1. The examination has 4 pages, including this instruction sheet. Please check now to ensure your copy is complete.
   
   
2. This is an open book examination; you are free to consult any written materials, and are expected to have all assigned course materials available. Formal citations to course materials are unnecessary, but you should refer specifically to statutory provisions when discussing them.
   
   
3. The exam consists of three questions, each carrying equal weight in the grading. I recommend that you spend a significant portion of the suggested time for each question planning and organizing your answer. If you feel that any of your answers depend on facts not provided in the question, you should state clearly any additional assumptions you are making.
   
   
4. In writing your exam, you should assume that the current version of UCC Articles 3 and 4 is in force, as opposed to any proposed revisions that have not yet been widely adopted.
   
   
5. To ensure that you receive full credit for your answers, please be sure to comply with the following format requirements:
   
   • Write or print your exam ticket number on all parts of your exam;
   • Begin your answer to each question on a new sheet of paper;
   • If you write your exam by hand, please write legibly.
     
     
6. I will notify you when grades are ready and will post a feedback memo on the class website as soon as possible after that. Good luck on the exam, and for those of you graduating at the end of the term, best wishes.
   
   

QUESTION 1 (40% of exam)

Stanley's wallet was stolen by a pickpocket on the #1 train during his morning commute. The contents of the wallet included his driver's license, his Steadibank ATM card, $200 in cash that he had just withdrawn from an ATM terminal, his VISA credit card, a blank check drawn on Steadibank that he regularly carried with him for convenience, and his Social Security card, which he happened to be carrying because some months previously, he had needed to present it when applying for a job, and he had neglected to remove it. The wallet also contained a piece of paper on which Stanley had written the PIN number of his ATM card, which he always had trouble remembering.

Stanley did not notice the theft until lunchtime, when he went to buy a sandwich and found that his wallet was missing. He immediately called to cancel his ATM card, and he cancelled his VISA card as soon as he got home that evening and recovered the necessary information from his monthly statement. The next morning he called his bank and placed a stop order on the stolen check. He spent much of the day arranging for the replacement of his driver's license and other ID cards, and late in the afternoon, as an afterthought, he reported the theft to the police.

Unfortunately, the pickpocket was working in cooperation with a gang of professional identity thieves. They carefully cut Stanley's photo from his driver's license, replacing it with a photo of Foster, one of the gang members, and then laminated the license in clear plastic to hide the substitution. They figured that nobody would notice that the license indicated Stanley's height as 5'4" while the much taller Foster was 6'2", and they were right.

That afternoon, Foster presented the altered license as personal identification along together with the VISA card and Social Security card, and opened up a new account in Stanley's name at QuickBank. He deposited the $200 cash together with valid checks for $3000 drawn on other bank accounts controlled by the gang. He also applied for a new QuickBank Mastercard, to be sent to his own address. Foster then proceeded to a Steadibank branch office and, presenting the driver's license and VISA and ATM cards as identification, arranged over the teller window to transmit all but $100 of the funds in Stanley's Steadibank accounts to the QuickBank account.
The thieves had made several quick purchases on the VISA card by the time Stanley reported its loss, and continued to make additional purchases on it for the next two days. When the new Mastercard arrived from QuickBank, they made purchases on that card as well, both over the Internet and in person at various local stores.

Finally, taking MICR and routing information from the blank check, the gang used check-printing software to create a large number of custom-made checks drawn on Stanley's Steadibank account. Over the next weeks, they passed numerous of these custom-made checks at stores all over the metropolitan area. Ultimately, they closed out the QuickBank deposit account and withdrew its funds.

It took Stanley months to deal with the aftermath of this scheme. He learned within a couple days that his Steadibank account had been emptied out, but the bad checks and creditor demands continued arriving for some time thereafter. He did not even learn of the Mastercard taken out under his name until he received a call from a collection company, demanding payment for amounts charged on that card.

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Which of these losses will Stanley bear ultimate responsibility for? Of those charges and payments that Stanley is not responsible for, who should bear the loss?

 

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QUESTION 2 (40% of exam)

Able, the assistant treasurer of the Conex Corporation, lost significant amounts of corporate funds by engaging in ill-advised currency swap transactions. To cover his tracks until he could figure out a way to recoup the losses, he structured a series of payments in cooperation with Twyne, the treasurer of Conex's subsidiary Subcon. Under this arrangement, at the end of every week Twyne would write checks drawn on Subcon and payable to Conex, which Able would deposit in Conex accounts that were audited every Monday. On Tuesday morning, following the audit, Able would then write checks drawn on Conex and payable to Subcon, which Twyne would deposit in Subcon's accounts in time for Subcon's weekly audit, which took place on Thursdays. Sometimes the payments were made via wholesale wire transfer to save time, and also to vary the pattern. The point of the arrangement was to have the same funds counted simultaneously as liquid assets for both Conex and Subcon.

This arrangement worked well for a time, until a fall in revenue threatened to reduce corporate account balances below a level that would trigger more intense scrutiny. Accordingly, Able and Twyne picked up the pace of their transfers and on March 1, Able wrote several checks drawn on Conex's account at Bank One and payable to Subcon. The sum of these checks exceeded the amounts then on deposit in Conex's account. To cover the excess, he arranged for Twyne to write two checks payable to Conex, drawn on Subcon's account at Bank Two. Able took these latter checks, indorsed them on behalf of Conex, and deposited them at Bank One. He also wrote a large check drawn on Conex's Bank One account to Prudent, the currency broker with whom Able had placed the losing swaps that had caused the liquidity problem in the first place, and to whom Conex still owed money.

In order to minimize the risk that any checks would bounce, Able asked Prudent to hold this last check for one week before depositing it. Prudent agreed on condition that Able obtain Twyne's signature on the check as well as his own. Such an arrangement was irregular, because in order for Subcon to guarantee any of its parent Conex's debts, it was necessary to obtain the permission of the Subcon board. Nonetheless, Able and Twyne assented to Prudent's condition, and Twyne indorsed the back of the check with the words, "Twyne, for Subcon, Inc." Prudent then immediately took the check and submitted it for deposit at his own bank, in violation of his oral agreement with Able and Twyne.

Unfortunately for Able and Twyne, Bank One's auditing software flagged the increased traffic on the Conex account, and on the morning of March 2, when the checks payable to Subcon arrived in Bank One's check processing office, an electronic alert was sent to Morse, the manager responsible for the Conex accounts. Morse decided that Bank One would hold on these checks till the last possible moment to see whether the checks payable to Conex and deposited by Able would clear. In fact, they did clear; and on the morning of March 4, Morse was ready to authorize payment, until the large check to Prudent was presented. This check set off additional alerts that resulted in sight inspection by Morse, who realized that Twyne's indorsement was irregular. He accordingly directed that all the questionable checks be dishonored. Prudent's bank was notified ofthe dishonor in ordinary course; and Bank Two was notified of the dishonor via special courier that arrived at its offices just before doors were locked at 3 pm.

What are the various parties' rights and duties on the dishonored checks?

 

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QUESTION 3 (20% of exam)

You are participating in a conference organized by the American Law Institute, which is considering undertaking a project to draft a comprehensive model payments law that would cover all methods of payment. You have been asked to present recommendations on the issue of final payment: that is, on the question of what rights should be provided to payors who wish to stop payments in process or to reverse payments after they have been made.

You may address this question from whatever policy perspective you wish, but you are expected at some point in your presentation to discuss whether a single rule for final payment is appropriate (or alternatively, should the rules differ for bank versus non-bank entities, debit versus credit transfers, etc.) In addition, you should consider the extent to which any such rules could be varied by contractual agreement.

Please provide a summary of the points you wish to make in your presentation..

END OF EXAM