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Assignment #11 - The Wire-Transfer System

A. Introduction

B. How Does It Work?

1. Initiating the Wire Transfer: From the Originator to the Originator’s Bank

Figure 11.1 - Payment by Wire Transfer
Trustmark Ins. Co. v. Bank One (DOC | TXT | HTM)
Banco de la Provincia v. BayBank Boston N.A.

2. Executing the Transfer: From the Originator’s Bank to the Beneficiary’s Bank

(a) Bilateral Systems (Including SWIFT)
(c) Fedwire

Figure 11.2 - Multilateral Netting on Chips
Figure 11.3
- Sample Fedwire Message (text)

3. Completing the Funds Transfer: From the Beneficiary’s Bank to the Beneficiary

C. Discharge of the Originator’s Underlying Obligation

D. Finality of Payment

Aleo International, Ltd. v. Citibank, N.A.

Problem Set 11

Figure 11.1
Payment by Wire Transfer



Figure 11.2
Multilateral Netting on Chips



Figure 11.3
Sample Fedwire Message



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Problem Set 11

11.1. Your first appointment this week is with Nicholas Nickleby, who tells you he has a problem related to a payment from Walter Bray. Bray owed Nickleby $100,000 on a promissory note; the entire sum was due to Nickleby on April 1. Accordingly, on Monday March 30, Bray asked his bank (Gride National Bank) to send a wire transfer to Nickleby’s account at Cheeryble State Bank. Gride sent a telex to Cheeryble executing Bray’s request on the morning of Tuesday March 31, calling for payment to Nickleby on April 1. Pursuant to a preexisting agreement between Gride and Cheeryble, Cheeryble was entitled to obtain payment for that order from Gride’s account at Cheeryble. At the time, that account contained more than enough funds to cover the Nickleby order.

Unfortunately, the Nickleby order was misplaced on the desk of the Cheeryble clerk (Timothy Linkinwater). Accordingly, Cheeryble did not accept or reject the order and did not notify Nickleby that the payment from Bray had come in by wire. On Friday, April 3, the Comptroller of the Currency closed Gride and appointed the Federal Deposit Insurance Corporation receiver to supervise the winding up of Gride’s affairs. Because Gride had withdrawn all of its funds late Thursday afternoon, no funds remained in the Gride account at Cheeryble.

(a) Nicholas is frustrated that he has not yet been paid. Given the fact that it is now April 6, five days late, can he pursue Bray for the $100,000? Alternatively, if he cannot sue Bray for the money, Nickleby wants to know if he is entitled to payment from Cheeryble. UCC §§ 4A-209(b), 4A-401, 4A-404(a), 4A-406.

(b) How would your answers to Nickleby differ if Linkinwater had rejected the order immediately after Cheeryble received it? {You should assume that Linkinwater’s rejection of the Nickleby order was not a breach of Cheeryble’s agreement with Gride.} UCC § 4A-210(a).

(c) How would your answers to Nickleby differ if the payment to Cheeryble had been made by Fedwire instead of through an agreement that Cheeryble debit Gride’s account with Cheeryble? UCC §§ 4A-209(b)(2), 4A-209 comment 6, 4A-403(a)(1); Regulation J, § 210.29(a).

11.2. As you walk back into your office after your meeting with Nicholas Nickleby, your secretary tells you that Ben Darrow is holding on the telephone. When you pick up the telephone, he tells you that he is handling the bank’s wire-transfer desk today while another officer is on vacation. Because he has had only outgoing wires during the past hour, FSB’s working balance at the Federal Reserve has been declining constantly. As Ben is speaking to you, the computer terminal that shows that balance indicates that the current balance is down to $3 million. The reason for Ben’s call to you is that Ben has just received a request from another officer to send out a wire for $5 million. When Ben told the officer that FSB did not have enough money to send the wire right now, the officer told Ben that the bank regularly sends wires out for up to $20 million more than it has on deposit at the Federal Reserve. Ben is calling you because he wants to know how FSB possibly could send out a wire paying money that it does not yet have. Can the other officer be correct? Why would the Federal Reserve let FSB do this?

11.3. Worn out from your hard morning, you decide to have lunch at the Drones Club. Unfortunately, you have not even reached your table when you see Jeeves approaching. Recalling your discussion with Jeeves in Problem 8.5, you resolve never to eat lunch at the Drones Club again. Nevertheless, you graciously agree to entertain his explanation of Bertie Wooster’s problem of the day. It appears that Bertie has continued his never-ending search for the perfect antique silver cow creamer, as well as his perennial indecisiveness. Today’s problem arose yesterday at lunch when Bertie saw an advertisement in which one Galahad Threepwood offered a particularly elegant silver cow creamer for “only” $450,000. Having consumed a few more martinis than most would consider conducive to proper business judgment, Bertie immediately telephoned Threepwood and told him he wanted the creamer. He then called his banker and directed him to send a $450,000 wire to Threepwood for the purchase price (using his general business account).

When Bertie woke this morning, he learned from Jeeves that the Threepwood creamer could not possibly be worth more than $75,000. Accordingly, he wants you to “stop payment” on the wire. You agree to call Bertie’s banker to inquire about the matter. When you do so, you learn that Bertie’s bank sent the wire late last night (apparently by means of some bilateral arrangement between the banks), and that Threepwood’s bank has received the wire but not yet notified Threepwood or taken any other action. Can you cancel the wire for Bertie? UCC § 4A-211 & comment 3.

11.4. At the end of the day, Ben Darrow calls you back to ask your advice about two other mistakes that he fears he made during the course of the day. The first relates to a wire-transfer request that Carol Long submitted asking the bank to transfer $750,000 from her checking account. She explained to Ben that she was transferring the funds out of her account at FSB (which does not bear interest) to an account at Wells Fargo that bears interest at 8% per annum. Although she submitted the request in time for it to be executed today, and although the funds were in her account at the time, Ben nevertheless neglected to send out the wire. As he calls, it is too late to send the wire out until tomorrow morning. He is getting ready to call Carol and apologize, but before he calls her he wants to know what damages she can seek from the bank. In particular, he wants to know if Carol’s damages will be likely to exceed the interest that Ben’s bank can earn by investing the funds until the time that it transfers them as Carol requested. Assuming that the bank’s agreement with Carol does not address the issue of damages, what do you tell Ben? UCC §§ 4A-210(b), 4A-506(b), 4A-506 comment 2.

11.5. Ben Darrow’s last problem relates to a payment order that he received by electronic mail this morning (April 6) from Matacora Realtors, an accountholder at his bank. The message asked FSB to make a $500,000 payment to a designated account of Jasmine Ball that also is at FSB. Priding himself on his efficiency, Darrow immediately sent back a message accepting the order, deducted the funds from Matacora Realtor’s account, and called Jasmine to tell Jasmine that the funds were available. Jasmine promptly came down to FSB and had the funds wired to an account in her name at a bank in Mexico. Darrow became worried a few minutes ago when he received a second message from Matacora Realtors canceling the Ball payment order. On reviewing the file, Darrow noticed that the payment order that he received this morning stated at the top: “Transmission Date: April 6; Payment date: April 8.” Darrow is concerned because he is not sure that he can recover the funds from Ball. Does Darrow have to return the funds to the account of Matacora Realtors? UCC §§ 4A-209(b) & (d), 4A-211(b), 4A-401, 4A-402(c) & (d).

11.6. Your last call of the day is from Carl Eben at Riverfront Tools, Inc. (introduced in Problem Set 2). His problem arises out of a contract with California Pneumatic Tools (“CPT”). Riverfront sold CPT $450,000 worth of tools. The contract called for CPT to pay for the tools with a cashier’s check from Wells Fargo. Notwithstanding that provision in the contract, CPT instead attempted to wire funds to an account of Riverfront at Texas American Bank (“TAB”). Riverfront had accepted payment by transfers into that account in several earlier contracts, but has not been using that account for several months because of Carl’s decision to phase out Riverfront’s relationship with TAB.

In any event, Wells Fargo (CPT’s bank) accepted CPT’s payment order, debited CPT’s account, and executed the transfer to TAB. TAB, in turn, notified Carl that it had received the funds for Riverfront. Carl immediately called CPT to complain, but later that afternoon (before CPT could respond) the Comptroller of the Currency closed TAB and appointed the Federal Deposit Insurance Corporation receiver to supervise the winding up of TAB’s affairs. The receiver informed Carl this morning that Riverfront probably would obtain very little from the account, and certainly would be unable to obtain the entire $450,000. Carl wants to know if Riverfront still has a claim against CPT. What do you tell him? If he does have a claim against CPT, does CPT have any remedy? UCC §§ 4A-209(b)(1), 4A-402(c) & (d), 4A-404(a), 4A-406(b).

Assignment Update



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