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Me. Fam. F.C.U. v. Sun Life, part 2.

2. Reasonable Commercial Standards of Fair Dealing
	[¶24]  We turn then to the objective prong of the good faith analysis. 
The addition of the language requiring the holder to prove conduct meeting
"reasonable commercial standards of fair dealing" signals a significant
change in the definition of a holder in due course.{19}  While there has been
little time for the development of a body of law interpreting this new
objective requirement, there can be no mistaking the fact that a holder may
no longer act with a pure heart and an empty head and still obtain holder in
due course status.{20}  The pure heart of the holder must now be accompanied
by reasoning that assures conduct comporting with reasonable commercial
standards of fair dealing. 
	[¶25]  The addition of the objective element represents not so much a
new concept in the doctrinal development of holder in due course status,
but rather a return, in part, to an earlier approach to the doctrine.  See 
James J. White & Robert S. Summers, Uniform Commercial Code § 14-6, at 628-
29 (3d ed. 1988) (discussing the objective test of good faith in England, first
applied by the King's Bench in Gill v. Cubitt, 3 B & C 466, 107 Eng.Rep. 806
(K.B. 1824)).  The concept of an objective component of good faith has been
part of the discussion regarding the holder in due course doctrine since the
first enactment of the U.C.C.  See id. (noting that "[t]he good faith
requirement has been the source of a continuing and ancient dispute").  The
early drafters debated the need and wisdom of including such an objective
component and ultimately determined not to include it in the definition of
good faith because of its potential for freezing commercial practices.  See
Sinclair, supra, at 653-54 (noting, in particular, the objection by the banking
industry to the addition of an objective good faith component).  The "new"
element of good faith requiring the holder to act according to reasonable
commercial standards of fair dealing is actually a more narrow version of the
"reasonable person" standard considered and rejected by the drafters of the
1962 Code.
	[¶26]  The new objective standard, however, is not a model of drafting
clarity.  Although use of the word "reasonable" in the objective portion of
the good faith test may evoke concepts of negligence, the drafters
attempted to distinguish the concept of "fair" dealing from concepts of
"careful" dealing:
Although fair dealing is a broad term that must be defined in
context, it is clear that it is concerned with the fairness of
conduct rather than the care with which an act is performed. 
Failure to exercise ordinary care in conducting a transaction is
an entirely different concept than failure to deal fairly in
conducting the transaction.

U.C.C. § 3-103 cmt. 4 (1991).  
	[¶27]  Unfortunately, the ease with which the distinction between
"fair dealing" and "careful dealing" was set forth in the comments to the
U.C.C. revisions belies the difficulty in applying these concepts to the facts of
any particular case, or in conveying them to a jury.  The difficulty is
exacerbated by the lack of definition of the term "fair dealing" in the
U.C.C.{21}  The most obvious question arising from the use of the term "fair"
is:  fairness to whom?  Transactions involving negotiable instruments have
traditionally required the detailed level of control and definition of roles set
out in the U.C.C. precisely because there are so many parties who may be
involved in a single transaction.  If a holder is required to act "fairly,"
regarding all parties, it must engage in an almost impossible balancing of
rights and interests.  Accordingly, the drafters limited the requirement of
fair dealing to conduct that is reasonable in the commercial context of the
transaction at issue.  In other words, the holder must act in a way that is fair
according to commercial standards that are themselves reasonable.
	[¶28]  The factfinder must therefore determine, first, whether the
conduct of the holder comported with industry or "commercial" standards
applicable to the transaction and, second, whether those standards were
reasonable standards intended to result in fair dealing.   Each of those
determinations must be made in the context of the specific transaction at
hand.  If the factfinder's conclusion on each point is "yes," the holder will
be determined to have acted in good faith even if, in the individual
transaction at issue, the result appears unreasonable.  Thus a holder may be
accorded holder in due course status where it acts pursuant to those
reasonable commercial standards of fair dealing--even if it is negligent--but
may lose that status, even where it complies with commercial standards, if
those standards are not reasonably related to achieving fair dealing. 
	[¶29]  Therefore the jury's task here was to decide whether the Credit
Union observed the banking industries' commercial standards relating to
the giving of value on uncollected funds, and, if so, whether those standards
are reasonably designed to result in fair dealing. 
	[¶30]  The evidence produced by the Credit Union in support of its
position that it acted in accordance with objective good faith included the
following:  The Credit Union's internal policy was to make provisional credit
available immediately upon the deposit of a check by one of its members.  In
certain circumstances--where the check was for a large amount and where
it was drawn on an out-of-state bank--its policy allowed for a hold to be
placed on the uncollected funds for up to nine days.  The Credit Union's
general written policy on this issue was reviewed annually--and had always
been approved--by the National Credit Union Administration, the federal
agency charged with the duty of regulating federal credit unions.  See 12
U.S.C.S. § 1552a (Law. Co-op. 1996).  In addition, the policy complied with
applicable banking laws, including Regulation CC.  See 12 C.F.R.
§§ 229.12(c), 229.13(b) (1998).  
	[¶31]  The Credit Union also presented evidence that neither
Regulation CC nor the Credit Union's internal policy required it to hold the
checks or to investigate the genesis of checks before extending provisional
credit.  It asserted that it acted exactly as its policy and the law allowed
when it immediately extended provisional credit on these checks, despite
the fact that they were drawn for relatively large amounts on an out-of-state
bank.{22}  Finally, the Credit Union presented expert testimony that most
credit unions in Maine follow similar policies. 
	[¶32]  In urging the jury to find that the Credit Union had not acted in
good faith, Sun Life and the Guerrettes argued that the Credit Union's
conduct did not comport with reasonable commercial standards of fair
dealing when it allowed its member access to provisional credit on checks
totalling over $120,000 drawn on an out-of-state bank without either:  
(1) further investigation to assure that the deposited checks would be paid
by the bank upon which they were drawn, or (2) holding the instruments to
allow any irregularities to come to light.  
	[¶33]  The applicable federal regulations provide the outside limit on
the Credit Union's ability to hold the checks.  Although the limit on
allowable holds established by law is evidence to be considered by the jury, it
does not itself establish reasonable commercial standard of fair dealing.  The
factfinder must consider all of the facts relevant to the transaction.  The
amount of the checks and the location of the payor bank, however, are
relevant facts that a bank, observing reasonable commercial standards of fair
dealing, takes into account when deciding whether to place such a hold on
the account.  The jury was entitled to consider that, under Regulation CC,
when a check in an amount greater than $5,000 is deposited, or when a
check is payable by a nonlocal bank, a credit union is permitted to withhold
provisional credit for longer periods of time than it is allowed in other
circumstances.  See 12 C.F.R. § 229.13(b), (h) (1998).  Therefore, the size of
the check and the location of the payor bank are, under the objective
standard of good faith, factors which a jury may also consider when deciding
whether a depositary bank is a holder in due course. 
	[¶34]  The Credit Union's President admitted the risks inherent in
the Credit Union's policy and admitted that it would not have been difficult
to place a hold on these funds for the few days that it would normally take
for the payor bank to pay the checks.  He conceded that the amount of the
checks were relatively large, that they were drawn on an out-of-state bank,
and that these circumstances "could have" presented the Credit Union with
cause to place a hold on the account.  He also testified to his understanding
that some commercial banks followed a policy of holding nonlocal checks for
three business days before giving provisional credit.{23}  Moreover, the Credit
Union had no written policy explicitly guiding its staff regarding the placing
of a hold on uncollected funds.  Rather, the decision on whether to place a
temporary hold on an account was left to the "comfort level" of the teller
accepting the deposit.  There was no dispute that the amount of the three
checks far exceeded the $5,000 threshold for a discretionary hold
established by the Credit Union's own policy.  
	[¶35]  On these facts the jury could rationally have concluded that the
reasonable commercial standard of fair dealing would require the placing of
a hold on the uncollected funds for a reasonable period of time and that, in
giving value under these circumstances, the Credit Union did not act
according to commercial standards that were reasonably structured to result
in fair dealing. 
	[¶36]  We recognize that the Legislature's addition of an objective
standard of conduct in this area of law may well have the effect of slowing
the "wheels of commerce."{24}  As one commentator noted:
Historically, it was always argued that if negotiable instruments
were to be usefully negotiable a subsequent holder should not
have to investigate the transaction giving rise to the paper.  The
paramount necessity of negotiability has dominated thinking and
legislation on negotiable instruments law.  Drafts and promissory
notes, it has been believed, must be able to change hands freely,
without investigation beyond the face of the instrument, and
with no greater requirement than the indorsement of the

Sinclair, supra, at 630 (footnotes omitted).  Notwithstanding society's oft-
cited need for certainty and speed in commercial transactions, however, the
Legislature necessarily must have concluded that the addition of the
objective requirement to the definition of "good faith" serves an important
goal.  The paramount necessity of unquestioned negotiability has given way,
at least in part, to the desire for reasonable commercial fairness in
negotiable transactions. 
IV. Effect of Fraud Defense A. The Guerrettes
	[¶37]  Having failed to persuade the jury that it was a holder in due
course, the Credit Union is subject to any defense of the Guerrettes or Sun
Life "that would be available if the person entitled to enforce the instrument
were enforcing a right to payment under a simple contract," 11 M.R.S.A.
§ 3-1305(1)(b), or any "claim of a property or possessory right in the
instrument or its proceeds."  11 M.R.S.A. § 3-1306.  Generally, fraud, such
as that perpetrated by Paul Richard and Steven Hall, may be the basis for
both a valid defense, see Silber v. Muschel, 593 N.Y.S.2d 306, 307 (N.Y. App.
Div. 1993), and a valid claim to the instrument itself.  See generally Bowling
Green, Inc. v. State St. Bank & Trust Co., 307 F. Supp. 648, 651-52 (D. Mass.
1969), aff'd, 425 F.2d 81 (1st Cir. 1970).  
	[¶38]  Fraud is an affirmative defense to a contract.  See M.R. Civ. P.
8(c).  To prevail on their fraud defense, the Guerrettes were required to
prove, by clear and convincing evidence, that a fraudulent or material
misrepresentation induced them to transfer the proceeds of their father's
life insurance policy, in the form of the Sun Life checks, to Steven Hall and
Paul Richard.  In addition, they were required to prove they were justified in
relying on the fraudulent misrepresentation.  See Kuperman v. Eiras, 586
A.2d 1260, 1261 (Me. 1991).  The parties' stipulation that Hall and Richard
fraudulently induced the Guerrettes to invest the checks in their company,
HER, Inc., is sufficient to satisfy the Guerrettes' burden on this issue.  The
Guerrettes are not liable to the Credit Union for their indorsement of the
Sun Life checks.
B. Sun Life
	[¶39]  Sun Life, however, may not raise the fraud as a defense to its
liability on the instrument.  Section 3-1305(3) provides generally that:
in an action to enforce the obligation of a party to pay [an]
instrument, the obligor may not assert against the person
entitled to enforce the instrument a defense, claim in
recoupment or claim to the instrument (section 3-1306) of
another person.

11 M.R.S.A. § 3-1305(3).  Accordingly, a defense to liability on an
instrument--such as fraud in the underlying transaction--raised by one party
to an action may not be raised by another party to the action as its own
defense to liability.  Section 3-1305(3) provides, however, that "the other
person's claim to the instrument may be asserted by the obligor if the other
person is joined in the action and personally asserts the claim against the
person entitled to enforce the instrument."  Id.  Therefore, only if the
Guerrettes have made a claim to the instrument and are parties to the
proceeding may Sun Life assert the fraud in defense of its own liability.  See 
11 M.R.S.A. 3-1305(3); First Nat'l Bank of Nonoca v. Duncan Sav. & Loan
Ass'n, 656 F. Supp. 358, 366 (W.D. Okla. 1987), aff'd, 957 F.2d 775 (10th
Cir. 1992).
	[¶40]  The Guerrettes, however, made no claim that they were
entitled to possession of the instruments held by the Credit Union.{25} 
Instead, they merely argued that they were not liable as indorsers of the
checks held by the Credit Union as a result of the fraud.  The issue of fraud
was therefore raised by the Guerrettes as a defense to their liability as
indorsers of the instruments.  See Louis Falcigno Enters., Inc. v.
Massachusetts Bank & Trust Co., 436 N.E.2d 993, 993-94 (Mass. App. Ct.
1982).  The Superior Court erred when it held that the issue of fraud had
been raised as a "claim to the instruments."  
	[¶41]  Therefore, Sun Life may not raise the fraud against the
Guerettes as a defense to its own liability.  Because Sun Life raises no other
relevant defenses, it is liable to the Credit Union as the drawer of the
instruments, see 11 M.R.S.A. § 3-1414(2)(a), and we vacate that portion of
the Superior Court's judgment finding that Sun Life was not liable to the
Credit Union.
	The entry is
Judgment in favor of Daniel, Joel, and Claire
Guerrette and against Maine Family Federal
Credit Union affirmed.  

Judgment in favor of Sun Life Assurance
Company of Canada and against Maine Family
Federal Credit Union vacated and remanded
for further proceedings consistent with the
opinion herein.

Attorneys for plaintiff: Daniel L. Cummings, Esq., (orally) Norman, Hanson & DeTroy P O Box 4600 Portland, ME 04112-4600 Attorneys for defendants: Seth W. Brewster, Esq., (orally) James G. Goggin, Esq. Verrill & Dana, LLP One Portland Square Portland, ME 04101-0586 (for Sun Life Assurance) Elliott L. Epstein, Esq., (orally) Isaacson & Raymond, P.A. P O Box 891 Lewiston, ME 04243-0891 (for Daniel, Joel, and Claire Guerrette) Attorney for amicus curiae: Gretchen L. Jones, Esq. Maine Credit Union League P O Box 1236 Portland, ME 04104
FOOTNOTES******************************** {1} . "'Issue' means the first delivery of an instrument by the maker or drawer, whether to a holder or nonholder, for the purpose of giving rights on the instrument to any person." 11 M.R.S.A. § 3-1105(1) (1995). {2} . Accordingly, Sun Life was the drawer of the checks. "'Drawer' means a person who signs or is identified in a draft as a person ordering payment." 11 M.R.S.A. § 3-1103(1)(c) (1995). Chase Manhattan was the "drawee." "'Drawee' means a person ordered in a draft to make payment." 11 M.R.S.A. § 3-1103(1)(b) (1995). More specifically, Chase Manhattan was also the "payor bank." "'Payor bank' means a bank that is the drawee of a draft." 11 M.R.S.A. § 4-105(2) (1995). {3} . "'Indorsement' means a signature, other than that of a signer as maker, drawer or acceptor, that alone or accompanied by other words is made on an instrument for the purpose of: (a) Negotiating the instrument; (b) Restricting payment of the instrument; or (c) Incurring indorser's liability on the instrument." 11 M.R.S.A. § 3-1204(1) (1995). {4} . Maine Family Federal Credit Union is a "federally chartered credit union," regulated by the National Credit Union Administration. See 12 U.S.C.S. § 1752a (Law. Co-op. 1996). It qualifies as an "insured credit union" under the Federal Credit Union Act, 12 U.S.C.S. §§ 1751-1795k (Law. Co-op. 1996 & Supp. 1998), and is therefore subject to the provisions of Regulation CC. 12 C.F.R. § 229 (1998). By accepting the checks for deposit, Maine Family Federal Credit Union became the "depositary bank." Under Maine law, "'[d]epositary bank' means the first bank to take an item . . . unless the item is presented for immediate payment over the counter." 11 M.R.S.A. § 4-105(1) (1995). {5} . "A customer . . . may stop payment of any item drawn on the customer's account . . . by an order to the bank describing the item or account with reasonable certainty received at a time and in a manner that affords the bank a reasonable opportunity to act on it before any action by the bank with respect to the item . . . ." 11 M.R.S.A. § 4-403(1) (1995). Thus Sun Life, as the customer of Chase Manhattan Bank, had the right to order Chase Manhattan to stop payment on the three checks deposited by Paul Richard at the Maine Family Federal Credit Union. {6} . "Notice of dishonor may be given by any person and by any commercially reasonable means, including an oral, written or electronic communication, and is sufficient if it reasonably identifies the instrument and indicates that the instrument has been dishonored or has not been paid or accepted." 11 M.R.S.A. § 3-1503(2) (1995). {7} . For reasons that have remained unexplained, Daniel Guerrette and Paul Richard together filed a joint answer to the original third-party complaint. Paul Richard, of course, later stipulated that he had fraudulently induced Daniel Guerrette to transfer the check to him. {8} . Paul Richard ultimately consented to judgment being entered against him on the Credit Union's cross-claim. {9} . Section 3-1305(3) provides, in part: . . . [I]n an action to enforce the obligation of a party to pay the instrument, the obligor may not assert against the person entitled to enforce the instrument a defense, claim in recoupment or claim to the instrument (section 3-1306) of another person, but the other person's claim to the instrument may be asserted by the obligor if the other person is joined in the action and personally asserts the claim against the person entitled to enforce the instrument. 11 M.R.S.A. § 3-1305(3). {10} . The parties stipulated to the fact that Daniel, Joel, and Claire were defrauded by Hall and Richard, and Paul Richard consented to the entry of judgment against him in the amount of $42,366.56 on the Credit Union's cross-claim against him. In addition, the parties stipulated that the Credit Union had incurred damages in the amount of $42,366.56. The parties' cooperation in crafting the stipulations appropriately allowed the court and the jury to focus on the only issue in dispute. {11} . An "instrument" refers to a "negotiable instrument." See 11 M.R.S.A. § 3-1104(2) (1995). A "negotiable instrument" is a signed writing evidencing an unconditional promise or order to pay a fixed sum of money on demand or at a definite time to order or to bearer. See generally 11 M.R.S.A. §§ 3-1104(1), 3-1103(1)(i), 3-1104 cmt. 1 (1995). A "draft" is a negotiable instrument that is an order. See 11 M.R.S.A. § 3-1104(5) (1995). The definition of a "check" includes "[a] draft, other than a documentary draft, payable on demand and drawn on a bank." See 11 M.R.S.A. § 3-1104(6)(a) (1995). {12} . 11 M.R.S.A. § 4-205(1) provides that a depositary bank becomes a holder of an item if the item was deposited by a customer who was also a holder. The Credit Union's customer, Paul Richard, became a holder of the checks when Daniel, Joel, and Claire indorsed them in blank and transferred them to Richard and Hall. See 11 M.R.S.A. § 3-1201(1) (1995) ("'Negotiation' means a transfer of possession, whether voluntary or involuntary, of an instrument by a person other than the issuer to a person who thereby becomes its holder."); 11 M.R.S.A. § 3-1202(1)(b) (1995) ("Negotiation is effective even if obtained . . . [b]y fraud."). {13} . If, however, the instrument is accepted for payment, if the instrument is not presented for payment in a timely fashion, or if notice of dishonor is not given to an indorser in a timely fashion, her indorser's liability is discharged. See 11 M.R.S.A. § 3-1415 (3)-(5) (1995). {14} . The Credit Union argues that neither Sun Life nor Daniel Guerrette satisfied their burdens of pleading with respect to the issue of fraud. A party may satisfy his burden of pleading a specific affirmative defense if he puts the opposing parties on notice that the issue will be raised at trial. See Bolduc v. Watson, 639 A.2d 629, 630 (Me. 1994); Federal Deposit Ins. Corp. v. Notis, 602 A.2d 1164, 1165 (Me. 1992). Contrary to the Credit Union's argument, the pleadings were sufficient to alert the Credit Union that fraud would be raised as an issue to shield the defendants from liability. The Credit Union's argument is therefore without merit. {15} . We reject the Credit Union's argument that the good faith element of holder in due course status was not intended to encompass the giving of value for the check. Unless the depositary bank has given value, it cannot become a holder in due course, and its conduct is not scrutinized for compliance with section 3-1302. To determine whether a holder is a holder in due course, the factfinder must determine whether the holder acted with good faith when it took the checks and gave value for them. {16} . The U.C.C. Prefatory Note of National Conference of Commissioners on Uniform State Laws and the American Law Institute lists the new definition of "good faith" among the "benefits to users" of the revised Article 3. The Note states that: The definition of good faith . . . is expanded to include observance of reasonable commercial standards of fair dealing. This objective standard for good faith applies to the performance of all duties and obligations established under Articles 3 and 4. {17} . Because we are required to interpret the current definition of "good faith" for purposes of holder in due course status--a definition which is not without ambiguity--we look to the history of the definition for guidance. "When the language of a statute is ambiguous, we 'look beyond the words of the statute to its history, the policy behind it, and other extrinsic aids to determine legislative intent.'" Arsenault v. Crossman, 1997 ME 92, ¶ 7, 696 A.2d 418 (quoting State v. Fournier, 617 A.2d 998, 1000 (Me. 1992)); accord Salenius v. Salenius, 654 A.2d 426, 429 (Me. 1995). {18} . But see, e.g., Seinfeld, 405 So.2d at 1042 n. 4 (applying what many have viewed as an objective standard of good faith). {19} . "The new definition of good faith substantially affects . . . the requirements for holder in due course status." Hawkland & Lawrence UCC Series § 3-103:05 (Rev Art 3) (emphasis added). {20} . The objective requirement, however, has generated a number of articles and commentaries on the reason, meaning, and anticipated interpretations of the changes. See, e.g., Patricia L. Heatherman, Comment, Good Faith in Revised Article 3 of the Uniform Commercial Code: Any Change? Should There Be?, 29 Willamette L. Rev. 567 (1993); Kerry Lynn Macintosh, Liberty, Trade, and the Uniform Commercial Code, When Should Default Rules be Based on Business Practices?, 38 Wm. & Mary L. Rev. 1465, 1466 (1997). {21} . One commentator has suggested that fair dealing refers to "playing by the rules." See Heatherman, supra, at 585. Yet "the rules" ordinarily define the parameters of reasonable conduct, a concept which sounds much like a negligence analysis. {22} . The Credit Union could also have withheld provisional credit under the law and its own internal policy if there were other reasons to doubt the validity of the checks. See 12 C.F.R. § 229.13(e) (1998). {23} . There was evidence that, on the second business day after he deposited the checks, Paul Richard notified the Credit Union that there may have been a problem with his deposit. {24} . The new definition of "good faith" has been forecasted by some to bring possible "undesirable changes" to the law of negotiable instruments. See Henry J. Bailey, New 1990 Uniform Commercial Code: Article 3, Negotiable Instruments, and Article 4, Bank Deposits and Collections, 29 Willamette L. Rev. 409, 415 (1993). {25} . The Guerrettes were issued new checks for the same amounts by Sun Life after Sun Life stopped payment on the original instruments.

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