## Facts

- Jelmoli Holding, Inc., with a Swiss parent, maintained a U.S. bank account and employed William Potts in Massachusetts to liquidate assets and invest proceeds.
- Potts had authority to sign checks on Jelmoli’s U.S. account and to oversee maintenance of that account.
- Potts maintained a personal margin brokerage account at Raymond James, handled by broker Craig Robinson in Texas.
- After market declines in 2000 triggered margin calls, Potts began using checks drawn on Jelmoli’s bank account to meet his personal margin obligations and to purchase additional stock.
- Robinson questioned the checks; Potts represented that he owned Jelmoli and could use the checks.
- From April through December 2000, Potts delivered approximately $1.5 million in checks drawn on Jelmoli’s account to Raymond James for Potts’s personal account activity.
- In December 2000, Potts confessed to Jelmoli that he had embezzled funds; Jelmoli notified Raymond James months later, after Potts had withdrawn funds from his Raymond James account.
- Jelmoli sued in the District of Massachusetts seeking recovery of more than $1.3 million, primarily on quasi-contract theories (money had and received; unjust enrichment).

## Issues

1. Under Massachusetts UCC Article 3 and Mass. Gen. Laws ch. 106, § 3-307, what showing is required to treat a transferee as having notice of a fiduciary’s breach sufficient to defeat a holder-in-due-course defense?
2. Must the plaintiff prove the transferee had actual knowledge that the check presenter was acting in a fiduciary capacity, or is suspicion/constructive notice of wrongdoing enough?

## Decision

- The First Circuit held that § 3-307 requires proof that the defendant had actual knowledge of the fiduciary relationship before “notice” of breach can be imputed to defeat holder-in-due-course status.
- The court concluded the evidence did not support a finding that Raymond James or Robinson actually knew Potts was acting as a fiduciary for Jelmoli when he tendered the checks.
- Potts’s use of corporate checks for personal margin needs, without proof the broker knew Potts was an employee or agent rather than an owner, showed at most suspicion and did not satisfy the statute.
- The court reversed the judgment to the extent it rejected the holder-in-due-course defense and remanded for further proceedings consistent with its interpretation of § 3-307.

## Legal Principles

- A holder in due course takes a negotiable instrument free of many claims, subject to exceptions including notice of adverse claims.
- Under Mass. Gen. Laws ch. 106, § 3-307, notice of a fiduciary’s breach regarding an instrument can function as notice of an adverse claim and can defeat holder-in-due-course status.
- To invoke § 3-307 against a holder-in-due-course defense, the plaintiff must establish the taker’s actual knowledge that the person signing or negotiating the instrument is a fiduciary for another.
- Suspicion, negligence, or constructive notice that a transaction is irregular is insufficient to satisfy the “actual knowledge” requirement as to fiduciary status.
- Where the taker lacks actual knowledge of fiduciary status, acceptance of checks drawn on a business account for the presenter’s personal purposes does not, by itself, trigger § 3-307’s notice-of-breach mechanism.

## Conclusion

The First Circuit ruled that Massachusetts UCC § 3-307 does not defeat holder-in-due-course protection unless the plaintiff proves the transferee actually knew the check presenter was acting as a fiduciary; irregular use of corporate checks, without that knowledge, is insufficient to impose notice of a fiduciary breach.


Jelmoli Holding, Inc. v. Raymond James Fin. Servs., Inc., 470 F.3d 14 (1st Cir. 2006)