2 IRAC CASE ANALYSIS: 400 Words Each
Kessler Case - Holder in Due Course
Plaintiffs -appellants, City Rentals, Inc. and E.J. Zeller Inc. (collectively referred to as "City Rentals"), ap-
peal the judgment of the Defian ce County Municipal Court dismissing City Rentals' case against Rodney
Kesler (hereinafter "Kesler"). For the reasons that follow, we affirm.
In the fall of 2008, City Rentals discovered that its former bookkeeper, Robin Bauer (hereinafte r
"Bauer"), had embezzled several hundred thousand dollars from the company. (Docs. Nos. 20, 31). On July
29, 2009, Bauer was convicted in a separate criminal case and ordered to pay $ 200,000.00 in restitution to
City Rentals. (Docs. Nos. 34, 43).
During the commission of the criminal offense, Bauer forged several checks drawn on City Rentals' bank
account and issued them to various people including Kesler. Kesler described Bauer as a neighbor and
family friend whom he had known for ove r thirty years. (Doc. No. 37, Ex. A). Kesler also explained that be-
tween 2005 and 2007, he had lent money to Bauer on several occasions in the form of personal loans.
(Docs. Nos. 31, 37, Ex. A). Between June 2007 and July 2008, Bauer repaid the some of the money she owed
to Kesler by directly depositing checks into his bank account or making payments on his commercial and
mortgage loans serviced by the bank. Kesler admitted to giving Bauer permission over the phone to make
each deposit or payment.
However, Kesler stated that unbeknownst to him at the time, Bauer made these deposits and payments
using City Rentals' checks. (Docs. Nos. 31, 37, Ex. A). Kesler explained that he never saw or endorsed the
checks Bauer deposited into his acco unt, and he further denied having any knowledge that the checks used
by Bauer were paid from City Rentals' funds. Kesler maintained that he only became aware of Bauer's
wrongdoing when the police questioned him about the checks in the fall of 2008 d uring their investigation
of Bauer. Kesler was never charged in connection with Bauer's crime.
City Rentals claimed that Bauer was not authorized to write the checks to Kesler. (Doc. No. 22). In addi-
tion, it is undisputed by the parties tha t Kesler never provided any goods or services to City Rentals. After
becoming aware of Bauer's embezzlement, City Rentals notified Kesler that Bauer had forged the checks
issued to him and demanded that he return the funds. (Doc. No. 34). Kesler refused Ci ty Rentals' demands.
City Rentals subsequently filed this action in the Defiance County Municipal Court alleging that Kesler's
retention of the funds constituted unjust enrichment. Kesler maintained that because he received the
checks as payment on an antecedent debt he was a holder in due course under the relevant provisions of
the UCC and, therefore, was under no obligation to return the funds to City Rentals.
Prior to trial, the parties stipulated that Bauer deposited $ 13,420.00 of City Rentals' money into Kes-
ler's accounts. On May 20, 2010, the court conducted a bench trial. The only witnesses to testify were
Kesler and his wife. O n June 10, 2010, the trial court issued its decision granting judgment in favor of Kesler
and dismissing City Rentals' case. . In rendering its decision, the trial court concluded that the UCC, and not
common law principles, governed this case. . The trial court further stated that it was "convinced that De-
fendant Kesler had no knowledge of Robin Bauer using money embezzled from the Plaintiffs." The trial
court then concluded as follows:
With the evidence presented to the Court, case law mandates that Plaintiffs' case be dis-
missed, the Defendant having received payment of an antecedent debt in good faith with-
out knowledge of the funds having been embezzled by the payer [sic] .
This is not to say that Plaintiffs don't have further recourse as to the return of their
money, as the Defiance County Common Pleas Court has already ordered the repayment of
the money embezzled by their former employee .
On June 29, 2010, City Rentals filed its notice of appeal and submitted the following three assignments
of error for our review.
ASSIGNMENT OF ERROR NO. I
Although the trial court did not explicitly indicate that it relied on the UCC in rendering its decision, it is
apparent that it followed the UCC doctrine of holder in d ue course in making its ruling. In particular, the
trial court in its Judgment Entry dismissing City Rentals' case quoted at length from Hinkle v. Cornwell Qual-
ity Tool Company (1987), 40 Ohio App.3d 162, 532 N.E.2d 772. In Hinkle , the Ninth District Court of Appeals
held that "only bad faith on the part of a third person receiving stolen money or his failure to pay valua-
ble consideration therefor, will defeat his title thereto as against the true owner. Money and bank notes
are the exception to the general rule that no one can obtain title to stolen property. A holder in due course
of a stolen negotiable instrument can receive good title thereto and is subject only to the defense that he
was a party to the theft."
Despite City Rentals' contentions that the common law should control this case, we believe the trial
court correctly determined that the facts of this case fall under the province of the UCC. The payments at
issue were made by eight checks written on City Rentals' account. Checks are negotiable instruments
falling within the scope of the UCC, .
Having concluded that the provisions of the UCC govern the parties' rights and responsibilities in this case,
we must next determine whether the trial court's decision . Implicit in the trial court's ruling is its determi-
nation that Kesler was a holder in due course and, therefore, not subject to City Rentals' claim for unjust
enrichment. Generally speaking, a holder in due course takes an instrum ent, in this instance a check, free
from all claims and defenses with certain limited exceptions. All American Finance Co. v. Pugh Shows, Inc .
(1987), 30 Ohio St.3d 130, 131 -32, 30 Ohio B. 443, 507 N.E.2d 1134. A person who is not a holder in due
course takes the instrument subject to all valid claims, defenses available in an action on a simple contract,
claims in recoupment and certain other specified defenses. Id.; see also, R.C. 1303.35 (listing the claims and
defenses in recoupment).
In order to qualify as a holder in due course, a person must meet all the statutory requirements. Arca-
num Nat. Bank v. Hessler (1982), 69 Ohio St.2d 549, 552, 433 N.E.2d 204. "Under UCC 3 -302, a holder be-
comes a holder in due course if the holder takes th e instrument (1) for value, (2) in good faith, (3) and
without notice of any claims or defenses otherwise available to the person obligated on the instrument or
various defects in the instrument." Dice v. White Family Companies, Inc ., 173 Ohio App.3d 472, 480, 2007
Ohio 5755, P 27, 878 N.E.2d 1105, citing R.C. 1303.32(A)(2).
At trial, Kesler testified that he had known Bauer for over thirty years. Kesler explained that he and
Bauer were raised in the same town, went to th e same primary and secondary schools and were neighbors
at one point. Kesler testified that his family and Bauer's family spent time together on several occa-
sions because their children were roughly the same ages.
Kesler testified that he did not hesitate in lending Bauer money because he was aware that she was go-
ing through a difficult time with her marriage and, based on the first few instances that he had lent her
money, he trusted that Bauer would promptly repay him. . Kesler stated that Bauer had established a
course of conduct in which she would repay him in person with either cash or a check written on her per-
sonal checking account.
Kesler maintained that when he was able to meet with Bauer she would pay him in cash or with a personal
check. . It was only on the occasions that he did not personally meet with Bauer that she repaid him by di-
rectly depositing the checks into his accounts.
Kesler revealed that he was notified of Bauer's wrongdoing several months after Bauer's last repayment
when the police questioned him during their investigation of Bauer. Kesler denied having any knowledge
that Bauer had used City Rentals' checks to make repayment to him.
Based on the testimony elicited at trial, we find that the judgment of the trial court was supported by
some competent, credible evidence going to all of the essential elements in this case. In reviewing the trial
court's application of the holder in due course doctrine to this case, we agree with the trial court that Kes-
ler paid value for the checks in question. Bauer deposited the checks into Kesler's account as repayment for
an existi ng debt she owed to him. [HN10] Section 1303.33 of the Revised Code provides that "an instru-
ment is issued or transferred for value if * * * the instrument is issued or transferred as payment of, or as
security for, an antecedent claim against any person, whether or not the claim is due." R.C. 1303.33(A)(3).
Regarding the second holder in due course element of good faith, City Rentals presented no evidence
that Kesler lacked good faith when he received the checks. See Buckeye Check Cashing, Inc., v. Camp , 159
Ohio App.3d 784, 787, 2005 Ohio 926, 825 N.E.2d 644 (stating that good faith is defined as the absence of
bad faith or dishonesty with respect to a party's conduct with a commercial transaction). On the contrary,
Kesler's testimony indicates that he was completely unaware that Bauer used City Rentals' checks to
make the repayments that she deposited into his accounts.
We also find that the evidence supported the trial court's decision with respect to the third hol der in due
course element of notice. In order to prevent one from taking as a holder in due course, notice of claims or
defenses of the person obligated on the instrument must be acquired at the time of the taking or the time
the instrument is tran sferred and not subsequently arising thereafter . Kesler was consistent in his adamant
denial of having any knowledge that Bauer forged the checks she depos ited into his accounts at the time
she made the repayments. Furthermore, City Rentals presented no evidence at trial to rebut Kesler's testi-
mony. After reviewing the record before us it is evident that City Rentals simply failed to present any evi-
dence to overcome Kesler's defense that he was a holder in due course under these circumstances.
A central tenant of the holder in due course doctrine is that the holder in due course takes the instru-
ment free of claims or defenses made by the obligor, in this case City Rentals.
Moreover, although not mentioned by the parties, we note that the UCC expressly addresses the liabil ity
of the em -ployer in a situation, such as this one, where an employee entrusted with the responsibility of
issuing checks on behalf of the employer has committed fraud. See R.C. 1303.47 (Employer's responsibility
for fraudulent endorsement by employee). This particular section adopts the principle that the risk of loss
for certain fraudulent conduct by employees who are entrusted with the responsibility with respect to
checks should fall on the employer rather than on innocent third parties. The rationale for this position is
that "the employer is in a far better position to avoid the loss by care in choosing their employees, in super-
vising them, and in adopting other measures to prevent fraud in the issuance of instruments in the name
of th e employer." Official comment to UCC ยง 3 -405; see R.C. 1303.47. Notwith -standing the above, we
acknowledge that Bauer was not a party to this case and that no evidence was presented at trial regarding
Bauer's employment with City Rentals other than the fac t that she was employed as a bookkeeper for the
company.
Finally, in upholding the judgment of the trial court we are reminded of the following. "[T]he Uniform
Commercial Code is a delicately balanced statutory scheme designed, in principle, to ultimately shift the
loss occasioned by negotiation of a f orged instrument to the party bearing the responsibility for the loss.
Ideally, the thief is held accountable. The unfortunate reality is that the loss is often shifted to the innocent
party whose conduct or relationship with the forger most facilitated th e risk of loss." Ed Stinn Chevrolet, Inc.
v. National City Bank (1986), 28 Ohio St.3d 221, 226, 28 Ohio B. 305, 503 N.E.2d 524.
Having found no error prejudicial to the appellant herein in the particulars assigned and argued, we affirm
the judgment of the trial court.
Judgment Affirmed .
