Contemporary Payment Systems

Contemporary Payment Systems

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2021 Update Memo

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Michael P. Malloy Distinguished Professor and Scholar

University of the Pacific McGeorge School of Law

Director, Business and Law Research Division

Athens Institute for Education and Research

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2021 Update Memo

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Summary of Contents

Casebook Update

page page

33 1.9A . . . . . . . 1

33 Getting the Spelling Right . . . . 1

39 Questions and Problems 1.9A . . . 3

39 1.9B. (Lesser v. TD Bank, N.A.) . . . 3

49 1.12A . . . . . . . 4

49 Barry’s Cut Rate Stores Inc. v. Visa, Inc. . . 4

49 Note: Going Up? . . . . . 18

98 2.6A . . . . . . . 20

98 JPMorgan Chase Bank, National Association

v. Syed . . . . . . 20

143 Questions and Problems 2.15 . . . 26

143 2.15A (Federal Trade Commission v. AMG Capital

Management, LLC) . . . . . 26

143 2.15B . . . . . . . 28

143 2.15C . . . . . . . 28

210 Questions and Problems 3.14A (Gaudin & Gaudin

v. IberiaBank Corp.) . . . . . 30

210 3.14B (Redsands Energy, LLC v. Regions Bank) . 30

233 3.28A (Federal Reserve Bank National Settlement

Service) . . . . . . 32

233 3.28B (Coronavirus Pandemic) . . . 32

233 3.28C (Payments in a Digital Age) . . . 32

252 3.38 Availability of Funds and Collection

of Checks . . . . . . 34

267 4.9A (BasicNet S.p.A. v. CFP Services Ltd.) . 35

302 Fridman v. NYCB Mortg. Co., LLC . . 36


2021 Update Memo

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2021 Update Memo

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p. 33. After Note 1.9, add the following discussion:

1.9A. Here is a new puzzle. Once we accept the idea that govern-

ment-printed currency is legal tender, does it matter if the currency

contains typographical errors? Consider this excerpt from a news item

–

GETTING THE SPELLING RIGHT ON 46 MILLION

BANK NOTES? IT’S A BIG RESPONSIBILTY by Niraj Chokshi

The New York Times (May 9, 2019)

It is our duty, our responsibility, to bring you this news: Australia

put 46 million new dollar bills into circulation in October and months

passed before anyone seemed to have noticed that the currency con-

tained an unfortunate spelling error.

The admittedly tiny mistake, on the new $50 note, came to light this

week, according to local reports, after someone spotted the typo and

anonymously alerted a radio station to the problem: The last “i” in the

word “responsibility” was missing.

The Reserve Bank of Australia told local publications that it would

fix the mistake, but leave the millions of notes bearing the misspelled

word in circulation.

“The error is being corrected as part of a normal print run so there

is no additional cost,” the bank said in a statement provided to

Nine.com.au, an Australian news website. “We are not withdrawing or

recalling bank notes with the spelling error.”

2 CONTEMPORARY PAYMENT SYSTEMS UPDATE

A representative of the bank defended the institution, arguing that

mistakes happen, according to the Australian Broadcasting Corpora-

tion.

“The process of designing and printing a bank note is complex and

iterative,” the representative said. “We have strict quality assurance

processes, but like any manufacturing process, errors can occur.” . . .

The $50 note includes several advanced features, such as raised

bumps for the visually impaired, holographic effects and a transparent

window.

_______________

Should the typographical error – in a quote from an historical Aus-

tralian political figure who is pictured on the $50 note – invalidate the

status of the note as legal tender? What if the error had been “$500”

instead of “$50” on one side of the note?

MEMO CONTEMPORARY PAYMENT SYSTEMS 3

p. 39. Replace the Note with the following:

Questions and Problems 1.9A. Revised Articles 3 and 4 (1990)

were intended to modernize, reorganize and clarify the law at a time

when payments were no longer as paper-based as the original version

of the UCC assumed – a situation that has become more pronounced as

digital transactions and digital currency have become more common.

For an excellent discussion of the revised articles by the former execu-

tive director of the Drafting Committee to Amend UCC Articles 3 and

4, see Fred H. Miller, Benefits of New UCC Articles 3 and 4, 24 UCC

L.J. 99 (1991). As of 2021, 38 states plus the U.S. Virgin Islands have

adopted revised Articles 3 and 4 (1990). Eleven other states plus the

District of Columbia have adopted the revised articles and the limited

amendments of the 2002 revisions of those articles. Curiously, New

York is the one state that has retained its original 1962 adoption of the

UCC articles, effective September 1964.1

1.9B. With or without adjustments in the UCC, “faithless employee”

cases continue to populate the negotiable instruments case law. Con-

sider, for example, Lesser v. TD Bank, N.A., 463 F.Supp.3d 438

(S.D.N.Y. 2020). Loeb Partners Realty LLC and its principal, Joseph S.

Lesser, brought a negligence and conversion action against two named

banks and other unidentified banks arising out of the fraudulent activ-

ity of a Loeb employee, who intercepted checks issued by or made pay-

able to the Loeb partnership and Mr. Lesser, endorsed them with his

own signature, and then deposited them in his own accounts at the

banks. The named banks moved to dismiss the complaint, and the mo-

tions to dismiss were granted in part and denied in part. The district

court held that Loeb and Lesser could not maintain a common law neg-

ligence claim against a bank at which Lesser also held accounts, since

such claims were duplicative of their claims under UCC § 3-419.2 How-

ever, their allegations were sufficient to state a claim for common law

conversion3 which, the court held, was not displaced by UCC Article 3.4

1 NY UCC §§ 3-101 - 3-805, 4-101 - 4-504 (McKinney). 2 Lesser, 463 F.Supp.3d at 446. 3 Id. at 452. 4 Id. at 452-453.


p. 49. After Note 1.12, add the following discussion and case excerpt:

1.12A. Tensions remain high among card-holders, merchants, card

issuers, and card networks.1 The major focus recently has been on the

antitrust implications of the fees and restrictions imposed by the net-

works on merchants in connection with the use of cards in payment of

purchase transactions.2 It may be difficult at times to decide who is pre-

vailing in these disputes. Consider the following case.

BARRY’S CUT RATE STORES INC. v. VISA, INC.

--- F.Supp.3d ---, 2019 WL 7584728 (E.D.N.Y. 2019)

MARGO K. BRODIE United States District Judge

A putative Rule 23(b)(2) class of millions of merchants commenced

this antitrust action under the Clayton Act, 15 U.S.C. § 16, to prevent

and restrain violations of the Sherman Act, 15 U.S.C. §§ 1 and 2, and

the California Cartwright Act, Bus. & Prof. Code § 16700 et seq., seeking

injunctive relief against Defendants Visa and Mastercard networks, as

well as various issuing and acquiring banks (“Bank Defendants”). . . .

Plaintiffs seek to represent a class of merchants that accept Visa- and

Mastercard-branded cards as forms of payment, and allege that Defend-

ants engage in anticompetitive conduct that harms competition and im-

poses supracompetitive and collectively-fixed fees on the merchants. ...

.

1 The situation has recently become much more complicated, with the

emergence of technology like “digital wallets,” such as ApplePay and Google

Pay. These are “smart” (i.e., interactive) payment applications that integrate

payments with real-time communication of any type of data between account

holders and merchants. For a comprehensive discussion of the legal and policy

implications of digital wallets, see Adam J. Levitin, Pandora's Digital Box: The

Promise and Perils of Digital Wallets, 166 U. Pa. L. Rev. 305 (2018). 2 See, e.g., In re Payment Card Interchange Fee and Merchant Discount Antitrust Liti-

gation, --- F.Supp.2d ---, 2006 WL 2038650 (E.D.N.Y. 2006) (deciding cross motions to ap-point lead plaintiffs' counsel in multi-district litigation challenging payment card inter-change fees and merchant discounts). Since that initial decision, 56 additional actions have been filed, and all have been transferred to the Eastern District of New York and assigned to one district court judge. In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, --- F.Supp.3d ---, 2021 WL 1530454 (U.S. Judicial Panel on Multidistrict Litigation 2021). See generally Adam J. Levitin, Priceless? The Economic Costs of Credit Card Merchant Restraints, 55 UCLA L. Rev. 1321, 1392-1404 (2008) (providing analysis of antitrust implications of credit card merchant restraints).

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Currently before the Court is Bank Defendants’ joint motion to dis-

miss the claims against them pursuant to Rules 12(b)(1) and 12(b)(6) of

the Federal Rules of Civil Procedure for lack of standing and for failure

to state a claim upon which relief can be granted. . . . [T]he Court finds

that Plaintiffs have standing to assert claims against Bank Defendants,

and that Plaintiffs have sufficiently alleged that Bank Defendants are

participants in ongoing conspiracies. Accordingly, the Court denies

Bank Defendants’ motion to dismiss.

I. Background

. . .

A putative class of over twelve million nationwide merchants

brought an antitrust action under the Sherman Act, 15 U.S.C. §§ 1 and

2, and state antitrust laws, against Defendants Visa and Mastercard

networks, as well as various issuing and acquiring banks. See In re Pay-

ment Card Interchange Fee & Merch. Disc. Antitrust Litig., 986 F. Supp.

2d 207, 213, 223 (E.D.N.Y. 2013) (“Interchange Fees I”), rev’d and va-

cated, 827 F.3d 223 (2d Cir. 2016) (“Interchange Fees II”). . . .

The plaintiffs sought both injunctive and monetary relief, and after

years of litigation, former District Judge John Gleeson approved a set-

tlement for an injunctive relief class and a monetary damages relief

class (the “2013 Settlement Agreement”), see Interchange Fees I, 986 F.

Supp. 2d at 216 n.7, 240, which the Second Circuit vacated on June 30,

2016, and remanded to this Court,2 Interchange Fees II, 827 F.3d at 227,

229. Following remand, the two putative classes — a Rule 23(b)(2) in-

junctive relief class and a Rule 23(b)(3) damages class — have been pro-

ceeding separately, each represented by separate counsel. . . . The Rule

23(b)(2) injunctive relief class filed its Complaint on March 31, 2017.4

Bank Defendants now move to dismiss claims against them by the pu-

tative Rule 23(b)(2) injunctive relief class plaintiffs. . . .

a. Payment card transactions

The processing of card-based transactions and the actors involved

2 The Second Circuit vacated in part because it found that unitary repre-

sentation of the two classes (damages and injunctive) violated Rule 23(a)(4) of

the Federal Rules of Civil Procedure (the representative parties did not ade-

quately protect the interests of the class), and the Due Process Clause (the

named plaintiffs in the class action did not adequately protect the interests of

all class members). . . . 4 After additional extensive discovery and renegotiations, the named rep-

resentatives of the Rule 23(b)(3) damages class and Defendants reached a new

and separate settlement agreement, which this Court preliminarily approved

on January 24, 2019. . . .

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have been described multiple times in this action and related cases, and

the Court draws on the facts alleged in the Complaint and case law to

describe the transactions.

“When a cardholder uses a credit card to buy something from a mer-

chant, the transaction is facilitated by a credit-card network.” Ohio v.

Am. Express Co. (“Amex III”), --- U.S. ---, ---, 138 S. Ct. 2274 (2018). This

also applies to certain debit card transactions. [Debit cards are dis-

cussed in the casebook, at pp. 49-67.] The relevant networks in this ac-

tion are Visa and Mastercard.5 Visa and Mastercard are “bank-card net-

works whose members include banks, regional-banking associations,

and other financial institutions.” . . . Both networks “operate as stand-

ard-setting organizations” for certain credit and debit card services and

“facilitate the exchange of transaction data and funds,” typically among

four main actors: merchants, acquiring banks, issuing banks, and con-

sumers. . . . Acquiring banks are members of Visa and/or Mastercard

that acquire payments from merchants when processing card pay-

ments. . . . Generally, after a customer presents a card for payment, a

merchant transfers the transaction information to an acquiring bank,

and the acquiring bank contacts the issuing bank via the Visa or Mas-

tercard network for the authorization of payment. . . . Issuing banks are

members of Visa and/or Mastercard that issue Visa- and/or Mastercard-

branded cards to consumers. . . .

When a customer (cardholder) makes a purchase with certain Visa-

and/or Mastercard-branded cards, the merchant from whom the pur-

chase is made “sends an electronic transmission to” the merchant’s ac-

quiring bank or a third-party processor.6 . . . The acquiring bank or

third-party processor sends an electronic transmission to Visa or Mas-

tercard. . . . Visa or Mastercard then informs the cardholder’s issuing

bank or a third-party processor of the transaction, and the issuing bank

or third-party processor pays the acquiring bank via the Visa or Mas-

tercard network. . . .

During this process, two types of fees are deducted. . . . First, the

“interchange fee” is deducted from the full price of the payment when

5 The processing of payment transactions that occur over the Visa and Mas-

tercard networks and the actors involved, differ from, for example, the business

model that American Express uses. See generally United States v. Am. Express

Co. (“Amex I”), 88 F. Supp. 3d 143, 156–60 (E.D.N.Y. 2015), rev’d on other

grounds, United States v. Am. Express Co. (“Amex II”), 838 F.3d 179 (2d Cir.

2016), aff’d sub nom., Amex III, 138 S. Ct. 2274. 6 Third-party processors, as defined in the Complaint, are non-Visa, Mas-

tercard, or member bank firms “that perform[ ] the authorization, clearing, and

settlement functions of a Visa or Master[c]ard Payment-Card transaction on

behalf of a Merchant or a Member Bank.” . . .




the issuing bank pays the acquiring bank. . . . Plaintiffs define the in-

terchange fee as “a fee that Merchants pay to the Issuing Bank through

the [Visa or Mastercard] network and the Acquiring Bank for each

transaction.” . . . Second, the acquiring bank takes a “merchant-dis-

count fee” when crediting the merchant’s account for the payment. . . .

Plaintiffs define the merchant-discount fee as a total sum fee that is

deducted from the amount of money paid to a merchant when a con-

sumer makes a Visa- or Mastercard-branded purchase, the largest com-

ponent of which is the interchange fee. . . . According to Plaintiffs,

“[u]nder this system, the Issuing Bank earns revenue from annual fees

and interest charged to cardholders, as well as the amount of the Inter-

change Fee, while the Acquiring Bank earns revenue from the differ-

ence between the Merchant-Discount Fee and the Interchange Fee.” ...

b. History of bank and network relationships

At the beginning of this litigation, and in prior related litigation in

this Circuit, Visa and Mastercard were effectively owned by their mem-

ber banks. See, e.g., United States v. Visa U.S.A., Inc., 344 F.3d 229, 235

(2d Cir. 2003) (noting that at the time, in 2003, Visa and Mastercard

were “organized as open joint ventures, owned by the numerous bank-

ing institutions that are members of the networks” — “MasterCard ...

by ... approximately 20,000 member banks; Visa ... by ... approximately

14,000 member banks” — and that “[t]he networks’ operations [were]

conducted primarily by their member banks”). Given this ownership

structure, the Second Circuit noted that it would be inaccurate to com-

pare the structure of Visa or Mastercard to single entity structures such

as Coca-Cola, because they “are not single entities; they are consorti-

ums of competitors. They are owned and effectively operated by some

20,000 banks, which compete with one another in the issuance of pay-

ment cards and the acquiring of merchants’ transactions. These 20,000

banks set the policies of Visa U.S.A. and MasterCard.” Id. at 242.

During the course of this litigation, both networks underwent re-

structuring. In 2006 and 2008, Mastercard and Visa, respectively, made

initial public offerings (“IPOs”), becoming publicly traded individual

companies. See Interchange Fees II, 827 F.3d at 229 (noting that after

the first consolidated complaint had been filed in this action in 2006,

“[b]oth Visa and MasterCard conducted initial public offerings that con-

verted each from a consortium of competitor banks into an independent,

publicly traded company”); Interchange Fees I, 986 F. Supp. 2d at 215

(“While the case has been pending .... [t]he very structures of Visa and

MasterCard themselves changed; in 2008 and 2006, respectively, initial

public offerings ... converted each from a consortium of competitor





banks into single-entity, publicly traded companies with no bank gov-

ernance.”).

Pursuant to its IPO, Mastercard redeemed its member bank shares,

“and then reissued them as Class B and Class M shares,” i.e., non-vot-

ing shares. . . . Class A shares, with voting rights, were offered to the

public and “represented 41 percent of the voting control of MasterCard.”

. . . Member banks, however, retained certain veto powers through their

Class M shares. . . . Visa similarly redeemed its member banks’ shares

and “reclassif[ied] them as publicly-held Class A shares,” and in ex-

change, “Visa provided the banks with a large part of the proceeds of

the IPO as well as Class B shares and C shares in Visa, Inc.” . . . Those

holding Class B and C shares, i.e., the member banks, “were permitted

to elect [six] or [seventeen]* directors over the three years following the

IPO.” . . .

Plaintiffs allege that the anticompetitive practices they challenge

have “continued despite the networks’ and the banks’ more recent at-

tempt to avoid antitrust liability by restructuring the Visa and Master-

card corporate entities.” . . . Bank Defendants remain member banks of

both Visa’s and Mastercard’s networks. . . . In addition, Plaintiffs allege

that Bank Defendants are, or were during the relevant period, repre-

sented on the Boards of Directors of Visa and/or Mastercard when the

Boards collectively fixed and imposed anticompetitive fees and re-

straints, and that Bank Defendants participated in and committed the

alleged conspiracies. . . .

c. Challenged anticompetitive behavior and developments over the

course of the MDL litigation

Throughout the course of the litigation, Plaintiffs have challenged

several Visa and Mastercard network rules as being anticompetitive. In

addition to the IPOs, other significant changes in the credit and debit

card industries have occurred during the litigation, as described below.

i. Challenged network rules

Plaintiffs argue that Bank Defendants violate antitrust laws “by de-

veloping, implementing, and continuing to agree to ... a series of unlaw-

ful restraints among themselves and with each of Visa and Master-

card.” . . . These “unlawful restraints” include default interchange rules,

honor-all-cards rules, no-surcharge rules, and no-discount rules. . . .

These network-developed rules have been described multiple times by

courts in this Circuit. As previously summarized by the Second Circuit,

* So in the original. This phrase should read “[six] of [seventeen]” as it

does elsewhere in the opinion.


The “default interchange” fee applies to every transaction on the

network (unless the merchant and issuing bank have entered

into a separate agreement).7 The “honor-all-cards” rule requires

merchants to accept all Visa or MasterCard credit cards if they

accept any of them, regardless of the differences in interchange

fees. Multiple rules prohibit merchants from influencing custom-

ers to use one type of payment over another, such as cash rather

than credit, or a credit card with a lower interchange fee. These

“anti-steering” rules include the “no-surcharge” and “no-dis-

count” rules, which prohibit merchants from charging different

prices at the point of sale depending on the means of payment.

Interchange Fees II, 827 F.3d at 228–29. Judge Gleeson further de-

scribed the challenges merchants faced as a result of the “anti-steering

restraint” network rules:

A linchpin to the problem, as far as the merchants are concerned,

is the package of anti-steering restraints that prohibit mer-

chants from using price signals at the point of sale to steer cus-

tomers to less costly forms of payment. The no-surcharge rules

prohibit merchants from adding a surcharge to a transaction in-

volving either of the networks’ credit cards. Thus, a merchant

who must pay a 2% interchange fee upon accepting a Visa or

MasterCard credit card is prohibited from adding a 2% sur-

charge (or any surcharge at all) to either discourage the use of

that card or to recoup the cost of acceptance. Similarly, until re-

cently ... no-discount rules prohibited merchants from offering

price discounts at the point of sale.

7 According to Plaintiffs, Visa and Mastercard “have established complex

‘default’ Interchange Fee schedules, including the fee levels, the structure of

the fees, such as the Interchange-Fee categories that are tiered by Merchant

type, card type, and the Merchant’s transaction volume, among other things.”

. . . Plaintiffs also contend that “[i]nterchange fees account for the largest por-

tion of Merchant costs for accepting such cards.” . . . Visa’s rules “provide[ ]

that ‘Interchange Reimbursement Fees are determined by Visa and provided

on Visa’s published fee schedule.’ ” [Citing Visa Product and Service Rule

9.1.1.3.] Mastercard’s rules “provide[ ] that ... ‘[MasterCard] has the right to

establish default interchange fees and default service fees.’ ” [Quoting Master-

card Rule 8.3.] Both networks’ rules state that default interchange fees apply

unless member banks of the networks set their own financial terms or created

a bilateral interchange fee agreement between member banks, or, for example,

“Visa has entered into business agreements to promote acceptance and Card

usage.” . . .



Interchange Fees I, 986 F. Supp. 2d at 215 (E.D.N.Y. 2013).

ii. Industry changes

The primary changes to network rules that have occurred over the

course of this litigation, occurred pursuant to the Dodd-Frank legisla-

tive reform in 2010, a consent decree with the United States Depart-

ment of Justice (“DOJ”) in 2011, and the vacated 2013 Settlement

Agreement in this action.

1. Durbin Amendment to the Dodd-Frank Wall Street Re-

form and Consumer Protection Act

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protec-

tion Act, which included the Durbin Amendment, was signed into law,

and “required the Federal Reserve to issue rules limiting the banks’

practice of issuing debit cards that were compatible with only the is-

suer’s networks.” . . . In addition, the Durbin Amendment “limited the

interchange fee that issuing banks could charge for debit card pur-

chases, and allowed merchants to discount debit card purchases rela-

tive to credit card purchases,” Interchange Fees II, 827 F.3d at 229, and

also permitted merchants “to place minimum-purchase amounts of up

to [ten dollars] on [c]redit-[c]ard transactions” . . .8

2. DOJ consent decree

In 2010, the same year that the Durbin Amendment was signed into

law, the DOJ and seventeen states filed an action against Visa, Master-

card, and American Express, challenging the networks’ anti-steering

rules as anticompetitive and in violation of the Sherman Act. See United

States v. Am. Express Co. (“Amex II”), 838 F.3d 179, 192 (2d Cir. 2016);

Interchange Fees I, 986 F. Supp. 2d at 215; United States v. Am. Express

Co. (“Amex I”), 88 F. Supp. 3d 143, 149 (E.D.N.Y. 2015), rev’d and re-

manded sub nom., Amex II, 838 F.3d 179, aff’d sub nom., Amex III, 138

S. Ct. 2274. While American Express decided to litigate the challenges,

Visa and Mastercard entered into a consent decree with the DOJ in

2011, agreeing to rescind many of the challenged restraints. Amex II,

838 F.3d at 192; Amex I, 88 F. Supp. 3d at 149. Under the consent de-

cree, “Visa and MasterCard agreed to remove their rules prohibiting

merchants from product-level discounting of credit and debit cards.”9

8 “The Durbin Amendment did not change the networks’ rules prohibiting

surcharging,” Interchange Fees I, 986 F. Supp. 2d at 215, nor did it “allow for

product-level discounting, by which a merchant could choose to discount a par-

ticular card type,” id. at 215 n.6. 9 However, similar to the Durbin Amendment, the consent decrees did not

affect the networks’ no-surcharge rules. Interchange Fees II, 827 F.3d at 229















Interchange Fees I, 986 F. Supp. 2d at 215. . . .

3. 2013 Settlement Agreement terms

Under the terms of the 2013 Settlement Agreement approved by

Judge Gleeson and vacated by the Second Circuit, in addition to agree-

ing to pay a cash award of $7.25 billion (before reductions for opt outs

and other expenses) to the Rule 23(b)(3) class members, Defendants

agreed to implement reforms of their rules and practices to settle the

claims of the Rule 23(b)(2) class members. Interchange Fees I, 986 F.

Supp. 2d at 213, 217. The relevant reforms included, among other

things, “Visa and MasterCard rule modifications to permit merchants

to surcharge on Visa- or MasterCard-branded credit card transactions

at both the brand and product levels”; “[a]n obligation on the part of

Visa and MasterCard to negotiate interchange fees in good faith with

merchant buying groups”; “[a]uthorization for merchants that operate

multiple businesses under different ‘trade names’ or ‘banners’ to accept

Visa and/or MasterCard at fewer than all of its businesses”; and “[t]he

locking-in of the reforms in the Durbin Amendment and the DOJ con-

sent decree with Visa and MasterCard, even if those reforms are re-

pealed or otherwise undone.” Interchange Fees I, 986 F. Supp. 2d at 217.

The Second Circuit and Judge Gleeson identified surcharging as one

of the most significant benefits of the settlement. See Interchange Fees

II, 827 F.3d at 238 (“No one disputes that the most valuable relief the

Settlement Agreement secures for the (b)(2) class is the ability to sur-

charge at the point of sale.”); Interchange Fee I, 986 F. Supp. 2d at 219–

20 (noting that in addition to prior payment card litigation, the Durbin

Amendment, the DOJ Consent Decree, and the IPOs, “[t]his proposed

settlement adds another crucial reform — the lifting of restrictions on

network- and product-level surcharging”). However, the surcharging

terms applied only to credit card transactions, and not to debit card

transactions. . .

The settlement benefits to the Rule 23(b)(2) injunctive relief class

consisted of the rules modifications and agreements by Visa and Mas-

tercard to maintain the terms of the DOJ consent decree. The 2013 Set-

tlement Agreement did not contain obligations for Bank Defendants

specifically, . . . but the release and covenant not to sue in the 2013

Settlement Agreement did release Bank Defendants from liability. . . .

To date, the rule changes and certain reforms brought about as a

(“[P]ursuant to a consent decree with the Department of Justice in 2011, Visa

and Mastercard agreed to permit merchants to discount transactions to steer

consumers away from credit cards use. None of these developments affected

the honor-all-cards or no-surcharging rules, or the existence of a default inter-

change fee.”).













result of the 2013 Settlement Agreement are still in effect, although

Defendants now have the ability to alter those reforms.

d. Rule 23(b)(2) Plaintiffs’ allegations and relief sought

Plaintiffs have consistently alleged that the anticompetitive re-

straints at issue “were adopted pursuant to unlawful agreements

among the banks and Visa [and Mastercard],” and “that the banks

owned and effectively operated Visa and MasterCard, such that Visa

and MasterCard were unlawful ‘structural conspiracies’ or ‘walking

conspiracies’ with respect to their network rules and practices.” Inter-

change Fees I, 986 F. Supp. 2d at 220–21. . . .

The nine named Plaintiffs are merchants that accept payment by

Visa- and Mastercard-branded cards. . . . They allege that Defendants

(1) impose supracompetitive interchange fees on Visa and Mastercard

transactions, and (2) facilitate these anticompetitive practices by forc-

ing merchants to abide by anti-steering and other restraints. (See id.)

Plaintiffs also allege that this anticompetitive behavior causes antitrust

injury common to Plaintiffs and putative class members, and will con-

tinue to cause harm unless enjoined. . . .

Plaintiffs contend that “[e]ven after litigation, legislation, and reg-

ulation forced needed reforms on the Defendants and technology threat-

ened to disrupt Visa and MasterCard’s dominant position in the mar-

ketplace, the Defendants used their market power to continue to re-

strain competition.” . . . In addition, although the rule changes resulting

from the Durbin Amendment, DOJ consent decree, and the 2013 Settle-

ment Agreement “were steps in the right direction for [m]erchants,”

Plaintiffs continue to suffer antitrust injury due to current anti-steering

restraints, “and as a result of the continuing effects of decades of en-

forcement of the No-Surcharge Rule and the prior versions of the re-

straints.” . . .

i. Allegations regarding restraints

Plaintiffs assert that they are subject to supracompetitive, exorbi-

tant, and collectively-fixed prices, . . . largely via interchange fees, set

by the networks, which operate as standard-setting organizations, . . .

Visa’s rules provide that interchange fees “are determined by Visa and

provided on Visa’s published fee schedule,” and that these fees “apply

on every transaction, except where they have been ‘customized where

Member [Banks] have set their own financial terms’ ” for the inter-

change fee or entered into a separate business agreement to promote

card acceptance and usage. . . . (quoting Visa Product and Service Rule

9.1.1.3).) Mastercard’s rules provide that Mastercard “has the right to

establish default interchange fees ... it being understood that all such





fees set by [Mastercard] apply only if there is no applicable bilateral

interchange fee agreement between two [Member Banks].” . . . (quot-

ing Mastercard Rule 8.3).) Plaintiffs allege that although these rules

theoretically provide for deviation — for example via entering into bi-

lateral agreements — other restraints, such as anti-steering rules, ef-

fectively operate to ensure that all issuing banks charge merchants the

default rates. . . . In addition, Plaintiffs contend that “[b]ecause of the

[r]estraints, bilateral negotiations between a Merchant, or group of

Merchants, and an Issuer simply do not occur.” . . . Plaintiffs allege that

these interchange fees, which were previously based on issuer costs, are

now “based on [the networks’] perceptions of Merchants’ elasticity of

demand.” . . .

Plaintiffs contend that the unlawful agreements regarding inter-

change fees “are enabled by other rules that were also collectively

adopted and continue to be collectively enforced by the Bank Defend-

ants.” . . . For example, honor-all-cards rules are enforced by Visa and

Mastercard, which require merchants that accept Visa- or Mastercard-

branded cards to accept all payment cards with the network brand, “re-

gardless of the identity of the Issuing Bank, the Card Product, or the

cost of accepting that card.” . . . Plaintiffs assert that this type of prac-

tice makes it “virtually impossible” for merchants to exert any leverage

over Bank Defendants “in order to obtain more favorable prices or

terms.” . . .

Other restraints, including no-surcharge rules and other anti-steer-

ing restraints, have been changed by the 2013 Settlement Agreement,

DOJ consent decree, and Durbin Amendment. However, Plaintiffs al-

lege that although pursuant to the 2013 Settlement Agreement, Visa

and Mastercard changed their rules to permit surcharging of credit

cards in certain circumstances, now that the 2013 Settlement Agree-

ment has been vacated by the Second Circuit, the networks may reim-

pose the no-surcharge rules at any time. . . . Plaintiffs also assert that

although the DOJ consent decree improved the ability of merchants to

offer discounts to cardholders with a particular brand or products, mer-

chants generally are still “prohibited from offering discounts to card-

holders for using the cards issued by particular Issuing Banks,” and,

but for the no-discount rule, “Merchants could use Issuer-specific dis-

counts to secure more favorable acceptance costs and terms than are

currently available.” . . . Plaintiffs contend that if consumers were given

price signals at a point of sale, “consumer[s] would migrate towards

less-expensive payment products, causing Defendants to reduce their

Interchange Fees” in the absence of the anti-steering restraints. . . .

ii. Allegations regarding Bank Defendants

Plaintiffs allege that “[f]or a half-century America’s largest banks

have fixed the fees imposed on Merchants” for payment transactions


processed over Visa’s and Mastercard’s networks, “and have collectively

imposed restrictions on Merchants that prevent them from protecting

themselves against those fees.” . . . In addition, Plaintiffs contend that

“[t]hese practices continued despite the networks’ and the banks’ more

recent attempts to avoid antitrust liability by restructuring the Visa

and MasterCard corporate entities,” (id.), and that “[a]fter the IPOs, the

Bank Defendants agree[ed] to continue to abide by these rules” . . . .

Plaintiffs name nineteen Bank Defendants in this action, some of

which have parent-subsidiary relationships. . . . The Complaint gener-

ally refers to these separate entities under an umbrella name, e.g.,

“Bank of America” for the three Bank of America-related Defendants,

and notes that issuing and acquiring of network cards and payments is

heavily consolidated among banks. . . . [I]n 2015, the top five credit card

issuing banks accounted for nearly two-thirds of all Visa and Master-

card purchase volume in the United States and over three-quarters of

Visa and Mastercard transaction volume was acquired by five acquiring

banks. . . .

Plaintiffs also allege that Bank Defendants are all members of both

the Visa and Mastercard networks, are issuing and/or acquiring banks,

and are prevented by network rules from suing Visa or Mastercard from

[sic] harm arising from the uniform schedule of interchange fees. . . .

“Because all Member Banks are required to issue Visa or MasterCard

Payment Cards, all Member Banks benefit from the supracompetitive

Interchange Fees that they agree to abide by and, at least until Visa

and MasterCard’s reorganizations, collectively set.” . . . In addition,

Plaintiffs contend that all Bank Defendants knowingly participated in

the conspiracies alleged, . . . “are actual or potential competitors” for

credit card issuance and merchant acquisition, “and have conspired

with each other and with [Visa and Mastercard] to fix the level of Inter-

change Fees that they charge to, and impose the unlawful Anti-Steering

Rules on, Merchants” . . . . Plaintiffs further contend that Bank Defend-

ants are or were represented on the Visa and/or Mastercard Boards of

Directors at times when the Boards “collectively fixed” uniform inter-

change fees and imposed anti-steering and other restraints, that Bank

Defendants delegated to the Boards the authority to take such actions,

and that they “have significantly profited from those policies and con-

tinue to do so to this day.” . . . In addition, Plaintiffs contend that Visa

and Mastercard fund their operations and generate revenue from fees

and assessments they charge their member banks. . . . Plaintiffs also

allege that interchange fees are exclusively retained by the issuing

bank in a transaction and that interchange fees are not necessary to

perform Visa and Mastercard’s functions. . . .

Plaintiffs allege that prior to the IPOs, both Visa’s and Mastercard’s


bylaws reserved seats on the Boards of Directors for officers of member

banks, and that, subsequent to the IPOs, Bank Defendants secured in-

fluence and representation on the Boards. For example, as of the filing

of the Complaint, “[e]ven after the IPO, representatives of Member

Banks maintain[ed] substantial representation on the Board of Visa,

Inc.” . . . Plaintiffs also allege that after the IPOs, Visa’s member banks

“were permitted to elect [six] of [seventeen] directors over the three

years following the IPO.” . . .

Plaintiffs equate the restructurings of Mastercard and Visa “to the

members of a cartel who, having been caught fixing prices in violation

of the Sherman Act, spin-off their competing businesses to a new ‘single

entity,’ with the explicit understanding and with structural guarantees

that the new ‘single entity’ will continue to fix prices at the su-

pracompetitive levels previously set by the cartel’s members,” and note

that both networks have increased interchange fees “several times”

since the restructurings and IPOs. . . . Plaintiffs highlight that the

Court of Justice of the European Union (“EU”) — the highest court in

the EU — affirmed the European Commission’s ruling that Master-

card’s default interchange fees harmed competition, and that the IPO

did not alleviate its violation of the EU’s equivalent of the Sherman

Act’s “contract, combination, or conspiracy” element, “because when In-

terchange Fees and Rules are set, the banks ‘intend or at least agree to

coordinate their conduct by means of those decisions,’ and that the de-

cisions on Interchange Fees and the Rules have ‘the same objective of

joint regulation of the market within the framework of the same organ-

ization, albeit under different forms.’ ” . . . ([C]itation omitted).)

Plaintiffs allege that after the IPOs, Bank Defendants “continue to

conspire” to fix fees and impose restraints, agreeing as network mem-

bers that Visa and Mastercard may apply uniform default interchange

fee schedules, and agreeing to adhere to Visa and Mastercard’s anti-

competitive network rules. . . . They contend that the member banks

understand that even after the IPOs, they “will continue to receive su-

pracompetitive Interchange Fees at the default rates, absent a bilateral

agreement (which are disincentivized nearly out of existence by the

Anti-Steering Restraints),” and that no member bank “has taken any

affirmative steps to withdraw from any of the MasterCard or Visa con-

spiracies described.” . . .

Plaintiffs further contend that “[a]cquiring banks enter into ac-

ceptance contracts with Merchants agreeing either implicitly or explic-

itly” that the networks’ uniform schedule of interchange fees will apply

to all merchant transactions made through the networks’ payment

cards, and with the understanding that the same uniform schedule of

fees will be applied to transactions conducted by every other acquiring

bank for the same merchants. . . . Similarly, “[i]ssuing [b]anks enter


into issuing contracts with Visa and MasterCard, agreeing and under-

standing that they will receive Interchange Fees from Merchants based

on ... Visa and MasterCard’s uniform schedule of Interchange Fees.” ...

Further, Plaintiffs allege that Bank Defendants operate as co-conspira-

tors that have participated in these agreements and conspiracies both

before and after the network restructurings and IPOs. . . . This includes

“certain banks that are or were members of the Boards of Directors” of

the networks that agreed to fix and impose interchange fees and anti-

competitive restraints, “and also designed and authorized the restruc-

turings that themselves violate the antitrust laws.” . . .

II. Discussion . . .

The Court finds that Plaintiffs sufficiently allege that they have

been and will continue to be injured by Defendants’ actions in the fu-

ture, including Bank Defendants’ actions. The main injury that Plain-

tiffs seek to alleviate is “fixed ... fees imposed on Merchants,” . . . — fees

that Bank Defendants are allegedly “directly responsible” for fixing,

and that they continue to “significantly profit[ ] from” . . . . Plaintiffs

contend that despite the IPOs, Bank Defendants continue to adhere to

“rules that require the payment of an Interchange Fee, set at Visa and

MasterCard’s uniform levels,” that they “collectively adopted and en-

forced” prior to the IPOs, “acting through the Visa and MasterCard

Boards of Directors.” . . . In particular, Plaintiffs contend that “[e]ach of

the Bank Defendants ... has agreed that Visa and MasterCard may ap-

ply uniform schedules of default Interchange Fees to their Payment

Card businesses and that they will adhere to the anticompetitive Visa

and MasterCard rules,” . . . and that “[t]hese unlawful agreement are

enabled by other rules that were also collectively adopted and continue

to be collectively enforced by the Bank Defendants” . . . . Further, ac-

quiring banks enter into contracts with merchants, implicitly or explic-

itly agreeing that uniform schedules of interchange fees will apply,

while issuing banks enter into contracts with the networks, agreeing to

receive interchange fees based on the uniform schedule. . . .

Plaintiffs allege that network rules, particularly anti-steering and

other restraints, remain in place and allow the injury — supracompeti-

tive fixed fees — to continue. This alleged harm is not “hypothetical” or

“contingent” as Bank Defendants suggest, but ongoing and continually

occurring. The network rules that Plaintiffs refer to include, for exam-

ple, honor-all-cards rules, which require merchants that accept Visa- or

Mastercard-branded cards to accept all payment cards with the net-

work brand, “regardless of the identity of the Issuing Bank, the Card

Product, or the cost of accepting that card.” . . . Plaintiffs assert that

this type of practice makes it “virtually impossible” for merchants to


exert any leverage over Bank Defendants “in order to obtain more fa-

vorable prices or terms.” . . .

The Court finds that Plaintiffs plausibly allege that Bank Defend-

ants are members of an ongoing conspiracy that they assisted in design-

ing, and that the anticompetitive practices they challenge have “contin-

ued despite the networks’ and the banks’ more recent attempt to avoid

antitrust liability by restructuring the Visa and Mastercard corporate

entities.” . . .

In addition to having sufficiently alleged the continuation of a con-

spiracy after the IPOs, the Court finds that Plaintiffs have also suffi-

ciently alleged that “Banks are members of classic hub-and-spoke con-

spiracies.” . . . Plaintiffs argue in the alternative that following the

IPOs, Bank Defendants “have, in effect, hired each of Visa and Master-

card to be the manager of a cartel whose essential agreement ... is that

no member bank shall compete on price against another member for

merchants’ business.” . . .

“[C]ourts have long recognized the existence of ‘hub-and-spoke’ con-

spiracies in which an entity at one level of the market structure, the

‘hub,’ coordinates an agreement among competitors at a different level,

the ‘spokes.’ ” Apple, 791 F.3d at 314 (citation omitted); see also In re

Elec. Books Antitrust Litig., 859 F. Supp. 2d 671, 690–91 (S.D.N.Y.

2012) (“A hub-and-spoke conspiracy ‘involves a hub, generally the dom-

inant purchaser or supplier in the relevant market, and the spokes,

made up of the distributors involved in the conspiracy. The rim of the

wheel is the connecting agreements among the horizontal competitors

(distributors) that form the spokes.’ ” (quoting Howard Hess Dental

Labs. Inc. v. Dentsply Int’l, Inc., 602 F.3d 237, 255 (3d Cir. 2010))). . . .

. . . [T]he Court finds that Plaintiffs have sufficiently alleged facts

to plausibly infer that Bank Defendants are members of a hub-and-

spoke style conspiracy and agreement. . . .

The Court finds that the Complaint states allegations akin to those

found in other major hub-and-spoke conspiracy cases. See, e.g., Inter-

state Circuit, 306 U.S. 208; In re Elec. Books Antitrust Litig., 859 F.

Supp. 2d 671. In In re Electric Books Antitrust Litigation, the court

found that the plaintiffs plausibly alleged that Apple and multiple pub-

lishers engaged in a hub-and-spoke conspiracy to raise prices for

eBooks. The court found that the plaintiffs “plausibly alleged that the

publishers signing of agency agreements with Apple and demands that

Amazon accept the agency model would have contravened that defend-

ant’s self-interest in the absence of similar behavior by its rivals.” 859

F. Supp. 2d at 683 (citation omitted). . . .

Accordingly, because Plaintiffs have standing and have plausibly al-













leged that Bank Defendants are part of a conspiracy to unlawfully ben-

efit from supracompetitive interchange fees, the Court denies Bank De-

fendants’ motion to dismiss the claims against them. See In re Elevator

Antitrust Litig., 502 F.3d 47, 50 (2d Cir. 2007) (quoting Cont’l Ore Co.

v. Union Carbide & Carbon Corp., 370 U.S. 690, 699 (1962)) (“The char-

acter and effect of a conspiracy are not to be judged by dismembering it

and viewing its separate parts, but only by looking at it as a whole.”). ...

_______________

Note

Going up? The court’s reference to In re Elevator Antitrust Litiga-

tion and Continental Ore Co. at the end of the excerpted opinion is par-

ticularly revealing of the analytical problem that confronted the plain-

tiffs. In re Elevator involved purchasers of elevators and elevator

maintenance services who sued sellers, alleging a . . . horizontal price

fixing conspiracy.1 The problem was that the plaintiffs did not establish

any plausible inference of an agreement restraining trade, nor did they

identify the place and time that the agreement occurred. The sellers'

alleged parallel conduct could just as well have been the result of ra-

tional individual business strategies. In Barry’s, with a structural ar-

rangement as complicated and multileveled as the card payment sys-

tem, how does a plaintiff demonstrate that it is an anticompetitive con-

spiracy and not just the cumulative effect of a series of separate trans-

actions? The court goes to great lengths to show the interrelated work-

ings of the system, as intended by the participants – and therein lies

the conspiracy.

But in order to make credit card (and debit card) usage practical and

efficient, doesn’t something like the system described by the court al-

most necessarily arise? Would negating the rules of this game result in

less efficient (and more expensive) card transactions? It may depend on

what one means by “efficient.” Certainly, card issuers and networks

1 On the difference between a “horizontal” and a “vertical” restraint of

trade, see Business Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717, 730 (1988)

(“Restraints imposed by agreement between competitors have traditionally

been denominated as horizontal restraints, and those imposed by agreement

between firms at different levels of distribution as vertical restraints”). For a

useful discussion of the implications of these two approaches, see Val D. Ricks

& R. Chet Loftis, Seeing the Diagonal Clearly: Telling Vertical From Horizontal

in Antitrust Law, 28 U. TOL. L. REV. 151 (1996).






may see a decline in revenues as they are forced to compete for the busi-

ness of merchants, but if the result is more value for card holders and

merchants, is that not an increase in efficiency?


p. 98. After Note 2.6, add the following discussion and case excerpt:

2.6A. So, for purposes of the UCC, what counts as a signature on a

negotiable instrument? Certainly, signing with X’s – if you can’t even

write your name – would be a valid signature.1 What about rubber-

stamping a name as a signature on a note or draft? What about rubber-

stamping a name as a signature, where the named person no longer

works for the company claiming that it has indorsed the instrument?

Consider the following case.

JPMORGAN CHASE BANK, NATIONAL ASSOCIATION

v. SYED 231 A.3d 286 (Conn. App. Ct. 2020)

BRIGHT, J.

In this foreclosure action, the defendant Sonia Syed appeals from

the judgment of strict foreclosure rendered by the trial court in favor of

the second substitute plaintiff, Wilmington Savings Fund Society, FSB,

doing business as Christiana Trust. . . . On appeal, the defendant claims

that the trial court erroneously (1) granted the motion filed by the first

substitute plaintiff, Christiana Trust, . . . for summary judgment as to

liability, despite questions concerning whether the original plaintiff,

JPMorgan Chase Bank, National Association (JPMorgan), was the

holder of the note at the time it commenced this foreclosure action. . . .

The following facts and procedural history are relevant to our dis-

position of this appeal. The defendant is the borrower on a note and the

mortgagor of a mortgage, which initially were executed in favor of

Washington Mutual Bank, FA (Washington Mutual), on property lo-

cated at 1200 Neipsic Road in Glastonbury (property). [Washington Mu-

tual failed during the financial crisis of 2008, and was being managed

by JPMorgan, on behalf of the Federal Deposit Insurance Corporation,

as receiver for Washington Mutual. While managing Washington Mu-

tual, JPMorgan assigned Syed’s mortgage to itself by an assignment

dated April 17, 2013.]

On May 17, 2013, JPMorgan commenced the present foreclosure ac-

tion by service of process on the defendant. On December 2, 2014,

JPMorgan filed a motion to substitute Christiana Trust as the first sub-

1 See I. Berlin, Doin' What Comes Natur'lly (1946) (discussing signing

checks with X’s).

https://www.youtube.com/watch?v=5Dus96cW4oA


stitute plaintiff, which the court granted on December 18, 2014. On Jan-

uary 8, 2014, JPMorgan executed an assignment of mortgage to Chris-

tiana Trust. . . .

. . . On January 5, 2016, Christiana Trust filed a motion for sum-

mary judgment as to liability, which was opposed by the defendant on

the grounds that she had viable special defenses and a counterclaim,

and that the note, “which was endorsed in blank by [Washington Mu-

tual] was endorsed falsely by an individual named Cynthia Riley, who

was not who she said she was at the time of endorsement and/or was

not an employee of [Washington Mutual] at the time of the endorse-

ment, and/or did not actually sign the document and someone else

signed her name or used a signature stamp on the endorsement.”

On January 2, 2018, the court, in a thorough memorandum of deci-

sion, concluded that the defendant’s special defenses and counterclaim

did not create a triable issue as to the defendant’s liability to Christiana

Trust and that there was no dispute that JPMorgan was the holder of

the note at the time it commenced this foreclosure action. Accordingly,

the court granted Christiana Trust’s motion for summary judgment as

to liability. On January 26, 2018, Christiana Trust filed a motion for

judgment of strict foreclosure.

. . . [O]n May 14, 2018, the court rendered a judgment of strict fore-

closure. . . . This appeal followed. . . .

The defendant claims that the court improperly rendered summary

judgment despite the existence of a genuine issue of material fact re-

garding whether JPMorgan was the holder of the note at the time it

commenced this foreclosure action. The defendant specifically argues

that, due to an invalid endorsement of the note by Washington Mutual,

JPMorgan and the subsequent substitute plaintiffs were not holders

entitled to enforce the note. We are not persuaded.

“In Connecticut, one may enforce a note pursuant to the

[Uniform Commercial Code (UCC) as adopted in General Stat-

utes § 42a-1-101 et seq.] .... General Statutes § 42a-3-301 pro-

vides in relevant part that a [p]erson entitled to enforce an in-

strument means ... the holder of the instrument.... When a note

is endorsed in blank, the note is payable to the bearer of the note.

... A person in possession of a note endorsed in blank, is the valid

holder of the note. ... Therefore, a party in possession of a note,

endorsed in blank and thereby made payable to its bearer, is the

valid holder of the note, and is entitled to enforce the note....

“In RMS Residential Properties, LLC v. Miller, [303 Conn.

224, 32 A.3d 307 (2011), overruled on other grounds by J.E. Rob-

ert Co. v. Signature Properties, LLC, 309 Conn. 307, 71 A.3d 492


(2013)], our Supreme Court stated that to enforce a note through

foreclosure, a holder must demonstrate that it is the owner of

the underlying debt. The holder of a note, however, is presumed

to be the rightful owner of the underlying debt, and unless the

party defending against the foreclosure action rebuts that pre-

sumption, the holder has standing to foreclose the mortgage. A

holder only has to produce the note to establish that presumption.

The production of the note establishes his case prima facie

against the [defendant] and he may rest there.... It [is] for the de-

fendant to set up and prove the facts [that] limit or change the

plaintiff’s rights.” (Citations omitted; emphasis in original; in-

ternal quotation marks omitted.) U.S. Bank, National Assn. v.

Fitzpatrick, 190 Conn. App. 773, 784–85, 212 A.3d 732, cert. de-

nied, 333 Conn. 916, 217 A.3d 1 (2019).

The defendant . . . argues that the presumption of ownership only

exists when the note is endorsed in blank and contends that, due to

Washington Mutual’s allegedly fraudulent or otherwise invalid en-

dorsement, the requirement for the presumption to apply was not met.

According to the defendant, JPMorgan’s simple possession of the note

was insufficient to establish its right to enforce the note. To support this

claim, the defendant relies on the fact that the endorsement by Wash-

ington Mutual was made using the name and signature stamp of Cyn-

thia Riley, a former employee of the bank who was no longer employed

at the time of the endorsement.4 The defendant argues that because the

endorsement bore the signature of an individual who no longer had the

capacity to make endorsements on behalf of Washington Mutual, the

note was never properly negotiated to JPMorgan and, therefore, re-

mained a specially endorsed note payable only to Washington Mutual,

rather than a blank endorsement payable to the bearer. The defendant

contends that, consequently, neither JPMorgan nor any of the subse-

quent substitute plaintiffs could have been holders entitled to enforce

the note.

Wilmington argues that Riley’s employment status was immaterial

to the validity of the signature and, therefore, the endorsement was un-

affected by the fact that it was made using Riley’s signature stamp even

though she was no longer employed by Washington Mutual. We agree

4 In her objection to the motion for summary judgment, the defendant in-

cluded excerpts of a deposition of Riley from an unrelated case in another ju-

risdiction, in which she admitted to never signing any endorsements, that

there were multiple stamps with her name and signature, and that her staff

used them to endorse notes. She also stated that she left the department in

November, 2006, which precedes the date of the subject note.


with Wilmington.

General Statutes § 42a-3-204(a) defines an endorsement as “a sig-

nature, other than that of a signer as maker, drawer, or acceptor, that

alone or accompanied by other words is made on an instrument for the

purpose of (i) negotiating the instrument,5 (ii) restricting payment of

the instrument, or (iii) incurring endorser’s liability on the instrument,

but regardless of the intent of the signer, a signature and its accompa-

nying words is an endorsement unless the accompanying words, terms

of the instrument, place of the signature, or other circumstances unam-

biguously indicate that the signature was made for a purpose other

than endorsement.” (Footnote added.) The official commentary to § 42a-

3-204 clarifies that “[t]he general rule is that a signature is an indorse-

ment6 if the instrument does not indicate an unambiguous intent of the

signer not to sign as an indorser.” An endorsement that does not iden-

tify a person to whom it makes the instrument payable is a “blank en-

dorsement.” General Statutes § 42a-3-205 (b). “When endorsed in blank,

an instrument becomes payable to bearer and may be negotiated by

transfer of possession alone until specially endorsed.” General Statutes

§ 42a-3-205 (b). In this case, the defendant does not claim that the pur-

ported signature of Riley could be read as anything other than an en-

dorsement in blank. Instead, she claims that because the purported sig-

nature was not her signature, it is simply not an endorsement at all.

The defendant’s argument is inconsistent with how the UCC defines a

signature.

General Statutes § 42a-3-401 (b) sets forth signature requirements

for a negotiable instrument and provides that “[a] signature may be

made (i) manually or by means of a device or machine, and (ii) by the

use of any name, including a trade or assumed name, or by a word,

mark, or symbol executed or adopted by a person with present intention

to authenticate a writing.” The official commentary to § 42a-3-401 ex-

plains that “[a] signature may be handwritten, typed, printed or made

5 General Statutes § 42a-3-201 (a) defines “ ‘[n]egotiation’ ” as “a transfer

of possession, whether voluntary or involuntary, of an instrument by a person

other than the issuer to a person who thereby becomes its holder.” 6 We note that the difference in spelling of “endorse” and “indorse” is a

distinction without significance; the terms have the same meaning. See Black’s

Law Dictionary (11th Ed. 2019) p. 925 (defining “indorse” to mean: “To sign (a

negotiable instrument) ... either to accept responsibility for paying an obliga-

tion memorialized by the instrument or to make the instrument payable to

someone other than the payee. —Also spelled endorse.”) Because the General

Statutes use “endorse,” we have adopted that spelling throughout this opinion

except where we quote from sources that have adopted the alternative spelling.


in any other manner. ... It may be made by mark, or even by thumb-

print. It may be made in any name, including any trade name or as-

sumed name, however false and fictitious, which is adopted for the pur-

pose.” Furthermore, the official commentary to § 42a-3-401 states that

a “[s]ignature includes an endorsement.”

In its memorandum of decision, the court stated that “[t]he defend-

ant ha[d] established only that ... Riley did not personally sign the en-

dorsement or personally authorize the use of her signature stamp for

that purpose. The defendant has not offered evidence to suggest that

the endorsement was ‘false and fraudulent’ in that it was not authorized

or adopted by the holder of the note, [Washington Mutual], or that the

subsequent negotiation of the note and mortgage to [JPMorgan] was

fraudulent and, as a result, [JPMorgan] was not the owner of the debt

at the time this action was commenced.” We agree.

We are not aware of any Connecticut jurisprudence directly on point

and, therefore, have looked to other jurisdictions that have addressed

similar issues involving identical or nearly identical versions of the

UCC provisions relevant to our disposition of the present case. In re

Bass, 366 N.C. 464, 738 S.E.2d 173 (2013), a case from North Carolina,

illustrates the general approach utilized by courts that have addressed

issues regarding the validity of signatures on negotiable instruments.

In In re Bass, the borrower challenged the validity of an endorsement

that was made using a signature stamp that bore only the name of the

lender, on the basis that it did not include “some representation of an

individual signature ....” Id., at 469, 738 S.E.2d 173. The borrower ar-

gued that, without an individual signature, there would be no way of

identifying the individual making the transfer and whether they had

authority to authorize the transfer. Id. In other words, the borrower

took issue with the content of the signature itself and not just its form

(i.e., a stamp versus handwritten).

Regarding the contested stamped signature, the court in In re Bass

held: “[It] indicates on its face an intent to transfer the debt .... We also

observe that the original [n]ote was indeed transferred in accordance

with the stamp’s clear intent. The stamp evidences that it was executed

or adopted by the party with present intention to adopt or accept the

writing. ... Under the broad definition of signature and the accompany-

ing official comment, the stamp ... constitutes a signature.7

“The stamp therefore was an indorsement unless the accompanying

words, terms of the instrument, place of the signature, or other circum-

7 North Carolina’s Commercial Code defines “ ‘[s]igned’ ” as “any symbol

executed or adopted with present intention to adopt or accept a writing.” N.C.

Gen. Stat. Ann. § 25-1-201 (b) (37) (West 2011).


stances unambiguously indicate that the signature was made for a pur-

pose other than indorsement. ... With no unambiguous evidence indi-

cating the signature was made for any other purpose, the stamp was an

indorsement that transferred the [n]ote ....” (Citations omitted; empha-

sis in original; footnote added; internal quotation marks omitted.) Id.,

at 469–70, 738 S.E.2d 173. The court then explained that the borrower

failed to offer evidence demonstrating the actual possibility of forgery

or error on the part of the lender to overcome the presumption in favor

of the signature before concluding that the note was properly endorsed

and transferred. Id., at 470–71, 738 S.E.2d 173.

We find the analysis of the North Carolina Supreme Court in In re

Bass to be persuasive. Although we recognize that the argument pre-

sented by the defendant in the present case—that the individual whose

name the signature bears lacked the authority to make the endorse-

ment—is more nuanced than that presented by the borrower in In re

Bass, we are not persuaded that such distinction affects the analysis.

The dispositive consideration in both cases is the same, namely,

whether the entity applying the stamp to the instrument intended that

the stamp constitute a signature for the purposes of endorsing and ne-

gotiating the instrument. . . .

We conclude that the stamped signature on the note meets the sig-

nature requirements for negotiable instruments set forth in § 42a-3-401

(b). Pursuant to § 42a-3-204, the stamp constitutes an endorsement, as

it is a signature made for the purpose of negotiating the instrument.

Because the endorsement did not identify a person to whom it makes

the instrument payable, the note was endorsed in blank, making it pay-

able to the bearer. Thus, JPMorgan, which was in possession of the orig-

inal note, was entitled to the presumption that it is the owner of the

debt evidenced by the note with the right to enforce it.

The defendant failed to offer any evidence to rebut this presump-

tion. . . .


p. 143. Replace Note 2.15 with the following:

Questions and Problems 2.15. Prompted by White and Sum-

mers, judicial skepticism about the good faith and practices of check

cashing firms might be justified, particularly given the vulnerability of

the clientele of check cashing facilities. Still, one might like to see a

little more evidence that check-cashing facilities are a home for persons

engaged in fraudulent behavior before courts impose higher standards

on these firms than might be applied to a bank. Do Drysdale and Keest,

mentioned on page 138, have a better handle on the milieu of the typical

check cashing operation? Would you be willing to bet that neither White

nor Summers have ever entered a check cashing location?

2.15A. “Check cashing companies” – and more broadly, “payday

lenders” – may also encounter judicial skepticism in large part because

many of their typical business practices are open to serious question as

misleading or deceptive under the Federal Trade Commission Act

(FTCA). Consider, for example, Federal Trade Commission v. AMG

Capital Management, LLC.1 A Ninth Circuit panel affirmed summary

judgment for the FTC and upheld aggressive remedies against an affil-

iated group of online payday lenders. While this decision was reversed

by the Supreme Court, the 2018 Ninth Circuit opinion by Judge

O’Scannlain does a creditable job of guiding the reader through the com-

plexities of payday lender disclosures, which is worth reading on its

own.2

The Ninth Circuit’s 2018 decision found that the loan note language

in question did not accurately disclose its terms and was therefore “de-

ceptive” within the meaning of FTCA § 5(a)(1),3 prohibiting deceptive

acts or practices in or affecting interstate commerce. In light of that

holding, the case went on to uphold the district court’s permanent in-

junction enjoining the owner of the affiliated companies from engaging

in consumer lending and its order of “equitable monetary relief,” calcu-

lated at $1.27 billion, under FTCA § 13,4 which authorizes injunctive

relief.

Curiously enough, in addition to writing the opinion of the court that

was eventually reversed by the Supreme Court, Judge O’Scannlain also

wrote a “specially concurring opinion,” joined by Judge Bea, in order to

1 910 F.3d 417 (9th Cir. 2018), reversed and remanded, --- U.S. ---, 141 S.Ct.

1341 (2021), vacated on remand, 998 F.3d 897 (9th Cir. 2021). 2 See AMG Capital, 910 F.3d at 422-423. 3 15 U.S.C. § 45(a)(1). 4 Id. § 53.


call attention separately to the Ninth Circuit’s “unfortunate interpreta-

tion of the Federal Trade Commission Act.”5 He vigorously questioned

the Circuit’s reading of the FTCA § 13(b) authorization of “injunction[s]”

to empower a district court to compel defendants to pay monetary judg-

ments in the guise of “restitution.”6 Apparently bowing to stare decisis,

in the court’s opinion he applied the Circuit’s approach in upholding

restitution,7 but he suggested in his specially concurring opinion that

this interpretative approach was no longer tenable, arguing that

[b]ecause the text and structure of the statute unambiguously

foreclose such monetary relief, our invention of this power

wrests from Congress its authority to create rights and reme-

dies. And the Supreme Court’s recent decision in Kokesh v. SEC,

––– U.S. –––, 137 S.Ct. 1635, 198 L.Ed.2d 86 (2017), undermines

a premise in our reasoning: that restitution under § 13(b) is an

“equitable” remedy at all. Because our interpretation wrongly

authorizes a power that the statute does not permit, we should

rehear this case en banc to relinquish what Congress withheld.8

However, it is a basic principle of appellate practice that a three-judge

panel may not overturn established circuit authority unless it is “clearly

irreconcilable with the reasoning or theory of intervening higher au-

thority.”9 Arguably, that threshold was not met in the case before the

AMG Capital panel. As the court’s opinion itself (i.e., O’Scannlain him-

self) points out,

Kokesh itself expressly limits the implications of the decision:

“Nothing in this opinion should be interpreted as an opinion on

whether courts possess authority to order disgorgement in SEC

enforcement proceedings.” Kokesh, 137 S.Ct. at 1642 n.3. Sec-

ond, Commerce Planet expressly rejected the argument that §

13(b) limits district courts to traditional forms of equitable relief,

holding instead that the statute allows courts “to award com-

plete relief even though the decree includes that which might be

conferred by a court of law.” Commerce Planet, 815 F.3d at 602

5 AMG Capital, 910 F.3d at 429. 6 AMG Capital, 910 F.3d at 429, citing FTC v. Commerce Planet, Inc., 815

F.3d 593, 598 (9th Cir. 2016); FTC v. Pantron I Corp., 33 F.3d 1088, 1102 (9th

Cir. 1994); FTC v. H.N. Singer, Inc., 668 F.2d 1107, 1113 (9th Cir. 1982). 7 AMG Capital, 910 F.3d at 426-427 8 Id. at 429. 9 Miller v. Gammie, 335 F.3d 889, 893 (9th Cir. 2003) (en banc).


(internal quotation marks omitted). Because Kokesh and Com-

merce Planet are not clearly irreconcilable, we remain bound by

our prior interpretation of § 13(b).10

On cert., the Supreme Court reversed, holding that the section of the

FTCA authorizing the Commission to obtain injunctive relief, including,

in proper cases, a “permanent injunction” in federal court against those

violating or about to violate a law that the Commission enforces, did not

authorize the Commission to seek, or a court to award, equitable mon-

etary relief such as restitution or disgorgement.11 Although the Su-

preme Court’s opinion refers to Judge O’Scannlain’s specially concur-

ring opinion in the most oblique fashion,12 it does nevertheless vindicate

the view he expressed in that opinion. The broad reading of FTCA §

13(b) given by past case law “could not have been Congress’ intent.”13

2.15B. AMG Capital also offers a concrete example of a payday loan

note, reproduced on the following page. Review the note, and see if you

can explain to a hypothetical client whether this loan note accurately

discloses the loan’s terms.

2.15C. In answering the previous question, you may want to con-

sider AMG Capital, 910 F.3d at 422-424 (analyzing note and illustrat-

ing its effects). Although the note’s “TILA box” – containing disclosure

10 AMG Capital, 910 F.3d at 427. 11 Monetary relief is authorized by the FTCA, as amended in the 1970s, in

situations where the defendant had violated an FTC administrative order re-

quiring the defendant to “cease and desist” questionable practices. Section 5(l)

of the act, 15 U.S.C. § 45(l), authorizes district courts to award civil penalties

against respondents who violate FTC final cease and desist orders, and to

“grant mandatory injunctions and such other and further equitable relief as

they deem appropriate in the enforcement of such final orders of the Commis-

sion.” Section 19 of the act, id. § 57b(b), authorizes district courts to grant “such

relief as the court finds necessary to redress injury to consumers,” including

through the “refund of money or return of property.” However, consumer re-

dress under § 19 can only be sought against those who have “engage[d] in any

unfair or deceptive act or practice ... with respect to which the Commission has

issued a final cease and desist order which is applicable to such person,” id. §

57b(a)(2), which was not the case in AMG Capital. 12 “Two judges, while recognizing that precedent in many Circuits sup-

ported that use of § 13(b), expressed doubt as to the correctness of that prece-

dent.” AMG Capital Management, LLC v. Federal Trade Commission, --- U.S.

---, ---, 141 S.Ct. 1341, 1345 (2021). 13 AMG Capital Management, --- U.S. at ---, 141 S.Ct. at 1349.


required by the Truth in Lending Act14 – seems to indicate that the “to-

tal of payments” would equal the full cost of the loan, under the default

terms of loan, disclosed in the densely-packed fine print below the box,

it seems the consumer would be required to pay much more than that

“total,” unless the consumer performed a series of affirmative actions in

order to “decline” to renew loan and thus pay only the amount reported

in the box. There is nothing “fine” about this fine print!

Source: AMG Capital, 910 F.3d at 429 (appendix).

14 15 U.S.C. §§ 1601–1693. For discussion of the TILA and its impact on

consumer financial protection, see 3 MICHAEL P. MALLOY, BANKING LAW AND

REGULATION § 14A.03[J] (2020 Cum. Supp.).

http://www.westlaw.com/Link/Document/Blob/I58ec35c0f75b11e8be0589c260a4fd01.png?originationContext=document&vr=3.0&rs=cblt1.0&transitionType=DocumentImage&contextData=(sc.Search)


p. 210. Add the following discussion after the excerpt from the Pereos,

Ltd. case:

Questions and Problems 3.14A. For an interesting variation on

this familiar “faithless employee” scenario, consider Gaudin & Gaudin

v. IberiaBank Corp., 293 So.3d 755 (La.App. 2020). In that case, the

Gaudin law firm, a customer of IberiaBank, brought an action against

the bank, alleging that the bank had negligently cashed fraudulent

checks that were written on its account and presented for payment by

Lainie Collins, Gaudin’s bookkeeper, and asserting claims under the

UCC and for fraud, fraudulent concealment, and fraudulent conversion.

The District Court granted the bank’s motion for summary judgment

and dismissed all claims. Gaudin appealed, and the Court of Appeal

affirmed, holding inter alia that claims alleging that the bank had neg-

ligently cashed fraudulent checks were barred under UCC Article 4;

that the UCC one-year prescriptive period governing conversion of in-

struments applied to the customer’s conversion claims; that claims

based on negligent cashing of fraudulent checks were barred by deposit

account agreements; and that the contra non valentum exception,1

based on the theory of fraudulent concealment by the defendant, did not

apply.

3.14B. Preclusive terms in the deposit agreement are becoming a

frequent issue in “faithless employee” cases. See, e.g., Redsands Energy,

LLC v. Regions Bank, 442 F.Supp.3d 945 (S.D. Miss. 2020). In Red-

sands, deposit agreements executed by two bank customers barred their

claims against the bank arising out of the bank’s payment of checks

1 On the meaning of the doctrine contra non valentum, see Gaudin &

Gaudin, 293 So.3d at 773 n.12:

Contra non valentum, which means that prescription does not run against

a person who could not bring his suit, is a jurisprudential doctrine under which

prescription may be suspended. Carter v. Haygood, 04-646 (La. 1/19/05), 892

So.2d 1261, 1268. The doctrine of contra non valentum, an exception to the

statutory prescriptive period, only applies in “exceptional circumstances,”

where in fact and for good cause a plaintiff is unable to exercise his cause of

action when it accrues. Specialized Loan Servicing, LLC v. January, 12-1225

(La. 6/28/13), 119 So.3d 582, 585. The Louisiana Supreme Court has recognized

four instances where contra non valentum can apply: (1) where there was some

legal cause which prevented the courts or their officers from taking cognizance

of or acting on the plaintiff’s actions; (2) where there was some condition cou-

pled with a contract or connected with the proceedings which prevented the

creditor from suing or acting; (3) where the debtor himself has done some act

effectively to prevent the creditor from availing himself of his cause of action;

or (4) where some cause of action is not known or reasonably knowable by the

plaintiff, even though his ignorance is not induced by the defendant. Id. . . .


forged by an employee of one of the customers. The forgeries were not

discovered and reported by the customers until several months after the

first account statement reflecting a forged check was made available.

The deposit agreements had modified the reporting periods provided in

UCC Article 4 – as permitted by UCC § 4-406 – by shortening the one-

year statute of repose after which a customer could not assert an alter-

ation against the bank to 30 calendar days, and the period after which

a customer could not assert an alteration committed by the same wrong-

doer to 10 calendar days after the first statement reflecting an altered

item was made available.



3.28A. In December 2019, the Fed approved modifications to the

Federal Reserve Bank National Settlement Service (NSS) and Fedwire

Funds Service to “enhance” the same-day automated clearinghouse ser-

vice (ACH) that it provides to Reserve Bank account holders.1 When

fully implemented, this should encourage quicker settlement of out-

standing checks and other items in the process of collection. The modi-

fications would presumably have a very significant impact on the col-

lection process.2 Of course, the enhanced process may increase costs and

other risks to banks and their customers, “including risks and costs re-

lated to additional staffing, compression of end-of-day processing activ-

ities, decreased availability of extensions to operating hours, and more-

frequent delays to the reopening of the Fedwire Funds Service” which

must process items.3 Faster processing should make it harder for play-

ers attempting to kite checks over an extended period. Would it have

made any difference to the situation in First National Bank?

3.28B. The onset of the coronavirus pandemic in the United States

in early 2020 has disrupted to some extent the payment system main-

tained by the Fed, at least to the extent that strict adherence to dead-

lines may be excessively burdensome to banks and their customers.

While still requiring settlement of accounts on a daily basis, the Fed

has installed temporary measures to encourage financially healthy de-

pository institutions to use intraday credit extended by Federal Reserve

Banks, to keep the payment system in smooth operation. See 85 Fed.

Reg. 23,448 (2020) (issuing policy statement describing temporary ac-

tions intended to support provision of liquidity to households and busi-

nesses and general smooth functioning of payment systems).

3.28C. Payments in a Digital Age. Historically, the Federal Reserve

Banks have provided a collection and clearance system for checks,4 and

currently also provide an interbank funds transfer system known as

Fedwire.5 With the emergence of instant payment services over the past

20 years, “enhanced speed and convenience [is] expected by the public

1 84 Fed. Reg, 71,940 (2019). 2 For example, on average, $35 billion is settled over the Fedwire Funds

Service in the first hour of its business day (9:00 p.m. ET to 10:00 p.m. ET). 84

Fed. Reg. at 71,943. 3 Id. at 71,945. 4 12 C.F.R. pt. 210, subpt. A. 5 Id. pt. 210, subpart B.


for payment transactions in modern digital economies.”6 Recognizing

that a traditional collection system was not easily applied to “instant

payments,” in June 2021 the Fed proposed amendments to its “Regula-

tion J,” the rules governing collection of checks and other items by Fed-

eral Reserve banks, to deal with funds transfers through a new FedNow

service.7 The new FedNow Service, the subject of a proposed subpart C,

is an interbank 24-7-365 real-time gross settlement service fully inte-

grated to support instant payments in the United States. The FedNow

Service is intended to operate alongside similar services provided by the

private sector, establishing a core infrastructure supporting instant

payments in the United States. Proposed subpart C terms of service will

include a requirement for a FedNow participant that is the beneficiary’s

bank to make funds available to the beneficiary immediately after it

has accepted the payment order over the service. Proposed subpart C

also expands and clarifies the applicability of the UCC Article 4A to all

transfers over the FedNow Service,8 subject to a limited number of mod-

ifications and clarifications that are consistent with the purposes of

UCC Article 4A.

6 Federal Reserve System, Collection of Checks and Other Items by Federal

Reserve Banks and Funds Transfers Through Fedwire, 86 Fed. Reg. 31,376,

31,376 (2021). 7 86 Fed. Reg. 31,376 (2021) (to be codified at 12 C.F.R. §§ 210.2, 210.25,

210.26, 210.28, 210.30, 210.32, 210.40-210.47; pt. 210, subpt. B, Appendix A,

subpt. C, Appendix A; pt. 210, Appendix A; removing pt. 210, subpt. B, Appen-

dix B). 8 UCC Article 4A, which has been adopted in all 50 states, provides com-

prehensive rules governing the rights and responsibilities of the parties to

funds transfers. It is discussed extensively in Chapter 5, infra.



3.38. Availability of Funds and Collection of Checks (Regulation

CC). Pursuant to section 609(a) of the Expedited Funds Availability

Act (EFAA),1 as amended by § 1086(d) of the Dodd Frank Act of 2010,2

the Federal Reserve and the Consumer Financial Protection Bureau

jointly prescribe regulations to carry out the provisions of the EFAA, to

prevent the circumvention or evasion of funds availability provisions,

and to facilitate compliance with those provisions. In December 2018,

the two agencies proposed amendments to Regulation CC, 12 C.F.R. pt.

229, which implements the EFAA.3 (And they also provided an addi-

tional opportunity for public comment on certain amendments to Regu-

lation CC that the Fed had proposed in March 2011! Things do not al-

ways move swiftly in the administrative state.) In the 2018 proposal,

pursuant to DFA § 1086(f),4 the agencies proposed a calculation meth-

odology for implementing a statutory requirement to adjust the dollar

amounts in the EFAA every five years by the aggregate annual percent-

age increase in the Consumer Price Index for Wage Earners and Cleri-

cal Workers (CPI-W) rounded to the nearest multiple of $25. Comments

on both proposals were required to be submitted by February 8, 2019,

but neither proposal would have affected the analysis in cases like Essex

Construction Corp. The proposal was adopted and issued in final form

in July 2019.5

1 12 U.S.C. § 4008(a). 2 Pub. L. No. 111-203, July 21, 2010, 124 Stat. 1376, 2086 (codified at 12

U.S.C. § 4008(d)-(e)). 3 83 Fed. Reg. 63,431 (2018) (to be codified at 12 C.F.R. pts. 229, 1030). 4 12 U.S.C. 4006(f). 5 84 Fed. Reg. 31,687 (2019) (codified at 12 C.F.R. pts. 229, 1030); corrected,

84 Fed. Reg. 45,403 (2019) (correcting amendatory instructions with respect to

amendments to 12 C.F.R. §§ 229.12-229.13, 229.21).



4.9A. Fertico Belgium refers to the possible effect of “fraud in the

transaction” on the independent legal significance of the L/C, typically

barring the bank customer’s intervention in the separate letter of credit

obligations between the bank and the beneficiary.1 It is important to

keep in mind that courts tend to be very reluctant to apply the “fraud

in the transaction” exception. See, e.g., BasicNet S.p.A. v. CFP Services

Ltd., 4 N.Y.S.3d 27 (N.Y.App.Div. 2015), where the licensors of an

amended trademark license agreement – beneficiaries of standby let-

ters of credit for which licensee was the account party – had backdated

by more than two weeks their execution of the amended agreement. The

court emphasized that the backdating was not an intentional fraud that

would allow the issuer to refuse to honor draws. There was a valid un-

derlying transaction, and the backdating was not material to the terms

of the letters of credit, which required the beneficiaries, in making

draws, to submit signed letters of claim and audited payment state-

ments from a licensed independent public accounting firm.

1 Cf. Banco Nacional De México, S.A., supra at 65-66 (discussing doctrine

of independent contracts as fundamental principle governing letters of credit).


p. 302. At the end of section A, add the following discussion:

Of course, the fact that we now have systems in place, both at the

wholesale1 and the retail level, for electronic funds transfers, does not

necessarily mean that they run smoothly and efficiently simply because

they are digital. Either because these systems are relatively new – par-

ticularly at the retail level – or because they can be so easily manipu-

lated, many legal issues are still open to question. Consider, for exam-

ple, Fridman v. NYCB Mortg. Co., LLC, 780 F.3d 773 (7th Cir. 2015), a

case involving a mortgagor who paid her mortgage electronically, using

an online payment system on the website of her mortgage servicer,

NYCB Mortgage Co. The court recognized that “[e]lectronic authoriza-

tions . . . are an increasingly common way to pay not only mortgage

payments but also a wide variety of other bills.”2 Fridman electronically

authorized NYCB Mortgage Co. to collect funds from her Bank of Amer-

ica account, but when exactly does that mortgage payment occur? Frid-

man completed the online form within the grace period allowed by her

mortgage note, but the servicer did not credit her payment for two busi-

ness days, causing Fridman to incur a late fee. Fridman brought a class

action alleging that this practice of not crediting online payments on

the day that the consumer authorized them constituted a violation of

the Truth in Lending Act (TILA).3 Since one objective of the TILA is to

protect consumers against unwarranted delay by mortgage servicers,

the court concluded that “[w]hen a consumer interacts directly with a

mortgage servicer (such as by . . . filling out an electronic authorization

form on a servicer's website), it is the servicer that decides how quickly

to collect that payment through the banking system.”4 It therefore re-

versed the district court’s summary judgment in favor of NYCB Mort-

gage and remanded the case for further proceedings.

1 At the wholesale level, the Federal Reserve System is currently proposing

new rules that would govern real-time funds transfers that utilize the Federal

Reserve Banks. See comment 3.28C, supra (discussing proposal for a FedNow

service, an interbank settlement service fully integrated to support instant

payments in the United States). 2 Fridman, 780 F.3d at 777. 3 15 U.S.C. §§ 1601 et seq. On the requirements and practical implications

of the TILA, see 3 MICHAEL P. MALLOY, BANKING LAW AND REGULATION §

14A.03[J] (2020 Cum. Supp.). 4 Fridman, 780 F.3d at 779.

Contemporary Payment Systems

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