Estate administrators regularly encounter financial complications when settling a decedent’s final affairs. The decedent may have issued checks shortly before death that later create problems for the estate. These situations become particularly complex when the decedent purchased official bank checks as part of business transactions or major purchases.
Imagine discovering that your decedent purchased a teller’s check for hundreds of thousands of dollars, later attempted to stop payment due to fraud concerns, but the recipient still negotiated the check and now demands payment from the estate. Does the estate remain liable even though the bank honored the stop payment request? This scenario raises fundamental questions about estate liability when banking instruments cross the boundary between personal obligation and institutional responsibility.
The case of Guaranty Federal Sav. Bank v. Horseshoe Operating Co., 793 S.W.2d 652 (Tex. 1990), provides an opportunity to examine how commercial banking law principles apply to estate administration situations involving stopped payment on institutional checks.
Facts & Procedural History
The consolidated cases before the Texas Supreme Court involved two separate disputes about teller’s check liability. In the first matter, Petrolife purchased a teller’s check for over $2 million from University Savings Association to pay Intercontinental Consolidated Companies for gasoline supplies. Petrolife borrowed against its line of credit to purchase the check. After discovering that the supplier had engaged in fraud and failed to deliver the gasoline, Petrolife requested University Savings to stop payment. University Savings contacted the Federal Home Loan Bank of Little Rock, which served as the drawee, and successfully stopped payment. The supplier sued University Savings directly rather than pursuing the drawee bank.
The second case involved Alan Parmet, who opened an account at Guaranty Federal Savings and Loan Association and immediately purchased a $900,000 teller’s check payable to a Las Vegas casino. Parmet cashed the check for gambling chips but returned the following morning seeking to stop payment. Guaranty Federal contacted Citibank, the drawee, and stopped payment. When the casino attempted to negotiate the check, Citibank dishonored it due to the stop payment order. The casino sued Guaranty Federal rather than Citibank or Parmet.
Both trial courts granted summary judgment favoring the payees and holding the savings associations liable despite successful stop payment orders. The courts of appeal reached conflicting decisions. The Fifth Court of Appeals treated teller’s checks as cash equivalents not subject to countermand. The First Court of Appeals rejected this analysis and found that material fact issues precluded summary judgment. The Texas Supreme Court consolidated the cases to resolve the conflict.
The procedural history also involved intervention and severance issues. Petrolife attempted to intervene in the University Savings case but the trial court struck the intervention without a motion to strike. In the Guaranty Federal case, the savings association filed third-party claims against Parmet and alleged conspirators, which the trial court severed from the main action.
What Are Teller’s Checks and How Do They Affect Estate Liability?
The Texas Business and Commerce Code governs banking instruments that estates may encounter during administration. A teller’s check represents a specific instrument used by savings associations that creates a three-party relationship affecting liability. The Texas Supreme Court defined teller’s checks as “checks drawn by savings and loan associations on commercial banks with which they maintain checking accounts.”
This structure differs from personal checks because the savings association acts as an intermediary. When someone purchases a teller’s check, they provide funds to the savings association, which then draws a check on its own account at a separate bank. The savings association becomes the drawer, another financial institution serves as the drawee, and the customer becomes the remitter.
The distinction between teller’s checks and cashier’s checks proves significant for estate liability. Cashier’s checks represent direct bank obligations where the issuing bank draws on itself and accepts the check upon issuance. Teller’s checks involve separate institutions as drawer and drawee, which means issuance does not constitute acceptance. This structural difference allows for stop payment orders that would be ineffective with cashier’s checks.
What Defenses Can Estates Assert Against Stop Payment Claims?
When payees sue estates on banking instruments, the available defenses depend on the payee’s legal status under the Texas Business and Commerce Code. The code establishes that “holders in due course” take instruments free from most defenses, while ordinary holders take subject to all valid claims and defenses.
A holder in due course must take an instrument for value, in good faith, and without notice of any defenses or claims. Even holders in due course remain subject to “real defenses” including fraud, duress, incapacity, and illegality. If the payee fails to qualify as a holder in due course, they face “personal defenses” such as failure of consideration, non-performance of conditions, and claims that the instrument was acquired improperly.
The code permits third parties to intervene in litigation to assert their defenses. Estate administrators can participate actively in defending against claims on instruments issued by decedents when the estate has legitimate defenses arising from the underlying transaction.
How Did the Court Rule on Estate Liability for Stopped Checks?
The Texas Supreme Court established that savings associations remain liable on teller’s checks even after successfully stopping payment with the drawee bank. The court explained that stop payment orders affect the relationship between drawer and drawee but do not eliminate the drawer’s liability to payees who sue directly on the instrument.
However, the court confirmed that drawers may assert applicable defenses to payment, including defenses available to their customers. This principle allows estate administrators to raise defenses when the decedent was the victim of fraud or other misconduct that would provide valid claims against the payee.
The court found that genuine issues of material fact existed regarding the payees’ status as holders in due course, which precluded summary judgment. The court emphasized that when disputed facts could affect the outcome, trial courts cannot grant summary judgment without allowing parties to present evidence on these material issues.
Can Estates Intervene to Protect Their Interests?
Texas procedural rules allow estate representatives to intervene in litigation over banking instruments when they have legitimate defenses or claims. The court held that intervention should not be stricken if the estate meets basic requirements, the intervention will not complicate the case excessively, and participation is almost essential to protect estate interests.
The court found that the trial court abused its discretion by striking intervention without requiring the opposing party to file a proper motion to strike. This ruling confirms that estates have substantial rights to participate in litigation involving instruments issued by decedents when the estate has valid defenses or related claims that could affect the outcome.
The Takeaway
The Guaranty Federal decision establishes that estates may face liability on banking instruments even when payment has been successfully stopped with the drawee bank. The ruling confirms that successful stop payment orders do not automatically eliminate drawer liability to payees who choose to sue on the instrument itself. However, estate administrators retain the ability to assert available defenses, including defenses that were available to the decedent, when defending against such claims. The payee’s status as a holder in due course determines which defenses remain available to the estate. Estate administrators should carefully examine the circumstances surrounding any banking instrument claims and consider whether factual disputes preclude summary judgment in favor of the payee.
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The content of this website is for informational purposes only and should not be construed as legal advice. The information presented may not apply to your situation and should not be acted upon without consulting a qualified probate attorney. We encourage you to seek the advice of a competent attorney with any legal questions you may have.
