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Commercial Paper 2010 Holmes
Commercial Paper 2010 Holmes
Commercial Paper 2010 Holmes
I.
Introduction
a. Essence of the course
i. About making payments for goods, services, etc.
1. The way payments are made
2. This used to be primarily negotiable instruments law
ii. Negotiable Instruments Law
b. History
i. 1896 America borrowed from English statute
ii. The only statutory law involved negotiable instruments
1. NIL negotiable instruments law. This is old terminology
2. Every state had adopted this old statute
iii. Mid-twentieth century
1. Development of the UCC by this time
a. Article 3 replaced old NIL
b. 1952 Articles 3 and 4 were promulgated
c. Article 4 collection and deposit of checks
d. By end of 1960s, all the states had adopted Original
Articles 3 and 4, except for Louisiana, which waited until
1973 to adopt them
i. The Louisiana version changed a lot of the UCC
official text
ii. So remember two things about La. law:
1. Any case prior to 1974 is based on NIL, not
the UCC
2. After 1974, our statutory law was
significantly different from other states
iv. 1990 Revision
1. ALI and National Commissioners did completely new version of
Articles 3 and 4 The Revision
2. Louisiana was one of the first states to adopt The Revision!
a. Louisiana did not tinker with the UCC articles of 1990
nearly as much as originally
b. There are minor differences
c. No blockbuster cases since the Revision
v. 2002 Amendments to Articles 3 and 4
1. Done by ALI and National Commissioners. Not a complete
revision.
2. Most states have not adopted these amendments
a. Louisiana has not
b. Our statute book includes these amendments in the official
text of the UCC without explaining that most states have
not adopted the new amendments
II.
3. The UCC result was that since B paid a nonholder of the instrument (A), there was no
discharge for B. B would have to either pay
the instrument the second time, to C, or have
the property seized by C.
a. Also Bs attorney would be liable for
malpractice, because when A said A
lost the note, Bs lawyer should have
required some security before B paid
A. Even if A still did have
possession of the note, if B didnt
obtain the note back with a notation
that it was paid, then B is vulnerable
to A giving the note to a holder in
due course and C could still collect
from B if C did not have knowledge.
i. This means never pay a note
unless you can obtain the
instrument marked paid.
To ensure that the note
cannot be subsequently
negotiated to a holder in due
course.
ii. Or demand some sort of
security.
iii. To do otherwise is
malpractice, if representing a
client debtor.
v. The 2002 amendment to UCC 3-602, however,
solves this problem. A broad reversal of the
traditional rule. Not limited to either mortgage
notes or even to consumer transactions.
1. Louisiana, as most states, has not adopted
this amendment. So it doesnt help very
much in the real world.
2. The New Rule: A notice paid to a person
that was formerly entitled to enforce the
note discharges the debt only if at the time
of payment, the party obliged to pay has not
received adequate notice that the note has
been transferred and that payment is to be
lender and buyer must contain the same legend stating that
the note to financer is subject to claims or defenses.
i. Business arrangement
1. What does it mean? Ambiguous.
2. UCCC is much more explicit: the lender in
a purchase money situation is subject to
buyers claims or defenses against the seller.
ii. FTCs power applies to sellers. Not lenders.
1. Creates an issue. If lender did not include
the notice, what should happen if the lender
does not include the legend?
2. Gonzales v. Old Kent Mortgage Co.
a. An ingenious solution for the
problem, though the court had
absolutely no authority.
b. Court treats a case as if the legend
was there. A virtual legend. Treat
the contract as if it did have the
legend. This solves the problem in
purchase money loans of the financer
not having the legend on the
promissory note.
c. The UCC thought this case was
great, so they added a comment to
Article 3
iii. 3-305. UCC Article 3 amendment: If extrinsic law
requires a legend, even if the instrument does not
have the notice, it is treated as if it did.
1. But this amendment has not been adopted
hardly anywhere. La. has not adopted it.
2. This amendment would apply to both
assigned paper and purchase money
transactions. So if federal law would require
the notice, if a state adopted this
amendment, in a regular old assigned paper
transaction, no financer would be able to
take the instrument as a HIDC, if the
underlying transaction was a consumer
transaction.
3. However, in reality, the financer will usually
be aware that the underlying transaction was
a consumer transaction. So they probably
reliance is anticipated is
unclear.
ii. This is inconsistent with
303(d), that says you only
become holder on a pro rata
amount of that which you
have performed.
iii. What the La. legislature
meant has not yet surfaced.
But this language is
troublesome.
iv. Problem 3
1. Payee was indebted to holder on past due
loan. To avoid holder suing payee, payee
negotiated the makers note to holder as
collateral for the payment of the loan holder
made to payee.
2. Holder demands payment from maker.
3. Holder did give value under (a)(3):
instrument was taken as security for an
antecedent debt of the payee.
4. The problem with this result is that arguably
holder has not done anything: he was an
unpaid creditor before, and he is an unpaid
creditor now. Why does he suddenly get to
sue maker? However, the statute adopts the
NIL common law policy that perhaps
through the holder taking the note as
security for payees debt, this may lead
holder to not sue payee on the debt. And
this is value under the statute.
2. Rights of Depositary Bank in Deposited Check
a. Generally
i. Involves Article 4, Bank Deposits and Collections
ii. Important because HIDC status most commonly
involves the right of depositary banks
b. Check Collection under Article 4: How it works
i. Drawer issues check to payee (customer), who
deposits the check in the depositary bank.
ii. Check drawn by drawer is drawn upon the drawee
(payor) bank.
iii. What happens?
III.
a. Generally
i. Often a dispute arises after check is given to seller.
Buyer wants to insure that seller does not end up
with his money.
ii. UCC 4-403(a) A payor bank wrongfully dishonors
an item if it dishonors an item that is properly
payable, but a bank may dishonor an item that
would create an overdraft unless it has agreed to
pay the overdraft.
iii. Customer is a person with an account at the bank
at issue.
b. The Right: 4-403(a) A customer may stop payment of any
item (check) drawn on customers account by order to bank
describing the item with reasonable certainty in time for the
bank to act.
i. The customer has a broad right. As long as he
describes the item and gives reasonable time to the
bank to act.
ii. Page 91
1. Problem 1 Buyer got cashiers check
payable to seller from Bank A. Bank A
debited buyers account for the amount of
the check, and Buyer delivered check to
seller; seller did not deliver goods. Buyer
suspected fraud, so he demanded seller give
check back; seller refused. Buyer contacted
Bank A to stop payment on the check.
Under the statute, there is no right to stop
payment because the buyer is a customer of
Bank A, but the draft was not drawn on his
account; the bank drew the draft on the
banks own account. Therefore, the buyer
has no right to stop payment on a cashiers
check.
a. The 1990 Revision made it clear that
the person buying a cashiers check
has no right to stop payment.
b. The bank that issued the check may
decline to pay, but this is not because
of a stop payment order.
2. Problem 2 Same, except Bank A issued
tellers check drawn on Bank B payable to
2.
3.
4.
ii. 3-309
1.
b. Facts
i. Plaintiff/payee had two
cashiers checks and lost
them. Asked for money from
the obligated bank.
ii. Obligated bank required a
bond in twice the face value
of the checks. The plaintiff
could not afford to post this
bond.
c. Court: Has no discretion, but must
enforce the statute providing that
security shall be required in not less
than twice the amount allegedly due
under the instrument. Plaintiff had
to post the bond or she could recover
nothing.
d. Tough result because the state did
not have a statute of limitations for
cashiers checks; therefore, there was
no law addressing how long security
had to remain posted. The security
would have to remain posted forever.
ii. 3-312
1. Applies only to c/t checks, certified checks,
and in Louisiana, money orders. 3-312 is a
more desirable alternative than 3-309 on
general lost checks. But you can choose
which one to proceed under if you have a c/t
check.
2. (a) Definitions
a. Check means c/t check
b. Claimant
c. Declaration of loss
d. Obligated bank
3. (b) A claimant may assert a claim to the
amount of a check by a communication to
the obligated bank describing the check with
reasonable certainty and requesting payment
of the amount of the check, if (i) the
claimant is drawer or payee of certified
check or the remitter or payee of a c/t check
IV.
addressed a re-presented
check.
iii. The rules applicable to time
drafts have nothing to do
with checks and representment of checks.
4. All courts now recognize that Leaderbrand
was wrong and that a re-presented check
must still be timely dishonored.
a. Its very common for dishonored
checks to be re-presented, and many
times they are paid the second time.
b. This is because laypersons deposit a
check in their account and then
immediately draw a check on their
account, not realizing that the funds
deposited wont be immediately
available. Therefore, often when the
check is re-presented, the customers
deposit will have cleared and
therefore the re-presented check will
be honored.
c. Also, the depositary bank has no way
of knowing of a checks dishonor
without this rule. Depositaries never
receive notice of payment; they only
receive notice of dishonor. The
depositary bank infers honor of the
check when it has not received
notice of dishonor by the time it
expects notice to come. This is the
importance of the midnight deadline;
it allows the depositary bank to
assume at some point that the check
it presented to the payor bank has
been honored by the payor bank.
d. Settlement by End of First Day of Receipt
i. Almost always, banks in practice do provisionally
settle by midnight on the first day, as is required by
the statute.
a. Generally
i. Banks make money because of receiving interest on
customers funds
ii. Card issuers of credit cards make their money off
fees that they charge the merchants to accept such
cards.
iii. Unauthorized use of debit cards is not governed by
the Truth in Lending Act, but by the Electronic
Funds Transfer Act (EFTA)
b. EFTA Rules: See problem below.
c. Problem, Page 179
i. How would Oscar, Supra,s case have been different
if it was a debit card and after 2 days he learns of
the loss?
1. If you dont report within 2 days after you
should have learned or learned of the loss,
you are liable for $500.
2. If you report within 2 days, then $50 is the
limit.
3. There is no limit if there is failure to report
within 60 days of transmittal of a statement.
a. But the card issuer (bank) has the
burden of loss of proving actual
damage beyond 60 days.
ii. The debit card holder is held to a higher standard
because the unauthorized use of a debit card holder
is more likely to occur through the card holders
negligencebecause to use a debit card, you need a
PIN.
1. But this rationale might break down because
we dont have to use our PINs to use debit
cards in certain situations.
iii. Now the federal legislation says that the function
that the card holder elects (debit or credit) is what
governs, for dual use (debit or credit) cards.
3. When Is Use Authorized?
a. Statute, Section 1602: when the user lacks actual, implied,
or apparent authority to make a purchase with the card.
b. Minskoff v. AMEX
i. Facts
1. M hires Ms. B as her office manager; and B
proceeds to steal M blind.
V.
a. In cases of e-fraud, the seller is the one who bears the loss.
If someone gets your credit card info and uses it to make a
fraudulent order over the internet, the merchant is the one
who "eats" it. How can seller protect itself?
i. Ship solely to home address
ii. Require telephone confirmation for large
transactions
Payment Systems: Electronic Transfers
a. Electronic Funds Transfers
i. The Basic Transaction Covered By Article 4A
1. Background
a. Article 4A deals with whole sale wire transfers
substantial amounts; not the Electronic Funds Transfer Act
which deals with small credit card and debit card and other
small wire transfers.
b. Wire transfers account for far more in dollar volume than
either checks or credit cards. While 98% of volume of
transactions are through credit cards and checks. 85% of
value is through wire transfers. Average value of wire
transfer is several million dollars.
c. Two important things to understand about wire transfers
why do they account for 85% of value?
i. Speed
ii. Cost
d. Wire transfer system gives you advantage of instantaneous
payment for substantial amounts of money on which you
dont have to pay much. Charge to make a wire transfer is
simply on the amount it takes to complete the transaction.
e. One of the truly astonishing things article 4A of UCC was
not promulgated until 1989. All states adopted it by 1996.
Thus astonishing for a system that handles such large
amounts of money, there were no governing laws until mid
1990s. Before that had to be handled through common law
processes. The world is much simpler now that we have
article 4A. But 4A does require some close attention.
2. The Concept of Funds Transfer
a. Funds transfers under Article 4Aaccomplished by one or
more payment orders, as defined in the statute, that are
made to a bank.
b. Bank is defined in the statute: broader than a commercial
bank, but it also includes several other institutions.
c. Section 108 excludes consumer transfers made under the
federal Electronic Funds Transfer Act (EFTA) that we
ii.
iii.
iv.
v.
d. Case 3
i. What happens when Banks A and B dont have
accounts with each other? The intermediary bank
comes in.
ii. Bank C is the receiving bank of As order and the
intermediary bank as to the funds transfer. Section
104 defines intermediary bank as any receiving
bank other than the receiving bank or beneficiarys
bank.
iii. X needs to pay 1 million to Y and does so by wire
transfer. Three bank, three payment order funds
transfer. A is Xs bank and B is Ys bank. In this
case, Bank A may not be able to move the funds
directly to Bank B because A and B may not have
any relationship with one another. In order for
funds transfers to work, the bank receiving the
funds transfer must be able to debit the account of
sender and credit account of person they are sending
payment order to. Need direct contractual
relationship as in #2 above. In many instances, A
and B may not have an existing relationshipthus
unless both are parties to a funds transfer system
1. Rules
a. A receiving bank other than beneficiarys bank accepts a
payment order when it issues a payment order itself
pursuant to instructions given in senders payment order.
b. A beneficiarys bank accepts by paying the beneficiary
pursuant to the rules in 4A-405(a): crediting the
beneficiarys account and advising the beneficiary that the
funds are present and available for withdrawal.
2. Problem, page 203
a. There is an ambiguity in the statute. There are three
methods by which payment can occur: (4A-405(a))
i. Beneficiary is notified of right to withdraw
ii. Bank lawfully applies the credit to a debt of the
beneficiary (setoff)
iii. When the funds are otherwise made available to the
beneficiary by the bankambiguous.
b. Beneficiarys Bank (BB) received payment order and
credited Bs account. BB notified B that credit had been
received but said nothing about availability. But B was
given immediate access at time account was credited. Was
payment made at the time of the credit or at the time of
notice?
i. The originators liability is discharged when
payment is made. This is why in this case the issue
of when payment was made is important.
ii. Held: Payment occurred as soon as the beneficiary
had access to the funds, even though the bank had
not given the beneficiary notice at that time.
iii. Once the account is credited, payment occurs, even
if the beneficiary bank has not given notice to the
beneficiary.
iv. Receiver Finality
1. Aleo Intl Ltd. v. Citibank
a. Background
i. Many obligees view funds transfers as an optimal
method of payment
b. Facts
i. Aleo instructed Citibank to send an amount to x in a
Germany Bank. Citibank issued a payment order to
Germany Bank.
ii. Germany Bank credited the amount of the payment
to x at 3:59 a.m. on October 14.
2. Discharge-for-Value Rule
a. Hypothetical: the originators bank sends the payment
order to the beneficiarys bank, but to pay the wrong
beneficiary. However, if by happenstance the wrong
beneficiary happens to be a creditor of the originator, if the
amount is in excess of $100k, the creditor may keep the
money in certain situations.
b. Two different rules:
i. Mistake of Fact
1. The more restrictive rule.
2. Under the common law, this meant that to
keep the payment, the person receiving
payment would have to show change in
position; detrimental reliance.
3. For example, show cancelation of a
mortgage, delivery of goods, etc.., in
reliance on receiving the originators money.
4. If no reliance was shown, the creditor/wrong
beneficiary would have to return the money
to the originator.
ii. Discharge-for-value Rule
1. Creditor has no duty to make restitution as
long as the creditor can show that (1) he had
no notice of the mistake and that (2) the
creditor was in good faith (made no false
representations)
2. Article 4A adopts this rule as the majority
principle.
c. In Re Calumet Farms
i. Note: This scenariowhere the wrong beneficiary
will actually be an obligee of the originators
obligation to payis very uncommon. The more
common situation is where someone is overpaid and
wants to keep the excess amount.
ii. Facts
1. Originator owes $1 million; instructs First
National (FN) Bank to make a payment on
the debt.
2. The money was sent to the correct account
of the correct beneficiary, but FN added a
zero, sending a higher amount in its payment
order to the next bank in the chain.
VI.
i. Facts
1. Plaintiff purchases timber from local
businesses, uses local truck haulers to bring
the timber to plaintiffs mill
2. When logs were delivered by haulers, the
plaintiffs employee was supposed to fill out
scaling slipgive original to bookkeeper
and give copy to the truck hauler.
3. However, the plaintiff rarely ever followed
these internal procedures. In actuality,
plaintiffs employee gave slips to the hauler,
who then brought the slips to the
bookkeeper
4. The fraudster was a truck hauler who would
get blank slips and fill them out to himself,
bring them to the bookkeeper, and have a
check written, and volunteer to bring the
checks to the timber owner. Fraudster then
would forge payees signature (forged
indorsements) and deposit them at the bank,
have them paid to himself.
ii. Court
1. Thompson is precluded from asserting the
forged indorsements against the bank
because of the customers failure to exercise
ordinary care that contributed substantially
to the loss.
2. Substantially contributesthere must be a
showing that the customers negligence
made it easier for the forger to commit the
fraud. Customer is precluded from pleading
the forgery because its negligence made it
easier for the fraudster to commit the
forgery.
iii. Ordinary Care
1. Making blank slips available to truckers and
not using sequentially numbered slips, in
addition to allowing truckers to bring the
slips to the bookkeeping officein totality,
all these acts constituted a failure to exercise
ordinary care.
a. Statute: 3-404(a)
i. If an impostor induces the issuer of an instrument to
issue the instrument to the impostor by
impersonating the payee of an instrument or by
impersonating a person authorized to act for the
payee, an indorsement by any person in the name of
the payee is effective as that of the payee in favor of
a person who in good faith takes the instrument for
value or collection.
ii. Problem, page 273
1. Pauley fraudulently induces Martini to write
a check to Herman by convincing Martini
that Pauley was Herman. Pauley then
indorses, with Hermans name, the check to
himself. Pauley deposits the check. Martini
claims that payor bank cannot debit his
account because Hermans indorsement was
forged.
2. This is the classic impostor rule: because
Pauley obtained the check fraudulently,
Martini is the fool and should bear the loss.
3. An indorsement by any person in the name
of the payee is effective in favor of persons
who in good faith take the instrument for
value or for collection. The depositary acted
in good faith. The check is properly
payable.
4. The indorsement is valid.
iii. Problem #2
1. Pauley induced Martini to write a check to
the chair of the Red Cross, claiming he was
chair of the Red Cross. Pauley then
indorsed as the chair of the Red Cross and as
Pauley.
2. Pauley forged the indorsement by writing
Red Cross as an indorsement.
3. Bank must re-credit Martinis account
because there was no impersonation. This is
not fraud covered by the statute. The fraud
was the representation that Pauley was an
agent of the Red Crossnot that he was any
one other than Pauley.
iii. Here the court says that the drawee can contract out
of the Price v. Neal rule that the drawee/payor bank
is liable for forgeries.
c. Freedom of Contract
i. Arguably, parties should be able to adapt in this
way.
ii. However, how is the customer to protect itself from
forgeries, if the customer agrees to absolve the
payor bank from responsibility for any check whose
signatures resembles the one on file?
1. If customer does not sign an agreement, the
bank will refuse to do business with him.
2. Such an agreement is a massive reallocation
of losses.
3. The banks have won most of these cases
under the freedom of contract banner.
4. However, one case has held that banks
should not be allowed to alter the basic
structure of Articles 3 and 4.
3. Nondisclosure
a. Courts might recognize that banks at least have a duty to
disclosethat when there is a boilerplate clause in the
contract, the bank must bring it to customers attention that
customer will be liable for forgeries
b. For example (and by analogy), in one case, bank said that it
did not have to stop payment unless customer on stop
payment order reported the exact amount of the check.
Held: if the bank wanted to enforce this provision, bank
should have explained the provision to the customer.
b. Alteration
i. Complete Instruments
1. Generally
a. **Common errors on the exam in this subject matter.
b. Alteration is far less common than forgery, but still exists.
2. HSBC Bank v. F&M
a. Facts
i. Authorized employee delivered check payable to
payee. Payee altered the amount of the check
without authorization of drawer.
ii. Check was deposited at payees account with
depositary; payor paid the altered amount. Draweremployers account debited for the higher-thanauthorized amount.
b. Statute, 3-407
i. (a) Alteration means (i) an unauthorized change in
an instrument purporting to modify a partys
obligation, or (ii) an unauthorized addition of words
or numbers or other change to an incomplete
instrument relating to the obligation of a party.
ii. (b) Except as in (c), an alteration fraudulently made
discharges a party whose obligation is affected by
the alteration unless that party assents or is
precluded from asserting the alteration. No other
alteration discharges a party, and the instrument
may be enforced according to its original terms.
1. Routinely misread by students.
iii. (c) A payor/drawee paying a fraudulently altered
instrument or a person taking it for value in good
faith and without notice of alteration, may enforce
rights with respect to the instrument (i) according to
its original terms, or (ii) in the case of an
incomplete instrument altered by unauthorized
completion, according to its terms as completed.
c. Analysis
i. Absent negligence on drawers part, payor can
charge the drawers account only for the original
amount and may recover the over-amount from
depositary bank on basis of its breach of
presentment warranty under 3-417: breached the
warranty that the instrument has not been altered.
ii. Depositary can then turn and recover the same
amount from the payee, who altered the instrument,
on basis of payees breach of transfer warranty
under 3-416, of the warranty that instrument has
not been altered.
iii. The alteration cannot change the obligation of the
issuer/drawer, unless the lack of ordinary care
contributed to the alteration, or the drawer has not
reported the alteration in a timely fashion.
iv. 3-407(b) is the key: where an alteration is made
with fraudulent intent, it discharges the drawers
obligation entirely, but subject to (c). (c) tells us
that the discharge is not effective against a payor or
drawee or one who pays the instrument in good
d. #3 Peter
For deposit only
Thief
i. Here is it unclear whether for deposit only was
written by Peter or Thief.
ii. If it is ambiguous and depositary cannot tell which
person indorsed, then depositary might argue that it
has the right to treat this as an indorsement by Thief
and therefore is not liable for conversion.
iii. Majority Rule: depositary must deposit the check in
account of payee. If depositary deposits funds in
account of anyone other than payee, depositary does
this at its perilthe customary assumption is that
restrictive indorsements are for the benefit of payee.
iv. 3-206(c)(2) states that the depositary bank must
make the payment available to the indorser or apply
the payment consistently with the indorsement.
1. This does not clearly state that in this
situation, the payment must be made
available to the payee.
2. However, the majority rule (e.g. State of
Qatar v. First American Bank) interprets the
statute as requiring payment to the payee.
3. However, there are some courts that find if a
particular account is not specified, the check
may be deposited in anyones accountthe
check just must be deposited, as opposed to
cashed.
4. Schulingkamp v. CarterLouisiana case
recently addressed case just like this one.
Louisiana First Circuit sided with the
majority rule. However, case went up to
LASC, who reversed without opinion. The
case has been remanded by the trial court.
5. Problem, page 298
a. Situation in which the indorsement indicates that the
instrument is being negotiated to the indorsee.
b. Peter, payee of check of 10k drawn on Payor, gave check to
Faith, legal guardian of Ward. Peter told Faith that the
check was a contribution to defray Wards nursing home
expenses. Peter indorsed:
VII.
ii. The second part is not okay: 4-103 does not allow
the bank to disclaim its liability for negligence,
which this clause attempts to do.
iii. The third clause is also an attempt to disclaim
liability for negligence, which the bank may not do.
d. #4It would seem that the drawee may charge a fee for
processing a stop-payment order. But some courts have
held that this is not allowed. But Professor says that bank
should be allowed to charge stop payment feebecause
customer just has buyers remorse.
3. Postdated Checks
a. 4-401(c) allows a customer to postdate a check. The
customer has to file a notice of postdating similar to a stop
payment order. This is because the banks machines cannot
read a notation that says the check should not be paid till a
later date.
c. Wrongful Dishonor
i. 4-402
1. (a) A bank wrongfully dishonors an item that is properly payable.
2. (b)
a. UCC: A payor bank is liable to its customer for damages
proximately caused by the wrongful dishonor of an item.
Liability is limited to actual damages proved and may
include damages for an arrest or prosecution of the
customer or other consequential damages. Whether any
consequential damages are proximately caused by the
wrongful dishonor is a question of fact to be determined in
each case
i. Loucks v. Albuquerque National Bank
1. Facts
a. Partnership opened an account with
the bank. One of the partners was in
default, so bank set off this amount
against deposited funds. This
resulted in checks bouncing.
b. Partners sued the payor bank.
2. Court
a. Held in favor of compensatory
belief, but not punitive.
3. Wrongful Dishonor: A creditor is not
entitled to partnerships assetsonly
entitled to partners share of profits. The
checks were properly payable.