Suit & Wells Equipment Co. v. Citizens National Bank

Singley, J., delivered the opinion of the Court. This case poses the question whether, under certain circumstances, the holder of a check on which payment has been stopped can require payment by the maker. 1 The facts which gave rise- to the controversy can be briefly told. On 3 September 1966, Shit and'Wells Equipment Co., Inc. (Suit and Wells) issued a check on its account at First National Bank of Southern Maryland (First National), payable to the order of Joseph F. Tayman in the amount of $4,200. The check had been given to Tayman in payment for some equipment which he had promised to deliver the following day.

When the equipment was not delivered, Suit and Wells stopped payment on the check early on the morning of 6 September, the next banking day. Later that day Tayman attempted to cash the check at First National, and when payment was refused, took the check to his own bank, Citizens National Bank of Southern Maryland (Citizens National), and cashed it. Citizens National seasonably presented the check for payment, which was refused and later brought suit. From a judgment for $4,200 with interest and costs in favor of Citizens National against Suit and Wells and Tayman, Suit and Wells has ap ¹³⁵ pealed.

We shall affirm the judgment against Suit and Wells, but vacate the judgment against Tayman, because an examination of the docket entries discloses that service had never been made on him. The principal thrust of Suit and Wells’ argument is that Citizens National was Tayman’s agent for purposes of collecting the check, and therefore, could not be a holder in due course. The Uniform Commercial Code (UCC) is found in Maryland Code (1957, 1964 Repl. Vol.) Art. 95B.

UCC § 4-201 is cited in support of the appellant’s proposition: “(1) Unless a contrary intent clearly appears and prior to the time that a settlement given by a collecting bank for an item is or becomes final (subsection (3) of § 4-211—and §§ 4-212 and 4-213) the bank is an agent or sub-agent of the owner of the item and any settlement given for the item is provisional. This provision applies regardless of the form of indorsement or lack of indorsement and even though credit given for the item is subject to immediate withdrawal as of right or is in fact withdrawn; but the continuance of ownership of an item by its owner and any rights of the owner to proceeds of the item are subject to rights of a collecting bank such as those resulting from outstanding advances on the item and valid rights of setoff. When an item is handled by banks for purposes of presentment, payment and collection, the relevant provisions of this subtitle apply even though action of parties clearly establishes that a particular bank has purchased the item and is the owner of it. “(2) After an item has been indorsed with the words ‘pay any bank’ or the like, only a bank may acquire the rights of a holder (a) Until the item has been returned to the customer initiating collection; or (b) Until the item has been specially in ¹³⁶ dorsed by a bank to a person who is not a bank.” We conclude that Suit and Wells’ reliance is misplaced. An examination of the Official Comment to § 4-201 makes it quite clear that the very purpose of the UCC provision was to create a prima facie presumption of an agency relationship and thus eliminate the distinction which had existed under the Negotiable Instruments Law (the N.I.L.) between instances where a bank was the purchaser of an item and cases where it was merely an agent for purposes of collection.

Despite the UCC’s presumption of an agency relationship, and the provisional character of the settlement, it is clear that there are circumstances in which a collecting bank may acquire the rights of a holder. UCC § 4-208 provides, in part: “(1) A bank has a security interest in an item and any accompanying documents or the proceeds of either * * * (c) If it makes an advance on or against the item.” UCC § 4-209 continues: “For purposes of determining its status as a holder in due course, the bank has given value to the extent that it has a security interest in an item provided that the bank otherwise complies with the requirements of § 3-302 on what constitutes a holder in due course.” A bank which cashes a check drawn on another bank has a security interest and is a holder for value, 3 Anderson, Uniform Commercial Code § 4.209:3 (2d ed. 1971); see also Peoples Bank of Aurora v. Haar, 421 P.2d 817 (Okla. 1966). Whether it is a holder in due course is determined by UCC § 3-302, which provides, in part: “(1) A holder in due course is a holder who takes the instrument ¹³⁷ (a) For value; and (b) In good faith; and (e) Without notice that it is overdue or has been dishonored or of any defense against or claim to it on the part of any person.” For a general discussion of these provisions, see Bunn, Bank Collections Under the Uniform Commercial Code, 1964 Wis. L. Rev. 278 , 280; and Annotations: Construction and Effect of UCC Art. 3, Dealing With Commercial Paper, 23 A.L.R. 3d 932 , 984-88 (1969) and Construction