claim]). 2 Observing that a duty to make inquiry into all possible claims by a maker would create intolerable commercial burdens, Bricks Unlimited applied a subjective standard to the threshold issues of good faith and lack of notice. 672 F.2d at 1259. Thus, a duty of inquiry is implied only if the circumstances reveal a deliberate desire by the holder to evade knowledge of a claim by the maker. Arthur Dooley, 422 So.2d at 1275 ( 'The reason to know,' portion of the notice requirement guards against an intentional willful ignorance.); Republic of Texas Savings Assoc., 417 So.2d at 1255 (same). 18 Turning to the merits, we begin with the findings of the district court based on uncontroverted summary judgment evidence: 19 [T]he Simmons note was not overdue and, thus, there could not have been notice to that effect, on April 1, 1986. It is undisputed that there was nothing on the face of the Simmons note to indicate a defense or claim of validity. Moreover, there was no information concerning the business practices of either BOC or Quinn-L to indicate that the Simmons note was subject to a defense. As indicated above, Sneed [Schwegmann's President] believed that the history of Quinn-L in repaying loans on a short term basis had been good. 20 Yet, Simmons alleges that Schwegmann knew certain facts which provided Schwegmann with notice of Simmons's three defenses to the note: failure of consideration; federal securities law violations; and fraud. 3 We disagree; the facts alleged could not alert Schwegmann to any such defenses nor do they create a material fact issue as to whether Schwegmann acted in bad faith. 21 The facts that Schwegmann was supposed to have known fall into one or more of three categories: (1) the fruition of a known investment risk; (2) contingencies contemplated and disclosed in the East Pointe Prospectus; or (3) evidence that Q-L or Quinn-L was in a poor economic condition. None of these facts, individually or together, raise an inference that Dr. Simmons was defrauded, that the securities laws had been violated, or that there had been a failure of consideration. 4 We shall discuss each fact in turn. 22 That the East Pointe limited partnership might never be fully subscribed was a known investment risk disclosed in the East Pointe Prospectus. The fact that it was not yet fully subscribed at the time Schwegmann Bank assumed the Simmons note, or that there were plans to refinance the East Pointe project, yields no notice of fraud and no defense to payment of the note. Schwegmann had no duty to inquire further into why this project was not yet fully subscribed. 23 Even assuming that the Quinn-L note and other Quinn-L loans funded by the Bank of Commerce were delinquent when Schwegmann purchased Simmons's note, that provides no notice of defenses Simmons may have had on his note. At most, that is some indication that Quinn-L may have been experiencing financial difficulties. As the district court stated, [m]ere knowledge of poor financial health of the debtor does not preclude a subsequent debtor from obtaining holder in due course status. (citing Michelin Tires v. First National Bank of Boston, 666 F.2d 673, 682, 685 (1st Cir.1981); Texico State Bank v. Hullinger, 75 Ill.App.2d 212, 220 N.E.2d 248, 250 (4th Dist.1966)). The same analysis applies to the alleged fact that the Bank of Commerce president believed that Quinn-L had not adequately responded to his inquiries regarding the use of the funds loaned under the Quinn-L note. Schwegmann Bank did investigate these matters, and Simmons does not dispute that Schwegmann was satisfied at the time it acquired his note that most of the proceeds of the loan were on deposit at the Texas American Bank. 24 The fact that the note of one limited partner (Sirbasku) was delinquent in another limited partnership which jointly secured the Quinn-L note would not alert Schwegmann that Simmons had any defenses to his note for the East Pointe partnership. 25 The East Pointe Prospectus provided that outside financing might be required and that mortgages and liens might have to be granted in exchange for the outside financing. The East Pointe Prospectus also provided that entities related to Quinn-L had the right to borrow funds from the partnership. The fact that these contingencies came to pass does not indicate failure of consideration, securities law violation, or fraud. 26 Finally, Simmons alleges that Schwegmann knew that the Bank of Commerce had filed a $2.5 million suit against the Ricou-Brewster partnership run by the same promoters. This is, again, notice that another Quinn-L related company was having financial difficulty. The relationship, if any, to the Simmons note and any potential defenses to its payment is extremely tenuous and is not developed in the record by Simmons. If knowledge of Quinn-L's financial condition is insufficient to constitute actual knowledge of Simmons's claimed defenses, then knowledge of a related company's financial difficulty is equally insufficient. 27 Besides these facts, Simmons alleges that the Bank of Commerce President sent a letter to Schwegmann asserting that the Simmons note was not in default. Simmons claims that this is evidence of bad faith on the part of Schwegmann since the representations were drafted in large part by a Schwegmann attorney with the intention of whitewashing Simmons's defenses and creating a fraudulent impression of good faith. Yet, the letter only recites three uncontested representations, and the only reference to the Simmons note is that none of the notes serving as collateral for the [loan are] in default, with the exception of the Sirbasku note. That statement is true; its inclusion cannot serve as evidence of bad faith. The author of the letter is immaterial. 28 There is simply no evidence that Schwegmann acted in bad faith or had any notice of Simmons's claimed defenses. Schwegmann did investigate the use of funds advanced to Quinn-L, and there are no facts that should have led Schwegmann to inquire further than it did. The facts, moreover, do not suggest that Schwegmann deliberately evaded learning information that would have supplied claims or defenses by Simmons against payment of his note. Bricks Unlimited, supra. We conclude that there is no genuine issue of material fact concerning Schwegmann's holder in due course status. 29 Simmons's final challenge relates to the UCC's provision relating to bulk transactions. Simmons alleges that Schwegmann Bank is not a holder in due course since it purchased the note as a part of a bulk transaction not in the regular course of business of the transferor. La.Rev.Stat. 10:3-302(3)(c). The comment to this subsection provides: 30 Subsection 3(c) applies to bulk purchases lying outside of the ordinary business of the seller. It applies, for example, when a new partnership takes over for value all of the assets of an old one after a new member has entered the firm, or to a reorganized or consolidated corporation taking over in bulk the assets of a predecessor. It has particular application to the purchase by one bank of a substantial part of the paper held by another bank which is threatened with insolvency and seeking to liquidate its assets. 31 Notwithstanding that the Bank of Commerce may have been threatened with insolvency, there is no evidence that Schwegmann purchased a substantial part of the paper held by BOC. On the contrary, the uncontroverted deposition of J. Harper Cox demonstrates that the Quinn-L loans represented less than ten percent of the BOC loan portfolio. There is no argument that Schwegmann's participation in the Quinn-L loan was not in the normal course of both banks' business. Nor is there any argument that the assumption of the loan administration by one of the participants is outside of the normal course of business. Thus, the bulk transaction section, 10:3-302(3)(c), does not apply. We conclude that Schwegmann Bank is a holder in due course of the Simmons note.