Negotiation
·
UCC 3-104
o
A negotiable
instrument is an:
§ Unconditional
·
3-106
o
Unconditional
means no express condition to payment, that the instrument is not subject to
another record, that no rights or obligations to payment are contained in
another record (but reference to another record with respect to rights of
collateral, prepayment, or acceleration is allowed).
·
Conditionality
is only in regard to restrictions on the recipient or payee of the instrument,
it does not refer to restrictions on the obligated party
·
If, when,
unless, until, as long as, subject to, upon, etc.
§ Promise or order
·
3-103
o
Must be in a
written, tangible medium, not electronic, and signed
·
1-201
o
Signed means
any symbol with intent to adopt the writing
§ For a fixed amount
·
3-107, foreign
money OK
·
3-112
o
If it says
“with interest” but is incalculable or unascertainable, then the judgment rate
at the place of payment applies.
§ Payable to bearer or to the order of a named person
·
3-109, basic
rules
·
3-110,
instrument payable to the individual intended by the signer
§ Payable on demand or at a defined time with
·
3-108, basic
rules
§ No other undertaking except for the immediate payment of money
·
3-104(a)(3)
o
Undertaking
does not include the responsibility or power to give, maintain, or protect
collateral to secure payment, etc.
·
Triffin v. Dillabough
·
Issuance of
instrument
o
The first
delivery of an instrument to a holder
o
1-201, Delivery
is a voluntary transfer of possession
·
Transfer of
instrument
o
3-203
§ When an instrument is delivered by a non-issuer transferor for the
purpose of giving the transferee the right to enforce it.
§ The transferee has a legal right to compel the transferor to
indorse the instrument to him, making him into a holder.
·
Negotiation of
instrument
o
3-201
§ Voluntary or involuntary transfer of possession of an instrument by
a non-issuer to a holder
·
If payable to a
specific person, indorsement is required
·
If payable to
bearer, no indorsement needed; possession alone is sufficient
|
Negotiation
|
Transfer
|
|
Transfer to a person who thereby becomes the holder (i.e., the
instrument runs to him, usually by indorsement)
|
Non-issuance delivery for the purpose of giving the recipient the
right to enforce the instrument; may or may not be indorsed, but the
transferee may compel indorsement by the transferor.
|
|
All negotiations are transfers,
|
not all transfers are negotations
|
|
|
Example: X issues a check to Y, payable to Y. Y simply hands the
check to Z and says “this is for you.” The unindorsed check is payable to Y
only, Z is not a holder because the payee Y did not order the drawee to pay
to Z or to bearer. Z is only a transferee in possession; but Z may compel Y
to indorse the check to him.
|
·
Indorsement
o
3-204
§ Any signature – other than a maker’s, drawer’s, or acceptor’s –
that is made for the purpose of negotiation, restricting payment, or incurring
indorser’s liability on the instrument.
§ Any writing on the instrument is deemed an indorsement regardless
of the signer’s intent unless it says “without recourse”
o
Special
indorsement
§ When a signer of the instrument says pay to the order of a specific
person
o
Blank
indorsement
§ When a signer of the instrument says pay to bearer
o
The indorser
becomes a guarantor of the instrument
·
Presentment
o
3-501
§ A demand for payment made by or on behalf of a person entitled to
enforce an instrument
Holder in Due Course Status
·
A HDC is
·
There is a
presumption against HDC status; the burden of proof rests on the person
asserting HDC status
·
3-302
o
A HDC is a
§ Holder
·
But
see 3-203(b), Shelter Rule
o
A
transferee retains the transferor’s HDC status, if any
§ Who took for value
§ In good faith
§ Without notice of
·
Dishonor, an
uncured default, or that the instrument is overdue
·
Forgery or
alteration
·
Any claim to
the instrument
·
Any defense or
claim in recoupment
·
Value and
consideration
o
A holder who
took for partially performed consideration only has HDC rights up to the value
of the partially performed consideration.
o
3-303
§ Only completed, existent – not contingent or future promises –
consideration qualifies
·
Good faith
o
Subjective
§ Honesty in fact
o
Objective
§ Reasonable standards of purchasers of commercial paper.
·
In re
Dixon-Ford
o
The debtor was fraudulently
induced by a 3P to obtain a mortgage.
o
3P sold the mortgage
to US Bank
o
US Bank
foreclosed when debtor stopped paying
o
Held: US Bank
purchased the mortgage in good faith and is a HDC, so debtor has no defenses
against the foreclosure on the note. US Bank was honest in fact when purchasing
the mortgage because nothing on the face of the document gave notice of the
underlying fraud. US Bank’s purchase of the mortgage without investigating past
the face of the document was within reasonable industry standards because it is
not feasible for banks to investigate the underlying facts of each mortgage
they buy.
·
Any Kind Checks
v. Talcott
o
∆ was scammed
into issuing 2 checks to the scammer
o
∆ sent the
first one for $10,000, but the scammer called and told ∆ that he only needed
$5,700.
o
∆ called to
stop payment on the $10,000 check and issued a $5,700 check.
o
Meanwhile, the
scammer took the $10,000 check to Any Kind, who cashed it based on the
scammer’s apparent status as a broker and the envelope which showed that
∆-drawer mailed it to him.
o
Then, the
scammer took the $5,700 check to Any Kind, who called ∆ and got confirmation
that the check was good.
o
∆ found out
about the scam and cancelled the other check too.
o
Both checks
were dishonored and Any Kind sued ∆ asserting HDC status, that the fraudulent
scam was not a defense.
o
Held: Any Kind
is not a HDC as to the $10,000 check. The check was cashed in subjective good
faith, but not with objective reasonableness for the check cashing industry,
which usually serves low income people who need small checks cashed – not
brokers with 5 figure checks, who would probably have a small business banking
account.
|
Dixon-Ford
|
Any Kind
Checks
|
|
Good faith does not require the holder to investigate beyond the
face of the instrument in order to obtain HDC status
|
Good faith requires the holder to investigate beyond the face of
the instrument in order to obtain HDC status
|
·
Problem 26
·
Notice
o Winter v. Passarelli
§ The face amount of the note was $16,250, which was both secured and
sold to the buyer for only $11,000. This, coupled with the fact that the seller
clearly gave the loan to the maker for an amount lower than $11,000, is clear
notice of usury. The buyer of the note is not a HDC.
o
Party to the
Transaction Rule
§ When the buyer and seller of the instrument were so closely related
that the seller’s notice of some kind of a defense to the instrument is imputed
to the buyer.
§ Jones v. Bancredit
·
Albee Homes was
the parent corp. of wholly owned subsidiaries Dell Homes and π, same directors
and officers.
·
∆ was
fraudulently induced by Dell to execute a mortgage note for a new home.
·
Dell sold the
note to π.
·
The home was
not built and ∆ stopped paying on the note
·
π sued and
asserted HDC status, that ∆ could not assert contractual defenses.
·
Held: Notice of
the fraud is imputed to π because π and Dell were operating as a single unit. π
wrote the financing contract, carried out the credit check on ∆, and had the
same officers and directors.
§ Sullivan v. United Dealers
·
∆ issued a note
to a contractor, who immediately negotiated it to π finance company
o
Contractor and
π did a lot of business together.
·
∆ wrote to the
π that all is well with the construction
·
A bank
purchases the note from π with right of recourse
o
Bank is allowed
to compel π to repurchase the note
·
∆ defaults on
the note, bank exercises its right of recourse compelling π to buy back the
note, and π sues ∆.
·
∆ asserts π is
not a HDC and pleads contractual defenses, that the contractor did not
adequately perform.
·
Held: There was
nothing at the time of π’s initial purchase of the note to put π on notice of any
kind of wrongdoing in the underlying transaction, nothing showing bad faith.
That the parties regularly did business together was not sufficient evidence to
impute notice of the contractor’s poor workmanship to π.
·
Shelter rule
o
The transferee
of an instrument, whether or not a holder, receives all rights of the
transferor to enforce the instrument UNLESS the transferee engaged in fraud or
illegality.
o
After one HDC
holds an instrument, all subsequent transferees are HDCs EVEN IF THEY ARE AWARE
OF PROBLEMS WITH THE INSTRUMENT.
§ The only exception is if the transferee engaged in fraud or
illegality in the issuance.
·
But this really
only applies when a scammer gets someone to issue an instrument, then tries to
wash it by selling and buying it back.
o
Triffin v.
Somerset Valley Bank
·
Defenses
Against HDC’s Enforcement of the Instrument
o
Engaging in
fraud or illegality affecting the instrument negates HDC status (Shelter Rule
exception)
o
3-305(a)(1)
§ Infancy of the obligor
§ Illegality, incapacity, or duress that makes the underlying
obligation VOID (not just voidable)
§ Bankruptcy
§ Fraud that induced the obligor to sign the instrument with neither
knowledge nor a reasonable opportunity to learn of its character or essential
terms.
o FDIC v. Culver
§ ∆ told his business partner he needed $30,000 ASAP.
§ Days later, $30,000 is in his account.
§ A bank representative approaches ∆ and tells him to sign a blank
promissory note.
·
∆ did not know
what was going on, thought that his business partner was obligated to take care
of the $30,000 need, and that he was just signing a receipt
§ Later, the note is filled out showing a $50,000 face amount with
interest.
§ The bank fails and π-FDIC takes over, assuming its assets and
liabilities
§ π sues ∆ asserting HDC status, that it purchased the note by virtue
of taking on the liabilities of the failed bank without notice of the
underlying fraud.
§ ∆ asserts fraud in the factum defense against HDC enforcement, that
because the note was blank when he signed it, he had no knowledge or reasonable
opportunity to learn of the note’s terms.
§ Held: Both π and ∆ are innocent, but π is more innocent. ∆ should
not have signed the instrument without absolute certainty, should have
consulted an atty. 3-115 says that an incomplete instrument is still
enforceable against the obligor who signs it according to its terms when filled
in later, unless done without the authority of the signer, in which case 3-407
applies. 3-407(c) says that a HDC may enforce an unauthorized completion of an
incomplete instrument.
o Sea Air Support v. Herman
§ ∆ issued a check for gambling chips at a casino.
§ The check was dishonored when the casino presented it and the check
sold to π without notice of any problems.
§ Held: Even though π was a HDC, ∆ is not liable on the instrument
because under the common law, all instruments to repay money lent or advanced
for gambling are VOID.
o Kedzie v. Hodge
§ ∆ issued a check to Fentress for some plumbing work, not knowing
that Fentress was unlicensed in violation of an ordinance.
§ Fentress failed to perform and ∆ stopped payment on the check
§ Fentress cashed the check at π’s check cashing store
§ The stopped check was dishonored on presentment and π asserted HDC
status in suing ∆ on the instrument.
§ ∆ asserted the illegality defense to HDC status, that the
underlying transaction for an unlicensed plumber to do plumbing work was
illegal and void.
§ Held: Unlike the Statute of Anne, which explicitly says that
gambling contracts are void, there is no law that affirmatively says that
contracts for unlicensed plumbing services are void. The ordinance says only
that plumbers shall be licensed.
Obligations to Pay and Limits on Those Obligations
The Underlying Obligation
·
Problem 44
·
Problem 46
·
Fifth Third v.
Jones
o
∆ executed a
mortgage, which was assigned to π.
o
At trial, it
was established by a preponderance of the evidence that a deceased aunt sent a
cashier’s, certified, or teller’s check to the π for a full payoff of ∆’s loan
and that the π lost the check.
o
π foreclosed on
the note and ∆ asserted discharge of the obligation by way of the lost check.
o
Held: 3-310(a)
states that receipt of a certified, cashier’s, or teller’s check is sufficient
to discharge an obligation in the same way as cash unless otherwise agreed by
the parties. 3-312(b) allows the claimant of a lost, stolen, or destroyed
certified, cashier’s, or teller’s check to assert a claim and request payment
from the obligated bank; but the claimant must communicate a declaration of
loss under penalty of perjury timely notifying the obligated bank before the
check is paid and describing the instrument with reasonable particularity.
Here, π has no claim against ∆ or the obligated bank because ∆’s obligation was
discharged upon π’s receipt of the check and π did not provide any declaration
of loss to the obligated bank.
·
Ward v. Federal
Kemper Insurance
o
π had car insurance through ∆, he overpaid on
a premium because his policy changed and ∆ sent him a check for $12 as a
refund, then discovered the refund should have been only $4 and billed him the
difference, which π never paid. ∆ mailed π a notice of cancellation because of
the nonpayment, the next month π got in a collision, and ∆ refused to cover.
o
π sought a
declaratory judgment that ∆ was obligated to provide coverage.
o
Held: The
delivery of a regular check only suspends the underlying obligation, it is not
discharged until the check is paid. The $12 check containing an overpayment was
never negotiated by π and the funds payable in accordance therewith were always
in ∆’s control up until the moment that the drawee accepts it, 3-408.
Liability on the Instrument
·
Problem 47
·
Problem 48
Maker Liability
·
3-412
o
The
issuer of an instrument is ultimately and primarily liable
Indorser Liability
·
3-204(a)
o
Anyone who
signs an instrument is presumed to be assuming indorser liability
·
3-415
o
The indorser is
secondarily liable after dishonor of the instrument upon presentment
and, in some cases, notice of dishonor.
o
The issuer of a
dishonored instrument is liable to the indorser therefor.
·
Example
o
A issues a
check to B; B indorses the check to C; C indorses the check to D; D wants to
negotiate the check to E, but E isn’t sure if the check is good and thinks E is
not reliable to repay him if the check is no good, so E makes D, F, and G
indorse the check, E indorses the check to H; H deposits the check at the depositary
bank, which presents the check to the drawee bank, which dishonors the check
for NSF.
o
Depositary bank
will debit H’s account or sue him for funds; H will sue E; E will sue D, F,
and/or G, who are jointly and severally liable but may sue each other for
contribution; F and/or G will sue D; D will sue C; C will sue B; B will sue A.
·
Problem 49
o
3-415(a)
§ Indorsers are jointly and severally liable for a dishonored
instrument; but, indorsers can sue each other for contribution.
Surety Liability
Drawer Liability
·
3-414
o The drawer is secondarily liable on a draft; the drawee is
primarily liable
·
Technicalities
o Presentment
§ Demand for payment to the maker or drawee
o Dishonor
§ Refusal of maker or drawee to pay
o Notice of Dishonor
§ A non-bank acceptor of a dishonored draft is not required to give
notice of dishonor; but a non-bank acceptor of a dishonored note has 30 days to
give notice of dishonor.
§ The bank must give notice of dishonor by midnight of the next
banking day in order for drawer and/or indorser liability to be triggered.
·
Notice must be
given by midnight of the next banking day
·
A non-bank
acceptor of a draft is not required to give notice.
o Protest
§ Obsolete, but codified in 3-505
·
Messing v. BoA
o
π received a
check payable to him drawn on an account at ∆’s branch.
o
π took the
check to ∆’s bank and presented it, ∆ confirmed availability of the funds,
instructed π to indorse the check, and demanded that π provide a thumbprint
signature on the check in accordance with its non-account holder policy.
o
π refused to
provide a thumbprint and sued to enjoin the bank from the practice; he also
asked the court if the check was accepted, dishonored, or converted.
o
Held: ∆ did not
dishonor the check because the check was never “presented” in accord with the
UCC. 3-501 provides that the bank may request reasonable identification of the
presenter, along with any other practice in agreement between the bank and the
account holder. Under 3-502(b)(2) provides that an unaccepted draft is
dishonored if presentment is duly made. π did not duly present the check when
he refused to give his thumbprint, so the check was not dishonored. Because the
check was neither accepted or dishonored, π cannot sue the drawer on the
instrument.
·
Exceptions
to the Technicalities
o 3-504(a), Excused Presentment
§ Impossibility; maker or acceptor pre-emptively refuses to pay, is
dead, or bankrupt; presentment is waived expressly or by the terms of the
instrument; no reason to expect payment; stopped payment; etc.
o 3-504(b)(c), Excused Notice of Dishonor
§ Waiver by the terms or by subsequent agreement, waiver of
presentment carries over, delay caused by force majeure
·
Makel
Textiles v. Dolly Originals
o π loaned ∆ $40,000, only $30,000 was repaid and ∆ made a note for
the balance, which was never paid.
o ∆ executed 2 more notes for $5,000 each, signed by the president
and a 3P, and simultaneously issued to π 5 checks for $2,000 each, which were
returned NSF.
o Later, ∆ issued 2 more checks for $2,000 each, only 1 was paid,
bringing the balance on ∆’s underlying obligation to $8,000.
o π sued the president and 3P as indorsers of the two $5,000 notes.
o President and 3P countered that the notes were never presented to
the maker and no notice of dishonor was given to them, discharging their
indorser liability.
o Held: Presentment was excused and notice of dishonor as to the
president was excused. π received several checks from ∆ signed by the
president, all but one of which were returned NSF. π had no reason to expect
payment from ∆ on the notes (3-504(a)(iv)). Notice of dishonor to the president
as indorser of the notes is impliedly excused under the UCC because the
president knew about the NSF of ∆’s bank account; he did not need notice of
dishonor because he knew that the notes would be dishonored and, thus, he
incurs indorser liability. As to the 3P, there is no evidence that he did not
need notice of dishonor, so his indorser liability is discharged.
Drawee Liability
·
Norton v. Knapp
o
π and ∆
contracted for a mill
o
π sent the mill
to ∆, payment by sight draft
§ π-drawer-seller issues a draft to his bank ordering ∆-drawee-buyer
to pay the draft on sight; seller’s bank indorses the draft to a collecting
bank in ∆-drawee-buyer’s jurisdiction, who presents the draft to ∆-drawee-buyer.
If ∆-drawee-buyer pays, the collecting bank gives ∆-drawee-buyer title to the
goods.
o
When ∆ was
presented the draft, he signed it “kiss my foot. Miles Knapp” on the back.
o
Held:
Acceptance of a draft requires the drawee’s signature on the draft, 3-409(a).
Acceptance triggers the acceptor’s liability to pay, 3-413.
·
Gaylen Petroleum
v. Hixson
o
∆ had an
unmatured loan with the drawee bank
o
∆ issued checks
to π for goods and services.
o
The drawee bank
dishonored the checks upon presentment for NSF in ∆’s account.
o
∆ made deposits
into his account
o
π presented the
dishonored checks again to the drawee bank
o
There were
sufficient funds in the account to pay the checks, but drawee bank applied the
funds toward the unmatured note, leaving NSF to cover the checks issued to π.
o
Held: The
banking agreement between ∆ and drawee provided for a security interest in and
right of setoff against all funds in ∆’s account, whether or not the obligation
is due. π has no rights against the drawee for anything, the drawee is just an
intermediary acting on ∆’s behalf. The issuance of the check is merely a
suspension of the underlying obligation, if it is dishonored, drawer is still
liable.
Bank Deposits and Collections
·
4-103(a)
o
While good
faith and ordinary care are immutable rules, the parties can define the terms
as long as the definition is not manifestly unreasonable.
o
The agreement
may not provide for liquidated damages for negligence and bad faith.
·
Cincinnati
Insurance v. Wachovia
o
∆ offers to
customers the Positive Pay program, which allows customers to ensure that the
number, payee, and amount of an issued check corresponds with the presented
check.
o
π chose not to
take advantage of the feature.
o
π's check
issued to a service provider was stolen, washed, presented for payment by an
unintended recipient, and paid by π’s bank, which would not happened if π had
implemented the feature.
o
π argues that a
bank may only pay from a customer’s account items that are properly payable
§ 4-401(a), “an item is properly payable if it is authorized by the
customer and is in accordance with any agreement between the customer and bank.”
§ That the check was not authorized by him, not properly payable,
and, thus, the bank’s liability
o
Held: Article 4
contains merely default rules. 4-103(a) provides that the bank and customer may
create their own agreements varying the provisions of the UCC. Here, the
banking agreement signed by π stated that π waives all claims against ∆ for paying
fraudulent items if π failed to implement any fraud-preventative feature
offered by ∆ that would have prevented the fraud.
·
Problem 72
·
Problem 76
·
4-402
o
The bank is
liable to its customer for direct and consequential damages caused by wrongfully
dishonoring a properly payable item.
·
Twin City Bank
v. Isaacs
o
π, previously
convicted of burglary, had an account and impeccable credit rating with ∆ bank.
o
Two checks were
stolen from his checkbook, forged, and paid by ∆ (not authorized; thus, not
properly payable, so bank was liable).
o
After the
guilty party was found and arrested, ∆ maintained the freeze on π’s account for
four years – even after the police stated there was nothing to connect π to the
forger – because the bank’s attorneys thought that π, due to his burglary
conviction, was involved.
o
Held: The
punitive damages awarded for embarrassment, mental anguish, loss of credit, denial
of a home loan to buy a new house, etc. were permissible.
·
Problem 77
·
Walter v.
National City Bank of Cleveland
o
∆ made a loan
to its customer who was insolvent at the time, which ∆ knew.
o
π obtained a
garnishment order on the insolvent customer’s bank account, which was served on
∆
o
∆ set off the
amount due on the unmatured note and sent the remainder to π.
o
Held: The basic
rule is that banks have the right of setoff against a customer’s account for
matured credit extended to the customer, but no such right for unmatured
obligations. However, the exception to the rule against setoff for unmatured
obligations is that, when the customer is insolvent, the bank is a prioritized
creditor as to the funds in the insolvent customer’s account. But, the
exception to the exception is that, when the bank already knew that the
customer was insolvent when it extended credit to him, the bank may not
exercise a prioritized right of setoff against funds in the customer’s account
to the detriment of other creditors.
·
Stopping payment
o
No right to
stop payment on cashier’s, teller’s, and certified checks.
o
4-403
§ The customer must describe the check with reasonable particularity
and within a reasonable time to allow the bank to act.
§ An oral order to stop payment lapses after 14 days, whereupon the
bank will incur no liability for paying
§ A written order to stop payment lapses after 6 months, whereupon
the bank will incur no liability for paying
·
But see 4-404
o
Bank does not
have to pay a check older than 6 months
o Parr v. Security National Bank
§ Customer described the check perfectly except for a $0.50 error,
bank paid the check, customer sued the bank for not stopping payment, bank said
customer’s description was not reasonably particular, that the computer system
requires exactness.
§ Held: A $0.50 error is reasonable and bank should have stopped
payment.
o
4-407
§ If the bank erroneously pays a stopped item and must recredit the
customer’s account, the bank is subrogated to the rights of any party harmed by
the customer’s order to stop payment
o Canty v. Vermont National Bank
§ π gave cancelled checks to the IRS to prove payment of tax debt.
§ The IRS presented the cancelled checks to ∆, who paid
§ π sued for recredit, that the checks were not properly payable
§ ∆ refused to recredit, that its rights were subrogated to the IRS
§ Held: π must prove actual loss from the payment of the cancelled
checks; ∆ is not required to immediately recredit π’s account before asserting
subrogated rights. The burden here is on π.
·
Bank Statement
Rule
o
If a bank gives
bank statements, they must reasonably describe the items (item number | amount
| date paid), and copies must be retained for seven years.
o
4-406(c), (d),
and (e)
§ If the customer fails to examine bank statements and inform the
bank of unauthorized payments with reasonable promptness, then the customer may
not assert that the bank paid an item that was not properly payable due to an
unauthorized signature or alteration IF the bank can also prove a loss (e.g.,
if the bank can prove that the fraudster has fled and is totally unavailable
and will never be held accountable for the fraud).
§ If the customer fails to examine bank statements and inform the
bank of unauthorized payments within 30 days, then the customer may not assert
that the bank paid an item that was not properly payable due to an unauthorized
signature or alteration.
§ BUT IF the customer prevails and is allowed to assert claims of an
unauthorized item, any allocation of loss is subject to comparative negligence
between the parties.
§ Customer is totally precluded from asserting an unauthorized
signature or alteration after one year
Bank Collection
·
Banking day
o
UCC
§
4-104(a)(3)
·
Any day where the bank is
open to the public to carry out substantially all of its functions
§
4-108
·
Bank may establish a cutoff
hour later than 2 p.m. after which items received are deemed to have been
received on the following banking day.
·
Business day
o
EFAA
§
Any day except Saturdays,
Sundays, and Holidays.
·
Funds
availability
|
UCC
|
|||
|
Cash
|
Checks
|
||
|
Presented and Accepted OTC
|
“On Us” Items[1]
|
Transit Items
|
|
|
Next banking day, 4-215(f)
|
Close of business on banking day of presentment, 3-502(b)(2)
|
Second banking day following receipt, 4-215(e)(2); but see
EFAA rule (business day after business day of deposit)
|
Within a reasonable time, 4-215(e)(1); but see 4-202 (bank’s duty of
reasonable care, midnight deadline[2] as safe harbor)
|
|
EFAA, 12 U.S.C. 4001, et seq
|
||
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Cash and/or Noncash Use
|
Day 1
|
$200
|
|
Noncash Use only
|
Day 2
|
Remainder up to $5,000
|
|
Cash Use only
|
Day 2
|
$300
|
|
Day 3
|
Remainder up to $5,000
|
|
o
UCC
§
Cash
deposit
·
4-215(f)
o
Customer
must have access to the funds on the next banking day
§
Checks
·
OTC
presentment
o
3-502(b)(2)
§
An
accepted check must be cashed or dishonored by close of business on the banking
day on which it is presented
·
“On
us” items
o
When
the drawer and the payee have accounts at the same drawee / depositary bank.
§
4-215(e)(2)
·
Customer
must have access to the funds on the second banking day following receipt of
the item.
§
EFAA
·
Customer
must have access to USD funds on the business day after the business day of
deposit
·
Transit
items
o
Interbank
collection process
§
Customer
deposits check
§
Depositary
bank makes a provisionary settlement
·
A
book entry debiting the payor bank’s account and crediting the customer’s
account;
·
The
depositary bank may or may not give the customer access to the funds, but if
the check is later dishonored by the payor bank, the provisionary settlement is
charged back and the customer must repay the funds.
§
Are depositary
bank and payor bank in the same city?
·
If
so, the check goes to a clearinghouse
·
If
not, depositary bank sends the check to an intermediary bank, usually a Federal
Reserve Bank.
§
The
check is presented to payor bank
§
If
paid, final settlement occurs and customer must have access to the funds
o
4-215(e)(1)
§
Within
a reasonable time
o
4-202
§
Banks
must exercise reasonable care and promptness.
§
Acting
before the midnight deadline is a safe harbor
·
Midnight
on the banking day following the banking day on which an item is received.
o
EFAA
§
Special
items
·
Funds
attached to certain low-risk items must be made available on the next business
day after the business day of deposit UNLESS the item was deposited into an
ATM, in which case the funds must be available on the second business day after
the day of ATM deposit.
·
Government
and bank checks, wire transfers, the first $200 of any check.
§
Ordinary
checks
·
The
first $200 of any check must be available for cash or noncash use on the next
business day after the business day of deposit, supra.
·
The
first $300 of any check must be available for cash use on the second business
day after the business day of deposit
·
The
remainder up to $5,000 must be available for noncash use on the second day
after the business day of deposit.
·
The
remainder up to $5,000 must be available for cash use on the third business day
after the business day of deposit.
§
Exceptions
·
30
day old accounts
o
Within
the first 30 days of a new account, the $200 rule does not apply to special items, the bank can put
a hold on the amount in excess of $5,000 for up to nine business days for other
special items, the UCC applies to all other checks.
·
Large
deposits
·
Redeposited
checks
·
Repeated
overdrafts
·
The
“reasonable cause” exception
·
Check
truncation
o
Check
21 Act, 12 U.S.C. 5001, et seq.
§
Basics
·
Allows
a Collecting Bank to present and requires a Payor Bank to accept a copy of a
customer’s check.
o
This
rule just sets a floor, banks can individually agree on electronic presentment.
·
The
copy is called a substitute check and is given legal equivalence to the actual
check
§
Process
·
Customer
deposits check
·
Depositary
Bank makes a copy of the check, a provisional settlement, and truncates the
check
·
Depositary
Bank e-mails the image to its branch in the Payor Bank’s city, which reconverts
the check by printing it out thus creating a substitute check.
·
The
branch presents the substitute check to the Payor Bank, who may not refuse to
accept it because it is not an original check, it has legal equivalence.
§
Rules
·
5004,
warranties
o
Any
bank that transfers a substitute check for consideration warrants that the
substitute check has legal equivalence and that neither the original or
substitute will be presented ever again
·
5005,
indemnity
o
Any
bank that transfers a substitute check for consideration must indemnify the transferee and any subsequent transferees against any
claims brought by the recipient of a substitute check for loss
·
5006,
expedited recredit for consumers
·
5007,
expedited recredit for banks
·
5008,
delays
o
A
bank’s delay caused by force majeure is an exception to the deadlines affixed
under the Check 21 Act
·
Final
Payment
o
When
the Payor/Drawee Bank fulfills its obligation according to the check.
Afterwards, the bank loses its right to dishonor the check.
o
The
Bank’s only remedies for an erroneous final payment are:
§
Breach
of presentment warranty
§
Common
law restitution against a criminal forger
o
4-215
§
Final
payment occurs when the Payor Bank has either:
·
Paid
the item in cash;
·
Made
an irrevocable settlement according to clearinghouse rule or other agreement
between the Collecting and Payor Banks; or
o
When,
according to private agreement, the ability to revoke settlement ceases to
exist
·
Failed
to revoke a provisional settlement according to UCC, clearinghouse rule, or
other agreement.
o
When
the Payor Bank holds on to the check past a deadline set by private agreement
or, in the absence thereof, the 4-302 midnight deadline, it immediately becomes
liable and final payment has occurred.
o Rock Island Auction v. Empire
Packing
§
Empire
issued a check to π for goods delivered, π deposited the check at its bank, who
presented the check to the ∆-drawee bank.
§
Empire’s
account was NSF, but it assured ∆ that funds would be deposited soon.
§
∆
held the check for a week, Empire’s account remained NSF, so ∆ returned the
check to π’s bank claiming dishonor.
§
Held:
∆ made final payment on and is strictly liable for the check by virtue of the
fact that it held the check past the midnight deadline in 4-302.
·
Check
Return
o
Checks
move quickly from collecting bank to payor bank because they want to get paid;
dishonored checks move slowly when being returned because there is no monetary
incentive, which harms depositary banks that need to charge-back a customer’s
account. The longer it takes to return the dishonored check, the more time the
customer has to squander the money.
o
4-202
§
Bank
must exercise reasonable care in returning a dishonored check; midnight
deadline as safe harbor
o
Reg
CC
§
229.30
·
Technical
rules for expeditious return
§
229.33
·
Technical
rules for expeditious notice of nonpayment
·
Charge-back
o
If
the depositary bank chose to extend credit to the customer during the check’s
float period and the check is not paid and returned, the bank may recoup the
funds under:
§
4-214
·
Charge-back
the customer’s account.
§
3-415
·
Usually,
the bank makes the customer indorse any deposited check.
o
Problem
100
o
Bank
of Ronan v. Hughes
§
∆
was scammed, given counterfeit official checks to deposit, π extended credit on
the checks, ∆ immediately wired the funds attached to the credit to the
scammers, who took the money and ran.
§
π
had assured ∆ that the checks were official, same as cash, and good, but the
checks were returned as NSF by the Payor Bank, so π sought to exercise its
right of charge-back on the funds which remained in ∆’s account and to hold ∆
liable for the remainder.
§
∆
asserted common law defenses on π’s representations that the dishonored checks
were good.
§
Held:
The UCC rights to recoup funds extended on credit from a subsequently
dishonored check do not preempt the common law.
Bearing the Costs of Forgery and Alteration
·
Least-cost
Avoider concept
o
As in torts,
whoever is best able to avoid the loss is secondarily liable – after the actual
tortfeasor (i.e., the forger) who is usually judgment proof – to subsequent
transferees.
·
Conversion
o Leeds v. Chase
§ Atty ran a Ponzi scheme using his Lawyer Trust Account, which
eventually collapsed when a client was not paid.
§ Summit Bank issued a teller’s check payable to π, the atty altered
it and deposited it into his account at Chase Bank, who presented it and
received payment.
§ From his separate LTA, the atty issued a check to π
§ When the scheme collapsed and a client was not paid, the client
sued the LTA, the LTA sued π who had been paid with the proceeds from the
client’s check and alleged conversion.
§ π sued the banks alleging strict liability on the teller’s check.
§ Held: Chase converted the teller’s check under 3-420 when it
received payment on it, which was placed into the atty’s account, who was not a
person entitled to enforce or receive payment.
·
Warranties
o
Transfer
warranties
§ 3-416 and 4-207
·
Any person,
bank, customer, etc. who transfers an instrument warrants that
o
He/it is a
person entitled to enforce
o All signatures are authentic
o
No alterations
o
No defenses or
claims to the instrument
o
Obligor is not
in bankruptcy
§ Whoever transfers an instrument warrants that it is good and
liability is passed back from transferor to transferor to the one who was
closest to the wrongdoing.
§ 4-401
·
Liability does
not go past the wrongdoing. The issuer is not liable for an alteration made
subsequent to his issuance.
o
Presentment
warranties
§ 3-417 and 4-208
·
Any person
accepting payment of a presented instrument and previous transferors of the
instrument warrant that:
o
He/it is/was a
person entitled to enforce
o No knowledge that signatures are not authentic
o
No alterations
o
Problem 111
o Wachovia v. Foster Bank
§ CMPMedia issued a check drawn on its account at Wachovia to
MediaEdge for services
§ Choi intercepted the check and either
·
Altered it,
replacing her name for the payee’s, OR
·
Forged it, by
copying and creating an entirely new check
§ Choi deposited the stolen check into her account at Foster Bank
§ Foster presented the check to Wachovia, who paid and destroyed it
§ When MediaEdge never got its money, it asked CMPMedia about it and
the fraud was discovered.
§ Wachovia sought a declaratory judgment, that Foster must indemnify
it for any judgment against it, based on 3-417 presentment warranties, which
state:
·
A presenting
bank warrants that
o
the check has
not been altered
o
it has no knowledge
of forgery
·
The corollary
is a sort of “acceptance warranty”, that the Payor Bank warrants that the check
is not forged
§ So, if the check were altered, then Foster would be liable for
breaching its presentment warranty; but if the check was forged, then Wachovia
would be liable for breaching its “acceptance warranty”
·
This reflects
the common law least-cost avoider concept; that the depositary bank has the
closest relationship with the purported payee and, thus, is best able to tell
if she physically altered/wiped out information on a check for which she was
not likely to receive, while the payor bank controls the format/layout of the
blank checks it gives to accountholders and, thus, is best able to tell if a
check that comes in is genuine or not.
§ Foster argued that Wachovia was solely liable for any claims for
loss lodged against Wachovia, that there is no way to tell if the check was
forged or altered because Wachovia truncated it, that its possible that Choi
used sophisticated technology to forge the check.
§ Wachovia argued in favor of the more likely answer, that Choi
simply wiped out and replaced the payee name with her own.
§ Held: the court errs on the side of caution and presumes that the
check was altered, the possibility of sophisticated forgery is outweighed by
the more likely possibility of simple, classic fraud, so it is presumed that
Foster breached presentment warranties and Wachovia wins
·
Hutzler v.
Hertz
o
Hertz handed a
teller’s check to Hutzler’s attorney as a settlement, payable to “Hutzler and /
or her attorney”
o
The atty signs
his name and forges Hutzler’s name, deposits the check, and flees
o
Hutzler sues
Hertz
§ Hertz wins. The attorney had apparent authority to accept a check
on behalf of a client, so Hertz’s obligation to Hutzler would be discharged
even if it had made the check payable only to the attorney
o
The point:
Hutzler should have sued the banks (depositary and drawee) for conversion and
let them fight out which one is liable. Under 3-420(a), a bank shall not make
or obtain payment on an instrument for a person not entitled to enforce an
instrument. Because, when joint payees are named on an instrument, both payee’s
signatures are required and because Hutzler’s forged signature was
unauthorized, the atty was not a person entitled to enforce.
o
Table of Definitions
|
Word / Phrase
|
UCC Definition
|
|
Acceptor
|
A drawee who has accepted a draft
|
|
Drawee
|
A person in a draft ordered to make payment
|
|
Drawer
|
A person in a draft who orders payment
|
|
Good faith
|
Honesty in fact (subjective) and observance of reasonable commercial
standards of fair dealing (objective)
|
|
Maker
|
A person who promises to pay a note
|
|
Remotely-created consumer item
|
An item drawn on an account which is not created by the payor bank
and does not bear a handwritten signature of the drawer
|
|
Cashier’s check
|
Bank is both drawer and drawee; bank draws a draft on itself
|
|
Certified check
|
|
|
Teller’s check
|
A draft drawn by a bank on or payable at or through another bank
|
|
Traveler’s check
|
Same as teller’s check, but is POD and requires a countersignature by
a designated party
|
|
Holder
|
A person in possession of an instrument payable to him or to bearer
|
|
Transferee
|
A person in possession of an instrument NOT payable to him or to
bearer
|
|
Holder in Due Course
|
|
|
Banking day (UCC)
|
The part of a day on which a bank is open to the public for carrying
on substantially all of its banking functions
|
|
Business day
|
|
|
Check
|
A draft drawn on a bank
|
|
Item
|
An instrument or a promise or order to pay money handled by a bank
for collection or payment.
|
|
Wrongful dishonor
|
Dishonoring any properly payable item, except one that would create
an overdraft, unless the bank agreed to extend credit and pay the overdrawn
amount
|
|
Midnight deadline (UCC)
|
midnight on the next banking day following the banking day on which an
item or notice is received or from which the time for taking action commences
to run, whichever is later
|
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