Maine Family Federal Credit Union v. Sun Life Assurance Co

Brief Fact Summary.

Three life insurance beneficiaries were fraudulently induced into indorsing their checks to a third party. After the third party deposited the checks, a stop payment was placed on the checks and the deposited checks were dishonored. The action is the result of the bank’s attempt to receive payment for the checks.

Synopsis of Rule of Law.

A holder will not be a holder in due course if there is a failure to exercise good faith by acting with honesty in fact and commercial fair dealing.

Facts.

Mr. Elden Guerrette purchased a life insurance policy from the appellee, Sun Life Assurance Co., naming his three children (the “appellees”) as beneficiaries. Upon Mr. Guerrette’s death, Steven Hall, an agent of Sun Life, was given three checks drawn on a Sun Life banking account to distribute to the appellees. Hall and an associate, Paul Richard, then fraudulently induced the appellees to make a blank indorsement of the checks to Hall and Richard so the money could e invested in a corporation formed by Hall and Richard. The checks were indorsed and Richard deposited the checks in his account at the appellant bank, Maine Family Federal Credit Union (the “appellant”). The appellant immediately made the funds available to Richard.
The appellees learned of the scheme and informed Sun Life to stop payment on the checks. When the checks were presented to Sun Life’s bank, the bank refused to pay the checks and returned the checks to the appellant. By the time the appellant received the returned checks, Richard had withdrawn over $42,000.00 from his account and the appellant was only able to recover $80,000.00.
The appellant filed a complaint against Sun Life but did not seek any recovery from the three Guerrette children. Sun Life filed a third party complaint against Daniel Guerrette and Paul Richard, whose signatures appeared on the back of one of the checks. The appellant then filed a cross-claim against third-party defendants, Guerrette and Richard. Daniel Guerrette then filed cross claims against the appellant and Sun Life. Sun Life eventually filed third-party complaints against the remaining two beneficiaries, Joel and Claire Guerrette.
The jury found that the Credit Union had not acted in good faith and therefore was not a holder in due course. Therefore, the Superior Court entered judgment in favor of Sun Life, Daniel, Joel, and Claire, and against the Credit Union.

Issue.

Was the lower court correct in its finding that appellant was not a holder in due course on a negotiable instrument because it failed to objectively exercise good faith?

Held.

Yes. In making its decision, the court turned to the definition of “good faith” contained in Article 3-A of the Maine U.C.C, which required holder to prove that it acted with “honesty in fact,” and the definition provides that “‘good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing.” The court first evaluated “honesty in fact” and determined that the appellants “had no knowledge that Richard obtained the Sun Life checks by fraud. Nor was the Credit Union aware that a stop payment order had been placed on the Sun Life checks. The Credit Union expeditiously gave value on the checks, having no knowledge that they would be dishonored. In essence the Credit Union acted as banks have, for years, been allowed to act without risk to holder in due course status. The Credit Union acted with honesty in fact.” In regards to the second element of good faith, “reasonable commercial standards of fair dealing,” the court found that it must fi
rst determine, “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.” If the answer to each question was “yes,” the holder will be determined to have acted in good faith. “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.” The court found that because the checks totaled over $120,000.00 and they were drawn from and out-of-state bank, a reasonable commercial standard of fair dealing would require the placing of a hold on the uncollected funds for a reasonable period of time in order to ensure their validity. Because the appellate immediately honored the checks whe
n deposited, the appellant did not act according to commercial standards that were reasonably structured to result in fair dealing.

Upon the finding that the appellant is not a holder in due course, the appellant was subject to any defense of the appellees or Sun Life “that would be available if the person entitled to enforce the instrument were enforcing a right to payment under a simple contract,” or any “claim of a property or possessory right in the instrument or its proceeds.” Fraud is an affirmative defense to a contract. To prevail on their fraud defense, the appellees were required to prove, by clear and convincing evidence, that a fraudulent or material misrepresentation induced them to transfer the proceeds of their father’s life insurance policy, in the form of the Sun Life checks, to Steven Hall and Paul Richard. In addition, they were required to prove they were justified in relying on the fraudulent misrepresentation. The parties’ stipulation that Hall and Richard fraudulently induced appellees invest the checks in their company is sufficient to satisfy the appellees’ burden on this issue. The appe
llees are not liable to the Credit Union for their indorsement of the Sun Life checks.

Discussion.

The state of Maine adopted the Uniform Commercial Code. “Pursuant to Article 4 of the Maine U.C.C., the Credit Union, as a depositary bank, is a “holder” of the instruments, making it a “person entitled to enforce” the instrument under Article 3-A. Upon producing an instrument containing the valid signature of a party liable on the instrument, a person entitled to enforce the instrument is entitled to payment, unless the party liable proves a defense or claim in recoupment or a possessory claim to the instrument itself.”