Bank’s Right to Pay Checks

8/10/2019 Banks Right to Pay Checks

1/86

I. The Basic Checking Relationship and the Banks Right to Pay Checksa. General

i. The Basic Relationship1. 3-103(a)(2), 4-104(a)(8), 4-105(3): Definition of draee! or payor "ank!#. 3-103(a)(3), 3-105(c): Definition of draer! or iss$er!

%. 4-105(2): Definition of depositary "ank!&. 4-105(4): Definition of inter'ediary "ank!ii. Pro'$lgation of R$les

1. Both (ederal and )tate la 'akes r$les. 4-103(b)acknoledges the pree'pti*eeffect of r$les that are pro'$lgated "y the federal r$les o*er state r$les

iii. The +CC1. ,rticle I is general principles that apply to all s$"stanti*e topics co*ered "y the

+CCa. Definitions in 1-201(b)". -"ligation of Good (aith in 1-304

#. ,rticle III is negotia"le instr$'ents

%. ,rticle I is Bank Deposits and Colllections". The Banks Right to Payi. /hen is it proper for the Bank to Pay0

1. 4-401(a): , Bank can pay only hen the check is properly paya"le!a. It is properly paya"le if the c$sto'er has a$thoried the pay'ent.! 4-

401comment 1

2. If a check is gi*en to an inter'ediary "ank2 then the inter'ediary "eco'es aperson entitled to enforce the check. 1-201(b)(25), (27)

%. If a check is stolen thro$gh no fa$lt of the payee2 the "ank does not ha*e the rightto pay the check. 4-401 comment 1, sentence 5-7.

c. -*erdrafts

i. The payor "ank can charge the acco$nt2 "$t 3a"sent so'e specific agree'ent4 it is alsofree to dishonor the check and ref$se to pay it. 4-401(a), 4-402(a)ii. McGuire v. Bank One, Louisiana, N.A.

1. 5an representing hi'self as in*est'ent "roker offers to sell o'an "onds. )herites hi' 6#772777 check2 says not to cash it $ntil later date. 8e cashes rightaay2 and 'oney has not transferred fro' her in*est'ent acco$nt into anotheracco$nt2 creating an o*erdraft of 61992777. 8e does not "$y "onds ith her'oney2 "$t keeps it for hi'self 3con*ersion4. )he "elie*es "ank failed to eerciseordinary care. 8eld2 Bank had the right to cash the check. 314 The check asproperly paya"le! $nder 4-401. 3#4 &;&71 per'its a "ank to charge a properlypaya"le check against a c$sto'ers acco$nt e*en if an o*erdraft res$lts. 3%4 +nder4-103the "ank '$st eercise ordinary care. 3&4 B$ired "anks to payo*erdraft o$ld "e $nd$ly "$rdenso'e for "anks

that o$ld ha*e to deal


2/86

#. R$le that re>$ired "anks not to payo*erdrafts o$ld "e $nd$ly "$rdenso'e onc$sto'ers ho o$ld ha*e "ad credit and "o$nced checks

i*. Banks can agree to pay o*erdrafts2 and th$s "eco'e o"liged to do so. 4-402(a)statesthat a "ank 'ay dishonor an ite' that o$ld create an o*erdraft $nless it has agreed topay the o*erdraft! and 4-103(a)states that the effect of the pro*isions of this ,rticle

'ay "e *aried "y agree'ent.1. The +CC does not reg$late ho '$ch "anks can charge in o*erdraft fees.8oe*er2 so'e state co$rts ha*e fo$nd that a h$ge charge *iolates the "ankso"ligation of good faith if charge as not in the reasona"le contract$alo"ligations of the parties! and so'e co$rts ha*e fo$nd the' $nconsciona"le.

*. Banks are alloed to pay checks in ,?@ order they choose. 4-303(b)d. )topping Pay'ent

i. C$sto'er '$st gi*e the payor "ank ti'ely and ade>$ate notice of the stop pay'ent. 4-403

ii. Bank cannot charge acco$nt o*er a stop pay'ent order. 4-403 & Comment 7iii. Three considerations li'it the practicality of the c$sto'ers right to stop pay'ent:

1. The c$sto'er '$st act pro'ptly to eercise the right. 4-403(a)a. Recei*ed at a ti'e and in a 'anner that affords the "ank a reasona"leopport$nity to act on it "efore any Afinal action "y the "ank ith respectto the ite'.!

i. +nlikely to ork if stop pay'ent co'es 'ore than a fe days aftercheck has "een ritten

#. The d$ration of the stop pay'ent order is si 'onths2 and can "e re*i*ed "y thepayee after that. 4-403(b)

%. The $nderlying o"ligation for hich the check as ritten.a. Payee has to separate rights on the check:

i. The right to enforce the checkii. The $nderlying o"ligation

". To handle these to rights2 +CC pro*ides to r$les:i. 3-310(b):+CC s$spends the payees right to p$rs$e the c$sto'er

on the $nderlying transaction hen the payee accepts thec$sto'ers check.

ii. 3-310(b)(1): The stat$te pro*ides that the s$spension ends if thecheck is dishonored.

e. Re'edies for I'proper Pay'ent. 4-401i. Bank '$st re*erse the i'proper transaction. B


3/86

II. The Banks -"ligation to Pay Checksa. /hen are f$nds a*aila"le for pay'ent

i. The "ank has the option to pay any ite' that is properly paya"le fro' the c$sto'ersacco$nt

1. /hen the acco$nt has f$nds a*aila"le! the "ank has an affir'ati*e d$ty to pay

the acco$ntii. To >$estions '$st "e ansered:1. /hen is the deter'ination 'ade0#. /hat is the "alance in the acco$nt at that ti'e0

". Ti'e of *al$ationi. The stat$te essentially chooses the 'o'ent that the payor "ank e*al$ates the check as the

the point in ti'e hen the acco$nt '$st ha*e s$fficient f$ndsii. +nder E 4-402(c)2 the "ank is free to deter'ine hether the acco$nt has s$fficient f$nds

at any ti'e "eteen the ti'e the ite' is recei*ed "y the payor "ank and the ti'e that thepayor "ank ret$rns the ite'.!

1. Dishonor re'ains appropriate notithstanding ne credits to the acco$nt after the

"ank has e*al$ated the s$fficiency of the f$nds in the acco$nt.c. ,*aila"ility of f$ndsi. Reg CC esta"lishes a fra'eork of deadlines ithin hich a depositary "ank '$st

release f$nds that its c$sto'ers deposit "y check.1. +nlike +CC E &;#1=2 those deadlines apply e*en if the depositary "ank does not

deter'ine "y the deadline if the payor "ank ill honor the check in >$estion.ii. (irst2 disting$ish a'ong fo$r separate di'ensions:

1. Generala. C$sto'er deposited in the for' of local check". C$sto'er deposited non;local check

i. ?on local check is any check dran on a "ank located o$tside thecheck;processing region of the "ank at hich the check isdeposited

c. C$sto'er ishes to $se f$nds indirectly 3riting checks against the'4d. C$sto'er ishes to $se f$nds directly 3ithdraing cash4.

#. ?oncash ithdrals fro' local checksa. The "ank '$st 'ake 6177 a*aila"le on the first "$siness day after the

"anking day on hich the f$nds are deposited.". The rest '$st "e a*aila"le for ithdraal no later than the second

"$siness day%. ?oncash ithdrals fro' nonlocal checks

a. The "ank has to 'ake 6177 a*aila"le on the first "$siness day after the"anking day on hich the f$nds are deposited.

". The rest '$st "e 'ade a*aila"le for ithdraal no later than the fifth"$siness day after the . . .

&. Cash ithdraals fro' local checksa. The "ank '$st 'ake 6177 a*aila"le on the first "$siness day after the

"anking day of deposit". 5$st 'ake an additional 6&77 a*aila"le the second "$siness dayc. 5$st 'ake re'ainder a*aila"le on third day


4/86

=. Cash ithdraals fro' non;local checksa. 5$st 'ake 6177 a*aila"le on the first "$siness day". 5$st 'ake additional 6&77 a*aila"le on the fifth "$siness dayc. 5$st 'ake re'ainder a*aila"le on the sith "$siness day.

iii. Banking *. B$siness Day

1. Banking Day: Those "$siness days on hich the "ank is open for carrying ons$"stantially all of its "anking f$nctions#. B$siness Day: ,ll calendar days ecept )at$rday2 )$nday2 and (ederal 8olidays

i*. )e*en ays yo$ can get all a*aila"le f$nds the net day. 8oe*er2 yo$ '$st "e 3a4 theoriginal payee of the instr$'ent and 3"4 personally deposit the ite' 3no ,T54:

1. Cash Deposits#. Checks dran on a local "ranch of the "ank here they are deposited%. +) Treas$ry Checks&. +)P) 'oney orders=. Checks dran on a federal reser*e "ank or federal ho'e loan "ankF. Checks dran on a local go*ern'ental entity

. Cashiers Checks or si'ilar ite's dran on "anks*. o;risk ite's that are not deposited ith a teller in the payees on acco$nt:1. , treas$ry check or Postal )er*ice 'oney order deposited "y so'e"ody other

than the original payee is treated as if it ere a typical local check#. If a (ederal Reser*e Check2 local go*ern'ent check2 or cashiers check is

deposited "y so'e"ody other than the original payee2 the check is processed$nder the standard r$les2 ith the a*aila"ility of f$nds depending on hether thecheck is a local or non;local check

*i. o Risk ite's deposited in an ,T5:1. If Cash2 Postal )er*ice 5oney -rder2 (ederal Reser*e Checks2 ocal Go*ern'ent

Checks2 or Cashiers Checks are deposited at an ,T5 into an acco$nt oned "ythe payee of the check2 the a*aila"ility is deferred a single day2 to the second"$siness day.

a. )o2 c$sto'er cant get shit $ntil #nd"$siness day 36177 then4*ii. H$stification for pro'pt f$nds a*aila"ility

1. (irst2 Reg CC doesnt $nconditionally o"ligate the "ank to release f$ndsi''ediately

#. )econd consideration is con*enience%. Third2 the likely long;ter' effects of gi*ing "anks the risk of loss that they face if

deadlines force the' to release f$nds itho$t deter'ining hether a check illclear

4. First National Bank v. Colonial Bank (Check Kiting Scheme/Risk of Loss)

*iii. /rongf$l Dishonor: /hat happens in a "ank ref$ses to pay1. If a "ank doesnt pay a check it as o"ligated to pay2 it has rongf$lly dishonored

the check#. C$sto'er is entitled to all of the da'ages proi'ately ca$sed "y the rongf$l

dishonor.! +CC E &;&7#3"4a. Marott v. First National Bank

III. Collection of Checks


5/86

a. The Payor Banks -"ligation to the Payeei. ,ltho$gh the payor "ank 'ight "e lia"le to the draer for rongf$l dishonor2 the payee

itself can $s$ally do nothing to force the payor "ank to pay the check1. Ill$stration: !"t#oor $echnologies v. %llfirst Financial& 'nc.

a. 8 ga*e a 677g check to -$tdoor for o$tstanding pay'ents. The check

stated it as dran on an acco$nt at (?B2 "$t it as act$ally dran on-'ni Bank. -$tdoor anted to get the check cashed as >$ickly aspossi"le "eca$se 8 as a"o$t to instit$te "ankr$ptcy proceedings.-$tdoor sent so'eone to dri*e to a "ranch of (?B to cash it. They said itas an -'ni check2 that -'ni as oned "y BankCorp. and to call thelayer of -'ni


6/86

i. (irst2 an agency relationship is set $p "eteen the "ank and thec$sto'er. E &;#71.

1. Th$s2 the depositary "ank "eco'es the collecting "ank!#. ,lso2 co'es ith a d$ty of ordinary care. &;#7#3a4

ii. )econd2 "ank gi*es pro*isional settle'ent2 reser*es its charge "ack

right if the payor "ank doesnt honor the check. E &;#1&". Depositary BankPayor Bank

i. Depositary Bank has "road discretion on ho to collect1. 5$st 'o*e >$ickly to 'eet f$nds a*aila"ility r$les

ii. Typically2 the check 3paper4 is trans'itted to the payor "ank2 hopays it

%. 5ethods of trans'issiona. Clearingho$se ,rrange'ents

i. )ee p. %& for a clearingho$se hypoii. ?ote: If "ank doesnt follo clearingho$se r$les regarding a

pro*isional settle'ent2 it can lose its right to dishonor $nder the

+CC1. Cant reco*er fro' depositary "ank2 clearingho$se2 orpayee after that

iii. )ee:Kimerl %llen $r"stp. %&9i*. Tr$st deposited into its acco$nt ith akeood a 6117g check.

akeood presented to the payor "ank the check the day after itas recei*ed2 and placed a hold on tr$st acco$nt pending pay'entof the check. akeood recei*ed a pro*isional credit. ,fter payor"ank notified akeood the check had cleared2 the hold as liftedfro' the acco$nt. (i*e days later2 the payor "ank said it asret$rning the check for ins$fficient f$nds2 and akeood charged

"ack the acco$nt and a fee. Tr$st filed action seeking its f$ndsfro' akeood. 314 +nder &;#1&2 a "ank loses its right to charge"ack hen pay'ent "eco'es final. 3#4 +nder &;#1=3d42 afterpay'ent "eco'es final2 the "ank is acco$nta"le to the c$sto'er forthe ite' and any pro*isional credit hen it "eco'es final. 3%4 &;#1=3a4 tells hen so'ething is finally paid!. 3&4 P$rs$ant to &;%7#2 if an ite' is presented to and recei*ed "y a payor "ank2 that"ank is acco$nta"le! for the a'o$nt of the de'and ite' if itretains the ite' "eyond 'idnight of the "anking day of receiptitho$t settling for it or2 hether ot not it is also the depositary"ank2 does not pay or ret$rn the ite'2 or send notice of dishonor$ntil after its 'idnight deadline 3'idnight of the net "anking dayafter receipt.

". Bilateral ,rrange'ents 3Direct )end and correspondents clearing4i. , pair of "anks that ha*e a relationship J a lot of checks dran on

the' each day ; ill enter into this type of relationship Jcontract$al2 here they gi*e pro*isional credits and then send thechecks to the "ank.

ii. Cheaper and (aster than the (ederal Reser*e 'ethod


7/86

c. Collection Thro$gh the (ederal Reser*e )yste'i. )yste' of last resort "eca$se it is 'ost epensi*e and sloer

ii. Send to Federa !eser"e #an$, %o sends it to 'aor ban$

m*st onor or noti+ b midnit deadine

iii. If the payor ants to dishonor2 go to Reg CC:

1. The Reg CC ret$rn deadline:a. Payor "ank '$st ret$rn the check in an epeditio$s'anner! in order to 'eet one of to deadlines!:

i. To Day$ires the dishonoring payor "ank to send

the check so that the check o$ld nor'ally"e recei*ed "y the depositary "ank not laterthan &p' on the deadline: the fo$rth"$siness day for nonlocal checksK the second"$siness day for local checks. CC ##.%73a43#4

#. Reg CC and the +CC 'idnight deadlinea. /hereas the +CC deadline re>$ires the payor "ankto p$t it in the 'ail "y 'idnight of the net "ankingday2 Reg CC allos the' to ait $ntil the net dayif they $se a 'ode of deli*ery that res$lts in a fasterret$rn than the 'idnight deadline

". (irst etension2 deadline is ai*ed if yo$ ret$rn thecheck to the transferor 3(ed Reser*e Bank4 "y theday after the 'idnight deadline

c. )econd etension ai*es the 'idnight deadline ifthe payor "ank $ses a highly epeditions 'eas oftransportation2 e*en if this 'eans of transportationordinarily o$ld res$lt in deli*ery after therecei*ing "anks net "anking day.!

%. Reg CC notice of non;pay'ent deadlinea. , payor "ank that dishonors a check for 6#=77 or

'ore '$st get notice of its deter'ination to thedepositary "ank "y &p' on the second "$siness dayafter the "anking day on hich the payor "ankrecei*ed the check.

i. /hether non;local or notii. ,llos depositary to release f$nds the

second "$siness day after the "anking dayd. Difference "eteen fail$re to 'eet the Reg CC r$les and fail$re to 'eet

the 'idnight deadline:i. (ail$re to 'eet the deadline affects the settle'ent process:

1. Payor "ank "eco'es acco$nta"le for the ite' $nder E &;%7#2 pay'ent "eco'es final $nder E &;#1=2 and depositary"ank loses any right of charge "ack $nder E &;#1&

ii. (ail$re to 'eet Reg CC:


8/86

1. Generally li'ited to da'ages CC E ##.%9e. Co''on Practice: Ret$rn notice o*er the lectronic arns )yste'3%=4

-"ligation ,ction Re>$ired Citations

5idnight Deadline )end the ite' "y 'idnight onthe net "anking day $nlessReg CC etends the deadline

+CC EE &;%713a42 &;17&3a431742 1;#713%94K Reg CC E##.%73c4314

Reg CC ret$rn Ret$rn the Ite' to the

depositary "ank either "y theto;day


9/86

I. Risk of oss in the checking )yste' J The Basic (ra'eorka. There are to tiers that address the iss$es of risk of loss in the Checking )yste'

i. Tier -ne: , Basic (ra'eork that distri"$tes losses "ased on generalied ass$'ptionsa"o$t the relati*e a"ilities of parties to pre*ent certain types of losses

ii. Tier To: )e*eral sit$ation;specific eceptions to the general first;tier r$les

". Basic Tier -ne Pro"le'si. ?onpay'ent1. General

a. To f$nda'ental ele'ents of the syste' 'ake nonpay'ent lossesrelati*ely co''on:

i. 314 The payees ina"ility to kno hen it takes a check hetherthe payor "ank ill honor it

ii. 3#4 The relati*ely long delay "eteen the ti'e that the payeeaccepts the check and the ti'e that the payee finds o$t hether thecheck ill "e honored

". +CC 3-415is the principal indorser lia"ility stat$te

2. ndorsementsa. 3-204: ndorse'ent itself need "e nothing 'ore than a signat$re "y theperson selling the check

b. 3-205(b):This is a ban$ indorsement/has the legal effect of 'akingthe check "earer paper! so tat te an art in ossession o+ tecec$ can en+orce it

c. -r2 endorse'ent can "e a secia endorsement! paya"le to a specifiedperson2 entity2 etc.

i. 3-205(a):This 'akes the check order paper! hich can "eenforced only "y the identified party

d. -r2 the party can endorse the check for deposit only! or for collection.!i. 3-20:This is called restricti*e endorse'ents! hich restrict the

right of later parties to transfer the check ecept in accordance iththe endorse'ent.

%. +CC r$les on indorse'ents and indorse'ent lia"ilitya. 3-415: each party that indorses a check 'akes an i'plied contract ith

s$"se>$ent parties that ac>$ire the check. That contract o"ligates theindorser to pay the check if the payor "ank dishonors it.

b. e r*e res*ts in a cain o+ iabiit *nder %ic eac art can ass

a disonored cec$ bac$ * te cain to te ast erson in te cain

tat is abe to a (te eariest indorser)

c. 3-414(b):ia"ility on the draer of the insol*ent check&. Protecting the indorser fro' lia"ility on stale o"ligations

a. 3-415(e):The indorsers lia"ility is conditioned on the checks "eingdeposited or presented ithin %7 days of the indorse'ent J or the indorserhas no lia"ility

". 3-415(c):,ny person seeking to enforce a clai' of lia"ility on anindorse'ent to gi*e pro'pt notice of the dishonor to the indorser.

c. 3-503(c):If the person gi*ing the notice is a collecting "ank 3"othdepository and inter'ediate "anks (4-105(5)),it '$st gi*e notice "y


10/86

'idnight of the "anking day after it learns of the dishonor. In all othercases2 the notice '$st co'e ithin %7 days.

5. "oidin indorsement iabiit

a. 3-415(b): te indorser m*st do to discaim te iabiit is to add terase%ito*t reco*rse/to te indorsement. If an indorse'ent is

'ade itho$t reco$rse2! s$"se>$ent oners of the check cannot s$e theindorser e*en if the check is dishonored.ii. (orged )ignat$res

1. Generala. Responses fro' the syste'

i. The first response of the syste' is the o"*io$s one that the$na$thoried signer J the thief J sho$ld "e responsi"le for alllosses ca$sed "y the forgery

ii. The diffic$lt task is to deter'ine ho is lia"le in the e*ent that the$na$thoried signer cannot "e located

". (orged Draers )ignat$res and the R$le ofPrice v. Neal

i. The check is a co'plete forgeryii. The allocation of losses fro' that kind of forgery depends onhether the payor "ank 3a4 is d$ped into paying the check or 3"4notices the forgery and dishonors the check

c. Payor Bank Pays the (orged Checki. Price *. ?eal: Payor Bank "ears the loss if it fails to notice the

forgery and honors the check 3check as not properly paya"le"eca$se the draer ne*er a$thoried it4

ii. 4-401(a):payor "ank has no right to charge the acco$nt if draerdoesnt a$thorie it

d. To eceptions that allo a shift in lia"ilityi. 3-418(a)(ii):payor "ank can seek reco*er fro' the person to

ho' or for hose "enefit pay'ent as 'ade.!ii. 3-418(c):Does not apply against a person that took the instr$'ent

in good faithiii. 4-208: series of i'plied present'ent arranties in fa*or of the

payor "ank. If any of those arranties if false2 the payor "ank canreco*er fro' the party that presented the check to the payor "ankor fro' any pre*io$s transferor in the chain of collection of thecheck

i*. 4-208(a)(3):/arranty lia"ility if the transferor had knoledge thatthe signat$re of the draer as $na$thoried

1. 1-202: Disting$ishing "eteen knoledge! and notice!*. It 'akes so'e sense to lea*e the responsi"ility of loss ith the

payor "ank. , legal r$le that p$ts the losses fro' forged checks onpayor "anks gi*es payor "anks e*ery incenti*e to ork to de*elopinstit$tions that li'it losses fro' forged checks

e. Payor Bank Dishonors the Checki. If the payor "ank notices the check is forged and dishonors it2 then

the collecting "ank is left holding the $ncollecti"le check


11/86

ii. +CC contains to legal r$les on hich the presenting "ank canrely:

1. 314 Creates a special set of arranties that li'it clai'sa"o$t forged draers signat$resK

a. 3-417(a)(3) & 4-208(a)(3):)tep 1 appears in the

>$alification of the arranty regarding the draerssignat$re that per'its a payor "ank to co'plainonly if the arrantor had knoledge that thedraers signat$re as $na$thoried

". 3-41(a)(2) & 4-207(a)(2):The analogo$s transferarranty incl$des an a"sol$te a*oal of thea$thenticity of the draers signat$re

#. 3#4 it li'its payor "anks to p$rs$ing that li'ited set ofarranties

a. %;&1F3a4 L &;#73a4: )tep # appears in the r$le thatthe parties that can p$rs$e transfer arranties '$st

"e parties to ho' an instr$'ent has "eentransferred". Beca$se an instr$'ent is presented to the payor

"ank2 not transferred to it2 the payor "ank cannotp$rs$e the "roader transfer arranties

f. -ne tist on the arranty r$les is the interaction "eteen articles % and &i. The article & transfer arranties pro*ide lia"ility only against

"anks and their c$sto'ers. ,ccordingly2 a party seeking to passlia"ility to a party that handled the check "efore it got to a "anko$ld ha*e to rely on the ,rticle % transfer arranties 33-414

1. The only significant difference is the r$le in %;&1F3a4 that,rticle % transfer arranties can "e enforced "y re'otetransferees only against entities that indorsed the check

iii. (orged Indorse'ents1. General

a. The draer act$ally signs the check in the first instance2 "$t so'e otherparty s$"se>$ently forges an indorse'ent on the check

i. These r$les are 'ore fa*ora"le to the payor "ank". Generally2 the payor "ank can J e*en if honor as 'istaken J pass the loss

"ack to the earliest sol*ent person in the chain after the forgery#. Payor Bank Dishonors the Check Beca$se of (orged Indorse'ent

a. The presenting "ank is left ith the "ad check2 "$t can reco*er its lossesthro$gh transfer arranties.

". 4-207(a)(1 & 2) or 3-41(a)(1 & 2):Beca$se neither the forger nor anyparty after the forger in the process of collection is a person entitled toenfordce the instr$'ent2 and "eca$se the indorse'ent itself is forged2 eachof those parties has "reached its transfer arranty $nder one of thesestat$tes

%. Payor Bank pays the Check despite the forged indorse'ent


12/86

a. It is no 'ore proper to charge the draers acco$nt in this instance than inthe forged signat$re area

i. 4-401(a) & comment 1: payor "ank had no right to charge draersacco$nt "eca$se they erent a$thoried to cash the check

". 3-418: 3pay'ent "y 'istake4 payor "ank cannot reco*er $nder this theory

either if the prior parties took the instr$'ent in good faith and for *al$e!c. 4-208(a)(1):payor "ank can reco*er for a "reach of present'ent arrantyJ the presenting "ank arrants that it is a person entitled to enforce thedraft! or is collecting the check on "ehalf of a person entitled to enforcethe draft

i. 3-301: ,"sent a *alid indorse'ent "y the payee2 no"ody other thanthe payee can "eco'e a person entitle to enforce a check

ii. Therefore2 payor "ank can reco*er its loss fro' the presenting"ank

iii. 4-207(a)(1 & 2):The presenting "ank2 in t$rn2 o$ld "e entitled topass the loss to parties earlier in the chain of collection "


13/86

*. 4-207(a)(3) & 3-41(a)(3): ,ny party against ho' the payor"ank reco*ers is entitled2 in t$rn2 to p$rs$e earlier parties "ased ona "reach of a si'ilar transfer arranty

*i. Th$s2 the loss ill rest ith the earliest sol*ent party to handle thecheck after the alteration

". ,n addition to an instr$'ent that as inco'plete hen ritteni. 3-407, Comment 2: The payor "ank can enforce the instr$'ent asco'pleted2 e*en if the instr$'ent as stolen fro' the iss$er andco'pleted after the theft.!

ii. 4-401(d)(2):The "ank is entitled to charge the draer for s$ch anite'


14/86

. Risk of oss in the Checking )yste' J )pecial R$lesa. ?egligence

i. General1. oss is on the draer if the draers negligence s$"stantially contri"$tes to the

forgery. %;&7F3a4

a. Precl$des a party hose fail$re to eercise ordinary care s$"stantiallycontri"$tes to . . . the 'aking of a forged signat$re . . . fro' assertingthe . . . forgery against a person ho2 in good faith2 pays the instr$'ent.!

#. Ill$stration:SBC Bank *S% v. F+M Bank Northern ,irginiaa. /ritten check had lots of "lank2 and so'eone inserted ne n$'"ers. 314 E

%;&7F pro*ides no clai' if a thief ho is not the payee indorses the checkin the thiefs na'e rather than the payees na'e. 3#4 +CC also i'posesordinary care on "anks J hich 'eans general "anking $sage.! 3%4 If a"ank can sho that 'ost "anks ha*e not yet adopted a ne proced$re thato$ld ha*e pre*ented a loss2 then the "anks potential lia"ility if it keepsthe old proced$re is lo. 3&4 ,lso2 the +CC recognies co'parati*e

negligence2 $nder hich any party sho$ld "ear the portion of the lossattri"$ta"le to its fail$re to eercise ordinary care. E %;&7F3"4.". Bank )tate'ents

i. General1. Rests on the ass$'ption that c$sto'ers can stop forgery sche'es if they o$ld

M$st look at their f$cking "ank state'entsN#. /hen a draer fails to disco*er a forgery e*ident fro' its 'onthly "ank

state'ents2 the +CC nor'ally transfers ens$ing losses fro' the payor "ank to thedraer "y precl$ding the draer fro' challenging the payor "anks decision tohonor f$t$re checks "y the sa'e forger. E &;&7F3d43#4

ii. The +CC does not 'ake the "ank holly responsi"le for losses2 "$t o$ld call for eachparty to "ear a portion of the loss "ased on the etent to hich its shortco'ingscontri"$ted to the loss. E &;&7F3e4

1. Ill$strati*e Case:Sto-ell v. Clo"et Coo0 Cre#it *niona. D$de steals g$ys check and then steals his "anks state'ent 'ail. 5an did

not recei*e "ank state'ent fro' Dece'"er # to )epte'"er %2 and henotified the "ank in Dece'"er # that he hadnt recei*ed one. 314 Thedraft agree'ent ith the "ank defines reasona"le pro'ptness! as thats$sed $nder the +CC A$nder the +CC2 yo$ ha*e %7 days fro' the 'ailingdate of the state'ent to o"Mect to the check J &;&7F3d43#4. 3#4 The 'an isat fa$lt J the risk is on hi' to take 'eas$res J the "ank cant "ear s$ch arisk.

iii. ,ltho$gh &;&7F3e4 eposes the "ank to a risk of responsi"ility for co'parati*e negligence'$ch like %;&7F2 &;&7F3f4 re'o*es that risk if the c$sto'er fails to ea'ine the state'entsent "y the "nak


15/86

#. In 'any cases2 the general negligence r$le or the "ank state'ent r$le ill placethis loss on e'ployers

ii. /hen the loss is ca$sed "y a responsi"le e'ployee2 the +CC placesthe loss on thee'ployer e*en if those 'ore general r$les dont apply. E %;&7=

iii. 8oe*er2 e'ployer ill try to shift the loss "ack to the "ank:

1. (irst2 $nder co'parati*e negligence: 8ere2 %;&7=3"4#. )econd2 a clai' that a "anks illingness to allo an e'ployee to o"tain f$ndsfro' an e'ployers acco$nt a'o$nts to participation in the e'ployees "reach offid$ciary d$ty: E %;%7

a. Ill$strati*e Case: Cale Cast Maga1ine v. 2remier Banki. 'ployee had "een stealing checks2 as confronted2 and ad'itted

it. Ca"le clai's "ank *iolated %;%7 "y accepting checks ithknoledge that e'ployee as "reaching fid$ciary d$ty. Bankclai's only e'ployer lia"le $nder %;&7= and %;&7F. 8eld2 the"ank is not lia"le. 314 The e'ployer '$st "ear the loss $nder %;&7=$pon a shoing that an e'ployee ith responsi"ility co''its a

fra$d$lent endorse'ent. 8oe*er2 Ca"le seeks to defa$lt %;&7= "yasserting that Bank as not in good faith hen it took the checkfro' e'ployee. 1;#71314 defines good faith as honesty in fact inthe cond$ct or transaction concerned. 3#4 There is nothing herethat indicates that the Bank kne the e'ployee asnt theco'pany2 or as a fid$ciary of the co'pany. 3%4 *en so2 Bankhad to eercise reasona"le care J here they did.

%. The e'ployer 'ay ha*e no s$"stantial clai' "$estion then2 is: can the e'ployer p$rs$e a clai'directly against the depositary "ank for losses the e'ployer s$stained fro' asche'e0

a. Ill$strati*e Case: 3ina Chin + %ssoc. v. First National Banki. 'ployee rote checks to s$ppliers2 forged the draers signat$re2

then forged the payees signat$re for indorse'ent p$rposes. Thesole ca$se of action is against draee "anks for charging heracco$nts in the a'o$nt of the forged checks. 314 %;&7& and &7=change the la "y alloing co'parati*e negligence. Co$rt holdsthat these pro*isions ,R TRIGGRD I? , D-+B(-RGR@ )IT+,TI-?

d. I'postorsi. General

1. Checks proc$red "y i'postors or paya"le to fictitio$s persons.#. General r$le is that the person *icti'ied sho$ld "ear the loss. %;&7&

a. Ill$strati*e Case:Meng v. Ma-oo# State Banki. Person has check 'ade paya"le to hi'self and fictional person. 314

The fictitio$s payee r$le co'pletely a"sol*es a "ank fro' anylia"ility for pay'ent o*er a forged endorse'ent. 3#4 It states in %;&7&3"4 that hen so'ething is 'ade o$t to a fictitio$s payee2 anindorse'ent in the na'e of the payee is effecti*e as theindorse'ent of the payee.! 3%4 This r$le is effecti*e o*er the r$le


16/86

that places the loss on the "ank for pay'ent of a forgedindorse'ent. 3&4 ,s a 'atter of la2 the designation of to payeeson a cashiers check is a'"ig$o$s here no directi*es are stated onthe checks to deter'ine the 'anner of pay'ent 3pay'ent can "e'ade to either of the na'ed payees4. 3=4 8ere2 Ps cant

de'onstrate the "ank failed to eercise ordinary care.


17/86

I. Iss$er;Cardholder Relationshipa. (o$r 5aMor Participants

i. P$rchaser that holds the cardii. The iss$er that iss$es the card

1. ,grees to pay the p$rchases that the cardholder 'akes in accordance ith the

agree'ent "eteen the iss$er and the cardholderiii. 5erchant that 'akes the salei*. ,c>$irer ho collects pay'ent fro' the 'erchant

". +ni*ersal Cardsi. isa and 5astercard2 "asically

c. )tat$tesi. ?o +CC generally applica"le to credit cards

ii. 5$st $se (ederal Tr$th in ending ,ct 3TI,4 L the (ederal Reser*es Reg$lation O1. TI, is li'ited to Cons$'er Transactions#. i'ited to Credit Cards etended to indi*id$als

a. ception: 6 104(1), !e 6 22.3(a)(2):

". ,lso does not apply to transactions of 'ore than 6#=2777. 6 104(3)d. Definitionsi. Credit Cards: 6 103($):any card . . . or other credit de*ice eisting for the

p$rpose of o"taining 'oney2 property2 la*or2 or ser*ices on credit.!e. General R$les

i. Cannot iss$e credit cards itho$t a re>$est or application. 6 132, 22.12(a)ii. 5$st pro*ide c$sto'er a clear and conspic$o$s! ritten disclos$re that s$''aries the

applica"le legal r$les. 22.5(a)(1)1. Closely rese'"le 'odel disclos$res pro*ided "y the (ederal Reser*e in

endi 9 o+ !e . Can "e enforced in federal co$rt.f. -*er*ie of )yste'

i. actly the opposite of the checking relationshipii. Credit cards and Checkign acco$nts at sa'e "ank: P$rs$ant to agree'ent2 Credit card

iss$er can periodically ded$ct an a'o$nt fro' the f$nds to pay a prearranged portion ofthe charges. 1(a), 22.12(d)(3)

iii. Beca$se credit cards cant in*est f$nds as "anks can2 they 'ake their 'oney off ofinterest rates

i*. Con*enience $sers are those people that pay their "ills e*ery 'onth J and so'e iss$ersha*e responded to these people "y i'posing ann$al fees li'ited to con*enience $sers

*. 6 1deals ith the a"ility of iss$ing "ank to offset charges against other acco$nts3checking4 of c$sto'er held at the "ank

*i. (ra$d$lent transactions are M$dged "y algorith's and s$chg. The 'echanics of collection

i. 5erchant has an agree'ent ith a 'e'"er of the applica"le netork 3I),2 etc.42 theac>$iring "ank

ii. /as once a "an on alloing 'erchants to offer disco$nts to people ho pay cash. 6 17no prohi"its those agree'ents and lea*es 'erchants free to offer any cashdisco$nts they find appropriate. 6 22.12(+)

iii. 5erchant2 after process2 recei*es =;9 of the a'o$nt chargedK 'erchant "ank getsa"o$t #.=K iss$er gets a"o$t 1.=K holder pays 177


18/86

i*. ?ote2 ac>$irers charge higher rates for people ho 'ake sales o*er the phone2 "


19/86

II. rroneo$s Chargesa. General

i. (irst2 cardholder has the right to ithhold pay'ent $nder 6 170ii. 6 11sets o$t detailed pro*isions of resol*ing alleged "illing errors related to

credit cards. ) 22.13

1. +nder 6 11(a),the cardholder '$st pro*ide ritten notice to the iss$erithin F7 days after the date on hich the creditor sent the rele*ant state'ent tothe cardholder

a. Billing rror! $nder 11(b)and 22.13(a)incl$des not only clai'sthat the cardholder did not 'ake the charge in >$estion2 "$t also clai'sthat the 'erchant failed to deli*er the goods and ser*ices co*ered "y thecharge in >$estion2 and e*e re>$ests for additional clarification a"o$t thecharge.

#. The iss$er '$st send a ritten state'ent of the notice ithin %7 days and '$stresol*e the iss$e ithin to "illing cycles

%. If the holder clai's the 'erchant didnt deli*er goods2 the iss$er '$st cond$ct a

reasona"le in*estigation and deter'ine that the property or ser*ices ere act$allydeli*ered.! 22.13(+) & 6 11(a)(#)(ii)&. If the iss$er doesnt accept holders acc$sation2 the iss$er '$st gi*e the

cardholder a ritten state'ent of the iss$ers reason for not correcting the charge. 22.13(c)(2), (+) & 11(a)

5. The creditor is "arred fro' closing or restricting the cardholders acco$nt forfail$re to pay the disp$ted a'o$nt d$ring the pendency of the in*estigation. 6 11(d), 22.13(d)

a. Iss$er can accr$e a finance charge against the disp$ted a'o$nt2 hich isd$e only if the disp$te is resol*ed against the cardholder. 22.13(d)(1)n. 30 & 22.13()(1)

F. The stat$te pro*ides only a 6=7 penalty against the creditor for fail$re to follothese proced$res. 6 11(e)

7. Ill$strati*e Case:Belmont v. Associates National Bank (ele!are"iii. If a charge is erroneo$s2 it gets passed "ack to the ac>$irer2 ho in t$rn passes it "ack to

the 'erchant". +na$thoried charges

i. ery strong cardholder protection1. 6 133(a)(1)(#)li'its the cardholders lia"ility to 6=72 regardless of ho

'$ch is charged2 e*en if no notice is sent. 22.12(b)(1)a. 8oe*er2 pro'pt notice can help a cardholder. -nce notice is recei*ed "y

the iss$er2 the cardholder is i''$ne to all other charges. 6 133(a)(1)()

". ,lso2 I), and 5,)TRC,RD ha*e pro*isions here2 if yo$ sendnotice ithin 3#4 "$siness days folloing the theft of the card2 yo$ arei''$ne fro' all lia"ility

#. ,ltho$gh yo$ are only charged 6=7 or less2 the cardholder sho$ld "e ary "


20/86

ii. There is an $n$s$al aspect of TI, that states the pro*isions that protect cardholdersfro' paying $na$thoried charges apply not only in cons$'er transactions2 "$t also in"$siness and co''ercial transactions

1. 8oe*er2 in the "$siness contet2 the iss$er and cardholder can contract o$t of thestat$tory allocation of loss fro' $na$thoried charges.

#. 6 135per'its any "$siness that iss$es credit cards to at least ten of itse'ployees to accept lia"ility for $na$thoried charges itho$t regard to thepro*isions of TI, E 1%%2 so long as the "$siness does not atte'pt to pass on tothe indi*id$al e'ployees any lia"ility greater than the lia"ility $nder E 1%%. 22.3(a) n.4, 22.12(b)(5)3eplanation of TI, E 1%=4.

iii. ia"ility1. In face to face transactions2 the iss$er "ears the loss fro' $na$thoried charges as

long as the 'erchant folloed the re>$isite proced$res 3*erified the signat$re ando"tained the appropriate a$thoriation for the transaction4.

#. In re'ote transactions 3phone2 internet4 the risk of loss is left ith the 'erchant.i*. Iss$es

1. Identity theft is an iss$eK also2 ne*er recei*ed cards that are stolen fro' a thief arean iss$e 3this has "een c$t "ack "eca$se of phone *erification4


21/86

III. General De"it Thingsa. Pay'ent ith a De"it Card

i. The pri'ary difference "eteen credit and de"it is that a de"it card alays ser*es as anadM$nct to a checking or sa*ings acco$nt

ii. There is no reason hy credit and de"it feat$res cannot "e co'"ined2 and th$s this has

"eco'e co''on. Reg 2 1# C(R E #7=.1#1. In this sit$ation2 it depends on hether c$sto'er pays ith the credit or de"itf$nction

#. De"it f$nctioned go*erned "y de"it r$les2 credit go*erned "y TI, and Reg Oiii. The $se of an i'p$lse to o"tain f$nds directly fro' an acco$nt >$alifies it as an

electronic f$nds transfer2 and is reg$lated "y the lectronic ($nds Transfer ,ct 3T(,41. Title I of the Cons$'er Credit Protection ,ct 3TI, is Title I4

i*. (T, E 7%3F4: T(, applies to transfer of f$nds . . . initiated thro$gh an electronicter'inal so as to order . . . a financial instit$tion to de"it . . . an acco$nt!

". sta"lishing the De"it Card Relationshipi. (T, i'poses to significant restrictions on "anks a"ility to $pdate its checking acco$nt

relationship ith de"it cards:1. (irst2 (T, E 11 generally allos a "ank to send an $nsolicited de"it card to ac$sto'er only if the card is sent in an $n*alidated condition.

#. )econd2 there are disclos$re re>$ire'ents that re>$ire the "ank to pro*ide thecons$'er a detailed $p;front disclos$re of the ter's and conditions that illgo*ern $se of the card. Reg E #7=.3a4

a. Seep in 'ind nearly no"ody ill read this.c. Transferring f$nds ith a de"it card

i. De"it card allos a person to go to an electronic 'achine 3,T54 and do any of thef$nctions it co$ld ha*e done at a "ank teller in person

ii. (T, E 7F re>$ires that a c$sto'er "e gi*en ritten doc$'entation of each transactionthat they inititate.

d. Collection "y the Payeei. , 'erchant '$st enter into a contract2 either directly ith the "ank that iss$ed the card or

indirectly thro$gh a netork that processes de"it;card transactions for the card;iss$ing"ank.

ii. To 'aMor types of netorks1. Pin Based

a. Characteried "y the re>$ire'ent that the c$sto'er enter a PI? n$'"er". +nder the typical netork r$les2 the payor "anks o"ligation to pay

"eco'es final at the 'o'ent that it trans'its the electronic 'essage "ackto the 'erchant

c. The act$al pay'ent is $s$ally 'ade "e a single daily deposit ot an acco$ntdesignated "y the 'erchant2 gi*ing it credit for all of the days de"ittransactions

d. The payor "ank "eco'es o"ligated to honor the pay'ent re>$est "eforethe c$sto'er lea*es the co$nter. Th$s2 risk to 'erchant is li'ited to payor"ank insol*ency or fail$re of the processing syste'

#. Pin essa. This syste' does not clear and settle transactions i''ediately


22/86

i. Rather2 there is an a$thoriation transaction hile the cardholder isat the ter'inal2 hich confir's the a*aila"ility of f$nds in theacco$nt to co*er the transaction

ii. Then2 o*er the net fe days2 the 'erchant o"tains f$nds fro' thetransaction in the sa'e ay as it o$ld o"tain f$nds for a standard

credit;card transaction1. These are called offline! de"itK PI? "ased are calledonline! de"it

". This syste' costs the 'erchant as '$ch as standard credit;cardtransactions 31 J # 4

i. PI? "ased transactions cost the 'erchant '$st less 3 cents pertransaction4

c. The key difference is finalityK $nder the PI? less syste'2 yo$ ha*e therights of TI, in collection

iii. rror and (ra$d in De"it Card Transactions1. rroneo$s Transactions

a. To types 3these ha*e not ca$sed significant losses4i. I'proper ithdraal 3ithdraal of the rong acco$nt or of therong a'o$nt4

1. If they charge the rong acco$nt2 they recredit the rongone and charge the other one

ii. Co$ld fail to 'ake a ithdraal that it sho$ld ha*e 'ade". The syste' 'ight fail in s$ch a ay that the 'erchant "elie*es that it is

recei*ing a$thoriations hen it in fact is not co''$nicating ith thepayor "ank.

i. The P-) netork r$les protect the 'erchant and pass the loss "ackto payor "ankK they can 'itigate losses fro' this easier

c. Ins$fficient ($ndsi. Bank can pay or not pay and p$rs$e c$sto'er on o*erdraft

#. (ra$d$lent Transactionsa. General

i. )e*eral feat$res of De"it 'ini'ie loss1. The r$les pre*enting $nsolicited 'ailing of acti*ated cards#. Both the a$thoriation re>$est fro' the 'erchant to the

"ank and the "anks reply are encryptedii. of fra$d on de"it cards res$lted fro' card $sage "y a close

ac>$aintance of the cardholderiii. Cons$'er faces '$ch "igger pro"le' ith $na$thoried

transactions on de"it than on credit". /ho "ears the loss "eteen 'erchant ho accepts stolen card and "ank

on hich the card dras0i. ?etork r$les allocate the loss to the "ankK '$ch "etter position to

'itigate these lossesc. /ho "ears loss "eteen c$sto'er and "ank0

i. Positi*e la pro*ides an anser that protects the cardholderconsidera"ly e*en apart for' the parties on agree'ents


23/86

ii. (ederal la pro*ides to separate protections related to$na$thoried transactions2 as ell as a set of specified proced$resfor deter'ining hether a partic$lar transaction as a$thoried

1. (irst set of r$les: esta"lishes threshold re>$ire'ent that acard ha*e so'e 'ini'al sec$rity feat$re 3PI?2 signat$re2

pict$re2 etc.4. F 6 0(a)a. In the a"sence of feat$re2 no cons$'er lia"ility#. -ther is 0(a)pro*isions2 disc$ssed net

%. ost of )tolen De"it Carda. F 6 0(a)esta"lishes a r$le li'iting c$sto'ers loss fro' each

$na$thoried transferi. These r$les apply to any series of related $na$thoried transfers.!

!e 6 205.

1. Th$s2 if thief $sed card 17 ti'es "efore ca$ght2 the dollarli'its in E 73a4 descri"e the cons$'ers epos$re for theentire incident2 not the indi*id$al transactions

". This r$le allos the "ank to hold the cons$'er lia"le for $p to 6=7 of$na$thoried transfers that occ$r "efore the financial instit$tion learns ofthe cons$'ers loss of the card. n no e"ent . . ./ F 6 0(a4

i. ,pplies


24/86

a. C$sto'er '$st gi*e "ank notice ithin F7 days after "ank 'ailsstate'ent. (T, E 793a4

". Bank '$st respond ithin 17 days or gi*e c$sto'er a pro*isional credit.i. I), and 5,)TRC,RD loer this to = days

c. Then2 "ank proceeds ith in*estigation2 hich it '$st co'plete ithin 7

days after recei*ing c$sto'er notice.i. (ederal co$rt can i'pose tre"le da'ages on any "ank that 3a4 failsto recredit an acco$nt ithin the 17;day period hen re>$ired todo so o r 3"4 $nreasona"ly reMects a c$sto'ers clai' of error.(T, E 79K Reg E #7=.113c43%4

F. Ill$strati*e Case:Herita&e Bank v. Lovett


25/86

I. ?egotia"le Instr$'entsa. ?egotia"ility and i>$idity

i. General1. i>$idity refers to the ease at hich an asset can "e sold at a price that reflects its

proper econo'ic *al$e

#. The lack of a 'arket 'akes sale diffic$lt "


26/86

1. General Definition of ?egotia"le Instr$'entsa. General

i. +CC E %;17&3a4ii. If an instr$'ent 'isses any of the re>$ire'ents2 the r$les of article

III dont apply

". The Pro'ise or -rder Re>$ire'enti. -rder: %;17%3a43F4: ,n instr$ction "y one person 3the draer4directing so'e other party to pay 3the draee4

1. ,n instr$'ent that contains an order is called a draft!#. Three 'ost co''on kinds of drafts:

a. , check J draft on a "ank: %;17&3f4". Cashiers Check J draer and draee are the sa'e

"ank: %;17&3g4c. Tellers Check J , draft "y one "ank on another

"ank: %;17&3h4ii. Pro'ise: %;17%3a434: , direct co''it'ent to pay

1. The party that 'akes a pro'ise is a 'aker!#. The instr$'ent that contains the pro'ise is a note!%.

iii. ,ll negotia"le instr$'ents '$st "e in ritingc. The +nconditional Re>$ire'ent

i. +CC %;17F1. i'its negotia"ility to instr$'ents that are a"sol$te and

incl$de on their face all of the ter's of pay'enta. Cant Incl$de Conditional Pay'ent -"ligation

ii. Case:B% 5nter0rises v. Fin#la1. Pro'issory note contained a state'ent that 5akers

o"ligation $nder this note is s$"Mect to the conditionsrecited in that Bill of )ale and Co*enants not to Co'pete"eteen the parties of e*en date.! 314 This 'akes the notenon;negotia"le.

iii. E %;17F3a43ii4 and 3iii4 states that a doc$'ent is non;negotia"le if itstates that it is s$"Mect to or go*erned "y! another riting or if itstates that rights or o"ligations ith respect to the doc$'ent arestated in another riting.!

i*. To ceptions J %;17F3"4:1. In a note for hich a 'aker gi*es collateral that incl$des

reference to other ritings 3sec$rity agree'ent2 loanagree'ent2 'ortgage4 that descri"es rights related to thecollateral and to the payees re'edies $pon defa$lt2 theseter's do not $nder'ine negotia"ility. %;17F3"43i4

#. If a doc$'ent contains a state'ent that pay'ent is li'itedto a partic$lar f$nd or so$rce! this does not $nder'inenegotia"ility. %;17F3"43ii4

a. .g. a nonreco$rse! real;estate noted. The 5oney Re>$ire'ent


27/86

i. The pro'ise or order '$st "e for the pay'ent of 'oney1. Incl$des do'estic and foreign c$rrency

e. The (ied a'o$nt re>$ire'enti. The a'o$nt of the o"ligation '$st "e (ID

1. This does not ecl$de state'ents ith interest or other

chargesa. ,lso2 interest can "e *aria"le or fied#. H$st cant "e: Ill pay yo$ half of hat I get for the sale of

'y "ooks.!ii. Case:Nagel v. Cronea"gh

1. ?ote doesnt contain a fied a'o$nt2 and th$s isntnegotia"le J so yo$ go to "asic contract principals tointerpret the note

f. The Paya"le to Bearer or -rder Re>$ire'enti. E %;17&3a4314

ii. 5$st "e paya"le to "earer! or order!

iii. Bearer J to ays:1. It '$st state:a. Paya"le to Bearer!". Paya"le to the order of Bearer!c. -r2 if it otherise indicates that the person in

possession of the pro'ise or order is entitled topay'ent. %;173a4314

#. ?ot paya"le to identified person:a. Doesnt state a payee". 5ade paya"le to cash!

i*. -rder J to ays:1. Paya"le to an identifia"le person

a. Pay to the order of Dan Seating!#. Paya"le to an identifia"le person or order!

a. Pay to Dan Seating or -rder!". 5$st incl$de "oth order! and an identifia"le

person! in the state'entc. If 'isses one2 it is not an instr$'ent

*. ception:1. , check that fails the "earer;or;order re>$ire'ent2 "$t

satisfies all of the re'aining negotia"ility re>$ire'ents>$alifies as an instr$'ent

g. The De'and and Definite Ti'e Re>$ire'enti. E %;17&3a43#4

ii. 5$st "e paya"le on de'and or at a definite ti'eiii. Can "e paya"le on de'and! or at no ti'e!i*. Incl$des ti'es that allo the holder to etend the ti'e for pay'ent*. Incl$des ti'es that allo acceleration and prepay'ent

*i. The only o'li&ation tat !oul) #ail te rule !oul) 'e a )ocument&ivin& te issuer eiter a completely un*uali#ie) option to e%ten)


28/86

or a *uali#ie) option to e%ten) tat )i) not state a )ate to !ic

te e%tension !oul) run

h. The ?o traneo$s +ndertakings Re>$ire'enti. %;17&3a43%4: (or"ids incl$sion of a pro'ise calling for so'ething

other than the pay'ent of 'oney

ii. Cannot "e negotia"le if it incl$des any non;'onetary pro'ises1. To deli*er heat2 etc.iii. Three eceptions:

1. ,n $ndertaking or poer to gi*e2 'aintain2 or protectcollateral to sec$re pay'ent.

#. ,n a$thoriation or poer to the holder to confessM$dg'ent or realie on or dispose of collateral

%. Conditions in hich the "orroer ai*es las intended forthe "enefit or protection of the "orroer or o"ligor

a. /ai*ers of the Re>$ire'ents of present'ent2dishonor2 notice of dishonor2 and the like


29/86

. Transferring a negotia"le Instr$'enta. General

i. , transfer of a negotia"le instr$'ent ne*er re>$ires anything 'ore than deli*ery of theinstr$'ent and a signat$re "y the transferor

". ?egotiation and )tat$s as a 8older

i. To concepts central to the transfer1. 8older! has a right to enforce the instr$'ent. 3-301(i)a. ?o person can "e a holder


30/86

&. Bank r$les that depart fro' a"o*e'entioned r$lesa. (irst2 ,rticle & generally dispenses ith the re>$ire'ent of indorse'ents

for transfers of checks in the check;collection syste'i. Depositary "ank a$to'atically "eco'es a holder of a check

deposited "y its c$sto'er. 4-205(1)

ii. Bank need not indorse a check hen it transfers to another "ank. 4-20". Reg CC pro*ides that no party other than a "ank can "eco'e the holder of

a check once it has "een indorsed "y a "anki. The only ay a different party can "eco'e the holder is if the "ank

specially indorses the check to a non"lank party or ret$rns thecheck to the depositor 3dishonored checks4. !e CC and4-201(b)

iii. Restricti*e and ,no'alo$s Indorse'ents1. Restricti*e Indorse'ents

a. P$tting a condition other than for deposit only! or for collection!". 6 3-20(a), (b)in*alidates al'ost all other restricti*e indorse'ents

c. If an instr$'ent "ears one of the alloa"le restricti*e indorse'ents2 aparty ho pays or p$rchases the instr$'ent co''its con*ersion $nless theproceeds of the instr$'ent are recei*ed "y the indorser or appliedconsistently ith the indorse'ent. 3-20(c)

#. ,no'olo$s Indorse'entsa. Indorse'ent 'ade "y a person that as not a holder at the ti'e it 'ade

the indorse'ent. 3-205(d)". If a person ho is not the holder signs order paper2 it re'ains paya"le to

the person it is paya"le to.c. ,rticle % ass$'es that these indorse'ents are 'ade for acco''odation!

so that the ano'alo$s indorser "eco'es a g$arantor of the instr$'ent. 3-41

c. nforce'ent and Collection of Instr$'entsi. The right to enforce an instr$'ent

1. ,ny person that holds an instr$'ent is a person entitled to enforce theinstr$'ent! $nder 3-301(i)

2. @o$ can sell an instr$'ent2 and than that person has all of yo$r rights $nder theinstr$'ent. 3-203(b)

%. 3-203also allos the p$rchaser a right to 'ake a party sign the instr$'ent afterthe sale

ii. Present'ent and Dishonor1. To step approach:

a. Present'enti. , de'and for pay'ent 'ade "y a person entitled to enforce an

instr$'ent. 3-501(a)1. If a note2 de'and is 'ade to the 'aker of the note.2. If a draft2 'ade to the draee. 3-501(a)

". The response of the party to ho' present'ent is 'adei. In 'ost cases2 the syste' ass$'es that a party intends to dishonor

the instr$'ent if it does not take an affir'ati*e action to honor it.


31/86

1. In 'ost cases2 it is considered dishonored if it is not paid atthe ti'e of present'ent. 5-502(a)(1), (b)(2)

iii. Defenses to enforce'ent1. ,s long as the person entitled to enforce the instr$'ent is not a holder in d$e

co$rse2 ,rticle III allos the o"ligor to i'pose a ide "ariety of defenses2 hich

incl$de not only any defense cereated "y ,rticle III2 "$t also any clai' the o"ligorhas against the payee ith respect to the original transaction. 3-305(a)(2), (3)#. Case: +urman v. ar)-s Home Improvement3fail$re ot pro*ide the goods or

ser*ices for hich the instr$'ent as gi*en4.d. ia"ility on an instr$'ent

i. (irst2 3-401artic$lates a general r$le of ecl$sion. cept for the transfer andpresent'ent arranty lia"ility2 no party is lia"le on an instr$'ent $nless it has signed theinstr$'ent.

1. To 'aMor pro"le's:a. )o'e a$thoriing 'ark other than a signat$re: etre'ely "road definition

hich incl$des 'arkings in 3-401(b); see 1-201(b)(37)

". Indi*id$al acting as an agent or representati*e:i. )igning party is the representati*e! and the person they are agentfor is the represented person!

ii. Is represented person lia"le:1. Bo$nd "y the sa'e principles as contract and agency la.

3-402(a)

iii. Representati*e lia"le:1. Is not lia"le if 3a4 the signat$re shos $na'"ig$o$sly that

he is signing on "ehalf of the represented person and 3"4 theinstr$'ent identifies the represented person. If either ofthese tests is failed2 representati*e is lia"le $nless he canpro*e that the original parties did not intend for hi' to "e"o$nd. 3-402(b)(1), (b)(2)

c. Deter'ine the lia"ility of the parties that ha*e signed the instr$'ent2 thereare fo$r r$les 3# 40.1, . 474

i. The party that iss$es the note is directly and $nconditionally lia"leon the instr$'ent. 3-412

ii. Draee has no lia"ility on a draft at the ti'e it is iss$ed. 3-408. Ifit accepts the draft 3M$st a signat$re4 the draee is lia"le for thedraft. 3-413

iii. Draer of a draft is not lia"le on the draft $nless it is dishonored.3-414(b)

1. Draers lia"ility if discharged if the "ank accepts the draft.3-414(c)

i". Indorser lia"le only if the instr$'ent is dishonored. %-415(a). Theindorsers lia"ility is dishcharged if the "ank accepts theinstr$'ent after it has "een indorsed. 3-415(d). ,n indorser canli'it its lia"ility "y indicating that it is signing the instr$'entitho$t reco$rse.! 3-414(e), 3-415(b)

e. The effect of the instr$'ent on the $nderlying o"ligation


32/86

i. General1. /hen a party iss$es a negotia"le instr$'ent2 it inc$rs lia"ility that is co'pletely

separate fro' its lia"ility on the $nderlying o"ligationii. 3-310sets o$t the r$les go*erning the relation "eteen lia"ility on the instr$'ent and

lia"ility on the $nderlying o"ligation.

iii. To Classes1. ?ear;cash instr$'ents. 3-310(a), (c)a. Certified Checks2 Cahiers checks2 and tellers checks.". Cashiers and Tellers Checks are checks on hich a "ank is the draer2 so

the "ank has lia"ility $nder 3-412 and 3-414(b)respecti*elyc. 3-310(a) and (c)pro*ide that the $nderlying o"ligations is dischared hen

the o"ligee takes one of the near;cash instr$'ents2. -rdinary Instr$'ents. 3-310(b)

a. The stat$te does not i''ediately discharge the $nderlying o"ligation". It is s$spended2 instead. 3-310(b)(1), (2).

i. In the instr$'ent is paid2 the $nderlying o"ligation is discharged.

3-310(b)(1), (2).ii. If the instr$'ent is dishonored2 the s$spension ter'inates2 and theo"lige has the option to enforce either the instr$'ent or the$nderlying o"ligation. 3-310(b)(3). )o2 yo$ can s$e on the check2or on the o"ligation.

i". , discharge of the $nderlying o"ligation $nder 3-310is effecti*e only to the etent of thea'o$nt of the instr$'ent. 3-310(a), (b)

*. Resol*ing disp$tes2 and paid in f$ll! cla$ses. 3-311generally s$pports that $se ofinstr$'ent to resol*e disp$tes

1. , paid in f$ll cla$se ill discharge an $nderlying o"ligation if 3a4 the instr$'entis tendered for f$ll satisfaction of a disp$ted clai'2 or 3"4 the payor conspic$o$slynotifies the payee that it intends the instr$'ent to constit$te f$ll satisfaction of theclai'2 and 3c4 the payee s$ccessf$lly o"tains pay'ent of the instr$'ent. 3-311(a),(b).

a. Ill$strati*e Case:McMaon orp. v. Bur&er airy o. 3Paid in ($llInstr$'ents4


33/86

I. 8older in D$e;Co$rse )tat$sa. General

i. 8older in d$e;co$rse stat$s i'ple'ents the idea that enhancing the a"ility of transfereesto enforce instr$'ents increases the li>$idity of negotia"le instr$'ents "y 'akingnegotia"le instr$'ents 'ore attracti*e in*est'ents

". The re>$ire'ents for holder in d$e;co$rse stat$si. 5$st satisfy to sets of r$les1. (irst2 it '$st o"tain the instr$'ent thro$gh the process of negotiation descri"ed in

the pre*io$s section so that it "eco'es a holder#. )econd2 there are special >$alifications that '$st "e satisfied to ele*ate an

ordinary holder to a holder in d$e co$rsea. )et o$t in to stages:

i. General definition: 6 3-302(a)ii. )ection ith definitions that descri"e the ter's in %;%7#3a4

ii. 5$st satisfy three re>$ire'ents:1. 5$st take the instr$'ent for *al$e

a. -rdinary pay'ent >$alifies as *al$e2 as does the release "y the p$rchaserof a pre;eisting clai' against the seller. 6 3-303(a)(3)b. Pro'ise of f$t$re perfor'ance D-) ?-T co$nt as *al$e $ntil

perfor'ance has occ$rred. 3-303(a)(1).#. 5$st take the instr$'ent in good faith. 3-302(a)(2)(ii)

a. Re>$ires honesty in fact! and the o"ser*ance of reasona"le co''ercialstandards of fair dealing. 6 1-201(b)(20), 6 3-103(a)(4)

i. ?eed not esta"lish that potential holder ac>$ired the instr$'entdishonestly2 M$st failed to confor' to reasona"le standards of fairdealing.

". 5ost co''on clai's challenge long;ter' relationships "eteen lendersp$rchasing negotia"le instr$'ents2 on the one hand2 and their clients2 onthe other. The iss$ers of those instr$'ents ha*e had considera"le s$ccessarg$ing that their relationship ith the client has "eco'e so close that thelender acts in "ad faith hen it tries to $se holder;in;d$e;co$rse stat$s toins$late itself fro' defenses that o$ld ha*e "een *alid against itslongti'e client.

%. 5$st take the instr$'ent


34/86

#. checks a$to'atically "eco'e o*erd$e 7 days after theirdate

%. Instr$'ents paya"le at a definite ti'e "eco'e o*erd$e$pon any fail$re to 'ake a sched$led pay'ent of principalor $pon any other e*ent that res$lts in acceleration of the

date of 'at$rity of the instr$'entii. The instr$'ent has a forgery or alteration. 3-302(a)(1), 3-302(a)(2)(i")

iii. , third party clai's to on all or part of the instr$'ent. 3-302(a)(2)(")

i*. -ne of the o"ligors has a defense or clai' that o$ld li'it or "arenforce'ent of the instr$'ent "y the original payee. 3-302(a)(2)("i)

c. If notice does not fall in one of the fo$r categories2 the notice is rele*antonly if it is s$fficiently da'aging to $nder'ine the holders good faith inac>$iring the instr$'ent.

d. 8older in d$e co$rse stat$s rests on the paradig' of an anony'o$s$nknoing p$rchaser that knos nothing a"o$t the $nderlying transactionand th$s cannot fairly "e charged ith pro"le's in that transaction

c. Rights of the 8older in D$e Co$rsei. (ree fro' 'ost significant defenses to pay'ent

1. 8older in d$e co$rse is i''$ne fro' 'ost ordinary contract clai's or defensesa. If thief stole "earer paper and sold instr$'ent to Bank2 Bank as holder in

d$e co$rse is i''$ne fro' any atte'pt "y person ho thief stole fro' toreco*er fro' "ank. Person '$st go after thief. 6 3-30

ii. -nly defenses are the fo$r real! defenses in 6 3-305(a)(1)1. Infancy: cannot enforce an instr$'ent iss$ed "y a 'inor ith no capacity to sign

it. 6 3-305(a)(1)(i)#. D$ress2 ack of legal capacity2 and illegality: cannot enforce if original o"ligation

o$ld ha*e "een *oid. 6 3-305(a)(1)(ii)%. (ra$d that ind$ced iss$ance of the instr$'ent ith neither knoledge nor

reasona"le opport$nity to learn of its character or essential ter's. 3-305(a)(1)(iii).a. Co$rts interpret this narroly

&. Discharge of the o"ligor in insol*ency proceedings. 6 3-305(a)(1)(i")d. Pay'ent and Discharge

i. To step sol$tion to the pro"le' here one party discharges2 and the holder;in;d$eco$rse can still enforce the instr$'ent:

1. (irst2 the holder in d$e co$rse stat$s is not precl$ded "y notice of pay'ent ofdischarge. 3-302(b)

#. )econd2 any hole or partial discharge is effecti*e against a person that takes


35/86

a. The discharged party can 'ake the discharge effecti*e "y ac>$iring thenote and destroying it at the ti'e of pay'ent.

i. 8older '$st s$rrender hen o"ligor 'akes pay'ent. 6 3-501(b)(2)(iii).

1. Doesnt really ork in practice

". If discharge is partial2 the stat$te offers the 'aker the a"ility to protectsitself "y forcing the holder to indicate on the instr$'ent that the pay'enthas "een 'ade. 6 3-501(b)(2)(iii)

c. +CC is a "it of a pain "


36/86

II. Re'edies of +nsec$red Creditors +nder )tate aa. /ho is an +nsec$red Creditor

i. ,nyone oed a legal o"ligation that can "e red$ced to 'oney M$dg'ent is a creditor ofthe party oing the o"ligation

ii. +nless a party contracts ith the de"tor for sec$red stat$s or is ranted it "y stat$te2 the

party is an $nsec$red creditor1. These are general and ordinary creditors that pop$late state collection proceedings#. Tort *icti's2 inca$tio$s creditors2 $ninfor'ed creditors2 creditors ho didnt or

co$ldnt negotiate for sec$rityiii. If the creditor has recei*ed a M$dg'ent2 they are a=*dment creditor2 "$t this doesnt

$nder'ine their $nsec$red stat$s.i*. These re'edies are the 'ini'$' collection re>$ire'ents oed to anyone ho has an

o"ligation that can "e red$ced to a 'oney M$dg'ent". +nsec$red Creditors Getting Paid

i. General Iss$es1. Cant do self;help sei$re of the de"tors property J this constit$tes con*ersion

torta. ,dditionally2 they 'ay "e charged ith larceny#. ,lso2 if yo$ de'and pay'ent2 yo$ '$st do so in a reasona"le 'anner to a*oid

rongf$l collection practices%. Case: ,itale v. otel California& 'nc.

a. Basically2 yo$ can le*y on the property and get the sheriff to go collect iti. Re'edy is le*y $nder rit of eec$tion

ii. /rit of garnish'ent: Re>$ires the third party to pay the M$dg'entcreditor rather than the de"tor

ii. i'itations on Co'pelling Pay'ent1. General

a. It is the M$dg'ent creditors responsi"ility to $se disco*ery to locate assets2and only then ill a sheriff go get it

i. If yo$ accidentally locate a third parties property:1. Co$ld "e lia"le for da'ages#. Co$ld "e lia"le for con*ersion

ii. Creditors cant cond$ct fishing epeditions "y shoing $p at ade"tors place ith an officer

". Disco*eryi. 5$st find the de"tor and ha*e the' sit thro$gh ea'ination

1. If de"tor lies: perM$ryii. 5ay not keep assets in predicta"le for's

iii. )ale to "onafide p$rchasers ee'pt the propertyi*. Can only enforce in the state the person is in

c. De"tors can preference one de"tor o*er another as long as the pay'ent tothat de"tor is fra$d$lent

#. e'ption )tat$tesa. Pre*etn sheriff fro' seiing certain property $nder a rit of eec$tion J

this property is ee'pt". /isconsin )tat$te J p. 7


37/86

i. , creditor can not seie:1. Pro*isions for "$rial#. B$siness and (ar' Property2 not to eceed 6=77 in *al$e%. Cons$'er Goods2 not to eceed 6=777 in aggregate *al$e&. 5otor ehicles2 not to eceed 61#77 in aggregate *al$e

=. = of de"tors inco'e in a one eek pay periodF. Depositary acco$nts in the aggregate *al$e of 61777ii. 8o'estead e'ption

1. 8o'e is ee'pt $p to 6&7g2 ecept certain liens#. 8o'e is "$ilding and land

c. (ederal la ee'pts a 'ini'$' of = of de"tors earnings fro'personal ser*ices

i. )o'e states ee'pt all earnings 3Teas2 Pennsyl*ania4iii. Is the a )erio$s ,"o$t Collecting +nsec$red De"ts0

1. egal 5echanis's:a. Co$rts can order those s$"Mect to their M$risdiction to 'eet their legal

o"ligations and i'prison the' if they ref$se to co'plyi. Do incl$de o"ligations regarding:1. ,li'ony or Child )$pport#. Respecting the property of others "y not trespassing or

stealing%. Perfor'ing $nder a contract to sell real property

ii. Dont incl$de o"ligations regarding1. Personal InM$ries#. The /ages of orking people%. Breaches of 'ost kind of contracts


38/86

III. )ec$rity and (oreclos$rea. The ?at$re of )ec$rity

i. The 'ore effecti*e collection right is knon as a lien1. , charge against or an interest in property to sec$re pay'ent of a de"t or

perfor'ance of an o"ligation.! BC E 171

#. , relationship "eteen partic$lar property and a partic$lar de"t or o"ligation%. The general nat$re of the relationship is that ifthe de"t is not paid hen d$e2 thecreditor can co'pel the application of the *al$e of the collateral to pay'ent of thede"t

a. This is foreclos$reii. There are to types of non;consens$al liens:

1. liens o"tained "y stat$te2 s$ch as 'echanics liens 3stat$tory liens4#. liens o"tained "y $nsec$red creditors thro$gh M$dicicial processs 3M$dicial liens4

iii. The sec$rity interest has effect only in the e*ent of a de"tors defa$lti*. +nsec$red creditors get only hat is left after pro*isions ha*e "een 'ade for sec$red

creditors

*. /hy "e an $nsec$red creditor1. Can charge higher interest rates#. Thron into it itho$t the opport$nity to negotiate%. )o'e agree to a contract that lea*es the' $nsec$red


39/86


40/86

c. The sec$rity agree'ent 'ight "e in the for' of a )ee) o# trusti. The deed of tr$st states that the collateral ill "e held in tr$st "y

the creditor or a third party s$ch as a "ank or title co'pany. The"orroer agrees that in the e*ent of defa$lt2 the tr$stee can sell theproperty and pay the loan fro' the proceeds of the sale.

#. (oreclos$re can "e acco'plished


41/86

I. The i'portance of possession pending foreclos$rea. General

i. /hy the sec$red creditor ants it1. , de"ter 'ay ha*e little incenti*e to preser*e and 'aintain the property#. The $se of the collateral "eteen the ti'e the right to foreclose accr$es and the

ti'e it "eco'es final 'ay ha*e s$"stantial econo'ic *al$e.%. If the de"tor is in possession of the property in the period leading $p to the sale2 it'ay "e diffic$lt or i'possi"le for prospecti*e p$rchasers to e*al$ate the property2there"y depressing the resale price

ii. /hy the de"tor ants it1. ?eeds a place to li*e2 senti'entality2 f$nctionality2 etc.

iii. The creditor ho can 'ake a credi"le threat to dispossess the de"tor has etraordinaryle*erage o*er the de"tor

1. Interest2 etc.i*. 5any sec$rity ,gree'ents pro*ide that the creditor has the right to possession

i''ediately $pon defa$lt2 "$t s$ch a pro*ision is only the starting point of legal analysis

". The De"tors right to possession d$ring foreclos$rei. General1. -nly the p$rchaser at the foreclos$re sale is entitled to dispossess the 'ortgagee#. By recei*ing a rit of assistance2 or rit of possession after filing an eMection or

e*iction action2 the p$rchaser can ha*e the sheriff on the scene in 17 to #7 days.c. ,ppoint'ent of a recei*er

i. Interested party can apply for the appoint'ent of a recei*erii. Recei*er is officer of the co$rt ith fid$ciary o"ligations to all interested parties

iii. 8e has the right to collect the rents and $se the 'oney to 'aintain the "$ilding2 as ell asthe a$thority to rent the' o$t as necessary

i*. The recei*er ill retain any rents collected in ecess of the a'o$nts necessary to'aintain the property2 pending the o$tco'e of the foreclos$re action

*. +sef$lness1. De"tor and 'ortgager dont get access to the cash flo#. 8oe*er2 cash flo ill "e $sed to 'aintain the "$ilding2 so it helps the

'ortgager*i. Co$rts are rel$ctant to appoint recei*ers

1. -nly in rare circ$'stances ill the co$rt appoint a recei*er to take care of onerocc$pied real estate

#. a de"tor can nearly alays "e s$re he ill retain possession of a fa'ily ho'estead%. Recei*ers are appointed for oner;occ$pied co''ercial real estate 'ore often2

"$t if so'eones "$siness is "eing r$n o$t of it2 this is $nlikely*ii. Check o$t the code ro"isions +or aointment o+ recei"ers on 732

d. ,ssign'ent of Rentsi. If the parties conte'plate that the de"tor ill rent the collateral to others d$ring the ter'

of the 'ortgage2 the 'ortgage is likely to incl$de a pro*ision "y hich the de"tor assignsthe rents fro' the property to the 'ortgagee as additional sec$rity

ii. Beca$se collecting the rents fro' 'ortgaged property that has "een rented to thirdparties2 like appointing a recei*er2 is f$nctionally the e>$i*alent of taking possession2so'e co$rts are rel$ctant to gi*e effect to the assign'ent of rents cla$se


42/86

e. The right to possession pending foreclos$re J Personal Propertyi. ,rticle go*erns nearly all sec$rity interests in personal property

ii. ,rticle fa*ors the sec$red creditor in *ery strong ter'siii. The sec$red party has a right to take possession i''ediately $pon defa$lt. 6 -0i*. ?eed not in*ol*e co$rts or officials if they can get possession itho$t a "reach of the

peace1. If de"tor resists repossession2 the sec$red party '$st o"tain a rit of reple*in.a. Does this "y filing an action for reple*in". ,ny party entitled to possession of tangi"le personal property is entitled to

the ritc. /rit directs sheriff to take possession of the property

#. I''ediately $pon filing2 the creditor can 'o*e for an order granting i''ediatepossession pending the o$tco'e of the case.

a. Typically takes no 'ore than 17 days to acco'plish%. 5ost states re>$ire P to gi*e notice of the hearing to the de"tor&. If the sec$red creditor pro*es it is likely to pre*ail in the action2 the creditor gets

the rit of reple*ina. +s$ally also has to post a "ond in case the de"tor ins in the action=. The de"tor can post a "ond to retain the propertyF. Typically2 a creditor can get ahold of personal property thro$gh the co$rt in a

'atter of eeksf. The ,rticle right to self;help possession

i. The right is deri*ed fro' 6 -02 pro*iding that fafter defa$lt a sec$red party 'ay takepossession

ii. There are collection repossession agencies2 etc.iii. 6 -0(2)gi*es the creditor the option to lea*e e>$ip'ent! te'porarily in the

possession of the de"tor "$t render it $n;$sea"le1. Take the engine o$t2 etc.

g. The i'its of self;help J "reach of the peacei. 6 -0(b)(2)pre*ents the creditor fro' doing a "reach of the peace

ii. (or ea'ples2 oo$ at cases on 742-744h. )elf;8elp against acco$nts as collateral

i. This M$st 'eans yo$ collateral the persons inco'ing acco$nts1. a'ples of tica arranements on 745

ii. In the e*ent of defa$lt2 E ;F7 and E ;&7F pro*ed a self;help re'edy to the partyholding a sec$rity interest in the acco$nts

1. 6 -07allos the sec$red creditor ho knos the identity of the accoc$ntde"tors to send the' ritten notices to pay directly to the sec$red creditor

a. If they dont2 they can "e s$ed2 and this orks


43/86

. H$dicial )ale and Deficiencya. General

i. Seep in 'ind that ,rticle sec$rity interests can "e foreclosed M$dicially. +CC E ;F713a4314.

". )trict (oreclos$res

i. )trict foreclos$res do not re>$ire a sale of the collateralii. 5ost co''on is the foreclos$re of a contract for deed2 or install'ent land contract1. This is a contract for the sale of real property that pro*ides for the pay'ent of the

p$rchase price in install'ents o*er 'any years2 ith the deed to "e deli*ered onlyafter the last install'ent has "een paid

iii. In 'ost states2 if the de"tor does not pay the f$ll p$rchase price in accord ith thecontract or at least "y the end of a stat$tory grace period2 the de"tors interest in theproperty is forfeited and the the co$rt confir's that the title re'ains ith the seller.

c. (oreclos$re sale proced$resi. In 'ost states2 stat$tes specify

ii. The high "idder ins2 '$st $s$ally place a deposit2 and pay the rest in a set a'o$nt of

ti'e 3ho$rs or days4. If he doesnt2 he 'ay lose his deposit and "e lia"le for any da'agesin contractiii. )ale Proceeds

1. The 'oney goes first to rei'"$rse the foreclosing creditor for the epenses ofsale.

#. ?et2 the proceeds are distri"$ted to the foreclosing creditor $p to the a'o$nt ofthe de"t sec$red "y the foreclose lien

%. ,ny re'aining s$rpl$s goes to the de"tori*. /hile the foreclos$re is in progress2 the 'ortgage de"tor has the right to redee' the

property fro' the 'ortgage "y paying the f$ll a'o$nt d$e $nder the 'ortgage2 incl$dinginterest and attorneys fees.

*. In 'ore htna half the states2 the de"tor also has a stat$tory right to redee' the collateralfro' the "$yer after the sale

*i. )tat$tory redee'ing rights $s$ally ranger fro' F 'onths to % years2 ith one year "eingthe 'ost co''on

*ii. )tat$tory rights of rede'ption are freely transfera"le.d. Pro"le's ith (oreclos$re )ale Proced$res

i. )o'eti'es the de"tor is s$fficiently o$traged to "ring a las$it asking the co$rt to setaside the sale "$ate sale price.

1. ,r'strong *. Cs$rilla: To instances hen it can "e set aside: 314/hen thedisparity is so great as to shock the co$rts conscienceK 3#4 /hen2 in addition tothe inade>$ate price2 there are circ$'stances hich o$ld 'ake it ine>$ita"le toallo the sale to stand. The M$dge in this case looks to a 17;&7 of 'arket *al$erange

e. ,d*ertisingi. (orclos$re sale ad*ertising 'ay "e fied "y stat$te

1. )ee /isconsin )tat$te on =9 and ,d*ertise'ent on = for ea'pleii. ,d*ertising is $s$ally in s'all circ$lation 'againe in order to keep costs don


44/86


45/86

d. Doesnt ha*e to pay2 M$st "$ys it on credit


46/86

I. ,rticle )ale and Deficiencya. General

i. ,s ith real property foreclos$res2 the re>$ire'ent that the collateral "e offered for saleas part of the personal property foreclos$re process cannot "e ai*ed or *aried in theinitial lending contract. 6 -02(10)

". )trict (oreclos$re $nder ,rticle i. ,fter a defa$lt has occ$rred2 the de"tor can consent ot the sec$red party retaining thecollateral in f$ll or partial satisfaction of the o"ligation.

ii. 6 -20(c)(2)i'ples consent if the sec$red party sends the de"tor a proposal for retentionof the collateral in f$ll satisfaction of the de"t and does not recei*e notification of theo"Mection to the proposal ithin #7 days.

iii. Right to consent s$"Mect to three conditions:1. There '$st "e no o"Mection fro' others holding liens against the collateral. 6 -

20(a)(2)

#. If the collateral is cons$'er goods2 the de"tor can consent2 in riting or "ysilence2 to strict foreclos$re only after repossession. E -20(a)

3. )trict foreclos$re is not per'itted if the de"tor has paid F7 of the cashs price ofthe cons$'er goods p$rchased on credit or F7 of the loan against othercons$'er goods. The de"tor 'ay ai*e this right after defa$lt2 "$t this kind ofai*er re>$ires a riting. 6 -20(a)(4) and (e), -24(b)

a. The i'plicit ass$'ption is that cons$'er ho ha*e paid less than F7percent dont ha*e an e>$ity2 and anyone other than a cons$'er ill "esophisticated eno$gh to protect its e>$ity "y 'aking the o"Mectiondescri"ed in 6 -20(c).

c. )ale proced$re $nder ,rticle i. 6 -10go*erns the sale of collateral hen ,rticle applies

ii. The sec$red creditor2 and not a p$"lic official2 cond$cts the sale and distri"$tes theproceeds.

iii. The foreclosing creditor has a d$ty to the de"tor to choose a proced$re for sale that isco''ercially reasona"le. *ery aspect of the disposition2 incl$ding the 'ethod2'anner2 ti'e2 place and ter's '$st "e co''ercially reasona"le.! 6 -10(b)

i*. 6 -11(c)(1)also re>$ires that the creditor gi*e the de"tor prior notice of the sale1. P$rpose is to ena"le the de"tor to o"ser*e the sale2 participate in it2 or otherise

protect its rights*. 6 -23incorporates the co''on la right to redee'. Rede'ption is acco'plished "y

paying the f$ll a'o$nt of the de"t2 incl$ding the sec$red creditors attorneys fees andepenses of sale.

1. ?o additional stat$tory right to redee' after the sale eists $nder the +CC*i. De"tors right to set aside a defecti*e or irreg$lar sale is 'ore constr$cted $nder the +CC.

If the sale as co''ercially $nreasona"le2 the de"tors only right is often to s$e thecreditor for da'ages.

1. If2 hoe*er2 the collateral is cons$'er goods2 the de"tor has the right to reco*er astat$tory penalty. 6 -25(c)(2)

#. The good faith p$rchaser at a +CC sale can "$y ith confidence that it ill notlose its "argain "


47/86

*ii. /hen collateral is sold for an ins$fficient price2 the inM$ry to the de"tor 'ay co'e ineither of to for's.

1. /here the de"tor has an e>$ity in the collateral2 the ins$fficient price 'ay forfeitall of part of this e>$ity.

#. There 'ay also "e an entry of a deficiency M$dg'ent in an a'o$nt larger than is

appropriate.d. De"tors defenses to deficiency M$dg'entsi. (ail$re to sell the collateral

1. 6 -10(a)pro*ides that a sec$red party 'ay sell the collateral after defa$lt2 "$tthere is not specific pro*ision that says the creditor '$st sell the collateral.

#. If the sec$red creditors delay in selling is not co''ercially reasona"le2 thesec$red creditors deficiency ill "e li'ited to the a'o$nt that o$ld ha*e "eenleft oing if the sale had "een co''ercially reasona"le. 6 -2(a)

ii. Re>$ire'ent of ?otice of )ale1. 6 -11re>$ires that the sec$red party send notice to the de"tor2 g$arantors2 and

so'e lieners.

#. The fail$re to gi*e this notice does not in*alidate the sale. 6 -172 "$t it is adefect that can ha*e the effect of red$cing the a'o$nt of the deficiency thesec$red party can reco*er.

%. Ill$strati*e Case:0I v. Laniera. ,ltho$gh the goods ere sold at a pri*ate sale2 the "anks letter did not

indicate the type of sale at hich the goods o$ld "e sold. This as not afatal defect. (or a pri*ate sale2 the creditor only need pro*ide notice ofthe ti'e after hich any pri*ate sale or other intended disposition os to "e'ade.! ,t a 'ini'$' it '$st "e sent in s$ch ti'e that persons entitled torecei*e it ill ha*e s$fficient ti'e to take appropriate steps to protect theirinterests "y taking part in the sale of after notice is sent2 gi*ing the de"torinterests "y taking part in the sale or other disposition if the so desire

iii. The Re>$ire'ent of a Co''ercially Reasona"le )ale1. The reasona"leness re>$ire'ent of 6 -10(b)is p$rposef$lly *ag$e. The

p$rpose is to "ring the knoledge and ingen$ity of the sec$red party to "ear indeter'ining a reasona"le ay to dispose of the partic$lar kind of collateral.

#. Ill$strati*e case: avers v. 0ra1iera. (ail$re to proc$re the "est price for collateral does not in and of itself

'ake a sale co''ercially $nreasona"le. 6 -27(a). 8oe*er2 314 thehasty sale for this type of e>$ip'ent asnt reasona"le2 3#4 Thead*ertising as not ade>$ate2 3%4 , distress sale a$ction as notreasona"le2 3&4 ,ircraft 'aintenance as not properly addressed prior tothe sale2 and 3=4 the p$rchase price as not reasona"le.

%. Contrast aver1"eteen M$dicial sale iss$esa. aversco$rt says that sity days as a grossly inade>$ate ti'e ofr

ad*ertising and 'arketing the aircraft2 "$t M$dicial sale rarely allos that'$ch ti'e2 e*en for co'ple collateral orth 'illions of dollars

". aversco$rt is disappointed in ad*ertising that ran only "riefly in the/all )treet Ho$rnal and Trade;a;Plane2 "$t $nder M$dicial sale proced$res2


48/86

the aircraft co$ld ha*e "een sold in eactly the condition in hich it asrepossessed.

c. averssays that a distress a$ction! as not reasona"le2 yet nearly e*eryM$dicial sale is precisely that.

d. aversco'plains a"o$t the 'aintenance of the aircraft2 "$t in a M$dicial

sale2 the aircraft co$ld ha*e "een sold in eactly the condition in hich itas repossessed.e. aversco$rt sets aside a sale for al'ost sity percent of the fair 'arket

*al$e2 a price that o$ld easily pass '$ster in 'ost M$dicial saleproced$res.

&. The appropriate re'edy for fail$re to fi*e notice of sale or fail$re to cond$ct thesale in a co''ercially reasona"le 'anner

a. 5aMority hold that there is a a re"$tta"le pres$'ption that the *al$e of thecollateral as at least e>$al to the a'o$nt of the de"t2 ith theconse>$ence that2 if the cons$'er de"tor o"Mects2 the co$rt ends $pdeter'ining hat the sale price sho$ld ha*e "een.

". 5inority holds that any significant irreg$larity in the sale proced$re iss$fficient to deny the deficiency altogether J a *ie that relie*es the co$rtof the necessity to g$ess hat the price o$ld ha*e "een a"sent the defect.

i. If conf$sed2 see e.g. on 9%


49/86

II. Bankr$ptcy and the ,$to'atic )taya. (iling a Bankr$ptcy Case

i. @o$ file a for'1. Chapter J li>$idation#. Chapter 11 J Reorganiation

%. Chapter 1# J Reorganiation only for oners of fa'ily far's&. Chapter 1% J Reorganiation for indi*id$alsii. Bankr$ptcy Clerk sta'ps it: To things happen

1. , "ankr$ptcy estate is created 3all of the property of the de"tor4#. )tay against any collection acti*ities is a$to'atically i'posed. BC E %F#3a42

=&13a4iii. /ho is in control after the filing0

1. +nder Chapter a. The +) Tr$stee appoints a tr$stee to ad'inister the estate". Tr$stee li>$idates the estatec. If the de"tor is an indi*id$al2 he can ee'pt certain property fro' the

estate. *ery indi*id$al de"tor is entitled to keep the property of the"ankr$ptcy estate that o$ld ha*e "een ee'pt fro' creditors re'edieson a M$dg'ent $nder state la. BC E =##3"4

d. ,fter li>$idation2 tr$stee distri"$tes 'oney pro rata to general creditorsi. If an indi*id$al2 de"ts are discharged

ii. If a corporation2 it is a corporate shell $idation. BC E 1%#=3a43=4

iii. Tr$stee ea'ines the "$dget and appears at the co$rt hearing toconsider the confir'ation of the plan. BC E 1%7#

i*. If the plan is confir'ed2 the tr$stee recei*es the pay'ents for' thede"tor and distri"$tes the' pro rata to the general creditors o*erthe life of the plan. The plan lasts fro' % to = years2 and the de"toris discharged fro' 'ost re'aining de"t hen the last pay'ent is'ade. BC E 1%#9

d. +nder Chapter 1#i. Basically the sa'e pattern

e. +nder Chapter 11


50/86


51/86


52/86

a. If the creditors contract pro*ides for the de"tor to pay the attorneys feesof the creditor or to rei'"$rse for other fees2 those a'o$nts are incl$dedin E =7#3"42 pro*ided that they ere inc$rred prior to the ti'e the"ankr$ptcy as filed. E =7#3"4314.

#. +nsec$red clai's

a. Do not gro ith interest". Traditionally2 co$rts ha*ent alloed $nsec$red creditorst to incl$depostpetition attorneys fees in the a'o$nts of their clai's. 8oe*er2 so'erecent cases ha*e if the contract originally pro*ided for it.

i*. Pay'ent on +nsec$red clai's1. The data fro' certain st$dies leads to to concl$sions:

a. The fate of 'ost $nsec$red creditors in "ankr$ptcy is not a happy one.". 8oe*er2 there are 'any cases in hich $nsec$red creditors 'anage a

s$"stantial if not f$ll2 reco*ery.c. )o'eti'es2 de"tors ith s$"stantial assets2 an alloed clai' can yield

s$"stantial di*idends.

*. Calc$lating the ,'o$nt of )ec$red Clai's1. (irst2 yo$ '$st "if$rcate the clai' as re>$ire $nder BC E =7F3a4a. The clai' of a sec$red creditor can "e asecure) claimonly to the etent

of the *al$e of the collateral. The re'ainder of the creditors clai' is anunsecure) claim.

#. )econd2 yo$ '$st deter'ine hether the creditor is entitled to accr$e postpetitioninterest2 attorneys fees2 or costs on its clai'.

a. E =7F says that they creditor can do so if2 and only if:i. ,ttorneys fees and costs '$st "e reasona"le

ii. Pay'ent of the attorneys fees and costs "y the de"tor '$st "epro*ided for $nder the agree'ent $nder hich the clai' arose

iii. Interest2 attorneys fees2 and costs can "e accr$ed only to the etentthat the *al$e of the collateral eceeds the a'o$nt of the clai'sec$red "y it. 3If the clai' is o*ersec$red4

*i. )elling the collateral1. /hen the tr$stee li>$idates the property of the estate2 the tr$stee ordinarily sells

only de"tors e>$ity in property s$"Mect to a sec$rity interest2 "


53/86


54/86

I. Creation of )ec$rity Interestsa. (or'alities for ,ttach'ent

i. , Prototypical )ec$red Transaction1. )ee pages 9#;9##. Pa"lo signs a financing state'ent on the for' set forth in +CC ;=#1

%. Bank sent the financing state'ent to the )ecretary of )tate for filing in the filingsyste'a. Pro*ides P$"lic ?otice

&. Bank also ordered a search of the +CC filing syste' for other financingstate'ents filed against the person Pa"los "$ying fro'

a. The "ank anted a sec$rity interest in the assets prior to all othersK onlythro$gh s$ch a search o$ld the "ank kno hether there ere alreadyother sec$rity interests in those assets

=. ,t closing2 pre*io$s oner deli*ered a "ill of sale for the resta$rant property2 anassign'ent of her rights $nder the lease2 and the keys to the resta$rant

F. Bank alked to co$rtho$se here it recorded the assign'ent of 'ortgage and

checked the records to 'ake s$re )tella had not con*eyed an interest in it toanyone else since the date of the "anks title search.ii. (or'alities for ,rticle )ec$rity Interests

1. +CC ;#7%3"4 lists three for'alities for the creation of a sec$rity interestenforcea"le against the de"tor:

a. ither the collateral '$st "e in the possession of the sec$red creditor orthe de"tor '$st ha*e a$thenticated a sec$rity agree'ent hich contains adescription of the collateral!

". al$e '$st ha*e "een gi*enc. The de"tor '$st ha*e rights in the collateral

#. -nly hen these are acco'plished does the sec$rity interest attach! to thecollateral and "eco'e enforcea"le against the de"tor. +CC ;#7%3a4 L 3"4

iii. Possession or ,$thenticated )ec$rity ,gree'ent1. ,rticle ratifies to different kinds of sec$rity agree'ents

a. , )ec$rity agree'ent can "e 'ade effecti*e "y possession of the collaterali. .g. Panshops

ii. 8oe*er2 the 'ost co''on arrange'ent is to rely on a rittensec$rity arrange'ent and lea*e the de"tor in possession of thecollateral

". Prototypical sec$rity transaction is "ased on a riting:i. )ec$rity ,gree'ent2 hich contains:

1. Description of the Collateral#. Description of the o"ligations sec$red%. Pro*isions defining defa$lt&. )pecifying the rights of the sec$red creditor on defa$lt=. Re>$ires that the de"tor care for the collateral and keep it

ins$redF. I'poses other o"ligations on the de"tor


55/86

ii. /hen the de"tor has signed s$ch an agree'ent2 +CC ;#7%3"43%43,4 re>$ire'ent of an a$thenticated sec$rity agree'ent is f$lfilled.+C

Bank’s Right to Pay Checks

Documents

Transcript of Bank’s Right to Pay Checks