Source: https://de.scribd.com/document/170551877/Commercial-Paper-Outline
Timestamp: 2020-07-12 14:11:56
Document Index: 248837872

Matched Legal Cases: ['Art 3', 'Art 3', 'Art 3', 'Art 4', 'Art 3', 'Art 3', 'Art 3', 'Art 4', 'arts 1']

Commercial Paper Outline | Negotiable Instrument | Cheque
Outline for Commercial Paper
speichernCommercial Paper Outline für später speichern
Prof McJohn Commercial Payments - Spring 2013 Negotiable instrument vs Contract Contract - defenses do work; may not get paid Negotiable Instrument- Holder in due course not subject to other parties defenses to not pay Negotiable Instrument- UCC 3-104- signed writing that orders or promises payment of money In writing (does not have to be on paper); not oral; not email Payable on demand, or at a definite time 3-108 Does not need a date (just means payable on demand) Fixed amount of $- readily determine amount promised/ordered to pay OK: variable interest rate; as long as can be determined on certain date Signed (by promiser (maker), or person ordering payment) Symbol, initials, signature, trade name etc; can be printed, stamped, written Must have intent to accept and/or adopt, authenticate FORGED SIGNATURE- NOT A NEGOTIATION Courier without luggage- no other promises/orders than to pay money Payable to Bearer or to Order- 3-109 payable to holder of the paper and not any specific person 3 possibilities: Negotiable: I promise to pay bearer $10K (whoever has it gets the money) Negotiable: I promise to pay to the order of Ian Negot: pay to a merry xmas (like cash) Nonnegotiable: I promise to pay Ian This requirement gives signer some warning about their obligation when they sign a promissory note Not applied to checks- these are always negotiable Unconditional promise/order- nothing else has to happen before payment is made Cant have any other undertaking or instruction Holder can determine negotiability from within 4 corners of doc alone; should not have to investigate if orig agreement was sound E.G. In consideration of John Does promise to convey title to Blackacre, I promise to pay him $100K. BUT e.g. NOT uncond: I promise to pay John $100K if he conveys B to me E.G. Check is void after 90 days- still unconditional/negotiable- payers use this just to get you to cash it quicker so their books are up to date; even tho seems like condition- Art 3 is persuasive authority and courts will likely defer to it. NOT unconditional (3-106): Express condition is stated (if) Promise/order is subject to (or governed by) another record Rights and obligations are stated in another record BUT just referring to another doc is ok (still unconditional) 1
Ok- refer to other doc for rights re collateral, prepayment, acceleration Ok- payment limited to particular fund/source Ok- simple reference, e.g. I will pay, in reference to the loan I signed, as per the agreement 2 Types Negotiable Instruments- UCC Art 3: Promissory NOTES- promise to pay money,e.g. 2 party instrument Maker promises to pay payee (or bearer) Banks CDs Credit card agreement Loan pay back agreement Defenses to enforcability may not exist: Unconscionability Fraud Usury- cant charge certain amt Consumer protection MA section 93A- orig claim + enhanced damages, attorney fees DRAFTS- order by a drawer to a drawee to pay money to a third party (payee) e.g. 3 party instrument Check writer (drawer) writes check to order bank (drawee) to pay cable co (payee) Consumer Notes E.g. consumer buys car from John Dealer/seller; warranty for 1 yr; sign the promissory note due in 3 yrs. HIDC does not apply to consumer credit notes Retains the consumers defenses if defective product But rest of Art 3 does apply (rules about how to fill it out) Consumer credit sale must have specific language 3 Stages of Negotiable Instrument Issuance- writing the promise and delivering for purpose of giving rights Non-issuance is a defense Transfer- (negotiation) Delivery by other than issuer for purpose giving recipient right to enforce it Presentment- the HIDC shows up for payment Must make demand at reasonable time/means Must show instrument, give ID, sign receipt Indorsement 3-305 Holder: (not same as HIDC) Whoever can transfer the check Can convert blank indorsement to special indorsement In possession (even thief); Depo Bank is if customer was 2
Indorser- signer of check (so promises to pay) Blank Indorsement- payee signs back of it; becomes bearer paper; can be negotiated by simple transfer of possession alone Special Indorsement- orig payee writes pay___ to make it an order paper; payable to that person, and can only be negotiated by the indorsement of that person Restrictive- for deposit only Anomalous- person not the holder signs (guarantor); does not affect how it can be negotiated Parties to a check: Drawer- check writer Drawee- bank where your money is Payee- person check written to first Depositary bank- automatically holder if the customer is holder, even if customer forgot to sign check Back to Drawee bank- not a holder in due course; cant collect on the check Forgery of Payees name 3-401, 3-403 NOT VALID negotiation - Unauthorized indorsement of payees name (or special indorsees name) Later transferees have no rights to it If bearer paper though- subsequent unauthorized signatures ok; valid indorsement not needed for bearer paper 3-308a- procedural burdens, when genuineness of signature is an issue VA Bank v Holt (1975)- 3-307 presumption of genuine signature when defendant wife didnt produce adequate evidence otherwise that she didnt sign a promissory note. Burden on person saying its not genuine to prove it.
Holder in Due Course: 3-302 possesses a negotiable instrument and is insulated from defenses/excuses by the promiser to try not to pay the money; Is a Super Plaintiff HIDC status only is relevant if a defense or claim against him is raised No defenses work for the payer (e.g. personal/contract ones like mistake, fraud, unconscionability, impracticality, etc) Except 3-305 Real Defenses: (rare; narrowly construed) Infancy- under age Minor doesnt have to pay bank note for defective goods Store must pay bank note (b/c breach of warranty; had claim against it and it signed note over to bank) Duress (gun to head) Lack of legal capacity/mentally incompetent, Illegality (gambling loan); kidnapping; stolen property Fraud- I signed this but didnt know what it was; couldnt find out FDIC v Culver (1986)- No defense of fraud; Culver signed a note without the terms filled in (essentially a blank check); he could read and could have ascertained the terms; not fraud; he is liable to holder in due course(no defense for stupid) Bankruptcy discharge of debt; 3-602 Payment made already Forgery But forged counter-sign on travelers check is not an indorsement; must be honored by bank (unless really bad, then maybe notice to merchants bank) Consumer credit sale note- no HIDC concept Protection for consumer if goods defective; Assume FTC disclaimer is there Negotiable instruments only HIDC Must meet ALL 4: Person holds the instrument- it was transferred/negotiated into his hands Holder gave value for the instrument-3-303 performed the promise/consideration or some other irrevocable commitment related to it (e.g. paid a debt, gave a security interest) NOT just got a gift of an instrument NOT just consideration/promise given that could be revoked or not performed YES a bank that lets you take $ out of account even tho check you deposited hasnt cleared Holds it in good faith (no notice) 3-103 Honesty in fact in the conduct or transaction (subjective) Reasonable commercial standards of fair dealing (objective) Holds it without notice of any problems with instrument (good faith) E.g. overdue, dishonored, defective, unauthorized signature, altered, subject to claim or defense (fraud, uncons, misrepresentation, breach K) If holder has notice of defense of maker, he doesnt hold it in good faith
3-307 Notice of Breach Fiduciary Duty: known that rep/fiduciary using instrument for personal benefit 3-407- Alteration: unauthorized change that purports to modify obligation; Not all changes are alterations; Corrections to date OK 3-304 Overdue- not overdue if missed interest payment; only if principle payment; still payable even if overdue at some point Checks: overdue 90 days after date Notes: overdue reasonable time after demand Other: day after demand 1-201 Forgotten Notice doctrine- you had notice but forgot; OK if a lot of time went by 3-203 Shelter Rule- transfer gives all rights of transferor to transferee (unless underlying fraud or illegality); So even if not a HIDC, you get rights of one who was one before you and xferred the note to you Triffin v Somerset- T in biz of collecting bad debts so by definition has notice of a defect, so not a HIDC- but has rights of one and can collect under Shelter Rule Jones v Bancredit Corp -Jones does not have to pay the mortgage to Bancredit when construction co Dell bulldozed into the house; Bancredit had notice of what Dell knew, since both owned by Parent co- too closely connected. Bancredit not a holder in due course; HIDC does not apply to commercial credit situations; Closely Connected Tests: Is transferree the alter ego of transferor? Same ees, officers, location? Who drafted original promissory note? Is transferee mentioned in the note? Is transferee the only market for transferor or do they sell to others? Knowledge of the transferors past poor perf? Sullivan v United Dealers (1972)- Knowledge of the transaction is not same as notice of a claim or defense arising from that transaction; just because a contract can be breached, doesnt mean theres notice of it; Bank is still HIDC Triffin v Dillabough (1998)- Stolen AmEx money orders are still negotiable instruments, even tho they put on back that not payable if stolen that was just a statement of their defense, not a condition). Triffin was holder in due course so Amex defenses dont work on him. Why sign the negotiable note (and give up your defenses)? Your promise is more credible since youre giving up defenses For what youre getting (consideration) Best alternative available Confidence in other party (e.g. have dealt with them 100 times) You have no defenses anyway (loan pay back note; you got the $) Non-HIDC- Defenses against 3-306 All claims good 5
All defenses- real and personal- good Most common personal: breach K, no consideration Herzog Contracting v McGowen Corp (1992)- P Herzog was subject to McGs defenses of breach of K since P not a HIDC- he took with notice; D was able to present parol evidence that their contract was not meant to be enforceable; it was just a side bargain and we both knew it; sham transaction- not enforceable - it was supposed to look like a loan, so didnt hit the books this year; not fraudulent, but we were deceiving the IRS Jus Tertii- succeeding or failing in a lawsuit on the rights of others (versus your own rights) is available only in special circumstances 3-305- Sureties- accommodation parties can raise defenses of their principals (accommodated parties) Claims of another can be raised when they join the lawsuit Jus tertii can be raised vs a non-HIDC- when instrument is lost or stolen and possessor is not the true owner; obligor doesnt have to pay twice if the true owner show up later
Ch 4 Nature of Liability 3-310 Underlying Obligation: Effect of Instrument on the Debt Certified check, cashiers check, tellers check- like cash for the obligation; it discharges the obligation when recipient takes it (since to get one you have to pay the $ first) Taker gives up any rights against person who gave it Promissory Note, uncertified (regular) check- obligation is suspended Uncert check- suspended until check is dishonored, paid, or certified (Payment or certification of check means the debt is paid to amount of check) Note- suspended until note is dishonored, or paid (payment means debt is paid) Dishonored check or note: Obligee can enforce the instrument, or obligation (if he is PEEI) Non-PEEI- still suspended If lost 3-309 can only enforce the instrument, not the obligation PEEI- Person Entitled to Enforce the Instrument 3-301- 3 ways to be one: Holder- in possession and payable to me (or just payable to bearer) Xferee from Holder- in possession of instrument who has rights of holder (e.g. under Shelter Rule, holder xferred instrument to nonholder, so holders rights go with it) 3-309- Person not in possession, but entitled to enforce per 3-309 (instrument lost, stolen, destroyed) Lost Instrument: 3-309- can still be collected; might need to give protection to maker though, to protect them from having to pay twice if HIDC shows up later E..g letter from payee saying its paid now; post bond, etc Just a copy? Not valid, just shows instrument exists, not who holds it PEEI- supplemented by Shelter Rule- instrument is xferred, and rights of transferor go to the transferee; doesnt need to be indorsed by the E.g. buyer gives check to seller; seller has check, never signed but gets stolen; theif brings check of Depo bank and gets money; Depo deposits check in buyer bank and gets $$ from buyers bank; thief disappears with money (wont get it back) Bad actor is gone Seller has the loss Buyer already paid when $ withdrawn from his account, but bank paid wroing person so needs the money back to properly pay seller; now seller is good Depo liable to bank Depo bank most in position to avoid loss; they voluntarily took forged check from thief Who did riskiest thing? Ask 4 questions: What negotiable instrument label do parties use: Drawer Payee 7
Drawee Maker Indorser Guarantor What causes of action are available to each party Contract claim- signing is promise to pay PEEI Warranty- transfering or presenting; implicit promise I am PEEI, plus.. Conversion- taking from, or paying a non-PEEI; makes thief liable to PEEI Suit off the instrument What defenses are available/possible Can liability be passed to someone else Fifth Third Bank v Jones (2007)- Bank has to credit the homeowner with paying mortgage note (a third party paid for the homeowner) when it lost the check prior to posting it to homeowers account; it was banks fault for losing the check- not the debtors. The debt is discharged upon delivery of the certified/cashiers check, which is same as taking for an obligation; once its handed over, the debtor has no more risk, just like with cash. Ward v Fed Kemper Insurance (1985)- 3-310 Ins co refund/overpayment check suspended its obligation to customer- not discharged; Ins co customer did not owe them anything at time of accident, so policy in full force and needs to be paid; Cust paid premium in full, then switched cars, got refund in part $12 for cheaper car; refund was too much (should have been $5) so they demanded some money back but he didnt pay it back; they cancelled him. Cust never deposited the orig $12 check- so Ins Co still $5 ahead
Signing An Instrument: Liability Implied in law promise to pay the instrument Enforced by current Holder of instrument 3-401- person not liable unless they sign instrument Signer obliged to pay instrument according to terms when signed Including blank checks (dont ever sign blank checks) Makers Obligation (issuer of a note) 3-412 Primary Liability- as an issuer, for promissory note (2 party) Obligation is owed to PEEI Indorser who paid properly to PEEI, or subsequent indorser No conditions precedent to be liable Like bank that issues cashiers check Can be multiple makers; all liable jointly and severally Indorsers Obligation 3-415 Secondary Liability- certain conditions must be met before can be sued: Presentment: Instrument presented to maker (or drawee if a draft) Dishonor by the maker (or drawee) (unable to pay) Notification to indorser of dishonor (3-503) 3 Reasons to Indorse: To negotiate To incur liability; act as guarantor To restrict payment (pay to order of _____) Indorser must pay PEEI, or later indorser who paid the instrument (when the person who was originally supposed to pay didnt pay- issuer of instrument) Issuer is included as earlier indorser 3-116 all liable jointly and severally if sign in same transaction together; entitled to get $ from any other indorser if pays it in entirety 3-414- (qualified indorsement) if indorser writes without recourse next to his name, not liable to pay instrument as an indorser E.g. if check bounces when seller deposits in his bank and bank gives money, and seller signed without recourse Person signing w/o recourse might be liable under other theory Breach of warranty Contract with your bank that you owe $ back if checks you deposit for cash not good After 30 days- if not presented for payment- discharges indorser Drawers Obligation (issuer of a check) 3-414 secondary liability- for DRAFT (3 party) - certain conditions must be met before can be sued: Presentment- draft presented to drawee for payment 9
Dishonored by the drawee If my bank (drawee) doesnt pay it, then I have to Obligation owed to: PEEI Indorser who paid under 3-415 If bank accepts, no liability for drawer Deposit is NOT acceptance No time limit protection (like indorsers 30 days) to discharge liability- you wrote the check so expect it to come out of your account any time Unless your bank goes under and takes your money with it Drawee Banks Obligation Not liable on a check it didnt sign No contractual obligation on the instrument But could be liable to drawer for wrongful dishonor 4-402 dishonor when presented with properly payable item 3-408 Drawee not liable if they dont accept the instrument bank doesnt have to cash a check for a holder; no liability to holder instrument itself does not mean actual funds available for payment in hands of drawee If certified, then yes accepted, and is liable on the instrument 3-401 person not liable on instrument unless signed it Drawee Acceptance 3-413 Drawees signed acceptance to pay a draft as presented 3-409 Drawee signature or other acceptance written on the draft (on a check, signed diagonally acros front) Obligation owed to: PEEI Drawer, indorser who signs Bank under no obligation to accept; check is demand for payment, not acceptance, and have to have acceptance before payment Deposit to bank is not acceptance Acceptance of check = certification Refusal to certify is not dishonor of check 3-409 Acceptor Obligation Obligated to pay at time of acceptance, by terms of draft Norton v Knapp (1884)- the buyer wrote kiss my foot on the bill for goods, and court said that was clear evidence he did not accept Galyen Petroleum v Hixson (1983)- Supplier has no case against customers bank when it wouldnt accept customer-written checks, for insufficient funds; Checks alone are not appropriations of corresponding sums of money the drawee has; check does not create a lien on the money that holder can enforce against bank; Bank decided not to cash the check so they 10
could use the customers money for other things he owed; supplier has action against drawer/customer however;
Presentment- 3-501 demand for payment made to maker of note, or made to drawer of draft/check at reasonable time must exhibit instrument, give reasonable ID to get the $, sign receipt required only if presentee demands it Refuse to sign? NOT a presentment Dishonor- 3-503 = Presentment + Refusal to Pay Refusal of presentee to pay Not a dishonor: bank returns check to get proper indorsement (e.g. no signature) refuse to pay b/c noncompliance with terms on instrument, parties agreement, other rule Messing v BoA (2002)- bank did not dishonor the check when a non-customer trying to cash a check (written by customer to non-customer) refused to give his thumbprint as form of ID the bank required from noncustomers. Was the thumbprint reasonable ID per 3-502? Yes. Not a valid presentment. 3-502 Notice of Dishonor- 3-503 Without notice, indorser not liable for their obligations Can be given by any person By any commercially reasonable means (oral, written, electronic) Reasonably identifies the instrument; indicates it was dishonored, not paid/accepted Deadline banks: midnite; Others 30 days Return of check is sufficient notice Excusing: Presentment, Dishonor, Notice of Dishonor 3-504 Presentment excused: Person presenting cant do it with reasonable diligence Maker is dead, repudiated his obligation, or insolvent By terms of instrument, presentment not necessary to enforce Drawer or indorser has waived presentment Drawer instructed drawee not to pay; drawee not obligated to pay Notice of Dishonor excused: By terms of instrument, NoD not necessary to enforce party to pay Payee waived NoD Waiver of presentment is also waiver of NoD Delay in NoD OK: Caused by circumstances beyond control of person giving NoD, AND Person giving NoD exercised reasonable diligence after cause for delay was over Makel Textiles v Dolly Orig (1967)- Notice of Dishonor is unnecessary (excused) since Dolly president knew the checks he was writing were not paid from corp funds 12
Agent Signature 3-402 To avoid liability- agent must: Name the principal (the person he is representing), and Indicate unambiguously he signs only in representative capacity Liable to HIDC w/o notice, but for others, can prove lack of intent to bind agent Mundaca Investment Corp v Febba (1999)- Real estate trustees/agents are not liable on notes for the mortgage payments overdue, when they signed next to the line labeled Borrower, since the actual borrowers name was in the mortgage (even though not on the instrument) (remanded for more facts) Nichols- ambiguous signing of note
BANKS- Ch 5 Checking Account- 2 legal relationships: Debtor (bank)/Creditor (customer) Principal (customer)/Agent (bank) Contract created by opening account- detailed or implied Bank strictly liable for properly paying, 4-103 Cannot disclaim banks responsibility for good faith/ordinary care, BUT: Bank and customer may contract out of strict liability for properly paying 4-111 Statute of Limitations: 3 years to file suit- Art 4; (3-118- 6 yrs for Art 3) 4-401 Properly Payable rule (When can a bank charge a customers acct) : Signed/Authorized by customer Paid to PEEI (holder, possession) Not altered 4-401 if altered, not properly payable, but can be paid for original amount, original terms Bank can pay out according to completed terms of check- so a blank check later filled in for any amount makes the account holder liable for whatever amount No notice of post dating 4-401c- Postdated Checks: Bank can still pay it out despite the later date; BUT if customer provides notice in time for bank to not pay, OK- bank should not pay it NSF- may overdraft 4-401a Overdrafts bank may still pay it out even if creates overdraft (assuming properly paid); if more than 1 customer in account, non-signing one is not liable for overdraft unless benefits 4-402a Bank CAN refuse to pay (dishonor) if would create overdraft, unless it agrees to pay the overdraft in which case it must pay No stop payment order in effect (4-403) Stop Payments: Bank cant require stop payments in order for customer to not be liable for forged signatures; Customer can stop a payment or close account anytime, as long as gives bank reasonable time to act on the order, and describes check with reasonable accuracy No notice of customer death/incompetency (4-405) 4-405 Death or Incompetence of Customer Bank can still accept, pay, collect, or account for proceeds of its collection, even if customer is dead or deemed/adjudicated incompetent- UNLESS/UNTIL the bank knows about it, and has reasonable oppty to act on it With knowledge: for 10 days after death date - bank can still pay/certify checks from the account (unless ordered to stop payment by interested person- official probate rep) Risk adverse bank would NOT pay checks; less risky to NOT pay once you know customer is dead 14
Check not stale (4-404) If check older than 6 months, bank has latitude Can pay it if in good faith- reasonably fair and honest; entitled to collect If doesnt pay it, ok, not a dishonor In accordance with any agreement between cust and bank 4-103 Agreement Between Customer/Bank to Vary Parties can agree to certain procedures (e.g. Bank only cashes customer-holders checks, Wachovia Positive Pay program to stop fraud) Parties CANNOT agree to disclaim Banks obligation for good faith and ordinary care Reasonableness standard Wachovia Bank Forged check is properly payable when customer rejected Positive Pay fraud protection program; it was reasonable, so customer is liable for check cashed by the theif. Not a violation of the properly paid requirement. 3-114 Contradictory terms on instrument: Typewritten terms prevail over printed Handwritten prevails over both Words prevail over numbers
4-402 Wrongful Dishonor (includes mistakes): Banks Liability if Properly Payable Liability is to bank customer/writer of check, not presenter Proximately caused damages: (varies by jurisdiction as to causation threshold) Actual damages to customer (incl other bounced checks, fees, arrest/prosecution of customer) Consequential damages: reputation decline, rejected for future credit, etc Punitive- if bank does not use good faith and ordinary care (Twin City) Timeframe to determine insufficient funds: any time from receipt of the item by bank, to time it returns item (or gives notice in lieu of return item) Banks discretion if it wants to re-evaluate funds before it returns a check unpaid (e.g. if customer deposited more money after he wrote the bad check, but before it got returned, but the bank already made the funds determination; too bad for customer) Bank cannot freeze funds Risk is greater for bank to NOT pay checks (WD, punitive, other damages) than to just pay them and only owe value of checks if wrong about payout Fees for Noncustomers? OK- Noncust can go after check writer to get fee back Twin City Bank v Isaacs (1984)- Bank liable for punitive damages (mental anguish) when it froze customer Isaacs account for 4 yrs, even tho customer reported stolen checkbook promptly, and was cleared by police of any suspicion of being involved in the forgery of checks; damages included 2 lost cars, lost oppty to buy house, and the stress involved with loss of income. Banks Right Of Setoff Right of bank to offset any debt (via credit card) the customer owes it, by taking from the customers other general account(s)- checking/savings- at the bank If customer depositor has a special account for limited purpose, bank cannot offset against it Benefit of protection to customer if bank offsets improperly Depositor can authorize/agree for bank to take funds from deposit accounts- via separately signed doc (not just a clause in the credit card agreement) Less limitations if commercial/biz customer Walter v Natl Bank Cleveland (1975)- Bank does not have right to offset a debt, not yet even due (unmatured), with money from customers checking acct Bankruptcy- effect Filing creates stay against creditors collection, including setoff Bank can still freeze money in account at bankruptcy (not taking $ for itself tho) until issue is resolved 4-403 Customers Right to Stop Payment Customer can stop a payment or close account anytime, as long as gives bank reasonable time to act on the order, and describes check with reasonable accuracy OK: One digit error OK: today, fridge check, do not pay honest juan; I am perez NOT OK: 2 of 3 descriptors incorrect16
Cannot undo already paid check Cannot stop payment on debit card (no buyer protection) Written order: Stop payment order effective for 6 mths; can be renewed for more 6-mth periods by written record Require written SPO? Probably not since oral is in statute; depends if reasonable Oral stop payment request lapses after 14 days if not followed up in writing for record Burden on customer to prove loss resulting from failure to stop payment or to close account Bank cant charge fee as condition for stop payments; must do them regardless Parr v Security Natl Bank (1984)- Bank had reasonable oppty to stop payment on check, even tho the order contained single digit error on it, but otherwise was exact to describe the check. Does not matter that a banks computer process might not read the check right; it was described with reasonable accuracy; Banks need to anticipate this type of inevitable loss when they implement systems that rely on 100% accuracy all the time 4-407 Subrogation Rule- Bank steps in shoes of a party to go after unjustly enriched party: When bank mistakenly pays item despite a stop payment order or closed account Guy buys car, stops payment/keeps car, bank mistakenly pays anyway; Shoes of car dealer to go after guy E.g. insurance co pays a claim on behalf of its client, then can sue the wrongdoer to get the money back; Shoes of client E.g. someone guarantees a loan; pays the debt, then goes back to orig debtor to get reimbursed Someone is getting unjust enrichment and Bank experiences loss: Payor bank has rights of whoever it paid on behalf of HIDC on the item Payee or other holder Drawer or maker against the payee/other holder Burden on customer to show loss, since even if the bank paid in error (b/c of a stop payment) the customer would still have to pay the HIDC of the check (e.g. a store); So leave it alone that bank paid it out Canty v VT Natl Bank (1994)- Bank not liable; is subject to subrogation rights when it paid out (for the second time allegedly) cancelled checks to IRS, when IRS came asking for them and then redeposited them. Burden on customer to show loss; Here bank used subrogation; customer could have been unjustly enriched if IRS credited his account twice; customer sent IRS cancelled checks after IRS said you still owe us; Cancelled checks got redeposited Cashiers, Teller, Certified Checks NO stop payment allowed 4-403 Comment- Certified checks are not checks drawn on customers account, so cust has no right to stop payment; bank is the obligor on the check
Patriot Bank v Navy FCU (2002)- Credit Union improperly denied to pay; liable to pay out a cashiers check on behalf of its customer, who bought a used car, even though the car dealer only put its acct number (and didnt sign check) when it deposited the check at Patriot Bank. Acct number was a proper indorsement, and Bank said it credited the account already, so CU must pay Bank the $7K amt of check. Lost, Stolen, Destroyed Cashiers Checks Some states: 3-312 person losing possession can file declaration of loss claim Within 90 days from date of check: bank will pay whoever has it; too bad for owner After 90 days- loser can get reimbursed if check had not shown up Alternative: 3-309- true owner of check can judicially re-create it; has to post bond or other adequate protection, for the entity that will end up paying the true owner 4-406 Bank statement- Extension of Negligence (type of) Applies to: drawer signature forgery, alteration Bank negligent if doesnt give you: Sufficient info about the checks you wrote Item #, Amount, Date of Payment Bank duty: keep the checks or copies of for 7 yrs Customer negligent if doesnt: examine the statement/checks to make sure no alterations, forged drawer signature Reasonable time notify bank if problem; 30 days No bank liability if: Customer fails here, and bank suffers loss because of it Multiple rule: Bank already paid out check altered by same wrongdoer/forger before, and you didnt notify bank within 30 days, and it happens again; too bad for customer One shot rule: If customer doesnt report problem within 1 year after statement, precluded from asserting claim against bank.; customer takes loss that bank had Then, payor bank may not recover either, from the presenting bank under Presentment Warranty 4-208 Comparative negligence applies too NOT negligence for bank to not look at check signatures; industry standards not to Peters v Riggs Bank (2008) - Bank does not bear loss when the PR of decedent did not notify bank within 60 days of unauthorized ATM withdrawals from Ds account, but just filed suit; not timely. Even if bank customer doesnt get the statements (e.g. intercepted by wrongdoer) no liability on bank if they sent them to address of record. Falk v Northern Trust Co (2001)- Bank is liable for bad faith to remain passive, when Falks personal assistant forged checks and bank should have had notice of the fiduciary relationship, and should have taken action to stop it, since she had accounts at the Bank and paid her debts with money drawn from Falks account; stole $2 mil in 4 yrs.
Bank Collection Funds Available to Depositor/Customer by rights Obligation of ordinary care in handling Cash: next banking day ; bank decides cutoff time of day; bank may have right of setoff Checks: must be paid or dishonored in timeframes: Across counter: before close of business if the drawee banks check On Us items: (both parties have accounts at that bank): the business day after biz day of deposit Transit items: not the same bank Charge Back- Right of Depositary Bank (# 101, p246) to get money back from depositing customer If check not paid by drawee bank, depositary bank may charge back depositor Bank loses right of chargeback if it is: negligent e.g. bank loses check so never paid (so loses right of charge back) agrees to fund- waives its right of chargeback; tells depositor check is good; well sign it and promise to pay it Depository bank can expect to be reimbursed from whoever deposited/cashed the check with it, if the payor/drawee bank dishonors it and returns it to depo bank; Does not matter how many days elapsed since check was deposited; 3 ways to justify demand for repayment: Initial contract agreement when the account was opened 3-415 Indorsers obligation 4-214 Statutory right of charge back Bank give provisional credit pending clearing of check Midnite deadline for depository bank to either return the check or notify customer of facts of NSF- then can: Revoke settlement Charge back to customer any credit it gave, or Obtain refund Liable for any loss from a delay in returning check or notifying customer Valley Bank - bank not liable when customer fell for a scam to send money overseas Bank was not negligent in processing the transaction and advancing customer the money; normal procedure. Customer was never told there was a final settlement. Remand for determination of whether bank was negligent in its communications about the check settlement process HSBC Bank- language checks have cleared is too ambiguous to make bank liable; does not mean checks have been paid, so bank can chargeback to customer
CH 6 Wrongdoing and Error Art 3- find person in best position to avoid loss to assign liability E.g. bank that takes stolen check w/forgery and pays/accepts Check 21 Act- permits electronic copies of checks (substitute checks) instead of paper copies; electronic presentment; or paper copies/printouts of checks sent by depo bank If customer damages in any way as result of e-checks, banks take liability Forgery of payees name- not a negotiation, so anyone after that is NOT A HOLDER When check made out to certain person and then is forged with his name No matter how innocent later people are No matter how much value they paid for it Original payee can get it back from whoever has it 3-403- Forger himself: forged signature is HIS signature and he promises to pay, unless validation applies Indorsement- forgot to sign check over to your friend: Friend has a right to your endorsement- so can force you to sign But not negotiated until you actually indorse it Friend is PEEI, nonholder with rights of holder per Shelter Rule 3-203 Warranty Liability- responsibilities of the victims/other parties after forgery Pass the loss back to the wrongdoer, or 1st person to trust the wrongdoer Remedies: Amount of loss as result of breach Not more than amount of instrument + plus expenses + loss of interest NOT attny fees Theory: Warranties Rule 3-417 Presentment Warranty (4-208 for checks) Drawee bank that pays/accepts gets warranty from presenter and previous transferors that: PEEI Not altered No knowledge that signature of drawer is unauthorized Originator of item authorized item in amount drawn Exception: Remotely created checks: (ie online checking acct transaction) Remedy: good faith taker may recover damages (up to amt of instrument + expenses + lost interest) 3-416 Transfer Warranty- no legal problems- very broad Transferor warrants to transferee AND subsequent transferees that: PEEI All signatures authentic & authorized Not altered 20
No claims or defenses against transferor re the instrument No knowledge that issuer/acceptor is in bankruptcy (but everyone who signed it could be broke- thats not a breach) Remedy: good faith taker may recover damages (up to amt of instrument + expenses + lost interest) Theory: Properly Payable Rule 4-401 Must be authorized by customer to be paid Forged signatures (drawer, indorser, etc) make it NOT properly payable No need for stop payment by customer- but customer should write another check to correct person, and would only be liable for that one Theory: Sue in conversion 3-420 Theft in CL Art 3: if accepted from someone who should not have it or paid to non-PEEI Cant use this if you are issuer/acceptor, or payee/indorsee that did not get instrument Only HOLDER has the property rights REMEDY: presumed amount of check Scenarios: Drawer writes check, gets stolen and forged, paid to theif, Payee never receives: Payee: no conversion remedy against banks (depo or drawee); never any delivery so no interest exists in check; never became a holder or PEEI; orig obligation to payee by drawer unchanged Drawer: no conversion remedy (but drawee bank liable for wrongful honor) Drawee bank: remedy against depo bank for breach presentment warranty Loss is on person who gave value to thief for check Payee A does receive, indorses to B, but then stolen and forged: A: remedy for conversion; it was As property B: no conversion remedy; never obtained rights; still can enforce the orig obligation by A Summary of theories Who suffered loss; Who is out of pocket now Can they shift their loss? Customer of bank- make bank recredit account: not properly payable; wrongful dishonor Transferee- enforce against upstream (prior) parties: transfer warranty Drawee/payor bank- enforce against presenter: presentment warranty Rightful owner of check- conversion Can the next party shift THEIR loss further? PEEI/HIDC- liability by the signer of check? 3-310 underlying obligation (of taking/accepting a certified check) Leeds bank liable when attorney forges his name on clients checks meant for them; bank honors
Price v Neal (1762)- if drawee pays/accepts the item, cannot pass liability/risk of forgery back to prior good faith parties; 4-302 final payment: payor bank accountable for item finally paid 3-418 finality rule: Payment/Acceptance by Mistake: no remedy for drawee bank if the payor/depo bank took the check in good faith and for value Decibel Credit Union v Pueblo Bank (2000)- Pueblo payor bank (depo bank) not liable to the drawee bank under presentment or transfer warranties, when thief forged blank stolen checks and cashed them at depo bank (his bank too). Presentment warranty doesnt apply to insufficient funds (of the thiefs account); Transfer warranty doesnt apply for drawee bank regarding authenticity of drawee signature. Prob 119, p280- thief steals blank checks, writes checks forging owners name to himself, cashes at Depo bank; Depo presents to Drawee bank for payment; Owner demands money back from drawee bank; bank recredits her- then what? Properly payable theory- not authorzied by customer/owner since she didnt sign check, so loss on drawee bank Drawee bank- Depo presented to Drawee so look at presentment warranty? NO doesnt work; Drawee bank has risk of forged drawers signature (customer) Depo bank- assumes risk of forged indorsements Wachovia Bank v Foster Bancshares (2006)- Choi presented a check to her bank Foster that wasnt the real check (cannot be determined if check was forged, or orig check was altered, since only had digital copy (more likely altered) so Depo bank has liability
Validation Rules- validate wrongdoing in some cases: makes checks properly payable (when they normally wouldnt be) Sting (imposter) goes to Amy and says she is Humane; gets money from Amy check written to Humane CL Validation: Hutzler v Hertz (1976)- Wrongful death suit settled in Ps favor; Defendant check writer not liable when plaintiffs attorney forged Ps signature on check and took off and disappeared with the money. Ps agent (attny) is liable 3-403 Ratification Prob122- suit wont succeed for George (he was best person to avoid loss) Unauthorized signature can be ratified (retro authorized) by statements or conduct, ie keeping the benefits after having knowledge of wrongdoing 3-404 Impostor/Ficticious Payee Rule- (probs 122, 125), Validates forgery of payees name only Impostor pretends to be someone else; induces someone In person OR via mail and signs that name to cash check Check was induced from the issuer, but issuer paid it anyway Liability: issuer/check writer; writer in best position to avoid loss; but check writer can seek comparative negligence against depo bank to share the loss (e..g if depo should have known imposter) 3-405 Employee indorsement/Ficticious EE- banks friend: if ee makes forged indorsement, the ER is liable (e.g. ee pads payroll, fakes ees, steals checks from ER); ee embezzlement is ERs problem, not any banks; ER in best position to avoid loss; should be more careful about your ees ER can be either issuer or payee (prob 128) Writer does not intend that person to get the money Comparitive negligence: But if bank failed to show ordinary care, ER can shift loss to bank to extent bank caused any (e..g huge deposit by embezzler into an account under new name- should have raised eyebrows) 3-406 Negligence- broad; could apply to lots of the other theories; per se negligence; fact driven; reasonable person std Can ONLY be used as DEFENSE; not an affirmative cause of action Persons/victims own negligence counts against them E.g. leaving huge blank spaces on check Not handling check accurately (sending to wrong payee) Cant argue the forgery against a good faith payer/taker Includes Forged indorsements, drawer signatures, alterations Comparitive negligence could apply Prob 129, 13123
First Citizens Bank v Cit & Assoc (2002)- Depo bank bears the loss for forged indorsements on checks; even tho depo bank took checks in good faith; they also had to show drawer failed to exercise ordinary care that contributed to forgery; could not do so; Drawer check writer was not negligent when they wrote checks to mortgage co, and the mort co manager forged the co name and then deposited into his own account at depo bank. Drawer didnt leave blank spaces or make checks payable to the manager himself; Nothing contributed to making of forged endorsement. 4-406 Bank statement- Extension of Negligence (type of) Applies to: drawer signature forgery, alteration Bank negligent if doesnt give you: Sufficient info about the checks you wrote Item #, Amount, Date of Payment Bank duty: keep the checks or copies of for 7 yrs Customer negligent if doesnt: examine the statement/checks to make sure no alterations, forged drawer signature Reasonable time notify bank if problem; 30 days No bank liability if: Customer fails here, and bank suffers loss because of it Multiple rule: Bank already paid out check altered by same wrongdoer/forger before, and you didnt notify bank within 30 days, and it happens again; too bad for customer One shot rule: If customer doesnt report problem within 1 year after statement, precluded from asserting claim against bank.; customer takes loss that bank had Then, payor bank may not recover either, from the presenting bank under Presentment Warranty 4-208 Comparative negligence applies too NOT negligence for bank to not look at check signatures; industry standards not to Peters v Riggs Bank (2008) - Bank does not bear loss when the PR of decedent did not notify bank within 60 days of unauthorized ATM withdrawals from Ds account, but just filed suit; not timely. Even if bank customer doesnt get the statements (e.g. intercepted by wrongdoer) no liability on bank if they sent them to address of record. Falk v Northern Trust Co (2001)- Bank is liable for bad faith to remain passive, when Falks personal assistant forged checks and bank should have had notice of the fiduciary relationship, and should have taken action to stop it, since she had accounts at the Bank and paid her debts with money drawn from Falks account; stole $2 mil in 4 yrs. Alterations 3-407- unauthorized change in instrument Modifies the obligation of party, or Adds words/numbers or other change to incomplete instrument (blank check) Discharges a party if his obligation is affected UNLESS 24
assents/consents, or incomplete/blank check signed by you (too bad for you) precluded from claiming an alteration Who can enforce the instrument: Payor/Drawee bank Person taking for value, in good faith, without notice of alteration How much can be enforced re the instrument: Original terms of instrument, or Terms as completed, if was incomplete/blank and got filled in
CH 7 Electronic Banking Credit Cards- unauthorized use limits cardholders liability to $50- even if cardholder negligent 3 possibilities: Authorized use- customer has unlimited liability Unauthorized use- customer $50 liability (some waive this $50 charge) Error by Issuer- customer Zero liability- e.g. computer error prob 148 Unauthorized Use: use by person other than cardholder, who doesnt have actual, implied, apparent authority and cardholder receives no benefit from Issuer takes greater risk- credit card law is federal law intended for consumer protection, not UCC; but have more security measures on the card (versus checks) Issuer must: Notify cardholder of the rights Card identifies the user Provide cardholder means of notifying them (phone #) Negligence Exception re employees: Azur v Chase Bank (2010)- No right to reimbursement after paying the bill; Azur cannot recover anything (reimbursement) from credit card co when he gave apparent authority to his personal assistant to use card and handle his bills, by enabling continuous payment over time; negligent failure to monitor employee; and she misappropriated $1mil over 7 years; he never reviewed bank stmts which would show withdrawals; he never returned bank s phone calls when they 3 times suspected fraud and left msgs for him (although PA returned calls and verified acct); Merchant liability: (per Network rules, not law) FTF transactions: Issuer takes risk/loss for unauthorized use- not merchant Online: merchant takes risk (so they often have extra precautions in billing process) Cardholder Can Assert Claim Vs. Issuer: (Reg Z 1026.12(c) When merchant (person who honors the card) fails to resolve dispute about transaction (services or property purchased), cardholder can assert claims/defenses against card issuer Up to amount of purchase + finance charges Issuer cannot report that amount delinquent (until resolved) Consumer cards- NOT business accounts Limitations on cardholder: Have to make good faith attempt to resolve first Disputed amount exceeds $50 Disputed transaction occurred in same state as cardholder address (or within 100 miles) Online purchase? Not resolved yet in law No limitations on cardholder (as above) IF merchant is: Same person as card issuer 26
Controls or is under control of card issuer Deals in card issuers products or services Sent out the flyer/solicitation leading to the purchase Issuer card co can chargeback to Merchants bank, who can chargeback to merchant Banks need to be careful about who they process payment for Billing Errors: customer complaint Issuer must acknowledge complaint in 30 days, good faith investigation; resolve it in 90 days (or 2 billing cycles- whichever less) Issuer cant report money overdue, or report to credit reporting agency If issuer doesnt comply, they lose the $50 customer liability Electronic Funds Transfer Act (EFTA)- online banking- consumers take risk for unauthorized use Xfers by computer, phone, terminal Instructing bank to debit or credit consumer account Debit cards, online banking, direct deposit Debit Cards Consumer Liability for Unauthorized EFT- Reg E 1005.6 ONLY if financial institution provided required disclosures (1005.7b(1,2,3) statement from bank required Access device (debit card) was an accepted device Financial institution provided means to ID the consumer it issued card to Limits on Consumer Liability: Timely notice given: within 2 days of learning of loss, up to $50 liability Not timely notice: Lesser of: up to $500, or total of: $50 (first 2 days limit) AND charges after the 1st 2 days Periodic Statement- NOT timely notice: once statement comes- have 60 days to limit your liability to the 500 for missing the 2 day limit; must report unauthorized EFT in 60 days of transmittal of statement or unlimited liability Extenuating circumstances? May limit liability Practice today- banks dont charge the liability of 50, 500, etc. and they take the risk on themselves for issuing debit cards Unauthorized Use Does NOT Include: 1. use by person given card and PIN (unless customer has notified issuer that such use is no longer authorized), or 2. fraud by consumer (i.e. unlimited liability) 3. error by issuer (i.e. not even payable up to the limits) Overdraft- have to opt in first; then get fees Direct Deposit/EFT payments- cant require someone to open account at particular bank- but can require generally DD 27
If party agrees to receive electronic transfer- they take responsibility if computer error (so you cant get evicted if your rent payment gets messed up) 3 days notice by consumer- to stop an EFT POS purchases- liability for consumer if defective goods bought? No right to raise defense like with credit card; Bank does not have to reverse charges; similar to paying with cash Statement errors: Prob 150 bank has 10 days to investigate after customer raises an error within 1 year Bank liable Unsolicited bank cards- prohibited, as would be sending a PIN you didnt ask for Unauthorized person takes from trash and activates it- consumer not liable since didnt validate/activate it Bank Liability: 910 Bank liable for all damages proximately caused (not just amount) by - failure to make transfer (unless NSF etc.) - failure to honor stop payment not liable for act of God, or malfunction known to consumer Bank must investigate alleged errors and report (10 days to recredit, but expandable) treble damages for bad faith failure to investigate or recredit Aerror:@ unauthorized/incorrect transfer, computational error, no money from ATM, etc. Breach of EFTA- Damages: actual damages, plus - between $100 and $1,000, plus - attorney=s fees but not liable for bona fide error occurring despite reasonable precautions One year statute of limitations from date of occurrence
Wire Transfers Electronic Fund Transfer Act protects consumers only; not biz Transfers in or out of consumer account- personal, family use UCC Art 4A and Reg J- non-consumer wire transfers Excludes EFTA transactions Covers any payment order to pay a beneficiary (not just wire xfers)- any instruction given orally, electronically or in writing; Pushes funds from sender bank account into the beneficiary payee account Push instruction Nonconditional To be reimbursed from acct or payment Transmitted by sender to bank Receiving/Beneficiary Bank2- in a 2-bank transaction: Rejects or Accepts Rejects: dont owe money to final destination; nothing from OriginatorBank 1 Accepts: have to pay final destination How Bs bank accepts:4A-209 Pays amount of order to B Notify B money avail (can be conditional or a loan until bank gets money) Receives money itself Money avail in account and Fail to make timely rejection (2 biz days, and $ in acct to repay) Effect of Acceptance of payment order by beneficiarys bank: B entitled to money Bank must notify B Bank liable to B Bank entitled to reimbursement from sender Discharges underlying obl of orginator to B Right to cancel BEFORE acceptance May request cancellation after acceptance if bank accepts, no right of charge back if fails to receive payment; cant change mind No requirement to make acceptance Must reject the order if does not want to make acceptance E.g. payor wants to wire $1mil to payee via his bank. Sends order1 to his bank, which then sends order2 to payee bank; payor bank will verify funds first/take money from payor acct 2 Banks dont know each other: use local Federal Reserve Bank as go between; FRB will find bank(s) they deal with to get to Bs bank; Money from Fed is always paid; they take risk; Intermediary banks are the 2 middle banks in a multi-bank transaction- one for the Originator and 1 for Beneficiary Effect of Sending Wire Xfer- no right of defense; have to be sure
Bank Mistakes Grain Traders v Citibank (1997)- customer assumes risk when he was one who chose the intermediary bank that was supposed to send along customers wire xfer payment of $310K cannot sue Citibank, which was merely the bank that customer gave payment instructions to along with its money; Citibank did what it was supposed to do and sent money and instructions along, but intermediary bank fucked up. Customer suing wrong party. Mis-description of Beneficiary By Bank: Bank only has to look at account number (not name)- if processes what it got, OK Whichever bank got the number wrong is liable, and must pay back the payer (money back guarantee) Wronged customers must report problem in 90 days after bank notifies him of payout By Customer (non bank) Gave wrong number, right name = not liable UNLESS had notice that bank was going to pay the beneficiary based on whatever number customer puts in- so get it right Notice- clause in contract with bank Corfan Banco v Ocean Bank (1998)- Ocean Bank that accepted 2 identical wires (except first wire had nonexistent acct number) but it accepted it anyway after contacting the assumed account owner, to confirm his acct number. It didnt reject it as it was supposed to do under FL statute. When Corfan bank sent 2nd wire as correction the Ocean bank paid that too. Ocean owes Corfan refund. BoA v Sanati (1992)- bank wins under mistake & unjust enrichment theories when erroneous funds transfer to womans account happens and she has no defense for keeping the money; Fraud- Unauthorized Use of Xferring Funds If bank and customer agree to use security procedure, then customer liable for unauthorized use if (1) commercially reasonable security procedure; and (2) bank followed procedure in good faith; unless customer can show info not directly or indirectly from customer 4A-203(a) Phishing: Experi-Metal customer/biz falls for fake requests for info- resulting in tons of fraudulent wire xfers by bank from customer/biz account to weird places; not the norm for biz who only xferred 2 times in past few years; Bank should have noticed this anomaly
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