                                                              FILED
                                                              14-0727
                                                              1/5/2015 3:43:34 PM
                                                              tex-3653833
                                                              SUPREME COURT OF TEXAS
                                                              BLAKE A. HAWTHORNE, CLERK

                             No. 14-0727

________________________________________________________________________

                 IN THE SUPREME COURT OF TEXAS
__________________________________________________________________

    ALLIED PROPERTY AND CASUALTY INSURANCE COMPANY,

                               Petitioner,


                                   vs.

                         VIEWPOINT BANK,
                              Respondent.
__________________________________________________________________

                      On Petition for Review from the
               Fifth District Court of Appeals, Dallas, Texas
                  Court of Appeals No. 05-12-01370-CV
__________________________________________________________________

               RESPONSE TO PETITION FOR REVIEW
__________________________________________________________________


                              James M. McCown
                              jmccown@nvmlaw.com
                              State Bar No. 00788002
                              NESBITT, VASSAR & McCOWN, L.L.P.
                              15851 Dallas Parkway, Suite 800
                              Addison, Texas 75001
                              (972) 371-2411
                              (972) 371-2410 – Telecopier

                              ATTORNEYS FOR RESPONDENT
                                          TABLE OF CONTENTS



  RESPONSE TO ISSUES PRESENTED ...............................................................2

  SUMMARY OF ARGUMENT AND RESPONSE TO ALLIED’S
  INTRODUCTION..................................................................................................2

  ARGUMENT .........................................................................................................4
 I.        UCC Article 3’s Comprehensive Scheme Requires Allied’s Liability. ........4
 II.       UCC Sections 3.309 and 3.310 Govern Allied’s Liability as a Drawer. ......5
      A. The court of appeals did not err in applying UCC Section 3.310. ................5
      B. The court of appeals did not err in applying UCC Section 3.309. ................7
      C. The court of appeals correctly considered Comment 4 to UCC Section
         3.310. ...........................................................................................................10
 III.      This Court Adopted Cases that Appropriately Analyze UCC Article 3 and
           Section 3.309. ..............................................................................................12
 IV.       UCC Article 3 Governs this Appeal Regardless of McAllen Hospitals’
           Retroactivity. ...............................................................................................14
  V.        Rule 56.1 Does not Merit the Review of this Case. ....................................17

  PRAYER ..............................................................................................................18
  CERTIFICATE OF SERVICE ............................................................................19




RESPONSE TO PETITION FOR REVIEW – Page i
                                      TABLE OF AUTHORITIES

                                                  Federal Cases

Bank of Am. Nat'l Trust & Sav. Ass'n v. Allstate Ins. Co., 29 F. Supp. 2d 1129
 (C.D. Cal. 1998) ...................................................................................... 12, 13, 14

Boyle v. United States, 395 F.2d 413 (9th Cir. 1968) ...............................................8

Northeast Bank v. Wells Fargo Bank, N.A., 2012 U.S. Dist. LEXIS 93966 (D.
 Minn. 2012) ............................................................................................. 12, 13, 14

Southeast Invs., Inc. v. Clade, 1999 U.S. Dist. LEXIS 10844 (N.D. Tex. 1999) .....7

Zions First Nat'l Bank v. Moto Diesel Mexicana, S.A. de C.V., 2011 U.S. Dist.
  LEXIS 72989 (E.D. Mich., July 7, 2011)...............................................................9

                                                    State Cases
1/2 Price Checks Cashed v. United Auto. Ins. Co., 344 S.W.3d 378 (Tex. 2011) ....5
Benchmark Bank v. State Farm Lloyds, 893 S.W.2d 649 (Tex. App.--Dallas 1994,
 no writ)........................................................................................................... 14, 16

Bowen v. Aetna Casualty & Surety Co., 837 S.W.2d 99 (Tex. 1992) ....................16
Crystaplex Plastics, Ltd. v. Redevelopment Agency, 92 Cal. Rptr. 2d 197 (Cal.
  App. 2000) ........................................................................................................7, 14
Fetter v. Wells Fargo Bank Tex., N.A., 110 S.W.3d 683 (Tex. App.--Houston [14th
  Dist.] 2003, no pet.). .............................................................................................11
General Motors Acceptance Corp. v. Abington Casualty Ins. Co., 602 N.E.2d 1085
 (Mass. 1992) .........................................................................................................14

Hutzler v. Hertz Corp., 347 N.E.2d 627 (N.Y. 1976) ..............................................15

McAllen Hosps., L.P. v. State Farm County Mut. Ins. Co., 433 S.W.3d 535 (Tex.
 2014) ............................................................................................................. passim

Parkway Bank & Trust Co. v. State Farm Fire & Cas. Co., 990 N.E.2d 1202 (Ill.
  App. Ct. 2013), appeal denied, 996 N.E.2d 16 (Ill. 2013). ........................... 12, 14


RESPONSE TO PETITION FOR REVIEW – Page ii
State ex rel. N.D. Hous. Fin. Agency v. Center Mut. Ins. Co., 720 N.W.2d 425
  (N.D. 2006) ...........................................................................................................14

ViewPoint Bank v. Allied Prop. & Cas. Ins. Co., 439 S.W.3d 626 (Tex. App.--
 Dallas 2014, pet. filed) ................................................................................. passim

                                                       Statutes
12 U.S.C. § 5001 ........................................................................................................8

TEX. BUS. & COM. CODE § 3.110 .........................................................................4, 16
TEX. BUS. & COM. CODE § 3.301 ...............................................................................4

TEX. BUS. & COM. CODE § 3.309 ..................................................................... passim
TEX. BUS. & COM. CODE § 3.310 ..................................................................... passim

TEX. BUS. & COM. CODE § 3.409(a),.........................................................................4
TEX. BUS. & COM. CODE § 3.414(b) ......................................................... 4, 6, 10, 16

TEX. BUS. & COM. CODE § 3.502(e).....................................................................4, 16
TEX. BUS. & COM. CODE § 3.504(a)(1) ......................................................... 7, 12, 16

TEX. BUS. & COM. CODE § 3.602(a).....................................................................4, 16

TEX. BUS. & COM. CODE § 3.802 (deleted by Acts of June 16, 1995, 74th Leg., R.S.,
  ch. 921, § 1) ..........................................................................................................15

TEX. BUS. & COM. CODE § 4.105 ...............................................................................8

TEX. BUS. & COM. CODE § 4.204 ...............................................................................8
TEX. BUS. & COM. CODE § 4.206 ...............................................................................8

TEX. BUS. & COM. CODE § 4.214 ...............................................................................8

TEX. BUS. & COM. CODE § 4.215 .........................................................................8, 12

TEX. BUS. & COM. CODE § 4.406(b) ......................................................................8, 9




RESPONSE TO PETITION FOR REVIEW – Page iii
                                                 Other Authorities
6B R. Anderson, Anderson on the Uniform Commercial Code § 3-309:13R (3d ed.
2003) ..........................................................................................................................8

28 WILLISTON ON CONTRACTS § 72:36 (4th ed. 2003) ............................................14

TEX. R. APP. P. 56.1 .......................................................................................... 17, 18
TEX. R. APP. P. 53.3 ...................................................................................................1




RESPONSE TO PETITION FOR REVIEW – Page iv
                                 No. 14-0727

________________________________________________________________________

                 IN THE SUPREME COURT OF TEXAS
__________________________________________________________________

    ALLIED PROPERTY AND CASUALTY INSURANCE COMPANY,

                                   Petitioner,


                                       vs.

                             VIEWPOINT BANK,
                                  Respondent.
__________________________________________________________________

                      On Petition for Review from the
               Fifth District Court of Appeals, Dallas, Texas
                  Court of Appeals No. 05-12-01370-CV
__________________________________________________________________

               RESPONSE TO PETITION FOR REVIEW
__________________________________________________________________

TO THE HONORABLE SUPREME COURT OF TEXAS:

      Respondent ViewPoint Bank (“ViewPoint”) responds to Petitioner Allied

Property and Casualty Insurance Company’s (“Allied”) Petition for Review pursuant

to Texas Rule of Appellate Procedure 53.3.




RESPONSE TO PETITION FOR REVIEW – Page 1
                     RESPONSE TO ISSUES PRESENTED

      Allied’s issues do not reflect the topics necessary to resolve Allied’s Petition.

In response to Allied’s first and second issues presented, the issue is:

      1.     Whether the court of appeals erred in holding Allied liable as drawer of

the checks under UCC Article 3?

      In response to Allied’s third issue presented, the issue is:

      2.     Whether UCC Article 3 governs Allied’s liability as drawer of the

checks?

                     SUMMARY OF ARGUMENT AND
                 RESPONSE TO ALLIED’S INTRODUCTION

      The court of appeals correctly held Allied liable under UCC Article 3 as a

drawer of ten insurance settlement checks. Allied agrees that Article 3 does not

discharge its liability to ViewPoint as drawer of the checks because those checks

were improperly paid. This key and undisputed fact is dispositive, irrespective of

Allied’s arguments. Because the checks were not properly paid, Allied is liable to

ViewPoint as a matter of law under either UCC Subsection 3.310(b)(3) or (b)(4),

regardless of the checks’ existence or location.

      The court of appeals properly found that Subsection 3.310(b)(4), when read

with Section 3.309, is the appropriate option for Allied’s liability because the checks

were lost, stolen, or destroyed. Allied contends that it escapes liability because the

checks were cashed. This is incorrect. Cashed checks cannot be recovered, and are
RESPONSE TO PETITION FOR REVIEW – Page 2
therefore lost or destroyed, both factually and under the analysis UCC Article 3’s

comprehensive scheme requires. Even if the checks existed and could be located,

Allied is, again, still liable to ViewPoint under Article 3 because the checks were

improperly paid.

       Allied embellishes its argument by characterizing the court of appeals’

decision, and this Court’s opinion in McAllen Hosps., L.P. v. State Farm County

Mut. Ins. Co., 433 S.W.3d 535 (Tex. 2014), as shocking departures from Texas law

that create “strict liability” to insurers as drawers of settlement checks. Allied

sounds a false alarm. Under Article 3, all drawers of checks, including insurance

companies, are liable on their checks until the checks are properly paid. This result

is not “unfair.” As the court of appeals’ decision and McAllen Hosps. recognize,

the drawer has a remedy against its bank under Article 3 for paying a check with

improper endorsements. The collecting bank that initially accepted the checks with

the improper endorsements bears ultimate liability. A drawer’s liability under

Article 3’s comprehensive scheme is not “unfair” and is not “strict liability.”

       Lastly, Allied mistakenly claims that limiting McAllen Hosps.’ application

absolves Allied from liability. It does not. McAllen Hosps. merely recognizes UCC

Article 3’s application; it does not create new law. Allied’s liability hinges on

Article 3, not on McAllen Hosps.’ holding. Even if McAllen Hosps. is necessary

for Allied’s liability (and it is not), its holding applies retroactively.


RESPONSE TO PETITION FOR REVIEW – Page 3
      UCC Article 3 permits only one result based on the undisputed facts of this

case. Allied is liable to ViewPoint as drawer of the improperly paid checks. The

court of appeals correctly decided that issue. Allied’s request for the Court to review

that decision does not have merit.

                                     ARGUMENT

I.    UCC Article 3’s Comprehensive Scheme Requires Allied’s Liability.

      Allied is liable as drawer of the checks because the checks were improperly

paid without the necessary endorsements. TEX. BUS. & COM. CODE §§ 3.110, 3.301,

3.309, 3.310, 3.414(b), 3.502(e), 3.602(a) [hereinafter, “TEX. UCC”]. A drawer is

liable on its check if the check is dishonored, regardless of the circumstances. TEX.

UCC § 3.414(b) and cmt. 2 (“The liability of the drawer of an unaccepted draft is

treated as a primary liability.”). A check is dishonored when it is not accepted or

improperly paid. TEX. UCC § 3.502(e). Allied’s checks were dishonored because

they were not accepted, TEX. UCC § 3.409(a), and because they were improperly

paid due to missing endorsements. TEX. UCC §§ 3.110(d), 3.602(a). Because the

checks were dishonored, Allied is primarily liable as a drawer:

      Article 3 . . . establishes a comprehensive scheme governing the
      procedures, liabilities, and remedies pertaining to negotiable
      instruments, including checks. As part of that scheme, when a bank
      dishonors a check, the drawer of the check is obligated to pay the
      amount of the check to the check's holder according to its terms at the
      time it was issued. TEX. BUS. & COM. CODE § 3.414(b).



RESPONSE TO PETITION FOR REVIEW – Page 4
1/2 Price Checks Cashed v. United Auto. Ins. Co., 344 S.W.3d 378, 380 (Tex. 2011)

(citations omitted).

II.   UCC Sections 3.309 and 3.310 Govern Allied’s Liability as a Drawer.
      Allied concedes that Article 3 does not discharge its liability on the checks.

(Petition at 8).   Allied nevertheless argues that it can avoid liability for the

dishonored checks because ViewPoint does not have an “avenue to enforce the

checks.” Id. UCC Sections 3.309 and 3.310 provide ViewPoint two “avenues” to

enforce Allied’s checks. The court of appeals properly found that those sections

delineate the mechanics for Allied’s liability.

      A.     The court of appeals did not err in applying UCC Section 3.310.
      With respect to Allied’s uncertified checks, subsection 3.310(b) lists three

rules to determine whether Allied is liable on the underlying obligation, or the

checks, or both.1 If the checks are properly paid, the obligation or debt is discharged.

TEX. UCC § 3.310(b)(1).         If the checks are dishonored, i.e. improperly paid,

ViewPoint can sue on the underlying debt, or on the checks.                   TEX. UCC §

3.310(b)(3). Subsection 3.310(b)(3) is expressly subject to Subsection 3.310(b)(4).

Under that provision, if the checks are lost, stolen, or destroyed, ViewPoint cannot

sue on the underlying debt, but it has a claim on the checks against Allied. TEX.

UCC § 3.310(b)(4).


1
      A fourth option relates to a note, which we do not have here. TEX. UCC § 3.310(b)(2).

RESPONSE TO PETITION FOR REVIEW – Page 5
      Allied’s checks were dishonored, leaving ViewPoint with one of two remedies

against Allied. See TEX. UCC § 3.414(b). Subsection 3.310(b)(3) allows ViewPoint

to enforce the checks or the underlying debt against Allied, subject to Subsection

3.310(b)(4). If ViewPoint does not possess the checks because they were lost,

stolen, or destroyed, Subsection 3.310(b)(4) allows ViewPoint to enforce the checks

against Allied. Thus, regardless of whether the checks can be found or obtained,

Allied is liable to ViewPoint as a drawer under one of the two subsections in 3.310

because the checks were dishonored. TEX. UCC § 3.310(b)(3) & (4).

      Allied argues that neither of these provisions applies. The court of appeals

properly rejected Allied’s theory:

      Allied's argument leads to the absurd result that the drawer is not
      discharged from liability on either the underlying obligation or the
      checks, but the payee cannot enforce either liability because the
      underlying obligation is suspended under section 3.310 and the payee
      cannot sue on the checks under Allied's limited reading of section
      3.309(a)(3).
ViewPoint Bank v. Allied Prop. & Cas. Ins. Co., 439 S.W.3d 626, 635 (Tex. App.--

Dallas 2014, pet. filed). The court of appeals correctly held Allied liable under the

second of the applicable options here, Subsection 3.310(b)(4), because the checks

were lost, stolen, or destroyed. ViewPoint Bank, 439 S.W.3d at 632 (“This case

involves the last situation [under 3.310(b)] because ViewPoint, although it once had

constructive possession, no longer has possession of the checks.”). Subsection

3.310(b)(4) directly connects Allied’s liability as a drawer of the checks to UCC

RESPONSE TO PETITION FOR REVIEW – Page 6
Section 3.309. TEX. UCC § 3.310, cmt. 4 (“The payee’s cause of action is against .

. . the drawer under Section 3-309.”).

      B.     The court of appeals did not err in applying UCC Section 3.309.
      Allied contends that ViewPoint does not meet UCC Section 3.309’s third

element, i.e. that ViewPoint cannot reasonably obtain possession of the checks

because the checks are lost or destroyed. (Petition at 10); TEX. UCC § 3.309(a)(3).

The court of appeals properly found that ViewPoint met this criteria because it could

not obtain the checks and present them for payment. ViewPoint Bank, 439 S.W.3d

at 634 (“The unpaid payee in this situation cannot with reasonable diligence present

the draft because it has been processed and paid, albeit improperly, to the forger.”)

(citing TEX. UCC § 3.504(a)(1)).

      “Under Tex. Bus. & Comm. Code § 3.309, a person who is not in possession

of an instrument may enforce the instrument if: . . . (3) the person cannot reasonably

obtain possession of the instrument.” Southeast Invs., Inc. v. Clade, 1999 U.S. Dist.

LEXIS 10844, *7 (N.D. Tex. 1999); see also Crystaplex Plastics, Ltd. v.

Redevelopment Agency, 92 Cal. Rptr. 2d 197, 204 (Cal. App. 2000) (“The third

requirement of section 3309 is that the person cannot reasonably obtain possession

of the instrument.”).

      It is sufficient that the plaintiff “cannot reasonably obtain possession.”
      That is, the Code does not impose the standard of absolute impossibility
      to produce the instrument, although, in cases of a physical destruction,
      such a standard is satisfied.

RESPONSE TO PETITION FOR REVIEW – Page 7
6B R. Anderson, Anderson on the Uniform Commercial Code § 3-309:13R, p. 400

(3d ed. 2003).

       The undisputed facts here conform to Subsection 3.309(a)(3). ViewPoint lost

possession of the checks when the insured misappropriated them. (Petition at 4).

There is no dispute that the checks were “lost, destroyed, or stolen.” See TEX. UCC

§ 3.310(b)(4). ViewPoint could not obtain possession of the “stolen” checks because

the insured cashed the checks. (Petition at 4). By doing so, the insured relinquished

the checks to its bank, and ultimately to Allied’s bank through the bank collection

process. See TEX. UCC §§ 4.105(3), 4.204, 4.206. If the checks still exist2, they

are canceled, and either Allied or its bank has them. See, e.g., TEX. UCC § 4.406(b);

Boyle v. United States, 395 F.2d 413, 416 (9th Cir. 1968) (“the checks, once paid

and canceled, became nothing more than records belonging exclusively to the maker

to whom they had been returned.”). It is undisputed that ViewPoint could not obtain

possession of the original checks from Allied. (CR 370-404). Even if ViewPoint

could obtain the canceled checks, it could not present them for payment because

Allied’s bank already funded the checks through final settlement. See TEX. UCC §§

4.214, 4.215.



2
        Checks are usually collected electronically. The check is “truncated,” i.e. imaged, and
sent for collection. 12 U.S.C. § 5002(18). This process, under the Check Clearing for the 21st
Century Act, typically results in destruction of the hard check, as the Federal Reserve explains.
12 U.S.C. § 5001; http://www.federalreserve.gov/paymentsystems/regcc-faq-check21.htm#16.

RESPONSE TO PETITION FOR REVIEW – Page 8
      The court of appeals therefore correctly held that ViewPoint’s inability to

obtain possession of the checks meets at least one of Subsection 3.309(a)(3)’s

criteria. ViewPoint Bank, 439 S.W.3d at 633 (“It is undisputed the checks were

processed through the banking system and are now in Allied's possession.)” Allied

assumes that the checks were not lost or destroyed because the insured cashed them.

(Petition at 10). This argument proves Allied’s liability under Subsection 3.309.

The insured initially stole the checks, triggering Subsection 3.310(b)(4), and then

caused the checks to be lost or destroyed under Subsection 3.309(a)(3) by cashing

them. See TEX. UCC § 4.406(b).

      Allied infers that copies of the checks disprove Section 3.309(a)(3). (Petition

at 10). This too is inaccurate. Check copies legally differ from original checks and

they cannot be presented for payment. See Zions First Nat'l Bank v. Moto Diesel

Mexicana, S.A. de C.V., 2011 U.S. Dist. LEXIS 72989, *11 (E.D. Mich., July 7,

2011). Allied’s production of copies of the checks, rather than the original checks,

also establishes Subsection 3.309(a)(3)’s requisites. (CR 370-404).

      Separately, Allied’s singular focus on whether the checks were lost, stolen or

destroyed under Subsection 3.309(a)(3) suffers from a fatal flaw. See ViewPoint

Bank, 439 S.W.3d at 634 (“Allied's reading of the last clause of section 3.309(a)(3)

in isolation ignores the comprehensive scheme established by the UCC and the

official comments”). If the checks were not lost, stolen, or destroyed, such that


RESPONSE TO PETITION FOR REVIEW – Page 9
ViewPoint could obtain them and Section 3.309 did not apply, Allied is still liable

to ViewPoint on the underlying obligation or the checks under Subsection

3.310(b)(3):

      Except as provided in Subdivision (4), if the check or note is dishonored
      and the obligee of the obligation for which the instrument was taken is
      the person entitled to enforce the instrument, the obligee may enforce
      either the instrument or the obligation.

TEX. UCC § 3.310(b)(3). See also TEX. UCC § 3.414(b). No matter Allied’s theory,

it is liable to ViewPoint under Article 3’s comprehensive scheme because, as Allied

admits, its checks were improperly paid. Subsection 3.309 is the appropriate method

for recovery because the checks were cashed and no longer exist. ViewPoint Bank,

439 S.W.3d at 633. The court of appeals did not err in holding Allied liable because

the checks were lost, stolen or destroyed. TEX. UCC §§ 3.309(a)(3), 3.310(b)(3).

      C.       The court of appeals correctly considered Comment 4 to UCC
               Section 3.310.
      The UCC’s official comment 4 to Section 3.310 determines Allied’s liability

under a hypothetical that is virtually identical to the facts here. Allied attempts to

distinguish this comment by claiming that it “does not address the enforcement

mechanism or remedy available” under Section 3.309. (Petition at 11). A cursory

reading of Comment 4 reveals that it does identify the specific “mechanism and

remedy available,” i.e. Section 3.309.

      The UCC and its interpretive comments must be read consistently. See Fetter


RESPONSE TO PETITION FOR REVIEW – Page 10
v. Wells Fargo Bank Tex., N.A., 110 S.W.3d 683, 687 (Tex. App.--Houston [14th

Dist.] 2003, no pet.). Comment 4’s plain language identifies Allied’s liability under

UCC Section 3.309. The drawer is not discharged when a check is improperly paid

because of an improper endorsement. TEX. UCC § 3.310, cmt. 4. The comment

further explains the drawer’s liability under UCC Section 3.309:

      There was uncertainty concerning . . . the case in which the check
      given for the obligation was stolen from the payee, the payee’s
      signature was forged, and the forger obtained payment. The last
      sentence of subsection (b)(4) addresses this issue. . . . If the payor bank
      pays a person not entitled to enforce the instrument, as in the
      hypothetical case, the suspension of the underlying obligation
      continues because the check has not been paid. Section 3-602(a). The
      payee’s cause of action is against the depository bank or payor bank in
      conversion under Section 3-420 or against the drawer under Section 3-
      309. In the latter case, the drawer's obligation under section 3-414(b)
      is triggered by dishonor which occurs because the check is unpaid.
      Presentment for payment to the drawee is excused under section 3-
      504(a)(i) and, under section 3-502(e), dishonor occurs without
      presentment if the check is not paid. The payee cannot merely ignore
      the instrument and sue the drawer on the underlying contract. This
      would impose on the drawer the risk that the check when stolen was
      indorsed in blank or to bearer.

TEX. UCC § 3.310, cmt. 4 (emphasis added). Contrary to Allied’s interpretation,

comment 4 goes beyond the mere suspension of an underlying debt. It includes a

statutory analysis of the drawer’s liability on the check under Sections 3.309,

3.414(b), 3.502(e) and 3.504(a)(i). The court of appeals properly found that this

“case is analogous to the hypothetical described in comment 4,” and properly found




RESPONSE TO PETITION FOR REVIEW – Page 11
that Comment 4 explained the “mechanism for enforcing [Allied’s] liability on the

instrument” under UCC Section 3.309. ViewPoint Bank, 439 S.W.3d at 633.

III. This Court Adopted Cases that Appropriately Analyze UCC Article 3
     and Section 3.309.
      Allied urges the Court to ignore Article 3’s scheme, and overturn McAllen

Hosps., by following three cases that have reached opposite results. (Petition at 14).

Northeast Bank v. Wells Fargo Bank, N.A., 2012 U.S. Dist. LEXIS 93966 (D. Minn.

2012); Bank of Am. Nat'l Trust & Sav. Ass'n v. Allstate Ins. Co., 29 F. Supp. 2d

1129 (C.D. Cal. 1998); Parkway Bank & Trust Co. v. State Farm Fire & Cas. Co.,

990 N.E.2d 1202 (Ill. App. Ct. 2013), appeal denied, 996 N.E.2d 16 (Ill. 2013).

      These three cases wrongfully assume, as does Allied, that the rightful payee

can recover cashed checks and submit them for payment. Northeast Bank, 2012 U.S.

Dist. LEXIS 93966 at *11; Bank of Am. Nat'l Trust & Sav. Ass'n, 29 F. Supp. 2d at

1145; Parkway Bank & Trust Co., 990 N.E.2d at 1207. As explained above, the

rightful payee cannot obtain canceled checks and present them for payment.

ViewPoint Bank, 439 S.W.3d at 633 (“a person not entitled to enforce the checks

has obtained payment, improperly, from the bank and the checks will have been

processed through the banking system and returned to the drawer”); TEX. UCC §§

3.504, 4.215.    UCC Article 4 prohibits the re-payment of checks in most

circumstances after certain deadlines, which undoubtedly lapsed here. See TEX.

UCC §§ 4.214, 4.215. And, these opinions fail to impose the drawer’s liability under

RESPONSE TO PETITION FOR REVIEW – Page 12
UCC Section 3.310(b)(3), which holds the drawer of an improperly paid check liable

on the underlying obligation or on the check if it is not lost, destroyed or stolen.

      Some of these opinions also wrongfully infer, as does Allied, that Section

3.309(a)(3) is not met because the checks were cashed by a forger that “was known

or could be served.” (Petition at 17 and n. 3). The original forger’s identity or

location is relevant under Subsection 3.309(a) only if the forger still possesses the

checks. The forger does not possess the checks here. ViewPoint could not obtain

the checks from the insured, i.e. the “forger,” whether it could be found or served,

because the insured did not possess the checks. The insured cashed the checks,

causing them to be canceled and either destroyed or sent to Allied’s bank.

Subsection 3.309(a)(3) is ViewPoint’s avenue to recovery because it cannot obtain

canceled checks and resubmit them for payment.

      Allied’s improper reading of 3.309(a)(3), and the erroneous holdings in

Northeast Bank, Bank of Am. Nat'l Trust, and Parkway Bank & Trust Co., are

contrary to Article 3’s comprehensive scheme. As with Allied’s argument, these

cases improperly relieve a drawer from liability despite the absence of a discharge

under Article 3. See ViewPoint Bank, 439 S.W.3d at 635 (“absurd result that the

drawer is not discharged from liability on either the underlying obligation or the

checks, but the payee cannot enforce either liability”). Far from committing error,

the court of appeals recognized that Article 3 conflicts with the holdings in Northeast


RESPONSE TO PETITION FOR REVIEW – Page 13
Bank, Bank of Am. Nat'l Trust, and Parkway Bank & Trust Co. The court of appeals

correctly followed other jurisdictions in reaching a decision that is true to Article 3:

      We follow these jurisdictions and construe the UCC to allow
      enforcement of the drawer's liability on the instruments where the
      instruments have improperly been paid on a missing endorsement. To
      hold otherwise "would result in 'no assurance that all the joint payees
      would receive payment' and would dissolve any distinction between
      drafts made out to alternative copayees and drafts made out to
      nonalternative copayees."

ViewPoint Bank, 439 S.W.3d at 635 (citing McAllen Hosps., 433 S.W.3d at 540 and

General Motors Acceptance Corp. v. Abington Casualty Ins. Co., 602 N.E.2d 1085,

1088 (Mass. 1992)). See also State ex rel. N.D. Hous. Fin. Agency v. Center Mut.

Ins. Co., 720 N.W.2d 425, 431 (N.D. 2006); Crystaplex, 92 Cal. Rptr. 2d at 204.

IV.   UCC Article 3 Governs this Appeal Regardless of McAllen Hospitals’
      Retroactivity.
      Allied urges the Court to limit McAllen Hosps.’ application to breathe life

into Benchmark Bank v. State Farm Lloyds, 893 S.W.2d 649 (Tex. App.--Dallas

1994, no writ). Benchmark Bank does not save Allied from Article 3 liability.

      Benchmark Bank is at odds with revised UCC Article 3. See 28 WILLISTON

ON CONTRACTS    § 72:36 (4th ed. 2003). UCC drafters significantly rewrote Articles

3 and 4 in 1991, resulting in a “complete deletion of existing Chapter 3.” Southwest

Bank v. Info Support Concepts, Inc., 149 S.W.3d 104, at 105-106 (Tex. 2004).

Texas adopted the revised UCC Article 3 in 1996, one year after Benchmark was

decided. Id. The former UCC Section 3.802 was the relevant discharge provision

RESPONSE TO PETITION FOR REVIEW – Page 14
on which Benchmark relied. 893 S.W.2d at 651. Revised Article 3 deletes Section

3.802 and adopts new discharge criteria that changes Benchmark’s result.

      Former Section 3.802(a)(2) suspended an underlying obligation when a check

was tendered on that obligation. TEX. BUS. & COM. CODE § 3.802 (deleted by Acts

of June 16, 1995, 74th Leg., R.S., ch. 921, § 1).3 If the check was dishonored, the

obligee could sue on the obligation or the check; if the check was paid, the obligor

was discharged on both the check and the obligation. Id. There was no specific

discharge language for lost, stolen or destroyed checks, leading to inconsistent

results as to whether a check cashed over a forged endorsement was properly paid,

thus discharging the obligor. See, e.g., Hutzler v. Hertz Corp., 347 N.E.2d 627, 629

(N.Y. 1976) (“we note that the courts of other jurisdictions have divided on the

question now before us and it seems as though no majority rule can be stated”).

      UCC Section 3.310 replaced the former Section 3.802, and establishes

discharge rules based on discrete circumstances, including when a check is “lost,

stolen, or destroyed.” TEX. UCC § 3.310 (b)(4). Section 3.310(b)(4) was drafted to

eliminate the confusion arising from payment over a forged endorsement, i.e. the

very issue here and in Benchmark:

      There was uncertainty concerning the applicability of former Section
      3-802 to the case in which the check given for the obligation was stolen


3
      A copy of the former Section 3.802 is attached for the Court’s reference.


RESPONSE TO PETITION FOR REVIEW – Page 15
       from the payee, the payee’s signature was forged, and the forger
       obtained payment.

TEX. UCC § 3.310, cmt. 4. Under this provision, and contrary to Benchmark, a co-

payee’s cashing of a stolen (or lost) check does not discharge the obligor. TEX. UCC

§ 3.310(b)(4). UCC Article 3, specifically Sections 3.110, 3.309, 3.310, 3.414,

3.502, 3.504, and 3.602, have governed a drawer’s liability in Texas since 1996, not

Benchmark Bank.       Those same UCC provisions govern Allied’s liability, not

Benchmark Bank’s outdated holding.

      McAllen Hosps. did not overrule Benchmark Bank; UCC Article 3, overruled

Benchmark Bank when Texas adopted the revised Article 3 in 1996. Because

McAllen Hosps. did not establish a new legal precedent, its ruling applies

retroactively. (Petition for Review at 18). For this same reason, none of the

“Chevron Factors” on which Allied relies are applicable here. Id.

      Even if McAllen Hosps. was necessary precedent to Allied’s liability, it

applies retroactively by its own terms. “A decision of the Supreme Court operates

retroactively unless this Court exercises its discretion to modify that application.”

Bowen v. Aetna Casualty & Surety Co., 837 S.W.2d 99, 100 (Tex. 1992) (citations

omitted). There is no reason to apply McAllen Hosps. prospectively. Correcting a

Texas statute’s interpretation does not justify the prospective application of a

holding. See Bowen, 837 S.W.2d at 100. On the contrary, properly construing a

Texas statute is grounds for the retroactive application of the decision. Id.; (Petition

RESPONSE TO PETITION FOR REVIEW – Page 16
at 19: The UCC’s objective is “promoting certainty and predictability in commercial

transactions.”) (citation omitted). The court of appeals correctly applied UCC

Article 3, and McAllen Hosps., to this case.

      In short, eliminating McAllen Hosps. does not benefit Allied. Allied is subject

to liability as a drawer of the checks under UCC Article 3’s comprehensive scheme,

with or without McAllen Hosps.’ holding. ViewPoint Bank, 439 S.W.3d at 634 (“As

discussed above, several sections in article 3 explain the drawer's liability on an

instrument and how it may be enforced under the code.”).

V.    Rule 56.1 Does not Merit the Review of this Case.
      Allied premises jurisdiction under four provisions of TEX. R. APP. P. 56.1,

none of which apply here.

      The Court does not have jurisdiction based a conflict among the courts of

appeals. TEX. R. APP. P. 56.1(a)(2). There is no conflict among the Texas courts of

appeal with respect to UCC Sections 3.309 and 3.310 (or any other Article 3

provision). Those UCC Sections (in their present form) did not exist at the time

Benchmark Bank was decided. This Court, in McAllen Hosps., ensured that no

conflict about Article 3 exists between Benchmark Bank and other Texas courts.

      The Court does not have jurisdiction based on the construction of UCC

Sections 3.309 and 3.310. TEX. R. APP. P. 56.1(a)(3). UCC Article 3, including

Sections 3.309 and 3.310 must be construed according to their plain language. To


RESPONSE TO PETITION FOR REVIEW – Page 17
the extent any ambiguity exists in those provisions, the UCC’s Official Comments

resolve any statutory interpretation.

      The Court does not have jurisdiction based on an error of law. TEX. R. APP.

P. 56.1(a)(5). The court of appeals properly applied and followed UCC Article 3 in

rendering its opinion. Insurance companies are subject to the same laws as other

drawers when drafting checks.

      Lastly, the Court does not have jurisdiction based on an issue of first

impression. TEX. R. APP. P. 56.1(a)(6). The UCC and its comments precisely

analyze Allied’s liability in this case, including a specific hypothetical on the same

facts. TEX. UCC § 3.310, cmt. 4. Allied’s disagreement with that interpretation does

not equal an unresolved legal issue that merits the Court’s attention. ViewPoint

Bank, 439 S.W.3d at 635 (“The UCC must be ‘liberally construed and applied to

promote its underlying purposes and policies’ . . . including ‘to make uniform the

law among the various jurisdictions.’”) (citing Tex. UCC § 1.103(a)).

                                        PRAYER

      Respondent ViewPoint Bank respectfully requests that Petitioner’s Petition

for Review be in all things refused, or otherwise denied, and that ViewPoint be

awarded all other relief to which it may be justly entitled.




RESPONSE TO PETITION FOR REVIEW – Page 18
                                    Respectfully submitted,

                                    NESBITT, VASSAR & McCOWN, L.L.P.
                                    15851 Dallas Parkway, Suite 800
                                    Addison, Texas 75001
                                    (972) 371-2411
                                    (972) 371-2410 – Telecopier


                                    By:            /s/ Jim McCown
                                       James M. McCown
                                       jmccown@nvmlaw.com
                                       State Bar No. 00788002

                                   ATTORNEYS FOR RESPONDENT

                          CERTIFICATE OF SERVICE
       This is to certify that on this 5th day of January, 2015, a true and correct copy
of the foregoing Response to Petition for Review was served by electronic mail on
the following counsel of record:

      Randall C. Owens
      Wright & Close, LLP
      One Riverway, Suite 2200
      Houston, Texas 77056


                                                     /s/ Jim McCown
                                               James M. McCown

                       CERTIFICATE OF COMPLIANCE
       I certify that the foregoing Response contains 4214 words, excluding the items
identified by TEX. R. APP. P. 9.4(i)(1). The Response therefore complies with Rule
9.4(i)(2)(D).


                                                     /s/ Jim McCown
                                               James M. McCown

RESPONSE TO PETITION FOR REVIEW – Page 19
                                     EXHIBIT 1

       3.802. Effect of Instrument on Obligation for Which It Is Given

       (a) Unless otherwise agreed where an instrument is taken for an
       underlying obligation

              (1) the obligation is pro tanto discharged if a bank is drawer,
              maker or acceptor of the instrument and there is no recourse on
              the instrument against the underlying obligor; and

              (2) in any other case the obligation is suspended pro tanto until
              the instrument is due or if it is payable on demand until its
              presentment. If the instrument is dishonored action may be
              maintained on either the instrument or the obligation; discharge
              of the underlying obligor on the instrument also discharges him
              on the obligation.

       (b) The taking in good faith of a check which is not postdated does not
       of itself so extend the time on the original obligation as to discharge a
       surety.

Biggs v. World Air Conditioning, Inc., 722 S.W.2d 27, 29 n. 3 (Tex. App.--Dallas

1986, writ ref’d n.r.e.).
