Standard Finance Co., Ltd. v. Ellis
657 P.2d 1056, 35 U.C.C. Rep. Serv. (West) 864, 3 Haw. App. 614 (1983)
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Rule of Law:
Summary judgment is appropriate when no genuine issue of material fact exists and the movant is entitled to judgment as a matter of law, especially when defenses of fraud in the factum or duress by physical compulsion are not met due to the signer's opportunity to understand the instrument or lack of direct physical coercion by the payee.
Facts:
- On September 30, 1976, Betty Ellis and her then-husband W.G. Ellis executed and delivered a promissory note in the amount of $2,800 to Standard Finance Company, Limited.
- Prior to the execution of the note, Ron Higa, vice president and manager of Standard Finance Company, personally explained the terms and conditions of the note to Betty Ellis and W.G. Ellis.
- Shortly before Betty Ellis executed the note, W.G. Ellis gave her "constant assurances" that her "signature was a formality and that he [W.G. Ellis] alone was liable and that the debt would be repaid without any participation by her."
- Betty Ellis was subjected to "physical beatings" and "psychological pressure" by W.G. Ellis "for at least the 3 yrs. prior to signing of note."
- Standard Finance Company issued a check for $2,800 payable to "W.G. Ellis and Betty Ellis," which bore the endorsement of "Betty Ellis" on the reverse side.
- Betty Ellis stated that she "[n]ever got the money or the use of it" and that "[i]t all went to my ex-husband and this was understood by the Plaintiff."
- Nothing was paid on the promissory note after its execution.
Procedural Posture:
- Standard Finance Company, Limited filed a collection suit against Betty Ellis in the trial court on May 15, 1980, after nothing had been paid on the promissory note.
- Standard Finance Company, Limited filed a motion for summary judgment.
- The trial court entered an order granting Standard Finance Company, Limited's motion for summary judgment on January 15, 1981.
- Judgment in the amount of $5,413.35 was filed on March 9, 1981.
- Betty Ellis (defendant-appellant) timely appealed the summary judgment to the Intermediate Court of Appeals of Hawaii.
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Issue:
Does a genuine issue of material fact exist regarding defenses of misrepresentation, duress, or lack of consideration sufficient to preclude summary judgment for a payee on a promissory note, even when the payee "dealt" with the signers?
Opinions:
Majority - Tanaka, J.
No, a genuine issue of material fact did not exist regarding Betty Ellis's alleged defenses of misrepresentation, duress, or lack of consideration, and therefore, the granting of summary judgment for Standard Finance Company was proper. The court first addressed the question of whether Standard Finance Company was a holder in due course. It determined that even if Standard Finance Company qualified as a holder in due course under HRS § 490:3-302, it nonetheless "dealt" with Betty Ellis because its vice president, Ron Higa, was personally present and explained the note's terms. Therefore, under HRS § 490:3-305(2), Standard Finance Company took the note subject to any and all defenses available to Betty Ellis. Regarding misrepresentation, the court found that W.G. Ellis's assurances did not constitute "fraud in the factum" as defined by Restatement (Second) of Contracts § 163 and Comment 7 to UCC § 3-305. This type of fraud, which renders a contract void, requires a misrepresentation as to the character or essential terms that induces signing by one who "neither knows nor has reasonable opportunity to know" of the instrument's nature. Betty Ellis knew she was signing a note, and Ron Higa explained its terms. She had an opportunity to obtain knowledge, distinguishing her situation from cases where signers were tricked into believing a note was a receipt or other document. The court also noted that Standard Finance Company itself did not induce Betty Ellis by misrepresentation, therefore the note was not voidable under § 164(1). Regarding duress, the court determined that W.G. Ellis's prior "physical beatings" and "psychological pressure" did not meet the standard for duress by "physical compulsion" under Restatement (Second) of Contracts § 174, which would render the note void. Such duress involves actual physical force compelling the signing, reducing the party to a "mere mechanical instrument" (e.g., signing at gunpoint). The court found no reasonable inference that the prior beatings directly resulted in her signing the note. Furthermore, there was no evidence that Standard Finance Company made an "improper threat" that left Betty Ellis with "no reasonable alternative," as required for a contract to be voidable under § 175(1). Regarding consideration, the court rejected the argument that Betty Ellis's failure to receive or use the $2,800 constituted a lack or failure of consideration. The loan check was made payable to both W.G. Ellis and Betty Ellis, and Betty Ellis endorsed it. Citing Territorial Collectors v. Harrison, the court reiterated the fundamental principle that consideration received by one co-maker on a note is sufficient to bind the other co-maker. Therefore, valid consideration existed for the transaction. Since the facts and their inferences, even viewed most favorably to Betty Ellis, did not constitute valid defenses to the action, summary judgment was properly granted.
Analysis:
This case significantly clarifies the high legal standard required for establishing defenses that render commercial instruments void or voidable, particularly fraud in the factum and duress. It reinforces that a party's direct interaction with the payee and opportunity to understand the instrument's terms undermine claims of excusable ignorance. The ruling also firmly establishes that consideration given to one co-maker is sufficient to bind all co-makers, ensuring the enforceability of joint obligations despite internal arrangements between the co-makers. This protects the stability of commercial paper by limiting defenses rooted in a signer's subjective understanding or external pressures not directly applied by the payee.
