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November 19, 1984

Antonio DA SILVA and Maria De Lourdes C.F.M. Da Silva, Plaintiffs,
James C. SANDERS, Administrator, United States Small Business Administration, et al., Defendants

The opinion of the court was delivered by: CORCORAN


 CORCORAN, Senior District Judge.

 A. Facts

 Antonio and Maria Da Silva (plaintiffs) were principal shareholders in a District of Columbia corporation known as April in Portugal Masonry, Inc. (April in Portugal). To cover a loan, April in Portugal executed a $ 50,000 promissory note in favor the Riggs National Bank of Washington (Riggs). The United States Small Business Administration (SBA) and the plaintiffs guaranteed the note. The plaintiffs secured their guaranty with their personal residence. April in Portugal defaulted on the note in May 1979, and the SBA thereupon purchased the note and plaintiffs' guaranty from Riggs.

 On June 15, 1979, April in Portugal filed a petition in bankruptcy. Consequently, under the terms of the note, the entire unpaid principal became due and payable. From the bankruptcy estate and from redemption of certain stock, the SBA received $ 32,935.49 as partial payment of the unpaid principal. The plaintiff advised the SBA that they would sell their home to pay the remaining balance.

 Homestead Settlement Company (Homestead) sold the plaintiffs' house on June 19, 1981. On July 8, 1981 a personal check payable to Homestead for $ 141,092 was deposited in Homestead's escrow account at the National Bank of Washington (NBW). Five days later, NBW issued and delivered to Homestead a $ 10,000 cashier's check payable to SBA. NBW had relied on the proceeds from the $ 141,092 personal check to serve as consideration for the cashier's check, even though the personal check had not cleared the proper banking channels.

 Homestead forwarded the cashier's check to the SBA to satisfy the plaintiffs' loan obligation. The SBA received the cashier's check on July 28, 1981, and, on the following day, mailed to Homestead the necessary documents to release the plaintiffs' obligation and SBA's lien on their property.

 On August 28, 1981, the SBA's Denver Fiscal Office deposited the cashier's check in its Denver bank. The check cleared the Federal Reserve Bank (FRB), and, on August 31, 1981, the cashier's check was presented to NBW for payment. More than a month earlier, however, a Florida bank had returned the $ 141,092 personal check "payment stopped, " because the personal check had been stolen or forged. Further investigation showed that Homestead had closed shop and left town. Consequently, NBW refused to honor its cashier's check, claiming fraud and lack of consideration. In turn, SBA attempted to regain its secured position on plaintiffs' residence through the local deeds office and refused to credit plaintiffs' records for any amount covered by the cashier's check.

 On October 4, 1983, the plaintiffs filed a complaint against the SBA alleging breach of contract and fiduciary duty. On January 17, 1984, the SBA cross-claimed against the NBW for wrongful dishonor of the cashier's check. *fn1"

 Both SBA and NBW have moved for summary judgment. *fn2" We find no genuine issue of material fact. *fn3" Accordingly, we must decide whether the Uniform Commercial Code in the District of Columbia allows the NBW to dishonor its cashier's check because of fraud or lack of consideration, notwithstanding that the payee of the cashier's check, the SBA, is an innocent party.

 B. Discussion

 A cashier's check is a negotiable instrument drawn by a bank upon itself. Swiss Credit Bank v. Virginia National Bank, 538 F.2d 587, 588 (4th Cir.1976); Munson v. American National Bank & Trust Co., 484 F.2d 620, 624 (7th Cir.1973); Michie on Banks and Banking, ch. 12 § 13 at 359 (1984). Although the common belief is that cashier's checks are the same as cash, the provisions of the Uniform Commercial-Code (UCC) give no indication as to how the courts should treat them, *fn4" and, since the enactment of the UCC in 1965, the District of Columbia courts have offered no guidance. *fn5" Consequently, we examine how other jurisdictions have construed the statutory language of the UCC and what role equity plays in determining whether banks may dishonor their cashier's checks.

 1. The Two Statutory Approaches

 Courts in other jurisdictions have divided sharply as to when a bank has a defense which arises from the purchase of a cashier's check. See generally L. Lawrence, Making Cashier's Checks and Other Bank Checks Cost Effective: A Plea For Revision of Articles 3 and 4 of the Uniform Commercial Code, 64 Minn.L.Rev. 275, 285-320 (1980) [hereinafter cited as Lawrence, Cashier's Checks ]. One group considers cashier's checks as ordinary negotiable instruments and treats them as such under the UCC. Id. at 286. According to these courts, if the payee of the cashier's check is a holder in due course, the bank may only raise real defenses before dishonoring its cashier's check. D.C.Code Ann. § 28:3-305. *fn6" However, if the payee is not a holder in due course, the bank may dishonor a cashier's check by simply asserting personal defenses, including lack of consideration and fraud in the inducement. Id. at § 28:3-306. *fn7"

 The other group of courts treats cashier's checks as cash equivalents and disallows banks from asserting those defenses that drawers of ordinary negotiable instruments may raise pursuant to sections 305 and 306. Lawrence, Cashier's Checks, at 286. In sum, these courts focus less on the status of the payee and more on the fact that the bank backs its cashier's checks with its own credit.

 Below we summarize and examine the statutory arguments of these courts. In our discussion, we label as Group A those courts that treat cashier's checks like ordinary negotiable instruments and as Group B the courts that view cashier's checks as cash equivalents.

 a. Group A: The Ordinary Negotiable Instrument Approach

 The Group A courts offer two different analyses in their treatment of cashier's checks as ordinary negotiable instruments. Some rely on UCC § 3-118(a) which states that "[a] draft drawn on the drawer is effective as a note." *fn8" Because the bank draws on itself when it issues a cashier's check, these courts treat the cashier's check as a note and the bank as the note's maker. Hence, they argue that, because a cashier's check is nothing more than a note, the defenses of sections 305 and 306 are available. See, e.g., TPO Inc. v. Federal Deposit Insurance Corp., 487 F.2d 131, 135-36 (3d Cir.1973); Banco Ganadero y Agricola v. Society National Bank, 418 F. Supp. 520, 524 (N.D.Ohio 1976).

 Other Group A courts look to the acceptor's contract in UCC § 3-413(1). *fn9" These courts argue that a cashier's check is a draft of the issuing bank that the bank accepts by the act of issuance. However, they point out that -- pursuant to UCC § 3-413(1) -- the acceptor's contract is identical to the maker's contract. Because makers are subject to the provisions of UCC §§ 3-305 and 3-306, these courts argue that sections 305 and 306 should also govern cashier's checks. See, e.g., Rezapolvi v. First National Bank of Maryland, 296 Md. 1, 459 A.2d 183, 187-88 (1983); Santos v. First National State Bank, 186 N.J.Super. 52, 451 A.2d 401, 407 (1982).

 We believe, as does Professor Lawrence, that the Group A courts misconstrue the application of UCC § 3-118(a) and § 3-413(1). Professor Lawrence explains: UCC § 3-118(a) "was intended simply to eliminate the need for a holder of a note or accepted draft to protest or give notice of dishonor to the instrument's maker or acceptor. The draftsmen of the Code recognized that requiring these parties to protest or give notice of dishonor would serve no function, since presumably they should already be aware of their own refusal to pay." Lawrence, Cashier's Checks at 288. Similarly, UCC § 3-413(1) "was designed to deal with the effect of alteration, and to set out the procedural conditions precedent to the liability of the instrument's acceptor or maker. Neither sections 3-118(a) nor 3-413 were drafted with the aim of specifying the defenses available to obligors." Id. Accordingly, we look to the Group B courts for guidance.

 b. Group B: The Cash Equivalent Approach

 A majority of Group B courts which treat cashier's checks as cash equivalents have cited UCC § 4-303 for support. That provision reads in part:


Any knowledge . . . or stop-order received by . . . a payor bank, whether or not effective under rules of law to terminate . . . the bank's . . . duty to pay an item . . . comes too late to so terminate . . . such . . . duty if the knowledge . . . [or] stop-order . . . is received . . . and . . . the setoff is exercised after the bank has . . . accepted . . . the item. . . . *fn10"

 These courts reason that a bank accepts a cashier's check as soon as the bank issues the check. *fn11" Accordingly, the bank cannot refuse payment of a cashier's check under sections 305 or 306 because such refusal is, in effect, a stop-order, and UCC § 4-303 disallows stop-orders on accepted items. See, e.g., Swiss Credit Bank v. Virginia National Bank, 538 F.2d 587, 588 (4th Cir.1976); Munson v. American National Bank & Trust Co., 484 F.2d 620, 623-24 (7th Cir.1973); State ex rel. Chan Siew Lai v. Powell, 536 S.W.2d 14, 16 (Mo.1976) (en banc); Wertz v. Richardson Heights Bank and Trust, 495 S.W.2d 572, 574 (Tex.1973).

 Several courts and commentators have criticized this application of UCC § 4-303. They state that the concept of stopping payment has relevance only to relations between a bank and its customer who draws a check against the bank. A personal check is an order to pay, and a customer has the right to revoke the order before it is carried out. But, since the bank, as drawer and drawee, is its own customer when it issues a cashier's check, it is nonsensical, the critics argue, to speak of the bank's liability to itself for failing to stop payment on its own cashier's check. See, e.g., Rezapolvi v. First National Bank of Maryland, 296 Md. 1, 459 A.2d 183, 188 n. 7 (1983); Santos v. First National State Bank, 186 N.J.Super. 52, 451 A.2d 401, 408 (1982); J. McDonnell, Freedom From Claims and Defenses: A Study In Judicial Activism Under the Uniform Commercial Code, 17 Ga.L.Rev. 569, 615 (1983); Lawrence, Cashier's Checks, at 292 n. 59.

 But we believe the foregoing reading of UCC § 4-303 may be unjustifiably narrow. Although the concept of a stop-order may necessitate both a bank and a bank customer, the application of UCC § 4-303 is not restricted to stop-orders. UCC § 4-303 also includes "any knowledge. . . received by a payor bank." Accordingly, as we read UCC § 4-303, a bank may not dishonor any accepted item when it receives later knowledge that would otherwise terminate its duty to honor that item. It follows that the defenses of sections 305 and 306 are not available when such defenses are based on knowledge that is received after the bank has accepted the item. In such circumstances -- because a cashier's check is an accepted item -- the bank may not dishonor a cashier's check. *fn12"

 We believe that this interpretation of UCC § 4-303 adheres to the UCC rules of construction. UCC § 1-102 states that the Code "shall be liberally construed and applied to promote its underlying purposes and policies." One such underlying purpose and policy is "to permit the continued expansion of commercial practices through custom [and] usage. . . ." UCC § 1-102(2)(b). Cashier's checks have always played a significant role in commercial practices. People and businesses have come to view cashier's checks as cash because such treatment furthers certainty in commercial transactions. As one New Jersey court elaborated:


A cashier's check circulates in the commercial world as the equivalent of cash. . . . People accept a cashier's check as a substitute for cash because the bank stands behind it, rather than an individual. In effect the bank becomes a guarantor of the value of the check and pledges its resources to the payment of the amount represented upon presentation. To allow the bank to stop payment on such an instrument would be inconsistent with the representation it makes in issuing the check. Such a rule would undermine the public confidence in the bank and its checks and thereby deprive the cashier's check of the essential incident which makes it useful. People would no longer be willing to accept it as a substitute for cash if they could not be sure that there would be no difficulty in converting it into cash.

 National Newark & Sussex Bank v. Giordano, 111 N.J.Super. 347, 268 A.2d 327, 329 (1970). Because certainty promotes the expansion of commercial practices, we believe our interpretation of UCC § 4-303 heeds to the mandate of UCC § 1-102. *fn13" See State ex rel. Chan Siew v. Powell, 536 S.W.2d 14, 16 (Mo.1976) (en banc) ("The nature and usage of cashier's checks in the commercial world is such that public policy does not favor a rule that would permit stopping payment of them."); White & Summers, Uniform Commercial Code § 17-6, at 681 n. 110 (2d ed. 1980). (The public treats cashier's checks as the equivalent of cash, and the draftsmen did not intend to overturn this public expectation.); cf. Bristol Associates, Inc. v. Girard Trust Bank, 505 F.2d 1056, 1062 (3d Cir.1974) ("Where language is susceptible of two reasonable meanings, a court, in the commercial field, should choose that interpretation which comports with current universal practice in the business world.").

 Here, NBW ultimately discovered that its cashier's check had been issued due to fraud and for no consideration. However, NBW received this knowledge only after NBW had accepted the cashier's check through issuance. NBW cannot now rely on UCC §§ 3-305 and 3-306 to dishonor its cashier's check because knowledge of the fraud and lack of consideration comes too late under UCC § 4-303. NBW has no choice but to pay.

 2. Principles of Equity

 Equity also requires the bank to honor its cashier's checks with respect to innocent third parties. D.C.Code Ann. § 28:1-103 (principles of equity supplement the UCC). *fn14" In a pre-UCC case from the Court of Appeals for the District of Columbia Circuit, a bank refused to honor its cashier's check because the payee was not a holder in due course. Whitehead v. American Security and Trust Company, 109 U.S. App. D.C. 202, 285 F.2d 282, 283 (D.C.Cir. 1960) (en banc). *fn15" The bank claimed that it had issued the cashier's check due to a third-party fraud on the bank, though the payee herself was an innocent party to that fraud. The Court of Appeals noted that the payee was without opportunity to protect herself from fraud, while the bank could protect itself by requiring an indemnity bond. Id. at 283-84. Ordering the bank to honor its cashier's check, the court held: "Since the obligation of the bank to appellant as owner of the [cashier's check] was not discharged by this [fraud], with the consequence that one of the two innocent parties, the payee and the bank, must suffer the loss, equity casts it . . . upon the one who has most trusted the party through whom the loss came." Id. at 284.

 This principle of equity applies here. Both the SBA and the NBW are innocent parties to the fraud perpetrated by Homestead. However, NBW could have required a bond or awaited the clearance of Homestead's personal checks. NBW did neither. Therefore, with respect to cashier's checks, we agree with the Court of Appeals: Between two innocent parties, equity casts the loss upon the party who has trusted the third-person through whom the loss came and who was in a position to protect itself. In this case, NBW should bear the loss. *fn16"

 C. Conclusion and Order

 For the above reasons, we hold that NBW cannot refuse to dishonor its cashier's check. It is accordingly,

  ORDERED that the motion for summary judgment of the defendant NBW against the defendant SBA be DENIED, and it is further

 ORDERED that the motion for summary judgment of the defendant SBA against the defendant NBW be GRANTED.

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