Court Opinion

ID: 9884365
Source: CourtListenerOpinion
Date Created: 2023-10-06 02:54:04.09449+00
Date Added: 2024-06-11T07:48:37.971043
License: Public Domain

Mr. Justice Schaefer, dissenting: The opinion holds that Niederberger is entitled to retain the $600,000 of Bank funds which he received because he was a holder in due course of the Bank’s checks in that amount. As the opinion notes, a holder in due course must, in addition to other requirements, have given “value” for the instrument. (Ill. Rev. Stat. 1963, chap. 26, par. 3— 302.) The majority holds that Niederberger gave value when he placed the Crest stock in escrow with directions not to release it to Brock until Brock relieved him of his obligations as a guarantor. By placing the stock in escrow, in the view of the majority, Niederberger made an “irrevocable commitment to a third person” which constitutes giving of value as defined in section 3 — 303(c). That section states: “A holder takes the instrument for value * * * (c) when he gives a negotiable instrument for it or makes an irrevocable commitment to a third person.” I am unable to agree that an “irrevocable commitment” was made, or that the purchaser of the stock was a “third person”, within the meaning of section 3 — 303(c). The comments to section 3 — 303 state that “an executory promise to give value is not itself value, except as provided in paragraph (c).” To fall within paragraph (c) and thus constitute value, an executory promise must be irrevocable. The comment explains that the Code refuses to treat other promises as value because a person who has taken a defective instrument but has given only a promise in return does not need the protection against claims and defenses afforded the holder in due course. He can protect himself from loss by refusing to carry out his part of the bargain and treating it as rescinded. The comment states: “The underlying reason of policy is that when the purchaser learns of a defense against the instrument or of a defect in the title he is not required to enforce the instrument, but is free to rescind the transaction for breach of the transferor’s warranty (Section 3 — 417).” The person who has made an irrevocable commitment, however, cannot rescind. The Code adopts a principle applied in equity, stated by Judge Story, in Wormley v. Wormley, 8 Wheat. 421, 449, (5 L. Ed. 651), “It is a settled rule in equity that a purchaser without notice, to be entitled to protection, must not only be so at the time of the contract or conveyance, but at the time of the payment of the purchase money.” The principle is recognized in cases holding that when a bank has received a negotiable instrument and credited it to the transferor’s bank account, the bank has not given value and is not a holder in due course. Instead, it has merely made an executory promise to the depositor to pay him a sum on demand. See First State Bank and Trust Co. v. First Nat. Bank of Canton, 314 Ill. 269, 273 (1924); Brannan, Negotiable Instrument Law 520 (Beutel ed., 1948). As applied to the present case this principle indicates that Niederberger was not a holder in due course. At no time had he given value as defined in section 3 — 303(c). His undertaking was contingent upon the elimination of his personal liability as a guarantor. When Niederberger learned that the checks had been fraudulently obtained, he was in a position to rescind his agreement with Brock, as the comment to section 3 — 303 suggests, on the ground that when Brock negotiated the checks he had breached his transferor’s warranty that “(a) he has a good title to the instrument * * * and the transfer is otherwise rightful; and * * * (d) no defense of any party is good against him; * * (Ill. Rev. Stat. 1963, chap. 26, par. 3—417(2)). These warranties had been breached since the instruments were obtained from the bank by fraud and without consideration. Section 3 — 303 of the Commercial Code expresses a policy of withholding “holder in due course” status from the transferee of a negotiable instrument' when the transferee can effectively protect himself against infirmities in the instrument. Whether the transferee can protect himself depends, under section 3 — 303, upon whether his commitment is “irrevocable” and to a “third person.” In the present case Niederberger’s commitment was conditional, and the condition was not fulfilled. And in my opinion it is inappropriate to treat Brock a “third person” within the meaning of section 3-303. He was the transferor of the instrument involved. Mr. Justice Ward joins in this dissent.