Downloaded From OutlineDepot.com UCC: Negotiable Instruments Masinter Winter 2013 CHAPTER 1 NEGOTIABILITY UCC Art.

UCC Art. 1 definitions application to the entire UCC UCC Art. 3 negotiable instruments ( 3-102 this article only covers negotiable instruments if the instrument is not negotiable, only K law will apply) UCC Art. 4 bank deposits and collections UCC Art. 4A wire transfers and EFT Act issues Art. 3 & 4 are state law must be adopted by each state 1-201 Definitions (p.19) o o Holder = person in possession of a NI payable to bearer or identified person in possession Bearer = payable to the holder of the paper and not to any specific person, transferred by physical deliveryno need for endorsement, Anyone in possession of bearer instrument is a holder

Types of negotiable Instruments o o o o o Art. 3 divided into notes and drafts Note = written promise to pay money Note created by bank = CD (pays higher rates of interest but cannot be easily redeemed) Other notes = promissory notes Draft = written order by drawer to drawee directing the drawee to pay money to a third person (the payee) o o o o Drawer = person in a draft who is ordering payment Drawee = person in a draft who is ordered to make payment Example: bank customer (drawer) writes check to cable company (payee) that directs bank (drawee) is to forward the money to the cable company

Check = draft written on a bank that is payable on demand instead of specified date Cashiers Check = check drawn on the bank itself (i.e. the bank is the drawer and the drawee) is the banks obligation and not the remitter Tellers Check = bank draws a draft on another bank or makes the draft payable thru another bank Non-Bank Drafts Used in the sale of goods. 3-party transaction: Seller = drawer orders the buyer to pay sellers designee (payee) Buyer = drawee Payee = Banks purchase drafts at a discount.

Maker = person who owes money on a note

Problem 1 o o o o o 3-103 Definitions (p. 241) Portia is a remitter a person who purchases an instrument from its issuer if the instrument is payable to an identified person other than the purchaser. Remitter = person who purchases an instrument from an issuer where the instrument is payable to someone other than the purchaser Payee = seller Drawer/drawee are the same the bank

If drawee on a draft is NOT a bank, Art. 3 still applies, but the instrument is no longer a check (check requires that the drawee be a bank)
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Downloaded From OutlineDepot.com o Example: Sale of goods seller in Boston Ks to sell 100 widgets to buyer in CA and buyer agrees to pay $5,000 30 days after receipt. Seller wants $ early so creates draft, putting buyer as drawee, but leaves payee line blank. Goes to bank and puts bank in as payee bank then buys draft at discount, collecting from buyer/drawee later.

****Negotiable instrument w/PROMISE to repay is a NOTE and one w/an ORDER to pay is a DRAFT The Negotiability Concept o Negotiable paper that reaches a holder in due course (person who has no knowledge of problems related to papers creation) creates in the holder the status of super-plaintiff who can sue the other parties on the draft who cannot defend the lawsuit Negotiable = complies with 3-104(a) unconditional promise or order to pay on demand or at specified time, etc. If instrument does not meet 3-104(a) then it is non-negotiable and may fall under 3-104(b) Negotiable instruments pass more easily than non-negotiable ones in commerce b/c protections of 3-104(a) apply Xfer of a non-negotiable instrument is only the xfer of a K right to another party (e.g. holder of a negotiable promissory note is not subject to K of any original parties to the note) Courts hesitant to find non-complying instruments to be negotiable rewards shoddy drafting and introduce doubt into commerce and exchange of true negotiable instruments

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Elements of Negotiability 3-104(a) o o Writing negotiable instrument cannot be oral and definitions of promise and order from 3-103 require a writing. The material on which instrument is written may vary. Signed instrument must be signed but the form of signature may vary 1-201(b)(37) (General Definitions, p. 19) Signed = any symbol executed or adopted w/present intent to adopt or accept a writing Comment 37 question of whether something is signed is whether the signature signals intent to adopt. Signature can be anywhere on document and can in various forms, be stamped, written, initials or thumbprint. 3-401 other rules on signature Problem 2 if the X signals Chaps present intent to accept or adopt the terms of the draft, then his signature will be valid. Problem 3 look to 3-401(b) a signature of a trade name or assumed name is valid as well. If Capitalist is a DBA for the man and he uses a personal bank account, the checks are valid if signed this way.

Unconditional Promise or Order Promissory note must contain an unconditional promise to pay and a draft must contain an unconditional order to drawee requiring payment on a specific date or on demand Negotiable instruments cannot be conditional would create uncertainty as to whether it could be accepted (this is why instruments like checks or money orders are more readily accepted than personal checks they are the obligation of a creditworthy company) 3-106 (and forward) sets forth requirements for unconditional promise or order
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Downloaded From OutlineDepot.com Implied conditions (things that could happen to destroy negotiability) are irrelevant only express conditions will destroy negotiability Implied Example: A promises to pay B for use of music hall (note). The fact that the music hall could burn down prior to use and render agreement pointless does not make promise conditional. Express Example: A promises to pay B for use of music hall only if the hall doesnt burn down prior to use.

Triffin v. Dillabough Triffin bought money orders at a discount from Chuckies (who had recd them from Dillabough a thief of the money orders). Triffin was a holder in due course but Chuckies had sold him the orders after Utd. Bank told him they were stolen and had no value. Triffin sued Dillabough and AMEX but lower court decided that the orders were not negotiable instruments. The appellate court found that the orders were negotiable instruments and Triffin had the right to collect from AMEX b/c: The orders were signed by the drawer, signaling intent to authenticate and accept/adopt ***Warning about fraud/ID making the order unacceptable for payment is not an express condition to payment but a warning that just restates requirements of Art. 3 Paper is payable on demand and payable to order or bearer Drawer = AMEX Drawee = Utd. Bank ***Remedy for dishonored check is to sue drawer AMEXs defense = money orders were not negotiable instruments and therefore Triffin only has K rights of thief which are none If the orders ARE negotiable instruments, Chuckies is a holder in due course and they will be enforceable against AMEX

Consideration Stated Look to 3-106(a) Instrument can mention existence of or details of the underlying K (e.g. renting the music hall in exchange for $) HOWEVER payment on note cannot be subject to performance on underlying K Cannot incorporate terms of underlying K into a promissory note as this would create an express condition to payment holder of a note should never have to check on status of other agreements between the original parties (if this is required, the note is non-negotiable) Negotiability found w/in 4 corners of document negotiability means there is no further condition to payment other than presenting the note

Problem 4 3-106(a) and Comment 1 No it contains the language of a promise subject to a K subject to [another writing] may not appear in a writing for a negotiable instrument Yes note refers to K which lays out terms but does not set a condition Yes statement of rights, prepayment or acceleration in another document does not make instrument non-negotiable b/c right to pay is not constrained (actually benefit the holder)- 3106(b)

Problem 5 this sounds like a condition (not payable on demand) but bank will not pay attention to it. Also, due to automated processing it will probably not get picked up. But the check represents an

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Downloaded From OutlineDepot.com agreement between the bank and the maker of the check. Can easily cash w/in 90 days no cases on this. Problem 6 No. A note may be collateralized and may refer to a separate security agreement 3106(b)(1) and Comment 1

Fixed Amount of Money must be able to look at instrument and readily ascertain amount maker or drawer has promised to pay Problem 7 See 3-112(b) discusses ways of stating interest on a note Note may require reference to information contained in instrument If note provides for interest but you cant tell how much from looking at note, the judgment rate applies Can also have variable interest rates

Negotiable instrument must contain order or promise to pay in money (not objects, services, etc.) Money defined in 1-201(24) as a medium of exchange authorized by a domestic or foreign government as part of its currency 3-107 instrument payable in foreign currency may be paid in that currency or in USD equivalent unless the note is limited to the foreign currency

Courier Without Luggage Requirement Negotiable instrument cannot be burdened by anything other than simple promise or order to pay on its face If additional legal obligations or promises are added, the negotiability is destroyed See 3-104(a)(3) for addtl items that could be added w/out destroying negotiable character Problem 8 Negotiability destroyed, because it adds an extra condition, which doesnt fall into any of the exceptions. This is a clear example of what makes it nonnegotiable. This sounds vague if holder deems himself insecure at any time. But this deals with collateral, which is one of the exceptions. Maker agrees this is a confession of judgment clause negotiability is not destroyed. 3104(a)(3)(ii) allows for a confession judgment clause. Prepayment clause so closely related to obligation to pay that it has been held to support the negotiability of the instrument Negotiability probably not destroyed. But this is not a good idea to have the SI and instrument in one document.

Woodworth v. Richmond Indiana Venture This case involves a promissory note. Woodworth agreed to pay a sum certain. Signet Bank claimed to be a holder in due course (HDC). First question: do we have a negotiable instrument?

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Downloaded From OutlineDepot.com In order to be negotiable, a promissory note must be signed, unconditional promise to pay a sum certain in money which is payable on demand or at a definite, stated time. The note must be payable to order or bearer and contain no other promise, order, obligation, or power given by the maker except as authorized by 3101, 3805., 3104. Here, the note contains reference to a partnership agreement and a promise by the maker resulting in forfeiture of his partnership interest and payment in event of default. Where there is doubt as to the negotiability of an instrument, the decision should be against negotiability. Since the promissory note is not negotiable, D cannot claim the status of a HDC and is subject to ordinary contract defenses that P may assert. Here is a forfeiture clause, exercisable by the partnership. This makes a difference, because forfeiture clause could not be exercised by the HDC, only by the partnership. Thus it destroyed negotiability.

Payable on Demand or at a Definite Time A holder of an instrument must be able to tell when it comes due, or the instrument is non-negotiable There is no requirement that the instrument be dated. An undated instrument that specifies no time of payment is treated as an instrument payable on demand by the holder See 3-108 (Payable on Demand or at Definite Time) and 3-113 (Date) Problem 9 Payable 30 days after sight. Clearly not demand. Yes, Definite time. Typically used in transactions in shipped goods. Requires buyer to sign face of draft to get bill lading for goods and take title. Buyer dates previously undated draft so you know when to start the clock. Payable in 11 installments, etc. This is neither on demand nor at a definite period of time, thus not negotiable Negotiability not destroyed. Definite time but with an acceleration clause 3-108(b) Not destroyed. We can determine on the date the instrument is c reated when tomorrow will be. Not destroyed. Do we know at the time the note was created whether ... It is an extension at the makers option, but an extension is to another definite time 3-108(b) Negotiability Destroyed. Not an extension at makers option to a definite date. There is no definite date here fails 3-108(b) This is a post obituary note. Not payable on demand and not at a specific time, so its not negotiable and Art. 3 doesnt apply. Payable 100 years from today this is a definite period. But if my rich uncle Al dies this is an acceleration clause, which is allowed note is OK. Payable on my next birthday not negotiable b/c no definite time possible

Payable to Bearer or Order Words of negotiability 3-109 Bearer paper. Payable to bearer (but negotiable, like cash). Payable to cash or to the order of cash is bearer paper like cash. Only hurdle to negotiability is that person is a holder (e.g. you are in possessio n of it) Order paper. Payable to order to a specific person, or the person that person orders to pay. It must use the word order unless its a check. 3-109(b) first have to make sure that its not payable to bearer
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Downloaded From OutlineDepot.com Any ambiguity as to whether its payable to order = not to order Cant be order AND bearer Payable to order if: o Not payable to bearer and is able to order if Payable to order of identified person Payable to identified person or order

Why does this language matter? 2 reasons. 1st to determine whether we have a negotiable instrument. 2nd goes to negotiation. There are different requirement for transferring bearer paper and order paper, to meet the technical requirements of negotiation.

Can bearer paper become order paper and vice versa? Yes, change it by the form of the endorsement on the back of the check. Blank endorsement or a special endorsement.

Problem 10 No, there are no words of negotiability fails 3-109(a) and (b). Could say, pay to John Smith or order. (See 3-107 for alteration) Pay to the order of John Smith or bearer. Payable to bearer. See Comment 2, 3-109. The term bearer controls. Pay to bearer this is bearer paper. Pay to the order of Cash. Payable to bearer. Pay to a Merry Christmas. Technically, bearer b/c not payable to an identified person

Problem 11 Pay to the order of [blank]. See 3-115, Comt 2 Incomplete Instrument It is bearer paper until the blank is filled in. Its bearer paper if it doesnt state a payee. Pay to John Does Estate 3-110(c)(2)(i). Is John Does estate a person? If an instrument is payable to an estate the instrument is payable to the trustee, whether or not the beneficiary or estate is also named. Does NOT use word order. Pay the order of the president of the U.S. 3-110(c)(2)(iv)A person to whom an instrument is payable may be identified in any wayIf an instrument is payable to an office or to a person described holding an office, the instrument is payable to the named person, the incumbent of the office, or a successor to the incumbent. Its payable to whoever holds that office. Still negotiable. Drawer of a check crossing out to the order of 3-104(d) A promise or order other than a check is not an instrument if, at the time it is issued or first comes into possession of a holder, it contains a conspicuous statement, however expressed, to the effect that the promise or order is not negotiable or is not an instrument governed by this Article. Still negotiable. 3-104(c) 3-104(c) in the case of checks they do not require the word order. o How to destroy negotiability? 3-104(d). State upon the instrument that it is nonnegotiable. You could stamp it non-negotiable.

Consumer Notes FTC language that has to appear on promissory notes and Ks taken in consumer sales, PMSI, etc. prevents another taker from being HDC
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This seems to say you could never have a holder in due course because it seems to place a condition on it. Or it may defeat the courier without luggage requirement UCC says that this particular statement does not destroy negotiability see 3-106(d) Problem 12 If violin is defective she can assert her claim being a HDC is irrelevant If seller doesnt include language it doesnt matter it is imputed into all notes in consumer transactions Not having language means you are violating fed. law If Sonata were professional musician she is NOT a consumer so the language is not required and she would have to pay a HDC in a commercial transaction

CHAPTER 2 NEGOTIATION Parties o o o o Maker 3-103(a)(7) the person who issues the promissory note and promises to pay. Under 3-412, the issuer of a promissory note is to obligated to pay the instrument... Bearer 1-201(b)(5) whoever possesses the instrument Payee The person to whom the promissory note or draft is made payable. This person may further transfer/negotiate the check. Drawer 3-103(a)(5) Person who creates the draft and orders the drawee to pay.

Obligations o o o 3-414, by drawing a draft, the drawer promises that upon dishonor of the draft by the drawee, the drawer will pay the amount of the draft. A drawer creates a draft, while a maker creates a note Drawee. The person who the drawer has ordered to pay the payee. 3-103(a)(4). If the drawee doesnt accept the draft then it is dishonored. If the drawee doesnt pay, then the drawer has the obligation to pay if the draft is dishonored. Obligations Incur an obligation if you accept it under 3-409. Obligations of an acceptor is under 3413. You have to pay if you accept. If the drawee doesnt accept then the drawer must pay it.

Negotiability (form) vs. Negotiation (transfer) o o o Is an instrument negotiable asks if the instrument is in the proper form to meet the technical requirements of negotiability in 3-104(a). Has the instrument been negotiated? asks about the legal validity of the attempted transfer of the instrument. Three steps of Transfer and negotiation Issuance 3-105. Presentment for payment (to Maker or Drawee) 3-501(a). Transfer Under 3-203(b), the physical transfer of an instrument, whether or not the transfer is a negotiation, vests in the transferee whatever rights the transferor had in the instrument.
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Transferee cannot acquire rights of a HDC by a transfer from a HDC if the transferee engaged in fraud or illegality affecting the instrument (fraudulent transfer) Holder 1-201(b)(21): The person in possession of a negotiable instrument that is payable either to the bearer or to an identified person that is the person in possession Negotiation 3-201: Negotiation means transfer of possession, whether voluntary or involuntary, of an instrument by a person other than the issuer to a person who thereby becomes its holder Negotiation of order paper is accomplished by The indorsement by the proper person; and The delivery of the instrument to the transferee (now the holder)

Special and Blank Indorsement Indorsement 3-204 Indorsement means a signature other than that of a signer as a maker . . . Indorser 3-204(b) person who makes indorsement Misspelled name 3-204(d). Sign both correct and incorrect. A drawee bank will require the payees indorsement before it makes payment. 3-501(b)(2)(iii). The payee can indorse in two ways: Blank indorsement: sign the back of the check, which has the legal effect of converting the instrument into bearer paper. Special indorsement This preserves the order characteristic. The original payee specifies a new payee by writing Pay (name of new payee) above the indorsement. This has the legal effect of making the instrument the sole property of the new payee, who becomes a holder as soon as the instrument is delivered. Anomalous Indorsement Someone who just signs to show receipt, etc. Restrictive Indorsement add words for collection (or deposit) only NI can still be negotiated but depository bank will be liable if it pays out to anyone not entitled to have deposited the instrument (i.e. the original payee that wrote for deposit only on the check. To be holder of a bearer instrument just need a blank indorsement Problem 13 Drawer Hansen Drawee Mechanical National Bank (MNB) Payee Egger/Cornucopia Grocery Depositary bankOctopus Natl Bank, 4-105(2) Issuance Hansen delivering check to W. Egger Blank Indorsement W. Eggers signature on back of check (he is an indorser) The following qualify as a holder: o o o o W. Egger because he was identified in the instrument and in possession Cynthia Egger, because she was in possession and the instrument was payable to the bearer after W. Egger indorsed it The manager of Cornucopia Grocery as an agent, because he was in possession when it was payable to bearer Cornucopia Grocery Store because the manager converted the blank indorsement into a special indorsement by writing Pay to the Cornucopia Grocery above Egger
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Downloaded From OutlineDepot.com signature, and it was, through its agents, in possession (now manager is no longer a holder b/c not indorsed by Cornucopia) MUST BE ABOVE SIGNATURE NOT Bill Speed because he was not identified in the instrument, nor was it payable to the bearer while he was in possession of it; Octopus because it was the depository or collecting bank of the customer per 4-205 (whether or not indorsed) provided that the banks customer is a holder NOT MNB NOT Hansen wasnt payable to bearer (drawer on check typically not holder unless made out to him or made out to cash)

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The depository bank becomes the holder, whether or not the customer indorses it 4-205 This action converted a blank endorsement to a special endorsement. Indorser under 3-204: W. Egger and Octopus. [Mechanical Bank is the acceptor 3-103]. MNB must either honor check as drawee or reject it

Problem 14 See 3-110(d), Comment 4 If an instrument is payable to two or more persons alternatively (X or Y), it is payable to any of them and may be negotiated, discharged, or enforced by any or all of them in possession of the instrument. If an instrument is payable to two or more persons not alternatively (X and Y), it is payable to all of them and may be negotiated, discharged or enforced only by all of them. If an instrument payable to two or more persons is ambiguous (X,Y) as to whether it is payable to the person alternatively, the instrument is payable to the person alternatively.

Problem 15 Portia Moot receives a check made out to Portia Mort. 3-204(d), Comment 3 The payee may indorse in the name used in the instrument, in the payees correct name, or in both. In each case the indorsement is effective. . . the accepted commercial practice is to endorse in both names.

Problem 16 These were promissory notes, so two parties. They allonge by folding it in. It must be stapled, etc. 3-204(a) a paper affixed to the instrument is a part of the instrument. Comment 1 An indorsement on an allonge is valid even though there is sufficient space on the instrument for an indorsement. The Bank is a holder, because the peace of paper was an allonge, or paper affixed to the instrument, if the folding is sufficient to be affixed.

Forgery of the Payees Name o o o o o If an instrument is paid to order of a payee, only the named payee can become a holder Holder status not confirmed until payee gets possession of the instrument Nobody else can become a holder until payee validly indorses the instrument Forgery of payees indorsement is NOT effective to negotiate the instrument so no later transferee can qualify as a holder (no matter how good forgery is, how far down the line transferee is, etc.) Forgery of special indorsees name is also not valid

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Downloaded From OutlineDepot.com o o o Missing indorsements of payee or special payee later possessors do not become holders HOWEVER bearer paper is different forged signatures have no effect b/c valid indorsements not needed to negotiate bearer paper 3-201(b) Problem 17 3-306 A persons taking an instrument, other than a person having right of a HDC, is subject to a claim of a property or possessory right in the instrument or its proceeds, including a claim to rescind a negotiation and to recover the instrument or its proceeds. Cornucopia was not a holder in due course because the check was fraudulently indorsed. Because it was not a HDC, it took the instrument subject to the claim by Laura. Therefore, Laura can get her check back from the Grocery store. 3-201 Negotiation means transfer from someone who isnt the issuer to the holder. Requires that an instrument payable to an identifiable person needs transfer of possession AND indorsement by holder. Here, Laura was the Holder and cannot be negotiated w/out her indorsement 3-403 unauthorized signature ineffective against holder Only party to whom Laura can look to for damages is thief or Cornucopia store

Problem 18 Once Laura signed the check, the check became payable to the bearer, as it was a blank indorsement. The requirement of a holder for a bearer instrument is possession. Therefore the store is a holder. It doesnt matter that it is a forgery, because its bearer paper. Two requirements for order paper to become bearer: (1) indorsement and (2) transfer Thief cannot be HDC b/c didnt pay value, didnt take in good faith and was on notice that he wasnt entitled to check and Laura would have claim against him

Problem 19 This is specially indorsed check pay Lilly Lawyer above her signature. Now Grocery is not a holder, and it takes the check subject to Lillys claim. See 3-205(a) specially indorsed instrument becomes payable to an identified person and may only be negotiated by that person Any unauthorized indorsement of the payees name of any special indorsees name is not a valid negotiation and gives subsequent transferees no legal rights in the instrument no matter how innocent they are or how far removed from the forgery. BUT once an instrument becomes a bearer paper, subsequent unauthorized signatures have no effect on the holder status of later takers, since valid indorsements are not required to negotiate a bearer paper 3-201(b).

Problem 20 Yes 3-205(c) says The holder may convert a blank indorsement that consists only of a signature into a special indorsement by writing, above the signature of the indorser, word identifying the person to whom the instrument is made payable.

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Downloaded From OutlineDepot.com CHAPTER 3 HOLDERS IN DUE COURSE Acquiring HDC Status o o o o Definition of HDC 3-302(a) Comment 4 payee can be HDC in rare situations 3-302(c) situations where transferee is denied HDC status (seizure of assets, successor in interest to an estate or bulk purchase not in ordinary course of business of transferor) Holder o Possessor must first be a holder in order to become a HDC Instrument must be negotiable and must have been negotiated into hands of possessor Payee = holder on issuance Bearer = holder on issuance or upon getting possession Drawee bank is NOT a holder b/c issuing check to payee is a presentment

Value HDC has to give value for instrument Once HDC status is achieved, receiving notice of problems w/instrument is irrelevant Gifting an instrument does not create a HDC status in the donee Value = performance or some irrevocable commitment (otherwise NOT value) Value = consideration (enough to support a simple K) If instrument is issued w/out consideration, can be used as defense by maker/issuer Promise of performance is enforceable and no performance = no value/consideration Promise only = value to the extent that performance is rendered 3-303, Comment 1 Problem 21 o o o o o o See 3-303 Lawyer has not given value and has made a revocable commitment to represent Joe Lawyer is not HDC Under 3-306, lawyer is not HDC so he is subject to repossession If lawyer argues that this is a binding commitment and he has begun performance, could be a HDC (retainer would make this clearer) Lawyer could be HDC in the check to the extent that he performed some services already 3-303(a)(1)

Problem 22 o 3-302(d) and Comment 6 The finance company is a holder in due course for the full $23,000 since the complete "agreed consideration" has been performed. The discount just reflects the finance company's profit on the purchase. ***HDC status on note for value = performance/value x face amount of note here its 1 x $23,000 The mother would be a holder in due course for only $21,000 since remainder was a gift and does not create HDC status 3-303(a)(3) xfer of instrument in exchange for antecedent debt is transfer for value Notes involved in consumer transactions do NOT fall under Art. 3 so a taker cannot be a HDC

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Problem 23
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Downloaded From OutlineDepot.com o o o If bank paid out anything to Tom which he has w/drawn then yes Last National Bank is a holder in due course even though it is acting as collecting agent for its customer. 4-211 collecting/depository bank is HDC to extent it has security interest in check to extent it has allowed Tom to get any portion of check amount in his pocket 3-302 states "holder in due course can only be established if the holder took the instrument for value, in good faith, without notice that the instrument had been dishonored". Last National Bank accepted the check in good faith, and was without notice that Mr. Winker had tricked Mrs. Nodding into writing the check.

Falls Church Bank v. Wesley Heights Realty depository bank is HDC and has given value to the extent that it has paid out on the deposited check. Depository bank is HDC up to amount paid out on check and can sue issuing bank for that amount. If you have security interest in a negotiable instrument you have HDC status up to amount you have lent against the instrument Exchanging one negotiable instrument for another is a transfer of value so that HDC status is created Executory promises are not irrevocable and are not value under 3-303(a)(5) Problem 24 o o o Under FIFO, the bank is not a HDC since Tom is presumed to have taken out his own money and the bank has not paid out anything on the $1,000 check. If he had withdrawn $750, the bank would have been a HDC to the extent of $250. See 4-211 and 4-210(a) and (b)

Good Faith and Notice HDC has to give value for instrument in good faith honesty in fact but also while observing reasonable commercial standards of fair dealing HDC must be without notice that there are any problems with the instrument (e.g. if person takes possession knowing that maker has a defense against payee, cannot be a HDC) Two standards to asses whether a potential HDC has acted in good faith: o o 1-201(20)honesty in fact in the conduct or transaction concerned 3-103(a)(4)honesty in fact & the observance of reasonable commercial standards of fair dealing

In re Dixon-Ford o o o o o o Dixon-Ford (P) sued various parties for fraud US Bank, Weichert DF had defaulted on mortgage and had an incorrect VOE document sued WFS and US Bank for fraudulent inducement US Bank as trustee of CMLTI 2007-10 said is recd MBS with DFs mortgage as HDC and was unaware of the fraudulent VOE No facial indication of fraud on mortgage or note US Bank had file that contained incorrect VOE but since there were no facial deficiencies it did not have to inquire further (e.g. look into the mortgage file) Note was therefore enforceable against Maker
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Downloaded From OutlineDepot.com o Fraud claims on WFS survive b/c they are the ones that filled out mortgage app.

1-202 Notice person has notice if they: (1) have actual knowledge; (2) received a notice or notification; and (3) from all facts and circumstances they have reason to know it exists o o Receive notice = is delivered in a form reasonable under the circumstances In re Dixon did US Bank receive notice by requesting and getting mortgage file that contained altered VOE (from all facts and circumstances) should they have inferred that a defense for fraud might exist? If so, not a HDC

Problem 25 o o o o o Does HDC status require that you actually take possession of instrument? 3-203 and Comment 1 if instrument is xfer for value and transferee is not a holder b/c of no indorsement, the instrument is not negotiated until it is indorsed by transferor Here, INB cannot enforce against the widower until it retains possession and indorsement Remember: if one is not a holder cannot be a HDC INB has no rights in the note since it has not been transferred might argue that it is an assignee not in possession or that they are a non-holder under 3-301

Problem 26 o According to 3-307(2) Notice of Breach of Fiduciary Duty, The Taker (American Express) has notice of the breach of fiduciary duty if the instrument is taken in payment of or as security for a debt known by the taker to be the personal debt of the fiduciary Comment 2 of 3-307 states that "mere notice of the facts is not enough to put the taker on notice of the breach of fiduciary duty and, does not give rise to any duty to further investigation". American Express had no knowledge that the Fiduciary was misusing the funds, and is not responsible for repayment

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Any Kind Checks Cashed v. Talcott o The issue in this case is whether a check cashing store qualifies as a holder in due course so that it can collect on a $10,000 check written by an elderly man who was fraudulently induced to issue the check by the person who cashed it We hold that the check-cashing store was not a holder in due course, because the procedures it followed with the $10,000 check did not comport with reasonable commercial standards of fair dealing. Old man wrote check in fraudulent investment scheme Court found that check-cashing store ignored red flags of check and as such did not observe reasonable commercial standards: size of check, inability to contact drawer, unfamiliarity w/customer, why a broker would cash a check for immediate funds instead of depositing, etc. Check-cashing stores held to a higher standard due to speed of transaction, immediate access to funds (less fees) and the fact that it is a negotiable transaction.

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Buckeye Question accepting a post-dated check might be good faith if it bears no overt signs of fraud or other problems but does not constitute observance of reasonable commercial standards b/c it is clear that the check might bounce before the dated date. Winter & Hirsch v. Passarelli

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Downloaded From OutlineDepot.com o o o o Whether the defense of usury is available for use against the P, who claims to be HDC of the promissory note and therefore claim to have taken it free from the defense of usury. W&H (P) provided the money for the usurious loan before the loan was actually made. W&H gave money to Equitable, and Equitable gave money to Passarelli, in exchange for a note. Winter & Hirsch claim to be a HDC. Because it gave Equitable the money before the note was executed, W&H was a co-originator of the loan and as such is charged with knowledge of the terms of the loan, and therefore knew of the usurious rate being charged. Even if the note was seen prior to W&H giving Equitable $11k, then W&H also say that the D had signed a note promising to repay $16k. As such it should have asked why Equitable would sell a $16k note for $11k. We cannot permit parties to intentionally keep themselves in ignorance of facts which, if known, would defeat their unlawful purpose. Promissory notes does not need to state principal or interest rate on its face so it wasnt possible to tell that note was usurious from looking at it Was the note usurious? Yes, it called for the maker of the note to pay more interest than is legally permissible. In some cases you can look the right to collect the principal. Was Winter & Hirsh a HDC? Equitable sells it to W&H. W&H acquired this note through transfer. Did it acquire it through negotiation, and was it a HDC? 3-302 did it take for value, in good faith, without notice? Did W&H give value? Yes. So this case will turn on whether W&H had notice of possible defects. Here there was a very deep discount. A discount by itself, standing alone, is not necessarily lack of value, or notice of a defense. Good faith and notice are tightly intertwined. But W&H made the payment before Equitable made the loan, this made them such close partners as to be a co-originator. What is notice? 1-202 Notice; Knowledge. from all the facts and circumstances known to the person at the time in question has reason to know that it exists. W&H had reason to know of defense and is NOT a HDC.

o o

Problem 27 o o o o o Probably OK 3-302(a)(1) states that instrument must not bear such apparent evidence ofalteration or be so irregular or incomplete as to call into question its authenticity. See also 3-407 this is not the kind of correction contemplated by the rule Here, the year is obviously wrong and the correction makes sense Changes to specific date, amount, payee, etc. would be a problem Checks dont have to be dated since they are on-demand instruments changing dates irrelevant

Problem 28 o o Yes per 3-304(c) knowledge of a default in an interest payment is harmless. But see 3-304(b)(1) and Comment 1 as to a default in a principal payment cannot be a HDC if you knew about principal default

Problem 29 o The check was presumptively overdue under 3-304(a)(2) since more than 90 days has passed since the date of the check.
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Downloaded From OutlineDepot.com o o o Checks are commonly negotiated in a much shorter period than this, and no one taking a check this suspiciously old should qualify as a HDC. Doesnt mean that check is invalid just that holder is not HDC Issue undated checks can still take as HDC unless you know of other facts that show that it is over 90 days old

Problem 30 o o o o o o o o o o Forgotten notice doctrine allows person to remain a HDC even if they had notice of a defect or defense by claiming that they forgot about it 1-202 deletes any reference to the doctrine so UCC is now silent about it Bank is not a HDC If notes says that its payable at a bank, it means that the payee should look to a bank and not the maker for payment bank makes payment for note Advantage holder doesnt need to travel. Can present note thru bank collection process Also, wont need to know who holder has become in the meantime (could have been transferred in the meantime) 3-502 note payable at bank requires holder to present for payment at bank otherwise cant demand payment on maturity Tender of payment stops accrual of interest 3-603(c) includes if you have funds on deposit at bank Payable thru a bank 4-106 that bank is merely a collecting bank and cannot pay for maker Payable at no forgotten notice problem

Problem 31 o o o No 3-203(c) and Comments 3 and 4 (Case 4) Until there is a valid negotiation, one cannot be a holder in due course and any knowledge of problems with the underlying transaction arising before the negotiation is accomplished would defeat that status. Normally, the moment of giving value is the point when we judge holder in due course status, but if at that time a valid negotiation has not yet taken place, the determination is made later since he got notice in the meantime he cannot be HDC

Jones v. Approved Bancredit Corp. o o o o o o o o Jones signed various documents in connection with the purchase of a home that was yet to be built, including documents that were not correct Jones put down deposit on home to be built and later entered into mortgage w/promissory note The note was indorsed and later purchased by Bancredit Subsequently, employee of builder drove bulldozer through house Dell said it was act of God and builder refused to go ahead w/work Jones had to pay for certain repairs. Dell later closed down operations. Bancredit sought to foreclose on mortgage as HDC Court found that Bancredit and Dell were owned by same company and that their business was intertwined (p. 60) Court found that Bancredit was so involved in the transaction that it could not be a HDC sister corp. w/Dell and dealings between companies

****Tests to determine whether seller/transferor of a note and buyer/transferee are too closely connected to make buyer a HDC:
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Downloaded From OutlineDepot.com o o o o o o

Buyer and seller have same officers, personnel and operate from the same location (alter-ego) Who drafted original note? Is subsequent buyer mentioned in the original note? Is buyer/transferee the only buyer of sellers paper? Did the buyer get involved in the original transaction (e.g. investigate the creditworthiness of the maker)? Did the buyer have knowledge of the sellers poor past performance on other Ks?

Critical question is not whether transferee has knowledge that the prior transaction existed, but whether he had notice at the time that value was exchanged for the note of claims, defenses or underlying problems from the prior transaction Courts can find that transferee was not acting in good faith, had notice of underlying defenses or that transferee is essentially the same entity as the transferor and couldnt be a HDC Sullivan v. Utd. Dealers Corp o o o o o o Sullivans were the maker of promissory note in favor of Memory Swift Homes note was secured by mortgage Memory Swift assigned the note to Utd. Dealers and Utd. Dealers negotiated the note to a bank Prior to the negotiation to the bank (but after Utd. Dealers got the note), the Sullivans wrote a letter to Utd. Dealers saying that the houses foundation and framing was OK Sullivans later defaulted on the note before last payment was due (but after default had occurred), bank transferred note back to Utd. Dealers Utd. Dealers sued Sullivans on the note now Sullivans claimed that the house was not built in a workmanlike manner and that Utd. Dealers was not a HDC so that it couldnt enforce the note Trial court and appellate court found that Utd. Dealers was a HDC Sullivans argument was that Utd. Dealers knew no work had been performed on the house and that Utd. Dealers should therefore know that a defense on the note might be possible later this is NOT the relevant test! Question is what did Utd. Dealers know at the time it gave value for the note?? Did not matter that Utd. Dealers knew about the promissory note and was doing a lot of business w/Memory Swift.

The Shelter Rule Chose in action = right to enforce payment of a debt by legal proceedings 3-203(b) transfer of an instrument, by negotiation or otherwise, gives transferee the transferors power to enforce the note, including HDC status. However, transferee cant become a HDC if the transferee engaged in fraud or illegality involving the note. See examples in Comment 4 (p. 261) Problem 32 Jessica is not a HDC b/c she has not given value for the note (she is a holder b/c the note was indorsed and transferred to her negotiated). However, she has Alfreds power to enforce the note as a HDC since he took the note as a HDC. Problem 33 Lorenzo will not become a HDC b/c he has not given value. Even if he knows of the problems underlying the note, he is protected under Alfreds HDC status. Knowing of problems regarding the car is irrelevant would only be relevant if he somehow engaged in fraud regarding the sale of the car.
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Downloaded From OutlineDepot.com Problem 34 if Manny gets the debt discharged in bankruptcy, Portia (who is a HDC) will not be able to collect from him 3-305(b) which says that under (a)(1)(iv) a discharge of the original debtor is a defense to a subsequent holder of the note. Portia can sue Alfred b/c he is an indorser and she is a HDC (See also 3-405 when Alfred indorsed the note he became secondarily liable for payment when Manny fails to pay). Lorenzo could therefore also sue Alfred. Alfred could defend by claiming lack of consideration - since Lorenzo is not a HDC he wont be able to overcome the K defense. That K defense will not help Alfred against Portia. Alfred should have endorsed note w/out recourse so that he couldnt be sued by subsequent transferees. Prior HDC reacquires his rights in the note if he gets it back all intervening indorsements are then stricken (would not make sense to allow each person to sue the person before them b/c it would lead back to original HDC who now has the note back) 3-207 This is why we dont diminish subsequent transferees rights of transferors HDC rights you would otherwise just return to HDC to enforce the note the result would be the same Triffin v. Somerset Valley Bank Triffin bought dishonored checks issued by Hauser Triffin sued to enforce Hausers liability on the checks Hauser was notified that people were cashing what appeared to be counterfeit Hauser checks this was confirmed and Somerset was also alerted payment on checks was stopped Triffin bought some of the unauthorized checks from check cashing stores checks now said on their face that they were fraudulent Court found that check cashing stores were HDC and that Triffin acquired the HDCs rights as transferee Fact that checks were unauthorized is irrelevant Court found that checks did not bear evidence of forgery, or alteration etc. signature is presumed to be genuine shifts burden to show otherwise (lack of authenticity also has to be pled in complaint) Therefore Triffin took the checks w/check cashing s tores HDC powers even though he knew of defenses w/r/t the checks

Real and Personal Defenses/Claims o Defenses Against a HDC HDC status usually means that the instrument can be enforced w/out worrying about defenses to a typical K action See 3-305 Defenses and Claims in Recoupment Obligor = person being sued by holder of instrument could be original maker, drawer of a draft or an indorser of an instrument 3-305(b) HDC can be defeated by defenses listed in 3-305(a)(1) real defenses Infancy of the obligor to the extent it is a defense to a simple contract Duress, lack of legal capacity, or illegality of the transaction which, under other law, nullifies the obligation of the obligor Fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms (e.g. fraud in the essence/factum telling someone the note is a receipt, etc.) Discharge of the obligor in insolvency proceedings [ALSO alterations of amounts on checks but NOT unauthorized/uncompleted but signed instruments]
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Downloaded From OutlineDepot.com 3-305(b) HDC cannot be defeated by defenses raised in 3-305(a)(2) personal defenses Defense of the obligor stated in another section of this Article or a defense of the obligor that would be available if the person entitled to enforce the instrument were enforcing a right to payment under a simple contract (e.g. fraud or misrepresentation)

3-305(b) HDC cannot be subject to claims of recoupment under 3-305(a)(3) recoupment is the ability to subtract amounts the holder may owe the debtor/obligor from the amount being sought by the holder from the debtor/obligor: Claim arose from the transaction that gave rise to the instrument Claim of the obligor may be asserted against a transferee of the instrument only to reduce the amount owing on the instrument at the time the action is brought. Comment 3 maker can always assert K defenses as a claim in recoupment against payee/holder (even if payee/holder is a HDC) Recoupment cant exceed value of instrument

Problem 35 Express warranty that boat would never sink 2 possibilities: o JA is a holder of the note made by Maturin but is not a HDC b/c he did not give value (an unsinkable boat) subject to K claims (breach of warranty/K) o JA is a HDC b/c he gave value and Maturin kept the boat, thereby affirming the K and not putting Aubrey on notice that Maturin can assert personal defenses breach of warranty claim Aubreys father: o Is not an actual HDC b/c he did not give value for the note is subject to recoupment claims of Maturin o Even assuming dad has HDC rights of Aubrey w/gift, Maturin can still get recoupment from him under 3-305(b) o BUT If dad bought the note from Aubrey, he would be a true HDC and the claim in recoupment would NOT reach dad Dog bite did not arise from the same transaction and is not relevant

FDIC v. Culver Culver recd $30,000 from Rexford Bank Culver later signed promissory note w/various blanks where material terms were missing was told that it was a receipt for the $30,000 Rexford later went bankrupt and FDIC bought the note and sought to enforce it against Culver Culver claimed that he had a real defense of fraud under 3-305(a)(1) Court disagreed and said it was not reasonable to sign a document with blanks all over it that was clearly missing critical terms and information Culver could therefore not assert the defense under 3-305(a)(1)(iii) he had the opportunity to read the note and its terms but didnt

Problem 36 Mustache committed a misrepresentation or fraud in the inducement but the finance company took the note as a HDC. Therefore, Rubes defense will not defeat the finance companys claim against Rube. Problem 37 this is a real defense listed under 3-305(a)(1) and will be valid to defeat Big Natl Bank K w/a minor is usually void or voidable under state law

Problem 38

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Downloaded From OutlineDepot.com Under 3-202, even an infant can negotiate an instrument and remedies are not available against a HDC who later takes the instrument (even from infant) However, Crusader is not a HDC b/c has not allowed Byron to get any of $1,000 into his pocket Therefore, Crusader is subject to repossession or rescission under 3-306 Assuming that Crusader has paid $ to Byron and is a HDC, it can sue drawer (Harolds employer) since it cannot sue Harold

Notes signed by those who are mentally incompetent are either void or voidable depending on the circumstances and the knowledge of the person dealing with the incompetent If someone has been adjudicated incompetent, their instruments are more likely to be declared void than if no adjudication had taken place Sea Air Support v. Herrman Herrman wrote $10,000 check to casino to cover chips which later bounced Check was assigned to SAS who couldnt collect so SAS sued Herrman Case was originally dismissed b/c state law says that negotiable instruments created to satisfy gambling debts are void SAS claimed to be a HDC but court rejected this b/c SAS knew the check was made out to a casino and SAS had not taken the check for value but in exchange for promise to enforce casinos rights
rd

Kedzie & 103 Currency Exch. V. Hodge Issue whether a HDC is precluded from payment where a check was issue for services to be provided by someone not properly licensed to provide those services Fentress agreed to install plumbing system in Hodges home and was paid by $500 check Fentress never showed and Hodges stopped payment at bank Fentress had gone to check cashing place and gotten $ for check Check cashing place said that it was a HDC and sued Hodges Hodges said that check cashing places claim as HDC could be defeated by 3 -305(a)(1) since Fentress was not a licensed plumber and transaction was therefore illegal Court held that (a)(1) refers to situations where the law says that the contract or transaction itself and the instrument exchanged on it are illegal or prohibited somehow Law has to say that exchanging a note or check w/r/t certain types of transactions is prohibited

Problem 39 even a HDC cannot enforce a note against someone whose debts have been discharged in a bankruptcy proceeding 3-601 Other types of discharge (aside from bankruptcy) are effective against a HDC who has notice of discharge (e.g. there are 4 sureties on a promissory note and one of their names is crossed out a subsequent HDC should know not to look to crossed-out person for $) Problem 40 3-601 Obligation under an instrument is discharged as stated in Art. 3 or by any act/agreement that would discharge obligation under simple K. Discharge is not effective against an HDC who gets note w/out notice of discharge (discharge is a personal defense under 3-305) 3-602(b) instrument is paid to extent that payment is made to persons entitled to enforce the instrument. A note is also paid if payment is made to person formerly entitled to enforce note as long as obligor is unaware that transfer has been made.

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Downloaded From OutlineDepot.com If Malvolio made payment to OFC before OFC transfers the note to Olivia and Olivia takes it as HDC, he will have to pay twice. Although the note is technically discharged, Olivia has no notice of the discharge. If Malvolio pays OFC after note is transferred to Olivia (but no notice is given) Malvolio has a 3602 defense. Transferee has incentive to make notice to maker. 3-501(b)(2) surrender instrument if full payment is made Malvolio should have gotten note back so that it could not be negotiated to a subsequent HDC. Malvolio situation is peculiar to prepaid notes someone cannot buy a matured note and take it as a HDC.

Forgery 3-401(a) a person is not liable unless he signed the instrument 3-403(a) unauthorized signature is ineffective except as the signature of the unauthorized signer in favor of a person who is a HDC If forgery of a name is necessary for negotiation there can be no HDC because no one else can become a holder Problem 41 o o o o o This is a negotiable instrument b/c it is signed by the maker Slick The fact that the instrument has a forged signature does not affect its status as a negotiable instrument Forgeries dont typically prevent someone from getting instrument as HDC only a forged necessary indorsement renders an instrument non-negotiable th JJ is the holder and 10 Natl Bank is a HDC 3-305(a) and (b) presume that someone is a party to the instrument and Milton did not sign the instrument per 3-401 Milton did not sign the note so he is not a party

Problem 42 o o o o Look to 3-106, Comment 2 The countersignature is for identification purposes so that it can be compared to the remitters specimen signature that already appears on the check The countersignature is NOT an indorsement so forgery rules do not apply 3-106(c) requirement for countersignature does not make instrument to be conditional for purposes of 3-104(a) just because remitter fails to sign does not prevent someone else from becoming a holder, but is a defense to the obligation of the issuer under 3305(a)(2) Cashiers check is an unconditional order to pay and is treated as cash HDC will be able to enforce the cashiers check Whether holder had notice of defense of forgery is a factual question: if forgery is good NO but if forgery is really bad MAYBE Octopus may have to pay on checks

o o o o

Procedural Issues Dont have to be a HDC to sue on instrument Any person entitled to enforce the instrument can sue 3-301 Includes holders and people using shelter rule to enforce HDCs rights

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Also includes: o o o Depository banks under 4-205 Rightful owner of a lost instrument under 3-309 Defendant in restitution action under 3-418(d)

3-308(b) HDCs burden to establish his HDC status 3-308(a) burdens when genuineness of signatures is an issue Virginia Natl Bank v. Holt o o o o Holt was maker on note when she defaulted and bank sued to enforce the note, Holt denied she had signed it Have to make specific denial in pleading that signature is not authentic Under 3-308(a) if authenticity is denied, burden shifts to person claiming that signature is authentic (unlike common law of Ks where burden would be Banks). Even then, signature is presumed valid. Burden is on Holt to offer sufficient evidence to rebut Holt was unable to do so

Defenses Against a Non-HDC Under 3-305(a) and (b) and 3-306 claims and real and personal defenses can be asserted against anyone who is not a HDC Common personal defenses are lack of consideration and failure of consideration (breach of K) Herzog Contracting Corp. v. McGowen Corp Whether solely on the basis that the notes are clear and unambiguous they are enforceable regardless of what the parties actually intended? The notes would be enforceable if enforcement was sought by a HDC, 3-305. But Herzog was no a HDC. A holder of a promissory note who is not a HDC takes the note subject to all defenses of any party which would be available in an action of simple contract. 3-305(b). One such defense is that the parties did not intend to create an enforceable contract. Held, court allows parole evidence to show it was a sham transaction, the note was never intended to be enforced, so long as neither party was a HDC. . . there wasnt a HDC. The question is whether to let in evidence that the note was fraudulent or a sham transaction. They were allegedly trying to defraud the IRS. 3-105(b)An instrument that is conditionally issued or is issued for a special purpose is binding on the maker or drawer, but failure of the condition or special purpose to be fulfilled is a defense. 3-117this contemplates admitting parol evidence, but it say that its subject to applicable law. If state law allows it, then you could have a defense.

Common Personal Defenses that can be Raised Against a non-HDC Lack of consideration Failure to perform Discharge by destruction Cancel Discharge by agreement Separate agreements that contradict terms Non-issuance deal never closed and someone stole note Condtl issuance Breach of K under common law
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Downloaded From OutlineDepot.com o Jus Tertii Sureties can raise defenses of their principals - 3-305(d) Obligor can refuse payment if doing so would violate a restrictive indorsement - 3-206(f) 3-305(c) genl prohibition against jus tertii One jus tertii that can be asserted against non-HDC instrument has been lost or stolen and current possessor is not true owner Problem 43 The note is no longer a negotiable instrument b/c it contains an addtl undertaking under 3 -104 (lunch clause) The note can never can reach a HDC Jane is a Holder and will seek to enforce against Craig Stonewall has a claim to get note back based on theft Uncle has claim on fraud in inducement 3-305(c) Craig would have to join Uncle in claim against Jane Craig can then assert Uncles claim as his own against Jane Obligor does not have to pay if Holder is not an HDC and got the instrument through theft/loss obligor would then pay rightful owner (Uncle) Craig has to prove this 3-602(e)(2) even if Craig had suspicions that note was stolen before it got to Jane, he can still pay Jane unless he KNOWS that note was stolen on its way to Jane Craig can interplead and post funds to court so that court can figure it out and pay $ to rightful party Breach of warranty Fraud, mistake, impossibility Absence of underlying K Risk of loss Modification Underlying transaction is unconscionable Recoupment Estoppel

CHAPTER 4 THE NATURE OF LIABILITY Promissory note has a maker and a payee if a payee signs it (in blank or special) they become an indorser (as does anyone else who signs it) On a draft, the drawer orders the drawee to make payment to payee anyone who signs check becomes an indorser The Underlying Obligation o o Common suit on negotiable instrument is based on the underlying obligation Problem 44 Yes. Once instrument is accepted in satisfaction of underlying obligation, the obligation merges w/the instrument and until instrument is dishonored the obligation is suspended 3-310(b). If instrument is dishonored, payee can sue on note or on underlying obligation. If the note is negotiated to the bank for value, Simon is no longer a holder so he cannot sue on the rent obligation anymore (even if Fran defaults) but the bank, as holder, can now enforce the note against Fran. Problem 45 Under 3-310(a) the obligation is discharged as if cash money had been paid. If it were a check, Simon could go after drawer but here drawer and drawee are ONB. ( See also Fifth Third Bank v. Jones).

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Downloaded From OutlineDepot.com o Cashiers checks and tellers checks have same effect under 3-310(a) o Cashiers Check same bank is drawer and drawee Tellers Check one bank is drawer and another is the drawee

Problem 46 Intentional destruction of the note wipes out the debt. The actual intent to absolve someone of debt is irrelevant. "The purpose or intent of the holder beyond intent to destroy his evidence of indebtedness is immaterial." However, cancellation and surrender of an instrument has no effect when it is the product of mistake or clerical error. Mistake of law = punished and mistake of fact = excused. Ward v. Federal Kemper Insurance Co. until holder/payee deposits check it is still under control of drawee bank and holder has no rights on it (not an assignment of funds)

Liability on the Instrument o o Person becomes liable on an instrument as soon as they sign it - 3-401(a) The Makers Obligation Maker is absolutely liable on a promissory note (same is true of a bank that issues a cashiers check) 3-412 More than one maker both are jointly and severally liable to the rest of the world but can sue for contribution from co-makers if they are forced to pay more than their share - 3-116(a) and (b) Problem 47 No. Andersen can sue any one or all three of the makers, as they are all jointly and severally liable on the note. They will have to sort out who pays what amongst themselves Winkin will have to sue the others for contribution. Problem 48 VDC cant sue b/c doesnt have actual original note and note was not indorsed VDC is not a holder. 3-309 lost note can be reestablished but will generally be payable to original payee per its terms. VDC has to prove transfer to it somehow can be difficult. If note and mortgage are separated, the note is the only source of liability. If Harry makes payment to VDC and it is not a holder so that it cant enforce note, his payment will be wasted. See, also 3-310.

The Indorsers Obligation 3-204(a) anyone who signs an instrument in an ambiguous capacity is presumed to have secondary liability on the note 3-415 description of indorser liability instrument/draft first has to be presented to the maker/drawee and dishonored before indorser is liable (indorser also has to be notified) To make indorser liable need (1) presentment; (2) dishonor; and (3) notice of dishonor Problem 49 Subject to notice and acceptance provisions in 3-415 (C and D), the bank can sue Snow as an indorser Can use defenses under 3-305 and 3-303 if subsequent holder is a HDC, a personal defense wont work. Here, failure of consideration will not help Snow against JSB. 3-415(d) acceptance means drawee who has accepted a draft here JSB cannot accept b/c they are not the drawee, which rejected the draft 3-415(c) bank should first alert Snow to NSF status before taking other action 3-205 anomalous indorsers sign but are not holders at the time of holding. Here, the indorsers are not anomalous. Anomalous indorsers and joint payees are J&S liable.

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Downloaded From OutlineDepot.com Here we have separate regular payees/indorsers Snows liability runs to BCCS but not the o ther way around (cant go forward earlier indorsers cant sue later indorsers unless J&S liable) Snow can sue Bigelow (original person)

Problem 50 The four indorsers are anomalous/sureties/accommodation parties and are liable under 3-415 they are J&S liable under 3-205 and 3-116 PP can sue any of the other sureties Under 3-119 PP can give other sureties notice of the suit and bring them into the suit 3-419(f) accommodation party who pays on instrument is entitled to reimbursement from the accommodated party

Whether it intends to or not, any indorser becomes surety to prior indorsers In order to avoid surety liability under 3-415, indorser should write without recourse next to or above his or her name. This will serve to negotiate the instrument but creates no further liability, even against HDC. Problem 51 COA against Melody enforcing the note 3-412 subj. to defenses under 3-305 COA against Ivory surety/indorser liability Defense (Melody) lack of consideration/performance Defense (Ivory) no recourse signature Melody will have to pay FLC b/c her defense is personal and ineffective against a HDC like FLC w/o recourse notation by Ivory is not notice to a HDC that there is a defense to the note it is a common commercial practice

The Suretys Obligation Accommodation parties are all sureties Surety involves 3 Ks: (1) obligation between maker/principal and creditor; (2) suretys promise to back the makers obligation; and (3) principal/makers promise to pay surety if surety has to pay makers debt Problem 52 Surety Big Bank; Principal Quickie; Creditor Frank Family Three contracts: o Frank Family/Quickie for Quickie to build a house and pay Quickie when complete o Quickie/BB Contract between the principal (Quickie) and the surety (BB) to pay the surety o Big Bank/Family Frank to pay laborers

Aside from reimbursement, surety also has rights of exoneration, subrogation, contribution and the principle of strictissimi juris (of the strictest law) Exoneration equitable right where surety can compel principal to perform at maturity instead of surety. This is an implied duty. Subrogation where surety is forced to pay a creditor, the surety steps into creditors shoes and uses creditors rights against principal. Can use these rights to enforce the underlying K as if it were the creditor

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Downloaded From OutlineDepot.com Contribution where payee has enforced surety against one of several co-sureties, that surety may sue others for contribution Strictissimi Juris where surety has backed up an underlying obligation, any changes to the original obligation will discharge the surety from further liability. Also, if creditor agreed to excuse principal from liability or gave him more time to pay, a surety is discharged unless excusal/extension is with preservation of recourse or surety consents. The Accommodation Party any party that signs the instrument for the purpose of incurring liability w/out being a beneficiary for value on the instrument (includes maker, drawer, acceptor or indorser). This party is obligated to pay in the capacity in which he signs indorser who signs as a surety has rights of indorser (presentment, dishonor and notice)

Problem 53 3-419(c) and 3-302 HDC status not affected by notice that Generous was a surety maker doesnt get notice of dishonor but if indorser doesnt he wont be liable w/out notice of dishonor Accommodation party may sign as maker, drawer, acceptor or indorser and will be liable in their role here Generous, is likely a maker and is liable as such Lack of consideration irrelevant under 3-419(b) Place of signature is important but under 3-204(a) clear and unambiguous terms of the note are also critical the note says that Mary maker is the maker so it could be argued that Generous is an indorser, even though his signature appears near Marys

Problem 54 Under 3-419(d), if guarantor is only guaranteeing collection and not the note itself, the payee would have to sue the maker before it sues the guarantor. If the word guarantor suggests that he is guaranteeing payment of the loan (i.e. I guarantee the loan), Generous can be sued right away and bank doesnt even have to look to maker. If it is not clear whether payment or collection is guaranteed, payment is assumed under 3419(d) and (e)

Floor v. Melvin issue was whether the phrase we irrevocably guarantee Floor against loss by reason of nonpayment of this note was a guarantee of payment or collection. Court found that guarantee against loss was one of collection and not actual payment. Problem 55 Margaret is liable as the maker of the note and cannot sue her daughter as an accommodation. Portia is an indorser but is not an accommodation party - 3-419 creates rebuttable presumption that Portia is an accommodation party Portia is NOT b/c it is actually Mom who is accommodating Portia and not the other way around

The Tender of Payment Rule - 3-603 Person who makes tender is never discharged only stops interest People who have right of recourse against person making tender are discharged (indorsers and sureties) ***Obligor who attempts to payoff note before or at maturity should get note back b/c payee/holder can otherwise negotiate the note to a HDC Problem 56

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Downloaded From OutlineDepot.com o o o Cather owes only the amount due at the time of payment with no additional interest per 3-603(c). The code does not mention atty fees. 3-603(b) does not apply to discharge the whole debt b/c Cather is not prejudiced and is liable as a co-maker. No. Indorsers and sureties are discharged by refusal to accept tender of payment by maker or principal b/c they have recourse against maker (Saul) - 3-603(b). Cather now faces risk of Sauls insolvency. Refusal of payment tender by Cather discharges Stout - 3-603(b)

Problem 57 Arnold is discharged up to the value of collateral ($6,000) b/c of Banks impairment of collateral since they failed to file for perfection 3-605(e) and (g). Arnold would have burden of proving fact of impairment and value of collateral.

Chemical Bank v. Pic Motors Group Bank agreed to Lend money to Pic under an established line of credit on the security of Pics inventory of cars as collateral. Siegel had been the director, president and principal stockholder of Pic, personally guaranteed the loans in writing. Siegel then sold his interest in Pic to Robl, and resigned as director and president. Pic fell behind on the payments. Bank then made a demand, and then sued Pic and the guarantors. Siegel defends that the deficiency was caused by the failure of the Bank to conduct regular inspections of the business. No provision of the loan agreement or the guaranty agreement obligated the Bank to conduct inspections. Held, Siegel was still liable.

Problem 58 3-605(e) doesnt apply b/c George is a maker and not an accommodation party 3-605(f) applies and George is discharged to the extent that his right of contribution from a comaker is prejudiced ($5,000) If Martha loses the collateral due to tax evasion she gets no discharge b/c she was not prejudiced she gained by avoiding taxes

Problem 59 Comment 3 to 3-605 agreements not to sue principal dont affect the sureties. Shadbolt has to pay the whole amount due and can sue Point under 3-419(e). Point cannot escape liability to Shadbolt. Extension agreements only discharge non-consenting sureties and indorsers if they can show harm from the agreement of extension of time to pay 3-605(c) Shadbolt would have to prove this and it would be tough if Point is solvent. Point still has duty to reimburse Shadbolt. Shadbolt waived impairment of collateral as a grounds for discharge of his surety obligation interest rate modification is material under 3-605(d) and will discharge Shadbolt unless bank can show that it wouldnt harm him. Surety agreement should be drafted under 3-605(i) so that surety waives surety rights

London Leasing Corp. v. Interfina Whether a corporate officer who makes a note on behalf of his corporation and, also personally endorses that note is discharged from personal liability on the note by an agreement between the payee and the corporate maker, by its president, which extends the corporate makers time to pay the note?

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Downloaded From OutlineDepot.com o Interfina made and delivered to Plaintiff a promissory note for $52k signed by Frederick as president of Interfina, and signed by Frederick personally. When the note was not paid on time, Interfina, through Frederick, made agreements to extend the time of the due date; these Frederick signed only in his corporate capacity. Frederick contends that the extension agreements, which were not signed by him in his personal capacity, as a matter of law discharged him from personal liability on the note because he did not personally consent to the extension. Court found that he had consented to the extension personally and held him liable.

The Drawees Obligation Problem 66 Banks dishonor is wrong but only the drawer (Sam) can go after the bank the payee has no rights against drawee under 3-408 Payee has rights against drawer under 3-310 Sue can sue Sam for alimony + atty fees or on the dishonored negotiable instrument Drawee is not liable on the draft b/c its signature is not on the draft - 3-401

Banks acceptance of a check = certification under 3-409(d) and 3-413 Acceptance is usually signing diagonally on the face of the instrument 3 types of drafts o o o o o Demand/on sight/check Specified date (presentment optional) 60 days after sight (presentment for acceptance reqd b/c it starts the clock) If there is no acceptance of specified date/60 day, have to give notice of dishonor to drawer 3-501 and 3-502 covers consequences of dishonor Refusal to accept/certify a check is not a dishonor

Problem 67 Banks refusal to certify is not a dishonor under 3-409(d) so George does not have to get notice Cash the check so that George cant mess with the check (gift check is not enforceable against drawer unless it reaches a HDC no consideration to sue on) 3-414(c) and 3-415(d) upon certification by the bank the liability of the drawer and any indorsers is extinguished

Problem 68 principal can be liable for agents authorized signature even if principal is not named 3-401 and 3-402, Comment 1. Finch doesnt even have to put agent by name b/c he is clearly signing in capacity as agent. Problem 69 Finchs signature could be seen as an ambiguous by a HDC so Finch would be liable 3-402, Comment 3 and Finch would go to Biggley for satisfaction. The Bank knows that the loan is not for Finch but for his principal and is also not a HDC. If there is no HDC parol and extrinsic evidence can be used to show intent of parties on instrument. See, also Money Corporation example on p. 163 Smith will be liable in this example unless HDC is on notice that there is an agency relationship between Money Corp. and Smith. Could argue that Smith is clearly not the corporation itself. Agents should sign in in a representative capacity and clearly name the principal. Problem 70

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Downloaded From OutlineDepot.com Yes absolutely no notice that he is acting on behalf of Money Corp. Possibly (see Money Corp. above) No would be even better if he said by John Smith, President

Problem 71 once the check has the principals name printed on it (i.e. a corporate check) , a signature of an agent does not need to clarify that they are an agent. This differs from notes, which are a borrowing instrument. Nichols v. Seale where a DBA is used, the underlying individual is liable unless clearly indicated otherwise. Unless HDC is involved, can used parol evidence to show shared intent of both parties individual affidavits unimportant.

CHAPTER 5 BANKS AND THEIR CUSTOMERS Article 4 covers bank deposits and collections 4-102(a) whatever provisions of Art. 3 conflict w/Art. 4 are dominated by Art. 4 4-103 bank and customer may vary the default UCC rules by agreement 4-104 genl definitions 4-105 more complex terms and premises drawee is now payor bank or paying bank Depositary bank is the first bank where an item is xfer for collection (can also be the payor bank if the drawer and holder do their banking at the same bank) Any bank in the collections process, except the payor bank, can be called a collecting bank (including the depository bank) The Checking Account o o o o 2 legal relationships involved w/checking account: (1) debtor/creditor and (2) principal/agent Depositor is creditor for purposes of deposits and bank is the accountholders agent w/r/t to payments of drafts and other instructions 1-303 course of performance/dealing and usage of trade may govern accountholder/bank relationship as well The Properly Payable Rule Bank may pay out customers $ only if it follows the customers orders exactly 4-401 bank may only charge an account where the item is properly payable Properly payable = authorized by the customer and in accordance w/any agrmt. btwn. customer and bank If bank does not follow customers orders exactly, it must put the $ back in the acct. What if there are errors or ambiguities on a check? 3-114 where there are contradictory terms, typed prevails over printed, handwritten prevails over both and words prevail over numbers Cincinnati Ins. Co. v Wachovia Bank, Natl. Assn. Todd's Snax, Inc., d/b/a Schultz Foods Company ("Schultz Foods"), issued a check in the amount of $ 153,856.46 to Amerada Hess Corporation Thieves stole the check, changed the name of the payee to "Kenneth Payton," and induced Payton (an unwitting accomplice) to deposit the check into his account at TCF Bank ("TCF"). TCF presented the check for payment to Schultz Foods's bank, defendant Wachovia, and Wachovia charged the amount of the check against Schultz Foods's account.
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Downloaded From OutlineDepot.com By the time that Schultz Foods discovered the fraud, Payton had wired the funds to an overseas bank account, and the thieves had disappeared with the money. The central question in this lawsuit is who must bear the $ 153,856.46 loss -- Schultz Foods or Wachovia. For the reasons described below, the Court finds that, under the deposit agreement between Schultz Foods and Wachovia, Schultz Foods must bear the loss because Schultz Foods failed to implement a fraud-detection program offered by Wachovia -- a program that would have prevented the loss. The Court thus grants summary judgment to Wachovia. Agrmt. between Wachovia and customer under 4-103 trumps 4-104 default rule that would normally render Wachovia liable

Problem 72 4-401(c) the bank may pay out on a post-dated check unless the customer (Portia) orally or in writing notifies the bank of the date on the check Notification has to be something separate from the check itself and must be similar to stoppayment instructions under 4-403 W/out such notification, the check is properly payable Banks may pay on an instrument even if it creates an overdraft dont have to, however 4401

Problem 73 3-401 creates liability for a signer of an instrument 3-403 says that an unauthorized signature is ineffective except against the unauthorized signer Under 4-401(a) the checks are not properly payable b/c they are not authorized by Point 4-401, Comment 1 bank cannot force Point to execute a stop-payment order on unendorsed checks b/c the checks cannot be properly payable from Points account Forged drawer checks are not properly payable bank will have to recredit account

Problem 74 This is an alteration under 3-407 which discharges party who is affected by the alteration (Ms. Douglas) Also, Harper is not a holder b/c the check has not been properly negotiated as it is payable to order of Rogers and Harper is not Rogers Therefore, 4-401(d)(2) does not apply and the check is not properly payable Bank will have to credit Douglas account for whole amount even the $10 was payable to Rogers or someone who takes from Rogers in negotiation Harper was neither Rogers can go after Harper for $10 or can recover check and re-deposit it for the original $10

****NOTE when a bank wrongfully takes $ out of a customers account, it seems reasonable to sue the bank for conversion but this is not possible b/c the $ is on loan to bank and the bank cannot convert its own property. Suit must be brought under 4-401 or K law. Genl Rules on Properly Payable Instruments Signed or authorized by drawer Not altered Presented by holder or PEEI Due care exercised by bank before paying out on check is irrelevant authorization of customer is the critical part of the 4-401 analysis as it is a K issue and not a tort situation (i.e. negligence)

Problem 75 Here, we are dealing w/a preauthorized draft or telecheck

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Downloaded From OutlineDepot.com Can make an argument that it is properly payable under 4-401(a) b/c it is authorized by the customer (he does not dispute this) and does not appear to violate any agreement between the bank and customer Under agency principal, can argue that telemarketer authorized check on customers behalf

Problem 76 4-404 an 8-year old check is stale (older than 6 months) and bank does not have to pay it unless it is certified 4-404 bank may pay out on a stale check if it does so in good faith (honesty in fact and observing reasonable commercial standards of fair dealing) paying out on a check like this is not acting in good faith 4-401(a) creation of an overdraft does not prevent check from being properly payable although bank does not have to pay out on overdrafts 4-402(a) 4-111 Gulliver must bring suit w/in 3 years of cause of action accruing 3-118 Gulliver must bring suit w/in 3 years of dishonor or 10 years from date of check, whichever occurs first FL law SOL is 5 years from date action accrues

Wrongful Dishonor When a bank makes an improper payment from an account, it may cause other checks to be wrongfully dishonored Bank can also make a computer-related or other mistake which causes a dishonor Customer may recover actual damages when the bank makes a wrongful (includes mistaken) dishonor of a properly payable check 4-402 a payor bank is liable for actual damages proximately caused by a failure to honor a properly payable item. However, bank does not have to honor such an item if it would create an overdraft (unless it has agreed to do so). Under 4-402, damages may include damages for an arrest or wrongful prosecution of the customer and special damages (if proven factual question) Consequential damages may be recovered if bank could have reasonably foreseen the damage (e.g. loss of a car due to freeze on check payments from account) many courts see proximate cause in 4402(b) and apply tort-like standards Punitive damages may be awarded when banks conduct is willful or malicious Twin City Bank v. Isaacs PROCEDURAL POSTURE: Defendant appealed a judgment from the Pulaski Circuit Court, Fourth Division (Arkansas) that held defendant liable for plaintiffs' damages, pursuant to Ark. Code Ann. 85-4-402, for defendant's wrongful dishonor of plaintiffs' checks, on grounds that the award of punitive damages were excessive and not supported by the evidence.

OVERVIEW: o o After plaintiffs discovered that their checkbook was missing, they reported the loss to defendant promptly. Plaintiffs later learned that two forged checks were honored by defendant before checkbook was reported missing.

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Downloaded From OutlineDepot.com o o o o Defendant froze plaintiffs' account, denying them access to it for four years, based upon defendant's suspicion that plaintiffs were involved in the forgery, despite being cleared of any suspicion. In plaintiffs' action, a jury awarded compensatory and punitive damages against defendant under Ark. Code Ann. 85-4-402. On appeal, defendant contended that the court improperly instructed the jury as to damages, that there was juror misconduct, and that the punitive damages award was excessive. The court affirmed holding: (1) the court properly instructed the jury as to damages; (2) the court did not abuse its discretion in not granting a mistrial for juror misconduct, and; (3) the evidence supported the jury's award of punitive damages for mental anguish.

Problem 77 Lis pendens is totally irrelevant to whether items paid from bank account are properly payable mistake of law Directed verdict should not be granted b/c bank has failed to honor a properly payable item under 4-401(a) and 4-402(a) it had no reason to dishonor the barbershop checks and there was no need to freeze the account Advice of counsel as to the law, while mistaken, will serve as a shield to punitive damages (mistake of fact would require a narrower analysis) Dishonor is similar to defamation so may not have to prove actual damages Harry may be able to collect compensatory damages for emotional distress if he can link dishonor to ulcer and mental anguish In order to collect actual damages, Harry will have to actually prove that the damages were suffered

Problem 78 The bank must honor the check b/c the drawer has issued it to the presumed payee who is presenting it at the drawee/payor bank this is a properly payable item The bank can protect itself by requiring reasonable identification such as ID or a thumbprint this does not qualify as a dishonor Refusing to pay after ID is a wrongful dishonor, however 4-103 bank should put a clause in customer agreement that says it will dishonor or charge a fee when a payee who does not have an account at drawee bank presents a check for payment this will make it a non-dishonor The only person who could sue the bank (drawer) would be precluded from doing so by the customer agreement Payee has no cause of action against Bank can sue drawer

Problem 79 Assumption here is that bank is completely refusing to cash checks w/out fee this counts as a wrongful dishonor Payees cannot pursue bank but can pursue drawer legally Drawer can pursue wrongful dishonor claim against bank

Baptista v. JP Morgan Chase Bank, NA

PROCEDURAL POSTURE: Plaintiff non-account holder payee alleged defendant bank's charging of a check-cashing service fee violated Fla. Stat. 655.85, and also asserted a claim for unjust enrichment. The United States District Court for the Middle District of Florida granted the bank's motion to dismiss, finding both claims preempted by the National Bank Act (NBA), 12 U.S.C.S. 21 et seq. OVERVIEW:
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Downloaded From OutlineDepot.com o o o

o o

o o o

Fla. Stat. 655.85 prohibited a bank from settling any check drawn on it otherwise than at par. But, 12 U.S.C.S. 24, Seventh, allowed banks to exercise all incidental powers as necessary to carry on the banking business. The Office of Comptroller of the Currency (OCC) was empowered to regulate banking, and one of its regulations, promulgated under the NBA, 12 C.F.R. 7.4002(a), stated that national banks could charge customers non-interest charges and fees, including deposit account service charges. The OCC's interpretation of "customer" to include any person who presented a check for payment was not unreasonable. Under 12 U.S.C.S. 25b(b)(1), conflict preemption applied, and, there was a clear conflict, as the OCC specifically authorized banks to charge fees to non-account-holders presenting checks for payment, while 655.85 prohibited such fees as to non-account holders. Section 655.85 was preempted by the NBA. Since the unjust enrichment claim relied on the same facts, it too was preempted. And, the fee was only levied because the bank conferred an additional benefit on the payee: immediate payment, and that consideration was a defense to an unjust enrichment claim.

Death or Incompetence of Customer 4-405(a) banks authority to collect, pay or accept an item, if otherwise effective, is not affected by death or incompetence of the customer of either bank unless bank has knowledge of death or adjudication of incompetence and has reasonable opportunity to act 4-405(b) even w/knowledge of death, bank may cont to certify checks drawn on or before the date of death for 10 days unless ordered to stop by someone w/interest in the account (helps payees get paid w/out having to file a claim in probate) If bank gets notice after death + 10 days has elapsed any checks paid before notice date are OK (bank does not have to continue paying for 10 days after death and dishonor will be rightful) If people who have gone missing, bank must continue to pay on checks before the person is found to be legally dead Problem 80 4-405(b), Comment 3 any relative, prospective heir/beneficiary or PR/executor may ask the bank to stop payment and the bank can do so w/out engaging in a wrongful dishonor The bank is under no obligation to verify the truthfulness of the claimed interest in the account Nellys call will have the same effect as a stop payment under 4-403

Banks Right of Setoff Generally, a bank has the C/L remedy of setoff whereby one obligation (a customers to the bank) is set off with another (the banks to the customer) Generally, bank cannot automatically setoff consumer credit card debt (bank could set off late car payment on bank car loan against bank account) Setoff is NOT a statutory lien UCC does not establish the right to setoff or regulate its terms Undisclosed setoff may be a violation of constitution and could trigger Truth in Lending Act notifications as a security interest
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Consumer Protection Act requires that setoff agreement at bank be a separate, signed writing and not just a clause in a credit agreement Bankruptcy filing creates automatic stay which prevents bank from exercising setoff (some courts allow for administrative freeze where bank freezes customers funds upon learning of a bankruptcy but does not take any $ for itself) Problem 81 Portia should probably start by reading all Ks and agreements she has w/the bank to make sure the bank did something wrong Portia can apparently sue under TILA 1640 can recover actual/punitive damages and atty fees May also have a case for wrongful dishonor of the checks 4-402

WALTER v. THE NATIONAL CITY BANK OF CLEVELAND PROCEDURAL POSTURE: Appellant bank sought review from the Court of Appeals for Cuyahoga County (Ohio), which had granted summary judgment to appellee judgment creditor in his action for civil conversion against the bank; the bank argued that it was entitled to a right of equitable setoff on the proceeds of the disputed bank account. OVERVIEW: o A judgment creditor filed suit against a bank claiming civil conversion and the right to the proceeds of the debtor's bank account, alleging that the bank had improperly claimed a right to equitable setoff of an unmatured indebtedness on a promissory note against the judgment creditor's attempt to reach the proceeds. After the lower court found for the judgment creditor, the bank appealed. The court held that (1) the bank did not have a priority of right in equity where it sought to set off an unmatured indebtedness, (2) the bank in question had made a loan for a definite term to the debtor even when it already knew the debtor to be insolvent, and (3) the contract embodied in the promissory note did not grant any contractual right to treat the note as a demand note and to set off the commercial account against that debt before maturity. NOTE if bank had been allowed this premature setoff it wouldve had priority over other creditors. Bank made mistake of lending money to an already insolvent entity. Shouldve included an acceleration clause so that the note could be held as overdue and setoff could be used.

o o

OUTCOME: The court affirmed the lower court's finding on behalf of the judgment creditor.

Customers Right to Stop Payment Ordinary Checks 4-403, Comment 1 stopping payment or closing an account is a service that depositors expect and are entitled to receive notwithstanding the difficulty, inconvenience and expense to the bank. Losses caused by failure to stop or close should be borne by the banks. Under 4-403, bank must have reasonable opportunity to act on stop/close instruction and description of item must be made w/reasonable certainty Burden of proving fact and amount of loss resulting from banks failure to stop payment or close account is on the customer

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Downloaded From OutlineDepot.com Stop-payment order is effective for 6 months but lapses after 14 days if oral and not confirmed in writing during that time (can also be extended beyond 6 months)

PARR v. SECURITY NATIONAL BANK o PROCEDURAL POSTURE: Appellant sought review, following a decision of the District Court of Tulsa County (Oklahoma), in an action brought against appellee seeking recovery of the amount of check, interest, and attorney fees after appellee paid check over appellant's stop payment order. OVERVIEW: Appellant sought review, following an action that appellant brought against appellee seeking recovery of the amount of check, interest, and attorney fees after appellee paid check over appellant's stop payment order. The court held that appellant, in making a stop payment order that included account number, check number, date, payee, but which had a 50 cent error in identifying the amount of the check, described appellant's check with the reasonable accuracy required under Okla. Stat. tit. 12A, 4-403(1) (1981). Therefore, appellee had a reasonable opportunity to act on the stop payment order. Appellee's decision to reduce operating costs, by using a system which increased the risk that checks for which there was an outstanding stop payment order would be paid, did not relieve appellee of the responsibility it owed appellant.

OUTCOME: The court reversed and remanded because appellant, in making stop payment order which included account number, check number, date, payee, but which had a 50 cent error in identifying the amount of the check, described appellant's check with the reasonable accuracy required under Oklahoma Uniform Commercial Code. Therefore, appellee had a reasonable opportunity to act on the stop payment order.

Problem 82 o o o o o o Agree Julio did not give the bank any information aside from the date and the payee (in the future, Bank can put in agreement the method by which a check must be stopped) Invalid this K provision does not display good faith and fair dealing and the inconvenience of decoding is not relevant under 3-403 in FL bank may mandate that stop-payment orders be in writing. 4-403, Comment 7 says that a payment made by mistake in contravention of a stoppayment order is a violation (negligence) and any agreement to the contrary must comply w/good faith requirements Invalid - 4-403, Comment 1 says that cost for stop-payment orders should fall on banks. If this is deemed a fee it might be OK. Julio (customer) has to prove losses under 4-403(c) If bank accidentally pays over stop-payment order, can subrogate under customer and sue Honest Juan for K-related claim per 4-407

Problem 83 o o o o Here, ONB improperly paid item over Crandalls stop-payment order 4-407(2) ONB is subrogated to Flash Flash would win in a suit against Crandall b/c there is not sufficient cause for a breach claim Crandall is actually in breach here ONB does not have to recredit Crandalls account b/c ONB/Flash would win against Crandall
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Problem 84 o o Both arguments work b/c Computer City is a HDC Payor bank can be subrogated to HDC rights and not repay b/c HDC will get paid unless drawer has a defense against HDC here Ruperts defense is personal and wont work against a HDC

Problem 85 o o o Here, ONB is the depository bank and has given value becomes a HDC Careless can therefore subrogate to ONB and has HDC rights against Rupert Careless will not have to recredit Ruperts account b/c Rupert could not prevail against ONB as HDC

Cashiers, Tellers and Certified Checks 4-403, Comment 4 Customer CANNOT stop payment on a certified check b/c once a check is certified, it becomes an obligation of the payor bank and the customer has no rights to force the bank to breach its acceptors K ( 4-413(a)) 3-104(g) and (h) customer cannot stop payment on cashiers or tellers (a/k/a bank) checks Problem 86 o o o o o o o o o 3-411 and Comment thereto say that a customer may not stop payment on the cashiers check (only drawer can stop payment and bank is the drawer on a cashiers check) 3-602 The bank from which the check was bought may pay to the holder despite notice that there may be an adverse claim to the instrument Some banks might accommodate customers and stop payment but the damages provision in 3-411 is designed to discourage this practice allows for consequential damages 3-202 Tom can try to rescind the negotiation of the check to Flashman (fraud here gives him claim to the instrument) 3-201, Comment 2 remitter may be able to rescind negotiation of cashiers check to Flashman based on fraud Problem here is that Flashman will likely negotiate the check to someone who will become a HDC bank may have trouble beating HDC rights However, 3-411(c)(ii) says that bank is protected if there is a reasonable defense wont work against an HDC 3-505(c) bank cannot assert any claims against Flashman but could join with Tom in a claim against Flashman Tom shouldve made cashiers check out to himself and not negotiate it to Flashman until hes seen the car

PATRIOT BANK, N.A. V. NAVY FEDERAL CREDIT UNION o PROCEDURAL POSTURE: Plaintiff bank sued defendant credit union for refusing to honor a cashier's check on presentment. The check was obtained by a credit union member who gave the check as payment to a used car dealer and bank customer which deposited the check into its account. The matter came to the circuit court as a de novo appeal from the General District Court (Virginia). OVERVIEW:

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Downloaded From OutlineDepot.com The bank maintained that the used car dealer properly indorsed the check when it wrote its account number and deposited the check. The credit union argued it acted properly and prudently since the cashier's check did not state that the absence of indorsement was guaranteed. The circuit court held that it was a reasonable inference from the evidence that the used car dealer wrote its account number in order to authenticate the check for the purposes of deposit and concluded that the account number constituted an indorsement as that term is defined in the Uniform Commercial Code. In light of Va. Code Ann. 8.4-205.1, there was no need for the credit union to return the cashier's check to the bank in order for the bank to guarantee the missing endorsement of its customer. By submitting the check, the bank warranted it had credited the dealer's account. The credit union had no defenses of its own to the payment of the cashier's check. The credit union could not properly stop payment on the cashier's check based on defenses of the member as remitter and refuse to honor the check when it was represented after the bank guaranteed the missing endorsement.

OUTCOME: Judgment was entered in favor of the bank in the amount of $ 7,000, the amount of the cashier's check, plus interest, costs, and attorney fees.

Problem 87 o o o o Portias declaration of loss has no value b/c she is the remitter and has no right to stop payment on the check However, after 90 days, bank can give her the money bank as illustrated in the problem 3-312 permits bank to avoid liability here and bank and has no liability to Uncles bank, even though Uncles bank is a HDC Uncles bank must look to Portia or Uncle for relief person who files declaration of loss is liable to HDC (uncle wont be found)

Bank Statements 4-406(a) since banks no longer xmit checks (just a picture of the check), a payor banks customer statement must only contain sufficient information about the check and no longer the check itself Sufficient information = item number, amount and date of payment Payor bank must be able to furnish copy of check or check itself for 7 years Problem 88 o o 4-406, Comment 3 bank may charge fee to furnish copies of past checks but fee must comply w/good faith requirements of UCC 4-406 imposes no timeframe on production of checks just says reasonable time

After customer gets bank statement, there is a duty to examine the checks/copies for unauthorized signatures of drawer or alterations + prompt reporting 4-406(c) customers duty to report only if unauthorized payment could have been reasonably discovered (will be hard to discover certain problems w/check if there is no copy/image) Problem 89 o Yes The larger amount on the one check, the fact that Josh knew he only wrote 4 checks and the missing checks gives him reasonable notice per 4-406(c) so that he has to report to bank
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Bank Collection o o Several federal laws have superseded UCC in area of bank collections but UCC still applies to check collection not covered by federal laws or where federal law refers to UCC Funds Availability Rules in this area state maximum limits on hoe long banks can hold deposited funds and when customer has legal right to funds Dont prevent banks from giving customer access to funds earlier Cash 4-215(f) cash is available for w/drawal at opening of next banking day (subject to any right of setoff) 4-104(a)(3) definition of banking day (open to public for carrying out substantially all of its banking functions) 4-108 permits bank to set a cutoff time for the banking day anything presented after that time is recd on next baking day

Checks 3-502(b)(2) across the counter presentments must be paid or dishonored by the close of business of that banking day 4-215(e)(2) checks where drawer and payee are at same bank (on us checks) opening of nd 2 banking day following receipt of the item (unless it is dishonored in the meantime) EFAA on us check funds can be w/drawn on the business day after the business day of deposit (trumps UCC) Transit Items (drawer and payee are not at same bank) rules more complicated b/c now there is actual collection process involved. Can be quick if banks are both in a small town. Problem 90 o o o o o 4-205 depository bank is a holder of the check as long as customer/depositor is a holder of the check Son is not a HDC b/c check was a gift (no consideration) but IS a holder payee and had possession 4-205(a) bank is a holder despite absence of sons signature on c heck if the customer/son was a holder (he was) Depository bank became HDC by taking check in negotiation and giving value offset sons obligation at bank Chalks defense of no consideration will be invalid against bank (is a personal defense)

Customer who deposits check may get access to funds under provisional settlement between banks subject to later dishonor and charge back If item is later charged back, customer will have to repay any funds advanced to him 4-214 4-202(b) banks in settlement process have 2 banking days to pass check on to next bank

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Downloaded From OutlineDepot.com Final settlement occurs when payor bank pays the check any provisional settlements become final Problem 91 o o o o o 4-204 prohibits depository bank from delaying settlement by sending customer checks on a circuitous settlement route Also a bad idea to hold check wont earn much $ on float period b/c EFAA wont let you hold checks that long 4-215(e)(1) bank must estimate float period when deciding how long a hold should be doesnt want to pay out on check until it is certain the check isnt coming back 8 days in collection 2 days at depositary bank, 2 days each at intermediary banks, 2 days at payor bank and four days coming back Hold should be 8 to 10 days

Next-Day Availability of Special Items Certain items are available on next banking day o o o Any state, local or federal govt check Cashiers, tellers and certified checks Wire transfers and EFTs

Availability of Ordinary Checks $200 Availability Rule next day access to the first $200 deposited in any one day Entire amount above $200 (up to $5,000 in deposits in any one day) must be available for check nd nd writing purposes on 2 banking day after deposit (can only get $300 in cash by 5 PM on 2 banking day after deposit rest available for cash w/drawal starting on following banking day) New Accounts during first 30 days of a new account, there must be next-day availability for cash and wire deposits, for govt checks and for cashiers checks (can have hold on check above $5,000 for up to 9 business days) Large Deposits Excess over $5,000 may be held for addtl reasonable amount of time beyond normal availability limits (presumed 5 business days) Redeposited Checks normal availability rules extended for 5 to 6 business days unless announced reason for return was missing indorsement or post-dated check and these problems have been cleared up by time of redeposit

Check Truncation Check 21 bank may make an electronic copy of the check, send it electronically and print it out for presentment Banks have the option but not the duty to create an image of the check for transmission If receiving bank refuses the image, the original bank can print image and xmit it Paper reproduction of the image = substitute check No one can legally refuse a substitute check Customers cannot insist on getting their original check back Problem 92 It sounds like Sharon has a substitute check, which no one can refuse, including State Federal law trumps UCC Sharon will win here if there is litigation 4(b)

Warranty Liability
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Parties passing a substitute check make presentment and xfer warranties that the check is good Problem 93 blurry check causes reconverting bank to debit wrong account accountholder can sue. Depository bank/truncating bank will be on hook for wrongful dishonor b/c did not transfer a substitute check (not exact copy of the original). Drawee bank made mist ake but its not its fault b/c didnt get an accurate check. Truncating bank should hold original check for 120 days (notice of claim period) so that it can protect itself in case there is such an issue.

Expedited Recredits Bank has 2 weeks to determine if check was properly payable must credit account even if an investigation is ongoing

Problem 94 consumer using iPhone app to truncate check is you acting as agent of the bank. Where a merchant scans the check, it is similar to an EFT. Consumer should take check back and destroy it.

Final Payment Following final payment, payor bank is now liable for amount of the check under 4-302(a) can no longer dishonor check and must pay out to person entitled to enforce check If check is properly payable thats good but if not, bank will generally lose $ Only defenses and breach of presentment warranty or C/L restitution Previously, holder of check could not sue payor bank b/c of lack of privity this changes now b/c payor bank is liable when it has made final payment to holder 4-302(b) The liability of a payor bank to pay an item pursuant to subsection (a) is subject to defenses based on breach of a presentment warranty (Section 4-208) or proof that the person seeking enforcement of the liability presented or transferred the item for the purpose of defrauding the payor bank. 4-215 Final Payment of Item by Payor Bank An item is finally paid by a payor bank when the bank has first done any of the following: o o o Paid the item in cash; Settled for the item without having a right to revoke the settlement under statute, clearinghouse rule, or agreement; or Made a provisional settlement for the item and failed to revoke the settlement in the time and manner permitted by statute, clearing-house rule, or agreement.

Once drawee makes final payment, drawer and indorsers are off the hook Once final payment is made, no cause of action remains on the instrument Problem 95 Bank negligence causes payment on $12,000 check from account w/$1,000 Under 4-215(a)(1) bank has made final payment by passing cash to Sure can no longer dishonor the check Banks legal recourse is against teller for negligence and against drawer of check under deposit agreement 4-401, Comment 1

Problem 96
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Downloaded From OutlineDepot.com 3-203, Comment 5 no split cause of action on an instrument 4-302(a) item presented to and recd by payor bank becomes payor banks responsibility No such thing as partial final payment Payment of part of the check in cash = final payment

Problem 97 Payment by cashiers check typically discharges the underlying obligation unless the parties agree otherwise (no agrmt here) 3-310(a) and 3-310(b)(1) If the remitter indorses the cashiers check, they retain liability under 3-310(a) Sallys creditor can enforce the check against her under 3-415 Sally has no recourse against Joe (who wrote original check) under 3-414(a) Also under 4-215(a)(2) the cashiers check is an irrevocable settlement of Joes check his liability is discharged Sally assumes risk of banks failure to pay cashiers check Sally shouldve just taken the cash

Under 4-215(a)(2), final payment occurs when a bank makes an irrevocable settlement of instrument wire xfer, setoff, cash if bank reserves right to change its mind, final payment cannot occur 4-215(a)(3) most common final payment scenario bank makes a provisional settlement on check and holds onto check past deadline to revoke the settlement Deadline = midnight of next banking day once this deadline is reached, bank cannot dishonor or return check bank becomes strictly liable Problem 98 4-108 cutoff for a banking day can be as early as 2 PM Here, check arrived on Tuesday b/c it came in after cutoff time on Friday and Monday was a holiday Therefore, bank has until Wednesday at midnight (midnight of banking day following receipt) to dishonor/return check

ROCK ISLAND AUCTION SALES, INC. v. EMPIRE PACKING CO., INC. PROCEDURAL POSTURE: Defendant appealed order from Circuit Court of Rock Island County (Illinois) in an action concerning the construction and validity of the Uniform Commercial Code, Ill. Comp. Stat. 26/4-302 (1963). OVERVIEW: o o o o o o o o o o Plaintiff [Rock Island] sold cattle to purchaser in exchange for a $14,706.90 check. Defendant payor bank dishonored the check marked it with "not sufficient funds." Plaintiff sued defendant payor bank. The court held defendant payor bank was liable for the amount of the check. Defendant argued the lower court interpreted Ill. Comp. Stat. 26/4-302, incorrectly. The court disagreed and determined the statute imposed liability for the amount of the item not paid because defendant held the check beyond the time allowed by 302. The court also interpreted the word "accountability" in the statute, as meaning "liable." It also found the statute was constitutionally sound. In other words, there was no constitutional violation. Furthermore, plaintiff's refusal to accept offers of payment from purchaser did not act as a waiver or estoppel barring plaintiff from asserting its rights under 302.

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Downloaded From OutlineDepot.com OUTCOME: The court affirmed and held that the lower court correctly interpreted the statute in question, which imposed liability for the amount of the check because defendant payor bank held check longer that statute allowed. The court interpreted the word "accountable" in the statute as synonymous with "liable," and further found no constitutional violations.

First National Bank of Chicago [PLAINTIFF] v. Standard Bank & Trust [DEFENDANT] PROCEDURAL POSTURE: Plaintiff bank appealed the order of the United States District Court for the Northern District of Illinois, Eastern Division granting defendant bank's motion for judgment on the pleadings in plaintiff's declaratory judgment suit, which alleged that defendant failed to return certain checks in a timely fashion under the Expedited Funds Availability Act, 12 U.S.C.S. 4010. Defendant appealed the trial court's award of prejudgment interest. OVERVIEW: o o o o o o o o o o o An individual presented to plaintiff bank checks drawn on customer accounts with defendant bank. The checks had an aggregate value of $ 3,997,406.75. On the same day, the individual deposited with defendant $ 4,025,000 in checks drawn on customer accounts with plaintiff. On the following day, the accounts were charged, and each bank was credited, but on the next business day, plaintiff dishonored the checks and returned them to defendant. Defendant then returned the checks it had received to plaintiff, but plaintiff did not credit defendant's account. Plaintiff filed suit arguing that defendant's return of the checks was not timely. Defendant argued that its return was proper and counterclaimed for prejudgment interest. The trial court granted defendant judgment on the pleadings and awarded defendant prejudgment interest at a rate below prime. Plaintiff appealed, and defendant cross-appealed the award. The court affirmed the trial court's grant of judgment on the pleadings to defendant ruling that the checks were returned properly. However, the court vacated and remanded the award concluding that the trial court's decision to award a rate below prime was an abuse of discretion.

OUTCOME: The court affirmed the trial court's order granting judgment on the pleadings because defendant returned the checks in a timely manner. The court vacated the award of interest and remanded with instructions to enter an award consistent with the average prime rate for the appropriate time period because the prejudgment interest rate had been based on an impermissible factor, and thus that method of computation was an abuse of discretion.

Problem 99 Reg. CC 229.36(b) receipt at the processing center = receipt by the bank and begins the midnight deadline period Time that the check is presented to the actual payer bank branch is not relevant

Check Return Under EFAA depositary banks must give customers quick access to funds from deposited checks it is still possible that customer may w/draw funds under EFAA rules and check is later returned Customer must repay money after a returned check is charged back to acct. 4-214 However, $ is often just gone and cannot be retrieved Regulation CC addresses this:

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Downloaded From OutlineDepot.com Checks over $2,500 payor bank must give direct notice to depository bank if it intends not to pay on the check (notice must detailed info. on check that is dishonored) failure to give notice can make bank liable for actual damages (up to amount of check) and consequential damages if it doesnt act in good faith nd Notice must be given by 4 PM on 2 banking day following receipt by paying bank (must be reasonable mode of notice incl. return of the check) nd Check must be returned quickly also by 4 PM on 2 banking day after presentment Return of check can be by a different route than original check

o Charge Back

If payor/drawee bank returns a check, the depository bank will seek payment form the depositor no matter how many days have elapsed since deposit 3 ways to justify demand for repayment: Initial K signed when account was opened Indorsers obligation under 3-415 Statutory right of charge back under 4-214

4-214 Charge Back [EXCERPT] If a collecting bank has made provisional settlement with its customer for an item and fails by reason of dishonor, suspension of payments by a bank, or otherwise to receive settlement for the item which is or becomes final, the bank may revoke the settlement given by it, charge back the amount of any credit given for the item to its customer's account, or obtain refund from its customer, whether or not it is able to return the item, if by its midnight deadline or within a longer reasonable time after it learns the facts it returns the item or sends notification of the facts. If the return or notice is delayed beyond the bank's midnight deadline or a longer reasonable time after it learns the facts, the bank may revoke the settlement, charge back the credit, or obtain refund from its customer, but it is liable for any loss resulting from the delay. These rights to revoke, charge back, and obtain refund terminate if and when a settlement for the item received by the bank is or becomes final.

Problem 100 NOTE final payment rules only apply to payor banks and not depository banks DSB got check on 7/8 had until midnight 7/9 to send BNB got on 7/10 so had until midnight 7/11 to reject (payor bank has to receive check to start clock running deposit date irrelevant) DSB has done nothing wrong by undoing transaction but has failed to give notice [a] and [b] for a charge back 4-214(a) and Comment 3 to 4-214 requires that bank give notice by midnight deadline or be liable for any losses customer can show bank has not recd a final settlement so it can charge back the customers acct no loss of right of charge-back [c] Yes under 4-214(d)(1) [d] Reg. CC 229.10(c)(vi) beats the UCCs 4-215(e)(2) under the UCC, DSB could have let nd Pythias have funds on 2 banking day following presentment but Reg. CC requires on next banking day following presentment [e] No. Once final payment occurs at payor bank then a final settlement under 4-214(a) has occurred and charge back is not longer possible [f] Unless authorized by customer in K or done w/customers permission, bank is taking a risk in re-presenting w/put notice of charge-back. Customer may attempt to write more checks and bank might be liable for damages.

Problem 101
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EFAA governs how much money must be made available on a check to be used and when Nothing prevents bank from recovering funds if item is subsequently returned (charge back) Lewis must return the $ and go after whoever gave him the bad check no final payment occurred EFAA does not mean that depositor gets to keep $ if check is returned Lewis could have called drawee bank to verify check or waited to send check until cashier s check cleared

VALLEY BANK OF RONAN [PLAINTIFF] v. CHARLES R. HUGHES [DEFENDANT] PROCEDURAL POSTURE: Appellant trustee appealed the orders entered in the Twentieth Judicial District Court, Lake County, Montana, granting summary judgment to respondent bank and granting the bank's motion in limine to exclude the testimony of the trustee's expert witness. OVERVIEW: o o o o o o o o o Swindlers promised the trustee a $3 million commission for his aid in procuring agricultural equipment and then proceeded to bilk him for hundreds of thousands of dollars in advanced fees. The funds the trustee advanced were wired via the services of a bank, resulting in a dispute over which party should bear the loss. The district court correctly concluded that the bank did not violate the U.C.C.-defined duty of ordinary care in processing the checks. Thus, the bank was entitled to summary judgment on the promissory note executed by the trustee to satisfy the charge-back liability. Also, the bank bore no liability on the wire transfer. The district court's interpretation of Mont. Code Ann. 30-1-103 was wrong. Common law and equitable principles could be used to supplement the U.C.C.-defined duty of ordinary care with respect to the bank's representations about the check settlement process. Thus, the trustee's counterclaims were not barred. The trustee's banking expert was not qualified to testify because she lacked adequate knowledge of the U.C.C. standard of ordinary care defined in Mont. Code Ann. 30-3102(g).

OUTCOME: The summary judgment to the bank on the promissory note was affirmed; however, the district court's order with regard to the trustees' counterclaims based upon those representations was reversed and the case was remanded for further proceedings.

Problem 102 Claim for negligent misrepresentation will fail immediately b/c Mustache has no damages Since check doesnt clear, bank can still charge back (no final payment)

Undoing Final Payment Final payment cancels check and payor bank is now accountable for paying to presenter Can payor bank resist payment using C/L theories such as mistake? Problem 103 Here, bank made final payment by mistake Assuming Foxholder hasnt breached any presentment warranties 1-103 says Foxholder and Shirker can be sued on non-UCC claims like fraud

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Downloaded From OutlineDepot.com 4-302(b) midnight deadline rules cannot be used to the benefit of fraudsters exactly what is happening here 3-418 bank has grounds to revoke payment and go for a restitution lawsuit if instrument has not reached HDC and payee didnt change its position in reliance on the clearance of the check Restitution is never available against HDC Payees who changed positions are also protected against restitution

Problem 104 Failure to stop payment caused LEO a loss radios are non-conforming goods Bank can recover from VOJ unless VOJ qualifies as a HDC or changed his position under 3418(a) and (b) Debatable as to what VOJ knew about radios and that they were not what LEO ordered Kelly can subrogate to VOJ (payee) does it not good VOJ would lose the suit against LEO Bank was right to recredit account Kelly can now subrogate to LEOs rights under 4-407(3) where it could win a K or UCC suit against VOJ this is a better course than restitution claim

Delays Problem 105 4-109(b) Delay by a collecting bank or payor bank beyond time limits prescribed or permitted by this [Act] or by instructions is excused if (i) the delay is caused by interruption of communication or computer facilities, suspension of payments by another bank, war, emergency conditions, failure of equipment, or other circumstances beyond the control of the bank , and (ii) the bank exercises such diligence as the circumstances require.

Restrictive Indorsements and Banks 4-203 and Comment collecting bank does not need to examine an item to see if there are restrictions or instructions on it (only collecting banks transferor can give it binding instructions) Problem 106 Here we have a restrictive/blank indorsement State does not have to pay Nina, nor does drawee bank final payment discharges this obligation Under 3-206(c)(1) and (2) Nina can recover from Max (thief/forger) and Pursesnatcher Bank (depository bank) depository bank is reqd to look at indorsement Only depositary bank can be liable for overlooking a restrictive indorsement PNB must follow indorsement and deposit funds only into Ninas account otherwise converts it Other collecting banks get a free ride under 4-203

Priorities in the Bank Accounts the Four Legals 4 Legals = notice (e.g., death, etc.), stop-payment orders, service of legal process (e.g., garnishment, etc.) and banks right of setoff 4-303 covers this: Any knowledge, notice, or stop-payment order received by, legal process served upon, or setoff exercised by a payor bank comes too late to terminate, suspend, or modify the bank's right or duty to pay an item or to charge its customer's account for the item if the knowledge, notice, stop-payment order, or legal process is received or served and a reasonable time for the bank to act thereon expires or the setoff is exercised after the earliest of the following: o o The bank accepts or certifies the item; The bank pays the item in cash
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Downloaded From OutlineDepot.com o o o The bank settles for the item without having a right to revoke the settlement under statute, clearing-house rule, or agreement; The bank becomes accountable for the amount of the item under Section 4-302 dealing with the payor bank's responsibility for late return of items; or With respect to checks, a cutoff hour no earlier than one hour after the opening of the next banking day after the banking day on which the bank received the check and no later than the close of that next banking day or, if no cutoff hour is fixed, the close of the next banking day after the banking day on which the bank received the check.

Problem 107 No bank can continue to pay checks until it receives notice of BK filing (can recover from payee) If Visors duties include reporting BK to the bank, her knowledge can be imputed onto the bank th per 1-202. If not, TIBs call will = notice and since it came after payment of the 4 check, it th would be too late to effect the payment of the 4 check under 4-303(a) No bank would need TIBs approval to unilaterally setoff customers obligation a t the moment of the filing of the BK petition rd 3 check was returned after midnight deadline on 10/7 so bank acted too late to escape liability to presenter. Bank has to pay out of its own funds and file claim in BK court.

Problem 108 4-303(b), Comment 7 bank can pay in whatever order it wants

CHAPTER 6 WRONGDOING AND ERROR Forgery of the Payees Name o o o o o o o o Forgery of the payee or special indorsees name means that no valid negotiation can take place and there can be no subsequent holder Check made payable to the order of a named individual only that individual can be a holder W/out a valid signature by payee, no later person can qualify as a holder or HDC Different if check is made out to bearer or if payee had indorsed the check in blank before it was stolen (anyone in possession could be a holder or a HDC) 3-301 person entitled to enforce the instrument = holder and non-holder in possession w/rights of holder Non-holder example depository bank who recd unendorsed check for deposit has rights of payee even w/out their indorsement Another example former holder of destroyed check who can recreate the instrument under 3-309 Problem 109 o CSB cannot be a HDC there was no negotiation b/c there was a forgery of Portias signature Villain is not entitled to enforce the instrument Grandma has no obligation to CSB as an indorser under 3-414 Drawer and indorser are liable to a holder CSB is not a holder CSBs only remedy is to charge back Villains account

Problem 110 Helen is not a holder b/c Moots indorsement is missing but is a non-holder w/rights of holder under shelter rule 3-203(b) Helen has given value and has the unqualified right to the indorsement of the transferor can sue Moot for her indorsement again has ability to enforce instrument
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Warranty Liability 3-417 and 4-208 cover presentment warranties made to drawee banks 3-416 and 4-207 covers transfer warranties made to banks and persons on transfer of the checks (parties other than drawee bank) Warranties are made through conduct and not just mere signatures Warranties are strict liability and produce certainty in determining who is liable in the chain of transactions Problem 111 This check is not properly payable under 4-401 b/c it was not cashed according to Moots instructions. Bank must recredit Moots account. ONB must look to presentment warranties in 4-208(a)(1) has to go against other parties in presentment chain Merchant Bank, Tower Drug and JC. None of these parties are holders (due to forgery) and none were entitled to payment or to enforce the draft ONB should give notice to MB w/in 30 days (doesnt lose rights but MB may defend by saying that

Problem 112 MB is not the drawee bank and cannot use the 4-208 presentment warranty Could use the 4-207 transfer warranties to pursue the drug store: subsection 1 and 2 MB must give notice to the drug store under 4-207(d) 30 days after notice (wont lose rights but losses of drug store due to delay can be a defense) Statute of limitations on transfer warranty suit is 3 years from date of breach under 3-118(g) and 4-111

Problem 113 Villain also breached a xfer warranty so drug store can sue Villain for breach of transfer warranty as well

Conversion Liability 3-420 Problem 114 Bank cannot keep a check even if they dont pay it this is a conversion Problem 115 stealing an indorsed check is conversion What if person who converts the check (that is already indorsed/is a bearer instrument) takes it to a check-cashing store and the check cash gives value, the store becomes a HDC. And HDC cannot be sued for conversion under 3-420. Payee will be stuck and drawers obligation will be discharged when check is paid under 3-310. Conversion is strict liability there is no negligence component Problem 116 Moots rent check was stolen from landlord was stolen Moot cannot sue the bank for conversion Landlord can sue the thief for conversion The check was never negotiated b/c payees indorsement was forged check store is not a holder and neither is any subsequent party Depository and drawee banks are liable for conversion under 3-420(a) b/c they accepted/made payment to someone not entitled to enforce the instrument (no holders w/forged indorsement)

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Downloaded From OutlineDepot.com Check cashing store also liable for conversion transfer (not negotiation) from someone not entitled to enforce

Problem 117 Under 3-420, a payee cannot sue for conversion if they did not receive the instrument If the bank hasnt received the check, the underlying obligation (mortgage) is not suspended or discharged ONB doesnt have to do anything can demand this months mortgage payment from Isle Isle can rely on 4-401 to recoup from his bank, which will in turn look to Sleepy Hollow under presentment warranty claims

3-420(a) delivery to the agent is delivery to the principal Problem 118 Missing necessary indorsement is treated the same as a forgery under 3-420 Here, delivery to a co-payee is a delivery to all payees Mary therefore recd delivery However, this check was not indorsed by both payees so the indorsement is not valid Depository bank cannot be a holder Mary can sue depository and drawee bank up to face value of check (question is what was Marys interest in the check)

Forgery of the Drawers Name o o o o Drawee bank who pays or accepts a draft takes the risk of a forged drawers signature (drawee doesnt take loss b/c check isnt properly payable) Forged indorsement depository bank takes loss b/c of presentment warranties Payee can still be a holder if the drawers signature is forged (subsequent holder who gives value can still be a HDC) Problem 119 o Check paid over forged drawers signature Check is not properly payable under 4-401 so it will have to recredit Moots account Harry is a holder b/c he is a payee in possession MB is also a holder so 4-205(a)(3) wont work Look to 4-205(a)(3) also wont work b/c Harry is the only one who knew that signature was forged ONB is stuck unless it can recoup $ from Villain Rule when drawee bank pays on check that has a forged dra wers signature, it will bear the loss Only warranty made to a drawee bank under 4-208(a) is a knowledge warranty

Problem 120 No depository bank is entitled to enforce the instrument on behalf of Villain He is drawer and payee so negotiation to drugstore and MB is OK Different from forged payee signature depository bank would be in better position to catch this as it has payees signature on file

Problem 121 Drawee bank has made final payment All drawee can do is pursue a claim of restitution against the depository bank under 3-418 or try presentment warranties under 4-208 neither will work Drawee can also try going after telemarketer

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Downloaded From OutlineDepot.com o o Regulation CC addresses remotely created checks creates transfer and presentment warranties that checks were authorized by drawer allows for return to depository banks Many payor banks do bulk filing where they wont look at any checks below a certain amount and just pay out on them if the check turns out to be forged, they recredit the drawers account and pursue the forger or draw down on their forgery insurance

Validation of the Forgery o o o o o o Forged indorsement is ineffective to negotiate an instrument 3-403(a) says unless otherwise provided in Article 4 and an unauthorized signature may be ratified If party with full knowledge of the forgery or alteration accepts the benefit or assents to the wrongful activity, the forgery will be ratified and treated as a genuine signature Can also have ratification of an agents actions by a principals actions or inactions that suggest apparent authority Problem 122 this is ratification by deliberate inaction and George will have to pursue Martha alone George also got a benefit (silence/inaction + a benefit = ratification). Hutzler v. Hertz Corp. PROCEDURAL POSTURE: Plaintiff and defendant filed cross-appeals from the decision of the Appellate Division of the Supreme Court in the Second Judicial Department (New York), which affirmed the grant of plaintiff's motion for summary judgment on her claim against defendant for negligent failure to notice a forgery on a settlement check, but which reduced the amount of plaintiff's recovery against defendant. OVERVIEW: Plaintiff sued defendant for wrongful death. Plaintiff received a settlement check from defendant. The check was drawn on bank and was made payable to plaintiff and plaintiff's attorney. Plaintiff's attorney indorsed the check with his signature and forged plaintiff's signature. Plaintiff's attorney deposited the check in his own account and later closed the account and his office. Plaintiff sued defendant and the bank for the amount of the check. The trial court granted plaintiff's motion for summary judgment against defendant and granted bank's motion for summary judgment. Plaintiff did not appeal from the judgment in favor of the bank, but defendant did. On appeal, the lower appellate court affirmed the judgment against defendant but reduced the amount of the award by the amount plaintiff's attorney would have been allowed for fees but for his misconduct. Both parties sought further judicial review. On appeal, the court reversed the judgment in plaintiff's favor and held that defendant's liability was discharged upon payment of the settlement draft by bank, forgery notwithstanding, and thus, plaintiff could not recover against defendant.

OUTCOME: The court reversed the amended judgment entered in plaintiff's favor and held that once bank paid the check issued by defendant to plaintiff and her attorney and then misappropriated by her attorney, defendant was discharged from the underlying obligation and plaintiff could not seek repayment from defendant. The court granted defendant's motion for summary judgment and dismissed the complaint. NOTES debtor/tortfeasor will not be required to pay on claim again if a joint payee forges the other payees indorsement. Creditor takes on risk of appointing agent to receive payment. Hutzler would have had a conversion claim against drawee bank under 3-420 it made payment to a person not entitled to receive payment or enforce instrument.

Problem 123

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Under 3-420(a), Payee can pursue conversion claim against ONB Once Payee succeeds in his suit against ONB, Donna has no damages under C/L payee was paid under conversion action Donna also has no properly payable suit under 4-401 ONB is also subrogated to Payees rights against Donna, including drawers obligation under 3-414

The Imposter Rule Impostor rule validates only the payees name in the situations described in 3-404 This rule assumes that the impostor is impersonating the payee and getting the drawer/maker to issue him a check Forged payee signature will be valid if instrument is taken by a HDC Liability is on drawer/maker and not indorsers or banks involved in collecting or paying checks Imposter does not apply to person who impersonates the payee at a bank or check cashing store Also does not apply where person forges drawers signature Problem 124 Sandra/Hilda is an impostor under 3-404(a) so the check is properly payable by the bank Amy is stuck and should have researched the background of Hilda If bank is found to be negligent under 3-404(d), Amy may be able to recover from the bank 3-404(a) also applies where person is acting on behalf of fake entity and check is made out to payee entity Amy may be able to collect for losses under 3-404(d) if depository bank failed to look into background (negligence of depository bank or other person who pays on check) Action against drawee bank under 4-401 will likely not work b/c check is properly payable drawee may also bring in depository bank

Problem 125 Wife impersonated her husband another impostor scenario Drawer insurance company will be liable under 3-404(a) drawee bank is not liable Indorsers or collecting bank will not be liable Walter has to ask for reinstatement of policy to do otherwise ratifies wifes conduct as his agent Insurance company lacked K authority to CXL policy only Walter can do that

Problem 126 Doesnt matter if names are real or fake this is an impostor payee situation Checks will be properly payable and drawer will be liable under 3-404 risk is on Business Corp. because it is in best position to prevent these kinds of problems 3-405(b) employer liable for forged indorsements of employee/impostor 3-404(d) negligence of depository bank or check cashing store where the treasurer deposited the checks Business Corp. has burden of showing that the failure to detect the forgeries contributed substantially to the loss (allowing acct. to be opened or failure to check ID)

Problem 127 3-404(b) would not apply if John Creditor is real and Sam intended to pay Creditor depository bank would be on the hook as this is a forged payee indorsement If Creditor is real, Secretary fits under 3-405(a)(3)(iv) employee w/responsibility so Sam/employer takes loss If Creditor is fake (fictitious payee), 3-404(b) applies and Sam loses the $ as well check is properly payable

The Employee Indorsement Rule

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Downloaded From OutlineDepot.com 3-405(b) [EXCERPT] For the purpose of determining the rights and liabilities of a person who, in good faith, pays an instrument or takes it for value or for collection, if an employer entrusted an employee with responsibility with respect to the instrument and the employee or a person acting in concert with the employee makes a fraudulent indorsement of the instrument, the indorsement is effective as the indorsement of the person to whom the instrument is payable if it is made in the name of that person. Liability of Depository Bank If the person paying the instrument or taking it for value or for collection fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to loss resulting from the fraud, the person bearing the loss may recover from the person failing to exercise ordinary care to the extent the failure to exercise ordinary care contributed to the loss. Problem 128 Employer would be liable under Comment 1 to 3-405 (covers indorsements on checks made out to ER and that ER made out to a payee) 3-405(b) ER can shift liability to depositary or drawee bank if bank failed to exercise ordinary care and that contributed to loss Employers name as payee was forged by person having responsibility for handling of ch ecks Brad Byte fits Case #1 in Comment 3 to 3-405 Business Corp. would not be liable here and it would fall on depository bank. 3-406 might apply. Look to whether ER was negligent in safeguarding the check (if not, depository bank could allege that indorsement was forged and bring action against depository bank)

AUTO-OWNERS INSURANCE COMPANY v. BANK ONE, BANK ONE INDIANA CORP PROCEDURAL POSTURE: The Indiana Court of Appeals affirmed the trial court's judgment that granted summary judgment to appellee bank on appellant employer's lawsuit claiming that the bank failed to exercise ordinary care in opening a bank account that allowed an employee of the employer to steal money from the employer, and that the failure substantially contributed to the employer's losses. The state supreme court then granted the employer's petition to transfer. OVERVIEW: o o o o o o o o o While the employee worked for the employer, the employee opened an account at the bank in both his name and the employer's name. The bank did not request, nor did the employee provide, any documents allowing the employer's name on the account. The employee intercepted checks directed to the employer and placed them in the account. It took the employer approximately seven years to uncover the misconduct. The employer then sued the bank for failing to exercise ordinary care in its opening of the account and alleged that the failure substantially contributed to the employer's losses. The bank denied that it failed to exercise ordinary care. The trial court agreed with the bank and the appellate court affirmed. The state supreme court found that the statute regarding the exercise of ordinary care, Ind. Code 26-1-3.1-405(b) (2004), did not focus only on opening an account, but also considered the taking and paying of an instrument. It then found even if the bank did not exercise ordinary care, the bank's conduct did not "substantially contribute" to the losses since the employer's failure to monitor the employee's conduct that was mostly responsible for the loss.

OUTCOME: The state supreme court summarily affirmed the appellate court's judgment, and affirmed the trial court's ruling that granted summary judgment in favor of the bank.

Problem 129

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Downloaded From OutlineDepot.com o 3-403(a) forgery of the drawers name operates as signature of FORGER its like McGees signature on there 3-404(b) validates the forgery on payees name check is now properly payable and depository bank is protected Forgery of drawers name risk falls on drawee bank Losses arising from payee indorsement would normally fall on payee bank Double forgery (payee + drawer) drawee bank is liable

The Negligence Rule Situation where a party can be estopped to complain about forgery when their own negligence substantially contributes to the creation of the forgery Also applies to creations or alterations of an instrument Problem 130 See Comment 1 to 3-406 Grote can use negligence as defense to Youngs claim that he wrongfully paid the draft Leaving space on instrument where number can be inserted = negligence that can be used against drawer by drawee 3-406 only applies to using negligence as a defense, NOT as a cause of action

Problem 131 This scenario is presented in Case #2 in Comment 3 to 3-406 Negligence here is mailing check to someone w/same name as payee cant claim that there is a forgery You have to make sure you send checks to the right person

THE BANK/FIRST CITIZENS BANK v. CITIZENS AND ASSOCIATES PROCEDURAL POSTURE: Appellee, the bank, filed suit in the Bradley County Circuit Court, Eastern Section (Tennessee) to obtain a declaration that it possessed no liability on three forged checks. Appellant, the drawer, filed a counterclaim. The circuit court found fault with both parties and allocated the loss of the instruments. The drawer appealed, and the court of appeals affirmed. The drawer again appealed. OVERVIEW: o o o o o o The drawer issued three checks payable to a mortgage company and delivered those checks to a branch manager of that company for transfer to the main office. The manager, however, forged the endorsement of the company and deposited the checks into her personal bank account at the bank. In a suit to recover the funds, the trial court applied Tenn. Code Ann. 47-3-406 and found that both the drawer and the bank failed to exercise ordinary care. The court of appeals affirmed the judgment. The supreme court held that the bank could not assert the negligent drawer defense under 47-3-406 to avoid the loss occasioned by its taking of instruments bearing forged endorsements. Although the record supported a finding that the bank took the instruments in good faith, it did not show that any failure by the drawer to exercise ordinary care substantially contributed to the making of the forged endorsements.

OUTCOME: The judgment of the appellate court was reversed.

Problem 132
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Downloaded From OutlineDepot.com 3-307(b)(2) bank wont be held to have taken checks in violation of breach of fiduciary duty unless it knows that Lucille was a fiduciary Accepting for deposit into a personal account a check made out to a corporation is either negligence or bad faith BNB should investigate before accepting these checks

Problem 133 Bank actually has duty to investigate why a check is made out to the bank by drawer Business Corp. Such a check is NOT a bearer check Lucille would not be able to make out a check to bearer or cash in corporate account only the banks inattention to this type of check can lead to her success

Problem 134 3-307(a) Patrick is the represented person and Mame is the fiduciary Patrick has a claim to the CD b/c bank knew it belonged to him and was being used for Mames pledge of collateral If instrument was a check used to pay Mames salary that would not be suspicious and the bank would not have to investigate further under Comment 4 to 3-307(b)(3)

The Bank Statement Rule 4-406 customer must examine bank statements or be estopped from asserting unauthorized signatures or material alterations that could have been discovered thru a review of the statement 3-406 has a similar provision failure to review bank statements and instruments causes victim to be estopped from claiming loss from forgery Need to look for unauthorized items and forged drawers signature with reasonable promptness Problem 135 4-406(d)(1) permits Rhonda to demand and receive a credit to her account unless the bank can show that her delay caused some loss that it could have avoided by prompter notice Here, bank paid before Rhonda even had notice of the check payment her delay did not cause any addtl loss (have up to a year to give notice to bank) If Burly had an account at bank, bank could argue that it could have taken the $ from his account had she acted sooner

Problem 136 4-406(d)(2) unless bank can show a loss b/c of Bus. Corp.s delay, it will have to recredit checks However, statute of limitations is 1 year under 4-406(f) bank will not have to recredit checks over a year old Bank will try to claim that Bus. Corp. negligent in not detecting the forgeries and is liable under 4-406(e) Bus. Corp. can try and shift some of the blame onto bank under same UCC provision If bank is found to have acted in bad faith, it will be liable for entire loss under 4-406(e) st If you dont give bank notice of 1 UA check w/in 30 days of getting notice (i.e. statement), you take loss of all future checks deposited by same wrongdoer moving forward after 30 day period (e.g. get stmt. 3/1 have until 4/1 to give bank notice checks paid prior to 3/1 stmt and between 3/1 and 4/1 stmt. can be recredited)
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Downloaded From OutlineDepot.com Peters v. Riggs Natl Bank PROCEDURAL POSTURE: Appellant, the personal representative of the decedent's estate, sued appellee bank in the Superior Court of the District of Columbia, for breach of contract, negligence, and violations of the Electronic Funds Transfer Act (EFTA), 15 U.S.C.S. 1693 et seq. The trial court granted summary judgment to the bank. The personal representative appealed. OVERVIEW: o o o The personal representative claimed that the bank permitted unauthorized withdrawals from the account of the decedent by check and ATM withdrawals. On appeal, the court found that the District of Columbia Uniform Commercial Code governed the disposition of the unauthorized checks under D.C. Code 28:3-102(a) and 28:3-104 (2001). Further, D.C. Code 28:4-406 imposed upon bank customers a duty to discover and report unauthorized signatures or alterations to the bank, and D.C. Code 28:4-406(f), a statute of repose not subject to equitable tolling, established a notice requirement for customers as a prerequisite to bringing any claim against the bank. Moreover, following the terms of a contract between the decedent and the bank which modified the notice period pursuant to D.C. Code 28:4-103(a) (2001), the decedent had 60 days from the mailing of her account statements to discover and report unauthorized transactions. Finally, 15 U.S.C.S. 1693m(g) limited the statute of limitations for unauthorized ATM withdrawals to one year. Thus, the claims regarding the unauthorized transactions were not timely reported.

o o

OUTCOME: The judgment was affirmed.

Falk v. Northern Trust Co. PROCEDURAL POSTURE: Plaintiff customer sued defendant bank for damages and an accounting based upon the bank's failure to investigate and alert the customer to fraudulent transactions involving his bank accounts. The Circuit Court of Cook County (Illinois) granted the bank's motion to dismiss the customer's second amended complaint, finding that the customer's action was time-barred under 810 Ill. Comp. Stat. 5/4-406(f) (1992). The customer appealed. OVERVIEW: o The customer alleged the bank (1) was placed on notice of over $ 2 million of his employee's misappropriations from his bank accounts based upon certain facts, such as the increased activity in his accounts during her tenure as his personal assistant along with specific transactions and that the bank's failure to take action upon such notice amounted to bad faith, (2) had actual knowledge of the fiduciary relationship between him and her, and (3) had accepted checks drawn by her on his account for payment of her loans and personal equity credit line at the bank and for deposit into her own personal account at the bank. The customer had alleged sufficient facts to state a claim under 4-406(f). The case of first impression decided that 4-406(f) was not a statute of limitations and a bank had to act in good faith when paying the items on the statement in order to claim the protection of the prerequisite of notice requirement contained in 4-406(f). The public policy behind placing the burden on the customer to determine unauthorized signatures or alterations was not served when the bank was a party, either actively or passively, to a scheme to defraud the customer.

o o o

OUTCOME: The appeals court reversed the judgment and remanded the cause for further proceedings in accordance with the views expressed in the appeals court's opinion.

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Downloaded From OutlineDepot.com Problem 137 Normally, drawee bank is automatically liable when forged drawers check is presented If customer fails to inspect his bank statements, he could be liable for losses under 4-406 unless bank failed to exercise ordinary care Ordinary Care In the case of a bank that takes an instrument for processing for collection or payment by automated means, reasonable commercial standards do not require the bank to examine the instrument if the failure to examine does not violate the bank's prescribed procedures and the bank's procedures do not vary unreasonably from general banking usage not disapproved by this Article or Article 4. Action or non-action approved by this Article or pursuant to Federal Reserve regulations or operating circulars is the exercise of ordinary care and, in the absence of special instructions, action or non-action consistent with clearing-house rules and the like or with a general banking usage not disapproved by this Article, is prima facie the exercise of ordinary care . Bulk filing is a common practice and is not inconsistent w/ordinary care requirements of 4-406

Problem 138 Contractual limitation of the 30-day period in 4-406 will be upheld Checks are not properly payable under 4-401 b/c of forged drawers signature If bank can be shown to be negligent in accepting forged checks, it will share in liability under 4406

Problem 139 Under 4-103, parties are free to change default UCC rules However, bank cannot K its way out of good faith/fair dealing and reasonable care Bank can create a standard for itself in the customer agreement as long as it is not unreasonable 3-103(a)(7) permits bulk filing w/out it being failure to exercise care Another argument liability arising from forged drawers signature falls on drawee and bank cannot K its way out of this requirement

Problem 140 Writing amount into a blank check this is a material alteration and makes check not properly payable bank may still pay unless it has notice that check was altered 4-208(a)(2) and (c) presentment warranty for alterations (depository bank can defend using 1-yea rule and appearance of properly payable. Also, Max was negligent under 3-406) Looking to 4-406(f) Moneys failure to examine his statements for alterations + the running of the 1-year SOL are defenses Fallguy Bank can use against presentment claim made by Investors Bank

Problem 141 3-405 Brad is the responsible EE falls on ER Fake payees + payee indorsement = valid negotiation and subsequent transferees are holders under 3-404(b) Bank can use above 4-208(c) bank is a holder and presentment warranties dont apply

Alterations

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Downloaded From OutlineDepot.com o o 3-407(b) fraudulent alteration completely discharges any non-negligent person whose negotiable instrument is changed by the alteration Problem 142 o Mafia is a holder and his alteration is fraudulent Innocent is discharged from paying on instrument under 3-407(b) unless Schmidt is a HDC Schmidt may be precluded from being a HDC due to his closeness w/Mafia and large discount to face value knowledge of defects may be inferred Since Schmidt is not a HDC, he takes the note subject to Innocents defenses Schmidt cannot collect anything from Innocent, either policy is to punish the parties involved in an alteration If Schmidt had negotiated the note to a HDC for fair value, HDC could collect $100 from Innocent Portia could sue Mafia/Schmidt under Xfer Warranty theory

Problem 143 While the check was altered, 3-407(b) says that George cannot raise the alteration issue against the Bank b/c he was negligent in his handling of the check (signed a blank check) 3-407 - A payor bank or drawee paying a fraudulently altered instrument or a person taking it for value, in good faith and without notice of the alteration, may enforce rights with respect to the instrument (i) according to its original terms, or (ii) in the case of an incomplete instrument altered by unauthorized completion, according to its terms as completed. 4-401(d)(2) allows drawee to deduct the full amount from Georges account unless it knew that completion of the check was improper the terms of the completed [signed but w/no payee] item, even though the bank knows the item has been completed unless the bank has notice that the completion was improper.

Problem 144 Mollys act was not fraudulent so the last sentence of 3-407 applies and liability on the instrument remains If Molly destroyed the note, Goodheart would have to reconstruct it under 3-309 Molly is not entitled to enforce the note so she cannot avail herself of the cancellation provisions of 3604 (nursing home could tear it up to discharge the obligation)

Problem 145 Item is not properly payable as a $500 item Under 4-401(d)(1), bank can only charge Smith $5 Account will be recredited for $495 Smith is discharged of the $495 b/c he was not negligent - 3-407 Banks remedy is breach of presentment warranties (no material alteration) against depository bank. ONB is a HDC if it gave any $ to Rouge on check wont help b/c HDC still makes presentment warranty

CHAPTER 7 ELECTRONIC BANKING Consumers and EFTs o Credit Cards Basic Liability Problem 146 o o Clark has to pay the charges b/c Alices use was authorized If the EFTA applied, Alices use would become unauthorized once he notifies the bank
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Downloaded From OutlineDepot.com o o Under EFTA 909(a), Clarks max liability would be Alices charges before he notified the bank Under Regulation Z, charges will be limited to $50 (or $0 depending on agreement w/issuer)

1026.12 of Reg. Z limits cardholder liability for unauthorized use to $50 or whatever lesser amount has been charged before the CC issuer is notified of the loss (assumes that CC issuer has notified cardholder of rights, provided phone #, etc.) Most CC issuers have waived the right to collect the $50 max cardholders get a free ride for unauthorized use Unauthorized charges on CC dont impact your bank account debit card will hit your bank account Azur v. Chase bank o PROCEDURAL POSTURE: Plaintiff credit cardholder sued defendant bank in the United States District Court for the Western District of Pennsylvania, alleging violations of 15 U.S.C.S. 1643 and 1666 of the Truth in Lending Act and negligence. The district court granted summary judgment in favor of the bank. The cardholder appealed. OVERVIEW: The cardholder's personal assistant allegedly misappropriated over $1 million from the cardholder through the fraudulent use of a credit card over the course of seven years. The court of appeals held that the cardholder did not have a right under 1643 to reimbursement of money paid to the bank TILA only protects against liability and has no reimbursement component for charges that have already been paid Section 1643 limited the ability of card issuers to sue cardholders to recover fraudulent purchases but did not obligate issuers to pay the costs associated with fraudulent card use. The 1643 and 1666 claims also failed because the assistant had apparent authority to use the card assistant was allowed to male payments on cardholders behalf The cardholder did not review his bank statements or exercise oversight over the employee. The negligence claim was barred by Pennsylvania's economic loss doctrine. An exception for negligent misrepresentation claims did not apply because the bank was not in the business of supplying information to others for pecuniary gain. Pennsylvania public policy weighed against holding the bank liable because cardholders, not card issuers, were in the best position to prevent employees with access to security information from committing fraud.

OUTCOME: The district court's judgment was affirmed.

Asserting Defenses Against CC Issuer Problem 147 o o If you buy defective goods w/CC and discover the defect prior to paying bill, you wont have to pay for item Lose right to challenge once you pay bill (unlike check have until it clears) Linda has to pay the hotel bill it is more than 100 miles away from her home and ONB has no control over the hotel
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Downloaded From OutlineDepot.com o o o Billing Errors Linda can dispute payment of the suitcase as the purchase occurred w/in 100 miles of her home (did not make a GF attempt to resolve but seller is B/K so it is moot) check would have had no geographic limit Linda can dispute the artwork item although it is less than $50, the merchant is affiliated w/ONB Compare to EFTA for debit card no statutory right to dispute charges for defective items

If a cardholder complains to CC issuer of a billing error, issuer must acknowledge receipt of complaint w/in 30 days Issuer must also conduct a good-faith investigation and resolve the difficulty w/in 90 days of complaint (or w/in 2 billing cycles, whichever is less) Issuer cannot treat disputed amount as overdue while it is conducting investigation and cannot report item adversely to credit reporting agencies Failure to follow these rules can lead to forfeiture of up to $50 of disputed amount + atty fees even if bank turns out to be right

Debit Cards Problem 148 o o o Under 913(2) she cant refuse b/c this section only prohibits ER from choosing the bank for Electra here bank gave her the choice 905(a) sets forth the disclosures for an EFT Question A o This seems to be an EFT under 903(6) but it is not authorized under 903(11)(c) b/c it is an error committed by a financial institution Bank would have to go thru error resolution process under 908. The computer did not charge an item so there is no 4-401 remedy available 4-402 provides a remedy for the bounced checks wrongful dishonor Electra can sue bank under C/L theories of negligence and breach of K

Question B 912 rental obligation is suspended unless landlord makes written demand for non-EFT payment Bank has no defense here 910(b)(1) wont be of any help b/c this is not an unforeseen circumstance beyond banks control

Question C Electra has same right to stop preauthorized xfer as w/a check 907(a) oral notice is sufficient and it was made at least 3 business days before payment was to be made If bank fails to stop payment it will be liable for damages under 910(a)(3) does NOT permit for recovery of atty fees

Question D In a POS EFT, 908 applies Nothing in 908(f) applies to Lindas complaints EFT must be resolved w/merchant, not issuer

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Downloaded From OutlineDepot.com Problem 149 No. EFTA applies to consumers consumer EFTs must be primarily for personal, family or household use under 903(2) Problem 150 o Question A o All info in 906(a) and (c) [ATM activity] must be on statement ATM activity can be combined w/statement required by 4-406

Question B 4-406 does not apply no items were returned 1-year SOL in EFTA will bar Arthurs claim Bank error is not unauthorized use under 903(11) so 909 is not triggered Arthur should have taken action w/in 1-year SOL Have to read bank statements!!

Question C Under 908(a), Arthur must promptly report error to bank Bank has 10 business days to act w/out recrediting account Bank can have 45 calendar days if it provisionally recredits account

o o

Question D bank has burden of proof under 909(b) Question E ATM should give full evidence of transaction under 906(a) Banks defense noise the ATM made put customer on notice that machine was not working customer thereby assumed risk Defense falls under 910(a)

Question F No - 908(c)(2) says that a mere assumption that ATM is working is NOT a good faith investigation Bank has a lot of evidence that machine is not working properly

Problem 151 o o No bank would be breaking EFTA if it sent PIN and card in same mailing on an unsolicited basis Scrooge did not accept PIN under 903 and will not be liable for transactions under 909

Problem 152 o o o o o o o Initial authorization to use card does not carry over to future uses!!! Carls total liability is $500 and cannot be more 4/30 Carl is liable for $50 (didnt report w/in 2 business days) 5/5 Carl is liable for $450 ($500 max for series of unauthorized EFTs w/no timely notice) 6/10 no liability (w/in 60-day period after date of statement and $500 limit was reached) Unlimited liability kicks in when unauthorized transactions take place 60+ days after statement is sent out and before consumer reports the problem Banks cant shorten 60-day period

Problem 153
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Downloaded From OutlineDepot.com o o o

Gunpoint w/drawal = unauthorized Maximum liability of Armstrong is $50 Armstrongs negligence in writing his PIN on bank card does not act as a defense the bank can use under EFTA

Gutierrez v. Wells Fargo Bank o PROCEDURAL POSTURE: Plaintiff consumers sued defendant national bank under California's Unfair Competition Law (UCL) for imposing overdraft fees based on "high-to-low" posting order and misleading clients as to the actual posting order used. The U.S. District Court for the Northern District of California found violations of the "fraudulent" prong of the UCL and issued a permanent injunction against "high-tolow" posting and ordered restitution. The bank appealed. OVERVIEW: State law could not dictate a posting method. Designating a posting method was a type of overarching federal banking regulatory power that preempted contrary state law. 12 U.S.C.S. 24, Seventh, and 12 C.F.R. 7.4002 authorized national banks to establish a posting order as part and parcel of setting fees, which was a pricing decision. The National Bank Act of 1864 preempted the unfair business practices prong of the UCL to dictate a national bank's order of posting. Similarly, both the imposition of affirmative disclosure requirements and liability based on failure to disclose were preempted by 24 and 12 C.F.R. 7.4007. But, liability under the UCL for its misleading statements about its posting method was not preempted because the fraud prong of the UCL was a non-discriminating state law of general applicability that did not conflict with federal law, frustrate the purposes of the National Bank Act, or impair the efficiency of national banks to discharge their duties. While a particular posting system or specific disclosures could not be ordered, the district court could enjoin fraudulent or misleading representations and order restitution for past misrepresentations.

OUTCOME: The injunction and the restitution order, based on both the unfair and fraudulent prongs of the Unfair Competition Law, were vacated. The district court's finding of liability for the bank's violations of the "fraudulent" prong of California's Unfair Competition Law was affirmed, and the case was remanded for the district court to determine what relief, if any, was appropriate.

Foreign Remittances Problem 154 o o o Disclosure of exchange rate, fees and amount to be recd Written proof of payment also must be provided Disclosures must be made in language the customer can understand

Wire Transfers Scope of Article 4A Problem 155 o Dept store pays EEs thru ACH xfer and recd receipts from its nationwide stores
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Downloaded From OutlineDepot.com o o o o Does Article 4 regulate ACH xfer? Receipts? Article 4A applies to payment orders pushed from one account to another (ACH) but not purely electronic capture of payment Weekly incoming receipts are not covered under Art. 4A b/c no instruction to send $ (push transactions) Incoming xfer governed under K law btwn. store and bank

Art. 4A covers payment orders pushing funds from sender to beneficiary. Art. 4A des not cover requests to pull funds from payor to payee (i.e., a check) Problem 156 o o o o o o o o o o o o o o o o Whiteside = originator/sender NYMNB = originator bank, receiving bank, sender NY FED = receiving bank, sender, intermediary Cincy Fed = receiving bank, sender, intermediary LESB = receiving bank, sender, intermediary MCB = beneficiary bank, receiving bank Jefferson = beneficiary Receiving Bank bank to which senders instructions are sent Sender person giving instruction to receiving bank Beneficiary person to be paid at beneficiary bank Originator sender of the first payment order Intermediary bank non-originating or receiving bank Beneficiary has right to $ when beneficiary bank accepts the payment order (can be w/drawn the following day) Bank must notify beneficiary of the receipt of the payment order if order lists beneficiary account number Banks may charge fees on receipt of wires Bank may setoff debt owed to it by beneficiary against wire improper setoff will cause bank to pay setoff amount + interest and consequential damages

Acceptance of Payment Orders Receiving bank that makes a technical acceptance of a payment order cannot change its mind and reverse it no right of charge-back Art. 4A allows banks to freely reject payment orders and does not have to accept them If a payment order specifies a payment date, no acceptance can occur before that date Acceptance occurs by receiving bank when it executes/passes on the order (incl. originating bank passing originators order along) Acceptance at beneficiary bank occurs when: o o o o Payment of the order to the beneficiary Notice to beneficiary that amount is available for w/drawal Receipt of full payment of the order Failure to reject payment order before start of next transfer/banking day

Before acceptance, any credit in the beneficiarys account is provisional Problem 157

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Downloaded From OutlineDepot.com o o o o Bank recd payment order from bank that is shaky or unknown Dont notify customer so there is no immediate liability If sending bank doesnt settle/send $ by end of day, can reject payment order Can also verify that sending bank is solvent somehow

Problem 158 o o Can bank put in customer K that no acceptance is final until bank actually recd funds any w/drawal is a loan before settlement No release of funds as a loan = payment to beneficiary cannot characterize the payment order

Transmission Errors Grain Traders, Inc. v. Citibank o PROCEDURAL POSTURE: Cross-motions for summary judgment by plaintiff and defendant bank in an action by plaintiff alleging violations of N.Y. U.C.C. Law 4-A and 1-203, and seeking the refund of money it allegedly lost in the process of an electronic funds transfer. OVERVIEW: Plaintiff initiated an electronic funds transfer, to pay a debt, with defendant bank, which performed the transfer as directed. Plaintiff chose an intermediary bank that had an account with defendant that was overdrawn, which prevented intermediary bank from withdrawing funds from that account. As a result, plaintiff's transfer never reached the proper account. Plaintiff sued defendant under several provisions of N.Y. U.C.C. Law 4-A and 1-203, alleging defendant owed it a refund and was liable for attorneys' fees and costs as it breached its obligation to deal in good faith and had converted plaintiff's funds under common law. Both parties moved for summary judgment. The court granted defendant's motion because it determined the risk of loss in this transaction was to be borne by plaintiff as the originator of the action, as it was plaintiff's choice of the intermediary bank that led to the loss. OUTCOME: Plaintiff's motion for summary judgment denied, defendant's cross-motion for summary judgment granted and compliant dismissed, because plaintiff sought recovery of funds from the wrong party as defendant fully complied with its statutory duty to transfer the funds as directed by plaintiff, and as transfer originator, plaintiff bore risk of loss.

Problem 159 o o o o o o ONB executes payment order but puts in wrong account number goes to wrong beneficiary Wrongful recipient takes $ and runs ONB will be on the hook receiving bank may rely on account number rather than name of beneficiary Here, account number exists so the wire is good ONB and not its customer will be liable Saul can only recover $1 million but no consequential damages (unless in K)

Corfan Banco Asuncion Paraguay v. Ocean Bank o o o o Corfan sent wire to OB w/correct name and wrong account number Then sent wire to OB w/correct name and correct account number Beneficiary got both wires and disappeared 4A-207. MISDESCRIPTION OF BENEFICIARY.
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(a) Subject to subsection (b), if, in a payment order received by the beneficiary's bank, the name, bank account number, or other identification of the beneficiary refers to a nonexistent or unidentifiable person or account, no person has rights as a beneficiary of the order and acceptance of the order cannot occur.

Problem 160 o o o Originator customer gives his bank right customer and wrong account number for beneficiary Originator bank (ONB) is liable ONB should have made its client liable by making it clear that the account number controls over the name of the beneficiary in the wire transaction

Bank of America v. Sanati o o o o o o Bank was supposed to send interest from account held by its customer only to his wife Amount between $2,000 to $3,000/month Bank mistakenly sent principal of $200,000 Wife disappeared w/the $ The bank was entitled to restitution from wife despite its negligence under general principles of mistake and unjust enrichment. Wife could not invoke the discharge for value rule because wife's claim that she had a community property interest in her husband's bank account did not raise a reasonable inference of a preexisting debt or lien at the time of the erroneous transfer.

Problem 161 o o o o o o o o o Corp pays bills by bank thru ONB corp. uses secret code it shares w/bank Breach of a commercially reasonable security procedure where the breach that led to the fraud was the corporations fault corp. will be liable Otherwise, bank will be liable for the loss if the breach came from its side Liability is strict only thing that matters is that customer/bank caused the loss by providing the access What is a security procedure? Various codes, algorithms, callback procedures, etc. but NOT a signature comparison from LOA to something. No security procedure look to see whether EE acted w/apparent authority of company Customer has burden of proving that loss was not caused by it if customer cant do this, he will instantly lose Who decides whether security system is reasonable? Fact finder jury. Bank still has to accept wire instructions in good faith a sudden increase in wire requests to strange destinations may indicate there is a problem and this may not be good faith.

Problem 162 o o If the bank forwarded the $ anyway it will be liable Bank failed to follow the security procedure

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