COMMERCIAL PAPER Curtis Fall 2010 PUBLIC POLICY BEHIND COMMERCIAL LAW A.

Promotes free flow of commerce by recognizing neg. instr. as substitutes for cash B. Promotes personal safety by encouraging use of system as an alternative to storing money elsewhere to avoid burglary, robbery, checks stolen from mailbox, etc. C. Promotes fast, convenient, and price-competitive financial services DEFINITIONS; CHECK COLLECTION PROCESS A. Definitions 1. Depository/Depositary bank: Bank of first deposit of a negotiated instrument; Payees bank 2. Payor bank bank on which negotiated instrument is drawn 3. Collecting bank intermediary bank usually used when theres significant distance bw. depository and payor bank 4. Drawer/Maker/Issuer party that issues negotiated instrument possible to have multiple) 5. Drawee payor bank 6. Payee beneficiary of payment order (possible to have multiple) B. Check Collection 1. Maker/Drawer issues the check: liability attaches. a. Maker is not liable to pay the negotiated instrument unless her authorized signature appears on it 2. Gives to Payee: first endorser 3. Payee deposits check at depository bank / collecting bank (either the payees bank or the bank of fist deposit) 4. Depository Bank credits payees account 5. Depository bank goes to Payor bank or Drawer a. There may be an intermediary bank that helps small bank make presentment to Drawer. b. If depository bank and payor bank are within same state, there may be Direct Presentment in which case no collecting is bank needed. TYPES OF NEGOTIABLE INSTRUMENTS A. Note 1. Instrument whereby maker (borrower) promises to pay money to payee (lender) 2. Interest isnt required, can have principal only note, but very unlikely B. Certificate of deposit (CD) 1. Instrument whereby bank promises to repay money deposited by payee 2. Interest isnt required, but very likely C. Draft 1. Instrument whereby drawer (maker) orders drawee (usually a bank) to pay money to payee a. Time drafts: Payable at specified future date. b. Sight drafts: Payable at sight, immediately at presentment or at time seen. 2. Not commonly used except by insurance companies and some govt agencies.

D. Check: 1. Instrument whereby drawer (maker) orders drawee (always a bank) to pay money to payee.,
payable on demand INDORSEMENTS A. Signature on an instrument, other than the makers signature, made for the purpose of negotiating the instrument 1. Blank risky. Once indorsed, anyone can indorse and cash. a. Signature of the indorser b. NO words specifying a new payee

2. Special a.

b.
c. 3. Restrictive a.

Signature of the indorser Words specifying a new payee Ex. Include Pay to the order of USC under signature Signature of the indorser Words designed to limit payment or use of the instrument Ex. Include For deposit only

b.
c.

4. Qualified a.

Signature of the indorser b. Words designed to negate payee liability c. Without recourse precedes signature d. Most banks wont accept this. If check is returned unpaid, bank has no right against payee, only maker 5. Anomalous a. Signature of indorser b. Words whereby second indorser accepts several liability with first indorser

NEGOTIATION A. The transfer of an instrument in a form that the transferee becomes a holder of the instrument B. Two ways to negotiate an instrument 1. Payee endorses the instrument then delivers the instrument to another (most common) 2. Delivery alone (uncommon) C. Language rules affect rights to N.I. 1. And separating multiple payees or stacked payees all must endorse 2. Or, And/or, or / (virgule) any one payee endorsement is sufficient 3. Numbers and words do not agree words control the numbers 4. Some handwritten, some typewritten, some printed handwriting controls typewriting which controls printing 5. Words describe the payee instrument is payable either to the office held or the fiduciary arrangement REQUIREMENTS OF NEGOTIABLE INSTRUMENTS (All must be met) A. In writing 1. Any tangible medium of expression may be used (handwriting, typewriting or printing writing on a shirt counts!) 2. Bank and client can vary this by agreement, but they cannot vary: a. Bank cannot excuse nonpayment b. Customers right to stop payment B. Signed 1. Mark, term, or signature 2. Rubber stamp or facsimile signature 3. Agent signature. (i.e. Power of attorney sign principals name, agents name, then attorney in fact ) C. Unconditional 1. No express conditions to payment; no conditions precedent D. Fixed amount of money 1. Any recognized currency of any government (US or foreign) E. Payable on demand or at a definite time 1. If silent re: time of payment or if it says Payable on demand payable on demand 2. Payable at [specified future] or payable at a definite time F. Payable to bearer or order 1. Bearer instrument either says pay to the order of bearer or cash 2. Order instrument says pay to the order of person or entity G. Cannot contain any other promise or order 1. Promise (note or CD) or Order (draft or check) 2. Violation of rule e: Pay to the order of James Curtis and transfer the deed of trust to Curtis violates bc 2 orders HIDC (Holder in Due Course) RULE OVERVIEW

A. To qualify as a holder in due course, the moving party must show that they are the (1)
holder of the instrument; (2) they gave value for it; (3) accepted it in good faith; (4) and without notice of a claim or defense. A HIDC takes free from personal defenses, but is subject to real defenses (IFSAD) How to Spot / Analyze a HIDC problem 1. Elements Present a. Negotiable Instrument present b. First /original payee negotiated the instrument to a 3rd party (new/2nd payee) i. Seller sells a car to Buyer (child). Buyer fraudulently induces Parent to pay seller. Parent issues check to seller. Parent learns of childs fraud and stops payment. Seller sues Parent as HIDC. c. Moving party (new/2nd payee) sues the original maker rather than either payee

B.

Steps in Analysis a. Is the negotiable instrument in the problem valid? Go through the 7 steps b. Has it been negotiated? i. Look for declarative statement designed to preclude ii. Define negotiation and note how it was negotiated c. Is the holder the HIDC? d. Are any of the Real Defenses applicable? C. Is the holder the HIDC 1. Holder a. Must show they were in possession at some point in the transaction i. usually est. by indorsement or processing stamp b. Party has all necessary indorsements 2. Value a. Performed, executed consideration (no future promises to give value) b. Not required to give 100% - can discount the instrument c. Examples i. Cash in exchange for an instrument ii. Credit payees account and permit withdrawal iii. Exchange of one negotiable instrument for another 3. Good Faith a. Acted honestly in the transaction factual inquiry i. NO duress ii. NO Knowledge that it was stolen or altered b. Observed of reasonable commercial standards of fair dealing i. Cannot negotiate too deep a discount more than 50% is too much. ii. Consisted with prior dealings of parties iii. Relative bargaining strength of the parties 4. Without notice of a claim or defense a. Actual Knowledge at the time of the transaction (Kaw Valley) i. Defense on the face of the instrument ii. Defense in document accompanying instrument iii. An obligated party gave notice of defense iv. Actual knowledge of the business practices of another and are closely aligned wit the transferor so as to be charged with knowledge of their practices requires factual investigation b. Claims/defenses i. Dishonor a. NSF (non-sufficient funds) b. Stop Payment c. Account closed i. Forgery a. actual knowledge lay person /HIDC has actual knowledge of forgery ii. Alteration a. Amount is raised b. Payees name has been switched c. Obvious erasures or white out iii. Irregular a. Stamped with valid or paid b. Crumpled up and then uncrumpled iv. Overdue a. Over 90 days old v. Material Term is blank

2.

a. Maker signature vi.

b. Dollar amount c. Payee name Claim in recoupment a. Check payable to Sam and Mary. Sam indorses check, but Mary doesnt.

D. Real Defenses IF SAD 1. The HIDC takes free of personal defenses but is subject to real defenses (IF SAD) 2. I: infancy, illegality, insanity a. Infancy before accept instr., make sure person is an adult (18+) b. Incompetency adjudicated incompetent by court (e.g. letters of
guardianship/conservatorship issued) c. Illegality if transaction is illegal, instruments assoc. with it are illegal 3. F: forgery, fraud in the factum a. Forgery forgery was good; layperson wouldnt notice forgery; expert would testify that sig. was forged b. Fraud in the factum person was duped re: nature of the transaction (e.g. woman signed promissory note, when she thought she was signing a purchase order for an item) 4. S: statute of limitations; suretyship defenses a. Statute of limitations wait too long to bring action b. Suretyship defenses (discuss in later class) 5. A: alteration a. Alteration changing instrument (e.g. dollar amount raised) 6. D: duress; discharge in bankruptcy a. Duress b. Discharge in bankruptcy defense for bankrupt person against HIDC. When bankruptcy court discharges HIDC, person no longer owes him, even though under ordinary circumstances, he would be a valid HIDC.

E. HIDC is designed to protect:

1. Depository bank in accepting checks or drafts for deposit a. DB takes risk every time it takes deposit from payee and waits to be paid by payor bank b. If not paid by payor bank (instrument returned unpaid) DB can reverse credit of payee or sue maker c. Cheaper/ faster to reverse payees credit, but sometimes DB is unable to (account closed or NSF) 2. New payee (2nd payee) of a note from a claim against the original first payee a. Car seller (payee 1) represents to purchaser and maker of note that car is in great condition. Purchaser agrees to pay $100/mo for 36 months. P1 wants $$ immediately and sells note for 80% of face value to finance co. (new, 2nd payee). Purchaser doesnt want to pay for car bc of P 1s misrepresentation. b. HIDC protects finance company as a HIDC. c. Purchasers remedy is to directly deal with car seller for compensation. F. HIDC Transactions 1. Fiduciaries a. Where a party (bank) claiming to be a HIDC allows an instrument payable to a fiduciary to be deposited into a non-fiduciary account, the party (bank) accepts the risk of misappropriation of funds i. Son was recipient of grandfathers life insurance. Father was appointed sons guardian (est. fiduciary relationship). Father was instructed to open a guardianship account where he would deposit the check. Instead father deposited it in his own personal account and used it for himself ii. Here, bank claims to be HIDC; check was payable to fiduciary; bank allowed a fiduciary to deposit in a non-fiduciary acct thus bank accepted risk of misapp. Banks remedy go after father 2. Officers in a Business

a.

3.

Businesses are subject to the same rule, but can overcome it with an indemnity agreement, including: i. Language of authorization: Ace hereby authorizes Bank to cash checks payable to X, Y and Z as officers of this business, or deposit them into their personal accounts. ii. Language of indemnity iii. Revocation only in writing at office where account is held (avoids potential problems) Consumers a. FTC Consumer Protection Rule (federal law, trumps state codes) i. Where a consumer buys (natural person, non-business except for sole proprietor) ii. Consumer goods or services (primarily for personal, family or household use) iii. On credit (making more than 4 (5+) installment payments) iv. Then personal defenses are available against HIDC b. Excluded Transactions from HIDC i. Bulk sales are always NOT HIDC ii. Estate sales or judicial sales

MAKER AND ENDORSER LIABILITY A. Maker Liability Rule: The Maker is primarily responsible for payment of instrument if her signature appears on it B. Endorser Liability Rule (aka Right of Chargeback) 1. To recover loss from payee / endorser, depository bank must show a. Instrument was presented to maker for payment b. Primary party refused to pay (NSF, stop payment, account closed) c. Holder of instrument gave endorser timely notice of dishonor i. Timely notice: midnight of the banking day following the banking day of receipt of the item ii. Notice must in writing iii. No duty to prove receipt only to show you sent it. TRANSFER AND PRESENTMENT WARRANTIES A. Warranties in General 1. Transferors promise to subsequent holders of an instrument that certain stmnts about the instrument are true 2. Warranties exist to protect the payor bank against claims that occurred prior to it receiving the instrument. 3. Payor bank can the seek indemnification because of a breach of warranty. B. Transfer warranty 1. Promises given by any party who transfers an instrument (e.g. payee to dep. bank; dep. bank to payor bank) a. Entitled to enforce instrument good title (has all req. endorsements) b. All signatures are genuine c. No material alterations on the instrument d. Transferor has no knowledge of bankruptcy of maker e. Theres no valid defense against transferor C. Presentment warranty 1. Promises given by party presenting instrument to drawee a. Entitled to enforce instrument (have all endorsements the law requires) b. All signatures are genuine c. No material alterations on the instrument D. Inter-bank Claim: breach of warranty claim 1. Depository bank must inspect the check 2. When depository bank sends check to payer bank, payer bank will RELY on the depository banks conduct 3. The first instance when payer bank hears of the claim is when the named payee or maker notes the problem 4. Payer bank must notify depository bank within 30 days of date listed on claimants affidavit 5. Gnerally, depository bank will honor it without litigation. No defense available unless PB does not meet 30 days a. if DB can prove it was prejudiced by the delay valid defense to the breach of warranty claim b. If they refuse to indemnify then the payer bank could have to pay expenses CASHIERS CHECKS AND LOST INSTRUMENTS A. Issuance: 1. Cashier Checks: Issued by bank, not by customer. Same bank is drawer and drawee 2. Official Check/Tellers Check: issued by one bank, but drawn on another bank B. Stopping payment 1. Only the bank has the right to stop payment, not the buyer. (It is not the buyers obligation)

C.

a. If buyer could stop payment, CC would lose its beneficial status as the equivalent of cash 2. Bank can stop payment on cashiers check or official/tellers check only if: a. It suspends payments (bc insolvent) b. Prohibited by law (OFAC prohibits payments to certain countries i.e. Iran, Libya, Cuba) c. Obligated bank has reas. grounds to believe it has a defense against party entitled to enforce instrument d. Bank has reason to believe that presenter is not entitled to enforce check is for A&B, only A shows up Lost Instruments remedies for lost cashiers check 1. Indemnity bond a. If a cashiers check is lost, before the bank will stop payment and issue new checks, buyer must post an indemnity bond in an amount to adequately protect the bank for: i. Administrative costs of stopping payment ii. Potential costs of litigation in case HIDC comes forward with supposedly-lost cashiers check

2.

Claim for refund (modern practice) a. If you supply the bank with an affidavit under penalty of perjury that says the cashiers check was lost, stolen or destroyed and you are willing to wait 90 days, on day 91, bank must give your money back. i. Applies only to cashiers, tellers and official checks ii. Eligible claimants are only purchaser or payee iii. Required to submit affidavit/declaration under penalty of perjury. Contents: 1. Identity of claimant 2. Representation that claimant is purchaser or payee 3. Description of check with reasonable certainty 4. Representation that its lost, stolen or destroyed buyers remorse is not a valid reason 5. Signed by claimant (usually notarized, although not required) 6. In writing iv. Claim is effective 90 days following issuance. On day 91, can get $ back without indemnity bond 3. Personal indemnity without bond, if bank will allow it a. based on reputation in the community or specifically at that bank 4. Suggest to bank that they reissue cashiers check to my client and my client will post his own money in a CD at that bank for 90 days so that client is earning interest on that money and will get the cashiers check reissued ACCOMMODATION PARTIES AND SURETYSHIP DEFENSES A. Accommodation Party Liability 1. Co-Maker Liability: Where 2+ makers sign as co-makers, they are jointly and severally liable a. Payee does not have to go after child first they can go after co-maker parents immediately 2. Accommodation party: A party who signs an instrument as a maker, for the purpose of incurring liability on the instrument, but without being a direct beneficiary of the value given, is not joint or severally liable. a. Accommodation party is not liable to the party accommodated b. Accommodated party is liable to the accommodation party c. Benefits test: To establish you are an Accommodation party, must show i. You are not the direct beneficiary of the given value ii. AND no ownership interest in the business/arrangement d. In community property states: spouse cannot be an AP e. Shareholders: Shareholder are AP if they receive no direct benefit (beyond indirect and derivative benefit) 3. Difference between Accommodation Party and Co-Maker a. Co-makers are jointly and severally liable no right of reimbursement. They are gen. equally responsible and can only get back from the other unless theres a private agreement in writing. B. Suretyship Defenses would be asserted by AP 1. Suretyship defenses applies when there is a material change to the obligation of the principle debtor (2+ makers) without the suretys (APs) consent. a. Material Changes include: i. Principle debtor is released from liability by payee or creditor (leaving AP as only one liable) ii. Change in the subject matter (change from a deal for a tractor to 10 tractors) iii. Change in principal amount iv. Change in interest rate v. Release of the collateral b. NOT material changes (surety does not need to consent and surety is not released from liability) i. Change in the payment address

ii. Change in the due date without more 2. General Rule: Creditor and the principle debtor cannot impose a new contract or obligation on the surety without notice to the surety and their waiver or consent a. Someone who holds a note like this cannot be a holder in due course (one of the IFSAD defenses) b. Accommodation Party is still responsible for what she agreed to. SIGNATURES BY REPRESENTATIVES A. If it is clear from the face of the instrument that the agent is signing on behalf of the principle, only the principle is liable a. Signing on an individuals behalf: Sign principles name + by + rep.s signature + rep.s status (atty in fact) b. Signing on behalf of a co: Print co. name + by + reps signature + officer status (president, treasurer) B. When signing on behalf of a principle, if the agent fails to disclose agency stauts, he escape personal liability if the account is in the principles name AND the check lists the principle. ACCORD AND SATISFACTION (Use to resolve dispute with merchant debt ends) A. For accord and satisfaction to be successful, a moving party must show: 1. Dispute over the existence or the amount of a debt 2. Debtor tendered check to creditor in full satisfaction 3. Conspicuous statement communicates payment in full/full satisfaction/final payment 4. Delivered check to creditor (Mail works) b. Sending a check to the agent + agent notifying the principal is the equivalent of notifying central address 5. Creditor negotiated the check B. Creditors Defenses 1. Creditor can refund the payment within 90 calendar days 2. Creditor can specify that all accord in satisfaction checks must be mailed to a central address MIDNIGHT DEADLINE (midnight of the banking day following the day of receipt of the check) A. Depository Bank Midnight Deadline: when holder must notify payee of chargeback B. Payor Bank Midnight Deadline: When depository bank sends payor bank a check the payor bank must return the check unpaid by the midnight deadline 1. If the payor bank misses the deadline, payor bank is deemed to have paid the item. It is as if they accepted it and debited the payers account and they cannot return the check to the depository bank 2. Payer banks has a duty to plan for foreseeable events (holidays, machines breaking down) 3. Payer bank must exercise diligence to resume performance C. Excuses that Enable Midnight Deadline Extension 1. War 2. Interruption of Communication or power facilities 3. Emergency conditions (earthquake) 4. Suspension of payments by a bank 5. Other circumstances beyond payor banks control (when it took longer than reasonable time to learn the facts) ENCODING ERRORS A. Encoding: Depository bank types on instrument the amount for which payor wrote it. (Customers like USC can do it too.) 1. Under-Encoding check encoded for less than face amount (X writes check for $10K. DB encodes check for $1K)

2. Over-Encoding check encoded for more than face amount B. Liability: The bank that performed the encoding (depository bank) is liable under a breach of
warranty-- it warranted to subsequent banks that it was correct 1. Liability for Under-Encoding: If the collecting bank receives settlement for check, the bank is accountable to payor bank for the check amount a. Amount of check is the face amount, not the encoded amount b. Liability remains with the bank that made the error c. Payor bank may use an estoppel defense if maker has no money remaining in the account 2. Liability for Over-Encoding: Payor bank can recover loss from depository bank on theory of breach of warranty a. Payor bank can only charge makers account for face amount, not encoded amount: If $100 check is over-encoded for $1000, payor bank may only charge maker for $100 resulting in a $900 loss to payor bank Damages that may be recovered: 1. Amount equal to loss suffered as a result of the breach 2. Loss of interest 3. Expenses (attys fees)

C.

REGULATION CC (Federal Reserve Board Regulation) A. Federal Law placing a maximum hold period on deposited checks 1. Next day availability (1 day)-- Cash, e-payments (direct deposit), wire transfers, cashiers checks, gov. checks 2. Local: 2 business days B. Exceptions: Add 5 days for exceptions when banks can hold longer (next day: 6; local: 7) 1. New accounts 2. Large deposits over 5K in a single day 3. Redeposited 4. Overdraft a. 6+ overdrafts in a 6 month period b. 2 5K overdrafts in a 6 month period 5. If bank has reasonable cause to doubt collectability a. The check you are trying to deposit is more than 6 months old b. Trying to deposit a post dated check c. If bank has knowledge that maker filed for bankruptcy d. Where payor bank notified depositor bank that the item will not be paid 6. Emergency conditions a. War b. Interruption of communication or power facilities c. Acts of God d. Other emergencies beyond control of the bank WIRE TRANSFER A. A senders instructions to a receiving bank, orally, electronically or in writing, to pay money or to cause another bank to pay money to an identifiable beneficiary. 1. The Typical transaction involves large payment of money by one business or financial inst. to another accomplished thru banking system by electronic means 2. NOT: ATM; debit or gift cards; direct deposits; automatic payments; small wire transfers by non-banks B. Parties: 1. Sender/Originator: partying requesting funds transfer 2. Receiving/Originating Bank: senders bank that executes the funds transfer 3. Beneficiarys Bank: agent of the beneficiary and recipient of funds transfer 4. Beneficiary: party entitled to payment 5. Instruction to Pay: payment order

C. When An Order May Be Cancelled Or Amended 1. A sender MAY cancel or amend a payment order IF the notice is received by the bank in a time and in a manner to give the bank a reasonable opportunity to act before the beneficiary bank accepts the payment order 2. It is too late if: a. The bank paid the beneficiary b. The bank notified the beneficiary that the order was received c. The beneficiary bank credits the beneficiary account 3. The beneficiary bank must agree to cancel 4. Applicable circumstances a. When it is a duplicate b. If the wrong beneficiary is paid c. If the amount of the transfer was excessive d. Where the original transfer was unauthorized (fraud) D. When There Is a Mistake 1. Mistake of fact: Mistaken party gets money back absent detrimental reliance that would make repayment unfair 2. Discharge for value: (used in cases of mistakes): If a creditor receives a payment from a 3rd party to which the creditor was entitled, the creditor gets to keep the money, absent actual knowledge or misrepresentation. a. EXCEPTIONS (so where creditor cannot keep money) i. Duplicate payment: creditor only entitled to the money its due ii. Wrong beneficiary: money was paid to someone not entitled to money E. When There Is a Delay or Failure 1. Damages for a Delay a. Lost Interest for period of delay b. Additional damages NOT recoverable UNLESS provided for in a written agreement bw bank and customer c. Atty fees recoverable if demand made and NOT paid before lawsuit filed 2. Liability for Failure a. Lost interest for period of delay b. Incidental damages cost of transfer gets principal bank c. Atty fees recoverable if demand made and NOT paid before lawsuit filed 3. If it is an unidentifiable person, NOONE has rights to the transfer and no acceptance may occur. To avoid duplicate payments, it should be rejected and sent back with NO attempts to find a correct customer.

LAW OF FORGERY A. Types Maker Forgery: a. Maker is NOT liable on a forged maker check since her authorized signature does not appear on the check. Payor bank is liable absent a defense. 2. Unauthorized Signature Rule: a. When a tiered singing authority exists, it is treated as maker forgery and the payor bank is liable. b. Tiered: when a system is in place. (i.e. for checks under $500, 1 signature is sufficient. Over, 2 are req.) 3. Counterfeit Check: payor bank is liable 4. Forged Endorsement: a. Applies when the payees signature is forged. Depository bank is liable 5. Altered Check: a. Applies when amt of check has been raised or payee name has been changed. Depository bank is liable. B. Maker Forgery and Unauthorized Signature Defenses 1. Ratification: can occur by (applies to all types of forgery) a. Victim adopts signature as his own b. Express statement by the victim to not prosecute the wrongdoer (if victim is the parent) c. Direct settlement with wrongdoer d. Victim retains benefits of forgery Maker Negligence: Applies to maker forgeries and unauthorized signatures a. Test Did the makers own failure to exercise ordinary care substantially contribute to the alteration or forged maker signature? In California, substantially has been struck out. i. If yes, the defense applies and bank is released from liability ii. If no, defense fails and bank is still liable to customer b. Business Examples of Maker Negligence i. Failure to secure signature stamp or facsimile machine or blank check stock ii. Careless mailing of a check to the wrong person having the same name iii. Knowingly hiring an untrustworthy employee iv. Failure to separate check writing and statement review functions v. Failure to adopt audit procedures or failure to follow them vi. Failure to take preventative action upon learning of forgery c. Consumer Examples of Maker Negligence i. Negligently making out a check to avoid, do not leave spaces ii. Mailing check to the wrong person having the same name as payee d. Failure to Inspect: failure of customer to inspect and report forgery i. Customer has a duty to review statement and cancel check with reasonable promptness and promptly notify the bank of any maker forgery or alteration a. Exceptions: health issues, out of the country, unavailable for another reason ii. If customer does not notify within 30 days, the bank may deny the claim if the bank shows that 30 days is not met AND bank could have avoided loss if notified timely iii. Where there are multiple forgeries by the same wrongdoer, the bank will be liable for forgeries in the first statement, PLUS forgeries within 30 days of first statement but not liable for all later a. Ex: April 20 maker forgery; May 1 - receive statement; May 17 maker forgery; May 31 maker forgery; June 1 receive statement; June 20 maker forgery

1.

Bank liable for forgery in May 1 stmnt, the May 17 forgery, and May 31 forgery. Thats it. Bank isnt liable for June 20 forgery b/c its not within 30 days of first account stmnt. iv. Comparative Negligence: When bank and customer are both liable, comparative negligence comes into play and loss is allocated according to fault v. Customer must notify bank within 1 year or claim is precluded bc of lack of evidence analysis. a. Reason: They wont be able to submit evidence that a forgery took place. b. Bank can have customer sign an agreement decreasing the 1 year term e. Espresso Roma: employee wrongdoer steals co. blank checks and conceals forgery. Co finds out and reports but bank denies claim and ct ruled in banks favor bc of timing and bc bank exercised ordinary care i. Timing: Co. failed to report w/in 30 days. Even if the bank was negligent, the company had a full year to report, but did not. ii. Ordinary care: Reas. commercial standards do not require sight examination of checks and the banks procedures did not require sight examination C. FORGED ENDORSEMENT 1. Forged endorsement claims are litigated as conversion claims. Conversion claims happen wen a bank either makes or obtains payment on a negotiable instrument for a person not entitled to enforce the instrument. 2. Parties who can sue for forged endorsement a. Maker sue payor bank i. Payor bank may only charge makers account the amount properly payable from the account b. Maker cannot sue depository bank directly i. If we dont force Maker to sue payor bank, we may never know if maker negligence is a defense c. Payee can sue depository bank d. Payor bank can sue depository bank (breach of warranty claim) e. Depository bank can see the wrongdoer (ultimately responsible) 3. Defenses to Forged Endorsement (available to bank) a. Ratification (see above) b. Fictitious Payee Rule i. To succeed with the defense, the bank must show 1. Wrongdoer (usually employee) issues a check as maker OR on behalf of maker 2. Wrongdoer does not intend payee to have any interest in the check a. Either payee doesnt exist, or payee exists, but maker owes them no money ii. Endorsement by anyone using the payees name will constitute valid, effective endorsement 1. Because the co. is in the best position to prevent this from happening iii. Comparative Negligence applies c. Employer Responsibility Rule i. To succeed with the defense, the bank must show: 1. Wrongdoer was either an employee or independent contractor of the victim 2. Applies to instruments issued by the employer AND to instruments payable to employer 3. Wrongdoer was an employee with responsibility a. Authorized signer on companys bank account

b.

b. Make out checks for someone else to sign c. Authority to process instruments after receiving them from bank (e.g. balancing the checkbook) d. Controls disposition of instruments (e.g. mails the checks) e. Otherwise acts in responsible capacity with regard to negotiable instruments ii. Impact endorsement by anyone is a valid, effective endorsement and relieves bank of liability iii. Comparative Negligence applies d. Imposter Rule: least likely to apply i. To succeed with the defense, the bank must show: 1. Wrongdoer posed as someone else (does not have to be a real person) 2. Imposter convinced maker to issue checks payable to person being impersonated 3. Endorsement by anyone is effective 4. Comparative negligence applies e. Statute of Limitations (applies to all types of forgery) i. SoL for maker forgery claims: 1 year from the day the instrument was made ii. SoL for forged endorsement claims: 3 years iii. SoL for US Treasury check: 18 months iv. California SoL for claims made by CA resident to CA bank: 1 year f. To Show comparative negligence on the bank, look at i. Operating manuals ii. Teller manual (most banks assign a max $ amt within tellers authority) iii. New accounts manual (look for missing req documents biz license; fictious biz name stmnt) OVERDRAFTS A. A payor bank may cash a check even if causes an overdraft. 1. Bank has no legal duty to return the check for NSF B. When there is a multiple ownership account, the banks claim is against the account owner who caused the overdraft unless the outer account holder benefited from the proceeds 1. Some banks have changed this to all account holders being jointly and severally liable

STOP PAYMENT A. Customer has absolute, unrestricted right to stop payment on a check for any or no reason B. Requirements: 1. Notify bank orally or in writing a. Oral only valid for 14 calendar days b. Written only valid for 6 months 2. Describe the item with reasonable certainty a. Minor discrepancies in either check # or dollar amount dont relieve bank of its responsibility to stop payment (40 cents is OK, but $20 is too much) b. Reasonable certainty: customer - in the absence of a contrary agreement must supply info the bank with necessary info to allow the bank under technology then existing to identify the item i. Check # ii. Dollar amount iii. Date of the check iv. Payee name 3. Order must be received by the bank at a time and in a manner to give the bank a reasonable opportunity to act (1 business day, unless the bank is still able to stop before deadline of day of receipt) C. Defenses 1. No Loss: 2. Bank subrogated to the right of the maker to prevent unjust enrichment to customer and a loss to the bank 3. Bank subrogated to rights of payee/HIDC to prevent unjust enrichment to customer and a loss to the bank POST-DATED CHECKS A. Maker must call the bank and notify just like you would with a stop payment: (1) orally or in writing; (2) described with reasonable certainty; (3) notice must be received by the bank in a timely manner 1. Bank may charge check against customers account even though payment is made before date of the check B. Unless the customer gives the bank notice, the bank can cash the check right away WRONGFUL DISHONOR A. Payor bank is liable to its customer for dishonor of an item that is properly payable (customer had sufficient funds, account was open and there were no stop payments) 1. Not wrongful dishonor: NSF, account closed, stop payment, payment of check will cause overdraft, ct ordered preventing payment B. DAMAGES FOR WRONGFUL DISHONOR 1. Payor bank is liable to customer for all damages proximately caused by wrongful dishonor, including

i. iii.

ii.

Actual direct compensatory damages: generally face amount of the check b. Consequential damages Damages for arrest or prosecution Damages for emotional distress (negligent IED standard physical injury required) Injury to your credit c. Punitive damages, if allowed under state law C. Standing to Sue 1. Customer: the party who has an account with the bank 2. Corporate Officers if the account owner is a company 3. Corporate officers directly if it is foreseeable that the dishonor would reflect directly on the officer (co. has no entity beyond the individuals)
BANKS ROLE IN LEGAL PROCESS

a.

A. Pre-Trial Writ of Attachment: preserves status quo pending the trial outcome. It orders the bank to
freeze the Ds bank account balance and safe deposit box. Remains valid for 3 years. 1. Required documents a. Notice of attachment: notice to bank that the order is to them (names Bank of America) b. Writ of attachment: court order, identifies defendant and amount of money to be held c. Memorandum of garnishee: banks answer to writ must complete and return d. If D tried to hide money, may also need an Affidavit of spouse or Fictious business name statement B. Post-Trial Writ of Execution: enfores judgement after trial by ordering the bank to freeze bank accounts and safe boxes and remit the property being held to the levy officer after a staturoy waiting period. (10 days if the account is in the Ds name) a. Required documents i. Notice of Levy: notice to bank that the writ is directed to them ii. Writ of Execution: identifies the judgment debtor and the amount to be held iii. Memorandum of Garnishee: banks answer iv. If D tried to hide money, may also need an Affidavit of spouse or Fictious business name statement C. Exemptions 1. Writ of attachment: a. Bank will not hold the first $1K b. Social Security: $2.7 is exempt if (1) account holder gets SS deposit; 4.5 K is exempt if 2_ holders get SS c. Public benefit recipient general assistance payments 2. Writ of Execution a. Social Security Exemption b. Public Benefit Exemption 3. And: IRAs, life insurance proceeds and homestead properties D. Cut off Hours (UCC 4303) 1. Banks must have finality (when they have duty to comply and when they dont) and can set the cut-off hour a. If a cut off hour is set, it cannot be set earlier than 1 hour after opening b. If no cut off hour is set, the cut off hour will be the close of business 2. If a legal process is received prior to the cut off hour, Bank must hold all the money that was there that day plus the amount that wa s there the night before must reverse checks paid the previous night if the funds are needed to honor the legal process REGULATION DD - (Truth In Savings Act) A. Goal: Create uniform national standards governing terms offered by banks re: deposit accounts. 1. Reg DD is a disclosure rule in response to customers complaining that it was difficult to compare banks terms and conditions. Regulation DD sets disclosure stnds that banks must comply with. B. Required Disclosures 1. Initial disclosures: Required to be made at time of account opening a. Applicable Interest rate expressed as an APY (the yield that the interest rate produces w compounding) b. Types and amount of fees c. Minimum opening balance d. Early withdrawal penalties (time deposit) i. All closing fees are prohibitive EXCEPT the fee when you close a CD after it opened < 6 days ago e. Transaction limitations 2. Periodic Statement Disclosures a. Banks required to give statements (monthly or quarterly) b. Types and amounts of fees assessed during statement period c. APY earned during the period

d. Dollar amount of interest credited during cycle e. Number of days in cycle or dates covered by statement 3. Advertising Disclosures a. If advertising is print or a face to face solicitation, interest rate must include APY b. Must disclose period of time APY is offered c. Must include statement that fees can reduce earnings d. If interest rate varies, must describe e. Minimum opening balance f. Balance required to avoid fees 4. Change in terms disclosure a. Banks must give a minimum of 30 days notice for any change in their terms and conditions that will either reduce the APY or otherwise adversely affect the consumer b. Exception: advertising c. When banks make errors in change in terms disclosure, civil money penalties are avail for non-compliance C. Penalty for Non-Compliance 1. If non-compliance is inadvertent (not a practice) , the likelihood of recovery of money damages is extremely low 2. If non-compliance is a pattern of practice, money damages are recoverable VALIDITY OF BANK PRICING A. Contracts of adhesion 1. A K must fall within the reasonable expectations of the weaker party. 2. Terms of a K will not be enforced if found to be duly oppressive or unconscionable B. Unconscionability 1. In determining whether a contract is unconscionable, courts look to: a. Basis and justification for the price has been satisfied i. Market price v. banks price ii. Cost of goods/services to the bank iii. Inconvenience imposed on the seller iv. True value of product/service to the consumer b. Procedural aspects i. Absence of full disclosure (bank didnt fully disclose fee increase . not in compliance w/ Reg DD) ii. Seller engaged in deceptive practices iii. Lack of sophistication of the consumer iv. Absence of meaningful choice no competitive choice if all banks adopt the same practice 2. Remedy for unconscionability, court can: a. Refuse to enforce the contract b. Enforce the remainder, but throw out the unconscionable clause c. Limit the application so as to avoid the unconscionable result C. Purdue Case: 1. P filed a class action to challenge validity of banks NSF charges alleging that the $6 for each NSF when the banks actual cost was $0.30 per check - was unconscionable, oppressive, and unreasonable and should be stricken. 2. Court found that existence of significant profit % was enough to give P reasonable opportunity to present evidence as to purpose, effect and commercial setting of the fee ARTICLE VLETTERS OF CREDIT A. Two Types 1. Commercial: Used by purchaser to pay for sellers goods and assure payment for performance. (import/export biz) a. Exporter (seller) is worried whether hell retain payment once he exports goods to importer (purchaser)

More reliable than personal or cashiers check b/c once its issued, its irrevocable for the period stated 2. Standby: Used to secure performance. Assures payment after default. (Investors are secure against default) a. Construction project example: Contractor posts surety bond as insurance if contractor fails to perform. If that happens, damaged parties can claim money damages by presenting a draft to the issuer of the LoC B. Parties 1. Applicant: Party requesting issuance of LoC. a. Buyer/Importer in commercial; contractor in stand-by; bank customer who requests issuance. 2. Issuer: Bank that issues the LOC. Bank that agrees to honor LoC according to its terms. 3. Beneficiary: Party entitled to payment upon submission of required docs. (If LoC does not refer to docs, then none are necessary.) Exporter-seller in commercial type; party seeking payment assurance in the stand-by type 4. Intermediary Banks a. Advising Bank: notifies beneficiary that LoC has been issued in his name. No liability to pay b. Confirming Bank: notifies beneficiary that LoC has been issued in his name + assumes liability to pay LoC c. Presenting Bank: duty limited to presenting required documents to issuer on behalf of beneficiary C. Structure3 transactions involved in every LOC 1. Transaction1: Underlying agreement between buyer and seller 2. Transaction 2: Agreement between issuer and applicant that issuer will pay beneficiary a. Applicants agreement to pay for the issuance of LoC and to pay for underlying purchase price for goods and reimburse issuer for fees paid to intermediary banks b. Issuers agreement to pay the beneficiary (applicant is counting on the issuer to pay the beneficiary) 3. Transaction 3: LoC agreement between issuer and intermediary bank, if needed a. Intermediary bank must perform required duties b. Issuer must pay intermediary bank for performing duties D. Definition of LoC: At an applicants request, an issuers agreement to honor a beneficiarys documentar presentation by payment or delivery of an item of value E. Governing Law: LoC can be governed by state law or UCP 500 - the international set of rules governing LoCs

b.

F. Requirements for Drafting a LoC

1. Legal Requirements a. Must be issued in any (durable) form that is a record (hard copy or electronic copy) b. Must be authenticated by issuers signature which is in accord with standard practices of issuers who regularly issue LOCs Sound Banking Practice Guidelines (have the practical effect of the law) a. Identify document as being a LOC b. Identify the parties c. Specify a start date (date of issuance) d. Assign a LoC # or other identifier e. State an expiration date (ending date of issuers duty) f. State whether the LOC is revocable or irrevocable. If silent, its irrevocable g. State total amount available to beneficiary under the LOC h. State place or address for presentment (issue address) i. State the governing law

2.

Payment terms k. State documents that must be presented to issuer by beneficiary to give beneficiary right to draw on LoC i. Commercial LoC 1. Payment draft (negotiable instrument that look like a check) 2. Invoice: directed to applicant 3. Bill of lading: directed to port of entry, used to communicate what is being imported 4. Inspection certificate: certificate that the port employee issues, not going to make any determination of value report of what arrived compared to bill of lading 5. Insurance certificate: insures the shipment ii. Standby LoC 1. Payment Draft 2. Certificate of default or certificate of completion l. Specify amendment process (amendment could increase risk to issuer which is why is should be specified) i. In writing ii. Approved or consented to by issuer iii. Issuer reserves right to deny all amendments iv. Payment of amendment v. Required to be signed by issuer G. Issuer Duties 1. Determine compliance with documents that must be presented a. Issuer has no duty to determine the existence of extrinsic facts. b. Issuer will look at the face of the documents presented and thats the only duty 2. Strict Compliance (majority rule + CA rule) a. Documents presented must strictly comply with the terms of the LoC as determined by the standard practice of banks that issue LoCs b. Strict compliance does not mean slavish conformity. Minute discrepancy that would not mislead a document examiner are OK (minor things with names and addresses) 3. Honor or dishonor LoC within midnight deadline a. Issuer has a reasonable time, but the reasonable time is not to exceed 7 banking days following the day of receipt of the documents to pay or not pay b. Default: if you dont respond youve dishonored the LoC H. Wrongful Dishonor Liability: what happens if issuer wrongfully dishonors 1. Wrongful Dishonor: beneficiary provided all of the necessary documents and you failed to pay. Must list the discrepancies. Cannot just vaguely dishonor. 2. Damages available: a. Face amount of the draft b. Lost interest (for every day they refuse to pay) c. Incidental damages (storage fees at the port more fees accrue when party fails to pay) d. No consequential damages are available different from checks I. Witchataw Eagle: To determine if default was cured requires the bank to look at extrinsic facts issuer has no duty to determine extrinsic facts. It is limited to looking at the face of the document

j.