MAINE FAMILY FEDERAL CREDIT UNION

v.

SUN LIFE ASSURANCE COMPANY OF CANADA et al.

SAUFLEY, J.

	[¶1]  We are called upon here to address the concept of "holder in due
course" as defined by recent amendments to the negotiable instruments
provisions of the Maine Uniform Commercial Code.  We conclude that,
pursuant to those amendments, the Superior Court (Cumberland County,
Calkins, J.) did not err when it entered a judgment based on the jury's
finding that the Maine Family Federal Credit Union was not a holder in due
course.  Because we find, however, that Sun Life Assurance Company was not
entitled to raise a third party's defense of fraud to its liability as drawer of
the instruments, we vacate that portion of the judgment entered in favor of
Sun Life and against the Credit Union.

I.  Facts

	[¶2]  Daniel, Joel, and Claire Guerrette are the adult children of Elden
Guerrette, who died on September 24, 1995.  Before his death, Elden had
purchased a life insurance policy from Sun Life Assurance Company of
Canada, through Sun Life's agent, Steven Hall, and had named his children
as his beneficiaries.  Upon his death, Sun Life issued three checks, each in
the amount of $40,759.35, to each of Elden's children.{1}  The checks were
drawn on Sun Life's account at Chase Manhattan Bank in Syracuse, New
York.{2}  The checks were given to Hall for delivery to the Guerrettes. 
	[¶3]  The parties have stipulated that Hall and an associate, Paul
Richard, then fraudulently induced the Guerrettes to indorse the checks in
blank and to transfer them to Hall and Richard, purportedly to be invested
in "HER, Inc.," a corporation formed by Hall and Richard.{3}  Hall took the
checks from the Guerrettes and turned them over to Richard, who
deposited them in his account at the Credit Union on October 26, 1995.{4}  
The Credit Union immediately made the funds available to Richard.
	[¶4]  The Guerrettes quickly regretted having negotiated their checks
to Hall and Richard, and they contacted Sun Life the next day to request that
Sun Life stop payment on the checks.  Sun Life immediately ordered Chase
Manhattan to stop payment on the checks.{5}  Thus, when the checks were
ultimately presented to Chase Manhattan for payment, Chase refused to pay
the checks, and they were returned to the Credit Union.  
	[¶5]  The Credit Union received notice that the checks had been
dishonored on November 3, 1995, the sixth business day following their
deposit.{6}  By that time, however, Richard had withdrawn from his account
all of the funds represented by the three checks.  The Credit Union was able
to recover almost $80,000 from Richard, but there remained an unpaid
balance of $42,366.56, the amount now in controversy.
	[¶6]  The Credit Union filed a complaint against Sun Life alleging that
Sun Life was liable as drawer of the instruments, and that Sun Life had been
unjustly enriched at the Credit Union's expense.  Although it could have
done so, the Credit Union did not originally seek any recovery from the
Guerrettes.  Sun Life, however, filed a third-party complaint against Daniel
Guerrette and Paul Richard, whose signatures appeared on the back of one
of the checks.{7}  The Credit Union then filed a cross-claim against third-
party defendants Guerrette and Richard, alleging that they were liable as
indorsers of the checks,{8} and Daniel Guerrette filed cross-claims against the
Credit Union and against Sun Life.  Finally, Sun Life eventually filed third-
party complaints against Joel and Claire Guerrette.
	[¶7]  The Credit Union moved for summary judgment.  The Superior
Court held, as a matter of law, that Daniel Guerrette had raised a "claim of a
property or possessory right in the instrument or its proceeds," 11 M.R.S.A.
§ 3-1306 (1995), and therefore that Sun Life was entitled to assert that
claim as a "defense" against the Credit Union.  See 11 M.R.S.A. § 3-1305(3)
(1995).{9}  The court found, however, that a genuine issue of material fact
remained as to whether the Credit Union had acted in "good faith" when it
gave value for the checks--a fact relevant to determining whether the Credit
Union was a holder in due course.  See 11 M.R.S.A. § 3-1302(1)(b)(ii)
(1995).  Accordingly, the court denied the Credit Union's motion for
summary judgment, and the matter proceeded to trial.
	[¶8]  At trial, the only issue presented to the jury was whether the
Credit Union had acted in "good faith" when it gave value for the checks,
thus entitling it to holder in due course status.{10}  At the close of evidence,
the Credit Union made a motion for a judgment as a matter of law, which
the Superior Court denied.  The jury found that the Credit Union had not
acted in good faith and therefore was not a holder in due course.  Therefore,
the Superior Court entered judgment in favor of Sun Life, Daniel, Joel, and
Claire, and against the Credit Union.  The court denied the Credit Union's
renewed motion for judgment as a matter of law and motion to amend the
judgment, and the Credit Union filed this appeal.

II.  Obligations of the Parties

	[¶9]  At the heart of the controversy in this case is the allocation of
responsibility for the loss of the unpaid $42,366.56, given the fact that Paul
Richard and Steven Hall, the real wrongdoers, appear to be unable to pay. 
Maine, like the other forty-nine states, has adopted the Uniform
Commercial Code.  Under the Maine U.C.C., Articles 3-A and 4 deal with
"Negotiable Instruments" and "Bank Deposits and Collections."  See 11
M.R.S.A. §§ 3-1101, 4-101 (1995).  It is these statutes that govern the
parties' dispute.
	[¶10]  Pursuant to Article 4 of the Maine U.C.C., the Credit Union, as a
depositary bank, is a "holder" of the instruments,{11} see 11 M.R.S.A.
§ 4-205(1) (1995),{12} making it a "person entitled to enforce" the
instrument under Article 3-A.  See 11 M.R.S.A. § 3-1301(1) (1995).  Upon
producing an instrument containing the valid signature of a party liable on
the instrument, a person entitled to enforce the instrument is entitled to
payment, unless the party liable proves a defense or claim in recoupment,
see 11 M.R.S.A. § 3-1308(2) (1995), or a possessory claim to the instrument
itself.  See 11 M.R.S.A. § 3-1306.
	[¶11]  Because their signatures appear on the backs of the checks,
Daniel, Joel, and Claire are "indorsers" of the checks.  See 11 M.R.S.A.
§ 3-1204(1), (2) (1995).  As indorsers, they are obligated to pay the
amounts due on each dishonored instrument "[a]ccording to the terms of
[each] instrument at the time it was indorsed."  11 M.R.S.A. § 3-1415(1)(a)
(1995).{13}  This obligation is owed "to a person entitled to enforce the
instrument or to a subsequent indorser who paid the instrument under this
section."  Id.
	[¶12]  As drawer of the checks, Sun Life is obligated to pay each
dishonored instrument "[a]ccording to its terms at the time it was issued." 
11 M.R.S.A. § 3-1414(2)(a) (1995).  Again, this obligation is owed to a
person entitled to enforce the instrument or to an indorser who paid the
draft under section 3-1415.  See 11 M.R.S.A. § 3-1414(2) (1995).  Chase
Manhattan, as drawee of these checks, was not obligated to accept them for
payment, see 11 M.R.S.A. § 3-1408 (1995), and therefore has not been
made a party to this action.
	[¶13]  Unless the Credit Union is a holder in due course, its right to
enforce the obligations of the drawer and indorsers of the instruments is
subject to a variety of defenses, including all those defenses available "if the
person entitled to enforce the instrument[s] were enforcing a right to
payment under a simple contract."  See 11 M.R.S.A. § 3-1305(1)(b) (1995). 
In addition, its right to enforce is subject to any claims in recoupment, see
11 M.R.S.A. § 3-1305(1)(c) (1995), or claims to the instruments themselves. 
See 11 M.R.S.A. § 3-1306.  If, however, the Credit Union establishes that it
is a "holder in due course," it is subject to only those few defenses listed in
section 3-1305(1)(a).  See 11 M.R.S.A. § 3-1305(2) (1995).  None of those
specific defenses is applicable here.  Thus, the Credit Union argues that
because it is entitled as a matter of law to holder in due course status, it is
entitled to enforce the instruments against the Guerrettes and Sun Life.

III.  Holder in Due Course

A.  Burden of Proof and Standard of Review

	[¶14]  A holder in due course is a holder who takes an instrument in
good faith, for value, and without notice of any claims or defenses.  See 11
M.R.S.A. § 3-1302(1) (1995).  Once the persons who may be liable on the
instruments have raised a recognized defense to that liability, the burden is
on the holder to prove by a preponderance of the evidence that it is a holder
in due course.  See New Bedford Inst. for Sav. v. Gildroy, 634 N.E.2d 920,
925 (Mass. App. Ct. 1994).{14}  If it fails in that proof, the persons otherwise
liable on the instruments may avoid liability if they prove a defense, claim in
recoupment, or possessory claim to the instrument.  See 11 M.R.S.A.
§§ 1305(1)(b), 3-1308(2).  
	[¶15]  The issue of whether a party is a holder in due course is usually
one of fact, although "where the facts are undisputed and conclusive, [a
court] can determine . . . holder in due course status as a matter of law." 
See Triffin v. Dillabough, 716 A.2d 605, 611 (Pa. 1998).  In this case, the
Superior Court declined to decide the holder in due course issue as a matter
of law, and submitted the question to the jury.  The jury found that the
Credit Union was not a holder in due course, implicitly because the Credit
Union did not act in good faith.
	[¶16]  The Credit Union argues that the court erred in failing to find,
as a matter of law, that it was a holder in due course.  "We review the denial
of a motion for judgment as a matter of law 'to determine if any reasonable
view of the evidence and those inferences that are justifiably drawn from
that evidence supports the jury verdict.'"  Larochelle v. Cyr, 1998 ME 52,
¶ 6, 707 A.2d 799 (quoting Davis v. Currier, 1997 ME 199, ¶ 3, 704 A.2d
1207).  The question before us, therefore, is whether any reasonable view of
the evidence, along with any justifiable inferences therefrom, can possibly
support the jury's conclusion that the Credit Union did not act in good faith
and therefore was not a holder in due course.  Alternatively stated, the
question is whether the evidence compelled a finding that the Credit Union
was a holder in due course.  If there is any rational basis for the jury's
verdict, we must affirm the judgment.

B.  Good Faith

	[¶17]  We therefore turn to the definition of "good faith" contained in
Article 3-A of the Maine U.C.C.{15}  In 1990, the National Conference of
Commissioners on Uniform State Law recommended substantial changes in
the U.C.C.  The Maine Legislature responded to those recommendations in
1993 by repealing the entirety of Article 3 and enacting a new version
entitled Article 3-A, which contains a new definition of "good faith."  While
the previous version of the good faith definition only required holder to
prove that it acted with "honesty in fact," the new definition provides:

"Good faith" means honesty in fact and the observance of
reasonable commercial standards of fair dealing.

11 M.R.S.A. § 3-1103(1)(d) (1995) (emphasis added).  Because the tests are
presented in the conjunctive, a holder must now satisfy both a subjective
and an objective test of "good faith."{16}

1.  Honesty in Fact

	[¶18]  Prior to the changes adopted by the Legislature in 1993, the
holder in due course doctrine turned on a subjective standard of good faith
and was often referred to as the "pure heart and empty head" standard.  See
M.B.W. Sinclair, Codification of Negotiable Instruments Law: A Tale of
Reiterated Anachronism, 21 U. Tol. L. Rev. 625, 654 (1990); see also
Seinfeld v. Commercial Bank & Trust Co., 405 So.2d 1039, 1042 (Fla. Dist.
Ct. App. 1981) (noting that the U.C.C. "seem[s] to protect the objectively
stupid so long as he is subjectively pure at heart").  That standard merely
required a holder to take an instrument with "honesty in fact" to become a
holder in due course.{17} 
	[¶19]  Courts interpreting this language have routinely declared banks
to be holders in due course, notwithstanding the failures of these banks to
investigate or hold otherwise negotiable instruments, when they took the
instruments with no knowledge of any defects, defenses, or stop payment
orders.  See, e.g., UAW-CIO Local #31 Credit Union v. Royal Ins. Co., 594
S.W.2d 276, 279 (Mo. 1980) (en banc); Bank of New York v. Asati, Inc., 15
UCC Rep. Serv. 2d (CBC) 521 (N.Y. Sup. Ct. July 8, 1991).  This approach has
been understood to promote the negotiability of instruments, particularly
checks, in the stream of commerce.  Rejecting a contrary approach, one
court put it bluntly:

The requirement urged by defendant would bring the banking
system to a grinding halt.  A stop payment order issued by the
drawer to the drawee which is unknown to the paying-collecting
bank cannot fasten upon the paying bank any legal disability;
particularly it cannot reduce the status of the collecting bank to
a mere assignee of the instrument or a holder of a non-
negotiable instrument, or a mere holder of a negotiable
instrument.

Mellon Bank, N.A. v. Donegal Mutual Ins. Co., 29 UCC Rep. Serv. (CBC) 912
(Pa. Ct. C.P. Alleghany County, Jan. 8, 1980).  
	[¶20]  Although courts were often urged to engraft an objective
reasonableness standard onto the concept of "honesty in fact," most refused
to do so.{18}  Their refusals recognized that:  "[T]he check is the major
method for transfer of funds in commercial practice.  The maker, payee, and
endorsers of a check naturally expect it will be rapidly negotiated and
collected . . . .  The wheels of commerce would grind to a halt [if an objective
standard were adopted]."  Bowling Green, Inc. v. State St. Bank & Trust, 425
F.2d 81, 85 (1st Cir. 1970).  
	[¶21]  Moreover, under the purely subjective standard, a bank was not
expected to require the presence of offsetting collected funds in the
customers' account in order to give value on newly deposited checks:  "A
bank's permitting its customers to draw against uncollected funds does not
negate its good faith."  Asati, Inc., 15 UCC Rep. Serv. 2d at 521; accord Vail
Nat'l Bank v. J. Wheeler Constr. Corp., 669 P.2d 1038, 1039-40 (Colo. Ct.
App. 1983); Flagship Bank of Orlando v. Central Florida Coach Lines, Inc., 33
UCC Rep. Serv. (CBC) 613 (Pa. Ct. C.P. Luzerne County, Oct. 13, 1981);
Mellon Bank, 29 U.C.C. Rep. Serv. at 912; Central Bank & Trust Co. v. First
Northwest Bank, 332 F. Supp. 1166, 1170 (E.D. Mo. 1971), aff'd, 458 F.2d
511 (8th Cir. 1972); Citizens Nat'l Bank of Englewood v. Fort Lee Sav.
& Loan Ass'n, 213 A.2d 315, 319 (N.J. Super. Ct. Law Div. 1965).
	[¶22]  Application of the "honesty in fact" standard to the Credit
Union's conduct here demonstrates these principles at work.  It is
undisputed that the Credit Union had no knowledge that Richard obtained
the Sun Life checks by fraud.  Nor was the Credit Union aware that a stop
payment order had been placed on the Sun Life checks.  The Credit Union
expeditiously gave value on the checks, having no knowledge that they would
be dishonored.  In essence the Credit Union acted as banks have, for years,
been allowed to act without risk to holder in due course status.  The Credit
Union acted with honesty in fact.
	[¶23]  Thus, had the matter at bar been decided before the
Legislature's addition of the objective component of "good faith," there can
be little question that the Credit Union would have been determined to have
been a holder in due course.  Because it took the instruments without notice
of any possible dishonor, defect, fraud, or illegality, it could have given value
immediately and yet have been assured of holder in due course status.  See
Mellon Bank, 29 UCC Rep. Serv. at 912; Industrial Nat'l Bank of Rhode
Island v. Leo's Used Car Exchange, Inc., 291 N.E.2d 603, 606 (Mass. 1973);
New Bedford Inst., 634 N.E.2d at 925; Triffin, 716 A.2d at 611.  Today,
however, something more than mere subjective good faith is required of a
holder in due course.

On to part two.

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