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Peoria S & L Ass'n v. Jefferson Tr. & Sav. Bk.

OPINION FILED SEPTEMBER 15, 1980.

PEORIA SAVINGS AND LOAN ASSOCIATION, APPELLEE,

v.

JEFFERSON TRUST AND SAVINGS BANK OF PEORIA, APPELLANT.



Appeal from the Appellate Court for the Third District; heard in that court on appeal from the Circuit Court of Peoria County, the Hon. Peter J. Paolucci, Judge, presiding.

MR. JUSTICE RYAN DELIVERED THE OPINION OF THE COURT:

The defendant, Jefferson Trust and Savings Bank of Peoria (Jefferson), appeals a judgment entered in the circuit court of Peoria County for the plaintiff, Peoria Savings and Loan Association (Peoria Savings). The appellate court affirmed the judgment and we granted leave to appeal. Broadly stated, the issue is whether Jefferson became a holder in due course of a $70,000 check drawn by Peoria Savings under section 3-303(b) of the Uniform Commercial Code (Ill. Rev. Stat. 1975, ch. 26, par. 3-303(b)) (taking an instrument in payment of an antecedent claim).

On January 30, 1975, Owen D. Cassidy, a Peoria businessman, maintained two accounts with Jefferson. One was a personal account in the name of "Owen D. Cassidy"; the other was an account in the name of "Cassidy Company."

On January 30, 1975, Cassidy deposited a check for $70,000 in his personal account with Jefferson and was given provisional credit for that amount. The check, designating Cassidy as payee, was drawn on a Cassidy Company account at the Harris Trust and Savings Bank in Chicago (the Harris check). Between January 30, 1975, and February 5, 1975, $61,039.30 was withdrawn against the provisional credit given to the Cassidy account for the Harris check, leaving in his account at Jefferson on February 5, 1975, only $8,960.78.

On the morning of February 5, 1975, a Jefferson return teller received a telephone call from the Continental Illinois Bank and Trust Company of Chicago, which was Jefferson's intermediary bank in that city, advising that the Harris check for $70,000 had been dishonored for insufficient funds and was being returned. The Jefferson account at the Continental Bank was charged $70,000 for the dishonor. The teller informed Ned Middendorf, a vice-president of Jefferson, of the dishonor. At approximately 3 p.m. Middendorf informed Cassidy by telephone of the dishonor and advised him that the overdraft would have to be covered that day. Cassidy replied that he would take care of it.

Approximately one-half hour after receiving the demand from Jefferson, Cassidy arrived at Peoria Savings. He informed Barbara Horn, the savings manager, that he desired to open a $10,000 savings account with Peoria Savings. She took Cassidy to meet with the president of Peoria Savings to discuss interest rates. Within a few minutes Cassidy returned to Mrs. Horn and gave her an $80,000 check payable to Cassidy drawn on a Cassidy Company account at the Northern Trust Company of Chicago (the Northern Trust check). Without verifying the check, Mrs. Horn used $10,000 of the check to open a savings account in Cassidy's name, and gave him a check for $70,000 to cover the difference (the Peoria Savings check). This check was payable to Cassidy and was drawn upon a checking account Peoria Savings maintained at Jefferson. This check was given to Cassidy at approximately 4 p.m.

The buildings housing Peoria Savings and Jefferson were adjacent to each other. At the trial, Middendorf testified he returned to his desk at approximately 4 p.m. after a short absence and discovered the Peoria Saving's check, which had been endorsed by Cassidy, laying on his desk. It was accompanied by a deposit ticket for Cassidy's personal account, the same account in which the dishonored $70,000 Harris check had been deposited.

Middendorf delivered the $70,000 check and deposit ticket to a teller, but before the teller processed the check, he retrieved both documents. Next, Middendorf called Jim Berry, a vice-president at Peoria Savings, and inquired as to the circumstances of the $70,000 Peoria Savings check and if Berry was familiar with transactions involving Cassidy and large checks. Middendorf testified that during prior business relationships Cassidy had mentioned transferring substantial deposits from Chicago banks to Jefferson and that the Peoria Savings check caused him to wonder if the large funds promised to Jefferson had been deposited with Peoria Savings. Berry stated that he knew nothing about the matter, but would inquire and call Middendorf back. After his conversation with Middendorf, Berry talked to Mrs. Horn and learned of the transaction involving Peoria Savings and Cassidy. He then requested that she call the Northern Trust to verify the Cassidy Company account. Mrs. Horn telephoned Northern Trust and was advised that the Cassidy Company account contained sufficient funds to cover an $80,000 check. Horn relayed this information to Berry, and they discussed the matter with Peoria Savings' president, Mr. McFarland. He directed Mrs. Horn to call Northern Trust and request that they place a hold on the funds necessary to pay the $80,000 check. When Mrs. Horn made her request to the Northern Trust she was informed that there were sufficient funds to cover an $8,000 check but not an $80,000 check and that the Northern Trust employee had misunderstood her on the first call. At trial it was established that the balance in the Cassidy Company account at Northern Trust was $8,700.80 on February 5, 1975.

Mrs. Horn related this information to Berry and McFarland. At approximately 4:30 or 4:40 p.m., Berry walked over to the Jefferson and informed Middendorf that Peoria Savings had been advised by Northern Trust that there were insufficient funds to cover the $80,000 drawn on Northern Trust. Middendorf was advised that the $80,000 Northern check was the consideration for Peoria Savings issuing its $70,000 check to Cassidy. There is a dispute as to whether Berry placed a verbal stop order on the Peoria Savings check at this time; however, Middendorf testified he told Berry a written stop order would be prepared and ready for Berry's signature the next morning. After Berry left Jefferson, Middendorf placed the $70,000 Peoria Savings check and the accompanying deposit ticket in the bank vault.

The next morning, February 6, Berry arrived at Middendorf's office about 10 a.m. and signed the stop order that Middendorf had prepared. Middendorf still had the Peoria Savings check and the deposit slip in his possession; they were unprocessed. Later that day he turned them over to George Kirkpatrick, a senior vice-president at Jefferson, who retained possession of the documents. At approximately 4 p.m. on February 7, Kirkpatrick took the Peoria Savings check and deposit slip to the Jefferson proof department, the documents were processed, and Cassidy's account was credited $70,000. Kirkpatrick testified that he did not present the written stop-payment order to the proof department with the check and deposit ticket because Jefferson considered it to be a wrongful order. Consequently, on February 10, the Peoria Savings account at Jefferson was debited $70,000 and Kirkpatrick testified the debit was a setoff for what was considered to be a wrongful stop-payment order. Peoria Savings was notified of the debit on February 11.

Subsequently, as a result of various transactions involving Cassidy's personal and business accounts with Jefferson, the business account was closed, and on March 19, 1975, $13,133.08, the balance remaining in the personal account, was credited to the Peoria Savings account.

On February 4, 1976, Peoria Savings brought this action against Jefferson to recover the amount of $56,866.92, the difference between the $70,000 check and the $13,133.08 credit given to Peoria Savings by Jefferson. On November 3, 1978, after a bench trial, the trial court entered judgment for Peoria Savings for $56,866.92. Jefferson appealed, and the appellate court affirmed the judgment of the trial court. 76 Ill. App.3d 915.

Jefferson argues that it became a holder in due course as soon as Cassidy placed the Peoria Savings check on Middendorf's desk at 4 p.m. on February 5, 1975, and that, as a result, Jefferson took the check free from all defenses except those real defenses enumerated in section 3-305(2) of the ...


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