Fairfax Bank & Trust Co. v. Crestar Bank

Citations: 247 Va. 356; 442 S.E.2d 651; 24 U.C.C. Rep. Serv. 2d (West) 990; 10 Va. Law Rep. 1178; 1994 Va. LEXIS 52Docket: Record No. 930585

Court: Supreme Court of Virginia; April 15, 1994; Virginia; State Supreme Court

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Justice Compton delivered the Court's opinion regarding a dispute between banks pertaining to the impact of a check's restrictive indorsement on the warranties made by a depositary bank to a payor bank during the check collection process. The case originated when Robert M. Stolldorf obtained a loan from Crestar Bank to purchase a used Mercedes Benz, and Crestar issued a $20,000 cashier's check payable to Chantilly Fleet Service, with a restrictive legend indicating that the payee must record a lien for Crestar Bank. Stolldorf transferred this check to Mark R. Wines, owner of Chantilly Fleet Service, who initially attempted to deposit it into his other business account at Fairfax Bank. Due to an improper indorsement, Fairfax Bank rejected the deposit but later opened an account for Chantilly Fleet Service where the check was successfully deposited after Wines added a handwritten notation. Crestar Bank eventually sought payment from Fairfax Bank after Stolldorf defaulted on his loan, demanding a refund or proper indorsement. Fairfax Bank argued that it was not liable to Crestar, acknowledging the restrictive nature of the indorsement but asserting it had obtained the correct endorsement from Wines. After a bench trial, the court ruled in favor of Fairfax Bank, confirming that the correct endorsement was obtained and that Chantilly Fleet Service received the funds.

Crestar successfully filed a motion for reconsideration, leading the trial court to rule in its favor, determining that Fairfax Bank breached its warranty of presentment by failing to comply with a restrictive endorsement. The court maintained its previous findings regarding the last endorsement and the receipt of funds by the payee. Fairfax Bank appealed the judgment of $20,000 awarded to Crestar, arguing that Crestar's loss stemmed from a poor loan rather than any failure in the check collection process, and contending that the court misinterpreted the relevant sections of the Uniform Commercial Code (U.C.C.).

Two key issues arose from the trial court's ruling: whether the endorsement was restrictive for Fairfax Bank, requiring it to oversee the contract between Crestar and the payee, Chantilly Fleet Services, and whether the court improperly broadened Fairfax Bank's warranty of title beyond U.C.C. provisions. The applicable section of the U.C.C., 8.3-205, which has since been replaced, defined a restrictive endorsement as one that is conditional or includes specific terms indicating a purpose of deposit or collection. The endorsement in question, which required the payee to record a first lien in favor of Crestar, was deemed conditional and restrictive but not in the context of the check collection process.

Former U.C.C. 8.3-206(1) clarified that a restrictive endorsement does not prevent further transfer or negotiation of the instrument. Thus, the endorsement constituted a separate contract between Crestar and the payee, with Fairfax Bank not being a party to it. The court concluded that the terms of Crestar’s endorsement did not align with the U.C.C. definitions relating to deposit or collection, indicating the contract was independent of the check collection process.

The trial court incorrectly imposed a responsibility on the depositary bank (Fairfax Bank) to ensure the payee complied with the payor bank's (Crestar) contractual obligations. This error extended to the court's interpretation of Fairfax Bank's warranty of title under former Code § 8.4-207, which was repealed on January 1, 1993, and replaced by present Code § 8.4-207.1. The former statute required a collecting bank to warrant to a payor bank that it has good title to the item or is authorized to collect on behalf of someone with good title. Fairfax Bank argued that this warranty did not apply in the absence of forged or invalid indorsements and maintained that there had been no breach. The court agreed, clarifying that "good title" in this context refers to the genuineness of indorsements rather than property law title. The warranty assures that no one holds a better title to the check than the warrantor. Since Chantilly Fleet Services received the funds and there was no claim of forgery regarding Wines's signature, Crestar did not incur any losses from the check's indorsement. Therefore, the court reversed the judgment in favor of Crestar and entered a final judgment dismissing Crestar's action in favor of Fairfax Bank.