NEW BEDFORD INSTITUTION FOR SAVINGS vs. C. L. GILDROY.

LAURENCE, J. In the summer of 1987, C. L. Gildroy, a Harvard M.B.A. (master of business administration degree) with many years of experience in banking, real estate, and

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venture capital operations, was a coowner of the Hyannis Regency Hotel with Robert F. Welch, Stephen C. Jones, and another. Welch and Jones were at the time also owners of the Taunton Regency Hotel, then under construction, in which Gildroy had no interest. In order to secure funds to complete construction of the Taunton Regency, Welch approached the Taunton Savings Bank (TSB) for a $200,000 loan. Welch represented to TSB that he, Jones, and Gildroy were the owners of the Taunton hotel. That representation was false as to Gildroy. During loan negotiations between Welch and TSB, Welch provided TSB with an altered form of Gildroy's financial statement that described Gildroy as an owner of the Taunton hotel and with promotional literature for a management organization then operating the Hyannis hotel that depicted Gildroy, Welch, and Jones (in both photographic and narrative form) as actively engaged in managing both hotels.

Ultimately TSB approved the loan and prepared a $200,000 promissory note for the signatures of Welch, Jones, and Gildroy. Rather than following TSB's normal procedure of conducting the loan closing with all borrowers present to execute the documents, the responsible TSB officer (apparently to accommodate Welch in hope of acquiring additional business) allowed Welch to take the note out of the bank in order to obtain the signatures of Jones and Gildroy. [Note 1] Welch presented the TSB note to Gildroy in a stack of documents

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that Welch advised Gildroy were necessary to sign in connection with applications for refinancing the outstanding construction loan for the Hyannis hotel.

Without reading the note -- which was titled in capital letters, "Taunton Savings Bank Commercial Loan Note and Disclosure $200,000.00," and bore the words, immediately above the signature lines, "If this note is signed by more than one person . . . their liabilities hereunder shall be joint and several" -- Gildroy affixed his signature under those of Welch and Jones. [Note 2] In accordance with Welch's instructions, TSB, after receiving the fully executed note from Welch, deposited the $200,000 loan proceeds into Taunton Regency's checking account at TSB. TSB was not aware of Welch's machinations or the circumstances that led to Gildroy's signing the note. Gildroy was not aware of the loan negotiations, the loan, or Welch's deception.

Welch and Jones made required monthly interest payments to TSB on the note for about a year. TSB was then acquired by the plaintiff, New Bedford Institution for Savings (NBIS), as a result of which TSB ceased to exist as a separate entity. [Note 3] Shortly thereafter, payments on the note

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stopped, and the loan went into default. Gildroy had never been contacted by either TSB or NBIS regarding the loan until the default occurred and NBIS demanded payment. [Note 4] Upon the failure of any of the three comakers to remove the default, NBIS commenced this action against them to enforce their joint and several liabilities under the note. While Welch and Jones defaulted, Gildroy responded vigorously, asserting defenses of fraud and want of any consideration flowing to him.

After a bench trial, the judge rejected Gildroy's fraud defense, since neither TSB nor NBIS bore any responsibility for Welch's knavery. He nonetheless ruled for Gildroy, holding that neither TSB (because it was note payee) nor NBIS (because it acquired the note as part of a "bulk transaction," see G. L. c. 106, Section 3-302[3][c]) qualified as a holder in due course under G. L. c. 106, our Uniform Commercial Code (UCC). Based upon that ruling, the judge deemed Gildroy's defense of lack of consideration to be available against NBIS, as one not a holder in due course (see G. L. c. 106, Section 3-408), under ordinary contract principles. He upheld that defense on the ground that "consideration was not given to any of the comakers, [but] rather to a separate entity at the verbal authorization of one of the comakers [Welch]." Because we conclude that TSB was a holder in due course that took the note free of Gildroy's contract defense, and consequently that NBIS acquired TSB's right to enforce the note

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against Gildroy as transferee pursuant to G. L. c. 106, Section 3-201(1), we reverse the judgment in favor of Gildroy. [Note 5]

The judge's understanding that an original payee of a note cannot be a holder in due course is belied by a consistent line of Massachusetts authorities to the contrary, both before promulgation of the UCC (see Boston Steel & Iron Co. v. Steuer, 183 Mass. 140, 143 [1903]; New Hampshire Natl. Bank v. Garage & Factory Equip. Co., 267 Mass. 483, 485 [1929]), and since. See Rockland Trust Co. v. South Shore Natl. Bank, 366 Mass. 74, 77 (1974); Simon v. Weymouth Agric. & Indus. Soc., 389 Mass. 146, 149-150 (1983). The UCC itself so states plainly. See G. L. c. 106, Section 3-302(2); Massachusetts Code Comment, Mass. Gen. Laws Ann. c. 106, Section 3-302, at 479 (West 1990). Whether TSB, as payee, in fact qualifies as a holder in due course in the instant circumstances depends upon whether it satisfies the requirements that it was a holder of an instrument taken for value, in good faith, and without notice of any defenses against it. See G. L. c. 106, Section 3-302(1)(a)-(c).

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TSB was undoubtedly a holder of the $200,000 note as defined in G. L. c. 106, Section 1-201(20), as inserted by St. 1957, c. 765, Section 1 ("a person who is in possession of . . . an instrument . . . drawn, issued, or indorsed to him or his order. . ."). The payee of an instrument in its possession is always a holder. See Hart & Willier, 2 Bender's Uniform Commercial Code Service Section 11.02[1], at 11-19 (1994). TSB took the note for value when it deposited the $200,000 loan proceeds into the Taunton Regency's checking account in return for the note, which constituted its performance of the agreed consideration. See G. L. c. 106, Section 3-303(a), (c); Bricks Unlimited, Inc. v. Agee, 672 F.2d 1255, 1258 (5th Cir. 1982). As to good faith, the judge expressly found that TSB was "not aware of how the note was signed" and "[a]t the time of the approval of the loan, TSB had no way of knowing whether . . . Gildroy's signature was genuine." These unchallenged findings are supported by the evidence and are sufficient to constitute the subjective, "honesty in fact" test for good faith in Massachusetts. See G. L. c. 106, Section 1-201(19); Massachusetts Code Comment, Mass. Gen. Laws Ann. c. 106, Section 3-302(1)(b), at 478 (West 1990); Industrial Natl. Bank of R.I. v. Leo's Used Car Exchange, Inc., 362 Mass. 797, 801-802 (1973); Bowling Green, Inc. v. State St. Bank & Trust Co., 425 F.2d 81, 85 (1st Cir. 1970). [Note 6]

Finally, TSB had no "notice" of any defenses available to Gildroy to avoid his obligation on the note, in the sense of having reason to know of it from all the facts and circumstances of which it was aware at the time. See G. L. c. 106,

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Sections 1-201(25), 3-304(1)(b). [Note 7] Despite the judge's findings that TSB did not follow its usual procedures on this particular loan transaction, apparently because of its desire to attract additional business from Welch, those irregularities were not deemed sufficient to constitute negligence on TSB's part. [Note 8] Further, a holder has no duty to inquire unless "the circumstances reveal a deliberate desire by the holder to evade knowledge of claims made by the maker." Schwegmann Bank & Trust Co. of Jefferson v. Simons, 880 F.2d 838, 842 (5th Cir. 1989). See also Bricks Unlimited, Inc. v. Agee, 672 F.2d at 1259; Carnegie Bank v. Shalleck, 256 N.J. Super. 23, 35 (1992).

No such deliberately cultivated ignorance emerges or can be gleaned from the record before us. Compare Universal C.I.T. Credit Corp. v. Ingel, 347 Mass. 119, 125 (1964) (even when the plaintiff-assignee of the note and the original payee had worked together on the financing, which made the assignee aware of complaints prior customers had lodged against the payee for its allegedly fraudulent representations, this was not sufficient for the assignee to have had reason to know of any fraud). However unorthodox TSB's handling of this loan may have been relative to its regular usages, no evidence was introduced, nor argument made, demonstrating any deviation by TSB from an applicable standard of care or from reasonable banking practices in similar loan transactions. (See note 1, supra.) The circumstances of the loan, albeit unusual, were not sufficient to put TSB on notice of Gildroy's defense of fraud. Cf. Carnegie Bank v. Shalleck, 256 N.J. Super. at 35 ("While plaintiff should have employed better banking practices in deciding whether to make the loan to Anderson with or without Hagan's guaranty, no evidence

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was presented that Carnegie was aware or even suspected a fraud was being perpetrated").

Since TSB was a holder in due course, NBIS as its transferee acquired the rights of a holder in due course by virtue of its succession to all of TSB's interest. See G. L. c. 106, Section 3-201(1); c. 168, Sections 34 & 34D; Duxbury v. Roberts, 388 Mass. 385, 388 (1983); Hart & Willier, supra Section 12.02[2], at 12-26 to 12-28. Those derivative rights are, however, "subject to the defenses of any party to the instrument with whom the [original] holder has dealt." [Note 9] Travi Constr. Corp. v. First Bristol County Natl. Bank, 10 Mass. App. Ct. 32, 37 (1980). See G. L. c. 106, Section 3-305(2); Hart & Willier, supra. Although the term "dealt" has been subject to no construction in Massachusetts and little elsewhere, we are persuaded that it requires a direct, face to face, personal interchange not here involved.

The analysis of this aspect of the case begins with Uniform Commercial Code comment 2(c) to Section 3-302, 2 U.L.A. 487-488 (1991), which sets forth an example of a payee who is deemed a full holder in due course in circumstances remarkably similar to the present case: "A [Welch] and B [Gildroy] sign a note as co-makers . . . A [Welch having] induce[d] B [Gildroy] to sign by fraud, and without authority from B [Gildroy] [A, Welch] delivers the note to P[ayee, TSB], who takes it for value, in good faith and without notice." Six additional examples of payees who are holders in due course are given in comment 2, all premising a payee who has not dealt personally and directly with the obligor on the instrument.

The few courts and treatises that have addressed the meaning of "dealt" in Section 3-305(2) have linked the examples of Section 3-302's comment 2 to the personal defenses preserved by Section 3-305(2) and have opined that a payee who does not

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actually deal with a drawer or maker (and otherwise qualifies as a holder in due course) takes free of those defenses (including lack of consideration). The rationale is that such a payee is not so directly and personally involved with the disputed aspects of the transaction as to be charged with knowledge of any fraud or other irregularity and therefore should not be deprived of holder in due course status. See Chicago Title & Trust Co. v. Walsh, 34 Ill. App. 3d 458, 468-469 (1975); Village Motors, Inc. v. American Fed. Savs. & Loan Assn., 231 Va. 408, 409-410, 412 (1986); 1 White & Summers, Uniform Commercial Code Section 14.7, at 718-719 (3d ed. 1988); Uniform Commercial Code (Revised) Section 3-302, comment 4, case 2, 2 U.L.A. 65-66 (1991); 6 Anderson, Uniform Commercial Code Section 3-305: 87 (1993). Cf. United States v. Mark Twain Bank-Kansas City, 771 F.2d 361, 365 (8th Cir. 1985). Contrast Standard Fin. Co. v. Ellis, 3 Haw. App. 614, 617 (1983) (plaintiff seeking to enforce notes "dealt" with defendant maker because it explained the terms and conditions of the notes to the defendant and witnessed the defendant signing the notes).

The underlying philosophy of these authorities -- that an innocent person who receives commercial paper in good faith and for value from one who has obtained it by a misrepresentation or fraud should be protected and allowed to enforce the obligation -- is reflected in the law of contracts, see Restatement (Second) of Contracts Section 164(2) & comment e (1979), and the law of suretyship, see Restatement of Security Section 119 (1941). Given the importance to our economy of facilitating commerce in general and the transferability and circulation of commercial paper in particular, such a principle appears appropriately invoked when construing the rights of an otherwise qualified holder in due course. Accordingly, we hold that TSB did not "deal" with Gildroy within the meaning of G. L. c. 106, Section 3-305(2). TSB would not, therefore, be subject to Gildroy's lack of consideration (or any

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other personal) defense, and neither is NBIS as successor in interest to TSB. [Note 10]

Even, however, were we to agree with Gildroy's unadorned assertion that he was a person with whom TSB "dealt," [Note 11] it would not support the judge's conclusion that the defense of want of consideration was available to Gildroy. [Note 12] As earlier noted, TSB gave value for the note when it paid the loan proceeds into an account available to Welch and Jones -- an indisputable detriment to TSB that legally satisfied the consideration requirement. See Cottage St. Methodist Episcopal Church v. Kendall, 121 Mass. 528, 529-530 (1877); Graphic Arts Finishers, Inc. v. Boston Redev. Authy., 357 Mass. 40, 42-43 (1970); Marine Contractors Co. v. Hurley, 365 Mass. 280, 284 (1974). At least two of the comakers, Welch and Jones, undoubtedly received direct benefit from TSB's performance by drawing out the proceeds of the loan. As the document Gildroy signed plainly stated, the liability of the

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comakers was joint and several. See G. L. c. 106, Section 3-118(e). The fact that one of the joint and several obligors did not personally receive any benefit from the transaction is immaterial; consideration enjoyed by any one of the co-obligors is sufficient to support the promissory note. See Armstrong v. Armstrong, 714 F. Supp. 451, 454 (D. Colo. 1989); Baum v. Abel, 379 S.W.2d 164, 165-166 (Mo. App. 1964); Lassiter v. Boxwell Bros., Inc., 362 S.W.2d 884, 886 (Tex. Civ. App. 1962). [Note 13]

Finally, although Gildroy has not contested the judge's rejection of his fraud defense, we address it briefly, since the kind of fraud here alleged (sometimes referred to as "fraud in the factum" or fraud in the inception) is one of the "real" defenses that can be interposed against even the most purehearted and scrupulously attentive holder in due course: "such misrepresentation as has induced the party to sign the instrument with neither knowledge nor reasonable opportunity to obtain knowledge of its character or its essential terms." G. L. c. 106, Section 3-305(2)(c), as inserted by St. 1957,

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c. 765, Section 1. The record, however, irrefutably deprives Gildroy of such a defense. See note 2, supra. On his own testimony, he did have a reasonable opportunity to discover that he was being asked to sign a negotiable instrument. His failure to have done so was properly ruled negligent by the judge, since even casual examination would have immediately exposed and ended the fraud Welch was perpetrating upon him. Gildroy not only suffered no constraints preventing his reading the document, he admitted that he had seen enough of the top of the paper to assert, at his deposition, that the typed word "Commercial" (which appears next to and on the same line as the words "Loan Note and Disclosure," printed in capital letters) was not on the document when he signed it.

For the foregoing reasons, we vacate the judgment below and remand the case to the Superior Court for a determination of NBIS's damages and further proceedings not inconsistent with this opinion.

So ordered.

BROWN, J. (concurring). Although I concur in the result reached by the majority, I am hard pressed to accept the notion that in such circumstances as presented here there must be an affirmative showing of "deliberately cultivated ignorance" on the part of the holder. See Schwegmann Bank & Trust Co. of Jefferson v. Simons, 880 F.2d 838, 842 (5th Cir. 1989). I deem TSB's handling of the loan not "unorthodox" but negligent -- plainly contrary to proper banking practices. Here, TSB certainly placed itself, by such an improvident choice, in a precarious position, whereby it was plainly vulnerable to fraud. After saying all that, I concur in the result because an experienced businessman (let alone a Harvard M.B.A.) surely ought to know that he assumes a risk when he "gets into bed" with someone, as well as to know he must first read "what he signs." Parenthetically, if that imperative was not inculcated firmly at "business school," he should be entitled to a refund of his tuition.

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Finally, I am compelled to point out that the bulk of the work product (i.e., research and analysis) evidenced in this opinion was done by the court. All too often this court is compelled to range far and wide from the parties' briefs to reach what I believe is the correct and proper legal solution.