A. Fraud

B. System Failure

C. International Transfers

1. Choice-of-Law Rules

Grain Traders, Inc. v. Citibank, N.A.

2. Error and Fraud in SWIFT Transactions

Problem Set 13

Problem Set 13

13.1. Your client Ben Darrow (the banker from FSB that you met most recently in Problem Set 12) calls you to discuss a funds transfer services agreement that he is negotiating with his customer Carol Long. FSB currently is marketing to its customers a newly developed AccuWire system that uses sophisticated encryption and multiple passwords to provide a high degree of security in wire transfers. When Ben started to describe the system to Carol, she said she was not interested (right after he told her that it would cost her “only” $3,500 to have the system installed). She says that she trusts her employees completely, believes that her workplace is totally secure, and has no interest in spending money on some expensive security procedure “cooked up by some hick from North Carolina,” apparently a contemptuous reference to the out-of-state bank that recently acquired FSB.

Carol tells Ben to draw up an agreement stating that FSB is authorized to act on any written instruction that it receives that appears to reflect a signature that matches the specimen signature she has provided the bank. Ben wants your help drafting the agreement. Does the agreement that Carol has proposed expose Ben or FSB to any significant risks? UCC §§ 4A-201, 4A-202, 4A-203, 4A-501(a).

13.2. Recall the facts of Problem 11.3, in which Bertie Wooster was unsuccessful in his attempt to cancel a wire transfer that he was using to purchase an antique silver cow creamer. Suppose now that Bertie tells you that Threepwood (the seller of the creamer) defrauded Bertie in the underlying sales transaction. The fraud is in claiming that the cow creamer is “antique.” Jeeves has discovered through examination of a smith’s mark on the creamer that the creamer was manufactured less than ten years ago. By the time Bertie approaches you with this question, the beneficiary’s bank has notified Threepwood the beneficiary of the incoming transfer, but Threepwood has not yet withdrawn the funds. Would Threepwood’s fraud enable Bertie to keep the beneficiary’s bank from paying the funds to Threepwood? UCC §§ 4A-209(b)(1)(ii), 4A-211(c), 4A-404 comment 3.

13.3. Shortly after Roderick Spode’s discussion with you about the risk of unauthorized checks being written on his account (see Problem 5.2), the bank that he uses approached him with a proposal that Spode start using wire transfers to make large payments to his suppliers. Spode thinks the proposal sounds too good to be true. The bank wants to install software on Spode’s office computer that would allow Spode to contact the bank over a telephone line and authorize payment orders directly to Spode’s suppliers. The bank is telling Spode that the payments will be much safer and more certain than payments made by mailing checks. Because the software will allow Spode to send his orders on-line in the same format in which the bank will retransmit them, the software minimizes the chances of the bank making a mistake in entering the order into its system. Finally, the bank argues, Spode has no reason to fear unauthorized orders because Spode will be the only one that knows the password. Spode wants to know if there is a catch. What do you say? UCC §§ 4A-202, 4A-203, 4A-205, 4A-207, 4A-402.

13.4. First on your schedule this week is a closing at which Bill Robertson is selling one of his grocery stores to a consortium of Canadian investors put together by Rick Compo. Conforming to his usual habit, Bill peppers you with questions at the closing trying to make sure that you have thought of everything bad that could happen to him. Just before he signs the papers, he asks about the security of the payment coming to him by wire transfer: “I’ve never thought about it before. I’ve just assumed it was safe. Am I absolutely safe if I go ahead and convey the property based on my bank’s advising me that it has received the purchase price by wire?” What do you tell him? UCC §§ 4A-209(b), 4A-404(a), 4A-405(d) & (e), 4A-405 comment 3.

13.5. Recall the facts of Problem 12.1, in which Josiah Bounderby asked his bank Cheeryble Brothers to wire $100,000 to an account of James Harthouse at Barclay’s. Unfortunately, Bounderby’s order included a number for Harthouse’s account at Barclay’s. Although the account number was incorrect, neither of the banks noticed the mistake, so the money was deposited in the designated account (which belonged to a Thomas Gradgrind). Suppose now that Bounderby and Cheeryble Brothers are located in Manhattan, that Harthouse is located in Munich, and that Barclays is located in London. Also assume that England has adopted the UNCITRAL Model Law on International Credit Transfers and that Germany has not adopted any wire-transfer law, but instead relies on common-law agency principles. Can Josiah recover the funds from Barclay’s? Does it matter whether Josiah sues Barclay’s in New York or London? UCC §§ 4A-207(b), 4A-507(a), Model Law arts. 10, 14(5).

Assignment Update

No update is needed at this time.