In Cincinnati Central Credit Union vs. Yuvonne Goss et al., this Ohio court noted that this case presents a common occurrence in the world of banking and one which the courts can resolve equitably.

Here, one Terrence Fitzgerald made payable his check for $4,000 to New Look Auto Trim and Upholstery and delivered it to Yuvonne Goss and Benii Arrazza [the Defendants].

Thereafter, Defendants appeared at Cincinnati Central Credit Union, endorsed the check by signing each of their names on to the back of the check, and thus delivered it to the credit union for payment. The Defendants’ endorsements were without any restrictions whatsoever.

The credit union deposited the check’s proceeds into Defendant Goss’s checking account; Goss subsequently withdrew all the funds from her account and the check was later dishonored and returned for insufficient funds by Fitzgerald’s bank.

The credit union demanded that Goss reimburse it for the $4,000 check, and when she refused to do so, the credit union filed this action against Goss and Arrazza.

The court ruled, as a matter of law, that every endorser engages that upon dishonor and any necessary notice of dishonor and protest he will pay the instrument to the holder.

Unless the endorsement is qualified by such words as “without recourse”, the endorser is liable whether or not he or she received any value for the endorsement.

The court noted that as long as the credit union is a holder in due course of the check, the endorsers are jointly and severally liable on the check, and they may not raise any claims and/or defenses.

[A]  holder in due course is one who holds a negotiable instrument taken for value in good faith and without notice of any claim to it or defense against it on the part of any person.

Here, the credit union is the holder of a negotiable instrument, the endorsed check, taken for value, as Goss withdrew the funds before the check was dishonored.

The Defendants, however, claimed that the credit union did not act in good faith, since the check was made payable to “New Look Auto Trim and Upholstery” and thus, should have only been deposited to such an account and not into the member’s individual account.

The court, however, ruled that if the Defendants desired the check be deposited into an account other than a personal account, that the Defendants had an affirmative duty to add that restriction to their endorsement; utilization of a restrictive endorsement is an affirmative duty, and the law will not permit an endorser who commits negligence in the endorsement to turn and assert subsequent negligence of another as a defense to the endorser’s contract.

In conclusion, the court found that the credit union did act in good faith as a holder in due course and was entitled to collect the $4,000 from Goss and Arrazza, jointly and severally, less any funds the credit union held from either Defendant to offset the $4,000 debt. The court also awarded costs to the credit union for collection of this debt.

EDITOR’S COMMENT

The ruling above is a result of application of applicable Ohio State law, however, most States have enacted similar statutes relative to this transaction. Please consult with your own credit union attorney as to whether this decision will apply under similar facts in your State.

Or, if a Regulation CC hold had been placed on this $4,000 deposit until the check cleared the makers account, the credit union may have avoided this action entirely, since the member would not have been permitted to withdraw the funds until the check properly cleared the issuer’s bank.

Author: Charles R. Harroun, Attorney at Law