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222 Cards in this Set

  • Front
  • Back
What is a payment system?
A system for transferring value between persons so as to complete exchange transactions.
What is money?
A medium for exchanging value - authorized or approved by a gov't (UCC 1-201)
A store of value to be used later
What is an order?
A signed written instruction to pay money 3-103(a)(8). Note this is more than authorizing payment.
What is a draft?
A negotiable instrument that is an order. 3-104(e)
What is a drawer?
The person signing the draft - the one ordering payment. 3-103(a)(5).
What is a drawee?
A person ordered in a draft to make payment. 3-103(a)(4).
What is a check?
Draft payable on demand where the drawee is a bank. 3-104(f)
Is an order for payment in 2 years a check?
No, it is not payable on demand.
Define item
instrument, promise or order to pay money handled by a bank for collection. Debit and credit card and wire transfers are excluded 4-104(a)(9).
Define Payor Bank
Bank that is the drawee of a draft. 4-105(3). The entity being ordered to pay.
Collecting Bank is . . .
a bank holding an item for collection except the payor bank. 4-105(5)
Define depository bank
First bank to take an item for collection. note this can be the payor bank unless paying a check in cash 4-105(2).
Overdraft is .. . .
a negative account balance.
Stop payment is . . .
An instruction reversing an order to pay in a draft. See 4-403.
Post dated check
A check bearing a future date.
Properly payable means?
(1) item authorized by customer
(2) in accordance with any agreement between customer and bank. 4-401(a)
Define subrogation . . .
Standing in the shoes of another; having the same rights as if the other person.
What is wrongful dishonor?
A failure to pay an item that is properly payable. 4-402
Must a bank cover a bad check?
No. Unless otherwise agreed, a payor bank need not but may pay an item if it creates an overdraft.
Is a bank liable for damages caused by wrongful dishonor?
Yes.
Problem 1.1:
If Rosymond writes a bad check for 1500 and takes a trip to England, is Tertius liable?
Depends, 4-401(b) says
" A customer is not liable for the amount off an overdraft if the customer nether signed the item nor benefited from the proceeds of the item."
The question to answer is "did this benefit Tertius?"
Problem 1.2
JB wrote a 900 check to a pay day lender dated Jan 31.
Check was cashed Jan 22 and bank bounced for insufficient funds and charge $50 fee.
A deposit was made on Jan 30 that would have covered the check.
Did the bank do wrong by bouncing the check?
No, the date on a check is supposed to be the date the check is written. The bank may pay a check at their own discretion.
When may a bank charge customer's account? (i.e when will a postdated check be valid?)
4-401(c) A bank may charge against the account of a customer a check that is otherwise properly payable from the account, even though the payment was made before the date on the check UNLESS THE CUSTOMER GIVES TIMELY NOTICE TO THE BANK OF THE POSTDATING AND DESCRIBES THE CHECK WITH REASONABLE CERTAINTY. (Check number amount and number of account).
Problem 1.3
Check drawn by L payable to Lo for 1.5K
Equip was too big but C refused to take back.
L immediately filled out a stop payment with check # amt, and date.

Clerical error results in check being paid anyway.
does FSB have to recredit Lassen's account for the check?
Under 4-403 this check was not properly payable. Described w/ reasonable certainty, and received the stop in a timely manner. FSB must give the money back, but has the right to subrogation. (ie, they can stand in C's shoes if she has a right to be paid, if she has a right to be paid, then FSB does. (4-407) Payor bank also has the same writes as the drawer (L) against the payee.
What are the accountholder's remedies for improper payment of a check.
Bank is liable for damages resulting from the loss.
4-401(c) && 4-403(c)
Problem 1.4
What if FSB had honored the stop order and not paid the check, could Long force Lassen to pay for the equipment?
1. What happened when La gave Lo the check.
2. What happened when the check was not honored.
3-310 implies that Carole may sue for the underlying obligation.
1. What happened when La gave Lo the check. Obligation to pay is suspended.
2. What happened when the check was not honored. Obligation was revived.
What are the Bank's remedies for improper payment of a check.
Subrogation to the rights of the payee or to the rights of the Drawer.
Problem 1.5
GMI banks with Bulstrode
Signature card lists Mary Garth and Fred Vincy.
Caleb voted his shares to oust Mary and Fred and made himself sole director and president.
Bulstrode freezes account and says it needs a letter from Mary and Fred consenting to their removal. They are out of town.
4 103(a) A bank cannot disclaim [its] responsibility for its lack of good faith or failure to exercise ordinary care."

It is much easier to add people to the signature card than to take them off of it.
What if Option 2 allows the bank to freeze the account until the dispute is resolved to is satisfied.
Agreement seems to authorize Bulstrode's action 4-103(a) permits Bulstrode and the Vincy's to alter the general agreement. Unless it would be manifestly unreasonable.

(you cannot answer 1.5 w/o an account agreement)
Problem 1.6
Jodi want to jack up the low balance rate 10 - > 25
and dishonored checks 25 - >50
Is it manifestly unreasonable 4-103 4-104 says nothing about anything else.
What does the EFAA accomplish?
It establishes fixed deadlines for making deposited items available for withdrawal.
What exceptions are available to EFAA deadlines
1) new accounts
2) large items
3) suspicion of fraud
define Local Check
Check drawn on a and located in the same check processessing region as the depository bank.
define non-local Check
A check drawn on a bank located outside the check processing region of the depository bank.
define Cash withdrawal
Receiving the withdrawal as legal tender. (Give me da money in small bills!)
what are some low risk items?
1. cash
2. on us items
3. U.S. Treasury Checks
4. U.S. Postal Service Money Orders
5. Federal Reserve (or Federal home Loan) Bank checks
6. Local Government Checks
7. Cashier's checks (check where the drawee and drawer are the same bank)

there is some risk with all of these.
What other factors can effect availability of funds?
1) payee is not the depositor
2) deposit of item not made "to an employee of the bank" (e.g. to an ATM).
define Business Day
All days except Saturday, Sunday and Federal Holidays
define Banking Day
A business day that a bank is open for general banking business.
Caleb's bank paid on a 7 month old check. Can they do that?
4-404
A bank is not obligated to pay a 6 month old check, but the statute does not require them not to pay. They are only required to act in good faith, a commercially resonable standard of fair dealing.[comment] Banks will normally not pay such checks w/o consulting the depositor unless they know the drawer wants the payment made.
Problem 2.a
$7000 check written by Moon on a Seattle Bank Account.
Eben wants to know when the funds will be available
[missing]
4-215
final payment of item
Problem 2.b
229-10(c)
has the rule for low risk and this is not a low risk item.
$100 first bus day
$900 the fifth
Problem 2.c
229-10(c)(2)(iii)-(iv) there is an extra bus day for not depositing with a live person, but there is a treasury check so the extra day does not count.

1000 on the first business day.
Problem 22.d
229.10(c) trick question
Time of Checking 4-402(c)

When may a bank dishonor a check.
A payor bank's determination of the customer's account balance on which a decision to for insufficiency of funds is based may be made at any time between the time the item is received by the payor bank and the time that the payor bank returns the item or gives notice in lieu of return and no more than one determination need be made.
Problem 5
CB has lost on bbad checks
Exceptions 229.13
a)new accounts
b)large deposites
c)

e) reasonable cause to doubt collectability.
What law regulates Collection of check?
State (UCC) and federal (REgulations CC)
What part of check collection is regulated by the UCC?
timing and of giving provisional and final statements and deadline for refusing to pay a check (Midnight Deadline).
what part of check collection is governed by REgulation CC?
chargeback: Reversing a provisional settlement
Midnight deadline: Midnight of the banking day after the banking day it receives a notice or item unless extended by Regulation CC.
Timeline of honored check
1. customer deposits check
Db grands provisional settlement

2. DB send check to PB
3. PB receives check and gives provisional settlement to DP by midnight
4. Midnight deadline passes DB's provisional settlement becomes final if item not sent

Within EFAA deadline: funds available to C
5. PB must send CC Notice by 4:00
7. Check sent by a method which would have DB normally receive by 4:00
8 DB recharges c by midnight (or later)
Methods of Final Payment of a check.
Direct payment over the counter at a payor bank
Direct send from depository to payor bank
Through an intermediary collecting bank
Through a clearinghouse
Through the Federal Reserve System
Reg CC Consequences of non-compliance
[missing]
Problem 3.1
Who is payor bank?
Who is the depository banks?
Who is the Payee.
a. Bulstrode Chicago
b. Bulstrode Boston
c. Lydgate
Methods of final payment
4-215(a)
1)cashed
2)settled w/o right to revoke
3)) made provisionary settlement and failed to revoke during period.
what is the midnight deadline?
4-108
Bulstrode Chicago v.s Boston
4-107
A different branch is a different bank for the purpose of the midnight deadline.
Problem 3.1
Sorry Lydgate, no violations.
Problem 3.2 a) b) c)
a.
b.
c.
Drawer Liability
3-414(b)
Drawer pays the draft if it is dishonored
Indorser Liability
3-415
Seeking recovery from the earliest solvent party that indorsed the check w/out disclaiming liability.
Transfers Warranty
Given if the transferor transfers instrument for consideration to tranferee and if tranferee is by indorsement to all future tranferees. cannot disclaim for checks 3-426 4-207
Presentment Warranty
Given to the drawee by person presenting a draft and receiving payment and all prior transferors it cannot be disclaimed for checks. 3-417 and 4-208
Who can sue for breach of transfer warranty?
Transferees (payor Bank (drawee)) is not a transferee as it does not transfer
Who can sue for breach of presentment warranty?
Payor bank
Who can sue for Drawer Liability
person entitled to enforce a dishonored draft or an endorser who paid the draft.
Who is a person entitled to enforece an instrument
Person with a good chain of indorsements. Person in possession who is also the correct payee.
Problem 4.1

Who are the players Drawer, Drawee, Payee, Payor?
Drawer - Dorthea Brooks
Drawee - Bullstrode Bank
Payee - Tertius Lidgate
Indorsers - Lattislow, Casaban, Wessex Bank (Lidgate says that that is not his signature on the back but rather a forger).
is there any Indorser Liability in problem 4.1?
NO, If an instrument is dishonored only, there is none in problem 4.1.
Is WL a holder? Is Casaban?
2-201
No, WL is a thief, No, Casauban took from a thief.
Is Wessex a holder?
No, its chain of title comes from an intervening thief.
What warranty did all these people breach?
4-208
(a) if an unaccepted draft is presented to the drawee for payment or acceptance and the drawee pays or accepts the draft
(i) the person obtaining payment or acceptance, at the time of presentment and
(ii) a previous transferor of the draft, at the time of transfer, warrant to the drawee that pays or accepts the draft in good faith that
(1)warrantor was entitled to enforce the draft . .. .

AHA this does not apply to any of the people in this chain and Bulstrode Bank can sue any of them for breach of presentment warranty.
Problem 4.1

Who can bulstrode sue?
Will
Casauban
Wessex
Problem 4.1

Who should BB sue?
Wessex, it has money.
Problem 4.2
Now bulstrode dishonors the check. Can Wessex now pursue Will and/or Casauban or indorser liability?
3-415

NO
Problem 4.2
What about Transfer Warranties?
4-205(a)(1)-(2)

(1)the warrantor is pwrson entitled to enforce the item; [no he isn't]
(2) all signatures ont the item are authentic and authorized;[NO they are not]

[So yes we have transferor liability]
Problem 4.2
Can Wessex pursue Cassaban only or can it pursue Will whose signature appears nowhere on the instrument.
Yes
3-403
(a) unless otherwise provided in this article or in Art 4 an unauthorized sig is ineffective except as the signature of the unauthorized signer

[Ladislowe signing as Lidgagte is invalid as a sig of Lidgate, but it is valid as a signature of Ladislowe]
Problem 4.3
Who are all the players?
Drawer: [brook but technically not]
Drawee: Wessex
Payee: Forger (presumably)
Indorsers: Forger, Lydgate, Chettam
Correspondent Bank:
Problem 4.3
Does chettam have Transfer Liability
Yes
4-207(a)(2) all signatures are vouched for
Problem 4.3
Does chettham have Indorser Liability
No, he disclaimed that liability.
Problem 4.3
What is Forger's Liability?
He has transfer liability 4-207(a)(2) for the bogus signature, and drawer liability, and indorser liabilty 3-414 b/c " the drawer is obliged to pay the draft"
Problem 4.4
What if wessex honored the check but then re-cretited dorthea's account when it found the forgery?
[]
Problem 4.4
Presentment Warranty. Wessex is on the hook unless they can find the forger.
Problem 4.5 who are the players
Drawer:Long
Drawee:
Payor:
Payee:
Problem 4.5
Is there a way to get the liability away from Carol who signed blank checks?
Even though there is a breach of the presentment warranty 4-208(a)(2) &(b) the bank can only recover what they cannot get back from Carol. Carol has the cause of action against thief.
Who is a "PERSON ENTITLED TO ENFORCE INSTRUMENT"
§ 3-301.

"Person entitled to enforce" an instrument means (i) the holder of the instrument, (ii) a nonholder in possession of the instrument who has the rights of a holder, or (iii) a person not in possession of the instrument who is entitled to enforce the instrument pursuant to Section 3-309 or 3-418(d). A person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument.
EFFECT OF INSTRUMENT ON OBLIGATION FOR WHICH TAKEN.
§ 3-310(b)
(b) Unless otherwise agreed and except as provided in subsection (a), if a note or an uncertified check is taken for an obligation, the obligation is suspended to the same extent the obligation would be discharged if an amount of money equal to the amount of the instrument were taken, and the following rules apply:
o (1) In the case of an uncertified check, suspension of the obligation continues until dishonor of the check or until it is paid or certified. Payment or certification of the check results in discharge of the obligation to the extent of the amount of the check.
o (2) In the case of a note, suspension of the obligation continues until dishonor of the note or until it is paid. Payment of the note results in discharge of the obligation to the extent of the payment.
o (3) Except as provided in paragraph (4), if the check or note is dishonored and the obligee of the obligation for which the instrument was taken is the person entitled to enforce the instrument, the obligee may enforce either the instrument or the obligation. In the case of an instrument of a third person which is negotiated to the obligee by the obligor, discharge of the obligor on the instrument also discharges the obligation.
o (4) If the person entitled to enforce the instrument taken for an obligation is a person other than the obligee, the obligee may not enforce the obligation to the extent the obligation is suspended. If the obligee is the person entitled to enforce the instrument but no longer has possession of it because it was lost, stolen, or destroyed, the obligation may not be enforced to the extent of the amount payable on the instrument, and to that extent the obligee's rights against the obligor are limited to enforcement of the instrument.
NEGLIGENCE CONTRIBUTING TO FORGED SIGNATURE OR ALTERATION OF INSTRUMENT.
§ 3-406.

* (a) A person whose failure to exercise ordinary care substantially contributes to an alteration of an instrument or to the making of a forged signature on an instrument is precluded from asserting the alteration or the forgery against a person who, in good faith, pays the instrument or takes it for value or for collection.
* (b) Under subsection (a), if the person asserting the preclusion fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to loss, the loss is allocated between the person precluded and the person asserting the preclusion according to the extent to which the failure of each to exercise ordinary care contributed to the loss.
* (c) Under subsection (a), the burden of proving failure to exercise ordinary care is on the person asserting the preclusion. Under subsection (b), the burden of proving failure to exercise ordinary care is on the person precluded.
CONVERSION OF INSTRUMENT.
§ 3-420

* (a) The law applicable to conversion of personal property applies to instruments. An instrument is also converted if it is taken by transfer, other than a negotiation, from a person not entitled to enforce the instrument or a bank makes or obtains payment with respect to the instrument for a person not entitled to enforce the instrument or receive payment. An action for conversion of an instrument may not be brought by (i) the issuer or acceptor of the instrument or (ii) a payee or indorsee who did not receive delivery of the instrument either directly or through delivery to an agent or a co-payee.
* (b) In an action under subsection (a), the measure of liability is presumed to be the amount payable on the instrument, but recovery may not exceed the amount of the plaintiff's interest in the instrument.
* (c) A representative, other than a depositary bank, who has in good faith dealt with an instrument or its proceeds on behalf of one who was not the person entitled to enforce the instrument is not liable in conversion to that person beyond the amount of any proceeds that it has not paid out.
IMPOSTORS; FICTITIOUS PAYEES.
§ 3-404.

* (a) If an impostor, by use of the mails or otherwise, induces the issuer of an instrument to issue the instrument to the impostor, or to a person acting in concert with the impostor, by impersonating the payee of the instrument or a person authorized to act for the payee, an indorsement of the instrument by any person in the name of the payee is effective as the indorsement of the payee in favor of a person who, in good faith, pays the instrument or takes it for value or for collection.
* (b) If (i) a person whose intent determines to whom an instrument is payable (Section 3-110(a) or (b)) does not intend the person identified as payee to have any interest in the instrument, or (ii) the person identified as payee of an instrument is a fictitious person, the following rules apply until the instrument is negotiated by special indorsement:
o (1) Any person in possession of the instrument is its holder.
o (2) An indorsement by any person in the name of the payee stated in the instrument is effective as the indorsement of the payee in favor of a person who, in good faith, pays the instrument or takes it for value or for collection.
* (c) Under subsection (a) or (b), an indorsement is made in the name of a payee if (i) it is made in a name substantially similar to that of the payee or (ii) the instrument, whether or not indorsed, is deposited in a depositary bank to an account in a name substantially similar to that of the payee.
* (d) With respect to an instrument to which subsection (a) or (b) applies, if a person paying the instrument or taking it for value or for collection fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to loss resulting from payment of the instrument, the person bearing the loss may recover from the person failing to exercise ordinary care to the extent the failure to exercise ordinary care contributed to the loss.
EMPLOYER'S RESPONSIBILITY FOR FRAUDULENT INDORSEMENT BY EMPLOYEE.
§ 3-405.

* (a) In this section:
o (1) "Employee" includes an independent contractor and employee of an independent contractor retained by the employer.
o (2) "Fraudulent indorsement" means (i) in the case of an instrument payable to the employer, a forged indorsement purporting to be that of the employer, or (ii) in the case of an instrument with respect to which the employer is the issuer, a forged indorsement purporting to be that of the person identified as payee.
o (3) "Responsibility" with respect to instruments means authority (i) to sign or indorse instruments on behalf of the employer, (ii) to process instruments received by the employer for bookkeeping purposes, for deposit to an account, or for other disposition, (iii) to prepare or process instruments for issue in the name of the employer, (iv) to supply information determining the names or addresses of payees of instruments to be issued in the name of the employer, (v) to control the disposition of instruments to be issued in the name of the employer, or (vi) to act otherwise with respect to instruments in a responsible capacity. "Responsibility" does not include authority that merely allows an employee to have access to instruments or blank or incomplete instrument forms that are being stored or transported or are part of incoming or outgoing mail, or similar access.
* (b) For the purpose of determining the rights and liabilities of a person who, in good faith, pays an instrument or takes it for value or for collection, if an employer entrusted an employee with responsibility with respect to the instrument and the employee or a person acting in concert with the employee makes a fraudulent indorsement of the instrument, the indorsement is effective as the indorsement of the person to whom the instrument is payable if it is made in the name of that person. If the person paying the instrument or taking it for value or for collection fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to loss resulting from the fraud, the person bearing the loss may recover from the person failing to exercise ordinary care to the extent the failure to exercise ordinary care contributed to the loss.
* (c) Under subsection (b), an indorsement is made in the name of the person to whom an instrument is payable if (i) it is made in a name substantially similar to the name of that person or (ii) the instrument, whether or not indorsed, is deposited in a depositary bank to an account in a name substantially similar to the name of that person.
UCC - SIGNATURE
§ 3-401. .

* (a) A person is not liable on an instrument unless (i) the person signed the instrument, or (ii) the person is represented by an agent or representative who signed the instrument and the signature is binding on the represented person under Section 3-402.
* (b) 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.
CUSTOMER'S DUTY TO DISCOVER AND REPORT UNAUTHORIZED SIGNATURE OR ALTERATION.
§ 4-406.

* (a) A bank that sends or makes available to a customer a statement of account showing payment of items for the account shall either return or make available to the customer the items paid or provide information in the statement of account sufficient to allow the customer reasonably to identify the items paid. The statement of account provides sufficient information if the item is described by item number, amount, and date of payment.
* (b) If the items are not returned to the customer, the person retaining the items shall either retain the items or, if the items are destroyed, maintain the capacity to furnish legible copies of the items until the expiration of seven years after receipt of the items. A customer may request an item from the bank that paid the item, and that bank must provide in a reasonable time either the item or, if the item has been destroyed or is not otherwise obtainable, a legible copy of the item.
* (c) If a bank sends or makes available a statement of account or items pursuant to subsection (a), the customer must exercise reasonable promptness in examining the statement or the items to determine whether any payment was not authorized because of an alteration of an item or because a purported signature by or on behalf of the customer was not authorized. If, based on the statement or items provided, the customer should reasonably have discovered the unauthorized payment, the customer must promptly notify the bank of the relevant facts.
* (d) If the bank proves that the customer failed, with respect to an item, to comply with the duties imposed on the customer by subsection (c), the customer is precluded from asserting against the bank:
o (1) the customer's unauthorized signature or any alteration on the item, if the bank also proves that it suffered a loss by reason of the failure; and
o (2) the customer's unauthorized signature or alteration by the same wrongdoer on any other item paid in good faith by the bank if the payment was made before the bank received notice from the customer of the unauthorized signature or alteration and after the customer had been afforded a reasonable period of time, not exceeding 30 days, in which to examine the item or statement of account and notify the bank.
* (e) If subsection (d) applies and the customer proves that the bank failed to exercise ordinary care in paying the item and that the failure substantially contributed to loss, the loss is allocated between the customer precluded and the bank asserting the preclusion according to the extent to which the failure of the customer to comply with subsection (c) and the failure of the bank to exercise ordinary care contributed to the loss. If the customer proves that the bank did not pay the item in good faith, the preclusion under subsection (d) does not apply.
* (f) Without regard to care or lack of care of either the customer or the bank, a customer who does not within one year after the statement or items are made available to the customer (subsection (a)) discover and report the customer's unauthorized signature on or any alteration on the item is precluded from asserting against the bank the unauthorized signature or alteration. If there is a preclusion under this subsection, the payor bank may not recover for breach of warranty under Section 4-208 with respect to the unauthorized signature or alteration to which the preclusion applies.
IDENTIFICATION OF PERSON TO WHOM INSTRUMENT IS PAYABLE.
§ 3-110.

* (a) The person to whom an instrument is initially payable is determined by the intent of the person, whether or not authorized, signing as, or in the name or behalf of, the issuer of the instrument. The instrument is payable to the person intended by the signer even if that person is identified in the instrument by a name or other identification that is not that of the intended person. If more than one person signs in the name or behalf of the issuer of an instrument and all the signers do not intend the same person as payee, the instrument is payable to any person intended by one or more of the signers.
SIGNATURE BY REPRESENTATIVE.
§ 3-402.

* (a) If a person acting, or purporting to act, as a representative signs an instrument by signing either the name of the represented person or the name of the signer, the represented person is bound by the signature to the same extent the represented person would be bound if the signature were on a simple contract. If the represented person is bound, the signature of the representative is the "authorized signature of the represented person" and the represented person is liable on the instrument, whether or not identified in the instrument.
VARIATION BY AGREEMENT; MEASURE OF DAMAGES; ACTION CONSTITUTING ORDINARY CARE.
§ 4-103.

* (a) The effect of the provisions of this Article may be varied by agreement , but the parties to the agreement cannot disclaim a bank's responsibility for its lack of good faith or failure to exercise ordinary care or limit the measure of damages for the lack or failure. However, the parties may determine by agreement the standards by which the bank's responsibility is to be measured if those standards are not manifestly unreasonable.
UCC - Ordinary care is defined as:
3-103(a)(7)
(7) "Ordinary care" in the case of a person engaged in business means observance of reasonable commercial standards, prevailing in the area in which the person is located, with respect to the business in which the person is engaged. In the case of a bank that takes an instrument for processing for collection or payment by automated means, reasonable commercial standards do not require the bank to examine the instrument if the failure to examine does not violate the bank's prescribed procedures and the bank's procedures do not vary unreasonably from general banking usage not disapproved by this Article or Article 4.
PRESENTMENT WARRANTEES - Drawee
4-208
(b) A drawee making payment may recover from a warrantor damages for breach of warranty equal to the amount paid by the drawee less the amount the drawee received or is entitled to receive from the drawer because of the payment. In addition, the drawee is entitled to compensation for expenses and loss of interest resulting from the breach. The right of the drawee to recover damages under this subsection is not affected by any failure of the drawee to exercise ordinary care in making payment. If the drawee accepts the draft (i) breach of warranty is a defense to the obligation of the acceptor, and (ii) if the acceptor makes payment with respect to the draft, the acceptor is entitled to recover from a warrantor for breach of warranty the amounts stated in this subsection.
Problem 5.1
Cliff Janeway leavea a 200K check on his airplane seat. What can cliff do if the check is cashed by a phony.
This is 3-420(a) Conversion "a bank makes or obtains payment with respect to the instrument for a pewrson not entitled to enforce the instrument or receive payment. The bank is liable and cliff can sue them
Problem 5.1
What limits Cliffs options?
3-406 says a person whose "failure to exercise ordinary care substantially contributes to an alteration of an instrument is precluded from asserting the alteration of the forgery . . . "
Is 4-406 a comparative fault standard?
No, 4-406 is a bar to recovery more similiar to contributory negligence.
Problem 5.1
Can Cliff sue the drawer?
Under 3-602 payment must be to a person entitled to receive payment. The forger was not.3-301 cliff is a person entitled to enforce b/c he is "a person not in possession of the instrument who is entitled to enforce the instument pursuant to 3-309" 3-309 a person not in possesion of an inst is entitled to enforce if (A) was entitled to enforce at time of loss (2) loss was not a transfer or legal seizure. 3-310 has not been satisfied so the check is not properly paid.
What is the negligence standard under the UCC?
reasonable person is the negligence standard under the UCC
Problem 2.a
Is the instrument properly payable( is spode liable ion the signature as dreawer)?
Is the indorsement of Fink-Nottle valid?
Not unless spode was 4-406 Negligence. Was he?

Yes, the signature is Fink-Nottle's.
2.b
The endorsement of Stiffy is effective as the signature of Basset. 3-404 (a) an endorsment of an impostor who he believes is the intended recipient, is effective as the endorsment of te intended recipient. [less, be paranoid when you give someone a check]
2.c
Pinker is the 3-404(b)(i) If finknottle did not intend the person identified as payee to have any interest in the instrument
(1) anyone is properly payable
2.d
3-404(b)(ii) since we have a ficticious name,
(1) any holder of the check is properly payable.
2.e
Negligence is removed, be careful who you give this authority to. If you give checkwriting authority.
2.g
3-405 a fraudulent indorsement means (i) in the case of an instrument payable to the employer a forged indorsement is
2.h
Spode's signiture is valid as spode actually signed the check

the fake persons:
The indorsements are valid under 404(b)(ii) so properly payable
The friends:
not properly payable b/c
What can spode do
1.
2. devide athority
3. perform audits
What is check Truncation?
Procedures designed to limit the need for check transportation.
Under 4-406(a) what info must a bank return to customers regarding checks?
1. item number
2. amount
3. date of payment
WHat are the two purposes of the Credit card system?
1. Make loans (extend credit: originated in department stores for hoity toities to not have to carry cash, so lines of credit were given)
2. causing payment without handing over cash.
truth in lending act?
requires a disclosure of credit card interest rates etc
How does the credit card system work
Issuing bank - issues the credit card to the purchaser. (like payor bank)
Seller - authorize charge to the card account
Who makes money
1.5% to issuer
.5% to acquirer
Merchant 98%
What law governs credit cards
Nothing in the UCC (4-104(a)(9)
Common Law of contracts
Truth in Lending Act
Regulates the extension of credit by making spec discloses obligatory
Extends some rights to cardholders.
issuing bank
issues the card in its name
Card network
visa: process payment slips and provide other technology for payment system functions; association of banks and other participants
Merchant Bank
bandk who accepts a pament slip from a merchant, grants a credit, and forwards for collection through card network
Merchant
Member of Network who accepts card as payment.
Right to withold payment
-On the basis of any clams or defesesarisiong out of underlying transaction relating to goods or services purchased with card.
-Cardholder made a good faith attempt to resolve dispute
- only in consumer credit transactions
- transaction was in carholder's state or 100 than miles from cardholder's billing address
-Transaction was in excess of 50
- to the extent customer hasn't paid teh charge.
Who absorbs the risk of a credit card transaction?
The "acquirer"
Problem 7.1-7.2
issuer bank -> 475 -> Card network(visa) -> 475 -> merchant bank (Bikers bank) -> 475 -> Merchant Bike Shop -> purse customer on K -> Customer
What is another word for Merchant Bank?
acquirer
open-ended consumer credit
Defined under Reg Z, and means there is not a set amount that you have borrowed.
Problem 7.3
Our client is an acquirer for a defunct computer company.
issuer bank -> 475 -> Card network -> 475 -> merchant bank (Our Client bank) -> 475 -> Merchant Computer Shop -> purse customer on K -> Customer

Sorry, every time we processed a transaction, we lent money to a now BR company. We're stuck :(
Problem 7.4
Slick Willie wants to hold off his creditors by paying his debts then disputing the charges so he does not have to pay off the card. Will this shuck and Jive work?
104(a)(1) Says that a commercial account is exempt from TILA, so this will not work if it is a commercial account.

Willie will tip off his suppliers more quickly by running this scam because once he contests the charges, they will know within days.
Problem 7.5
Can Bulstrode (acquirer) make his credit card customers wait 45 days to get their money?
Probably OK to do this unless it is in bad faith or descriminatory. [get some law here]
What are the basics of Unauthorized charges
TILA caps liability at $50
Protection afforded to business use as well
Can avoid $50 if you report loss before unauthorized use
Card Network rules forgive $50 if repored within two business days
Businesses that issue cards to 10 or more employees can contract out (but can't shift loss to employees)
Who bears the risk of loss for fraudulent transaction
In the face to face transaction, the acquirer if all procedures were followed by the merchant.
Billing Errors
TILA gives right to challenge billing errors
What are some Biling errors?
1)
Problem 9.1
Ciffy left his debit card with pin on an airplane seat 12K in the checking account.
909 - "Consumer, shall be liable for an electronic transfer, onlyif the corad or totehr means of accces utilized was an accepted card or other means. in no event shall the liability exceeed
1) 50
2) 60 day after statement cap of $500

No issue of negligeenc in loosing card
loss cap at 500 even if never call
Sixty days after first statement to noticfhy of unauthorized.
3)
Problem 9.2
Seller wants to start taking debits and asks about the risks.
Joe's only risk is if he uses the system while it is down. Forged and Stolen credit card usage falls back on the issuing bank
Problem 10.4

you want to undo an ACH transfer?
There is nothing you can do
(get this from his websight)
Problem 10.5
4-402(a) gives customers a right to consequential damages for wrongful dishonor of an "item" but

an ACH debit is not an "item"
But NACHA 14.1.28 says "item" shall include an entry and Article 4 will apply?
So the result is the same, but not because of congress, because of ACHA clearinghouse.
Problem 10.6.a
Under EFTA 908(c) if he reports this error to hs bank they must recredit within the earlier of their investigation being complete or 10 business days.
NACHA requires a "prompt" re-credit which is probably one business day NACHA 8.6
Problem 10.6.b
Article 4 applies so check was not properly payable.
Under new tele check presentment warranty, depositary bank warrants the tele check was authorized so it bears the loss.
Problem 10.6.c
[fill in]
Problem 10.6.d
Who bears the loss?
a. Cliffs bank will recover from teh merchant bank under the ODFI warranty and indemnity NACHA 2.2.1.1
b. Telemarketer bank would be responsible to teh payor bank under new vision to Article 4

c. Cliff's bank will recover from merchang bank under the ODFI warranty and indemnity NACHA 2.2.1.1
What is the advantage of a wire transfer?
quick transfer of funds; immediately available
What is a "funds transfer?"
transaction whereby a bank credit is transfered from one party to another through a series of payment orders
What is a "payment order?" (PO)
An instruction (orally, in writing or electronically) to a bank to transfer a credit which is part of a funds transfer.
originator
the party that intiatiates a funds transfer
originators bank
the bank to whome the first PO is given
beneficiary
the party the origninator designatges in its paymen order to receive the transfered funds
Beneficiary's bank
bank of bf
intermediary bank
a bank which receives and makes a payment order to accomplish a funds transfer which is not the Originator's or Beneficiary's Bank.
what are some ways banks accomplish funds transfers/
Bilateral Netting
Multilateral Clearinghouses
Federal Wire System
Describe Bilateral Netting
contractual agreement between two banks taht have accounts with each other and net payment at the end of each day and settle by a single debit.
What happens when a Beneficiary's bank accepts a PO?(wire)
The originator's underlying obligation is discharged.
When is a PO accepted?
for any receiving bank, not the beneficiary's bank, are deemed to have received a PO when they have acted upon it.
What about the beneficiary's bank?
1) when beneficiary is notified or paid
2) when Beneficiary's bank receives a final settlement trough fedwire, a clearing system or by withdrawable credit to an account
3 if not rejected one day after payment date if withdrawable credit available at Beneficiary Bank in account of Sender.
How many funds transfers ?
One
How many POs?
two
bray - Grid
Grid - Cheryble
1.a Can Nickleby go after Bray or Cheeryble?
No
Problem 11.1(b) what if cheryble rejected Gride's payment order immediately on receipt
No cause of action against Cheryble
Problem 1.c
Who bear sthe loss of Gride goes uder before paying for the fed wire?
Fed reserve?
Problem 11.2
missing
Problem 11.3
Can bertie cancel; No sent
No sent
can his bank?
yes if the other bank has not accepted.
Is the bene bank obligated to reject the PO?
NO
What happens if a bank fails to put through a PO in a timely manner?
4A-201(b): They owe you interest.
4A-506

He must pay her the full federal funds rate.
Problem 15.1
Cliff paid $12,000 through paypal to wrong seller. Cant' find the seller?
Did he pay with credit card or bank account?
15.1
Cliff used credit card.
Withhold payment.
15.1
Bank (ACH)
Two EFTA's

-His bank to paypal (not unauthorized)
-paypal to seller (not unauthorized)

he has no rights under the EFTA b/c neither of these transactions were unauthorized.
15.1
Paypal dispute.
Cliff can open a paypal dispute, but the guy with the money has already absconded.
Problem 15.2
It takes four days for ACH transfer to post to Cliff's paypal account (consisten wit their posted policy.) Can they do this?
EFAA does not apply . Accooun tis defined as an account with a bank from which checks can be written. Reg CC section 215.2(a)
Problem 15.4
Wepaynow.com is victim of fraud
Fraudster opens two accounts
-stelas credit card number
-sends money to itself
in a remote transaction, merchant bears the loss for fraudulent transfers.
Merchang bank can charge tehir account
15.4

What could have prevented the above
know customer practice in opening accounts

But the more hassle the harder to win customers from paypal.
15.5
Chris uses an EBPP called paysure
he was sent a spoofed bill appearing to be an electric bill and he paid it.
No relieve if he authorised the transfer and EFTA gives not right of retraction for a mistaken authorization. He is eft to whatever the terms of use of PaySure say about this.
15.5
A payment on his car loan appears twice on his account (it went through PaySure).
No relief he provided th eaccess device to Paysure so teh transfer is authorized . He is left to whatever the terms of use of PaySure say about this
- Good news is he at least knows the recipient and can get credit for next month or refund!
15.5
PaySure uses Chris's password to abscond with his whole bank account. Any help for Chris?
1. Bank will not allow large ACH transfers - but

Probably no relief since Chris furnished the access info it was authorized under EFTA.
- Maybe he could argue he furnished it to PaySure but not the individual who work there who stole it? Maybe???
Chapter 16

What is E- Money
Stored value Cards
Internet E Money
Stored value cards: what are the
- pay value before use
- issuer gets the float and makes oney from investin it
- seller collects a commission
- Issuer charges inactivity fees and escheatment policies - may be illegal in some states.
What law governs stored value cards
EFTA maybe - are tehy accounts? Is there a transfer? Not sure for smart cards.

State money transmitter laws (register, report , restrict investment and audit - goal regulate issuer to make sure money is there)

Bank Secrecy Act - Institutions must report large money transfers ($3000) to federal gov't

Patriot Act - Anti-moey laundering. KYC
-EU Electronic Money Directive
Internet E Coins
Deposite money traditiona l way with issuer
Issuer sends couin (packet of info) coded with its private key to mark it as valid
Customer sends to merchant
-merchant verifies validity with public key
- issuer transfers value to merchant's bank
May a bank issue a credit card without a request from a consumer?
TILA 132 / Reg Z 226.12(a)

No, may not "except in response to a request or application."
negotiable instruments requirements
1. must be written promise or order
2. obligation must be unconditional
3. the obligation must require payment of money
4. the amount of the obligation must be fixed
5. the obligation must be payable to bearer or order
6. the obligation must be payable on demand or at a definite time.
7. The obligation must not contain any extraneous undertakings by the issuer.
cashiers check
A check where the same bank is both drawer and drawee.
Problem 1.a.
Are the procedures good?
[Legally everything could be right and he might still not get paid.]
1/201(b)(21) defines holder

3-205 can make it from holder to bearer

Bad procedure; now risk of loss on the check if stolen
Get cusomer to wrie "pay to the order of TKO"
Specially endores "for deposit only"
UCC 1-203(b)(21)
HOlder is. . ..
UCC 3-414
(b) if an unnacteptable draft is dishonored, the drawer is obliged to pay teh draft (i) accourding to itds terms at the time it was issued or , if not issued, at the time it first came into possession of a holder or (ii) if the dreawer signed an incomplete instrument, according to its terms when completed, to the extent stated in Sections 3-115 and 3-407. The obligation is owed to a sperson entitled to enforce the draft or to an indorser woh apid the draft under 3-415.
Problem 3
jans' tentant sent a check for half rent with the statement "full and final payment for back rent" is this satisfaction?
3-311 Accoard and Satisfaction by instrument (a)
(i) satisfied
(ii) satisfied
(iii) satisfied (we assume)

(b) unless submsection (c) applies a conspicuous statement is good.

- Satisfied

The payment is withdrawn.
UCC 3-311(c)
(c) Subjecto to d a claim is not discharged under (b) if ether
1) (wrong office) claimant put you on notice that a particular part of the organization had to be put on notice and you did not.
2) Claimant repays you within 90 days
UCC 3-311(d)
[]
Problem 4.a.
Dorthea wrote a check to Paul.
Ingrid mugged Paul and impersonated him and indorsed his name TKO.
Dorthea stopped payment
who can sue TKO?
UCC 3-414(b)
Dorthea No
Paul Payee No
Ingrid Interloper Yes
4.b
Dorthea wrote to "cash"
No endorsement
is there a transfer warranty
Transfer Warranties
3-416
Dorthea Yes (drawer liability)
Paul No (never signed; no breach)
Problem 4.d
Same facts as c. but
McInnes has indorser and transfer liability
Problem 5
Jodi paid a check
Customer wanted to stop payment but too late
On
4-205 Depositary Bank Holder of Unindorsed item. If a customer delivers an item to a depositary bank for collection:
1) depo bank becomes a holder of the item ta the time it received
Problem 6
Cliff got a check signed by a bank as drawer and remitter was his client
the bank is rumored to be in troubled
should she accept it?
This is a cashiers cheYou can ck the payer
3-104

3-310(a) You cannot hold the payee accountable if the bank comes up short.

Never accept a cashiers check from a bank you do not trust.
tellers check
A check from one bank drawn on the resources of another bank.
Certified check
a certified check is accepted in advance based on funds from the payor's account, and cannot be dishonored. You are still out of luck if the bank goes bankrupt.
Holder in due course
Gives you super legal armor to enforce your check. . .
Allows claimant to payment without claims or defenses.
Contract Defenses
1) a defense of the obligor based on a simple contract
2) CLAIMS IN RECOUPMENT
Who is a HIDC?
UCC 3-302
1) holder took the instrument for value in good faith, without noctice that the instrument is overdue, without notice of unauthorized sig or alteration (v) without notice of 3-306 or 3-305(a) claim
Don't forget, if you do not have a negotiable instrument, you do not have an HIDC under 3-302
negotiable instrument
HOw is an instrument discharged?
To discharge an instument you must pay a person entitled to enforece the inst and acanno tsue the defense of prior payment to a claim for payment by HIDC if HIDC took without knowledge of the instrument 3-601 and 3-602
Shelter Rule
Transferee acquires rights of his transferor including HIDC rights. 3-203
Problem 1
stacy want to buy a package fo five year negotiable instruments from teh curren holder
some notes are amtrizing asome are ballooon
Makers have missed some monthly payments on the notes but notse have not been accelerated
Stacy buys

Can she be an HIDC
3-302 (2)
i)
ii)
iii)
iv)
v)
vi) here is the problem - she knows that there are defaults

3-304 Overdue instruments
(c) Unless the due date of principal has been accellarated
Problem 2
-Bill issued a note to Tab for 2M
-four weeks ago he wired payment in full to Tab.
3-602 Payment - must be to a person entitled to enforce the instrument.
3-601
3-302 but discharge is effective against a person who became a holder in due course with notice of the discharge.

Since payment was made 2 weeks after he became HIDC
Problem 2.b
what should bill have done when he paid?
what can bill do now?
f()
WHat is this??
delivery + adding of necessary endorsement. No obligation to notify the "maker."
Tom took a travelers check payble to 'beare but that required a countersignature of kingle
thief stol and thdid a really good forger of kinglsey
Kingley reported theft so issuer stopped checks and Tom didn't get paid.
Can Tom assert HIDC status against the issuer.
Is a trav check a neg inst (to be an HIDC it must be) - 3-106 says they are
What does it mean to be a Holder in Due Course?
3-302
how bad is the forgery. If it is a good forgery you are a HIDC.
Problem 24.4

Flatiron Linen v. First American State Bank
3-411
b) If the obligated bank wrongfully (i) refulses to pay a cashier's check or certified check (ii) stops payment of a tellers check r (iiiO refuse sto pay
Are their exceptions to this obligation
3-418 Payment or acceptance by mistake.

we don't have to pay on the cashiers check because

s3-305 a HIDC takes free of the right to reclaim. under 3-418
Is securitization a payment system?
not one per se.
Securitization is what?
Breaking up an economic interest, activity, or unit into pieces for dividing among investors.
The way to turn an economic asset into a security is?
ORIGINATOR transfers assets to an ISSUER who issues securities unto itself. Underwriter markets securities to the INVESTORS.
A SERVICER is contracted to make sure the assets get to the issuer in due course.
Security is
Obligation of or interest in or share in an issuer
2. Divisible into a class or series
3. must have a type traded on securityes exchanges or markets or the items opts in to Article 8
4. In the form of either (i) certificate security in bearer form, (ii) certificated security in registered form, or (iii) uncertificated
If something is a negotiable instrument and a security which is it treated as?
A security. Conflicts of law between 3 and 8 are resolved in favor of Article 8.
issuers are barred from asserting defenses against purcgaser of security for value without notice of the defense EXCEPT?
1. Security is counterfeit
2. Constitutional invalidity against purchasers at issuance
Basic Concepts - Effectiveness of Transfer in Direct system

Between seller and buyer when does the law recognize the share moved over?
Delivery (possession or registration)
Basic Concepts - Effectiveness of Transfer in Direct system

issuer and buyer?
Registration
Basic Concepts - Effectiveness of Transfer in Direct system

Against Third parties
Protected purchaser takes free of adverse claims of which it has no notice (actual or should have).
- Give value
- No Notice
- Control (deliver + endorsement or registration)
Who are the players in the Indirect Holding System?
Issuer
DTC - Depository Trust Company
Participants - Brokers
Investors
IBM stock held By REgistered Shareholder for Deutchbank and CitiBank, on behalf of Shareholders
Issuer - IBM
DTC - Registered Shareholder
Participants - Deutsch and CITI
Investors - Me
What does a Securities Intermediary (participant) have to do?
Maintain ownership of enough securities to cover investors holdings.
Once the issuer pays to DTC is there any liability for the issuer?
No