Commercial Paper Class Notes 10/13/03 Problem 2.2: Deposit made on Monday March 1 on bank in Houston. Bank is open Monday-Saturday for regular business (a): Check from Seattle and Carl wants to withdraw cash (b): Cashier’s check from Seattle originally made payable to Tools but properly endorsed from Tools to Carl (c): Carl deposits $1K check payable to himself from Treasury at ATM at Houston (d): Carl deposits $1K check drawn on State of Michigan with a teller REGULATION CC Non-Local Check §229.10(c): Next day availability applying to check deposits §229.12(c)(1): This is the section that talks about when non-local checks are available. §229.12(d): Supposed to be making funds available up to $400 if it is cash withdrawal but remainder on the next day. - Special rule: Where we have a cash withdrawal, then the bank can extend the time for an additional business day. The sixth business day will be Tuesday in the problem below. - $100 Rule: First business day after banking day on which check was received - $400 Rule: Fifth business day “ “ “ “ “ “ - Remainder Rule: Sixth business day “ “ “ “ “ §223.13(b): Large deposit – One that is over $5K = This is an exception When it is a large deposit, §229.12 applies to everything in excess of the $5K. The additional money will be held back until §229.13(h): It can be extended a reasonable period of time…They can hold it for some unspecified amount of time. (6 business days for checks described as (c)(1) and (2) under §229.12. - It can be held for longer than the 6 days prescribed above – They can use a longer period if the burden was unreasonable in 6 days. - The act is accomplishing the goals but also preserving some of the bank’s right to check and see if the check is proper. §229.14: Generally, banks shall begin to accrue interest when the bank receives credit for the funds. If you go into the CFR, that is where you will find Regulation CC (12 CFR §229) §229.19(a)(viii): Must stay open to a certain time – Funds may be considered deposited on the next banking day if deposited after the cut-off time. §229.10(c)(1)(i): Treasury Check – Available 1st business day after the banking day of deposit §229.10(c)(2): ATM Deposits: Available the 2nd business day Cross-references do not apply to the treasury check. §229.12(b)(2): The second business day rule applies for a check on the treasury that it not governed by availability requirements These treasury checks are those that have been negotiated. This is an additional day – 2nd day availability under this section. Answer to Problem 2.2 (a): $100 on day 2 (business day) Business day after the banking day of receipt of check (3/2) - $400 on day 5 (3/8); $3500 on day 6 ($4500) = So, the $2000 can be given on a reasonable day (usually 6 days after). (b): SKIP (c): §229.10(c)(1)(i): Funds must be available after the banking day on the next business day – Tuesday 3/2 – All of it is available. BUT we also want to consider the fact it is an ATM – He can get his money on the second business day (d): SKIP Problem 2.3: Payor bank did honored check despite valid post-dating notice. The car is repossessed and the bank charges $25 NSF fee. Drawer deposited $2K check if they had abided by notice. Answer to Problem 2.3 §4-402(b): Payor bank, when there is wrongful dishonor, is liable for damages proximately caused, actual damages which include consequential damages. - Are any of the damages characterized as proper damages? o Consequential damages are those damages that result indirectly from the harm/breach. They do not flow directly and immediately from the injurious act, but result indirectly from the act.
NSF fee: Proximate causation? Actual damages? These are actual damages because if not for the wrongful dishonor the fee would have never resulted. o Repossession of Car: Consequential – The wrongful dishonor did not cause it completely. The debt on the promissory note usually gets accelerated. There is an acceleration clause there. o 4-402(b): What if it isn’t foreseeable? Question of fact, but also something else that they say there if you read it closely Arrest and prosecution: Is that foreseeable? You are liable despite it not being foreseeable. - UGH! From that cases say that as long as they are actual damages proximately cause, we don’t look at negligence or foreseeability of damages. §4-103(e): Contrast – Measure of damages for failure to exercise ordinary care is the amount of the check reduced by amount that would have been lost if they had exercised ordinary care. Only collect up to the amount of the check Problem 2.4: Banker sees on day 2 that a check he was going to dishonor on day 1 actually has enough funds. Does he have to honor the check? Answer to PROBLEM 2.4 - If a banker goes back the next day and looks at the check that originally was not enough money, - §4-402(c): Bank is liable for wrongful dishonor – If the bank decides to go back and recheck the dishonor and there is sufficient money in the account. There is no need to look more than once at the account. o They look at the check the first day and will not decide for another day. o Then they look at it again? BUT once they do look again, then they will be liable for wrongful dishonor. - He is liable for wrongful dishonor given the facts. Why did he go back and look at it? He concluded that there was sufficient money in the account and that there program was working properly. o Does that make a difference? If the only reason he went there was for software It doesn’t matter – Bank would not be liable under §4-402(c) – When they looked at it, they saw there was enough to pay the check. Bad Faith o Provisional Settlement about the check on the first day usually – but in this situation that is not the case. - Also referred to Regulation CC: Large Cash Deposits §229.10(a)(1): Available on the business day after the banking day. If not made in person, then it is on 2nd business day. REGULATION CC - §229.13 Exceptions to the Rules o Large deposits; New accounts (30 days or less); Patterns o §229.13(e): If the bank has reasonable cause to doubt collectibility, the funds don’t have to be available under mandating time; Where facts put doubt in reasonable mind o If they know that the payor bank is going to dishonor the check or other information about the check not being good…If the check is stale (more than 6 months after the issuance). There are these rules that allow for exceptions o Looks big and vague, but here is what you can’t do: Not based on nationality or ethnicity o Repeated overdrafts: §229.13(d) – There is an exception o Emergency Conditions: Computer or other things, war, etc. - §229.19: Cut-Off Hour: Must be later than 2 PM. - State law is preempted by this rule - Civil liability: Customer can sue for a bunch of stuff - §229.25: If there is a bona fide error on Federal Reserve Board rulings, then there is safe harbor provision - Policy issue: Reg CC is federal. Funds should be available promptly and defined this by Congress. We confronted the issue and a bunch of people around the country said that the whole thing should have been federal. But the lawyers said NO way is it going to be federal. Article 4 was thought that it should have been federal, but it is not for the aforementioned reasons. - This can be amended as before through notice and comment. COLLECTION OF CHECKS - Payor bank’s obligation to Payee o Generally, not the payor bank is not liable to the payee except as below
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§3-408: A check is not an assignment of funds unless the bank accepts the check, honors the check or waits too long. Then the non-action will make the payor bank liable to the payee. o Outdoor Technology: Drawer printed his own checks and putting down the wrong bank causing delay and confusion. The illustration – If it is too late, then the payee will not have action under UCC. Wrongful dishonor is a remedy for the drawer only. Payee looks for common law cause of action and tries fraud and misrepresentation. Under common law, it is difficult to get this dealt with. In most cases, you need to find something in the UCC. Payee’s protection o REFUSE ORDINARY CHECK: Pre-accepted check (certified check); cashier’s checks; teller’s check Process of Collection o Go to payor bank and get payment over the counter - §4-301(a) o The on-us check: Both bank and the same bank (depositor and drawer).
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NEXT ASSIGNMENT: Try to finish assignment 3 (going through problems) - Omit problem 3.1 and do the handout problem instead - 3.2 is an on-us check. Problem - Bud cashes or tries to cash check – means Bud withdraws or tries to withdraw the fund from his checking account. 10/15/03 Regulation CC – Banking Day 2003 ed. Selected Commercial Statutes p. 1949 2002 ed. Selected Commercial Statutes p. 1928 What if bank receives the check on Saturday? - UCC and Reg CC are the same: Any day when the bank is carrying on predominantly all of the business. - Banking day is any business day…and therefore can’t be a Saturday. FRB says the banking day is a day in which banking function is going on. Therefore, if the bank receives the check on Saturday, it is a banking day, but since it must be business day it is deemed to have been received on Monday. - Banking day cannot be Saturday. Collection of Checks - Immediate payment over the counter – Final Judgment - “On-Us” Checks: o If payee and drawer bank at the same bank and that bank is both Depositary and Drawee/Payor Bank, then the check is an “on-us” check. o Bank has until midnight deadline to decide whether or not to pay that check. o Note on bottom of page 49 – Ordinarily the bank tries to give a provisional settlement on the date of receipt of check – They provisionally credit his account with that money. o Assume unless you are told differently that the bank has provisionally settled, given credit to the depositor for the check. o Bank is not required to make the settlement the first day of receipt of check. - They have to decide to pay the banking day after the banking day after they receive the check. They must give final credit at Tuesday at Midnight deadline (§4-104) and banking day definition. §4-301: Deferred Posting; Recovery of Payment by Return of Items; Time of Dishonor; Return of Items by Payor Bank (see handout for the correct statute – not right in 2002 edition of rules) - If the payor bank settles for a check before midnight of the banking day of receipt, the payor bank may revoke the settlement and recover the settlement, if, before it has made final payment and before its midnight deadline (this is about an “on-us” check): You don’t have to give depositor provisional credit. o Return the item o Return image of the item (new – This is an authorization of the electronic processing of this transaction from the return end of things. If the depositor has agreed, then this is how the check can be returned.) o Sends a record providing notice of dishonor or non-payment if the item is unavailable for return. - Comment 8: Explains the electronic banking (check-processing) angle.
UETA: Federal E-Sign – An electronic notice is just as good as a paper notice in other kinds of situations (There are federal acts that say that where law says paper notice, an electronic notice will suffice) - Let’s say you, drawer, allege that there is a forgery. Don’t you want the original? An expert might be able to identify pressure points on the original but not on the electronic one. As we see in 4-301(a)(2): This is going to be a way to facilitate electronic images. If it is not an on-us check, they have to give you credit on the next day. On-us check they must do the same, but they may and usually do give provisional settlement. §4-301: returning the check - (d): Returned when it is sent or delivered (see §1-201(38) for definition of sent – put in mail or deliver by other usual means) - (a)(3): Sending the record – o Defining Record: Revised Article I: p. 1084 – Record: information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form. “On-Us” check: - Honor the check - If bank does nothing, the check is treated as if it has been honored. - Dishonor the check o Provisional Credit o They must revoke the provisional credit if they dishonor the check. It is not final settlement on the check so they can revoke it and exercise what is called charge back. - Depositor has gotten the provisional credit – What if they let him draw on them so fast (when they go to exercise charge back, there is no money there)? o §4-214(c): May charge back or obtain refund (which means to sue or alternative means like debt collector) If they have allowed Archie to take the money, can they sue drawer? o §3-414(b): The language that allows bank to sue drawer for unaccepted draft – The drawer is obliged to pay the draft – This has been construed to allow the bank to go after the drawer. Regular Plain Old Check - Privity makes sense in dealing with banks because there is always a contract with the customer - Lots of different contractual relations. There is no contractual relationship between Archie and drawee/payor bank. - There is another concept mentioned that becomes important as well. o Agency: Depositary Bank is agent and Archie is the principal. o Debtor/Creditor Law o Contract Law o Tort Claims Collecting Banks - All the banks except for drawee/payor bank, including intermediary banks Depositary bank is the agent of the depositor and it is a collecting bank which has an ordinary duty of care – General duty without specifications - When the depositary bank gets the check from the payee, it gives the payee the provisional credit. - If the check is dishonored, it gets a charge back §4-214(a) to revoke the settlement. Depositary bank and payor bank relations - Routes to determine whether to honor the check o Intermediary bank o Clearinghouse bank o Check with payor bank - Under Reg CC, depositary bank has an obligation to make funds available promptly to the depositor.
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They have an incentive to get the check to the payor bank and allow payor bank to make a decision before the deadline and they have to release the funds to the depositor.
On p. 52 – Check processing schematics (MICR numbers – on bottom of check for computers to read) - Magnetic Ink Character Recognition Kimberly Allen Trust - Payor bank dishonors check and depositary bank has charge back and charges a fee. (Provisional Settlement) - Under the §4-214(a), does bank have the right to charge back? - Final Settlement: Terminates right to charge back. - Did the settlement in this case become final? If so, it terminates the right to make charge back under §4-214(a). - What did the payor do to make the settlement final? The problem here was that they missed the midnight deadline. - Look at §4-215(a): A check is finally paid when the following occurs: 1) paid in cash; 3) made provisional settlement and failed to revoke in a time and manner permitted by statute, clearing-house rule or agreement. - Bank has until midnight deadline – if deadline passes, there is final payment. If there has been final payment, then we return to §4-302(a)(1): If a check is presented and the bank retains it beyond the midnight deadline, then the bank is accountable for the amount of the check whether or not it was properly payable. - §4-215(d): If a collecting bank receives a settlement for an item which is or becomes final, the bank is accountable to its customer for the amount of the item and nay provisional credit given for the item in an account with its customer becomes final. o This is like a domino effect – If the payor bank honors the check, that makes what the payor bank has done a final settlement. All of the other provisional settlements will then become final. Provisional settlements/credits to the accounts become final when the final payment has kicked in. o If there has been final payment because deadline has passed, then the charge back right has terminated. - Banks may not go after its affiliates, its corresponding banks (agreement between the two to accept a check), etc. – Banks may not sue other banks for those reasons. When you have all of the provisional settlements firmed up, the relationship between the depositor and the depositary bank becomes creditor and debtor. FOR NEXT CLASS - Finish 3 and begin 4. - FYI: Reg CC Term is paying bank; UCC Term is payor bank. Warning: Make sure you have the terminology down pat.
10/22/03 Risk of Loss in the Checking System (Chapter 4) - Generally, the check collection system works is under Chapter 3 General Rules - Introduction - Exceptions come into place when you have a careless or negligent party or wrongdoing took place in business establishment. All of the parties this afternoon are innocent – No one is being careless and wrongdoing did not take place in workplace. - Here we must determine who is going to suffer the loss - Rules embodied in provisions in endorser liability; imposed warranties. - Make some general assumptions about the relative ability of the parties to prevent certain types of losses - Why one party and not the other? When rules were being re-examined the drafters asked themselves this question. - Did the payor bank honor or dishonor the check? (Must ask this question)
General Rules A. Non-Payment o Situation: Payor bank dishonors the check. - Endorser Liability §3-415 o Each party that endorses a check makes an implied contract with all of the subsequent parties. So the transferor of the check is incurring this obligation and they are going to be obligated to the transferee. EXAMPLE: Payee X Y Depositary Bank = By signing the payee is incurring liability to the people after him. By endorsing X is incurring an obligation to Y and the depositary bank (subsequent transferees) but not to payee or payor because they are upstream. The obligation/liability can ultimately be shifted upstream because of the obligation incurred by the endorsers to the subsequent transferees. o Payee Escape hatches Make the signature without recourse (p. 72): The next transferee probably shouldn’t take it unless there is one signature without recourse. However, as will be seen, there is the other thing – Transfer warranties. Drawer liability: Signed the check and is liable on the underlying obligation and so the payee can still go after the drawer. §3-415(e): Stale Obligation – If the check is presented more than 30 days after the date of endorsement. Safeguard to narrow the loss and not allow the checks to hang out there. How can you tell when the check was endorsed in order to determine the 30 days? There is a matter of proof here and injustice may be done here. o §3-415(c): Notice of Dishonor is required §3-503(c): Any person who is requiring liability from an endorser must give notice: (i): Bank: before midnight of the next banking day after the banking day when the bank received notice of the dishonor. (ii): Other people: within 30 days following the day they received notice of dishonor The reason for the time limits – The payee will be less likely to recover from the drawer if the time is too great. The last other person endorser should give notice to all prior endorsers within 30 days. o §3-503(b) and (c): Form of Notice – Oral, written, anything sufficient. B. Forged Signatures - Whose signature might be forged? o Drawer: Usually a forged drawer signature when they talk about forged signatures and specific if they mean endorser signature o Endorser - The thief is supposedly liable but usually uncollectible so someone has to bear the loss - Price v. Neal: Old English case from 1762 where the court said that when you have forged drawer’s signature and the bank pays, the payor bank is liable. o “A payor bank bears the loss if it fails to notice the forgery and honors the check” - Is the check properly payable under §4-401? Nope. - §3-418: Payment or Acceptance by Mistake o (ii): The mistaken belief that the drawer’s signature was authorized…This section happens to say that the remedies provided may not be asserted against holder in due course. When payor bank looks at the previous parties, all of those people in the ordinary course took it in good faith and for value. o This section does not help at all in the long run. o FINAL PAYMENT DOCTRINE (§4-215): If the bank has paid, then it is too late to go and do anything. Again, the payor bank paid the check and can’t go back later and try to undo it. - Justification for the Rule: Bright line, certainty, decreases litigation - §4-208: PRESENTMENT WARRANTIES o A check may be presented to payor bank and these warranties arise automatically by operation of law. o These are not just the presenting bank but others who have presented checks. o §4-208(a)(3): Warranty that the presenting bank/person has no knowledge that the signature is unauthorized.
What is “knowledge” under this section? (§1-202) Actual knowledge. Definition of notice (§1-202(e): It comes to that person’s attention or delivered in some form that would be enough to give them notice and ordinarily they would see the notice. THIS SECTION REQUIRES ACTUAL KNOWLEDGE OF FORGED DRAWER’S SIGNATURE. o Payor bank is liable and cannot shift loss. Payment by mistake doesn’t help and warranty doesn’t help. - Decibel case: 14 forged signatures and payor bank paid the checks and the decision goes through the legal principals that are involved. o PART 1: The payor bank cannot debit the drawer’s account…etc. It is regarded as final payment in favor of the person taking the check. o PART 2: Application to the facts - Breach of presentment and transfer warranties to payor bank. - §4-207: Breach of Transfer Warranty (a)(2) o All signatures on the check are authentic and authorized (drawer’s signature). o Was there a breach of this warranty? o A bank that transfers the check is warranting that all drawer’s signatures are authentic and authorized. o Transfer Warranty provision does not apply at all. o This doesn’t apply to the payor bank. These are being made from one transferor to another transferor but not the payor bank. o Final Allegation: Bad faith - §3-418(c): Court remands this cause of action but state that the standard whether there was bad faith in terms of the subjective intent of the depositary bank. - §3-103(a)(4): Good faith means honesty in fact and the observance of reasonable commercial standards of fair dealing. - On p. 76, the book describes the pre-existing relationship with the drawer with the payor bank and that the payor bank may know that the check is not good. (10/27/03) - The casebook mentions positive pay systems and software programs that recognize patterns. - Positive Pay Systems (p. 77) o Example Drawer’s List to Bank includes check #310 for $5K Payor Bank receives check #310 for $5K Payor Bank pays check because it is on drawer’s list Later another check #310 for $5K is presented o If it is not on the list, the bank is not going to pay it. It is not foolproof because they may receive more than 1 identical check as above. Drawer is complaining. There is a forged signature on the first check. The first check was one that was unacknowledged…The bank doesn’t know there is a problem because it matches the list. The payor bank has paid despite the positive pay system. o Agreement between the parties can modify the rule here. The loss may not be on payor bank if there is another agreement between the parties. - See outline he passed out in class for Assignment 4 - Payor bank dishonors check and can shift loss upstream o Upstream parties can shift loss using: Endorser liability - §3-415 Breach of transfer warranties - §4-207(a)(2) – Transfer liability to the party that dealt with the thief. - Presentment Warranties: - Warranties: Difference between presentment and transfer warranties o Presentment: Those parties presenting check warranty that they don’t know of any forged signatures. o Transfer: Those parties transferring the check warranty (person entitled to enforce the check) – Guaranteeing that there are authentic and authorized signatures. - Forged drawer signature where bank pays and no breach in the warranty and loss stays with payor. o Bank honors check. Has there been a breach of presentment warranty? Nope. Drawer Merchant Payor Bank (Bank honors check) - “Without recourse” has nothing to do with transfer warranties. - TELEPHONE CHECKS – 4 situations where payor bank has paid the check o Payor bank pays the check (this is an unauthorized check and the loss would be with the payor bank) The rule has changed under the amendments to the Code.
They created a new category that never existed before Bank got something that had a value – signature on file – without consumer’s signature. Payor bank pays it. Consumer says that they never authorized it but it keeps going. o Complaints have been so widespread that there is unauthorized telephone check. o UCC made a step they thought they would never take: o Not in UCC 2002: Consumer Account: Established by individual primarily for personal, family or household purposes. Consumer Transaction: Transaction in which individual incurs obligation primarily for personal, family or household purposes Remotely Created Items: Item created on consumer account that is not created by the bank and does not bear the handwritten signature of the drawer Warranties that go along §4-208(a)(4) – Not in the UCC – A guarantee made by the parties in presenting the check to the payor bank making this guarantee (consumer) authorized the issuance the telephone check in the amount for which the check is drawn. If the presenting bank is making the guarantee, and the consumer is not, the loss may be shifted to the presenting bank. Payor bank may honor telephone check, but the presenting bank may have the loss shifted to them upstream. If there are these other parties involved, we have §4207(a)(6) which allows the presenting bank to shift it upstream futher. o It says that under §4-207(a)(6) – the person on whom whose bank is drawn for the amount that the item is drawn…Two promises under Warranty This item is authorized Even if it was authorized but the consumer did not authorize the amount, it would also be covered. o Under the present law (those who have not yet adopted this), upon whom is the loss placed when you get one of these checks? Payor bank (who paid the check and took the money out of the account) Now, payor bank should return the money and shoulder the loss under the old rules. o Under the new version, the payor bank recredits the consumer’s account and is more likely to recredit because they can go to the presenting bank or further and get it from them. - Think about the revision from the point of view for the bank. Will it really work? Operations – What we are doing now is saying that consumer accounts are treated one way and others another way. - What is a consumer account? What disputes are we going to have? o They will have a problem determining what the checks are going for – what their purpose is. What primarily are the checks being used for? o American Bankers Association – States with demand draft statutes The telephone check provision has a far preferable solution has been determined by the states. They make a demand draft statute which is not restricted to consumer transactions, but applies to all transactions. The reasons the ABA favors that approach so much that they are telling their people to oppose the UCC solution is that there is no different treatment for business and personal accounts. States were right according to that. - Reciprocity Provision: o Assume GA passes revision and consumer’s bank in GA – Seller’s business is in Alabama and Alabama does not pass the revision. o What applies there? CA and TX have reciprocity provision in their statute. The rules apply only if both states involved have passed the statute. FORGED ENDORSEMENTS - Drawer = Employer Payee = Employee Thief (forged instrument) Depositary Bank Payor Bank - Payor bank can shift loss using transfer warranties - §4-207(a)(1) o Dishonors the check - Payor bank pays check o Have to recredit drawer’s account §4-401 o There is breach of presentment warranty §4-208(a)(1) = Presenting bank has made a warranty that there are no forged endorsements.
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Can use transfer warranty (upstream party) §4-207(a)(1) = Presenting bank can push it further upstream using this – promising there are no forgery problems Rationale: The result is that the loss is with the party that dealt with the thief (the earliest solvent party that dealt with the thief). There is another party that is suffering the loss. Payee has also suffered a loss since drawer owed her money – payee cannot recover on the underlying obligation §3-310(b)(4): If the obligee…the obligation may not be enforced to the extent of the amount payable on the instrument and to that extent the obligee’s rights against the obligor are limited to enforcement of the instrument. §3-309: To sue on the instrument – Makes it hard on the payee to sue the drawer. He will have to show a whole bunch of stuff to get this. In subsection b, the payee must adequately protect the drawer against loss. The payee can be required to post bond in case someone else comes up with the check that has been stolen and the check is paid and the drawer has to pay for the check. It is a stolen check. The court will require adequate protection in case of a holder in due course to protect the drawer. It is tough for the payee to sue the employer for the stolen check.
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10/29/03 Forged Signatures - Payor Bank Honors or Dishonors - Forged Indorsements o Conversion §3-420: We do not consider the first sentence of 3-420 (state law of conversion) You can go against those banks – Conversion = Theft Resulted in forged indorsement and as the check passes to the banks for collection – Those banks are dealing in stolen property. Conversion action may qualify to be brought against those banks. PAYEE vs. PAYOR BANK: Payor bank is liable to payee on conversion claim – Payor bank also must recredit drawer’s account because the check is not properly payable. Payor bank can sue for breach of presentment warranty to pass loss upstream. Payor bank has honored the check – o First: (§4-401) Payor bank must recredit the drawer’s account for forged indorsement; o Second: If payee sues payor bank under conversion claim because there was the forged indorsement, §3-420(a), they should go after drawer for subrogation on the underlying obligation. o Third: The earliest solvent party is the one who bears the loss because it can go after those prior indorsers for presentment warranties. Use presentment warranty instead of transfer because the check was presented. Presentment vs. Transfer: Check is transferred with warranties by previous warranties; Once it is “presented to the payor bank” at that point. Transfer warranties only go to the parties that are not payor banks. Payor bank cannot use transfer warranties. Presentment warranties are hard to prove because they require knowledge of the unauthorized signature. §4-208: When it is forged drawer signature, you have to show actual knowledge that the drawer’s signature is unauthorized. PAYEE vs. DEPOSITARY BANK: Payor bank honors the check. Depositary bank liable in conversion. Depositary bank may be able to use equitable subrogation to recover from the payee its double payment. (Don’t worry about this course for UCC purposes) ALTERATION - Change in original writing o §3-407(c)(i): Enforceable according to its original terms o Additional payment of more money would be dealt with under presentment warranty. - Unauthorized Completion – Carte Blanc
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§3-407(c)(ii): Loss is on the drawer because it assumes that the drawer was in the best position to have prevented that from happening.
PROBLEMS (Blue = Class additions to the Reading notes) 4.3: Check written on account that Brooke has at Wessex Bank. Signature on check was forged drawer’s signature. Lydgate was tricked by the forger into cashing the check. Lydgate then deposited it in C Bank account. C Bank sent it to B Bank for payment. C Bank included without recourse and any warranty” W Bank dishonored the check and returned it to B Bank. Bulstrode wants to know if he has any basis for recovery from C Bank or the forger. Drawer Forger Lydgate Chettam (Depositary/Depository/Collecting) Bulstrode (Presenting/Collecting/Intermediary) Wessex (Payor/Drawee) - Chettam Bank: Presentment Warranty under §4-207(a)(2) because those warranties under (d) cannot be disclaimed with respect to checks within 30 days. Presenting bank vs. Depositary Bank for transfer warranty. Assume there is the legend (without recourse) – you cannot escape warranty obligations. - Forger: Once dishonored – An indorser is obligated to a subsequent endorser who paid the instrument under this section. (§3-415(a)). He is not indorser though – he is drawer. §3-403(a): unauthorized signature is ineffective except as a signature of the person who signed it – the thief. (Holder in due course: Without notice, in good faith and for value). When the forger signs it, it is treated as the forger drawing as a drawer – meaning if you sign it as the drawer, you are signing it in the capacity of a drawer. §3-414(b): Obligation of drawer – drawer is liable, so the forger is being treated as drawer so forger is liable. 4.4: The bank honored the check and then recredited the drawer’s account. Bank could go after others for presentment warranty and then they can go after for transfer warranty. What are the rights of the payor bank? Here we have a situation where a bank honored the check and paid the check under §3-415 – obligation of indorser – if an instrument is dishonored an indorser is obliged to pay. Only kicks in when check is dishonored. Cannot use transfer warranties because it is payor bank – so it must use presentment warranties under §4-208. This is a rehash of things discussed before §3-418: If bank pays by mistake, the bank can recover, but in (c) it states that this may not be asserted against he who has given value and presented in good faith. 4.5: Signed checks in wallet and a check was stolen and completed for $1K and cashed and honored by her bank. What options does the payor bank have? Payor can enforce it and charge drawer under §4-401(d)(2) and §3-407(c) – Even then under §4-208(b), payor bank can not use presentment warranties to get money from previous indorser. Drawer bears the loss because she left the check half written. §4-208(b): Keeps you from going after presentment warranty – Because you are entitled to receive the entire amount from the drawer and under §4-208(b) will require you to get it from the drawer. 4.6: Altered check for $10K instead of $1K. Who can he recover the $9K from? May enforce as to original terms – for the $1K. He can go after those upstream for presentment warranties. See §3-407(c), §4-208(a)(2) and §4-401(d)(1). Can enforce original terms of §1k under §3-407(c), the extra $9K can be recoverd under presentment warranties under §4208(a)(2). 4.7: Payor bank: Telephone Check – Does it come within the scope of the sections that deal with telephone checks? i.e. Consumer Account, Remotely Created Consumer Item We are within the scope. The payor bank has to recredit the consumer’s account and then go after the presenting bank for presentment warranty. RISK OF LOSS – SPECIAL RULES Negligence (exceptions to the rules) - HSBC Bank case (p. 86) o Altered check with spaces around the numbers o Room to alter was not a breach of ordinary care. o Case goes to court and payor bank wins breach of presentment warranty. o Lack of standards Judge has to decide case by case as to whether there was too much space to clearly write things out on it. There was not vast area of open space. Just an inch here and inch there o If you look at checks, there is no idea what might constitute negligence by drawer in that situation. - §3-406: Comment 3 – Cases where they illustrate negligence on the part of the drawer o Blank checks in unlocked desk drawer o Rubber signature stamp o Insurance company mails check o Large blank spaces FOR NEXT CLASS - Substantially contributes language to p. 96
11/03/03 LAST CLASS: Indorser Liability - Without recourse does not get rid of warranties. NSF Checks – Small number that are actually dishonored, but when they are… - Presentment - Re-Presentment – If they are re-presented most are cleared at that point, but there are times when the money is not in there. Every time the check is re-presented they will impose fee on drawer and probably on the presenter as well. Fees can mount here. Often: Electronic representment occurs through automated clearinghouse rules of National Automated Clearinghouse Association (NACHA) limit number of electronic representments in consumer cases. (See §3-410) - Rules promulgated by the NACHA issuing their own rules. All of the other parties sign contracts stating they will abide by these rules and they limit the number of times that the business can re-present the check. - Assignment 9 Talks about automated clearinghouse payments §3-406: Negligence Contributing to Forged Drawer signatures, Alterations and Forged Indorsements - §3-406(a): What does “substantially contributes” mean? o That person is precluded from asserting forgery defense. o You had to show that the drawer engaged in conduct that directly facilitated the forgery. o The courts were looking at the general business practice. That might constitute “substantially contributed”. Not necessarily needing a smoking gun Can look at all of the practices o See comments – Reference to Thompson Maple Products case o Courts have followed the comment and have the broader approach. - §3-406(b): Both are negligent Forged drawer signature where drawer is negligent and payor bank is negligent – This is a situation of comparative negligence. o Comparative Negligence: o Person asserting the preclusion: Bank (a person failing to use ordinary care is precluded from complaining that the bank paid.) Drawer (person being precluded). o Loss is allocated between the parties where both are negligent to the extent that each person’s failure contributed to the loss. o You cannot really estimate what percentage each will be. o Most of these are settled out of court.Most likely to prevail as far as time in court is the bank. - §3-406(c): Drawer cannot complain because he was negligent and the burden is on the bank to show that the drawer was negligent. ORDINARY CARE: Casebook (we can read those and we have already talked about the sections) §3-103(a)(7): Ordinary Care Defined in Article 3 - Defines ordinary care – Bank does not have to engage in sight exam and ordinary care can still be used. - Earlier, when we talked about bank exercising ordinary care will make it extremely difficult for a non-bank to show that they did not use ordinary care. o Except as provided in the following sections’ comments §3-103 (comment 5): Show bank’s procedures are unreasonable, arbitrary or unfair, then lack of ordinary care. §4-103 (comment 4): Better to allow market forces to define ordinary care – Specific defining would hinder new procedure BANK STATEMENTS §4-406: Customer’s Duty to Discover and Report Unauthorized Signature or Alteration - §4-406(c): Customer must exercise reasonable promptness in examining the statement. o There is no requirement of notification for the customer. o Bank is not required to send a statement. o If you do receive statement, then you have to examine the statement or the items for problems with reasonable promptness to see if there are unauthorized signatures or alterations to drawer’s signatures.
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The customer has no duty to deal with the forged indorsements If there is one you must notify the bank promptly. (If not going to be there, you might need a trustee to look over your account. Otherwise, you are taking a chance. o Basically, this is a facts and circumstances deal but usually laid out in the deposit agreement. Stowell case: Putting in the mail is sending. o 20 days from when sent by the bank as opposed to 20 days after receipt of the statement o Regulation E (Debit Card): It runs from when the bank sent the statement also. The consumer customer is given 60 days mandated by federal law and not subject to agreement modification. o Court looks at the argument where the drawer’s statements were stolen from the mailbox month after month. o Bank cannot disclaim duty to act in good faith and ordinary care. §4-406(d)(1): If bank finds customer fails to perform his duty, customer is precluded from asserting that the signature is unauthorized or alteration, but ONLY if the bank also proved that it suffered a loss because of this, it would not have suffered a loss if the customer had notified the bank in the time period required. o “On Us” Check: Bank has control over both accounts – They would not have suffered a loss (they would have used charge back to recover. That is a situation where they would not have suffered a loss. Drawer would have to bear the loss. o Under usual situation, the notification would not be successful in preventing loss. o Ordinarily this is difficult proof for bank. §4-406(e): Comparative Negligence Section – Customer did not act promptly but the bank also failed to exercise ordinary care itself. The loss is allocated between both parties. If the customer shows that bank did not pay in good faith, then the preclusion does not apply at all. o Stowell court discusses the fact that the agreement cannot be enforced if it waives the rights under §4-406(e). o Same types of problems with the comparative negligence standard. §4-406(f): We don’t look at failure of ordinary care and instead it imposes a limit for the drawer reporting forgeries or alterations without regard to whether the drawer was negligent. o Classic case: Drawer was in a coma. Not lack of ordinary care - Judge put this case under (f). o She is stuck with the ONE YEAR rule.
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Borowski case in supplement – discuss that and GA Statutes in supplements and then talk briefly about truncation and then go through CHECK 21 form. Then hopefully the next section – Theft by employees Go to page 99 (not including case at bottom of page 99). - Pages in supplement – 31-41 11/05/03 Missed class 11/10/03 eleary@u.washington.edu Send notes for Agency and Commercial Paper for Monday
CHECK 21 INFORMATION CHECK 21 BILL – See handout – now enacted to solve the problem (check imaging) Problem – Inefficient System to process checks, too few banks and drawers agree to truncate Solution – Check 21: Requires no agreement Since Check 21: New Problems – Substitute checks defective, errors in transmission, double debits New Solutions – Warranties, indemnification, consumer recredit
Truncation: Under §4-406(a) and (b), customer must agree to that (not returning checks – truncation). Image the drawer receives = IRD. There are problems that can arise with the new system but correctible with warranties, recredit and indemnity. Banks may truncate checks if drawer consents. CONSUMER RECREDIT - Can make claim for recredit to her account o If consumer asserts in good faith that The bank charged the consumer’s account for a substitute check that was provided to the consumer Either The check was not properly charged to the account Consumer has warranty claim with respect to such substitute check Consumer suffered resulting loss Production of check original or a better copy is necessary to determine validity of any claim in subparagraph (B) (beginning with either). - Claims require o Why the check was not properly charged o Nature of warranty claim if that is basis of claim o Allege that loss has been suffered o Estimate amount of loss o Reason why production of check is necessary to determine the validity of charge or warranty claim o Sufficient information to identify the substitute check and to investigate the claim Problem in Check 21 Handout – CONSUMER RIGHTS - Does she have a warranty claim? Yes, the check has already been paid. - She clearly suffered loss o $15K double debit o Checks that she has been bouncing – bounced checks = Wrongful dishonor o Possibly eviction if rental check – credit report - She can estimate the amount of the loss. - Reason why the check production is necessary? o We don’t know why the double debit was made. Could be another forged check Could be a counterfeit check Could be presentment of 2 substitute check - If she cannot meet requirements for stating the claim for recredit, she will have the UCC to help out. o UCC gives them §4-401, §4-402 (wrongful dishonor) – basically the UCC is giving them a right to sue (or arbitration as the agreement with the bank states). - If not necessary, should Congress have limited this to showing of reason why check production is necessary? o Should it be broader? Should there be a greater more expansive? o Something with the substitute check must be part of the problem in order to get the original. - Should Consumer agree to truncate? o If they say no, then they get protection of Check 21. o This is kind of backward…Consumer Advocates say that the right to recredit should be broader. o Consumer should be allowed the right as long as there was a substitute check somewhere in the process. o Also should apply where consumer agreed to truncation So, it would impose §4-406 the rights of check 21. Should cover voluntary truncation as well. - Should Bank want UCC or Check 21? o UCC would be better for the bank. o They will not really sue in most cases. o The recredit is really bothering banks If you do recredit, the bank may lose money if there is fraud. o It is better for bank to be under UCC. They would need voluntary truncation so to get truncation they can do a number of things: Close account Charge fees for not truncating
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Must recredit up to $2500 within 10 days if they cannot figure out the problem – If not within 45 days, then they must recredit the entire amount PROBLEM 2 on p. 6 of handout o They gave her the $2500. o Is it sound public policy to limit the recredit to only $2500? o Loss under UCC…UGH! This gives bank an interest in finding out what happened ASAP. If the claim was not valid, the bank can reverse the recredit.
ELECTRONIC FUNDS TRANSFER ACTS - When there is an electronic transfer (EFTA) there is an unrestricted right to recredit if the bank cannot figure it out in a couple of days. The bank, if they decide the claim is not valid, has to provide them with check, reasons why it was not accepted as invalid. Disclaimers (consumer notices) must be included on the agreement. Small chance that the check issues will actually hurt “us” But there is enough. DAMAGES - No more than amount of substitute check - The customer has UCC remedies plus any other applicable law. - You are limited to the amount + interest + expenses o Expenses: FRB commentary on the bill that they submitted to Congress which was changed in some important ways, but the commentary says they don’t mean “expenses” incurred by the complaining drawer, but instead attorney fees, court costs, etc. o Damages may be decreased through comparative negligence standard which is included in the section. o END OF CHECK 21 DISCUSSIONS THEFT BY EMPLOYEES Don’t forget other exceptions. §3-406: Possible basis for transferring losses §4-406: Loss may be on drawer if failed to examine bank statement EMPLOYER exception here - Cablecast case o Pennington is depositing the Cablecast checks into her own account. o Usually where there is a forged indorsement, the depositary bank – who dealt with the thief – will be held liable for this situation. o GENERAL RULE: Depositary bank is liable for forged indorsement. o EXCEPTION: Where employee is trusted with responsibility, the indorsement is effective against the person to whom the instrument is payable. Here, the employer – payee – will bear the loss. o Forged endorsement of payee Payor bank does not have to pay and can shoot liability up to the party who dealt with the thief. The payee still wants to get paid (§3-420: Conversion action against payor or depositary bank) - Here you are going to pretend that there was no forgery at all. The payee cannot sue for conversion. o The loss will remain on the employer. This is the effect of our saying that the endorsement was treated as not being forged at all. - Rationale: You should supervise and care about whether your employees are doing the right thing. Employer can also insure against these losses. - In supplement on p. 33, he discusses the section (§3-405 and §3-404) and hopefully by reading casebook and supplement we will be able to piece together how the section operate. SKIP OVER CREDIT CARDS (Do assignment 8 instead). Electronic Fund Transfers