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VALLEY BANK & TRUST CO. v. AMERICAN UTILS.

June 18, 1976

VALLEY BANK & TRUST COMPANY
v.
AMERICAN UTILITIES, INC.



The opinion of the court was delivered by: GREEN

 Presently pending before the Court is plaintiff's motion for summary judgment and the defendant's response thereto. The instant action presents the issues of whether plaintiff is a holder in due course of a negotiable instrument and whether defendant has established a defense which would not entitle plaintiff to recover on the instrument. For the reasons hereinafter stated, we conclude that there does not exist a genuine issue of material fact for a jury to determine, and we grant plaintiff's motion for summary judgment.

 This diversity action arises out of the negotiation of a negotiable promissory note to the plaintiff bank. Defendant American Utilities, Inc. (hereinafter "Utilities") purchased nine water companies from American Realty Service Corporation (hereinafter "Realty") pursuant to an Agreement dated August 25, 1972. As part of the purchase price, defendant Utilities issued a negotiable promissory note to Realty on February 28, 1973 in the sum of $1,128,179.00. Said note provided for payments of principal and interest to commence on February 28, 1974, and continue thereafter for eight equal annual installments. Defendant Utilities and Realty executed an Assignment and Consent dated September 20, 1973, which permitted Realty to transfer and negotiate said note to the plaintiff Valley Bank and Trust Company (hereinafter "Valley Bank") as collateral for a loan from Valley Bank to Realty. Accordingly, on September 20, 1973, Realty endorsed and negotiated said note to Valley Bank.

 In its motion for summary judgment, plaintiff contends that it is entitled to judgment as a matter of law based upon (1) paragraphs 1 through 4 of the complaint and the admissions contained in paragraphs 1 through 4 of defendant's answer, (2) paragraphs 9 through 15 of defendant's counterclaim and setoff and the plaintiff's corresponding reply thereto, and (3) the affidavit of John F. Thompson, III, senior vice-president of the plaintiff Valley Bank. In its original reply to plaintiff's motion for summary judgment, defendant requested that this Court permit it the opportunity to conduct discovery so that it would be able to present sufficient evidence that there were genuine issues of material fact in the instant matter. We have permitted defendant the fullest opportunity to conduct such discovery, and thereafter we have held oral argument on plaintiff's motion. The record is presently composed of the pleadings, the affidavit of Mr. Thompson, interrogatories and answers thereto by the parties, and the depositions taken by defendant, all of which we consider in order to decide the pending motion.

 Plaintiff Valley Bank contends that it is a holder in due course in compliance with the requirements of Section 3-302 of the Uniform Commercial Code, 12A P.S. § 3-302(1). Defendant Utilities, on the other hand, contends that Valley Bank is not a holder in due course since it lacked the good faith required to be such a holder. Section 3-302 provides:

 
§ 3-302. Holder in Due Course
 
(1) A holder in due course is a holder who takes the instrument
 
(a) for value; and
 
(b) in good faith; and
 
(c) without notice that it is overdue or has been dishonored or of any defense against or claim to it on the part of any person.

 Initially, it appeared from defendant's reply memorandum of law and supplemental memorandum of law that defendant contested the fact that Valley Bank took the note in question either for value, in good faith or without notice of any defenses. However, at the oral argument on this matter, defendant conceded that there is no question that Valley Bank took the note for value and without notice of any defense to it. This is so because the evidence of record affirmatively shows that the note in question was negotiated to Valley Bank as collateral in consideration of the conversion of Realty's short term borrowings from plaintiff into a long term loan. Such an arrangement comes within the definition of taking for value contained in Section 3-303 of the Code. *fn1" The evidence of record also affirmatively shows that Valley Bank took the note in question without notice of any defense to it on the part of any person. We note that defendant itself admits in its answers to plaintiff's interrogatories that it did not learn of any of the alleged breaches of warranty by American Realty until June, 1974 and thereafter; however, significantly the note in question was negotiated to Valley Bank prior thereto on September 20, 1973.

 In support of its position that Valley Bank lacked the good faith necessary to become a holder in due course, Utilities essentially advances two theories. First, defendant contends that bad faith may be inferred from the fact that there is a difference in the deposition testimony concerning Valley Bank's knowledge of American Realty's water utility business and Valley Bank's knowledge of the existence of the note in question prior to its negotiation to them. More specifically, defendant Utilities contends that Valley Bank had an active business relationship with Realty that extended over a twenty-five year period, and that Valley Bank first learned of the note in question in February, 1973, rather than August, 1973, as testified to on deposition. Even if we accept defendant's contentions as being true, which we do for purposes of this motion, we do not find that it could establish bad faith on the part of Valley Bank.

 The crucial factor here is not plaintiff's knowledge of Realty's general business or plaintiff's knowledge of the existence of the note in question, but rather it is plaintiff's knowledge of a defense to the note or the underlying contract of ...


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