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Do Banks Report $5000 Cashiers Checks to the Irs

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Do Banks Report $5000 Cashiers Checks to the Irs Powered By Docstoc
					                                          COMMERCIAL PAPER

   I.      HISTORY
           a. Created in England during Industrial Revolution
                  i. Needed a way to pay for the goods w/o exchanging money
                         1. 1 way –> take money and leave w/ X. Buyer travels and fills out a bill of
                             exchange (order issued by 1 (drawer) to 2nd (drawee) directing drawee to pay
                             specified sum of money and specified time to 3rd (holder)) w/ Seller. Buyer
                             instructs X to pay Seller amount
                         2. 2nd way –> Give seller a promissory note which promises to pay on a certain
                             date. Seller gives to C, who gives to buyer demanding payment
           b. Used to be civil law (non-uniform)
           c. Now, National Conference developed Model Laws
                  i. Negotiable Instruments Law (NIL)
                         1. Every state adopted
                 ii. 1950 new practices
                         1. UCC (covers more than just negotiable instruments)
                         2. Article 3 – negotiable instruments
                         3. Article 4 – Relations b/t Banks and Customers
                iii. 1990 – revised Articles 3 & 4
                         1. B/c of computers
                         2. Also, New Article 4A – Electronic Funds Transfer

   II.     NEGOTIABILITY AND HDC
           a. INTRODUCTION
                 i. SCOPE OF Art 3 § 3-102; 4-102(a)
                      1. § 3-102 (a) –> Article 3 applies to negotiable instruments (not money, payment
                         orders (Art. 4(A)) or securities (Art. 8))
                      2. If there is a conflict b/t Art 3 and Art 4 or 9, then Art. 4 or 9 governs
                      3. Federal Reserve System (usually when write a check) has own regulations that
                         supersede Art 3
                      4. If what you have is NOT a NI, then look to other law (K law, etc) to govern
                      5. Courts will sometimes look to Art 3 to govern even if not NI
                      6. Also, parties can K to have Art 3 govern

Why is it so important that Article 3 applies and not K law for negotiable instrument?
                   i. MERGER DOCTRINE
                          1. If you obligated to make a payment and use negotiable instrument, your
                              obligation cannot exist separate from the instrument
                          2. If instrument transferred, obligation transferred
                          3. Debt merged into instrument
                          4. Can transfer right to get paid to another
                                   a. If you do not know, can pay wrong person
                                           i. If gave money – then can pay wrong person and holder of right can
                                              sue in K
                                          ii. If gave negotiable instrument – then can pay wrong person BUT
                                              did NOT fulfill obligation unless paid the holder
                  ii. Holder in Due Course – HDC
                          1. Protect innocent purchaser of negotiable instruments
                                   a. Wanted people to take the instrument
                          2. Inn person = holder in due course
                                                         1
                          3. H contracts to build building for S. S transfers K rights to W. W cannot go to H
                              b/c contract breached. W must go to S.
                          4. H has keys and S has negotiable instrument. S gives to W who is HDC. W asks
                              H for money – H has to pay.
                          5. H wants Simple K; S wants Negotiable Instrument
                                  a. S – better market if want to sell
                                  b. H – doesn’t want negotiable
                          6. HDC – immune (super P) = W
                                  a. Want to encourage people to buy this paper
                  iii. MEANS K law only good if pay w/ cash
If pay w/ check or note (negotiable) –> then new law

                  ii. DRAFTS and NOTES § 3-104(c)-(j); § 3-103(a)(2); § 3-103(a)(3), (5), (11)
                        1. NOTE –
                              a. 2 Parties (Ex. Cert of Deposit)
                                      i. Cert of Deposit - Certificate stating bank received a sum money
                                          and promises to repay that money
                              b. PROMISE to Pay
                                      i. § 3-103(a)(9) Promise is a written undertaking to pay money
                                          signed by the person making the undertaking
                                     ii. Maker (promisor)
                                    iii. Payee (promisee)
                              c. § 3-103(a)(5) Maker – a person who signs or is identified in a note as a
                                 person undertaking to pay (I sign a note for a car, I am the maker)
                              d. Payee – a person who was promised money (I sign the note for the car,
                                 Regions is the payee)
                              e. § 3-104(j) Certificate of Deposit – an instrument containing an
                                 acknowledgement by a bank that a sum of money has been received by the
                                 bank and a promise by the bank to repay the sum of money. A certificate
                                 of deposit is NOTE of the bank
                                      i. Most Certs of Deposit are NOT neg b/c says aren’t
                                     ii. Banks do not want the responsibility of determining who the
                                          correct person to pay is
                              f. § 3-104(d) - A promise or order other than a check is not an NI is, at the
                                 time it is issued or first comes into possession of a holder, it contains a
                                 conspicuous statement, however expressed, to the effect that the promise
                                 or order is not neg or not an Art 3 instrument
                              g. Can be payable on demand or on future date; in lump sum or installments

                         2. DRAFT
                              a. 3 parties (ex. check)
                                     ii. § 3-103(a)(3) Drawer – a person who signs or is identified in a
                                         draft as a person ordering payment (ex. on a check – me)
                                    iii. § 3-103(a)(2) Drawee – a person ordered in a draft to make
                                         payment (ex. on a check – the bank)
                                    iv. Payee – party payment is made to (ex. on a check – Casual Corner)
                              b. ORDER to pay
                                      i. § 3-103(a)(6) Order is the written instruction to pay money signed
                                         by the person giving the instruction
                              c. Drafts can be
                                      i. Payable on demand
                                                     2
      ii. Certain date
     iii. Can be drawn on anyone (whether have to is another question)
d. Kinds of Drafts
       i. § 3-104(f) CHECK is:
              1. A draft, other than a documentary draft, payable on demand
                  AND
              2. Drawn on a bank OR (what is a bank § 4-104(a)(1))
              3. Cashier’s check or teller’s check
              4. Ex. If I write a check to Peggy
                       a. Drawer: Me
                       b. Drawee: regions
                       c. Payee: Peggy
              5. Post dated checks are oxymorons
      ii. Sometimes instrument says payable at a bank –> not a check b/c
          drawee is not a bank)
     iii. § 3-104(g) Cashier’s Check is a draft with respect to which the
          drawer and drawee are the same bank or branches of the same bank
              1. Drawer: Regions
              2. Drawee: Regions
              3. Payee: Casual Corner
              4. Remitter: Me
                       a. § 3-103(a) (11) Remitter is a person who purchases
                          an instrument from its issuer if the instrument is
                          payable to an identified person other than the
                          purchaser
     iv. § 3-104(h) Teller’s Check is a draft drawn by a bank on another
          bank or payable at or through a bank
              1. Drawer: Bank of America
              2. Drawee: Pulaski Bank
      v. § 3-104(i) Traveler’s Check is an instrument that is:
              1. Payable on demand
              2. Drawn on or payable at or through a bank
              3. Designated by the term AND
              4. Requires, as condition to payment, a countersignature by a
                  person whose specimen signature appears on the instrument
e. Other Drafts (see handout – non-check)
       i. Hutsel runs a feed store and buy from Iowa. Gives Ross, with a
          truck a draft to take to Iowa. Ross fills out draft. Grain elevator
          takes to bank (prob. won’t get credit right away). Sends to AR
          bank, which calls Ross and asks. Teller’s check to Iowa bank
          sends Iowa bank for $4,950 (other $50 is fee charged to Iowa bank
          for collecting the fee). Iowa bank will put money in Grain
          Elevator’s account.
              1. People
                       a. Drawer – Ross
                       b. Drawee – Hutsek
                       c. Payee – Grain Elevator
              2. Not a check b/c not drawn on a bank, but on a person
              3. Also can do 30 days after sight, so 30 days later will pay.
                  NOW not a check b/c not drawn on a bank and not payable
                  on demand
                      3
                                     4. If don’t pay (b/c didn’t sign and have no liability) –> hurts
                                         business. May look to Ross.
                             ii. Today would do a wire transfer
                      f. § 3-104 (comment 4) Money Orders – can be
                              i. Check
                             ii. Cashier’s Check
                            iii. Teller’s Check
                            iv. Ex. If buy from Kroger = check (Kroger drawn on a bank)
                             v. Ex. If buy at bank = either cashier’s or tellers (drawn on self or
                                 another bank)

b. REQUIREMENTS of NEGOTIABILITY (9) § 3-104
          9 requirements
              - Promise/Order
              - Writing
              - Signed
              - Unconditional
              - Money
              - Fixed Amount
              - No other undertaking
              - Payable on Demand or at Definite Time
              - Payable to Bearer or Order
          Some are affirmative (required) – MUST APPEAR ON FACE OF INSTRUMENT
          Some are prohibited – CANNOT appear on face of instrument
                   - If put in separate document – ok and apply to the NI
          See effects on language in handout
       i. Promise/Order § 3-104(a), 3-106(a)(6) & (9)
              1. Promise (note) - written undertaking to pay money signed by the person
                       a. NOT IOU, or just acknowledgment
                       b. “I promise to pay to the order of”
              2. Order (draft) – written instruction to pay money signed by the person giving the
                  instruction
                       a. Order, not just authorization
                       b. “Pay to the Order of”
      ii. Writing § 1-201(46)
              1. Promise or order has to be in writing (see § 3-103 definition of “promise” and
                  “order”)
              2. § 1-201(46) - Printing, typewriting, or reduction to tangible form (usually on
                  paper)
              3. Cannot call and say to pay –> not negotiable and cannot transfer
     iii. Signed § 1-201(39); 3-401(b); 3-403(a)
              1. Signed by the person who makes the promise or order payment to be made
              2. § 3-103 – definitions of “promise” and “order” require signing
              3. § 1-201(39) – reduction to tangible form, etc. any symbol executed or adopted by
                  a person with present intention to authenticate a writing
                       a. Ex. Smilie, brand, trademark, thumbprint, stage name
              4. § 3-401(a)(b) – A person is not liable on an instrument unless that person signed
                  the instrument or a representative or agent signed the instrument. A signature
                  may be manually or by machine or use of name, trademark, symbol, assumed
                  name, etc.

                                            4
          5. § 3-403(a) – An unauthorized signature (forgery) is ineffective except as the
              signature of the forger in favor of a person who in GF pays the instrument or takes
              it for value
                   a. It is neg but is a check on the forger, not the person whose name was
                       forged
                   b. Signed by Drawer = forger
          6. Stage Name – Signature can be an assumed name as long as used for purposes of
              authenticating a document
iv.    Unconditional § 3-104(a); 3-106
          1. Prohibition
          2. § 3-104(a) – “unconditional promise to pay” – person who gets it should not have
              to check and see if conditions satisfied
                   a. CANNOT have a condition on the face of the document
                   b. Ex. Not obligated to pay unless you build –> non-neg
                   c. Traveler’s checks are the exception (condition by signature)
          3. For a condition to be construed as such and make an instrument non-neg, must
              appear on the face of the document
          4. § 3-106 – Unconditional Promise or Order defined
                   a. A promise or order is unconditional unless it states
                            i. An express condition to payment
                           ii. That the promise/order is subject to or governed by another writing
                               OR
                          iii. That rights or obligations with respect to the promise or order are
                               stated in another writing
                   b. A promise or order is NOT made conditional by:
                            i. A reference to another writing for a statement of rights w/ respect
                               to collateral, prepayment, or acceleration
                           ii. B/c payment is limited to resort to a particular fund or source
          5. You can put conditions in a separate agreement and the note is still neg BUT an
              HDC is not bound by the other agreement
          6. Payable out of a special fund is now allowed
          7. HANDOUT
 v.    Money § 3-103(a); 1-102(24); 3-107
          1. Has to be money and not goods
          2. § 1-201 (24) Money – medium of exchange adopted by a gov’t
          3. § 3-107 – Instrument payable in Foreign Money
                   a. Instrument can be paid on equivalent US dollars unless instrument says in
                       yen only
vi.    Fixed Amount § 3-104(a); 3-112
          1. “I promise to pay you $100,000 dollars and 3% over NY Prime Rate as Interest.”
                   a. In the past, this was not negotiable b/c not a fixed amount
                   b. NOW – fixed amount applies ONLY to principle
                   c. Interest can be adjusted
          2. Principle amount MUST be fixed
          3. § 3-112(b) – Interest can be fixed or variable amount
          4. § 3-104 – Note providing for late charge is still neg “other charges”
vii.   No Other Undertaking or Instruction § 3-104(a)(3); 3-311
          1. § 3-104(a)(3) can not state any other undertaking or instructions, BUT may
              contain
                   a. An undertaking or power to give, maintain, or protect collateral to secure
                       payment (protect collateral)
                                           5
                b. An authorization or power to the holder to confess judgment or realize on
                   or dispose of collateral (repo collateral)
                c. A waiver of the benefit of any law intended for the advantage or
                   protection of an obligor
                -These do not make non-neg
         2. Cannot promise to do something
         3. Ex. $100 and 10 hours of legal service is not neg
         4. EASY way to is have a clean promissory note AND all others into separate
            document
                a. Can even refer to the separate agreement in the note and still neg
viii. Payable on demand or at a definite time § 3-104(a)(2); 3-108
         1. § 3-104(a)(2) – “payable on demand or at a definite time”
         2. § 3-108 Fleshes out
                a. “Payable on demand”-
                         i. States payable on demand or at sight OR
                        ii. Otherwise indicates that it is payable at the will of the holder OR
                       iii. Does not state any time of payment
                b. “Payable at definite time” -
                         i. Payable on elapse of a definite period of time after sight or
                            acceptance OR
                        ii. At a fixed date(s) OR
                       iii. At a time readily ascertainable at the time the promise or order is
                            issued
                                1. Subject to rights of:
                                        a. Prepayment
                                        b. Acceleration
                                        c. Extension at the option of the holder
                                        d. Extension to a further definite time at the option of
                                           the maker or acceptor or automatically upon or after
                                           a specified act or event
                c. If an instrument is payable at a fixed date, the instrument is payable on
                   demand until the fixed date and (if not paid before) becomes payable at a
                   definite time on the fixed date
                d. If an instrument is payable upon demand made before the fixed date, the
                   instrument is payable on demand until the fixed date and (if not paid
                   before) becomes payable at a definite time on the fixed date
         3. Examples - HANDOUT
                a. Payable 30 days at sight = on demand
                b. Payable 30 days after sight = at definite time
                c. Payable if feels insecure = definite time
                         i. Acceleration clause
                d. Payable on Nov 3 but holder can extend due date = demand
                         i. Allows holder to change time
                e. Payable on Nov 3 but maker can extend the due date
                         i. Non-Neg (not definite time)
                f. Payable on Nov but maker may extend to Dec 4
                         i. Neg (b/c definite due date)
                g. Payable unless corn price changes on this date, and then this date
                         i. Neg b/c automatic change upon or after specified event
                h. Payable 120 days after uncle dies
                         i. Time not definite
                                       6
                     ii. On demand
              i. Payable Nov 1 but holder may demand payment if uncle dies
                      i. Definite time subject to right of acceleration
              j. Payable on or before Nov 1, 2002
                      i. Definite time subject to right of prepayment
              k. Payable on Nov 1 or on demand
                      i. Definite time subject to holder
ix. Payable to bearer or order § 3-104(a); 3-109
       1. § 3-104(a)(1) – payable to bearer or to order at the time it is issued or first comes
          into possession of the holder
       2. § 3-109 – Payable to Bearer or to Order – Elaborates
              a. Payable to Bearer if it:
                      i. States it is payable to Bearer
                             1. Or to the order of bearer or otherwise indicates that the
                                 person in possession of the promise or order is entitled to
                                 payment
                     ii. Does not state payee OR
                    iii. Is not payable to an identified person (ex. payable to cash)
              b. Payable to Order
                      i. Payable to the order of identified person (or payable to identifiable
                         person or order)
                             1. Payable to Matt or any one Matt orders to pay
                     ii. Payable to an account
       3. Examples - HANDOUT
              a. Pay to order of bearer = bearer
              b. Pay to the order of John Doe = order
              c. Pay to John Doe or order = order
              d. Pay to the order of ___ = bearer
                      i. When fail to fill out a check, then it is available to whoever holds
              e. Pay to the order of cash = bearer
              f. Pay to the Order of John Doe or bearer = bearer
              g. Pay to John Doe = non-neg
                      i. Neither
                     ii. Ex. I promise to pay Matt the sum of $10,000 on 1-12-2002. And
                         signed
                    iii. MUST have the MAGIC words “order”
                    iv. Checks are EXCEPTION to rule
                             1. Pay to the order of Matt
                                       a. Order
                             2. Pay to (crossed out rest) Matt
                                       a. Neither until 1990
                                       b. Still non-neg in England
                                       c. Neg now in America
                                       d. B/c now machines read the checks
                                       e. ONLY for checks and credit union stuff
              h. Pay to bearer = bearer
              i. Pay to order of Happy Birthday = order (if person); bearer (if not person)
              j. Pay to order of Pulaski County Tax Collector = order
                      i. Identifiable person
              k. Pay to order of Pulaski County = order
                      i. Person is now defined broadly to include organization
                                      7
   2. NEGOTIATION AND HOLDER § 3-105(a); 3-501(a); 3-201; 3-205; 1-201(20); 3-203
        a. Negotiation

    Instrument’s Life = (Maker(note)/ drawer(check)–>Issue–>Payee–>Neg–>Holder A–>Neg–>B–>Neg–
>C–>Presentment–> Maker /drawee

                 i. Negotiation = transfer of possession (vol or invol) by person OTHER than issuer to a
                    person who hereby becomes the holder
                ii. § 3-201 – NEGOTIATION – means a transfer of possession, whether voluntary or
                    involuntary, of an instrument by a person other than the issuer to a person who thereby
                    becomes the holder
               iii. § 3-105 Issue – means the 1st delivery of an instrument by the maker or drawer, whether
                    to a holder or nonholder, for the purpose of giving rights on the instrument to any person
               iv. § 3-501 Presentment – a demand made by or on behalf of a person entitled to enforce an
                    instrument

                 v. § 3-201(b) Additional Requirements for Negotiation
                        1. Instrument payable to an identified person, negotiation requires transfer of
                           possession of the instrument and its indorsement by the holder
                        2. Payable to bearer, may be negotiated by transfer of possession alone
                vi. If someone takes a neg instrument by gunpoint = transfer
               vii. If BEARER - Negotiation requires ONLY transfer
              viii. If ORDER - Negotiation requires transfer AND indorsement

               ix. § 3-204 INDORSEMENT - a signature made on an instrument for the purpose of:
                       1. Negotiating the instrument
                       2. Restricting payment
                       3. Incurring indorser’s liability
                x. § 3-204 Signature – No requirement that it appear on the back, it can appear anywhere as
                   long as it is not the signature of the maker, drawer, or payee
               xi. § 3-204(d) Check made out in the wrong name – you can indorse it w/ the wrong name,
                   your real name, or both. Bank may require you to do both (and they can demand it)

              xii. 3-205 –> 2 Types of Indorsement
                      1. Special indorsement – signed with the name of payee and identifying whom the
                          check is being transferred. It identifies the person to whom the check is being
                          transferred. Must be given by a holder.
                              a. § 3-205(a) Makes it payable to an identified person
                              b. If no one indorses, no one down stream, no matter how innocent can be a
                                   holder
                              c. Ex. On back of check, write pay to Patrick Higle and sign your name =
                                   special indorsement
                              d. After this – not able to be further negotiated, no longer unless Patrick
                                   Higle signs
                                       i. “Order” does not have to appear
                                      ii. Makes a Bearer note an Order note
                      2. Blank indorsement – If an indorsement is made by the holder of an instrument
                          and it is not a special indorsement, it is a blank indorsement. It does not identify
                          to whom it is payable. It only requires possession to be further negotiated
                                                      8
                                 a. § 3-205(b) just your signature
                                 b. Able to be further negotiated w/o further indorsement
                                 c. Makes it a BEARER
** Instrument can be payable on order (pay to order of ME), then bearer (ME signs the back), then order (Me
gives to Kay who writes pay to the order of SCOTT).

           b. Holder
                  i. § 1-201(20) Holder -
                         1. Person in possession if instrument is payable to BEARER
                         2. Identified person in possession if ORDER
                 ii. Holder is the person in possession if the goods are deliverable to bearer or to the order of
                     the person in possession

                          1. Ex. If I get check from gov’t and Sam steals it:
                                 a. I’m not holder b/c no possession
                                 b. Sam’s not holder b/c no identified person
                                 c. NO ONE is holder here

                          2. Ex. If I endorse the check and Sam steals it
                                 a. Sam is holder b/c blank indorse

                          3. How can you protect yourself if given a BEARER?
                                  a. Write pay to Sarah Greenwood but do not indorse yet.
                                  b. If write for deposit only –> means only bank can be a holder after that
                 iii. § 3-205(a) What about MAGIC works? – The principles stated in § 3-110 apply to
                      special indorsements. You don’t need “order” only need to state identified persons
                 iv. Forgery – ineffective – Not holder b/c the identified person is the only one who can be
                      the holder and indorse
                  v. § 3-203(c) What if original payee forgets to indorse? – This section provides that if the
                      instrument is transferred for value and the transferee does not become holder b/c of lack
                      of indorsement, the transferee has a specifically enforceable right to the indorsement, but
                      negotiation of the instrument does not occur until the indorsement is made




           c. Merger Doctrine § 3-301; 3-602
                 i. § 3-301 – Person entitled to enforce – The right of a party to payment depends upon
                    their status as a holder
                        1. Can be a person entitled to enforce even if not owner and in wrongful possession
                ii. § 3-602 – If you pay the person entitled to enforce, your debt is satisfied
                                                     9
                          1. If pay the holder – debt is satisfied
                 iii. If an instrument is negotiable, then 2 doctrines kick in:
                          1. The Doctrine of Merger
                                  a. When obligation to pay is incorporated into a NI, the obligation to pay
                                     ceases to exist outside of that obligation. When the instrument is
                                     negotiated, the obligation is negotiated also

                          2. The Doctrine of Holder in Due Course
                                 a. Not a holder –> not entitled to enforce (exception: burned in fire)
                                 b. Holder –> entitled to enforce
                                 c. HDC –> entitled to enforce plus takes free of certain defenses and claims
                                     (SUPER PLAINTIFF)
SMS Financial, LLC v. ABCO Homes
FDIC took the notes and sold to SMS. SMS found a note missing and got money back. FDIC then finds the
note and mails to SMS (mistake). SMS sue the makers of the note. Makers say not the owner (FDIC).
Does not matter if the owner or not
SMS is holder; Makers are liable to SMS for the amount of the note.
SMS are in possession of instrument indorsed to them = holder (person entitled to enforce)

                         3. Fair?
                                a. Not unfair to Makers –> b/c paid out liability to holder
                                       i. If Makers pay person entitled to enforce, no longer have liability
                                      ii. Payment as Defense § 3-602
                                b. FDIC cannot sue Makers
                                       i. If really worried – join FDIC in litigation
                         4. Cannot refuse to pay just b/c you don’t think the holder is the owner
Lambert v. Barker
Barker (maker) buys property from Davis and pays w/ note (mortgage to secure). Barker conveys to Beloff
(takes subject to mortgage). Beloff to Harwoods (assumes payment). Davis gives notes to Lambert, but does
not transfer mortgage to Lambert. Harwoods wants to sell to Bugg. Bugg goes to Davis to pay off mortgage
(Davis lied saying cannot find note). Lambert shows up demanding payment. Lambert sues Barker and
Harwoods (Davis is in jail and does not have the money).
Can sue Barker as maker and Harwoods b/c assumed payment
        - Cannot sue Bugg – clear title, never agreed to pay the note, got affidavit
Have to pay the holder or obligation is not discharged
         - Lambert is the only person entitled to enforce the note

                         5. It is the payer’s responsibility to ensure that the person they are paying is the
                             holder of the note
                                  a. MUST do to protect yourself
                                  b. Make Davis put up bond, whatever, to secure
                         6. No notice required when transfer, so payor should demand production of the
                             instrument and should refuse if cannot
                         7. If you ever pay off a note, be sure to get it back
                         8. Easy protection for Lambert is to require the mortgage titles to state that Lambert
                             is the mortgagee
                 iv. There is a procedure (§ 3-309) for when you lose a note –> prove lost and post a bond to
                     be entitled to enforce
                         1. Only b/c court protects later innocent holder
                  v. IMPORTANCE of NI
                         1. Merger Doctrine
                                                      10
              2. HDC Doctrine

d. Holder in Due Course § 3-305; 3-306
ADVANTAGES to being a HDC -
       i. A holder who purchases an instrument innocently gets special protections –> § 3-
          305(b)
      ii. § 3-305 Defenses and Claims in Recoupment
              1. Defines when obligor (maker if note/ drawer if draft) has to pay (certain defenses
                 can impose – Real Defenses)
              2. Ex. Maker –> Payee –> Neg to A (Holder; not HDC) –> Transfer to B (Holder &
                 HDC)
                     a. What defenses are good as against:
                             i. Payee?
                            ii. A?
                           iii. B?

      iii. § 3-305(a)(1) REAL DEFENSES (defenses a HDC takes subject to – good against
           anyone)
               1. Infancy of the obligor to the extent it is a defense to a simple K
                      a. § 3-202 Negotiation is effective even if it is obtained from an infant.
                          Minors can indorse a check. S can write a check to a minor and neg to A.
                      b. Maker is 17 (Age of Maj is 18)
                      c. AR law for infancy
                               i. Void except for Ks for necessities (food, clothing, shelter, med.
                                   attention)
                              ii. If not a necessary, infant will win
               2. Duress which under other law nullifies the obligation of obligor
                      a. Ex. Blackmail, gun to head => Yes, probably
                      b. No AR law on point
                      c. Lesser forms of pressure – d/k
                               i. Threat of lawsuit is not suff
               3. Lack of Legal Capacity which under other law nullifies the obligation of the
                  obligor
                      a. Ex. Elderly, insane, drunk
                      b. Void v. Voidable
                               i. If voidable – HDC cuts off
                              ii. If void – no one can enforce
                      c. Generally AR law suggests only voidable (b/c can come back and affirm
                          later) – law is a little fuzzy
               4. Illegality of the transaction which under other law nullifies the obligation of the
                  obligor
                      a. AR LAW – one type of illegality is clearly null and void (gambling debt)
                      b. Ex. Betting (note or bill to pay off betting debt. If you get loan to pay off
                          debt already incurred, not null and void.
               5. Fraud in the execution (fraud that induced the obligor to sign the instrument w/
                  neither knowledge NOR R opportunity to learn of its character or its essential
                  terms)
                      a. You thought you were signing a receipt. Things added after signed that
                          made a promissory note
                      b. Different from fraud in the inducement; there knew signing note but were
                          tricked
                                              11
                      i. Ex. Say will put roof on house if sign this; you sign and they take
                          off = fraud in the inducement
             c. Courts not usually very sympathetic
       6. Discharge in insolvency proceedings
             a. Bankruptcy
                      i. If maker gives promissory note and later declares bankruptcy and
                          lists the debt and is discharged from the debt, good defense against
                          anyone
       7. Forgery (of the drawer)
             a. Not specifically listed but HDC cannot hold you if forged
             b. § 3-401 – not liable on an instrument unless your authorized signature is
                 on it (either you or an person you authorized to sign)
       8. Alteration
             a. Amount altered, cannot be enforced if maker is in no way responsible for
                 the alteration. HDC can enforce as to original amount
             b. If issue a check and payee puts an extra zero and then transfers to HDC,
                 cannot enforce except as to original amount




iv. § 3-305(a)(2) ORDINARY/PERSONAL DEFENSES (defenses HDC not subject to;
    only good against ordinary holder)
        1. Defenses based on Article 3
        2. Defenses available on simple K under AR law
               a. No consideration
               b. Failure of consideration
               c. Non-Performance of a Condition Precedent
               d. Fraud in the inducement
        3. Examples
               a. Ex. Relative gives a gift (check) to you. You give to a holder A (not
                  HDC). Relative mad and stop payment. A cannot sue b/c gift, no
                  consideration.
                       i. B (an HDC) could
               b. Ex. D comes to do roof and gets a check. D leaves. You stop payment. D
                  gives to A.
                       i. A cannot enforce b/c fraud in the inducement or failure of
                          consideration
                      ii. If HDC, you must pay
               c. Ex. Maker of note to payee. Maker pays the note and payee gives receipt.
                  Has the note been discharged?
                       i. Yes – paid the holder § 3-602
                      ii. Now payee neg to A. A sues Maker.
                              1. Defense of discharge. A cannot sue
                     iii. If A neg to B (HDC). B sues Maker.
                              1. Maker has no defense (B/c defenses of Article 3 no apply
                                 to HDC)

                                    12
                               2. Notice – defense of bankruptcy good against HDC; defense
                                  of payment not good against HDC
               d. Ex. You buy traveler’s check from a bank. You must sign the check then.
                         i. Drawer – Bank
                        ii. Drawee – Bank
                      iii. Don’t know who payee is yet (you determine)
                       iv. You lose traveler’s check – safe b/c bank replaces
                        v. W finds it and fills it out to Y. W forges you signature. Y neg to
                            A. A neg to B (HDC). Was A a holder?
                               1. Yes § 3-106(c)
                               2. Failure to countersign is a defense
                       vi. A cannot sue bank
                      vii. B CAN (defense of Article 3)
                     viii. NOT forgery defense (real defense)
                               1. B/c only for forgery of the drawer
                               2. B/c your signature is not indorsement; only requirement for
                                  payment
v. § 3-305(a)(3) – A claim in recoupment of the obligor against the original payee of the
   instrument if the claim arose from the transaction that gave rise to the instrument. (A
   HDC is not subject to a claim in recoupment) BUT ONLY for the amount of the original
   note (offset the note amount) if claim is greater than the amount of the note.
       1. Building completed, builder paid, but later see doors are not as required - $10,000
           damages. This amount can be set of if builder has not been paid)
       2. If $100,000 building completed, builder not paid, and $10,000 damage. Builder
           sues, you counterclaim. You owe $90,000.
       3. If $100,000 building, no pay, and $115,000 damages. If you win, then builder
           must pay $15,000. CAN assert counterclaim for more and get paid.
       4. $100,000 Building built and perfect. But hired for $25,000 legal fees. Builder
           sues on note. You counterclaim (unrelated claim) for legal fees. Builder gets
           $75,000. Can offset even though unrelated. (Can also if unrelated claim is more
           than original claim)
               a. OK – b/c ordinary K law (not UCC yet). Original parties to the note
       5. NOW – Builder neg note to H (not HDC). If building not built and H sues me, no
           win (b/c personal defense)
               a. Complete failure of consideration
       6. Building leaks and I have $15,000 damages. Builder gone. H sues me. I can set
           off the $15,000 from the $100,000 note.
               a. § 3-305(a)(3) – claim the obligor has arising out of transaction that
                   produced the note
               b. H gets $85,000
       7. Same but I have $115,000 damages. H sues.
               a. I can get $100,000 ONLY; H does not have to pay the $15,000
               b. The claim in recoupment is reduced to ONLY the amount of the
                   original note
               c. Cancels out (no one gets anything)
       8. Now building is perfect, but legal service of $45,000 to Keeter. H sues.
               a. H can get $100,000 (does not have to pay the unrelated claim)
               b. If Builder had sued, I could get the $45,000 offset from the unrelated
                   claim (permissive counterclaim)
               c. I can get claims in recoupment, not unrelated claims
       9. NOW H neg to K (HDC). Building not built. K sues.
                                     13
                          a. K can get $100,000 b/c defense of failure of consideration no apply to
                              HDC
                  10. Building leaks for $15,000 damages. K sues.
                          a. K gets $100,000 b/c claims in recoupment no apply to HDC
                  11. Building perfect; legal fees $45,000. K sues
                          a. K gets $100,000 b/c no unrelated claims can apply to HDC
                  12. If someone steals ring and gives to another, can you get it back?
                          a. Yes, thief cannot deliver good title
                  13. Maker to payee (indorses – BEARER). Thief steals and gives to B. Is B a
                      holder?
                          a. B – holder (not HDC) b/c bearer
                          b. Who is owner?
                                  i. Payee
                          c. Payee sues B to get note back. Result?
                                  i. Payee can get it back
                          d. B neg to C (HDC). Payee sues C. Result?
                                  i. C wins
                                 ii. § 3-306 – person taking instrument (other than HDC) is subject to
                                     a claim in property or possessory right
** REMEMBER: HDC takes subject to real defenses but cuts off all personal defenses and claims in
recoupment (arising out of transactions) and unrelated claims

            SUMMARY: Not a HDC (regular holder) You take subject to:
                 § 3-305(a)(1) Real Defenses
                 § 3-305(a)(2) Ordinary (personal) defenses
                 § 3-305(a)(3) Claims in recoupment
                 § 3-306 Ownership Claims – a holder is subject to a claim of a property or a
                 possessory right in the instrument or its proceeds, including a claim to rescind a
                 negotiation and to recover the instrument or its proceeds.
                         Ex. C steals a check and neg to innocent D (HDC). If B (true owner) sues
                         D, a HDC takes free of ownership claims but a holder takes subject to
                         claim in property
                 BUT NOT Unrelated Claims – a Holder does not take subject to unrelated
                 claims.
                         Ex. Builder owes S for legal fees, S owes for building. This is between B
                         and S.
                 Examples: Mr. W and S K to build a house. S gives him a note and W promises
                 to build the house for $100,000. W puts on the wrong doors (a $2,000 mistake).
                 W owes S $5,000 for legal fees unrelated to the house. What claims may S assert
                 to offset the note?
                         As to W (no holder, only obligor)
                                 100,000 Build the house
                                 (5,000) Legal fees (unrelated claims)
                                 (2,000) Doors (related claims)
                         If W neg the note to holder
                                 100,000 Build the house
                                 (2,000) Doors (related claims)
                         If W neg the note to a HDC
                                 100,000 Build the house


                                              14
              TAKE SUBJECT TO . . . ?
                     Ordinary Contract             Holder of NI             HDC of NI
Personal Defenses           YES                       YES                     NO
Real Defenses               YES                       YES                     YES
Recoupment                  YES                       YES                     NO
Unrelated Claims            YES                        NO                     NO
Ownership Claims            N/A                       YES                     NO


               vi. Traveler’s Checks –
                      1. Stolen traveler’s check w/ forged countersignature § 3-106(c)
                      2. Innocent holder B, is HDC and Drawer (bank) has defense against holder but not
                          HDC
                      3. Compare to forged indorsement –> never a HDC

         e. REQUIREMENTS for STATUS as HDC § 3-302
               i. List
                     1. Holder
                     2. Instrument complete and appears to be authentic
                     3. Value
                     4. GF
                     5. W/o notice
                            a. Defenses or claims in recoupment
                            b. Overdue or dishonored or uncured default
                            c. Claim to instrument
                            d. Unauthorized signature or alteration
                     6. Take in ordinary course
              ii. Holder
                     1. § 1-201(20) see previously discussed
                            a. If bearer – possession
                            b. If order – possession and identity of person paid to
                     2. § 4-205(a) – Bank
                            a. If a person has a check payable to them, go to deposit and fail to indorse,
                               the BANK is still a holder (and on down the line)
                            b. SPECIAL group (holder w/o necessary indorsement)




               iii. Authentic Instrument (Instrument complete and appears to be authentic) § 3-
                    302(a)(1)
                       1. No reason to question as appears on the face
                       2. Does not bear such apparent forgery or so irregular or incomplete
                              a. Usually if so bad – aware of such problems cannot be HDC
                       3. Does not come up often
               iv. Value § 3-303; 4-105; 4-211; 4-210
                       1. If you do not give value, you did not lose anything – no gift
                       2. § 3-303 Value and Consideration



                                                   15
      a. The instrument is issued or transferred for a promise of performance, to
         the extent the promise has been performed (promise of performance does
         not equal value)
      b. § 3-303(a)(1) – Value if issued or transferred for promise or performance,
         to the extent the promise has been performed
               i. Drawer –> Payee –> Harper (for paint house).
                      1. Drawer sees problem w/ goods for it and stops payment
                      2. H can defeat if HDC
                      3. H is HDC if part performance
                               a. Value – promise to perform to extent have
                                   performed
                               b. OTHERWISE – don’t need the protection b/c you
                                   are out nothing
                      4. What if have painted a 1/4 ($250) of the house?
                               a. HDC to that extent ($250)
                               b. Can protect self for rest by not performing
              ii. Maker –> Payee ($10,000 note) –> A (for $9000 – notes typically
                  transfer less than note is worth; sometimes more than note is worth
                  b/c interest rates fluctuate). Is A a HDC?
                      1. Yes
                      2. To the extent of $10,000 – bargained for consideration
                      3. A bargained for $10,000 value; that is what he gets
                      4. What if A has only paid $6,000 of the $9000? What can he
                           get?
                               a. 2/3 of the $10,000
                               b. B/c performed 2/3 (6,000/9,000)
                               c. Don’t pay the rest
             iii. § 3-303(a)(2) – the transferee acquires a security interest or other
                  lien in the instrument other than a lien obtained by judicial
                  proceeding
             iv. § 3-303(a)(3) – the instrument is issued or transferred as payment
                  of, or as security for, an antecedent claim against an person,
                  whether or not the claim is due
              v. § 3-303(a)(4) – the instrument is issued or transferred in exchange
                  for a negotiable instrument OR
             vi. § 3-303(a)(5) – the instrument is issued or transferred in exchange
                  for the incurring of an irrevocable obligation to a 3rd party by the
                  person taking the instrument
      c. PROTECT only for extent paid; protecting the HDC from assertion of
         maker’s defense only to extent that HDC cannot protect himself
      d. § 3-302(d) - % of performance completed – HDC as to that %
               i. Example:
              ii. Maker –> $3,000 Note –> Payee –> Discounted to $2,800 –>
                  Holder
             iii. They bargained for $3,000. They are a HDC to $3,000
             iv. If H agreed to pay $2,800 but at the time of suit had only paid
                  $2,100, then what?
                      1. H would be a HDC (2,100/2,800) *$3,000 = 2250
                      2. (Paid amt/Agreed amt) *Total amount of loan
3. Checks go from bank to bank to bank
      a. Drawer –> Payee –> A (bank) –> B (bank) –> Drawee (Bank C)
                             16
4. When does a bank give value?
     a. § 4-105 Depository Bank – the first bank to take an item (A)
             i. Payor Bank – Drawee’s bank (C)
            ii. Collecting Bank – Handles an item but is not the payor’s bank
                (A) & (B)
     b. Hypo – bank returned check to you (insuff funds)
             i. When bank returns to you –> it is b/t you and the person who
                wrote
            ii. Don’t put the funds in your acct – not involved
     c. § 4-211 – When a Bank gives value for the purposes of HDC
             i. The bank is a HDC to the extent it has a security interest in an item
                (as long as meets all other requirements)
            ii. EX. If drawer stops payment for reason (does not like goods), bank
                is HDC (does not take subject to ordinary defenses) when it has a
                security interest and can sue drawer for amount (no return to
                payee)
     d. § 4-210 – When a Bank acquires a security interest in a check
             i. A bank has a security interest in an item of either:
                    1. In case of an item deposited in an account, to the extent to
                        which credit given for the item has been withdrawn or
                        applied
                    2. In case of an item for which it has give credit available for
                        withdrawal as of right, to the extent of the credit given,
                        whether or not the credit is drawn upon or there is a right of
                        charge-bank or
                            a. [Says that’s your money and we cannot just take it
                                bank – VERY unusual]
                    3. If it makes advance on or against the item

       e. Hypo § 4-210(a)(1)
             i. Drawer –>1,000–>Payee–>deposits check to–>A (depo/collecting
                bank)–> B (collecting bank)–> C (Drawee bank)
                    1. Bank will credit account for $1,000
                    2. Drawer asserts ord. defense and stops payment
                    3. If payee is in bankruptcy, bank will sue drawer
            ii. Bank A may allow payee to make w/d on the account ($400)


                  Payee’s Account
                  W/D                    Dep           Balance
                                         1,000         1,000
                  (400)                                600
                   if check is returned, bank is HDC as to $400 (they can get other
                  600 from acct)




                            17
                                      iii. § 4-210(b) Credits first given are first w/d (FIFO)

                                          Payee’s Account
                                          W/D                     Dep           Balance
                                                                                500
                                                                 1,000          1,500
                                          (500)                                 1,000
                              If 1,000 bounces, the bank takes it from the customer’s account


                                          Payee’s Account
                                          W/D                     Dep            Balance
                                                                                 500
                                                                  1,000          1,500
                                          (750)                                  750
                                           The bank is HDC as to 250


                                          Payee’s Account
                                          W/D            Dep                    Balance
                                                         1,000
                                                         3,000                  4,000 (1 depo)
                                          (1,000)                               3,000
                                         § 4-210(b) says if credit given on several items, security interest is
                                        given as prorated. If deposit about $4,000 at one time, and like
                                        withdrew $250 from $1,000 and $750 from $3,000. Bank is HDC as
                                        to the $250
                                   * The BANK’S rights against Drawer; NOT against payee

Laurel Bank v. City National Bank
Laurel Bank for P – Account #1 – 0; Account #2 – overdraft of $21,000
P pays for cashiers check (3,445) at CNB drawn on account #1. Deposits in account #2 (17,000).
Laurel won’t pay for acct 1 check; CNB won’t pay for cashier’s check. Laurel sues CNB. CNB argues defense
of failure of consideration. Is Laurel an HDC?
Yes –> applied deposit to overdrawn account (even provisionally) = value given or applied (4-210(a)(1).
Also –> 3-303(a)(3) – value given if it is transferred or given for debt

                                          Payee’s Account
                                          W/D          Dep                       Balance
                                                                                 500
                                                          1,000                  1,500
                                                          2,000                  3,500
                                          (2,500)                                1,000


                                         if 1,000 check bounces, the bank is a HDC to 1,000

                                          Payee’s Account
                                          W/D          Dep                       Balance
                                                                                 500
                                                          1,000+3,000            4,500
                                                     18
                                            (1,000)                              3,500
                                           the bank is a HDC as to 250 (prorate the deposit)

                                            Payee’s Account
                                            W/D          Dep                       Balance
                                                                                   (1,500)
                                                            1,000                  (500)
                                           Is the bank a HDC? Yes, - if you take a check and there is a
                                          deficit in the account then the bank is a HDC up to a zero balance


                                          Payee’s Account – loan at the bank ($1,000)
                                          The bank is a HDC as to $1,000 (b/c gave security interest) §
                                          303(a)(3)

                                          Payee’s Account – cashier’s check given in return for $1,000 check
                                           the bank is a HDC § 3-303(a)(4) (b/c given value as a neg
                                          instrument)

CRUX OF DEFINITION OF HDC IS NEXT 2 - INNOCENT
             v. Good Faith § 1-201(19); 3-103(a)(4)
                   1. § 1-201(19) Good Faith – Honest in fact in the conduct or transaction concerned
                          a. Subjective standard (hard standard)
Crux of
                   2. § 3-103(a)(4) Good Faith – Honest in fact and the observance of reasonable
HDC
                      commercial standards of fair dealing
Doctrine
                          a. Objective standard
                          b. Applies only to Articles 3 & 4 in the Code
                                  i. Put in when revised
                          c. NOT talking about ordinary car (neg) but R standards of fair dealing
            vi. Without Notice § 1-201(25); 4-205; 3-307
                   1. § 1-201(25) A person has “notice” of a fact when
                          a. He has actual knowledge of it OR
                          b. He has received a notice or notification of it OR
                          c. From all the facts and circumstances known to him at the time in question,
                             he has reason to know it exists
                   2. Defense or claim in recoupment
                   3. Overdue, dishonored, or uncured default
                   4. Claim to the instrument
                   5. Forgery or alteration

Kaw Valley State Bank & Trust Co v. Riddle
R gives note to C. R then changes mind about diff equipment. C says will destroy the note. Actually gives to K
for value. R said that is not mine. K cancels it (unusual). R asks if this is all my notes –> cumulates. C goes
bankrupt. K sues R for note.
R says failure of consideration (ordinary defense – not good against HDC).
R says not HDC b/c had notice.
K acted in GF. R had to prove that K had notice of the defense of no consideration.
Closely-connected doctrine?
Ongoing relationship b/t C and K. K knew that C had not delivered a lot of equipment yet. C had been making
payments to K on that note (took awhile). R asked if all notes, and K said yes.
         K probably strongly suspected what C was doing
                                                        19
    6. § 3-302(a)(2)
           a. Without notice of overdue or dishonored or uncured default
           b. Unauthorized signature
           c. Claims to the instrument
           d. Defenses or claim in recoupment
           e. No unusual acquisition
 Best way to attack a HDC is to show that A did not take in GF or took with notice of a
defense or claim
 Another line of attack is that A took with notice of overdue or dishonor or uncured
default

   7. § 3-304 Overdue Instrument
          a. Demand instruments are overdue at the earliest of the following:
                     i. Note is due day after demanded
                    ii. Check is due 90 days after date of check
                   iii. Not a check – unreasonably long time in circumstances of
                        particular case and nature of the instrument and usage of the trade
          b. Instruments due at definite time
                     i. Default for installment notes: overdue when non-payment of
                        installment and remains overdue until default is cured
                    ii. Non-installment note: overdue day after due date
                   iii. If principle has been accelerated: the day after the accelerated due
                        date
          c. Instrument does not become overdue for default in payment of interest,
               only for default in principle. So if you take w/ notice of overdue interest,
               you are still a HDC
          Examples:
           Time Note: P gave $10,000 check on 4/1/01 for note to D–> N took the note
          on 9/12/01 = N cannot be a HDC b/c N took w/ notice that it was overdue
          (holder if indorsed)
           If N just sued on the check, can she recover?
               = YES, only has to be a person entitled to enforce (a holder is). Taking
               overdue check does not give Maker a defense. Just allows the Maker to
               strip holder of HDC status. Need to have a defense (failure of
               consideration, etc
           Demand Note: Day after demand for payment is made. If D came to P for
          payment on the note (8/15/01), and P dishonored and then D transferred to N
          (9/12/01), N is STILL a HDC if did not KNOW the demand was made.
               = P must show dishonored and N knew dishonored to defeat HDC status
           Demand Note: If unreasonably long period of time, then cannot claim
          innocent HDC status.
           Note due 9/1/01 and take 9/11/01 –> cannot be HDC
               = MUST have had notice when took it
               = Same w/ check past 90 days written
           Installment Note: Payment due 1st of the month. A buys note on 9/8/99.
          On back of the note, payments were made 7/6/99, 8/4/99, and 9/6/99.
               = A is HDC b/c 9/6/99 cured the default, but if no 9/99 payment then A is
               not HDC


                                20
                                 $100,000 Note, 5-year balloon, 10% interest, Interest due 9/1 of every year
                                and balance due on 9/1/03. If 10,000 interest payment is not made on 9/1/99,
                                can A be HDC?
                                   = Yes, it must be default on the principle under § 3-304(c)
                         8. § 3-306 Claims to an Instrument
                                a. If you take w/ notice of another’s claim to the instrument, you are not an
                                   HDC
                                b. Ex. P –> D loses check and N find it and neg to P, P can be HDC if
                                   properly indorsed.
                                        i. P would have better claim than D
                                       ii. If knows, cannot be HDC
                                c. § 3-307 Notice of Breach of Fiduciary Duty
                                        i. If parent deposits kid’s check, bank is on notice of superior claim
                                           to check. Minor check that bank let father convert the money to
                                           father’s own use – notice of a claim here
Smith v. Olympic Bank
Dad gets check for child (trustee). Opened a personal checking account. Attorney – called to check and bank
mentioned Estate of Son. Father spends the money. Court appoints a new guardian who filed suit against the
bank. Is bank HDC?
Bank had notice – not HDC
         - R commercial practices
         - Fiduciary – agent, trustee, partner, director, owing fiduciary duty
         - Represented Person – ins, corp, trust, etc as beneficiary
If bank allows (after knows of fiduciary duty), then no protect as HDC
         If know from check, what have you, have notice of beneficiary’s claim

                                        ii. A represented person has superior claims to the representor of that
                                            person. Ex.
                                                 1. Trust has superior claim to trustee
                                                 2. Estate has superior claim to executor or administrator, etc
                         9. Examples of Notice
                                a. If signature forged and you have notice –> cannot be HDC
                                         i. If so forged that can tell on face, then also fail authentic on its face
                                        ii. If just know, also fails GF
                                b. Drawer–>Payee–>(neg instrument w/o indorsement)–>A. Drawer has a
                                    defense/claim in recoupment against so drawer stops payment on the
                                    check. A sues for amount of the check. Is A an HDC?
                                         i. A cannot be an HDC w/o an indorsement b/c A cannot even be a
                                            holder. See § 3-203(c)
                                        ii. What if Payee won’t indorse? Under § 3-203(c), A has a legal
                                            right to have the indorsement but A cannot become the holder until
                                            indorsement occurs
                                                 1. SUE – court will make them
                                       iii. A will not be an HDC b/c A had notice before the indorsement
                                                 1. When have notice of a claim when NEG then not HDC
                                                     (neg only takes place when indorsed)
                          Notice Test is performed when indorsement is made. A already knew of
                            default of check by Drawer so not a HDC

                         10. § 3-203(c)

                                                       21
                                 a. If you get a check and it is not indorsed, you have a right to demand
                                    indorsement to become a holder

                          11. § 4-205(1)
                                  a. When a bank takes a check w/o indorsement, they are still a holder (even a
                                      HDC)
Bowling Green, Inc. v. State Street Bank and Trust Co.
Bank gets check w/o indorsement. Applied to overdraft. Learned about to reorg. Applied to debt.
Bank is HDC w/o indorsement (value is applied to security interest)

                         12. § 3-206(c)
                                 a. “For deposit” or “for collection” – only the bank can take it and it must be
                                    put in the payee’s account

                 vii. Ordinary Course § 3-302(d)
                        1. § 3-302(c) If take this way, cannot be HDC
                               a. Example: Maker –> Payee. Creditor has claim and seizes note from
                                  Payee. Creditor does not get HDC protection (in shoes of Payee).
                               b. Example: If Payee died –> note goes to estate. Executor steps into shoes
                                  of Payee, and not HDC


                         2. § 3-302(d)
                                a. If the promise of performance that is the consideration for an instrument
                                   has been partially performed, the holder may assert rights as a HDC of the
                                   instrument only to the fraction of the amount payable under the instrument
                                   equal to the value of the partial performance divided by the value of the
                                   promise performance
                         3. See Value discussion
LOOSE END
If you are not HDC, you take w/ claims and defenses even if not for reason you are not an HDC.
Ex. Payee realizes leaky roof when took ($2,000 claim in recoupment) but doesn’t know of foundation crack
($50,000). Once not HDC, take claim don’t know about too

                viii. Shelter Rule § 3-203(b)
                         1. § 3-203(b) Shelter Rule
                                 a. Transfer of an instrument, whether or not the transfer is a negotiation,
                                     vests in the transferee any right of the transferor to enforce the instrument,
                                     including any right as a HDC, transferee cannot acquire rights if transferee
                                     engaged in fraud or illegality affecting the instrument
                         2. Examples
                                 a. Maker/Drawer–>Payee–>A (HDC)–>B (took w/ notice of claim/defense)
                                          i. If A is a HDC, B has A’s rights. Rationale is that if payee could
                                             successfully sue B, B could in turn sue A, then A could sue the
                                             maker/drawer – it is more efficient to let B assert the rights of A.
                                         ii. Even though B is not the HDC, B gets A’s rights
                                 b. Maker/Drawer–>Payee–>A(HDC)–>(no indorsement)–>B
                                          i. A has special right of indorsement as HDC. If B sues, B will win
                                             under the shelter rule.
                         3. A person who takes from a HDC acquires all the HDC’s rights whether or not
                             they themselves are an HDC
                                                        22
          a. Ex. Give to daughter (Not HDC but has rights of HDC)
          b. Ex. A dies and estate (Not HDC but has rights of HDC)
   4. The policy behind the rule is to protect A! not B! Why?
          a. To assure that A has a market for his instrument
                  i. Otherwise, maker will tell everyone about the claim and A cannot
                     transfer to anyone
          b. If B has a negotiable instrument, B has 2 options (b/c indorsement
              guarantees payment of the note)
                  i. Sue the maker OR
                 ii. Sue A
   5. No collusion allowed (Payee cannot launder claim through A (HDC) and then get
      it back)
   6. Does learning of a defense later make a person no longer a HDC?
          a. No – you take notice at the time the instrument transferred

BIG DEAL
§ 3-305(b) A holder in due course is not subject to defenses of the obligor or claims in
recoupment against a person other than the holder

Re-phrased: A HOLDER IN DUE COURSE TAKES SUBJECT TO ANY DEFENSES
OR CLAIM IN RECOUPMENT THE OBLIGOR HAS AGAINST THE HOLDER
HIMSELF

Maker         –>             HDC            –>             Holder
Defenses                     payee                         A
Claim in recoupment

 A is only a holder so when A sues maker for payment of the note, Maker will assert a
  defense or claim in recoupment, therefore A would have to be a “super  or HDC to
  take free and clear of this defense. A can say I want to assert payee’s rights under
  the shelter doctrine b/c payee is HDC. Maker will say ok so you step into the shoes of
  the payee and assert his HDC status. Fine and dandy but under § 3-305(b) a HDC
  takes subject to claims asserted by the obligor against the holder (payee would now
  be the holder is you are stepping into his shoes). Claim becomes against payee who is
  no longer a holder
 Does the party have a defense or claim in recoupment against the holder arising out
  of the transaction by which the holder acquired the instrument?
 A sues maker – can maker assert claim against A? Under the shelter rule, A gets
  payee’s rights, so what is payee’s right against maker? Payee’s rights are subject to
  claim in recoupment. Cannot get any rights better than Payee could have gotten
  under § 3-305(b).

   7. Examples
         a. B owes –> Drawer –> Payee (UALR) HDC
         b. B was supposed to pay Drawer back. Is payee an HDC? – yes
         c. Can Drawer assert his claims against Payee? – No b/c Drawer’s claim in
            recoupment is against B. It must be a claim against UALR to defeat
            UALR’s HDC status
         d. UALR will take free of outside claims (claims outside the transaction that
            made them a HDC). Claims against a 3rd party won’t work. Drawer’s

                                23
                        claim is against B – UALR does not take subject to that claim even if B is
                        an HDC
                     e. A HDC cuts off all claims and defenses against 3rd



f. PROOF of SIGNATURES and STATUS as HDC § 3-308
       i. § 3-308(a) Unless signature denied, all signatures DEEMED to be admitted. If do deny,
           presumption valid but has burden of proof.
               1. To contest – MUST SPECIFICALLY plead forged
               2. Cannot generally deny
      ii. § 3-308(b) In order to recover, only must show holder. Then D must prove D or claim in
           recoupment. If D does, then P must prove HDC.
     iii. If someone is going to sue on a note payable, what do you have to show to recover?
     iv. § 3-301 Persons Entitled to Enforce Instrument
               1. Person entitled to enforce means:
                      a. The holder of the instrument
                      b. A nonholder in possession of instrument who has the rights of a holder
                      c. A person not in possession who is entitled to enforce the instrument
                          pursuant to § 3-309 or § 3-418(d)
      v.  to avoid judgment against him – must assert a defense or claim in recoupment ( has
           the burden of proof)
     vi. Then the  has to show that he is a HDC.  has the burden of showing he is an HDC
                                        –>                    
         complaint says  is a holder                   defense/claim in recoup
                                                             
         If  shows HDC then  claim in recoup are cut off
    vii. Examples
               1. Maker          –>             Payee–>gift –>         A (not a HDC)
                  A sues Maker – A can as a holder. A must allege in complain that A is a holder.
                  Even though A is not a HDC, Maker can only refuse to pay if he has defense or
                  claim in recoupment

              2. Drawer     –>   Payee (check lost for 6 months)     –> Bank
                 Bank is not a HDC b/c of the 90-day rule

     viii. SIGNATURES
              1. § 3-308 If validity of signatures is denied in the pleadings, the burden of
                 establishing validity is on the person claiming validity, but the signature is
                 presumed to be authentic and authorized unless the action is to enforce the
                 liability of the purported signer and the signer is dead or incompetent
              2. If responsive pleading does not challenge signature, then it is waived
              3.  must assert it in responsive pleasing even if you deny allegation
              4. The person trying to enforce the note has the burden if someone is challenging the
                 validity but there is a presumption


g. EXCEPTIONS TO HDC PROTECTION
     i. Judicially Created Exceptions
           1. Courts DID NOT LIKE
                                          24
        2. Common Situation
                         Note payable to ABC Corp
                Maker                                  Payee –> A (ABC fin)
                            Goods or services
                A cuts off claim/defenses Maker has concerning goods or services-
                Maker has to sue payee for the K. This was abused and this developed the
                closely connected doctrine
                 Closely Connected Doctrine – (Childs case) if HDC and payee are
                closely connected, they will not allow to take advantage of being a HDC
                and A will take subject to defenses/claims
                    - Developed in AR in 1930s (Commercial Credit v. Childs)
                             Lemon car; Commercial had note (had funded) – HDC
                             Court said D was so closely connected with the entire
                                transaction/deal that cannot be HDC
                 Unizo v. Owens became the rule - FACTORS
                        1) Same offices, officers, employees?
                        2) Did transferee provide original note (how close to original
                        transaction)?
                        3) Does payee sell notes to anyone other than A?
                        4) Was A involved in original transaction (do the credit check)?
                        5) Is there a form assignment?
                        6) Was it prepared in advance?
                        7) Only buy notes from this payee?
                    - Courts will treat Payee and Transferee as ONE entity
                    - Sometimes will use GF requirement
                    - Sometimes use notice of claim/defense
           DID NOT always work

 ii. Legislatively created exceptions – Federal Trade Commission HDC Regulations, 16
     CFR 433.1-433.3
        1. The Federal Trade Commission has adopted regulations which apply to consumer
            credit corps (Page 1910-1911 – WRITE DOWN)
                a. In consumer transaction, any note/sales K has to have bold face warning
                    (anyone takes this note, take w/ notice of claims of maker)
        2. They must provide a NOTICE – that any holder of this consumer credit K is
            subject to all claims and defenses that the debtor could assert against the seller of
            goods or services obtained pursuant hereto or with the proceeds hereof. Recovery
            hereunder by the debtor shall not exceed amounts paid by the debtor hereunder
        3. § 3-106(d) provides that this notice does not make the instrument conditional but
            it does prevent someone from becoming a HDC
        4. REMEMBER – NO HDC of CONSUMER NOTE
        5. § 3-302(c) You can’t be a HDC if you acquire in a way listing in this section even
            if you take in GF
                a. Sheriff’s sale
                b. Bulk transaction (bank buys large # of another bank’s loans)
                c. Estate
                * But you still may have protection of the shelter rule
iii. Payee as HDC § 3-302 comment 4
        1. Can payee be HDC?
        Maker  (note) Payee

                                      25
        (Truck)
         a. Typically won’t
                  i. No able to show GF or No Notice
                 ii. What if test every truck to make sure ok?
                         1. Can be HDC
2.   Can the payee of a check be a HDC?
         a. MAJ – Payee cannot be HDC b/c no GF or took w/ notice of defense
         b. Maker–>car–>Payee               Payee–>note–>Maker
         c. If car is tested and expected to be good, payee may be HDC
         d. If it breaks down = breach of warranty/claim in recoupment – Maker stops
            paying
                  i. Learning of a defense later DOES NOT make a person no longer
                     an HDC (notice at time instrument when transferred) § 3-305
3.   PAYEE cuts off defenses against a person OTHER THAN THE HOLDER
     (cannot insulate themselves)
         a. Ex. Payee will cut off defenses for people transferred to (they are HDC)
         b. Ex. Payee cannot cut off defenses for self
4.   YES – payee can be HDC but irrelevant b/c does not help the payee (only helps
     people down the line)
         a. HDC applies ONLY when more than 2 people involved
         b. HDC policy is that innocent 3rd person should not have to pay a claim
            arising from original transaction it was not a part of
5.   Payee CAN be HDC
         a. BUT usually does not matter b/c HDC takes FREE OF defenses and
            claims in recoupment AGAINST A THIRD PARTY (not original parties
            to transaction – which includes payee – so cannot take free of defenses
            and claims against himself)
6.   Ex. Rent an apartment, and you have not paid rent. You want to give a check (hot
     check in October). He wants $1,000 in cash. Run into Mr. H (always pays rent
     on time). Mr. H gives you a check made out to Landlord. You default. Mr. H
     stops payment. Landlord sues you on the check. Defense?
         a. No value (no consideration)
         b. Does Landlord (payee) take free and clear of my defense?
                  i. Holder, for value, GF, no notice
                 ii. Landlord qualifies as HDC
         c. That a payee can take as a HDC and IT MATTERS HERE
                  i. Landlord takes free and clear of my defense against third party
                     (Mr. H) for no consideration
         d. ONLY in this limited situation




                             26
III.   CHAPTER 2 – LIABILITY of PARTIES to a NEGOTIABLE INSTRUMENT
       a. Liability of parties on note or draft
             i. MUST distinguish b/t liability on the instrument from liability on the underlying
                 obligation
                     1. Ex.
                              Check ($10,000) 
                 Merchant                             Contractor
                                 Building 

                             a. Does giving the check discharge the obligation (to pay under the
                                construction K)?
                                      i. No
                                     ii. Suspends obligation under construction K
                                              1. Only discharged when bank pays it OR
                                              2. When dishonored, obligation no longer suspended
                             b. What if a note given?
                                      i. ONLY discharged when
                                              1. Pays OR
                                              2. Dishonored
                                     ii. If refuses to pay, what are the legal remedies?
                                              1. Sue for
                                                     a. Payment of the note OR
                                                     b. The obligation under the K
                                    iii. Which would be easier?
                                              1. The note
                                              2. BUT may want to sue on both
                             c. What if note due 12/1/01? It is 9/18/01.
                                      i. NO – payment suspended until note is due
                                              1. Note not due
                                              2. Obligation suspended
                                     ii. Cannot sue on either
                                    iii. Tying hands when time note (this is why may want to make a
                                         demand note)
                             d. If sue on note and don’t mention K in complaint, can she counterclaim for
                                a claim in recoupment?
                                      i. Yes
                                     ii. § 3-305 – Obligor can raise claim in recoupment or defense
                                    iii. Also, applies even if HDC b/c claim is not against 3rd party § 3-
                                         305(b)




              ii. Effect of deliver of note or check on underlying obligation § 3-310
                     1. Most people execute a note or a check to pay a debt
                     2. § 3-310(b) Unless otherwise agreed, if a note or uncertified check is taken for an
                         obligation, the obligation is suspended to the same extent the obligation would be
                         discharged if an amount of money equal to the amount of the instrument were
                         taken, the following apply


                                                  27
       a. § 3-310(b)(1) UNCERTIFIED CHECK – suspension continues until
          dishonor of the check or until it is paid or certified. Payment results in
          discharge of the obligation to the extent of the amount of the check.
       b. § 3-310(b)(2) NOTE – suspension continues until discharge of the note or
          until it is paid. Payment of the note results in discharge of the obligation
          to the extent of the payment.

3. Example 1:
            Note $10,000 due 1/2/2000 
   Merchant                              Contractor
                   Services 

         Can contractor sue on K if he needs the moneys today on 11/4/99? NO,
          b/c the payment is suspended until the note is due. Under § 3-310(b)
          when the note is accepted, the underlying obligation is suspended. To
          protect the contractor, he should have made the note payable on demand.
         On 1/2/2000, you can sue on the note, but can you still sue on the
          underlying K? YES, you can enforce EITHER the note or the underlying
          obligation. Which would be easier? Note, but you may want to sue on
          them both.
         Now building has leaky roof. Suing on the note, can you still raise the
          defense of the roof? YES, under § 3-305, obligor can raise claim in
          recoupment or defense. § 3-305(b) (applicable to HDC) does not apply
          b/c claim in recoupment is NOT against 3rd party.




4. Example 2:
           Note $10,000 due 1/2/2000           Note 
   Merchant                          Contractor          A
                   Services                   9,000

         Can A sue on the note prior to 1/2/2000? NO, b/c the obligation is
          suspended under § 3-310
         After 1/2/2000, what are A’s options? Can A sue on the note? YES
         Can A sue on the K? NO!!!! Under § 3-310(b)(4), the doctrine of merger
          plays in here. K for services merges into the note and the note is all that is
          left.
         Now the merchant discovers the leaky roof. Merchant raises a claim in
          recoupment of the leaky roof when A tries to collect on the note. A raises
          the defense that A is a HDC (he bears burden of proof; if does – will cut
          off claim in recoupment).
               - A could also sue contractor and make him take the note back (as
                  indorser), and then contractor could sue Merchant on services
                  (obligation) or the note.
                             28
                                        -   A CANNOT sue on the K; contractor can (but will take subject to
                                            the claim in recoupment b/c original party)

LIABILITY ON INSTRUMENTS
             iii. Liability on NOTE
                      REMEMBER § 3-401(a) – A person is not liable on an instrument unless:
                                (i) The person signed the instrument OR
                                (ii) The person is represented by an agent or representative who signed the
                                instrument and the signature is binding on the represented person.
                         VERY IMPORTANT CONCEPT!!!!

                    2 types of liability:
                     1) Primary – obligated to pay w/o going to anyone else
                     2) Secondary – you are not liable unless someone else fails to pay




                               Note $10,000 due 1/2/2000           Note 
                      Maker                              Contractor          A
                                   Services                       9,000

                            So far ONLY person who has signed the instrument is Maker
                         1. Maker’s Liability on a NOTE § 3-412
                                a. Maker – liable on the note – Maker is the person who promises to pay the
                                   note! They sign the note and issue it.
                                        i. PRIMARY
                                b. When you sign a note and promise to pay (issue a note payable), you
                                   undertake the obligations in § 3-412.
                                c. § 3-412 Issuer of a note is obligated to pay the instrument according to its
                                   terms at the time it was issued or if not issued at the time if first came into
                                   possession of a holder
                                d. Holder does not have to go to anyone else first. Issuer is primarily liable.
                                e. Technically it is not even necessary to present the note (for payment)
                                   under § 3-501 (Presentment).
                                        i. However, you will usually want to present it if it ever goes to
                                           court, the judge will want to see effort to collect on your part.
                                       ii. Also, to charge indorsers and it is cheaper to present than to go to
                                           court.
                                f. Ex. Now you have a note signed by 3 people – A, B & C (common). Who
                                   do you make presentment to?
                                        i. Any one of them § 3-501.
                                       ii. Holder can sue any one of them under § 3-116 (J & S Liability
                                           Contribution)
                                               1. If note for $12,000  can sue any one or all
                                               2. J & S liability – can recover $12,000 from any one; or all
                                               3. If gets from one  A, B, & C have contribution rights
                                                   against each other FOR AMOUNT PAID OVER AND
                                                   ABOUVE YOUR PRO RATA SHARE

                                                      29
                              a. Ex. If gets $12,000 from A, can get $4,000 from B
                                  and $4,000 from C
                              b. Ex. If gets $6,000 from A, can get $2,000 from B
                                  (over and above amount liable for)
                                      i. B cannot get anything from C b/c has not
                                         paid anything above amount liable for
                                     ii. C can get off scot-free b/c Holder chose to
                                         get less than amount due
        g. § 3-116 Co-makers have J & S liability on a note unless the K says
           otherwise
        h. You can get a judgment for the total amount from each one but you can
           only collect one judgment.
               i. Ex. A pays 10,000 – A can seek contribution from B only for 3,333
                  unless there are unusual circumstances such as if C has filed
                  bankruptcy (then B could have to pay 5,000)


       Note $10,000 due 1/2/2000           Note 
Maker                              A (indorse)                  B
           Services                       9,000

  2. Indorser’s Liability on a NOTE § 3-415, 3-501, 3-502(a), 3-503, 3-504
        a. § 3-415 – Must have 3 things for an indorser to be liable:
                 i. Holder (B) has to make presentment (to maker who is liable
                    under § 3-412)
                ii. Maker has to dishonor
               iii. Indorser (A) must have notice of dishonor
        b. Liability is SECONDARY – have to go after maker first
        c. B/c when indorse = saying if maker does not pay this, I WILL
                 i. Innocence (HDC) has NO relevance

        d. § 3-502 Dishonor
               i. Dishonor of a note is governed by the following rules:
                     1. If the note is payable on demand, the note is dishonored if
                        presentment is duly make to the maker and the note is not
                        paid on the day of presentment
                             a. Therefore, for indorser to be liable on demand note,
                                 must have PRESENTMENT and then DISHONOR
                     2. If the note is not payable on demand and paragraph 2 does
                        not apply, the note is dishonored if it is not paid on the day
                        it becomes payable




        e. Example 1:
        Note 1/2/2000       Note     Note                  Note
      Merchant            K’or        A                    B           C
              Services       9,000                          

                             30
      C presents to Merchant – Merchant dishonors (fails to pay)
      C can go after Merchant under § 3-412 (Obligation of note issuer). To sue
       Merchant, must (1) present it, (2) note is then dishonored (may be subject
       to a claim in recoupment)
      C can go after B under § 3-415 (Obligation of Indorser). To sue B, must
       (1) present to Merchant, (2) dishonored by merchant, (3) notice of
       dishonor was given to B in a commercial R means.
      § 3-503 How do you give notice of dishonor? - Any commercially R
       means, including oral, written, or electronic communications, and it is suff
       if it R identifies the instrument and indicates that the instrument has not
       been paid or accepted. Except for banks notice of dishonor must be given
       w/i 30 days following the day on which the person (holder - C) receives
       notice of dishonor.

    f. MOST notes state that borrower waives “presentment, demand, protest, or
       notice of dishonor”
           i. If this is suff, don’t have to prove these things

   g. Example 2:
   Note 1/2/2000            Note         Note          Note
Merchant                 K’or           A              B           C
           Services          9,000                      
Note is signed on the back by K’or, A, or B

    h. § 3-412 Obligation of Maker
            i. Obligor is issuer of the note = Merchant
           ii. Person to whom obligation is owed
                  1. Person entitled to enforce § 3-301
                  2. Subsequent Indorser who pays under§ 3-415
    i. § 3-415 Obligation of Indorser
            i. Person entitled to enforce
           ii. Subsequent Indorser who pays under § 3-415

    j. Three things to show under § 3-503 to sue any indorser
           i. Presented to maker
          ii. Maker dishonors
         iii. Give notice to indorser w/i 30 days

      C can go back against B, A, or K’or. You can go after any one on the
       back of the note § 3-415
      30 days starts to run when § 3-503 note is dishonored – You have 30 days
       from the date of dishonored – give notice to ALL!!!!
       - Excused in § 3-504(b) when circumstances beyond control of person
       giving notice and exercised all R due diligence
      If C recovers from B – Can B sue A and the others? - YES
      B can get the whole amount from A. This is not J & S liability for
       indorsers under § 3-116 (comment 2).
               - Indorsers DO NOT normally have J & S liability
               - Earlier indorser has complete liability to later indorser
               - If skips an indorser, can K’or sue B?
                         NO
                          31
                           Indorsers owe liability to
                                      1) Person entitled to enforce
                                      2) Subsequent indorser
                  - Indorser can sue Maker (obligated to ANY indorser who pays)
                     § 3-412
                           Maker may have claim in recoupment
         If C goes after A or B, HDC is not relevant
         Could write “w/o recourse” on indorsement to protect self (or not indorse
          at all)

      k. Example 3:
              Note                          Note
    Merchant            K’or               A              B
            Services                         car

         What if transfer from A to B was in exchange for a car? -Claim in
          recoupment, can it be raised if B sues A as indorser? § 3-305(a) defense
          of obligor – indorser is obligor here. A can raise any defense or claim in
          recoupment in § 3-305(a). That means A can claim car is defective should
          B argue that A is an HDC. A will still win b/c B takes subject to obligor’s
          defenses. A is not a third party.
         So A can raise claim in recoupment against B if car is defective – B only
          takes free of claims against 3rd parties
         If B recovers against A, then can A recover from K’or? –ONLY if 30
          days still left on notice
         K’or can get notice from C, and if A ends up suing K’or on note, the
          notice from C is suff even if A is suing

         Can an indorser’s liability ever be J & S?
         If check is made out to 2 people and both indorse – if joint indorsers are
          sued, they are each liable for 1/2 amount
         What if they indorse out of order – Must prove that order is wrong, but
          tough, court will err on the side the way the check is indorsed
         Notice is really not an issue in the real world!!! B/c all notes have waiver
          clauses for waiver of dishonor and presentment § 3-504(b) allows.


3. Transferors’ Warranties on a NOTE § 3-416
      a. § 3-416 Transfer Warranties
              i. A person who transfers an instrument for consideration warrants to
                 the transferee, and if the transfer is by indorsement, to any
                 subsequent transferee that:
                     1. The warrantor is the person entitled to enforce the
                         instrument
                     2. All signatures on the instrument are authentic and
                         authorized
                     3. The instrument has not been altered
                     4. The instrument is not subject to a defense or claim in
                         recoupment


                            32
                           5. The warrantor has no knowledge of any insolvency
                              proceeding commenced w/ respect to the maker or acceptor

            b. Example:
                    Note                               
          Merchant            K’or          A                B (HDC)
                  Services       (takes w/ notice that roof leaks)

               B could sue A – must prove holder only under § 3-415 (obligation of
                indorser)
               B could also sue Maker (claim in recoupment BUT B is HDC)
               A indorsed the note and also transferred the note so A has obligation of §
                3-415, but A also has the warranties of § 3-416 b/c A is an indorser and
                transferor of the note.
               What you would have to show under each section to sue A:
                Indorser                              Transferor
                1) Obligation under § 3-415           1) Warranties of transferor § 3-416
                2) Dishonor                           2) Knew of leaky roof
                                                      * You have to show so much more
                                                      here that if you can recover under §
                                                      3-415 it is so much easier
               If bearer paper and A did not indorse, you could go after A but would have
                to use § 3-416 (would avoid liability as an indorser BUT LIABLE as
                transferor)
               If A indorses “w/o recourse” – A would not be liable for § 3-415 for
                breach of indorser obligation
               A would still be liable under § 3-416 unless it says “w/o recourse and w/o
                warranties” b/c § 3-416 are the transfer warranties.
                         - CANNOT do this on a check § 3-416(c)
               A takes subject to claim in recoupment b/c A knew about the leak. If K’or
                has not indorsed, but transferred to A, § 3-203(c) A can specifically
                enforce the indorsement – K’or must indorse w/o any qualification.


iv. Liability on draft (ex. check)
                Note                      
    Drawer                   Payee   A      B   Drawee (bank)
               Services Indorses Indorses

      1. Drawer’s Liability on a DRAFT § 3-414, 3-501, 3-502
            a. Drawer (person writing the check) has PRIMARY liability
            b. OCCURS when:
                    i. Presented AND
                   ii. Dishonored
            c. Is notice required?
                    i. NO
                   ii. § 3-414 comment c
            d. Drawer owes obligation under § 3-414 (b)
                    i. A person entitled to enforce OR
                   ii. An indorser who paid the draft under § 3-415
                  iii. NOT to drawer/drawee
                                  33
       e. CAN draw a draft “w/o recourse” as long as not a check
            i. Drawer will not be liable
       f. REMEMBER – if the drawer didn’t sign then no liability




2. Indorser’s Liability on a DRAFT § 3-415, 3-501, 3-502(b), 3-503, 3-504
      a. Indorser’s liability arises under § 3-415 WHEN
               i. Presentment for payment to drawee
              ii. Dishonor
             iii. Notice of dishonor to all indorsers
      b. Time limits under § 3-503 (30 days for people; for drawee bank –
          midnight of next banking day [midnight deadline]; HOW - Mail to you a
          Return of check for insuff funds)
               i. Although indorsement not required on bearer draft, bank will make
                  you sign it ANYWAY so you have obligation to pay
      c. For Individual – you get 30 days from the date of notice of dishonor
      d. § 3-502(b) describes dishonor of a draft
      e. While it is very common for a note to waive notice of dishonor, a check
          does not waive notice of dishonor

3. Transferors’ Warranties on a DRAFT § 3-416
      a. If you transfer an instrument, you make warranties under § 3-416
      b. If you indorse, then you go back under § 3-415. You will probably be
          sued under § 3-415 b/c it is easier to show indorsers than breach of
          transfer warranties.
      c. See § 3-416 previously discussed

4. Drawee’s Liability § 3-408
      a. No signature = no liability
      b. § 3-408 - DRAWER NOT LIABLE UNLESS ACCEPTS - A check or
         other draft does not of itself operate as an assignment of funds in the hands
         of the drawee available for its payment, and the drawee is not liable on the
         instrument until the drawee accepts it
               i. If bank refused to pay, drawer may have cause of action but NO
                  ONE else does
              ii. Even if bank was neg or malicious in its refusal
      c. Drawer can sue bank - if they wrongfully dishonor your check, you can
         sue ON the check for the amount of the check or sue for violation of
         depositor’s agreement for excess of amount of the check
      d. Payee can never sue bank for wrongful dishonor b/c no
         relationship/liability b/t bank and payee
      e. Ex. If insurance adjuster gives check drawn on ins co, is it a check and
         you take to a bank?
               i. No, not a bank
              ii. Drawer – ins co no sign or accept
            iii. Drawee – says w/o recourse
             iv. = Worthless piece of paper
                            34
                         1. NO liability on this instrument
               v.   If you indorse, you are liable on it
              vi.   See example 9/21/01
             vii.   If didn’t say “w/o recourse,” then can sue adjuster
            viii.   If signed Insurance Co by adjuster, then could sue ins co
                         1. THIS is the way they are drafted so that ins co can override
                            the adjuster
                         2. 99/100 the ins co will agree

5. Non-bank ACCEPTOR’s liability § 3-408, 3-409, 3-413, 3-502(b) & (d), 3-414(d)
      a. 2 situations where the drawee bank will be liable on the instrument:
               i. Drawee will be liable on a cashier’s check only b/c they are also
                  the drawer
                      1. NOT under § 3-414
                      2. Under § 3-412 (same as notes)
              ii. § 3-409 Acceptance of Draft – drawee sign the instrument and is
                  obligated to pay according to § 3-413 – same as liability of drawer
      b. § 3-409 Acceptance means the drawee’s signed agreement to pay a draft
         as presented. It must be written on the draft and may consist of the
         drawee’s signature alone. Acceptance may be made at any time and
         becomes effective when notification pursuant to instructions is given or
         the accepted draft is delivered for the purpose of giving rights on the
         acceptance to any person.
               i. Normal way – sign name across front of instrument
      c. If signature accompanies by any words indicating they did not intend to
         accept = no acceptance
               i. Ex. Kiss my foot – S. Greenwood = no acceptance
      d. Does not require “accepted” or “certified” or “good”

      e. Example - See 9/21/01 sheet example:
     Thompson makes draft  Howe (indorse) A (indorse)  B (indorse)
     Drawee (Reed). Draft is payable on demand.
                 - Thompson is drawer
                 - Howe is payee
        § 3-502(b)(2) – If Reed refuses to pay when draft is presented = dishonor.
         Then B can go back against the A or Howe or Thompson. Thompson can
         sue Reed for breach of K if she gets goods and doesn’t pay – but she can’t
         sue on draft b/c Reed never signed it.
        In number two - § 3-502(b)(3)(ii) – Draft not due until Nov 1, 2001 – B
         hold until date. B can go to Reed and ask to accept (if refuse = dishonor
         and won’t wait to the date). Then on date, B can go back to Reed to
         present for payment. B can go against Reed under § 3-413 or B can go
         against A or Howe § 3-415 or go against Thompson § 3-414(c)
                 - Getting acceptance makes more marketable b/c makes another
                      liable for it
        In number three – You MUST present for acceptance b/c the 30 days
         ONLY begins on the date Reed signs the draft § 3-409(c). If she neglects
         to date it, you can fill in the date in GF. If made payable in 30 days after
         sight – does not have to be presented for acceptance; must only be
         presented for payment.

                              35
                        -   If has not been accepted, to go against A or Howe, B must give
                            notice (BUT not to Thompson § 3-414(c))
                                o If sue Thompson, then he can sue Reed (but not on the
                                    instrument) only on the underlying obligation
                        -   If has been accepted, THEN Thompson entitled to notice § 3-
                            414(d)
                                o If sue Thompson, Thompson can sue Reed on note or
                                    underlying obligation (K) § 3-413(a)
                                o When Reed accepts, gets liability for either drawer or
                                    indorser who pay
                        -   Can Thompson

      6. Right to stop payment of check § 4-403
            a. Thompson has NO right as drawer to stop payment for a DRAFT
                     i. Bank HAS to give you right to stop payment of a check




v. Lost note or draft § 3-310(b)(4), 3-309
  Hypo: C owes M for $1000. M loses the check.
                         Check $1,000 
              Christian                      Miller
                             Boat 

      1. C writes a check (drawer) to M (payee)
      2. M loses the check and call C to stop payment, give me another check. C says no.
      3. Can M sue on the obligation?
             a. NO, the obligation has been suspended § 3-310(b)(4)
             b. No longer suspended ONLY when paid or dishonored
      4. Can M sue on the check?
             a. § 3-309(a) (Enforcement of lost, destroyed, or stolen instrument)
             b. YES - IF she proves that
                      i. She was in possession and entitled to enforce and
                     ii. She did not sign the check and make it bearer paper or else it could
                         be transferred to a HDC, AND
                   iii. She cannot R obtain possession of instrument (b/c lost, destroyed,
                         stolen)
                    iv.  She would be required to post bond to protect C (§ 3-309(b)) by
                         a court
      5. § 3-309 says a person not in possession of an instrument is entitled to enforce the
         instrument IF
             a. The person was in possession of the instrument and entitled to enforce it
                when loss of possession occurred, (§ 3-301)

                                   36
                                   b. The loss of possession was not the result of a transfer by the person or a
                                       lawful seizure, AND
                                   c. The person cannot R obtain possession of the instrument b/c the
                                       instrument was destroyed, cannot find, or it is in wrongful possession of
                                       an unknown person or a person that cannot be found.
                               The court may not enter judgment in favor of the person seeking enforcement
                               UNLESS it finds that the person required to pay the instrument is adequately
                               protected against loss that might occur by reason of a claim by another person to
                               enforce the instrument. Adequate protection may be provided by a R means
                               (bond).
Entitled to enforce
        - Holder
        - Nonholder in poss w/ rights of holder (no indorse)
        - Not in possession w/ rights § 3-309

Dennis Joslin Co v. Robinson Broadcasting Corp
P was not in possession (FDIC lost the note). Court would not allow P to sue. DECIDED WRONG (FDIC had
right to sue and could have assigned it)

                          6. Chart

       Obligor         UCC §          Obligation owed to Who           Prereqs to that liability
        Maker         3-412          Person entitled to enforce OR    Dishonor
                                      Indorser under § 3-415
       Drawer         3-414          Person entitled to enforce OR    Dishonor
                                      Indorser under § 3-415           Notice § 3-414(d)
       Indorser       3-415          Person entitled to enforce OR    Presentment
                                      Indorser under § 3-415           Dishonor
                                                                       Notice
       Drawee         3-408          No liability unless cashier ck
       Acceptor       3-413          Person entitled to enforce OR    Acceptance
                                      Person who paid the draft
                                      Under § 3-414 or 3-415


                   vi. Jus Tertii § 3-305(c)
                                             10,000 Note          Note 
                              Merchant                         K’or                 A
                                              15,000 bldg          boat (leaks)
                            The building is perfect/ there are no claims in recoupment and no defenses
                            The boat is leaky and A knew it, therefore A is not an HDC
                            A wants $ for boat for the note, so A sues Merchant or K’or for the money under
                             § 3-412 (Obligation of a Maker of a note)
                                      - If sued K’or, K’or could assert claim in recoupment against A
                            Does Merchant have to pay note to A, even though not an HDC? – YES,
                             Doctrine of Jus Tertii (“jus tersha”)
                          1. Jus Tertii – the rights of a 3rd party cannot be pled by another (ex. claim in
                             recoupment cannot be pled). § 3-305. BUT the other person’s claim to the
                             instrument may be asserted by the obligor IF the other person is joined in the
                             action (Interpleader)

                                                        37
                      a. Assume A committed fraud for the boat, K’or has a claim to the
                           instrument (recover the instrument from A; rescind the whole deal - § 3-
                           306). If this is the situation, can join K’or to the action and then interpose
                           her claim
                      b. CANNOT just be claim in recoupment; MUST be a claim in the
                           instrument
                      c. Remember – Merchant will have to pay the note anyway (to either K’or or
                           A)
               2. Obligor does not have to pay a person not an HDC if proves that instrument was
                  lost or stolen



b. Liability on Cashier’s Check/Teller’s Check/Certified Check
   Definitions:
           1) Cashier’s Check - § 3-104 Check drawn on a bank by itself – Drawer and Drawee are
           same bank
           2) Teller’s Check - § 3-104 – Drawer and Drawee are both banks but different banks
           (Regions writes a check drawn on 1st Community)
           3) Certified Check - § 3-409(d) – Check drawn on individual – but bank has accepted it
           (signed on it)
       i. Effect of delivery of cashier’s check or teller’s check on underlying obligation § 3-
           310(a)
               1. What is the effect of a cashier’s check or teller’s check on an underlying
                   obligation?
                            $$$$$$$
               Merchant                    Contractor
                             Services
               2. The Contractor does not want to take a personal check or a note; he wants a
                   cashier’s check/teller’s check/or certified check. What does these do to the
                   obligation of the Merchant?
                       a. The underlying obligation is discharged if you use a cashier’s check,
                           teller’s check, or certified check § 3-310(a)
                       b. If you use a personal check, the obligation would be SUSPENDED
                       c. The resulting effect is that if you present a cashier’s check, teller’s check,
                           or certified check for payment and it is dishonored, they cannot sue on the
                           underlying obligation because it is discharged. They can only maintain a
                           suit on the instrument itself

                     Cashier’s Check 
         Allsworthy                    Jordan (indorse)  A  Region’s bank
                      building 

         Can sue Regions (§ 3-412) and Jordan (§ 3-415)

       ii. Liability on Cashier’s Check
              1. Issuer’s Liability § 3-412, 3-411
                      a. Does issuing bank have liability for a cashier’s check as a Drawer under §
                         3-414?
                             i. NO

                                             38
                                          ii. That section does not apply to cashier’s checks
                                  b. § 3-412 Covers the liability of the issuer of a cashier’s check. The issuer
                                      is obligated to pay the instrument according to the terms and is obligated
                                      to a person entitled to enforce the instrument or indorser
                                  c. § 3-411 Refusals to pay cashier’s check. If the obligated bank
                                      wrongfully refuses to pay a CC, stops payment on a CC, or refuses to pay
                                      a dishonored teller’s check, the person asserting the right to enforce the
                                      check is entitled to compensation for expenses and loss of interest
                                      resulting from the non-payment and may recover consequential damages
                                      (if notifies the bank), (c) gives some defenses where i.e. the bank suspends
                                      payment, the obligated bank has a claim in defense, the person is not
                                      believed to be entitled to enforce. As a practical matter, they always pay
                                      to save face.
                                           i. Same for Teller’s Check and Certified Checks
                           2. Indorser’s Liability § 3-415
                                  a. An indorser might also be liable under § 3-415 of a CC
                                  b. If person has bank make CC payable to themselves, then they would have
                                      to indorse (I’m not really sure if I will purchase goods at auction, but I
                                      have to have a CC just in case, I would have the bank make it to me). If
                                      CC was made payable to Kristen Riggins, then Kristin Riggins indorsed
                                      and gave to contractor. § 3-415 would provide liability for KR.
                                  c. The contractor could have me indorse the CC even though it was made out
                                      to the contractor, so that I would have liability as well as the bank
Merrillville v. Northern Trust
S and Z have accounts w/ N and 1 – both w/ no money in them. S  Z of $98,000. 1 forwards to N. Z
withdraws $98,000. Check presented to N (insuff funds) and returned to 1. Z  S $103,000 (puts in account).
1 calls N and finds out S has funds. Employee of 1 asks for cashier’s check for $98,000. 1 presents and
bounces $103,000. 1 sues N for cashier’s check.
 Bank can assert own rights (Jus Tertii does not apply)
         - Lack of Consideration defense – shifts burden to Northern to prove HDC (fails for GF and Notice)
 § 3-411 & § 3-411

                  iii. Liability on Teller’s Check
                          1. Drawer’s Liability § 3-414, § 3-411
                              Drawer Regions                      Teller’s Check 
                              Drawee Bank of America      Merchant                  K’or
                              Payee K’or                             Building

                             The K’or presents the Teller’s Check and it is dishonored
                                a. Go against the Drawer (Regions) under § 3-414 on the instrument
                                b. Cannot go after Drawee (Bank of America) b/c of § 3-308 and § 3-309
                          2. Indorser’s Liability § 3-415
                                a. If the Merchant indorsed the check, you could go after the merchant under
                                   § 3-415
                                b. If K’or neg it to A, then A neg to B, B could go after K’or or A, or Drawer
                                   b/c the indorsers’ liability under § 3-415

                  iv. Liability on a certified check
                         1. Drawee bank’s liability § 3-413, 3-502(b) & (d), 3-411
                                              Certified Check 

                                                       39
   Merchant                                     K’or
                        Building       

   Drawer = Merchant
   Drawee = Regions
   Payee = K’or
   The Regions will stamp the check and an officer of the bank will sign (many
   banks will not certify checks)
      a. If Regions refuses to certify, then NOT dishonored
               i. Cannot go against Indorser (no presentment or dishonor § 3-415)
              ii. Cannot go against maker § 3-414 (no presentment)
             iii. GO TO BANK AND HAVE THEM PAY IT!!!
                      1. Presentment for payment
                      2. THEN if dishonor,
                              a. Go after Indorser?
                                       i. NO
                                      ii. When accept from bank, liability of indorser
                                          is discharged § 3-415(e)
                              b. Go against Maker?
                                       i. NO
                                      ii. § 3-414(c)
                              c. ONLY recourse is the bank
      b. Remember that Regions is also an ACCEPTOR AND DRAWEE!
      c. Also remember that the underlying obligation is discharged by certified
          checks, see § 3-310
      d. What is LIABILITY of the bank and others HERE?
               i. You could sue the merchant under § 3-414 (obligation of a
                  drawer). Merchant will say that when draft is accepted by the
                  bank, his obligation is discharged, see § 3-414(c)
              ii. You could sue the bank under § 3-413 (obligation of acceptor).
                  The bank would be liable to pay according to the draft’s terms at
                  time it was accepted
             iii. IF the merchant indorsed the check, you could sue the merchant
                  under § 3-415 for indorser’s liability. However, the merchant will
                  argue § 3-415(d) which says if a draft is accepted by a bank after
                  an indorsement is made, the liability of the indorser under
                  subsection (a) is discharged
                      1. ONLY IF INDORSE BEFORE THE BANK CERTIFIES
                      2. If indorse after, still liable
      e. What if Merchant  K’or  A  B? If A were to take the check to the
          bank and get it certified, can B sue K’or?
               i. No
          Anyone indorsing before certification is discharged !!!!

2. Drawer’s liability § 3-414(c)
      a. Drawer’s liability is discharged once accepted by the bank and certified!
         See § 3-414(c)
3. Indorser’s liability § 3-415(d)
      a. Indorser’s liability is discharged once accepted by the bank (remember all
         previous indorsements but not subsequent)

                            40
v. Stopping payment of cashier’s check/teller’s check/certified check § 4-403, comment
   4
      1. § 4-403 I have a right to stop payment on a personal check. If the bank pays over
         the stop payment, they may owe me money
      2. Can you stop payment on a cashier’s check?
             a. NO
             b. You are not the drawer (you are also not the drawee, payee, or anything
                 else but remittur for that matter). Only a bank can decide to stop or pay
      3. What about a Teller’s Check?
             a. NO
             b. Drawer is another bank, only they can stop payment
      4. What about a Certified Check?
             a. You are the drawer, so you can stop payment until certification of a check
                 – then you cannot
             b. You lose the right of stop payment
      5. You can always ask the bank to stop payment




vi. Lost cashier’s check/teller’s check/certified check § 3-411, 3-602, 3-312 (not adopted
    in AR)
                   10,000 
    Merchant                            K’or
                    services 

    You want to get a Cashier’s Check to pay the K’or (you are the merchant) and you
    wonder what the best way to go about it is?

                                 Advantages            Disadvantages

    Pay to order of K’or         No indorser liability M is not a holder
    Pay to order of Merchant     M is a holder         Indorser Liability

       1. What if you find a defect before you deliver the check to K, and it is made out to
          him? (what if you change your mind)
             a. You could ask the bank to take the check back -
       2. What if he gives it to K’or?
             a. The underlying obligation is discharged
       3. Can he stop payment on –
             a. Cashier’s Check § 3-412 – Issuing Bank can dishonor
             b. Teller’s Check § 3-414 – Drawer Bank can stop payment
             c. Certified Check § 3-413 – Accepting Bank can dishonor
       4. What if Merchant talks Bank into refusing to pay Cashier’s Check b/c Merchant is
          good customer?
             a. Under § 3-411(b) if a bank wrongfully refuses to pay a cashier’s check,
                 they are subject to consequential damages; unless it is a situation under §
                 3-411(c)
                      i. Bank suspends payment or § 4-104(a)(12) Suspends payment
                         means that the bank has been closed by order of the supervisory
                                    41
                                           authorities, that a public officer has been appointed to take it over,
                                           or that it ceases or refuses to make payments in the ordinary course
                                           of business
                                       ii. Bank believes that there is a claim or defense of the bank. What
                                           then?
                                               1. Interplead – if only 10,000 at stake Not enough for a claim
                                                    in recoupment, they have to be able to get the whole
                                                    instrument back??? This section states that they can assert
                                                    a claim in accordance w/ § 3-305(c) but if they are wrong,
                                                    they can still be liable for Consequential damages

                          5. REMEMBER THAT § 3-312 WAS NOT ADOPTED IN ARK – LOST CC
Diaz v. Manufactures Hanover Trust Co.
Lost cashier’s check. Stop payment under § 3-309, post bond and wait 90 days (b/c amount of days until check
is overdue). What is reasonable amount?
        - Same as the check?
                NO – bank’s liability is more under § 3-412, and § 3-411
        - Double (UCC allows for may; Here, NY law is double)

          c. Accommodation Parties
                  Notes, Drafts, only people who sign
                   Instead of normal right of contribution, has right of reimbursement for amount paid
                  AND subrogation rights
                   Indorsement – neg, not liability
                   Indorsement for accommodation – (converse) no neg function (anomalous indorsement)
                i. Liability of accommodation party and rights of accommodation party against
                   accommodated party § 3-419, 3-305(d)
                       1. § 3-419(a) If 2 persons sign an instrument and 1 person receives value and the
                           other person signs for liability but receives no benefit – it has been signed “for
                           accommodation” purposes
                       2. Accommodation Party – Receives NO Direct Benefit (signs to incur liability, but
                           no direct benefit)
                       3. Accommodated Party – Receives Benefit
                       4. Ex. Son could have father co-sign as a maker to get a loan. (son = accommodated
                           party, father accommodation party)
                       5. Ex. Son could sign as a maker and father could sign as indorser (§ 3-205(d) –
                           Anomalous indorsement – an indorsement made by a person who is not the holder
                           of the instrument. An anomalous indorsement does not affect the manner in
                           which the instrument may be negotiated)
                       6. Look at special rights and benefits of accommodation party (in addition to
                           rights in capacity of liability)
                               a. Ex. Note –
                                        i. Maker and Indorser are liable
                               b. Ex. Draft
                                        i. Maker, Indorser, and Acceptor liable
                       7. Could be accommodation maker or indorser. What would be the difference?
                               a. Maker – No presentment/notice required
                               b. Indorser – presentment to maker, dishonor, and then notice of dishonor to
                                   indorser required


                                                     42
       8. Mary Merchant wants a loan for her corp. She signs the note Merchant Inc. by
           Mary Merchant President //ss Mary Merchant. Is Mary an Accommodation
           party?
               a. YES
               b. Even though she receives some benefit, it is for the corporation. See § 3-
                   419 comment 1
       9. Husband and Wife – Husband goes to buy a truck and the dealership wants the
           wife to sign as co-maker. Is the wife an accommodation party?
               a. How is title set up?
               b. Who uses the truck?
               c. Who gets the benefits?
               d. No bright-line rule
                        i. Facts depend ability to argue accommodation party status
       10. Special Rights
               a. Comment 7 to § 3-419 - Suretyship law brought in provides that general
                   suretyship rules apply § 3-605 – read
               b. § 3-419(e) Special Defenses – Accommodation party is entitled to
                   reimbursement from the accommodated party and is entitled to enforce the
                   instrument against accommodated party (three rights)
                        i. Reimbursement
                       ii. Subrogation
                      iii. Exoneration (orders debtor to discharge obligation – not imp)
               c. § 3-305(d) No Jus Tertii – In an action to enforce the obligation of an
                   accommodation party to pay an instrument, the accommodation party may
                   assert against the person entitled to enforce the instrument any defense or
                   claim in recoupment under subsection (a) that the accommodated party
                   could assert against the person entitled to enforce the instrument EXCEPT
                   (discharge in bankruptcy, infancy, lack of legal capacity)
               d. § 3-603(b) Special rights Available to Accommodation Party– If tender
                   of payment of an obligation to pay an instrument is made to a person
                   entitled to enforce the instrument and the tender is refused, there is
                   discharge, to the extent of the amount of the tender, of the obligation of an
                   indorser or accommodation party having a right of recourse against the
                   person tendering payment
ii. Suretyship defenses § 3-605, 3-603
       1. Suretyship terms:
               a. Creditor – person to whom the obligation is owed = Person entitled to
                   enforce
               b. Principal Debtor – owes obligation = Accommodated Party
               c. Surety – Guarantees that debtor will pay obligation = Accommodation
                   Party
       2. Surety – in addition to having rights against the principal debtor, also has certain
           rights which can be asserted against the creditor seeking enforcement of the
           surety’s obligation to pay the debt
               a. Related to changes in the obligation of the principal debtor w/o consent of
                   the surety
       3. Ex. Creditor: Pulaski Co (person entitled to enforce the instrument) / Principal
           Debtor: D (accommodated party) / Surety: Bail Bondsman (Accommodation
           party)
       4. At common law, a surety has 3 remedies available:

                                     43
                                 a. Reimbursement - § 3-419(e) An Accommodation party is entitled to
                                     reimbursement
                                 b. Subrogation – If surety paid creditor, the surety stepped into the
                                     creditor’s shoes. If there was collateral, then surety could also enforce the
                                     collateral / foreclosure
                                 c. Exoneration – court order that ordered debtor a creditor (not that imp)
                          5. A note is signed by Mary Merchant and John Doe for $10,000. MM is
                             accommodated party. JD is accommodation party. K’or can go after either one
                             ALWAYS
                                 a. If K’or goes after JD, JD can get $10,000 from MM
                                          i. Right to reimbursement/subrogation (JD gets the note)
                                                  1. Ex. If
                                 b. If K’or goes after MM, MM cannot get ANYTHING from JD
                          6. MM sign a note and on back JD and JS sign. If MM does not pay, K’or can go
                             after JD or JS as an indorser. Indorser (never holder under § 3-116 (Annomalous
                             indorser)) has a right of contribution
                                 a. W/ Accommodation Indorser, must try to present to MM first and then
                                     give notice to JD and JS
                                          i. Can go after either
                                 b. JD and JS owe rights of contribution to each other
                                          i. ONLY if BOTH sign as anomalous indorser
                                         ii. If not, then order of indorsement § 3-415
                                 c. Also, either can go after MM for whole amount (right of
                                     reimbursement/subrogation)

Fithian v. Jamar
Case set out below – business case where wives of business partners had to sign on and the court was
determining the rights of the parties to each other. Walter left and upon agreement Richard had assumed full
liability on $12,000 interest on the note. Bank can go after everyone (went after Bill and Mildred who paid all)
Connie  co-maker and accommodation party (not liable to Richard). Owes $3,000 to B and M and can get
whole $3,000 back from either Walter or Richard (if went after Walter, due ONLY to separate K, Walter can
get full return from Richard – normally would not be able to)
Janet  co-accommodation party w/ Connie (both have right of contribution; inchoate claim until pay more
than proportionate share)
Bill & Mildred  can go after Richard & Walter for full amount; could go after Connie & Janet for
contribution when pay more than proportionate share (when pay over $6,000).
BE SURE, when getting your client out of something like this, that you get releases from all the accommodation
parties. (Ex. Accommodation Parties NEVER released Walter from obligation even though Richard did)


                          7. Accommodation Parties                  Accommodated Parties
                             Bill        $3,000                     Walter
                             Mildred     $3,000                     Richard
                             Janet       $3,000
                             Connie      $3,000

                             What if Bill paid $5,000? He could get the whole $5,000 from Richard or Walter.
                             But what if they have no money? Bill paid $5,000, how much can he get in
                             contribution? He can go against the others for $2,000. He paid his $3,000 share.


                                                       44
   8. Until a Co-Surety pays more than his proportionate share, he cannot get
      contribution
   9. A indorses a note and B indorses a note and neg to C. If C presents instrument
      and is not paid, if C goes back against B and B gives C $10,000, B can go against
      A for the whole $10,000. This is indorsers’ liability, not accommodation. You
      can go back against all indorsers in the order in which they sign. Exception is J &
      S liability

SUB-SURETYSHIP
  10. A and B are co-surety as accommodation parties. A & B could be co-surety to
      each other. Ex: A will assume the whole liability if either one of them has to pay
      liability.
  11. Ex. T gets A to indorse note and B to indorse A’s indorsement. = sub-surety
          a. T has NO right of recourse
          b. A has NO recourse against B; recourse against A
          c. B has ABSOLUTE recourse against A and T
  12. Difference b/t sub-sureties and co-sureties
          a. Sub-surety CAN go after the other surety
          b. Co-surety CANNOT go after other co-surety
  13. § 3-605 (comment 6) So if A and B are sub-sureties, if B pays the whole $10,000,
      he can get the whole amount from A, but if A pays the $10,000, he cannot get
      anything from B
  14. Hypo: If 2 guys and get C to sign (C should get in writing if only wants to
      guarantee A and not B) OTHERWISE presumption signing for both
  15. Hypo:
      Contractor = creditor/ person entitled to enforce
      John Smith = Surety/ Accommodation Party
      MM = Principal Debtor/ Accommodated party
      § 3-419(c) There will be a presumption that John Smith is Surety (He signs //John
      Smith collection guaranteed. If John Smith signs COLLECTION
      GUARANTEED, there is a different result than if he just signs as a surety b/c he
      is not guaranteeing that MM will pay but that K’or can collect. § 3-419(d) that
      means K’or must execute a judgment against MM and it has been returned
      unsatisfied or MM is insolvent (involved in insolvency proceedings) or MM
      cannot be served w/ process. K’or can ONLY collect after all remedies have been
      exhausted from the co-surety guarantor (sue MM and get judgment, send sheriff
      to go get MM’s assets; THEN go to John Smith)
                     - Puts more hurdles in the way of judgment against surety
                     - Also “I GUARANTEE YOU IF YOU HAVE ANY LOSS”
                     - Bank has this apply against them too (If don’t know, may
                         accept it w/ this)

   16. Now what if John Smith says he will only be an accommodation party if Jane Doe
       will sign. John Smith signs. MM cannot find Jane Doe so she gives to K’or with
       John Smith’s signature only. What can John Smith do?
           a. Under § 3-117 John Smith can get out of paying the obligation if he can
               prove agreement w/ MM. However, if HDC gets the note, John Smith
               could not get out of obligations - an HDC would cut off his rights
           b. Called Conditional Suretyship
           c. John Smith OUGHT to put on there “Conditioned upon signing of Jane
               Doe”
                                 45
        17. Now MM has a $2,000 claim in recoupment against the K’or w/ John Smith as
            Accommodation Party. K’or goes to John Smith when the note is due. Can John
            Smith assert MM’s claim in recoupment?
               a. John Smith could interplead MM and let her assert the defense OR
               b. Under § 3-305(d) he could go ahead and assert MM’s claim in recoupment
               c. Jus Tertii DOES NOT APPLY here unless her defense was discharge in
                   bankruptcy or MM was an infant or lack of capacity
                       i. Makes sense – WHOLE REASON to require a co-signor;
                          accommodation
                      ii. Accommodation Party can plead OWN bankruptcy
               d. Accommodation Party gets to step into shoes of Accommodated Party




        18. What if MM (accommodated party) has a claim in recoupment of $2,000. John
            Smith (accommodation party) pays the full amount and does not know of MM’s
            claim. He is entitled to FULL reimbursement back from MM under § 3-419
            Comment 6
        19. However, if John Smith pays and knows of her claim, he cannot get the money
            back
        20. § 3-119 When K’or sues John Smith, he may give notice of Right to Defend to
            MM to bring her in. If MM will not join in the lawsuit, but it will bind her as to
            her claim in recoupment (b/c John Smith does not want to litigate the claim in
            recoupment – does not help him). MM will probably come in and litigate her
            claim in recoupment.

iii. § 3-603 Tender of payment – Where one party has the right of recourse against another
         1. Under § 3-603(b), if A tenders payment and then that of payment is refused, then
             that tender discharges anyone with a right of recourse against person making a
             tender
         2. HYPO: MM and JS  K’ors
         If MM refused from her trying to pay, then JS would be discharged. B/c JS has a
         right of recourse against MM. If MM tenders payment and K’or refuses, the JS is
         discharged
                  a. When refuse payment or accepts payment from one who I have a
                     right of recourse against, then I am DISCHARGED
         3. READ § 3-603 CAREFULLY!!!!
         4. This also applies to other situations:
             Maker  Payee  Holder
             § 3-603 applies to both situations. If Maker tenders money to holder, then payee
             is released from liability under § 3-603.
         5. § 3-603(c) Payment is tendered and refused, then no interest accrues after refusal
         6. HYPO: MM and JS  K’ors
         MM delivers a note to K’or for $10,000 at 8% due 1/2/2002. John Smith signs as
         Accommodation Party. John Smith goes to K’or and says MM does not have the
         money to pay the note. So he wants to write the check for MM debt. K’or (friend of
         MM) says no, wait and see if MM can pay. MM does not pay. JS has not lost
         anything – therefore, he is liable for what he offered. JS will not have to pay interest

                                      46
                  b/c no interest accrues after 1/2/2002. Neither JS nor MM is discharged. JS escapes
                  liability for interest after 1/2/2002. Could exonerate (but not important – make him
                  take all assets and pay)
                  Many states have Pay v. Packard statute  go to creditor and offer to pay note and
                  refuse (discharged). AR doesn’t
              - STOPS the interest BUT releases NO ONE (no right of recourse against)

              DISCHARGE OF ACCOMMODATION PARTIES (also to indorser)
                 7. Has the creditor’s action/inaction caused a loss to the right of recourse? If it has,
                    then the accommodation party is discharged
                 8. § 3-605 sets out various situations that will discharge the Accommodation Party
                    and also implied indorsers

                    Person entitled to enforce  Bank (creditor)
                    Accommodated Party  Person given money (debtor) MM
                    Accommodation Party  Person who secures (surety) John

                    9. Hypo: MM issues a $10,000 note to Bank for 10K 8% interest due 1/2/2002.
                       John signs as Accommodation Party. Bank insists on John signing the note.

                       Bank goes to MM on 1/2/2002 and MM says I only have $6,000. She will pay the
                       $6,000 if they will release her from liability or she will file bankruptcy. Bank
                       takes the $6,000 and releases MM. How much does John owe?
                               $4,000
                               Banks can release Accommodated Parties for little or nothing and not
                               release the Accommodation Party. See § 3-605(b)

                              They could go to John for the whole $10,000, then he could get $6,000
                              from MM and he will still be out $4,000. He has not been injured by the
                              Bank releasing MM. If Bank releases MM, it does not affect John b/c it
                              does not affect his right of recourse.
                              Bank’s action did not damage John AT ALL




Right of Recourse                     Right of Recourse              Damage (Loss) To
If No Discharge        MINUS          If Discharge      EQUALS       Right of Recourse


$10,000                               $4,000                               Same
- 6,000                MINUS                             EQUALS
$4,000




                    10. What if Bank comes to MM on 1/2/2000 and she says I don’t have the money but
                        extend the date 6 months and I will. The Bank agrees and John does not agree. 6

                                               47
                       months later on 7/1/2000, MM says I’m filing bankruptcy. To see if John’s rights
                       are affected, look to see if there is any change to the Accommodation Party’s right
                       to recourse. If John could get nothing on 1/2/2000, he has not been affected by
                       the extension. Does John owe interest on the extra 6 month of money?
                           a. Yes
                           b. § 3-605(c)
                           c. B/c he has not lost anything. If John did not like this extension, he could
                               have paid the note on 1/2/2000. This will enable John to go against MM
                               and say I paid your debt and get what money MM has now

Right of Recourse                     Right of Recourse               Damage (Loss) To
If No Discharge        MINUS          If Discharge      EQUALS        Right of Recourse

$0                                      $0                                 Same


                    11. But what if evidence shows that MM was not insolvent on 1/2/2000 and she had
                        $6,000. John would be discharged as to his right of recourse

Right of Recourse                     Right of Recourse               Damage (Loss) To
If No Discharge        MINUS          If Discharge      EQUALS        Right of Recourse

$6,000                          $0                                         -$6,000

                        All Bank can recover is $4,200.

                    12. § 3-605(c) John would have the burden of proof on the issue of lost right of
                        recourse (he would have to prove MM had $7,000 on 1/2/2000 and she spent it
                        while the bank gave her an extension)
                            a. Not only that he has been damages, but to what extent

                    13. § 3-605(d) If John finds out about the extension and wants to get MM’s current
                        assets, he can pay the bank off and assert his right of recourse
                    14. If John knew about the extension and did nothing, is it held against him?
                            a. No, but the Bank will use this fact in the determination before the court
                            b. Bank would have to prove that John knew and John would have to prove
                                that his right of recourse has been damaged
                    15. HYPO: MM issues a note same as above. The Bank goes to MM and says I know
                        you are broke. Bank uses acceleration clause and wants money one year early.
                        MM says please wait and I will pay 12% instead of original 8%. Bank agrees.
                        The Bank and MM altered the original terms of the note § 3-605(b). At 1/2/2000,
                        MM still has no money and files bankruptcy. Bank goes after John. If Bank and
                        MM materially alter a term w/o John’s consent, and then John is discharged to the
                        extent of right of recourse.
                            a. Presumption that John is discharged and Bank has burden of proof to
                                prove John suffered no loss § 3-605(g)
                            b. John would have gotten nothing from MM either way if MM paid 0. BUT
                                if MM pays $400 on the interest in the extension year, then John has lost
                                $400 b/c his right of recourse against MM is lessened by what she paid to
                                Bank.
                            c. Material alteration often discharges accommodation party
                                                    48
                          16. Same Hypo: Except bank wants collateral and an Accommodation Party. MM
                              puts up Equip A worth 6K and Equip B worth 5K as collateral. John signs as
                              Accommodation Party. The Bank perfects the security interest on equip A but not
                              on Equip B. MM files for Bankruptcy and Bank goes after John. John could get
                              $6,000 from Equip A and had the Bank perfected he could have gotten the whole
                              $10,000 back. So when Bank sues him, John can say I’m discharged as to $4,000.
                              I only have to pay $6,000. Bank should bear the loss b/c it failed to perfect the
                              interest. Then John steps into Bank’s shoes (secured creditor for $6,000) and can
                              get it back from the bankrupt estate
                          17. Ways to Impair collateral
                                  a. Failure to perfect or record
                                  b. Releases the collateral
                                  c. Failure to perform duty to preserve the value of collateral
                                  d. Failure to comply w/ law in disposing collateral

                          18. Same hypo: except puts up $3,000 (perfects) and $2,000 (fails to perfect). What
                              has John lost?
                                  a. If both perfected  $5,000 from bankrupt estate
                                  b. Since not  $3,000
                                  c. Can get $2,000
                                  d. John will only have to pay Bank $8,000
                                  e. Then John would go after bankrupt estate ($3,000 at most)
                                            i. John is still out $5,000 but only secured to that much and not
                                               Bank’s fault
                                           ii. DAMAGE = damage to right of recourse
                                                  1. Remember (i.e. damage b/c of Bank’s neg  $5,000 would
                                                       have been secured if Bank had secured both)
                          19. Same Hypo: Except John signs as co-maker. MM puts up collateral ($10,000)
                              and Bank fails to perfect $10,000 (file financing statement claiming the security
                              interests), see § 3-605(f) & (g)
                                  a. Not right of reimbursement (right of contribution)
                                  b. John can get only $5,000
                                  c. For MM if John went into bankruptcy, the damage to the right of recourse
                                      (contribution) is $0 b/c he is in bankruptcy
                                            i. NOT BANK’S FAULT
                                           ii. FOCUS ON THE VALUE OF THE RIGHT OF RECOURSE

                          Section                   Action/Inaction                Burden
                          § 3-605(b)                Discharge of Party             n/a
                          § 3-605(c)                Extension of Due Date          John
                          § 3-605(d)                Material Modification          Bank
                          § 3-605(e)                Impairment of Collateral       John
                          § 3-605(f)                When Co-Maker

Venaglia v. Kropinak
If cannot bring yourself w/i § 3-605 (e) Impairment of Collateral, then look to general suretyship law (broader
net).

HYPO: Morris  Larson  Keet

                                                       49
       AC (Patel)
        Note due and Morris gets extension from Keet. Morris had $10,000 in assets to use to pay. When
       due, Morris is bankrupt. Can Keet go against Patel?
       § 3-605(h) – Accommodation Party NOT discharged unless person entitled to enforce has notice of
       accommodation OR notice b/c instrument signed as accommodation party
        If Larson changes the note, etc and Keet has NO notice (HDC). Keet sues Patel who asserts defense
       of discharge § 3-605(c) or (d) or (e). BUT HDC cuts off co-defenses
                Hard in practice (how to extend the date w/o notice or alter face of notes etc)
                Usually happens when other documents etc

§ 3-605(i) Cannot plead the defenses is you have waived them or consented to action.
        A lot of agreements will require this waiver before take a note
        If Pres of Corp signs in that capacity to extend, cannot argue did not consent as Individual person

           d. Signature by Representative
              Person is not liable on an instrument UNLESS they sign or someone authorized by you signs it §
              3-401
                      - Usually deals w/ corporations (only way can act is through agents/reps)
              § 3-402 READ Agent must:
                      1) Sign in a way that represents the person (principal)
                      2) Unambiguously indicate that signature is in representative capacity
              If don’t do both and agent signs his/her name, agent will be liable to HDC:
                               When just signs his/her name and no indication of agent status or represented
                              party existence
                               When sign his/her name, agent but does not identify represented party
                               Signs both represented party and his/her name w/o indicating that agent signed
                              as agent
                       Under § 3-402(b)
              § 3-403(a) If one unauthorized signs for you and you retain the benefit, then you have authorized
              that signature. RATIFIED
               If sign as agent and no mention represented party/agent status, represented party is bound
              (ONLY when authorized to do so)
              § 3-402(c) If agent signs his/her name and check is on your account and no mention of agent,
              you are liable and agent is not if authorized

               BEST WAY TO SIGN TO PROTECT SELF:
                                               D, Inc.
                                               By S Greenwood, treasurer

                   i. Liability of agent on notes § 3-401, 3-402(a) & (b), 3-403
                         1. Wang v. Wang – V borrows 98K from Credit Union. CU has arrangement w/
                             Coop. Coop will guarantee loan if CU spends money there. Signed by Schramm
                             (Coop agent) but not stamped showing agent. V did not pay off note. CU pays
                             off Coop 43K. Coop goes and gets collateral from V. R got involved when Coop
                             calls R give 8K to CU and R has note and equip. R sues Schramm. S did not
                             indicate that he was acting in representative capacity, and he did not say whom he
                             represented.
                                 a. R will win against Schramm if R is an HDC. If fail to show principal or
                                     that the representative is signing for represented party.
                                 b. § 3-402 says if transferred to HDC, and then they can sue the individual.

                                                       50
                                 c. Robert knows the note is overdue and has been dishonored. Robert is not
                                    HDC
                                 d. So against any other person, Schramm can show that the original parties
                                    did not intend the representatives to be liable on the instrument.

                  ii. Liability of agent on checks § 3-402(c)
                         1. Hypo: Check on ABC Corp, pay to order of Jane Doe, signed by John Smith. JS
                             is President of ABC Corp and is authorized to sign on the account. The check
                             bounces and Jane Does sues John Smith personally. Who wins? Did John Smith
                             indicate unambiguously that he was signing in a representative capacity?
                         2. Under § 3-402(c), a representative signs the name of the representative as drawer
                             of a check w/o indication of the representative status and the check is payable
                             from an account of the represented person who is identified on the check, the
                             signer is not liable on the check if the signature is an authorized signature of the
                             represented person
                                 a. Rules don’t apply to checks when on account of the represented party

           e. Accord and Satisfaction § 3-311, 1-207(2)
                  i. § 3-311 address when an accord and satisfaction is done w/ a negotiable instrument
                 ii. Def: Claimant – Person against who claim is asserted
                iii. 3 things MUST happen:
                         1. Tender has to be in GF
                             * See comments – Insurance Co offers ridiculously low amount – not tendered in
                             GF. Some people have preprinted clause – not in GF (honesty in fact and in
                             accord of R standards of commercial dealing)
                         2. Amount must be unliquidated or disputed
                         3. Person (claimant) who gets the check has to cash it (obtain payment of the
                             instrument – cannot hold the check)
                iv. EXCEPTIONS
                         1. § 3-311(c) will not be discharged if claimant has advised that you must contact
                             regarding dispute of amount owed
                         2. Claimant also has 90 days to offer money back
                         3. Claimant is an organization w/ a designated person to contact and org gives notice
                             of who person is and that person has not received check



McMahon Food Corp v. Burger Dairy Co.
Milk corp case. Burger sold milk to McMahon. Credits when return cartons. Debt of $58,000. New manager
and asked about the debt. McMahon said neg in meeting and I don’t owe for it (lie). 2 Checks said payment in
full through this date. Burger marked out paid in full and cashed and wrote cashing w/ reservation. TC – deceit
and no accord (unilateral action) = for Burger.
 There was payment (cashed)
 BUT NOT tendered in GF (honesty in fact)
Took risk when cashed after crossed out and wrote words of protest – no effect (OLD)
Other checks saying paid in full on invoice  not conspicuous enough. Trying to slip this by – not GF. Must
make GF effort to settle
 Amount was disputed - trying to get out of whole amount (owed some of it; even w/ credits for milk cartons
returned)
Not as simple as putting “paid in full” on check and getting it by
New § 1-207(2) – cannot use words of protest to avoid § 3-311 (accord and satisfaction) – used to be able to
                                                        51
County Fire and CF Wooding
Seller shipped doors to buyer and billed them for $2,619. Doors were late and it caused damages. Buyer sends
check for $400 and says payment in full. Seller crosses it out and cashes the check they put “we take w/
protest.”
Court said claimant cannot cross out and keep the check. They should have sent it all back to tendering party




   IV.     CHAPTER 6 – THE BANK-CUSTOMER RELATIONSHIP
           Most things dealing w/ relationship b/t bank and customer are in Part 4 of Article 4
           4-103(a) allows parties to alter Part 4 by agreement
              - Cannot eliminate Bank’s duty of GF
              - Cannot eliminate Bank’s duty of ordinary care
           There is some overlap b/t Article 3 and 4
              Ex. § 3-416; § 4-207
              Since 4 are more specific than 3, then look at 4 for banks
           a. Intro § 4-103(a), 3-103(4)
                   i. § 4-103(a) Article 4 confers certain rights on bank and customer. Under this § a party
                      can vary the terms of the agreement w/i certain limits
                  ii. § 4-105
                          1. Bank = business of banking, savings and loan, credit union, trust co
                          2. Depository bank = 1st bank on the chain; can even be payor bank
                          3. Payor/Drawee bank = bank on which check is drawn
                          4. Intermediary bank = all banks in collection chain but depository and payor bank
                             (“I/B”)
                          5. Collecting bank = many banks (collecting for payor bank); not payor bank
                             (“C/B”)
                          6. Presenting bank = an Intermediary bank presenting check to payor bank for
                             payment; not payor bank (“P/B”)

                                                      P/B
                 “C/B”                    “C/B”      “C/B”
(Customer)       Depository         [Neg]  I/B [Neg] I/B [Presentment] Payor Bank
Drawer  Payee  Bank A                  Bank B  Bank C          Bank D (Drawee)

                 iii. MICR System (Magnetic Ink Character Recognition System)
                 iv. Certain Information is incoded on the check
                         1. Routing Number – drawee bank number (so computer will send to that bank
                            (location))
                         2. Account Number
                         3. Check Number
                         4. Amount of the Check – this is done by 1st Bank to handle the item (some large
                            companies do it also)
                  v. § 4-209 The bank that encodes the amounts warrants that all amounts are correct
                 vi. Not on there
                         1. Date of the check
                         2. Payee
                         3. Signature

                                                     52
      vii. § 4-110 Electronic Presentment – payee presents the depository bank and dep bank
           presents electronic on down the line and after 90 days destroys the check

b. Properly Payable Check § 4-401, 4-402, 3-420, 4-404
       i. There are 2 categories of disputes:
              1. Bank pays a check and customer did not want it paid  Improper Payment
              2. Bank did not pay a check and customer thought they should have  Wrongful
                  Dishonor
      ii. Properly Payable Rule – When is a bank authorized to charge a customer’s account w/ a
          check?
     iii. § 4-401(a) A bank may charge against the account a properly payable item (even though
          creates overdraft). An item is properly if it is payable if it is authorized by the customer
          and is in accordance w/ any agreement b/t the customer and bank.
              1. Check is order to pay
              2. Must comply w/ account terms (K)
     iv. § 4-401(a) When a bank pays an improper check. Normal remedy for error is that bank
          will put money back in your account.
      v. § 4-401(c) If you have a postdated check, is the check properly payable?
              1. Yes, according to (c) even though payment was made before the date of the
                  check, UNLESS the customer has given notice to the bank of the postdating
                  describing the check w/ R certainty.
                      a. Postdated check not properly payable ONLY when notice given
              2. Notice to bank must be given to bank w/ R opportunity to act on the customer’s
                  request
                      a. Must suff identify the check
                               i. At a minimum - Check #, account #, amount
              3. If notice given, bank will either pay or dishonor
                      a. If dishonor, not wrongful dishonor b/c not properly payable
                      b. Can send back and person can send back through when date is given
              4. If bank pays after notice, was it improper payment?
                      a. Yes
                      b. Remedy?
                               i. If date has already passed, no loss (poss overdrawn, then can get
                                  overdraft fee; also arguably interest but better be a large amount)
                              ii. Won’t have to put money back b/c by time raise the issue, no loss
                                  b/c date has arrived
                             iii. Could also bring charge for wrongful dishonor if caused
                                  overdraft(s)


      vi. § 4-401(b) Bank can pay a check that creates an overdraft, but they don’t have to – can
          dishonor. Can do either (still properly payable)
              1. If you have overdraft protection and bank does not pay, then customer would have
                 a right for improper payment.
              2. Customer is not liable for amount of overdraft if customer neither signed the
                 check nor received any benefit from it.
                     a. So if joint account and husband bounces  only he is liable if you did not
                          sign and received no benefit
                     b. However, usually agreement sign w/ bank allows the bank to go after all


                                            53
 vii. Husband and Wife having marital trouble. Wife goes and takes out all the money. H’s
      checks clear the bank and create an overdraft. Bank can go back against person who
      signed the check – husband only
viii. Customer  A  Thief  Payor Bank
      If drawer’s signature was forged is it properly payable? NO - § 4-401
               How is the bank supposed to know?
                              - Computer cannot know
                              - Based on very old English case, rule that drawee is supposed to
                                  know the drawer’s signature
                              - Legal fiction
      If A’s (payee’s) indorsement is forged, is sit properly payable? NO – not proper payment.
               Thief not a holder. (Neither is any subsequent party).
               Drawer ordered bank to pay A or any subsequent holder (if pays anyone else, then
               improper payment)
  ix. § 3-420 Conversion – Unauthorized use/control of personal property – law applicable to
      conversion of personal property applies to neg instruments.
          1. One example of conversion is when a bank pays to one NOT ENTITLED to
               ENFORCE
          2. Action for conversion cannot be brought by (see comment):
                  a. Issuer or acceptor of instrument (not their property) OR
                  b. A payee or indorser who did not receive delivery of instrument
   x. S writes a check to W. W loses it w/o indorsing (order paper). S calls bank and says W
      lost it. S does not have to stop payment. If Bank pays, then Bank is liable to W for
      conversion and customer for improper payment.
          1. Customer has no exposure unless negligent in losing
          2. No point in paying for stop payment
          3. § 4-401 (comment 1) – lost check w/ no indorsement or special indorsement, not
               proper for bank to require stop payment b/c never will be properly payable on
               account

  xi. W indorses the check then loses. T gets check and presents it to the bank. When W
      indorses, she made that bearer paper meaning anyone in possession is entitled to enforce
      and this is properly paid. W will end up having to bear the loss. W can go after T on
      conversion.
         1. Either bank will pay OR stop payment (dishonor and bounces back to whoever T
              gave to (grocery store who will go after W)
                  a. § 3-408 – cannot go after drawer bank
                  b. § 3-414 – can go after drawer
                  c. § 3-415 – can go after payee if indorsed
 xii. You can’t make customer execute a stop payment if check is lost b/c they are not paying
      proper person.
xiii. Customer  $100  A (alters to read $1,000)  Payor bank
      Bank pays $1,000. Bank will have to repay $900 but charge $100. § 4-401(d).
              - Can charge for original amount written for (not for altered amount) – b/c pays a
              holder
       IF thief steals it and forges A’s indorsement and alters it to $1,000. To Grocery Store
      and then to Bank.
              A would sue T on conversion. C can sue on improper payment (NOT LIABLE
              FOR ANY AMOUNT b/c bank is not paying a holder (grocery store)).
xiv. What if C gave A a check and authorized A to write at grocery store for him? Is it
      properly payable b/c you did not fill it out?
                                        54
                 1. Yes, b/c authorized
                 2. If you give incomplete instrument and he goes over the limit you set, as long as
                     bank does not know unauthorized, then bank can still pay § 4-401(d)
      xv.    If account requires 2 signatures (org) and bank takes check w/ only 1 signature, is the
             check properly payable?
                 1. § 3-403(b) NO – unauthorized
                 2. Remedy?
                         a. Bank will pay b/c computer not set up to recognize signatures
                         b. Any loss if org. received goods? – no
                         c. Anytime remedy used -when embezzled, then get re-credit
     xvi.    Customer  A for $1,000. A loses the check. 7 months later, A finds it and tries to cash
             it. What is the result?
                 1. § 4-404 The bank is under no obligation to pay a stale check – check is more than
                     6 months old. The bank can pay a stale check if it is in GF § 3-103(a)(4). Bank
                     may have an obligation to check w/ its customer. (Remember that if more than 90
                     old cannot have HDC but still good check)
                 2. Statute of Limitations on a check - § 3-118(c) SOL on a check is 10 years if you
                     can find a bank to cash it
                 3. Bank would have to detect the check’s date and dishonor (not by computer)
                 4. If bank pays the check  good if bank pays in GF (honesty in fact and
                     observance of R standards in fair dealing)
                         a. Poor choice of wording here
                         b. If bank actually detects the stale date, then should probably call the drawer
                                  i. GF does NOT apply to ordinary care
                                 ii. LOOKS only at the conduct/not the care
                                iii. Prof not sure what this means here
    xvii.    P draws a check on A for refreshments. A keeps for 7 months and takes to bank. Teller
             notices the date and pays it. [Stipulates not good faith to pay w/o contacting P]. Properly
             payable?
                 1. No (not in GF)
                 2. Remedy – nothing (if got refreshments, will have to pay)
                 3. Maybe improper payment, but unless lost something, then does not matter
    xviii.   C owes A $350. Goes to P and gives her $350 and P writes check to A.
                 1. If thief steals and takes and bank pays, cause of action?
                         a. Yes (improper payment)
                 2. Can C sue bank?
                         a. No, not the bank’s customer
                 3. Can P sue?
                         a. Yes, but won’t b/c got her money
                 4. Can A sue?
                         a. Yes, conversion (from thief or bank)
                 5. Third party, other than bank’s customer, has no cause of action against bank for
                     improper payment

c. Wrongful Dishonor of a Check § 4-402
      i. Cannot do much but get apology
     ii. A bank wrongfully dishonors a check if it dishonors a check that is properly payable (can
         dishonor an overdraft unless agreed to pay for overdraft). § 4-402(a). Bank will be liable
         for damages proximately caused by the wrongful dishonor § 4-402(b). – Actual damages
         proved or other consequential damages (may include damages for arrest/prosecution).

                                              55
                   iii. § 4-402 - If a bank refuses to pay a check and check is properly payable is the bank liable
                        to the customer?
                            1. Yes
                   iv. Damages – amount of check, charges, good standing in community, in jail, attorney’s
                        fees, fine
Loucks v. American National Bank
M borrows personal money. L & M form partnership. Bank takes money from partnership to pay M’s loan. 9
to 10 checks bounced. Their damages were $402 set off, $5,000 for damages to credit of business, $1,800 ulcer
causing loss of income, and $144,000 punitive. TC only allowed to submit $402 setoff to jury.
Court found damage to credit – salesmen angry, won’t take check, etc. Why $5,000? – didn’t have to quantify
(jury decided)
Court said M & L cannot recover for ulcer b/c they are not customers of the bank. The partnership is the
customer. Partnership cannot get punitive damages (not suff evid), and the jury could decide damaged to
reputation and credit.
Fact finder gets to determine damages for wrongful dishonor (BIAS by jury against the bank)

Twin City Bank v. Isaacs
Isaacs’s checks missing after friends visit. Isaacs called bank and let them know. Bank froze Isaacs account
(thought Isaacs was involved; kept frozen after police caught, arrested, convicted, and told bank not involved;
for 4 years). P’s vehicles were repoed, couldn’t buy a house, credit problems. Sued and won - $18,500 for
compensatory damages (damage to credit, emotional distress [couldn’t in AR common law; this is code],
consequential damages). Also got $45,000 punitive.
Do you have to quantify your damage? No. Court said if you can show actual damages, you do not have to
show damages w/ exactness.
Upheld compensatory; allowed for punitive b/c D didn’t preserve the issue. Allowed D to raise excessiveness
of punitive – but not
Fairly broad remedy under AR law
        Bank must decide to pay/not pay
               Pay – improper payment (liable for amount paid out)
               No pay – wrongful dishonor (liable for more)
                Also, improper payment can cause wrongful dishonor

City National Bank of Fort Smith v. Goodman, 301 Ark. 182
Larry K owed bank money. Bank going to set off checking account. Larry K’s Social Security placed on Larry
J’s account. Set off on wrong checking account (wiped out). Bounced checks. Bank immediately tries to fix
and called all people aware of that it was their fault. Few didn’t find out until later (notified week later). Sued
the bank for wrongful dishonor.
$20,000 in compensatory damages; $145,000 punitive from jury.
Bank appealed challenging punitive. (no intent)
AR SC – if the bank has dishonored by set off under erroneous belief that thought had the right to, then not
mistake but intentional and can get punitive. In this case, bank had the right of set off, mistake goes to
customer, and not intentional.
 If make a mistake of law (no right when thinks has right), then intentional (punitive)
 If make a mistake of fact (wrong account), then mistake (no punitive)

                   v. Comment 5 under § 4-402 – One can get actual damages w/ consequential and punitive
                      damages. § 4-402 does not displace any common law right to sue for defamation.
                  vi. What if Lamb, P.A. writes a check (written by Lamb) and bank wrongful dishonors?
                      Lamb not the customer (Lamb, P.A. is)?
                         1. Lamb suffers the harm; corp cannot suffer emotional damages

                                                        56
                         2. Not settled in AR (other states settled to officer who wrote the check)
                 vii. Liability to third party for wrongful dishonor
                         1. What if H needs rent and F writes check to S. Bank wrongfully dishonors.
                                  a. S and H cannot sue bank for wrongful dishonor
                                           i. Even though both to get the benefit of the check
                                  b. F would
                viii. Another issue of wrongful dishonor:
                      W has $905 in her account. W writes checks for 900, 10, & 20. In what order do you
                      want them to clear?
                              - Bank argue that we want them to pay largest first b/c they are most important
                              - Some banks pay in order of the checks
                  ix. Under § 4-402 comment – banks can pay them in any order they want

           d. High-to-Low Basis of Posting § 4-403, comment 7
                  i. Hi-to-low posting basis  policy of a bank to pay the largest check first
                 ii. § 4-303(b) – Items may be accepted, paid, certified, or charged to the indicated amount of
                     its customer in any order
                          1. Allows bank to do high-to-low posting

Smith v. 1st Union National Bank
Court decided (based on language of § 4-303 then) that bank was allowed to pay largest first and bounce several
smaller check (charge NSF – get more revenue).
§ 4-303 then said paid in any order convenient to the bank
That language has now been removed

           e. Stop Payment Orders
                  i. Customer’s Right to Stop Payment § 4-403
                        1. Under § 4-403 – Customer has a right to stop payment on a check. The bank must
                           provide this service.
                               a. Another type of improper payment is payment after the customer has
                                  ordered a stop payment
                               b. § 4-403(a) – banks must offer customer right to stop payment
                               c. Must notify by identifying the check w/ R cert and within reasonable time
                                  for bank to act
                        2. A stop payment lasts 14 days if oral (you call) or 6 months if in writing. § 4-
                           403(b)
                               a. Comment 6 – if first oral order and then written, the six months runs from
                                  the day of the oral order
                               b. Can renew the stop payment if w/i time that the stop payment is effective
                        3. Must describe the check w/ “R certainty”
                               a. Account #
                               b. Check #
                               c. Amount
                               d. Payee
                               e. Date
                        4. Courts have said you don’t have to get five out of five. But you must get close.
                           Courts say three to four out of five to establish R certainty
                        5. § 4-403(c) - The burden of establishing the fact and amount of loss resulting from
                           the payment of an item contrary to a stop-payment order is on the customer.
                        6. How does the bank do this?

                                                      57
               a. Doesn’t want to just pay this check (b/c section allows for punitive, other
                  damages, etc)
               b. Program the computer w/ account #, check #, and amount of the check to
                  hit either check # or amount or both
                       i. MICR – this is what the computer can read
                              1. If match, kicks the check out
                              2. Then look at it
                              3. Should program that when either amount or check # comes
                                  up, should kick out
                      ii. Are cases where only looking for 1, when customer gave slightly
                          wrong amount or wrong check number, and bank is liable b/c court
                          said R identification

ii. Bank’s Right to Subrogation § 4-407
       1. If payor bank pays over stop-payment order the payor bank is subrogated to the
          rights:
              a. Of any HDC on the item against the drawer or maker
              b. Of the payee or any other holder of the item against the drawer or maker
                  either on the item or under the transaction out of which the item arose and
              c. Of the drawer or maker against the payee or any other holder of the item
                  w/ respect to the transaction out of which the item arose


       HYPO:
       Customer  5,000  Payee  HDC  Payor Bank

       2. C never receives the goods. C calls the bank and stop payment on the check.
          HDC has the check and bank won’t pay. HDC can sue C on § 3-414 as a drawer.
          C argues failure of consideration. HDC argues I take free and clear of your
          defense against me b/t it is an ordinary defense.
       3. What if bank paid $5,000 check over the customer’s stop payment order? C
          demands that bank put money back into C’s account. Bank can refuse and argue
          that C did not suffer a loss if the bank paid the money to a HDC b/c C would have
          had to pay the HDC 5,000 anyway. § 4-403(c) – customer has proof of loss results
          from improper payment over stop payment order OR § 4-407 bank’s right of
          subrogation if got from HDC (now bank has burden)
       4. Customer has the burden or proof of showing valid stop payment. Bank has
          burden of proof to show they have rights of HDC.
       5. Usually Payee will take it to his bank, depositary bank, DB will send to Payor’s
          bank. PB fails to catch the stop payment order and pays it. Same HDC rules
          apply to depositary bank (w/o notice and for value). The main issue is did DB
          give value for the check (allow deposit and Payee to draw off it). PB can step into
          shoes of DB if DB if HDC.
       6. Alter the HYPO: C discovers goods are defective. C has a claim in recoupment
          for $1,000. Payee goes to PB. Payee is not HDC. C’s loss is $1,000. Bank steps
          into shoes of Payee and only gives C $1,000. Bank is not shielded by an HDC,
          but only a holder.
       7. What if Reed gets leaky roof from C for $10,000? Stops payment on check but
          payor bank pays. Reed had $1000 claim in recoupment. Reed’s loss is $1,000, so
          bank only gets $9,000. Then bank sues C to get their $1000 back (subrogated to
          the party of the original transaction) § 4-407
                                     58
                            8. Many times the bank will shift the burden of proof to customer to show their loss
                                suffered. Many times the big bad banks will pay over a stop payment and when
                                the customer demands the money be put back into their account the bank will say
                                no, sue us. This means that customer must show loss.
                                    a. Many complaints about putting the burden on the customer
                                    b. Bank in better position to find out the status of the person they are paying
                                        (esp when bank gets to step into the shoes of that person)
                                    c. MAJ view – customer must show valid stop payment order, then if bank
                                        wants to assert HDC status back must go prove that it got the status as
                                        HDC (go find the person and determine/prove their status), and if does,
                                        customer then must prove defense to HDC status (more fair)
                            9. § 4-403(c) – Customer has burden of proof
                            10. Could bank say customer waives right to stop payment in agreement?
                                    a. No – this is an absolute right § 4-403
                            11. Improper Payment – Does § 4-407 help?
                                    a. Forged Drawer’s Signature
                                             i. No (cannot be an HDC)
                                    b. Forged Indorsement
                                             i. No (cannot be an HDC)
                                    c. Post Dated Check w/ Notice
                                             i. Yes
                                            ii. B/c step into shoes of holder
                                    d. Stale check (more than 6 months old)
                                             i. Yes (as long as person did not get the check after the 90 days –
                                                cannot be HDC)
                                    e. Two signature/only got one
                                             i. Yes (when org got the goods/benefit)
                                    f. POINT  § 4-407 applies to any action where customer alleges improper
                                        payment (not just stop payment)
                                             i. If customer has not lost anything when HDC would have sued
                                                customer anyway (if dishonored the check) then this can apply
Dunningham v. First Bank
Cohn made an error (bookkeeper mistake) and sent I too much money ($19k). L has overpayment of 19k. L
delivers later more coins (21k). C correctly draws amount due (2 checks for it – 9k and 12k). C discovers the
overpayment. C requests Bank stop payment order on the 2 checks (thinks should get credit). Bank stopped 9k
but not 12k. C suffered loss. Court said there was no loss. Each transaction stood on its own. COURT only
looks at the last transaction alone (got coins)
DISSENT – claim in recoupment would have been asserted (C did suffer a loss b/c bank paid over stop payment
order).
You stop payment on check to get bargaining leverage which you lose when bank pays over the order (always
suffer a loss in a sense but courts probably won’t let you go this far)

           No right to stop payment on cashier’s check; teller’s check; certified check
           § 4-401 – Properly payable rule; 402 – Wrongful Dishonor; 403 – Stop Payment Rule; 404 – Stale
           Check; 405 – Death of Customer; 406 – Bank Statement Rule;
           407 – Payor Bank’s Right to Subrogation

           f. Death or Incompetence of Customer § 4-405
                 i. § 4-405 Bank can pay checks of a deceased person until they have knowledge of
                    customer’s death. Once bank knows of death, bank can pay deceased customer’s checks
                    for 10 days after death. After 10 days, a holder would have to file a claim on the estate.
                                                     59
        ii. If a bank does not know customer is dead, then they can pay the checks.
      iii. If bank knows customer is dead, they can pay checks for 10 days after death (don’t have
            to)
       iv. If a person w/ an interest in the estate calls and tells bank not to pay the checks, the bank
            must not pay any checks (comment to § 4-405)
                 1. ANY PERSON can call and say have a claim to the estate and override the
                    executor and stop payment (bank not required to investigate)
        v. Reason for 10 days  so all people that person wrote checks to do not have to file a
            claim in probate court
       vi. If bank chooses to honor checks for 10 days, a beneficiary can try to get the money back
            from the people who the bank paid but the bank is out of it
      vii. Ex. Oct 1 die, Oct 4 obituary, Oct 12 check arrive and bank paid
                 1. Knowledge § 1-201(25)  actual knowledge
                 2. Has duty of due diligence § 1-201(27) BUT prob not required to read obits every
                    day
                 3. OK to pay as long as come in w/ NO knowledge
     viii. Unclear whether a person claiming interest in the estate stops payment and bank pays
            anyway, don’t know whether executor has a right to sue on that stop payment (person
            who made it cannot)

g. Bank’s Right of Setoff § 4-210, comment 1; 12 CFR § 226.12(d)
       i. Bank’s right of set off is not specifically addressed in the Code
      ii. Bank will probably have this right in the deposit agreement or in the note is you have a
          loan – “I owe you and you owe me”
              1. Most notes/agreements give the bank a right to enter the account (right of self
                  help)
              2. Bank has a common law right of set off anyway
              3. § 4-210 recognizes
              4. If causes checks to bounce, only have a claim if bank wrongfully exercised set off
                  right
     iii. Bank will probably have the right to pull from your checking account/CD to pay on your
          loan
     iv. Exception Fed Regs: p.1743 Bank cannot take money from your account to offset your
          credit card

h. Bank Statements § 4-406
       i. If a check contains a forged drawer’s signature under § 4-401 it is improper for the bank
          to pay it. If the amount of the check is altered it is improper for the bank to pay it under §
          4-401. These things are typically paid and then discovered by the customer when they
          receive their statement.
      ii. THERE is NO case requirement that a banks MUST send out statements.
     iii. § 4-406(a) provides that if a bank CHOOSES to send out statement then they must return
          the checks or pictures of checks – sufficiency info for customer to identify the check
          (amount, check #, date)
               1. Safe Harbor – item #, amount, and date of payment
               2. Computer will know all three (knows when paid it)
               3. Banks have to maintain the capability to get a picture of the check for 7 years
                  (banks can charge a R fee for making a copy)
     iv. § 4-406(b) If banks don’t send checks back then they must keep electronic images or
          some way to give a legible copy. Most banks keep for seven years.

                                             60
                    v. § 4-406(c) If the bank sends statements – the customer has a duty to review the statement.
                        You should be able to discover forged drawers signature altered amounts etc.
                            1. This is why banks send a statement when not required to (want to kick in the
                                obligation)
                   vi. Banks send statements to shift the burden to the customer to find errors and notify the
                        bank. This also shifts the liability.
                  vii. § 4-404(d) if customer fails to promptly report – customer cannot assert signature or
                        alteration if not promptly reported and bank can prove that it suffered a loss and
                        customer’s unauthorized signature or alterations was by the same wrongdoer on any other
                        item paid by the bank in GF after the customer has been afforded a R period of time not
                        exceeding 30 days.
                            1. Customer must exercise R promptness
                            2. Not for forged indorsement (no back of check picture)
                            3. § 4-404(d)(1) – customer precluded from asserting the unauthorized sig or
                                alteration IF the bank can prove it suffered a loss
                                     a. Bank would have to prove could have caught the forger (usually person or
                                        money long gone) but customer did not warn
                            4. § 4-404(d)(2) – Repeat forger
                                     a. Precludes customer from asserting the later forgeries b/c bank would have
                                        kicked out checks and caught later forgeries
Stowell v. Loquet Co-op Credit Union
Repeat forgery – old man in white county statements were stolen from his mailbox. The bank argued that if you
had reported the 1st one, you could have stopped the forgeries.
20 day notice requirement (for telling the bank that mistake) – started to run when bank sends and not receives
(otherwise never received). After 20 days, § 4-406(d)(2) kicks in.
Under § 4-406 the bank only has to send the statements, not make sure the customer receives them.
What about the checks before the 20 days? The bank is liable for them unless bank can prove ((d)(1)) a loss b/c
waited past the 20 days
For later checks after the 20 days, P can still try to show bank’s failure of ordinary care

                viii. § 4-406(e) Comparative fault – (for customer’s delay and banker’s lack of exercising
                      ordinary care) if the bank asserts subsection (d) the customer can assert that the bank
                      failed to exercise ordinary care. § 3-103(7) defines ordinary care and says the bank does
                      not have an obligation to look at the signatures. They do have to use GF – no dishonesty.
                          1. Comparative fault question can go to jury (more sympathetic to customer)
                                  a. What if bank paid something that did not look like your signature AT
                                      ALL, is that failure of due care?
                                           i. No
                                          ii. Ordinary care (computerized methods – no duty to examine checks
                                              to make sure your signature)
                          2. If bank in BF – customer can get to jury just on bank’s liability
                 ix. § 4-406(f) Absolute statute of limitation of one year to report anything or bank wins. If
                      customer waits 1 year, they are precluded.
                          1. Liable for some if no report w/ R promptness (w/i 30 days)
                          2. Liable for ALL if no report for 1 year

           i. Freedom of Contract § 4-103(a)
                  i. To what extent can a bank limit the rights of the customer?
                        1. Parties to a K can vary the terms of the K. A deposit agreement will typically
                           attempt to modify the K.
                 ii. Generally any agreement will stand that is not manifestly unR.
                                                     61
              iii. Under § 4-103(a) A bank cannot disclaim responsibility for GF or failure to exercise
                   ordinary care or limit the measure of damages for the lack or failure.
                       1. CAN determine standards for the care if not manifestly unR
                       2. Usually bank will not assert rights (small amount of money and would rather have
                          you as customer)
              iv. Could bank limit
                       1. Properly Payable Rule?
                              a. Probably could BUT would be terrible marketing
                       2. Wrongful Dishonor?
                              a. Limit liability/damages probably improper
                       3. Stop Payment Rule?
                              a. No too much public policy under Art 4
                                       i. A right that customer’s expect
                              b. Banks may alter the information you must give them (i.e. precise amount)
                       4. Stale Check Rule?
                              a. Bank cannot alter obligation of GF
                       5. Death of Customer Rule?
                              a. Same
                       6. Bank Statement rule?
                              a. A lot do
                              b. The time the customer has to get back to the bank (what is R promptness
                                  not to exceed 30 days)
                              c. § 4-406(c) (d)(2) (f)
                       7. Payor Bank’s Right to Subrogation
               v. You could say customer has right to stop payment as long as they provide the correct
                   amount.
              vi. What about limiting the S of L (1 year report forgery)?
                       1. Could bank reduce the S of L from 1 year to 90 days?
                       2. Some but few courts have upheld 30 days and struck down 15 days but most
                          courts have upheld 90 days.

        j. Service Charge and Fees
                i. Service fees: § 4-401 comment – Purdue case: court indicated amt of NSF fees might be
                   unR relation to the cost. Oregon: Court upheld amt of NSF
               ii. Many banks have inverse relation b/t NSF fees and service charges. High NSF fees and
                   low service charges or visa versa.
              iii. Must give 30 days notice for change in fees (any fees charged)
              iv. As long as bank tells on the front in, courts usually allow bank to set whatever amount
                   ($27 NSF fee when costs the bank $2 to process)
                      1. Deterrent
V.      CHAPTER 3 – CHECK COLLECTION PROCESS
        a. Intro § 3-602(a), 4-104(a)(3) & (10), 4-103(A); 12 CFR § 229.41
                i. Two Kinds of Liability
                      1. Liability ON the check
                      2. Liability Other than ON the check

     Drawer  $1,000  Payee  A  B  Payor Bank (must decide to pay or not to pay)

               ii. What is the consequence for paying or not paying?
                     1. NOT PAYING

                                                  62
     a. Payor Bank could be liable to the drawer under § 4-402 for wrongful
        dishonor
     b. What about § 3-408?
              i. I thought Drawee has no liability ON the check if they didn’t sign?
             ii. This is true – the drawee’s liability arises under the deposit
                 agreement and out of the UCC § 4-402
            iii. If bank dishonors, B could go back against the drawer on the check
                 or the underlying obligation under § 3-414 or against A and the
                 payee under § 3-415
2. PAYING
     a. If bank pays the check, then wants to take the money back b/c of NSF or
        forged signature or stop payment order.
              i. Will bank have to put money back if stop payment?
                     1. NO
                     2. 4-403(c) – drawer would have to show loss
                     3. 4-407 – subrogation if B was HDC
             ii. Can bank go back against B?
                     1. No
                     2. Can’t they go back under § 3-415 b/c B indorsed the
                         check?
                     3. BUT WAIT
                             a. Under § 3-602(a), Everybody’s obligation is
                                 discharged once paid by the bank
            iii. What if forged drawer’s signature?
                     1. Only if waited to notify (Bank statement § 4-406)
                     2. Can sue B? – check was paid BUT if breached presentment
                         warranties would be liable
                             a. Is B a holder?
                                      i. YES – b/c B only warrants that she is holder
                                         of check of the thief
                             b. Bank can only get money back if could prove that B
                                 knew of theft
                     3. Can sue A (indorser)? – no, check was paid & did not
                         violate presentment warranties
                     4. BANK is probably stuck if drawer’s sig is forged
            iv. WHAT if thief steals from A and forged indorsement?
                     1. Bank can sue B for breached warranty (not person entitled
                         to enforce)
                     2. Breached § 4-208(a)(1) warranty
                     3. Can B sue A?
                             a. § 3-415 – indorser’s liability is discharged when
                                 bank paid
                             b. § 3-416 – when A transferred the check, A warrants
                                 that the check is not forged
                                      i. MAKE the transfer warranties whether
                                         indorse or not (for A)
                                     ii. If breached and B suffered a loss, B can sue
             v. Same for alteration for A, B, and others
                     1. Breached presentment warranties § 4-208
     b. Once the bank paid, the bank cannot go back and recover on the check
        from B
                            63
                                          i. § 3-418 – maybe (not learned yet)
                                         ii. § 4-208? - no
                                 c. If creates overdraft, bank can now get money back from drawer
                                          i. § 4-401(a)
                                 d. Once a check is paid, it is no longer a check – not a neg instrument (just a
                                     scrap of paper)
                  iii. But where will the bank get its money??
                          1. Even though a bank has paid a check, the bank can still undo final payment from
                             A, B, and other parties if one of the three sections applies:
                                 a. § 4-208: Presentment Warranties
                                          i. I am the person entitled to endorse the check
                                         ii. It has not been altered
                                        iii. As far as I know the drawer’s signature is not forged
                                 b. § 4-209: Encoding and Retention Warranties
                                          i. Whoever encoded the check warrants that the amount is correct –
                                             1st bank
                                 c. § 3-418 Mistake
                                          i. Very tiny loophole where can undo if by mistake

                                      Bank v. Drawer                         Bank v. Presenter

Overdraft                              4-401(a) (yes)                         3-418 (yes)
Stop Payment                           4-403(c); 4-407 (yes)                  3-418 (yes)
Drawer’s Signature is Forged           4-406 (no)                             4-208 (unless HDC)
  - Also apply on unauthorized sig
Forged Indorsement                     n/a                                    4-208 (yes)
  - Also apply to lack of authorized
  indorsement
Alteration                             4-406; 4-401(d)(1) (no)                4-208 (yes)
                  iv. DEFINITIONS
                           1. Settle a check – § 4-104(a)(11) - to pay in cash, by clearing-house settlement, in
                              a charge or credit or by remittance, or otherwise agreed. A settlement may be
                              either provisional or final. Provisional is how it settles until payor bank pays, then
                              it is final. Provisional means tentative.
                                   a. NOT the same as funds availability (federal statute – says how soon bank
                                       must make funds available to be withdrawn)
                                   b. Provisional is code (can credit but funds availability can make you wait to
                                       write a check against that amount)
                           2. Banking day - § 4-104(a)(3) – the party of a day on which a bank is open to the
                              public for carrying on substantially all of its banking functions
                                   a. So defined that Sat is usually not a banking day (despite branches that are
                                       open – not enough functions available)
                           3. Midnight deadline - § 4-104(a)(10) – w/ respect to a bank is midnight on its next
                              banking day following the banking day on which it receives the relevant
                              item/notice or from which the time for taking action commences to run, which
                              ever is later
                           4. Clearing House – association of banks (rules that will override Art 4 when
                              conflict)
                           5. § 4-108 – Banks can set cut off for processing no earlier than 2:00 p.m.
                           6. Federal Reserve System clears checks – Ark branch is in St. Louis
                                   a. Sets interest rates
                                                          64
                          b. Check collection service for most banks (most do)
                          c. Concerns for check collection
                                   i. Speed
                                  ii. Cost
                          d. FRS – 12 banks
                                   i. We are in St Louis
                                  ii. Each area – divided into regional divisions (RCPC)
                                 iii. RCPC – Regional Check Processing Center
                                 iv. Routing symbol (820, 829 – LR RCPC)
       v.    THREE SETS OF RULES
                  1. Article 4, parts 2 & 3
                  2. Federal Reserve Rules – Regulation J (pg. 1841)
                          a. 210.3(f) – the provisions of this subpart subsides any conflicting
                              provisions of UCC
                          b. Governs the collection of checks
                  3. Federal Reserve Rules – regulation CC (pg. 1856)
                          a. Under UCC, bank can wait until sure the check is paid before allow
                              customer to draw on it
                                   i. Florida banks – 1 month
                          b. Changed to allow customers to draw on
                          c. This governs how soon the bank must make the amount available to the
                              customer
                          d. Also governs how quickly must reject checks
                          e. 229.41 – trumps any inconsistent provision of Art 4
      vi.    Art 4 parts 2 & 3 apply and also p.1841 Reg. J governs the collection of checks through
             the federal system
      vii.   If there is a conflict b/t Reg. J and Art 4, Reg. J trumps
     viii.   Reg CC deals w/ the availability of Funds and Collection of checks (the availability of
             funds and how soon checks come back to bank A)
      ix.    § 229.41 IF there is a conflict b/t Reg. CC and Art 4, Reg. CC controls

b. Final Payment
       i. Holder receives cash for check at payor bank § 3-502(b)(2), 4-215(a)(1), 4-108, 4-
          208(a)

            Drawer (E)  $100  Payee (L - indorses)  Store (X)  Payor Bank

                 1. ONLY payor bank can finally pay a check
                      a. Others can deal w/ the check
                 2. What does teller do?
                      a. Pulls up Egan’s account on computer
                      b. Will check for
                               i. Overdraft – computer will tell
                              ii. Stop Payment – computer will tell
                             iii. Drawer’s Signature Forged - 0
                             iv. Forged Indorsement - 0
                              v. Alteration - 0
                      c. How long to check all this?
                               i. That day
                              ii. § 3-502(b)(2) – midnight that day
                             iii. NOT 3-502(b)(1) - b/c immediate payment over the counter
                                           65
                   iv. Practical – right then (maybe could postpone it till afternoon)
           d. § 4-108 – payor bank can set a cut off time of 2 p.m.
                     i. Can have to end at next day
      3. What are my options?
           a. Teller may decide to dishonor – Then payee will sue drawer under § 3-414
               (obligation of the drawer)
                     i. Also for indorser liability § 3-415
           b. Teller may pay you in cash - § 4-215(a) If they give you cash, the payment
               is final
                     i. § 3-414  Drawer now has no liability ON the check
                    ii. Same for indorser
                   iii. ONCE final payment has occurred, bank limited on ability to undo
                        final payment
                            1. § 4-208 (warranties made when present)
                            2. § 4-209 (encoding warranties)
                            3. § 3-418 – (mistake)
           c. Teller keeps the check – How long do they have to decide to dishonor or
               pay? § 3-502(b)(2) – THAT DAY is how long they have to decide. What
               if they keep the check and don’t give you cash by midnight? § 4-302 If
               presented and received by payor bank, the bank is liable for the amount of
               the item if it retains it beyond its midnight of the banking day of receipt
               w/o settling for it or return w/ notice of dishonor. If it was forged or NSF,
               the bank is stuck!

ii. Holder deposits check drawn on payor bank in payor bank § 4-301(a) &(b), 4-
    214(c), 4-301(d)(2), 4-215(a)(2) &(3), 4-302(a)(1), 4-208(a)

 Drawer  $1,000  Payee  Payor Bank (deposits $1,000 into account)
 Drawer and Payee have the SAME bank

      1. § 3-502(b)(1) says to go to § 4-301 and § 4-302 to dishonor or paid
      2. § 4-301(b) – If a demand item is received by a payor bank for credit on its books,
         it may return the item or send notice of dishonor and may revoke any credit given
         or recover the amount thereof w/d by its customer, if it acts w/i the time limit and
         in the manner specified in subsection (a).
             a. (a) says send notice or check (usually will do both)
             b. Send = mail – correct address and stamp
      3. Therefore, if in the hypo above, the payee deposited the money into her account
         on Monday, the payor bank would have until Tuesday to revoke her credit. They
         must send it back to her by midnight Tuesday.
             a. Monday = provisional credit ONLY
             b. Bank has until midnight on Tuesday to give final credit
      4. § 4-214(c) They will charge back the amount of a check to its customer’s account.
         Customer will have to go back on the check.
             a. Payee has no cause of action on the bank 3-408
             b. Can sue indorser or drawer (must give indorser notice)
      5. § 4-215(a) Payment is not final until you have:
             a. (1) Paid in cash
             b. (2) Settled for the item w/o having a right to revoke the settlement under
                 statute
             c. (3) Made a provisional settlement for the item and failed to revoke
                                   66
6. If the bank fails to charge back or dishonor before their midnight deadline, they
   have made a final payment of the instrument (will have to undo the final payment;
   released indorser and drawer’s liability). This hypo is only when depository bank
   and payor bank are the same bank.
        a. § 4-215(a)(3)
7. Can bank undo final payment?
        a. Overdraft – no
        b. Stop Payment – no
        c. Forged Drawer’s Signature – no
        d. Forged Indorser’s Signature – yes 4-208(a)(1) – breached warranty that
           you are the holder
        e. Alteration - same
8. Once final payment has occurred, ONLY choice for bank is
        a. § 4-208 warranties
        b. § 3-418
9. DEPOSIT RULE
        a. Now what if you walk in the bank and deposit part and get cash back?
                i. A takes check of $2,315 and asks for $100 cash and deposit rest.
                    Which rules apply?
        b. If you deposit part (no matter how small) the deposit rule applies and they
           get until midnight deadline – next banking day. But if you cash your
           check and make a deposit the cash rule applies and payment is final. It is
           critical how you fill out the deposit ticket.
        c. Case: Sec at law firm had her boss write her a $75,000 check on his
           deathbed for taking care of him. She went to deposit it and the teller told
           her that b/c of the funds availability at the time, she would not be able to
           w/d the funds for X days. So the teller told her I will cash it for you then
           you can deposit it so the funds will be available. Court ruled the payment
           was final.
        d. Case: Kirby check was made out for $2,500 and a deposit slip was filled
           out w/ $2,300 written in the cash part. Kirby walked away w/ $200 cash.
           The court held that even though in substance it was a deposit w/ $200
           cashed, in form it was cash deposit which is final payment. You look at
           the deposit slip b/c it controls.
                i. As if got 2,500 in cash and turned around and deposited 2,300 in
                    cash
               ii. Cash rule
        e. 167 S.E.2d 273; 598 N.E.2d 781
        f. ALL depends on the deposit ticket is structured
        g. CAVEAT – many banks in deposit agreement, if account we are entitled
           to recover even if give you cash
                i. Prof thinks probably can get around this provision

10. Hypo
Drawer  Payee  Thief  Grocer  Payor Bank

Thief forges payee indorsement and then neg to grocer who takes to payor bank to
deposit. One week later, the payee discovered the thief forged the indorsement.
        a. This check is not properly payable
        b. Payee cannot sue the drawer b/c the obligation is discharged
        c. Payee could sue the thief but he has skipped town
                             67
                      d.   Payee could sue Payor Bank under § 3-420 for conversion
                      e.   Payee could also sue grocery store under § 3-420 for conversion
                      f.   Bank has no way to check a forged indorsement
                      g.   Grocer is not a holder and not entitled to enforce and the bank is liable to
                           the payee under § 3-420 – therefore bank could sue Grocer for breach of
                           presentment warranties § 4-208(a)(1). Then bank will take $1,000 out of
                           grocer’s account

        iii. Holder deposits check drawn on payor bank in depositary bank § 4-201(a), 4-214(a),
             4-202, 4-204, 4-207(a), 4-209(a), 4-301(a), 4-302, 4-215(a)(2) & (3); 12 CFR 229.30,
             229.33, 229.38(a) &(b)
                1. Up until now, we have only talked about one bank in hypos. Now turn to real
                    world. Checks are drawn on payor bank at depositary bank.

               Drawer  Payee  Payor Bank
               2. Payee cashes check at payor bank where she DOES NOT have an account. She
                  asks bank to give her a $5,000 cashier’s check. What do we do if they make the
                  cashier’s check and drawer has no money? If w/i midnight deadline, has final
                  payment occurred?
                     a. Now a cashier’s check is not the same as cash, but the code wants it to be
                          close to cash. Under § 4-215(a)(2) Final Payment occurred b/c cashier’s
                          check cannot be revoked. Drawer has no more liability – If bank stops
                          payment, payee can sue bank on § 3-412 on cashier’s check. Bank will
                          take money out of the Drawer’s account and then bank will go after her
                          later.
                               i. Can undo final payment, but will have to go through the rules

                     b. See clearinghouse handout!!!
                             i. Association of banks together for purpose of collecting and
                                clearing checks
                            ii. A – brings $600 to clearing house and picks up $400 in checks.
                                Clearinghouse owes A $200 (either through other bank or account
                                at clearinghouse – determined by clearinghouse rules which
                                override UCC)
                           iii. Clearinghouse ought to balance out at the end of the day
                                    1. Although probably charge to keep clearinghouse up and
                                        running
                     c. Now we have more than one bank. A, B, & C have formed a
                        clearinghouse. § 4-103(b) agreements for a clearinghouse override the
                        UCC.
               3. Hypo:

                        Dep. Bank & CB  CB         CB         Payor Bank
Drawer  $5,000  Payee  Ark. Bank  LR RCPC  St. Louis RCPC MO Bank

                      a. Remember that ONLY the payor bank can actually pay the check!! The
                         Ark. Bank is payee’s agent (the owner of the item).
                             i. Asking Ark. Bank to please try to collect this for me
                            ii. Payee still owner until know it is good
                           iii. Payee given provisional payment (credit) by Ark. Bank

                                             68
b. If final payment does not occur, they (DB) have the right to take back any
   credit. Provisional credit § 4-201(a) - They are her agents and can revoke
   provisional credit.
c. § 4-204(a) – Collecting bank shall send items by a R prompt method,
   taking into consideration relevant instructions, the nature of the item, the
   number of those items on hand, the cost of collection involved, and the
   method generally used by it or other to present those items.
d. § 4-204(b) – Collecting bank may send:
         i. Item directly to the payor bank
        ii. Item to a nonpayor if authorized by its transfer AND
       iii. Any item other than documentary drafts to a nonblank payor, if
            authorized by Federal Reserve regulation or the like

e. How soon must the Ark bank send the check forward for collection?
      i. § 4-202(a)(1) and § 4-202(b) - Exercises ordinary care by taking
         prompt action by its midnight deadline = midnight of the next
         business day. If bank takes longer, it will only be liable for loss
         caused to payee

f. When Ark. Bank sends the check to LR-RCPC, they make certain
   warranties:
       i. § 4-207 Transfer Warranties Made from Ark Bank to Missouri
          Payor Bank
               1. Holder – person entitled to enforce
               2. Signatures are authorized and authentic
               3. No alterations
               4. Not subject to defense
               5. No knowledge of insolvency

       ii. § 4-208 Presentment Warranties Made from Ark Bank to
           Missouri Payor Bank
               1. Holder – person entitled to enforce
               2. Not been altered
               3. Signature is authorized

      iii. § 4-209 Encoding Warranties Made from Ark Bank to ALL
           banks Including Missouri Payor Bank
               1. Amount of check is correct – MICR correctness

g. If payee deposits in Arkansas bank on Monday at 3:00 p.m. The check
   goes to the LR RCPC by 8:00 p.m. Then to the St. Louis RCPC at 3:00
   a.m. and hits the Missouri Payor Bank at 8:00 a.m. Tuesday.
         i. § 4-301 – The Missouri Bank must settle w/ RCPC by midnight of
            day of receipt. Reg. CC – bank must settle w/ Federal Reserve by
            time fed. line closes. (provisional settlement)!!
        ii. § 4-301(c) - So if they settle w/ the RCPC on that day, how long
            do they have to settle or send check back? – Wed midnight if
            received on Tues = Midnight deadline. If they don’t send back by
            Wednesday at midnight – Payment is final! § 4-215(a)(3).
       iii. What can PB tell about the check?
                1. Overdraft and Stop Payment
                       69
                         2. NOT forged drawer’s sig, forged indorser’s sig, alteration
                         3. Can undo for forged indorsement or alteration (4-208)
              iv.    What if there was a breach of the presentment warranty?
                         1. The bank can act after its midnight deadline and get the
                            money back.
               v.    The only way the PB can get extra 24 hours is to settle w/ St. Louis
                     RCPC on date of receipt. Then Missouri bank can send check
                     back to St. Louis RCPC by Wed. 12:00 midnight.
              vi.    What if Payor Bank does not want to pay check drawn on its
                     customer’s account?
                         1. A return check may follow a different route than a
                            forwarded check.
              vii.   Reg. CC gives the bank 2 alternative tests: Reg CC § 229.30
                         1. § 229.30(a)(1) Two-day/four-day test – Focuses not on
                            when bank sent it back but on how bank sent the check
                            back – was the bank in the same RCPC?
                                 a. If yes, then was check sent back in a way that would
                                    normally reach the DB in 2 days?
                                 b. If no, was check sent back in a way that would
                                    normally reach DB in 4 days?
                                 c. Only have to use method that will most likely get it
                                    there in 2-4 days.
                                 d. If bank fails (§ 229.38(a) – liable for the loss)
                         2. Forward Collection Test – Send it in a way that they
                            would send for collection. Send it back through the system
                            by changing ABA# on the MICR
                                 a. Clear envelop (print MICR on it) altering routing
                                    system and sent it back (way to override MICR)

        h. Is there any excuse for missing the midnight deadline?
                 i. § 4-109(b) – Yes, if the delay is caused by interruption of
                    communication or computer facilities, suspension of payments by
                    another bank, war, emergency conditions, failure of equipment, or
                    other circumstances beyond the control of the bank, and the bank
                    exercises such diligence as the circumstances require.
        i. 2 burdens of payor bank
                 i. Act w/i midnight deadline – UCC § 4-301; 4-215(a)(3)
                ii. Reg CC § 229.30 Send back in such a manner to make deadline (2-
                    day/four-day test)
               iii. Reg CC § 229.33 – more than 2,500 check and returning must
                    notify sooner (fed wire)
               iv. PURPOSE – collecting/depositary bank is making funds available
                    to customer and needs to know
        j. Reg CC § 229.33 – Notice of nonpayment – If a paying bank determines
           not to pay a check in the amount of $2,500 or more, it shall provide notice
           of nonpayment such that the notice is received by the depository bank by
           4:00 p.m. on the 2nd business day following the banking day on which the
           check was presented. (immediate notice)
        k. Reg CC § 229.38 – If payor bank fails to comply w/ Reg CC and UCC
           midnight deadline, it shall be liable under either but not both.
Under      UCC                     Reg CC
                              70
                            5,000(amt of check) Damages suffered by drawer and other banks
              Therefore, you would want to bring an action under the UCC b/c you could probably get
              more.
                         l. Assume Missouri bank acts by midnight deadline and sends it back in a
                            way that it should arrive w/i 2-day/4-days. It gets 5k from St Louis bank:
                            St. Louis bank sends to LR RCPC also w/i 2-4 day test. LR RCPC bank
                            sends back to Ark. Bank. Each bank takes back the provisional credit.
                                 i. Under § 4-214(a) Ark. Bank may charge a/g their customer
                                    (CHARGE BACK). Acts by midnight deadline or longer R time;
                                    bank can still revoke/charge back but liable for any loss. Check
                                    bounces – the payee sues the drawer
                                ii. Bank can also § 3-503(c) go after for indorser liability (notice of
                                    dishonor must occur w/i midnight deadline (for banks; most get 30
                                    days))
                               iii. So if bank does not act w/i midnight deadline, loses right to go
                                    against as indorser (remedy the same and bank may not care)
                                        1. But if A indorses and gives to J who takes to bank and bank
                                            does not act w/i midnight deadline, bank loses right against
                                            A (but still can charge back)
                 4. Bank tried to collect as agent (but failed)  charge back and returns to you


   c. Right of Chargeback § 4-214, 4-215(d)
                            § 4-202(b)      § 4-202(b)       § 4-202(b)
Drawer  Payee  Ark Bank  FRB-LR  FRB-Dallas  Texas Bank
                   Payee         Ark Bk       FRB-LR         Texas Bank
                   5,000 pc 5,000 pc          5,000 pc         (5,000)p
                    sends by midnight deadline            must settle that day w/
                                                           FRB-Dallas and then get until
                                                           Midnight of next banking day to decide
         i. Hypo
                1. Ark bank gives payee provisional credit on account
                2. Ark bank not collecting and depositing bank
                3. Under § 4-202(b), a collecting bank must exercise ordinary care in sending checks
                   forward; this means by midnight deadline
                       a. Every incentive to do so
                       b. If doesn’t, not ordinary care
                       c. Penalty? 4-103(e)
                                i. Loss b/c of failure of care by failing to exercise ordinary care
                               ii. [If was payor bank – would be final payment]
                              iii. Collecting bank only liable for any loss
                4. FRB-LR will give Ark Bank provisional credit on its account
                5. FRB-LR must send to FRB-Dallas by midnight deadline
                6. FRB-Dallas gives provisional credit to FRB-LR
                7. FRB-Dallas presents to TX bank
                8. TX bank must settle on date received by midnight but TX bank gets until
                   midnight of next banking day to decide whether to pay.
                9. § 4-215 – if TX bank settles but does not make a decision by midnight of the next
                   day then payment is final


                                              71
             10. § 4-202(b) R care makes these banks, all in-between banks, if they fail to meet
                 midnight deadline, they are only liable for damages suffered = minimal
             11. If payor bank fails to meet midnight deadline, it is strictly liable for amount of
                 check under § 4-301(a), 4-215(a)(3), 4-302(a)(2)
             12. All collecting banks can revoke and charge back the respective accounts and
                 ultimately payee will get the check under § 4-214(b)
             13. Payee can sue drawer on § 3-414 (obligation of maker) or underlying obligation.
                 Banks could revoke or recover under § 3-415 on indorser liability.
             14. § 3-403 Notice of dishonor – If bank charges or dishonors it must do so by
                 midnight deadline, also
             15. § 4-214 If Ark does not charge back to customer, then only liable for loss to
                 customer
       ii. Now alter it
             1. What if Ark Customer wants to cash $5,000 check and teller asks if customer has
                 account (customer says yes).
             2. Even though they give payee cash, the check is not paid b/c the Texas bank is the
                 only one who can pay the check. Can the Ark bank take cash from the customer’s
                 account?
                      a. § 4-214 says yes if cash is provisional settlement
             3. If bank cannot get under § 4-214, they can get for liability of indorser § 3-415(a).
                 Considering we assume money is a provisional settlement, bank could also use
                 the midnight deadline and say we are letting you know we will charge the account
                 if you don’t bring the money back.

d. Undoing Final Payment § 4-208, 3-418, 4-207, 4-407
       i. Once midnight deadline has run for payor bank: Final payment has occurred. What can
          payor bank do to undo final payment?
      ii. Why do banks want to undo final payment?
             1. NSF
             2. Stop payment
             3. Forged Drawer’s Signature
             4. Forged Necessary Indorsement
             5. Alterations
     iii. As a general rule, banks cannot undo payment. There are 3 exceptions:
             1. § 4-208 Breach of presentment warranties:
                     a. Holder (person entitled to enforce) – a forged necessary indorsement will
                         keep from being a holder (or lack of authorized indorsement)
                     b. No Alterations
                     c. Drawer’s signature forged – warrantor must know of forgery (or
                         unauthorized sig)
                     d. Of the reasons banks undo payment
                               i. Unauthorized drawer’s sig 4-208(a)(3) – if know
                              ii. Lack of authorized indorsement – yes 4-208
                             iii. Alteration 4-208
             2. § 4-209 – Encoding warranties – if breached bank can undo final payment only
                 Ark Bank makes the warranty and only applies if encoded amount is wrong
             3. § 3-418 – Payment or Acceptance by Mistake (applies to all drafts not just
                 checks). Applies if payor bank paid by mistake (no stop payment or authorized
                 drawer’s sig – can recover on check from one to whom payment was made) but
                 (c) provides that it may not be asserted a/g a person who took the instrument in

                                           72
                             GF and for value or who in GF changed position in reliance on the payment or
                             acceptance
                                a. Can if insuff funds, stop payment, unauthorized drawer’s sig 3-418(a) &
                                    (b)
                                b. ONLY for mistake

                                       4-208       3-418(a)(i)   3-418(a)(ii)   3-418(b)
Overdraft                                                                         Yes
Stop Payment                                         Yes
Drawer’s Signature is Forged                                        Yes
  - Also apply on unauthorized sig
Forged Indorsement                     Yes
  - Also apply to lack of authorized
  indorsement
Alteration                             Yes

                 iv. BUT § 3-418(c)  took on GF and for value OR in GF and changed position in reliance
                         1. KEEPS doctrine of undoing final payment that seems gutted but § 3-418(a) &
                             (b)
                  v. Seller  buys goods from  Buyer
                     Drawer (buyer)  Payee (seller)  Payor Bank
                     Drawer issues a stop payment order. Bank pays over stop payment order by mistake.
                     Payor Bank could take from Drawer’s account, b/c they can prove no loss.
                 vi. BANK MUST pay by mistake for this to apply
                         1. If pays anyway b/c good customer and deliberately pays b/c good customer,
                             cannot claim mistake
                vii. Alter: Buyer only gets $800 worth of goods and buyer stops payment. Bank can step into
                     shoes of buyer and § 4-407 will let the bank get $200.
               viii. Father gives Daughter check for $1,000. Father calls the bank to stop payment on the
                     check. Bank pays the check by mistake. Did bank make a mistake?
                         1. Yes, daughter did not give value so under § 3-418 bank can get money back from
                             the daughter
                         2. What if daughter gave to friend and friend took to back (no value and no change
                             in position)? Who can bank go against?
                                 a. Bank revokes and instrument deemed NOT to have been paid
                                 b. All liabilities as indorser, etc are REVIVED
                                         i. Diff than 4-208 (doesn’t revive)
                                 c. Friend can go against daughter (indorser) or father (drawer)
                                 d. Father cannot assert defense of no consideration against friend unless she
                                     knew (not HDC)
                 ix. What if drawer issues check to payee? The check is NSF and bank calls drawer and
                     drawer says I will bring money in tomorrow, I promise. There is no mistake here b/c this
                     was a credit decision. You cannot recover under § 3-418.
                  x. Case: Blake v. Woodford Bank and Trust Co
                       $16,450
                       $11,200
              K & K → Blake → MorrisTown Bank → FRB Cleveland → Woodford Bank
                                  $16,450 (bounce; re-present)
                                  $11,200


                                                     73
                     12/24 presented to Woodford Bank. WB gets until midnight of 12/26 (Christmas is not a
                     banking day)
                        1. If they don’t make the deadline final payment has occurred.
                        2. Everyone agrees that made a late return but they said we have an excuse. § 4-109
                            – delay (excused if interruption of communication, computer facilities, war,
                            emergency, failure of equipment, other circumstances beyond the control of the
                            bank AND bank exercises such diligence as circumstances require)
                        3. NO DUE DILIGENCE HERE
                                 a. § 4-415 – final payment
                                 b. § 4-302 - accountable
                        4. It was foreseeable that there would be a big rush after Christmas and people
                            would be absent. They got them posted, but they were not returned.
                        5. Even if courier had run, then they could have put in the mail. The court held that
                            they did not exercise due diligence to meet the midnight deadline.
                        6. Montana Case: Courier broke down, computer broke, and court held that they did
                            not exercise due diligence
                        7. Oklahoma Case: manual posting converting to computer posting.
                            Computer broke and they went to alternative posting facility and they couldn’t do
                            it all. The court held this was due diligence.
                        8. Another issue is the 1st check which was previously dishonored. Bank argued
                            that they were not liable b/c it had been run through already. Court held that
                            midnight deadline does apply to checks run through a second time.
                                 a. Otherwise, stupid b/c requires depository bank to wait
                        9. What about depository bank adopting a policy to resend checks that bounce first
                            time (b/c normally paid second time)?
                                 a. 4-214 → when check bounces back, must notify payee by midnight of
                                     next banking day (or R time) when want to charge back. If don’t liable for
                                     the loss.
                                 b. Bank should at least notify payee and ask whether want to try again.

                 xi. § 4-302(a)(1) – If a check is presented to a payor bank, the bank is accountable for the
                     amount of the check in any amount in any case if it is not also depository bank, if does
                     not settle on the day of receipt
                         1. If is depository bank – must settle by midnight deadline
                         2. So if payor bank = depository bank → midnight deadline (next day)
                         3. If payor bank does NOT = depository bank → THAT DAY
                xii. § 229.30(c) – If intermediary bank presents to payor bank on Mon., then gets till
                     midnight of next day (Tues) AND deliver by courier
                         1. Deliver by Courier – no (Wed)
                         2. Deliver by Mail – yes (when put in mailbox)
                                 a. STUPID to encourage mail and not courier
                         3. THIS rule says midnight deadline extended if gets back to intermediary just as
                             quickly as if mailed
               xiii. Two ways for bank to recover its payment
                         1. Violation of presentment warranties
                         2. Mistake

          e. Check Kiting
FNB in Harvey v. Colonial Bank
This was check kiting scheme (bank fraud). Tuesday presentment was made by both banks so Wednesday is
the midnight deadline. FNB got suspicious and dishonored the check saying “refer to maker.” Under Reg CC,
                                                    74
you have to send notice to the bank that you are dishonoring on Wednesday. FNB clearly made the midnight
deadline. BUT Colonial did not b/c FNB was closed on Wednesday (and person defrauding said don’t worry),
they returned the check on Thursday. Bank that discovers kite first will get the money usually, they do not have
to tell the other banks. Colonial took a credit risk by letting customer w/d against uncollected funds and lost.
Another Issue is can the bank undo final payment? You can undo final payment if you pay by mistake and
there is not a party who has taken in good faith and given value. Colonial can recover if FNB did not give value
(no and take in GF (yes)) BUT they did NOT pay by mistake
         - What FNB did was legal and superior player (corp)
         - § 3-418 – Mistake unless act in GF and for value
                 → NO MISTAKE HERE
                 → Deliberate decision to allow customer to do this
Why does § 4-302(b) not apply? The bank was not the one w/ the kiting scheme, it was the customer.

First National Bank of Chicago v. Standard Bank & Trust
Got it back in time although bank missed midnight deadline
Officers in car and run to bank 3:58 and made it
Same amount of time as would have if mailed

Essex
Eastside  Essex  Industrial Bank  Signet Bank
There is a difference in funds availability and provisional credit. The funds availability extended to April 6.
Drawer stopped payment and Essex did not get check until April 11. Bank won b/c Industrial Bank sent w/i the
midnight deadline (mailed on April 7). IB if they missed midnight deadline would only be liable for damages
for loss.
Footnote 6: No loss b/c Essex would not have been able to get money from Eastside (told Essex was canceling).
Loss would include NSF fees, but no case law on loss of reputation.

AR Case – Coop → Gordon signs Gordon Wallace Farms → Planter’s Bank →LR RCPC→FNB
- FNB permits midnight deadline to run. Wallace hears about the check (wants ½). Persuades FNB to send
check back after midnight deadline. Gordon and Wallace settle up for ½. Gordon sues Planter’s bank for
wrongful chargeback § 4-214
- ARSC – FNB made final payment. Planter’s Bank must pay whole amount of check back to Gordon b/c
accountable § 4-215(d). Failure to exercise ordinary care (loss) and BF (punitive) § 4-103. Sent back.
       - Unusual b/c how often have a bank employee (Wallace) able to work inside and persuade.
       - DISSENT – Gordon trying to get money that is not his (pg 201)

           f. Encoding of Checks § 4-209
                  i. Under § 4-209, if a bank encodes amount, it warrants that the amount is correct to the
                     collecting banks and payor bank (warranty survives final payment).
                 ii. ONLY Depository Bank Makes the encoding warranties 4-209 (unless payee encodes -
                     then both do and depository bank can go against)
                         1. 4-208 Payee, Depository Bank, Payor Bank make presentment warranties
                iii. 2 types of errors
                         1. Over-encode
                         2. Under-encode

              Drawer  100  payee  depository bank 1,000  collecting bank  PB

                  iv. Comment 2 to 4-209 - you cannot go back a/g collecting bank, only the depository bank
                        1. ONLY person making the warranty is the person who encodes it
                        2. NOT by any subsequent banks
                                                   75
                        3. Then Depositary Bank can turn around and get it back if deposited that amount in
                            payee’s account (moneys not received – common law remedy)
                 v. What if drawer wrote payee 500 check and the depository bank encoded for 50, it went
                    up the line to the payor bank who only took out 50 dollars out of the drawer’s account.
                    Depository Bank has the claim. Payor bank would get 450 from drawer account. What if
                    drawer only had 50 in the account, they could overdraw his account…Comment 2 says
                    they get the extent of the money in account (even if less than the check). Payor bank not
                    obligated to go a/g the drawer for amounts not in their account (overcharge). Now
                    drawer owes bank the amount left over.
                        1. Fair b/c depository bank made the mistake

FNB of Boston v. Fidelity Bank
New York shoes wrote Maxwell shoes a check for 100,000. The bank of Boston encoded it for 10,000 and sent
it to Fidelity bank. Bank of Boston discovered the mistake and wanted another 90,000 but NYC shoes had
closed the account. Bank of Boston had to eat the difference.
Payor bank ONLY accountable for the money in THAT account (not another account).

          g. Electronic Presentment § 4-110
                  i. 2 ways to truncate
                         1. Electronic presentment
                         2. Retain the checks after payment rather than returning them
                 ii. In an effort to reduce costs, banks have considered ways of not transporting the actual
                     checks around the country. Electronic images lets the bank send an electronic picture of
                     the check and keep the actual paper on hand and then destroy the paper after a brief
                     period of time.
                iii. § 4-110 provides that banks can make agreements to use electronic presentment instead
                     of actual presentment of paper.

      h. Expedited Funds Availability § 4-215(e) & (f); 12 CFR § 229.10, 229.12, 229.13(a)-(e)
             i. Funds Availability does not mean provisional credit. It has to do w/ when you deposit a
                check in the bank when the funds are available for withdrawal.
            ii. Funds availability works together w/ expedited check return policies
           iii. Reg CC § 229.20 says if state law requires the bank make funds available before Reg CC
                state law governs. Reg CC trumps the UCC.
HANDOUT

              Deposits on Monday           UCC                   Reg CC
              Cash                         Tuesday               No later than banking day
                                           § 4-215(f)            After banking day of deposit
                                                                 Tuesday § 229.10(a)

              Checks drawn                 Wednesday             Tuesday**
              On payor bank                § 4-215(e)(2)         § 229.10(c)(vi)

              Checks drawn                 Reasonable time      SHORTEN - Local or              On bank other
                    for return of item     Nonlocal - See chart
              Than depository              up to depositary     $100 – next day
                                           bank! § 4-215(e)(1)

                iv. If deposit on MONDAY
                        1. If Cash next day  Tuesday
                                                  76
              2. If Check drawn on payor bank (branches w/i same state or same RCPC) 
                 Tuesday
              3. If Check drawn on other bank
                     a. Same RCPC 
                             i. Cash withdrawals - $100 Tuesday, $400 Wednesday, $500
                                Thursday (remainder)
                            ii. Check writing - $100 Tuesday, $900 Wednesday
                     b. Different RCPC 
                             i. Cash withdrawals - $100 Tuesday, $400 Next Monday, $500 next
                                Tuesday (remainder)
                            ii. Check writing - $100 Tuesday, $900 Next Monday


       v. EXCEPTIONS TO FUNDS AVAILABILITY
            1. There are exceptions to when a bank must make funds available Reg CC § 229.13
                  a. New Accounts
                  b. Deposits over $5,000 (the excess is not)
                  c. Re-deposited checks
                  d. Accounts with repeated overdrafts
                  e. Reasonable cause to doubt the collectibility of a check

i. “Four Legals” § 4-303
       i. § 4-303 Four Legals
              1. Legal action while checks in process
      ii. What happens when a bank is processing a check and the bank receives a competing
          claim?
              1. Notice (death, incompetency, or bankruptcy) § 4-405
              2. Stop Payment (which prevails)
              3. Legal Process (writ of garnishment)
              4. Bank’s Setoff → no legal process required
     iii. Any of the four legals comes too late if it is received at the earliest of the following:
              1. Bank certifies check
              2. Bank pays check in cash
              3. Bank settles for check w/o reserving right to revoke
              4. Bank becomes accountable for an item under § 4-302 (midnight deadline)
              5. Cutoff hour on banking day after day (a banking day) bank receives check
                     a. No earlier than 1 hour after opening, no later than closing
     iv. Problems illustrating the Four Legals
              1. Daniel Drawer has an account w/ FNB. The account has a balance of $4,000.
                 FNB is open for business Monday through Friday from 9:00 a.m. to 3:00 p.m.
                 The following sequence of events occurs:
                     a. Friday, October 22, 4:30 p.m.: One of Daniel Drawer’s creditors obtains
                        issuance of a writ of garnishment in the amount of $10,000 a/g DD based
                        on a judgment owed by Daniel. FNB is not aware that the writ of
                        garnishment has been issued.
                     b. Monday, October 25, 8:00 a.m. A check in the amount of $750 is received
                        by FNB from the Fed Reserve bank of LR. The check has been deposited
                        in a Texas bank on Oct 18 and sent through the Fed Reserve bank for
                        collection by a depository bank.


                                          77
             c. Monday, October 25, 9:30 a.m. A check in the amount of $500 written by
                 DD to AA is presented for payment by AA. AA is paid $500 in cash by
                 FNB teller.
             d. Monday, October 25, 10:00 a.m. A check in the amount of $1,500 written
                 by DD to BB is deposited by BB in her account at FNB.
             e. Tuesday, October 26, 11:30 a.m. writ of garnishment is served on FMB by
                 process server.
       2. What is the amount of funds that FNB is requires to pay in response to the writ of
          garnishment?
             a. If no cutoff time - DO NOT PAY $750 check – Bank (1) did not certify
                 (2) did not pay in cash (3) did not settle w/o reserving right to revoke (4)
                 did not miss midnight deadline and become accountable (5) DO NOT
                 PAY the $750 b/c the garnishment was received before the cutoff hour of
                 the day after bank received this check.

                  If Bank established cutoff hour of 10:00 - PAY

              b. If no cutoff time - PAY $500 – (2) it was paid in cash

                  If Bank established cutoff - PAY

              c. If no cutoff time - DO NOT PAY $1500 – Same as $750 the service of
                 process comes before cutoff of 10:00
                         THEREFORE:           4,000 Balance
                                              (500)
                                              3500 Pay to Garnishment

                  If cutoff time – PAY
                          THEREFORE:            4000 Balance
                                                (500)
                                                (750)
                                                (1500)
                                                1750 Pay to Garnishment

       3. Why wouldn’t Bank establish the earliest date of cutoff?
              a. Affects right of setoff
              b. Probably would have 3:00 cutoff time, so that everything that day would
                  work
       4. If customer files Bankruptcy, Bankruptcy CODE deals w/
v. § 4-303 DOES NOT ANSWER
       1. Priority of Legal Events against each other
              a. (Notice, Stop Payment, Service of Legal Process, Bank’s Right of Setoff)
                       i. Really applies to the last 2
              b. Ex. Bank gets Writ and then uses its right of setoff and not give the
                  creditor anything
       2. Does not indicate priorities among the checks
              a. Up to the bank, hi-to-low, low-to-high etc




                                   78
VI.   CHAPTER 5 – FRAUD, FORGERY, and ALTERATION
      a. Intro
             i. Forgery – Who bears the loss when a signature is forged?
                   1. KEEP in mind, may have a legal duty but nothing happens UNLESS there is a
                       loss
                   2. Not enough to say section imposes duty unless loss occurs
                   3. TEST
            ii. Our main concern is
                   1. Drawer’s signature (if bank accepts, must pay (SL) → no right to charge customer
                       – improper payment)
                           a. Bank’s payment is final in favor of HDC or one relied on payment in GF
                           b. Price v. Neal – one who accepts or pays is bound
                           c. Prior parties in collection chain are immunized by final payment
                   2. Necessary indorsement (payee’s indorsement) (bank is SL liable to customer –
                       improper payment)
                           a. Can pass liability back through collection chain to forger b/c breach of
                              presentment warranty (good title)
                           b. Also, payee (true owner) can sue for conversion against person who took,
                              grocer, depository bank for amount of check § 3-420

      b. Allocation of loss – forgery of the payee’s indorsement § 3-301, 1-201(20), 3-203, 3-309, 3-
         418, 4-208, 4-207, 3-416(b), 3-310, 3-420

Drawer  Payee – Thief (forges payee’s indorsement)  Grocery store  DB  IB → PB

              i. Payee can sue thief, grocer, DB, PB for conversion § 3-420. Payee cannot sue Drawer
                 for underlying obligation (suspends obligation and has not been paid or dishonored b/c
                 paid thief – improper payment). Payee can sue under § 3-309 as person entitled to
                 enforce (not in possession but were when loss, loss not result of transfer, and cannot R
                 obtain possession) for obligation based on the instrument (presentment and dishonored
                 excused under § 3-504). Drawer would insist bond payment to protect Drawer from
                 HDC
                     1. Comment 4 of § 3-310 tells what Payee’s choices are when stolen
             ii. Drawer could go a/g payor bank for improper payment. Under § 4-401. Park could not
                 sue thief for conversion b/c under § 3-420 check is not property of drawer




            iii. Payor bank CAN sue DB, IB, and Grocer for breach of presentment warranties under § 4-
                 208 (not person entitled to enforce).
                    1. Once Payor Bank pays either Drawer or Payee – no further obligation (was liable
                        to both)
                    2. Depository bank cannot claim HDC b/c they were not a person entitled to enforce
                        under § 3-301.
            iv. Depository bank is not entitled to enforce check and therefore breach presentment
                 warranties under § 4-208
                    1. The person presenting the check for payment makes the presentment warranties as
                        well as prior transfers: § 4-208 Presentment warranties/§ 3-418. Not available b/c
                        they took for value in GF
                                                   79
                2. When payor bank sues depository bank, is it an action on the check? – no
                   § 4-208(b) this is good b/c you can get consequential damages, if it is on the
                   check you are limited to 1,000.
         v. Grocer did not present to depository bank. They transferred so § 4-207 will allow
            recovery, not § 4-208. They were not a person entitled to enforce! It is easier to recover
            under § 4-207 than § 4-208 b/c under 4-207, no signatures are forged under § 4-208 no
            knowledge of forged signature.

Park            Vinett   Winslow       Moore              Bolden        Davis
Drawer  1,000  Payee  Thief (for)  Grocer       Depository Bank Payor Bank
                                                                   
                           § 3-416                 § 4-207           § 4-208
                           Trans Warr              Trans Warr        Pres Warr

         vi. Is this fair?
                  1. Yes, b/c the grocer is in the best position to avoid the loss by asking for
                      identification
        vii. Can payee sue drawer on underlying § 3-310 obligation?
                  1. The obligation has been suspended. Payee can only enforce on the check
                  2. § 3-301 payee would still be entitled to enforce
                  3. Even though Vinett is not a holder, she can still enforce the obligation under § 3-
                      309
       viii. Can Eldridge make Vinett post bond? Is he worries about it being transferred to a HDC?
                  1. No, b/c he has the cancelled check
         ix. To recover from drawer § 3-414 must be dishonored – won’t work b/c Vinett doesn’t
             have it. § 3-504 Presentment is excused if person entitled to enforce cannot get the
             check.
          x. Can Vinett go after the bank? Deepest pockets? § 3-420 Conversion – Checks are
             convertible and bank converts if they take from a person not entitled to enforce. How
             much is bank liable for?
                  1. 1,000 amount of bank § 3-420(b)
         xi. You could also get other bank and grocer.
        xii. What if check was sent through fed.?
                  1. § 3-420(c) people who transfer not liable for conversion

      Alter the facts
       xiii. What if things come unraveled and Depository bank would not take from grocer?
        xiv. What if thief stole from payee before even given to payee?
                  1. § 3-310 was underlying obligation actually suspended – no.
         xv. § 3-420 can payee sue for conversion?
                  1. No last sentence of § 3-420(a) payee must sue only on underlying obligation. Can
                      drawer sue for conversion?
                          a. No see comment to § 3-420
        xvi. What if the check has been put in payee’s mailbox?
                  1. Payee can sue for conversion.
       xvii. What if sent to wrong address?
                  1. Improper deliver
                  2. Never received by payee so payee cannot sue for conversion, only on the
                      obligation
                  3. Putting in mailbox = delivery

                                              80
               xviii. Case:
                      Drawer issued check to IRS for 3,000 and it went through to Payor Bank. Drawer owed
                      the IRS 10,000. The IRS disputed the amount paid by taxpayer. Taxpayer said he paid
                      3,000 and sent them the actual cancelled check. The IRS ran the cancelled check through
                      again and taxpayer said the second time was improper payment.
                          1. § 4-407 Would the drawer be unjustly enriched if bank returned the money?
                                 a. Yes – the bank steps into the shoes of the IRS and does not have to pay the
                                     customer back

              Drawer  Payee (indorses in blank) Thief  Grocer  Dep Bank  Payor Bank

                          2. Payee can go after thief and win
                          3. Dep Bank was entitled to enforce so no conversion by payor bank
                          4. You cannot sue Dep bank and grocer also b/c he was also entitled to enforce
                          5. Sue Drawer?
                                  a. Underlying obligation was suspended
                                  b. What about § 3-309 (under a theory of recovery of 3-414?)
                                  c. No – b/c § 3-602 the check was paid and therefore the obligation was
                                     discharged
                          6. If the check was endorsed, the loss shifts from grocer to payee

              Drawer  Payee (Jill and Sally mailed to Sally)  Dep Bank  Payor Bank

                          7. § 3-410(b) made out to 2 people; it takes 2 people to indorse. Depository bank
                             cannot be a holder w/o both signatures.
                          8. Who can Jill sue?
                                 a. Drawer can sue for improper payment but Jill can sue bank for conversion
                                    under § 3-420.
                                 b. When payor bank paid the check they became liable for conversion.
                          9. Then payor bank could sue depository bank for breach of presentment warranties
                             and they will get money back from Sally’s account




           c. Allocation of loss – forgery of the drawer’s signature § 3-403(a), 4-208, 3-418, 4-207, 3-416

       Drawer (T forges D’s signature)  Payee Thief  Grocer  Dep Bank  Payor Bank

                   i. Drawer calls the bank and wants money back b/c signature was forged under § 4-401 for
                      improper payment
                  ii. § 3-403(a) The signature of Mr. Thomas is treated as if it was on John Thief. It was
                      payable to John Thief and indorsed by John Thief. This means that Grocer is now a
                      HOLDER of the check drawn on John Thief. Since grocer is now a holder and grocer
                      presents to Dep. bank, Dep. Bank will also be a holder. So there is no breach of
                      presentment warranties b/c they were all holders of a check by John Thief.

Price v. Neal (handout)


                                                      81
Sutton drew drafts on Price which were then sent to London for acceptance and payment. Lee forged S’s name
to 2 drafts drawn on P. N took the drafts w/o notice of the forgery and presented them for payment to P. P paid
the drafts. After the forgery was discovered, P sued N seeking to recover the payment made for the drafts.
Court said P should have known the signature of drawer (Sutton) and Price should bear the loss.

                 iii. Under § 4-208 All the presentment warranties warrant is that to the best of my
                      knowledge, the signature is not forged. So Payor bank bears the loss b/c they could
                      check the signatures. Banks take the risk.
                 iv. Grocer makes warranties to Payor bank but Payor bank cannot go back against the grocer
                      b/c they were entitled to enforce.
                  v. Can Dep bank go back against the grocer?
                          1. Grocer makes warranties of § 4-207(a)(2) to Dep bank. But Dep bank has not
                              suffered a loss. Payor bank takes the loss.
                 vi. One way to undo final payment is show breach of presentment warranties or payment by
                      mistake. We cannot qualify under 4-208 (presentment warranties), what about 3-418?
                      We qualify as a mistake under (a) but (c) prevents us from undoing final payment b/c DB
                      gave value and took in GF




                                                      82
       REVIEW

       Forged Indorsement

       Drawer        Payee        Thief         Grocer        Dep Bank  Payor Bank

              Drawer v. PB  improper payment § 4-401
              PB v. DB  § 4-208(a)(i) Presentment Warranties
              PB v. Grocer  § 4-208(a)(ii) Presentment Warranties
              DB v. Grocer  § 4-207 Transfer Warranties
              Grocer v. Thief  § 3-416 Transfer Warranties outside of bank
              Payee v. Drawer  § 3-309 (basis 3-414) I no longer have the check
              Payee v. Grocer, DB, PB  § 3-420 Conversion
              Grocer ends up eating the check – no double recovery
If thief stole out of Drawer’s mailbox – payee never paid for (sue for underlying obligation; never paid)
If thief stole out of Payee’s mailbox – payee cannot sue drawer under obligation (obligation suspended) BUT
can sue 3-309 of obligation of drawer; sue thief, DB, PB for conversion
         → Check must be actually delivered to Payee before action for conversion arises

       Forged Drawer Signature

       Drawer Thief Payee  Thief  Grocer  Dep Bank  Payor Bank

            Drawer v. PB  improper payment § 4-401
            PB v. DB  No, Price v. Neal
            PB v. Grocer  No, same result




                                                     83
          d. Validation of the forgery
Chart:
Validation of Forged Indorsement                   Validation of Forged Drawer’s Signature
1) Imposter Rule                                   1) Negligence Rule
2) Intent Rules                                    2) Bank Statement Rule
        a) § 3-404(b)(i)
        b) § 3-404(b)(ii)
3) Employee Indorsement Rule
4) Negligence Rule

                  i. Intent of the issuer § 3-110
                        1. § 3-110 – look to intent of the person signing the check
                                 a. If intend to RR, then only indorsement of THAT RR will work
                                          i. Even if other person has same name
                                 b. If intend a person who thinks name is RR, but really is PP, then ONLY
                                     indorsement by PP will work (can sign either RR or PP)
                                 c. If by machine, intent of the person putting info in
                        2. § 3-404(b) If (i) a person whose intent determines to whom an instrument is
                            payable (§ 3-110(a) or (b)) does not intend the person identified as payee to have
                            any interest in the instrument, OR
                            (ii) the person identified as payee of an instrument is a fictitious person, the
                            following rules apply until the instrument is negotiated by special indorsement:
                                     (1) Any person in possession of the instrument is its holder
                                     (2) An indorsement by any person in the name of the payee stated in the
                                     instrument is effective as the indorsement of the payee in favor of a person
                                     who, in GF, pays the instrument or takes it for value or for collection.
                        3. Law Firm office manager knows Jill Dent works as a clerk sometimes. The office
                            manager makes a check payable to JD and then promptly forges JD’s
                            indorsement. The office manager takes it to the bank and deposits it in an account
                            set up in the name of JD. When the law firm finds out the officer manager has
                            been embezzling and is now in Mexico, they will go after the payor bank saying
                            under § 3-404(b)(1) that the officer manager’s intent controlled and she did not
                            intend the person identified as payee to have any interest in the instrument
                                 a. Therefore any person in possession of the instrument is its holder and the
                                     check was properly payable.
                                 b. The law firm will eat the loss.
                        4. Now assume JD has performed some services for the firm and an Attorney writes
                            her a check. The office manager takes the check after the attorney has signed and
                            forges JD’s name, takes it to the dep bank, and it clears the attorney’s account at
                            the payor bank. Does § 3-404(b)(i) apply?
                                 a. No b/c the Attorney’s intent controls.
                        5. § 3-404(b)(ii) – if a person identified as payee is fictitious person, then any person
                            can be a holder
                        6. Now the office manager submits a check request to pay JD (fictitious). The
                            attorney signs a check payable to JD. The office manager signs the indorsement
                            and deposits in dep bank and it clears attorney’s account at payor bank.
                                 a. Now the intent rule (§ 3-404(b)(i)) does not apply b/c it is fictitious payee
                                          i. Intent DOES NOT matter
                                 b. § 3-404(b)(ii) any person can be a holder - so this check is properly
                                     payable

                                                      84
                      7. Now, the Law Firm has check taken by thief who forges the drawer’s signature
                         and makes it payable to PB. The thief forges PB’s signature and deposits it in the
                         bank. The Law Firm wants the payor bank to put the money back in the account
                         under § 4-401 b/c the check was not properly payable.
                            a. Double forgery
                            b. Can go after Payor Bank for improper payment
                            c. Depositary bank?
                                     i. Case # 5 in comment 2 of § 3-404
                                    ii. The payor bank could try to go back a/g the dep bank for breach of
                                        the presentment warranties § 4-208. Under § 4-208(a)(1), the dep
                                        bank warranted that they were person entitled to enforce the draft –
                                        This is true b/c of the intent rule. The person who signed did not
                                        intend PB to actually have the check, therefore it is properly
                                        payable. (a)(2) says they warrant the draft has not been altered –
                                        this is ok b/c it has not been altered. (a)(3) says the warrantor has
                                        no knowledge that the signature of the purported drawer of the
                                        draft is unauthorized - this is ok also b/c the bank did not know that
                                        this was not the drawer’s signature. So the payor bank will not be
                                        able to recover from dep bank for breach of presentment
                                        warranties.
                                   iii. Can the Payor Bank undo final payment? § 3-418 – No, b/c of (c)
                                        the dep bank took in GF and for value
                                   iv. So who eats the loss?
                                            1. The Payor Bank


              ii. The imposter rule § 3-404
                      1. Imposter Rule - § 3-404(a) If the person goes to drawer and impersonates payee,
                         an indorsement by any person in name of payee is effective.
Smith →    (Prof convinces Smith that he was Matt Hutsell)            Thief → DB → PB

           - Smith complains to PB of improper payment
           - PB argues § 3-404(a) imposter rule – anyone can indorse it (become valid indorsement)
           - Matt could sue on obligation if performed; not the one who delivered the goods, no loss

W/O THESE RULES → DEP BANK WILL BEAR LOSS (best position to prevent)
IF JUST IMPOSTER RULE → DRAWER WILL BEAR LOSS
IF INTENT RULE → DRAWER
IF FICTITIOUS PAYEE → DRAWER
IF EMPLOYEE INDORSEMENT RULE SIGNS CHECK → DRAWER (employer)
IF EMPLOYEE STEALS A CHECK COMING IN → PAYEE (employer)

                      2. Scooter tells H that he is Donald Trump real estate investor then an indorsement
                         by any person in the name of the payee is effective
                             a. Payor bank does not have to re-credit your account b/c Scooter defrauded
                                you
                             b. Payor bank could go against DB but DB is person entitled to enforce and
                                they have not breached presentment warranties
                             c. The indorsement is valid and DB is person entitled to enforce
                             d. Drawer is in best position to prevent this

                                                   85
        3. This also works if Scooter defrauds drawer to make it out to Trump Corp w/ and I
           am Donald Trump (Pres and agent)
              a. Comment 1 – this is a change from the former law
              b. Also if impersonate the agent
        4. What if you act as an agent of a corp but you don’t pretend to be someone else -
           you just pretend to have authority to act for the corp?
              a. You misrepresent your agent status. NOT an imposter
                       i. Misrepresentation of authority to act is NOT covered
              b. Courts have held that imposter rule § 3-404(a) does not apply.
                       i. Have a good cause of action against payor bank to put money back
                st
        5. Say 1 hypo – payor bank puts back and sues DB (presentment warranties § 4-
           208(a)(i)
              a. DB can take advantage of 3-404 and say valid indorsement

iii. The employee indorsement rule § 3-405
        1. This section makes 2 types of indorsements effective:
               a. Checks payable to an employer coming into the firm where an employee
                   w/ responsibility forges the indorsement of the employer AND
               b. Checks going out and employee w/ responsibility forges payee’s
                   indorsement
        2. Under this section, employee must be a person w/ responsibility. § 3-405(a)(3)
           Responsibility means authority
               a. To sign or indorse instruments on behalf of employer, the process
                   instruments received by employer for bookkeeping purposes, for deposit
                   to an account or other deposition,
               b. To prepare or process instruments for issue in the name of the employer,
                   to supply information determining the names or addresses of payees of
                   instruments
               c. To control the disposition of instruments to be issued in the name of
                   employer OR
               d. To act otherwise w/ respect to instruments in a responsible capacity
        3. So if a R person forges a signature, then that signature is valid
        4. This shifts loss from Bank to Employer
        5. Office manager opens checks, process, and makes deposits. Office manager
           indorses w/ forgery and it clears the bank. Is this valid?
               a. Yes, under § 3-405
        6. Office manager makes check to RR and office manager takes to an attorney to
           sign. Attorney signs, then Office manager forges indorsement and deposits into
           own account.
               a. Under § 3-405, bank does not have to re-credit the account. If payor bank
                   does pay it, it can try to go against dep bank, but it does not have to pay
                   b/c they were holder and forgery was valid
               b. This ties up the hole in § 3-404(b)
        7. Now, what if a new clerical employee types up the envelopes and never touches
           the check. They type-up envelops w/ their own address on it and forge a check.
               a. They are still an employee w/ responsibility.
               b. However, just b/c someone has access to checks does not mean they are
                   employee w/ responsibility.
               c. The forgery would be valid
     Overlap Occurs b/t 4-404 and 4-405
        8. Padded payroll → leave employee on the books and cash payroll checks
                                      86
                                  a. Way a lot embezzle money
                         9. Now assume an employee is padding the payroll (sending out extra paychecks to
                             real or fictitious employees). The treasurer of Hogs Inc. keeps paying Lucas after
                             he quit.
                                  a. Intent Rule - § 3-404(b)(i) applies b/c treasurer did not intend for Lucas to
                                      have the instrument, so anyone can forge.
                                  b. Employee Indorsement Rule - § 3-405 also applies b/c treasurer is
                                      employee w/ responsibility.
                         10. If treasurer pays fictitious employees, the § 3-404(b)(2) applies and § 3-405
                         11. Now if bookkeeper is padding w/ a real person and turns in payroll to treasurer
                             who makes checks, § 3-404(b)(1) & (2) DO NOT apply
                                  a. However, § 3-405 would apply b/c bookkeeper is employee w/
                                      responsibility

W/O THESE RULES → DEP BANK WILL BEAR LOSS (best position to prevent)
IF JUST IMPOSTER RULE → DRAWER WILL BEAR LOSS
IF INTENT RULE → DRAWER
IF FICTITIOUS PAYEE → DRAWER
IF EMPLOYEE INDORSEMENT RULE SIGNS CHECK → DRAWER (employer)
IF EMPLOYEE STEALS A CHECK COMING IN → PAYEE (employer)
SHIFT BACK SECTION
                    12. § 3-404(d) & § 3-405(b) 2nd sent – Where § 3-404(a) or (b) applies, if person
                        taking for value fails to exercise ordinary care, they may be liable for some or all
                        of the loss

       Drawer        →       Payee             →      Dep Bank        →      Payor Bank
                         13. If fictitious payee rule applies, the dep bank will SHIFT the loss BACK to drawer
                         14. The drawer could then shift the loss back if the dep bank failed to exercise
                             ordinary care.
                                  a. Ex. They failed to ask when took the check from the thief when
                                       depositing or cashing the check (amount, way made out, etc)
                                  b. Comparative neg section
                         15. Then the jury can decide how to allocate the loss b/t the dep bank and drawer →
                             comparative neg
                         16. § 3-404(d) last sentence: the person bearing the loss may recover from the person
                             failing to exercise ordinary care to the extent the failure to exercise ordinary care
                             contributed to the loss.
                                  a. – This means that payor bank may shift loss back to drawer b/c even
                                       though they failed to exercise ordinary care b/c they failed to examine the
                                       indorsement on the back, § 3-103 - ordinary care – they don’t have to look
                                       at indorsements
                                  b. They did not breach ordinary care, so you would have a lot stronger case
                                       w/ dep bank b/c they should have looked at the indorsements

                 iv. The negligence rule § 3-406
                        1. § 3-406 – person whose failure to exercise ordinary care substantially contributes
                           to an alteration of an instrument or to the making of a forged signature on an
                           instrument is precluded from asserting the alteration or the forgery against a
                           person who, in GF, pays the instrument or takes it for value or for collection


                                                      87
                                  a. Loss allocated b/t person precluded and person asserting preclusion
                                      according to the extent to which the failure of each to exercise ordinary
                                      care contributed to the loss
                                  b. Burden on the person asserting the preclusion
                         2.   What if forger takes a check and stamps indorsement on the back?
                                  a. § 3-406 – leaving a check around for anyone to pick up might be neg
                         3.   Negligence rule applies if you send to wrong address w/ correct name (wrong
                              person)
                                  a. Not employee b/c bad actor is person of same name who kept the check
                         4.   Parents get SSN benefits and has child on drugs, child forges indorsement on
                              check for years, parents get fed up and turns child in, § 3-403 (ratify) if parent
                              knew child was doing it and never complained
                         5.   The negligence rule of § 3-406 is the only rule that applies to both forged
                              indorsements and forged drawer’s signature
                                  a. For forged drawer’s signature – just being careless in leaving check book
                                      around not enough; but if have signed blank check lying around, then neg
                         6.   If bank pays over forged signature, they can invoke the defenses against customer
                              or go back against the dep bank
                                  a. § 4-208(c) Depostitory bank may invoke § 4-208(c) and payor bank
                                      cannot go against dep bank


                         7. Payor bank can undo final payment if:
                               a. § 4-208 applies – breach of presentment warranties
                               b. § 3-418 Mistake
                                       i. If forged indorsement - § 4-208 will be used
                                      ii. If forged drawer’s signature –
                                               1. § 3-418 will be used b/c 208 won’t work b/c under § 4-
                                                  208(a)(3), they warrant that they have no knowledge of
                                                  forged drawer’s signature
                                     iii. § 3-418 won’t work either if the dep bank took in GF and for value
                                          – you need to go back to § 4-210 for def of value
FORGED DRAWER’S SIGNATURE
IF NONE OF THESE RULES → PAYOR BAND BEARS THE LOSS
      - complain to Payor Bank 4-401 (improper payment)
      - cannot go against Dep Bank (no knowledge)

NEXT 2 RULES VALIDATE THE FORGED DRAWER’S SIGNATURE IF APPLY
     1) Negligence Rule
     2) Bank Statement Rule

                  v. The bank statement rule § 4-406
                        1. Remember that banks are under no duty to provide a statement, but they are sent
                           to shift the liability to the customer to discover mistakes
                        2. What would a customer discover in a bank statement?
                               a. Altered amounts
                               b. Forged drawer signature
                               c. NOT forged indorser’s signature
                        3. § 4-406 APPLIES TO UNAUTHORIZED signatures → more broad
                               a. Changed based on AR Pine Bluff National Bank v. Testerson case that
                                    expanded
                                                        88
                            4. § 4-406(d)(1) asserts that if customer failed to promptly notify the bank of
                                forgery, then the customer is precluded from asserting that there was a forger IF
                                the bank also proves that it suffered a loss b/c the customer failed to promptly
                                notify
                                     a. This is usually not very helpful b/c been if forged drawer’s signature has
                                        been reported, the bank will still lose the money unless the bank can show
                                        money was in the forger’s account and bank would not have lost money if
                                        they knew at X date
                            5. § 4-406(d)(2) – applies to multiple forgeries where the bank suffered a loss b/c
                                they could have stopped forgeries if they had known
                                     a. This is usually very helpful to the bank
                            6. § 4-406(e) customer can shift loss back to bank if customer can show bank failed:
                                     a. To exercise ordinary care
                                     b. Bank did not pay in GF
                            7. § 4-406(f) Even if bank has been negligent, there is ONE YEAR S of L.
                            8. § 4-406(f) with § 4-406(d)(2) will sometimes operate to completely protect the
                                bank.
                                     a. Ex. If a forgery has been taking place over 15 months, the first three
                                        months would be precluded b/c of S of L.
                                             i. The last 12 months would be precluded b/c of § 4-406(d)(20 that if
                                                they had been alerted in the first three months, they would have
                                                stopped the insanity
                                            ii. That precludes the customer for the whole 15 months
                          /----first 3 months § 4-406(f) ----/ ----12 months § 4-406(d)(2) ----/today

                           9. What if it says 2 signatures required for law review and AS only signs her name?
                                a. Pine Bluff National Bank decided this very issue
                                b. § 4-406 would not apply b/c there is no forged signature
                                c. Under § 3-403 – if 2 signatures are required, there is an ALTERED
                                     signature
                                d. § 3-406 would apply to altered signatures and also § 4-406

Thompson Maple Products Inc v. Citizens National Bank
Timber co – hire Ind K’or who hauls logs in and delivers. Given scaling slips and then co would write check
for appropriate amounts. P sued Bank for improper payment (forged indorsement)
Citizens Bank invoked § 3-406 Negligence Rule. The standard is “substantially contributes” NOT
PROXIMATE CAUSE. Thompson was neg leaving slips around, failed to use R diligence in examining
loggers records, failure to use sequentially numbered slips, failed to initial slips, initialed copies are supposed to
be made for bookkeeper to use. Court said looking at this in total = Negligence of Company
                            10. Is there a way to shift the loss back to the bank?
                                     a. § 3-406(d) bank failed to exercise ordinary care
                                             i. Bank permitted Albers to cash check w/ Joe Loggers’ name.
                                            ii. Bank may come back w/ for all we know Loggers were allowing
                                                Albers to cash checks for them
                                     b. Imposter Rule DOES NOT apply b/c he was being himself
                                     c. Intent Rule DOES NOT apply b/c bookkeeper intent controls, and they
                                        intended for Joe Logger to have it
                                     d. Fictitious Payee DOES NOT apply b/c Joe Logger is a person
                                     e. Employee Indorsement DOES NOT apply b/c Albers is not an employee
                                     f. What if someone on the scales was involved?
                                             i. Scale person was employee (same if bookkeeper involved)
                                                           89
                                        ii. Could still use neg

Storey v. Wells Fargo
D honored more than 100 checks which were forged. (forged indorsement)
Norris → Payee        Thief → DB → PB
                         11. Go after Depositary Bank (§ 3-406) – no, no indep cause of action
                                 a. Conversion? – 3-420
                                          i. An action for conversion cannot be brought by issuer of instrument
                                             (can but only interest in the paper and not the money in the bank;
                                             0.03 cents worth)
                                 b. 3-405 – can argue employee indorsement rule anyway
                                          i. Says not Norris’s employee (attorney – law firm’s employee)
                                         ii. BUT Employee includes ind K’or and employee of ind K’or
                                 c. INTENT RULE – attorney signed and did not intend payee to have
                                     interest in → ANYONE can be holder
                         12. Go after Payor Bank - § 4-406 Forged Drawer’s Signature (Bank Statement Rule)
                             – “ordinary care” does not require the bank to examine checks. Statements went
                             to law firm. More than one-year § 4-406(f) less than one-year § 4-406(d)(2). No
                             evidence that bank failed to exercise ordinary care
                                 a. 3-404 and 3-405 → only validate a forged indorsement, not a forged
                                     drawer’s signature
                                 b. Negligence applies – but not neg to leave checkbook w/ attorney while
                                     travel
                                 c. Bank statement rule – should have notified
                                          i. Client’s never got the statement
                                         ii. Bank only has to show that mailed the statement
                         13. Client can make § 4-406 – if failed to exercise ordinary care
                                 a. 3-103 – ordinary care def → when use automated means, R standards does
                                     not require to examine every check
                                          i. Comply w/ its procedures AND
                                         ii. The bank’s procedures vary unR from that used by other banks in
                                             the area
                                 b. Here – out sort check when out of order and less than $10,000 AND
                                     normal procedures are bank’s secret of business
                                          i. No industry standard b/c if told, the forged check procedures
                                             would be easy to get around

National Savings and Trust Co v. Park Corp
DAI → 75,000→           Garland       →       Park → forward for collection →       National Bank
Garland called bank to see if check was good and bank said it was not, so Garland looked at 2 methods for
sending it to the bank:
       1) If through regular banking channels, use presentment of check and then bank has until midnight
       deadline to reject
       2) If forward for collection, no presentment and bank keeps the check and checks the account each day
       to see if money is in the account
Garland mailed it. Gets sent to the wire department. National wired the money to Garland by mistake
Did the bank make final payment?              Yes § 4-215(a)(2) – as soon as wire transfer become irrevocable
Can bank undo final payment?                  § 4-208 (presentment warranties)– No § 3-418?
Did the bank make a mistake?                  § 3-418(b) – probably is a mistake b/c no one looked at the
account.
                                      Then go to § 3-418(c) – Did Park take in GF (honesty in fact)? Yes
                                                        90
                                      Did they take for value? – Park had promised to deliver the equip but had
                                      not given value
§ 3-418 also applies if they took in GF and changed positions in reliance
They argued that they paid Garland a commission on the equip of § 37,500. Why does this not protect Park?
       - They paid after they knew the whole story from bank
Bank was able to get the money back


Stefano v. First Union National Bank of Virginia
Father gave 2 sons property JT to avoid probate. Checks put in Anthony (father’s) mailbox. L (son) deposited
the checks in partnership account at Bank w/o M (son)’s indorsement. M sues Bank.
Why did M go after depositary bank?
        → Conversion. Requires both indorsements to effect negotiation. If w/o 1 indorsement and needs 2,
        then conversion occurs
        → Bank said no delivery (no conversion; P should have sued for underlying obligation against drawer)
        → Did M get the check?
                 Constructively delivered (cannot deliver to 2 people at same time and both have
                constructively received it)
                 Delivery to payee or agent or at least 1 payee (delivery to A’s mailbox is constructive to L and
                M)
        → Then bank states when property owned in JT, when 1 dies, it is all the other’s property (so while
        delivery rule may be true when A alive; no interest left to A’s estate when died and never delivered to
        M)
                 3-420 – “but” clause in subsection (b) conversion when multiple payee
                 When 0% interest in check, cannot sue for conversion; BUT if you have 100% interest in the
                check, then cause of action for conversion → delivery to 0% interest in the check IS delivery to
                the one w/ 100% interest
Could he have gone after drawer?
        → No, b/c when delivered, underlying obligation suspended
Could he have gone after payor bank?
        → For conversion – 3-420 if bank paid the check, then it converted
Why did he sue depositary bank instead?
        → Failure of R care easier to prove AND easier to sue one bank in area than huge national payor bank
Can sue for conversion for interest in checks that YOU have (if 33% and 67% - can get 67%)
ALSO § 3-420(c) – old version would allow dep bank out; NOW other than dep bank, collecting banks not
liable when no longer have any of the money
        → payor bank does not take as a representative


Stone & Webster v. FNB
Employee of Stone stole checks and cashed checks at bank. Court said no action for conversion b/c bank’s
money is stolen. Not drawer’s money; only interest in the paper (when bank makes payment, it is their money).
Drawer has right to order money to be put back.
Payee is the one bringing action for conversion
POLICY – if sue payor bank for improper payment; then payor bank will sue dep bank for presentment
warranties. Why not allow drawer to sue dep bank and have 1 suit? B/c payor bank may have defenses against
drawer and if payor bank has to pay, then it can sue
Principal is now codified in § 3-420 (issuer of instrument cannot bring action for conversion)
Even if double forgery (when forger is issuer), drawer still does not have a property interest
S & W v. FNB under § 3-420 – No b/c no property rights in the check.

                                                       91
S & W COA is improper payment against payor bank
S & W v. PB → § 4-401 Improper Payment
Then PB v. FNB (DB) § 4-208 – Why not consolidate? (PB might have defense of bank statement rule,
employee indorsement rule, etc)
DB will argue § 3-405 valid forgery - could shift back by arguing lack of ordinary care, employee indorsement
rule
S & W v. Westinghouse → § 3-405(b)
Look at comment (4) of § 3-405 → CAN SUE DB under this when employee indorsement (failed to exercise
ordinary care in letting employee bring check of well-known business and deposit in account). Open up this
possibility while shutting down 3-420; should also get in w/ ordinary care when imposter, intent, or fictitious
employee case 3-404. DB more vulnerable for ordinary care than payor bank.


State of NY v. Bardays Bank of NY
State of NY never received the tax checks and could not sue for conversion b/c they never received § 3-420.
State of NY could sue drawer on underlying obligation. Drawer writes a check to NY against, then they sue
payor bank
Drawer v. PB → Improper Payment § 4-401
        - Payor bank would then shift burden back to drawer under § 3-406 b/c Caliendo was agent (independent
        K’or)
Drawer could argue that bank failed to use ordinary care if (i.e.) the checks were signed in handwriting


Gina Chin v. FUB
Employee Indorsement Rule (forged drawer and payee indorsement). P sues DB.
Could she sue Payor Bank?
       → Improper Payment; not for conversion (its their money)
       → Double forgery and not issuer
       Employee indorsement validates supplier’s indorsement 3-405; also 3-404(b)(i)
       To validate drawer’s signature – need negligence or bank statement rule 3-406 & 4-406
               No promptly report or worse than leaving checkbook out
Sues DB for 3-405 failure to exercise ordinary care
       → Not worried about drawer’s sig; worried about supplier’s indorsement
       → 3-404(d) and 3-405 (b) last sentence
Assume sues payor bank, what happens (improper payment)
       → Payor bank can argue neg or bank statement rule; won’t win
       → Pay Gina and go after DB for presentment warranties (not holder) 4-205(a)(1)
       → DB’s response – validated indorsement of employee


BUT teller at DB was helping employee SO response would be DB NOT a person who took in GF (only one
who can take advantage of validation rules)
3-418(a)(ii) – Payment by mistake to undo final payment– signature of drawer not authorized; BUT DB can
come back 3-418(c) BUT did not take under GF so PB will win under either


Denn v. First State Bank
Blesener              →     Advance (Denn)                 Carlson → Sp Lk Bank          → Nfield Bank
Denn sued everyone
Denn v. Spring Lane for conversion § 3-420

                                                      92
Spring Lake v. Denn - § 3-405 if Denn sued under § 4-208 Denn could then argue that dep bank failed to
exercise ordinary care


Title Ins Co of Minnesota v. Comerica
FNMC →          Helen Nastor         Rudy Nastor and accomplice →         Commerica Bank
FNMC (drawer; actually title co) v. Commercial Bank – neg in allowing imposter to cash check
§ 3-404 Imposter Rule → Rudy did not say he was Helen Nastor, he just acted like he was an authorized agent
Imposter Rule does not apply if you misrepresent authorization/agency status, but it DOES apply if you
impersonate a person (either Helen or an agent of Helen)


Merrill Lynch
ML →           Payee THIEF →         DB      →      Chemical Bank
E’ee in accounts payable dept prepared false invoices. Accounts payable cut 13 checks for 115,000
ML v. CB → Improper Payment § 4-401
CB v. ML → § 3-405 – employee w/ responsibility § 3-405(a)(3)(iv) – validates (also if fictitious payee rule
may come in if employee made up payee)
ML v. CB → § 3-406 Negligent – Corporate payee and indorsements were in handwriting (you should have
known)
CB will argue that they have no duty to physically examine checks
Can ML go against DB?
        For Conversion § 3-420?              NO
        For Ordinary Neg § 3-405(b)?         Last sentence (person bearing the loss may be able to recover to
        extent
                                     they caused the loss by taking instrument and fails to exercise ord care)


                  vi. Allocation by contract

Jefferson Parish v. First Commerce Corp
Facsimile signature. Corp signed K that said Corp assumed all risks involved in unauthorized use of facsimile
signature. Employee, using own computer, copied (Corp was not neg and had protected check writing
machine). Corp reported as soon as got bank statement
K said bank could honor ALL checks purporting to bear the signature, regardless of by what means as long as
resembles
§ 4-401 – can vary by agreement if R
Court upholds as R (b/c corp and not ind). Key is probably limited to when drawer want to use facsimile
signature

                          1. Some banks do check for out-of-sequence checks to cover this




           e. Alteration § 3-407, 3-413(b), 3-302(a)(1)
                  i. Alteration → a change that purports to modify the obligation of a party to an instrument
                     if the change is unauthorized § 3-407(a)
                          1. Very broad definition – includes fraudulent changes as well as changes made in
                             GF
                 ii. What validation rules apply to Alteration
                                                      93
                          1. § 3-406
                          2. § 4-406
                          3. § 3-407
                          4. § 4-401(d)(1)
               iii.   Fraudulent alteration releases all parties from the instrument
                          1. Discharges a liability normally
                          2. BUT payor bank taking in GF can still take the original amount out of account (is
                             still paying a holder if indorsed)
                                  a. If incomplete instrument (left blank) can get amount of completion
                          3. Payor bank does not have to credit if § 4-406 - bank statement (can shift back if
                             neg or 3-406 – comparative fault (neg in leaving too much space)
                iv.   § 4-401(d)(1) if PB pays holder, they can enforce the amount of the check
                 v.   § 3-406(b) comparative fault rule
                vi.   If payor bank puts the money back and goes back against the dep bank for breach of
                      presentment warranties § 4-208(a)(2)
                          1. Warrants not altered and PB suffers loss
               vii.   What if PB does not want to make customer mad and they go against dep bank and dep
                      bank can use § 4-208(c) to assert the rights of payor bank or can go against grocer § 4-
                      207(a)(3)
                          1. Presentment and transfer warranties
              viii.   What is the effect of stop payment?
                          1. If drawer stops payment, the PB will dishonor
                          2. DB → can assert § 3-407(b) (HDC) estoppel → Drawer
                                  a. Discharge is PERSONAL defense and cannot be asserted against an HDC
                                  b. Drawer → obliged to pay for the original amount (3-414)
                                  c. Also for 3-407(c)
                          3. DB → Grocer
                                  a. 3-415 indorser liability
                                  b. Also transfer warranties 4-207
                                  c. DB can get WHOLE amount from grocer
                                           i. Agreed according to Indorser liability to pay out according to
                                              terms when indorsed
                                          ii. Same as Transfer Warranties
                          4. If incomplete – 3-406 → neg made possible the alteration (easier)

                ix. What is the effect of Certification?
                      1. § 3-414(c) - Drawer is not liable
                      Now when payor bank certified → Payor Bank becomes liable
                      2. When PB goes against the dep bank, did they breach presentment warranties?
                               a. NO, b/c payor bank assumed liability
                      3. Can they recover from anybody?
                               a. § 4-208 only payee (payee warrants to payor bank upon presentment or
                                   acceptance that it is not altered)
                 x. What if Certification then alteration?
                      1. Common law – a bank that certified an altered check was liable on the check only
                           as originally drawn
                      2. 2 recent cases interpret UCC change in common law rule and as binding a
                           certifying bank to the terms of the instrument at the time of certification

Brower v. Franklin National Bank
RICCI → certification by FNB → Alteration → Brower → Franklin Bank
                                                 94
               $8; $10          $28,600; $10,000
If change before certification – bank liable; if after, not
Negligence – UCC § 3-406 – any person who by his neg substantially contributes to a material alteration of the
instrument is precluded from asserting the alteration against a HDC
       - Banks included when certified
Case said there was negligence of bank that certified (left amount)

                  xi. § 3-413(b) make it advantageous for the bank to put amount w/ the certification
                           1. IF certification does not state amount, amount raised, and transferred to HDC →
                              liable for amount to HDC
                 xii. If clumsily altered – Bower must show HDC § 3-302 does not have apparent alteration –
                      would all bank shift loss to Bower if bank did not put amount in certification

           f. Restrictive Indorsements § 3-206
                  i. § 3-206 READ (c) – this is the guts of the §
                 ii. Usually indorsement’s purpose is negotiation
                         1. In blank – anyone; Special – that person
                iii. Purpose of restrictive indorsement – to restrict payment of the instrument
                         1. Ex. Indorse in blank w/ words for deposit only – blank indorsement but restrictive
                         2. Ex. Indorse to John Doe in trust for Jane Doe – special indorsement and
                            restrictive
                iv. Some restrictive indorsements are ineffective
                         1. Pay to JD only – does not restrict negotiability
                         2. Indorsements that attempt to prohibit payment unless a stated condition is
                            satisfied is also ineffective to restrict payment

                                    (c)(1)    (c)(2)        No liability for conversion (Same)
Drawer → Payee → Thief →            Grocer → DB →           Intermediary Bank →          PB
        Indorses      $100          $100$100             $100               $100
      “For Deposit
      Only – Payee”
                  v. If payee indorses in blank and thief ends up w/ check and transfers to grocer then to dep
                     bank and payor bank. Payee is out of luck
                         1. Payee can prevent by writing “for deposit only – Payee,” then goes to thief and
                            grocer and DB and PB
                         2. Grocer coverts under § 3-206(c)(1)
                         3. DB – converts under § 3-206(c)(2)
                         4. IB and PB have no liability § 3-206(c)(4)
                         5. If PB caught it and wouldn’t pay § 3-206(f) grocer is stuck b/c PB has defense
                                a. PB – can ignore restrictive indorsement too § 3-206(c)(4)
                         6. DB → Grocer for transfer warranties (no defense)
                         7. Grocer eats loss
                         8. Drawer is off the hook (cannot sue on check or obligation)
                 vi. What if PB dishonors bank, check comes back?
                         1. DB → Grover for transfer warranties
                                a. What about drawer?
                                         i. NO - 3-206(f) – restrictive indorsement is defense
                                b. Payee – indorser’s liability?
                                         i. NO - 3-206(f) – restrictive indorsement is defense
                                        ii. Gets $100 from drawer b/c both are not liable on instrument
                                            (willing to give new check now)
                                                       95
  vii. What if signs “payee” – then “for deposit only” and a thief gets it and signs below the
       “for deposit only.” Is this still ok?
           1. Dep bank will probably be protected from conversion claim
                  a. Applied it consistently w/ the indorsement

Drawer → Paul Payee → Pay to faith as guardian for ward Paul Payee → DB
 viii. § 3-206(d) they can go ahead and pay unless they know that she is breaching fiduciary
       duty § 3-307
           1. They will be liable if she pays on a personal note, not if she gets cash or puts in an
              account
  ix. What about PB - § 3-206(d)(2)?
           1. Ward may have COA against DB but probably not PB




                                         96
   VII.   CHAPTER 4 – ELECTRONIC FUNDS TRANSFER
          There is more money (in dollar amounts wise) in electronic movement than in regular paper
           Electronic Funds Transfer Act of 1978 (pg 1827) and REG E (pg 1827) apply to some electronic
          transfers (consumer transfers)
           Art 4A does not apply to any part of a transfer if EFTA applies - § 4A-108
           EFTA clearly covers:
              1) Point of sale transfer
              2) ATM
              3) Direct Deposits/ Withdrawals
              - pulls straight from checking account
           EFTA does not cover natural persons
           A distinction that is IMP is:
              1) Credit (PUSH): Payment Instructions are given by person making the payment
                       Payor → Receiver * Art 4A applies
              2) Debit (PULL): Payment Instructions are given by person receiving the payment
                       * Art 4A does not apply
                       (Ex/ Debit Card at Kroger, and Entergy pulls payment)
           Most transactions are pull

           Art 4A – 102 provides that except as otherwise provided, this applies to funds transfers → see
          4A-104 for def of funds transfers
           Funds transfers = 1 or more payment orders
           4A-103 – definition of payment order
             An instruction of a sender to a receiving bank, transmitted orally, electronically, or in writing, to
             pay or to cause another bank to pay, a fixed or determinable amount of money to a beneficiary
             IF:
                     (i) The Instruction does not state a condition to payment to the beneficiary other than
                     time of payment
                     (ii) The receiving bank is to be reimbursed by debiting an account of or otherwise
                     receiving payment, from, the sender AND
                     (iii) The instruction is transmitted by the sender directly to the receiving bank or to an
                     agent, funds-transfer system, or communication system for transmittal to the receiving
                     bank

          CHIPS – Clearing House Interbank Payments System of NY Clearing House Associations (end of
          the day net balance and both banks must be participants)
          FedWire – competitor; instantaneous net balance (not end of day); can be used by banks in privity w/
          Reserve banks or through a bank in privity w/ Reserve banks

         4A-501 trumps Art 4A – if join an automatic clearing house, those rules apply
         4A-104 – comment 4 – funds transfers fall into categories
            1) Credit transfer (push) – person ordering payment wants it to be credited to another account →
            covered by Art 4A
            2) Debit transfer (pull) – person issuing order wants money pulled through system from your
            account → not covered by Art 4A
         a. Basic transaction under Article 4A
                i. Payment Order § 4A-103
                        1. Egan → Carr
See Handout

                                                       97
Sender (Egan) → orders Ark Bank to send payment (PO1) (Receiving Bank 1) → to Carr’s bank (Beneficiary’s
Bank) → to Carr (Beneficiary)


Originator      Originator’s Bank

Egan → PO #1 → Ark Bank
Sender         Rec Bank
                  Sender     → PO # 2 →           FRB
                  Egan                            (FEDWIRE)
                  1,000,000                       Rec Bank
                         (10) charge              Sender      → PO #3 → Texas Bank
                                                  Ark Bank    Texas Bank Rec Bank
                                                  (1,000,000)  1,000,000 Benef Bank
                                                                         Now Liable to Carr

                                                                                CARR
                                                                                Beneficiary

                               a. Will normally go through FEDWIRE or CHIPS
                                      i. So Receiving Bank (sender) will send second PO (PO2) to Federal
                                         Reserve Bank (Intermediary Bank and Receiving Bank 2)
                                     ii. RB2 (Sender) will send 3rd PO to Texas Bank (Receiving Bank 3)
                                              1. Texas Bank is only one that is the Beneficiary Bank
                               b. Egan (Sender) is also the originator § 4A-104
                                      i. Originator’s Bank – Ark Bank (RB1)
                               c. Possible to only have 1 PO (Egan and Carr have same bank)
                                      i. Debit my account and credit Carr’s account
                                     ii. Technical term → Book Transfer (§ 4A-104 comment 1)

                        2. What if Bank refuses to send Sender’s PO?
                             a. Nothing (no obligation) – unless agreed beforehand
                                       i. If agreed beforehand, § 4A-212 → breach of contract
                                      ii. Damages according to agreement
                             b. If Bank wants to accept the PO,
                                       i. § 4A-209(a) – acceptance when executes the order
                                      ii. § 4A-301 – execute a PO when bank issues a PO intended to carry
                                          out the PO received by the bank
                                     iii. When accepts, undertakes obligations in § 4A-302
                                              1. If indicated particular method or intermediary bank or time,
                                                  in general banks are obligated to carry out
                                              2. If nothing particular is indicated, not obligated to do in a
                                                  certain way
                                                      a. Bank has a lot of flexibility unless limited by sender
                                              3. If specify time, bank must adopt a method to meet the
                                                  deadline
                                     iv. Bank will charge a fee for this
                                              1. BUT § 4A-302(d) – cannot take their fee from the amount
                                                  of the PO
                             c. Acceptance by the order of receiving bank obligates sender to pay the
                                  receiving bank - § 4A-402(c)
                                                     98
         i. Payment by sender is not obligated to pay until execution date (if
            bank does it earlier, could be liable on interest)
d. If bank wants to reject PO - § 4A-210
         i. Notice of rejection - Communicates rejection orally, written,
            electronically in no particular language
        ii. What if the bank does nothing and no obligation (no K)?
                1. § 4A-211(d) – if does not accept w/i 5 working days,
                    automatically rejected
                2. If don’t send notice, owe 5 days interest § 4A-210(b) at
                    Federal Funds Rate § 4A-506 (right now 2%) in non-
                    interest bearing account (b/c assume would have spent the
                    money) b/c bank got the use of her money for 5 days longer
                    than would have if gave notice
                        a. If nothing in account – no loss
                        b. If has money in the account and did not pay interest
                            on the account – interest
                        c. If has money in interest bearing account – no loss
                            b/c already got interest
e. Can beneficiary bank reject PO?
         i. Yes
        ii. How would it accept?
                1. § 4A-301 – Beneficiary bank cannot execute a PO (only
                    receives)
                2. § 4A-209(b) earliest of following
                        a. (b)(1) Pays Carr
                                 i. PUPID (Pay Upon Proper Identification)
                        b. (b)(1) Payment by cash – accept
                        c. (b)(1) If credit account – accept
                        d. (b)(1) If notify before credit – accept
                        e. (b)(2) If bank receives payment for PO (even if no
                            credit to Carr yet)- accept
                                 i. FEDWIRE (Reg J 210.29 – pg. 1841)–
                                    payment in the message (no time to reject
                                    b/c payment occurs)
                                ii. CHIPS – not instantaneous – few hours to
                                    reject (end of day)
                        f. (b)(3) – Opening of business on next banking day if
                            fully covered by withdrawable account (when book
                            transfer or other than FEDWIRE)
       iii. § 4A-404 – Obligation of Beneficiary Bank when accept
                1. (a) – if accepts, the beneficiary bank is liable for amount to
                    beneficiary
                        a. Not obligated to render, receiving banks,
                            FEDWIRE
                        b. If fail to put in beneficiary’s account, and he puts on
                            notice for consequential damages, the bank is liable
                            for those as well
                        c. UNLESS bank proves R doubt concerning right of
                            beneficiary to payment
                                 i. If doubt identity, then can refuse

                      99
                                                                ii. If Sender is trying to stop payment, cannot
                                                                    not give to Beneficiary (not suff for a R
                                                                    doubt) – comment 3
                                                         d. LOT of potential liability
                                                  2. Can beneficiary bank have Beneficiary waive the right to
                                                     get consequential damages in agreement?
                                                         a. No § 4A-404(c)
                                                  3. Beneficiary bank also has duty to notify the beneficiary
                                                     before midnight of next banking day § 4A-404(b)
                                                         a. Why – to allow him to do something w/ it (don’t
                                                            have to wait until get bank statement)

                            3. Buyer owes large sum of money to seller

               Buyer → P.O. → Buyer Bank → P.O. 100,000 to Seller → Seller’s bank → Seller

                                   a. Funds transfers are made up of one or more PAYMENT ORDERS
                                   b. §4A-103 Payment Order (5)(4)(3)(2)
                                   c. (5) Sender – the person giving the instruction to the receiving bank
                                   d. You can have a time condition – it does not have to be on demand
                                           i. (i) Otherwise no condition to payment to the beneficiary
                                          ii. (ii) Receiving bank receives by debiting account of sender
                                         iii. (iii) Instruction is transmitted by sender
                                   e. Begins w/ payment order – includes entire transaction

               Originator      Orig Bank              Beneficiary bank       Bene 1
       PO1     Sender 1        Rec Bank 1             Rec Bank 2             Bene 2
       PO2     Buyer           Buyer’s Bank           Seller’s Bank          Beneficiary

                            4. When the receiving bank and the beneficiary bank are the same bank, it is called a
                               book transfer
                            5. Contact you bank and have them put money from one account to another (sender
                               and beneficiary could be the same person)
                            6. Sender’s instruction can be orally, written, or electronic
                            7. Receiving bank can use letter other communications (comment (6)) nothing says
                               it has to be electronic but it almost always is
                            8. If it is electronic transfer, a few systems are available:
                                    a. Fed wire (common) Reg J governs (pg 1841). Art 4A-107 Reg J trumps
                                         any discrepancies w/ Art 4A
                                    b. CHIPS (another electronic means) chips has its own rules and is used a lot
                                         to get money overseas. 4A-501 says CHIPS rules will override 4A
                                    c. ACH – EX: Dillard’s has stores all across America and they deposit in
                                         banks across America. Dillard’s pulls all cash to main office. ACH
                                         would also be depositing pay check some are covered by 4A and some are
                                         not (depends if push or pull transaction)

Aleo International v. Citibank
Sent wire to Berlin (6 hours ahead) and paid before instruction to stop the transfer.
Art 4A – instructs all transfers done electronically and has NO provision for neg
4A-211(2) – Cancellation

                                                        100
        → communication by sender canceling or amending payment is effective to cancel or amend IF
        NOTICE received at a time and manner affording receiving bank a R opportunity to act on the
        communication before the bank accepts the payment order
4A-209(2) - Acceptance of payment order
        → beneficiary’s bank accepts payment order at the earliest of the following
                (1) Pays the beneficiary OR
                (2) Notifies the beneficiary of receipt of the order or that the account has been credited
Paid before instruction b/c received notice of the credit
ACUTALLY – accepted once receiving bank sends 2nd PO, then it has accepted
After LAB accepting payment order by crediting account and notifying, buyer cannot stop payment unless LAB
agrees to do so and then in ONE of the following cases 4A-211(c)(2):
        Payment order was (1) unauthorized; (2) in duplicate; (3) made to the wrong beneficiary; (4) in an
        excessive amount
FedWire – the message is the money (other cases, beneficiary’s bank will not receive settlement on payment
order until after receive the order)

How does beneficiary bank protect self?
      1) Reject payment order if doubts solvency of sending bank
      2) Notify beneficiary that it will not be allowed to withdraw funds until bank receives settlement from
      sender of order
      3) Can withhold funds until an hour after opening of business on day after receipt, by which time, if it
      has not already received settlement, it must reject to avoid acceptance

Failure of Receiving Bank to Execute Payment Order
Evra Corp v. Swiss Bank Corp.
Something happened and bank did not execute payment order, causing business to lose money and charter
Same as Hadley v. Baxendale – unless reason to know or notice → not liable for unforeseen consequences
Bank did not know enough to infer that if lost a $27,000 payment order, it could face liability in excess of $2
million
Also – duty to mitigate damages (P caused a lot of own damage by waiting 6 days before sending another
payment)
§ 4A-305(b) – codified this case → COMES DOWN SAME WAY TODAY
        No consequential damages unless express writing agreeing to be liable for it
        GOES FURTHER THAN THE CASE → Does not matter if bank should have known (need actual
        notice and agreement)




Comparison
Draft → Drawee sent T to get goods and he makes draft to C for Drawee. C could release goods if wants, but
will have to send draft through banking channels to go back to Drawee. If releases goods and Drawee
dishonors, could sue drawer of draft, T, (unless w/o recourse, on instrument) or Drawee (on underlying
obligation).
         C will have some risk.

Check → E makes check to C and sends through banking channels. Risk C takes is dishonor/stop payment by
payee bank. C could sue E (on instrument and underlying obligation). What about bank trying to undo final
payment (§ 3-418)? If C calls bank and bank says paid the check, C can release the goods and is a person who
took in GF and for value and protected against mistake.
                                                      101
        C still runs a little risk (could ask for cashier’s check – which discharges E’s liability and makes bank
       liable (§ 3-412 – liability of issuer (drawer and drawee) and can get expenses (§ 3-411) and if alert to
       fact can get consequential damages)); only way E liable on cashier’s check is if made check out to self
       and indorses to C (liability of indorser))
               ● BUT what if bank goes belly-up (§ 4-104(a)(12) – if closed bank, it suspends payment; then
               insured only for 100,000; § 3-411(c) and cannot get expenses or consequential damages). Then
               C stuck, b/c cannot go after E. Still some risk
        What if certified check? E is released and bank liable. SAME THING
               ● If obtained by fraud, then bank can rescind the negotiation and assert ownership claim.
                        - Defense to 3-412 (payee claim but 3-305(e) – exception for jus tertii)
               ● What about 3-411? Subsection (3)(iii) says bank can have R doubt whether person demanding
               payment is the person entitled to enforce the instrument.
               Bank cannot have defense under 3-411 unless remitter claim upheld – protected then. MUST
               rise to level of claim to get ownership bank.
               ● Judgment call of the bank to dishonor if believe you or not

Wire Transfer → If C received notice of wire transfer and releases goods, E is released once beneficiary notifies
b/c considered payment of C. C can only look to Texas bank for money.
        Risk is of own bank going belly up.
        Can protect self by (§ 4A-406(b)):
               (1) If payment by wire transfer is against the terms of the K w/ E
               (2) W/i R time notified beneficiary bank of refusal of payment
               (3) Funds not withdrawn by C
               (4) Beneficiary would suffer a loss that could R have been avoided if payment made by means
                   complying w/ K
       Then can go against E for the 900,000 bank will not pay (not liable for).
        IF E wants to stop payment - § 4A-211 ((b) can if calls and cancels before bank executes it by
       sending payment order #2).
               - § 4A-211(c) If accepted, cancellation not effective UNLESS bank agrees or rules permit and
                       (1) Bank (not beneficiary bank) agrees and in position to cancel payment order #2
                           (depends on whether other bank has sent on) – when beneficiary bank not received
                       (2) If beneficiary bank accepted, up to BB (its fight will be w/ beneficiary b/c once
                           accepted then obligated to beneficiary) UNLESS
                               a. Unauthorized payment order OR
                               b. Mistake resulting in
                                        i. Could be in duplicate
                                       ii. Sent to person not entitled to receive it
                                      iii. Orders payment of amount greater than authorized

SAFEST IF CASHIER’S CHECK ON BANK NOT GOING TO GO UNDER (LARGE ENOUGH)


                  ii. Funds Transfer § 4A-104
                         1. Gives definitions for funds transfer, intermediary bank, originator, and
                            originator’s bank
                         2. Funds transfer is the series of transactions, beginning w/ originator’s payment
                            order and ending w/ acceptance by beneficiary’s bank

           b. Acceptance of Payment Order § 4A-212, 4A-209, 4A-210, 4A-211, 4A-402(c), 4A-403(a),
              4A-402(b), 4A-404, 4A-405(a) & (b), 4A-406(a) &(b)

                                                       102
            i. Wire transfers are efficient and also easy to steal
                   1. Authorization is different
                           a. Payment Order is treated as the order of the person in whose name it is
                               issued if it is properly tested pursuant to a security procedure and the order
                               passes the test
                           b. Risk of loss depends on commercially reasonable security measures and
                               GF accepted by receiving banks after verifying in compliance w/ order
           ii. § 4-212 Buyer’s bank refused to carry out transfer ordered by buyer. Is any bank
               obligated to accept a payment order?
          iii. There is no obligation to accept a payment order unless there is an agreement in place.
               That the bank will accept. You would look at agreement to see what recovery will be. It
               may run the customer off.
          iv. How does Buyer’s bank accept a payment order? § 4A-209 When it executes the order, it
               has accepted the payment order by sending order number 2
           v. § 4A-302 If buyer gave buyer’s bank any particular instructions (i.e. by FedWire or just
               by wire) then buyer’s bank is obligated to honor those instructions
          vi. § 4A-302(a)(2) If buyer says “by wire transfer” bank is obligated to use most expedious
               means, Buyer’s bank can call and say take it out of our account at the seller’s bank.
         vii. § 4A-302(c) says they can use the mail unless § 4A-302(a)(2) applies
        viii. § 4A-302(d) What does this keep bank from doing? Keeps bank from charging for
               services unless they do it. They cannot take it out of the wire transfer proceeds. What
               makes sense b/c the purpose of sending seller 100,000 is that seller is expecting to get
               100,000. Not that minus the wire fees.
          ix. § 4A-402(c) – Money must be in account for payment to take place – entitled to money
               when order is executed.
           x. § 4A-403 Receiving bank will debit account of sender for amount of order.
          xi. § 4A-402(c) 2nd sentence – They can’t take money out of buyer’s account until the
               correct date. Penalty is that the bank loses the interest. Payment not due until execution
               date.
         xii. § 4A-506 Rate of Interest – If one party owes interest to another party – fed funds rate of
               interest
        xiii. Can buyer cancel a payment order? – Yes, up until execution buyer can cancel the
               payment order. Then bank runs the risk of losing the whole amount of money if they
               send it too early. They can then go after seller.
         xiv. If bank wants to reject the payment order, how do they do it? Don’t execute the payment
               order. Do they have to tell the buyer? – Technically no, but could cause problems if they
               don’t
          xv. § 4A-210 They can tell customer by telephone, writing, etc
         xvi. (b) If there was money in buyer’s account and buyer bank does not execute the payment
               order the bank owes the buyer interest on the money
        xvii. § 4A-211(d) How long is payment order good for? –5 days
       xviii. Penalty for not promptly notifying the customer – the bank could owe the buyer interest
               for 5 days.
Acceptance by Seller’s Bank
         xix. § 4A-209(a) applies only to receiving bank NOT a beneficiary bank
          xx. § 4A-209(b) rules are trying to accomplish payment comes to seller’s bank and seller’s
               bank has obligation to beneficiary. Rules allow seller’s bank to get assurances that they
               will get the money.
         xxi. Seller’s bank accepts order and becomes liable to beneficiary at the earlier of these 4
               events:
                   1. Beneficiary bank pays beneficiary
                                                  103
                             2. Beneficiary bank notifies beneficiary
                             3. Beneficiary bank has received payment (if by FedWire payment takes place at the
                                 same time payment order)
                             4. In case of payment covered by credit-opening of next day (b)(3) – money in
                                 buyer’s bank by opening of next business day and no rejection by seller’s bank.
                                 Allows seller’s bank to make sure money is still in the account.
                xxii.   Once a bank has accepted the payment order § 4A-404 – once 1 of 4 events has occurred
                        it is obligated to the beneficiary. If it refuses to pay seller, it can be liable for
                        CONSEQUENTIAL DAMAGES
               xxiii.   Acceptance / rejection applies to each payment order
               xxiv.    The Buyer’s Bank / originating bank / receiving bank number 1 / sender bank of payment
                        order 2 is under no obligation to accept but after 5 days it has rejected and they may be
                        liable for interest.
                xxv.    The Seller’s Bank / receiving bank 2 / beneficiary bank accepts at the earliest of one of
                        the 4 things and once this acceptance is made they are obligated to pay the beneficiary
                xxvi.   § 4A-404 If they do not pay beneficiary, they are liable for amount of payment order and
                        consequential damages
               xxvii.   § 4A-404(b) “Credit seller’s account at seller’s bank”
              xxviii.   If a bank contrary to Code deducted fee from the amount transferred, and caused E to
                        breach K w/ C, can C rescind the K?
                             1. No
                             2. § 4A-406(c) – complied w/ K if E complies w/ C’s demand for reimbursement of
                                 transfer fee
                             3. Code protects from MASSIVE damages that could be caused by bank’s mistake
                                 or error
                             4. Does not help if time is of the essence

Corfan Banco Asuncion Paraguay v. Ocean Bank
CBAP Wire transfers for fictitious account to Swiss Bank to Pay Silva account in OB. OB checked w/ Silva to
make sure. OB put in his account even though account number was not his. OB did not tell the others. Then
CBAP realized mistake and sent the same amount w/o notification of correction. Silva took all out.
§ 4A-207(a) – If a payment order received by the beneficiary bank, the name, bank account number, or other
identification of the beneficiary refers to a nonexistent or unidentifiable person or account, no person has rights
as a beneficiary of the order and acceptance of the order cannot occur.
CBAP – language is clear and unambiguous – were name or bank account number or other identification refers
either to nonexistent or unidentified person or nonexistent account, the order cannot be accepted
Although payment order correctly identified the beneficiary, it referred to non-existent account and acceptance
could not occur
Court refused to interpret OR as “And” (both name and number) for no one to have rights
IF could get past (a), would (b)(2) apply?
        → No, b/c name and account # did not apply to 2 different people (1 real person and 1 non-existent
person)
        → Drafting error (actually would apply)
Would (c) – no b/c originator was a bank
When this happened, don’t call the customer, call the bank




                                                        104
c. Unauthorized transfers § 4A-201, 4A-202, 4A-203, 4A-204, 4A-205
      i. Authorized § 4A-202(a) – If authorized, then bank can take out of account
     ii. Verified § 4A-202(b) – Even if unauthorized, if it has been verified, then bank can
         take out of account.
            1. To show verification, bank will have to show:
                    a. (b) Was a Security Procedure in place?
                    b. (b) & (c) Was the Security Procedure Commercially Reasonable?
                    c. Was the Security Procedure followed?

              2. Policy:
                      a. So many wire transfers go through the bank
     iii. 4A-203 – Way out
              1. (a) Bank can agree to limit its right to enforce a verified payment order
              2. (b) Customer has some wiggle room (did not occur through the customer’s acts)
                      a. Requires a customer to prove a negative
                      b. Cannot be unclear how the thief got to it
      iv. 4A-201 – talks about some examples of security procedures
       v. § 4A-201 – Security Procedure - Security procedure means a procedure established by
          agreement of a customer and a receiving bank for the purpose of
              1. Verifying that a payment order is that of the customer OR
              2. Detecting error in the transmission or the content of the payment order or
                  communication
         Can require use of codes, words, etc
         Comparison of signature is not a security measure by itself
      vi. § 4A-202 – Authorized and Verified Payment Orders A payment order received by
          receiving bank is authorized order of person identified as sender if that person authorized
          or is otherwise bound
              1. If agreed b/t bank and customer that authenticity of payment orders is determined
                  by security procedure, then good if
                      a. Security procedure the commercially R method AND
                      b. Bank proves accepted order in GF and in compliance w/ procedure and
                          any written agreement or instruction of customer restricting acceptance
                      c. Bank not required to follow instruction violating written agreement or
                          notice received too late or in a manner that bank cannot R act on before
                          payment
     vii. § 4A-203 – Unenforceability of Certain Verified Payment Orders If accepted
          payment order is not authorized order under 202(a) but is effective as an order 202(b), the
          following rules applied:
              1. (a)(1) By express written agreement, the receiving bank may limit the extent to
                  which it is entitled to enforce or retain payment of payment order
              2. (a)(2) Receiving bank is not entitled to enforce or retain payment of the payment
                  order if the customer proves that order was not caused, directly or indirectly, by a
                  person (i) entrusted at any time w/ duties to act for the customer w/ respect to
                  payment order or the security procedure or (ii) who obtained access to
                  transmitting facilities of the customer or who obtained, from a source controlled
                  by the customer and w/o authority of the receiving bank, info facilitating breach
                  of the security procedure, regardless of how the info was obtained or whether the
                  customer was at fault
              3. (b) – also applies to amendments of payment orders

                                          105
            viii. § 4A-204 – Refund of Payment and Duty of Customer to Report If a receiving bank
                  accepts a payment order issued in the name of its customer as sender, which is (i) not
                  authorized and not effective as the order of the customer or (ii) not enforceable, in whole
                  or in part, against the customer, the bank shall refund any payment of the payment and
                  shall pay interest on the refundable amount calculated from the date the bank received
                  payment to the date of the refund. However, customer not entitled to interest from the
                  bank if the customer did not exercise ordinary care to determine that order was not
                  authorized and fails to notify the bank of the relevant facts w/i R time not to exceed 90
                  days after customer receives notification from bank that accepted order. Bank is not
                  entitled to ANY recovery from customer based on failure to notify
                      1. Obligation of a receiving bank to refund payment as stated in (a) may not
                          otherwise be varied by agreement
              ix. § 4A – 205 – Erroneous Payment Orders If payment order was transmitted pursuant to
                  security procedure for detection of error AND payment order (i) erroneously instructed
                  payment to beneficiary not intended by seller, (ii) erroneously instructed payment in an
                  amount greater than amount, OR (iii) was erroneously transmitted duplicate of a payment
                  order previously sent by the sender, then:
                      1. If sender proves that the sender or person acting on behalf complied w/ security
                          procedure and that the error would have been detected if receiving bank had also
                          complied, sender not obliged to pay the order to the extent.
                      2. If the funds transfer is completed on the basis of an erroneous payment order, then
                          sender is not obliged to pay the order and the receiving bank is entitled to recover
                          from beneficiary any amount paid to the beneficiary to the extent allowed for
                          mistake and restitution
                      3. If the funds transfer is completed on the basis of a payment order, the sender is
                          not obliged to pay the order to the extent the amount received by the beneficiary
                          is greater than the amount intended by the sender. Then receiving bank entitled to
                          recover from beneficiary the excess amount received to the extent allowed by the
                          law of mistake and restitution.
READ comments
                      4. SEE HANDOUT FOR LAW OF MISTAKE AND RESTITUTION
                               a. R § 14 – creditor (Seller) of another (Buyer) who has received from a 3rd
                                  person (Bank) any benefit in discharge of the debt is under no duty to
                                  make restitution therefore, although the discharge was given by mistake of
                                  the transferor as to his duties, if the transferee make no misrepresentation
                                  and did not have notice of the transferor’s mistake
                                       i. Bank could subrogate (comment to 4A-204) AND R § 162
                               b. R § 20 – A person who has paid another an excessive amount of money
                                  b/c of an erroneous belief induced by a mistake of fact that the sum paid
                                  was necessary for the discharge of a duty is entitled to restitution of the
                                  excess
                               c. R § 22 – a person who has paid money to or for the account of another not
                                  intended by him, is entitled to restitution from the payee or from the
                                  beneficiary of the payment, unless the payee or beneficiary is protected as
                                  a contracting party or as a BFP
                               d. R § 60 – A person who has performed a duty owed to another (Seller),
                                  enforceable at law or in equity, is not entitled to restitution from the other
                                  for such performance, although the performance was induced by mistake
                               e. R § 162 – Where property of 1 (Bank) is used in discharging an obligation
                                  owed by another (Buyer), under circumstances that the other would be

                                                      106
                         unjustly enriched by the retention of the benefit thus conferred, the former
                         (bank) is entitled to be subrogated to the position of the obligee (Seller)

d. Authorized but erroneous transfers § 4A-205, 4A-207, 4A-303
      i. Authorized but erroneous transfers
            1. Wrong beneficiary
            2. Wrong amount
            3. Duplicate transfer
     ii. Typical Methods for Sending Funds Transfers
            1. FEDWIRE
            2. CHIPS (Clearing House Interbank Payment System)
            3. SWIFT (Society for Worldwide Interbank Financial Communications, SC)
                    a. Have own unique SWIFT number
                    b. For international transfers

     iii. § 4A-205 – Erroneous Payment Orders - If payment order was transmitted pursuant to
          security procedure for detection of error AND payment order (i) erroneously instructed
          payment to beneficiary not intended by seller, (ii) erroneously instructed payment in an
          amount greater than amount, OR (iii) was erroneously transmitted duplicate of a payment
          order previously sent by the sender, then:
             1. If sender proves that the sender or person acting on behalf complied w/ security
                  procedure and that the error would have been detected if receiving bank had also
                  complied, sender not obliged to pay the order to the extent.
             2. If the funds transfer is completed on the basis of an erroneous payment order, then
                  sender is not obliged to pay the order and the receiving bank is entitled to recover
                  from beneficiary any amount paid to the beneficiary to the extent allowed for
                  mistake and restitution
             3. If the funds transfer is completed on the basis of a payment order, the sender is
                  not obliged to pay the order to the extent the amount received by the beneficiary
                  is greater than the amount intended by the sender. Then receiving bank entitled to
                  recover from beneficiary the excess amount received to the extent allowed by the
                  law of mistake and restitution.
     iv. § 4A-207 – Misdiscription of Beneficiary
             1. (a) – if the PO received by BB has a name, bank account #, or other identification
                  that refers to a nonexistent or unidentifiable person/account, no person has rights
                  of beneficiary and acceptance cannot occur
             2. (b) If PO received by BB identified beneficiary both by name and identifying OR
                  bank # and the name an # refer to diff people:
                      a. (1) If BB does not know name and # refer to diff people, it may rely on the
                          # as the proper identification. BB does not have to determine whether
                          name and # refer to same person
                      b. (2) If BB pays the name OR knows that refer to diff people, no person has
                          rights as beneficiary EXCEPT the person paid by the BB if that person
                          was entitled to receive payment from originator. If no one has rights of
                          beneficiary, no acceptance can occur.
             3. (c) If PO in (b) is accepted, the originator’s PO described beneficiary
                  inconsistently by name and #, AND the BB pays the person by #:
                      a. (1) If originator is bank, obliged to pay order
                      b. (2) If not bank and can prove that person of # was not entitled to receive
                          payment from originator, originator NOT obliged to pay UNLESS OB
                          proves that O, before acceptance of PO, had notice that payment of PO
                                            107
                                        might be made by BB on basis of # even if identifies a person diff from
                                        named beneficiary.
                                             i. Proof of notice by admissible evid and bank satisfied burden is
                                                proves that originator, before PO accepted, signed a writing stating
                                                the info about the way the bank pays the PO.
                           4. (d) If PO paid by BB rightfully to person identified by # and person not entitled to
                               receive payment from originator, amount paid can be recovered from that person
                               to extent that mistake and restitution law allows:
                                   a. (1) If O is obliged to pay the PO in (c), the originator has the right to
                                        recover
                                   b. (2) If O is not a bank and is not obliged to pay PO, OB right to recover.
                           5. If Beneficiary not owed the money – restitution from her
                           6. If Beneficiary owed the money – cannot get back from her (can keep it)
                           7. § 4A-305 and sometimes § 4A-205 (security procedure that would detect the
                               error, i.e. PIN number for each beneficiary on a list and bank did not follow it)
Bradford Trust Co. of Boston v. Texas American Bank-Houston
Rocheford → Bradford Brokerage Firm → Thief orders 1,000,000 in gold coins and arranged to pay for by
funds transfer to account of Colonial at Texas American Bank (#1234). Forged power of attorney letter of
Rocheford and told Brokerage firm to sell 1,000,000 of securities and → State Street Bank to transfer to
Rocheford’s account at Texas American Bank (#1234). Colonial asked bank to call when get the money. Thief
gets 1,000,000 in untraceable gold. Brokerage sued Texas after returned money to Rocheford.
No law on
Trial Court apportioned fault b/t.
AP – said like neg instrument. Neg Instrument usually puts blame on the wrongdoer → Bradford
NOW in § 4A-207
If today – State Street Bank - (c)(2) – no notice given

                         8. If Bank accidentally puts money in wrong account b/c of wrong number – Bank
                            can rely on number
                   v. § 4A-303 – Erroneous Execution of Payment Order
                         1. Hypo – Receiving bank executes the sender’s payment order by sending
                            erroneous payment order
                                a. Generally, sender liable for its own errors
                         2. O instructs bank, OB, to send $100,000 to account of B in his bank BB. OB
                            executes O’s order by instructing correspondent bank (intermediary bank (IB) to
                            pay BB as indicated in following examples.

                               O → OB → IB → BB → B

                                  a. Example – OB executed payment order by instructing IB to pay BB
                                     $100,000 for the account of B. IB mistakenly instructed BB to pay
                                     $100,000 for account of X.
                                         i. Did IB execute the payment order of OB? § 4A-301(a)
                                                1. Yes – executed but erroneous
                                        ii. Is OB entitled to payment from O? § 4A-402(c)
                                                1. Yes
                                       iii. Is IB entitled to payment from OB? § 4A-402(c)
                                                1. Yes
                                       iv. Is BB entitled to payment from IB? § 4A-402(b)
                                                1. Yes
                                        v. Is IB entitled to recover from X? § 4A-303(c)
                                                      108
                                                    1. Law of mistake and restitution governs
                                                    2. Not if O owed money to X (Restatement § 60)
                                                            a. Then Bank subrogated to rights of X against O
                                                    3. Is if paid by mistake and not protected as BFP or
                                                        contracting party (R § 22)
                                  b.   Example – OB mistakenly instructed IB to pay BB $200,000 for B’s
                                       account. IB executed OB’s payment order by sending the same payment
                                       order to BB. BB deposited funds in B’s account and B withdrew the
                                       money. What are OB’s rights against O and B under § 4A-303(a)?
                                             i. OB has no rights against O (OB’s mistake)
                                            ii. Rights against B (same)
                                  c.   What if late – need express agreement for PO execution to recover
                                       expenses in transaction § 4A-305(d)
                                  d.   Also need express written agreement to recover consequential damages
                                             i. § 4A-305(c)
                                            ii. So if lose the K b/c of late payment, no recover unless agreed in
                                                writing
                                           iii. UNLESS notifies the bank of the extenuating circumstances (right
                                                cannot waive)
                                  e.   If cancel, LOOK at § 4A-211 (if paid and person entitled → then mistake
                                       and restitution and beneficiary can keep; if paid and person not entitled,
                                       then can get back)

Banque Worms v. BankAmerica International
Bank SP messed up and did payment order twice (1 correct and 1 was ordered not to happen (BW’s account at
BAI)). BW is creditor of originator. SP gave BAI money on accident. BAI agreed to refund if SP would
furnish a US Council on International Banking (CIB) indemnity. SP did. BW refused to allow BAI to debit
account to reflect the return.
Court said the “discharge for value” rule should apply and entitled BW to keep funds mistakenly sent w/o
necessity of demonstrating detrimental reliance

Detrimental reliance necessary to prove mistake of fact doctrine
       → Money paid under mistake of back from the bank can be recovered back, no matter how negligent in
       making the mistake, UNLESS payment caused such a change in position of other party that unjust to
       require to refund
Restatement – discharge for value rule
       → A creditor of another or one having a lien on another’s property who has received from a 3rd person
       any benefit in discharge of the debt or lien, is under no duty to make restitution therefore, although the
       discharge was given by mistake of the transfer as to his interests or duties, if the transferee made no
       misrepresentation and did not have notice of the transferor’s mistake.
Low cost is important w/ wire transfers
The Restatement rule is consistent w/ policy of finality of business transactions
       ● When beneficiary received money to which it is entitled and has no knowledge that the money was
erroneously wired, the beneficiary should not have to wonder whether it may retain the funds; rather the
beneficiary should be able to consider the transfer of funds as a final and complete transaction, not subject to
revocation

                  vi. WRONG AMOUNT/DUPLICATE AMOUNT
                        1. § 4A-303(a) A receiving bank that (i) executes the payment order of the sender by
                           issuing payment IN EXCESS or (ii) issues payment and then DUPLICATE

                                                       109
                ORDER, is entitled to payment of the amount of 402(c) – law governing mistake
                and restitution
                    a. Remedy from Beneficiary (if owed a debt, he’s not obligated to pay it
                        back)
                    b. Cannot go against the banks if it is your own mistake
                    c. If it is the bank’s mistake, then the bank must pay her back (§ 4A-303)
                             i. If Receiving bank, cannot get back from Beneficiary bank if
                                 properly executed
                            ii. If Beneficiary bank did not properly execute or made the mistake,
                                 then
                                     1. If beneficiary not owed it, then can get back from him
                                     2. If beneficiary owed it, subrogated to beneficiary’s rights
                                        and can go against originator
                    d. If bank does not follow its security procedure, then bank is liable (§ 4A-
                        205 cannot trump § 4A-303)
             2. § 4A-303(b) A receiving bank that executes payment order of sender by issuing
                payment order in amount LESS than order is entitled to payment of the amount of
                the order under 402(c) IF (i) that subsection is otherwise satisfied AND (ii) the
                bank corrects its mistake by issuing additional payment order for benefit of
                beneficiary. If error NOT corrected, issuer entitled to receive or retain payment
                from sender ONLY to amount of erroneous order
                    a. This does not apply when payment order is less b/c bank took out amount
                        for charge of sending the PO
             3. § 4A-303(c) If receiving bank executes payment to wrong beneficiary and
                completed, sender not obligated to pay and issuer is entitled to recover from
                wrong beneficiary to extent allowed by law of mistake and restitution
                    a. If beneficiary not owed it, then can get back from him
                    b. If beneficiary owed it, subrogated to beneficiary’s rights and can go
                        against originator
             4. § 4A-406 – Discharge of Underlying Obligation
                    a. Underlying obligation is discharged when payment accepted AND amount
                        is equal to order accepted and not more than originator’s order
     vii. DUPLICATE
             1. IF sender’s mistake – tough if beneficiary is owed the bank
             2. Same deal
    viii. CANCELLATION
             1. § 4-211 can when in time, but subject to same law of mistake and restitution
      ix. § 4A-304 – Duty to report
             1. MUST notify by R time not to exceed 90 days
             2. If does – put money back and gets interest
             3. If does not – put money back (loses interest)
       x. § 4A-505 – Failure to notify (Preclusion of Objection)
             1. If she waits a year, bank gets to keep money and interest
             2. Similar to 4-406 (Bank Statement Rule)
e. Automatic Clearing House (ACH) Transactions
        i. CONSUMER TRANSFERS
             1. Slower and lower costs – ACH
             2. Can be credit or debit
       ii. COMMERCIAL PAYMENTS
             1. Business moving to electronic payment and usually use ACH
             2. ACH – value dated and can plan exact date of payment
                                          110
             3. Differences b/t ACH and FEDWIRE/CHIPS
                    a. FED – big dollar and fewer
             4. Now transmitting payment documents electronically (invoices, etc)
                    a. Financial EDI
                    b. More common for docs to go through EDI and funds through ACH
                    c. Other process – both through ACH
f. Emerging Trends in Funds Transfers
       i. STORED VALUE CARDS
             1. Plastic cards (credit or debit) merely bear info, encoded in machine form on a
                magnetic strip on the back.
                    a. Stored value card – “pre-paid” or “value added” uses computer chip or
                        magnetic strip to hold info
                    b. “Smart cards” used computer chips which reliably retain info and allow
                        encryption to avoid duplication or unauthorized use
                             i. Future potential use (ins card) unlimited
             2. Serve a substitutes for cash
                    a. Does not transfer funds to merchant but stores the right to be paid
             3. Two types
                    a. “Online” System
                             i. Process use of the card by communication from the facility giving
                                authorization for a transaction
                            ii. Record of balance of funds available is maintained only at a central
                                data facility
                    b. “Offline” System
                             i. No contact w/ central data facility
                            ii. If primary record of balance of funds is maintained at a central data
                                facility → off line accountable system
                           iii. If primary record is maintained on the card itself → off line
                                unaccountable system
                                    1. Card is worthless (Disposable after used up)
                                    2. More sophisticated cards may be reloadable
      ii. INTERNET PAYMENTS
             1. Most powerful global medium for sale of goods and services and information
             2. Limitations
                    a. Cannot deliver goods
                    b. Cannot pay for the goods (usually w/ credit card)
             3. Encryption of Credit Card Numbers
                    a. Unlikely stolen while traveling through Internet
                    b. Vulnerable when stored unencrypted in merchant’s server (same
                        vulnerability when phone or personal use of card)
     iii. HOME BANKING
             1. Can call bank about account status, apply for credit cards, transfer money from
                one account to another etc
                    a. Cannot withdraw or deposit money
             2. W/ keypad of telephone
             3. Working on making available by computer




                                           111
FINAL
20 Multiple Choice – 60 Minutes – 3 Minutes Apiece
10 Short Essay – 120 Minutes – 12 Minutes Apiece
        - These are guesses
Can use your book
        - Can tab it OR
        - Go to Table of Contents and writing down page numbers
Can use these Handouts
        1) Mistake and Restitution
        2) Funds Availability Schedule
        3) Gambling Debt Statute
Just because the section number is not on the syllabus does not mean it is not fair game
Examples
        1) 4A-304 – 90 day
        2) 4A-502
        3) 4A-505
NO questions on 3-312
MUST WRITE THE TEST (no Blue Books required)
        - If change mind after circled, write “not marked” on it

SAMPLE TEST – 20 Minutes
1. B, C – 3-305
        - Fraud in Inducement → not HDC (knew signing note)
        - Fraud in Execution (in factum; in essence) → HDC (did not know signing a note)
        - AR law nullifies if gambling debt
2. E – 3-420 (comment 1)
        - If stolen from Payee’s mailbox, can sue all (drawer for E after prove loss)
3. A, C - 4-208
        - Not ALL signatures (only drawer’s signatures) WATCH FOR “ALL”
4. (3-406?, 3-405?) 3-307
        3-405; 3-406 – Does not apply; not fraudulent indorsement (theft – go to 3-307); read comment to 3-405
        - Smith v. Olympic Bank
        - Father put check to son (trust) in his own account
        Fiduciary – includes corp official
        Representative – includes corp
        Comment 3 - explains

● CAN ALSO CITE TO CASES                     ● READ COMMENTS CAREFULLY




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