Problem Set 1

1.1. Tertius Lydgate comes to you with a problem about a $1,500 check that his wife Rosamund wrote recently on their joint bank account. The account contained only $50 at the time, and Tertius had declined to purchase overdraft protection from the bank at which he maintained the account. Still, the bank honored the check and has now written Tertius a letter threatening unspecified “serious consequences” if he does not reimburse the bank for the amount of the check.

(a) Is Tertius liable for the check? UCC § 4-401(a) & 4-401 comment 1.

(b) Would your answer change if you learned that Rosamund and he are estranged and that she used the funds to purchase an airplane ticket for a trip that she took (by herself) to London? UCC § 4-401(b) & 4-401 comment 2.

1.2. Your old college classmate Ben Darrow is a senior vice president at the First State Bank of Matacora (which is owned by his father-in-law). He calls you one Monday afternoon to ask you about a problem that has arisen at his bank. Darrow explains that his problem relates to a $900 check drawn by his customer Jasmine Ball, which Darrow’s bank received for payment on Monday January 22. The check was payable to Matacora Realtors and dated February 1 of the current year. Because his bank’s new automated check-processing system does not examine dates on the checks, and because Ball’s account at that time contained $1,000, the system paid the check and deducted $900 from Ball’s account. Upon further examination, it appears that Ball sent the bank a letter in September of last year. The letter identified Ball’s account by number and explained that she would be paying her rent for the next year by postdated checks payable to Matacora Realtors. The letter asked the bank not to cash any of the checks until the indicated dates. The bank never responded to the letter. Has Darrow’s bank acted improperly? UCC §§ 3-113(a), 4-401(c), 4-401 comment 3, 4-403(b), 4-403 comment 6.

1.3. Pleased with your advice in Problem 1.2, Darrow calls you again a few days later. Because of a clerical error, the bank paid a check in contravention of a written stop-payment order. The check was written by Albert “Bud” Lassen, and payable to Carol Long in the amount of $1,500, apparently for some cooking equipment. Shortly after Bud got home with the equipment, he decided that he did not want it because it was slightly larger than he had understood. As a result, the equipment was too big for the space in his kitchen. Carol refused to take back the equipment. Bud immediately came to the bank and filled out the bank’s stop-payment form, identifying the account number, as well as the number, amount, and date of the check. Unfortunately, a clerk incorrectly entered the information supplied by Bud. As a result, the system did not recognize the check to Carol when she came in and cashed it the next day. Bud is furious and insists that the bank recredit his account. Darrow wants to know if he must recredit Bud’s account. If he does recredit Bud’s account, will the bank lose the money? UCC §§ 4-401(a), 4-403(a) & (b), 4-407(2) & (3), 4-407 comments 2 & 3.

1.4. What would have happened if the bank had complied with Bud’s stop-payment order and refused to honor Bud’s check? Could Carol force Bud to pay for the equipment? UCC § 3-310(b)(1), (3) & comment 3.

1.5. You come into work one morning to find a voice-mail message from Caleb Garth asking for an urgent appointment to discuss a problem with his bank. When you meet him later that morning, he explains that he is the President and sole shareholder of Garth Management, Inc. (“GMI”), a corporation that manages rural estates for absentee landowners. Caleb tells you that GMI has had its only bank account at Bulstrode Bank for the last three years. The signature card for GMI (executed at the time that the account was opened) listed as authorized signatories on the account Garth’s daughter Mary Garth and his son-in-law Fred Vincy, who took over operational control of GMI from Caleb about five years ago. Because GMI has been losing money ever since Mary and Fred took over, Caleb finally lost patience two weeks ago and decided to regain control of the corporation. He convened a shareholder’s meeting at which he voted his shares to elect himself the sole director of the corporation. Acting in that capacity, he removed Mary and Fred as officers of the corporation and named himself as President.

His problem came when he went to the bank to remove Fred and Mary from the signature card. When he explained the situation to the bank, the account officer (Nicholas Bulstrode) told Caleb that the bank would freeze all funds in the account until Caleb presented the bank with a letter from Mary and Fred consenting to their removal from the account. The bank officer relied on the following provision in the account agreement:
If another person or entity makes a claim against funds in your account, or if we have reason to believe there is or may be a dispute over matters such as the ownership of the account or the authority to withdraw funds, we may, in our sole discretion, (1) continue to rely on current signature cards, resolutions or other account documents, (2) freeze all or part of the funds until the dispute is resolved to our satisfaction, or (3) pay the funds into an appropriate court of law for resolution.
You are satisfied that Caleb has complied with all of the appropriate corporate formalities. His problem is that Mary and Fred are out of town (on a walking tour of old cathedrals). Can he force the bank to release the funds without providing the letter from Mary and Fred? UCC § 4-103(a), 4-103 comments 1 & 2.

1.6. Caleb goes on to tell you of another frustrating experience he recently had with Bulstrode. Caleb’s friend Peter Featherstone has long been a devotee of the British royal family. As best as Caleb can tell, persistent press criticism of Prince Charles appears to have pushed Peter over the edge. One day a few weeks ago Peter went to Bulstrode and attempted to use funds in his account to purchase a cashier’s check for $50,000, payable to the “Prince Charles for Prime Minister Fund.” Doubting Peter’s competence, Bulstrode refused to issue the check and called Caleb (knowing that Caleb was a close friend of Peter). After discussions with Lydgate (Peter’s physician), Caleb went to court and obtained an emergency order adjudicating Peter an incompetent and appointing Caleb guardian of Peter’s estate. Caleb sent a telecopy of the order to Bulstrode. Notwithstanding that notice, Caleb discovered yesterday that Bulstrode proceeded late last week (four days after receiving the order) to honor a $50,000 check that Peter wrote to the Prince Charles for Prime Minister Fund. Caleb wants to know if there is anything he can do to recover the funds for the benefit of Peter. UCC § 4-405 & comments 1 & 2.

1.7. Your friend Jodi Kay is an executive at CountryBank. She comes to you to discuss a proposed restructuring of CountryBank’s fee structure for checking accounts. CountryBank has been involved in an aggressive program to open branches of its bank in underserved areas of the community, where most of the customers have relatively modest income. Unfortunately, although the new branches have been doing well at getting accounts opened, several of them have been unprofitable. Because the bank’s senior management is committed to keeping the branches open, it called Jodi in to investigate the situation. After studying the records of the branches, she attributed the lack of profitability to an unusually large number of overdrafts and stop-payment requests. Those items are consuming a larger amount of administrative time than is normal for branches of similar size.

Jodi has come up with two different ways to return the branches to profitability. First, she could increase the monthly account charges on low-balance accounts from $10 to $25. She is worried about that course because of the possibility that it will drive out the low-income customers she is trying to reach. Second, she could increase the fees on dishonored checks and stop-payment requests from $25 to $50. She asks you for your advice, specifically inquiring whether it would be lawful for her to impose the charges that she has proposed. UCC §§ 4-401 comment 3, 4-403 comment 1.

Problem Set 2

2.1. One day a friend named Caleb Garth calls you with question about his checking account. Upon examining one his checks that the payor bank recently honored, Caleb noticed that the check was dated last summer (about seven months ago). Caleb thinks it ridiculous that the bank honored a check so stale. Can you do anything for Caleb? UCC §§ 4-404 & comment, 1-201(19), 3-103(a)(4), 3-103 comment 4, 4-103 comment 4, 4-104(c).

2.2. Your friend Jodi Kay (from Problem 1.6) has been asked to audit the bank’s funds availability policies to ensure that they comply with Regulation CC. She wants to know when that regulation required the bank to release the funds from the following deposits made into accounts at a Houston branch of CountryBank. For purposes of this problem, you should assume that each deposit was made on Monday March 1 and that CountryBank is open for substantially all of its operations six days a week (every day except Sundays). Finally, except as noted in the first question, all of the withdrawals are to be made by check. {Although you need to understand how the statute justifies your answers, you may wish to refer to Figure 2.1 and Figure 2.2 to help you get started.}

(a) Carl Eben wishes to withdraw cash against funds deposited with one of the bank’s tellers in the form of a $10,000 check written by Archie Moon on Archie’s Seattle bank account. UCC § 4-215(e), 12 CFR §§ 229.2(f), (g), (r), (s), (v) & (w), 229.10(c)(1)(vii), 229.12(c)(1) & (d), 229.13(b).

(b) Carl Eben deposits a $1,000 cashier’s check with one of the bank’s tellers. The check was drawn on Rocky Mountain Bank in Seattle. The check originally was payable to Riverfront Tools, Inc. (to purchase some machine tools for Archie Moon’s book shop), but was properly indorsed from that corporation to Carl. 12 CFR §§ 229.10(c)(1)(v) & (c)(1)(vii), 229.12(b)(4) & (c)(1)(ii).

(c) Carl Eben deposits a $1,000 check, payable to himself from the United States Treasury, at one of CountryBank’s ATMs in Houston. 12 CFR § 229.10(c)(1)(i) & (c)(2), 229.12(b)(2).

(d) Carl Eben deposits a $1,000 check drawn on the State of Michigan with one of the bank’s tellers. 12 CFR §§ 229.10(c)(iv) & (vii), 229.12(b)(4) & (c)(1)(ii).
2.3. Recall the facts of Problem 1.2, in which the bank at which Ben Darrow works (FSB) honored a rent check that Jasmine Ball had written for $900 even though Ball had provided the bank a valid postdating notice. The day after those events (Tuesday January 23), another check drawn on Ball’s account was presented, this one dated January 22, in the amount of $400, payable to Generic Motors Acceptance Corporation (a finance company affiliated with Generic Motors). Because the account at that time contained only $100 (as a result of the bank’s decision to cash the $900 rent check the day before), FSB’s system automatically dishonored the check and charged Ball a $25 fee for issuing a check against insufficient funds. Darrow started to worry about bouncing Ball’s car payment when he read a notice in the paper this morning (January 29) that GMAC had repossessed Ball’s brand new GM pickup and when he arrived at the bank to find a $2,000 cash deposit to Ball’s account. The funds from that deposit would have been available in time to cover the postdated rent check that raised the situation discussed in Problem 1.2. Does FSB have any significant liability? UCC § 4-402(b) & comment 3.

2.4. Darrow also wants to ask you about another problem he recently had with the bank’s check-processing system. That software is designed to decide whether to honor a check by checking the balance in the account at the close of the banking day on the date that the check was presented. When Darrow saw a check written by Carol Long one morning included on a list of checks that were to be bounced because of insufficient funds in the account at the close of the previous banking day, he decided to recheck her account. Although he noticed a large cash deposit the previous day that had become available by the time he made the determination, he concluded that the software was working properly, because the funds in the account at the close of business the previous day were insufficient to cover the check. He wants to confirm with you that his current practices are satisfactory. Does he have a problem? UCC § 4-402(c) & comment 4; 12 CFR § 229.10(a)(1).

2.5. Early this week Jodi Kay called again, asking advice about her most recent job assignment. Several of the branches discussed in Problem 1.7 have received checks (often quite large) drawn on nonlocal banks, which the payor banks eventually have refused to honor. Those branches have lost a substantial sum of money on those checks in cases in which the customers withdrew the funds and closed their accounts before CountryBank learned that the checks would not be honored. Jodi mentions that a large share of the problems occurred in cases that involved recently opened accounts or accounts on which overdrafts had been frequent past occurrences. Jodi wants to know if there is anything that she can do about that problem. In particular, she wants to extend to six business days the hold that the bank puts on all nonlocal checks deposited at the problem banks. What do you recommend? Regulation CC § 229.13(a), (b), (d) & (e).

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 New Haven, Connecticut. 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 New Haven branch on Wednesday morning. The New Haven 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); 12 CFR § 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 12 CFR § 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 November 9, 1995. 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, November 13, 1995, 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 (November 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, November 18, 1995, 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); 12 CFR §§ 229.30(a)(1), 229.33(a), 229.34(b) & (d), 229.38.

3.5. 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, 12 CFR § 229.34(c)(3).

3.6. 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; 12 CFR §§ 229.10(c)(vii), 229.12(b).

Problem Set 4

4.1. Impressed by the advice you’ve been giving his customers (most recently in Problem Set 3), Nicholas Bulstrode came in this morning to discuss a forgery incident that recently occurred with respect to a $300 check written by Dorothea Brooke. Dorothea gave the check to Tertius Lydgate to pay for a recent visit to Dr. Lydgate. Bulstrode Bank honored the check, which now is in Nicholas’s possession. The check bears what appears to be a blank indorsement by Lydgate, followed by indorsements by Edward Casaubon and Wessex Bank.

Lydgate, however, claims that he never received the check, and Bulstrode believes him (for reasons that should be clear from what ensues). Casaubon told Bulstrode on the phone yesterday that she got the check from Will Ladislaw (a somewhat disreputable relative of Casaubon’s) as partial payment of some outstanding debts Ladislaw owed to Casaubon. Casaubon said that Lydgate’s indorsement was on the check at the time that he got the check from Will. On inquiry to Lydgate, it appears that Will is a patient of Lydgate’s who saw Lydgate the day before Will gave the check to Casaubon. Lydgate discovered Will’s apparent theft of the check when he called Dorothea to ask her why she had not paid him. Bulstrode promptly agreed to recredit Dorothea’s account. Bulstrode is galled at the prospect of taking a loss for the check and wants to know what he can do. What should he do? UCC §§ 3-203(a), 3-301, 3-415, 4-208.

4.2. Referring to Problem 4.1, what could Wessex Bank have done if Bulstrode had noticed the forged indorsement and dishonored the check? UCC §§ 3-403(a), 3-415, 3-416, 4-207.

4.3. Before he leaves, Bulstrode asks about another problem arising out of a check written on an account that Dorothea Brooke has at another bank (Wessex Bank). It appears that some unknown person stole a check from Dorothea’s checkbook and issued the check by forging her signature. Lydgate, tricked by the forger, agreed to cash the check for the forger. After Lydgate deposited the check in an account he has at Chettam Bank, Chettam forwarded the check for collection through its correspondent Bulstrode Bank. Chettam included the following legend as part of its indorsement: “Without Recourse and Without Any Warranty Whatsoever.” Wessex Bank (the payor bank) dishonored the check and returned it to Bulstrode Bank. Recognizing that he has no right to pursue, Dorothea, Bulstrode wants to know if he has any basis for recovering from Chettam Bank or the forger. See UCC §§ 3-403(a), 3-414(b), 3-415, 3-418(a), 4-207(a)(2) & (d).

4.4. Referring to Problem 4.3, what rights would Wessex Bank have had if it had honored the check, but then recredited Dorothea’s account when the fraud was discovered. UCC §§ 3-415(a), 3-418(a) & (c), 4-207, 4-208(a).

4.5. Ben Darrow (whom you last saw in Problem Set 4) asks you about another problem with Carol Long. Carol seems to have the habit of carrying signed checks in her wallet, completed except for the amount, date, and name of the payee. When Carol left her wallet in a diner last week, one of those checks was taken, completed for the amount of $1,000, cashed at Nazareth State Bank, and honored by Darrow’s bank (First State Bank of Matacora (FSB)) without anybody noticing the problem. Carol has come to Darrow claiming that the check should not have been honored. Darrow feels sorry for Carol, but does not want his employer FSB to bear the loss. What are Darrow’s options? UCC §§ 3-407(c) & comment 2, 4-208(a)(2) & (b), 4-401(d)(2) & comment 4.

4.6. Before letting you off the phone, Darrow has one other question. In reviewing her statements in connection with the discussion in Problem 4.6, Carol noticed another check that she recalled writing to one of her suppliers for $1,000. At some point in the collection process, the check was altered to indicate an amount of $10,000. Darrow’s bank did not notice the skillful alteration and honored the check for the full amount. Darrow tells you that he assumes that he can’t charge Carol for anything but the $1,000 for which she wrote the check. What he wants to know is whether he can recover the extra $9,000 from anybody. What is your advice? UCC §§ 3-407(c), 4-208(a)(2), 4-401(d)(1).

4.7. Dorothea Brooke receives a telephone call from a marketer selling encyclopedias. At first, she is quite attracted to teh idea of buying a new encyclopedia. The marketer asks her for her checking-account number so that he can collect payment. Dorothea then gives him the number. After further discussion, however, she decides not to go through with the transaction until she receives further details in the mail. To her surprise, the next month she finds that the telemarketer (EncarPedia.com) has created and processed a check charging her $1,800 for the encyclopedias. The check was deposited at Bulstrode Bank and paid by her bank Wessex Bank. Assuming that EncarPedia.com is insolvent, who will bear the loss?

Problem Set 5

5.1. Late one afternoon you get a call from Cliff Janeway, a book-dealer friend of yours. He tells you that he is in Seattle and that yesterday he received a $200,000 check as a finder’s fee for locating some extremely rare books and manuscripts for an eccentric collector. He is just about to get on the plane and has realized that he left the check on the seat of the airplane. Does he have anything to fear if a third party takes the check, forges his indorsement, and cashes it? UCC §§ 3-301, 3-310(b), 3-406, 3-420(a).

5.2. Sir Roderick Spode is a client that Bertie Wooster referred to you, who operates a small women’s clothing store on the west end of town. His business processes a large number of incoming checks (paying for items that he has shipped to customers all over the country) and outgoing checks (paying for supplies, materials, and payroll). He has never had any losses from theft, but is worried about the possibility. He tells you that he has a lot of customers and workers in and out of his shop all the time. Because he has only a single very large room for his business, it is hard to keep his checkbook and blank checks in a completely inaccessible location unless he removes all of those materials from the office entirely. Spode wants to know what he needs to do to be sure that he is not stuck with any losses if somebody steals some blank checks. Consider the following possible scenarios and decide whether Spode would have any liability in any of those scenarios. If so, what should he do to limit that liability? UCC §§ 3-404, 3-405, 3-406, 4-401(a), 4-406.

(a) August (“Gussie”) Fink-Nottle, an employee who packages outgoing shipments (but has no check-writing authority) picks up one of Spode’s blank checks, makes it out to himself, and forges Spode’s signature as drawer. Gussie then indorses the check and deposits it in his bank. After withdrawing the funds from his account, Gussie then disappears (ostensibly on some type of newt-hunting expedition). UCC §§ 3-406 & comment 3, 4-401.

(b) Stephanie (“Stiffy”) Byng comes to Spode’s office and claims to be Madeline Bassett, a supplier to whom Spode owes money (whom Spode has not met). Spode issues a check to Madeline Bassett and gives it to Stiffy, who indorses the check in Madeline’s name, cashes it, and then departs with the money for the Isle of Man. UCC § 3-404(a).

(c) Would your answer change if Stiffy does not claim to be Madeline herself, but only an employee of Madeline’s sent to pick up the check? UCC § 3-404(a).

(d) Same facts as question (a), but instead of writing the check to himself, Gussie writes a check to Madeline Bassett, intending to give the check to Gussie’s friend Harold (the “Stinker”) Pinker. After Gussie gives the check to Pinker, Pinker forges Bassett’s indorsement and cashes the check. UCC §§ 3-110(a), 3-404(b)(i), 3-406, 4-208(a)(1).

(e) Same facts as (d), but Gussie makes the check out to Catsmeat Potter-Pirbright (a wholly fictitious character). Pinker indorses the check in Potter-Pirbright’s name and deposits it in an account that Pinker maintains in Catsmeat’s name. UCC § 3-404(b)(ii), (d) & comments 2 & 4.

(f) Same facts as question (d), but Gussie is the person in Spode’s office responsible for issuing checks. UCC §§ 3-402(a), 3-404(b)(i) & comment 2.

(g) Same facts as question (e), but Pinker stole the check and used Spode’s facsimile signature machine to sign the check. Spode’s account agreement stated that any signature using that machine would be treated as authorized by Spode. UCC §§ 3-404(b), 3-404 comments 1 & 2, 4-103(a).

(h) Gussie also is responsible for depositing incoming checks. In that capacity, Gussie forges Spode’s indorsement on an incoming check payable to Spode and deposits the check in Gussie’s account. UCC § 3-405.

(i) Gussie’s last task is to maintain a daily list of checks authorized to be written. The list is processed early in the afternoon each day to produce the checks indicated on the list. In an effort to defraud the bank, Gussie adds names to the list that reflect fictitious persons or close friends of Gussie willing to participate in the scheme. He then intercepts the checks after Spode writes them, indorses them in the name of the payees, and deposits them in his account. UCC § 3-405.

5.3. Jodi Kay also wants to discuss another problem that the bank faces. Carl Eben (Jodi’s long-time customer from Problem 3.5) has just been victimized by a lengthy forgery scheme by his accounts-payable clerk. The clerk forged checks on the account for 18 months before being caught, stealing a total of about $135,000. Because Carl never noticed any of the forgeries on his statement, Jodi is guessing (but is not sure) that the bank has no obligation to return the funds to Carl’s account. Because of its long-standing (and highly profitable) relationship with Carl, however, the bank has decided that it is better to return the funds without getting into any messy arguments about who is responsible.

Jodi wants to know what the bank can do in the future to mitigate these problems. She wants both to mitigate the bank’s exposure to legal liability and also to mitigate the possibility that the losses will occur in the first place. But she has to be conscious of costs: “You can’t ask me to do anything crazy like recommend that we actually look at the checks to identify forged signatures.” Is Jodi liable for losses like this? If so, what can she do to limit that liability and the likelihood of future losses? UCC §§ 3-103(a)(7), 4-104(c), 4-406.

Problem Set 6

6.1. Ben Darrow (your client, a banker from FSB) stopped by late yesterday afternoon to show you a “bizarre” letter that he received in the mail yesterday. He mentions that because of a recent consolidation he now oversees his bank’s credit-card issuing operations, even though he has little experience in the area. The letter is from one of FSB’s cardholders and describes a $275 mountain bike that the cardholder recently purchased using an FSB Visa card. The letter explains that the bike’s gear-shifting mechanism does not function properly and asks FSB to “refund” to the customer the amount shown on the customer’s current Visa statement for the purchase of the bike. The letter encloses payment for $100 (the amount of the other charges shown on the statement).

Ben tells you that he is completely befuddled. “Why should I care whether the stupid bike works? If she doesn’t like it, let her take it up with the merchant. My only job is to make sure I pay the merchant for her charges and then to make sure that she pays me. What does she think I am, some kind of traveling Better Business Bureau? Can you believe the nerve of some people?” Do you share Ben’s assessment of the “nerve” of the letter-writer? Is the writer entitled to a refund? To anything? Do you need to know anything about the charges on her statement to ascertain Ben’s obligations to her? TILA § 170; Regulation Z, 12 CFR § 226.12(c).

6.2. After your discussion with Ben in Problem 7.1, Ben asks you how he would be able to respond to the cardholder’s defenses in cases where the cardholder could assert those defenses. “How am I supposed to prove that her mountain bike works? I don’t sell mountain bikes. I drive a car to work. I haven’t ridden a bicycle since I was 15 years old. Do I just have to give her the money?” What do you tell Ben?

6.3. Jodi Kay from CountryBank calls to discuss a troubling newspaper article that she read in this morning’s paper. The article reports that a client of hers named CompUPlus recently filed for bankruptcy in the face of rampant consumer complaints about CompUPlus’s newest line of laptop computers. Jodi thinks that she is in good shape, because (she says) she has never made any loans to the client. The only service that she has provided has been as a merchant bank processing CompUPlus’s mail-order credit-card sales. Those sales recently have been substantial: $150,000 over the last three months. Does that relationship put her employer CountryBank at risk? TILA § 170; 12 CFR § 226.12(c).

6.4. Your friend Willie McCarver runs a struggling computer-services company. Talking to you over dinner, Willie tells you that he has gotten into a tight spot with some of his most important suppliers. If he does not pay them $10,000 in the next week, they are going to stop shipping goods to him, which would finish his business in a matter of days. Willie thinks that some highly profitable orders are “just around the corner.” In the meantime, he thinks that he has hit on a way to keep his suppliers satisfied and wants your advice. Specifically, he plans to use the MasterCard to pay the suppliers $10,000 to reduce the amount that he owes for past shipments; the card that he received in the mail conveniently has a $10,000 limit. Mindful of some advice you gave him several years ago about his rights on credit-card charges, he figures that he can dispute the charges (perhaps claiming that the goods were defective) and defer payment to the credit-card issuer indefinitely. He wants to know if you think the scheme will work and how he can design it to hold off the creditors as long as possible. TILA §§ 104(1), 170; 12 CFR §§ 226.12(c).

6.5. Cliff Janeway drops in to discuss a difficulty he is having with Bulstrode Bank, the merchant bank that clears credit-card transactions for him. Cliff found out this morning that Bulstrode has bounced several checks of Cliff’s during the last week. Cliff is unhappy because the checks should have been covered easily by funds deposited into his account several days earlier in the form of credit-card receivables from his business. When Cliff called Bulstrode to complain, Bulstrode explained that it had adopted a new policy with respect to credit-card services. Under that policy, Bulstrode plans to place a hold on Cliff’s credit-card deposits for forty-five days after the date that Cliff deposited them, to protect against the possibility that Bulstrode will be obligated to disgorge funds to card issuers if cardholders challenge any of the relevant transactions. Cliff wants to know if the bank can do this. “Isn’t there some law requiring the bank to release the funds to me in just a few days?” UCC §§ 4-104(a)(9), 4-214(a), 4-215(e); 12 CFR §§ 229.10-.12; TILA § 170, 12 CFR § 226.12(c).

6.6. Your congressional representative Pamela Herring recently got involved in a credit-card dispute with a mail-order merchandiser and was outraged to discover that she could not cancel the transaction because of the 100-mile limit in TILA § 170. She decided to look into introducing a bill to eliminate that limit. Shortly after she started investigating that problem, a similarly outraged constituent telecopied her the following excerpt from a recent Nevada Supreme Court decision:

[A]ppellants present policy arguments as to why they should be excused from th[e 100-mile] requirement. Appellants argue that the one hundred mile requirement is unrealistic because an explosion in credit card use has occurred since [TILA § 170] was written. Appellants further complain that if the one hundred mile limit is enforced, an unscrupulous merchant could defraud travelers almost at will, secure in the knowledge that it is unlikely that the traveler would return to a remote location to press a claim against the merchant. Finally, appellants note that the credit card issuer, because of its regular contact with both the merchant and the cardholder, is in the best position to prevent problems such as those which occurred in this case.

Singer v. Chase Manhattan Bank, 890 P.2d 1305, 1306 (Nev. 1995). She wants to know two things. (a) Is there anything to be said for the 100-mile limit? (b) Who would be most seriously harmed by its removal?

Problem Set 7

7.1. When Cliff Janeway returned to his home in Denver this weekend, he called to tell you that he has discovered that at the same time he lost the check last week in Seattle (see Problems 5.1 and 6.1) he also lost his Iridium MasterCard, which has a $20,000 limit. It now has been more than a week since he lost it. Does that give him anything new to worry about? TILA §§ 133, 170(a); 12 CFR § 226.12(b) & (c).

7.2. While he has you on the phone, Cliff tells you that he is about to start selling books by mail-order, in an effort to build volume for his business. He is worried about accepting payment by credit cards because the cardholders won’t be signing any slips. Does that mean the cardholders will have a greater right to get out of the transactions? TILA §§ 103(o), 133(a), 170, 12 CFR § 226.12(b) & (c).

7.3. Cliff's last question for you relates to a trip he had planned to take to London. Several weeks ago he bought tickets to fly to London on Great Atlantic Air. Yesterday, Great Atlantic Air stopped flying. This morning's paper reports that the assets of Great Atlantic Air are being liquidated in bankruptcy. Cliff purchased his ticket on his MasterCard. Can he get the money back? What do you need to know to answer Cliff’s question? TILA §§ 161, 170; 12 CFR §§ 226.12(c), 226.13.

7.4. Ben Darrow (your banker client from FSB) meets you for breakfast this morning to discuss a problem with some credit cards that FSB recently issued. As part of a general initiative to provide more services to small businesses, FSB has a program that provides credit cards for small businesses at low costs, with no annual fee and an interest rate that is two points lower than FSB’s standard rate. As part of the program, however, the cardholding small business must sign an agreement accepting responsibility for any unauthorized charges that are made with a stolen card.

Ben got in a dispute this week with Carol Long (one of the first people to sign up for the program) after a thief came through her offices at lunch and stole three of the five credit cards she has issued to her employees. Although Carol called Ben to report the theft by the end of the day, the thief already had charged about $500 on each of the three cards. Based on Carol’s agreement with Ben, Carol was not surprised to see the unauthorized charges on the statements for the employees. Because she had agreed to accept responsibility for those charges, she proposed to deduct them from the next paycheck due to each employee whose card was stolen. One of the employees, however, protested, arguing that Carol could not make him pay an unauthorized charge on the credit card. In response to that claim, Carol called Ben. She wants to know if the employee is right. Moreover, if the employee is right, she thinks that Ben should bear the charge, not her. What should Ben tell her? TILA §§ 133(a)(1), 135, 15 U.S.C. §§ 1643(a)(1), 1645; Regulation Z, 12 CFR § 226.12(b)(5).

7.5. While you are having dinner at the Drones Club one evening, Jeeves (Bertie Wooster’s valet, whom you met in your work on Problem 4.1) approaches your table to ask if you have time to talk to him about a problem that recently has come upon Bertie. The first problem involves Bertie’s Diner’s Club card. When Bertie tried to use the card to pay for lunch yesterday, the merchant refused to accept the card and asked Bertie if he would speak on the telephone to a representative of the issuer. The issuer advised Bertie that the card was not being honored because of Bertie’s failure to pay any of the bills for the last three months; the total amount outstanding on the card currently is about $4,500.

Bertie was shocked to hear this, because he only uses the card once or twice a month and can’t imagine that he would have declined to pay the bill. On further examination, it appears that the problem arose from a $40 charge that the issuer erroneously entered on Bertie’s statement as a charge for $4,000. Unfortunately, because Bertie neglected to send the credit-card issuer a notice of his new address when he moved three months ago, Bertie has not received the last three statements on that card (the first of which included the $4,000 entry).

When Bertie explained the problem to the issuer’s service representative, the representative referred Bertie to a provision of his card agreement that states: “Except to the extent otherwise required by applicable federal law, all entries that appear on any account statement produced by Issuer shall be final and conclusive evidence of Cardholder’s liability to pay Issuer, and Cardholder agrees to pay all such charges that Cardholder does not contest in accordance with the procedures established by applicable federal law.” Bertie wants to get the $4,000 charge removed from his credit card. What can he do? TILA § 161, 15 U.S.C. § 1666; Regulation Z, 12 CFR § 226.13(b)(1).

7.6. Before you leave the club, Bertie’s acquaintance Roderick Spode stops at your table to discuss a problem he has with his credit card. He asks if you recall an incident that happened a few weeks ago with Gussie Fink-Nottle (famed for his exploits in Problem 6.2), in which Spode’s negligence permitted Fink-Nottle to obtain one of Spode’s blank checks and issue the check fraudulently. As it happens, the checkbook from which Fink-Nottle took the blank check also contained one of Spode’s credit cards. Fink-Nottle used the credit card to obtain a $1,000 cash advance from Bulstrode Bank (the bank that issued the card).

Spode did not mention that problem to you at the time he came to discuss Problem 5.2, because Spode assumed that he would be able to recover those funds by challenging the appropriate entry on his credit-card bill. As it happens, however, Spode’s bank (Bulstrode) has not been successful at recovering the funds from Fink-Nottle (who appears to have left town indefinitely). Because Bulstrode cannot recover the funds from Fink-Nottle, Bulstrode is trying to obtain payment from Spode. Specifically, when Spode talked to Nicholas Bulstrode this morning, Bulstrode advised Spode that he planned to hold Spode responsible because (in Bulstrode’s words) “the whole problem is your fault. After all, you’re the one that was stupid enough to leave your credit card laying around where any moron could pick it up and make some false charges. There’s nothing that I could have done to prevent this, so I think you should pay.” Is Spode obligated to pay for the charge? What is Bulstrode’s best argument? UCC § 3-406(a); TILA § 133, 15 U.S.C. § 1643.

Problem Set 8

8.1. The ever forgetful Cliff Janeway (your bookseller friend, most recently from Problem 8.1) calls you one afternoon from the airport in Albuquerque, where he just got off a plane to visit some local booksellers. He is frantic because he left his checkbook on the seat next to him when he left the plane. He is pretty sure that his debit card was stuffed inside the checkbook, and he is sure that his personal identification number is written on the inside cover of the checkbook. His account has about $12,000 in it, because he planned to purchase several expensive books while in Albuquerque. He wants to know what he should do? Does he have anything to worry about? EFTA §§ 908, 909.

8.2. Joe Willie (“Bill”) Robertson is a long-time friend of yours who operates a chain of independent grocery stores in Houston, Texas. His bank has just come to him with a proposal that he start accepting debit cards under a PIN-based system at his stores. The bank tells Bill that his account will be credited with funds much more rapidly on debit-card transactions than it is on traditional checking transactions, which should bring him additional interest income on an annual basis of about $160,000. Bill also hopes that it will save him a substantial amount on bad-check expenses; he currently has to write off about one-and-a-half percent of all receipts that come in the form of checks, either because the checks are uncollectible or because of the litigation expenses of collecting them. Those cost savings far exceed the cost of the equipment that Bill would have to buy to implement the debit-card system, even taking account of the fifteen-cent discount Bill will have to pay his bank on each transaction.

Notwithstanding those possible benefits, Bill is skeptical about the bank’s proposal for two reasons. He doubts the reliability of the computer technology, and he has a policy of always worrying when his banker claims to be doing something for his benefit. Bill asks you whether he faces any significant risks of loss if he starts accepting the cards. What if people present forged cards? What if they use stolen cards? What if the system malfunctions and lets him sell things to people whose accounts are empty? Can you think of anything else that he is missing?

8.3. Archie Moon comes by this morning and insists that he has to see you without an appointment. He tells you that about a month ago he purchased a new printing press. As it happens, he is completely dissatisfied with the printing press, because it does not perform nearly as well as the salesperson promised him. Accordingly, he decided that he wanted to withhold payment. Remembering some advice you gave him several years ago, he did not write a check for the press; instead he paid for it with his bank card. When he called his bank officer last week to tell her that he did not wish to pay for the press and identified the transaction, his bank officer told Archie that Archie could not challenge the transaction because he had purchased the press with a debit card.

Archie has looked at the card in his wallet and the information from his bank and tells you that the card contains two features, a conventional credit-card feature (a MasterCard, as it happens), and a debit-card feature. He believes that the clerk at the press shop erroneously processed the transaction as a debit-card transaction rather than a credit-card transaction. Putting aside any right that Archie might have against the merchant, and assuming that Archie is right about what happened (and that he can prove it), can Archie force the bank to refund the money to him? EFTA §§ 903(11), 909, TILA § 170(a), Regulation E, 12 CFR §§ 205.2(m), 205.6(a), Regulation Z, 12 CFR § 226.12(c)(1).

8.4. Luck being what it is, Archie calls you a few weeks later to report that in the course of reviewing his bank statements in connection with the transaction discussed in Problem 9.3 he noticed quite a number of unauthorized transactions. The transactions go back over a year and total $3,000. {The thief did not get greedy, but took only $250 each month.} Archie remembers ordering a new card about a year ago, and has just remembered that the card was taken from him in a mugging about a year ago. Trying to put the mugging out of his mind, he entirely forgot to do anything about the lost card. For how much of the $3,000 is Archie responsible? {For purposes of the problem, assume that the theft occurred on March 1, that the bank mails a statement on the first day of each month that includes all of the previous transactions, and that the thefts occurred in a single $250 transaction on the 15th of each month.} EFTA §§ 909(a); Regulation E, 12 CFR § 205.6(b), 205.12(a).

8.5. Just after you get off the phone with Archie, you discover that Cliff Janeway is waiting to see you. He explains that in response to the advice that you gave him in Problem 9.1, he promptly went to his bank to report the unauthorized transactions. That visit occurred on Monday March 1, the same day that he learned that the card had been lost. Based on a review of charges that had been posted to his account at that time, he reported a total of $1,000 of unauthorized charges, all of which apparently were used to purchase beer and wine at a nearby liquor store that accepts debit cards. Assuming that the problem had been dealt with, Archie went about his business.

Much to his surprise, three weeks later on March 22, Archie got a telecopy from one of his suppliers advising Archie that the supplier was canceling its contract with Archie because Archie’s bank had bounced the check Archie had written to that supplier on March 12. On inquiry, Archie discovered that the bank bounced the check on the morning of March 17 because it had not yet determined how to respond to Archie’s claim that the beer-and-wine debit-card transactions were unauthorized. Does Archie have a right to complain about the bank’s dishonor of his check? UCC § 4-402; EFTA § 908(c); Regulation E, 12 CFR § 205.11(c).

8.6. Would your answer to Problem 9.5 be different if Archie’s card was a MasterMoney debit card?

8.7. Jodi Kay calls you in response to a newspaper article that she just read about the staggering frequency with which criminal enterprises forge credit cards. Because she knows from prior conversations with you that her bank bears most of the risk of loss from unauthorized debit-card transactions, Jodi is worried that her bank could lose a lot of money from transactions made with forged debit cards. Does the frequency of forged credit cards justify her in worrying about forged debit cards? What does she have to fear? Does it matter if she uses a PIN-based system or a PIN-less system? EFTA § 909.

Problem Set 9

9.1. 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, 12 CFR § 210.29(a).

9.2. As you walk back into your office after your meeting with Nicholas Nickleby, your secretary tells you that Ben Darrow (from FSB, most recently encountered in Problem Set 8) 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?

9.3. 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.

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.

9.4. 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.

9.5. 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).

9.6. 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).

Problem Set 10

10.1. 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, 12 CFR § 210.29(a).

10.2. As you walk back into your office after your meeting with Nicholas Nickleby, your secretary tells you that Ben Darrow (from FSB, most recently encountered in Problem Set 8) 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?

10.3. 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.

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.

10.4. 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.

10.5. 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).

10.6. 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).

Problem Set 11

11.1. Your morning starts with a meeting with a new client, Josiah Bounderby. He is upset because of a number of problems that he has had recently with wire transfers. The first problem deals with a $500,000 payment that he asked his bank (Cheeryble Brothers) to send to James Harthouse. Bounderby provides you a printout from his computer of the payment order that he sent Cheeryble Bros. That order identified Harthouse by name and indicated that the funds should be sent to Harthouse’s account at Barclay’s, identified in the order as account number 002131. Promptly upon receipt of the order, Cheeryble debited Bounderby’s account for the amount of the order and executed the order by sending a payment order directly to Barclay’s in Chicago. Barclay’s, in turn, executed the order by depositing the funds in its account number 002131. Unfortunately, that account belonged not to James Harthouse but to Thomas Gradgrind.

(a) Can Bounderby recover the funds from Cheeryble? Do you need to know anything further to answer that question? UCC §§ 4A-207(c), 4A-207 comment 2.

(b) If Bounderby cannot recover the funds from Cheeryble, does he have any way to recover the money? UCC § 4A-207(d).

(c) How would your answer change if you discovered that Barclay’s recognized the discrepancy before it accepted the payment order from Cheeryble? UCC §§ 4A-207, 4A-207 comment 2, 4A-402.

11.2. Ben Darrow from FSB (back again from Problem Set 10) calls you to discuss a problem with a recent wire transfer the bank sent for one of Darrow’s customers. Jasmine Ball sent FSB an electronic-mail message requesting a wire transfer for $100,000 to an account of Carol Long at the Second National Bank (“SNB”) of Muleshoe. The request was processed by a novice clerk at FSB, who accidentally duplicated the transaction and sent two identical $100,000 transfers rather than one. FSB’s processing system automatically deducted funds from Ball’s account to cover both orders. Ball called to complain later that day when she happened to notice the unusually low balance in her account. As soon as Darrow discovered the problem, he called SNB. SNB told him that it had received the funds and notified Ms. Long, but that she had not yet removed the excess money. Darrow has several questions.

(a) First, can Darrow force SNB to send the extra $100,000 back to FSB? UCC §§ 4A-209(b), 4A-209 comments 4 & 5, 4A-211(c), 4A-211 comments 3 & 4, 4A-402(b), 4A-404(a).

(b) If not, can FSB recover the excess funds from Long? Do you need to know anything else about the relation between Ball and Long? What if Ball in fact owes Long $1,000,000? UCC § 4A-303(a) & comment 3.

(c) If Darrow has no right to recover the excess funds from SNB or Long, can FSB retain all of the funds that it debited from Ball’s account to pay for the orders? UCC §§ 4A-303(a), 4A-303 comments 2 & 3, 4A-402(c) & (d).

11.3. Your old friend Jodi Kay calls to talk to you about a project she is supervising, which involves producing a new form funds-transfer agreement for CountryBank. CountryBank’s new computer system has been plagued with operating shutdowns, so she is particularly concerned about CountryBank’s liability in cases where it fails to execute a customer’s order in a timely manner. She wants to have the customer waive any right to recover from the bank for such an occurrence: no interest, no incidental expenses, no consequential damages, no attorney’s fees. After all, she says, computer failures are endemic and really beyond her control. Moreover, the customer hasn’t really lost anything if the Bank never sends the money to the wrong place and eventually sends it to the right place. She wants to know if such an agreement would be enforceable. If it would not be entirely enforceable, what things should she include that would be enforceable? UCC § 4A-305.

11.4. When you see Jeeves walking across the room toward you just as you start to enjoy your weekly lunch at the Drones Club, you think back to Problem Set 10 and groan inwardly at the prospect of facing another one of Bertie Wooster’s problems. Thus, you are not the least bit surprised when Jeeves asks for a moment of your time to discuss a problem of Wooster’s. The problem arises out of a wire transfer in the amount of $500,000 that was made from Wooster’s account thirteen months ago. Wooster’s bank dutifully mailed a bank statement to Wooster reflecting that transfer the day after the transfer. Unfortunately, the notification was lost in the mail and received by Wooster only yesterday. When Jeeves looked at the notification for Wooster, Jeeves remembered immediately that Wooster had authorized a transfer for $50,000, not $500,000. Because the transfer had been shown on the lost statement, none of the intervening month’s statements showed anything about the transfer.

If Jeeves is correct in his recollection (and he always is), can Wooster force the bank to recredit the funds from the transfer? If so, is Wooster entitled to interest as well? UCC §§ 4A-304, 4A-402(d), 4A-505.

11.5. Before he leaves, Jeeves pauses to raise another problem with you. It appears that even Wooster’s considerable bank balance was lessened substantially by the incorrect withdrawal of $450,000 discussed in Problem 11.4. As it happens, Jeeves discovered when he contacted the bank yesterday afternoon that the bank had dishonored several checks written by Wooster in the last few weeks. Jeeves has contacted just a few of the recipients and already has discovered that the bank’s decision to bounce the checks has caused Wooster a variety of problems, ranging from bounced-check fees to more serious claims for default under agreements that Wooster had with the payees of the checks. Jeeves wants to know whether Wooster can pass the costs of solving those problems back to the bank as consequences of the bank’s incorrect actions. UCC §§ 1-106(1), 4-402(b), 4-402 comment 2, 4A-305, 4A-305 comment 2, 4A-402(d), 4A-402 comment 2.

Problem Set 12

12.1. Ben Darrow (your client the banker from FSB that you met most recently in Problem Set 11) calls you to discuss a funds transfer services agreement that he is negotiating with 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).

12.2. Recall the facts of Problem 10.3, 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.

12.3. Shortly after Roderick Spode’s discussion with you about the risk of unauthorized checks being written on his account (see Problem 6.2), 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.

12.4. First on your schedule this week is a closing at which Bill Robertson (the grocery-store operator from Problem 9.2) 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.

12.5. At your now-regular weekly meeting, Jodi Kay wants to discuss with you a proposal she is considering under which her bank would transfer some of its wire-transfer activities off of Fedwire. Because of its large national presence, CountryBank necessarily has an extremely high number of wire transfers, and thus incurs large daylight overdrafts on a regular basis. To avoid the daylight overdraft fees, one of her superiors proposes shifting as many transfers as possible to CHIPS. She wants to know if that proposal exposes CountryBank to any greater risk of loss than the bank’s current practice that uses Fedwire wherever possible. UCC § 4A-209(b) & comment 6.

12.6. Recall the facts of Problem 11.1, 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).

Problem Set 13

13.1. Jodi Kay at CountryBank (most recently encountered in Problem Set 12) calls the first thing this morning to ask you about a minor letter-of-credit problem. Her problem arises from a letter of credit that her bank has issued, which states that it will provide payment for goods shipped “from the end of February 1998.” She received a draft this morning including an invoice for goods shipped on February 21, 1998. She tells you that the letter of credit incorporates the UCP by reference. Can it be possible that the draft complies? UCP Articles 47(a) & (d).

13.2. Right after you get off the phone with Jodi, your assistant tells you that you have a call holding from Cliff Janeway (your book-dealer friend, most recently encountered in Problem 9.1). Cliff is frustrated because he is having trouble collecting on a letter of credit for a large shipment of books that he just sent overseas. When he submitted a draft on the letter of credit, the confirming bank (SecondBank) told him that it was not obligated to pay Cliff because the issuing bank (FirstBank) had closed. Thus, the officer explained to Cliff, SecondBank would not be able to obtain any reimbursement if it paid Cliff. Accordingly, the officer argued, SecondBank’s confirmation of Cliff’s letter of credit was unenforceable for lack of consideration. Cliff wants to know what he can do to obtain payment. UCC § 5-105 & comment.

13.3. Ben Darrow (your banker client from FSB, most recently from Problem Set 12) has an appointment this morning to discuss two letter-of-credit problems with you. The first arises from a situation where FSB misfiled a draft presented on a letter of credit and thus failed to respond to it. In the case in question, the beneficiary presented a draft on January 5, 1998. Ben’s bank did absolutely nothing until the beneficiary wrote in early February and repeated its demand for payment. Upon review of the letter of credit, Ben saw that the letter of credit called for payment based on documents covering a shipment of 100 cases of Llano Estacado wine at a price of “around $140 per case.” The draft seeks payment of $120 per case. Ben wants to know if he is obligated to pay on the credit. What do you say? UCP Articles 14(c) & (e), 39(a); UCC § 5-108(c), 5-108 comment 3.

13.4. Ben’s second question involves a letter of credit that FSB received initially by an authenticated electronic-mail message from Portland State Bank (PSB). The message requested that FSB advise the beneficiary of the issuance of the credit and, if willing, also serve as a confirming bank. Always trying to follow procedures, Ben started by making sure that the message satisfied FSB’s security procedure for transmissions from PSB. When it appeared to comply, Ben printed out the letter of credit, added an indication that FSB confirmed the letter of credit, and had the original confirmed letter of credit delivered to the beneficiary by messenger. Last week, Ben honored a draft on the letter of credit in the amount of $500,000 (the stated face amount of the credit that Ben delivered).

That’s where things started to break down. When Ben sought reimbursement from PSB, Ben learned that the letter of credit should have been for $50,000, not $500,000. The $500,000 figure appears to have been a typographical error by PSB in the electronic-mail message. Moreover, on looking through his file, Ben sees that he received a written copy of the letter of credit, with the correct amount, in the mail the day after Ben delivered the letter of credit to the beneficiary. Does PSB have to reimburse FSB for the funds that FSB disbursed on PSB’s letter of credit? UCP Article 11(a)(i); UCC §§ 5-107(a), 5-108(a) & (i)(1).

13.5. You return from lunch to an appointment with Jane Halley from Boatmen’s Bank. She has a customer, Toy Importing Company (TIC), for whom she has issued a letter of credit in the form set forth in Figure 13.1. The letter of credit was to pay for a shipment of toys from Toy Manufacturing Company (TMC) in Hong Kong. Because TIC is dissatisfied with the toys, TIC wants Boatmen’s to reject the draft that has been presented to Boatmen’s under the letter of credit. Jane wants to be as accommodating as possible, but does not want the bank to dishonor a proper draft.
Acting under that letter of credit, TMC on September 21, 1996, submitted a draft with the appropriate documents to its main bank, Bank of Hong Kong. Bank of Hong Kong processed those documents, paid TMC on the letter of credit, and submitted the draft to Boatmen’s on September 24, 1996. Jane wants to know if she can reject the draft because it was presented to her after the letter of credit had expired. She says she could understand if she was obligated to accept a draft presented to Hang Seng Bank (the advising bank) in a timely manner, but how can she possibly be obligated to respect a draft presented to some bank with which she has not had any prior dealings. What do you tell her? UCC §§ 5-102(a)(11), 5-102 comment 7, 5-108 comment 1; UCP Article 10(b)(i) & (d).

13.6. Before Jane leaves your office, she raises one other situation with you. One of her department’s largest customers is the April Company, a department store that has a large volume of imported shipments. As part of a master letter-of-credit agreement with Boatmen’s, the April Company and Boatmen’s established special procedures for drafts submitted under letters of credit issued to some of April’s regular suppliers. April and Boatmen’s agreed that Boatmen’s would provide same-day service on drafts for less than $25,000 submitted on designated “Express Draft” letters of credit. As part of that arrangement, April agreed that Boatmen’s would not be obligated to review any of the documents submitted with such drafts, and Boatmen’s agreed to reduce its normal processing fees by 50% for those drafts.

Jane’s problem comes from a $20,000 draft submitted last week on one of the “Express Draft” letters of credit. Following its normal practice, Jane’s department honored the draft in a few hours, without even looking at the underlying documents. When the documents got to April, April noticed that the documents did not include the bill of lading called for by the letter of credit. On further inquiry, April has discovered that the supplier/beneficiary (a small Indonesian company) in fact did not ship the goods in question; indeed, that company has become insolvent and stopped operations. April’s shipping clerk called Jane yesterday and said that under the circumstances April did not want to reimburse Boatmen’s for that draft. Jane tells you that she is not sure she wants to make an issue of the matter, but she wants to know whether she has a right to payment from April. What do you say? UCC §§ 4-103(a), 5-103(c), 5-103 comment 2, 5-108(a) & (i)(1), 5-108 comment 1 6.

Problem Set 14

14.1. Consider anew the facts of Problem 13.3, in which FSB failed to make a timely response to a draft on a $12,000 letter of credit issued by FSB. As the facts of that problem indicate, the draft did not comply with the requirements of the letter of credit.

(a) Assume that FSB received a $12,000 deposit from the applicant at the time that FSB issued the letter of credit. If FSB is forced to pay $12,000 to the beneficiary, can FSB keep the $12,000 to reimburse itself? UCC §§ 4-407, 5-108(i)(1), 5-117(a), 5-117 comment 1.

(b) Same facts as question (a), but FSB did not take a deposit from the applicant. Can FSB recover the $12,000 from the applicant? UCC § 5-117(a).

14.2. Jane Halley from Boatmen’s Bank (introduced in Problem Set 13) calls first thing one morning with another letter-of-credit problem for you. This one involves a letter of credit that Boatmen’s issued for $1 million to Riverfront Tools (“RFT”). Early last week (ten days ago), she received a draft on the letter of credit, which appeared to contain all of the requisite documents. For reasons that are not clear, her office failed to process the draft in a timely manner. When she found out about the problem this morning, she immediately contacted the applicant to tell it that she had found the draft and was about to process it. The applicant told her that the draft must be forged, because the applicant had talked that morning to Carl Eben (the president of RFT), who had told the applicant that RFT would be submitting a draft tomorrow. Given Jane’s delay, must Boatmen’s honor the draft? UCC § 5-108(b), (c) & (d); UCP Article 14(d) & (e). Would your answer be different if the letter of credit were issued by a Boatmen’s branch located outside the United States? UCC § 5-116(b).

14.3. At a meeting with Jodi Kay (back from Problem Set 13), Jodi asks you about a pending request for her bank to issue a letter of credit. The applicant (a regular customer of Jodi’s) tells Jodi that the proposed beneficiary (a company in Prague) does not want the letter of credit to require submission of the original letter of credit as a condition of payment. Jodi says that she has never done this, but can’t see anything wrong with the request. What is your advice? UCC §§ 5-108(a), 5-108(i)(1), 5-108(i)(5), 5-108 comment 12, 5-109(a)(2).

14.4. As you leave the office for the weekend, you get a desperate call from Archie Moon. He tells you that he has just received a shipment from Malay Ink Company of what should have been four barrels of expensive indigo ink. Unfortunately, the barrels appear to contain ordinary black printer’s ink, which has only one-fourth the value of the ink that he ordered. Archie is concerned because he obtained a $75,000 letter of credit to pay the shipper, and is worried that his bank will proceed to pay a draft on the letter of credit. He called his bank this morning. The banker told Archie that she had received a draft on the letter of credit and that the draft appeared to be in order. The banker declined to defer her consideration of the draft and told Archie that in the ordinary course of business the bank would honor the draft tomorrow morning. What do you advise? UCC §§ 2-601, 2-711, 5-108(a) & (i)(1), 5-109(b), 5-109 comment 1, 5-111.

14.5. Same facts as Problem 14.4, but assume now that hte draft and supporting documents were presented to the issuer by the Bank of Hong Kong and that nobody at that bank had any reason to doubt the legitimacy of those documents or the underlying transaction. Does your answer change? UCC §§ 5-108(i)(1), 5-109(a)(2), 5-109(b)(2).

14.6. When Jane Halley comes in at the end of the day to finish up some paperwork associated with Problem 14.2, she mentions another problem related to a letter of credit that she has issued with Toy Manufacturing Company as the beneficiary. The letter of credit is in the form set forth in Figure 13.1. Today she received a draft drawn on that letter of credit by Hong Kong Toys. The draft included all the documents specified by the letter of credit. Attached to the draft was the original letter of credit, to which a single piece of paper was stapled. The piece of paper appears to be signed by Sun Yat Toy as President of Toy Manufacturing Company, and reads as follows: “The undersigned Toy Manufacturing Company hereby transfers the attached letter of credit and all rights under that letter of credit to Hong Kong Toys.”

(a). Is Jane obligated to honor the draft? Should she honor the draft? UCC §§ 5-112(a), 5-114(d).

(b) Would your answer change if the draft also included a cover letter explaining that Hong Kong Toys had acquired the letter of credit in connection with a transaction in which it merged with Toy Manufacturing Company? UCC § 5-113.

Problem Set 15

15.1. Jude Fawley (a friend of yours who is a stone-mason) calls you to help finalize the settlement of a dispute that he has with one of his customers. He recently completed a custom headstone for a customer that had promised to pay $8,000 for the headstone. When the customer received the headstone, though, the customer insisted that the headstone should have been made from green serpentine marble rather than white marble. Feigning dissatisfaction, the customer refuses to pay. Jude privately believes the customer simply doesn’t have the money. In any event, the customer has offered to settle the dispute by signing a promissory note for $6,000, payable with 10% interest in twelve equal monthly installments. Jude wants to know whether the customer’s agreement to sign a note for the $6,000 will wipe out any of the customer’s defenses to payment. How would you advise him? In evaluating Jude’s question, consider Section 13 of the promissory note set forth in the assignment (referred to in future problems simply as the “Promissory Note”).

15.2. Jodi Kay comes to you with a question about a variable-rate promissory note held by CountryBank. The note calls for interest at the rate of “the Prime Rate plus two percent per annum.” The Prime Rate is defined as it is in § 2(e) of the Promissory Note. She read in the newspaper yesterday that the Federal Reserve raised its interest rates yesterday and she knows that the interest that CountryBank pays on its funds will rise over the next few days. She is concerned because she knows that Texas Commerce Bank has been merged into Chase Bank and thus no longer announces a prime rate. She wants to know whether the interest payments due under the variable-rate note will remain constant now that Texas Commerce Bank no longer announces its own prime rate. What do you tell her? If the amounts of the payments will not remain constant, how can she figure out how much the payments will be?

15.3. Bill Robertson (your friend that operates and develops grocery stores, most recently from Problem Set 12) comes in to discuss a problem he is working through in obtaining financing for a new shopping center that he is in the process of constructing. When Bill finishes the shopping center, the income will come from long-term leases with rents that should provide a fixed return to Bill above the expenses of operating the shopping center. Bill tells you that he has no interest in trying to make a profit on the financing. He just wants to make sure that once he obtains a loan, future fluctuations in the interest markets do not put him in a position where payments on the loan exceed the amount he is receiving from the leases that he already has in place.

After Bill leaves, you ask your associate Tom McCaffrey to try his hand at producing a draft of a promissory note for the transaction. Tom ? always careful ? comes back a few minutes later and points out that Bill never said specifically whether the note should have a fixed interest rate or a variable interest rate. Tom wants to know which type of note he should use. What do you tell him?

15.4. As it turns out, the lender from whom Bill obtains his loan (TownBank) uses a five-year interest-rate swap to facilitate the transaction. The notional amount of the swap is $2 million. TownBank agrees to pay a fixed rate of 9% against a return from the swap dealer (Cheeryble Bros.) of LIBOR plus three percent. {LIBOR is 6% at the time of the swap.} Bill’s loan for $2 million is at a fixed rate of 10% per annum, with interest-only payments for a term of five years. Answer the following questions about the transaction:

(a) If interest rates do not change during the first year, what net payment will be due under the swap?

(b) If LIBOR increases to 7% during the second year, what net payment will be due under the swap during that year?

(c) If LIBOR falls to 5% during the third year, what net payment will be due under the swap during that year?

(d) For each year, what will the net rate of return be for TownBank, taking account of its outstanding loan to Bill, the interest that Bill pays to TownBank, and the payment made on the swap.

15.5. Referring to the facts of Problem 15.4, suppose now that Cheeryble becomes insolvent during the third year of the swap (at a time when LIBOR has fallen to 5%). How would termination of the swap contract between TownBank and Cheeryble affect TownBank? If TownBank chose to obtain another swap contract to replace the canceled contract with Cheeryble, is it likely that the terms would be more favorable to TownBank than the terms in the existing contract or less favorable? {You should assume that TownBank and Cheeryble have no other swap contracts with each other at the time of Cheeryble’s insolvency.}

Problem Set 16

16.1. Your longtime client Jodi Kay (most recently from Assignment 17) calls you to ask you two usury questions about her standard form promissory note. On fixed-rate loans, she uses a form just like the form in Assignment 17. The Stated Rates of the notes in her current loan portfolio vary between nine and fourteen per cent per annum and between $1 million and $8 million in size. She would like you to prepare a brief memorandum for her files explaining why those notes are not usurious. What would your memorandum say? Tex. Finance Code §§ 302.001(a), 302.102(a).

16.2. Tertius Lydgate retains you for advice regarding a simple loan transaction. Bulstrode Bank has offered to loan Lydgate $1 million for Lydgate’s medical clinic. Bulstrode has offered him a variable-rate loan at a rate of prime plus 1.5%. Prime currently is 7%. He understands that the variable-rate loan will leave him exposed to the risk of paying more if interest rates go up, but he wants you to quantify that risk for him. He tells you that the transaction takes place in Texas and that the note will be in the form set out in Assignment 17, with a revision of the Stated Rate provision to call for “a per annum rate of interest equal to the lesser of (a) the Maximum Lawful Rate; or (b) one and one-half percent (1.50%) per annum above the Prime Rate; the parties specifically agree that the monthly ceiling described in Texas Finance Code § 303.204 applies for purposes evaluating the lawfulness of the Stated Rate.” Lydgate wants to know three things.

(a) First, he doesn’t know anything about the “Maximum Lawful Rate” described in the Promissory Note. He wants you to tell him what that rate would be if the auction rate for 26-week treasury bills rose to 8%, 11%, 13%, and 15%? Tex. Finance Code §§ 303.204, 303.301, 303.303, 303.304, 303.305.

(b) Second, assuming that the auction rate always remains five percent per annum below the Prime Rate described in the Promissory Note, at what rate would interest accrue in the circumstances described in question (a)? Could Lydgate contest that rate as usurious? Promissory Note § 2(d).

(c) Third, if the interest would not be usurious, can you think of any other way that he could sign the Promissory Note and still be in a position to avoid any legal obligation to pay interest at that high rate? Would bankruptcy help? 11 U.S.C. § 1129(b)(2).

16.3. Ben Darrow (your long-time client, going all the way back to Problem Set 1) calls you for advice about a new loan product that he is designing for his bank, First State Bank of Matacora (FSB). Essentially, the product is designed to deal with potential small-business borrowers who fill out an application but decide not to borrow money from the bank after the bank goes to the trouble of evaluating the application. The way the product works is that the borrower makes an up-front interest payment of two percent of the loan at the time of the application.

If the application is rejected, the money is refunded. If the loan closes, FSB applies the two-percent fee against interest accruing during the first two months of the loan. If FSB accepts the application but the borrower fails to close the loan (or repays the loan before the conclusion of the second month), FSB retains the two-percent fee. Assuming that Texas law applies, do you have a problem with that arrangement? Would your answer change if FSB was using that structure for home-mortgage loans instead of small-business loans? Texas Finance Code §§ 303.204(a)(2), 305.001, 305.002, 305.005.

16.4. After pondering the advice that you gave her in Problem 18.1, your friend and client Jodi Kay calls back about another variable-rate transaction using the form promissory note in Assignment 17 (just like the promissory note in Problem 18.2). In this case, however, the borrower has asked Jodi to remove Section 12 from the note. The borrower explains that it is not entirely sure exactly what it plans to do with the money. Jodi says that the potential borrower is quite creditworthy, and thus that she does not really have any concern about the request. Does the borrower’s request trouble you for any reason? Texas Finance Code §§ 302.102, 303.204(a)(2).

16.5. A friend of yours named Bill Stewart runs a small local computer-services company. His company’s main line of work involves setting up and troubleshooting custom operating systems for area businesses. Because of the nature of his business, his company has relatively few tangible assets. From his perspective, the main asset of the company is his own expertise. Reflecting the lack of collateral and the relatively risky nature of the business, he has been financing his company with a $300,000 line of credit from a local bank that bears interest at a floating interest rate of prime plus 10%. When prime rose last week above eight percent, his bank called him and told him that it had decided to terminate the line of credit because applicable state law (slightly different from the Texas law set forth above) absolutely bars it from charging interest at a rate greater than 18% per annum.

Bill is satisfied that the loan documents permit the bank to terminate the line of credit. He also tells you that he is not unsympathetic to the bank’s concerns and would be happy to pay a return of 20% per annum if he could get the funds needed to keep his business going. What do you recommend?

Problem Set 17

17.1. Tertius Lydgate is a physician for whom you’ve done work from time to time (going back to Problem Set 1). He approaches you now with a problem about a promissory note on which he is liable. The payment terms are precisely the same as the payment terms in the promissory note in Assignment 17, except that the monthly payment is exactly $20,000. Because he is in serious financial difficulty, he wants your help in calculating how much it would cost him to stop making payments on the note for a while. He has several questions for you. {For purposes of this problem, assume that the Maximum Lawful Rate applicable to the Promissory Note is 18% per annum.}

(a) First, he wants to know what the lender could do to him if he simply stopped making payments for three months. Could he cure the default at that time by paying the three late payments? What if he also paid interest and late charges on those payments? Would that be enough to cure the default? Promissory Note §§ 1, 6, 8, 9.

(b) Tertius points out that Section 6 of the note includes a fixed late charge of 4%. He sees that interest accrues under the note at 10% per year. Does that mean that he actually saves money if he can hold out on making a late payment for more than 4/10 of a year? Assuming that the lender never accelerates, what would Tertius owe if he managed to defer making a single payment for six months? Promissory Note §§ 1, 6, 9.

17.2. While eating lunch with you, Bill Robertson (your client the grocery-store operator, most recently from Problem Set 17) asks you a question about one of his loan transactions. The promissory note includes standard provisions regarding application of payments. Those provisions are identical to those in Sections 4 and 5 of the promissory note in Assignment 17, except that Section 4 of Bill’s note allows partial prepayments and does not require any prepayment fee for prepayments made less than five years before maturity of the note. Noticing that he was getting ahead on his cash flow, he made a total of four payments on his regular payment date last month (his regular payment and three month’s worth of prepayment). Because the note comes due in four years, the lender did not assess a prepayment fee. Bill tells you that he did not make a payment on the first day of this month, and planned also to skip payments the next two months. The way he looks at it, the lender is ahead because it got those three payments early. Accordingly, he was astonished when he got a call from the lender’s office yesterday telling him that he was in default for failing to make this month’s payment.

(a) Can you explain the basis for the lender’s complaint? Is the lender correct? Promissory Note §§ 4, 5.

(b) If the lender is correct, what benefit does Bill get from making the prepayments? Promissory Note §§ 1(ii), 5.

17.3. You are pleasantly surprised this afternoon to find Jodi Kay (your regular client from CountryBank, most recently from Problem Set 18) waiting in your office when you return from lunch. She brings you a special drafting problem. She wants you to evaluate CountryBank’s standard promissory note provisions regarding prepayment fees. In particular, she is concerned about the possibility that fees imposed under those provisions would be invalidated as unlawful penalties. Does it matter whether she uses a fixed-percentage prepayment fee (like the one in Promissory Note § 4) rather than a yield-maintenance prepayment fee (like the one at issue in Carlyle)? As she leaves, she cautions you not to worry about usury issues or other matters, just the penalty question. Promissory Note §§ 4, 6.

17.4. While she is with you, Jodi also raises some difficulties that she is having with a long-term promissory note that she has from La Domain, Ltd. (in the form set forth in Assignment 17). Jean La Domain has just called to ask Jodi to renegotiate the interest rate to drop it to 7%. Jean explained that interest rates have fallen dramatically in the five years that have elapsed since Jean signed the note. Jean threatened to prepay the note and take her business elsewhere if Jodi did not agree to lower the interest rate. Jodi thought that the note barred prepayment and wants to know where she stands. She acknowledges that the market rate for a similar note now would be only 7% per annum. She wants to know what Jean’s rights are under the Promissory Note. Furthermore, is there anything Jodi can put in her form notes to avoid similar problems in the future? Promissory Note § 4; 11 U.S.C. § 1129(b)(2).

Problem Set 18

18.1. Pleased with your advice in Problem Set 17, your friend Tertius Lydgate comes by this morning to discuss another round of financial difficulties. He says that he has found one bright spot in one of his transactions and wants to tells you about it. Lydgate is the guarantor of a large loan from Bulstrode Bank to Middlemarch Medical Clinics, Inc. (“MMC”). MMC has just closed its doors after protracted litigation with Bulstrode. Although Lydgate is depressed at the failure of MMC ? MMC has no remaining assets to pay Bulstrode or any of its other creditors ? Lydgate tells you that he gets some satisfaction out of the knowledge that Bulstrode spent $400,000 in legal fees pursuing MMC. Lydgate said that he was reading the terms of his guaranty agreement last night (which is identical to the Continuing Guaranty in the assignment) and figured out that Bulstrode cannot collect those legal fees from Lydgate under his guaranty. Lydgate explains that he has read Section 13 of the Continuing Guaranty carefully and understands that it allows Bulstrode to recover the litigation expenses of a suit against Lydgate, but not the expenses of a suit against MMC. Is Lydgate correct? Continuing Guaranty §§ 1, 2, 13; Promissory Note § 9.

18.2. California Fidelity Bank (“CFB”) has issued a $20 million line of credit to Jaffe Investments, Inc., a business operated by Wendell Jaffe and Carl Eckert. Although Jaffe runs the day-to-day affairs, Eckert provides most of the capital for the business. Accordingly, CFB took a continuing guaranty from Eckert in the terms set forth in the assignment. Yesterday morning, a grand jury indicted Jaffe on charges of embezzling funds from the company’s clients. Yesterday afternoon, Jaffe’s sailboat was found floating off the Santa Barbara coast. There was a suicide note, but police suspect that Jaffe fled to avoid his legal problems. This morning, Mac Voorhies (the loan officer at CFB) received a hand-delivered letter from Eckert, stating: “I hereby terminate the Continuing Guaranty that I have signed with respect to your loan to Jaffe Investments, Inc., and abjure any further liability whatsoever with respect to any future advances under that loan.”

Voorhies is concerned about the effects of the notice, mostly because he doubts that Jaffe left any assets in the company and because Eckert is his only likely source of payment. CFB currently has $2 million outstanding on the line of credit, which is accruing interest at about 13% per annum. More seriously, CFB has another important transaction pending under the Jaffe line of credit: CFB issued letters of credit backing up $10 million of short-term commercial paper that Jaffe Investments, Inc. issued almost two months ago. The paper matures next week. If Jaffe Investments fails to pay the holders of the paper the $10 million that they are owed at that time (and Voorhies has no reason to think that Jaffe will make that payment), the holders of the paper will be entitled to payment from CFB.

Voorhies says that Eckert easily has the assets to pay off the entire $20 million. Voorhies wants to know if the notice will limit Voorhies’ ability to pursue Eckert for the amounts CFB might have to pay on the commercial paper or subsequently accruing interest. What do you tell him? Continuing Guaranty § 4.

18.3. Jude Fawley (your wealthy stone-mason friend from Problem 17.1) comes to consult you about some serious problems with his business, Obscure Wessex Headstones (“OWH”). Several years ago you organized Jude’s business as a corporation, with Jude as the sole shareholder. Jude has guaranteed OWH’s $1.2 million line of credit with Wessex Bank (which contains a provision similar to § 8 in the Promissory Note in Assignment 17). Over the last six months, OWH’s net monthly income has decreased from $20,000 to only $2,000. At the same time, operating expenses have caused OWH to draw down its entire line of credit, so that it now owes Wessex the entire $1.2 million. OWH has only $10,000 cash on hand right now. Its current obligations include a $10,000 monthly payment due to Wessex on the first of the month and $8,000 in overdue bills from suppliers.

Jude tells you that he would feel terrible if he did not pay his suppliers, many of whom have been doing business with him for decades, but that he doesn’t want to do anything that would worsen his personal financial situation. He also tells you that he doesn’t mind all that much if he loses the stone-mason business, as long as he can keep the rest of his assets (which include a multi-million dollar business syndicating walking tours of rural Britain). What should he do?

18.4. Ben Darrow (your friend from the early days of the book) calls you in distress. He read in the paper this morning that one of his borrowers, Matacora Pipelines, Inc., was hit yesterday with a $1 million tort judgment. The judgment resulted from a tragic accident in which a Matacora employee working on construction of a new pipeline was killed by an exploding dynamite charge. Ben knows that Matacora does not have enough assets to pay the judgment and is worried about his $250,000 loan to Matacora (for which Ben has no collateral). On further questioning, Ben tells you that he has a personal guaranty from Bud Las-sen, the independently wealthy owner and operator of Matacora. Ben also tells you that he believes the entry of the tort judgment is a default on the loan to Matacora, because it constitutes a “material adverse change” in Matacora’s financial condition. What is your assessment of Ben’s situation? Will the situation change if Matacora files for bankruptcy?

18.5. Impressed with your work on the Jude Fawley matter (in Problem 20.3), Wessex Bank retains you to handle a proposed restructuring of one of its loans. For several years, Wessex has been lending to a growing chain of specialty stores called We-R-Red, which specialize in bright red clothing and accessories. Until now, the business has been operated as a sole proprietorship owned by Diggory Venn. Because of Venn’s considerable wealth, Wessex traditionally has considered the relationship a safe one even though the loan is unsecured.

Venn recently learned that the Environmental Protection Agency has decided to list as a toxic substance the chemical that Venn uses to makes his products (reddelic acid). Venn believes that the resultant dye (ordinary “reddle”) is completely safe, but is worried about the possibility of some accident that would result in environmental liability that would wipe out all of his assets. In response, Venn has decided to incorporate the business under the name of We-R-Red, Inc. Venn will remain the controlling shareholder and chief executive officer. Venn would like to transfer the loan to the new entity, but is willing to issue a guaranty of the loan himself. The loan officer at Wessex, Eustacia (“Stacy”) Vye, wants to know what you think about Venn’s proposal. What do you say?

Problem Set 19

19.1. Jude Fawley is back to see you again, following up on the issues that you discussed with him in Problem 18.3. Shortly after the events at issue in that problem, Jude managed to sell his company OWH to a new investor (a Canadian named Rick Compo) who planned to put up the additional funds necessary to keep the business running. Unfortunately, the headstone business was not as profitable as Compo anticipated. Compo called Jude this morning to advise him that OWH will not make a loan payment that is due from OWH to Wessex next week. OWH is primarily obligated on that loan, with a guaranty by Jude individually. Jude thinks that OWH’s assets still have considerable value, and thus has determined that the best approach is to pay off the loan with his personal assets and then try to recover from the business. Assuming that Jude’s guaranty was in the form set forth in Assignment 20, will that plan work? Continuing Guaranty § 11.

19.2. Your regular client Jodi Kay from CountryBank has a question about a guaranty that she is negotiating. She sent the potential guarantor her standard-form guaranty (identical to the form in Assignment 18). The guarantor responded by asking her to delete the first sentence of Section 11. {The provision currently states: “Guarantors shall have no right of subrogation, and waive any right to enforce any remedy that Lender now has or may hereafter have against Borrower, and waive any benefit of, and any right of reimbursement, indemnity, or contribution or to participate in any security now or hereafter held by Lender.”} The guarantor proposes replacing it with the following: “Guarantors shall be entitled to rights of reimbursement and subrogation, but only to the extent of payments actually made to Lender under this Guaranty.” The guarantor explained to Jodi that a recent amendment of the Bankruptcy Code (adding 11 U.S.C. § 550(c)) had made the old provision unnecessary. Jodi wants to know how you would respond to the request. What do you say?

19.3. Stacy Vye (the Wessex loan officer from Problem 18.5) extends a loan to We-R-Red, Inc. (WRRI). She also obtains a guaranty from Diggory Venn, the sole shareholder of WRRI. Later, Stacy, concerned about the solvency of WRRI, settles with WRRI for 60 cents on the dollar and releases WRRI from any further liability. Consider the following hypotheticals:

(a): Both the Note and the Guaranty are on the lender's standard forms, resembling the forms in Assignments 15 and 18. To what extend does UCC § 3-605 apply to determine the rights of WRRI and Venn? UCC §§ 3-103(a)(17), 3-605 & comment 2.

(b): The original transaction is effectuated with a negotiable promissory note, on which Venn signs as a co-signer. The relevant settlement agreement does not include any terms that address the effect of the release on the rights of Stacy against Venn or the rights of Venn against WRRI. What effect does the release have on those rights? UCC § 3-605 & comment 4.

(c): Same facts as question (b), except that the settlement agreement states that Stacy returns the right to enforce the note aainst Venn on its origianl terms. UCC § 3-605 & comment 4.

(d): Same facts as question (b), except that the settlement agreement states that Stacy retains the right to enforce the note against Venn on the original terms and that Venn retains its rights against WRRI. UCC § 3-605 & comment 4.

19.4. Cynthia Sharples has been referred to you by a friend of yours that practices family law. It appears that Cynthia and her former husband Ernest owned a framing business, for which Ernest obtained a loan that Cynthia guaranteed. In their divorce last year, the business was assigned to Ernest, along with full responsibility for the loan (the balance of which at the time was about $220,000). Cynthia knew that the business was not doing well, but learned yesterday that it has gotten worse than she had known. Specifically, Cynthia received a letter from the lender advising her that the lender graciously has accepted her ex-husband’s request to modify the terms of the loan to increase the stated interest rate from 8% to a floating rate of prime plus 3%. {Prime currently is 7.5%.} In return, the lender also has agreed to forgo taking action in response to Ernest’s failure to make a number of past-due payments that total about $32,000; the lender proposes to add those payments to the current principal balance, together with fees for this transaction. At the end of the day, the total principal balance would be about $265,000. The lender is seeking Cynthia’s consent and a reaffirmation that her guaranty continues to apply to the debt as modified.

The letter is courteous and respectful, but closes by expressing an intention to pursue its remedies as aggressively as possible if Cynthia does not agree to the proposal by the end of the week. What do you recommend to Cynthia?

Problem Set 20

20.1. Archie Moon (a bookdealer friend that you’ve been representing since Problem Set 9) sends you a telecopy one morning that includes a proposed agreement with one of his major suppliers. The agreement states that Archie “at all times will maintain a clean standby letter of credit from a bank reasonably satisfactory to Seller.” Archie has called his banker at Safety Central Bank, who has agreed to issue a letter of credit in the appropriate amount if Archie allows the bank to maintain possession of some certificates of deposit that Archie owns. Archie has no problem with that arrangement, and wants to know if you have any concerns about the letter of-credit provision quoted above.

20.2. Jodi Kay is working on a possible construction loan to Chancellor Investments, a long-time developer in her area that has suffered some hard times recently. Because Jodi has never done any business with Chancellor before, she is highly motivated to get the transaction for her bank. Jodi’s bank ordinarily insists on a personal guaranty for at least one-quarter of the construction-loan amount, even for the most attractive projects from the most reputable developers.

Jodi’s concern is that the principal of Chancellor Investments (Olive Chancellor) has suffered some financial reverses during the last several years that make Jodi doubt Olive’s ability to cover the $500,000 guaranty that would be standard in this transaction. When Jodi raised that concern with Olive, Olive responded that she understood Jodi’s concern. Olive asked if Jodi would be willing, in lieu of the guaranty, to accept a $500,000 letter of credit from SecondCity Bank, Chancellor’s principal bank Olive faxed SecondCity’s letter-of-credit form to Jodi, who says it is identical to a form that you have approved in the past. Jodi is completely satisfied with SecondCity’s financial strength. Is there any other reason that you can see why Jodi should be concerned about accepting a standby letter of credit as a substitute for a guaranty?

20.3. Jodi followed your advice in Problem 22.2 and the loan transaction went forward without incident. Several months later, however, you read in the newspaper one morning of a bankruptcy filing by Chancellor Investments. Accordingly, you are not surprised later that afternoon to receive a phone call from Jodi. She tells you that she has just spoken with the general contractor on the project, who tells her that he could finish the project for $300,000. Jodi started by calling Olive to tell her that she plans to pursue her remedies as forcefully as possible to get the $300,000. Jodi became concerned when she received a telecopied letter from Olive’s attorney advising her that any action against Olive or the SecondCity letter of credit would violate the Bankruptcy Code’s automatic stay. What do you advise? 11 U.S.C. §§ 105, 362(a)(3).

20.4. Stacy Vye (the Wessex Bank loan officer from Problems 21.3 and 21.4) calls you about a $40,000 standby letter of credit that one of her less experienced loan officers issued several weeks ago. The letter of credit was issued for the benefit of Timothy Fairway at the behest of Stacy’s customer Damon Wildeve. Fairway had agreed to build some customized cabinetry for Wildeve’s office. This morning, Fairway called Stacy to tell Stacy that Fairway would be drawing on the letter of credit because Wildeve refused to pay when Fairway delivered the cabinets to Wildeve yesterday. When Stacy called Wildeve, Wildeve told Stacy that he was sorry but that his business had done so poorly that he had no money to pay Fairway. A few minutes ago, Fairway appeared at Stacy’s office with a draft on the letter of credit. Because the draft appeared to be in order, Stacy paid it.

Stacy is concerned because the loan officer that issued the letter of credit (Clym Yeobright) arranged for reimbursement by having Wildeve pledge $50,000 of Wildeve’s stock in Tram Whirl Airlines (TWA). Because of TWA’s bankruptcy last week, that stock is now completely worthless. Stacy wants to know what she can do to get paid if, as appears likely, Wildeve has no money to pay her. UCC §§ 2-702(2), 5-117(a); 11 U.S.C. §§ 509(a), 546(c).

20.5. Before she leaves, Stacy asks about a problem that she has on another one of her letters of credit. Wessex Bank issued a standby letter of credit for the benefit of Bulstrode Bank. Stacy issued the letter of credit to back up the obligation of Tertius Lydgate to repay a construction loan for a new medical office building that Lydgate has under construction, but neglected to take any collateral securing Lydgate’s obligation to reimburse Wessex if it should be forced to pay on the letter of credit. In addition to the letter of credit from Stacy, Bulstrode took a lien on the office building to secure Lydgate’s obligation to repay the loan. Because Lydgate’s financial affairs have collapsed, Lydgate has fallen into default on the loan from Bulstrode. Accordingly, Bulstrode last week presented a draft on the letter of credit to Stacy. In response to the draft she issued a check to Bulstrode in the full amount of the loan from Lydgate.

Thinking it was a routine matter, Stacy hired one of your associates to attempt to obtain reimbursement from Lydgate. Stacy assumed that Wessex would be subrogated to Bulstrode’s lien against Lydgate’s office building and that Wessex could use that lien to take the office building from Lydgate. It turns out, however, that a state statute requires mortgage creditors to release liens whenever they receive full payment of their loans. Hence, Bulstrode released the lien on the building the day after Bulstrode received payment of the loan from Wessex.

(a) Does that release by Bulstrode mean that Wessex has lost its right to use that lien to pursue Lydgate? UCC § 5-117 & comment 2.

(b) Would the same thing be true if Stacy had acted as a guarantor instead of having Wessex issue a letter of credit? In pondering that question, assume that the guaranty would have been in the form set out in Assignment 20, except that it also would have included a defeasance provision like the one set out in Assignment 21. Continuing Guaranty § 10.

20.6. Bulstrode issues a standby letter of credit related to an issue of bonds by General Motors. The letter of credit incorporates ISP98 by reference. The letter of credit conditions payment on presentation of a draft described as follows: "The draft must include the exact wording that follows: 'Jeneral Motors has failed to make a payment on its Series C 20-year bonds maturing January 1, 2006.'"
General Motors defaults on the bonds. Subsequently, the beneficiary of the letter of credit submits a draft that states: "General Motors has failed to make a payment on its Series C 20-year bonds maturing January 1, 2006." Is Bulstrode obligated to pay? UCC § 5-108(a) & comment 1; UCP art. 13(a); ISP98 Rule 4.09.

20.7. In a weak moment last summer, you agreed to serve on a committee considering revisions to the ICC Uniform Customs and Practice for Documentary Credits. (One of your partners suggested that it might be a good way to attract some new clients.) Your first task on the committee is to consider differences between that document and ICC ISP98. You have been asked to write an analysis of two of the ISP provisions. The first of the provisions is Rule 4.09, at issue in the previous problem. The second is Rule 4.08, which provides that a standby letter of credit is presumed to require a demand for payment even if the letter of credit does not call for it. As you know, those rules differ from the rules set out in UCP art. 13, which include no analogous requirement for specific documents and contemplate examination under “international standard banking practice.”

Do you see any basis for either of the two distinctions? Would your recommend revising the UCP to bring it into conformity with ISP98?

Problem Set 21

21.1. Jodi Kay (your long-standing client from CountryBank) has started work on a project to sell a number of the bank’s less desirable miscellaneous assets. The first item that comes to hand is a corporate bond issued by HAL Corp., in the following (standard) form:

HAL Corp.
Albany, New York
8 percent Bond
Due January 1, 2020

For value received, HAL Corp., a New York corporation (the “corporation”), promises to pay to Mark Henry, or registered assigns, on January 1, 2020, the principal sum of $1,000 in lawful money of the United States of America. The Corporation further promises to pay interest on the principal sum from January 1, 1990, at the rate of 8 percent per annum in lawful money of the United States of America. Interest will be paid semiannually on July 1 and January 1 of each year after January 1, 1990, until the principal sum hereof has been paid or provision for its payment has been made.
The principal of this Bond will be payable at the principal office of the Corporation (or at whatever other place may be designated in writing by the Corporation from time to time) upon the presentation and surrender hereof. The semiannual interest payments will be mailed to the registered holder hereof at the address last furnished in writing to the Corporation.
This bond is registered both as to principal and interest and is transferable only on the books of the Corporation by the presentation and surrender hereof accompanied by an assignment form duly completed and executed by the registered holder hereof or a duly authorized attorney.
IN WITNESS WHEREOF, the Corporation has caused this Bond to be signed by its duly authorized officers on January 1, 1990.

Trying to determine exactly what she can say about it, she faxes you a copy of the bond with a cover sheet asking you to get back to her as soon as possible. She is trying to fill out a form that requires her to state whether each asset is a negotiable instrument. Does the bond qualify? UCC §§ 3-104(a), 3-109.

21.2. Pleased with your thoughtful advice in Problem 21.1, Jodi faxes you another one. This time it’s the promissory note set out in Assignment 17. What is your opinion? UCC §§ 3-103(a)(9), 3-104(a), 3-106(a), 3-108, 3-109, 3-112(b).

21.3. Late in the evening, Jodi calls to tell you that she has “just one more” for you to look at. She tells you that she has a cache of several hundred home mortgage notes, all of which are on identical forms. She faxes you the form, which appears to be the standard form promulgated by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. It includes the following provisions:

4. BORROWER’S RIGHT TO PREPAY
I have the right to make payments of principal at any time before they are due. A payment of principal only is known as a “prepayment.” When I make a prepayment, I will tell the Note Holder in writing that I am doing so. . . .

10. UNIFORM SECURED NOTE . . . In addition to the protections given to the Note Holder under this Note, a Mortgage, Deed of Trust or Security Deed (the “Security Instrument”), dated the same date as this Note, protects the Note Holder from possible losses which might result if I do not keep the promises which I make in this Note. That Security Instrument describes how and under what conditions I may be required to make immediate payment in full of all amounts I owe under this Note.
Do those provisions prevent the home-mortgage notes from being negotiable? UCC §§ 3-104(a), 3-106, 3-108.

21.4. Ben Darrow (your rural banker friend, most recently from Problem 20.4) calls you to ask about an unusual item that has landed on his desk. This morning’s ATM deposits included a $12,000 check where the drawer (Carol Long) had crossed out the printed words “to order of” and written in pen “only to.” The result is that the check states: “Pay only to Jasmine Ball.” It appears from the back of the check that Ball cashed the check at Ovco Drugs in downtown Matacora. Ovco Drugs, in turn, deposited the check into its account at First State Bank of Matacora (Darrow’s bank). Darrow wants to know if the check is valid and any advice you have as to what he should do. He tells you that Long is a valued customer, so he does not want to do anything wrong. UCC §§ 3-104(c), 4-301(a).

21.5. An old law-school classmate of yours named Doug Kahan works for the Internal Revenue Service. While you are reminiscing with him one afternoon, he asks you about a funny incident that came up the preceding week. He tells you that he’s always heard stories about taxpayers mailing in their payments written on shirts, the “shirt off their back,” as it were. Because he had never seen such a thing in all his years at the IRS, he has dismissed those tales as nothing but a common urban myth. This week, however, he received just such a package: a box including a (somewhat worn) white dress shirt, with the following written in black ink across the back of the shirt: “Pay to the order of the Internal Revenue Service $150,000.” The taxpayer had scrawled its signature below that sentence and written “SecondBank” and a series of numbers to the left of the signature. Those numbers appear to identify the taxpayer’s account at SecondBank.

Doug’s assistant took the shirt to a branch of SecondBank a few blocks away. SecondBank, however, refused to honor the shirt-check. It acknowledged that the taxpayer had an account at SecondBank, that the shirt properly identified the taxpayer’s account number, and that the account contained funds adequate to cover the specified payment. The bank explained, however, that it had a policy of honoring checks only if they were written on forms supplied by the bank.

Doug is frustrated, because he has been attempting to collect payment from that particular taxpayer for several years. He tells you that the shirt-check story he’s heard always ended with the statement that the shirt is a valid instrument. Is that right? If so, doesn’t the bank have to pay it? What do you tell him? UCC §§ 3-103(a)(6), 3-104(a), 3-104(e), 3-104(f), 3-108(a), 3-408.

Problem Set 22

22.1. This morning you meet with a new client named Tom Mae. Tom has operated billiard halls on the west side of town for several years and recently started to operate a check-cashing business with counters in each of his billiard halls. The check-cashing business operates as Tom’s Kash Outlet (“TKO”). The business has been successful; Tom is cashing about 150 checks a day. A long-time regular at one of the locations suggested to Tom that he see a lawyer to make sure that Tom was handling his checks properly.

Tom tells you that his normal practice requires the customers to sign the top end of the reverse of the check. Like most check-cashing services, Tom’s business has a policy against cashing checks for parties other than the named payee. Accordingly, his clerks always check to make sure that the name with which the customer signs matches the name of the payee on the front of the check. Like most check-cashing services, Tom’s business has a policy against cashing checks for parties other than the named payee. The clerks then examine a driver’s license to ensure that the signer is in fact the payee. Finally, his clerks stamp the top end of the reverse of each check, just below the signature by the customer. The clerks use a rubber stamp that reads “Tom’s Kash Outlet.” The result is something like Figure 22.2.

S/ PAUL PAYEE

TOM’S KASH OUTLET

(a) Tom first wants to know if his procedures expose him to any undue risks. What do you think? UCC §§ 1-201(20), 1-201(39), 1-201 comment 39, 3-109(c), 3-204(a), 3-205(b) & (c), 3-206(c), 3-401(b), 3-401 comment 2, 3-402(a).

(b) Tom also wants to know what additional risks he would face if he began accepting third-party checks. He says that customers frequently try to cash checks that have been indorsed to them by the named payee. If the check appears to have been specially indorsed by the named payee, and is submitted for cashing by the person to whom the named payee indorsed the check, what risk does Tom face in cashing the check? UCC §§ 1-201(20), 3-415(a), 3-416(a)(1), 3-417(a)(1), 3-420(a).
(c) What advantages would TKO gain if it altered the stamp with a line above its name that said either "Pay to TKO" or "For Deposit Only"?

22.2. While Tom is in your office, you get a call from Doug Kahan, who wants to follow up on your analysis of Problem 23.5 (the problem where Doug could not get a taxpayer’s bank to honor a check written on the back of the taxpayer’s shirt). What Doug wants to know is, if the IRS can’t make the bank pay the check, can the IRS at least sue the taxpayer on the shirt-check? UCC §§ 1-201(20), 3-301(i), 3-310(b)(1) & (3), 3-414(b).

22.3. While having lunch with your friend Bill Robertson (a grocery-store operator and real-estate developer that you’ve represented on a variety of matters since Problem Set 9), Bill’s assistant Jan Brown asks you about a problem she has. She has a particularly difficult tenant that has been complaining constantly about problems with the space it leases from Bill. Finally, Jan received from the tenant this morning a check for exactly half of what she believes the tenant owes, including a notation on the check that it constitutes “Full Payment for all Past-Due Rent.” In the past, Jan has had a practice of drawing a line through such a notation and depositing the check. Her view is that the tenant cannot unilaterally decide that the check constitutes full payment and that drawing a line through the full-payment notation is adequate evidence of her rejection of the tenant’s position. Jan wants to know what you think of her practice. What do you say? UCC § 3-311.

22.4. Pleased with the thoughtful advice that you provided in Problem 24.1, Tom calls you back a few weeks later to ask whether you would be interested in doing some work for him collecting checks that payor banks dishonor after he cashes them. For the first installment of the project, Tom wants to know whom he could sue on each of the following three checks:

(a) The first check was written by Dominic Felse and payable to Chad Wedderburn. Tom’s employee took the check in accordance with Tom’s procedures. Thus, the check bears an indorsement that purports to be the signature of Chad Wedderburn. It turns out, though, that the person that cashed the check actually was Helmut Schaffler. Schaffler had mugged Wedderburn and stolen his wallet, including Wedderburn’s driver’s license and the check. Schaffler indorsed the check as requested by Tom’s clerk. Because Schaffler bears a vague resemblance to Wedderburn, Tom’s clerk did not understand that Schaffler in fact was not Wedderburn.

When Felse heard of the attack on Wedderburn, he stopped payment on the check. Felse’s bank dishonored the check, so it eventually was returned to Tom. Can Tom sue Felse on the check? Wedderburn? Schaffler? UCC §§ 1-201(20), 3-205(a), 3-301(i), 3-401(a), 3-403(a), 3-414(b), 3-415(a), 3-416(a)(1).

(b) The second item is a check that was written by Owen Archer as “Pay to the order of bearer.” Nicholas Wilton brought the check into one of Tom’s facilities. Because Tom’s clerk could not figure out whose signature to get, the clerk simply paid Wilton cash for the check and took possession of it without obtaining any indorsement at all. The bank dishonored the check and returned it to Tom. Can Tom sue Wilton? Archer? UCC §§ 1-201(20), 3-109, 3-301(i), 3-401(a), 3-414(b), 3-416(a)(1).

(c) The third check was written by Milo Turner to Ralph Kahn. Two signatures appear on the back of the check. The first (at the top) is by Ralph Kahn and states “Pay to Tom Mae, /s/ Ralph Kahn.” Below that appears a signature by Callixtus Huckaby. Tom is not sure what happened, but when he tried to deposit the check it was dishonored, apparently because Turner has closed his account and left town. Can Tom sue Kahn? Huckaby? If Tom successfully sues Huckaby, can Huckaby recover from anybody else? UCC §§ 1-201(20), 3-205(b), 3-205(d), 3-301(i), 3-414(b), 3-415(a), 3-416(a), 3-419.

22.5. One Friday morning you get a call from Jodi Kay (your friend and longtime client from CountryBank). She has a question from an irate customer named Ishmael Chambers. Chambers wrote a $3,400 check to purchase a new stereo system from Alan’s Stereo Service. When Chambers put the stereo together the next day, the stereo would not work. Chambers called Alan’s and asked if Chambers could return the stereo, but could not get an answer on the phone. Chambers then drove by the store and observed prominent “going out of business” signs. Chambers promptly called the bank and asked Jodi to stop payment on the check. Jodi told Chambers that Jodi could not stop payment because she already had paid the check. Chambers asked Jodi if he could come in and look at the check.

When Chambers came in, he looked at the back of the check and saw that there was no indorsement by Alan’s, only a stamp by BigTown Bank (which appeared to be Alan’s depositary bank). Bragging of his undergraduate business-law class, Chambers told Jodi that Jodi had acted improperly in paying the check. He insisted that BigTown Bank was not the holder of the check because of Alan’s failure to indorse the check. Accordingly, he says that Jodi has to give him back the money. Jodi wants to know if Chambers is correct. What do you say? UCC §§ 1-201(20), 4-205(1), 4-401, 4-401 comment 1.

22.6. Cliff Janeway (your book dealer client dating back to Assignment 1) calls you with a question about a payment he just received from one of his large customers named Clydell Slater. Janeway’s normal arrangement with Slater requires Slater to pay him once a month for all of the books that Slater bought during the preceding month. Slater’s recent purchases, however, have been much larger than usual: they totaled $12,000 during the last two weeks. Accordingly, Janeway called Slater last week and asked Slater to forward payment immediately. Today in the mail Janeway received an odd-looking check for $12,000: it appears to be drawn on the Third State Bank of Yakima, but also is signed by that bank in the lower right hand corner. In the lower left-hand corner it lists Clydell Slater as “remitter.” Cliff thinks he recently heard some negative news about that bank and worries that Slater might be trying to pull something on him. Cliff asks you what he should do. What do you say? UCC §§ 3-104(g), 3-310.

Problem Set 23

23.1. When you come into the office Monday morning, you find a telephone message from Stacy Vye (from Wessex Bank, a client of yours since Problem Set 20) asking you to call her about a package of promissory notes that she wants to acquire. None of the notes mature during the next five years, but in each of them, the borrower has missed one or more of the recent scheduled monthly payments. The seller of the notes has not yet accelerated the date of maturity of the notes or otherwise responded to the default. Wessex Bank plans to acquire a package of those notes at a deeply discounted purchase price, reflecting the fact that the notes currently are in default. Stacy says that she does not need you to examine the notes to determine whether they are negotiable in form. Instead, assuming that they are negotiable in form, that the seller of the notes is the current holder of the notes, and that Stacy obtains proper indorsements in connection with the purchase, she wants you to tell her whether her knowledge that the borrowers have missed payments would prevent her from becoming a holder in due course of the notes.

She tells you that the notes have two different types of payment schedules. Some call for a series of amortizing monthly payments (part interest and part principal), while others call for monthly payments of interest only, with the entire principal due in a single “balloon” payment on the date of maturity. What do you tell her? UCC §§ 3-302(a)(2)(iii), 3-304, 3-304 comment 2.

23.2. You have lunch today with Bill Robertson, a grocery-store operator whom you have represented on a variety of matters dating back to Problem Set 9. He tells you that he has gotten into a dispute with Bulstrode Bank over a $2,000,000 promissory note that Bill issued to Texas American Bank (“TAB”) in connection with a mortgage of his recent project “Shops at Four Corners.” Bill tells you that he paid off the TAB note last month with a lump-sum payment of $2,000,000, made by a wire transfer directly to TAB. Accordingly, Bill was surprised yesterday to receive a telephone call from Bulstrode Bank informing Bill of the address to which Bill should send this month’s payment. When Bill told the officer from Bulstrode (Nicholas Bulstrode) that Bill already had paid off the TAB note last month, Bulstrode laughed and said that wasn’t his problem, because Bulstrode purchased the TAB note from TAB six weeks ago (two weeks before Bill made the $2,000,000 payment). Bill can’t believe that he might be liable to Bulstrode for a note that Bill already has paid. What do you tell him? UCC §§ 3-302(b), 3-601(b), 3-602(a).

23.3. Following up on your successful work in Problem Set 24, you take an afternoon field trip to visit your client Tom Mae at his pool-hall check-cashing service. While there, he asks you about a traveler’s check that he recently cashed for a customer. The check was issued by Hunt Bank and payable to “bearer,” but required a countersignature from Jane Kingsley as a condition to payment. It turns out that the customer for whom he cashed the check had stolen the check from Kingsley. The customer forged the Jane Kingsley countersignature. Because Kingsley had notified Hunt Bank of the theft before the check was processed, Hunt Bank refused to honor the check. Accordingly, Tom is stuck with the check. Not surprisingly, Tom cannot locate the customer for whom his employee cashed the check. Tom points out to you that he did not really do anything wrong. Because the forgery was quite good, he could not plausibly have known that there was a problem. Why can’t he rely on holder-in-due-course status to enforce the check against Hunt Bank? UCC §§ 1-201(25), 3-104(a), 3-106(c), 3-106 comment 2, 3-305(a)(2).

23.4. Your friends at the World Wilderness Fund (WWF) call you for some advice about a gift that they recently received. They explain that the problem arises out of a transaction between Diggory Venn and Clym Yeobright. Venn operates a dyeing business, under which he dyes clothes a bright red that (he claims) is permanent and impervious to extremes of heat and cold. Clym Yeobright asked Venn to dye for him a set of 20 uniforms that Yeobright planned to sell to the local fire department. Yeobright agreed to pay for the work with a negotiable promissory note in the amount of $3,000, payable to the order of Venn in equal monthly installments over two years. When Venn finished the uniforms, Yeobright delivered the note. Venn promptly took the note to Stacy Vye at Wessex Bank. She agreed to purchase the note from Venn for $2,800. Venn added a special indorsement, as follows:

Pay to Wessex Bank
/s/ Diggory Venn

Venn then gave the note to Stacy. A few weeks later, Stacy called your friends at WWF and told them that Wessex wanted to donate the note to WWF. She delivered the note to them, with a special qualified indorsement, as follows:

Pay to WWF, Without Recourse
Wessex Bank,
by /s/ Eustacia Vye
Vice President

It turns out that Venn did a poor job of the dyeing. The dye washed out of the uniforms the first time that they got wet. Accordingly, Yeobright refuses to pay the note. WWF got a letter today from Yeobright’s lawyer asserting that WWF could not force Yeobright to pay because WWF is not a holder in due course. WWF wants to know your opinion. What do you say? UCC §§ 3-203(b), 3-204, 3-205, 3-302(a)(2), 3-303(a), 3-305(a)(3), 3-305(b), 3-412.

23.5. Consider again the facts of Problem 1.3, in which Bud Lassen wrote Carol Long a $1,500 check for some kitchen equipment that was too large for his kitchen and then stopped payment on the check in an effort to avoid payment. Suppose that instead of cashing the check at the First State Bank of Matacora (as Carol did in Problem 1.3), Carol properly indorsed the check and deposited it into an account at her own bank (the Nazareth National Bank). Now suppose that the Matacora bank (on which the check was drawn) dishonored the check the next day based on the stop-payment request and returned it to the Nazareth bank before the funds were available to Carol under the Nazareth bank’s customary funds availability policies. What can the Nazareth bank do to recover the funds that it has credited to Carol’s account? UCC §§ 1-201(20), 3-302, 3-303(a)(2), 3-305(b), 4-105(5), 4-210, 4-211, 4-214.

23.6. Maggie Tulliver calls you about a $3,000 promissory note that she signed to pay for some new furniture in her living room. The promissory note obligated her to make monthly payments on the furniture over a three-year period. She has made the first six payments, but wants to stop paying because the furniture has never arrived. When she called the telephone number listed on the payment coupons, she reached an officer at SecondCity Finance (“SF”). That officer told her that she should take up any problem about the furniture with the dealer from whom she bought it; her obligation to pay SF (the officer says) is absolute. Maggie says that the dealer won’t return her calls and wants to know if she can stop making her payments. You tell her not to worry. You envision an easy time taking care of SF on the theory that the note will contain the standard FTC legend that prevents SF from obtaining holder-in-due-course status.

Life should be so easy! When you review the note you discover that it does not contain the prescribed legend. Does that mean that SF is a holder in due course? UCC §§ 1-201(25), 3-103(a)(4), 3-106(d), 3-302(a)(2).

Problem Set 24

24.1. This week you have a new client, Bob Puget from Puget Shipping Company. His first question relates to Puget’s form bill of lading, which is identical to the form set out in Figure 24.1. Puget tells you that a recent audit of Puget’s files indicated that several recent shipments were made in which the bill was completed by an inexperienced clerk. Contrary to Puget’s customary practices, the clerk typed the name and address of the consignee into blank 2 (designating that party as the consignee). If the bills were completed in that manner, do they constitute documents of title? Are they negotiable? UCC §§ 1-201(6) & (15), 7-102(e), 7-104(1)(a).

24.2. Puget’s second question involves a shipment of two containers of air movers (a type of industrial machinery used to cool factory workers) from Seattle to a Brasileira Lumber, in Rio de Janeiro. The seller was Guterson Pneumatic Tools. At the time of the shipment, Puget issued a negotiable bill of lading stating that the goods were consigned to the “order of shipper” (that is, to the order of Guterson, the seller). The vessel on which the goods are being shipped currently is located in Los Angeles. This morning Puget received an urgent telephone call from the captain of the vessel. The captain says that an attorney for Olympia National Bank has just served papers on him claiming that it has a lien on all of Guterson’s assets. The attorney wants Puget to hand the goods over to Olympia.

When Puget called Brasileira Lumber and advised it of the situation, Brasileira told Puget that it intended to pay for the goods as contracted and that Brasileira (to put it mildly) would be displeased if Puget did not deliver the goods as agreed. It appears that the original bill of lading currently is in an overnight mail package on the way to Banco de Janeiro (Brasileira’s bank). What should Puget do? UCC §§ 7-104(1)(a), 7-403, 7-602.

24.3. Later in the day, Puget calls you back with one final question about the Guterson shipment from Problem 24.2. He is frustrated because he has just discovered that the check Guterson gave him for the shipping charges has bounced. When Puget tried to telephone Guterson about paying for the charges, Puget listened to a recording stating that Guterson’s number had been disconnected. When he went to Guterson’s business, he saw that the warehouse was completely boarded up. When you question Puget about his charges, he explains that he always notes the charges on the bill, but ordinarily does not insist on payment until he delivers the goods. In this case, his understanding was that the seller Guterson would pay him before the goods arrived. Do you have any suggestions for how Puget can obtain payment? UCC § 7-307, UCC § 7-403(2).

24.4. You get a call this morning from a new client, Giles Winterborne, who runs a gourmet apple company with customers worldwide. He came by this afternoon to consult about a shipment of apples that he sent to one Grace Melbury (in Paris), using a standard documentary draft transaction to protect his right to payment. When the draft arrived in Paris, Melbury called up Winterborne, told Winterborne that she had changed her mind and no longer wanted the apples, and advised Winterborne that she would not pay for the apples. Later that afternoon, Safety Pacific (Winterborne’s bank) called to advise Winterborne that it had been notified by telex that Melbury had dishonored the draft. Winterborne comes to you confused. Can’t he force Melbury to pay the draft? If he can’t, he wants to know what the point of all of the documents and drafts is? UCC §§ 3-401, 3-408. How would his position differ if he had shipped the apples with a nonnegotiable document of title consigning the apples to Melbury? {In this problem and the rest of the problems in this assignment, you should assume that rights on the drafts in question are determined either under Article 3 or under rules that are substantively identical to Article 3.}

24.5. Satisfied by the frank advice that you rendered in Problem 26.4, Winterborne returns to you the next day with a new problem. His question involves another documentary draft shipment, this time to Edred Fitzpiers in Hintock, England. The collection document was in the customary form, calling for delivery of the documents “against payment.” For reasons that are unclear to you and Winterborne, Hintock Bank and Trust (Fitzpiers’s bank) released the documents to Fitzpiers without obtaining payment from Fitzpiers. Accordingly, Fitzpiers now has the apples and Winterborne has not been paid. What can Winterborne do to obtain payment? C.I.S.G. Article 62.

24.6. A week later, Winterborne comes to you with another problem. This one involves a banker’s acceptance transaction, in which he sold some apples several months ago to Marty South, drawing a draft on the same Hintock Bank and Trust. Hintock accepted the draft and sold it to Barclays Bank on the open market. Unfortunately (for reasons that should be obvious from Hintock’s conduct in Problem 26.5), British regulatory authorities recently closed Hintock. Thus, Hintock did not pay the banker’s acceptance when it came due. Barclays has now approached Winterborne seeking payment from him as “drawer” of the draft. Winterborne can’t understand what possible claim Barclays has against him. “I shipped apples to Marty South. She got the apples. I got paid. What’s the problem?” Does he have anything to fear? UCC §§ 3-414, 3-415.

Problem Set 25

25.1. Pleased with your fine analysis in the matter of Problem 25.2, Bill Robertson comes to you this Monday morning with a similar problem. This one involves one of a series of bonds issued by Bill’s company, Pearland Holdings, Inc. Each of the bonds states that it is payable to the order of the initial purchaser (identified by name on each bond). The bonds also state that transfers of the bonds can be registered upon Pearland’s books. This particular bond was issued to Texas American Bank. Like the note in Problem 25.2, the bond was acquired from Texas American Bank by Bulstrode with an appropriate indorsement from Texas American Bank. Bulstrode did not, however, register its acquisition with Pearland or otherwise notify Pearland of its ownership of the bond. Accordingly, Pearland has made the last two payments on the bond to Texas American Bank rather than Bulstrode.

Bulstrode has written Pearland demanding the two payments that Pearland has made to Texas American Bank that were due after the date on which Bulstrode acquired the bond. Is Pearland obligated to Bulstrode for those payments? UCC §§ 3-302(b), 3-601(b), 3-602(a), 8-102(a)(13), 8-102(a)(15), 8-103(d), 8-207(a).

25.2. Following up on the advice that you rendered in Problem Set 23, Jodi Kay calls you to ask about a few problems with some securities that CountryBank has purchased. On the first one, she sends you a telecopy of a bond issued by Chiripada Investment Trust (“CIT”). The bond states on its face that the entire series of bonds is governed by Article 8, includes standard provisions for registering transfers on CIT’s books, and recites that it was issued pursuant to and in accordance with the provisions of the New Mexico Investment Trust Company Act. Jodi received a letter last week from CIT stating that CIT intends to stop making payments on the bonds. The letter states that the bonds are invalid because they were issued without a unanimous vote of the trust managers of CIT. The letter asserts that the New Mexico Investment Trust Company Act requires such a vote for a trust validly to issue securities and that all purchasers of the securities are on notice of that requirement because of the reference to that statute in the securities.
Jodi tells you that she was personally responsible for CountryBank’s investment in the CIT securities, so she is directly interested in establishing their validity. Assuming that the letter from CIT accurately describes the provisions of the New Mexico statute, does CIT’s letter establish a defense that is valid against CountryBank? UCC §§ 1-201(25), 8-102(a)(13), 8-102(a)(15), 8-202.

25.3. Jodi’s other question relates to a bond that she purchased about a month ago from one of her customers (Harlan Smythe). Because the bond is in a registered form, she tried last week to register her purchase with the issuer, but failed when she discovered that she had neglected to obtain an indorsement from Smythe at the time that she purchased the bond. She became concerned when yesterday’s newspaper included a detailed article describing a federal indictment alleging that one J.R. McDonald has engaged in a wide-ranging scheme to defraud his creditors by selling securities that he already has pledged to his lenders. Under the scheme, McDonald would obtain possession of a security from his lender on the pretext of using it for internal auditing purposes. Instead of returning the security to the lender, however, he would sell it to a third party, hoping to purchase a substitute security to return to the creditor within a few days.

Because Jodi could tell from a McDonald indorsement on the bond that Smythe had purchased the bond from McDonald the day before Smythe sold the bond to CountryBank, Jodi was concerned that one of McDonald’s creditors might assert a claim against CountryBank. Accordingly, she went down to Smythe’s office yesterday and obtained his indorsement on the bond. Does that indorsement protect her from the claims of McDonald’s creditors? If not, does Jodi have any other way to defeat that claim? UCC §§ 8-102(a)(4), 8-106, 8-301(a), 8-302(a), 8-303, 8-304(d).

25.4. Edward Casaubon comes to you to ask you a question about a potential problem that he has with his broker (Bullish Broker). Casaubon tells you that he asked his contact at Bullish last week to purchase 10,000 shares of stock in Advanced Tactical Devices, Inc. (“ATDI”) The contact advised Casaubon that the purchase had been completed. Furthermore, Casaubon has ascertained by examining his account record from his home computer that Bullish credited Casaubon’s account with the ATDI stock on the date of the purchase.

While talking to his broker this morning, Casaubon was upset by a stray comment to the effect that the broker had not yet been able to obtain the ATDI securities that Casaubon thought he had purchased last week. Casaubon wants to know if he has anything to be worried about. Does Casaubon own the securities or not? Does Bullish have any obligation to remedy the situation? UCC §§ 8-102(a)(7), 8-102(a)(14), 8-102(a)(17), 8-501(b), 8-503(a), 8-503(b), 8-504(a).

25.5. A few weeks later, Casaubon calls you back to tell you that the situation has deteriorated at Bullish Broker. Apparently because of large investments in Southeast Asian municipal bonds, Bullish has become insolvent. This morning it was closed for liquidation. Casaubon’s broker tells him that Bullish’s portfolio will be inadequate to cover the accounts of many of its customers. Among other things, Bullish owns only 180,000 shares of ATDI stock, although its customers have accounts for 200,000 shares. Also, the broker has told Casaubon that 120,000 of the 200,000 shares in the accounts were acquired by the entitlement holders before Casaubon acquired his entitlement. Finally, the broker has told Casaubon that Bullish in the aggregate has only 75% of the securities that would be necessary to cover all of the various types of securities in all of its customer’s accounts.

(a) Assuming that the broker’s statements are accurate, what will Casaubon receive upon liquidation of Bullish? UCC § 8-503(b).

(b) How would your answer change if 80,000 of the ATDI shares were pledged to ThirdBank? What further information would be helpful in answering that question? UCC §§ 8-106, 8-503(a), 8-511(a) & (b).

25.6. Jude Fawley is a stone-mason and tour guide whom you have represented on a variety of matters dating back to Problem Set 17. He has decided that he wants to raise more money to expand his tour-guide business (Wessex Tours, Inc.). Based on some reading that he has been doing, he wants to know whether he would be better off proposing to issue negotiable instruments for the debt or securities. He wants your advice as to the relative merits of the two possible approaches. He tells you that his conversations with potential lenders have convinced him that Wessex Tours, Inc. is sufficiently large and creditworthy to accomplish the proposed borrowing in either format, and he will be able to determine for himself whether one transaction would cost more to perform than the other. He wants your advice on something that is not strictly a legal question, but (he hopes) still within your expertise. What he is trying to figure out is which one would be likely to produce a more marketable obligation. Essentially, he wants to know which one would be more liquid. What do you say?