APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE
Weis, Sloviter and Becker, Circuit Judges.
In this diversity case, the district court held that the defendant bank properly refused to pay on its negotiable certificate of deposit presented by an indorsee. The court reasoned that because the holder had acquired the certificate after its maturity date, the bank's asserted defense of its prior payment to the depositor was valid. We conclude that in view of the specialized nature of a certificate of deposit whether the indorsee was a holder in due course depends upon unresolved factual issues. Moreover, since the payee clause of the original certificate did not include the depositor, credit to its account did not constitute payment by the bank on the original instrument. We hold also that in the circumstances of this case a negligence action is not foreclosed by the provisions of the Uniform Commercial Code. Accordingly, the judgment in favor of the defendant will be vacated and the case remanded to the district court.
Plaintiff's complaint against the bank alleged that it had wrongfully dishonored its certificate of deposit. Other parties were joined on related issues and a number of cross-claims were filed. The district court granted summary judgment in favor of the bank and, thereafter on stipulation of the parties, entered final judgment dismissing all remaining claims.*fn1
Plaintiff Yahn & McDonnell sold merchandise to Delaware Candy & Tobacco Service for a period of time and, when Candy's credit became extended, requested security to protect the account. On May 16, 1978, Candy and plaintiff entered into an agreement designated "Assignment" that transferred to Yahn Candy's right to receive a negotiable certificate of deposit in the amount of $150,000 issued by defendant, Farmers Bank of the State of Delaware. The agreement recited that the instrument's maturity date was July 12, 1978, although, unknown to plaintiff, the certificate bore a maturity date of October 12, 1976.
At the time the agreement was executed, the certificate was in the possession of the Insurance Company of North America as collateral for a surety bond previously issued by INA on behalf of Candy. Plaintiff and Candy expected that the surety bond would be cancelled soon after the assignment thereby making the certificate of deposit available for the transfer. Those events came to pass and, on June 16, 1978, at Candy's direction the certificate was indorsed by INA as follows: "Full return of collateral in accord with assignment instructions, pay to the order of Yahn & McDonnell, Inc.; Insurance Company of North America; By: S/Walter G. Young; Walter G. Young; Secretary."
Plaintiff presented the certificate to Farmers Bank, which dishonored it on June 23, 1978, asserting payment had been made in 1976.
The pertinent history of the certificate of deposit in question, Number 4681, begins on July 12, 1976, when it was issued at the request of Candy for use as collateral. At the instruction of INA, the certificate was made "payable to the order of Insurance Company of North America for account of Delaware Candy and Tobacco Service." Interest was payable for 92 days after the issue date until maturity on October 12, 1976. The certificate recited that it was payable "only upon presentation and surrender of this certificate" and that "neither the deposit nor the interest may be withdrawn prior to maturity." The instrument was then delivered to INA and remained in its vault until transferred to plaintiff in June 1978.
Although certificate Number 4681 was payable only upon presentation and surrender, the bank purported to "rollover"*fn2 the certificate by issuing a new one dated October 12, 1976. The new certificate, bearing Number 4718, was issued in the same amount and to the same payee as certificate Number 4681, and matured on November 11, 1976. This new certificate was apparently delivered to Candy but the first one remained in the possession of INA. Despite the fact that the payee on the new certificate was the same as that on the original, and that the original certificate remained in INA's vault, the bank on November 11, 1976 paid the second certificate by crediting Candy's account for $150,000, plus accrued interest. The bank was subsequently unable to offer an explanation for its action in paying Candy.
On cross-motions for summary judgment, the district court determined that the "rollover" in 1976 constituted a payment on the original certificate and the bank, therefore, would not be required to pay twice unless the plaintiff was a holder in due course. That status was denied because when plaintiff took possession in June 1978, it then acquired notice that the certificate was "overdue" because the instrument recited a maturity date of October 12, 1976. The court also held that for notice purposes the twenty-month interval between the rollover and transfer constituted "more than a reasonable time" after the maturity date. The plaintiff's contention that payment of the certificate by means of a rollover constituted a conversion under section 3-419(1) of the Uniform Commercial Code was rejected. Finally, the court concluded that plaintiff had no cause of action in negligence against the bank because if there were a duty of due care, it was owed only to the INA which had suffered no loss.
On appeal, plaintiff disputes each of the four conclusions reached by the district court.
I. HOLDER IN DUE COURSE STATUS*fn3
The district court held that plaintiff was not a holder in due course because it took the instrument with notice that it was overdue.*fn4 The court based its holding on two grounds. The first was that plaintiff came into possession of the certificate in June 1978, more than twenty months after the October 12, 1976 maturity date of the instrument. The court stated that in June 1978, plaintiff "had notice of the maturity date and had reason to know that [the certificate] was overdue."*fn5 538 F. Supp. at 716.
In reaching its conclusion, the court held that a certificate of deposit is overdue once it matures. Such a characterization maybe accurate as to some negotiable instruments, but the district court failed to consider whether there is a difference between certificates of deposit and other negotiable instruments. Such a distinction has been recognized, for example, in the application of the statute of limitations.
A long line of authority holds that for the purpose of determining when the limitations period begins to run, a certificate of deposit, in contrast to a simple promissory note, is not considered due until a demand for payment has been made. See, e.g., Whitlock v. Bank of Maryville, 612 S.W.2d 481 (Tenn. Ct. App. 1980); In re Gardner's Estate, 228 Pa. 282, 77 A.509 (1910) (cited with approval in Delaware Study Comment to § 3-122); see generally Annot., 23 A.L.R. 7 (1923), supplemented by, Annot., 128 A.L.R. 157 (1940). Delaware law has adopted this position through section 3-122, which provides that a cause of action "against the obligor of a demand or time certificate of deposit accrues upon demand." (Emphasis added.)
The principle that a certificate of deposit is not due until demand has also been applied in cases involving holders in due course where the issue is whether the holder took a demand certificate without notice that it was overdue. See National Surety Co. v. Allen, 243 Mass. 218, 137 N.E. 533 (1922). In the case at hand, determination of whether the mere passage of the payable date of the certificate makes the instrument overdue requires examination of considerations overlooked by the trial court. The Delaware distinction between certificates of deposit and other negotiable instruments with respect to the statute of limitations is a significant factor which ...