## Facts

- Borrowers obtained a loan from an issuing bank to fund a manufactured-home down payment and directed the bank to issue loan proceeds as a cashier’s check payable to the seller.
- The seller deposited the issuing bank’s cashier’s check into its business account at a depositary/collecting bank and requested immediate availability of funds.
- Before making funds available, the depositary bank’s branch manager contacted the issuing bank and confirmed the cashier’s-check information.
- After the depositary bank credited the account, the seller withdrew funds, including by purchasing a cashier’s check from the depositary bank payable to one of the seller’s principals.
- The borrowers later claimed the seller had defrauded them and instructed the issuing bank to stop payment on the issuing bank’s cashier’s check.
- The issuing bank contacted the depositary bank after the seller’s withdrawals had already occurred, and the depositary bank later honored the withdrawal-related cashier’s check upon presentment.
- The issuing bank refused to honor its own cashier’s check when presented through the collection process, and the depositary bank sued to enforce payment.
- The trial court denied the depositary bank’s partial summary judgment motion and granted summary judgment for the issuing bank.

## Issues

1. Under Indiana’s enactment of UCC Article 3, when, if ever, may an issuing bank refuse to pay its cashier’s check after issuance.
2. Whether the depositary/collecting bank was a holder in due course entitled to enforce the cashier’s check free of the issuing bank’s asserted defenses based on alleged fraud in the underlying transaction.
3. Whether the depositary bank failed to mitigate damages by making funds available and honoring withdrawals before receiving notice from the issuing bank.

## Decision

- The Court of Appeals reversed the summary judgment for the issuing bank and remanded with instructions to enter judgment for the depositary bank.
- The court held the issuing bank wrongfully refused to pay its cashier’s check and that the issuing bank lacked an applicable Article 3 defense against the depositary bank.
- The court concluded the depositary bank did not fail to mitigate damages.
- The court directed entry of judgment for the face amount of the cashier’s check ($31,917.55), plus expenses, interest, and any consequential damages as determined on remand.

## Legal Principles

- A cashier’s check is drawn by a bank on itself and is treated as the issuing bank’s direct obligation; an issuing bank’s ability to dishonor is narrowly limited by Article 3 defenses.
- A customer’s stop-payment instruction does not, by itself, permit an issuing bank to refuse payment of its cashier’s check when enforcement is sought by a good-faith holder who took the instrument for value without notice of defenses.
- A depositary/collecting bank that takes a cashier’s check for value, in good faith, and without notice of claims or defenses qualifies as a holder in due course and may enforce the instrument free of most personal defenses arising from the underlying transaction.
- Mitigation is not shown where the depositary bank verified the cashier’s check before releasing funds and the issuing bank’s notice came only after the proceeds had already been withdrawn.

## Conclusion

The appellate court held that the issuing bank could not avoid its primary obligation on a cashier’s check based on the drawer-customer’s later fraud allegations and stop-payment request where the depositary bank took the check in good faith for value as a holder in due course, and it ordered judgment for the check amount and related recoverable damages.


South Cent. Bank of Daviess Cnty. v. Lynnville Nat'l Bank, 901 N.E.2d 576 (Ind. Ct. App. 2009)