An Outline for Cats, Written by Dogs
Commercial Paper
Maggs – Fall 2002
Part I – Enforcement of NIs
INTRODUCTION TO NEGOTIABLE INSTRUMENTS
I. NI’s generally
A. 2 Doctrines
1. Merger Doctrine
a. obligation is merged into the instrument itself
i. destruction of an NI discharges it
b. suspends obligations – only rights are rights on the instrument, not the underlying
obligation
2. Good Faith Purchaser Doctrine
a. strips away defenses
b. what distinguishes NI’s from ordinary contracts – modifies K rules of assignment
B. 2 Types of NIs
1. Promissory Notes (3-104(e) – an I is a note if it is a promise)
2. Checks (3-104(e) – an I is a draft if it is an order)
C. NI’s are a type of K
1. if it’s not an NI, “HIDC” status doesn’t strip defenses
2. 3 Qs M P H
a. Is it a Negotiable Instrument?
b. Is H a person entitled to enforce it?
c. Can M assert any defenses against H? (ie is H a HIDC, which strips ordinary
defenses?)?
II. Formal Requirements of NI’s
A. Negotiable Instrument Definition 3-104
1. unconditional promise or order to pay fixed amount of money, w/ or w/o interest
or other charges described on the promise or order IF
a. it is payable to bearer or to order at the time it is issued or first comes into
posession of a holder AND
b. is payable on demand or at a definite time AND
c. does not state any other undertaking or instruction by the person promising
or ordering payment to do any act in addition to the payment of money
B. Promise 3-103(a)(9) (promissory note)
1. written undertaking to pay $ signed by the person undertaking to pay (NOT oral)
2. an acknowledgement of an obligation by the obligor is not a promise unless the the
obligor also undertakes to pay the obligation (NOT an IOU)
C. Order 3-103(a)(6) (check)
1. written instruction to pay $ signed by the person giving the instruction
2. may be addressed to any person including the person giving the instruction
3. authorization to pay is not any order unless the person authorized to pay is also
instructed to pay
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D. Unconditional 3-106(a), (b)
1. unconditional UNLESS
a. there is an express condition to payment
b. promise or order is governed by or subject to another writing (“subject to our K to
sell property”)
c. rights or obligations w/r/t the promise or order are stated in another writing (“pay
an amount calculated by the formula in our K”)
d. 3-106(b) - mere reference to another writing, as in home loans and mortgages
(collateral, prepayment, acceleration), doesn’t make it conditional – just tells you
that you may have some additional security above and beyond your claim on the
NI
E. Money 1-201(24)
1. medium of exchange authorized or adopted by a domestic or foreign government and
includes a monetary unit of account established by an intergovernmental organization
or treaty ($ ¥ etc.)
2. “I promise to deliver 100 books” is NOT an NI
F. Fixed Amount 3-112 cmt 1
1. nothing you can disagree about (ie NOT “the current value of my car”)
a. applies only to principal, not interest
b. can include things like collection costs including atty fees
c. Taylor v. Roeder – Pre 1990 Revision of the UCC (Revision is NOT
retroactive) - Taylor is paying on notes owed to VMC but doesn’t get VMC to
surrender them, VMC assigns the notes to Pruitt, Taylor continues to pay VMC
and pays off the notes. Pruitt (Roeder) forecloses b/c Taylor hasn’t paid him.
Court says the note is NOT an NI b/c it contains a variable interest rate, and thus
ordinary K law applies and Taylor was discharged by paying VMC b/c he had no
notice of the assignment of the K
G. Interest 3-112(b)
1. can be fixed or variable amount or rate
2. described in any manner, may require reference to info not in the document s/a
“prime Chase Manhattan rate on the 1st of the Month”
H. Payable to Bearer or to Order
1. 3-109(a) payable to bearer if
a. says payable to bearer or to the order of bearer or otherwise indicates that the
person in possession is entitled to payment OR
b. it does not state a payee OR
c. states that it is payable to or to the order of “cash” or otherwise indicates that it is
not payable to an identified person (“PTO Happy Birthday”)
2. 3-109(b) payable to order
a. payable to order if it is payable to an identified person
3. “Magic Words” 3-104(c) “pay to” is sufficient on checks (dealing w/ designer check
problems)
a. otherwise, NI’s must say “PAY TO THE ORDER OF _______” (magic
words for BOTH checks and promissory notes)
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b. argument -- “It’s not an NI because it says “pay to”, not “pay to the order of””
“Yes it is b/c “pay to” is sufficient on something that otherwise meets the
definition of a check”
I. Payable on demand or at a definite time
1. demand instrument – usually checks
2. time instrument – promissory notes or Cds
J. Conspicuous Statement of Non-Negotiability 3-104(d)
1. NOT an NI if it contains a conspicuous statement s/a “Non-Negotiable” at the time it
is issued or first comes into the hands of a holder
a. the resulting note is still a K and enforceable as such, just not an NI
2. for those who don’t want their defenses stripped…
3. doesn’t work on checks
III. People and Actions
A. People
1. Maker 3-103(a)(5)
a. person who signs or is identified as undertaking to pay
2. Bearer
a. person in posession of an instrument payable to bearer or indorsed in blank 1-
201(5)
b. payable to bearer 3-109(a)(1)
payable to cash OR
payable to bearer OR
no payee named
3. Payee
a. person to whom instrument is initially payable
b. cf. 3-110(a) – example of UCC’s non-use of word “payee”
4. Holder
a. in posession AND 1-201(20)
i. payable to bearer OR
ii. payable to you
b. how to become a holder
i. have an I negotiated to you - 3-201(a) negotiation is the transfer of
posession (by anyone but issuer), whether involuntary or voluntary, to a
person who then becomes a Holder
ii. have an I issued to you
5. Owner CL
a. can intentionally transfer your rights on an I w/o negotiating it
b. UCC doesn’t displace CL rules of property ownership
i. there is no general rule of “finders keepers, losers weepers”
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6. Loser
a. Loser entitled to enforce 3-309(a)
i. if in posession and entitled to enforce when I was lost
ii. loss of posession not result of lawful seizure or transfer
iii. can’t reasonably recover b/c destroyed, whereabouts unknown, wrongful
posession of an unknown/inaccessible person
b. 3-309(b) must provide “adequate protection” to person paying the
instrument (usually Lost Instrument Bond)
B. Actions
1. Deliver 1-201(14)
a. voluntary transfer of possession (not loss or theft)
2. Issue 3-105(a)
a. first delivery of an NI
b. by the maker / drawer
c. whether to an H or nH
d. for purpose of giving rights on the I to any person
3. Negotiate 3-201(b)
a. of an I payable to an identified person:
i. transfer of posession AND
ii. endorsement by H
b. of a bearer I
i. transfer of posession alone
ii. whether voluntary or involuntary (loss/theft)
c. purpose of negotiating an I is to make receiver a Holder
4. Indorse
a. signature by anyone other than maker/drawer 3-204(a)
i. alone or w/ other words
ii. for purpose of negotiating, restricting payment, or incurring indorser
liability
b. indorsement in blank 3-205(b)
i. creates a bearer instrument
ii. just signature – no person indicated
iii. can include restrictive words s/a “for deposit only”
c. special indorsement 3-205(a)
i. I becomes payable to identified person
ii. negotiated only by indorsement of that person
iii. special indorsement of a bearer I makes it not a bearer I any more
5. Transfer 3-203(a)
a. delivered (by other than issuer) w/ intent to give the other person the right to
enforce
i. 3-203(b) gives the transferee any rights the transferor had, including rights
as a HIDC
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ENFORCEMENT OF NEGOTIABLE INSTRUMENTS
I. Enforce 3-301, 3-310(b) (force maker to pay the I)
A. who can enforce? 3-301
1. holder 1-201(20)
a. even if you aren’t an owner
b. even if you’re in wrongful posession
2. non-holder in posession w/ rights of a holder 3-203(a)
a. I transferred to them, but not negotiated
b. “mere transferee”
3. Losers
a. person not in posession who is entitled to enforce under 3-309
B. to enforce you must show 3-308(b)
1. validity of signatures – Cmt 1
a. admitted unless specifically denied in the pleadings
b. presumption of validity – ∆ must present evidence that sig is invalid (if no
evidence presented, wins)
2. you are a person entitled to enforce (H, nonholder in posession w/ rights of a
holder, loser)
a. if loser, this entails showing chain of posession and providing adequate
protection
3. MORAL – its good to be a holder b/c easier to enforce (just present the I and rest – if
∆ produces nothing, you win)
II. Presentment 3-501(a)
A. demand to pay the I made by/on behalf of a person entitled to enforce
B. 3-501(b)(2) on demand of the Presentor, the person presenting must
1. exhibit the I
2. give reasonable ID (and showing of authority if applicable)
3. sign receipt on I for any payment made or surrender I if paid in full
C. Presentment Warranties 3-417(a), 4-208(a)
1. When presenting an item for payment, you make 3 warranties
a. Presenter is a person entitled to enforce
i. if forged endorsement, NO ONE is entitled to enforce
ii. if forged drawer’s /s/, person is entitled to enforce (against forger, not
against person whose name was forged)
b. draft has not been altered
c. Presenter has NO KNOWLEDGE that /s/ of Drawer is unauthorized
III. Payment & Discharge 3-602(a)
A. payment to person entitled to enforce discharges liability on the I
1. pay the wrong guy – no discharge
2. get discharge even if you know there is a competing ownership claim
B. Exceptions 3-602(b) – no discharge IF
1. payment prohibited by injunction
2. you KNOW the instrument was stolen
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3. Lambert v. Barker – Barker and Harwood pay off a promissory note to Davis, after
Davis pledged the note as collateral to Lambert, b/c Davis claims he “lost it”.
Lambert then seeks payment from the Harwoods. If an ordinary K, Harwoods would
be discharged by paying Davis b/c they were never notified of the assignment to
Lambert. B/c it’s an NI, they didn’t discharge their obligation b/c they paid someone
not entitled to enforce. (Harwoods should’ve insisted on lost instrument bond).
4. RESPA – if you have a residential mortgage, and your bank transfers it to another
bank, the transferee must give you notice of the change and you get discharge for all
payments made to the transferor until you get the notice
HOLDERS IN DUE COURSE
I. Holder in Due Course Doctrine – strips defenses
A. Holder in Duc Course 3-302(a)
1. Holder
2. takes the I for value
3. in good faith
4. no notice that NI is overdue/altered, that sig’s are unauthorized, or of other claims or
defenses
a. no notice when takes the note – can find out later and still be HIDC
b. “reason to know” – actual OR constructive
II. HIDC’s take free of claims and defenses except real defenses
A. Takes free of competing ownership claims 3-306
1. Miller v. Race – Bank of England draft “to Finney or bearer” is stolen by a thief who
uses it to pay Miller, an innkeeper for services/goods. Miller presents it to Race, the
bank clerk. Lord Mansfield says that Miller owns the note, and is not subject to
competing ownership claims, because he took it for value in good faith and w/o
notice of problems. W/o this rule, no one would want to take banknotes as currency.
B. Takes free of all defenses except “real defenses” 3-305
1. the real defenses 3-305(a)(1) – can be asserted against both H’s and HIDCs
a. infancy of obligor
b. duress
c. illegality of transaction
d. incapacity
e. fraud in the factum
f. insolvency
2. regular K defenses 3-305(a)(2) – can be asserted against H’s, NOT against
HIDC’s
a. 3 most common = fraud in the inducement, lack of consideration, failure of the
consideration
3. claims in recoupment 3-305(a)(3) – can be asserted against H’s, NOT against
HIDC’s
a. claim that maker has against payee arising out of the same transaction (ex-
defective goods)
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b. Example 1 – Claims in Recoupment
“PTO B $1000” “B”
A B C
goods $
i. A’s claim against B = $600 for breach of warranty
ii. can A assert claim against B?
YES if claim arises from same transaction as the note
iii. if C is NOT a HIDC (ex – if C knew of the problem when she took the
note), how much can C recover from A?
only $400
iv. if C IS a HIDC?
all $1000
c. Example 2 – Claims in Recoupment
“PTO Merchant $10K” “Merchant”
Plumber Merchant Finance Co.
goods $
i. Plumbers claim against Merchant
$8000 for plumbing work (unrelated counterclaim asserted in the
litigation)
$4000 for defects in the goods (recoupment claim)
ii. how much can M get from P?
M can recover NOTHING
M has $10K in claims
P has $12K in claims
iii. how much can Finance Co recover?
if FC is an H = $6K ($10K -$4K recoupment claim)
if FC is an HIDC = $10K ( HIDC takes free of claims in recoupment)
not subject to unrelated claims
III. Shelter Doctrine 3-203(b) + cmt 2
A. whatever rights you have on an I, you can give or sell to someone else,
including your rights as a HIDC
B. Exception – transferee can’t get rights of a HIDC if transferee engaged in fraud/illegality
w/r/t the I (can’t money launder using the Shelter Doctrine)
C. cmt 2- reason for the Shelter Doctrine is to ensure HIDC has a free mkt for the I
IV. How to be a HIDC - took for value, w/o notice and in good
faith
A. NO APPLICATION TO ORIGINAL PARTIES TO THE TRANSACTION (ie the
payor/drawer and payee)
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B. 3-302 Holder in Due Course means the holder of an instrument if:
1. the instrument when issued or negotiated to the holder does not bear such apparent
evidence of forgery or alteration or is not otherwise so irregular or incomplete as
to call into question its authenticity AND
2. the holder took the instrument
i. for value
ii. in good faith
iii. w/o notice that the I is overdue or has been dishonored or that there is
an uncured default w/r/t payment of another instrument issued as part of the
same series
iv. w/o notice that the I contains an unauthorized signature or has been
altered
v. w/o notice of any claim to the I described in 3-306 (property or
possessory right including claim to rescind the negotiation)
vi. w/o notice that any party has defense or claim in recoupment
described in 3-305(a) (real defenses, ordinary defenses, claims in
recoupment)
C. Overdue and Irregular I’s
1. Irregular 3-302(a)(1)
2. Overdue – does NOT mean its not enforceable, just that defenses
can’t be stripped in favor of a HIDC
a. checks 3-304(a)(1), (2)
i. Dishonor of checks 3-304(a)(1) - overdue on the day after demand for
payment is duly made (check is a demand I)
When a check is dishonored, 3 options (payee gets check back so they can
be a holder and sue on the I)
call payor to get payment
wait and present the check again
send the check to a collection agency
bank marks dishonored (bounced) checks “NSF” in red to give notice
that the check has been presented and is thus overdue (collection
agencies are never HIDCs for this reason)
stamp makes sure no one can ever be a HIDC – otherwise wouldn’t
know that it had been presented and payment refused
ii. (a)(2) checks are otherwise overdue 90 days after its date
b. Demand notes 3-304(a)(1), (3) (Miller v. Race – “PTO Finney or bearer”)
i. (a)(1) – overdue day after demand for payment is duly made
ii. (a)(3) – if the I is NOT a check, when the I has been outstanding for a
period of time after the date which is unreasonably long under the
circumstances (in light of nature of I and usage of trade)
c. Notes payable at a definite time
i. in installments 3-304(b)(1)
Note is overdue while in default (until cure), or once it has been
accelerated
Definitions
default – you miss one payment
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arrears – how much you owe in back $
cure – payment plus interest or fee
acceleration – pay entire amt. immediately (may be required by terms
of the note after in default for a certain period)
ii. lump sum 3-304(b)(2)
overdue the day after its due date
3. Period of Limitation
a. When the I becomes unenforceable
i. 3-118(a) – notes – w/in 6 yrs after stated due date or date of acceleration
ii. 3-118(c) – checks – 3yrs after dishonor, or 10 yrs after date of draft
b. what if check says “void after 180 days”? obligation is still enforceable, just an
instruction to bank not to pay, usually they pay anyway
4. Example – S issues note to B for $6500 to cover potential problems w/ house payable
in 75 days; they have a side agmt the if repairs cost less than $6500, S will pay only
the actual expenditures. Actual expenditures = $4200. B sells note to for $3000 5
months later. How much can recover?
a. if is HIDC, he can get $6500 (the additional agreement is a defense that gets
stripped)
b. took in good faith and for value BUT it was overdue (more than 75 days had
passed), so is not a HIDC and can only recover $4200
c. S shouldn’t have issued this note – should’ve made an ordinary K instead
5. Example – Maker issues note to Payee. Payee gives note to Bank only for them to
collect payments while Payee is at war, indorses it in blank at Bank’s insistence.
Maker stops paying, Bank sells the note to Purchaser. Purchaser knew that 4
payments had been missed, but didn’t know about the circumstances by which Bank
acquired note. Payee comes back and sues Purchaser to reclaim the note.
a. Payee has a 3-306 claim for ownership of the note
b. if Purchaser is a HIDC, Payee cannot reclaim the note
c. Purchaser took for value, in g.f., is a holder BUT note was overdue b/c maker had
defaulted at time of purchase
D. Value
1. Defined
a. 3-303(a)(1) HIDC bought the I
i. promise of performance to the extent it has been performed
merely promising to pay isn’t enough – need to actually pay before value
is given
b. 3-303(a)(3) HIDC took I as payment for a debt
i. giving up a claim to the underlying obligation for a claim on the I
c. NOT receivers of gratuitious transfers, finders, thievcs
d. must get the value before you get notice, act in bad faith, whatever else might
make you not a HIDC
2. Consideration 3-303(b)
a. VALUE is needed to be a HIDC (and is also sufficient as consideration)
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b. CONSIDERATION is a defense someone liable on a note might make
i. executory promise can be consideration, but never value (until it is
performed)
3. “partial” HIDC status 3-302(d) + cmt 6
a. Holder may exert rights of a HIDC to the extent of % he’s paid
b. Ex – Note for $1000 by Maker to X, H agrees to buy it from X for $900 (at a
discount), he pays X $600, Maker calls H and asserts a defense, how much can H
recover? 600/900 = 2/3 = 66%, 66% of $1000=$660 (If M had no defenses, H
could’ve collected the entire amount $1000)
4. Application of “VALUE” to Depositary Banks
a. Depositary Bank
i. 4-105(2) – Depositary Bank is the first bank to take an item (even if it
is also the Payor bank) unless the item is presented over the counter for
immediate payment
ii. Options for dishonored checks – what rights if you deposit a check and
it is returned to Depositary Bank unpaid?
revoke credit given to depositor 4-214(a)
if they give provisional credit and don’t get paid for it, can charge back
or get refund from the customer
must act by midnight deadline after they get notice of dishonor from
Payor bank or reasonable time thereafter
(1) if longer, must pay damages caused to Payee
may be impractical for bank if no $ in acct
enforce check against Drawer 3-301
Can Bank enforce the I? – YES, holder
(1) 4-205(1) bank automatically becomes a holder when you
deposit the check, whether or not you endorse
Can Drawer assert any defenses against the Bank? – Bank can be a
HIDC if 3-302 is met – NEED TO GIVE VALUE
b. 4-211 – Bank gives value to the extent it has a security interest in the item
i. Security Interest in Deposited Checks
banker’s lien (CL)
by agreement w/ customer (Art 9)
Bowling Green v. State Street Bank – BG uses check to pay BowlMor
for equipment, BM deposits the check in SSB (knowing they will
never deliver) and goes b.r. BG sues SSB alleging check is held in
constructive trust b/c BM acted fraudulently. SSB says it’s a HIDC so
no defenses. BG says not a HIDC b/c they gave credit for the check
AFTER they knew BM was in b.r. (notice of possible defense). Ct
says they got a Security Interest before they made the credit b/c they
had an Agreement w/ BM!
for credit given
4-210(a) – bank has a security interest in deposited item to the
extent that credit given by the bank for the item has been w/drawn
by the customer or applied by the bank to set off a debt owed
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(1) FIFO rule – says which of your money you’re w/drawing –
FIRST IN, FIRST OUT
(2) Problem – Bob has $4K in his bank account. On 11/2 he deposits
a $5K check. His bank balance is now $9K.
(a) Does bank have a security interest in the check? NO – it hasn’t
been w/drawn at all yet
(b) On 11/3 Bob w/draws $4K. Does he have a security interest in
the check now? NO – FIFO rule says he w/drew his original
$4K, not any of the money from the check
(c) On 11/4 Bob makes a $6K cash deposit, his balance is now
$11K
(d) On 11/5 Bob w/draws $5K. Do they have a security interest
NOW? YES, FINALLY
(e) On 11/6 bank receives notice of dishonor for the Nov 2 check.
What should they do? REVOKE CREDIT IMMEDIATELY
under 4-214(a) (he still has $6K in the account)
(f) Bob immediately w/draws his $6K, spends it, and becomes
insolvent. Can Bank go after the Drawer of the 11/2 check?
YES – Bank is a Holder under 4-205(1)! Can Drawer assert
his defenses against Bank? NO – Bank gave VALUE so they
are a HIDC!
Laurel Bank v. CNBank – MAJORITY VIEW = even revocable credit
is value - Maisto’s acct w/ LB is overdrawn by $21K. He gives LB a
cashier’s check for $3500, they use it to set off some of the overdraft,
the check is then dishonored b/c the issuing bank (CNB) says the
consideration Maisto gave when buying it failed. LB says it is a HIDC
and thus CNB can’t assert the defense. Ct says the credit LB gave IS
VALUE (even though all they did is change the #s on their books) and
thus LB is HIDC
Graybar v. Marine Midland Bank – MINORITY VIEW (NY) -
Graybar pays Dynamics, Dynamics deposits in MMB, dishonored,
MMB sues Graybar. Graybar wants to assert a defense, MMB says
they can’t b/c it is a HIDC b/c it gave value by giving revocable credit
to Dynamics. Ct says NOT VALUE b/c it was a unilateral act by
MMB and b/c it was revocable (NY had abolished banker’s lien, so no
security interest there)
E. Good Faith and Notice
1. Good Faith 3-103(a)(4)
a. honesty in fact AND
b. observance of reasonable commercial standards of fair dealing
c. (no cases, treatises suggest ex. bank buys $3K note for $500 w/ no good reason
given for the steep discount)
2. Notice 1-201(25-27)
a. (25) - actual knowledge, received a notice or notification, had reason to know
based on facts and circumstances
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b. (26) – person notifies if they take action reasonably calculated to give the other
actual notice; you receive notice when it comes to your attention or is delivered to
you
c. (27) – notice is given to an organization if they would’ve gotten it had they
exercised due diligence
d. Kaw Valley v. Riddle – Riddle makes note payable to Co-Mac then asks them to
destroy it. Co-Mac instead assigns it to KVB and makes the payments on the note
itself. Co-Mac goes bankrupt, KVB sues Riddle for the remainder of the
payments. Riddle defends w/ “lack of consideration”, KVB says “HIDC”, Ct says
NOT HIDC b/c they had reason to know of the defense
i. 4 categories of reason to know
holder had info from the transferor
defense appears in accompanying document
due date passed, forgery, etc.
business practices lead to constructive AGENCY (ie close relationship b/t
transferor and holder) (this is the reason Ct. uses for KVB)
VI. HIDC Doctrine & Consumer Transactions
A. 2 Types of Consumer Financing w/ Promissory Notes
1. Seller Financed (ex – Kaw Valley)
note note
Consumer Merchant Bank/Finance Co.
goods $
2. Non-Seller Financing (Independent Lender)
$ for purchase $
Lender Consumer Merchant
note goods
B. If there’s a problem w/ the goods/services, can Consumer just stop
paying on the note? 3 Obstacles that require consumer to keep paying even
though no goods/defective goods
1. HIDC Rule (seller financing) - strips defenses if the K is an NI
2. Waiver Clauses (seller financing) - “I will not assert any claims against any assignee
of this K”, works whether or not an NI
3. Non-privity (non-seller financing) – can’t assert defenses against the bank b/c they
aren’t a party to the transaction
C. 3 Consumer Protections
1. UCC
a. 2-302 – Unconscionability / Void against Public Policy (Unico)
i. defeats Waiver Clauses
ii. minority view
b. Close Connectedness Doctrine – all states have adopted this
i. Merchant and Assignee are so closely connected that ct will view the
assignee as being a party to the original K
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ex - Merchant sells all its notes to Assignee, Assignee determines the K
terms, Assignee examines Merchant’s books at will, Assignee exists only
to buy notes from Merchant
ii. Unico v. Owen (the Record case) – Seller financing case. Owen signs K
and promissory note w/ Universal to buy albums. Universal sells the K and
note to Unico, Universal goes bankrupt and stop delivering, Owen stops
paying, Unico sues to get rest of $. Owen argues failure of consideration,
Unico says HIDC and waiver clause. Ct says (1) close connectedness doctrine
means Unico is not HIDC; (2) waiver clause is void against public policy
2. FTC – applies only to consumer Ks for goods or services (not home loans,
educational loans)
a. Seller Financing 16 CFR 433.2(a) – illegal for merchant to take note unless it
says “no stripping of defenses”
i. illegal unfair trade practice to take/receive a consumer credit K for goods
or services (a note) UNLESS it contains a legend stating that ANY holder is
subject to all claims and defenses which the Debtor could assert against the
Seller (in at least 10 pt boldface)
ii. HIDC doesn’t apply to strip defenses b/c note itself says so
b. Non-seller Financing 16 CFR 433.2(b) – merchant bad if it takes $ from a
purchase money loan, unless note to lender contained legend
i. illegal unfair trade practice to accept money from consumer if consumer
borrowed the $ in a purchase money loan and the note didn’t contain legend
ii. applies ONLY to Purchase Money Loan – 16 CFR 433.1(d)
Purchase Money Loan if (1) Merchant referred Consumer to Lender OR
(2) Merchant and Lender have affiliation by common control, contract or
business arrangement
c. Remedy – FTC must bring civil suit to rescind or enjoin
3. UCCC [Cf. UCC 3-302(g) – says HIDC is subject to UCCC where applicable] –
only adopted in 11 states and DC, all w/ major changes
a. 3.307 – creditor cannot take NI’s other than checks dated less than 10 days
after issuance
b. 3.404
i. (1) defenses not stripped, even for HIDCs
ii. (2) before asserting the claim against Bank, Consumer must make a good
faith attempt to resolve w/ Merchant
iii. (4) No Waiver Clauses
c. 3.405 – Non-Seller Financing - Lender is subject to defenses if Merchant is
somehow related to Lender
i. (a) Lender knows that Seller arranged the extension of credit by the
Lender for a commission or fee
ii. (b) lender is a person related to the Seller
iii. (c) seller guarantees loan or otherwise assumes risk of loss by Lender on
the loan
iv. (d) lender supplies Seller w/ the K document
v. (e) loan conditioned on consumer’s purchase or lease from a particular
seller or lessor
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vi. (f) Lender knows Seller has a bad reputation
VI. FDIC as a Protected Holder (HIDC)
A. NOT governed by the UCC (UCC is a STATE LAW, McCulloch v. Maryland)
1. Federal Statutes (acts of Congress)
2. Federal Common Law – Clearfield Trust (1943), fed CL can govern rights of US gov
w/r/t NI’s & Kimball, 3-prong test to see if Fed CL should follow UCC (see 3-102,
cmt 4)
B. FDIC (they sell lots of NI’s to other banks) as a protected Holder – 3 Doctrines used
by FDIC to say “we’re not subject to defenses” (First 2 are now questionable, look
at all 3 on exam)
1. D’Oench, Duhme Doctrine
a. you are estopped from asserting an agreement as a defense if the FDIC couldn’t
see the defense on the books when they audited
2. Federal HIDC Doctrine
a. FDIC IS ALWAYS A HIDC, and can pass their rights as HIDC on to others
under the Shelter Doctrine – even if the note is
i. overdue
ii. nonnegotiable
iii. notice of defenses, etc.
b. see 3-302 cmt 5 – FDIC is exempted from “bulk transfer rule” that prevents HIDC
status
3. 12 USC § 1823(e)(1)
a. intended to be partial codification of D’Oench, Duhme – says secret agreements
are not enforceable as defense against FDIC (agmts must be in writing, executed
at same time as acquisition of the asset, approved by BoD of the bank, continually
in official record of the bank to be enforceable against FDIC)
b. may displace the 2 CL doctrines (?) under O’Melveny (1994 – Sup Ct holds
that if there is a Fed statute, cts shouldn’t make Fed CL to supplement it)
i. Divall (8th Cir. 1995) – Divall issues note to MNB, MNB goes b.r., FDIC
is appointed receiver and sells note to Boatmen’s Bank, Boatmen’s sues
Divall for nonpayment. Divall argues lack of consideration (their directors
stole the $ and used it for personal stuff). Boatmen’s wasn’t a HIDC b/c there
was variable interest rate (old rule), tries to use Fed HIDC rule + Shelter
Doctrine to get HIDC rights. Ct concludes that under O’Melveny, § 1283
displaces Fed HIDC so state law applies and Divall wins
ii. note that 11th Cir. has specifically rejected Divall, several District Cts
have followed it
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Part 2 – Liability of Parties on Checks and Notes
LIABILITY OF PARTIES ON NI’s
(When enforcing, who can you sue?)
I. 4 Basic Liabilities on Checks and Notes – who’s liable?
A. Drawee Bank
1. NOT liable on ordinary check – checks cannot be enforced against the drawee
bank 3-408
a. 4-402 Drawee bank is liable for wrongful dishonor, but only for actual damages
2. YES on “accepted checks” including CERTIFIED CHECKS 3-413
a. 3-409(a) – acceptance is Drawees signed agreement to pay the draft as presented
written on the draft
b. (d) – certified check is a check accepted by the bank it’s drawn on
B. Drawer
1. YES on ordinary checks
a. Drawer must pay if check is dishonored 3-414(b)
2. NO on certified checks
a. if check accepted (certified) by bank, Drawer discharged 3-414(c)
C. Indorser
1. YES generally liable on checks 3-415(a)
a. EXCEPTIONS
i. NOT liable if indorser wrote “w/o recourse” when indorsing 3-415(b)
ii. indorser liable ONLY if presentment and dishonor occur w/in 30 days 3-
415(e)
iii. [3-415(c & d) no liability if notice of dishonor is req’d and not given, no
liability if check certified by bank after indorser indorsed]
2. Endorser who pays on the I can enforce it against any earlier endorser OR
against the Drawer
a. Obligation of Drawer to pay is owed to … indorser who paid the draft under 3-
415 - 3-414(b) last sentence
D. Transferor
1. If you transfer for consideration you make 5 warranties to transferee (and, if
transfer by indorsement, to any subsequent transferees) EVEN IF YOU
DIDN’T NEGOTIATE the I 3-416
a. Transferor is person entitled to enforce
b. all signatures are authorized and authentic
c. no alterations
d. not subject to defense or claim in recoupment assertable against the Transferor
e. Transferor has no knowledge of any insolvency proceeding of Maker, Drawer,
Acceptor Bank
2. Limitations
a. ONLY if you transfer for consideration (not gratuitous transfer)
b. negotiations count as transfers
c. if you transfer by negotiation, the warranty is made to ALL SUBSEQUENT
TRANSFEREES!
d. knowledge is irrelevant to all but the last one (insolvency)
e. you CANNOT disclaim warranties on checks; you can disclaim them on notes
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3. Problem
note – PTO Patience w/o recourse /s/ Patience
Morris Patience Helen
(claiming fraud by Patience)
$
a. can Helen enforce? YES – she’s a holder
b. can she enforce against Patience?
i. Patience is NOT liable as an indorser b/c she wrote “w/o recourse”
ii. she IS LIABLE for breach of TRANSFER WARRANTIES (that there are
no claims or defenses on the I that Patience, the warrantor, is subject to)
4. Disclaimer of Transfer Warranties
a. can disclaim transfer warranties on any NI except a check by writing “w/o
warranties” 3-416, cmt 5
II. Checks Sold by Banks
A. Bank Checks
1. Cashier’s Check
a. “Citibank, PTO Bob $20K, /s/ Citibank” – check that bank draws on itself at
behest of customer
b. draft on which DR and DE are same bank 3-104(g)
2. Teller’s Check
a. “Citibank, PTO Bob $20K, /s/ Bank of America”
b. draft drawn by one bank on another bank 3-104(h)
3. Money Order (NOT A BANK CHECK)
a. not clearly defined
b. not considered a check drawn by the bank (you are the DR) – like opening a
checking acct for a single check
B. Remittur Transactions – how to identify the Payee of a Bank check
1. Option 1 – Chamner buys cashier’s check payable to himself, indorses it to Mark
Quartermaine
a. bad for Chamner b/c he incurs indorser liability if Bank arbitrarily refuses to pay
b. bad for Mark b/c concerned that Chamner’s indorsement is forged
2. Remittur Transaction – MORE COMMON WAY – Chamner buys a cashier’s
check payable to Mark Quartermaine and then delivers it to him
a. Chamner is the REMITTUR of the NI
b. 3-103(a)(11) – remittur is a person who purchases an I from its issuer where I is
payable to someone else
C. Merger Rules re/ Discharge of Underlying Obligation
1. Bank Checks (certified, cashier’s, teller’s)
a. if taken for an obligation, discharged SAME AS CASH 3-310(a)
2. Personal Checks, Notes
a. debt is suspended (cannot be enforced) until check is paid or dishonored 3-310(b)
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b. if dishonored, Holder has a choice b/t enforcing EITHER the original
obligation OR the NI (can sue for the amt of the check or the amt of the debt)
3-310(b)(3)
D. Problems
1. B purchases cashier’s check from Bank A, gives it to S, S gives her the goods, Bank
A is shut down by regulators before it pays the cashier’s check
a. if the check is payable to B and indorsed to S
i. S has a cause of action against B on the dishonored check b/c B is
ENDORSER
ii. S cannot enforce the underlying obligation against B b/c it was discharged
3-310(a)
b. what rights if payable to S?
i. S cannot enforce check against B b/c B has not endorsed, is not DR, has
been discharged on underlying obligation (3-310(a))
c. S has claim against Bank A (it’s the Drawer) either way
2. B purchases Teller’s check issued by Bank A and drawn on Bank C payable to S;
Bank C refuses to pay the check b/c Bank A has been shut down
a. S has a claim against Bank A as Drawer (FDIC Insurance will cover it up to
$100K)
b. S has no claim against Bank C b/c they’re the Drawee
c. S has no claim against B because he didn’t endorse and the underlying obligation
was discharged through the merger doctrine
3. B issues a personal check to S to pay for goods, check bounces
a. S can enforce the check against B as Drawer
b. S can alternatively enforce the underlying K claim for the goods b/c merger
doctrine only suspends the debt when check is not a bank check
III. Stop Payment Orders
A. Personal Checks
1. Requirements
a. no formal procedure specified (oral, written, whatever)
b. 2 Requirements 4-403(a) – right to stop payment
i. describe the check w/ reasonable certainty (check #, acct #, maybe amt)
ii. do it promptly enough that bank has opportunity to act on it
2. Drawer is STILL LIABLE on the check 3-414(b)
a. Stopping payment does NOT extinguish/discharge your liability
b. instruction to bank to dishonor check (Drawer is liable on dishonored check)
c. merely puts you in a better position in litigation b/c you have $ and goods
3. What if Bank IGNORES proper stop payment order?
a. bank cannot charge your account b/c payment is no longer authorized 4-401
b. if failure causes damages s/a bouncing other checks, bank must pay 4-403(c)
B. Bank Checks – NO RIGHT TO STOP PAYMENT
1. Bank is Drawer, so no right to force Bank to Stop Payment 4-403 cmt 4
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2. Can you ask the bank? – must have a valid defense to stop payment, otherwise it’s
wrongful / illegal
a. Bank can only assert its OWN defenses (s/a failure of consideration in Laurel
Bank)
b. Bank CANNOT voluntarily assert the defenses of the Drawer 3-305(c)
i. only way the instrument buyer’s defense can come up is if buyer is
impleaded in litigation against the bank
3. Consequences for bank – in their interest to pay the check
a. If Bank wrongfully refuses to pay cashier’s check or certified check, stops
payment on teller’s check or refuses to pay dishonored teller’s check the person
enforcing gets expenses including atty fees, lost interest, consequential damages,
amt of check 3-411(b)
b. If Bank pays person entitled to enforce, they get full discharge, even if they
know of a defense 3-602(a)
C. Buyer’s other option is to sue to Rescind the Transaction
1. 3-202(b) – can go to ct to rescind the transaction w/ the person you gave the cashier’s
check to based on fraud, misrepresentation, etc. (outside of UCC reasons)
D. Problem
1. B get’s cashier’s check from Bank A to buy goods from S (PTO Seller), gives it to S,
S never delivers the goods
a. immediately before B delivered the check to S, B was the OWNER and remittur
b. Was he entitled to enforce? – disagreement
i. B isn’t a holder or a loser
ii. ct’s disagree on whether he’s a non-holder in posession w/ rights of a
holder
c. Equitably, B should be able to get his money back on the cashier’s check if he
changes his mind and doesn’t want to give it to S (UCC doesn’t address this)
d. once B gives it to S, if S refuses to return it to him does B have a claim that can be
asserted against S? – B can seek RECISSION b/c S wrongfully failed to deliver
the goods 3-202 (only if S hasn’t collected on the check yet)
e. Can B ask Bank A not to pay the check? B has no right to stop payment (not the
drawer), Bank A cannot assert B’s defense so if it dishonored it would be
wrongful and thus liable for damages
IV. Lost Instruments – Bank Checks
A. Losers can enforce 3-309
1. must show were in possession and entitled to enforce and you lost it (can’t enforce
b/c lost or in wrongful possession of unknown/unavailable person)
2. must provide adequate protection to guard issuer against double liability
B. Lost Instrument Bond (only option on personal checks)
1. no right to buy a Lost Instrument Bond – have to get someone to sell to you
2. they’ll only sell if
a. you have good credit (ability to pay them back if they pay on the bond)
b. you haven’t endorsed the I in blank
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c. you pay 2-5% (never a problem – you can pay out of the money you’ll get on the
I)
3. If you can’t get one – 3-118 says no effective period of limitations on cashier’s /
teller’s / certified checks, so escrow can never be sufficient protection
a. homeowner’s insurance may cover it
b. Diaz – Mrs. Diaz loses cashier’s checks for $37K, her entire life savings. No one
will sell her a bond b/c she could never repay if a HIDC showed up and surety co
had to pay on the bond (this $ is everything she’s got). Ct says result is harsh b/c
Bank gets a windfall, legislature needs to change the law (case is PRE-
REVISION of UCC Art 3)
C. 3-312 Revised Article 3 – Declaration of Loss for Bank Checks
1. Claim / Declaration of Loss
a. affidavit declaring you had a cashier’s check, teller’s check, or certified
check and lost it (not a transfer) 3-312(a)(3)
2. 90 day enforcement pd. 3-312(b)(1-4)
a. until check is 90 days old, the bank can pay whoever shows up that’s entitled to
enforce (no duty to notify claimant of payment)
b. after 90 days the bank is discharged on the I and must pay the claimant if they
haven’t paid anyone else entitled to enforce already
c. if someone else entitled to enforce shows up after 90 days, their only claim is
against Claimant, not against the Bank (Bank’s obligation was discharged when
they paid claimant)
3. If HIDC shows up, Claimant must pay them or reimburse the bank if
bank pays them 3-312(c)
4. Problem #1
a. 1st Bank issues $90K cashier’s check to Claimant, its stolen by Thief
i. she could enforce udner 3-309 as loser, but not creditworthy and it costs a
lot
ii. she could file a Declaration of Loss under 3-312 – for first 90 days, no
effect
b. W/in the 90 days, Thief forges her indorsement, deposits at 2dBank, 1stBank pays
2dBank
i. SHE CAN STILL GET HER $ AFTER 90 DAYS! why? – 1stBank paid
someone NOT ENTITLED TO ENFORCE (it was a forgery, 2dBank was not
a holder – ONE FORGED ENDORSEMENT AND ITS ALL OVER!!!!!!!
(never enforceable again, by anyone who’s title traces to the forger)
ii. 1stBank does have a breach of warranty claim against 2dBank (warranted
it was a person entitled to enforce and that all signatures were valid)
iii. 2dBank has a claim only against Thief
c. what if she’d endorsed in blank before it was stolen?
i. Thief and 2dBank are then holders, 1stBank discharges its obligation
when it pays 2dBank, Claimant gets nothing
ii. if she’d bought a Lost Instrument Bond, she’d have gotten the $90K but
then had to pay it back when the Bond was collected on + she’d be out the
cost of the bond
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d. What if check was issued in January, 2dBank didn’t get it until May?
i. 90 days have passed, 1st Bank has already paid Claimant, so 2dBank’s
only claim is against Claimant (not bank)
ii. 2dBank could sue her on indorser liability, but it extinguishes after 30
days
iii. 2dBank can sue under 3-312(c) BUT C is only obligated to pay 2dBank IF
they are a HIDC (this check was taken w/ notice it was overdue so no HIDC)
V. Accomodation Parties
A. Anomolous Indorsers
1. indorse solely for purpose of incurring liability (not to negotiate)
2. if Maker defaults Anomolous Indorser is liable to Holder 3-415(a)
3. If Anomolous Indorser pays, he has a claim against the Maker 3-412
B. Ordinary Co-makers
1. liability to holder is joint and several between co-makers (both are liable for full
amount of obligation) 3-116(a); 3-412
2. right to contribution from other co-makers 3-116(b)
a. if you pay more than your fair share you get amt back from others so you only
pay fair share
b. you must have paid more than your fair share and the person you’re suing must
have paid less than theirs
C. Accomodation Co-Makers (Sureties) 3-419(a) – get no direct benefit from the
transaction, sign only to incur liability (ask – will both parent and student own the
car, or just student?)
1. liability to holder if Maker defaults 3-419(b)
2. right to reimbursement of full amount paid from “accomodated” co-makers
(principal debtors) 3-419(e)
a. accomodation co-maker (surety) is also not liable to accomodated co-maker
(principal debtor) for contribution or reimbursement
3. notice of accomodation 3-419(c)
D. Corporate Accomodation
1. If X owns 50% of corp stock and signs note along w/ corporation, is X a surety?
a. YES – no direct benefit
b. what if he owns 100%? still Surety/Accomodation Co-Maker (no direct benefit)
E. Fithian v. Jamar – R and W have a business, need a loan. Bank makes their wives, J and
C respectively, sign too. Bank also makes W’s parents, B&M sign. R signs separate
agreement w/ W assuming W’s portion of the debt. Who owes who what?
1. C owes R – NOTHING – she is a surety, so she’s liable only to the holder, never to
the principal debtor
2. C owes J – CONTRIBUTION – they are co-makers w/r/t each other (neither is a
surety or principal debtor for the other) – J can recover anything she pays over 25%
of the total debt
3. W owes R – NOTHING – sep agreement absolves all liability of W to R (they are co-
makers, so ordinarily right of contribution)
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4. W owes J – REIMBURSEMENT – she is a surety, so she gets back 100% of
whatever she pays
VI. Liability on Signatures – Represented Parties
A. Liability of Represented Person (usually a corporation) – Liable to
extent that Representative signing was authorized under agency law 3-
402(a)
1. Actual Authority
2. Inherent Authority
3. Apparent Authority (based on Principal’s representations to 3p)
4. If no authority at all, no liability at all
B. Liability of Representative (agent – employee, officer)
1. If Agency is Shown NO PERSONAL LIABILITY 3-402(b)(1)
a. unambiguously indicate signing in representative capacity
b. /s/ John Smith, Treasurer, for GWU
2. If Agency NOT Shown 3-402(b)(2)
a. PERSONAL LIABILITY to HIDC
b. NO PERSONAL LIABILITY TO NON-HIDC IF you can show by parol
evidence that original parties BOTH understood the representative capacity and
intended no personal liability
3. On Checks 3-402(c) + cmt 3
a. no need to indicate representative capacity if check names the
REPRESENTED party and is drawn on the ACCT of the Represented party
b. no personal liability if above is satisfied
4. If you have NO AUTHORITY OF ANY KIND, you are PERSONALLY LIABLE
b/c you can’t represent and bind
C. Wang v. Wang – Pre-Revision of Art 3 – Schramm signed as representative of a Co-op
but didn’t so indicate on the note. Pre-Revision code does not allow him to intro parol
evidence, so he is personally liable b/c Agency Not Shown (he gets off b/c he’s an
accomodation co-maker and there’s a problem w/ the collateral impairment)
D. Jemaros v. Serna – Pre-Revision of Art 3 - Serna signs check on behalf of Jemaros Inc.
w/o indicating representative capacity. Old Code – he’s personally liable b/c he signed
his own name. New Code – he’s not personally liable b/c of 3-402(c) check names
represented party and drawn on their acct and he’s an authorized representative. Ct uses
Old Code b/c substantive laws are not retroactive.
VII. “Payment in Full” Checks – Accord and Satisfaction
A. Accord & Satisfaction = K to settle a disputed claim (ex – settlement of a
lawsuit)
1. can make an accord and satisfaction by writing “paid in full” on the memo line of a
check – if Payee gets paid, they’ve made an Accord and Satisfaction if 3-311 is met
2. if you cash a payment in full check, you’ve made an A&S – if you don’t want to do
that, have to send the check back
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B. When Effective as Accord and Satisfaction 3-311(a), (b)
1. 4 requirements
a. given in good faith
b. claim is subject to bona fide dispute (unliquidated)
c. person taking check must obtain payment (check doesn’t bounce)
d. conspicuous statement of “payment in full” or words to that effect
2. If Payee gets paid on it, claim is discharged
C. Dispute Offices
1. Creditor can mandate that Payment in Full checks be sent to a special office (so
they don’t slip through the automated payment system) 3-311 (c)(1)
a. send to wrong office, NOT EFFECTIVE as A&S
2. even if you sent to wrong office, EFFECTIVE as A&S if they have ACTUAL
KNOWLEDGE of the “Payment in Full” language 3-311(d)
D. Alteration 3-407(b)
1. can you just scratch out the payment in full language? NO
a. unauthorized alterations are NULLITIES – if you don’t want to make an A&S
you can’t cash the check
E. Reservation of Rights 1-207(2)
1. writing “All Rights Reserved” doesn’t negate the “Payment in Full” language on the
check – if you cash it, you’ve made an A&S
F. McMahon Foods(assholes) v. Burger Dairy – Burger Dairy takes a “Payment in Full”
check, cash it after crossing out that language. The alteration was ineffective, but the
check did not act as an A&S because it was not tendered in good faith
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Part III – Check Collection System
CHECK COLLECTION SYSTEM
I. Intro to Check Collection System
A. “Pay now, take it back later” system – checks get paid at the intermediary bank level at
night, and accounts aren’t checked at the Payor Bank until after the next morning
1. If everything okay, when Payor Bank gets the checks the next morning they debit
their customer’s accounts and send out the cancelled checks
2. if Not Sufficient Funds, problem – they have to get their money back fr. the
Intermediary bank and on down the line
B. Settlement 4-104(a)(11)
1. Payment, whether provisional or final
2. provisional – can be taken back later
C. Midnight Deadline 4-104(a)(10)
1. Midnight on the next banking day
2. Ex – Payor Bank receives check on Monday morning, midnight deadline is Tuesday
night at Midnight
3. Ex – Payor Bank receives check Friday morning, midnight deadline is Monday at
midnight
D. 4-108(a) – the Banking Day ends at 2:00 pm
1. if check arrives at 3pm on Monday is deemed to be received on Tuesday, so midnight
deadline is Wednesday night at midnight
E. Both Payor and Depositary bank have the right to Revoke Settlement
1. Payor Bank must make it’s midnight deadline – strict
a. If misses the deadline, ACCOUNTABLE for entire amount of the check
(can’t revoke)
2. Depositary Bank – has longer “reasonable time”. Not so strict
a. Liable ONLY for damages (can ALWAYS revoke)
II. Payor Bank’s Midnight Deadline
A. Payor Bank must revoke Settlement by dishonoring the check and returning it to
the Intermediary Bank prior to its Midnight Deadline 4-301
B. If Payor Bank misses the Midnight Deadline, it’s ACCOUNTABLE for the amount
of the check (CAN’T REVOKE SETTLEMENT ANY MORE) (whether properly
payable or not) 4-302
1. Excused Lateness 4-109(b)
a. can Revoke Settlement by sending it back after the midnight deadline only in
truly exceptional circumstances (war, emergency, computer failure,
communications breakdown)
b. must use such diligence as the circumstances require to get it back as fast as
possible
2. Blake v. Woodford Bank – Woodford bank held checks beyond the midnight deadline
before dishonoring them. Payee sues saying Woodford is accountable. Woodford
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says no b/c it’s “excused lateness” – Xmas holiday heavy volume, bookeeper was
sick, posting machine broke, they thus didn’t get the checks processed before courier
arrived. Ct says not excused b/c all those were forseeable and Woodford should’ve
tried harder to get the checks sent back.
III. Depositary Bank’s Midnight Deadline
A. Depositary Bank gives credit to Payee, Payor Bank revokes their settlement w/in their
midnight deadline. Depositary Bank can revoke credit given to Payee. When must they
do this by?
B. Depositary Bank can ALWAYS revoke credit
1. should act before midnight deadline after they receive NOTICE of dishonor
from Payor Bank or w/in longer reasonable time 4-214(a)
2. if they miss this deadline, only liable to Payee for damages caused by the delay
3. same rule applies to all Intermediary Banks (collecting banks)
C. Essex v. Industrial Bank – Bank promises credit to Essex for deposited checks. The
checks bounce, Indus receives notice of dishonor on 4/6, revoke $100 credit given and
mail notice on 4/7. Essex receives notice on 4/11. Ct says Bank made it’s midnight
deadline by sending out the notice before midnight on 4/7. When Essex receives the
notice is irrelevant (calling them is customer service, not required – mail is sufficient).
NOTE – if they had unreasonably delayed, Essex still couldn’t get the $120K value of the
checks, only damages caused by delay in notice.
IV. Negligence
A. Depositary Bank has duty to exercise ordinary care in sending the check
onward for presentment 4-202(a)(1)
1. Example – Payee deposits check. Depositary bank puts it in a drawer and doesn’t
find it until 2 months later, at which point they send it on. In the interim, Maker
becomes insolvent. Payor Bank returns it (w/in their midnight deadline) for
insufficient funds.
a. Depositary bank was CLEARLY negligent
b. they can still revoke any credit given to Payee
c. here, damages would be full amount because Maker wasn’t insolvent then and
thus full amount could’ve been realized
B. Damages for breach = damages caused by the failure to exercise due care
1. Amount of Damages – Amount that Couldn’t be Avoided
V. Contradictory Terms 3-411
A. If Instrument contains contradictory terms
1. typewritten prevail over printed
2. handwritten over either typwritten/printed
3. words prevail over numbers
VI. Encoding Warranties
A. Depositary Banks encode the amount of the check in MICR when they receive it – what
if they get it wrong?
1. Encoding Warranties – 4-209(a)
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a. Encoder warrants to any subsequent collecting bank and Payor bank that
amount encoded is correct amount
b. 4-209(c) – can get damages resulting from breach, expenses, and lost interest
incurred
2. If Payor Bank misses their midnight deadline b/c of a miscode, they are STILL
ACCOUNTABLE for the amount of the check – they just have a warranty claim
against the Encoder
3. First Bank of Boston v. Fidelity – Pre-Revision of UCC - Fidelity fails to return
checks for NSF by midnight deadline b/c the amount encoded on the check by 1st
Bank was wrong ($10K – check was really for $100K) and the acct had $10K in it,
but not $100K. Ct says that face amt of the check is the actual amount, BUT
Depositary Bank (1st Bank) is ESTOPPED from asserting the higher amount if their
encoding error was relied on by the Payor Bank (Fidelity)
4. Example 1 - $100K check encoded by Depositary Bank as $10K. DB gets $40K
additional out of Maker, then Maker has no more $. PB is thus fucked – they’re
accountable for the entire amt of the check b/c DB miscoded, and they are liable for
$90K they can’t get out of their customer b/c he’s insolvent.
a. DB vs. PB – 4-301 claim for amount of check for missing midnight deadine
i. amount of check – amount DB has received = 100 – (10+40) = 50
b. PB vs. DB – 4-209 claim for breach of encoding warranty
i. amt PB paid DB + amt PB owes DB – amt PB recovers from Drawer = 10
+ 50 – 10 = 50
c. liabilities cancel out
5. Example 2 - $100K check encoded for $110K
a. DB v. PB (4-301) = amt of check – amt DB has received = 100 – 110 = -10 (no
liability)
b. PB v. DB (4-209) = amt PB paid DB + amt owed by PB to DB – amt PB recovers
from Drawer = 110 + 0 – 100 = 10
VII. Check Truncation / Electronic Presentment
A. Check Truncation
1. changes the last step – Payor Bank doesn’t send cancelled checks back to Drawer,
instead sends a statement giving check numbers and amounts
a. doesn’t radically alter the system
2. 4-406(b) Bank has duty to provide legible copy of item on request (s/a to verify that a
payment was sent or figure out whether a check is really yours)
B. Electronic Presentment
1. 3-501(b)(1) presentment by electronic means is permissible under UCC
2. 3-501(b)(2) – Payor Bank has right to INSIST on physical presentment
VIII. Funds Availability – When must DB give credit to Payee?
A. UCC Rule – 4-215(e)(1) – Depositary Bank must give credit w/in a
reasonable time
1. if Depo B has rec’d provisional settlement, reasonable time has passed for revocation,
and credit hasn’t been revoked
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B. Reg CC Schedule – 3 Types of Checks + Exceptions
1. Low Risk + 1st $100 229.10(c) - NEXT DAY
a. Low Risk Checks =
i. 4 Types of Government Checks
ii. Cashier’s Checks, Certified Checks, Teller’s Checks
iii. “On Us” checks
b. First $100 of ALL CHECKS (See, e.g., Essex case)
c. credit given by start of business day after the banking day of deposit (deposit on
Monday, credit by start of business on Tuesday)
2. Local 229.12(b) – 2d DAY
a. drawn on Bank served by same Federal Reserve Bank as the Depositary Bank
b. Deposited on Monday, credit by start of business Wednesday
3. Non-Local 229.12(c) – 5th DAY
a. drawn on bank NOT served by same Federal Reserve Bank
b. Deposit on Monday, credit by start of business NEXT Monday (weekends aren’t
banking days)
4. Exceptions 229.13(b – f), (h) – REASONABLE TIME
a. (b) checks greater than $5000, the funds availability schedule applies ONLY to
the first $5000
b. (c) schedule DOES NOT APPLY for checks that have bounced once and are
being re-presented
c. (h) – the UCC “reasonable time” provision applies to all the exceptions
C. Expeditious Return Requirements – Payor Bank MUST return checks
expeditiously, so Depositary Bank will know whether the check is dishonored (hopefully
before it gives credit)
1. Expeditious Return Tests 229.30 – what is “expeditious enough”
a. 2 Day / 4 Day Test (M W/F)
i. sending back by any method that would ordinarily get the check to the
Depositary Bank by 4pm on the 2d day after (local checks) or 4th day after
(non-local checks) the check was presented to the Payor Bank
probably precludes merely mailing the check back to the Depositary Bank
b. Forward Collection Test
i. add a new tape strip at the Payor Bank w/ new MICR code, sending the
check back through the regular collection system
“2” in position 44 of MICR line lets Depositary Bank know that it’s a
returned check when it gets back to them
2. Notice (check > $2500) 229.33(a)
a. Payor Bank must give NOTICE OF DISHONOR to the Depositary Bank by 4pm
on the 2d day for all checks over $2500
i. any reasonable means – copy of check, writing, phone call
ii. Expeditious Return will NOT always get the check back in time –
Depositary Bank may have to give credit w/o knowing (and depend on their
ability to revoke) – this provision addresses that problem
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3. Effect on Midnight Deadline 229.30(c)
a. General Rule – Payor Bank must STILL meet its Midnight
Deadline
i. not a pre-emption of Midnight Deadline, just an additional requirement
b. Special Extension
i. If Payor Bank misses its midnight deadline BUT use a method that
would ordinarily get the check back to the Depositary Bank by 4PM THE
NEXT DAY, Payor Bank is NOT accountable for the amount of the check
OR use highly expedited method of delivery, even if it wouldn’t get it
there the next day by 4pm
ii. First National v. Std. Bank & Trust – crook opens 2 bank accts, writes a
large check on each and deposits in the other. Check deposited in NBD,
presented to Std on Friday, Std’s Monday midnight deadline passes, Tuesday
morning NBD calls to say “we won’t honor the checks drawn on us”, Std
desperately wants to dishonor the checks drawn on it but has missed midnight
deadline SO they drive it over by 3:58PM and thus not liable under 229.30(c)
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Part IV – Fraud and Forgery in Connection w/ Checks
FRAUD / FORGERY OF NEGOTIABLE INSTRUMENTS
II. Intro to Fraud and Forgery
A. Forged Check = Forged Drawer’s /s/
1. Check is ENFORCEABLE, but against the forger, not against the person whose name
was forged 3-403(a)
a. Payee is a Holder, so is anyone they negotiate it to, BUT only enforceable against
forger
2. “Forgee” is not liable 3-401(a)
B. Forged Indorsement
1. MAKES THE CHECK UNENFORCEABLE – it’s still payable to the payee, so no
one after the forged indorsement can EVER be a HOLDER
C. Forged Signature is not effective as /s/ of the person whose name is used
1. “Forgee” is NEVER liable 3-401(a)
2. it IS EFFECTIVE as the signature of the Forger
D. Bank does NOT have to pay checks with forgeries (if they detect them); if bank does
pay the check how can they get money back - charge customer’s account or another
way?
III. Payor Bank’s Right to Charge Customer’s Account
A. Properly Payable Rule
1. Bank can ONLYcharge customer’s account for checks that are authorized by
customer 4-401(a)
a. Forged Drawer’s /s/ - not properly payable b/c not authorized
b. Forged Indorsement – not properly payable b/c customer said “Pay X” and bank
paid Y
B. Exceptions
1. Customer Negligence 3-406(a)
a. customer’s failure to exercise ordinary care in preventing forgeries
i. cmt 3 – Case #1 – employer keeps blank checks and rubber stamp
signature in same unlocked drawer
ii. Thompson Maple Products – TMP does NOTHING to prevent fake checks
then tries to assert “not properly payable, you can’t charge our account” when
the checks show up w/ forged indorsements. Ct holds them liable (they gave
blank slips to drivers, didn’t separate the duplicates to check them, gave the
drivers the resulting checks for delivery, and failed to maintain inventory
records)
b. negligence must substantially contribute to the forged signature – if so, customer
cannot assert that the check is not properly payable b/c of the forgery
2. Reporting Delay AND – customer has a duty to examine periodic statements for
forged drawer’s /s/ and report forgeries to the bank 4-406(c) (no duty to look for
forged indorsements)
a. Provable Loss – bank can prove that if customer had reported promptly they
would’ve been able to avoid the loss 4-406(d)(1)
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i. Ex – Bank knows who the forger was and could’ve collected, but now the
forger is insolvent
b. OR Same Wrongdoer - Customer liable for forged checks by same
wrongdoes paid AFTER customer had a reasonable time to inspect and report (not
to exceed 30 days) but BEFORE customer gives notice of the forgeries 4-
406(d)(2)
i. NEVER works for the FIRST CHECK!
ii. Storey Road Flea Mkt. – Ct applies 3-103(a)(7) in holding flea market
owners liable for repeated forged checks by their employee. They argued that
bank was negligent for not sight-inspecting the checks to discover the
forgeries.
C. Exception to the Exception – Customer can Claim Bank’s Negligence
1. If Bank was ALSO negligent in paying the check, loss is allocated between customer
and bank (3-406(b) for customer negligence, 4-406(e) for reporting delays)
a. 3-103(a)(7) – Ordinary Care by Bank
i. no requirement of sight-inspection of signatures on all checks
ii. Bank must follow its own procedures
iii. Bank’s procedures must comply w/ general banking usage
b. If they DO Manually inspect the check, need to look at whether they were
negligent in not detecting the forgery 3-103(a)(7)
i. i.e. if it’s a blatant forgery vs. a very good one
ii. looking only at “ordinary care” – bank’s “procedures” are irrelevant if
they do hand inspect it
IV. Payor Bank’s Right to Recover Mistaken Payments Arising
from Forged Signatures – Other Claims
A. Restitution – can Payor Bank get the $ back from the person they paid?
1. general rule 3-418(a)
a. yes, Payor Bank can get the $ back b/c they paid under mistaken belief that /s/
was authorized BUT
2. Price v. Neal exception 3-418(c)
a. cannot get the $ back if they paid someone who took the check in GOOD FAITH
AND FOR VALUE, or who relied on the payment to their detriment
b. Price v. Neal – Lee forges Sutton’s signature on draft ordering Price to pay
Ruding. Ruding sells the draft to Neal, who obtains payment from Price. Price
has to pay Sutton on the original debt as well, so sues Neal to get the $ (Lee is
hanged). Where Drawee makes mistake in payment, can Drawee get $ back on
theory of Restitution? NOT if person paid took the I in good faith and for value.
c. this does NOT mean that if you take a check in good faith and for value that you
automatically get paid despite forgeries – it just says that if you do get paid, you
can keep the $
B. Transfer Warranties - NO transfer warranties are EVER made to the Payor
Bank!
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1. when transferring an Instrument for value, you warrant that ALL
SIGNATURES ARE VALID (3-416(a)(2) when individuals transfer, 4-207(a)(2)
when banks transfer)
a. warranty applies to all subsequent transferees as well
2. NO ONE makes transfer warranties to the payor bank (checks are presented to
the payor bank, not transferred)
C. Presentment Warranties 3-417(a), 4-208(a)
1. When presenting an item for payment, you make 3 warranties
a. Presenter is a person entitled to enforce
i. if forged endorsement, NO ONE is entitled to enforce
ii. if forged drawer’s /s/, person is entitled to enforce (against forger, not
against person whose name was forged)
b. draft has not been altered
c. Presenter has NO KNOWLEDGE that /s/ of Drawer is unauthorized
2. Made both by actual presenter and ANY PRIOR TRANSFEROR
D. Conversion 3-420(a)
1. Check Stolen – whoever it was stolen from has a conversion claim
a. claim is against Thief and ALL SUBSEQUENT TRANSFERORS (including
Depositary Bank and Payor Bank)
E. Problem #1 – Forged Drawer Signature
1. Taylor steals Juliet’s checkbook, writes “PTO Taylor $100, /s/’Juliet’”. He takes it to
Bestfoods, signs his name as the endorser, they give him groceries. Bestfoods
deposits the check in Depositary Bank, who gets payment from Payor Bank. Payor
Bank then discovers the forgery …
a. can Payor Bank get $ from Depositary Bank?
i. Restitution? - No, DB took in good faith and for value (PvN exception)
ii. Presentment Warranty Breached? – NO
both Bestfoods and DB made presentment warranties
no breach b/c item not altered, there was no knowledge that drawer’s /s/
was forged, and BOTH DB and Bestfoods were Holder’s and entitled to
enforce against Taylor
iii. Transfer Warranty Breached? – NO, no one made a transfer warranty to
Payor Bank
2. loss rests with Payor Bank (they didn’t have to pay in the first place if they’d found
the forgery)
F. Problem #2 – Forged Indorsement
1. Drawer makes check out to Payee and gives it to him. Thief steals check, forges
Payee’s /s/ of indorsement, and deposits it at Depositary Bank. They get paid by
Payor Bank. Payor Bank then discover’s the forgery…
a. Can Payor Bank charge Drawer’s account? – NO, properly payable rule
b. Can PB get $ back from Depositary Bank?
i. Presentment Warranty Breached – YES
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both Thief and DB made presentment warranty that they are persons
entitled to enforce the check and they AREN’T (b/c of the forged
indorsement check is still payable to Payee)
c. Can DB get $ from Thief? – YES
i. breach of transfer warranty that all signatures are valid and authorized
d. Can Payee get anything? - YES
i. tort claim for CONVERSION against Thief, Depositary Bank, or Payor
Bank
ii. once Payee gets paid, Drawer’s account can be charged, eliminating
double liability (closes the circle)
V. Bank’s Right to Recover for OVERDRAFTS
A. Can Bank charge customer’s account for overdrafts? – YES
1. 4-401(a) – item is still properly payable even if it creates an overdraft in the account
B. Can Bank get money back from the person they paid? – YES, w/
exceptions
1. Restitution 3-418(b) – generally, yes the bank can recover if Restitution so
allows (watch for detrimental reliance and/or “discharge for value” payment to
creditor) BUT
a. must be payment BY MISTAKE (not an intentional extension of credit, as with
overdraft protection) 3-418(b)
b. bank cannot recover from someone who took the instrument in Good Faith
and for Value (Price v. Neal exception, 3-418(c))
2. Park Corp v. National Savings – National Savings pays a check to Park Corp before
noticing that the customer’s account had NSF. Sues to get the $ back. Park argues
that banks are not entitled to restitution (NO), it was a knowing extension of credit by
Nat’l (NO), they took it in good faith and for value (NO b/c they hadn’t shipped the
equipment yet), and that they detrimentally relied on the payment (NO b/c they acted
after they were notified of the request for $ back by Nat’l)
VI. Special Cases
A. Misnamed Payee
1. YES properly payable
2. Identity of Payee is determined by Issuer’s Subjective Intent 3-110(a)
a. Ex – you write “PTO Mark Quartarone”, Mike can get it paid and bank can
charge your account for it
b. Bank could NOT charge your account if some random guy named Mark
Quartarone found it and deposited it
3. Indorsement in either right name or wrong name is effective 3-204(d)
a. Bank can insist on indorsement in both names if they choose
B. Nominal / Ficticious 3-404(b)
1. YES properly payable
2. checks intended BY DRAWER to be payable to nominal / ficticious payees
a. ANYONE in possession is a holder (essentially a bearer instrument)
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b. ANY INDORSEMENT in the ficticious/nominal name is EFFECTIVE as a
NEGOTIATION to one who takes it in good faith and for value
3. payable to someone who doesn’t exist or who does exist but isn’t intended to have
any interest in the check
a. Ex – Treasurer wants to steal from his corporation, so he signs checks “PTO John
Smith $100” and “PTO Office Depot $100” and then indorses the checks w/
forgeries of JS’s and Office Depot’s signatures
i. Office Depot is a nominal payee, John Smith is a ficticious payee
ii. seems like they wouldn’t be properly payable b/c of forged indorsement –
that’s why this is a special case
C. Impostors 3-404(a)
1. YES properly payable
2. Issuer issues check to the impostor b/c they believe them to be someone else
a. if you hand a check to an impostor, it’s properly payable (you should check
id)
b. their indorsement in the name of the payee is EFFECTIVE as a valid
indorsement
3. Impostors are NOT merely people misrepresenting agency or authorization
a. “I’m Dean Young” vs. “I’m Greg Maggs, but I’m authorized to accept checks on
behalf of Dean Young”
b. Title Insurance Co v. Comerica – Rudy Nastor goes to FMNC/Title Insurance and
takes out a loan on his Mom’s house using a forged power of attorney. They give
him 2 loan checks payable to Helen Nastor. He has a friend indorse them “Helen
Nastor” and deposit them in Comerica Bank, who charges FMNC’s account.
When Rudy doesn’t repay, they come after Helen who proves that it wasn’t her
fault. FMNC then sues Comerica alleging “not properly payable” b/c of forged
indorsement. Comerica says Impostor so properly payable. Ct says, no merely
misrepresentation of agency/authority so not properly payable.
4. If check is paid to an Imposter, loss falls on the DRAWER. What can they do?
a. could go after Impostor if they can be found (Restitution, fraud)
b. 3-404(d) – could get the $ from either Depositary Bank or Payor Bank if
either one was NEGLIGENT (failed to exercise ordinary care) in paying the
check to the impostor
i. Gina Chin Assoc v. First Union – Lehman writes checks on GCA’s
account to nominal payees and forges both the Drawer and Indorsement
signatures (nominal payee, any indorsement is valid, so problem w/ the checks
is the forged drawer /s/). Citizen’s couldn’t charge GCA for the checks b/c not
properly payable – they did anyway. GCA should’ve sued Citizen’s for
charging the account, instead sued First Union for negligence in taking the
checks. CASE IS SCREWY.
D. Employee Forgery of Indorsement 3-405(a), (b)
1. YES, properly payable
2. 3-405(b) – if Employer trusted ee w/ responsibility w/r/t the check and the ee or a
person acting in concert w/ them forges an indorsement on the check, the
indorsement is effective as the indorsement of the Payee
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a. 3-405(a) – Responsibility w/r/t checks = ability to sign, process checks received
by employer, prepare checks for issue, supply info on who gets checks for how
much, distribute the checks
b. 3-405 cmt 3 – Janitor steals large check from employer and forges indorsement.
Check is NOT properly payable b/c Janitor is not someone w/ Responsibility!
c. if Bank is negligent in paying, loss is allocated b/t them
3. Ex – Maggs is responsible for handing out paychecks, keeps one, forges “Dean
Young” indorsement. Seems like not properly payable b/c of forged indorsement
BUT it is properly payable b/c Employer trusted Employee Maggs with substantive
role in checks
4. Merill Lynch – Employee provides bogus invoices at Merrill Lynch and then steals
the checks, forges the indorsements, and gets paid. NOT Nominal or Ficticious Payee
b/c Merrill Lynch is the Drawer (not Employee) and they intended the suppliers to get
the checks. Merrill Lynch says “not properly payable so no right to charge our
account”. Bank says “EE forgery of Indorsement” (not customer negligence in hiring
or practices, not reporting delay b/c no forged drawer signatures to report, not
misnamed, not nominal/ficticious). Ct says Bank was not negligent under 3-405
contrib negligence provision so Merrill is liable for full amount.
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Part V – Funds Transfers
WIRE TRANSFERS
I. Intro to Wire Transfers
A. Definition of Wire Transfer 4A-104(a)
1. series of transactions beginning w/ Originator’s payment order, made for purpose of
making payment to the Beneficiary of the order. Includes any payment orders issued
by Originator’s Bank or an Intermediary Bank intended to carry out the order.
Completed w/ the the Benficiary’s Bank receiving the payment order.
B. Payment Order 4A-103(a)(1)
1. instruction of a sender to a receiving bank to pay or cause another bank to pay a
fixed or determinable amt of $ to a beneficiary
a. no formal requirements – can be oral, written, electronic instruction
b. must be unconditional
C. Does NOT include electronic transfers into or out of CONSUMER’S bank accounts
4A-108
1. these are regulated by EFTA (Fed regulation)
a. ATM, Point-of-Sale debit card transactions, direct deposit, automatic bill
payment, transfers initiated by phone, debit card transactions whether or not using
an electronic terminal
II. Acceptance of Payment Orders (PO)
A. Acceptance By Originator’s Bank (OGB) or Intermediary Bank (IB)
1. OGB and IB accept a PO by EXECUTING the order 4A-209(a)
a. PO is Executed by issuing another PO intended to further carry out the
transaction 4A-301(a)
i. if OGB gets a PO and send it on to IB, they’ve accepted
ii. until the bank acts by sending the next PO, they have NOT ACCEPTED
2. Right to Payment from Sender
a. If OGB accepts the PO, OG must pay them 4A-402(c)
i. OGB can IMMEDIATELY debit OG’s account after they send the next
PO
3. Money-Back-Guarantee to Sender
a. If money never gets to BEB, duty to pay is excused (4A-402(c))
b. IF OG has already paid and $ never gets to BEB, right to a refund from
OGB (4A-402(d)
i. duty to pay upon acceptance of PO creates 2 liabilities for OG – liability to
pay on the underlying K and duty to pay the bank on the wire transfer
c. Grain Traders v. Citibank – GT initiates funds transfer, it’s bank BCN sends PO
to Citibank. Citi accepts but the PO they send never gets accepted b/c that bank
(BCIL) is out of business. Money never gets to Beneficiary – Citi retains it. GT
sues Citi saying “money-back guarantee”. Ct says GT does have a right to $ back
BUT they should’ve sued BCN, not Citi. Requirement of Privity – each bank
or person can only sue the person that they sent the PO to, not someone
further down the line
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B. Acceptance By Beneficiary’s Bank (BEB)
1. BEB accepts PO when they receive the payment from the IB (completely passive
on their part) 4A-209(b)(2)
2. Right to Payment from Sender 4A-402(b)
a. once BEB accepts, sender is obliged to pay the BEB the amount of the order
3. Duty to Pay Beneficiary 4A-404(a)
a. once BEB accepts the PO they have a duty to pay the BE
C. Liability for Failure to Accept?
1. No duty of Bank to Accept Payment Orders except as determined by private K b/t
banks and their customers 4A-212
III. Payment Orders the Bank may Execute – when can OGB charge OG’s
Account?
A. Authorized POs 4A-202(a)
1. bank can charge your account if you or someone w/ authority from you sent the PO
B. Effective and NOT unenforceable POs
1. Even if the PO is NOT AUTHORIZED, can charge account if PO is:
a. Effective 4A-202(b) – passed agreed upon security procedure (ex – password,
callback, computer encryption)
b. Not Unenforceable 4A-203(a)(2)
i. Unenforceable if Customer proves 2 things
the person who issued the PO was NEVER entrusted w/ the information
necessary to get through the security check by the customer AND
person who issued the PO did not get the info from the customer (as by
access to customer’s records or computers)
ii. this is a hard thing to prove (have to show who did it and how)
IV. Cancellation of Payment Orders
A. Before Acceptance
1. Right to cancel before acceptance by the bank if you do so in reasonable time for
them to act (by not sending the next PO) 4A-211(b)
B. After Acceptance 4A-211(c)(1), (2)
1. No RIGHT to cancel after acceptance by bank 4A-211(c)
2. CAN cancel / amend after acceptance but before BEB accepts
a. BUT ONLY if the bank agrees – they can only agree if their receiving bank
agrees to cancel / amend too (and so on down the line of banks) 4A-211(c)(1)
3. Once BEB accepts can ONLY cancel / amend if PO was mistake, unauthorized,
duplicate, erroneous BE named, etc. 4A-211(c)(2)
V. Receiving Bank’s Errors
A. Recovery from Beneficiary
1. Send too much money (wrong amt in PO or duplicate PO sent) 4A-303(a)
a. can recover excess amount from BE to the extent allowed by law of
Restitution
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i. if BE relied on payment to their detriment, can’t recover under Rest
ii. if BE was a creditor up to the greater amt, can’t recover under Rest
(“discharge for value” rule)
2. Send $ to wrong BE 4A-303(c)
a. OGB (or whoever first made the error) can recover $ directly from the “BE”
under a theory of Restitution
i. if BE relied on payment to their detriment, can’t recover under Rest
ii. if BE was a creditor up to the greater amt, can’t recover under Rest
(“discharge for value” rule)
b. all the previous senders (before the one who made the error) don’t have to pay –
no privity concerns (OGB can get $ directly from “BE”, IBs and BEB have no
liability) – UNLIKE MONEY BACK GUARANTEE
c. OGB can’t get the $ from the OG (their customer) b/c of the money back
guarantee
B. Liability to Sender
1. Sender’s Money-Back Guarantee 4A-402(c)
a. Sender can’t be charged if the PO never gets accepted by BEB
2. Failure to Execute
a. Receiving bank has NO DUTY to accept POs unless it has a private K to do
so 4A-212
b. if there is a breach of such a K, the receiving bank is liable for 4A-305(d)
i. expenses (wire transfer fee)
ii. incidental damages (ex- cost of express mailing a check, paying another
bank to wire transfer)
iii. interest lost (if the money was going to or coming from a place where it
earned interest)
iv. NO LIABILITY for consequential damages
3. Improper Execution, 4A-305(a)-(c)
a. If bank accepts a PO, they must follow sender’s instructions w/r/t timing and
intermediary banks to use 4A-302(a)(1)
b. Remedies for failure to follow instructions
i. Delay – sending payment too late 4A-305(a)
remedy = lost interest
ii. PO sent results in failure to use specified IB, noncompletion of the funds
transfer, issuance of PO not in compliance w/ OG’s PO 4A-305(b)
remedy = lost interest, expenses, indcidental damages
iii. 4A-305(c) – bank can contract to assume consequential damage liability if
they want to (none of them ever will)
4. Negligence ? 4A-102 cmt
a. Banks face little risk when dealing w/ POs – send too much $, you get it back,
don’t accept or screw it up, only liable for expenses, incidental damages, and lost
interest
i. OG almost never has a 4A claim worth pursuing, so would like to file
TORT suit for NEGLIGENCE
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ii. whether 4A does or does not pre-empt is a highly litigated point
b. 4A-102 cmt – suggests 4A was intended to pre-empt tort claims s/a negligence
C. Problem – OG issues PO for $100K to be paid to B. OGB sends PO to IB for $100K to
be paid to B. IB accepts, but mistakenly sends PO to BEB for $100K to be paid to X.
BEB pays X.
1. Did IB execute the PO of OGB? Yes – they executed, just improperly
2. Is OGB entitled to payment from OG? No – money back guarantee
3. Is IB entitled to payment from OGB? No – money back guarantee
4. Is BEB entitled to payment from IB? Yes – BEB followed the instructions they were
given perfectly by paying X
5. Is IB entitled to recover from X? Yes – receiving bank’s error, so can recover under
Restitution
D. Banque Worms v. Bank of America – Spedly orders SecPac to “pay Banque Worms”,
then before SecPac accepts amends to “pay NatWest.” SecPac accidentally sends $ to
both. (It can only charge Spedly for the correct one). BW won’t give the $ back b/c
Spedly owes them $. Ct says SecPac can’t recover $ from BW under theory of
Restitution b/c BW “discharge for value” (you accidentally pay a creditor, you can’t get
the $ back) (also no Restitution if BE detrimentally relied). SecPac has a Restitution or
subrogation claim against Spedly b/c they paid Spedly’s debt to BW, but Spedly is broke.
E. Evra v. SwissBank – prior to Art 4A – HM loses favorable K for ship charter when Swiss
Bank receives PO but never executes it. Ct says no consequential damages if it was a K
claim b/c no notice of extraordinary consequences. No consequential damages on tort
claim b/c HM failed to exercise prudence in avoiding consequences it could’ve (Swiss
probably had no K obligation to accept the PO, so under Art 4A, no liability)
VI. Misdescription of Beneficiary
A. Number trumps name 4A-207(b)(1)
1. bank can rely on acct number specified, needn’t look at name
2. if PO rec’d by BEB identifies the BE by both acct # and name, they BEB can rely on
the account # as correct unless they ACTUALLY KNOW the name and # refer to
different people
B. OG’s recovery for mistake 4A-207(d)
1. BEB is not liable if Beneficiary is misdescribed
2. OG can get $ from the recipient under theory of Restitution (problem if detrimental
reliance or if recipient is also a creditor of OG)
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An Outline for Cats, Written by Dogs
Part VI – Credit and Debit Cards
CREDIT CARDS
I. Law Governing Credit Cards
A. Form Ks
1. Visa and MasterCard are groups of banks that set standards for these Ks – b/t Issuing
Banks and Cardholders & b/t Merchants and Issuing Banks
2. all member banks agree to issue cards w/ substantially same standards
3. Merchant’s bank gets the “discount fee” (2.08% for V/MC), issuing bank gets
“interchange fee” (1%) and interest on balances
B. Common Law
1. Form Ks are governed by CL of Ks
2. Agency law, etc.
C. Consumer Credit Protection Act (part of Truth in Lending Act)
D. Miscellaneous State Statutes
II. Cardholders Liability for Charges – CCPA §§ 103(o), 133
A. By Cardholder – Yes, Liability
B. By person w/ Actual or Implied Authority – Yes, Liability
C. By person w/ Apparent Authority – Yes, Liability
1. Only Principal can create Apparent Authority
2. Minskoff v. AmEx – Ct holds cardholder Minskoff liable for charges by his ee on the
theory that she had Apparent Authority. There is no apparent authority merely b/c
she fraudulently applied for a card using his name. Ct holds Apparent Authority was
created when, for 18 months, AmEx sent him statements and got back checks drawn
on his accounts, so Minskoff is liable for everything after a reasonable time to inspect
statements and report misuse. Problem w/ the opinion is that Apparent Authority was
probably meant to be w/r/t the Merchants, not w/r/t the Issuing Bank. SUGGESTS A
DUTY TO INSPECT AND REPORT, as w/ bank statements.
D. Unauthorized Use – liability from $0 - $50
1. Unauthorized Use = not by cardholder, person w/ NO AUTHORITY
(e.g. thief) CCPA § 103(o)
2. Cardholder has LIABILITY ONLY IF: CCPA § 133 (applies to both
consumer and business cards and charges)
a. card is an accepted card
i. cardholder has activated it – not one stolen out of mailbox
b. LIABILITY ONLY FOR $50
b. Cardholder has made a good faith attempt to resolve the issue w/ the
Merchant first
c. transaction occurred in same state as Cardholder’s mailing address or w/in
100 miles of that mailing address
i. where phone, internet, mail transactions take place is defined by state law,
not in the CCPA
B. Contractual Augmentation
1. V/MC have waived the geographical limitation by K
2. some cards have additional “buyer protection” (they’ll insure the cost, even if you’re
the one that breaks it)
C. State Law Issues – not resolved by § 170
1. location of charge transaction (if by phone or internet)
a. most States say that a transaction takes place where the acceptance is uttered
b. under UCC Art 2, orders are offers and shipping goods is acceptance, so usually
the transaction will be said to occur where the MERCHANT is located
2. existence of defenses
a. § 170 does not create any substantive defenses
b. state law determines whether you have a breach of warranty claim, failure of
consideration claim, etc.
3. Israelewitz v. Hanover Trust – Is refuses to pay bill when Britton Enters. won’t give
him his money back. When HT tries to chargeback, Britton won’t accept the
chargeback, citing their no refund policy. HT then sues Is for payment. Ct says Is
has NO VALID CLAIM OR DEFENSE against Britton (nothing stops them from
having a fair, clear no refund policy), so therefor he has nothing to assert against HT
either
D. Issuer’s right to “charge back” loss to the merchant
1. by Contract w/ merchant
2. Issuing Bank investigates your claim and, if valid, tells the merchant to give them the
money back (loss fall on merchant)
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An Outline for Cats, Written by Dogs
Part VII – Letters of Credit
LETTERS OF CREDIT
2Qs – Is it a Letter of Credit? Was there strict compliance?
I. Letter of Credit 5-102(a)(10)
A. undertaking by issuer (bank) to pay money to beneficiary if they
present certain documents
1. Witchita Eagle – Pac Nat’l issues letter of credit to Witchita Eagle that conditions
payment on (1) Lessee’s failure to perform it’s lease (2) affidavit by WE as Lessor
that notice of default was given to Lessee and (3) Lessee’s failure to cure default. Ct
says this isn’t a Letter of Credit b/c not conditioned strictly on documentary
presentation. It’s an ordinary Guaranty K, so any of Lessee’s defenses can be
asserted against WE and they don’t automatically get the full $250K
II. Duty to Honor 5-108(a), (e)
A. STRICT COMPLIANCE - Issuer must honor a presentation that
appears to strictly comply w/ the terms and conditions for the letter of
credit 5-108(a)
1. viewed in light of standard banking practices 5-108(e)
2. no factual inquiry into the truth of statements made in the documents or the validity
of the documents, signatures, etc.
3. NO DUTY TO PAY IF NOT STRICT COMPLIANCE
4. American Coleman – Letter of Credit requires affidavit refering to “note of 11/21”.
There was no such note, actual note dated 11/16. American Coleman makes a
presentation seeking payment that mentions both dates. They argue that they did
strictly comply b/c reference to 2d date was “mere surplusage”. Ct holds no strict
compliance, so no payment required. Also note that Issuer cannot refuse to pay based
on factual impossibility of affidavit’s truth (“they’re in default. 11/13.” when note
not due until 11/16).
III. Reimbursement 5-108(i)(1)
A. If Issuer honors the letter of credit, it has a right to reimbursement from the Applicant
1. often banks require payment in advance (when application for letter is accepted) and
charge a 1% fee
IV. Independence of Letter from underlying K 5-103(d)
A. Issuer’s duty to pay is independent of whatever underlying K the Beneficiary has with the
Applicant
1. Issuer must pay based ONLY on facial compliance of documents
with presentation specified in the letter (can’t consider Applicant’s
defenses)
2. regardless of outside claims or defenses Applicant may be trying to assert as reason
for non-payment
a. Issuer must pay Beneficiary, Applicant must therefor pay Issuer – Applicant can
sue Beneficiary to get the money back if there’s a problem s/a defective goods
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An Outline for Cats, Written by Dogs
V. Claims and Remedies arising from Letters of Credit
A. Beneficiary’s Claims
1. Beneficiary sues Issuer for wrongful dishonor 5-111(a)(e)
a. if Issuer doesn’t pay after Beneficiary makes a proper presentation
b. Remedy = Actual Damages = Amt. of Letter of Credit + Incidental Damages –
Damages Avoided + Atty Fees
i. Beneficiary has NO DUTY TO MITIGATE DAMAGES – if they do
mitigate, the actual amount avoided will be subtracted
ii. No liability for consequential damages
iii. Incidental damages might be cost of storing goods, cost of arranging a
substitute transaction, etc.
2. Beneficiary sues Applicant for breach of underlying K (failure to pay) 5-103(d)
a. can sue EITHER the Issuer on the Letter of Credit OR the Applicant on the
underlying K
i. will probably sue the Issuer b/c no duty to mitigate, can get atty fees, bank
is a deep pocket
b. Remedy – defined by applicable law (for K for Sale of Goods, UCC 2-703)
B. Applicant’s Claims
1. Applicant sues Issuer for wrongful dishonor 5-111(b), (e)
a. if Issuer fails to pay upon proper presentation by Beneficiary – Applicant will
have to find some other way to pay
b. Remedy – Incidental Damages (ex – cost of arranging substitute payment) + Atty
Fees
i. no liability for consequential damages
2. Applicant sues Beneficiary for breach of underlying K (ex – damaged or
defective goods shipped) 5-103(d), cf 2-711
a. B got paid by Issuer (and thus Applicant had to pay Issuer) even though they
breached the K – Applicant retains the right to sue on that claim
b. Remedy – defined by other law (ex – UCC 2-703 if K for sale of goods)
C. Issuer’s Claims
1. Issuer sues Applicant for reimbursement 5-108(i)(1)
a. usually Applicant is forced to pay in advance – this only comes up rarely
b. Remedy = Amt of Letter of Credit
2. Issuer sues Beneficiary – subrogation of A’s K claim against B 5-117(a)
a. If Issuer cannot get reimbursed by Applicant (b/c they are bankrupt), Issuer is
subrogated on any claim Applicant has against Beneficiary (s/a breach of K
claim) – Issuer can assert the claim instead of Applicant
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