A. The Payor Bank's Obligation to the Payee
Outdoor Technologies, Inc. v. Allfirst Financial, Inc.
B. The Process of Collection
1. Obtaining Payment Directly
Figure 3.1 - Direct
Presentment
2. Obtaining Payment Through Intermediaries
(a) Payee/Customer to Depositary
Bank
(b) Depositary Bank to Payor Bank
(i) Multilateral arrangements
(clearinghouses)
Kimberly A. Allen Trust v. FirstBank
of Lakewood, N.A.
Figure 3.2 -
Clearinghouse Collection
(ii) Bilateral Arrangements
(direct-send and correspondent clearing)
(iii) Collection through the Federal
Reserve system
Figure 3.3 - Direct-Send Collection
Figure 3.4 - Federal Reserve Collection
Figure 3.5 - Sample EARNS Notice
Figure 3.6 - Return
Obligations
NBT Bank v. First National Community Bank
Problem Set 3
Problem Set 3
3.1. One Tuesday morning Tertius Lydgate (from Problem Set 1) calls with a complaint about
Bulstrode’s treatment of a $1,000 check that Lydgate deposited into his
bank account on the preceding Monday afternoon. The check was drawn on
an account at a branch of Bulstrode located in Philadelphia.
Lydgate deposited the check into a branch of Bulstrode in Boston,
Massachusetts at about 3 p.m. Lydgate tells you that a sign on the
counter indicated that items received after 2 p.m. would be treated as
received the next day, but doesn’t see why that matters. “After all,
either they got it Monday or they didn’t, right?” The Boston branch
apparently gave Lydgate a provisional settlement for the check
immediately and forwarded the check to the Philadelphia branch on
Wednesday morning. The Philadelphia branch dishonored the check on
Thursday afternoon, returning the check to the Boston branch by a
courier that arrived back at the Boston branch before midnight on
Thursday. On Friday, the bank called Lydgate to advise him that it was
revoking the provisional settlement and removing the funds from his
account. Muttering something about “midnight deadlines,” Lydgate wants
to know if Bulstrode acted promptly enough for its dishonor to be
effective. UCC §§ 4-104(a)(10) & comment 9, 4-107 & comment 4, 4-108 &
comment 1, 4-215(a)(3) & comment 4, 4-301(a) & comment 2, 4-302(a); Regulation CC §§ 229.30(a).
3.2. Late one Thursday afternoon, Ben Darrow (your friend from
Problem Sets 1 and 2) calls you frantically and wants to know what he
should do about a bad check his bank received this morning. Bud Lassen
came in first thing this morning and deposited a $10,000 check written
by Carol Long. When Bud deposited the check, Carol’s account contained
only $100. Accordingly, the check was sent to Darrow for action. Darrow
promptly placed a hold on the funds in Bud’s account and placed a
telephone call to Carol to see whether Carol would deposit funds to
cover the check.
(a) Later in the morning, Bud came back down to the bank and
attempted to cash a check for the total balance in his account
($12,000, including the funds from Carol’s check). Because Darrow had
placed a hold on the funds, the teller refused to cash the check. Early
in the afternoon, Darrow learned that Carol had left town indefinitely
to work on a construction project several hundred miles away.
Accordingly, Darrow doubts that he will be able to get funds from Carol
to cover the check. What should Darrow do? UCC §§ 4-214(c), 4-215(a),
4-301(a) & (b), 4-301 comment 4.
(b) Assume instead that the bank allowed Bud to cash Carol’s
check when he first presented that check in the morning. Where would
that leave the bank? UCC §§ 4-215(a)(1), 4-301(a).
(c) Finally, assume that Darrow neglected to place a hold on the
funds, perhaps because he thought that the bank’s computerized
check-processing system would do that automatically. As a result, the
teller readily cashed Bud’s check when Bud returned late in the
morning. Now what is the bank’s situation? UCC §§ 4-214(c), 4-301(a) &
(b), 4-301 comment 4.
3.3. Recall the facts of the Colonial Bank case from
Assignment 2: Shelly is running a check-kiting scheme through First
National Bank (“FNB”) and Colonial Bank. On Tuesday February 11 First
National presents $1.5 million of checks to Colonial for payment. The
checks had been deposited at First National and drawn on one of the
accounts of a Shelly entity at Colonial. Although Colonial is concerned
about the possibility that something was amiss, Colonial does not
dishonor the checks on Tuesday or Wednesday, largely because an officer
at Shelly’s company assures the Colonial loan officer that everything
is fine. Thursday morning, however, Colonial discovers the seriousness
of Shelly’s misconduct and attempts to dishonor the checks at that
time.
Colonial lost the case because it had delayed its return of the
checks past midnight Wednesday. If you had been called in by Colonial
early Thursday morning, could you have suggested anything that might
have helped its chances? UCC §§ 4-104(a)(10), 4-215(a)(3), 4-301(a),
4-302(a); Regulation CC, § 229.30(c)(1).
3.4. The day after you handle Problem 3.2, Ben Darrow calls
you back with another question for you, this one related to Carol’s
account. What happened here is that Carol deposited a $2500 check from
Jasmine Ball on Monday September 9. The check was drawn on Ball’s
account at TownBank in Los Angeles. First State Bank of Matacora (FSB)
gave Carol a provisional credit for the Ball check on the date that
Carol deposited that check and forwarded the check for collection
through the Federal Reserve Bank in Dallas. Under ordinary conditions,
that would get the check to TownBank late Tuesday night (during
Townbank’s Wednesday banking day). At 3:00 p.m. on Friday afternoon,
September 13, FSB received an electronic notice of nonpayment from
TownBank, indicating that it was bouncing the check because Ball’s
account had insufficient funds to cover it. FSB responded by
immediately charging the $2500 back to Carol’s account and mailing
Carol a notice that it had removed the funds from Carol’s account
because Ball’s check had bounced.
On Monday morning (September 16), a check in the amount of $2,000 was
presented against Carol’s account. Because of the chargeback on the
Ball check Carol had deposited, FSB dishonored Carol’s check. On
Wednesday morning, September 18, FSB received the Ball check from
TownBank by regular mail in an envelope bearing a Monday postmark.
Reviewing Carol’s account in connection with the Lassen transaction
discussed in Problem 3.2, Darrow became concerned that the bank might
have acted improperly in dishonoring Carol’s $2,000 check. What do you
say? Did TownBank meet the midnight deadline of Article 4? The return
and notice requirements of Regulation CC? Is there anything else you
need to find out from Darrow? UCC §§ 1-201(38), 4-214(a), 4-215(a),
4-301(a) & (d)(2); Regulation CC, §§ 229.30(a)(1), 229.33(a), 229.34(b) & (d),
229.38.
Problem 3.5. Same facts as Problem 3.4, except that the postmark on the envelope with the Ball check was Friday rather than Monday.
New Problem 3.5A Same facts as Problem 3.5, but assume now that TownBank sent no notice, and thus that FSB honored the $2,000 check on Monday morning.
3.6. Having dealt with all of Ben Darrow’s problems, you come
back in the office on Friday morning to find an urgent phone message
from Jodi Kay at CountryBank. When you call her back, Jodi tells you
that she has a large problem with a long-time customer named Carl Eben.
Carl wrote a check for $10.37 to purchase some materials at Deuce
Hardware. Deuce’s sales terminal mistakenly imprinted a MICR line
indicating that the check was for $1,037,000.00. When Deuce deposited
the check in its account at Hunt Bank, Hunt did not examine the check
manually, but instead blindly deposited the million dollars to Deuce’s
account and forwarded the check to CountryBank. Because Jodi had
authorized complete overdraft protection for Carl’s account,
CountryBank paid the million dollars to Hunt Bank and charged Carl’s
account; the computer generated and mailed an overdraft notice to Carl.
Carl called Jodi to object this morning when he got the notice. When
Jodi called Hunt to complain, Hunt pointed out that the mistake was
made by Deuce, not Hunt. Jodi asks you what she should do. UCC §
4-209(a) & (c); Regulation CC, § 229.34(c)(3).
3.7. At the end of your conversation, Jodi mentions in
passing a recent incident that caused a problem at the bank. The local
clearinghouse has a rule that checks presented to a clearinghouse
member by the clearinghouse before 11 p.m. become final at 12 noon the
next banking day. A problem occurred because one of her bankers became
stuck in traffic one morning. Unbeknownst to the banker, several
notices were on his computer regarding checks written by his customers
against insufficient funds. When he arrived at 12:30 in the afternoon,
it was too late for him to act on the checks. The bank’s system
proceeded to honor the checks. The bank was unable to collect the funds
from the drawers of the checks and thus took a loss on the incident.
Jodi wants to know what you think about the rule. She knows that the
bank has a representative on the drafting committee for clearinghouse
rules and wants to send a memorandum to that representative proposing
that the bank have the deadline pushed back until later in the
afternoon. {Jodi proposes 6 p.m.} Can you think of any reason why such
a change might trouble the bank? If that change won’t work, can you
think of anything else she could do to prevent that problem from
occurring in the future? UCC § 4-104(a)(10), 4-215(a)(3) & comment 7,
4-301(a) & comment 2; Regulation CC, §§ 229.10(c)(vii), 229.12(b).
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