Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. Docket No. 83-1549)
Before: SEITZ, WEIS, and ROSENN, Circuit Judges.
This case involves conflicting claims to a cashier's check drawn by Stuart Crawford on the Bankers Trust Company of Western New York (the Bank). Crawford mailed the check to Chalfont Industries, Inc. (Chalfont) as payment on a distributorship agreement he had entered into with Chalfont. Chalfont endorsed the check to Kutner Buick, which sought payment as a holder in due course. Kutner Buick was unable to collect on the check, however, because Crawford had obtained an order from a New York Supreme Court restraining payment of it.
To resolve the conflicting claims, the Bank filed suit in the United States District Court for the Western District of New York, paid the amount of the check into the court, and interpleaded Chalfont, Crawford, and Kutner Buick. The case was transferred to the Eastern District of Pennsylvania*fn1 where Crawford argued that Kutner Buick was not a holder in due course because its president was the father of Chalfont's president and the tow companies maintained a close financial relationship. The court held that Kutner Buick was a holder in due course and entitled to the proceeds of the check. Crawford appealed and we affirm.
The facts in this case are not generally in dispute. Chalfont Industries was a manufacturer of an automotive product. "Stop-A-Flat." From December 1981 to February 1982 Crawford negotiated with Chalfont concerning his possible purchase of distributorship for North Carolina. During the negotiations, Chalfont made a number of false representations to Crawford relating to the product and the distributorship. Chalfont further promised Crawford that his distributorship would be at "no risk" because Chalfont would buy back any product that Crawford purchased from Chalfont but could not sell. Chalfont drafted an agreement without a clear buy-back provision, but Crawford's lawyer redrafted the agreement to accurately reflect the provision. At the signing on February 10, 1982, a Chalfont employee left the room with Crawford's redrafted agreement, ostensibly to obtain the president's signature. He returned with a document, open to the signature page and signed by Chalfont's president. This document, however, was not the agreement Crawford had brought, but a substituted one, which did not contain the buy-back provision. Crawford signed the agreement without realizing that a substitution had been made by Chalfont.
As payment on the agreement, Crawford wrote a personal check for $42,023 and one for $5,000. Chalfont endorsed these checks and delivered them to Kutner Buick which deposited them. On that same day, February 10, 1982, Kutner Buick issued a number of checks to Chalfont totaling $47,056 which Chalfont endorsed over to various companies, apparently some of its creditors. Crawford successfully stopped payment on the $42,023 check on February 14, but was unsuccessful in efforts to stop payment on the $5,000 check. At that point, Kutner Buick was out-of-pocket $42,056 as a result of Crawford's stop-payment order.
A week later, after further discussions with Chalfont's president, Jerome Kutner, Crawford instructed his son in New York to request the Bank to issue a cashier's check in the amount of $50,023 payable to Chalfont Industries. Crawford's son did so and mailed the check to Chalfont. After his son mailed the check, Crawford again had misgivings about Chalfont; Chalfont's national sales manager called and warned Crawford to stop payment on his check. Crawford instructed his lawyer to try to stop payment, and he himself proceeded to Chalfont's office in Pennsylvania to physically intercept the check. On Crawford's arrival at the Chalfont office in Pennsylvania to physically intercept the check. On Crawford's arrival at the Chalfont office on Monday, February 22, 1982, a Chalfont employee told him that he could have the check when it arrived. Crawford waited in Chalfont's offices for tow days, but was told the check has not arrived. In fact, the check had been received and Chalfont had endorsed and delivered it to Kutner Buick. Except for $8,000 which it returned to Chalfont, Kutner Buick applied the proceeds of the check the the amount due it as a result of the stop-payment on the February 10, 1982, check [for $42,023].
Crawford's lawyer in the meantime had obtained an order from the Supreme Court of New York, blocking payment on the check. The Bank filed an interpleader naming Crawford, Kutner Buick, and Chalfont as defendants. The case was transferred to the Eastern District of Pennsylvania pursuant to 28 U.S.C. § 1404 (changing of venue). The court conducted a bench trial; only Crawford and Kutner Buick asserted claims to the check. Kutner Buick argued that it was "a holder in due course" and thus entitled to the check without regard to Chalfont's fraudulent conduct. Crawford responded that Kutner Buick should not qualify as a holder in due course because of its close relationship with Chalfont Industries.
The record indicates that Chalfont Industries and Kutner Buick indeed maintained a close relationship. Kutner Buick is wholly owned by Jules Kutner and Chalfont Industries is wholly owned by his son, Jerome. Jules provided the initial capital for Jerome to establish Chalfont Industries, lent him funds for working capital, and made further capital infusions. At one time Jules obtained a loan form Kutner Buick for Chalfont and repaid it without Chalfont ever having issued a note as evidence of the debt. Jules ultimately obtained judgments aggregating $315,000 against Chalfont based on loans Kutner Buick had made to it from time to time at well below prime interest rates.
Chalfont turned to Kutner Buick for other banking services as well. Kutner Buick regularly cashed Chalfont checks and established a system of writing Kutner checks in "exchange" for Chalfont checks. Other check exchanges took place, some with no discernible purpose. On one occasion, Chalfont used a Kutner Buick "exchange" check in part to meet its payroll. At least twelve checks from Chalfont to Kutner were returned due to insufficient funds. Finally, when Chalfont filed a petition in bankruptcy on March 4, 1982, Jules Kutner paid the filing fee.
After considering the evidence of the relationship between Chalfont and Kutner Buick, the district court made findings. If found that no evidence showed that Kutner Buick lacked good faith in accepting the disputed check, that Kutner Buick had no knowledge of any conversations between Crawford and employees of Chalfont, that Kutner Buick's failure to inquire regarding the cashier's check did not stem from an attempt to avoid knowledge of Crawford's efforts to stop the check, and that Kutner buick had no knowledge of the circumstances surrounding the signing of the ...