Dalton & Marberry, P.C., Appellant-Respondent, v. Nationsbank, N.A., Respondent-Appellant.

This slip opinion is subject to revision and may not reflect the final opinion adopted by the Court. Opinion Missouri Court of Appeals Western District Case Style: Dalton & Marberry, P.C., Appellant-Respondent, v. Nationsbank, N.A., Respondent-Appellant. Case Number: 53453 and 53485 Handdown Date: 02/03/1998 Appeal From: Circuit Court of Boone County, Hon. Gene Hamilton Counsel for Appellant: Thomas M. Schneider Counsel for Respondent: Ronald A. Norwood and Marvin E. Wright Opinion Summary: Nations Bank f/k/a Boatmen's Bank of Mid-Missouri (Boatmen's) appeals from the $130,337.00 judgment in favor of Dalton & Marberry, P.C. Boatmen's was found to have been negligent in allowing a Dalton & Marberry employee, Janet Hollandsworth, to embezzle $130,334.00 from a Dalton & Marberry account maintained at Boatmen's. Boatmen's raises five points on appeal. Boatmen's contends the trial court erred by (1) denying Boatmen's motions for directed verdict and judgment n.o.v. on Dalton & Marberry's claim that Boatmen's was negligent where Boatmen's was a holder in due course, and hence, not subject to claims of negligence; (2) denying Boatmen's motions for directed verdict and judgment n.o.v. on Dalton & Marberry's claim that Boatmen's was negligent where Dalton & Marberry cloaked Ms. Hollandsworth with apparent authority to cash checks drawn from the account and Boatmen's relied on that authority; (3) excluding Boatmen's defenses of contributory negligence and estoppel where Dalton & Marberry's negligence allowed Ms. Hollandsworth to embezzle the funds; (4) denying Boatmen's motions for directed verdict and judgment n.o.v. on Dalton & Marberry's claim that Boatmen's was negligent where there was no evidence that Boatmen's knew the check proceeds were being used for Ms. Hollandsworth's personal benefit; and (5) failing to give Boatmen's credit against the judgment for the $37,084.57 that Ms. Hollandsworth paid in restitution to Dalton & Marberry. Dalton & Marberry also raises one issue on appeal: that the trial court erred in denying its request for pre-judgment interest under section 408.040, RSMo 1994. REVERSED. Division IV holds: 1. Where Boatmen's qualifies as a holder because the misappropriated checks were payable

to Boatmen's and Boatmen's was in possession of the checks; where Boatmen's gave value for the misappropriated checks because it accepted the checks in exchange for cashier's checks or money orders; where Boatmen's took the misappropriated checks in good faith because the checks were regular on their face and the signature card on file authorized Ms. Hollandsworth to exchange the checks for money orders or cashier's checks; and where Boatmen's took the checks without notice of any defect in or adverse claims to the checks because Boatmen's lacked actual knowledge of Ms. Hollandsworth's embezzlement and because under the circumstances it had no duty to inquire as to Ms. Hollandworth's authority to exchange the checks for cashier's checks or money orders, Boatmen's qualifies as a holder in due course under section 400.3-302, RSMo 1994 and, therefore, under section 400.3-305, RSMo 1994, takes free of all of Dalton & Marberry's claims regarding the misappropriated checks. Further, Boatmen's holder in due course status is not limited to the checks written after 1992 because the former section 400.3-305 protects Boatmen's, as a holder in due course, from "all claims" to each instrument, and, therefore, Dalton & Marberry's claims to the instruments before 1992 are also barred under section 400.3-305. Because Boatmen's qualifies as a holder in due course and takes free of all Dalton & Marberry claims to the misappropriated checks, the trial court erred in failing to grant Boatmen's motions for directed verdict and for judgment n.o.v. Citation: Opinion Author: Robert G. Ulrich, Chief Judge, Presiding Judge Opinion Vote: REVERSED. Hanna and Ellis, J.J., concur. Opinion: Nations Bank f/k/a Boatmen's Bank of Mid-Missouri (Boatmen's) appeals from the $130,337.00 judgment in favor of Dalton & Marberry, P.C. Boatmen's was found to have been negligent in allowing a Dalton & Marberry employee, Janet Hollandsworth, to embezzle $130,334.00 from a Dalton & Marberry account maintained at Boatmen's. Boatmen's raises five points on appeal. Boatmen's contends the trial court erred by (1) denying Boatmen's motions for directed verdict and judgment n.o.v. on Dalton & Marberry's claim that Boatmen's was negligent where Boatmen's was a holder in due course, and hence, not subject to claims of negligence; (2) denying Boatmen's motions for directed verdict and judgment n.o.v. on Dalton & Marberry's claim that Boatmen's was negligent where Dalton & Marberry cloaked Ms. Hollandsworth with apparent authority to cash checks drawn from the account and Boatmen's relied on that authority; (3) excluding Boatmen's defenses of contributory negligence and estoppel where Dalton & Marberry's negligence allowed Ms. Hollandsworth to embezzle the funds; (4) denying Boatmen's motions for directed verdict and judgment n.o.v. on Dalton &

Marberry's claim that Boatmen's was negligent where there was no evidence that Boatmen's knew the check proceeds were being used for Ms. Hollandsworth's personal benefit; and (5) failing to give Boatmen's credit against the judgment for the $37,084.57 that Ms. Hollandsworth paid in restitution to Dalton & Marberry. Dalton & Marberry also raises one issue on appeal: that the trial court erred in denying its request for pre-judgment interest under section 408.040, RSMo 1994. The decision of the trial court is reversed. FACTS Dalton & Marberry maintained an account at Boatmen's bank to perform payroll services for its clients from which a former Dalton & Marberry staff accountant, Janet Hollandsworth, misappropriated $130,334,00. Dalton & Marberry wrote payroll checks for its clients on the Boatmen's account and its clients gave Dalton & Marberry checks to deposit into the account to cover the payroll amounts and payroll taxes. In performing payroll services, Dalton & Marberry prepared Form 8109 Tax Coupons to make quarterly tax payments to the federal government and to pay Missouri withholding taxes and the Division of Employment Security. The 8109 tax coupon provided written instructions to Boatmen's and the IRS as to which client tax account to credit. Boatmen's could not process payroll tax payments without completed tax coupons. The checks that accompanied tax coupons contained a red endorsement which stated, "Deposit to The Credit of Treasury Tax and Loan Account Boatmen's Bank of Mid-Missouri Columbia, MO". Checks not utilized for payroll tax payments did not display this endorsement. Each month, the canceled checks and a monthly bank statement were forwarded by Boatmen's to Dalton & Marberry for review. Dalton & Marberry had on file with Boatmen's a Corporate Resolution signed in May of 1989 that stated: "Boatmen's is authorized to honor and pay all checks, drafts and orders when so signed or indorsed including those drawn or indorsed to the individual order of any such person listed on Schedule A." The signatories on the Schedule included principals Jimmy Marberry and David Dalton and the office manager, Margaret Kirby. Ms. Kirby was formerly employed by Boatmen's. As staff accountant at Dalton & Marberry, Ms. Hollandsworth was responsible for preparing the computations and documents directing payroll tax deposits and payments. Ms. Hollandsworth's responsibilities at Dalton & Marberry also included acting as staff accountant, recording accounting transactions, income and expenses, preparing monthly financial statements, preparing income tax deposit vouchers, computing payroll taxes and reconciling client bank accounts and Dalton & Marberry's bank accounts. Ms. Hollandsworth, however, was not authorized to withdraw funds from any Dalton & Marberry accounts.

In misappropriating Dalton & Marberry funds, Ms. Hollandsworth effectuated a scheme over time that included advising Ms. Kirby that she had forgotten to prepare a tax coupon for a client and that the payment needed to go to Boatmen's that day. Ms. Hollandsworth would hand-write a check payable to Boatmen's in Ms. Kirby's presence from the Dalton & Marberry account with Boatmen's, have Ms. Kirby sign the check and then offer to take the checks and tax coupons to Boatmen's. Ms. Hollandsworth would then take the check to Boatmen's and exchange it for either blank money orders or a cashier's check. All of the canceled checks representing funds that were misappropriated by Ms. Hollandsworth bore an endorsement reflecting that they had been used to purchase money orders. Boatmen's had no knowledge that Ms. Hollandsworth was not conducting legitimate banking transactions at Boatmen's for Dalton & Marberry's clients. Twice a month Ms. Kirby would also present checks to Boatmen's in exchange for blank money orders. Ms. Kirby obtained the money orders for Mr. Marberry so that he could pay his child support payments. The checks were drawn from Dalton & Marberry's general account although on two occasions the checks were drawn from the payroll account. After failing to uncover the thefts for almost five years, Dalton & Marberry discovered the misappropriation when it conducted an internal audit of the account. Mr. Marberry and Mr. Dalton isolated checks made payable to Boatmen's that lacked the red endorsement reflecting transfer of accounts into the tax account. The absence of the red endorsement on each check used by Ms. Hollandsworth to steal funds was a significant factor in their determining that Ms. Hollandsworth had done something improper with the account. Dalton & Marberry filed a negligence action against Boatmen's alleging that Boatmen's was negligent for allowing Ms. Hollandsworth to exchange the checks for cashier's checks and money orders without first inquiring as to her authority. In its answer, Boatmen's raised a number of affirmative defenses, including the defense that because it was qualified as a holder in due course, section 400.3-306, RSMo 1994, Dalton & Marberry was barred from recovery in negligence. Boatmen's also asserted Dalton & Marberry was contributorily negligent and otherwise estopped from recovering against Boatmen's because it failed to discover the misappropriated checks for five years; failed to require Ms. Hollandsworth to present the tax receipts with the checks she transacted; failed to adopt a system to review all receipts; negligently hired and retained Ms. Hollandsworth; failed to properly supervise Ms. Hollandsworth; failed to establish adequate internal control procedures; failed to audit & reconcile the account; failed to verify that the signed checks were deposited into the appropriate account at Boatmen's; failed to affix the Form 8109 tax coupons in a manner that did not allow removal; and allowed its agents unwarranted access to checks. Boatmen's retained an accounting expert, Larry Pevnik, to testify in support of each of its affirmative defenses.

The case proceeded to trial on July 23, 1996. The court granted Dalton & Marberry's motion in limine to prevent Boatmen's from introducing any evidence, including the expert testimony of Mr. Pevnik, regarding Boatmen's defenses of contributory negligence and estoppel. The evidence Boatmen's wished to introduce included the following: Ms. Hollandsworth was stealing from Dalton & Marberry for thirteen months before she began misappropriating money using the scheme proven in this case; Ms. Hollandsworth misappropriated $30,000 in funds using 113 checks received from Delta Gamma, a Dalton & Marberry client, from August 1988 to October 1989; the misappropriation was made possible because Ms. Hollandsworth was responsible for maintaining the bank account records, preparing and presenting checks to pay expenses of the sorority and reconciling the Delta Gamma account; the Delta Gamma account went unreconciled from April 1992 to April 1994; Ms. Hollandsworth's misappropriation from the Delta Gamma account continued until April 1994 when Dalton & Marberry discovered that $219,000, involving 357 checks, had been misappropriated; Ms. Hollandsworth's scheme to steal money from the Delta Gamma account involving changing the payees on checks prepared by her on behalf of Delta Gamma or creating fictitious venders to misappropriate the funds; Dalton & Marberry was grossly negligent in allowing Ms. Hollandsworth to prepare the checks and then allow the checks to be returned to her for reconciliation without review from either Mr. Dalton or Mr. Marberry, and without a monthly review and reconciliation.; and if any principal had reviewed the canceled Delta Gamma checks, Dalton & Marberry would have discovered Ms. Hollandsworth's misappropriation prior to the first time she misappropriated Dalton and Marberry funds from Boatmen's. After presentation of the evidence, the court held a conference to determine the amount of restitution Ms. Hollandsworth paid Dalton & Marberry. The court determined Dalton & Marberry received $37,084.57 in restitution. The jury returned a verdict in favor of Dalton & Marberry in the amount of $130,337.00. The court overruled Dalton & Marberry's request for prejudgment interest in the amount of $45,831.41 under either section 408.0202, RSMo 1994 or section 408.040. The court also denied Boatmen's request that it receive credit for $37,084.57, the amount of restitution paid by Ms. Hollandsworth. Boatmen's then filed a judgment n.o.v. and a motion for a new trial. Both were denied. Boatmen's filed a Notice of Appeal on October 17, 1996. Dalton & Marberry filed a cross-appeal seeking prejudgment interest. BOATMEN'S QUALIFIES AS A HOLDER IN DUE COURSE As its first issue on appeal, Boatmen's contends that the trial court erred in denying its motions for directed verdict and judgment n.o.v. on Dalton & Marberry's claim that Boatmen's was negligent in failing to inquire as to Ms. Hollandsworth's authority when she presented checks payable to Boatmen's to Boatmen's on Dalton & Marberry's

account because Boatmen's is a holder in due course and, hence, not subject to claims of negligence. A motion for judgment n.o.v. presents the same issue as a motion for a directed verdict at the close of all the evidence: whether plaintiff made a submissible case. Kimbrough v. J.R.J. Real Estate Investments, Inc., 932 S.W.2d 888, 889 (Mo. App. 1996). A case is not to be submitted to the jury unless each and every fact essential to liability is predicated upon legal and substantial evidence. Id. "Substantial evidence is that which, if true, has probative force upon the issues, and from which the trier of facts can reasonably decide a case." Id. (quoting Hurlock v. Park Lane Med. Ctr., Inc., 709 S.W.2d 872, 880 (Mo. App. 1985)). The questions of whether evidence is substantial and whether inferences drawn are reasonable are questions of law. Id. To determine whether Boatmen's qualifies as a "holder in due course," whether Boatmen's is a "holder" as utilized in section 400.3-302 must be determined. "Holder" as utilized in section 400.3-302 is defined as "the person in possession if the instrument is payable to bearer, or in the case of an instrument payable to an identified person, if the identified person is in possession." Section 400.1-201(20), RSMo 1994. A payee can qualify as a holder in due course. Wycoff v. Commerce Bank of Kansas City, 561 S.W.2d 399, 402 (Mo. App. 1977). A drawee can also qualify as a holder in due course. See Mid-Continent Nat. Bank v. Bank of Independence, 523 S.W.2d 569, 573 (Mo. App. 1975) (noting that drawee bank would qualify as holder in due course so long as bank took check in good faith and without notice of fraudulent procurement of check). Here, Boatmen's was both the payee and the drawee of the misappropriated checks that it accepted from Ms. Hollandsworth. Boatmen's qualifies as a holder under section 400.3-302 as the misappropriated checks were payable to Boatmen's and Boatmen's was in possession of the checks. Because it qualifies as a "holder," Boatmen's may assert a holder in due course defense. Section 400.3-302 defines "holder in due course" as: the holder of an instrument if: (1) the instrument when issued or negotiated to the holder does not bear such apparent evidence of forgery or alteration or is not otherwise solely regular or incomplete as to call into question its authenticity; and (2) the holder took the instrument (i) for value, (ii) in good faith, (iii) without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series, (iv) without notice that the instrument contains an unauthorized signature or has been altered, (v) without notice of any claim to the instrument described in Section 400.3-306, and (vi) without notice that any party has a defense or claim in recoupment described in Section 400.3-305(a). Section 400.3-302, RSMo 1994. The next requirement of being a holder in due course is that the holder take the instrument "for value." Section 400.3-302(2)(i). The value requirement is met when the holder provides the agreed consideration or takes the instrument

in payment of or as security for an antecedent debt. Section 400.303(a-b), RSMo 1994. Boatmen's acceptance of the misappropriated checks in exchange for either cashier's checks or money orders satisfies this requirement. Another requirement of being a holder in due course is that the holder take the instrument in "good faith." Section 400.3-302(2) (ii). "Good faith" is defined as "honesty in fact in the conduct or transaction concerned." The good faith standard does not require the holder of an instrument, regular on its face, to inquire as to possible defenses unless facts known to the holder are as such that failure to inquire discloses a desire to evade knowledge for fear that it would reveal a defense to the instrument. See Mid-Continent Nat. Bank, 523 S.W.2d at 574-75 (holding that bank acted in good faith in accepting check because check was regular on its face and no facts evinced desire to evade knowledge). Analysis of the evidence reveals that Boatmen's acted in good faith. The checks Ms. Hollandsworth deposited at Boatmen's were regular on their face. Boatmen's lacked knowledge that Ms. Hollandsworth was misappropriating Dalton & Marberry funds. Ms. Hollandsworth's exchange of the checks payable to Boatmen's drawn on a Dalton & Marberry account for cashier's checks or money orders does not establish that Boatmen's was evading knowledge of Ms. Hollandsworth's misappropriation of Dalton & Marberry funds because the effect of the corporate resolution that Dalton & Marberry had on file with Boatmen's was to authorize Ms. Hollandsworth to exchange the checks for cashier's checks and money orders. The resolution provided that, "Boatmen's is authorized to honor and pay all checks, drafts, and orders, when so signed or indorsed, including those drawn or indorsed to the individual order of any such person listed on Schedule A." All the misappropriated checks were signed by persons listed on Schedule A. As a part of the scheme, Mrs. Hollandsworth obtained the signature of one of the authorized signatories on Schedule A and then volunteered to take the checks to Boatmen's for deposit. Dalton & Marberry does not contend that Boatmen's acted in bad faith. Boatmen's, therefore, satisfies the "good faith" requirement of section 400.3-302. Whether Boatmen's took the checks without notice of any defect in or adverse claims to the checks, as required by section 400.3-302 to be a holder in due course, is determined. A person has notice of a fact under section 400.3-302 when (a) he has actual knowledge of it; (b) he has received notice or notification of it; or (c) from all the facts and circumstances known to him at the time in question he has reason to know it exists. A person "knows" or has "knowledge" of the fact when "he has actual knowledge of it..." section 400.1-201(25), RSMo 1994. Dalton & Marberry specifically argues that Boatmen's was charged with notice of the misappropriation under sections 400.3-306 and 400.3-305(a) because it breached its duty to inquire as to Ms. Hollandsworth's authority to exchange Dalton & Marberry checks for cashier's checks and money orders. Boatmen's contends that it had no duty to inquire under Missouri law. Dalton & Marberry first argues that under Martin v. First Nat. Bank in St. Louis, 219 S.W.2d 312 (Mo. 1949),

Boatmen's had a duty to inquire as to Ms. Hollandsworth's authority and, therefore, may be held liable in negligence for breaching that duty. The Martin decision, however, is not in point. In Martin, an employee of a corporation took corporate checks payable to the defendant bank and cashed them or exchanged them for cashier's checks. Id. at 314-15. The corporation brought suit under the Uniform Negotiable Instrument Law (UNIL) claiming the bank was negligent in allowing the employee to misappropriate the funds. Id. Following a jury trial, the bank was found liable in negligence. Id. The bank, however, did not assert a holder in due course defense because under the UNIL, as payee of the check, it could not acquire status as a holder in due course. Id.; see also Hawkins v. Mall, Inc., 444 S.W.2d 369, 385 (Mo. 1969) (noting that holder in due course defense was not available to payees under UNIL). The Martin court did not address the holder in due course defense. Id. Martin, therefore, is not relevant in this case. Dalton & Marberry also cite Audsley v. Allen, 774 S.W.2d 142 (Mo. banc 1989), where two debtors, Wilhelm and Allen, executed a note refinancing their indebtedness to the bank. Id. at 143. Security for the refinancing note was property the two debtors owned and interest in which they had sold limited partnerships to five investors. Id. Each purchaser of a limited partnership interest had signed a separate promissory note in negotiable form to effect the purchases. Id. These notes signed and delivered to Wilhelm and Allen by the investors who purchased limited partnership interests in the property owned by Wilhelm and Allen were delivered to the bank as security on Wilhelm and Allen's refinancing note. Id. When Wilhelm and Allen defaulted on the refinancing note, certain investors of the limited partnership sued the bank contending that the refinancing transaction between the bank and Wilhelm and Allen had been procured by fraud and seeking rescission of the limited partnership investment notes. Id. The court found that the bank was a holder in due course of the five investment notes provided by Wilhelm and Allen as security on the refinancing note because "[t]he bank's knowledge that [the debtors] proposed to sell interests in property they owned [to the investors] did not impose a duty to inquire into the details of the transaction." Id. at 145. The bank, therefore, took free from the claims of the investors. Id. While Dalton & Marberry is correct in its contention that the Audsley court did recognize that a duty to inquire may be imposed in certain circumstances,(FN1) the particular circumstances under which notice will be imposed need not be decided in this case as the evidence establishes Boatmen's lacked the requisite notice. The only evidence presented to show that the bank in this case had reason to know of a claim or defense was that relevant to Ms. Hollandsworth's authority to negotiate the checks. Boatmen's, however, lacked any actual knowledge that Ms. Hollandsworth did not have the requisite authority and under the circumstances could not have been expected to infer that such authority was lacking. The effect of the corporate resolution that Dalton & Marberry had on file with Boatmen's authorized Ms. Hollandsworth to exchange the checks for cashier's checks and money orders. The resolution

provided that, "Boatmen's is authorized to honor and pay all checks, drafts, and orders, when so signed or indorsed, including those drawn or indorsed to the individual order of any such person listed on Schedule A." As already noted, as a part of the scheme, Mrs. Hollandsworth obtained the signature of one of the authorized signatories on Schedule A on all the misappropriated checks and then volunteered to take the checks to Boatmen's for deposit. Boatmen's lack of notice of Ms. Hollandsworth's misappropriation is further evinced by the fact that another Dalton & Marberry employee, Ms. Kirby, exchanged Dalton & Marberry checks payable to Boatmen's for either money orders or cashier's checks for legitimate business reasons. Finally, Dalton & Marberry's failure to give Boatmen's any reason to question Ms. Hollandsworth's authority supports a finding that Boatmen's lacked notice under section 400.3-302. Ms. Hollandsworth's misappropriations lasted for nearly five years and not once during those five years did Dalton & Marberry inform Boatmen's that Ms. Hollandworth's authority was limited or that Ms. Hollandsworth was misappropriating Dalton & Marberry funds. Even viewing the evidence in a light most favorable to the verdict as is required, the evidence established, at most, that Boatmen's should have been suspicious of Ms. Hollandsworth's authority to exchange Dalton & Marberry checks made payable to Boatmen's for cashier's checks and money orders. The mere arousal of suspicion, however, is not sufficient evidence of knowledge of a claim or a defense as required by section 400.3-302. See G.F.D. Enterprises, Inc. v. Nye, 525 N.E.2d 10, 16 (Ohio 1988) (finding that bank was a holder in due course because although employee's depositing of employer's checks made payable to bank into her personal account should have aroused the bank's suspicions, "the mere arousal of suspicion by the circumstances alone is not sufficient evidence of 'knowledge' of a claim or defense"); Johnstown Mfg., Inc. v. Haynes, 557 N.E.2d 1221, 1224 (Ohio App. 1988) (holding that bank was holder in due course where employee wrote check from employer's account payable to bank for cash and had express check signing authority because circumstances did not give bank reason to know the transaction was unauthorized). Because Boatmen's acted without notice of Ms. Hollandworth's misappropriation, Boatmen's achieved status as a holder in due course under section 400.3-302. Under section 400.3-305, Boatmen's, as a holder in due course, takes free of all of Dalton & Marberry's claims regarding the checks. Section 400.3-305 provides in relevant part, "[t]he right of a holder in due course to enforce the obligation of a party to pay the instrument is subject to defenses of the obligor stated in subsection (a)(1), but is not subject to defenses of the obligor stated in subsection (a)(2) or claims in recoupment stated in subsections (a)(3) against a person other than the holder. Section 400.3-305(b), RSMo 1994; see also Mid-Continental Nat. Bank, 523 S.W.2d at 574-75 ("A person having rights of a holder in due course takes free of the claims to the instrument"). The defenses in

subsection (a)(1) which a holder in due course is subject to is infancy, duress, lack of legal capacity, illegality, fraud and discharge of the obligor in bankruptcy. Section 400.3-305(a)(1). Dalton & Marberry does not assert infancy, duress, lack of legal capacity, illegality, fraud or discharge of the obligor in bankruptcy as a defense to the instruments. Instead, Dalton & Marberry's asserts that defenses to the instrument fall within the purview of subsections (a)(2) and (a)(3). Under section 400.3-305, Boatmen's, as a holder in due course, took the instruments free of those claims. Dalton & Marberry, therefore, was precluded by section 400.3-305 from asserting an action in negligence against Boatmen's. Dalton & Marberry's contends that Boatmen's status as a holder in due course is limited to the checks written after 1992 because of the language of former section 400.3-305. The former section 400.3-305 provided that, "[t]o the extent that a holder is a holder in due course he takes the instrument free from (1) all claims to it on the part of any person; and (2) all defenses of any party to the instrument with whom the holder has not dealt except...." Section 400.3-305, RSMo

1. Dalton & Marberry contends that because Boatmen's had dealt with Dalton & Marberry before in connection with

the subject transactions and Dalton & Marberry was a party to the instrument that under subsection (2), Boatmen's did not take free from the Dalton & Marberry's defenses to the checks. In making this contention, Dalton & Marberry ignores subsection (1) which expressly provides that Boatmen's, as a holder in due course, takes free of "all claims to it on the part of any person." Section 400.3-305(1)(emphasis added). Because subsection (1) of former section 400.3-305 protects Boatmen's, as a holder in due course, from "all claims" without limitation, Dalton & Marberry's claims to the instruments before 1992 is also barred under section 400.3-305. Because Boatmen's qualifies as a holder in due course, it was not subject to Dalton & Marberry's claims to the checks. The trial court, therefore, erred in failing to grant Boatmen's motions for a directed verdict and for judgment n.o.v. Point one is granted.(FN2) The judgment of the trial court is reversed. All concur. Footnotes: FN1.See Allis Chalmers Leasing Serv. Corp. v. Byron Ctr. State Bank, 341 N.W.2d 837, 840 (Mich. App. 1983) (denying bank holder in due course status where employee took check payable to bank and had bank distribute proceeds to his creditors because "[f]or a bank blindly to treat commercial paper payable to his order as bearer paper for the sole reasons that the drawer and bearer are known to the Bank is manifestly unreasonable"); Sun 'n' Sand, Inc. v. United Cal. Bank, 582 P.2d 920, 937 (Cal. 1978) (denying bank holder in due course status where employee took employer's checks payable to bank, altered amounts on checks and then deposited checks in her personal account because "the bank is confronted with an obvious irregularity when the drawer's dishonest employee attempts to negotiate such checks for his own benefit"); Von Gohren v. Pacific Nat. Bank of Wash., 505 P.2d 467, 473-74 (Wash. App. 1973) (denying bank holder in due course status where employee cashed employer's check made payable to bank and deposited them in her own personal account); see also Gino's of Capri, Inc. v. Chemical Bank, 187 A.D.2d 71, 75 (N.Y. App. Div. 1993) (stating that checks payable to bank which are cashed is a transaction "that would naturally trigger inquiry"); but compare Hartford Accident & Indemnity Co. v. American Express Co., 542 N.E.2d 1090, 1095-96 (N.Y. 1989) (holding that bank was a

holder in due course because no duty to inquire existed under facts). FN2.As the other issues on appeal relate to the propriety of the judgment against Boatmen's and because that judgment is reversed. Separate Opinion: None This slip opinion is subject to revision and may not reflect the final opinion adopted by the Court.