Opinion ID: 1895319
Heading Depth: 3
Heading Rank: 2

Heading: Reasonable Commercial Standards of Fair Dealing

Text: [¶ 24] We turn then to the objective prong of the good faith analysis. The addition of the language requiring the holder to prove conduct meeting reasonable commercial standards of fair dealing signals a significant change in the definition of a holder in due course. [19] While there has been little time for the development of a body of law interpreting this new objective requirement, there can be no mistaking the fact that a holder may no longer act with a pure heart and an empty head and still obtain holder in due course status. [20] The pure heart of the holder must now be accompanied by reasoning that assures conduct comporting with reasonable commercial standards of fair dealing. [¶ 25] The addition of the objective element represents not so much a new concept in the doctrinal development of holder in due course status, but rather a return, in part, to an earlier approach to the doctrine. See JAMES J. WHITE & ROBERT S. SUMMERS, UNIFORM COMMERCIAL CODE § 14-6, at 62829 (3d ed.1988) (discussing the objective test of good faith in England, first applied by the King's Bench in Gill v. Cubitt, 3 B & C 466, 107 Eng.Rep. 806 (K.B.1824)). The concept of an objective component of good faith has been part of the discussion regarding the holder in due course doctrine since the first enactment of the U.C.C. See id. (noting that [t]he good faith requirement has been the source of a continuing and ancient dispute). The early drafters debated the need and wisdom of including such an objective component and ultimately determined not to include it in the definition of good faith because of its potential for freezing commercial practices. See Sinclair, supra, at 653-54 (noting, in particular, the objection by the banking industry to the addition of an objective good faith component). The new element of good faith requiring the holder to act according to reasonable commercial standards of fair dealing is actually a more narrow version of the reasonable person standard considered and rejected by the drafters o the 1962 Code. [¶ 26] The new objective standard, however, is not a model of drafting clarity. Although use of the word reasonable in the objective portion of the good faith test may evoke concepts of negligence, the drafters attempted to distinguish the concept of fair dealing from concepts of careful dealing: Although fair dealing is a broad term that must be defined in context, it is clear that it is concerned with the fairness of conduct rather than the care with which an act is performed. Failure to exercise ordinary care in conducting a transaction is an entirely different concept than failure to deal fairly in conducting the transaction. U.C.C. § 3-103 cmt. 4 (1991). [¶ 27] Unfortunately, the ease with which the distinction between fair dealing and careful dealing was set forth in the comments to the U.C.C. revisions belies the difficulty in applying these concepts to the facts of any particular case, or in conveying them to a jury. The difficulty is exacerbated by the lack of definition of the term fair dealing in the U.C.C. [21] The most obvious question arising from the use of the term fair is: fairness to whom? Transactions involving negotiable instruments have traditionally required the detailed level of control and definition of roles set out in the U.C.C. precisely because there are so many parties who may be involved in a single transaction. If a holder is required to act fairly, regarding all parties, it must engage in an almost impossible balancing of rights and interests. Accordingly, the drafters limited the requirement of fair dealing to conduct that is reasonable in the commercial context of the transaction at issue. In other words, the holder must act in a way that is fair according to commercial standards that are themselves reasonable. [¶ 28] The factfinder must therefore determine, first, whether the conduct of the holder comported with industry or commercial standards applicable to the transaction and, second, whether those standards were reasonable standards intended to result in fair dealing. Each of those determinations must be made in the context of the specific transaction at hand. If the factfinder's conclusion on each point is yes, the holder will be determined to have acted in good faith even if, in the individual transaction at issue, the result appears unreasonable. Thus a holder may be accorded holder in due course status where it acts pursuant to those reasonable commercial standards of fair dealingeven if it is negligentbut may lose that status, even where it complies with commercial standards, if those standards are not reasonably related to achieving fair dealing. [¶ 29] Therefore the jury's task here was to decide whether the Credit Union observed the banking industries' commercial standards relating to the giving of value on uncollected funds, and, if so, whether those standards are reasonably designed to result in fair dealing. [¶ 30] The evidence produced by the Credit Union in support of its position that it acted in accordance with objective good faith included the following: The Credit Union's internal policy was to make provisional credit available immediately upon the deposit of a check by one of its members. In certain circumstanceswhere the check was for a large amount and where it was drawn on an out-of-state bankits policy allowed for a hold to be placed on the uncollected funds for up to nine days. The Credit Union's general written policy on this issue was reviewed annuallyand had always been approved by the National Credit Union Administration, the federal agency charged with the duty of regulating federal credit unions. See 12 U.S.C.A. § 1752a (Law.Co-op.1996). In addition, the policy complied with applicable banking laws, including Regulation CC. See 12 C.F.R. §§ 229.12(c), 229.13(b) (1998). [¶ 31] The Credit Union also presented evidence that neither Regulation CC nor the Credit Union's internal policy required it to hold the checks or to investigate the genesis of checks before extending provisional credit. It asserted that it acted exactly as its policy and the law allowed when it immediately extended provisional credit on these checks, despite the fact that they were drawn for relatively large amounts on an out-of-state bank. [22] Finally, the Credit Union presented expert testimony that most credit unions in Maine follow similar policies. [¶ 32] In urging the jury to find that the Credit Union had not acted in good faith, Sun Life and the Guerrettes argued that the Credit Union's conduct did not comport with reasonable commercial standards of fair dealing when it allowed its member access to provisional credit on checks totalling over $120,000 drawn on an out-of-state bank without either: (1) further investigation to assure that the deposited checks would be paid by the bank upon which they were drawn, or (2) holding the instruments to allow any irregularities to come to light. [¶ 33] The applicable federal regulations provide the outside limit on the Credit Union's ability to hold the checks. Although the limit on allowable holds established by law is evidence to be considered by the jury, it does not itself establish reasonable commercial standard of fair dealing. The factfinder must consider all of the facts relevant to the transaction. The amount of the checks and the location of the payor bank, however, are relevant facts that a bank, observing reasonable commercial standards of fair dealing, takes into account when deciding whether to place such a hold on the account. The jury was entitled to consider that, under Regulation CC, when a check in an amount greater than $5,000 is deposited, or when a check is payable by a nonlocal bank, a credit union is permitted to withhold provisional credit for longer periods of time than it is allowed in other circumstances. See 12 C.F.R. § 229.13(b), (h) (1998). Therefore, the size of the check and the location of the payor bank are, under the objective standard of good faith, factors which a jury may also consider when deciding whether a depositary bank is a holder in due course. [¶ 34] The Credit Union's President admitted the risks inherent in the Credit Union's policy and admitted that it would not have been difficult to place a hold on these funds for the few days that it would normally take for the payor bank to pay the checks. He conceded that the amount of the checks were relatively large, that they were drawn on an out-of-state bank, and that these circumstances could have presented the Credit Union with cause to place a hold on the account. He also testified to his understanding that some commercial banks followed a policy of holding nonlocal checks for three business days before giving provisional credit. [23] Moreover, the Credit Union had no written policy explicitly guiding its staff regarding the placing of a hold on uncollected funds. Rather, the decision on whether to place a temporary hold on an account was left to the comfort level of the teller accepting the deposit. There was no dispute that the amount of the three checks far exceeded the $5,000 threshold for a discretionary hold established by the Credit Union's own policy. [¶ 35] On these facts the jury could rationally have concluded that the reasonable commercial standard of fair dealing would require the placing of a hold on the uncollected funds for a reasonable period of time and that, in giving value under these circumstances, the Credit Union did not act according to commercial standards that were reasonably structured to result in fair dealing. [¶ 36] We recognize that the Legislature's addition of an objective standard of conduct in this area of law may well have the effect of slowing the wheels of commerce. [24] As one commentator noted: Historically, it was always argued that if negotiable instruments were to be usefully negotiable a subsequent holder should not have to investigate the transaction giving rise to the paper. The paramount necessity of negotiability has dominated thinking and legislation on negotiable instruments law. Drafts and promissory notes, it has been believed, must be able to change hands freely, without investigation beyond the face of the instrument, and with no greater requirement than the indorsement of the holder. Sinclair, supra, at 630 (footnotes omitted). Notwithstanding society's oftcited need for certainty and speed in commercial transactions, however, the Legislature necessarily must have concluded that the addition of the objective requirement to the definition of good faith serves an important goal. The paramount necessity of unquestioned negotiability has given way, at least in part, to the desire for reasonable commercial fairness in negotiable transactions.