Chemical Bank of Rochester v. Haskell, 51 N.Y.2d 85 (1980)
To qualify as a holder in due course under UCC § 3-302, a party must take the instrument for value, in good faith, and without notice of any defenses or claims against it, with good faith defined subjectively as ‘honesty in fact’.
Summary
Chemical Bank sought to recover on promissory notes executed by limited partners (defendants) of Quarry Square Associates. The notes were transferred to Chemical Bank by Stanndco, the general partner, at a discount. When Stanndco declared bankruptcy, Chemical Bank attempted to collect on the notes, but the makers raised defenses including fraud and breach of fiduciary duty. The trial court held Chemical Bank was a holder in due course and thus not subject to those defenses. The Appellate Division reversed, finding Chemical Bank did not act in good faith. The New York Court of Appeals reversed, holding that Chemical Bank met the subjective ‘good faith’ standard and had no actual knowledge of any defenses, entitling it to holder in due course status.
Facts
Defendants were limited partners in Quarry Square Associates, a real estate development venture. They contributed capital by executing promissory notes. Stanndco Developer’s, Inc., the general partner of Quarry, sought to borrow money using these notes as collateral. Chemical Bank’s predecessor, State Bank of Hilton, declined a loan but offered to purchase the notes outright at a discount. Stanndco, through its agent Quigley, endorsed the notes to itself as an individual, then to State Bank. The bank issued a check to Stanndco, not specifically as a general partner of Quarry. The makers were notified of the transfer and initially made payments. After Stanndco’s bankruptcy, Chemical (successor to State Bank) sued to collect on the notes.
Procedural History
Chemical Bank sued Haskell to collect on his notes. Chayefsky, Sherwood, and Giliotti sued Chemical, seeking to prevent collection. The bank counterclaimed. The three cases were consolidated due to similar issues. The trial court ruled for Chemical Bank, finding it was a holder in due course. The Appellate Division reversed, concluding Chemical Bank did not act in good faith. Chemical Bank appealed to the New York Court of Appeals.
Issue(s)
Whether Chemical Bank took the notes (1) in good faith and (2) without notice of any claims or defenses, such that it qualified as a holder in due course and was therefore not subject to the makers’ defenses against Stanndco.
Holding
1. Yes, because the UCC defines “good faith” subjectively as “honesty in fact,” and Chemical Bank had no actual knowledge of any facts that would prevent a commercially honest individual from taking the notes.
2. Yes, because under UCC § 3-304(7), the purchaser must have actual knowledge of the claim or defense or knowledge of facts indicating bad faith, and Chemical Bank possessed no such knowledge.
Court’s Reasoning
The court emphasized that UCC § 3-302(1) requires a holder in due course to take an instrument for value, in good faith, and without notice of defenses. The court focused on the “good faith” and “notice” requirements. It noted that “good faith” under UCC § 1-201(19) means