Question 1, Answer 1
Stanley's
monetary
losses include the $200 in cash from his stolen wallet, the charges the
gang
made on his VISA card, the amounts of the checks the gang made, the
money
drained from his Steadibank accounts, and the charges made on the
Mastercard
the gang opened in his name.
All
of the following
analysis assumes that the members of the gang are unavailable, and
cannot bear
any of the losses involved. If
the
members were available, ultimately all of the losses could be placed on
them
under a variety of common law and statutory theories, including
conversion,
fraud, and encoding warranties. The
analysis below assumes the more likely situation, and thus considers
only who
bears the costs among the other persons involved.
Cash
Unlike
many kinds of
property, a thief can convey good title of cash to a Bona Fide
Purchaser (BFP).
Whether Stanley can recover the stolen $200 from Quickbank thus depends
on
whether Quickbank is a BFP. Status
as a
BFP requires, according to the Court in Portland v. Berry, good faith
and for
valuable consideration. The Court did not define good faith, but it is
defined
in UCC 1-201 as "honesty in fact."
Under the more stringent good faith requirements of
Article 3, QuickBank
might fail. The
Article 3 definition
would require in addition to honesty in fact, "the observance of
reasonable commercial standards of fair dealing."
QuickBank might fail this standard, if they
did not do the standard investigation into Foster's IDs. Stanley may argue that
Article 3 should
apply, because the gang simultaneously deposited checks when they
deposited his
cash. However, this argument seems likely to fail.
Cash is intended to be free of many of the
requirements of negotiable instruments, so a court would not apply
Article
3. So, it is more
likely the Article 1
definition of good faith applies, so Stanley would need to show
dishonesty on
the part of QuickBank. He
is unlikely to
be able to do so, unless the teller involved was complicit in the fraud. Similarly, by the time
Stanley could pursue
his claim, QuickBank will have given valuable consideration for the
cash, as
the account has been closed out and the funds withdrawn. So QuickBank
almost
certainly qualifies as a BFP, and Stanley must bear the loss of the
cash.
VISA card
For analysis,
the charges on
Stanley's VISA card can be divided into two groups: those made before
he
cancelled the VISA card, and those after.
Charges made
before cancellation
Stanley's VISA
card was a credit card, and thus governed by TILA.
Section 1643(a)(1) says, in relevant part,
that a cardholder is only liable for an unauthorized use of the card if
the
liability is in excess of $50. It
can be
fairly assumed that VISA has given Stanley notice of his potential
liability,
and has provided him a means for reporting loss or theft. The use of the gang was
clearly
unauthorized. The
gang had no authority
to use the card, and VISA would be hard-pressed to find an argument
otherwise.
VISA's best argument would be under Minskoff v. American Express, where
the
Court found apparent authority due to the customer's negligence. Here, however, although
Stanley was perhaps
negligent in certain respects (e.g., having his pin number in his
wallet), any
negligence he may be accused of did not cause his VISA card to be
stolen, or
allow it to be used. The
use will
certainly be held to be unauthorized
Under the
statute, Stanley would be
liable up to $50 for each charge made before he cancelled the card, but
VISA
has waived this deductable when notice is given promptly. Stanley cancelled his card
as soon as he got
home in the evening, though he had cancelled his ATM card immediately.
Prompt
notice, however, does not require immediate notice, or notice as soon
as
possible. Certainly the timing is not subject to attack. Stanley cancelled the card
perhaps 9 hours
after it was stolen, and 6 hours after he knew of the theft. This is certainly prompt.
Another question is
whether Stanley provided notice of theft or loss, or whether he merely
cancelled the card. Even if only the latter, it is possible that
cancelling a
credit card provides constructive notice that there has been a theft or
loss. VISA will
almost certainly waive
the $50 fee, and TILA conclusively protects Stanley for any loss above
that.
In determining
who ultimately bears
the loss, it would be necessary to examine the contract between VISA
and the
merchants who accepted the stolen VISA card.
If, as is typical, there are provisions pushing the loss
on the
merchants in cases of negligence, this negligence may exist here if
they failed
to match Foster's signatures with Stanley's signature on the back of
his card.
Charges made
after cancellation
The preceding
analysis applies equally to charges made after Stanley cancelled the
card, but
Stanley has a few additional arguments. Any charges after cacellation
even more
clearly unauthorized. Furthermore, TILA provides that a cardholder can
only be
liable for an unauthorized use if "the unauthorized use occurs before
the
card issuer has been notified that an unauthorized use of the credit
card has
occurred or may occur as the result of loss, theft, or otherwise."
Thus,
so long as Stanley provided notice that he was cancelling because the
card was
stolen, or so long as such notice may be inferred from the cancellation
itself,
Stanley cannot be charged even the $50 deductible on the charges made
after
cancellation.
As above, the
ultimate loss will
fall on either the merchants or VISA, depending on the contract between
them
and factual findings regarding negligence.
Checks
The checks the
gang made and passed were forged instruments. Under 3-401, A person is
not
liable on an instrument they didn't sign, or their agent didn't sign. Under 4-401, a bank cannot
charge an account
of a customer if the item is not properly payable.
Here, the item was not, as it was not
authorized. However,
under 3-406, a
person whose failure to exercise ordinary care substantially
contributes to the
making of a forged signature is precluded from asserting the forgery
against a
person who takes it in good faith for value or collection. So, if the bank has
already charged Stanley's
account, as is likely, he can recover unless its found that his failure
to
exercise OC substantially contributed to the making of a forged
signature.
OC is defined
in 3-103(a)(7). In
the case of a person engaged in business
means observation of reasonable commercial standards.
However, it doesn't seem that Stanley falls
under this definition. Indeed, he could argue that 3-406 is directed at
businesses, in order to make sure their internal auditing procedures
are
adequate to prevent alteration or forgery.
None of the comments to section 3-103 mention how it
should be applied
to non-business people. Likewise, all of the comments in 3-406
providing
examples focus on the ordinary care of businesses. It seems likely,
therefore,
that this provision was not intended to extend to consumers.
Even if Stanley
is held to a more
general standard of ordinary care from the common law, it doesn't
appear that
he has failed in this duty. He
carried a
single blank check, in case he needed to write a check without knowing
in
advance. Again,
although he was
negligent in some respects, this negligence does not extend to the
blank check,
as they did not contribute to the making of the forged signatures. Likewise, Stanley did not
fail in monitoring
the situation, as the evidence indicates he stopped the check in an
adequate
time (recognizing that one does not need to act as quickly on a stolen
check as
a stolen ATM or credit card), and monitored his bank account.
Presumably he
notified Steadibank that the bad checks were unauthorized when they
began
rolling in.
Ultimately, the
loss will probably
fall on the merchants. The
instrument
was a forged instrument, and the signature counted as a signature of
the gang
member who signed it, so the merchants became holders, and BFPs. Thus, the bank could not
recover from the
merchants under 3-418. Likewise, the merchants (nor their banks) did
not
violate presentment warranties under 3-417 because they were entitled
to
enforce the instrument and it had not been altered.
So long as the merchants or their banks did
not have actual notice that the signature was unauthorized, they do not
violate
the presentment warranty. The
analysis
for the transfer warranty under 3-416 is the same, except that here the
merchants and their banks warrant that all of the signatures are
authorized. Under
3-403, an unauthorized signature is
treated as the signature of the unauthorized signer in favor of a BFP. Presumably, the merchants
gave value for the
check, so as long as they met the standards of honesty in fact and
reasonable
commercial standards of fair dealing, the merchants are BFPs. This
determination will depend on the facts of the check-passing
transactions, but
it is likely that the merchants qualify for BFP status. Thus, if the
checks had
already been paid, Steadibank would bear the loss, but since the checks
were
bouncing, the merchants will bear it.
They cannot recover from Steadibank because it has no
duty to payees to
pay checks, and the merchants cannot recover from Stanley because he is
not
liable for an instrument he didn't sign, under 3-401.
Money drained
from Stanley's bank accounts
It appears that
the funds were transfered from Stanley's Steadibank accounts to the
gang's
QuickBank account via an ACH transaction or a wholesale wire transfer. The former is more likely,
as the latter is
expensive for small orders. The
ACH
system is governed by the NACHA rules between banks.
As between Steadibank and Stanley, EFTA
applies. Under
EFTA, Stanley's liability
for unauthorized transactions is capped at $50 if reported within 2
days, and
$500 if reported within 60 days. Again,
negligence is irrelevant except as it may establish apparent authority.
Here,
keeping his driver's license, VISA card and ATM card together do not
establish
such negligence. Carrying
these cards
together is not unusual, and the gang didn't need his PIN number to
order the
money transfer. It
can be fairly assumed
from the facts that Stanley notified the bank quickly, but it is
unclear
whether he met the 2 day deadling.
Thus,
if Stanley reported the loss within 2 days, he can recover all but $50,
otherwise, all but $500.
This loss will
likely fall on
Steadibank. Under the NACHA rules, 2.2.1.1, Steadibank warranted to
QuickBank
(or any other banks within the chain) that the transaction was properly
authorized.
Therefore, they will not be able to recover from QuickBank, unless (as
seems
unlikely) they were able to move quickly enough to enter a reversing
entry
under 2.5.1.
Charges to new
Mastercard Account
Stanley will
not
be liable for any of the charges on the new Mastercard.
As a credit card, the new card was govered by
TILA 1643, which provides that a cardholder is only liable if the card
is an
accepted credit card. Stanley
can argue
first that he was not a cardholder.
He
never asked for the card, and was never in possession of the card (he
never
"held" it). Furthermore,
he
never had a contract with Mastercard, nor received any benefit from the
card.
An even
stronger
argument is that the card was not "accepted."
"Accepted" is defined in 1602(l),
as one "which the cardholder has requrested and received or has signed
or
has used, or authorized another to use for the purpose of obtaining
money,
property, labor, or, services on credit." So, even if Stanley is a
cardholder, and thus otherwise liable for charges, he cannot be liable
for
unauthorized charges on a credit card he didn't accept.
Ultimately,
this loss will probably
fall on QuickBank. Again,
it would only
fall on merchants if they failed to take reasonable precautions, but
any
precautions they would take would be frustrated by QuickBank's own
negligence. The
signature on the back of
the card would be Fosters, as would any picture on the front. QuickBank was negligent
not only in failing
to notice the heights on the license was inaccurate, but by sending a
credit
card to a different address than was on the license, for a newly
created bank
account. Thus,
QuickBank will bear the
loss, despite any failure of merchants to take precautions.
^ TOP
Question 1, Answer 2
Stanley not
responsible:
1.
New Mastercard credit card
This is
presumably a credit card,
and is therefore governed by TILA.
Here,
since the card was issued in his name, it seems that Stanley is
technically the
"cardholder," since the card was issued to him by Mastercard. 1602(m). Therefore,
Stanley's liability for
the charges depend on whether they were "unauthorized."
In this case it seems that the thieves,
including Foster who used a quality fake ID, were without question
"unauthorized" users. Although
an argument can perhaps be made that they had apparent authority under
1602(o),
due to the fake ID, this seems like a very weak argument. It is hard to imagine that
theft of a credit
card and ID cards, followed by fraudulent alteration of the ID card,
could
possibly qualify as "authorized" use.
Further, TILA does not seem to be much concerned with
consumer
negligence, such as Stanley's mistake in carrying around his social
security
card, as it establishes fixed liability regardless of the consumer's
own
conduct. Assuming
that the use was in
fact unauthorized, Stanley's liability is governed by 1643. Although
subsection
(a)(1) provides for some cardholder liability, this is only true for an
"accepted" card. 1643(a)(1)(A).
Stanley never accepted the card, since he
did not request
it himself. 1602(l). For that reason, Stanley bears zero liability for
this
unauthorized use of the Mastercard. 1643(d).
In this case,
it makes the most
sense to stick Mastercard with the loss.
Even though an argument can be made that the merchant
should have
spotted the height discrepancy on Foster's fake ID, it seems rather
unusual for
an ordinary store cashier to examine the listed height on an ID.
Rather, they
generally just look to see that the name and photo match up. Since Mastercard is in
control of the card
issuing and reading technology, rather than the merchant or issuing
bank, it
makes the most sense to hold them accountable for the loss. Of course, Mastercard
could perhaps shift
this liability to its member-merchant by private agreement, but it
seems
unlikely that they would do so.
2. Wire
Transfer (possibly not liable)
The exact
amount of the loss here is
unclear, but it is presumed that the transfer was made electronically,
and was
not sent through the ACH network.
This
is governed by EFTA, since it is a consumer credit transfer, since
Foster went
directly to Steadibank, the holder of the original account, and
requested that
SB "push" the money to the new QB account.
Although the transfer was technically between
banks (which would fall under Article 4A), since a consumer is on each
"end"
of the transfer, this seems to fall outside the scope of 4A.
Under EFTA, a
consumer's liability
for an unauthorized electronic fund transfer is governed by 1693(g). As
a
threshold matter, this transaction is presumed "unauthorized" for the
same reasons as discussed above, under TILA.
Stanley's liability here is a bit unclear. EFTA provides generally
for consumer limits
on liability, such that if he notified SB within two days of learning
of the
loss, he will be liable for up to $50. On the other hand, if he failed
to
notify the bank within two days after learning of the loss, his
liability will
be the lesser of $500, or the sum of the amount of unauthorized
transfers that
occurred in the first two days (up to $50), plus any other amount that
occurred
after those two days, and before notice was given to the bank. Since Stanley apparently
reported the loss
pretty quickly, it does not seem that his case invokes the third level
of
consumer liability, which provides for unlimited liability after 60
days have
passed from the time the first unauthorized transfer appeared on a
periodic
statement.
But, whether
Stanley will face any
liability at all is still unclear.
This
is because the first two levels of consumer liability under 1693(g) -
$50 or
$500 - seem to apply only where an "access card or device" was used
in the transfer. It
is therefore
possible that since no access device was presumably used here, as it
was a
teller transfer and not an ATM transfer, that Stanley will only be
liable for
unauthorized transfers that he failed to report within 60 days of
receiving a
periodic statement. Since Stanley reported the problem quickly, he may
not be
liable for anything here.
If Stanley is
not liable, the loss
will likely have to fall on QB. This is because the only other party
involved
in the transfer was SB, which had no interaction with the fraudster in
terms of
this particular transaction (irrespective of possible failures of care
in
allowing Foster to open the receiving account). Since QB had direct
interaction
with the fraudster, and controlled the security procedures for making
the
transfer, it should bear the loss.
Do
note, however, that it shouldn't matter that the teller at QB didn't
recognize
that Foster was impersonating Stanley, since even though Stanley was
QB's
customer, given the volume of customers banks generally deal with, it
is
excusable that the teller failed to recognize the impersonation.
3. Forged
Checks
Here, Stanley
will probably not be
liable for the losses on the forged checks that were created by the
thieves
from his QB blank check. This is because the checks were not "properly
payable" under 4-401. This is because the checks had forged drawer's
signatures, which qualify as "unauthorized signatures" under
3-403. See also,
1-201(43), and 4-401,
Comment 1. Since
the checks were not
properly payable, QB cannot charge Stanley for them.
In addition, any overdraft fees that Stanley
incurred on these forged checks are also not chargeable to Stanley
under
4-401(b).
Of course, QB
will try to shift some
of this loss to Stanley under 3-406, by arguing that his negligence in
carrying
around the blank check "substantially contributed" to the forgery
losses. Since there
doesn't seem to be
an applicable "ordinary care" definition for consumers not engaged in
business (3-103(a)(7)), it is presumed that Stanley did act with
ordinary care
if he acted as a reasonable person would have under the circumstances. Here, although Stanley was
carrying around a
blank check in his wallet, this is probably not such unusual behavior
as to
qualify as a failure to exercise ordinary care.
Had Stanley signed the check and left it incomplete, and
a thief filled
it in and used it, that would be a different matter. But it is assumed
that
Stanley did not sign the check. If
he
did, then he might bear some responsibility here, if the thieves used
his
self-provided signature to create a replica, thus enabling the fraud. If, on the other hand,
Stanley merely carried
around an unsigned blank check for emergency purposes, this can hardly
be
considered a lack of ordinary care.
It
is analogous to a woman carrying around a checkbook in her purse, and
having
the purse stolen. If
this is a lack of
ordinary care, then lots of women are in trouble.
For these reasons, it does not seem that
Stanley was negligent under 3-406, and therefore QB probably can't
shift any of
the loss to him. Further, 4-406 doesn't apply, because it appears that
Stanley
reported the fraud even before receiving a statement containing the
fraud.
In this case,
QB will bear the loss,
unless the merchants who accepted the forged checks, or the presenting
banks,
"knew" that Stanley's signature had been forged, under 4-207 or
4-208. Since this
requires actual
knowledge (1-201(25)), QB will have an almost impossible time
satisfying this
standard. For this
reason, neither the
4-207 nor 4-208 (or their article 3 counterparts) warranties will apply. Also, 3-418 will not
apply. This is because,
even though QB paid under a mistaken belief that Stanley's signature
was authorized,
QB loses the Mistake warranty where the prior taker of the check took
the
instrument in good faith and for value, or who in good faith "changed
position" in taking the check. 3-418(c).
Here, the merchants who took the checks
exchanged some form of
goods or services, which qualify as "value," and as argued above,
also took in "good faith" since it seems unreasonable to require them
to check the fake ID for discrepancies in the check passer's listed
height on
his ID, compared with his actual height.
-Negligence?
Stanley
responsible
1. $200 cash
In this case,
the taker of the $200
was QB. As provided
in City of Portland
v. Berry, the "money rule" absolves a taker of currency who takes in
"good faith" and who pays "value."
It is presumed that in exchange for the $200
cash, QB gave Foster $200 of withdrawable credit, and the thieves
withdrew the
cash. This should
qualify as
"value" (similar to the rule for depositary banks under 4-211). In
this case, it does not seem that the bank violated any standard of good
faith,
which is probably defined in this context as something similar to
honesty in
fact and acting according to industry custom.
It is presumed that taking a photo ID and social
security card are
sufficient to open a new bank account, without any further
documentation. Again,
although Foster's height varied
considerably from that listed on Stanley's ID, it seems reasonable that
a bank
officer could miss this fact, particularly considering that the rest of
the ID
was probably of excellent quality, given that the thieves were
professionals. If
these facts are true, then Stanley cannot
recover the cash from the bank. Since
the thieves have already withdrawn the cash, although they can be
pursued under
common law causes of action, they are likely in hiding.
Of course, it
is possible that the
bank will be held to a higher standard of "good faith" than the
ordinary merchant discussed above, and in that case should have
examined the ID
more carefully. If true, then the bank did not take the cash in "good
faith," and will have to return it to Stanley.
2. VISA credit
card
As
with the
Mastercard, this is governed by TILA, section 1643.
Stanley will be liable for the unauthorized
use of his credit card - this time an "accepted card" - in an amount
up to $50. Since
the thieves used the
card before he reported the loss of the card, he will be liable up to
an
aggregate amount of $50 under 1643(a)(1)(B).
Any further use of the card will not affect Stanley.
Here, it seems that
the loss for those transactions will fall on Mastercard for the same
reasons as
discussed above under the VISA problem, unless Mastercard has a
separate
agreement shifting liability to QB or to the merchant.
^ TOP
Question 1, Answer 3
Foster's gang
used a number of
different payment systems to steal money from Stanley (S), each
governed by
their own rules. I
will address each of
these in turn.
Transfer from
SteadiBank (SB) to QuickBank (QB)
The transfer
from Stanley's account
at SB to the account Foster (F) opened in his name at QB is an ACH
transaction.
It is excluded from the scope of Article 4A of the UCC because it
involves
consumers; it is covered by EFTA and the NACHA operating rules.
EFTA limits S's
liability for
unauthorized transfers under sec. 909.
This situation fits the definition of an unauthorized
transfer in sec.
903(11) since it was an electronic fund transfer from a consumer's
account
(Stanley's), initiated by a person other than the consumer (Foster)
without
actual authority, and S received no benefit.
SB could try to
argue that the
transfer is not unauthorized because it fits under the exception in
sec.
903(11)(A), which excludes from the definition of "unauthorized" any
transfer itiated by a person "furnished with the card, code or other
means
of access to such consumer's account by such consumer." However, this
argument is unlikely to be successful here.
S did not furnish F with his driver's license and other
identity
information; F stole it. The
bank could
argue that S's negligence in carrying his ATM code with his ATM card
was
tantamount to furnishing F with that information. However, F did not
use the
code to withdraw the funds; luckily for S, F never used the ATM to
withdraw
cash at all. Instead,
he showed the card
itself along with S's Visa card and driver's license. Without a causal
link
between the negligence in carrying the code around and the transfer of
funds,
the bank will have a hard time arguing that the transfer was authorized. It should also be noted
that S has the
advantage here, since the burden is on the bank to show that the
transfer was
authorized (sec. 909(b)). Any jury is likely to sympathize with S's
plight more
than that of the bank.
Under sec. 909,
S is only liable for
unauthorized electronic fund transfers if the bank has provided some
means of
positively identifying the initiator of the funds transfer, which it
has done
here. However, if he reports the loss in time, S's loss is limited to
$50; and
even if he does not, his liability is limited to $500.
We are told that he learned within a couple
of days that his SB account had been emptied out.
Given how prompt he was about reporting
everything else that happened to him, it seems likely that he would
have
notified the bank immediately that this funds transfer was unauthorized. Therefore, his loss from
this funds transfer
will be limited to $50.
The NACHA rules
govern who will bear
the loss here as between SB and QB.
SB
has until midnight of the fifth banking day following the transfer to
reverse
the payment made to QB (NACHA 2.5.1). They should be able to meet this
deadline
if S reports the transfer right away, as he discovered it within a
"couple" of days. However,
SB
will have to indemnify QB for losses resulting from the reversed entry;
so it
will have to compensate QB for the funds withdrawn by F and his gang
(NACHA
2.5.2). This is the right result, as SB is the party in the best
position to
verify the identity of a customer making a transfer.
It might try to argue that S was negligent in
carrying his social security card around, but this argument is unlikely
to
succeed as many people do this.
Visa purchases
The Visa
purchases are governed by
TILA. Under sec.
133(a)(1)(B), S's liability
for unauthorized charges to his Visa card before it was reported stolen
are
limited to $50. He
has no liability for
charges made after he told the issuer that the card was stolen (TILA
sec.
133(a) (1)(E)).
Although issuers have
put a lot of pressure on the concept of "unauthorized use" in an
attempt to avoid this expansive liability shift, it is unlikely that
they could
successfully argue that this is not a case where the use of the card is
by
someone other than S who lacks actual, applied or apparent authority
(TILA sec.
103(o)).
These are
losses that the issuer
will bear. This
makes sense because the
issuer is in a position to contract with the merchants to make sure
security
procedures are in place, such as checking signatures or checking IDs;
merchants
with more security procedures will pay lower fees (the equivalent of
lower
premiums on an insurance policy for a low-risk party).
For the purchases made after the card was
reported stolen, the issuer is in the best position to set up a system
to let
merchants know that a card is unauthorized before they accept it for
payment.
Mastercard
purchases
The Mastercard
purchases present
more difficulty, as it appears in this case that F could be the
cardholder.
Sec. 133(m) defines "cardholder" as any person to whom a credit card
is issued. This
could be F, since the
bank issued it to him; or it could be S, as the card was issued to his
name. If
S is considered the cardholder, the same analysis would apply as for
the Visa
card, as use by F would be unauthorized.
If F is the
cardholder, S has no
liability at all, since it is not his card.
The issuer would bear the losses resulting from
extending credit to F.
This seems like the right result, since QB was in the best position to
determine that F was not actually S.
Even if F's alteration of S's driver's license was
well-done, QB could
have determined that it had been altered had it checked the height--10
inches
is not a difference easily explained away.
Forged checks
Liability for
the forged checks is
governed by Articles 3 and 4 of the UCC.
SB can only
charge S's account for
the amount of the forged checks if they are authorized by S (4-401). As
long as
he inspects his statements and notifies the bank promptly of
unauthorized
items, his account cannot be charged (4-406).
S could be
precluded from asserting
the forgery, however, if his failure to exercise ordinary care
substantially
contributed to the forgery (3-406). Ordinary care is a question of
fact. The
bank could argue that S did not meet a standard of ordinary care in
carrying
around a blank check; however, his blank check was in as secure a
place--his
wallet--as his credit cards and cash.
There was no information on that blank check that the
gang could not
have gotten from his bank otherwise. Therefore, SB would have a
difficult time
showing that S's negligence substantially contributed to the forgery.
SB
will bear the
loss as between it and a depositary bank unless it rejects the check in
time. A forged
check does not violate
the 3-417 presentment warranty of the depositary bank, as long as the
bank has
no knowledge of the forgery; therefore, SB as the payor bank will have
no claim
against the depositary bank for breach of warranty.
However, once it finds out that there are
forged checks on S's accounts going around, it can refuse to honor
checks drawn
on his account and presented for collection. This will push the loss
back to
the depositary bank, which will bear the loss if the merchant has
absconded
with the funds, or will will pass the loss back to the merchant if it
has
not. This will
leave the merchant to bear
the loss.
Check
from Conex to Prudent
This check was
written and signed by
Able on behalf of Conex in payment of an existing debt owed to Prudent.
Twyne
added the anomolous indorsement, "Twyne, for Subcon, Inc." Prudent had orally agreed
to hold the check
for one week in exchange for this indorsement, but deposited it
immediately. It
was presented to Bank One on March 4th and was dishonored immediately.
Prudent's Bank was notified of the dishonor in ordinary course.
Prudent
Prudent has no
liability on the check. Although
it may have some liability for
violating the collateral agreement to hold the check for one week, this
liability is not on the check itself.
When the check is dishonored, the underlying obligation
is revived, so
Prudent has the right for payment of its debt, but again, this is not a
right
from the check itself. Prudent
can also
pursue the drawer of the check under 3-414(b).
Here, the drawer was Conex.
Any
argument that the signature on this check was unauthorized is unlikely
to
succeed, as the check paid a valid debt of the company. Likewise,
Prudent can
pursue the indorser on the check, under 3-415.
Whether Twyne or Subcon is the indorser is a closer
question, since the
ordinary practice was to require approval of Subcon's board to
guarantee
Conex's debts. Here,
Subcon probably is
liable as an indorser of the check, because Twyne has apparent
authority to
sign checks as an agent for the corporation (3-402).
Subcon would not be liable as indorser if
Prudent knew that Subcon required approval of the board before
guaranteeing
debts, as there would be no apparent authority, and Twyne does not have
actual
or implied authority to guarantee checks of Conex. If Twyne is found
not to
have authority, then he is personally liable to Prudent on the check as
an
indorser only if Prudent takes the instrument for value in good faith. This again turns on what
Prudent knew about
Twyne's authority. If
they knew he had
no authority to sign the check, then Prudent is not in good faith and
cannot
pursue Twyne on the check. If
a court
finds that Twyne didn't have authority, but Prudent had no reason to
know about
the lack of authority, then they can pursue Twyne individually, but
this is a
difficult facutal determination to make, since if Prudent fairly
believed Twyne
to have authority, then he in fact had apparent authority.
Conex
Conex is liable
to pay the full
amount on the check, assuming it was less or equal to the amount of the
outstanding debt (otherwise Able would have exceeded his authority, and
Prudent
would likely know as much).
Subcon
Subcon is
probably liable as
indorser to pay the full amount of the check upon dishonor. Subcon is entitled to
indemnification from
Conex under 3-419(e).
Bank One
Bank One is
liable for wrongful
dishonor unless there were insufficient funds to pay the Prudent check
under
4-402. However,
Conex would need to
prove actual damages, which would include at least NSF fees, and
perhaps any
interest accumulated on the debt to Prudent.
The check was properly payable (as Able was authorized
to sign at least
this check), so the bank is liable for actual damages under 4-402(b). Twyne's irregular
signature did not have any
effect on whether the check was properly payable or not. Bank One may argue that it
feared fraud, but
no fraud exists as to this check, and 4-402 appears to feature strict
liability. Wrongful
dishonor occurs when
the item "is properly payable." There
is no exception for good faith belief otherwise.
If a bank
dishonors a check fearing fraud, it bears the costs if its belief is
incorrect. However,
these costs are
likely to be minimal, particularly in the present case.
Checks from
Conex to Subcon
Subcon
Upon dishonor,
Subcon can collect on
the checks against the drawer under 3-414(b).
However, here, Able may be exceeding his authority in
writing these
checks, and Subcon (through Twyne) knew so, so there isn't even
apparent
authority. Furthermore,
since Subcon was
not in good faith in taking the instrument, the signature does not
count as
Able's personal signature. So Subcon has no recovery on the check, if
Able was
exceeding his authority, which seems likely.
Bank One
Bank One is not
liable for wrongful
dishonor, because the check was not properly payable, since Able's
signature on
behalf of Conex was unauthorized.
However, Bank One has potential liability if its return
of the check did
not meet the extention of the midnight deadline.
Under 4-215(a), payment of the check would
have become effective at midnight March 3rd, since the check was
received March
2nd. However, the
midnight deadline is
preempted by federal law of Reg CC, which provides that the midnight
deadline
is extended to the time of dispatch when a paying bank uses a means of
delivery
that would ordinary result in receipt by the bank to which it is sent
on or
before the receiving bank's next banking day.
So, if Bank One's courier would ordinarily have reached
Bank Two before
the end of the banking day on March 4th, it met the midnight deadline. This is a factual
question, and the actual
arrival time of the courier, while useful, is not dispositive. "Banking
day" is defined by Reg CC as "that part of any business day on which
an office of a bank is open to the public for carrying on substantially
all of
its banking functions." This
is
another question of fact, but if the courier traveled at the usual
speed, it
appears to be met. Although just barely, the bank was still open to the
public
for carrying on substantially all of its banking functions. Of course, some tellers
may have been winding
down the day and closing out books, but the bank was still open, albiet
by a
slim margin. Of course, Bank One may still have missed the deadline if
the
courier would not ordinarily have reached the bank by 3 pm, but this
will be a
difficult point to prove. Therefore,
Bank One is not considered to have paid the check by operation of
4-215(a).
Bank Two
Bank Two is
entitled to charge back
the provisional credit given to Subcon under 4-214
Conex
Conex has no
liability on the
checks, as the check did not bear an authorized signature of the
corporation
(3-401 and 3-402).
Able
Able has no
liability to Subcon,
since Subcon was not in good faith in taking the check.
If the check were held by a holder in due
course (or any BFP), Able would be personally liable for the amount of
the
checks.
Checks from
Subcon to Conex
The checks from
Subcon to Conex cleared, but the signature of Subcon (via Twyne) was
unauthorized. Therefore, Subcon can claim Bank Two was not authorized
to charge
its account under 4-401. Bank Two's best argument in return is under
4-406(d)(2) - that Twyne had previously written unauthorized checks,
which
Subcon had failed to report within 30 days.
The bank would still be subject to division of the loss
by comparative
negligence under 4-406(e). The
bank has
a strong argument here, as even the most cursory of monitoring would
have
revealed Twyne's scheme.
Subcon may be
able to recover from Conex under a restitution theory, as Conex was not
a
holder in due course of the check, since Conex, via Able, was complicit
in the
fraud. However,
Conex probably has a
counterclaim in equal amounts under the same theory, arising from the
same
scheme, and at any rate, these affiliated corporations would be
unlikely to
pursue this matter far.
Even if Bank
Two
were found liable under 4-401, it could pursue a breach of presentment
warranty
claim under 4-208, but this would be unlikely to succeed since Bank Two
would
need to prove that Bank One had knowledge that Twyne's signature was
unauthorized. Since
Bank Two was privy
to the same facts as Bank One, this would be a difficult argument to
make on a
"reason to know" theory, so without a smoking gun memo, this claim
would probably fail.
Therefore,
there
is probably no liability remaining on the checks from Subcon to Conex,
now that
they have cleared.
^ TOP
Question 2, Answer 2
As a threshold
matter, although
there is some substantial check kiting going on here, it does not seem
that
Bank 2, as depositary bank for the check from Conex to Subcon, had any
knowledge of the kiting. Therefore, in presenting the check, it does
not appear
that Bank 2 was trying to get paid before the kite fell apart, in order
to
stick Bank 1 with the loss. Thus, problems specific to "check kiting"
(e.g., such as accountability issues under 4-302(b); see also 1st Nat'l
Bank v.
Colonial Bank) don't seem to be at issue here that needs to be
resolved.
Also, even
though the problem
mentions that some of these check kiting transactions actually occurred
via 4A
wire transfer, the transfers at issue here were apparently made only by
paper
check. Thus, only Articles 3 and 4, and not 4A, are implicated.
1. Conex check
to Subcon
Bank 1
The question
here is whether Bank 1
properly dishonored the check by its midnight deadline under 4-302 and
Reg CC.
Here, given that the problems Able faced in playing with Conex's money
were so
substantial as to require him to engage in this kiting scheme, and to
later
write a "large" check to Prudent (and given that this is in a
commercial context), it is assumed that the amount of each check was
greater
than $2500. Therefore, Reg CC 229.33 provides that notification of
nonpayment
must be received by the depositary bank by 4pm local time on the second
business day following the banking day on which the check was presented
to the
paying bank. In this case, the check was presented on the morning of
March
2. Assuming that
March 3 and 4 were
"banking days," and not weekend or holiday days, this means that Bank
1 had to give notice of nonpayment to Bank 2 by midnight of March 3rd. For this reason, Bank 1
missed its midnight
deadline, and became "accountable" for the checks payable to Subcon.
Payment therefore became final under 4-215, meaning that Bank 1 must
pay Bank 2
on the check. Bank
1 will be able to
charge Conex for the amount of the check under 4-401.
This problem
does not raise any
3-405 issues, because no indorsements were forged.
Subcon and
Bank 2
Since payment
is final under 4-215,
any provisional credit that Bank 2 gave to Subcon for the checks must
be
"firmed up" under 4-214. Thus, Subcon gets its money.
Conex
Here, Conex
might like to argue that
the checks were forged, and that it should therefore be able to get a
chargeback from Bank 1 under 4-401, but this argument has no merit. In this case, Able was
Conex's treasurer,
which almost certainly means that, under agency principles, he was
"authorized"
to sign on behalf of Conex. Further, the facts seem to indicate that
Conex did
not require multiple signatures on its checks, because then all checks
signed
by Able, including the one to Prudent, would be "unauthorized" by
default under 3-403. Since
this doesn't
seem to be the case, Able's signatures on the Conex checks to Subcon
should
qualify as "authorized. Under 3-402(c), regardless of whether Able
indicated his representative status on the checks, the represented
person
(Conex) is by default responsible for payment of the check. Therefore,
Conex
has to pay for the mistake of its employee.
Able
He has no
liability on the checks,
under 4-402(c).
2. Prudent check
Bank 1
Here, Bank 1
made its midnight
deadline, so it properly dishonored the check.
Where a bank dishonors a check, it has no liability to
anybody but the
Drawer. Here, since
the check was
dishonored, Bank 1 cannot charge Conex for the check under 4-401. Further, Bank 1 cannot be
liable to Prudent
for wrongful dishonor, since 4-402 only applies to customers of drawee
banks,
which only includes Conex.
Bank 2
Since the check
was properly
dishonored, Bank 2 is allowed to revoke any provisional settlement it
made with
Prudent. If Bank 2 allowed Prudent to withdraw the funds, and Prudent
did so,
Bank 2 can obtain a refund from him.
4-214. Of
course, Bank 2 will
only have these chargeback rights if it returns the item, or informs
Prudent,
of the the dishonor by midnight of the next banking day following the
banking
day on which Bank 2 learned of the dishonor.
4-214.
Conex
Conex bears no
liability on the
check under 4-401, as far as Bank 1 is concerned, since the check was
properly
dishonored by Bank 1. However,
Conex
will still be liable to Prudent for several reasons. First, it seems
that the
check qualifies as an "authorized" payment from Conex to Prudent,
under the representative rules of 3-402(c).
This is because, even though Able was responsible for
the debt incurred
to Prudent, these debts were made on behalf of Conex, and were not
Prudent's
personal debts. Having
little background
in that area of law, I have no idea whether Able needed to obtain Board
approval before engaging in these investments, but it is assumed that
he did
not, and the debt to Prudent was a valid Conex debt. For this reason,
the
payment was "authorized" by Conex, and Conex became obligated on the
check to Prudent via 4-402(c) when Able drew the check to Prudent on
Conex's
account.
Since Conex was
a proper
"drawer" on the check, and Bank 1 subsequently dishonored the check
within its midnight deadline, there is no discharge on the check
(3-602), or on
the underlying obligation owed to Prudent (3-310). Therefore, Conex
remains
liable to Prudent on both, under 3-414.
Subcon/Twyne
This is a
tricky issue. Here, it
does not seem that Twyne acted as an authorized representative of
Subcon, under
3-402(a). Note that 3-402(c) does not apply because Twyne did not sign
as
drawer of a check. Twyne was likely not authorized, because he was
apparently
required by corporate rules to first obtain Board approval before
signing
Subcon's name as guarantor of any of Conex's debts. Again, without
proper
foundation in the law of Agency or other such laws, I presume that this
will be
enough for Subcon to establish that it Twyne's signature was not
"authorized." Regarding Twyne's liability as a representative on the
check, it does not seem that he will bear liability since he
unambiguously
showed that his signature was at least intended as made on behalf of
the
Subcon, and not as a signature of his, personally.
3-402(b) (1). Therefore, it does not seem
that either of these parties will be liable in any way on the check.
On the other
hand, if Twyne's
signature does in fact count as an authorized signature of Subcon, then
Twyne
still will not be liable on the signature under 3-402(b)(1). On the
other hand,
Subcon will almost certainly be liable as an Accommodation Party under
3-419. Here, since
the check was
dishonored, and if Conex is now unable to pay on the check due to
Able's
conduct, Prudent will be able to pursue Subcon under 3-419. Subcon qualifies as an
Accommodation Party
since it apparently did not derive any benefit from signing the check,
and
clearly signed to benefit Conex, the accommodated party. As a result, Subcon is
liable in the capacity
in which it signed, which should be as an Indorser.
3-419(b). Because the check was dishonored,
Subcon becomes liable on the check (again assuming that Conex can't
pay) under
3-415(a). Despite this liability, though, Subcon should be able to
escape its
obligation as an accommodation party under 3-605(d).
This is because, by depositing the check a
week early, when Prudent had clear notice that Conex didn't have enough
money
in its account to cover the check (this was the whole reason for
Prudent
requiring Twyne to sign on), Prudent substantially altered the original
agreement. Due to
this
"modification," Conex was unable to pay, and Subcon became liable. It
will be up to Prudent to establish that no loss was caused to Subcon by
this
modification, which seems impossible to prove.
Bottom
line:
Twyne has no liability personally, and Subcon has no liability,
regardless of
whether this is established by showing that Twyne was not an
"authorized" representative, or that Subcon was a valid accommodation
party, who is discharged under 3-605.
^ TOP
Question 2, Answer 3
Checks
payable to Conex
These
checks were deposited on 3/1 and they cleared. Therefore they are not
dishonored.
Checks
payable to Subcon drawn by Conex
These
checks were deposited on 3/1 and presented at Bank 1 (PB) on 3/2. If
Bank 1
failed to give at least provisional credit by midnight of 3/2, then
Bank 2
would be entitled to get payment from Bank 1. (4-302)
If Bank 1
did give provisional credit by midnight of 3/2, then Bank 1 has
midnight
deadline of midnight of 3/3, or may have extended deadline under Reg
cc. Since
Bank 1 notified Bank 2 of dishonor by ¾ and delivered check
by closing of the
next banking day following the midnight deadline, it seems that Bank 1
has met
the requirement of Reg cc.
So, the
Bank 1 dishonored the checks payable to Subcon in time. However, Conex
may have
an action against Bank 1 via the wrongful dishonor (4-402). However,
Bank 1 may
raise the defense under 4-302(b) that the person seeking enforcement
presented
or transferred the item for the purpose of defrauding the Bank 1. Since
both
Able and Twyne, as representatives of the Conex and Subcon, engaged in
check-kiting, this defense may be viable.
If the
defense is accepted by the court, then the liability of these checks
would fall
on Subcon because it can not collect on the check. There does not seem
to be a
legitimate underlying obligation against Conex other than the agreement
between
Able and Twyne.
If the
defense by Bank 1 is not accepted
by the court. Then Bank 1 can be held liable for
wrongful dishonor by
Conex including the consequential damages (4-402). However, Subcon has no claim on the
check against Bank
1.
Prudent’s
Check
Prudent’s
check was presented on 3/4 and was dishonored in ordinary
course. Presumably, the
midnight deadline was met. Bank 1 does not have to pay the check via 3-408.
However, it may be liable to Conex for wrongful dishonor if the account
balance
was sufficient, then NSF is not a wrongful dishonor, (4-402(a)). Unless
Bank 1
has agreed to pay overdraft.
It is
unclear whether the check was post-dated, but it does not matter
because a bank
may process post-dated checks unless the customer gave bank prior
notice.
Since
Prudent has no claim against Bank 1, he can bring an action against
Conex (via
agency of Able) for the underlying obligation itself, or as the drawer
of the
check (3-414). The drawer is obliged to pay the check according to its
terms at
the time it was issued. Prudent can also hold Subcom liable as an
indorser
under 3-415. Twyne indorsed the check as “Twyne, for Subcon,
Inc.” and that
would be sufficient to be a signature by representative under 3-402,
given that Twyne is the treasurer of Subcon. The issue is whether Twyne
would
be personally liable along with Subcon. If the signature is deemed
authorized
by Subcon, the representative may not be liable 3-402.
The fact that
Twyne is the treasurer may support that the signature is authorized,
but the
fact that he was engaged in wrongful conduct may justify holding him
jointly
liable.
Prudent can
hold Conex and Subcon jointly and severally liable under 3-116. If
Subcon pays
the damage, then Subcon may be able to claim against Conex as
accommodation
party against accommodated party. 3-605. However, if Conex pays, then
Conex
would not be able to claim against Subcon.
It is
an
issue of fact whether Able and Twyne were acting as representatives of
their
companies Conex and Subcon. Due to their positions in their respective
companies as assistant treasurer and treasurer, it is likely that they
will be
found as acting as representatives. Their signatures will be deemed
authorized
signatures under 3-402, and the companies will be held liable for the
actions
of the employees.
^ TOP
Question 3, Answer 1
The policy
arguments for making available means to stop-payment or reverse
payments are
the following. Customers need such means to correct mistakes or errors
that
they system has not caught or the human errors made by the parties. It
is also
a useful consumer’s tool against merchants who behave badly
and sell inferior
products. And such stop payment or reversal of payment is necessary to
effectively combat theft and fraud made on the consumers. Stop-payment
will
shorten the duration of theft via credit cards and other means of
payment.
Reversal of payment is an effective remedy while the stolen fund has
not been
withdrawn from the crook’s financial institution.
On the
other hand, consumers may abuse these measure by using them to enforce
their
“buyer’s remorse” on an otherwise
legitimate commercial transaction. They may
also stop-payment to unjustly gain an advantage over contractual
matters
already made with the payee. Such abuse should be considered and
curtailed. I
would argue that a single rule for final payment is not
appropriate. The
amount of leeway given for stopping or reversing the payment should
depend on
the type of parties using the payment method, the speed desired or
intended
with the payment method, and also the cost of stopping or reversing the
payment.
If the
parties who use the payment method are mostly consumers who are not
sophisticated, then the law should protect them by allowing leeway for
shopping/reversing payment. Consumers who may fall prey to identity
theft
should also be allowed this leeway. The cost of such theft is better
spread
among the society via the large financial institutions than born by a
single
person. A single person may be crippled by such loss. If the parties
are large
institutions then the stopping/reversing of payment should be
restricted. For
example, the limited right of stopping/reversing payment under Article
4A seems
to be appropriate given that the parties are sophisticated financial
institutions that can fend for themselves.
The
intended speed of the payment method should also play a part in whether
leeway
is given to stopping/reversing payment. In a slow payment method (e.g.
checks),
where consumers typically use the payment method, ample protection
should be
afforded. Stopping payment is rather convenient and easily feasible in
such
slow payment methods.
Implementing
step-payment in a system intended to be a speedy way to make payments
can be
difficult if not impossible. Since the parties have a choice of which
methods
they could use to make payments, they could be reasonably held
responsible for
the particular method that they choose.
The cost of
stopping or reversing the payment may vary with the type of payment
method. The
immediate cost of looking up entries are lower where they payment is
largely
automated and high where human inspection is necessary.
The cost to
society due to the liability and the uncertainties of liabilities may
also be
large. For example, if the liabilities were high for intermediary banks
in 4A
transactions, they would not be a party to the transaction. Therefore,
the
society would be deprived of a useful, speedy way of making payments
via 4A
transactions.
In
conclusion, s single rule for final payment is not appropriate. In
transactions
where primary parties are consumers, finality of payment should be
relaxed
(e.g. credit card uses). Where as the primary users are sophisticated
institutions (e.g. 4A transactions), finality is desired because it
reduces the
cost of transaction, both in terms of processing and cost of risk.
Speed
intended for making the payment should also be considered.
Lastly,
whatever the payment method, there should be some provision for
stopping and
reversing payment for errors made in good faith.
^ TOP
Question3, Answer 2
First, there is
clearly a need for
some sort of final payment item that is not simply cash. Cash is
subject to
theft and loss, hard to trace, and does not come in arbitrary (and
arbitrarily
large) denomonations.. The ability to undertake all sorts of commercial
transactions requires some form of transactional (by that I mean
something with
transactional finality, or "durability") payment method. There is a
need for this both electronically (for closings) as well as a paper
form for
smaller transactions and for liquidity.
There is also a
need for payment
schemes that protect the consumer, as evidenced by the growth in credit
card
revenues of internet retailers and of schemes like "paypal" that
provide some insurance with the payment. Without these, the range of
those able
to conduct business over distances, and those willing to buy from them,
would
be severly limited. Only large companies with trusted names would be
able to
solicit businness since they would be trusted to deal fairly with an
aggrevied
consumer.
I
don’t think that the
differenciator between these is necessarily bank v. non-bank, or debit
v.
credit (for example). The differenciation between the former and latter
is
mostly on the consumer (latter) vs. business (former), but not
entirely. Certainly
in the area of micopayments, consumers would be willing to accept
finality if
the overhead fees would be appropraitely reduced (especially
considering that
they are not likely to pursue claims for pennies anyway--when was the
last time
you callled the coke machine company to make a claim for a quarter that
the
machine ate??) Additionally, for some transctions (the sale of a house
for
example) the consumer values the transactional quality of unrevocable
payments.
The key here, which is unfortunately absent in the world of EFTA/TILA
Debit/credit distinction, is transparency. Given a robust enough
market, the
rules should be allowed to vary, both by type and by contract, as long
as all
parties have a good handle on the finality of payments.
One alternative
would be third party
insurance. Thus some credit card companies (AMEX on their credit
products for
example) will offer the ability for you to return products to them for
a
refund, when the retailer refuses. The consumer thus gets the effective
ability
to achieve most** of the goals of a reversal of payments when the
product is
unsatisfactory. Of course insurance just shifts the costs from the
merchant to
the industry as a whole (and creates various moral hazards for both the
merchant (to sell shoddy goods) and the consumer (to return items
without
cause)).
Now, given that
we will have some
non-final payment methods, the question of what rights we should give
them is
paramount. For the purpose of paper notes, the right to stop payments
must
depend on some easily distinguishable characteristic of the note
(although it
is not clear, in this age of 24X7 internet, that this must be inherent
in the
note, or simply something that can be looked up on a website). If it is
something that can be looked up (for example by entering a check number
and
amount on some website and getting the check "certified", then the
note should be revocable until such time as a request for the status of
the
note is returned "certified" (sort of like schrodinger's cat I
guess). Similar for any ambiguous electronic payment (that is one that
might be
durable or not)--we can allow revocation until such time as the
receipient has
been notified of the receipt, unless it is clear that any payment is
provisional.
We might also
distinguish between push and pull orders. A push order is much less
likely to
be reversed due to mistake than a pull order (one hopes). Again I think
transparency is the only requirement, as the market will likely steer
the right
application to the right products if a sufficient range exist.
** minus the
punative goal of punishing the seller of shoddy goods.
^ TOP
Question 3, Answer 3
Good morning
all. I have been asked
to discuss the merits of a comprehensive model payments law that would
cover
all methods of payment, as well as to discuss the possible elements of
such a
law relating to my area of expertise: finality of payment. I will address each of
these points in order.
Is a uniform
payments law desirable?
To start, I
recommend strongly
against a uniform payments law, for several reasons.
First is the problem we will face in
designing a scheme that will cover both banks and non-banks. As you already know, the
principal areas of
concern here relates to the solvency of the institution, as well as
consumer
and merchant confidence. Regarding solvency, banks are covered by the
FDIC.
This coverage extends to depositors. Non-banks have no such advantage,
and thus
the risks associated with transferring money with them, or more
significantly,
in holding asset accounts with them, are greatly increased. Any system of regulation
covering both types
of institution would have to consider the solvency risks. On the one hand, a heavily
pro-consumer
regime, which would be necessary to protect consumers from non-bank
insolvency,
might burden non-banks so much that it will end up barring non-banks
from
entry. This will,
in turn, reduce
competition and perhaps lead to increased prices for consumers and
greater
inefficiency. On the other hand, a lax system will benefit banks, but
will
perhaps expose consumers to unnecessary risks of non-bank insolvency. Designing a "middle
ground" system
would likely be ineffective. If it were simple to design such a system,
then
the FDIC would likely already be insuring qualifying non-banks, as well.
This leads to
the second point
regarding consumer and merchant confidence.
Since consumers and merchants are much more likely to
trust their own
banks, a regulatory scheme governing banks does not have to worry so
much about
increasing consumer confidence in the system, and can therefore allow
the
parties much more freedom to contract around the default rules. In contrast, consumers are
probably less likely
to trust non-banks, which partially explains why smart card systems
haven't
quite caught on yet, and therefore a more restrictive regime may be
necessary
to convince consumers and merchants that the system is safe. Since freedom of contract
is generally
encouraged by most existing payment systems, it seems that separate
regulatory
systems would be in order here.
Another problem
that I have with
adopting a uniform system of payments concerns the problems that will
arise in
attempting to design a system that covers both debit and credit orders. This will not be
impossibly difficult, as
Regulation E shows us, but Reg E is still in its early stages, and we
do not
yet know how effective it will be.
More
to the point, we must acknowledge that debit transfers are
substantially
riskier than credit transfers. This
is
because, in a credit transfer, an unauthorized payment is easier to
detect and
stop. On the other
hand, an unauthorized
debit transfer may not be detected until substantially more time has
passed,
since funds will be directly withdrawn from a consumer's account
without any
"lag" time.
Further, and
most significantly, is
the problem that regulators will face in designing a uniform payments
law that
will cover emerging technologies, as well as forms of payment that have
not yet
been developed. Regarding emerging technology, such as smart cards and
EBPP,
regulators have struggled enough to either fit them into existing
systems, or
to create a new set of rules governing their use. Developing a single
system
that will cover all of these systems seems much more difficult. In addition, new methods
of payment are
constantly being developed, and again, as these emerging systems have
indicated, as well as our past experience with the development of
wholesale
wire transfers - which required an entirely new UCC article - it is
near-impossible to come up with a system that adequately addresses all
aspects
of the varying forms of payment.
Last, we should
also worry about
consumer information costs. That
is, if
we attempt to develop a single set of laws governing all payment
systems, we
will likely end up with a massive volume, similar to the tax code, that
is
constantly changing as lawmakers discover holes and inconsistencies in
the
text. In fact, a single section of the tax code, dealing with interest
free
bonds, requires thousands of pages of regulations and a number of
highly
specialized lawyers to make any sense of. In short, the cost to
consumers of
understanding such a statute are incredibly high. Although the UCC and
other
regulations are divided, which might at first glance indicate that they
are
inefficient and sloppy, they are divided for a reason.
If parties to a transaction want to send a
check, they turn to about 100 pages in the UCC.
If they want to use a consumer debit transfer, they look
to about 30
pages of EFTA. Although
the text can be
burdensome, it is much easier to digest than a single, massive, body of
law
that will by necessity be so generic as to require a mass of
supplementary material. Even
if the only issue subjected to the
uniform regulations is " finality," this is perhaps the most
important, and most cumbersome, issue of all payment systems.
For these
reasons - again, the
primary ones being administrative inefficiency and consumer information
costs -
I urge the ALI to avoid adopting anything that I say for the rest of
this
presentation, and to continue the longstanding practice of developing
separate
regulatory schemes for individual forms of payment.
Proposals for a
uniform body of law
If the panel
does not support my
earlier recommendation, then I shall now offer a few proposals for how
a
uniform system of finality laws might be constructed.
As a threshold
matter, the most
important consideration here is that there are many forms of payment.
Plus, new
forms of payment are constantly emerging that are entirely different
from their
predecessors. Whether and in what form these systems will survive, is
yet
another consideration. Because of these issues, any uniform system must
be
developed with an eye to the most recently developed, accepted forms of
payment. But what
is to become of the
"old" forms, you ask? Well, my proposal - which again, I do not
support - is that the regulatory scheme will be highly amenable to
modification
by private agreement. In
fact, it will
have to be, because in order to avoid meeting massive resistance from
consumers, merchants, and financial institutions, these parties will
have to be
able to adjust the laws to fit their current practices, or the system
costs in
making adjustments will be massive.
For this
reason, I start with the
issue of contractual modification.
I do
not propose leaving this wide open to the parties. Although I feel
that, in the
case of existing payment systems, the finality rules would eventually
just
about mirror the existing rules for the various systems, I am concerned
about
emerging systems. Here,
we do not want
to leave the new systems entirely to market forces, because market
forces are
not perfect, particularly in the consumer-financial institution
relationship.
That is, most consumers are not sophisticated in the knowledge of
payments law,
and will therefore be likely to accept the terms offered by bank and
non-bank
financial institutions. In short, market forces will lead to heavily
pro-financial institution laws. For
this
reason, I envision a rule that is similar to 4-103, allowing for
modification
of the default rules, but denying modifications that affect the
institution's
ordinary care, good faith, and damages requirements. All other
modifications
would be subject to judicial interpretation, and a body of law relating
to the
separate, new, payment systems would eventually emerge.
But as mentioned above, I do not like the
idea of a uniform system for precisely this reason - it will require a
tremendous
external body of law and regulation merely to interpret it in the
context of
each individual system.
Turning now to
the issue of
finality, and again operating on the premise that the uniform regime
would have
to be slanted toward emerging systems, such as smart cards, and rely on
private
agreements to bring the finality rules to their current state for the
established payment systems, I will address both the issue of stop
orders, and
the issue of chargebacks. Both
of these
instructions would, of course, come from the payor in the case of
credit
transfers. To
side-track for a moment,
this points back to a reason that I mentioned for opposing a uniform
system -
the rules would have to be different for debit transfers, where the
order comes
from the payee, much as we see with ACH transfers.
But assuming
that we are only
dealing with credit transfers and the rights of the payor, here is how
I
foresee the uniform regulatory scheme developing.
Since we presumably want to encourage the
adoption of new payment systems, sellers will need to have confidence
in
accepting them. Thus, we will not want to rely on a personal check
theory, for
finality, because these rules substantially favor payors. Instead, we
may want
to create rules that mirror those for cash: that is, we should
encourage
immediate finaity o fpayment, such that once a payee receives funds,
either
directly from payor or through a participating financial institution,
payor is
obligated to pay and cannot dishonor.
Such a rule would largely mirror that found in
Regulation E, which
denies chargebacks after a transfer is completed.
In short, chargebacks should be denied once a
funds transfer is completed, all though, yet again, this will be
subject to
modification by private agreement.
Last, regarding
stop orders, this is
a tricky issue. I
propose that any
uniform body of payments law should require two things, somewhat
related to
finality. That is,
since regulatory
authorities are always concerned with detecting crime and money
laundering, any
"open" payment system (where payment can be made to 3rd parties)
should require that transfers be traceable to individual users, and
should
allow merchants to identify the card at the point of sale. These rules will have to
be balanced with
privacy issues, but this is not impossible.
Assuming that these rules are in place, a stop order
will be allowed if
cancellation of the order is received in time for the issuer/financial
institution to act, and in time to make this information available to
the
merchant (somewhat analogous to 4-303).
This would balance the payor's interest of having some
chance of
stopping the transfer, with the seller's interest in securing finality. If the payor wants more
time to make this
decision, she can choose a system such as paper checks that take longer
to
arrive and clear. Otherwise,
she can use
a system of more rapid transfer.
Thank
you for your time.