Rezapolvi v. First National Bank

³ Eldridge, J., delivered the opinion of the Court. The dispute in this case concerns the right of a bank to dishonor its own cashier’s check. Kamal Rezapolvi entered into a "Preliminary Agreement” with R. Gordon Loetz, Sr., the president and owner of Columbia Marketing Corporation, for the purchase of a restaurant franchise. Pursuant to this agreement, in October 1977, Rezapolvi paid Loetz a total of $13,622 as a deposit.

According to the uncontradicted testimony, after Loetz failed to find a location for the franchise within 30 days, as provided by the contract, and after Loetz raised the price of the franchise from $40,000 to $100,000, Rezapolvi requested that Loetz return his deposit. On December 1, 1977, Loetz personally delivered to Rezapolvi a check in the amount of $13,622. The check was drawn on Columbia Marketing’s account with the First National Bank of Maryland. The check was signed by Stanley E. Lloyd, an employee of Columbia Marketing, whose signature was not an "authorized” signature for the Columbia Marketing account.

Accompanying the check was the following letter: "December 1, 1977 Kamal Relapolvi [sic]: Inclosed [sic] you will find our check for $13,622.00 which represents your deposit for an Old Western Chicken 'N’ Chips Restaurant. I am returning your deposit at your request. Mrs. Merhadi will be purchasing an Old Western Chicken 'N’ Chips Restaurant this evening. This cancellation is contingent upon Mrs. Merhadi’s participation.

Sincerely yours, /s/ R. Gordon Loetz, Sr. President RGL/pd end: check” ⁴ The next morning, Friday, December 2, 1977, Rezapolvi brought the Columbia Marketing check to First National’s branch in Bethesda, Maryland, where he endorsed the check in blank and exchanged it and a one dollar service charge for a cashier’s check payable to himself. 1 Before issuing the cashier’s check, the head teller checked Rezapolvi’s identification, and determined that there was no stop payment order on Columbia Marketing’s check and that Columbia Marketing’s account contained sufficient funds to cover its check. The teller then placed a hold on those funds so that they could not be paid out on other items. The teller did not follow standard procedure and ascertain whether the Columbia Marketing check contained an authorized signature. Rezapolvi then deposited the cashier’s check in his account at the American Security and Trust Company bank.

On Monday, December 5, 1977, Loetz, apparently unaware that the Columbia Marketing check had already been paid by a cashier’s check, sent his secretary to First National’s branch in Columbia, Maryland, for the purpose of placing a stop payment order on the Columbia Marketing check. Someone at First National’s branch in Columbia contacted the manager of First National’s Bethesda branch, Frances Manus, because the Bethesda branch had placed a hold on Columbia Marketing’s funds in its account. Manus testified that she then contacted Loetz who stated that Columbia Marketing’s check could not properly have been ⁵ paid because of insufficient funds. After being informed that Columbia Marketing had sufficient funds, Loetz replied: "Well, you ... still couldn’t have [properly cashed the check] . . . because someone else signed the check.

I didn’t sign the check. I had someone else sign the check ... I did intend to come into the Branch and give you new signature cards with this new person’s [Stanley Lloyd’s] signature and resolutions but there was a meeting and we just, you know, didn’t get around to it.” (Emphasis added.) When Manus attempted to pursue the matter with Loetz, he responded, "Well, you know, I can’t do anything about it... . I had someone else sign the check and you’re the one that gave the money.” Manus thereupon issued a stop payment order on the cashier’s check and released the hold on Columbia Marketing’s account. 2 A few days later, Rezapolvi received a telephone call from American Security and Trust Company informing him that First National had stopped payment on the cashier’s check and that Rezapolvi could retrieve the cashier’s check from an American Security and Trust Company office. 3 Subsequently, Rezapolvi telephoned Loetz and requested another check.

Loetz replied, "Don’t talk to me. I cancelled your contract, and I gave you a check. This is between you and your bank.... You got your check.” In November 1979, Rezapolvi commenced this action in the Circuit Court for Montgomery County, seeking damages from First National for its dishonor of its cashier’s check.

After a trial by the court, judgment was entered in favor of First National. Rezapolvi appealed to the Court of Special Appeals, and this Court issued a writ of certiorari prior to a decision by the Court of Special Appeals. ⁶ I Preliminarily, it should be emphasized that two separate negotiable instruments are involved in this case — the Columbia Marketing check and First National’s cashier’s check. Furthermore, the parties to the checks differ with the exception of the plaintiff, Rezapolvi. Before turning to First National’s specific argument as to why it was entitled to dishonor the cashier’s check, we shall discuss more generally both negotiable instruments, dealing first with the Columbia Marketing check and second with the cashier’s check.

A. The first instrument in this case, the Columbia Marketing check, was accepted and paid prior to Columbia Marketing’s attempted stop payment order. Although acceptance and payment are normally viewed as separate events, if a check has been paid it has clearly been accepted. First National accepted and paid the Columbia Marketing check when it issued its cashier’s check in return for the Columbia Marketing check. The issuance of the cashier’s check represented both a promise to pay the Columbia Marketing check and payment of the check.

See Citizens & Southern Nat. Bank v. Youngblood, 135 Ga.App. 638 , 219 S.E.2d 172, 173 (1975); Page v. Holmes-Darst Coal Co., 269 Mich. 159, 162-165 , 256 N.W. 840 (1934); Friends in Need Society v. Peterson, 9 S.W.2d 1110, 1111 (Tex. Civ. App. 1928). 2 Bender’s Uniform Commercial Code, Commercial Paper, § 12.16[1] (W. Willier & F. Hart ed. 1982); Brady on Bank Checks, § 4.8 (H. Bailey 5th ed. 1979).

Furthermore, contrary to the assertion in First National’s brief, the later nonpayment of the cashier’s check did not change the fact that the Columbia Marketing check had been paid. "A holder who accepts a bank instrument on which the bank is obligor, such as a cashier’s check or a bank draft, has ... been paid whether or not the bank instrument is ever paid.” 2 Bender’s Uniform Commercial Code, ⁷ Commercial Paper, supra, at § 12.16[1], See § 4-213 of the Uniform Commercial Code, Maryland Code (1975), § 4-213 of the Commercial Law Article, and Official Comment point 2 (Final payment does not depend on whether bank’s remittance draft was itself paid). 4 See also Brady on Bank Checks, supra, at § 4-8. Under § 3-802 (1), "[ujnless otherwise agreed where an instrument is taken for an underlying obligation (a) the obligation is pro tanto discharged if a bank is drawer, maker or acceptor of the instrument and there is no recourse on the instrument against the underlying obligor.” When First National issued its cashier’s check in exchange for the Columbia Marketing check, Columbia Marketing’s obligation as drawer of its check was pro tanto discharged, and Rezapolvi would not be able to recover from Columbia Marketing on its check to him. B. The traditional definition of a cashier’s check has been set forth in a multitude of cases, both prior to and after the adoption of the Uniform Commercial Code.

One leading opinion stated it as follows (State of Pa. v. Curtiss Nat. Bank of Miami Springs, Fla., 427 F.2d 395, 398 (5th Cir. 1970)): "A cashier’s check is defined as a bill of exchange drawn by a bank upon itself and accepted in advance by the act of its issuance and not subject to countermand by either its purchaser or the issuing bank.” A recent decision of the United States Court of Appeals for the Fourth Circuit, holding that a bank was not entitled to dishonor its own cashier’s check, and that the timeliness under the Uniform Commercial Code of the dishonor notice was immaterial, said (Swiss Credit Bank v. Virginia Nat. Bank-Fairfax, 538 F.2d 587, 588 (4th Cir. 1976)): ⁸ "We see no need to reach the question of timeliness of the notice of dishonor. A cashier’s check is a bill of exchange drawn by a bank upon itself.

It is accepted in advance by the act of its issuance, and it cannot be dishonored by the issuing bank because of an indebtedness to it of one of its customers.” Also a "cashier’s check, purchased for adequate consideration, unlike an ordinary check, stands on its own foundation as an independent, unconditional and primary obligation of the Bank.” State of Pa. v. Curtiss Nat. Bank of Miami Springs, Fla., supra, 427 F.2d at 400 . "[T]he general rule [is] that the act of issuing a cashier’s check binds the issuing bank to pay the instrument and the bank is not allowed to stop payment on it.” Anderson, Clayton & Co. v. Farmers Nat. Bank, Etc., 624 F.2d 105, 109-110 (10th Cir. 1980).

See, e.g., TPO Incorporated v. Federal Deposit Insurance Corp., 487 F.2d 131, 135 (3d Cir. 1973); Banco Ganadero y Agricola v. Soc. Nat. Bk., Cleve., 418 F.Supp. 520, 523 (N.D. Ohio 1976); Kaufman v. Chase Manhattan Bank, National Ass’n, 370 F.Supp. 276, 278 (S.D.N.Y. 1973); Gillespie v. Riley Management Corporation, 59 Ill.2d 211 , 319 N.E.2d 753, 756 (1974); Louis Falcigno Enterprises v. Mass. Bank, 14 Mass.App. 92 , 436 N.E.2d 993 (1982); Thompson Poultry v. First Nat.

Bank of York, 199 Neb. 8 , 255 N.W.2d 856, 858 (1977); Santos v. First Nat’l State Bk. of N.J., 186 N.J.Super. 52 , 451 A.2d 401 , 407 & n. 10 (1982); National Newark & Essex Bank v. Giordano, 111 N.J.Super. 347 , 268 A.2d 327, 328-329 (1970); Dziurak v. Chase Manhattan Bank, N.A., 44 N.Y.2d 776 , 377 N.E.2d 474 , 406 N.Y.S.2d 30 , 31 (1978); Wertz v. Richardson Heights Bank And Trust, 495 S.W.2d 572, 574 (Tex. 1973). Moreover, courts have recognized and given effect to the public perception of a cashier’s check. According to one court, "[a] cashier’s check circulates in the commercial world as the equivalent of cash.... People accept a cashier’s check as a substitute for cash because the bank stands behind it, rather than an individual.” National Newark & Essex Bank ⁹ v. Giordano, supra, 268 A.2d at 329 .

The United States Court of Appeals for the Third Circuit has pointed to "the strong considerations of public policy favoring negotiability and reliability of cashier’s checks.” TPO Incorporated v. Federal Deposit Insurance Corp., supra, 487 F.2d at 135 . Although the traditional view is that a cashier’s check is a draft or a bill of exchange drawn by the bank upon itself, there has been some disagreement by a few authorities concerning the classification of a cashier’s check under the Uniform Commercial Code. While Article 3 of the Code, governing negotiable instruments, fails to even mention the term "cashier’s check,” 5 some recent authorities classify a cashier’s check as a note because of § 3-118 (a) which states that "[a] draft drawn on the drawer is effective as a note.” 6 Nevertheless, whether we label a cashier’s check as a note or a draft is unimportant in the instant case because § 3-413 imposes equivalent obligations on the maker of a note, the acceptor of a draft and the drawer of a draft (once the draft has been dishonored). "§ 3-413.

Contract of maker, drawer and acceptor. (1) The maker or acceptor engages that he will pay the instrument according to its tenor at the time of his engagement.... (2) The drawer engages that upon dishonor of the draft and any necessary notice of dishonor or protest he will pay the amount of the draft to the holder or to any indorser who takes it up. . . .” ¹⁰ Thus, regardless of whether First National’s cashier’s check is classified as a draft or a note, First National generally had the duty to honor the check. See 6E Bender’s Uniform Commercial Code, Reporter-Digest, § 4-403 (A8., comment 1) (W. Willier & F. Hart ed. 1982).

Despite the language in some opinions suggesting that a bank may never dishonor its cashier’s check, 7 courts have ¹¹ recognized that a bank may do so under very limited conditions. These are where the holder has dealt with the bank in connection with the transaction or is not a holder in due course, and where the cashier’s check was obtained by fraud upon the bank or, under certain circumstances, where there was no consideration given to the bank for the instrument. See generally Anderson, Clayton & Co. v. Farmers Nat. Bank, supra, 624 F.2d at 110 ; Matter of Johnson, 552 F.2d 1072 , 1078 n. 5 (4th Cir. 1977); TPO Incorporated v. Federal Deposit Insurance Corp., supra, 487 F.2d at 136 ; State of Pa. v. Curtiss Nat.

Bank of Miami Springs, Fla., supra, 427 F.2d at 399 ; Banco Ganadero y Agricola v. Soc. Nat. Bk., Cleve., supra, 418 F.Supp. at 523-524 ; Laurel Bank & Trust Co. v. City Nat. Bank of Conn., supra, 365 A.2d at 1224-1225; Wilmington Trust Company v. Delaware Auto Sales, 271 A.2d 41, 42 (Del. 1970); Beach National Bank v. Bank of Hollywood Hills, 256 So.2d 251, 252 (Fla.

App. 1971); International Furn. Dis. v. First Ga. Bank, 163 Ga.App. 765 , 294 S.E.2d 732 (1982); Gillespie v. Riley Management Corporation, supra, 319 N.E.2d at 756 ; Travi Const. v. First Bristol Cty. Nat.

Bank, 10 Mass.App. 32 , 405 N.E.2d 666 , 668-669 (1980); State Bank of Brooten v. Am. Nat. Bank, 266 N.W.2d 496, 499 (Minn. 1980); Santos v. First Nat’l State Bank of N.J., supra, 451 A.2d at 406 ; Thompson v. Bank, 47 Ohio App.2d 249, 252-253 , 353 N.E.2d 895 (1975); Wertz v. Richardson Heights Bank and Trust, supra, 495 S.W.2d at 574 ; Neve Welch Enterprises, Inc. v. United Bank, 628 P.2d 1295, 1296-1297 (Utah 1981). 8 ¹² Consequently, because Rezapolvi dealt with First National, the bank may assert its defenses against him. 9 Under the principles recognized in the above-cited cases, however, the only defenses which First National may assert as a basis for dishonor are its own; the bank may not rely upon the defenses of any third party such as Columbia Marketing. See also § 3-306 (d) ("The claim of any third person to the instrument is not. .. available as a defense to any party liable thereon . ..”); Louis Falcigno Enterprises v. Mass.

Bank, supra, 436 N.E.2d at 993 . II Against this background, we shall now address First National’s argument as to why it was entitled to dishonor its cashier’s check. The bank contends that the "unauthorized” signature on the Columbia Marketing check rendered it not properly payable and that, for this reason, the Columbia Marketing check furnished no consideration for the cashier’s check. This argument must be rejected for several reasons.

First, there simply was no unauthorized signature for purposes of the Uniform Commercial Code. Section 1-201 (43) states that an " '[unauthorized signature or indorsement’ means one made without actual,