Business Law 11th Edition by Kenneth Clarkson,Roger LeRoy Miller,Gaylord Jentz,Frank Cross

Exercise 16

Graves v. Johnson
Court of Appeals of Indiana, 2007. 862 N.E.2d 716.
• Background and Facts Vernon and Shirley Graves owned a commercial building and the property on which it was located in Kokomo, Indiana. The Graveses leased the premises to John and Tamara Johnson, who operated Johnson's Towing Recovery on the property. The Johnsons insured the property and their business through Westport Insurance Company. A fire destroyed the building in November 2003. Westport hired Claims Management Services, Inc. (CMS), to investigate and pay the claim. On CMS's behalf, Robert Davis met with Vernon, who was acting as the rebuilding contractor, and agreed that Westport would pay $98,000 in three "progress payments" with the checks to be "co-payable" to Johnson's Towing and Vernon. Westport issued two checks, for $30,000 and $29,000, respectively, and delivered them to Vernon, who deposited them into his account. A third check for $68,037.42 was tendered to the Johnsons. They did not remit the funds to the Graveses, however, who subsequently filed a suit in an Indiana state court against the Johnsons and Westport. a The court entered a summary judgment in Westport's favor. The Graveses appealed to a state intermediate appellate court.
a. The Johnsons filed for bankruptcy, which automatically suspended the Graveses' suit against them.
DARDEN, Judge.
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* * * Indiana Code [S]ection 26-1-3.1-310(b)(1) [Indiana's version of UCC 3-310(b)(1)] * * * provides in relevant part as follows:
[I]f a note or uncertified check is taken for an obligation, the obligation is suspended to the same extent the obligation would be discharged if an amount of money equal to the amount of the instrument were taken, and the following rules apply:
* * * In the case of an uncertified check, suspension of the obligation continues until dishonor of the check or until it is paid or certified. Payment or certification of the check results in discharge of the obligation to the extent of the amount of the check.
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As to method of payment, there is no dispute that Westport agreed to make progress payments to Vernon and agreed to make the payments by check. Furthermore, [Vernon] does not dispute that Westport informed him that any check would be made payable to Vernon and Johnson's Towing, the named insured on the insurance policy. Vernon made no objection to the method of payment and acquiesced to it when he took the first check.
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We find no dispute that Westport sent the Check in accordance with the terms it set forth to the Graveses and as agreed upon by the Graveses * * *.
* * * The Graveses argue that Westport did not discharge its obligation to them because they never received or took the Check.* * * [W]e find this argument unpersuasive.
In determining whether an obligation is suspended as to all joint payees when a check is taken by one joint payee,* * * payment to and possession by one joint payee is constructive possession by the other joint payee.* * * [W]here one joint payee takes and possesses a check, it suspends all obligations as to other joint payees not in actual possession of the check as the party possessing the draft holds the draft for the benefit of himself and the other payee. [Emphasis added.]
Furthermore, as to the actual discharge of a debt, it is well settled * * * that once a check is paid, it extinguishes the debt for which it is presented. Such debt is extinguished even where a jointly payable check is sent to one co-payee and that co-payee embezzles the funds. [Emphasis added.]
* * * Furthermore, this Court relie[s] on Indiana Code [S]ection 26-1-3.1-310 in finding that payment of the settlement check extinguished [Westport's] obligation * * *.
• Decision and Remedy The state intermediate appellate court affirmed the judgment of the lower court. Westport's tender of the check to the Johnsons suspended the insurance company's obligation to both payees, including the Graveses. Payment of the check "extinguished" the firm's obligation to its insured and their landlord.
• The Ethical Dimension Does a drawer who acts as Westport did-consulting with, and delivering the first two checks to, the Graveses-create an ethical obligation with respect to the delivery of the third check Why or why not
• The Legal Environment Dimension Is there a method, other than payment, that would have discharged Westport's obligation as the drawer of the check Explain.