Tales of whoa! On the docket: third-party check tendered by mortgagee for less amount due and at other-than-designated place does not constitute payment

RMA Journal, The, April, 2004 by Michael L. Weissman

In U.S. Bank National Association v. Whitney, 119 Wash. App. 339, 81 P.3d 135 (2003) the court granted a significant victory to the bank as mortgagee in a dispute with its mortgagor.

Philip and Arva Whitney filed for Chapter 12 bankruptcy protection in 1987. In bankruptcy, U.S. Bank was granted a $237,500 secured claim against the Whitney's farm and equipment. An order was entered directing that annual payments be made to the bank. The Whitneys made payments in 1989 and 1990 at local U.S. Bank branch offices where they were well known.

In 1991 the amount of the annual payment changed, and the Whitneys disputed the new figure. To resolve the issue, the bankruptcy court entered an order clarifying that the new amount was $32,555.03 per annum. In October 1991 U.S. Bank sent the Whitneys a payment invoice for $32,555.63. It included a tear-off portion to be mailed with the payment to the bank's loan processing center in Yakima, Washington.

Instead of sending a payment to the Yakima loan processing center, the Whitneys mailed a check to the bank's main office in Seattle and for only $30,389. The check was drawn on the account of Whitney Farms, Inc. (the Whitneys' closely held corporation) at Home Security Bank. Both Mr. and Mrs. Whitney signed the check, but their names were not printed on it. They did not include the tear-off nor any information to explain the purpose of the check.

Lacking any identification on the check, the Seattle branch credited it to an account Whitney Farms, Inc,. maintained at that branch. As a result, the Whitneys were shown as delinquent on their mortgage loan and, at a later date, the bank filed a mortgage foreclosure action. In the foreclosure action the Whitneys asserted the mortgage debt had been paid in full with the $30,399 check and other payments. This was despite the fact that they had withdrawn the $30,389 that was credited to the account of Whitney Farms, Inc. and deposited it in an account of still another one of their corporations.

The court focused on the issue of whether, as the Whitneys contended, the $30,389 should have been applied to their mortgage debt. Reminding the banking community of some basic principles, the court rejected the Whitneys' arguments.

First, the court held that the Whitneys had sent their payment to the wrong place. Payment on the note had to be made at the place designated by the bank, and the bank had designated the Yakima loan processing center, not the Seattle branch, said the court.

Second, the court said the Whitneys took no steps to reasonably notify the bank that the check was intended to be applied to their mortgage debt. Although the Whitneys had inserted their bankruptcy case number on the memorandum line, the court said the memorandum data is for the convenience of the customer and does "not constitute notice to the bank of the purpose of the check."

And, finally, the court said that the bank had no duty to accept a check drawn in the wrong amount and that the Seattle branch had no duty to ascertain that the check was for the account of the Whitneys individually rather than for its own customer, Whitney Farms, Inc.

What's the point? Lenders that designate a place for payment can enforce that requirement. Borrowers who do not use the identifying documentation supplied by their lenders must take steps reasonably designed to let the lender know how their payments are to be applied. And a bank is under no duty to accept a payment in an incorrect amount.

Contact the author by e-mail at Michael.Weissman@bridgeviewbank.com or by telephone at 773-975-5308.

Weissman is EVP and General Counsel of the Bridgeview Bank Group and counsel to the Chicago law firm of Holland & Knight, L.L.P. He has prosecuted civil and bankruptcy matters on behalf of many financial institutions.