Brief Fact Summary. Plaintiff gave a manufacturer of bowling alley equipment a check out of a small business loan for the purchase of some bowling machines. The check was deposited in the defendant bank and the money was credited against an overdraft and applied to debts owed by the manufacturer. Plaintiff never received the equipment and the defendant remains in possession of the money.
Synopsis of Rule of Law. Mass. Gen. Laws Ann. ch. 106, Section: 3-307(3), states: “After it is shown that a defense exists a person claiming the rights of a holder in due course has the burden of establishing that he or some person under whom he claims is in all respects a holder in due course.”
Issue. Was the district court correct in rejecting plaintiff’s view of the evidence, concluding instead that the defendant was a holder in due course and therefore entitled to take the check free of all personal defenses?
Held. Yes, the defendant was found to be a holder in due course and therefore entitled to take the check free of all defenses. First, the plaintiff argued that the defendant was not a holder of the check because of Bowl-Mor failed to provide its own indorsement. However, UCC Section: 3-201(a) states that a transfer of an instrument vests in the transferee all the right of the transferor. The court found that the evidence indicated that Bowl-Mor was a holder of the check and that Bowl-Mor transferred the check to the defendant, therefore, the defendant is a holder. The official comment of 3-201 states that, “one who is not the holder must first establish the transaction by which he acquired the instrument before enforcing it.” The court found that the defendant met this burden. Additionally, article 4 provides that a lack of an indorsement shall not affect the bank’s status as agent for collections, and Section: 4-205(1) authorizes the collecting bank to supply the missing indorsements as a mat
ter of course. The court followed this and did not want to penalize a bank which “accepted unendorsed checks for deposit in reliance on the Code, at least when, as here, the customer himself clearly satisfies the definition of ‘holder’”
The plaintiff’s second argument was that the defendant gave value only to the extent of $5,024.85 to the extent of the overdraft charge, but the defendant could not be a holder in due course with respect to the rest of the money. The court agreed with the lower court’s decision that Bowl-Mor had entered a security agreement which gave the defendant a floating lien on Bowl-Mor’s chattel paper. The check was part of the proceeds of the Bowl-Mor contract, and the court concluded that the defendant had given value for the full $15,306.00 at the time it received the deposit.
Discussion. “The bank secured its loan to Bowl-Mor by a security interest in Bowl-Mor’s installment sale contracts (defined as chattel paper by Section: 9-105(1)(b)). Its security interest applied not only to the chattel paper but also to any proceeds of the chattel paper. Section:9-306. Bowling Green’s check to Bowl-Mor, since it was in payment of the first installment of its sales contract, was proceeds. Under Section: 9-306 and Section: 9-203 the bank automatically obtained a security interest in this check as soon as Bowl-Mor obtained “rights” in the check, which in this case was when Bowl-Mor received the che.