In July 1993, Cigna Insurance Company issued James Mills a workers’ compensation check for $484. Then Mills lied to Cigna and said he had not received the draft due to a change in his address. He requested that payment be stopped and a new draft issued. The insurer complied, stopped payment on the initial draft, and promptly issued a new check for Mills. However, Mills cashed the first check at Sun’s Market before the stoppayment notation was placed on the draft. Sun’s Market then presented the check for payment through its bank.
As a result of the stop payment on the initial draft, the bank dishonored the check, stamped it “Stop Payment,” and returned the check to Sun’s bank. After not receiving the cash for the bad check, Sun’s Market tacked the check on its bulletin board. An individual, Robert Triffin, purchased the check from Sun’s Market and obtained an assignment of Sun’s interests in the instrument.
More than two years after the check was returned unpaid, Triffin filed a lawsuit against Cigna for payment on the check. Triffin argued that by purchasing the check from Sun’s Market, he gained a special legal status called holder-in-due-course status. This status entitled him to payment on the dishonored check. He argued that he received this special status under the shelter principle because the transfer by a holder in due course to a third party, even one with notice of the dishonor, transfers all rights of the holder in due course to the third party.
1. Who do you think should bear the dishonored check? In other words, should Cigna be required to pay Triffin for the dishonored workers’
compensation check? Why or why not?
2. Suppose you are a business manager at Sun’s Market. You learn that the court holds that Cigna Insurance Company does not have to pay for dishonored checks. Would you make any changes to your business policies? Would you be less likely to accept checks from insurance companies in the future?