                         Nos. 2--07--0064 & 2--07--0158 cons. Filed: 6-2-08
______________________________________________________________________________

                                     IN THE

                        APPELLATE COURT OF ILLINOIS

                              SECOND DISTRICT
______________________________________________________________________________

MIDAMERICA BANK, FSB,                       ) Appeal from the Circuit Court
                                            ) of Du Page County.
       Plaintiff-Appellee,                  )
                                            )
v.                                          ) No. 02--L--706
                                            )
CHARTER ONE BANK, FSB,                      )
                                            )
       Defendant and Third-Party            )
       Plaintiff-Appellant                  )
                                            )
(David Hernandez, Gina M. Nelson            )
Hernandez, Mary Christelle, and Essential   ) Honorable
Technologies of Illinois, Inc., Third-Party ) John T. Elsner,
Defendants-Appellees).                      ) Judge, Presiding.
_________________________________________________________________________________

MIDAMERICA BANK, FSB,                       ) Appeal from the Circuit Court
                                            ) of Du Page County.
       Plaintiff-Appellant,                 )
                                            )
v.                                          ) No. 02--L--706
                                            )
CHARTER ONE BANK, FSB,                      )
                                            )
       Defendant and Third-Party            )
       Plaintiff-Appellee                   )
                                            )
(David Hernandez, Gina M. Nelson            )
Hernandez, Mary Christelle, and Essential   ) Honorable
Technologies of Illinois, Inc., Third-Party ) John T. Elsner,
Defendants-Appellees).                      ) Judge, Presiding.
_________________________________________________________________________________
Nos. 2--07--0064 & 2--07--0158 cons.


       JUSTICE O'MALLEY delivered the opinion of the court:

       In this consolidated appeal of the trial court's ruling after a bench trial, defendant Charter One

Bank (Charter One) appeals the trial court's ruling that Charter One was liable to plaintiff

MidAmerica Bank (MidAmerica) for the $50,000 value of a cashier's check Charter One had refused

to honor, and MidAmerica appeals the trial court's ruling denying it attorney fees. For the reasons

that follow, we reverse in part and affirm in part.

       The parties do not dispute the basic underlying facts. Mary Christelle, the mother of David

Hernandez (who was also president of Essential Technologies of Illinois, Inc. (ETI)), purchased a

$50,000 check payable to ETI with funds from her Charter One account, and the check was deposited

in ETI's account at MidAmerica. Four days after ETI deposited the cashier's check, Christelle asked

Charter One to stop payment on the check. Charter One did so and subsequently refused to honor

the check when MidAmerica presented it for payment. Charter One returned the check to

MidAmerica with a "stop payment" stamp across the front, and MidAmerica sent the check to ETI

after removing the $50,000 credit from ETI's account. Within two weeks, the balance of ETI's

MidAmerica account dropped to approximately negative $52,000 due to a series of checks that were

returned for insufficient funds. MidAmerica closed the account and instigated a lawsuit in which

it was assigned ETI's interest in the $50,000 check. MidAmerica then filed the present suit against

Charter One to recover the value of the check, and Charter One in turn filed a third-party complaint

against Christelle, David Hernandez, his wife Gina M. Nelson Hernandez, and ETI. Though a copy

of the cashier's check was used as an exhibit at trial, the parties were unable to produce the original

cashier's check. Some testimony indicated that the check may have been in an out-of-state ETI

office, but there was no definitive evidence as to the check's location.



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       After hearing testimony and receiving other evidence, the trial court ruled that Charter One

was obligated to honor its cashier's check and thus was liable to MidAmerica for $50,000, because

"[t]he law under the [Uniform Commercial Code (Code) (810 ILCS 5/1--101 et seq. (West 2002))]

is that [cashier's checks] are as good as currency." The court further found that ETI and David and

Gina Hernandez had used Christelle as a pawn in a check-kiting scheme to defraud Charter One and

that Charter One was entitled to a judgment against them for the same $50,000. Based on its reading

of the relevant case law, the court declined to award MidAmerica attorney fees in connection with

the lawsuit. Charter One had argued that it was entitled to a setoff against MidAmerica because

MidAmerica, as an assignee of ETI, inherited ETI's $50,000 liability to Charter One along with the

right to enforce the $50,000 check against Charter One. However, because Charter One had failed

to request a setoff in its pleadings, the court declined to award one. Charter One and MidAmerica

both filed timely appeals.

       In its appeal (case No. 2--07--0064), Charter One first argues that its refusal to honor its

cashier's check was justified, because it accepted a stop payment order from Christelle. MidAmerica

counters that Illinois law does not allow a bank to stop payment on a cashier's check and thus that

Charter One's refusal to honor its check was not justified.

       In support of its position, MidAmerica directs us to the decision in Able & Associates, Inc.

v. Orchard Hill Farms of Illinois, Inc., 77 Ill. App. 3d 375 (1979). In Able, the court addressed the

very question presented here: whether the law allows a bank to stop payment on a cashier's check.

Able, 77 Ill. App. 3d at 377. The court in Able recognized a split of authority between cases,

including one Illinois Appellate Court case that held that a bank could stop payment on a cashier's

check "consistent with those provisions of the Uniform Commercial Code relat[ed] to holders in due



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course," and cases that "adhere[d] to a contrary rule that cashier's checks are not, under any

circumstances, subject to countermand by the issuing bank." Able, 77 Ill. App. 3d at 380. The court

sided with the latter line of cases, and it explained its reasoning as follows:

               "It is clear that in Illinois, a cashier's check is regarded as accepted by the act of

       issuance. [Citations.] Further, under section 4--403 of the Uniform Commercial Code, a

       stop order is ineffective 'after the bank has *** accepted or certified the item.' (Ill. Rev. Stat.

       1977, ch. 26, par. 4--303.)" Able, 77 Ill. App. 3d at 381.

Other courts clarified that this rule, that a cashier's check be considered accepted by the act of

issuance, was based on language from the Code that "[a]cceptance is the drawee's signed engagement

to honor the draft as presented" (Ill. Rev. Stat. 1977, ch. 26, par. 3--410(1)); these courts considered

a bank officer's signature on a cashier's check as sufficient for acceptance under the quoted language.

See Da Silva v. Sanders, 600 F. Supp. 1008, 1012 n.11 (D.C. 1984).

       The Able court also argued that policy considerations favored its holding, because cashier's

checks operate as the commercial equivalent of cash, and allowing a bank to stop payment (and thus

renege on its guarantee to honor the check) 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.' " Able, 77 Ill. App. 3d at 382, quoting National Newark & Essex Bank v. Giordano, 111 N.J.

Super. 347, 351-52, 268 A.2d 327, 329 (1970).

       The Able decision was consistent with Illinois case law preceding it. See, e.g., Gillespie v.

Riley Management Corp., 59 Ill. 2d 211, 216 (1974) ("The cashier's check is substantially equivalent

to a certified check in that neither generally can be countermanded and both circulate in the

commercial world as primary obligations of the issuing bank as substitutes for the money



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represented"). But see Bank of Niles v. American State Bank, 14 Ill. App. 3d 729 (1973) (departed

from in Able). The approach followed in Able came to be known as the "cash substitute" or "cash

equivalency" approach, or the "acceptance approach." See J. Carter, Uniform Commercial Code:

A Bank's Right to Dishonor a Cashier's Check, 38 Okla. L. Rev. 359, 362 (1985) (hereinafter Carter)

(discussing differing views to the problem presented in Able); B. Davis, The Future of Cashier's

Checks Under Revised Article 3 of the Uniform Commercial Code, 27 Wake Forest L. Rev. 613, 621

(1992) (hereinafter Davis).

        While Illinois followed the cash-equivalency approach described above, other jurisdictions

followed a divergent approach that allowed a bank to dishonor its cashier's check where it could

assert a defense that would be valid against enforcement of a note. See Bank One v. Northern Trust

Bank, 775 F. Supp. 266, 270 n.4 (N.D. Ill. 1991) (noting split between this approach and the Illinois

approach); Carter, 38 Okla. L. Rev. at 364-65 (discussing two approaches under which courts treated

cashier's checks as negotiable instruments instead of cash equivalents). Proponents of this approach,

which we term for purposes of this discussion the "note approach," criticized the cash-equivalency

approach's reliance on the Code rule that a stop order may be issued only before acceptance (see Ill.

Rev. Stat. 1977, ch. 26, par. 4--303(a)). They argued that "the concept of stopping payment has

relevance only to relations between a bank and its customer who draws a check against the bank"

and, "since the bank, as drawer and drawee, is its own customer when it issues a cashier's check, it

is nonsensical *** to speak of the bank's liability to itself for failing to stop payment on its own

cashier's check." Da Silva, 600 F. Supp. at 1012 (summarizing criticism). Critics of the cash-

equivalency approach also argued that it contravened section 3--118(a) of the Code, which provided

that "[a] draft drawn on the drawer is effective as a note" (Ill. Rev. Stat. 1977, ch. 26, par. 3--118(a)).



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Davis, 27 Wake Forest L. Rev. at 621 (criticizing approaches that treated cashier's checks as drafts

instead of notes). These critics instead advocated for a position that would allow a bank to dishonor

a cashier's check to the extent it had any defense that would be valid against a note. See Ill. Rev.

Stat. 1977, ch. 26, pars. 3--305, 3--306 (defenses to honoring a note).

       Most courts that reached this result did so in two different ways. Da Silva, 600 F. Supp. at

1011 (explaining various approaches). Some courts relied on section 3--118(a), quoted above, to

hold that a cashier's check should be treated as a note. Da Silva, 600 F. Supp. at 1011. Other courts

agreed with the premise from the cash-equivalency approach that a cashier's check could be

considered a draft accepted by the act of issuance, but they argued that, under section 3--413(1) of

the Code, an acceptor was bound in the same way as was a maker and thus should have the same

defenses as a maker. Da Silva, 600 F. Supp. at 1011; see Ill. Rev. Stat. 1977, ch. 26, par. 3--413(1)

("The maker or acceptor engages that he will pay the instrument according to its tenor at the time of

his engagement"); see also Davis, 27 Wake Forest L. Rev. at 622-23 (discussing this approach).

       In an attempt to quell this dispute and provide uniformity to the treatment of cashier's checks,

"the National Conference of Commissioners on Uniform State Laws and the American Law Institute

completely revised Article 3 of the U.C.C." Davis, 27 Wake Forest L. Rev. at 614. Effective

January 1, 1992, the Illinois General Assembly adopted the amendments to Article 3. R. Robertson,

Survey of Illinois Law: Commercial Law, 17 S. Ill. U. L.J. 719, 725 (1993), citing Pub. Act 87--582,

eff. January 1, 1992. Though MidAmerica urges that we follow the Able decision discussed above,

Able predates the revision of the Code and is thus an imperfect guide for us here. However, we find

ample guidance nonetheless in the plain language of the amended Code.




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        The current version of the Code (810 ILCS 5/1--101 et seq. (West 2002)) provides as follows,

in pertinent part:

                "The issuer of a note or cashier's check or other draft drawn on the drawer is obliged

        to pay the instrument *** according to its terms at the time it was issued ***. The obligation

        is owed to a person entitled to enforce the instrument or to an indorser who paid the

        instrument under Section 3--415." 810 ILCS 5/3--412 (West 2002).

Thus, the revised version of the Code treats a cashier's check as a note, and it rejects the cash-

equivalency approach that many courts, including those in Illinois, followed. See Davis, 27 Wake

Forest L. Rev. at 631 ("The theory that ultimately prevails under the revised Article 3, with important

limitations ***, is that cashier's checks should be treated as demand notes, with the issuing bank

making a contract equivalent to that of a maker of a note"). Since a cashier's check must be treated

as a note, all of the defenses to enforcement of a note apply. See 810 ILCS 5/3--305 (West 2002).

        We find further support under section 3--411 of the Code for the notion that a bank may

dishonor a cashier's check under certain circumstances. Section 3--411 provides as follows:

                "(a) In this Section, 'obligated bank' means the acceptor of a certified check or the

        issuer of a cashier's check or teller's check bought from the issuer.

                (b) If the obligated bank wrongfully *** refuses to pay a cashier's check ***, the

        person asserting the right to enforce the check is entitled to compensation for expenses and

        loss of interest resulting from the nonpayment ***.

                (c) Expenses *** under subsection (b) are not recoverable if the refusal of the

        obligated bank to pay occurs because (i) the bank suspends payments, (ii) the obligated bank

        asserts a claim or defense of the bank that it has reasonable grounds to believe is available



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       against the person entitled to enforce the instrument, (iii) the obligated bank has a reasonable

       doubt whether the person demanding payment is the person entitled to enforce the

       instrument, or (iv) payment is prohibited by law." 810 ILCS 5/3--411 (West 2002).

       As Charter One observes, because the plain language of subsection (b) of section 3--411

limits the section to a situation in which a bank "wrongfully" refuses to pay a cashier's check, there

must, by implication, be a situation in which a bank's refusal to pay a cashier's check is not wrongful.

       Based on the above discussion, we accept Charter One's position that a bank may dishonor

a cashier's check under certain circumstances. The question becomes whether any of those

circumstances exist here.

       Charter One first argues that it properly dishonored the check pursuant to section 3--312 of

the Code, which discharges a bank's obligation to honor a cashier's check when a person who claims

the right to receive the amount of a lost, destroyed, or stolen cashier's check files a written

declaration of loss as part of an effort to recover the value of the check from the issuing bank. 810

ILCS 5/3--312 (West 2002). Even though no written declaration of loss appears in the record or was

produced a trial, Charter One asserts that Christelle asserted such a claim here because, according

to testimony at trial, "the only way that Charter One would have placed the stop payment order on

the Cashier's Check is if Christelle had prepared and submitted to Charter One" a declaration of loss.

Charter One thus argues that its stop payment order was valid. However, Charter One overlooks

some important qualifications on the procedure outlined in section 3--312. A section 3--312 claim

made to a bank "becomes enforceable at the later of (i) the time the claim is asserted, or (ii) the 90th

day following the date of [a cashier's check]" (810 ILCS 5/3--312(b)(1) (West 2002)), and, "[u]ntil

the claim becomes enforceable, it has no legal effect" (810 ILCS 5/3--312(b)(2) (West 2002)). Only



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if "the claim becomes enforceable before the check is presented for payment" may the obligated bank

avoid its obligation to pay the check. 810 ILCS 5/3--312(b)(3) (West 2002).

       Section 3--312 allows a bank to pay a claimant the value of a lost cashier's check without fear

of double liability in the event the original check resurfaces; the section is not, as Charter One

implies, a blanket authorization for a bank to stop payment on a cashier's check upon the request of

a customer. That said, even assuming that Christelle asserted a lost-check claim under section 3--

312 when she asked Charter One to stop payment on the check four days after issuance (a dubious

assumption, if for no other reason than that a request to stop payment on a check is quite different

from the claim to the value of the check contemplated in section 3--312), the claim could have no

legal effect until 90 days after the date of the check. See 810 ILCS 5/3--312(b)(2) (West 2002). By

the time 90 days had passed, MidAmerica had presented the check to Charter One for payment,

received the check back from Charter One, returned the check to ETI, and closed ETI's account.

Section 3--312 did not authorize Charter One's decision to dishonor the cashier's check.

       To the extent Charter One argues that a bank should have a broad right to stop payment on

a cashier's check upon a request from the customer who purchased the check, we note that the current

version of the Code appears designed to penalize just such a practice. See 810 ILCS Ann. 5/3--411,

Uniform Commercial Code Comments--1992, at 239 (Smith-Hurd 1993) ("A debtor using [cashier's

checks, teller's checks, or certified checks] has no right to stop payment. Nonetheless, some banks

will refuse payment as an accommodation to a customer. Section 3--411 is designed to discourage

this practice"); 810 ILCS Ann. 5/3--411, Uniform Commercial Code Comments--1992, at 239

(Smith-Hurd 1993) ("Subsection (c) provides that expenses *** are not recoverable if the refusal to

pay is because of the reasons stated. The purpose is to limit that recovery to cases in which the bank



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refuses to pay even though its obligation to pay is clear and it is able to pay. Subsection (b) applies

only if the refusal to honor the check is wrongful. If the bank is not obliged to pay there is no

recovery"); Davis, 27 Wake Forest L. Rev. at 639 ("the drafters included modifications to prevent

banks from being too easily persuaded to dishonor the checks or from feeling compelled to do so

upon a customer's request").1

       Charter One also argues that MidAmerica should not now be able to enforce the cashier's

check, because ETI procured it through fraud and MidAmerica, as assignee of ETI's interest in the

check, stands in the shoes of ETI. Before addressing this argument, we must clarify precisely what

right to enforcement is at issue. The parties base their written arguments at least partially on a

dispute as to whether Charter One wrongfully dishonored the check at the time MidAmerica

originally presented it. However, that dispute is not before us. Regardless of the propriety of Charter

One's decision to dishonor the check, MidAmerica, upon having the check returned, removed the

$50,000 credit from ETI's account and gave the check to ETI. (ETI's MidAmerica account later

accrued a negative balance after subsequent checks deposited by ETI were dishonored due to

insufficient funds.) MidAmerica did not suffer any damage as a result of the Charter One check.

In a suit to recover the negative balance of ETI's account, MidAmerica was assigned ETI's right to




       1
           MidAmerica relies on the committee comments to argue that an issuing bank may never

refuse to pay a cashier's check. However, as demonstrated by our discussion above, the revised Code

requires that cashier's checks be treated as notes, and thus defenses to the enforcement of notes

apply. The committee comments do not indicate that a bank may never dishonor a check; they

indicate that a bank should not try to stop payment on a check as an accommodation to a customer.

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enforce the check. Therefore, the dispute before us is whether ETI has a current right to enforce the

check against Charter One.

       We turn to the Code to resolve the dispute. The Code defines a "[p]erson entitled to enforce"

an instrument as, among other things, "the holder of the instrument." 810 ILCS 5/3--101 (West

2002). However, the Code also places limitations on a party's right to enforce an instrument:

               "3--305. Defenses and claims in recoupment.

               (a) Except as stated in subsection (b), the right to enforce the obligation of a party to

       pay an instrument is subject to the following:

                       (1) a defense of the obligor based on (i) infancy of the obligor to the extent

               it is a defense to a simple contract, (ii) duress, lack of legal capacity, or illegality of

               the transaction which, under the law, nullifies the obligation of the obligor, (iii) fraud

               that induced the obligor to sign the instrument with neither knowledge nor reasonable

               opportunity to learn of its character or its essential terms, or (iv) discharge of the

               obligor in insolvency proceedings;

                       (2) a defense of the obligor stated in another Section of this Article or a

               defense of the obligor that would be available if the person entitled to enforce the

               instrument were enforcing a right to payment under a simple contract; and

                       (3) a claim in recoupment of the obligor against the original payee of the

               instrument if the claim arose from the transaction that gave rise to the instrument; but

               the claim of the obligor may be asserted against a transferee of the instrument only

               to reduce the amount owing on the instrument at the time the action is brought.




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                (b) The right of a holder in due course to enforce the obligation of a party to pay the

        instrument is subject to defenses of the obligor stated in subsection (a)(1), but is not subject

        to defenses of the obligor stated in subsection (a)(2) or claims in recoupment stated in

        subsection (a)(3) against a person other than the holder.

                (c) Except as stated in subsection (d) [dealing with obligations of accommodation

        parties], in an action to enforce the obligation of a party to pay the instrument, the obligor

        may not assert against the person entitled to enforce the instrument a defense, claim in

        recoupment, or claim to the instrument (Section 3--306) of another person, but the other

        person's claim to the instrument may be asserted by the obligor if the other person is joined

        in the action and personally asserts the claim against the person entitled to enforce the

        instrument.    An obligor is not obliged to pay the instrument if the person seeking

        enforcement of the instrument does not have rights of a holder in due course and the obligor

        proves that the instrument is a lost or stolen instrument." 810 ILCS 5/3--305(a), (b), (c)

        (West 2002).

        As noted, Charter One asserts that MidAmerica has no right to enforce the cashier's check

here because ETI obtained the check through a fraud on Charter One. MidAmerica counters by

challenging the trial court's finding that ETI engaged in fraud. MidAmerica's argument on this point

has three prongs. First, it argues that Charter One failed to plead fraud against ETI and therefore

cannot now assert such fraud, regardless of the proof adduced at trial. Charter One does not respond

to this argument in its reply brief. However, we note that, when the trial court found that ETI

defrauded Charter One, it did so not to sustain liability against ETI but to establish a factual predicate

to its ruling on the respective rights of MidAmerica and Charter One, because, as ETI's assignee,



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MidAmerica's right to enforce the instrument coincided with ETI's right to enforce it. This question

of fact was raised even if ETI was not a proper party to the suit.

       Second, MidAmerica argues that the trial court lacked jurisdiction over ETI due to a failure

of service of process, and, therefore, the trial court could not enter a finding of fraud against ETI.

We reject this argument for the same reason we reject MidAmerica's first argument.

       Third, MidAmerica argues that "absolutely no evidence was introduced by Charter One

establishing that ETI was involved in the alleged check kiting scheme or that MidAmerica was aware

of it." Of course, since the issue is whether ETI has a right to enforce the instrument, whether

MidAmerica was aware of any fraud is irrelevant. That said, Charter One directs us to ample

evidence to support the trial court's finding that ETI defrauded Charter One. The trial court heard

evidence that Christelle's Charter One account had never had more than $5,000 in activity in a single

month before January 2002, when the account value rose to over $100,000 before two $50,000

checks were returned for insufficient funds. There was also evidence that items were being

deposited and withdrawn from Christelle's account for the same dollar amount in a very short period

of time. Further, David Hernandez, an agent of ETI, asserted his fifth amendment privilege against

self-incrimination when asked about allegations that he had manipulated Christelle's finances and

when asked about ETI's financial transactions. As the trial court noted in its ruling, the cashier's

check was made out to ETI, and thus ETI was poised to benefit from the check. We will not

overturn a trial court's factual findings unless they are against the manifest weight of the evidence.

E.g., Thomas v. Diener, 351 Ill. App. 3d 645, 652 (2004). In light of the evidence that supports the

notion that ETI defrauded Charter One, we will not disturb the trial court's finding on that point. We

therefore reject all three prongs of MidAmerica's challenge to the trial court's finding that ETI



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procured the check by fraud through a check-kiting scheme, and we consider whether ETI (and thus

its assignee, MidAmerica) may enforce the instrument after committing such fraud to obtain it.

       The type of fraud at issue here, termed "fraud in the inducement," is a defense of the obligor

under section 3--305(a)(2). J. White & R. Summers, Uniform Commercial Code §14--10, at 542-43

(5th ed. 2000). MidAmerica argues that, even if ETI committed fraud, Charter One may not assert

fraud as a defense to enforcement because, pursuant to section 3--305(b), defenses of the obligor do

not apply against holders in due course, a status MidAmerica ascribes to ETI. Section 2--203 of the

Code provides a quick rejoinder to MidAmerica's argument:

               "Transfer of an instrument, whether or not the transfer is a negotiation, vests in the

       transferee any right of the transferor to enforce the instrument, including any right as a holder

       in due course, but the transferee cannot acquire rights of a holder in due course by a transfer,

       directly or indirectly, from a holder in due course if the transferee engaged in fraud or

       illegality affecting the instrument." 810 ILCS 5/3--203(b) (West 2002).

Because the trial court found that ETI procured the cashier's check by fraud, ETI cannot claim the

protection of holder-in-due-course status. Also because the trial court found that ETI procured the

instrument by fraud, Charter One has a valid defense against ETI's right to enforce the instrument.

Since MidAmerica stands in the shoes of ETI, Charter One's defense is also valid against

MidAmerica's right to enforce the instrument. We must therefore reverse the trial court's ruling that

Charter One was liable to MidAmerica (through ETI) for the value of the check.

       In its appeal (case No. 2--07--0158), MidAmerica argues that the trial court erred by refusing

to award it attorney fees for Charter One's wrongful refusal to pay on the cashier's check. However,




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we hold above that MidAmerica, as an assignee of ETI, cannot enforce the cashier's check against

Charter One. Therefore, we do not reach this issue.

       For the foregoing reasons, we reverse the judgment of the circuit court of Du Page County

holding that MidAmerica could enforce the cashier's check against Charter One. We affirm the trial

court's decision not to award attorney fees to MidAmerica.

       No. 2--07--0064, Reversed.

       No. 2--07--0158, Affirmed.

       BYRNE, P.J., and ZENOFF, J., concur.




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