Marine Midland Bank v. Price, Miller, Evans & Flowers, 57 N.Y.2d 220 (1982)
A bank that stamps a check “credited to the account of the payee” without verifying if the payee has an account, and then wire transfers the funds, does not give value consistent with the indorsement and thus cannot claim holder in due course status when payment is stopped.
Summary
Marine Midland Bank cashed checks made out to Leo Proctor Construction without Proctor’s endorsement, stamping them “credited to the account of the payee” and wire transferring the funds. Proctor had no account at Marine Midland. When the drawer, Price, Miller, Evans & Flowers (a law firm), stopped payment due to Proctor’s default, Marine Midland sued, claiming holder in due course status. The Court of Appeals held that while the bank could supply the missing indorsement, it failed to give value consistent with the indorsement because it wire-transferred funds instead of crediting an account, and thus could not be a holder in due course.
Facts
The defendant, a law firm, made progress payments to Leo Proctor Construction via checks totaling $36,906.54. The checks were drawn on a trust account at First National Bank of Jamestown, payable to Proctor. A Proctor employee presented the checks to Marine Midland Bank, requesting a wire transfer to Proctor’s account in Oklahoma. The checks lacked Proctor’s endorsement. Marine Midland stamped the checks “credited to the account of the payee herein named/Marine Midland Chautauqua National Bank” and wire transferred the funds. Proctor did not have an account with Marine Midland. The law firm, upon learning of Proctor’s default, stopped payment on the checks.
Procedural History
Marine Midland sued the law firm to recover on the stopped checks. The case was submitted directly to the Appellate Division on an agreed statement of facts. The Appellate Division ruled in favor of Marine Midland, holding that the bank had properly supplied the missing indorsement and was a holder in due course. The law firm appealed to the New York Court of Appeals.
Issue(s)
Whether a depositary bank that cashes a check without endorsement, stamps it “credited to the account of the payee,” and wire transfers the funds, can claim holder in due course status under the Uniform Commercial Code when the payee has no account with the bank and payment on the check is stopped.
Holding
No, because the bank did not pay or apply value given for the instrument consistently with the indorsement. The bank’s actions were inconsistent with the restrictive indorsement it supplied, preventing it from achieving holder in due course status.
Court’s Reasoning
To attain holder in due course status, a party must be a holder of a negotiable instrument, taking it for value, in good faith, and without notice of defenses. Under UCC § 4-205(1), a depositary bank may supply a missing indorsement of its customer. While Proctor was arguably a “customer” because Marine Midland agreed to collect the checks, the bank failed to satisfy all requirements for holder in due course status. The stamp served as an effective indorsement under UCC § 4-205(1), but the bank did not give value consistent with the indorsement. UCC § 3-206(3) requires a transferee under a restrictive indorsement (such as “for deposit”) to pay or apply value consistently with the indorsement. Because the bank wire-transferred the funds rather than crediting an account (which didn’t exist), it failed to give value as required. The court rejected the bank’s argument that no indorsement was required when the check is presented by the payee, stating that such an exception cannot be reconciled with the UCC’s requirement for predictable results. The court quoted UCC § 4-205 comment 1 that the purpose of the section is “to speed up collections by eliminating any necessity to return to a non-bank depositor any items he may have failed to indorse”. The court further observed: “It hardly seems unfair to penalize the bank when it fails to perform such a simple act and then seeks the unusual shelter of the holder in-due-course status”.