Dice v. White Family Cos.: A Course in the Meaning of "Holders in Due Course"

In law school we are taught that hard cases make bad law.  Well, sometimes hard cases just make hard law.

In Dice v. White Family Cos., 173 Ohio App.3d 472, 2007-Ohio-5755, the appellate court squarely faced a hard case. 

The facts of this case are very complicated, but come down to the following:  On September 3, 1999 White Family Cos. (“WFC”) and Nelson D. Wenrick (“Wenrick”) made a bridge loan to Invesco, L.L.C., which was owned by two men, Krishnan Chari and Michael Karaman.  The loan money was placed into Dayton Title escrow account, which was held at National City, and then paid to Invesco.

The loans to Invesco were due to be repaid on October 3, 1999.  WFC and Wenrick received checks from Mr. Chari, but they were returned for insufficient funds.  On October 19, 1999, Chari delivered a check to Dayton Title for $5,000,000, which Dayton Title placed in its escrow account.  Dayton Title then directed National City Bank to issue two checks, one to WFC and one to Wenrick in payment of the bridge loan.  Both checks cleared by October 25, 1999.

Shortly thereafter, National City Bank discovered that the check that Mr. Chari had given to Dayton Title was forged.  By that time, Dayton Title’s escrow account had been drained leaving Eugene Collins and Janice Dice (among others, who had had funds in Dayton Title’s escrow accounts to which they were entitled), without a source of funds.  Dayton Title then filed for bankruptcy protection.

Collins and Dice filed suit against WFC and Wenrick making a variety of claims, including conversion, tortious interference with business relations, fraudulent transfer, constructive trust, unjust enrichment, and breach of fiduciary duty.  The trial court found for Dice and Collins on the unjust enrichment and constructive trust claims, and WFC and Wenrick appealed.

The appellate court examined each claim carefully, but at the end of the day, the appellate court concluded that WFC and Wenrick were “holders in due course” of the checks that Dayton Title had issued to them.  A holder in due course must have taken the instrument (in this case, the checks) after meeting the following requirements:  (1) for value; (2) in good faith, and (3) without notice of any claims or defenses available to the person obligated on the instrument or of defects in the instrument.  The Uniform Commercial Code provides special protections to holders in due course, specifically that they take free of the claims of all others.  Other non-statutory claims cannot be raised where the Uniform Commercial Code provides specific rights, claims, and defenses.  Therefore, even though the court agreed that Collins and Dice were damaged and were more innocent of any involvement than WFC and Wenrick, the UCC’s holder in due course concept worked to protect WFC and Wenrick.

So what does this mean to you?  Most of us put money into title company’s escrow accounts all of the time.  What protection is there for our money if someone defrauds the title company and the title company innocently makes checks payable to others such that they are rendered insolvent? 

There are a couple of avenues that you may consider.  First, always require a closing protection letter from the title company.  If the underwriter has issued such a letter and the title agent becomes insolvent, therefore rendering them unable to follow the terms of your written instructions to the agent, there is a reasonable argument that the underwriter may have responsibility.  Second, in larger transactions or transactions with an agent where you may have some concern, you could always ask to see the title agent’s errors and omissions insurance policy.  Finally, do not put your money into escrow for any longer than is really necessary.

Posted by: Kimberly K. Mauer

Categories: Bankruptcy & Banking Law