Case 27-5

Facts
• Elden Guerette purchased a life insurance policy from Steven Hall, an agent of the Sun Life Assurance Company.
• Guerrette made his three adult children his beneficiaries
• When Guerette died, Sun Life issued each child a check for $40,759.35
• These checks were drawn on Sun Life’s account at Chase Manhattan Bank and Hall was supposed to deliver the checks to the beneficiaries.
• Instead, Hall fraudulently convinced the beneficiaries to endorse the checks and sin them over to him as an investment in his corporation.
• Paul Richard, Hall’s associate, deposited the checks into his account at the Maine Family Federal Credit Union which permitted Richard to immediately access those funds.
• The next day, the Guerrette beneficiaries regretted their decision and asked Sun Life to stop payment on the checks. Sun Life ordered Chase Manhattan to stop payment; thus, when the Credit Union presented the beneficiary checks for payment, Chase refused to pay.
• At this point, Richard had already used $42,000.
• The Credit Union filed suit against Sun Life, the Guerrettes, and Richard.
• The Credit Union argued that it was a holder in due course and this not subject to the defenses raised by Sun Life and the Guerrettes. However, the trial court held that the credit union did not act in good faith and was thus not a holder in due course. The Credit Union appealed.
Issue
• Did the Credit Union act in good faith in allowing Richard to cash the checks from the Guerrette’s?
Rationale
• UCC definition of “good faith” means honesty in fact and the observance of reasonable commercial standards of fair dealing.
• This is both a subjective and objective definition of good faith
• The Credit Union had no knowledge that Richard obtained the Sun Life checks by fraud nor were they aware that a stop payment order had been placed on the Sun Life checks.
o Therefore the Credit Union acted with honesty in fact. (subjective)
• The objective part is “reasonable commercial standards of fair dealing”
o The test is that the pure heart of the holder must now be accompanied by reasoning that assures conduct comporting with reasonable commercial standards of fair dealing.
o The drafters limited the requirement of fair dealing to conduct that is reasonable in the commercial context of the transaction at issue.
Conclusion
• When a check in an amount greater than $5,000 is deposited, or when a check is payable by a non-local bank, a credit union is permitted to withhold provisional credit for longer periods of time than it is allowed in other circumstances. Therefore, the size of the check and the location of the payor bank are under the objective standard of good faith.
• The appellate court affirmed the trial court’s decision that the Credit Union did not act in “good faith.”