Flores v. Woodspecialties, Inc.

This is an action brought by the plaintiff to recover the amount of a check drawn by the defendant in which the El Paso National Bank was named as payee, and of which plaintiff claimed to be a holder in due course.

Defendant appeals from a judgment in favor of the plaintiff.

The parties to the transactions involved here, other than the plaintiff and the defendant, are the El Paso National Bank (hereinafter called “The Bank”) and a Mexican corporation Exportadora Ponderosa, S.A. (hereinafter called ‘ ‘ Exportadora ”).

Responsive to issues tendered by the third amended complaint and the answer thereto the trial court found: that the defendant executed, delivered and negotiated the check in question to the Bank; that the plaintiff was the holder in due course of said check; that said cheek was complete and regular on its face and that plaintiff and the Bank became the holders of said cheek before it was overdue, and without notice that it had been dishonored; that plaintiff and the Bank took the check in good faith and for value; that at the time that the check was negotiated to the Bank on- August 14th and on that day negotiated to the plaintiff neither the Bank nor plaintiff had knowledge of any infirmity in the check or defect in the title of the person who negotiated it; that on or about July 29, 1953, Exportadora executed its promissory note to plaintiff in the sum of $4,365.60; that plaintiff pledged said note to the Bank as collateral security for his note to the Bank in the sum of $3,547.05; that on August 14, 1953, the Bank negotiated said check to plaintiff in consideration of the plaintiff’s paying his indebtedness to the Bank, as evidenced by his said promissory note, and that the Bank then surrendered to plaintiff the note of Exporta

The evidence fully supports the findings of the trial court. The following facts were established by substantial evidence Exportadora was engaged in the business of manufacturing milled lumber, including moldings. Its mill was situated in Mexico. Prior to June of 1953, plaintiff has assisted in marketing its products in the United States by making advances to it on account of sales made. Defendant was engaged in the business of selling lumber, including milled products, at wholesale and retail. In June of 1953, it acquired an interest in Exportadora and loaned Exportadora certain monies. Thereafter, but in the same month, the presi

Thereafter, and prior to July 28, 1953, six shipments were made by Exportadora to defendant and each transaction was handled in the following manner. When the shipment was loaded on the truck and crossed the border, plaintiff would give Exportadora his cheek for the net amount of the invoice, and would receive Exportadora’s note for the amount of the invoice. He would then borrow from the Bank such amount as he needed over and above his own funds, give his note to the Bank for that amount, and pledge to the Bank Exportadora’s note. Exportadora would, at the same time, assign its account, represented by the invoice for that shipment, to the Bank and would write the Bank a letter directing it to accept payment from defendant and upon receiving payment, to credit the amount thereof to the account of plaintiff. Upon the receipt of defendant’s check the Bank would deposit it to plaintiff’s account. Plaintiff would then draw a cheek to the Bank for the amount of the note he had given to the Bank upon that transaction. The Bank would redeliver to him his note and Exportadora’s note and he would mark that note paid and redeliver it to Exportadora. Neither the Bank nor plaintiff were ever advised that Ex-portadora was indebted to defendant or that defendant had any claims against Exportadora. Plaintiff did know that defendant had some interest in Exportadora.

On July 28th, the seventh shipment as to which Invoice Number 7 in the amount of $5,457.01 was issued, was made and the plaintiff gave to Exportadora his check-in the sum

“Deposited to the credit of Henry Flores Endorsement guaranteed El Paso National Bank

/s/ J. Moreno V. P. Cashier”

It deposited the same to the credit of plaintiff and issued to him a duplicate deposit slip in the amount of $4,530 which stated that all deposits not payable at the bank were received for collection at the depositor’s risk. At the same time plaintiff drew his check on the Bank and in favor of the Bank for the amount of his note given in connection with the loan made on July 28th, in the sum of $3,547.05. The Bank then delivered to plaintiff his note marked paid and Ex-portadora’s note which had been pledged with it, and plaintiff in turn marked that note paid and delivered it to Exportadora. On August 17th, defendant stopped payment upon the cheek and gave notice to the Bank that it had done so.

Appellant makes three points on this appeal. Its first point is that the Bank was only the assignee of the check for collection. The trial court found against appellant upon this issue and not only does the evidence fully support the finding of the trial court, but there is no evidence to the contrary. The evidence is undisputed that the Bank held the account, evidenced by Invoice Number 7 as security for the indebtedness of plaintiff to it up to the amount of that indebtedness, and as trustee for plaintiff for the excess over and above plaintiff’s indebtedness. It therefore took the check, not for collection, but in the same capacity in which it held the account.

Appellant’s second point is that there was no consideration for the issuance of the check by defendant to the Bank. Here again, the trial court found against appellant as to this point, and the evidence, without conflict, sustains the finding of the trial court. The consideration to the defendant for the issuance of the cheek was the receipt by it of the goods covered by the invoice. Any consideration that will support a simple contract is sufficient to support a negotiable instrument (Civ. Code,' §3106), and the consideration need not move from the promisee. (First Nat. Bank v. Pomona Tile Mfg. Co., 82 Cal.App.2d 592 [ 186 P.2d 693 ].)

Appellant’s third point is stated by it as follows: “C. The real issue then is whether the Plaintiff Flores is a holder in due course of the cheek as the trial court found. If he is, he of course took the cheek free of the defenses of the Defendant and the set-off and counterclaim of the Defendant against Exportadora Ponderosa, S. A. If the Plaintiff is not a holder in due course, then he stands in the shoes of the El Paso National Bank and takes subject to the defenses of the Defendant and subject to. the set-off and counterclaim.” (Emphasis ours.) From this statement by defendant of his contention, it is evident that plaintiff is entitled to recover, if the Bank was a holder in due course and therefore free of any defenses that defendant might have as against Exportadora.

“A holder in due course is a holder who has taken the instrument under the following conditions:

“(1) That it is complete and regular upon its face;

“(2) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact;

“(3) That he took it in good faith and for value;

“ (4) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.”

Applying the evidence here to this definition it is evident that the Bank was a holder in due course if the fact that it is the payee rather than the endorsee of the cheek does not prevent it from being one. The check in question here was complete and regular upon its face. At the time the Bank received it and acted upon it the check was not. overdue and it had not then been dishonored. The Bank, as we have heretofore shown, took the check for value and took it in good faith for the purposes for which it was issued. There was no infirmity in the instrument or defect in the title of the person (defendant) transferring it and the Bank had no notice of any offsets or defenses to the account as to which the check was tendered in payment. Therefore, if a payee of a check who is not an immediate party to the obligation for which the check is tendered in payment can be a holder in due course, the Bank was such a holder.

Prior to the adoption of the Uniform Negotiable Instruments Act in this state a payee of a negotiable instrument who took in good faith without notice was considered a holder in due course. Hockett v. Pacific States Auxiliary Corp., 218 Cal. 382 [ 23 P.2d 512 ] ; Johnson v. Ulrey, 201 Cal. 456 [ 257 P. 505 ] ; Pasadena Nat. Bank v. Shorten, 96 Cal.App. 451 [ 274 P. 358 ].) Since the adoption of that act the appellate courts of this state have not passed upon the question and the courts of other states which have adopted the Uniform Act are divided upon it, a majority holding that a payee may be a holder in due course. (See Brannan's Negotiable Instruments Law, 7th ed., pp. 591-592, 675-691; Anno. 15 A.L.R. 437 ; 21 A.L.R. 1365 ; 26 A.L.R. 769 ; 32 A.L.R. 289 ; 68 A.L.R. 962 ; 97 A.L.R. 1215 ; 142 A.L.R. 489 ; 169 A.L.R. 1455 ; see, also, Ogden on Negotiable Instruments, 5th ed., pp. 282-285; Aigler, Payees as Holders in Rue Course,

It would serve no useful purpose to review here the divergent opinions of the courts of other states. They are fully reviewed in the annotations and texts we have cited above. Our study of the act has led us to the conclusion that, under a proper interpretation of it, a payee may be a holder in due course, and that the Bank in the case here was such a holder.

Section 3266 (N.I.L. §191), of the Civil Code, defines a holder as the payee or endorsee of a bill or note who is in possession of it. (A cheek is a bill, Civ. Code, § 3265a.) A payee is therefore a holder within the meaning of section 3133. He is, if he takes in good faith, for value and without notice, a holder in due course, if the transfer to him by the maker constitutes negotiation. Negotiation is accomplished when an instrument is transferred by one person to another in such manner as to constitute the transferee the holder thereof. (Civ. Code, §3111; N.I.L. §30.)

Section 3111 reads as follows: “An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer it is negotiated by delivery; if payable to order it is negotiated by the indorsement of the holder completed by delivery.”

When the first sentence of this section is read with Civil Code, section 3266, it is clear that the delivery of a negotiable check by the maker to the payee makes the payee a holder of that check. The second sentence would seem at first reading to make it necessary, in order that there may be a negotiation of an instrument, that the instrument first come into the hands of a holder and then be delivered by him (with proper endorsement if not payable to bearer) to another. This sentence, however, is not definitive of the only manners in which an instrument may be negotiated; it is only illustrative of the manners in which an instrument in the hands of a holder may be negotiated. As stated by the Supreme Court of Massachusetts in speaking of this sentence, it “was not intended to include all the ways in which an instrument might be negotiated, nor to restrict the comprehensive terms of the preceding sentence. Plainly under these two sections [sections 30 and 191 of the Uniform Law] a negotiable instrument payable to a named payee in negotiated when the physical possession of it is handed for value

There seems to be no sound reason to hold that the Bank here should not be held to be a holder in due course. It is as much an innocent purchaser for value as it would have been had defendant delivered the check to Exportadora and it had immediately endorsed and delivered the cheek to the Bank. The Bank, as we have shown, meets all of the requirements of section 3133 as to a holder in due course as fully as it would have met those requirements had the check passed through the hands of the party to whom the defendant was directly indebted instead of having been made payable directly to the Bank at the direction of that party. To hold that an innocent payee is not a holder in due course would impede commercial transactions such as those involved here. On the other hand, to hold that such a payee is a holder in due course facilitates these transactions by giving security to them. Inasmuch as the payee, in order to be a holder in due course, must meet all of the requirements that an endorsee would, no undue burden is placed upon the maker of the check. If a payee is the immediate creditor of the maker, then he cannot be a holder in due course for he is on notice of any defenses or offsets that the maker might have against him. Thus, if the check here had been made payable to Exportadora and had been in its hands at the time payment was stopped, Exportadora could not assert that it was a holder in due course, for it would have been on notice of defendant’s offsets.

What we have heretofore said makes it unnecessary to determine the questions raised by appellant as to whether plaintiff gave a consideration for the transfer of the check to him and thereby became a holder in due course, or as to whether the endorsement placed on the check by the Bank was a restrictive endorsement. When the check was deposited to his account, plaintiff became a holder of the check through transfer from the Bank, and as the Bank was a holder in due course, plaintiff had the same rights as it did. (Civ. Code, § 3139.) Further than this, the trial court found, and the evidence upholds its finding, that plaintiff was the assignee of all of the rights of the Bank.

The judgment is affirmed.

Doran, Acting P. J., and Fourt, J., concurred.

Appellants’ petition for a hearing by the Supreme Court was denied March 21, 1956.