The Dallas Court Of Appeals Clarifies Payee Standing In Negotiable Instrument Litigation Matters

The Dallas Court Of Appeals Clarifies Payee Standing In Negotiable Instrument Litigation Matters

by Onyinyechi Muilenburg

Since the Texas legislature adopted in 1996 revised Chapter 3 (Negotiable Instruments) and Chapter 4 (Bank Deposits and Collections) of the Uniform Commercial Code (codified in the Texas Business and Commerce Code), only a handful of Texas cases have resulted in published judicial opinions interpreting or applying the revised UCC provisions. The absence of Texas case law under the Revised UCC necessarily has resulted in gaps in the law of negotiable instruments. In Mazon Associates, Inc. v. Comerica Bank, 195 S.W.3d 800 (Tex. App. – Dallas 2006, no pet.), a case of “first impression” in Texas, the Dallas Court of Appeals filled in remaining gaps in the area of payee standing in negotiable instrument matters governed by the UCC.

The Case. Mazon Associates, Inc. (“Mazon”) brought the lawsuit on one check, asserting claims in negligence, gross negligence, and UCC conversion against the “drawee” bank that paid the check, Comerica Bank (“Comerica”).[1] Mazon asserted that Comerica acted wrongfully in paying the check without the indorsement of any named payee. The check at issue was drawn payable to:

Carter & Associates / dba RSM
Mazon Associates

As deposited and ultimately paid, the check was indorsed only with the indorsement “Douglas Carter”. At the trial level, Mazon offered evidence that it was in the business of factoring accounts receivable, that it had entered into a factoring agreement with “D. Carter and Associates, Inc. and/or DBA RSM”, and that the check was in payment of an invoice it had purchased from RSM. Comerica proffered evidence that the account into which the check initially had been deposited (at another bank) was an account of RSM, and denied liability, asserting that the check was payable alternatively to any of the named payees as a matter of law, and was effectively indorsed when presented to Comerica. Comerica further argued that, as a drawee bank, it owed no duty to Mazon, as a payee, to inspect the indorsements. The trial court denied Mazon’s first and second motions for summary judgment, and granted Comerica’s cross-motion for summary judgment.

The Payee Standing Rulings. The Dallas Court of Appeals agreed with Comerica’s argument that Mazon lacked standing to sue the bank in negligence. While not deciding whether the negligence claims were displaced by the Texas UCC, the court held that, to maintain a negligence action, Mazon had to first establish some duty owed to it by Comerica; and that, in failing to proffer evidence that it was a customer of Comerica, or that “it had a relationship with the bank that would give rise to a legal obligation regarding the check,” Mazon failed to produce evidence to establish any legal duty owed to it by Comerica. This decision therefore establishes law in Texas that, absent a relationship with the drawee (payor) bank, a payee on a negotiable instrument generally may not sue that bank for wrongful payment of the instrument.

The Dallas Court of Appeals also determined that Revised UCC Section 3.420 provided the “sole basis in law” for the conversion claim. The court ruled that, because Section 3.420 prohibits an action for conversion by a payee or indorsee “who did not receive delivery of the instrument,” and because Mazon asserted that there was no evidence that either payee had obtained possession of the check, and the evidence reflected that Mazon did not receive delivery of the check, Mazon lacked standing to sue in conversion as well.

Hirsch & Westheimer represented Comerica Bank in the Mazon Associates matter. The Firm welcomes any request for additional information.

[1] In the trial court proceedings, Comerica Bank joined the bank that had initially accepted the check for deposit (the “depositary” bank), as a third-party defendant; however, Comerica non-suited its third-party claims after obtaining summary judgment against Mazon at the trial level, and the depositary bank was not a party to the appeal.