Commercial Law

Prof. Graham

Spring 2005

Text: Problems and Material on Commercial law, 7th Ed., Whaley.

Grade: B


3)      Introduction.  UCC –what is it?  Purpose?  Texas has adopted a version of the UCC.  Always be sure you’re dealing with the latest version.

a)      Art. 3negotiable instruments

i)         “Article 3 applies to negotiable instruments.” p. 242

b)      Casebook – Ch 7, p. 325

c)      Art. 1 – Definitions, p.

i)        Analyzing Problems Under the UCC:

(1)   First, is this governed by Art. 3?  Do we have a negotiable Instrument?  If it’s not a neg. instr. it’s not governed by Art. 3.

d)      2 types of Neg instruments: “Notes” and “Drafts” – § 3-104(e)

i)        What is a negotiable instrument? § 3-104(e) (“an instrument is a “note” if it is a promise and is a “draft” if it is an order.”)

(1)   NOTE” is a written PROMISE to pay.  It’s a 2-party transaction of Promise § 3-103(a)(12): maker/payee.  EX: “I promise to pay B $”

(2)   DRAFT” is a written “ORDER” to Pay.  It’s a 3-party transaction

(i)      drawer - § 3-103(a)(5)(the person ordering the payment),

(ii)    drawee §3-103(a)(4)(the person ordered to make the payment),

(iii)   payee

1.      EX:  A orders B to pay C.

(iv)   Order § 3-103(a)(8) (“a written instruction to pay money signed by the person giving the instruction”).  (Exam question:  is this a neg instr. a note or a draft?).

1.      writing

2.      signed

(b)   A “note” created by a bank is a CD (but this may or may not be negotiable).

(c)    the most common type of draft is a check.

(3)   Remitter.  § 3-103(a)(15)—“remitter” -- “a person who purchases an instrument from its issuer if the instrument is payable to an identified person other than the purchaser.”  Problem 81 p. 327:  Portia is buying a car and the seller won’t take a personal check.  So she gets a cashier’s check, issued by the Bank.  What do we call Portia?  CN:  The bank is both the “drawer” and “drawee.”  

(a)    § 3-104(g)Cashier’s check means a draft with respect to which the drawer and drawee are the same bank or branches of the same bank.

(b)   Who is the payee?  Whoever is selling the car, Seller.

e)      Non-Bank Drafts

i)        Used in the Sale of goods.  3-party transaction

(1)   Seller = drawer – orders the buyer to pay seller’s designee (payee)

(2)   Buyer = drawee

(3)   payee -- Banks purchase drafts at a discount .

(a)    CN:  Seller orders Buyer to pay the Bank.

(b)           Drawer       Drawee               Payer

ii)       But the bank will discount the amount because it has to make money on it, and because of the “time value of money” and because they are taking on the risk of not collecting.  Bank pays a discounted amount to A, but collects the full amount from B. 

4)      Is the instrument NEGOTIABLE in Form? (Negotiability is the type of transfer.) 

a)      Technical requirements of negotiability -- ALL 7 requirement must be met p. 335:

i)        Writing” –for both “Promise” and “order” § 3-103(a)(8) and (12)

ii)       Signed” – for both “promise” and “Order” § 1-201(37), p. 29: “includes using any symbol executed or adopted with present intention to adopt or accept a writing.”

(1)    Comment 37 – “a complete signature is not necessary.  The symbol may be printed, stamped, or written; it may be by initials or by thumbprint.  It may be on any part of the document and in appropriate cases may be found in a billhead or letterhead. . . . The question is always whether the symbol was executed or adopted by the party with present intention to adopt or accept the writing.”

(2)   Problem 82: signs an X with branding Iron.  Yes, its a signature.

(3)   Problem 83 – What if an individual signs a corporation’s name? 

(a)    § 3-401 Signature.  (b) A signature may be made (i) manually or by means of a device or machine, and (ii) by the use of any name, including a trade or assumed name, or by a word, mark, or symbol executed or adopted by a person with present intention to authenticate a writing.

(b)   § 3-402 By representative

(c)    § 3-403 Unauthorized Signature.  “an unauthorized signature is ineffective except as the signature of the unauthorized signer in favor of a person who in good faith pays the instrument or takes it for value.”

iii)     Unconditional Promise or Order -- §3-104(a), p. 331

(1)   Reason: We want a negotiable Instrument to be unconditional, because if a conditional paper were negotiable, prospective holders of the paper would not feel safe in taking it until they had checked to see if the condition had occurred.

(2)   Exception—Implied conditions.  Some conditions are okay:  §3-106.  Express conditions are NOT Okay – they Destroy negotiability.  EX: “I promise to pay only if the building does not burn down.”  Implied conditions, on the other hand, ARE okay.  EX: “I have rented the building and will pay $ to owner.”  There is an implied condition that the building not burn down.

(a)    Reference is okay, but “subject to” another document is not okay.  Why not?  Because then the parties have to look outside the negotiable instrument

(3)   Triffin v. Dillabough, p. 332; § 3-104(a).

(a)    Issue:  whether AE’s money-orders are negotiable instruments, and if so, whether Triffin has the rights of a HDC who may recover the face value of those money-orders from AE?  Held, yes.

(b)   Facts: AE had its money orders stolen.  They were pre-printed with the signature of the Chairman of AE, but blank as to amount, sender, payee, and date.  Dillabough presented several checks to a check cashing business, and the owner, Giunta paid the face value.  AE refused to pay Giunta, because they were stolen checks.  Giunta then sold the money orders to Triffin. 

(c)    Was the negotiability of these money orders destroyed by the legend: “Will not be paid it if has been altered or Stolen”?  Held, no; this was not a condition, merely a restatement of AE’s defenses present in the commercial Code. Held, this is not an express condition, just a warning, just an expression of their rights. 

(d)   The dissent argues that the inclusion of the word “if” makes it an express condition and thereby destroys negotiability.  Was this an express condition?

iv)     Consideration Stated, p. 341

(1)   § 3-106 permits the instrument to mention the details of the underlying contract without destroying negotiability as long as payment of the note is not made “subject to” the performance of that contract.

(2)   § 3-106(a)’s last sentence permits a reference to the underlying contract, though an incorporation of the terms of that contract (without restating them in the note itself) would be fatal to negotiability.

(3)   Referencing an underlying contract.  Does reference to underlying contract destroy negotiability? no.  What if payment is made subject to the terms of an underlying contract?

(4)   What if the note incorporates the TERMS of the underlying contract? negotiability is destroy, but the court may look to art. 3 for guidance, as well as general contract law.

(5)   Reason: prospective holders should never he required to investigate whether all is well with the original agreement; the separate agreement might contain terms placing a condition on payment;  Negotiability must be determinable from the four corners of the instrument.

(6)   Problem 84, p. 342

(a)    Not negotiable, because it used the word “subject to”. Com’t 1, 2nd para, §3-106.

(b)   Yes, negotiable. This is a mere reference to a separate writing regarding the amount of payment.

(c)    Yes, negotiable.  This contains only reference to the content regarding rights to prepayment and acceleration.  Com’t 1, para 2, last sentence. § 3-106(b)(i). CN: this does bring in terms from another agreement, and appears to be “subject to” but specifically permitted are:

1.      collateral,

2.      prepayment, and

3.      acceleration”.

(7)   Problem 85

(a)    “Void after 90 days.”  Does this destroy negotiability? technically, it is a condition, but the bank will not generally pay attention to it.  Also, due to automated processing it will probably not get picked up.  But the check represents an agreement between the bank and the maker of the check.

(8)   Prblem 86

(a)    §3-106(b)(i)—an instrument is not made conditional by reference to another record for a statement of rights with respect to collateral.

(b)   Com’t 1, 3rd para: A statement of rights and obligations concerning collateral . . . does not prevent the note from being an instrument if the statement is in the note itself.

(c)    My answer:  this is a negotiable instrument because the condition regarding collateral is in the note itself. 

(d)   §3-106

1.      Express condition – payment “IF” a certain condition is met.

2.      Implied Condition?

3.      Subject to: another agreement?

4.      “As per” another agreement?

5.      Collateral, prepayment or acceleration described in another document?

6.      Payment limited to an particular fund? ok

v)      Fixed Amount of Money, p. 342

(1)   Problem, p. 87

(a)    §3-112  Interest ..(b)

(b)   My answer: Negotiability is NOT destroyed.

(2)   Must be Money—not bales of cotton or other commodity.

(a)    § 1-201(b)(24) “money” means “A medium of exchange currently adopted or authorized by a domestic or foreign govt.”  This provision is designed to address the Euro.  What about Trade beads or tobacco?  Early in our history, tobacco was a medium of exchange, but not today.  This is more like barter, without an exact valuation.

(b)   Foreign currency.  §3-107Unless the provision otherwise provides, the amount payable in foreign money, may be paid in foreign money.”  Thus I have the choice of paying either in French francs or in US dollars.  What’s the spot rate?  The rate at the current time. If a rate at a future date were allowed, it could be higher or lower, depending on inflation, country risk, etc.  The Code looks only at the spot rate, the daily conversion rate on the day the note is paid.  But it also says, “unless the instrument otherwise provides” so you can specify otherwise.

vi)     Courier without Luggage” Requirement, p. 343

(1)   The instrument must not be burdened with anything other than the unconditional promise or order; it cannot be made to carry around other legal obligations.  If the maker of the note adds any undertaking in addition to the promise to pay money, the note becomes non-negotiable.  § 3-104(a)(3) “no other undertaking”.  This is because you want it to be definite on the face of the document.

(2)   Problem 88, p. 344

(a)    negotiability destroyed, because it adds an extra condition, which doesn’t fall into any of the exceptions. This is a clear example of what makes it nonnegotiable.

(b)   CN:  This sounds vague “if holder deems himself insecure” at “any time”.  But this deals with collateral, which is one of the exceptions.

(c)    “Maker agrees” this is a confession of judgment clause--negotiability is not destroyed.  §3-104(a)(3)(ii) allows for a confession judgment clause.

(d)   “Payment in full clause” §3-311 Accord and satisfaction.  But this also contains reference to other documents (reference doesn’t destroy negotiability).  But what about the “payment in full” clause?  §3-311,  requirements: Good faith, unliquidated, etc.  But an “accord and satisfaction” clause does not destroy negotiability.

(e)    Negotiability probably not destroyed.  But this is not a good idea to have the SI and instrument in one document.

(3)   Woodworth v. Richmond Indiana Venture, p. 344

(a)    This case involves a promissory note.  Woodworth agreed to pay a sum certain.  Signet Bank claimed to be a HDC.  First question: do we have a negotiable instrument?

(b)   R: In order to be negotiable, a promissory note must be signed, unconditional promise to pay a sum certain in money which is payable on demand or at a definite, stated time.  The note must be payable to order or bearer and contain no other promise, order, obligation, or power given by the maker except as authorized by §§3101, 3805., §3104.  Here, the note contains a promise by the maker resulting in forfeiture of his partnership interest and payment in event of default.

(c)    Where there is doubt as to the negotiability of an instrument, the decision should be against negotiability.  Since the promissory note is not negotiable, D cannot claim the status of a HDC and is subject to ordinary contract defenses that P may assert.

(d)   CN:  there is a forfeiture clause, exercisable by the partnership.  This makes a difference, because forfeiture clause could not be exercised by the HDC, only by the partnership.  Thus it destroyed negotiability. 

vii)   6. Payable (i) on Demand or (ii) At a Definite time, p. 347

(a)     A holder of an instrument must be able to tell when it comes due, or the instrument is non-negotiable; however, there is no requirement that the instrument be dated.  An undated instrument that specifies no time of payment is treated as an instrument payable on demand by the holder. 

(i)      § 3-108 payable on demand, or at a definite time:  payable:

1.      at sight = payable on demand; if

2.      no time is specified = payable on demand.  It can be subject to acceleration or extension, but if the extension is at the maker’s option then it must be at a definite time.  Can it be both?  Yes, it could be on demand up to a certain time, and then after that, then . . .

(ii)    § 3-113.

(b)   Prblem 89, p. 347—Is negotiability destroyed?

(i)      “Payable 30 days after sight.”  Demand or definite time? yes, Definite time.

(ii)    “Payable in 11 installments, etc” CN:  This is neither on demand or at a definite period of time, thus not negotiable.

(iii)   Negotiability not destroyed.  cf. §1-208. CN: Definite time but with an acceleration clause.

(iv)  Not destroyed. CN: we can determine on the date the instrument is created when “tomorrow” will be.

(v)    Not destroyed.  CN:  Do we know at the time the note was created whether ... It is an extension at the maker’s option, but an extension is to another definite time.

(vi)  Negotiability Destroyed.  CN:  not an extension at maker’s option to a definite date.  There is no definite date here.

(vii) This is a post obituary note.  not payable on demand and not at a specific time, so its not negotiable and art. 3 doesn’t apply.

(viii)                       “Payable 100 years from today” this is a definite period.  “but if my rich uncle Al dies . . .” this is an acceleration clause, which is allowed, but it’s not very certain so it’s arguable.

(ix)  “Payable on my next birthday” but the time must be certain from the face of the document.

viii)  Payable to Bearer or Order (words of negotiability)- §3-109, p. 348

(1)   Establishing privity.

(a)    Bearer paper.  “Payable to bearer” (but too negotiable, like cash). “Payable to cash or to the order of cash” is bearer paper like cash.

(b)   Order paper.  “Payable to order” – to specific person, or the person that person “orders” to pay.  It must use the word “order” unless it’s a check.

(c)    Why does this language matter? 2 reasons.

(i)      1st to determine whether we have a negotiable instrument.

(ii)    2nd goes to negotiation. there are different requirement for transferring bearer paper and order paper, to meet the technical requirements of negotiation.

(d)   Can bearer paper become order paper and vice versa? yes, change it by the form of the indorsement on the back of the check.  Blank indorsement or a special indorsement.

(2)   Problem 90, p. 349 are the following are promissory notes.

(a)    No, there are no words of negotiability.  Could say, “pay to John Smith or order.”  (see 3-107 for alteration)

(b)   “pay to the order of John Smith or bearer.”  payable to “bearer.”  See com’t 2, §3-109.  The term “bearer” controls.

(c)    “Pay to bearer” this is bearer paper.

(i)      “Pay to the order of Cash.”  Payable to bearer.

(ii)    “Pay to a Merry Christmas.”  Technically, bearer.

(d)   Problem 91, p. 349

(i)      “Pay to the order of (blank).”  see §3-115, com’t 2--Incomplete instrument.  It is bearer paper until the blank is filled in.  It’s bearer paper if it doesn’t state a payee.  3-104(c) deals with chad [??].

(ii)    “Pay to John Doe’s Estate” § 3-110(c)(2)(i).  Is John Doe’s estate a person?  If an instrument is payable to an estate the instrument is payable to the trustee, whether or not the beneficiary or estate is also named.”  So it’s still negotiable; still order paper.

(iii)   “Pay the order of the president of the U.S.” §3110(c)(2)(iv)—A person to whom an instrument is payable may be identified in any way . . . If an instrument is payable to an office or to a person described holding an office, the instrument is payable to the named person, the incumbent of the office, or a successor to the incumbent.”  It’s payable to whoever holds that office.

(iv)  Still negotiable.  Drawer of a check crossing out “to the order of”   §3-104(d) “A promise or order other than a check is not an instrument if, at the time it is issued or first comes into possession of a holder, it contains a conspicuous statement, however expressed, to the effect that the promise or order is not negotiable or is not an instrument governed by this Article.”

(v)    Still negotiable.  §3-104(c) §3-104(c) in the case of checks which do not require the word “order.”

1.      how to destroy negotiability? § 3-104(d).  State upon the instrument that it is non-negotiable. You could stamp it “non-negotiable.”

(3)   Consumer Notes

(a)    FTC, see notice on p. 350.  This seems to say you could never have a holder in due course because it seems to place a condition on it.  Or it may defeat the courier without luggage requirement.  Ordinarily, it would defeat negotiability, but the Code says that this particular statement does not.  See § 3-106(d).  this looks like it destroys negotiability, but the code tells us no. 

5)      Negotiation, p. 353

a)      technical terms

i)        Maker.  §3-103(a)(7) The person who issues the promissory note and promises to pay.  Under §3-412, the issuer of a promissory note is to obligated to “pay the instrument...”

ii)       bearer§1-201(b)(5) whoever possesses the instrument

iii)     Payee. The person to whom the promissory note or draft is made payable. This person may further transfer – negotiate -- the check.

iv)     Drawer. § 3-103(a)(5).  Person who creates the draft and orders the drawee to pay.

(1)   Obligations§3-414, by drawing a draft, the drawer promises that upon dishonor of the draft by the drawee, the drawer will pay the amount of the draft.

(2)   Cf: a drawer creates a draft, while a maker creates a note.

v)      Drawee.  The person who the drawer has ordered to pay the payee. § 3-103(a)(4).  If the drawee doesn’t accept the draft then it is dishonored.  If the drawee doesn’t pay, then the drawer has the obligation to pay if the draft is dishonored.

(1)   Obligations.  incur an obligation if you accept it under § 3-409.  Obligations of an acceptor is under § 3-413.  You have to pay if you accept.  If the drawee doesn’t accept then the drawer must pay it.

b)      Negotiability (form) vs. Negotiation (transfer)

i)        “Is an instrument negotiable” asks if the instrument is in the proper form to meet the technical requirements of negotiability in §3-104(a).

ii)       “Has the instrument been negotiated?” asks about the legal validity of the attempted transfer of the instrument.

c)      Three steps of Transfer and negotiation, p. 354

i)        Issuance. § 3-105.

ii)       transfer ß

iii)     Presentment for payment. §3-501(a).

d)      Transfer

i)        CN:  3-201 negotiation. 

ii)       Under §3-203(b), the physical transfer of an instrument, whether or not the transfer is a negotiation, vests in the transferee whatever rights the transferor had in the instrument.  If the physical transfer is done in such a manner as to make the transferee a technical holder, then the transfer is called a negotiation.  ... but the transferee cannot acquire rights of a HDC by a transfer, directly or indirectly, from a HDC if the transferee engaged in fraud or illegality affecting the instrument.

iii)     Holder. §1-201(b)(21):  The person in possession of a negotiable instrument that is payable either to the bearer or to an identified person that is the person in possession;[very important]. the legal effect . . .

iv)     Negotiation. § 3-201.  Negotiation means transfer of possession, whether voluntary or involuntary, of an instrument by a person other than the issue to a person who thereby becomes its holder.  Com’t 1.  Thief or Finder becomes holder if it’s bearer paper.

(1)   Negotiation of order paper is accomplished by

(a)     the indorsement by the proper person (now the indorser §3-204(d)), and

(b)   the delivery of the instrument to the transferee (now the holder)

(c)    “negotiation means the transfer of an instrument, whether voluntary or involuntary” what is a holder.

e)      Special and Blank indorsement-§3-205, p. 355

i)        Indorsement§3-204 “Indorsement means a signature other than that of a signer as a maker . . . “

ii)       Indorser -3-204(b)

iii)     Misspelled name 3-204(d).  Sign both correct and incorrect. A drawee bank will require the payee’s indorsement before it makes payment. §3-501(b)(2)(iii).  The payee can indorse in two ways:

(1)   blank indorsement:  sign the back of the check, which has the legal effect of converting the instrument into bearer paper.

(2)   Special indorsement. This preserves the order characteristic.  The original payee specifies a new payee by writing “Pay (name of new payee)” above the indorsement.  This has the legal effect of making the instrument the sole property of the new payee, who becomes a holder as soon as the instrument is delivered.

(3)   Anomalous Indorsement.  Someone who just signs to show receipt, etc.

(4)   Restrictive indorsement 3-206—read this!!!

iv)     Problem 92, p. 356 [exam question]

(1)   drawer—Hansen; drawee—Mechanical National Bank; payee—Egger/Cornucopia Grocery; depositary bank—Octopus Nat’l Bank, §4-105(2).

(2)   The following qualify as a holder: Wm Egger because he was identified in the instrument and in possession, Cynthia Egger, because she was in possession and the instrument was payable to the bearer after Wm indorsed it; the manager of Cornucopia Grocery as an agent, because he was in possession when it was payable to bearer; Cornucopia Grocery Store because the manager converted the blank indorsement into a special indorsement by writing “Pay to the Cornucopia Grocery” above Egger signature, and it was, through its agents, in possession; NOT SPEEDY because he was not identified in the instrument, nor was it payable to the bearer while he was in possession of it; Octopus was a holder because it was the depository bank §4-205; NOT Mechanical .

(3)     CN: not covered in class. § 4-205—yes, the depository bank becomes the holder, whether or not the customer indorses it.

(4)   Converted a blank endorsement to a special endorsement.

(5)   Indorsers.  § 3-204.  Wm Egger; Octopus.  [Mechanical Bank is the acceptor §3-103].

v)      Problem 93,

(1)   §3-110(d), OC 4

(a)    If an instrument is payable to two or more persons alternatively (“X or Y”), it is payable to any of them and may be negotiated, discharged, or enforced by any or all of them in possession of the instrument.

(b)   If an instrument is payable to two or more persons not alternatively (“X and Y”), it is payable to all of them and may be negotiated, discharged or enforced only by all of them.

(c)    If an instrument payable to two or more persons is ambiguous (“X,Y”) as to whether it is payable to the persona alternatively, the instrument is payable to the person alternatively.

vi)     Problem 94, p. 357 Portia Moot receives a check made out to “Portia Mort.”

(1)   §3-204(d), OC 3 “The payee may indorse in the name used in the instrument, in the payee’s correct name, or in both.  In each case the indorsement is effective. . . the accepted commercial practice is to endorse in both names.”

f)        Persons who may sue to enforce payment. §3-301Holder, or persons entitled to enforce the instrument.

(1)   Two requirements to be a holder: §1-201(20): 

(a)    possession of the instrument and, for non-bearer instruments,

(b)   be the person identified in the instrument, either as payee or special endorsee.

ii)       Problem 95, p. 358

(1)   These were promissory notes, so two parties.  They allonge by folding it in.  It must be stapled, etc.

(2)   §3-204(a) “a paper affixed to the instrument is a part of the instrument.”  OC 1 “An indorsement on an allonge is valid even though there is sufficient space on the instrument for an indorsement.”

(3)   MA:  The Bank is a holder, because the peace of paper was an allonge, or paper affixed to the instrument, if the folding is sufficient to be “affixed.”

g)      Forgery of the Payee’s Name, p. 358

i)        An unauthorized signature is not effective to negotiate the instrument, so following a forgery of the payee’s name, no later transferee can qualify as a holder

ii)       If the instrument is payable to the order of a named payee, only that payee can become a holder. UNAUTHORIZED SIGNATURE of payee’s or special indorsee’s name (forgery or signature by non-agent) is NOT effective negotiation.

iii)     For BEARER PAPER, forged indorsement does not have any effect on subsequent “holder” status.  Valid indorsements are not required to negotiate bearer paper: §3201(b)

iv)     Named payee must take possession to become a holder.

v)      No one subsequent can be a holder unless the named payee indorses.

vi)     No subsequent transferee, even if innocent, can be a holder.

vii)   Problem 96, p. 359

(1)   §3-306 “A persons taking an instrument, other than a person having right of a HDC, is subject to a claim of a property or possessory right in the instrument or its proceeds, including a claim to rescind a negotiation and to recover the instrument or its proceeds.

(2)   Cornucopia was not a holder in due course because the check was fraudulently indorsed.  Because it was not a HDC, it took the instrument subject to the claim by Laura.  Therefore, Laura can get her check back from the Grocery store.

(3)   CN: can she get the check back?  yes.  the grocery store loses.

viii)  Problem 97

(1)   Once Laura signed the check, the check became payable to the bearer, as it was a blank indorsement.  The requirement of a holder for a bearer instrument is possession.  Therefore the bank is a holder. CN: it doesn’t matter that it is a forgery, because it’s bearer paper.  Two requirements for order paper to become bearer 1 indorsement, 2 transfer.

(2)   CN: [see Slides].  Is this bearer paper?  yes, writing, signed, unconditional, fixed date, in money, no additional promises.  The date is the day it was written because none is given.

(3)   CN:  This is a check, thus a draft§3-104, §3-103.  Parties are the Joe Smith, Amy Adams, and the bank.

(4)   CN “I, John Doe, promise to pay to Sally Smith $10 if she runs the White Rock Marathon in under 4 hours. /s/ X.”  This is probably not negotiable because of the condition, otherwise it would be a note because only two parties.  The signature is fine under 1-201(b)(37).

(5)   CN: “In accordance with a contract for sale of the Paramount Theater dates January 1, 2005, I promise to pay to John Doe or order $500k on demand.  H must refurbish the theater to my satisfaction before this obligation becomes due and own.  Dates and sign this day, jan 1, 2005.  /s/ May Miller.”  The problem is the language that he must “refurbish to my satisfaction.”  This could either be an extra agreement or promise; either way it is an express condition that defeats negotiability.

(6)   “Susie Simon has a check made payable to her from Texas Tech in her purse when it is stolen.  She has not indorsed it.  Can Terry Talon, who finds the check, deposit it into his bank account?” no.

(7)   “Rita Rich’s father gives her a $200 check and tells her to buy a pair of shoes.  She immediately signs her name on the back and puts it in her pocket.  She loses the check and Mike Moore finds it.  Can he deposit the check . . .”?

(8)   §3-415(a)

ix)     Problem 98

(1)   This is specially indorsed check “pay Lilly Lawyer” above her signature.  Now Grocery is not a holder, and it takes the check subject to Lilly’s claim.

(2)   §3-205(a)(special indorsement)

x)      RULE: any unauthorized indorsement of the payee’s name of any special indorsee’s name is not a valid negotiation and gives subsequent transferees no legal rights in the instrument no matter how innocent they are or how far removed from the forgery.  BUT once an instrument becomes a bearer paper, subsequent unauthorized signatures have no effect on the holder status of later takers, since valid indorsements are not required to negotiate a bearer paper.  §3-201(b).

xi)     Problem 99

(1)   YES.  § 3-205(c) “The holder may convert a blank indorsement that consists only of a signature into a special indorsement by writing, above the signature of the indorser, word identifying the person to whom the instrument is made payable.”

6)      Holder in Due Course (“HDC”), p. 361

a)      CN:  Steps in the analysis:

i)        First, do we have a negotiable instrument? §3-104;

ii)       Second, was there a negotiation? § 3-201-for bearer paper, you need delivery or transfer, for order paper you need indorsement and delivery;

iii)     Indorsement? 3-204

b)      HDC takes

i)        1) for value,

ii)       2) in good faith,

iii)     3) without notice of defects and defenses.

c)      “Dishonor” means that the bank refused to pay, because, for example, the drawer didn’t have sufficient funds; but if it is dishonored, the drawer retains the obligation to pay the instrument.  Can I be a HDC if it is stamped on the back “NSF”? No, because then you have notice of dishonor.  Slight blemishes won’t matter; it has to call into question the authenticity.

d)      Acquiring Holder in Due Course Status--§ 3-302(a)

i)        A HDC takes free of most of the defenses the parties to the original transaction have against one another. 

(1)   Can the payee ever be a HDC? 3-302 OC 4.Yes; but not in the normal situation. Only when there is fraud or two payees. Situations in which there can never be HDC:

(a)    acquisition of negotiable instrument through judicial process. If you acquired through judicial process then you have some notice that a defense may be hidden there someone.

(b)   bulk transaction--When you acquire a bunch of instruments at once.  BULK TRANSFERR CAN NEVER BE A HDC.

(c)    Gift.

(2)   Is it a negotiable instrument?

(3)   Has there been effective negotiation? – Drawee bank can never be a HDC; the instrument is presented to it, not negotiated with it.

ii)       Holder”—to be a HDC, the possessor must first be a holder which means the instrument must be technically negotiable and must have been technically negotiated. NOTE: the drawee bank is not a holder.

iii)     Value”--§3-303—the holder must have given value, i.e., it can’t have been a gift; value is not the same as consideration. § 3-303 OC 1, 1st paragraph. “One gives value only to the extent that the holder has performed the consideration or made some irrevocable commitment in connection with it.”

(1)   CN: If I give you a check as a gift, then you can’t be a HDC, because a gift does not constitute value.  Thus, a donee can never be a HDC.  What’s the difference between value and consideration?  An executory promise can constitute “consideration” but not “value.”  The reason is that you’re not out anything.

(2)   What about purchasing a note at a discount?  If I have a note worth $1k, I can sell it to a finance company, and even though they pay me less than the full value of the note, it is still value.

(3)   Problem 100, p. 363, --

(a)    §§3-303

(b)   3-306 – “a person taking an instrument, other than a holder in due course, is subject to a claim of a property possessory right in the instrument or its proceeds, including a claim to rescind a negotiation and to recover the instrument or its proceeds.”  MA: Here, the atty had not yet performed any services, so he is not a holder in due course and is subject to a claim to receive the instrument. CN:  What if it were a “retainer,” i.e., buying a reservation of the lawyers time, could it be value then?  If the atty has turned away other business, then possibly he has given value.  So this could be argued either way.

(4)   Problem 101, p. 364

(a)    Finance is a HDC for $22,800, under §3-303(a)(4)

(b)   CN:  Do we have a negotiable instrument?  yes; was it negotiated? yes.  There’s a discounting of the note; but the car falls apart so the maker of the note has a defense.  If we have a HDC then we take free of that defense.  If it’s a HDC, then it is for the face amount of the note, not the discounted amount, because it takes on the risk.

(c)    Yes, because it is for an antecedent debt.  §3-303(a)(3).  But the extra $2k, no.

(i)      CN: Not on the portion of the gift.

(5)   Problem 102

(a)    No, because it has not given value.  Last National Bank is not a HDC, because its still has the funds in its checking acct. It can put a freeze on the checking account, and recoup the money from the checking acct.

(i)      The drawee bank dishonors the bank and sends it back?  The answer to whether the dispositary bank is a HDC depends on whether the bank gave provisional credit and the customer withdrew the credit to your account, and the customer withdrew it.

(6)   Falls Church v. Welsley Heights Reaalty, Inc, p. 365

(a)    Can a depositary bank achieve the status of HDC of a negotiable paper deposited with it by a customer? 

(b)   F: X drew a check for $1,400, payable to the order of a Customer of Bank.  The Customer deposited the check in his account and was given a provisional credit.  The customer withdrew $140 from his account prior to the bank’s discovering that X had stopped payment on the $1,400 check.  When the check was returned to the bank dishonored, the bank’s customer left no credits in his account on which to charge the $140.  The bank then made a demand on X for the amount.  X refused. 

(c)    R: UCC provides that a bank acquires a SI in items deposited with it to the extent that the provisional credit given the customer on the item is withdrawn. § 4-210.  For the purpose of achieving the status of HDC, the depositary bank gives value to the extent that it acquires a SI in the item in question.  § 4-211.  As a HDC as to $140, the Bank is a HDC and its claim cannot be defeated.

(d)   CN:  Here, the customer had nothing in the account except $1,400-$140.  If all they gave was $140, then they’re only a holder to the extent of $140.

(e)    Problem 103

(i)      Here the bank is not a HDC of any amount because they haven’t given value.  §4-210(b) FIFO Rule-- “credits first given are first withdrawn.”  If he withdraws $750 then the bank becomes a HDC for $250.

iv)     “Good faith” and “notice,” p. 366

(1)   To become a HDC, the owner must be in effect a bona fide purchaser, i.e., given value in good faith, which is both an objective and subjective test.

(a)    §1-201(20)—“honesty in fact in the conduct or transaction concerned:

(b)   § 3-103(a)(4)—honesty in fact & “the observance of reasonable commercial standards of fair dealing.

(c)    §3-103, OC 4:

(2)   General Investment Corp v. Angelini, p. 367

(a)    Lustro agreed to do some work on Angelinis’ home.  Angelini executed a note that it would begin payments 60 days after the work was completed.  Before Lustro completed the work he sold the note at a discount to General Investment.  But Lustrro never completed the work.  Claiming to be a HDC, General Investment sued Angelini.

(b)   R: The more the holder knows about the underlying transaction, and particularly the more he controls or participates or becomes involved in it, the less he fits the role of a food faith purchaser for value.

(c)    Ordinarily where the note appears to be negotiable in form and regular on its face, the holder is under no duty to inquire as to possible defenses, such as failure of consideration, unless the circumstance of which he has knowledge rise to the level that the failure to inquire reveals a deliberate desire on his part to evade knowledge because of a belief or fear that investigation would disclose a defense arising from the transaction.  Once it appears that a defense exists against the payee, the person claiming the rights of a HDC has the burden of establishing that he is in all respects such a holder. §3-308Absence of inquiry under the circumstance amounts to an intentional closing of the eyes and mind to any defect in or defenses to the transfer.  They could have demanded a certificate of completion.  Thus, Gen Inv did not acquire the note in good faith and therefore is not a HDC.

(d)   CN: Gen Investment is buyer commercial paper at a discount.  This transaction called for the payment of $3,600 in cash, this was transferred from the contractor, Lustro, to Gen Instrment Corpr.  There was a contract that payments on the note would begin only after 60 days from the commencement of work. Here, there wasn’t much work.  10% of the notes Gen Inv bought came from this contractor.  They did not ask for a certificate of completion which they should have from a reasonable commercial stand point.  They were in the business of buying notes from contractors, so they should have known to ask for a certificate.  Also, they didn’t inquire as to whether the work had been done.  Held, even though they gave value, they didn’t take in good faith [because they didn’t observe reasonable commercial standards].

v)      Problem 104, p. 372

(1)   §3-302(a)

(2)   §3-307(b)(4)  “If an instrument  is issued by the . . . fiduciary as such, to the taker as payer, the taker has notice of the breach of fiduciary duty if the instruments if (i) taken in payment of or as a security for a debt known by the taker to be the personal debt of the fiduciary, (ii) taken in a transaction known by the taker to be for the personal benefit of the fiduciary, or (iii) deposited to an account other than an account of the fiduciary, as such or an account of the represented person.”

(3)   CN:  Was Am Ex a HDC?  Was there reason to question the authenticity?  This is a very common business practice for corporations pay their Am Ex bills for their employees.  So there was nothing on the face that would give AM Ex notice of defenses.  Merely using a corporate account to pay a personal bill does not create circumstances so suspicious as to call into doubt the authenticity.

vi)     Winter & Hirsch v . Passarelli, p. 372

(1)   Whether the defense of usury is available for use against the P, who claims to be HDC of the promissory note and therefore claim to have taken it free from the defense of usury.

(2)   F: P provided the money for the usurious loan before the loan was actually made.  P Winter & Hirsch gave money to Equitable, and Equitable gave money to Passarelli, in exchange for a note.  Winter & Hirsch claim to be a HDC.  Because it gave Equitable the money before the note was executed, it was a co-originator of the loan and as such is charged with knowledge of the terms of the loan, and therefore knew of the usurious rate being charged.

(3)   Even if the note was seen prior to plaintiff giving Equitable $11k, then P also say that the D had signed a note promising to repay $16k.  As such it should have asked why Equitable would sell a $16k note for $11k.  We cannot permit parties to intentionally keep themselves in ignorance of facts which, if known, would defeat their unlawful purpose.  §3-302 states that when an instrument is so incomplete as to call its validity into question, a purchaser of that instrument is on notice of the possibility of a claim against it.  Here, the incomplete part was the principal sum of the loan extended to the D [the note didn’t say how much Equitable had loaned to Passerelli (10k), only the amount (16K) Passarelli was obligated to pay, and the amount of the discount (11k)].  By failing to include the principal amount loaned to the borrower on the face of the loan contract or note, a subsequent purchaser of that contract is able to say “I had no idea that usury was involved.”

(4)   CN: first, was the note usurious? yes, it called for the maker of the note to pay more interest than is legally permissible.  In some cases you can look the right to collect the principle.  Was Winter & Hirsh a HDC? 

(a)    Maker -- Passarelli,

(b)   payee -- Equitable. 

(5)   Equitable sells it to Winter & Hirsh.  W&H acquired this note through transfer.  Did it acquire it through negotiation, and was it a HDC?  §3-302 – did it take for value, in good faith, without notice?  Did W&H give value?  yes.  So this case will turn on whether W&H had notice of possible defects.  Here there was a very deep discount.  A discount by itself, standing alone, is not necessarily lack of value, or notice of a defense.  Good faith and notice are tightly intertwined.  But W&H made the payment before Equitable made the loan, this made them such close partners as to be a co-originator.  What is notice?

(6)   §1-202 Notice; Knowledge. “from all the facts and circumstances known to the person at the time in question has reason to know that it exists.”

(a)    FTC issue p. 150

vii)   Problem 1053-302(a)(1)—the purchaser has notice of a claim or defense if the instrument is so incomplete, bears such visible evidence of . .. alteration. .. .” 

(1)   this would not seem to be “so incomplete”.   This alteration would not call into question the authenticity of the entire instrument.  If I decided to cross out the amount, then it might call that into question.

viii)  Problem 106--§3-304(b) and (c), OC 2

(1)   (b)(1) “If the principal is payable in installments and a due date has not been accelerated, the instrument becomes overdue upon default under the instrument for non-payment of an installment, and the instrument remains overdue until the default is cured.

(2)   (c) Unless the due date of principal has been accelerated, an instrument does not become overdue if there is default in payment of interest but not no default in payment of principal.”

(3)   §3-302(a)(2)(iii) “without notice that the instrument is overdue or has been dishonored or there is an incurred default with respect to payment of another instrument issued as part of the same series.” 

(4)   CN: In a normal amortizing note, like a mortgage, you are paying off both the principal and interest.  In an interest-only note, you don’t pay any of the principal until the very end.  If it says “failed to make first payment” it means that the interest wasn’t due [paid?].  §3-304(b) deals with the principal being paid.  So interest being overdue does not rise to the level of notice for the purpose of defeating HDC status.

ix)     Problem 107—

(1)   § 3-304(a)(2) “An instrument payable on demand becomes overdue . . . if the instrument is a check, 90 days after its date”

(2)   Here, the check was dated April 30 and presented to the Grocery on August 31 (4 months, 120 days).  Therefore it was overdue and Grocery is not a HDC.

(3)   CN:  the grocery paid value, but they had some notice of defects, because after 90 days it’s overdue. It was a stale check.

x)        Problem 108Forgotten notice doctrine-deleted from Code.  § 1-201(25)

(1)     Maker of the Note is Ellen Brown; payee is the computer company; Harold Slow is that cashier at the bank.  Note: for Art. 4 stop payment of checks.  We’ll be talking about reasonable actions on both sides.  Oral stop-payment orders, written stop-payment orders.  The bank would defend that it had taken reasonable steps.

xi)     Problem 109—

(1)   Tractors sells the note to a Finance company at a discounted amount (this alone doesn’t give notice of defect). Was there a transfer? Yes, but it didn’t occur until it was indorsed.  For a negotiation of order paper you need a (a) transfer and (2) indorsement. Here, it was transferred first, then indorsed.  I can make them give me the indorsement.  But I already know of the defect because the equipment isn’t working, the defenses to the note . . .  Therefore the indorsement doesn’t help much.  What I know at the time of negotiation is what matters, and here the negotiation occurs after I have notice, which means I can’t be a HDC.

(2)   §3-203(c) “Unless otherwise agreed, if an instrument is transferred for value and the transferee does not become a holder because of lack of indorsement by the transferor, the transferee has a specifically enforceable right to the unqualified indorsement of the transferor, but negotiation of the instrument does not occur until the indorsement is made.” 

(a)    OC 3, “Until [the transferor indorsed the instrument] the transferee does not become a holder, and if earlier notice of  a defense or claim is receied, the trasnferr does nto qualify as a HDC.”

(b)   OC 4Case #4

(3)   Here, Friendly received notice of the defense of Maker before obtaining the indorsement by Tractors; therefore Friendly cannot become a HDC because at the time notice was received the note had not been negotiated to the Purchaser/Friendly.

xii)   Party to the transaction rule Jones v Approved Bancredit, p. 379--  An agent for Dell, a home building contract, presented Jones with documents. Jones said she wanted to have her atty examine the documents first.  Dell objected and eventually Jones signed, among others, a note for $3, 250, which Dell immediately sold to Bancredit for $2,250.  A builder crashed a bulldozer into the home, ultimately requiring the complete demolition of the structure.  Dell (the originally payee) closed its office. Bancredit sued Jones for the note.  It turned out that Dell and Bancredit were wholly owned subsidiaries of Homes, Inc.  Homes Inc. and Bancredit had the same officers and directors.  Each transaction of Dell was approved in advance by Bancredit.  Held, Bancredit was so involved in the transaction that it may not be treated as a subsequent purchaser for value.  It was more nearly an original party to the transaction.  Therefore, Bancredit should be denied HDC status.

(1)   Too-Closely Connected test, p. 386.  This provides a medthod for denying HDC status, which also goes to good faith.

(a)    Is the buyer-transferee the alter-ego of the seller-transferor? Do they have the same officers, same personnel, same location?

(b)   Who drafted the original promissory note?

(c)    Is the buyer-transferee mentioned in the note?

(d)   Does the seller transferor sell paper to other buyers, or is the buyer-transferee the only market?

(e)    Did the buyer-transferee get involved in the transaction by which the note was created?  Did it, for instance, conduct a credit investigation of the maker?

(f)     Did the buyer-transferee have some knowledge of the seller transferor’s poor past performance fo similar contracts?

xiii)  Sullivan v. United Dealers Corp., p. 386

(1)   Whether United Dealers Corp (transferee), a finance company, was a HDC of a promissory note executed and delivered by Sullivan (maker), in payment for building material and labor furnished by Memorial Swift Homes, the payee of the note?

(2)   Sullivan executed a negotiable note for $18k to Memorial Swift.  On the same day, Memorial negotiated the note and assigned it to United Dealers.  United in turn negotiated the not to a Bank.  Sullivan defaulted.  The bank transferred the note back to the finance company for value.  United sued Sullivan, who in turn claimed the defense that the work was not done in a workmanlike manner and United is not a HDC.

(3)   R: Notice, in order to prevent one from being a HDC means notice at the time of the taking or at the time the instrument is negotiated, and not notice arising subsequently.  The moment value is given for the instrument is decisive.  The moment value is given without notice, the status as a HDC generally is definitely and irrevocable fixed.  Under §3-302(f)—to be effective, notice to a purchaser must be received at such time and in such manner as to give a reasonable opportunity to act on it.  Here, there was no direct connection between the contractor and the finance company.  United had no notice and therefore was a HDC.

(4)   CN: Sullivan is the maker of the note; Memorial Swift was the payee; it sold the note to United. Memorial was supposed to build a house for Sullivan, then Sullivan defaulted and returned the note to the finance company.  Sullivan says that the Bank knew of the underlying contract, but they did get a certificate from Sullivan that things were going well.  The best thing about Sullivan’s argument and they knew that somewhere down the road there might be a defense. But this doesn’t matter, as long as you’re proceeding in good faith, if all you know is that there may be some subsequent defenses.

xiv) The Shelter Rule, p. 389

(1)   If I’m a HDC I might be able to give you the same rights of a HDC I . . one way to not be a HDC, if, for example, I give you a gift, but you have the same rights that I have.  So there’s a difference between being a HDC and acquiring the rights of a HDC as the transferee.

(2)   Problem 110

(a)    Is Alfred a HDC? yes.  He paid value, even if it is discounted.  Thus Alfred as HDC.  He didn’t know of the problems with the case.  Alfred gives the note to his daughter.  She is not a HDC, but he gave her the gift. 

(3)   Problem 111, p. 390. What if Jessica gets the note and gives it to her husband.  He is not a HDC, but he gets the rights of the HDC with a claim against the maker.  This is the difference between having the rights of a HDC and being a HDC.  If I only have the rights, then I can only go after the maker; if I’m a HDC, then I can go after anyone in the chain.

(4)   Problem 112—Is Portia .... we don’t look merely to that transfer of the rights, because she is a HDC in her own right.  If you pay a note, you get it back, so she acquires her original HDC status.[????]

xv)   Triffin C Sommerset Vally Bank

(1)   Drawer of check?  House contracting co.  Threshold question, do we have a negotiable instrument. Does it call into question is authenticity?

(2)   How did Triffin acquire the checks?

(3)   How did the check cashing Co. acquired Check?

(4)   Negotiable instruments?

(5)   Check Casher as HDC?

(6)   Triffin as HDC or

(7)   What about FORGERY of the signatures 3-308.

e)      Real and Personal Defenses/Claims

i)        Defenses against a HDC, p. 398

(1)   § 3-305, OC 3

(2)   Obligor—the party being sued by the holder of the instrument.

(3)   CN: §3-305(a)(1) real defenses [very important]

(a)    Infancy – to the extent under state law it is a defense to a simple contract.  This depends on state law.  If it’s a defense to a contract under state law, it will be good against a HDC.

(b)   Duress, lack of legal capacity.  “Duress” means gun-to-the-head duress, not a remote threat or minor bullying.  “Lack of legal capacity” also goes to state law.

(c)    Illegality (gambling, usury,) if it VOIDS the transaction; not if it is just voidable.  If it nullifies the obligations.  “Usury” is charging more than the legal rate of interest.

(d)   Fraud that induced signature.  Only fraud in factum or essential fraud. where it arises in a situation where the person has no knowledge nor a reasonable opportunity to learn of character or terms of the instrument

(e)    Insolvency--Bankruptcy.  If I list this obligation on my schedule, it is discharged, even if the note later ends up in the hands of a HDC.

(4)   Personal Defenses -- § 3-305(a)(2) (3).  A HDC wins against these defenses. 

(a)    Art. 3 Defenses OC 2 for.

(b)   common law defenses-- fraud, misrepresentation or mistake in issuance.

(c)    Claims in recoupment. (a)(3). “Recoupment” is the legal ability to substract from any payment due the amount the person trying to collect the debt happens to owe the debtor.  Illustration:  Buyer issues a note to the order os Seller in exchange for a promise of Seller to deliver specified equipment.  Is seller fails to deliver the equipment or delivers equipment that is rightfully rejected, Buyer  has a defense to the note because the performance that was the consideration for the note was note rendered.-- claims I can make that mean I do not have to pay what . . .

(5)   Problem 113, p. 399 – Seller said that the boat would never sink.  But the boat did sink.  Seller gave the note to his father as a gift.  Is the claim that the boat sunk be a personal or real defense?  -- personal defense:  Is it a fraud that induced the signature ? . .. . What about the expense of raising the boat?  He’s seeking recovery of the expense of raising the boat?  It rose out of the transaction – this is recoupment.  What about the dog bite?  This didn’t rise out of the same transaction.

(a)    Real & personal defenses:  Is the Father a HDC? Is representation about “unsinkable” boat, “essential fraud” - real defense? no, personal defense

(b)   Set-off is not the same as recoupment.

(c)    CN:  trace out the chain of this instrument:  Maturin is the maker, Aubrey is the payee, these are the original parties to the transaction. The payee gives it to his father.  Does the father acquire as a HDC? No because payee was not a HDC.  What if payee sold it to someone else? the other person would become a HDC.

(i)      If he had stolen it and forged a signature, there would never be a HDC.  But if he received it as a gift, and then sells it to someone else, as long as that person paid value, in good faith, without notice of defenses, then that person is a HDC.  Now, if this third person gave it to someone, then this new person would not be a HDC but would take under the Shelter Rule with the rights of a HDC.

(d)   Under §3-305, there are some defenses that won’t win against a HDC if proven, and some that will when proven.  If we had a non-HDC then we can ansert all the defenses in subsection 1.

(6)   Real defense of fraud. §3-305(a)(l)(iii).  This is a very hard defense to prove, as illustrated by the following cases. FDIC v. Culver, p. 400

(a)    Culver signed a paper, which he thought was a receipt but turned out to be a promissory note.  Payee is Rexford State Bank

(b)   Was the FDIC a HDC?  Yes, (FDIC is an exception to the rule that a buyer of bulk notes can never be a HDC).

(c)    What was Culver’s defense? - Fraud in factum.  “fraud that induced the obligor to sign the instrument without knowledge or opportunity to learn . . .”  If he were correct of meeting the test in 3305(a)(1)(iii), then he would have prevailed and would not have had to pay FDIC.  He said he thought it was a receipt.  He also said that he didn’t have the opportunity to learn of the terms of the note because it was blank.  Real defense?  Personal Defense?—Real defense.  Court says, you dummy, it was not reasonable for you to sign the instrument with all the blanks there.  He could have read it and seen that it was not a receipt.

(d)   Ort (1884) -- this case had better facts than Culver, suggesting he didn’t have the opportunity to learn about it.  ... someone approached Farmer, and told him what the note was, but he didn’t have his glasses with him, so he had the agent to read it to him.  The agent said it was an agency contract.  The farmer protested at first, he didn’t have his glasses, and even if he did, he couldn’t read that well.  Farmer signed an instrument. The court didn’t excuse him, because he did have enough opportunity to not sign.

(e)    Rights of HDC as to incomplete instrument? §3-407(c) --

(7)   Problem 114, p. 406—

(a)    A sells B the Brooklyn bridge, then A sells the note to a finance company.  This is common law fraud and is not good against a HDC.

(8)   Problem 115

(a)    Piano Co. indorses note to the bank at a discount.  So the bank is a HDC even though it was discounted.  He offered the real defense of infancy and he would win if it were a good defense under state law.

(b)   Do we have a negotiable instrument?

(c)    Negotiated?

(d)   HDC?

(e)    What is the defense?--Real or personal?

(f)     Who wins?

(9)   Problem 116

(a)    Another minor.  He wants his check back.  He wants to recover his check.  §3-306.  “a person having the rights of a HDC, takes free of . . .

ii)       Illegality--gambling.  Sea Air Support Inc. v Herrman, p. 407

(a)    F:  Hermann wrote a check for $10k payable to Ormbsy House.  Who’s the Plaintiff here?  Casino.  “Illegality of the transaction” because this was a gambling debt.  So this would be good against a HDC.  The Court concluded that there was no HDC, because the casino was on notice.  There were problems with value because it was a promise for future value, which is not “value.”

(b)   Law that voids the contract. 

(i)      Void (majority) Kedzie v. Hodge, p. 409

1.      Illegality of the transaction. It is only when an obligation is made entirely null and void under local law that the illegality exist as one of the real defenses under §3-305 to defeat a claim of a HDC; Not if it is merely voidable.

2.      Defense is illegality because he was not a licensed plumber.  Held, this is not the type of illegality we’re looking at.  It must be a law that makes the contract void.

(ii)    Voidable (minority). defense of illegality is not limited to gambling and usury.

iii)     Insolvency

(1)   Problem 117.—§3-305(a)(1) & (b).  Transfer Warranties – 3-416(a)(4) & (5).

(a)    Defense was discharge in bankruptcy. this is a real defense and is good against a HDC.

(b)   Transfer of Warranty – the transferor warrants that the instrument is not subject to a defense or claim in recoupment of any party which can be asserted against the warrantor, and that the warrantor has not knowledge of any insolvency proceeding commented with respect to the maker ...”

(2)   Problem 118, p. 418--§3-501(b)(2); §3-601, §3-602

(a)    Malvolio signs $18k note payable to Val, Val discounts note to Orsino.  Malvolio sends payment in full to Orsino.  Mal then asks for Note Back.  But it didn’t give it back but sold it to Olivia.  Olivia notifies him that they hold note & he should make payments to Olivia.  3-501(b)(2)  they must surrender the instrument if full payment is made.  But here, they [???]

(b)   3-601 “Discharge of the obligation of a party is not effective against a person acquiring rights oa holder ind due course of the instrument without notice of the discharge.”

(c)    3-602 OC 2—“if a person entiled to enfore the instumen transfers the instrument without giving notice to parties obligated to pay the instrument, and one of those parties subsequently makes a payment to the transferor, the payment is effective even thoug it is not makde to the perons entitled to enforce the instrument.”

(d)   Discharge by payment ..

(i)      Real or personal defense?

(3)   Analysis? 

(a)    First Q:  Negotiable instrument?  This will determine the rights and obligations of the parties to the instrument. 

(i)      NOTE:  Maker and Payee. 

(ii)    Draft: drawer, drawee, payee.

(b)   Second Q: has it been negotiated to HOLDER – §3-201- negotiation.

(c)    Third Q:

(d)   Forth Q.

(4)   Now go to problem 113 above.

iv)     Forgery

(1)   Is forger a real defense under the Code, so that it can be raised against a HDC, or a person defense, so that it cannot . . .  à § 3401(a) “A person is not liable on an instrument unless the person signed the instruments,” and §3-403(a):

(2)   Problem 119.—§3-305(a) and (b);

(a)    Slick signs Money’s name to promissory note.  Who is obligated by this signature?  §3-401(a) and 3-403(a).  Bank takes as HDC.  What is the effect of §3-305(a) and b? 

(b)   Key:  Don’t analysis this as a Real or Personal Defense.  Why?

(i)      Who is obligated under the instrument?  the con man.  But Slick skipped town. 

(ii)    3-401(a)—a person is not liable on an instrument unless the person signed the instrument or his agent signed it for him

(c)    3-402 a –Unauthorized signature

(d)   The Bank takes as a HDC.  A forged maker’s signature is not one of the defenses in §3-305(a), but: “Except as otherwise provided in this section, the right to enforce the obligation of a party to pay an instrument ....”  Here, Money never had an obligation to pay so you don’t even have to look at the defenses.

(3)   Problem 120—Travelers checks.

(a)    §3-104(i) “Traveler’s check” means an instrument that is payable on demand, is drawn on or payable through a bank . . . .”  The bank is both the drawee and the drawer.  The person buying the travelers check is a remitter.  §3-103(15).

(b)   What’s the result? § 3-106 (c) the person who should countersign must countersign. Failure to sign does not prevent the person from becoming a holder.  the specimen signature is there for the purpose of comparing the signature.  If I made a sloppy forgery, then there could never be a HDC, then there would be notice of a defense.

(c)    Key: Do we have an HDC? §3-302.  There are some forgeries in the change.

(d)   §3-308—Proof of signature.  First we accept the signatures as valid unless someone presents evidence to the contrary.  If someone says that it was forged, then I have the burden of showing that it’s not forged, but I’m aided by the presumption that it is authentic.  This is a shifting set of presumptions.

(e)    Defenses §3-305.

v)      Procedural Issues

(1)   You don’t have to be a HDC to sue on a Note.

(2)   Person entitled to enforce instrument §3-301. The holder, the person who holds it, or a person not in possession who is entitled to enforce, could be someone taking under the Shelter rule.

(3)   Holder

(4)   Nonholder: Sheler Rule, Depositary bank, Rightful owner of lost instrument §3-309

(5)   Virginia Nat’l Bank v. Holt, p. 420

(a)    VNB had a note in its possession. Holts were the makers.  Mrs. Holt claims she didn’t sign it.  But procedurally she didn’t meet the burden of proof.  She did deny it but she didn’t put on any proof to overcome the presumption of proof.

(b)   §3-308 creates a presumption that a signature is genuine.

(c)    The code determines not only substantive rights but also procedural rights.

(d)   §3-308—proof of signature.

vi)     Defenses against a non-holder in Due Course, p. 424

(1)   Common personal defenses. 

(2)   Herzog Contracting Corp. v. McGowen, p. 424

(a)    Whether solely on the basis that the notes are “clear and unambiguous” they are enforceable regardless of what the parties actually intended? 

(b)   The notes would be enforceable if enforcement was sought by a HDC, §3-305.  But Herzog was no a HDC.  A holder of a promissory note who is not a HDC takes the note subject to all defenses of any party which would be available in an action of simple contract. §3-305(b). One such defense is that the parties did not intend to create an enforceable contract.

(c)    Held, court allows parole evidence to show it was a sham transaction, the note was never intended to be enforced, so long as neither party was a HDC. . .  there wasn’t a HDC. The question is whether to let in evidence that the note was fraudulent or a sham transaction.  They were allegedly trying to defraud the IRS.

(d)   §3-105(b)—“An instrument that is conditionally issued or os issued for a special purpose is binding on the maker or drawer, but failure of the condition or special purpose to be fulfilled is a defense.

(e)    §3-117—this contemplates admitting parole evidence, but it say that it’s subject to applicable law.  If state law allows it, then you could have a defense.

vii)   Jus Tertii—§3-305(c), p. 431

(1)   Prohibition vs. Jus Terii §3-305(c)

(a)    Unless other person joins the lawsuit, and that person pursues the claim.  If you want to assert someone else’s rights, bring them into the lawsuit

(b)   OC 4:  Illustration:  Buyer buyer food from Seller and negotiations to seller a sachiser’s check used by Bank in payment of the proce.  Shortly after delivering the check to Seller, Buyer leanrs that Sller has defrauded Buyer in the sale transferion.

(i)      Seller may enforce the check against Bank even though Seller is not a HDC.  Bank has no defesnet to its obligation to pay the check...Bank cannot asser the Buyer’s claim of fraud unless Buyer is joined in the action in which Seller is trying to enforce payment of the check.

(2)   Accommodation parties – §3-305(d).—can raise defense except personal defenses.  But not discharge in insolvency.

(3)   Problem 121—§3-602, p. 431

(a)    This can’t be a negotiable instrument because it violates the Courier-without-luggage rule.  But if it were, what kind of instrument would it be? bearer paper.  How do you negotiate bearer paper?  delivery.  He gave it to his uncle.  Do we have a HDC?  no, because the uncle received it by gift.  But Stonewall did give money for it, even if at a discount.  They could be a HDC.  The uncle has the defense of failure of consideration.  The check bounced, so they didn’t really give value, and if they’re not a HDC, then he may be able to recover the note. While in their possession, the note is stolen. Jane is a HDC.

(b)   3-602—so he should try to join these other parties.

viii)  Conclusion---

7)      The Nature of Liability, p. 435

a)      Ask 4 questions when a problems arise.

i)        Who are the parties? (drawer, payee, drawee, maker, indorser, guarantor, acceptor, accommodation party, etc.)

ii)       What causes of action are available to each party? (contractual, warranty, conversion, suits “off the instrument”)

iii)     What DEFENSES are possible?

iv)     Can liability be passed to someone else?

b)      There are 3 theories for suing under the code (by analogy)

i)        Contract §3-412, §3-415, §4-401

(1)   Obligations of issuer, acceptor, drawer, indorser

ii)       Property (warranty §3-416, 3-417, 4-207, 4-208

iii)     Tort

c)      Underlying obligation, p. 436

i)        INTRO: Distinguish the underlying obligations from the instrument itself.  If a check is lost in the mail, found by a thief, forged and cashed, the payee can still sue on the underlying obligation.  See explanation following §3-420, p. 363.  In addition to the negotiable instrument, may the party always bring suit on the underlying obligation? no.  At some point, the one obligation is merged into the other for a period of time.

ii)       Merger-§ 3-310(b)--Problem 122, 437

(1)   Merger—once an instrument was offered and accepted in satisfaction of an underlying obligation, the obligation merged with the instrument, and until the instrument was dishonored the underlying obligations is suspended (unavailable as a cause of action).

(2)   He tried to sue her even though she had given him a promissory note and he had accepted it.  The underlying obligation was suspended upon delivery of the note; but for how long?  Until paid or dishonored, and this cannot be determined until the underlying obligation becomes due. Here, it was still unmature.

(3)   §3-412—If we have a cashier’s check or a note, if dishonored the drawer is obliged to pay the note.

iii)     Problem 123, p. 437

(1)   §3-104(g)—cashiers check.  The unusual thing is that the person with the underlying obligation here is not a party to the transaction.  The bank is both drawer and drawee.  the person who buys the cashier’s check is the remitter.

(2)   §3-310(a)—“if a cashier’s check is taken for an obligation . . . the obligation is discharged to the same extent discharge would result is an amount of money equal to the amount of the instrument were taken in payment of the obligation.”

(3)   MA: she should tell him that the amount is discharged.

(4)   CN:  ONB is the drawer/drawee.  Simon accepts the cashier’s check in payment of the rent and before he can cash it, he has failed.  Can Simon now go against Aunt Fran? No, acceptance of a cashier’s check discharges the underlying obligation just as if she paid in cash.  Once he accepted the check, her underlying obligation was discharged.

(5)   If it were a normal check and the bank dishonored it, then Simon could go back to Fran for the underlying obligation.  With a normal check, delivery of the check holds the underlying obligation in suspension , but does not discharge it.

iv)     Problem 124, p. 438

(1)   CN: there is an underlying obligation to pay rent, it is paid by check, payee tears up the check

(2)   §§3-604Discharge by cancellation or renunciation.  A person entitled to enforce an instrument [Simon], with our without consideration, may discharge the obligation of a party to pay the instrument (i) by an intentional voluntary act, such as surrender of the instrument to the party, destruction, mutilation, cancellation...” 

(3)   CN: this could go both ways. He did intend to tear it up, but he did it under a mistake of law.  He might actually prevail, because . . . there was no intent to discharge the obligated party.

(4)     3-310(b)(4)(If a note . . . is taken for an obligation, the obligation is suspended to the same extent the obligation would be discharged if an instrument were taken, and “if lost, stolen or destroyed, the obligee may not enforce it”)

(5)     3-309--???

v)      Ward v. Federal Kemper Ins. Co., p. 438

(1)   F: W changed vehicles which reduced his insurance premiums.  Ins. Co sent him a refund check of $12.50 which he received but never cashed (negotiated).  Then, the Ins Co. realized the refund should have been $4.50, and charged him the difference ($7.50), which he never paid. Later, W got in a wreck and Ins. Co declined to give coverage.

(2)   R: an insurer may not cancel a policy for nonpayment of premium unless the premium is in fact due.

(3)   I: Who had the $7.5 premium that was included in the un-negotiated $12 check?  If this was Ward’s by virtue of his possession of the check and his ability to negotiate it, then Ward owed Ins. Co. the $7.5 and the cancellation was proper.  If the $7.50 was still under Ins Co.’s control because the check had not been negotiated when the policy was cancelled, the cancellation was improper.

(4)   R: 3-408  “A check or other draft does not of itself operate as an assignment of funds in the bands of the drawee available for its payment, and the drawee is not liable on the instrument until the drawee accepts it.”

(5)   Ward argues that it was still under Ins. Co.’s control because it could have made a stop payment on it.  Ins. Co. argues that it was not because W could have negotiated it to a HDC in which case it would be liable on the whole amount.

(6)   Held, a check is not payment, the money remained under Ins. Co.’s control and therefore the cancellation of the policy was improper.

(7)   CN: Ins. Co. sent him a rebate check, but then realized they sent too much.  He never cashed the check.  If the funds still belonged to them because it wasn’t cashed, then they owe him money.  But if by sending him a check, he got control to it.   The bank relationship is debtor / creditor where the bank is the debtor. and this is important in the analysis of this case. a check doesn’t represent an assignment of funds, just a direction to the drawee to pay that money.  Holding the check is not owning the funds, but owning an obligation of the bank.  Who owns the money?  the bank, owns it, subject to their deposit liability.  Ward won.

d)      Liability on the instrument, p. 443

i)        Putting your signature on a negotiable instrument – except as a witness – leads to a promise implied-in-law (actual intent is irrelevant) to pay the instrument under certain circumstances.  This obligation is called liability on the instrument, i.e., as a result of signing the instrument, and the person who could enforce that liability was the current holder of the instrument.

(1)   §3-401(a) “A person is not liable on an instrument unless the person signed the instrument.” This implies they are liable if they do sign.  (b) says that a signature can be made with anything that expresses an intention to sign.

(2)   Signed §1-201(37) & §3-401(b)

(3)   A forger’s signing creates a liability in signing the instrument, not what name he signed.

(4)   §3-105(c) issuer of the instrument.  “Issuer is the maker or drawer of the instrument.”  Bank issuing a cashier’s check.

ii)       Primary liability §3-412

(1)   Maker’s obligation, p. 444

(a)    The maker of an instrument is absolutely liable on the instrument, as is the bank that issues a cashier’s check.  §3-412.  When there is more than one maker, they are jointly and severally liable.

(b)   Problem 125, p. 444

(i)      3-116—“two or more person who have the same liability on an instrument as makers, drawers, acceptors, indorses who indosrse as joint payee, ...are jointly and severally liable in the capacity in which they sign.”

(ii)    joint and several liability: you can sue co-makers, anyone of them, because the liability is joint and sevr’l, and

(iii)   Right to contribution: they have the right to contribution from each other.  What if one of the makers is insolvent?  Divide the remaining liability amount the solvent signers.

(2)   The indorser’s obligation--§3-415, p. 445

(a)    once the payee signs the back of the instrument, the payee incurs the obligations of the indorser§3-415.  Anyone who signs an instrument in an ambiguous capacity is conclusively presumed to assume this liability.  But the indorser’s obligation (unlike the maker’s) is secondary: – 3 conditions must be met before he can be sued.  There is no obligation until the three requirements have been met.

(i)      1.  Presentment. the instrument must first have been presented to the maker or the drawee,

(ii)    2.  Dishonor.  there must have been a dishonor, and,

(iii)   3.  Notice of dishonor. §3-503 requires that the indorser be given notice of dishonor.

(b)   CN: the indorser’s liability arises only if the instrument is dishonored, so this is a secondary liability.  If the instrument is paid as completed, but is not then . . . you will have a liability to pay it according to its terms, and you owe this obligation to anyone entitled to enforce the instrument or a subsequent indorser.  How to pick up liability:

(i)      Signing the back of the instrument §3-204(a)

(ii)    Signing in ambiguous capacity §3-415.  If not clear, then I pick up obligation. 

(c)    What is the obligation of the indorser? §3-415 (pay according to its terms, ).

(i)      To whom owed.?—anyone entitled to enforce.

(ii)    The indorser to a negotiable instrument, and the person who signs in an ambiguous way

(d)   Indorser obligation is secondary and arises under 3 conditions.  3415:  Presentment, dishonor, Notice of dishonor, §3-503.  So failure to get notice may get you off the hook.  If I’m an indorser and the person who has the check either keeps passing it on or after 30 days, then your obligation is discharged.

(3)   Discharge by Acceptance§3-413.  The fact that you deposit in your bank doesn’t make your own bank the acceptor of the check, until the check makes its way back to the drawee bank, and then the drawee bank makes an acceptance or dishonor.

(a)    What does acceptance of a check by a bank mean?  It does not mean acceptance by a depositary check.  My bank is the depositary bank; if it is a prudent bank, it will not give me complete credit until it passes the check on to the drawee bank.  Only when it gets back to the drawee bank that it is either accepted or dishonored.  They might dishonor the check because of NSF, or because there’s been a stop payment.  If it has been dishonored, then they can go after the maker/drawer, -- or they can go after the indorser, if there’s first been presentment, dishonor, and notice of dishonor to the  ...

(b)   §3-504Excused presentment and Notice of Dishonor.  but these three requirements must be met before the indorser has any liability.

(c)    §3-415—also says the indorser’s liability can be extinguished after 30 days.

(4)   Problem 126, p. 445—Billy writes and check to Snow.  Payee Snow indorses and cashes check at drugstore.  Drugstore indorses and deposits with Jordan Bank.  Depositary bank indorses and presents to drawee bank.  Drawee Bank does not accept but dishonors and returns check NSF. Check is returned to the depositary bank.  The Drugstore has gone out of business and can’t be reached.  Can the Depositary Bank sue a previous indorser (Snow)? yes.

(a)    CN: §3-415(a) the bank is a party entitled to enforce.  Can Snow, who in this instance is a payee and indorser, . . .

(i)      Once you sign it as an indorser, you pick up the obligation to pay on the instrument the amount that is stated, any party that has the right to enforce the liability.

(ii)    Can snow raise a defense of failure of consideration from the previous indorser? no.

(b)   3) §3-116 Joint and Several Liability.  “Except as provided in the instrument, two or more persons who have the same liability on an instrument as makers, drawers, acceptors, indorsers who indorse as joint payees are jointly and severally liable in the capacity in which they sign.”  Snow is entitled to contribution from the others.

(i)      CN: It’s possible that we sign as joint indorsers.  A person liable for joint and several liability is entitled to contribution.

(ii)    §3-415, OC 5; I can go backward in the indorsement chain, but not forward. EX:  If A signs, then B signs, then C signs, then I sign, then D signs, then E signs and it is dishonored and E sues Me.  I can get contribution from A, B, and C, but not D.

(iii)   §3-205(d)—anomalous indorsement. CN: an indorsement made by a person who is not a holder.  OC 3.  The only effect of an anomalous indorsement is to make the signer liable on the instrument as an indorser. Such an indorsement is normally made by an accommodation party.

(c)    Problem 127, p. 446—Peppermint Patty is one of 4 co-signers on a note to the bank for a loan to Charlie Brown.  When the note becomes due, the bank presents it to Charlie Brown and he can’t pay it, i.e., dishonors it.  PP claims she’s only liable for 1/4th.  See §3-415.

(i)      Is she right?  MA: no.  3-415(a)  they are co-sureties, not sub-sureties.  They are joint and severally liable. 

(ii)    If she pays $10k can she sue Pig Pen for the entire amount or only for part? see §3-116, §3-205(d).  §3-205 OC 3: “the only effect on an anomalous indorsement” is to make the signer liable on the instrument as an indorser.”  MA: She would seem to be able to sue only for part, i.e., contribution, under §3-116

(iii)    Can she bring the other indorsers into the lawsuit?  §3-119.  yes.

(iv)  §§3-116, 3-205.  MA: the indorsers are jointly and severally liable.  All anomalous indorsers are liable.  Therefore she will have to pay the full amount.

(v)    Co-Suretyship vs. Sub Suretyship.  447

1.      §3-205(d), § 3116,

2.      §3-415, OC 5.  CN: why do we call these anomalous?, because they’re just signed as accommodation parties. they’re just signing to incur obligation . . . why would they want to do this?  Here, Charley Brown would not have gotten the money if he hadn’t gotten four anomalous indorsers.  Ask yourself whether the person is signing as an indorser or as an anomalous indorsement.

(vi)  §3-119—Notice of Right to Defend Action--Vouching In.  If the notice states that the person notified may come in and defend.  If I go after an anomalous indorser, the Anomalous indorser can go after the other indorsers.  If you have the opportunity to come in and defend your interests, and you don’t then it will be binding on you.  This is a required opportunity for me to go after....if you do not notify then you don’t have the right to pursue contribution from them.

1.      Can the indorsers go after the maker?  §3-412.  The issuer of a note is obliged to pay an instrument an indorser who paid the instrument under §3-415.

2.      §3-419(f)—this says the reverse.  The right of reimbursement that the indorser has against the maker.  The “indorser’s obligation” refers to sureties, whose law has been altered by the UCC.

3.      Who is the indorser a surety for?  Who is the principal here?  An accommodation party may sign as a maker, drawer, acceptor, or anomalous indorser.  The liability they pick up is in the capacity in which they sign.

(d)   Qualified indorsements§3-415(b)—if an indorsement states that it is made “without recourse” ...the fact that I indorse without recourse, only affects my liability, does not affect the transfer of the ...but if it’s a check then I’m . . . then you can’t be gone with all liabilities.

(i)      Qualified Indorsements. By writing “without recourse” above his name, the indorser can escape liability. §3-415(b).

(e)    Indorser’s liability.  Problem 128, p. 447

(i)      Parties: Melody maker; Ivory is the payee; Friendly is HDC.  A HDC is a “party entitled to enforce the instrument”; the maker must pay to the person holding the note.  Melody has maker liability.  Even though there may be a cause of action, there may also be defenses.

(ii)    Causes of action: 

(iii)   Defenses: failure of consideration. is this good against a HDC? no, because it’s a personal defense.  Music Co.’s defenses?  They signed “without recourse.”  They can disclaim indorser liability; had it been a check they would not have been able to disclaim transfer warranty.

(iv)  CN:  Friendly tries to sue the maker, who claims failure of consideration, which is not a defense;  But what if Friendly goes after the Music Co., can the Music Co. defend that there’s failure of consideration?  They need to bring Melody in; but they would still lose.  But the indorser here signed “without recourse,” so she has no liability unless it’s a check, even against a HDC.

(f)     Indorsers can only go back in the chain, not forward in the chain. 

(5)   Some people, as a favor, sign on as a surety.  There are problems with being a surety, you pick up liability that you didn’t mean to pick up.

iii)     Sureties obligation, p. 448

(1)   Problem with being a surety?—If you sign at the request of your friend, then you will pick up liability without getting any benefit of the instrument.  That’s what the FTC notice is for.  FTC “plain language notice.” p. 449. 

(2)   What are the 3 “contracts” in a surety case?

(a)    The underlying obligation between the principal and the creditor

(b)   the promise of the surety to back up the underlying obligation and see that the creditor loses nothing as a result of accepting the principal’s promise on the first contract

(c)    the promise of the principal to reimburse the surety if the surety is forced to pay off on the surety’s promise to the creditor.

(3)   Problem 129

(a)    Identify the parties—

(i)      Surety?-Big Bank; 

(ii)    Principal?-Quickie;

(iii)   Creditor?—Frank Family 

(b)   Three contracts? 

(i)      Frank Family/Quickie for Quickie to build a house and pay Quickie when complete;

(ii)    Quickie/BB; Contract between the principal (Quickie) and the surety (BB) to pay the surety

(iii)   Big Bank/Family Frank to pay laborers.

(4)   Remedial rights of sureties.

(a)    CN: The bank had secondary liability as a surety, that if the accommodating party could not perform, the surety would perform.  What happens if the surety does get liability?  It has common-law remedies. 

(b)   Reimbursement—from the principal.

(c)    Exoneration, p. 450—the surety can compel the principal to perform instead of the surety.  You want the right of exoneration.  This avoids having the surety pay and then going after the principal, the surety can just make the principal pay.

(d)   Subrogation—by paying off the second contract, the surety acquires the ability to become a party to the first contract and enforce it as if the surety were the creditor. CN: this comes up in the insurance context.  If I pay the creditor, I step into his shoes, and get his rights to, if he has collateral I can go after the collateral and sell it.

(e)    Contribution—right of partial reimbursement that co-sureties have against each other. 

(f)     Strictissimi Juris—where possible a court will find in favor of the surety. Strict construction in favor of surety.

(i)      Discharge of a Surety

1.      Modification of underlying Agreement between the Principal and creditor.

a.       Even if it Benefits Surety? doesn’t matter.  The law goes in favor of the surety.

2.      Releasing Principal.  If you discharge the primary obligor then you are discharging the surety. “If the creditor releases theprincipal debtor from liability on the first contract or gives the debtor a binding extension of time in which to pay, the surety is discarged unless (1) the surety consents, or (2) the creditor informs the principal of the preservatnion of the surety’s rights against the principal.”

a.       Granting principal more time to pay?—“I’ll give you an additional 6 months to pay.”  This will discharge the surety’s obligation, because I may go bankrupt during this time.

b.      Preservation of secondary obligor’s recourse.

3.      2 Hypos, p. 452.

a.       The note comes due, and the principal does not pay it; the creditor waits a month before suing. – no discharge.

b.      The note comes due, and the creditor and principal agree to wait a month to enforce it, with the principal agreeing to pay an extra month’s worth of interest.

(ii)    Accommodation party, p. 453--§3-419—a party who signs the instrument without being a direct beneficiary of the value given for the instrument. OC 1.  The accommodation party may sign in any capacity, but is obligated to pay the instrument in the capacity in which the accommodation party signs.”

(iii)   3-419(d)— Guaranteeing payment is the default.  the person seeking to enforce the instrument must go after the surety first.  ... unless you have unambiguous words to the contrary, stating the he is guaranteeing collection only.

(iv)  (e) the accommodated party may not seek reimbursement from the accommodation party.

(g)    Problem 130, p. 454

(i)      The default is that he is guaranteeing payment, not collection.  If it is a guarantee for collection only, it must be unambiguously stated.

(ii)    May George establish his status as surety against a HDC?  See § 3-419(c) OC 3 (), §3-205(d) (anomalous indorsement), §3-605(h)(“a secondary obligor asserting discharge under this section has the burden of persuasion both with respect to the occurrence of the acts alleged to harm the secondary obligor and loss or prejudice cause by those acts.”). MA: Yes, because under 3-419(c) the HDC would be on notice that he was an accommodation party.  CN:  3419(c); 3-302(a)(2), but its Not good against a HDC.

(iii)   May George [an accommodation party] defend on the basis that he received no consideration for his undertaking? no; §3-419(b) OC 2.  “The obligations of the accommodation party may be enforced . . . whether or not the accommodation party receives consideration for the accommodation.”

1.      CN: may be enforced notwithstanding the statute of frauds.

(iv)  Is George an accommodation maker or accommodation indorser?—MA: maker.  §§3-116(a)(“two or more persons who have the same liability on an instrument as makers, drawers, acceptors, indorsers who indorse as joint payees, or anomalous indorsers are jointly and severally liable in the capacity in which they sign”), 3-204(a) (“Indorsement . . . “)—Philly Bond v. Highland Homes –“ a signature in the lower right hand corner of an instrument indicates an intent to sign as the maker of a note or the drawer of a draft.”

(h)    CN Words of Guarantee.

(i)      Art. 3 applies to signers of a negotiable instrument

(ii)    Separate document?

(iii)   NOTE: art. 3 applies only to accommodation parties who sign the instrument; not if they sign a separate suretyship agreement.  OC 3, last para 3-419.

(iv)  Guarantor—3-419(d), only liable if the other party cannot pay up.

(v)    Problem 131, p. 455—MA yes.

(i)      Floor v. Melvin, p. 455

(i)      Melvin signed the back of the note: “For an in consideration of funds advanced to Melco, Inc., we irrevocably guarantee Majorie Floor against loss by reason of nonpayment of this note.”

(ii)    CN: Estate of Melvin – Guarantor against Loss. Guarantee of payment or collection?  Who must be sued first? 4419(d) & (e).“Accommodation party “ can sue. “Accommodation party”

(iii)   Not Vice Versa 3-419(f)

(iv)  I: Must Majorie Floor sue Melco first, or can sue go directly after Melvin for the money?

(v)    There are two types of contracts guaranteeing negotiable instruments:

1.      Contracts guaranteeing the collection of notes: the guarantor promises to pay the debt upon condition that the owner shall use the ordinary legal means to collect it from the debtor with diligence but to no avail.

2.      Contracts guaranteeing the payments of notes: guarantor promises to pay the debt at maturity if the principal debtor fails to, and upon maturity the guarantor must be sued at once.

3.        EX: “I hereby guarantee this loan” = guarantee of payment, not collection.

4.        EX: “For value received I guarantee payment of the within note at maturity.” – for payment

(vi)  Here, the terms of the guarantee are made conditional upon the collection of the note, not payment.  Because it is a guarantee against “loss”.

(j)     Problem 132, p. 459

(i)      Who is the principal and who is the Surety?

(ii)    Does the maker of a note have a cause of action against indorsers, whose 3-415(a) obligations runs to “ a person entitled to enforce the instrument” defined in 3301 as the holder (defined in 1201(20) as the person identified in the instrument as the person to whom it is payable which ot note include the maker).

(iii)   Can Portia Sue the mother? §3-412.  no.

(iv)  CN: the mother borrowed the money from ONB and signed as a maker, but the mother is an accommodation party.

iv)     Tender of Payment, p. 460--§3-603.

(1)   Problem 133

(a)    §3-603(c) (“If tender of payment of an amount due on an instrument is made to a person entitled to enforce the instrument, the obligation of the obligor to pay interest after the due date on the amount tendered is discharged.”) MA: Here, Cather, the co-signer, tendered payment.  Therefore, he is discharged of his obligation to pay interest after this date.

(b)   CN: indorser is discharged because he may not be able to pay at a later date.

(c)    CN: interest is discharged, if I agree to take at a later date.  This is so as not to increase the surety’s risk.  So we stop the interest.


(e)    §3-603(b) (“If tender of payment . . . is made to a person entitled to enforce the instrument and the tender is refused, there is a discharge, to the extent of tender ... of the obligation of the indorser or the accommodation party.).  MA:  therefore Goodwin (one entitled to enforce it) may not recover from Cather (accommodation party.).  Nor can he recover from Stout who is the indorser.

(f)     What if payment is tendered, refused, and then both the accommodation party and the maker go bankrupt?  Can Goodwin, the purchaser of the note, go after Stout, the indorser/seller/payee?  §3-415(a) “if an instrument is dishonored, an indorser is obliged to pay the amount due on the instrument “).  MA:  so yes, Goodwin can go after Stout the indorser for the money.

(g)    Cather is the accommodation party. 

(h)    CN: the accommodation maker goes to holder and offers to pay the debt.  Refusal of tender will discharge an accommodation party and an indorser.

(i)      any refusal of tender is a discharge

(j)     Impairment of collateral as Discharge – See new rules, below

(i)      3-605(d) also (e), (f), (g), (h)

v)      § 3-605 – Strictissimi Juris Again, p. 461

(1)   Under 3-605(e), (f), (g) the non-consenting surety is discharged, up to the value of the collateral, if the creditor (holder) fails to protect the collateral and if it is thereby unavailable to pay the debt.

(2)   New Rules for Discharge of Secondary Obligors §3-605

(a)    Test: loss to the secondary obligor

(b)   3-605(a)—RELEASE of the primary obligor in whole or in part:

(i)      If the 2d’ry obligor has already paid part, he can still recover from the 1st obligor.

(ii)    Discharge of the 1st obligor is discharge of 2nd obligor to same extent – unless creditor “retains the right to enforce” against 2nd obligor BUT 2nd obligor gets credit for partial payment by obligor and is Discharged to the extent it would cause LOSS to 2nd obligor [e.g., in the meantime, the primary obligor goes bankrupt, or does have the resources.  this adversely affects.]

(iii)   CHECK: Any discharge of the maker is discharge of the indorser.

(c)    3-605(b)(2)—granting Extension of Time to principal obligor discharges the Secondary obligor to the extent that it causes the second obligor loss.

(d)   3-605(c)—Other modification......

(e)    Impairment of the collateral3-605(d)-- What is collateral?  security.  Impairment of collateral.  But what happens if I, as the security holder, damage the collateral?  that’s an impairment of collateral.  It’s equivalent to losing the security interest.

(f)     2d obligor Discharge to the extent of Impairment

(g)    2nd obligor can always consent . . . .

(3)   Problem 134[???]

(a)    3-605(e)—“A secondary obligor is not discharged under subsections . . . unless the person enetiled to enforce the instrument knows that the person is  asecondary obligor or has notice under section 3419(c) that the instrument was signed for accommodation.”

(b)   3-605(g)--

(c)    Arnold’s liability is now only for 4k.

(d)   Here the bank was under-secured.

(4)   Chemical Bank v. Pic Motors Corp, p. 461

(a)     F: Bank agreed to Lend money to Pic under an established line of credit on the security of Pic’s inventory of cars as collateral.  Siegel had been the director, president and principal stock holder of Pic, personally guaranteed the loans in writing.  Siegel then sold his interest in Pic to Robl, and resigned as director and president.  Pic fell behind on the payments. Bank then made a demand, and then sued Pic and the guarantors.  Siegel defends that the deficiency was caused by the failure of the Bank to conduct regular inspections of the business.  No provision of the loan agreement or the guaranty agreement obligated the Bank to conduct inspections.  Held, Siegel was still liable.

(b)   CN:  This was a floor plan arrangement.  The dealer wants to secure a line of credit, this has a lien on the cars that move in and out of the lot. 

(c)    Pic – Car Dealership, Floor plan arrangement – Inventory Financing line of credit secured by cars.  Siegel – Guarantor – resigns for company “the undersigned hereby guarantees, absolutely and unconditionally, the payment of all liabilities of the borrower, whether now existing or hereafter incurred.”  It is “out of trust”.  Siegel sells remaining collateral, pays down note;

(d)   Is He liable for deficiency?  yes. He said that the bank had a duty to inspect the collateral and preserve it.

(e)    Discharge?

(f)     Negligence or Fraud of Bank employees?

(g)    Prior course of dealing

(5)   Problem 135, p. 467

(a)    3-605(e), George would only be discharged if the Finance Co. knew that George signed as a secondary obligator, which is not clear here.

(b)   Under 3-605(f)? George did not consent to the event or conduct (bankruptcy) that is the basis of the discharge.  Therefore, he IS discharged.

(c)    OC 7, 3605.

(d)   CN: The bankruptcy creditors took priority here.  Does impairment of the collateral cause an impairment of the note?  It’s not clear who is the accommodation party, nor whether the bank is at fault.

(e)    The accommodation party is discharged to the extent of the impairment.

(f)     Tax issue. Even though the state seized the vineyard to pay a tax liability, she is no worse off, she hasn’t been caused a loss, because the taxes would have had to have been paid anyway.

(6)   Problem 136, p. 468—§3-605 [???]

(a)    §3-605(b)—deals with situations where the person entitled to enforce an instrument, YNB here, grants the principal obligor, Jck Point, an extension of time.  MA: here, YNB did not grant an extension of time, but rather a discharge of a party of the amount, therefore I think that 3-605(b) does not apply.  So Shadbolt still owes it.

(b)   CN:  he borrows 75k, and he gets a surety.  is the surety

(i)      3-419(e)[f?], OC 3 §3-605. Is the secondary obligor discharged?  He is discharged to the extent he has suffered a loss.  if truly the primary obligor had nothing else, then he wouldn’t have suffered a loss.  If he truly didn’t have any more money then he’s not prejudiced.  Then there’s also the issue of the subsection (g) language. 

(c)    3605(c) OC 4.  Extension of time is discharged, only to the extent he is damages


(d)   3-605(d) OC 5.

(i)      Stock. If the primarily obligor just takes it back then the secondary obligor has much less protection. But here they consented in advance, then you can no longer complain.

(ii)    3-605(h) and (i)—burden of proof.

(e)    3-605(i) OC 2.—it’s presumed that it caused a full loss up to my full liability.  The party seeking to enforce my obligation as the secondary party has the burden of proof.  If I’m trying to enforce it and I say it’s not the full amount, then I have to prove it.

(7)   London Leasing Corpor  v. Interfina, Inc, p. 469

(a)    I: whether a corporate officer who makes a note on behalf of his corporation and, also personally endorses that note is discharged from personal liability on the note by an agreement between the payee and the corporate maker, by its president, which extends the corporate maker’s time to pay the note?

(b)   F: Interfina made and delivered to Plaintiff a promissory note for $52k signed by Frederick as president of Interfina, and signed by Frederick personally.  When the note was not paid on time, Interfina, through Frederick, made agreements to extend the time of the due date; these Frederick signed only in his corporate capacity.

(c)    Frederick contends that the extension agreements, which were not signed by him in his personal capacity, as a matter of law discharged him from personal liability on the note because he did not personally consent to the extension.

(d)   R: What is consent?

(e)    Held, Frederick consented.

(f)     CN:  President signs on behalf of the corporation and personally.  Here he was so intertwined with the transaction, he had the opportunity and consent... and this w

vi)     New notes for old, p. 472

(1)   Problem 137

(a)    MA:  no; §3-310(b)(2)—“In the case of a note, suspension of the obligation continues until dishonor of the note or until it is paid.”

(b)   may enforce either note.

(c)    §3-605(c)

(d)   CN:  Bank had a valid promissory note with a guarantor.  Instead of extending the note, then entered into a new not and they held the first note as collateral for the second note.  The accommodation party knew nothing about the extension..  She’s discharged to the extent she is damaged.

(2)   Problem 138

(a)    3-605(e)(impairment of the collateral)

(b)   3-305(b) “The right of a HDC

(c)    3-601(b) “Discharge of the obligation of a party is not effective against a person acquired rights of a HDC of the instrument without notice of discharge.”

(d)   3-302(b)  “Notice of discharge makes the discharge effective against a person who became a HDC with notice of discharge.”

(e)    CN: Discharge to the extent he is damaged.  But this is a personal defense.  The rule is that the collateral follows the note.  there is question regarding whether they were a HDC.

(3)   Conclusion

(4)   Liability (methodology)

(a)    What are the parties? Drawer, maker, payee, drawee, indorser, guarantor

(b)   What liability on the underlying obligation?

(c)    What rights and obligations under the UCC?

(d)   What defenses?

(e)    Can liability be passed to someone else?

(i)      maker’s obligation 3412

(ii)    Drawers obligation 3414.

(f)     What’s the obligation?

(i)      To whom is it owed? person entitled to enforce.

(ii)    When does it arise?

(g)    When can it he discharged?

(h)    Difference between primary liability and secondary liability?

(i)      3-414(f)—drawee suspends payments means “bank failure.”

(j)     Indorser’s obligations §3-415.

(k)   anomalous indorser?

(5)   Accommodations parties (sureties) §3-419

(6)   Discharge of secondary obligors 3-605  Extent?

(a)    Extension of time, medication, impairment of collateral.

(b)   Consent & Waiver

(7)   Tender of payment – §3-603

(8)   Drawer’s obligations §3-414

e)      The Drawer’s Obligation--§3-414, p. 473

i)        §3-414—the drawer’s obligation is secondary because the draft must first be presented to the drawee for payment and dishonored by the drawee before the drawer has a legal obligation to pay the instrument.

(a)    Presentment and dishonor 3-501 and 3-502.  R

ii)       Presentment and Dishonor, p. 474

(1)   “Presentment” is the demand for payment made to the maker of the note or, for drafts, to the drawee.  §3-501.  Exhibition is only required if the presentee demands it.  §3-501(b)(2).

(2)   “Dishonor” is the refusal to pay. §3-502. 

(3)   Problem 139, p. 474. 

(a)    If a bank won’t pay a check that the payee won’t sign, has a technical dishonor occurred? Grosvenor takes check to bank, refuses to sign his name, and bank refuses it.  Is this dishonor?

(i)      3-501(b)(3)(i)—“without dishonoring the instrument, the party to whom presentment is made may (i) return the instrument for lack of necessary indorsement.”

1.      CN: they may also ask him to sign a receipt, but more likely they were asking him to indorse it.  But it’s not a dishonor, so the drawer is not liable.  The drawee bank is justified without dishonor in requiring indorsement.

(ii)    3-501(b)(2)(iii)—“Upon demand of the person to whom presentment is made, the person making presentment must (iii) sign a receipt on the instrument for any payment made or surrender the instrument if full payment is made.”

(b)   MA: there has been no technical dishonor.

(4)   Problem 140, p. 474

(a)    Is the drawer still liable on a check that has not been cashed for 8 months?

(i)      4-404—Bank not obliged to pay check more than 6 mos old.

1.      CN:  But it may pay the check

(ii)    3-408—drawee is not liable until it accepts the check; but the check by itself does not operate as an assignment of funds.

(iii)   3-414(f)—if the bank fails during this time of delay, then drawer is discharged, but if the bank does not fail then he’s not discharged. CN: thus delay in presentment alone, does not result in a discharge, only if there is also a bank failure.

(iv)  3415(e)--

iii)     Requiring a thumbprint is ok.  Messing v. Bank of America, p. 475

(1)   Whether Bank’s practice of requiring non-account check holders to provide a thumbprint signature before it will honor a check is lawful? yes.

(2)   Banks can require a thumbprint as a reasonable form of identification.

(3)   CN: This was not a messy thumbprint, it’s invisible.  He was not a customer of the bank.  The drawer of the bank was a customer.  This is used as a theft or fraud deterrent.  Is there are privacy issue?  he could have taken his business elsewhere.  There is not database of these thumbprints.  The court held that it was a reasonable

iv)     Notice of Dishonor—3-503, p. 480

(1)   Indorsers are entitled to notice of dishonor.  If I want to preserve liability, do I need to send a certified letter? no.  any reasonable means.  If the bank sends it back through the collection process, that is adequate notice of dishonor.

v)      Protest. 3-505. Evidence of dishonor is a document purporting to be a protest.

(1)   Not often used in a domestic transaction, but in international transactions.  This is a notarized certificate of dishonor made by a US consul.  This is a notarized statement of presentment and dishonor.  But is some cases, we can get away with no presentment and no dishonor.

vi)     Excuse3-504

(a)    force majeure, acts of god, presentment is excused if it can’t be made with reasonable diligence

(b)   Maker has already repudiated, is dead or in bankruptcy.

(c)    Waiver

(i)      No reason to expect the instrument to be paid or accepted.  §3-504(a)(iv)—“Presentment for payment or acceptance of an instrument is excused if the drawer or indorser whose obligation is being enforced has waived presentment or otherwise has no reason to expect or right to required that the instrument be paid or accepted.”

(ii)    §3-504(b)(ii)—“Notice of dishonor is excused if the party whose obligation is being enforced waived notice of dishonor.  A waiver of presentment is also a waiver or notice of dishonor.”

(d)   Delay can be excused

(e)    WAIVER or PRESENTMENT = waiver of notice of dishonor.

(2)   Problem 141

(a)    Is this effective?  yes, Does the tiny print matter?  probably not.

(3)   Problem 142, p. 482

(a)    Frank has a check written out to him from Dan.  Frank indorses the check over to Holdit.  Frank then calls Dan and got him to put a stop payment on the check.  But Holdit didn’t present the check to his bank for 6 weeks.  After 6 weeks he took it to his bank, Creditors National Bank, who in turn presented the check to the drawee bank, which dishonored the check. Creditors National bank takes the money back from Holdit.  Holdit sues Frank for his indorser’s obligation.

(b)   Was Frank discharged by delay of presentment ? yes. 3-415(e)—“If an indorser of a check is liable under subsection (a) and the check is not presented for payment, or given to a depositary bank for collection within 30 days after the day the indorsement was made, the liability of the indorser under subsection (a) is discharged.” CN: Is indorser discharged? 3415(e)

(c)    Was presentment delay excused within the meaning of 3-504(a)(iv)? no. —“Presentment for payment or acceptance of an instrument is excused if the drawer or indorser whose obligation is being enforced has waived presentment or otherwise has no reason to expect or right to require that the instrument be paid or accepted.”

(d)   Is delay in presentment excused? no, because he was the one who got the indorser to put a stop payment.

(4)   Makel Textiles v Dolly Originals, p. 483

(a)    Dolly borrowed $40k, paid down $30k, and made a note for 10k.  It then executed 5 notes for 2k each.  One was deposited but returned for insufficient funds.

(b)   The notes were signed personally by Goldberg and Kushner.

(c)    Because Goldberg was the president and principal officer of Dolly, and signed in that capacity as well as in a personal capacity, it was unnecessary to serve Goldberg with notice of dishonor and nonpayment because failure to do so could not injure or prejudice his rights in anyway.  Formal notice of presentment and dishonor to Mr. Goldberg would be merely a useless gesture of advising him of  a fact with which he was already aware. §3-504.  He already knew that the notes could not be and were not paid from any corporate funds.

(d)   Regarding Kushner, he signed only as an indorser, there is no proof of presentment and dishonor, nor was there any activity or participation in the affairs of the corporation so as to excuse presentment or notice of dishonor.

(e)    Held, the claim against Kushner is dismissed, the claim against Goldberg wins.

(f)     CN: Goldberg was the president; because he knew the corporation couldn’t pay it, so the technical requirements of presentment wouldn’t have done any good.

(g)    Kushner was just an indorser.  there was no evidence to prove up notice of presentment and dishonor, so he was discharged.

(h)    Last guy: Lewis was discharged because it wasn’t even his signature.  §3-401.  “A person is not liable unless he signs an instrument.” The only person still on the hook is the person for whom the technical requirements of presentment and dishonor would be unnecessary.

vii)   The Drawee’s Obligation, p. 485

(1)   the drawee, not having signed the draft, is not liable on it.  The drawee having signed nothing, incurs no contractual obligation.

(a)    Problem 143

(i)      §3-408. Drawee not liable on unaccepted check. “A check or other draft does not of itself operate as an assignment of funds in the hands of the drawee available for its payment, and the drawee is not liable on the instrument until the drawee accepts it.”

(ii)    CN:  under 3408, with respect to the person presenting the check, the check itself does not operation as an assignment of funds.

(iii)   3-401(a)-a person is not liable on an instrument unless that person signs it.

(iv)  3-414,

(v)    4-402—the bank may be liable to the customer for wrongful dishonor. so the drawer may sue the bank.

(vi)  Bank refuses to accept draft although money is in account.  The holder of the check cannot sue the bank, but the drawer of the check can do this.

(2)   The Non-Bank Acceptor, p. 486

(a)    The drawee who places a signature on a draft is said to have accepted it, and he incurs the obligation of an acceptor.  §3-413.  “Acceptance” is the “drawee’s signed agreement to pay a draft as presented.”  §3-409.

(b)   Norton v. Knapp (1884), p. 486

(i)      F: Drawee, Miles Knapp was presented with a sight draft to pay to the order of Exchange Bank, $85.”  On the back of it Knapp wrote “Kiss my foot. Miles Knapp.”

(ii)    I: How to construe the words “Kiss my foot.”? Held, this was a refusal.

(iii)   D intended by the use of the contemptuous and vulgar words to give emphasis to his intention not to accept or have thing to do with the bill or the plaintiff. They imply, and are understood to mean a contemptuous refusal to comply with such request.

(iv)  CN: Court says it couldn’t have been acceptance.  S

(v)    EX: Payable 60 days after sight. You have to present to start the running of the time period. So there are two presentments.

(c)    Sight drafts and delay periods.  If the drawee had dishonored the first presentment (instead of indorsing it) -- the one for acceptance—he would not have been liable on the instrument because at that point she had incurred no 3-413 liability.

(d)   When a sight draft gives the drawee time for payment after sight, the holder must make a presentment for acceptance in order to start the running of the credit period.  3-502(b)(4), OC 4, last para.

(3)   Checks, p. 489

(a)    3-408

(i)      Galyen Petroleum Co v. Hixson, p. 489

1.      Galyen-payee presented checks to drawee bank, drawn on the account of drawer.  Bank refused despite having adequate funds in Hixson’s account.  On three instances, the Bank refused to honor checks presented by Galyen, drawn on Hixson’s acct.

2.      The bank setoff the amount in Hixson’s acct, against a loan, even though it was not yet due.

3.      Hixson declared bankruptcy and was discharged.

4.      Galyen says bank unlawfully refused to honor his checks.

5.      R:  3-408—a check or other draft does not of itself operate as an assignment of any funds in the hands of the drawee, and the drawee is not liable on the instrument until he accepts it.

6.      CN: Bank returned check NSF, even though the acct held money;  Bank exercised setoff.  Not property.  Third party rights to account funds:  Special agreement drawer/payee; oral statement by the bank officer-fraud; negligence of bank; earmarking of the funds.  these are non-code provisions.

(ii)    Nevertheless, the bank may incur some liability under §1-103, for common law liabilities.

(4)   Certification--acceptance, p. 492

(a)    The drawee bank’s acceptance of a check is called “certification.” 

(b)   §3-409(d) “A ‘certified check” means a check accepted by the bank on which it is drawn....The drawee bank has no obligation to certify the check, and refusal to certify is not dishonor of the check.”  OC 4: “In the absence of an agreement, a bank is under no obligation to certify a check.”

(c)    §3-411—“If an obligated bank [the acceptor of a certified check] wrongfully refuses to honor it” may be liable for expenses and consequential damages.

(d)   §3-413—“Obligation of acceptor.”  The acceptor of a draft is obligated to pay it according to its terms.

(e)    Problem 144, p. 492

(i)      a. Does the drawee bank have to certify a check? No. bank is under no obligation to certify a check.  3-409d.

(ii)    b. What should the payee do?

1.      Cash the check or get Generous George to make an agreement with the bank to certify it.

(iii)   c. No, the church cannot sue G, G is discharged once acceptance occurs, but it can sue the bank.  3-411(b)—“if the obligated bank wrongfully refuses to pay a certified check, the person asserting the right to enforce the check is entitled to compensation.” an certified check is a check accepted by the bank upon which it is drawn. §3-409(d).  Once the bank has accepted it, the drawer is discharged.  3-414(c) “If a draft is accepted by a bank, the drawer is discharged, regardless of when or by whom acceptance was obtained.”  If the bank wrongfully refuses to honor

(iv)  What if G donated a certified check which the bank later dishonored? OC 3,  3414, “the drawer is discharged of liability on a draft accepted by a bank regardless of when accepted was obtained.”

(v)    CN:  What if the bank had certified, is the drawer still liable??

viii)  Signature by an Agent--§3-402(a), p. 492

(1)   3-402(a)—agency law, real, express or implied, or apparent.

(a)    §3-402(b)(1)

(b)   To avoid liability, the agent should do two things:

(i)      (1) name the principal and

(ii)    (2) unambiguously indicate that the agent is signing only in a representative capacity.

(iii)   If you fail to, then what will happen? worst case is that you become personally liable.  If it’s against a HDC, then you will lose.  If not then you’ll be able to show that the parties’ intent was not to bind the person.

(c)    OC 2:  Any ambiguity should be resolved against the agent.

(d)   Problem 145, p.

(i)      §3-402 OC 1.

(ii)    Look to ordinary contract law.

(iii)   Yes, he is bound.

(iv)  He does not name the principle. Is the principle bound?  Yes, under ordinary agency law. 

(v)    What about, “Money Corporation, John Smith.”  Does this name the principal? yes.  Does it unambiguously show a representative capacity? no.  So he will be personally liable to a HDC.  As between the original parties, he would be able to prove that the parties didn’t intend for him to sign in his agency capacity.

(e)    Problem 146

(i)      Yes, Finch would be liable.  Though he has unambiguously indicated that he is an agent, he has not named the principal.  Therefore any ambiguity will be resolved against him. CN:  He would be liable because the principal is not named.

(ii)    Not liable to Wickets because they had notice that he was signing with authority of Biggley.

(f)     Mundaca Investment Cor v. Febba, p. 494

(i)      F:  At the end of the bote below the signature line, the name of each defendant was typewritten beside  the preprinted term “Borrower.”  Following their signature, each of the defendants handwrote the word “trustee.”  But the trstee was not identified on the fact of the notes.

(ii)    They do not indicate the name of the trust.  So as to a HDC they would be personally liable, but

(iii)   Because the represented person  --the trust – is not identied in the instrument as required by 3402(b)(1), this case fall under 3402(b)(2).  Thus they are personally liable in two situations 1) to a HDC, 2) to any other party unless defendants prove that the originalparties did not inent them to be personnlly liable.

(iv)  Held, there was a genuine issue of material fact, therefore summary judgment was not appropriate, because the note stated “Borrower”.

(g)    Problem 147

(i)      “John Smith”—personally liable, because this neither indicates that he is an agent, nor does it name the principal.  John Smith is personally liable.

(ii)    “Money Corporation, John Smith.” – personally liable. Though he has indicated the name of the principal, he has not indicated that he is an agent.  CN: maybe personally liable.  It is ambiguous.

(iii)   “Money corporation, John Smith, President”  not personally liable.  Here he has both named the principal and indicated that he is signing as an agent.  CN: this is the most advisable way to sign.

(h)    Problem 148

(i)      CN: what if the check have the principal’s name in the upper left hand corner.  3402(c)

(ii)    No. he is not liable. Tho he did not indicate that he was an agent, when dealing with checks that indicate the name of the holder of the account upon which it is drawn, no one is deceived.  §3-402(c) OC 3—“If a representative signs the name of the representative as drawer of the check without indication of the representative status and the check is payable from an account of the represented person who is identified on the check, the signer is not liable on the check if the signature is an authorized signature of the represented person.”

(i)      Assumed name.  Nichols v Seale, p. 498

(i)      Note was signed in the following manner: “The Fashion Beauty Salon, Carl Nichols [typed], /s/ Carl Nichols.  The Fashion Beauty salon was a dba, i.e., assumed name for Carls Fashion, Inc.

(ii)    Held, the use of an assumed name does “name the persons represented’ within the meaning of the code. extrinsic/parol evidence is admissible to identify the signer, and when he is identified, the signature is effective.

(iii)   Also, parole evidence is admissible to show, as between the original parties, that the signer was not personally obligated.  The intent must be communicated to the other party.

(iv)  CN:  is using the dba sufficient disclosure of the principal.  yes. 

(v)    Is the signature ambiguous as to the representative capacity.  yes, but we’re not dealing with a HDC, so he gets the opportunity to prove up the intent of the parties, whether the original parties intend for him to be bound or not.

(vi)  There’s a problem with this case under Texas law, he failed to disclose his intent, even though he had that intent.

8)      Banks and their customers, p. 503

a)      Overview/ recap

i)        Bank deposits & Collections Art. 4.

ii)       If conflict between art. 3 & art. 4, which controls? article 4 controls.

iii)     Definitions: §§4-104 & 4-105.

iv)     Payor Bank = Drawee bank

v)      Depositary bank = 1st bank for collection

vi)     Depositary bank could be payor Bank as well.

vii)   Debtor/creditor

viii)  Principal/agent—in my bank, I am the principal, the bank becomes my agent

ix)     “properly payable” rule – §4-401

x)      What happens is the bank pays an item that is not “properly payable?”  If it is properly payable, the bank

b)      Problem 149, p. 505

i)        Postdated Check: 4401(c) the bank can properly pay on a postdated check unless you give the bank notice with reasonable certainty.  Usually their contract sets out what “reasonable notice” is.  And how far in advance do you have to give  reasonable notice? so they’ll have enough time to act on it.  What is the basis for this rule on postdated checks?  because the checking system is automated and you can’t catch this kind of thing.

ii)       You may think that a postdated check is not properly payable, but it is, unless you give the bank reasonable notice with reasonable certainty.  But how law does this  notice last?

(1)    6 months -- written

(2)   14 days –oral

(3)   renew it for an additional 6 months.

iii)     Procedure §4-401 & §4-403(b).

c)      Problem 150

i)        Someone forges my name?  under a forged drawers signature, the item may not be properly payable.  §3-401  a person is not liable on an instrument unless the person signs the in instrument.  3-403 (discussing unauthorized signatures).  But it may be effective for the wrongdoer.

ii)       If you lose your check book, can the bank require you to pay a stop payment fine for all the remaining  check? §4-401 OC 1 no.  It is inappropriate for the bank to require stop-payment order, because a check with a forged drawer’s signature by itself is not properly payable.

d)      Problem 151, p. 506

i)        Widow writes a check for $10.00, then someone steals it and changed the amount for $1,000.  Is this properly payable for 1,000? 4-401(d) a bank that in good faith makes . . . unless the bank has notice that the completion was improper. This is tough on the customer.  But it does have the good faith requirement.  Here, the customer may have to eat the loss.  It’s an allocation of loss between innocent parties.  Fortunately for the widow, there’s another problem with this instrument, because there was never an negotiation, because the signature was forged, so this does not work against the widow here.  4-401(d) provides that if the bank makes payment to a holder, but a thief is not a holder, because there was no negotiation.

e)      “Properly payable Rile

i)        What happens if the bank pays and the item is not properly payable? it must recredit the account. – § 4401

(1)   Not Conversion, because the money in the acct belongs to the bank, not the customer. The customer is a creditor to the bank and the bank is a debtor to the customer.  The bank cannot convert its own property.

ii)       Problem 152, p. 507

(1)   No Drawer’s signature

(2)   pre-authorized Draft/tele-check

(3)   Depositary Bank liability?

(4)   No Drawer’s Signature – not properly payable?

(5)   CN: it was not properly payable because there was no signature under 4401.  This gives the customer the ability to have “buyer’s remorse.”  the operation of this rule could requires the bank to take a loss when a customer may or may not have authorized this.

f)        General Rules

i)        Issues in applying Properly Payable Rule

ii)       Which prevails: the writing or numbers? 3-114.  typewritten rules over numbers, and handwritten over both.

iii)     Discuss MICR Encoding

g)      Problem 153, p. 507

i)        8 year old check paid? §4-404 –“bank is under no obligation to pay a check that is over 6 months old.”

ii)       Overdrafts? 4-401(a)

(1)   May the bank pay? yes.

(2)   Must the bank pay? no.  The overdraft is effectively a loan.

iii)     How quickly must he file suit? Art 4; §4-111- 3 years after the cause of action accrues.

iv)     Statute of limitation on check §3-118(c)—6 years.

h)      Wrongful Dishonor—§4-402, OC, p. 508--

i)        General Rule—a payor bank wrongfully dishonors an item it if a bank fails to honor an item that is properly payable. 4-402

(1)   The bank may but doesn’t have to honor a check that would cause an overdraft.  When does it determine whether there are enough funds in the account: between the time of receipt and

ii)       Punitive damages.  Twin City v. Isaacs, p. 508

(1)   P’s checkbook was missing; two forged checks showed up; the bank put a freeze on P’s account because P had once been convicted of a burglary.  But someone else was convicted for forging the checks.  The account remained frozen for 4 years.  Jury awarded P 18k in compensatory, and 45k in punitive damages.

(2)   Held, there is sufficient evidence to sustain damages for mental suffering, loss of credit, and loss attributable to the inability to pursue the purchase of a home.

(3)   CN: Bank decided not to pay and froze the account, for 4 years; as a result they bounced a bunch of checks, had their cars repossessed, and the bank was continuing to charge them a service fee.  Before the freeze, their credit rating was “impeccable.”  But afterward they couldn’t get any credit anywhere else.  Personally, they almost got a divorce.  The court awarded compensatory and punitive damages.  Actually damages are a question of fact and must be proved up.  Punitive damages are not authorized by §4-402, but are recognized in the commentary.

iii)     Problem 154, p. 512

(1)   CN: couple files for divorce and the atty files a lis pendens. Atty advised the bank to freeze the acct until after the divorce.  4-402 rreui  damages proved, so he would have to prove them. Therefore summary judgment would be inappropriate.

(2)   No; it is a question of fact. §4-402(b).

iv)     Problem 155, p. 513

(1)   F: Check maker’s bank's alleged failure to make full payment of payroll checks maker issued to its employees by imposition of a service charge was contrary to the purpose of the Illinois commercial code to simplify, clarify and modernize law governing commercial transactions and thus illegal.  Your Style Publications, Inc. v. Mid Town Bank and Trust Co. of Chicago

(2)   Could the bank and the customer make an agreement that the bank may dishonor an over-the-counter check presented by someone who does not have an account with the bank? MA: yes,

(3)   4-103

(4)   CN: goes to drawee bank and tries to cash the check.  Bank’s policy was not to accept those who do not have an account with the bank.  Was this a wrongful dishonor, yes, because the check was properly payable.

(5)   Refusal to pay “on us” check if payee is not a customer –Wrongful Dishonor? yes

(6)   Who can sue? OC 5.  Only the customer/account holder.  The payee is not a party to the contract.  The bank’s liability

(7)   FEES to cash “on us” check.  Deposit account agreement?—would you include in your account contract that you can charge a fee to pay for cashing the check.

(a)    4-401 says that the UCC does not regulate banks setting fees for.  What if a bank charged 45 to cash a check?  it might be considered unconscionable.  It must al

v)      Death or incompetence of Customer, p. 513

(1)   §4-405—a bank may honor checks even after the maker is dead or incompetent, and up to 10 days after it received knowledge of the death.

(2)   Authority of payor bank rendered ineffective?

(3)   What if the Bank does not know?—then it can continue.

(4)   Grace period?-10 days.

(5)   Who can stop payment during grace period?—a party claiming to be a party in interest. Any party.

(6)   Problem 156, p. 513

(a)    §4-405(b)—if ordered to stop payment by a person claiming an interest in the account, then the bank MAY NOT continue to make payments, even within the 10 day period.  The bank MUST stop honoring checks.

(b)   3-502

(c)    4402--??

(d)   Crazy Nelly—no grounds , relationship, or justification, even though baseless, the bank must stop payments.

vi)     Bank’s Right of Setoff, p. 514

(1)   Although the UCC mentions setoff in passing, the Code neither establishes this right nor regulates it.  It’s a common law right.  It’s a settling of mutual obligations.  But the mutual obligations must occur in the same right and capacity.  So if I have a personal acct and a business account and I take out a business loan, the bank cannot setoff my personal account.

(2)   Setoff may be had only against generally accounts, not special accounts.

(3)   Consumer protections:

(4)   Walter v. Nat’l City Bank of Cleveland, p. 516

(a)    Account balance: 3,600.

(b)   Loan/note amount (unmatured): 3,600.

(c)    Here, the bank made the loan to debtor after he was already insolvent.

(d)   CN: a Third Party obtained a judgment against the acct holder, the bank did not hold the judgment held by a third party against the bank customer.  the judgment creditor served the bank with a notice of garnishment.  The bank setoff his account for the loan, even though the loan was not yet due.  Was there mutuality between the loan the and the deposit account? yes, but it wasn’t due yet.  The judgment creditor got to them first, so they should have paid him.  There are times when the bank can setoff an unmatured loan if the debtor becomes involvent after the loan is made.  But most installment loans contain an insecurity provision.

vii)   Customer’s right to Stop Payment, p. 520

(1)   §4-403, OC 1:  Procedure? Duration? Burden of Proof?

(2)   Ordinary checks

(a)    Parr v. Security Nat’l Bank, p. 521

(i)      P ordered a stop payment, first orally, then in writing, and both times made a 50-cent error in identifying the amount.  P did give the correct date, check number, of the check.  Bank ended up paying the check.

(ii)    RULE: Stop payment order must identify the check with “Reasonable accuracy.”  Held, P gave reasonable accuracy even if the amount was off by 50-cents.  the bank’s defense that it’s computer could only detect an exact match is untenable.

(iii)   CN: what info did she give to identify the check?  she gave the check number, account number, it was timely.  Bank said that the computers would only stop payment if the amount was exactly correct, but they didn’t inform her of this, neither in the account agreement, nor when she entered the stop payment order.  Held, she had given enough information, and it was the banks burden.

(iv)  What if they just made a mistake?  is that a defense to failure to do a stop payment order? OC 7 no, even if made by mistake or inadvertence.

(b)   Problem 157, p. 523

(i)      P buys a refrigerator which is a piece of junk.

(ii)    (a)—§4-403(a). MA: the stop payment order did not give enough information to be effective.  I agree.

(iii)   (b)—§4-103(a)—these provisions may be varied by agreement.  CN: no, you can’t contract away good faith and ordinary care.

(iv)  (c)—§4-403, OC 7 –pay by mistake.:  no, this agreement is invalid.

(v)    (d)—stop payment fee. §4-403 OC 1—this is a loss that should be born by the bank as part of the cost of doing banking....CN: this is allowed but not specifically authorized and is subject to good faith..

(vi)  (e) Bank’s right of subrogation 4407: This means that they may not have to re-credit the account even though they wrongfully paid.

(c)    Problem 158, p. 525

(i)      4-407(2)—bank’s right of subrogation.

(ii)    CN:  He puts an oral stop payment, which is good for 14 days (written is for 6 months. 4403).  Was the stop payment order legitimate on the part of the customer or would the car seller still have a claim against him?  The dealer would still have a claim against him because his only problem is with the color.  So when the bank negligently makes a payment, it steps into the shoes of the payee and doesn’t have to re credit the account before they assert the right of subrogation.

(d)   Canty v. Vermont National Bank, p. 525

(i)      P handed his canceled IRS checks over to the IRS for inspection.  The IRS re-deposited the check, and the Bank paid them as second time, withdrawing the funds from his account.  Plaintiff moved for summary judgment.

(ii)    R: 4407—

(iii)   4-401 if an item is not properly payable, the bank may not charge the customer’s account and if it has done so, it must re-credit the acct.  However, the bank may refuse to re-credit its customer’s acct after wrongful payment of an item by subrogating itself to the rights of the presenter or the improperly paid instrument.

(iv)  The IRS is unique because our account with them is never settled.  Given the purpose of avoiding unjust enrichment, the question is whether plaintiff depositor actually suffered any loss by the admittedly improper payment.

(v)    Held, plaintiff will have to prove his loss.  The bank is not required to re-credit his account before exercising its subrogation rights.

(vi)  CN: the IRS was owed money by the depositor, and if they didn’t get it through the payment of the checks, then they would have gotten it some other way, and so the bank steps into the shoes of the IRS.

(e)    Problem 159, p. 529

(i)      (a) Can a drawee bank be a HDC?  No, §4-403 OC 7.

1.      4-407 OC 1.  “Payment can be stopped against a HDC, but if it is, the drawer or maker is liable and the sound rule is that the bank is subrogated to the rights of the HDC.”

2.      MA: this would seem to help the bank.

(ii)    (b) 4-403(c)—the burden of establishing loss because of the wrongful payment is on the customer.

(iii)   CN: this is a gift check, with a timely stop payment, transferred to a third party for value, so is the written stop payment order effective against a HDC?—yes, but the bank gets the rights of the HDC.  So the effect is the same.  And not have to credit the account.  Usually, a bank will honor the stop payment order.  This situation of the bank invoking its subrogation rights only arises when the bank accidentally pays out on the check. §4407.

(f)     Problem 160, p. 529

(i)      §4-211—a bank has given value to the extent it has a security interest in an item.

(ii)    4-210(a)—a bank has a security interest in an item to the extent it makes an advance on or against the item.

(iii)   MA: so here the bank would be a HDC.

(iv)  CN: As a HDC, the bank is entitled to recover against the drawer.  They could also recover against Maggie Lee.

(3)   Cashiers-, Tellers-,  and Certified Checks, p. 530

(a)    Can a customer stop payment on a check that has been certified? no.  “A customer has no right to stop payment on a certified check.  §4-403 OC 4.   This is true of a cashier’s check and a teller’s check.

(b)   CN: §4-403 a customer purchasing a cashier’s check has no right to stop payment. 

(c)    Problem 161, p. 530

(i)      §3-411 OC—the purchaser of a teller’s or cashier’s check has no right to ask for a stop payment , and if the bank does refuse or stop payment, then the bank may be liable.

(ii)    §3-305(c)—the obligor bank may not assert any defenses against a person entitled to enforce the instrument.

(iii)   What can Tom do?

(iv)  3-202 OC 2—“The remedy of a person with a claim to the instrument is replevin, impoundment, injunction, et.”

(v)    3-201—

(d)   Declaration of loss period – 90 days.  CN:  He asks the bank to stop payment, can he do this? no.  If the bank does stop payment then the bank can be liable under §4-411.

(i)      Lost or stolen  cashier’s check. §3-312.  Only the drawer, payee, or remitter.  The loss was not because of transfer, seizure, and he can’t reasonably get it back.  The file this, then wait 90 days, then they can recover the amount of the lost, stolen, cashiers’ check.  That mean so for the first 90 days, the bank must honor it, then it can refuse to pay it.

(ii)    What if the bank does what it should do, and does not stop payment?  Then he has rights against the seller of the car under contract law.

(e)    Problem 162, p. 531

(i)      §3-312(b)(2) OC 3, 2d para

(ii)     §3-312(c), 3415—Portia signed her name.  Therefore she is an indorser and is liable on the check.

(iii)   CN: Portia sent it to her uncle.  Nothing happens . .. What should happen here.

(iv)  If it waits 90 days then the bank is justified in paying it.  This is a timing issue because the HDC was paid by the ...the original bank has a valid declaration of loss. If you lose or have stolen a cashier’s check, you can file a declaration of loss and waiting 90 days.  What if payment is demanded before the running of the 90 days? Until the claim becomes enforceable, it has no legal effect and the party may pay it to someone else... you have to pursue other remedies.  You can go against the other, but not the bank, the bank is entitled to pay within the 90 days.  If something happens during the declaration of loss period then you’re out of luck.

viii)  Bank Statements--4-406, p. 532

(1)   §4-406(a)—requires that the bank return “sufficient information” about the check in the bank statement but does not mandate return of the check. 

(a)    Sufficient information” means: item number, amount, and date of payment.” This is the minimum standard, safe harbor.  What is the minium info the bank must return to the customer in the bank statement?

(b)   7 years. The bank must keep these records for 7 years. How long must the bank retain items or copies? 7 years.

(c)    Customer’s Duty to Examine statements.  How long does customer have to examine statement and report alteration or unauthorized signature?  Customer is looking for forgeries or alterations.  And how long to report?  Reasonable promptness?  Not exceeding 30 days. can it be less than 30 days? yes.  But the bank will put this into the contract to it’s less than 30 days.

(2)   How quickly must Bank provide item/copy? a reasonable time, depending on the bank’s system and the customer’s needs.  Can it charge Fees? yes, as long as it’s reasonable.  Customer Remedy? OC 3.

(3)   What is the customer’s remedy if the bank does not make the statement available? The Code does not address this, but looked to other law.

(4)   Shifting Burden. §4-406(c)-(f)  There is a shifting burden dealing with unauthorized signatures.  They only have the duty to report from the information the bank gave back to them.

(5)   Problem 163, p. 532

(a)    CN:  Portia gets a letter from the IRS saying that she’s getting an audit, she calls up the bank and asks for 172 checks.  The bank says sure, but it’ll be $25 per check.  Can they do this? as long as it’s reasonable

(b)   Fees.  §4-406 OC 3—“This act does not regulate fees that banks charge their customers for furnishing items or copies, but under principles of law such as unconscionability or good faith and fair dealing, courts have reviewed the fees ...”

(c)    §4-406(b)—the bank must provide the copies.

(6)   Problem 164, p. 533

(a)    §4-406(c)—after the bank has provided the customer with a bank statement, the customer must use reasonable care in examining it for errors such as whether there was any payment not authorized.  “The customer must promptly notify the bank of the relevant facts.”

(b)   MA: yes, joe is required to report this to the bank. Yes, he has the obligation to report alternations and unauthorized signatures.

i)        Bank Collections, p. 534

i)        Process: Check goes to Depositary bank, then to Collecting banks, then to Payor bank.

(1)   Funds flow from Customer’s acct at Payor Bank to collecting bank to depositary bank to Payee or indorser’s account. This is called float time.

(2)   How long does this take? it used to take a week.  Now it’s much less.

(3)   when is the money available to payee or indorser?

ii)       Controlling law

(1)   UCC Art. 4

(2)   Federal Reserve Reg. J - Fedwire, p. 2099

(a)    CN: Federal reserve banks. There are 12 in the country, one of which is in Dallas.  Reg. J governs how the Federal Reserve will deal with these.

(3)   Clearinghouse Rules

(a)    A group of banks gets together and sorts out all of the checks in a given area. 

(4)   Expedited Funds Availability Act (“EFAA”)(1988) & Reg CC – 12 229 –Commentary Appendix E.

iii)     Funds availability. 

(1)   CN:  Banks can make funds available sooner, but we won’t complain about that.  When MUST a bank make funds available?  Federal law (Reg CC) preempts UCC 4215

(a)    When as a matter of legal right is the customer entitled to the funds?

(2)   Cash, p. 535

(a)    If you deposit cash into your banking acct how quickly can you take it out against? the next banking day. §4-215(f)

(b)   Banking day§4-104(a)(3)—“when the bank is open to the public for carrying on substantially all of its banking functions.”

(c)    CN: Reg CC 229.10—Next day availability. EXAM Question.  “Next business day after the banking day of deposit IF MADE IN PERSON TO BANK EMPLOYEE and not depositing into an ATM, or night deposit.”

(i)      Banking day.  229.2(f)  When the bank is open for all functions.

(ii)    Business day.  229.2(g)  calendar day other than a weekend or holiday.

(d)   What about CASH deposited at ATM or night drop?  Second business day after banking day of deposit.

(e)    DISCUSS cut off time 4108.  The bank can set a time, after 2 A.M. as the cutoff time, and item received after that time is treated as being received at the opening of the next banking day.

In person/over the counter

ATM or night drop

Next banking day

Second business day


(3)   Checks, p. 536—look first whether a federal rule will control.

(a)    Across the counter Presentments.

(i)      If someone gives you a check and you (the payee) walk into the drawee bank and present it across the counter, how quickly must the bank pay or dishonor it?—[ §3-502(b)(2) requires the bank to make a decision to honor or dishonor that same day]

(b)   “On us” Items.

(i)      If the payee and the drawer each maintain an acct at the same bank, this is an “on us” item, 4-215(e)(2) permits you to remove the money at the opening of the second banking day following receipt.

(ii)    But EFAA requires the depositary bank to make same-bank checks available for withdrawal on the business day after the business day of deposit, ie, next day.  Thus, a bank must decide whether to honor overnight.

(c)    Transit Items.  If the depositary bank and the payor/drawee bank are not the same, the check is a transit item.  Your bank then becomes the collecting bank.

(d)   “Next day” availability for checks. 229.10.

(i)      Business day after the banking day.

1.      Treas. Check – deposited in acct of payee.

2.      Cashiers’ check –acct of payee, in person, special deposit slip if required.  Use a special deposit slip so you can recognize that it’s something that’s going to require next day availability.

3.      “On us” checks (in same state or processing unit)

a.       Lesser of $100 or total deposits that are not otherwise “next day.”  This is to make some amount available.

(4)   Problem 165, p. 537

(a)    Father gives son $1k check.  son mails it  unindorsed to his bank.

(b)   Lack of indorsement.  §4-205—“if the customer fails to indorse the check, the bank nevertheless becomes the HDC.  The lack of a signature does not prevent it from being a valid negotiation; moreover, the bank was a person entitled to enforce under §3-301 because it was a HDC. Additionally, failure of consideration is not a defense against a HDC.

(i)      CN: if you decide to deposit a check into your own acct, and forget to indorse it, the bank may not require you to endorse it.  See 4-205 Bank is a HDC when it gives value; thus father cannot prevail on person defense of a Failure of Consideration.

(c)    CN: Did the bank have to require his indorsement? no.  The father is trying to say he rescinded a gift check, but a HDC intervened in the form of the bank, which paid value by offsetting a debt.  So the HDC is able to prevail against the donor.  For the purposes of determining the HDC, the bank acquires this status at the moment of setoff.

(d)   “Lock Box” arrangements.—If a store has a bunch of checks, they don’t have to indorse them all.  Also, a mortgage company, you may send the check to the mortgage processing unit, they receive all the checks is their PO box, make a list of all the checks, but they may not indorse them. Sometimes a third party has the job to process the checks, and they may not indorsement.

iv)     Check Clearing process

(1)   Interbank Collection –art. 4—parts 2&3

(2)   In small towns, two banks will often agree to permit the depositary bank to debit the account of the payor bank for the amount of the deposited check, subject to the right of the payor bank to dishonor the check later and have the acct re-credited...Each bank has 2 banking days in which to pass the item on to the next bank §4-202.

(3)   What is “Provisional settlement”?—one that can legal be reversed, a final settlement cannot be legally reversed.

(4)   What is charge back?—when you’ve made provisional credit, but then found out that the check was no good, so you charge back the acct.

(5)   “Float period.”—the physical time taken for the check to go through the process.

(6)   What is a Clearing house?

v)      Availability of Ordinary Checks

(1)   Reg CC -12 cfr 229.12

(a)    LOCAL CHECKS defined 228.2(r)

(i)      2nd business day following the banking day of deposit

(b)   NONLOCAL CHECKS – 229.2(v)

(i)      5th business day following the banking day of deposit.

(2)   Exceptions to general availability rules

(a)    New accts (first 30 days) 229.13.  Because the bank doesn’t know you and there’s the possibility of fraud.

(b)   Large checks à $5k in any one banking day.  This limits the bank’s risk.

(c)    Re-deposited checks.  Why?  It’s already been presented and dishonored once, so the likelihood of it being returned NSF is high.

(i)      BUT not for missing indorsement or postdated

(d)   Repeated overdrafts.  To protect the bank from risk.

(e)    reasonable cause to doubt collectability

(f)     Emergency conditions.  If something beyond the control of the bank, prevent it from

(3)   Notice & Liability.

(a)    When to give the customer notice? at time of deposit or as soon as practical.

(i)      one time notice

(b)   General disclosure—229.15. must be conspicuous, in a form customer can keep.

(c)    Civil liability – 229.21.  If bank fails to comply with these, they may be subject to civil liability.

(d)   What about Bona Fide Errors?

(e)    Reliance on FRB Rulings?

(4)   Problem 166, p. 540

(a)    §4-204—A collecting bank shall send items by a reasonably prompt method . . .”

(b)   §4-215(e)(1)—“credit given by a bank for an item in a customer’s acct becomes available for withdrawal as of right: If the bank has received provisional settlement for the item, when the settlement becomes final, and the bank as had a reasonable time to receive return of the item and the item has not been received within time.”  So failure to dishonor within the required time entitles the customer to payment as a matter of right.

vi)     The Federal availability Rules

(1)   Federal rules usually completely displace §4-215(e)(1).

(2)   The next day Availability of Special Items.

(a)    Under the EFAA, next banking day availability is required for items not likely to be dishonored, such as govt, checks, bank checks, wire transfers.

(b)   $100 availability rule.

(3)   Availability of ordinary checks.

(a)    Local checks. Located within the federal processing region.

(b)   Non-local checks.  Not located within the federal processing region.

(c)    See MAP/CHART p. 544

(4)   Escape valves

(a)    New accts

(b)   Large checks

(c)    Re-deposited Check

(d)   Repeated overdrafts

(e)    The reasonable cause exception.

(f)     Emergency conditions

(g)    The notice

(h)    Civil liability. 

j)        Final Payment--§4-215, p. 547

i)        INTRO: the moment of final payment fixes many of the legal rights.  The payor bank is “accountable” for the amount of the check, and may no longer dishonor the check and must pay it to the person entitled to enforce it.  §4-302(a).  Thus, following final payment, the payor bank bears the risk of any mistaken payment not covered by one of the legal theories (breach of presentment warranties, restitution §3-418).  §4-301(b).

ii)       §4-215.  Final payment of a check destroys the check as a cause of action, dishonor is no longer possible, and the drawer and indorser are off the hook. CN: “An item is finally paid when the item has been (1) paid in cash, (2),

iii)     Problem 167, p. 548

(1)   teller is counting out the cash.  But then he checks the computer, and discovers that he doesn’t have the money in the acct. can the teller grab the money back?  no.   It’s been paid in cash and it’s final.

(2)   The bank had paid the item in cash.  Therefore, under §4-215, the bank had made a final payment.

iv)     Problem 168, p. 548

(1)   Split deposit.  A $1k check, $200 cash, $800 deposited.  Has the bank made final payment?  if all the money gets paid out and then the customer pays some of it back to deposit, this is a final settlement for the full 1k.  But what if they just give you $200, and you tell them to deposit the rest, then it’s final payment for $200, not the $800.  But if I already have $200 in my acct, and the bank give $200 from my acct and provisional credit for the $1000 then there’s not final payment.

v)      Problem 169, p. 549

(1)   Cashier’s check in lieu of cash.  §3-104(g) (“Cashier’s check”), 3-412 (obligation of an issuer of a cashier’s check), the bank is both drawer and drawee, but it fails before the cashier’s check can be presented.

(2)   §3-414 (this section does not apply to cashier’s checks), §3-310(b)(1) (payment or certification of a check results in discharge of the obligation to the extent of the amount of the check.)

(3)   §4-215(a)(2)—An item is finally paid by a payor bank when the bank has first  settled for the item without having right to revoke the settlement under applicable law.

(4)   §4-213(c)—if settlement for an item is made by cashier’s check . . . and the person receiving settlement, before its midnight deadline: presents the check for collection, settlement is final when the check is finally paid, or fails to present  for collection, settlement is final at the midnight deadline of the person received settlement.

(5)   CN:  she’s the payee on a 1k check, brings it to the bank  and gets a cashier’s check in lieu of cash.  She endorsed it to her creditor and the bank fails.  See 4-215 OC 8.

vi)     Second method of making final payment is settling for a check and not having the legal right to evoke the settlement. §4-215(a)(2).

vii)   Third method, and most common, Where final payment is made by simply holding onto the check past the deadline to returning it. §4-215(a)(3).

(1)     Deadline. depends on the agreement, clearing house rules, or the UCC (midnight deadline).

(a)    Midnight deadline§4-104(a)(10)—midnight on its next banking day following the banking day on which it receives the relevant item or notice or from which the time for taking action commences to run, whichever is later. CN:  if today is a “banking day,” then I have until midnight the second day, not tonight.

(b)   Interaction between 4215 and  Reg cc.  Bank has a period of time within which to make final payment or DISHONOR.  With dishonor they may be liable to their customer for not honoring a properly payable item.

(c)    Questions

(i)      When did the check come in?

(ii)    When does the count start?

(iii)   When must the bank make a decision?

(2)   Problem 170, p. 550

(a)    When did the check come in?  Tuesday morning, legally, though actually the check came in on Friday.  Wednesday, midnight is the time to worry about.

(3)   Rock Island Auction Sales Inc. v. Empire Packing Co, p. 550

(a)    Construing §4-302.

(b)   September 24, Rock received a check from Empire for $14k,

(c)    September 24 Rock deposited check with First Bank.

(d)   September 27 payor bank Illinois Nat’l Bank received item; Held item until Oct 2.  Oct 4, received by First Bank.

(e)    Nov 7, Empire goes bankrupt.

(f)     Rock sues Ill. Nat’l Bank, because it held the check beyond the time limit fixed by § 4-302.

(g)    “Accountable”=liable.

(h)    Held, the statute imposes liability for the amount of the item.  §4-302 imposes liability upon a payor bank for failing to act prior to its midnight deadline.  4-103(5) imposes liability on a depositary bank or collecting bank for the same fault.

(i)      4-303 places a greater liability on payor banks than §4-103 places on depositary or collecting banks, because those banks are merely conduits, whereas the payor bank knows whether or not there are sufficient funds available to pay the item.

(j)     CN:  Customer said he would put the money in the bank. The bank tried to do him a favor, but became strictly liable.

(4)   Reg CC & Returning Checks

(a)    229.30

(i)      Two day & 4 day test for expeditious means

(ii)    Highly expeditious means – Results in an extra day –  Discuss mailbox compared with Courier.

(b)   A payor bank that misses its midnight deadline is strictly liable for the amount of the check involved.  Reg. CC creates a warranty of timely return for checks, so that if a bank is guilty of making a late return it has to respond in damages.  But because banks were “mailing “ the checks by placing them in an envelop and then in the mail before their midnight deadline, thus complying with the law that they “Send” it before their midnight deadline, but with the result that no one knew when it would arrive at the other bank, the Reg. CC now provides that a payor bank is permitted to miss its midnight deadline as long as it is able nonetheless to return a check to the presenting bank before the close of that bank’s next working day, in effect giving banks an extra day to return the check.

(5)   Highly Expeditious. First Nat’l Bank of Chicago v. Standard Bank & Trust, p. 554

(a)    NB sues Standard bank, for failure to return checks in a timely fashion.  Held, the checks were returned timely.

(b)   I: which bank should absorb the loss of a check kiting scheme perpetrated against both of these banks?

(c)    F: a person presented NB with checks amounting to 3.9 M, drawn on Standard, and presented Standard with checks amounting 4 M drawn on NBD. The next day each bank presented the other with the checks.

(d)   Next day (Monday), NBD opted not to honor the checks, and returned all the check to Standard.

(e)    Tuesday, Standard received notice of this decision.  Standard then attempted to dishonor its checks. Stanford executives drove the checks to NBD’s processing center.  the checks were received by NB at 3: 58pm, but NB did not credit Standard’s account.

(f)     I: Did Standard return the check in compliance with Reg CC, which provides that the deadline is extended if the bank uses a “highly expeditious” means of transportation.

(g)    Under the UCC, a paying bank may dishonor or revoke its provisional settlement of a check before midnight on the next business day after it received the check. 4-301.

(h)    But Reg CC extends the deadline when a paying bank “expedites delivery of a returned check.” Thus the bank need not regularly use a courier to delivery the check.

(i)      Here, Standard’s executives drove to the processing center.

(j)     Held, NB should have honored the checks Standard delivered in the amount of  3M.

(k)   CN:  The executive drove to the bank, and the court cut them a break. There’s a special allowance for highly expeditious.

(l)      Standard misses the midnight deadline.

(6)   Problem 171, p. 560

(a)    Reg. 229.36 (b)—Receipt at bank office or processing center: A check is considered received by the paying bank when it is received 1) at a location to which delivery is requested by the paying bank 2) at an address of the bank associated with the routing number on the check ; at any at a branch, head office, or other location consistent with the name and address of the bank on the check if the bank is identified on the check by name and address.

(b)   MA:  when received at the branch.

(c)    CN: this is a multi-branch situation with a check processing center.  Is the moment of presentment to the payor bank for purposes of EXPEDITIOUS RETURN when the checks get to the processing center OR when they are returned to the individual branch?

k)      Check return, p. 560

i)        Intro:

(1)   Federal Notice for large check return,--2,500 +.

(a)    §229.33 requires the payor bank to send a direct notice to the depositary bank any time it decides not to pay a check in the amount of $2,500 or more.  Failure to give notice makes it liable for actual damages.

(b)   How quickly must notice be given?—“notice must be received by the depositary bank by 4pm (local time) on the second business day following the banking day on which the check was presented to the paying bank.”

ii)       Purposes of EFAA –

(1)   Benefit to Customers/ Customer quick access to funds

(2)   Risk to depositary funds

(3)   Customer may withdraw funds BUT subject to CHARGE BACK

(4)   What if FUNDS are gone?

(5)   Reg. cc balance the customer interest with FEDERAL Notice for large check return, 229.33, and forward Collection test, 229.30.  You can’t route return items in a very circuitous way, you must return checks in the same way you would the forward checks.

l)        Charge Back, p. 562

i)        If the depositary bank has given as advance on a check, and the drawee bank turns out to dishonor it, the depositary bank can seek reimbursement from the depositor, on three grounds: the initial contract agreement signed when the acct was opened, the indorser’s obligation (3-415), and the statutory right of charge back.

ii)       CN: P If the payor/drawee bank dishonors and returns a check to depositary bank, that bank can look to customer (No matter how long since deposit).  Three ways to charge bank the customer’s acct.

(1)   Contract agreement

(2)   Indorser’s obligation §3-415

(3)   Charge back §4-214—this has some time limits on it.

iii)     SkIP__Problem 172, p. 562

(1)     Monday, july 8—Pythias deposits in DSB, a check drawn on BNbank.

(2)     july 10—DSB receives check, marks NSF and returned to DS bank the next day (July 11).

(3)     July 11—Pythias writes check on his acct at DSB.

(a)     Can Pythias sue DSBank under 4402

(i)       4215(d)—If provisional settlement for an item does not become final, the item is not finally paid.”

(ii)     4215(e)(1)—“[Subject to (i) appliacebl law stating a time for availability of funds and (ii) any right of the bank to apply the credit to an obligation ot the customer,] credit given by a bank for an item in a customer’s acct becomes available for withdrawal as of right (1) if the bank has received a provisional settlement for the item, when the settlement becomes final and the bank and had a reasonable time to received return of the item and the item has not been recieved within that time.”

(iii)    4-214—

(b)     Since DSBank has failed to give a propert chargeback notice, it is liable for the amount of the item?

(i)       4214(a)—If the reutn or notice is delayed beond the banks’s midnight deadline or a longer reasonable time after it learns the facts, the bank may revoke the settlkemnt , charge back the credit, or obtain refund from its cumster, but it is liablt for any loss resulting from the delay.”

(c)     If it had given Pythias notice of dishonor, could DSBank have recovered the $500 even if it had let Pythias withdraw all the money from his account prior to the reutn of the check from the payor bank?

(i)       4214(d)(1)—“The right to charge back is not affect by (1) previous use od a credit given for the item.”

(d)     Would your answer to the first question be the same if DSBank both the depositary and the payor bank?

(i)       4-215(e)(2)—Subject to . .. . credit given by a bank for an item in a customer’s acct becomes available for withdrawal as of right: (2) if the bank is both the depositary bank and the payor bank, and the itemis finally paid, at the opening of the bank’s  second banking day following receipt of the item.”

(ii)     4302—“If an item is presented to and received by a payor bank, the bank is accountable for the amount of []”

(iii)    Rec. CC 229.10(c)(vi)—Certain check deposits. (1) General Rule.  A depositary bank shall make funds deposited in an account by check available for withdrawal not later than the business day after the banking day on which the funds are deposited, in the case of—(vi) A check deposited in a branch of the depositary bank and drawn on the same or another branch of the same bank if both branches are located in the same state or the same check processing region; and  

(e)     If the check had been returned by BN Bank to DSBank on September 25, could DSBank have still charged back?

(i)       4214(a)—“these rights to revoke, charge back, and obtain refund terminate if and when a settlement for anitem reiceved by the abk is or becomes final.” I.e, Charge bank is allowd only for provisional settmentments.  If the payor bank made final payment on a check, all the provisional settlements “firm up and became final”  Charge back is not allowed to undo final settlements.

(f)     If the check is sent through for repayment, does 4214 allow DSBank to charge back, assuming that it does not immediately on learning of the seoncd return?

(4)   Gordon v. Planters and merchants Bancshares, inc., p. 563

(a)    Gordon sues Planters for wrongful charge back of a check he deposited into his acct.

(b)   September 24—Gordon deposits check (from Co-op drawn on First National) in Planters Bank (where Wallace works)

(c)    September 25—First national makes final settlement with Planters, Planters credits Gordon acct.

(d)   September 26—Wallace calls Gordon’s home

(e)    September 27—Wallace calls Co-op-“check had cleared”

(f)     Oct 3 Wallace instructed a chargeback against Gordon’s acct.

(g)    I: because Planter admitted fault, the only question is was there was evidence to support awarding punitive damages.

(h)    First, are punitive damages allowed under §4-415(d)? yes.

(i)      Second, was there sufficient evidence  that Planters (through Wallace) acted wantonly in causing the injury or with such conscious indifference to the consequences that malice may be inferred”? yes.

(j)     Third, Was there an agency relationship between Wallace and Planters? yes.

(k)   Fourth, attys fees

(l)      CN: Gordon received a check made out to the business, which he deposited it into his personal acct.  He thought he had bought out the partnership and owns it all.  The check was long overdue; Wallace had to use his position to get dishonored.  The bank had to pay punitive damages.  You can you the dishonor process with our own bank to effect your’ personal interested to secure a wrongful charge back.

(5)   Problem 173, p. 574

(a)    CN:  EFAA tells customer when the funds are available, it does not say that the customer gets to keep them.

(b)   Provisional settlement; she goes . . .. .

iv)     Undoing Final Payment, p. 574

(1)   Can the payor after final payment, resist payment using common law theories, such as mistake?

(a)    Problem 174, p. 575

(i)      4-302(b)—“The liability of a payor bank to pay an item pursuant to subsection (a) is subject to defend based on breach of a presentment warranty (4-208) or proof that the person seeking enforcement of the liability presented or transferred the item for the purpose of defrauding the payor bank.”

(ii)    3418--

(iii)   §1-203—Lease distinguished from SI.

(iv)  CN: 1103—Fraud outside the UCC.

1.      §1-103—other law supplements UCC.  So if you can’t help you’re client under the UCC, try fraud etc.

2.      §2-418—restitution

3.      §4-302(b)--

(b)   Problem 175, p. 575

(i)      Buyer receives a product that turns out not to be what it ordered. But it already sent a check to the seller.  It immediately sends a stop payment order to its bank.  But its bank negligently pays the check anyway.  What is the bank’s defense?

(ii)    3-418 & OC—If the drawee of a draft pays a draft and the drawee acted on the mistaken belief that payment of the draft had not been stopped.... the drawee may recover the amount of the draft from the person to whom or for whose benefit payment was made..”  Thus, “if the drawee acted under a mistaken belief that the check had not been stopped, the drawee is entitled to recover the funds paid or to revoke the acceptance whether or not the drawee acted negligently [except against a HDC or BFP?].

(iii)   CN: this is negligent payment of a stop payment order.  Look at subrogation.

v)       Restrictive Indorsements and Banks, p. 576

(1)     4203—only the collecting bank’s transferor can give it binding instructions and the collecting bank need not examine the documents to see whether other instruction or restruction are contained in it. See OC.

(2)     Problem 176, p.

(a)     3206(c)(2)—this would seem to suggest that the depositary bank converts the check as well.  Of the banks involved, only the depositary bank faces liability for non-compliance with the terms of a restrictive indorsement.

vi)     Delays, p. 577

(1)   Problem 177

(a)    F: Janitor accidentally feeds a box of checks into a paper shredder.  For some of the checks the bank would he a depositary bank or collecting bank, for other payor/drawee bank. 

(i)      Collecting banks are required to take action before their midnight deadline following receipt §4-202(b).

(ii)    Payor banks become absolutely accountable for a check not routed before the expiration of the midnight deadline.  §4-215(a)(3), §4-301, §4-302.

(iii)   §4-109(b)—“Delay by a collecting and payor bank is excused if it is because of circumstances beyond its control and the bank exercises such diligence as the circumstances require.”

(iv)  MA: here, , the delay was arguable not because of circumstances beyond the bank’s control, but it certainly it exercised such diligence as the circumstances required.

(v)    Bank loses.

vii)   Priorities in the Bank acct-- the four legals, p. 578 – ON EXAM

(1)   Who gets paid first?

(2)   4303(a)—the four legals come too late if a given check has either been certified or the bank has taken the steps that lead to final payment of the check; or after the time periods described in (a)(5).

(3)   These are guaranteed to be on the midterm.  The four legals are

(a)    Notice (of customer’s death).

(b)   Stop payment

(c)    Service of legal process

(d)   bank’s right of setoff

(e)    4-303(b)—pay in any order

(4)   Problem 178, p. 578

(a)    Filing bankruptcy freezes the acct when the bank has notice of BR.  Then a check come through.

(b)   First, payee is standing at the counter.  As long as they knew nothing about it, they are allowed to pay the amount.

(c)    second check for $500 came through. This is fine because they did not know about the BR.

(d)   What about the check that got put in the hold file, and is sitting there without final payment when the notice of BR comes in.

(e)    Telling the bank teller over lunch with someone who happened to run into, is probably not notice. Chatting over lunch while probably not suffice unless that was the teller’s responsibility. 

(f)     at 4, the teller makes a payment of

(g)    Some of these checks were presented over-the-counter for immediate payment in cash, which means it’s a final payment.

(h)    Notice of bankruptcy.   There may be a delay in time between the filing of BR and the time when the bank learns of it.  Here, the Debtor filed BR at the end of the day.  Before the bank has notice, any payments are valid.  The bank receives official notice when the trustee calls the bank and tells the bank.

(i)      EXAM: she may set up a problem dealing with when notice was received.  It also deals with an item that is pending.

(j)     Bank’s right to setoff.

(5)   Problem 179, p. 580

(a)    §4-303(b)—items may be accepted, paid, certified, or charged to the indicated account of its customer in any order.”  So the bank has discretion of paying it in any order it wants.  One way to avoid litigation is to establish a policy and then follow it religiously.

(b)   CN: this deals with the order in which the bank pays items.  Usually a number of checks clear in one day.  What order to pay in?  The bank sometimes uses the high-to-low, where the bank will look at all your checks and then pay the highest checks first, because usually there are items which are highly important that you pay.  If your bank has $3k, and your mortgage is $2.9, and then you have 10 $100 checks.  It’s a balancing of the evils.  The customer can protect against this with overdraft protection.  Some say that high-to-low check processing yields NSF fees which may

9)      Wrongdoing and Error:  Chapter 12, p. 581

a)      Forgery of the Payee’s Name, p. 582

i)        Intro:  the forgery of the payee’s name means that no valid negotiation takes place;

ii)       Remember:

(1)   No valid negotiation can occur – so no one taking after forgery can be a HDC or holder.

(2)   But Bearer paper is different result.

(3)   It is possible to be a non holder with rights of a holder – Shelter Rule –§3-203(b).

(4)   Can deposit without indorsement: 4205.  Can the bank be a HDC? yes. also if the item was delivered without an indorsement, Bank can force indorsement.

(5)   Can force indorsement. 3203(c)

(6)   “Person entitled to enforce” the instrument: Definition 3-301.

(7)   Person who loses the instrument, but can recreate: §3-309. 

(8)   Payment of acceptance by mistake: §3-418(b).  This is harder to analyze.

(9)   Properly payable rule §4-401 – If payee’s name is forged, check is not properly payable.

iii)     Problem 180, p. 582

(1)   Thief finds check and forges payee’s signature then below it signs his own.  He deposits check in Bank, but the maker had already stopped payment.  Thief has fled.  Is the bank a HDC? 

(a)    3-414(b)

(b)   3-201—“Negotiation’ means a transfer of possession, whether voluntary or involuntary, of an instrument by a person other than the issuer to a person who thereby becomes its holder.”  There was no negotiation because the bank never became the holder.

(c)    Stolen check.   Thief forges payee’s name as indorsement.  Deposits check, withdraws case & disappears.  Drawer

(2)   If a check is payable to the order of a X, only X can be a holder.  Without a valid indorsement by the payee, not later person can qualify as a holder.

(3)   §4-208Presentment Warranties.  the drawee bank has several choices. Presentment warranty’s are available only to the drawee bank. It can go back against the immediately back in the change of collection, or if over-the-counter, then that person; if there is a series, then it can go after anyone in the chain.  But what about the previous people?. 

(4)   transfer warranties, § 4-207, this is designed to pass the liability up the chain to the person who dealt with the person who breached the warranty.  Each person along the way has violated the warranty. 

(5)   So the rights of the depositary bank is to go after the person who violated the transfer warranty.  But what if the check had been made out to bearer or indorsed in blank, then no indorsement would have be required,  So if this was stolen there would have been not warranty necessary.

iv)     A “person entitled to enforce the instrument.”  §3-301.

(1)   The holder of the instrument

(2)   a non-holder of the instrument who has the rights of a holder or

(a)    EX: Problem 181, p. 583

(i)      Portia gives a check for which she is the payee to Helen for an antecedent debt, but forgot to indorse it.  Is Helen a holder and can she force Portia to sign it?  §3-203(b).  CN: Helen is not a holder but she can require Portia to indorse it under 3203(c)--

(ii)    EX:  Depositary bank.  Portia deposits check, unendorsed, in a new bank acct.  §4-205 gives the depositary banks portia’s holder rights and makes it a person entitled to enforce the instrument in spite of the lack of signature.

1.      The depositary bank will be come a holder but only if the depositor was a holder.

(3)   a person not in possession of the instrument who is entitled to enforce under 3309, or 3418(d).

(a)    A person who has lost the instrument but who has the right to go to court and recreate it pursuant to §3-309.

(i)      EX:  Portia’s cat chews up the check.  Portia is no longer a holder, but she is still a person entitled to enforce by using the mechanism of §3-309.

(b)   The person described in 3418(b).

b)      Warranty Liability, p. 584

i)        INTRO:  When there’s a forgery, look to:

(1)   properly payable rule 4401

(2)   warranties

(3)   conversion

ii)       Presentment.  §3-417 & §4-208---Run to Draw

(1)   No unauthorized or missing indorsements, no alternation, no knowledge of forged drawer’s signature.

iii)     transfer – 3416 & 4207

iv)     Go Back up chain to wrongdoer or 1st party to deal with him

v)      Problem 182, p. 584

(1)   §4-401—“a bank may charge against the acct of a consumer [only] an item that is properly payable. . . “ MA: here the check was not properly payable because it was forged.

(2)   4-302(b)—final payment does not prevent warranty liability from giving relief to the bank, see 4208.

(3)   CN: Harry Villain is not a thief but a Finder.  Finder forges Payee’s name and cashes it a drugstore.  Drugstore deposits it at Merchant’s bank.

(4)   Check forwarded for collection to drawee bank ONB.  Drawer gets the bank statement & discovers forged indorsement § 4-406

(a)    Can payee make the drawee bank re-credit or account?  Under §4-401 because the item was not properly payable.

(b)   What is ONB’s remedy?  §4-302(b) §4-208, go up the chain for the presentment warranties.

(c)    Presentment warranties run to drawee inclied prior transfer.....

vi)     Problem 183, p. 585

(1)   What warranties can the depositary bank use?  Notice to prior warrantors?  §4-207(d). Do they have to give notice? no, only required to prevent the warrantor from being discharged, it protects against loss for not giving notice.

(2)   When to file suit? 4-111—3 years after the cause of action occurs.

(3)   4-208(a)

(4)   4207(a)

(5)   4207(d)

(6)   4-111—

vii)   Problem 184

(1)   What if you are the drugstore, what is you’re theory of recovery?  You have the transfer warranty.  Pass the loss back to wrongdoing or 1st to deal with him.  Factually you’d win, but realistically, you probably won’t find him.  The drugstore were always in the best position to prevent the loss, so they should have gotten his id.

c)      Conversion Liability—§3-420(c), p. 587

i)        Conversion at common law:  a civil action for misappropriation of another’s property.

ii)       Only the person whose property rights are adversely affected [the holder] may sue for conversion.

iii)     Problem 185, p. 587

(1)   The teller says they won’t pay the check and they wont’ give it back.  This is to illustrate the idea of conversion.

iv)     Problem 186

(1)   Art is a thief and takes a check that is made out to a named payee, who had already endorsed the check.  But do we know how he endorsed it?  If it were a blank endorsement, it would have been bearer paper, and it’s treated like cash.  But what if he had indorsed it payable to another named party, then Art would have to forge it.

(2)   But REMEMBER:  Only the person whose rights are adversely affected may sue for conversion.

(3)   Who May NOT bring an action in conversion?

(a)    §3-420—the issuer cannot sue in conversion, only the payee, because this is the person whose rights are adversely affected.  But he cannot sue for conversion unless you receive the instrument by actual delivery.

(b)   §3-420(c)—a representative, other than a depositary bank, who has in good faith ....this places a higher burden on the depositary bank, because it has more likely dealt directly with the wrongdoer.

(4)   Theories of recovery:

(a)    1. Conversion: payee can sue drawee bank or anyone taking a check after forgery

(i)      If drawee pays the payee, draw[ee] sues on Presentment Warranty (not a person entitled to enforce the instrument 4-208).

(ii)    That person pursues Transfer warranties.  4207

(b)   §3-420

(c)    2. Replevy the check from current possessor (probably drawee check returned in statement).  Cross off forged indorsement, indorse & present tot drawee bank.  If draw resulted payment, sue drawer on drawer’s obligations §3-414 or Underlying obligation.

v)      Problem 187, p. 589

(1)   3-420(a)—Portia is the issuer/drawer who give check to her landlord, and it is stolen from him.  She sues the bank in conversion.  Can she do this?  no.  The issuer cannot sue in conversion.  Who is the proper plaintiff?  The landlord.  But what is Portia’s remedy?  go after her bank under the properly payable rule §4-401(a).

vi)     Problem 188, p. 589

(1)   ONB cannot sue in conversion because it never received delivery of the instrument. §3-420(a).

(2)   CN: what is the risk you run when the issuer drops an incertified check in the mail? You cannot sue for conversion.  Because the issuer cannot sue for conversion and the payee who never received the check cannot sue for conversion.   There may be other remedies, but not this one.

vii)   Leeds v. Chase Manhattan Bank, p. 589

(1)   Atty received a check in a settlement case made “to the order of Client.”  Above this he type “Egnasko as atty for”.  He endorsed the back and deposited it into his Trust fund acct. 

(2)   R:  3-420(a) provides that an “instrument is converted if it is taken by transfer, other than negotiation, from a person not entitled to enforce the instrument or a bank makes or obtains payment with respect to the instrument for a person not entitled to enforce the instrument or received payment.”

(3)   Although the check was not actually delivered to Client, it was delivered to Egnasko as Client’s atty, with intent that title be transfer to Client, the payee.  Accordingly, Client is entitled to bring this action for conversion as one who “received delivery of the instrument . . . through delivery to an agent . . .” 3420(a).



(6)   Leeds—Payee, Egnasko—agent; Chase (agent’s Bank), Summit—drawee; agent alters payee name on check; bank pays to Altered Payee name;  Check not delivered to payee, but to their  AGENT—This is delivery.  Indorsement was unauthorized.  Depositary bank Liable:  RULE—loss falls on 1st solvent party in the stream after the forger.

(7)   Summit paid in good faith, no conversion . 3410(c).

(8)   CN: Agent altered the settlement check and made himself the payee.  Once he received the funds, he gave them another check, drawn on a different account.  He was their agent to agent is delivery to the payee.  He indorsed the check in an unauthorized fashion.  So when he took it to the bank he was not a person entitled to enforce the instrument.  The loss should fall on him, but he’s not around.  So the loss should fall on the depositary bank, because they worked most closely with him.  He he typed in this the depositary bank may not have been able to detect it.  There is no conversion action able against the collecting banks, because they paid in good faith.

(9)   Warranties, presentment and transfer.  4207--

viii)  Problem 189, p. 594

(1)   Conversion in joint accounts.  Is a missing signature the same as a forged one? yes.  But what could he have done?  He could have deposited it into a joint acct instead of his individual account because then he wouldn’t need her signature.  But then he would have withdrawn the funds.  There’s nothing that she could have done if he had deposited it into a joint acct.  Here he tried to deposit it into his individual acct without only his signature on it.

(2)   3-110(b)

(3)   3-420(a)—OC 1.

d)      Forgery of the Drawer’s name, p. 594

i)        RULE:  The drawee who pays or accepts a draft takes the risk of a forged drawer’s signature.  BUT:  the drawee does not take the risk of a forged indorser’s signature [which risk falls on the depositary bank].

ii)       Price v. Neal, p. 594

(1)   F: If the drawee pays or accepts the draft, it cannot pass the risk of the drawer’s signature being forged off onto prior good faith parties.  This rule is embedded in UCC § 4-301, which makes the payor able accountable for an item that has been finally paid. Also, §3-418, a finality rule.

(2)   CN: It used to be that the drawee bank used to take out signature card and physically compare them.  This doesn’t happen any more.  It’s more a risk of loss between two innocent parties.

(3)   “The drawee bank must know its client’s signature as a mother knows her son.”

(4)   Loss allocation Rules.

(a)    If the drawer’s signature is forged but the drawee bank pays the check anyway, Price v. Neal puts the loss on the PAYOR (drawee) bank – even if there is no fault or negligence.

(b)   §3-418(c)—Drawee bank cannot recover mistake payment or payment over forged drawer’s signature from a “Person who took the instrument in good faith” or “in good faith changed position”  OC 1.

(c)    You have to incorporate the section of (c) to get to the Holding in Price v. Neal

iii)     Decibel Credit Union v. Pueblo Bank, p. 599

(1)   F: Thief steals blank checks, forges drawer’s signature.

(2)   a thief stole blank checks furnished by Decibel to one of its customers.  The thief forged the signature of the customer on several checks.  Each check was cashed at Pueblo Bank.  Pueblo processed all checks through the Federal Reserve System to Decibel, and Decibel timely paid the checks.

(3)   Decibel/drawee—

(4)   Pueblo Bank/presenting bank

(5)   Held, there were no presentment or transfer warranties made to Decibel by Pueblo by returning the check to it through the Federal Reserve system.

(6)   A transfer warranty as to the genuineness of the drawer’s signature does not apply for the benefit of the drawee bank.

(7)   CN:  Which party must bear the loss for amounts paid on Forged checks?

(8)   Decibel bank’s customer discovers forgery upon reviewing statements.

iv)     Was there breach of PRESENTMENT WARRANTY?  §4-208.  There’s a warranty made that the warrantor ..... if the drawer’s signature is forged, has there been a violation of the presentment warranty?  it was forged, but not altered, moreover it’s clear that the warrantor has no knowledge that it was not authorized, but was the warrantor a person entitled to enforce the draft.  A forgery operates as a signature of the person forging.  So there’s no violation of the presentment warranty. 

v)      What about the transfer warranty?

vi)     Transfer warranty includes a warranty that all signatures are authentic but this is not what we’re concerned with here.  Transfer warranty as to the Genuineness of drawer’s signature does not apply for the benefit of the drawee bank. [presentment warranties run to the drawee bank, transfer warranties do not.

vii)   §3-416—Transfer warranties CANNOT be disclaimed with respect to checks – §3-416 and OC & 4207.  You can indorse “without recourse,” but you can’t disclaim a transfer warranty.  Distinguish transfer warranties and presentment warranty. 

viii)  3416—OC 4—what is not warranted?  NO promise that there won’t be collection difficulties.

ix)     TO whom does the transfer warranty run?  to everyone in the chain except the drawee bank.

x)      §3-416(a)(6)—Remotely created consumer items.  Limited rejection of Price v. Neal for remotely created consumer items.  Depositary bank is in best position to bear loss.  3-416(a)(6_ & 4-207(a)(6).   OC 8.

xi)     Distinguish the liability for a forged signature of a payee, and a drawer.  For a payee, it’s the first person to deal with the wrongdoer, i.e., the collection bank.  With a forged signature ot the drawer’s signature, the drawee bank usually bears the liability.

xii)   Problem 190, p. 602

(1)   Harry steals a check from Portia and makes it out to himself and signs her name on the drawer’s line.  He cashes it at Drugstore à Merchants Bank à ONB(drawee).

(2)   Thief steal check book, forges Drawer’s signature, cashes check at drugstore, check deposited to Merchant  bank.  MB presents check to drawee (payor) bank.

(3)   §4-401(a)—

(4)   §4-208(a)—ONB can go after Merchant’s Bank, and the Drugstore, each of whom have warranted that (a) they are entitled to enforce the draft, and the draft has not been altered, (b) the warrantor has not knowledge that the signature of the purported drawer of the draft is unauthorized.

(5)   §3-418—the remedies of subsection (a) cannot be asserted against Merchant’s bank or Drugstore because they took the instrument in good faith and for value.

(6)   §4-406- customer’s responsibility to examine the bank statement.  She did this in a timely manner.

(7)   Is the check properly payable under 4401? no, it’s not paid according to the customer’s instructions, so the bank has to re-credit her acct.  The check was not properly payable so customer won’t have to bear the loss.  The drawee bank will try to pass the loss up the chain of ... for presentment warranty, but it can’t under Price v. Neal.

xiii)  Problem 191, p. 603

(1)   Did the depositary bank [Merchant’s } violate 4-208(a)(1)(Presentment warranties). 

(a)    MA: No.  Under §3-403—“an unauthorized signature is ineffective except as the signature of the unauthorized signature in favor of a person who in good faith pays the instrument or takes it for value.”  I.e., the forgery acts as if the forger had signed his own name instead of the name forged.  Legally, the check was drawn by Harry Villain payable to the order of Harry Villain.  The drawee bank decided to pay, but cannot charge the customer for this. Under Price v. Neal, it must eat the loss.

(b)   Therefore, the depositary bank was a person entitled to enforce the draft of Villain.

(c)    CN: is the depositary bank a “person entitled to enforce...” no.

(d)   CN: Price v Neal discussion.  Compare loss allocation to the payor bank.

(e)    SEE slides.

xiv) Problem 192, p. 603

(1)   4-208(a)

(2)   3-418—the depositary bank may claim it took it in good faith for value, in which case this section cannot be used against it.


e)      Validation of the forgery, p. 604,

f)        CN:  Basic forgery rule.  §3-403 has an escape clause.  An unauthorized signature may be ratified.  Agency law.  Principal accepts benefits of forgery:

i)        Both Price v. Neal and the rule that forged indorsement is ineffective to negotiate the instrument put a heavy burden on drawee banks.  §3-403(a) has an escape clause in the words “Unless otherwise provided in this Article or Article 4” and “an unauthorized signature may be ratified.”  Ratification occurs when the party in question, with full knowledge of the forgery or alteration, accepts the benefits thereof or actively assents to the wrongful activity.

ii)       Problem 193, p. 605

(1)   F: H got the benefit of delaying his divorce.

(2)   Apparent authority,

(3)   Ratification where agent has apparent authority

iii)     Common Law Validation, p. 606

(1)   Hutzler v. Hertz Corp., p. 606

(a)    Hutz settles with Hertz in a wrongful death claim.  Huts makes the check payable to “Hutz and Yudow, her attorney,” drawn on Manufacturer Hanover.  Yudow sign his own name and forges Hutz, and deposits the check into his personal account.  Then he closes the account and skips town.  Hutz sues Hertz and Many Hanny.  Trial court dismissed the claim against both and Hutz appealed only the dismissal of the claim against Herts.

(b)   Agency law: Herts has no further liability.

(c)    Negotiability instrument law.  Hutz should have sued the drawee bank, not the payor.

(d)   CN:  Payee—Hutz and her atty, Yudow.  Yudow indorsed the check individually, and deposited the check in his own acct.  If there is a joint payee, then normally both signatures are required.

(e)    Yudow must have had apparent authority, and under the law of agency,’s clear that if Hertz had paid in cash, they would have been discharged of their obligation; with a check, there is suspension of that obligation until cashed, here it was cashed.  So even though he forged his signature, and both signatures were required....she bears the loss because she selected the agent.

(2)   QUESTION:  Could Huts have sued the drawee bank?  §3-420(a).  Can the plaintiff (whose signature as a joint payee was forged by her agent) sue the drawee bank for Conversion?  Yes, §3-420  OC 2. Without both signature’s there’s not an appropriate negotiation.

(3)   Problem 194, p. 611

(a)    Drawer gives check to payee who loses it.  Generally, the loss will go the person who first dealt with the forger.

(b)   §4-320(a)—“an instrument is converted if it is taken by transfer, other than a negotiation, from a person not entitled to enforce the instrument.”

(c)    4401

(d)   4407

(e)    CN: How to avoid double recovery?

(f)     Payee losses check, wrongdoer forgers payee’s signature.  Can the payee sue the drawee bank for conversion?  yes, §3-420.  Because you should have paid me and you paid someone else. 

(g)    Can the drawer sue the drawer for conversion? no. No, because conversion is not available to the issuer of the check.

(h)    Is the drawee bank also liable to the drawer under §4-401?  no, because there was still an obligation. The bank would have to pay twice, both to the drawer and payee.  The theory is that the funds got to where they needed to go.

(i)      Remember: subrogation §4-407 will also allow

(4)    A successful conversion action destroys the drawer’s §4-401 not properly payable suit against the drawee.

(5)   WRONGDOING & ERROR—When good checks go bad. 

(a)    Validation of forgery, we have discussed the effects of FORGED drawer’s signature & forged payee’s signature

(i)      Those results will change if there is RATIFICATION of forgery

(ii)    Common law: acceptance of benefit (H wanted to stay married, so he said nothing when his W signed his name.)

(iii)   Agency: apparent authority

(iv)  If the drawee bank pays a check with a forged drawer’s signature, the drawee Bank will most likely take the loss because of Price v Neal Rule (Drawee must know drawer’s signature as a mother knower her child) and §3-418(a) &(c).  OC 1.

(v)    The presentment warranty will not help the drawee bank here.  See §4-208, 3417.  Reas what is being warranted.

(vi)  What the drawee bank should do is dishonor the check (not pay it).  The check would in that case be returned through the chain of banks to the depositary bank.  Hopefully, the Depositary bank gave only provisional credit and could Charge back (§4-214) the amount against its customer’s account.  The Customer will be able to go back up the chain of indorsements & transfer warranties until it reaches the wrongdoer or the 1st solvent party to deal with the forger (wrongdoer).  It could go all the way back to the wrongdoer, but this rarely happens.

(b)   If the drawee bank pays a check with a forged payee’s signature, the usual rule is that the DEPOSIATARY bank is most likely to take the loss because there can be no negotiation after forgery of the named payee’s indorsement, so no “person entitled to enforce the instrument,” so violation of the presentment and transfer warranties.

(c)    In these fact situations, also consider Conversion §3-420 and Subrogation §4-401 as wells at the properly payable Rule §4-401 and the Bank Statement Rule §4-406.

(d)   Also ask if there has been RATIFICATION.  if so, then it operations as if there were no forgery.

(e)    4 UCC Validating Wrongdoing”

(i)      3404—the Imposter Rule

(ii)    3405—The employee endorsement rule

(iii)   3406 –negligence Rule

(iv)  4406—Bank Statement rule

(v)    READ CHECK 21  FEDERAL LAW provision, which preempt state law.

iv)     The Impostor Rule§3-404, p. 612

(1)   The impostor rule validates the Payee’s name, when the drawer or maker has been duped by either an outsider or a trusted employee into creating an instrument on which the name of the payee is highly likely to be forged.  This covers:

(a)    Impostors

(b)   Fictitious payees

(c)    Who is an impostor?  One who impersonates the payee—result governed by §3-404(a) indorsement in the name of payee can be effective.

(d)   Who is a fictitious payee?  Made up name or Real company named as payee IF no intent to give that company an interest in the instrument.  §3-404(b).

(e)    Anyone in possession is a HOLDER & can indorse.

(f)     The impostor rule places the loss on the person who had the ability to verify the identity of the impostor.

(2)   Loss Sharing for Negligence.  §3-404(d).  There are two negligence parties, the drawer who should have verified the identity of the payee and the bank because it should have

(a)    Rationale: 

(3)   Problem 195, p. 612

(a)    No. §3-404(a)—indorsement is effective as the indorsement of the payee in favor of a person who pays in good faith or takes it for value.  Therefore, Amy cannot raised the claim that it’s not properly payable under §4-101.

(b)   There is no Hilda Humane, and even if there is Sandra Sting is not this.  So Amy cannot rely on forgery as a defense.

(c)    CN:  Impostor payee §3-404(a)

(i)      Is this properly payable? §4-401.  It may not be, but for the operation of this rule.  You could say that had there no ....because there was an impostor

(ii)    What is the effect of 3404(a)

(iii)   Will the Bank share in loss? 3404(d)—does the bank have a responsibility to verify the id?  yes.  (Be very familiar with the examples following §3404 exam]

(4)   Problem 196,

(a)    §3404(b)—“a person whose intent determines to whom an instrument is payable” is usually the person writing the check.

(i)      §3-110(a) “The person to whom an instrument is initially payable is determined by the intent of the person signing as the issuer of the instrument.  The instrument is payable to the person intended by the signer even if that person is identified in the instrument by another name.”

(b)   MA: “Walter Heartstrong” was the person to whom the instrument was intended to be payable.  But under §3-404(b) the husband can do nothing.

(c)    Who did the insurance company intend to pay?  This may be arguable. They intend to pay whoever signed the letter asking for the cancellation of the insurance policy. 

(d)   Is W an impostor (posing as Walter)? this is debatable.  “If an impostor, and by use of the mails induces the issuer to issue the check to her, then her indorsement will be effective as to her name.  But the question is whether she will have to pay him again.  He may have ratified her act of forgery.

(e)    Is the Bank also negligent?  Husband negligent? 3-404(d).

(f)     Will the Ins. Co. have to pay Husband?

(g)    Common law? acceptance of benefit?

(h)    You could argue that the bank was negligent, also that the husband was negligent.

(5)   Problem 197,

(a)    §3-404(b)

(b)   Yes, the checks are properly payable because the intended payee is himself.

(c)    Corporate Treasurer add fictitious employees to payroll & cashes check (indorsing in fictitious name).

(d)   Are these checks properly payable ? §3-404(b).

(e)    Same result if real former employees? §3-404(b)

(f)     STUDY EXAMPLES in OC to 3404.

(g)    CN: this is a situation where there is either fictitious persons or person’s not intended to receive.  In both situations

(h)     As between the corporation and the bank who takes the loss, because of the impostor/fictitious payee rule?  The corporation.

(6)   Problem 198, p. 614

(a)    Not §3-404(b), but §3-405 OC 1.

(b)   CN: person writing check DOES intend named payee to get proceeds of check so this is not a 3-404 case UNLESS we view the Secretary as the one whose intent controls.

(c)    If there were no such person, §3-404 would apply

(d)   In any event, the bank will be protected by §3-405.

(e)    Is the check properly payable?  the bank didn’t following his instructions, they paid someone other than the person intended.  The bank counters that this is part of the impostor/fictitious payee rule.  Then he counters that the bank was also negligent.

v)      Employee Indorsement Rule, p. 614

(1)   Who is an employee?

(2)   What is “fraudulent indorsement?

(a)    Employer?

(b)   Payee

(3)   Who has “responsibility” for the instrument?

(4)   Who does not have responsibility?

(5)   §3-405(b) What if the bank fails to exercise “ordinary care” in paying the instrument?

(6)   SEE examples in commentary.

(7)   3-405 and OC 1,

(8)   Problem 199, p. 614

(a)    F: bookkeeper forgers a

(b)   She is generally responsible for handling checks? does that make her “responsible” yes. Maintenance man? no. 

(c)    Does 3-405 cover forgery of Employer’s name as payee?

(d)   Does she have “Responsibility? yes

(e)    Who takes the loss?  the employer

(f)     bank may be liable for some comparative negligence.

(g)    IF these validation rules do not apply, who is likely to bear the loss for forged payee signature?

(h)    Forged drawer’s signature?

(i)      NOTE on federal commercial paper law.

(9)   Problem 200, p. 615

(a)    3404(b)

(b)   Price v. Neal

(c)    CN: Stolen check book.  Writes name of a fictitious payee.  Ordinarily a forged indorsement makes the bank responsible under Price v. Neal.  But is there a validation.

(d)   If an indorsement is validated it operates as a valid indorsement.

vi)     The Negligence Rule, p.

(1)   A party is estopped from complaining about a forgery when the person’s own negligence substantially contributed to the creation of the forgery.  Young v. Grote.

(2)   A party who is negligent and contribute...

(3)   Problem 201, p. 616

(a)    F

(4)   Problem 202, p.

(a)    F

(5)   Depositary Bank v. Drawer (Citizens and Assoc)., p. 617

(a)    3-406

(b)   F:  Frieda Gray, a branch manager for Allied Mortgage, received three checks from Citizens totaling $50k, and payable to Allied.  Gray deposited these checks in her personal acct, the an indorsement “Allied Mortgage Company #259” or “Allied Branch #259.”

(c)    The checks were written by Wilburn, president of Citizens.

(d)   Gray – branch magr for Allied.  Check were made payable to Allied, Gray took checks as Allied, deposited to her personal acct.  Forged Indorsement. [normally the depositary bank suffers the loss of a forgery.  in the case of a forged indorsement, it is not a valid indorsement, so there is not one entitled to enforce the check, there is no valid negotiation].  Who normally takes the loss?  Why? see above.

(e)    Can we apply §3-405 to shift loss?

(f)     Allied’s employee forged Allied/Payee’s.  Who’s employee was she?  someone not a party to the suit.

(g)    Try to shift the loss.

(h)    Although we expect the depositary bank to take the loss for forged indorsement  UCC §3-406 may change the result:

(i)      Negligence validates forgery

(j)     HOw was the drawer negligent?  They didn’t verify that she was authorized, they could have...but were they that negligent?

(k)   How was the depositary bank negligent?

(l)      Comparative negligence:  Drawer 80%, Depositary 20%

(m)  Key—you can use these sections for reallocating the loss and passing it back to someone else.  One section is negligent contributing to a forged signature.

(6)   Problem 203, p. 624

(a)    3-307(b)(2)—the bank is charged with notice of the breach of fiduciary duty if the payment is taken... or deposited into an acct other than the acct of the fiduciary as fiduciary.  If the bank knows she’s the corporate treasurer, then the bank may have a heightened duty.  If they’ve been negligent it m...§3-406.  3307 may give us notice.

(7)   Problem 204

(a)    4-401—properly payable

(b)   Instruments payable “to the order of the bank” are NOT bearer paper.  Court imposes a duty on the bank to investigate why the check is payable to the bank.  treasurer could not have gotten away with writing check to Cash or Bearer.

(c)    Bank’s negligent practice caused the loss caused by “forged indorsement” but was corporation also negligent?  What is the effect if there is negligence on both sides?  Apportion the loss according to negligence.

(8)   Problem 205,

(a)    3-307(b)(3)

(b)   Fiduciary Issues>

(c)    3307

(d)   Fiduciary uses instrument payable to represented person or fiduciary as such for persona benefit

(e)    Patrick has a Claim to the CD without repaying the loan, ) since the bank knew it belonged to him and was being used for mame’s personal benefit

(f)     What if she has written check out of trust acct to pay her salary as trustee §3-307(b)(3).

(g)    OC 2—situation in which fiduciary embezzles money by

vii)   The Bank Statement Rule, p. 626

(1)   4406—the customer must examine the bank statement or be estopped from asserting unauthorized signatures or material alterations that could have be discovered.  This is an extension of 3406.

(2)   Problem 206, p.

(a)    Furnace repair man steals check and forgers the drawer signature. 

(b)   4406(d)(1)

(c)    Forged Drawer’s signature

(d)   Does the bank have to re-credit acct?

(e)    Not properly payable

(f)     Price v. Neal, 3418 (a) &(c).

(g)    BUT customer failed to exercise “reasonable promptness in examining the statement and reporting the forgery, but did the bank suffer a loss?

(h)    What if she had notified them promptly? the bank still takes the loss.  The only place it would make a difference, because....the bank would take the loss in any event, unless it has some avenue of recovery that she has precluded from her failure to give prompt notice.

(i)      If she failed to do something that actually caused them to eat the loss.  Because of her inaction, she caused them loss.

(j)     Because the bank had to pay is not the loss we’re talking about..  If they have an avenue of recovery, which her inaction caused.

(3)   Problem 207, p. 627

(a)    4406(c) (d) (e) and (f)

(b)   The customer has the

(c)    Forged drawer signature -- must bank re-credit?

(d)   4406(c) Customer failed to exercise reasonable promptness in examining statements

(e)    4406(d)—bank shows that customer’s failure led to more forged checks by same wrongdoer

(f)     NOTE that drawee bank could have liability for checks cleared before statement plus reasonable time.

(g)    4406(f) statute of limitation. Customer precluded after 1 year from statement

(h)    4406(e) –Bank failed “ordinary care” – apportioned bank lacks “good faith”,  Bank take the whole loss.  See definition of “good faith”—§1-201(b)(20)—“honesty in fact” and “observance of reasonable commercial standards of fair dealing.”

(i)      Shifts: first, the general rule is that the depositary bank will suffer the bank,  then look to whether the customer failed to notify in time, within one year.  Be clear about how the loss can be shifted back and forth.

(4)   Falk v. Northern Trust Co., p. 627

(a)    §4-406—Without regard to CARE or lack of care of either customer or Bank, a customer has 1 year after statement to report forged Drawee’s signature or Alternations

(b)   BUT What if the bank acted in bad faith?  then it extends it beyond the one year.

(5)   Problem 208, p. 634

(a)    4406(c), (d)

(b)   4406(e)

(c)    4103(c)—ordinary care

(d)   3103(a)(7)

(e)    Bank paid checks with Forged drawee’s signature.

(f)     Customer failed to review statements and report items for 7 months after 1st item:  4406(c) & (d).

(g)    Customer says bank negligent in not reviewing items—apportion loss §4-407(e)

(h)    BUT 3103(a)(9) –Ordinary care

(i)      Bulk filing, standing alone is not negligence.

(6)   Problem 209, p. 634

(a)    4406(d)

(b)   4401

(c)    4-103

(d)   4406(e)

(e)    What is the effect of a deposit acct agreement that imposes a short time for the customer to discover and report forgeries?

(f)     §1-302- variation by agreement. the effect of the provisions of the UCC may be  disclaimed by agreement.  But the obligations of good faith.. a time that is not manifestly unreasonable, may be fixed by agreement

(7)   Problem 210, p. 635

(a)    Bank adds a clause.

(b)   4103

(c)    4401(a)

(d)   3103(a)(7)

(e)    CN: but can the deposit acct agreement vary the rile of Price v. Neal/ §3-418.... probably not

(8)   Problem 211, p.

(a)    4208(a)(2)

(b)   4406(F) last sentence

(c)    4208(c)

(d)   Customer signs all check.  One is stolen and filled in.  Bank pays check.  Customer discovers and reports it 2 years later.

(e)    4401?  4406?

(f)     Bank re-credit customer’s account.

(g)    Can drawee (Payor) bank pursue breach of presentment warranty? §4-406(f)?  no, if they choose to re-credit the acct.  they can’t pass the loss along

(9)   Problem 212, p. 636

(a)    4208(c)

(b)   3417(c)

(c)    3404(bA)—Fictitious payees—anyone can indorse in that name so everyone after that is a “holder” if in good faith paying or taking for value or collection

(d)   So no violation of presentment warranty §4-208

(e)    Under agency law, principal is responsible for Agent’s acts within the scope of his employment; check appeared to be properly

(f)     Graham has typed out the bank statement rule, but we should do the same ourselves for the other rules, the Imposter rule, 3404, Employment Indorsement Rule, 3405, negligence Rule, 3406, Bank statement Rule 4406.

g)      Alteration, p. 637

i)        CN:  An alteration means . . . notice that it doesn’t speak of non-fraudulent alternations.  Discharge as a personal Defense §3-305.  Real defenses are good against a HDC.  “Discharge” does not appear in the real defenses, but it would fall under the personal defenses as in “simple contract.”

ii)       §3-407(c)—may enforce the rights according to its original terms. see also §4-401(d)  a bank that in good faith makes payment ...unless the bank knows that the alteration was improper.

iii)     Problem 213

(1)   3-407—a fraudulent alternation completely discharges any non-negligent person whose negotiable instruments contract is changed by the alteration.

(2)   Is the maker of

(3)   Maker signs note in the amount of $100, but it is altered to show $9,500.  Then it is discounted for $100 to a company that “always buys their paper”.  Would this lead to a HDC?  probably not, the discount was too deep, and it was probably a party to the original transaction.  So if it’s not a HDC then he can raise the defense of discharge.  

(4)   What if the document had already gone through a bank... they would have to re-credit it part of it, but they would have to enforce according to its original terms.

iv)     Problem 214

(1)   3-115

(2)   3407

(3)   3-406

(4)   4401(d)

(5)   Guy signs a check, with nothing else filled out.  Check stolen, Completed and paid.  Can he get the drawee bank to re-credit his account because not properly payable? §4-401.   He claims discharged by §3-407 Alteration.

(6)   But see §3407(c)

(7)   §3406—His negligence contributed to alteration

(8)   4401(d)

(9)   §3-115(b) may be paid according to its terms as augmented by completion. (c)  If words or numbers are added to an the bank can enforce it but they would go back to the warranties to recover.

(10)                       As to the bank, it is enforceable.  So who has the remedies here, and who has to go after someone for completing the instrument?  the drawer.  This makes sense because it’s his fault.  So the drawer takes the loss unless he can go after the person who altered. it.  His common law defense is discharge.

v)      Problem 215

(1)   3309 & OC

(2)   CN:  This was an alteration by someone who didn’t have fraudulent intent, so it’s not an alteration that would discharge the party?

(3)   What if she had eaten it?  §3-309, is the reconstruction provision.  It’s not a cancellation because she’s not a person entitled to enforce. §3-604.

vi)     Problem 216, p. 638

(1)   3407

(2)   4401(d)—drawee bank can charge customer’s acct for original amount ($5) and §3-4107(c)

(3)   4208(a)

(4)   Drawee bank can recover from Collecting Bank under presentment warranty 4208 , a 4-317.

(5)   Collecting bank recovers from depositary bank under transfer warranties 4207, 3416.

10)  Check 21

a)      Check clearing act for the 21st century

b)      Federal Reserve Reg. CC subpart D (Commentary)

c)      Regulation effective: Oct 28 , 2004


i)        Paper reproduction of an original check

ii)       Suitable for electronic processing

e)      Purpose: speed, efficiency and cost reduction

f)        Does not REQUIRE bank to use electronic process.  Nor does it alter tha agreement between you and your bank.

g)      Truncate – remove an original check from forward collection or return process and send instead a substitute Check, or MICR line info or electronic image

h)      Losses associated with Substitte checks

i)        Fall on the reconverting Bank

(1)   Bank that creates a dsusbtitute check

(2)   OR--- 1st bank to receive substitute check


i)        Warranties and indemnities are involved.

j)        Consumer concerns

i)        Notices

ii)       Expedited Recredit

(1)   content of claim

(2)   timing—bank must receive the claim by the ened of the 40th calendar day on which the bank mailed or delivered the statement.

(3)   When must the bank investigate and respond? denial or provisional recredit (up to 2.5k) by end of 10th calender day day after banking day when bank received claim – Recredit or deny in full by Day 45

Explain denial

Comparative Negligence

Check 21 & Law Enforcement

Law Enforcement Concerns

Original Check Retention                                                          -- No measures to Encourage

Electronic Check Conversion

Information from check is used for Electronic Payment from your account

Check is NOT the method of payment

You must be notified of electronic conversion

What law controls? EFTA & Reg E

Consequences:  Faster Processing, Cost Reduction this reduces float time to almost nothing.

Different Consumer Rights:

Reg E – Error Resolution – 60 days to report, bank has 45 days to resolve

Electronic Fund Transfers

Electronic Check Conversion


Point of Sale (POS Transactions) – Debit Cards

Preauthorized Transfers

Telephone Transfers




Letters of Credit & Secured Transactions


Commercial Law

Graham, Spring 2005

Art. 5-Art. 9


CONTROLLING LAW: UCC Article 5; Texas Business & Commerce Code - Chapter 5 (1999);; UCP 500 (1994) – Uniform Customs & Practice International Chamber of Commerce; U.N. Convention on Int’l Standby Letters of Credit International Standby Practices (ISP 98) – ICC published 2001

What is a Letter of Credit?

Three Parties:

1.  Buyer (Applicant)

2.  Seller (Beneficiary)

3.  Issuing Bank

4.  Confirmer – §5-107: Pays on letter of credit, reimbursement by issuer; usually bank in beneficiary’s location; directly obligation on L/C

5.  Nominated Person


Three Contracts:

1.      Between Buyer (who applies for L/C) & Seller (who will get paid by L/C)

2.      “Undertaking” of the Bank to Pay the Beneficiary Upon Presentment of Documents

3.      Reimbursement Contract between Applicant & Bank


Letters of Credit

Commercial Letter of Credit

Payment Device

Loan Aspects - Time before Reimbursement

Protects Seller

Standby Letter of Credit

Like a Guarantee of Performance (“Backup”)

Risk Analysis is the Same as Loan

Most Expire without Draw

Independence Principle

Key attribute of L/C

INDEPENDENT of underlying sales contract

5-103(d) (“The rights and obligations of an issuer to a beneficiary or nomintated person under a letter of credit are independent of the existence, performance, or nonperformance of a contract.”) &

5-108(f)(“An issuer is not responsible for the performance or nonperformance of the underlying contract.”)

Issuer pays against DOCUMENTS

5-108  Issuer’s Rights & Obligations

Duty to Applicant to Examine Documents

Dishonor if Documents do not “Strictly Comply” with L/C

Duty to Beneficiary & Applicant to Pay if Documents Comply

Quick Review of Documents

Issuer has a “Reasonable Time” after presentation – Not beyond the end of the 7th Business Day after receipt of documents

7 days is not a safe harbor

Must decide to PAY or GIVE NOTICE of Documentary Discrepancy


Except Fraud, Forgery, Expiration before Presentation

“Strict Compliance” – 5-108; Strict Compliance - not “Substantial Compliance”

BUT not “slavish conformity” or “oppressive perfectionism”

Examples in Comments

General Motors – Jeneral Motors

Number – No.

Bank of Clarksville – Bank of Clarksville, Clarksville, TN

Not just Documents, also time & place of presentation

Invoice is critical – description of goods.

Once there’s notice of documentary discrepancy, then there’s opportunity to cure.


Nondocumentary Conditions

Label as “L/C” is not controlling

If nondocumentary conditions are FUNDAMENTAL, it’s not a Letter of Credit and Not Governed by Article 5

5-102 Comment 6:  Label not conclusive.

If nondocumentary conditions are not fundamental, they are disregarded - 5-108(g)

When Does a Letter of Credit Expire?

Terms provide expiration date

Failure to specify date does not invalidate L/C

No Stated Expiration Date:  Expires 1 Year after Date of Issuance

Perpetual:  Expires 5 Years after Date of Issuance


Injunctions Against Honor

Injunction to prevent payment by Issuer; Injunctions should be few & far between; Exception to Independence Principle; Applicant can get Injunction to prevent the Beneficiary from presenting forged documents or committing material fraud. 5-109 and OC.

Statute of Limitations

Later of: 

One Year after L/C expiration date OR

One year after cause of action accrues.  §5-115.


Revocable or Irrevocable?

If silent, L/C is Ireevocable.  If irrevocable, then it can’t be changed.


Assignment of Proceeds.  5114.



See sample problems


Secured Transactions

9-101 – Comprehensive Scheme for the regulation of “security interests” in PERSONAL PROPERTY and fixtures.  Standardization

The Scope of Article 9

The Creation of a Security Interest

Perfection of Security Interest





Default & Enforcement

Building on Art. 3

Promissory Note – Unsecured (Signature Loan)

 Add Accommodation Maker (Co-signor)

Add Guarantor

Add Collateral

How to protect the Lender’s interest in the Collateral? – Article 9

Bankruptcy is the ultimate test

Bankruptcy Primer: Unsecured Creditors usually get nothing. Secured Creditors can get value of collateral; IF Perfected under Article 9, If Security Interest in Collateral is Unperfected, Creditor becomes an Unsecured Creditor


1)      Pre-Code Security Devices, p. 810

a)      Secret lien.  Benedict v. Ratner – U.S. Supreme Court 1925, p. 810--Hub Carpet – Bankrupt (Debtor);  Benedict – Trustee; Ratner – Written Agreement  4 mo. 3 days before bankruptcy (outside the 90 day period.). Assignment to secure existing loan $15k plus future advances up to $15k.  NY law – transfer of property as security that reserves to transferor the right to dispose of & use proceeds is, as to creditors, fraudulent & void  “Unrestricted Dominion Reserved”

b)      CN: trying to avoid a secret lien.  Before the UCC, here debtor retained possession of the collateral. Ostensible or seeming ownership, also unrestricted dominion.  To the outside world it looks like it belongs to him and it’s not clear that a SI has been created.  So a secret lien can be a fraud on other creditors.  It wasn’t recorded anywhere.  He had the opportunity to require periodic financial statements.  He had the right to require a transfer of the accounts receivable.  But he didn’t do any of them.  He left the control completely with the debtor’s purview.  And when the debtor earned more money

c)      A. Pledge(hypothecation), p. 815

i)        In a “pledge” debtor gives physical possession of the collateral to the creditor until the debt is paid.  Possession Perfects Security Interest.

(1)   2 Drawbacks:  Only Tangible Objects can be Pledged; Debtor needs to keep possession of some collateral. 

d)      B. Chattel Mortgage, --Real Property Mortgage; Chattel Mortgage for Personal Property; Filing allows Mortgagor to retain possession; Avoids “Secret Lien” problem.  But every state adopted its own version.

e)      C. Conditional Sale,

i)        Problem 256, p. 816

(1)   When can the Seller Repossess?  The unpaid seller may repossess only three circumstances:

(a)    (1) when 2-702 applies;

(b)   (2) buyer has specifically granted seller a SI in the object sold; and

(c)    (3) when the seller sues, recovers judgment and has the sheriff seize the property as part of the execution of the seller’s judgment. 

(2)   2-702:  Seller discovers that Buyer has received goods on credit while insolvent.  If the seller discovers that the buyer has received the goods on credit while insolvent, the seller may reclaim the goods upon demand made within a reasonable time after the buyer’s receipt of the goods.

(3)   Security Interest. art. 9.  if I don’t have an SI, and don’t fall within  2-702, all I can do is get a judgment.

(a)    Sheriff seizes property for Judgment Creditor

(4)   What effect does the seller’s retention of title have under the UCC?  §2-401(1), 2d sentence, and 1201(37) last sentence in first para.

ii)       Conditional Sale attempted to have Seller retain Title although Debtor has possession. But this creates a Secret Lien. “Fictitious Title Retention” = Unperfected SI.  What effect does “retention of title” have under Article 9? 

(1)   9-202 Titles to Collateral Immaterial. “Except as otherwise provided...Art 9 the rights and obligations apply whether titles to collateral is in the secured party or the debtor.

f)        D. “Trust Receipts” - Automobile Dealer – Floor Plan Financing; Factory’s Lien

g)      Field Warehousing;  regardless of what we call these, we have to follow the provisions of art. 9. Article 9 Covers all these:  9-109.  What the Parties call the security device is irrelevant

2)      The Scope of Article 9, §9-109 p. 821

a)      Article 9 History.  First adopted by all states in 1960s.  Current:  “Revised Article 9” – Effective July 1, 2001.  Transition Rules 9-702;

b)      Scope:  9-109(a)(1): Article 9 covers “a transaction, regardless of its form, that create a security interest in personal property or fixtures  BY CONTRACT” not by operation of law.

c)      “Security Interest” – Defined §1-201(b)(35) “an interest in PERSONAL PROPERTY or fixtures which secures payment or performance of an obligation.”

i)        “Secured Party” §9-102(a)(72)

ii)       “Debtor”  §9-102(a)(28)

iii)     “Collateral”  §9-102(a)(12)

iv)     Be sure you can identify:  Debtor, Secured Party, Underlying Obligation, Collateral

v)      Note:  §1-203

d)      Problem 257

i)        §9-109(d)(2).  Is an “Artisan’s Lien” created by statute an Article 9 “Security Interest”? no, if it arises by operation of law, it doesn’t meet the “contract” requirement, and it’s specifically excluded.

ii)       What about priority?  §9-333 deals with a possessory lien, look at this section, even if it is created by statute.

iii)     What about signing a statement giving a right to repossess?  §9-109(a)(1)  now we have an art. 9 security interest.  It’s a consensual lien credit by contract.

e)      Sale of Accounts Receivable. Problem 258, p. 822

i)        Sale of Accounts Receivable (NOT a loan).  Is this an Article 9 “Security Interest”?  9-109(a)(3)  yes, it applies to “accounts receivable.”  OC 5: Transfer of Ownership in Sales Receivables is Treated as creating a “security interest” even if SALE.  Buyer must perfect this “security interest” under Article 9, Includes SALES of Accounts, Chattel Paper, Payment Intangibles or Promissory Notes

ii)       KEY POINT:  Some business transactions with no apparent loan or collateral may still fall with in Article 9.  If a “security interest” is created, perfection under Art. 9 is required.

3)      Consignments, p. 822.  Art. 9 applies to “consignments”   §9-109(a)(4)

a)      Definition:  9-102(a)(20). “Consignment” means a transaction, regardless of its form, in which a person delivers goods to a merchant for the purpose of sale and: (A) the merchant: (i) deals in goods of that kind under a name other than the name of the person making delivery; (ii) is not an auctioneer, and (iii) is not generally known by its creditors to be substantially engaged in selling the goods of others.

i)        KEY:  person to whom goods delivered is “not generally known by its creditors to be substantially engaged in selling goods of others”

ii)       Distinguish True Consignment:  Neither SALE nor SECURITY DEVICE

iii)     Benedict v. Ratner problem?

iv)     Some “consignments” are disguised sales on credit

(1)   EX: Antiques Are Us, is a well known place where antique dealers could hire out space and exhibit the wares, with the store handing the sales and taking a commission on each one, and returning to the dealers items that remain unsold.  When the store takes out a loan from ONB and uses as collateral “all its property,” will the bank’s SI reach the items in the store that belong to the dealers if the dealers have never taken the steps required of consignors under Art. 9?  Problem 259, p. 824.

(2)   ANSWER: no, because Antique’s R Us is generally known as a place where antique dealers can hire out space.  Thus, it would fall under the exception of being generally known, so long as they are also generally known to their creditors as such.

(3)   COMPARE: Retail carpet merchant enters an agreement with Persian Rug Seller stating that title to the rugs remained with the dealer, that the proceeds of any sale are held in trust for the dealer; the proceeds of any sale were to be remitted to the dealer, and the all rugs were held at the risk of the consignee.  Before entering into the agreement, Retail Carpet never dealt with oriental rugs.  Retail put an advertisement in the newspaper stated “By Special arrangement, we proudly introduce a distinctive collection of Oriental Rugs.”  Merchant does not perfect; Bankruptcy

(4)   ANSWER: this was not a true consignment. First, the agreement provided that the risk was on the consignee; it also provided that the consignee held the proceeds in trust and yet it was allowed to mingle the proceeds with its own funds.  Moreover there is no evidence that Retail was generally known to its creditors to be substantially engaged in the selling of goods of others.  In re Fabers, p. 824

(5)   Does Article 9 Apply? yes.

(6)   Does Risk of Loss make a difference? yes.

(7)   Trade usage? no, doesn’t matter that in this trade its always consignment.

(8)   Who wins?  Consigning rug owner or B’cy Trustee? trustee.

v)      Problem 260, p. 826

(a)    Yes, this is a consignment because it meets the requirements of §9-102(a)(20).

(b)   Is this a True Consignment?  OR is it an Article 9 Consignment? this is an art 9 consignment. Is Article 9 perfection of SI required?

4)      III.  Leases, p. 827

a)      §1-203(a).  Lease distinguished from SI

i)        Bright Line Test:   A transaction in the form of a lease creates a SI IF

(1)   lease is for a term AND

(2)   Not subject to termination by lessee AND

(3)   one of the following

(a)    Original term of lease = economic life of the goods

(b)   Lessee is Bound to Renew for remaining economic life or Bound to become Owner

(c)    Lessee has Option to Renew for remaining life for no additional or nominal consideration; OR

(d)   Option to become Owner at no/nominal consideration, e.g., $1.00. CN: it looks like I’ve bought it but am paying off the amount.

(4)   What if we can’t determine that a Lease is actually a “SI” under the Bright Line Test?-- We must look to facts of each case. §1-203(a)

ii)       BUT see §1-203(c)

(1)   Lease is not necessarily a “SI” IF any one of the factors under §1-203(a) are met, merely because lessee has option to renew, assumes payment of taxes, because lessee has option at a fixed price.  These are factors but alone will not suffice.  Use these factors if the bright-line test doesn’t give an answer.

(2)   What if several of those factors are met?

(3)   When is consideration “nominal”?  Comment 2:  FOCUS ON ECONOMICS, not intent of the parties.

iii)     Problem 261, p. 827

(1)   Connie’s leased a Copy Machine from BIG;  5 year lease;  Rental payments equal the current Market Price;  Option to Purchase at end of lease for $5; 

(2)   this falls under (b)(4); but they failed to record the perfection of the interest.

(3)   After Lease was in place, Connie’s borrowed money from ONB & signed security agreement pledging all of Connie’s “equipment”;  Bank perfected; BIG did not;  Who wins?  The Bank.  Was this a Lease or Security Interest?  1-203

(4)   Real World Question:  Why try to structure a transaction as a LEASE rather than a SALE?  See conservative tax tips on p. 828

(5)   Focus is on the “EQUITY” lessee builds in leased property and the VALUE of property at the end of the lease

iv)     Distinguish and true lease from a disguised lease.  §1-201(35)

(1)   1.  If at the end of the lease period the lessee becomes the owner of the property for little or no consideration, a secured transaction and not a lease has been created.

(2)   2. If the contract contains a clause that permits the lessee to terminate the lease at any time and return the leased goods, a true lease has resulted.  Such a right of termination is not an attribute of a sale of goods.

(3)   3.  If the lease is for the entire economic life of the leased goods, with or without renewal, a disguised sale has occurred.

v)      Problem 262, p. 829

(1)   5 year lease – 10 year useful life

(2)   $300,000 lease payments = FMV

(a)    Option to own at lease end for $10,000

(b)   Is it a true lease?

(c)    Is it an Article 9 “security interest”?

(d)   CN: here the lessee has the option to own.  is 10k nominal? depends, if the fmv is 300k, it may be nominal.  if nominal then it’s a SI.

vi)     In re Architectural Millwork of Virginia, p. 830

(1)   F; CN: he went down with the intention of buying a truck, and then spoke with the dealer as to how to pay for it.  The dealer talked him into buying it with “lease financing”.  But was it a lease or did it create a SI?  The determining factor was not whether he agreed to pay maintained or insurance, but what’s leftover when he was done, this is the economics reality test.

(2)   RULE: it is a SI if the contract allows the lessee to become the owner of the lease property for nominal or no additional consideration upon compliance with the terms of the lease.

(3)   Ch 11 Bankruptcy – DIP; Associates & Debtor have 2 “lease agreements”

(4)   Forklift lease—contract provides for the option to purchase the forklift for $1 dollar after all scheduled payments are completed.  Held, this was a security agreement, not a true lease.  $1 dollar is a nominal amount, thus it falls within the brightline test.  §1-203(b)(4)

(5)   Truck lease. Did it create an option? yes, for $9.5k, the residual value; but this is not “nominal consideration”.

(a)    There, if (i) the debtor cannot avoid paying Associates the value of the payments due under the lease, and (ii) the debtor can become the owner of the Freightliner for nominal or not consideration upon compliance with the terms, the the transaction creates a security interest.

(b)   Here the first condition exists, but the second does not, the consideration – 9.5k compare to the cost of the lease $38k – is not nominal.  Nevertheless, the fact that the transaction doesn’t meet any of the bright line tests  does not conclusively mean that the Truck Agreement is a true lease. Look to 1-203(c).(2) and (6).

(6)   Debtor wanted to buy truck, used “lease financing”

(7)   Final adjustment clause                                                                         – Doesn’t meet Bright Line Test

(8)   Could buy at end of lease for $9,725   ($38,500)

(9)   Economic Realities Test

vii)   Play It Safe.  §9-505 – Precautionary Filing; when in doubt.  Option of Filing Financing Statement w/o affecting substantive classification of the transaction.  CN: you might need to perfect the transaction, just in case the transaction did create a SI.  But if I do this, does this mean that I’m admitting it is a SI? “filing and compliance is not a factor of whether the collateral secures an obligation.” 9505(b).

viii)  Equitable Subordination.   Problem 263, p. 838

(a)    Hospital requires the builder to get a surety.  Crash borrows money from ONC, with the right to collect progress payments; goes bankrupt.

(b)   Who wins?  look to §9-109(a)—this covers transactions regardless of contract.  Equitable subordination arises by law not by contract, so Surety would be ahead of the bank.

(c)    Is this transaction subject to Article 9? no.

ix)     Exclusions from Article 9, p. 839

(1)   §9-109(c) and (d).  This article does not apply to the degree federal law preempts.

(2)   A. Federal Statutes

(a)    Philko Aviation v. Shacket (US), p. 840

(i)      CN: this is a choice between two innocent parties.  The Shackets bought an airplane, paid full price, and had possession of the airplane, but didn’t get title to it; but the seller then sold the title to another purchaser, who filed the title to the aircraft with the FAA. 

(ii)    I: the Federal Aviation Act prohibits transfer of title to aircraft from having validity against innocent third parties unless the transfer has been evidence by a written instrument, and the instrument has been recorded with the FAA.

(3)   B.  Landlord’s Lien and Other Statutory Liens, p. 845

(a)    Problem 264

(i)      Is a landlord’s lien required to be recorded under art. 9?

(ii)    If this was a landlord’s lien arising by operation of law, then it would not require perfection; but here, they have made an agreement, a contract, and the landlord would have to perfect it.

(4)   C. Wage assignments—§9-109(d)(3)—art. 9 does not apply to assignment for claim of wages.

(a)    But what about “commissions”? Problem 265  –

(i)      Wages versus commissions.  are wages and commissions the same thing? it’s arguable.

(5)   D. Non-Financing Assignments—§9-109(d)(4)—(7)

(a)    Problem 266

(i)      This is a sale of accts, but here is was part of the sale of the business of the business out of which it arose, so it’s excluded under  9-109(d)(4)—“sale of accounts as part of a sale of the business out of which they arose.”

(ii)    §9-109(a)(72(D), and

(iii)   §9-109(d)(6)—assignment of right to payment from the payor, but the assignee is required to perform.

(iv)  §9-109(d)(5)—assignment of accounts for collection only.

(v)    §9-109(d)(7)—single account in payment of a preexisting debt.

(6)   E. Real estate, p.

(a)    Problem 267

(i)      F: normally real estate doesn’t fall under Art. 9 because it addresses personal property.  But the documents may be intangibles, and so may be perfected.

(ii)    §9-109b—the real property is not subject to this article, but the paper is.

(7)   F. Other exclusions. 9109(d)


Creation of a SI, Chapter 19


5)      Classifying collateral

a)      What is collateral? §9-102(a)(12)?--Property subject to a ”Security interest” or ag lien.  Includes proceeds.

(1)   proceeds to which a SI attaches

(2)   Accts, chattel paper, payment intangibles & notes SOLD

(3)   Goods subject of consignee.

b)      Types of collateral

i)        consumer goods

ii)       equipment

iii)     Farm Products

iv)     Inventory

c)      4 Classes of goods are mutually exclusive: however, goods can fall into different categories under different circumstances.

(1)   EX: a coffee maker at home is consumer goods, but in a hotel is inventory.

d)      goods” §9-102(a)(44)—Property that is movable when SI attaches:

i)        Fixtures

ii)       Standing timber to be cut and removed

iii)     Unborn young of animals

iv)     Crops grown, growing or to be grown

v)      Manufactured homes

vi)     Includes Computer program imbedded in goods

vii)   What does defined term GOODS not include?

e)      “Consumer goods” §9-109(a)(23):  (1) Used or bought for use, (2) primarily for, (3) personal, family or household purposes.

f)        Equipment 9-102(a)(33)—goods other than inventory, farm products, or consumer goods.

g)      Farm products 9102(a)(34)

i)        Goods other than standing timber, which respect to which the debtor is engaged in a “Farming operations”

ii)       Includes: Crops (even aquatic, ) Livestock, supplies, products of crops or livestock in Un-manufactured states – OC 4a.

iii)     What is “Farming Operations’? 9102(a)(35).

h)      Inventory—9-109(a)(48)—OC 4a

i)        Goods other than Farm Products

ii)       A. Leased by lessor

iii)     B. Held for sale or lease

iv)     C. Furnished by a Person under a contract of service

v)      D.  Raw materials, work in process, or materials used or consumed in a business.

i)        Quasi-intangible property—pieces of paper,

1) instruments  - includes prom notes.  Negot instrument OR any other writing that evidences a rt to pymt and trans in ord course of bus by indorsement and assignment

·         Does NOT include: LOC; invest prop; credit card rt to pymt


2) Investment Property (PRF – GEN MEANS STOCKS AND BONDS) – certificated or not; debt security also    (bond)

3) Documents (WH receipts and bills of lading)

·         Title docs that can be transferred


4) Chattel Paper – record evidences 1)monetary obl and 2) security interest


5) LOC rights to pymt 9102a51

j)        intangible property—No Significant physical form

1. Accounts 9102a2

       - rt to pymt from a 3d party of a monetary obl;

Pymts for: property, services, lottery winnings; credit card bill


2. Deposit accts BUT SEE 9109d13

        - does not include investment prop or accts evidenced by instrument

           RULE – art 9 doesn’t govern assignment of deposit acct in CONSUMER TRANSACTION but priority rules

                         apply IRT proceeds

3. General Intangibles – comm. tort claims; LOC rights; rt to sue for BREACH OF K; rt to money oil or gas

       - Pymt intangibles – rt to payment that doesn’t fall under pymt of monetary obl  for services (like retrn of sec


       - software

i)        Why is it important to Classify Collateral?

ii)       Does the Debtor’s announced use of Collateral matter?

k)      Instruments – 9-102(a)(47)

l)        Promissory Notes 9-102(a)(65)

m)    Investment Property (stocks & bonds) 9-102(a)(49)

n)      Documents (WareHouse receipts & bills of lading)--9-102(a)(30)

o)      Chattel Paper – 9-102(a)(11) – record evidences both a monetary obligation + SI.

p)      Letter of Credit Rights 9-102(a)(51)

q)      Accounts 9-102(a)(2) Right to payment of monetary obligation:  for property, for services, lottery winnings, credit card bill

i)        NOT payment right evidenced by Chattel Paper & NOT Deposit Accounts, NOT L/C rights,   NOT Investment Property

r)       Health-Care-Insurance Receivables 9-102(a)(46)

2.      Deposit Accounts – 9-102(a)(29) BUT 9-109(d)(13)

3.      General Intangibles  - 9-102(a)(42)

i)        See Comment 4d (“catchall” category for intangibles)



1) PRF – after identify the creditor, debtor, agrmnt, need to ID the collateral

·         May not be governed by art 9

·         Rule – primary use rule (1st use) determines type of collateral


2) Next w is how to perfect sec interest – may be outside art 9


Problem 268


In re Morton, p. 851

Collateral is 1968 Ford Bronco; Debtor is Morton

Creditor is Maine National Bank – perfected SI.

Is collateral Consumer Goods? 9-102(a)(23)

Is it Equipment? 9-102(a) (33)

How & when to decide?

What if debtor lies?  Monitoring obligation for creditor?

Problem 269, p. 854– Health-Care-Insurance Receivables



Problem 270, p. 855

Credit Card Receivables


Problem 271, p. 855

Morgan County Feeders, p. 856

Are these cattle Equipment or Inventory?

Problem 272, p. 858

Elvis Presley Guitar

Problem 273

Car Lease Contracts as Collateral?

Problem 274 – Crop Duster Lien

Creating a Security Interest

FIRST:  Classify Collateral – GOODS

Consumer Goods


Farm Products




SECOND, Review Technical Validity of Forms Creation of “Security Interest” 1-201(b)(35)

            Interest in Personal Property/Fixtures that secures Payment or Performance

6)      Technical Validity of the Forms, p. 859

i)        The creation of an art. 9 SI usually requires both a security agreement and a financial statement.

ii)       Security agreementcontract between debtor and creditor; Creates Property Rights between D & CR – Contract  - 9-102(a)(73)

iii)     Financial statementnotice that is filed in the place specified in §9-501 in order to give the later creditors an awareness that the collateral is encumbered.   Creates Property Rights as against Third Parties – Notice – 9-102(a)(39)  Must be Filed & Indexed:  9-501

iv)     §§9203(a) and (b), 9-502(a), 9-509(a) and (b) and 9521

v)      A. The security agreement, p. 860

IF Collateral in Secured Party’s Possession,      no written security agreement required BUT may be advisable

9-203 – Attachment & Enforceability of Security Interest

Attaches to Collateral when Enforceable against D

SI is enforceable vs. D & 3rd parties IF:

Value Given;

D has rights in collateral or power to transfer rights to secured party; AND

One of the following:

i.         D has AUTHENTICATED a Security Agreement with DESCRIPTION OF COLLATERAL

ii.       Possession (except certificated securities)

iii.      Special provisions under Art.8 for Certificated Securities

iv.     Control:  Deposit Accts, Electronic chattel paper, investment property, L/C rights, electronic documents

b.      No particular form necessary – 1-201(3) agreement

c.       Apparently absolute transfer may be secured transaction – 9-203 – OC 3 (B/S or lease) – parol ev.

(1)   If collateral is not in the secured party’s possession or control, the §9-203 security agreement must (a) be authenticated by the debtor and (b) describe the collateral.  But the security agreement need not be in any particular form; it needn’t call itself a security agreement.  OC 3, 9203.

(2)   Problem 275, p. 860

(a)    §1-201(35)

(b)   §2-401(1)—“any retention or reservation by the Seller of the title (property) in goods shipped or delivered to the Buyer is limited in effect to a reservation of a SI.”

(c)    MA: yes.  the contract describes the computer and he has signed it, thereby complying with §9-203(b)(3)(A)

(d)   “Conditional Sale Contract”

(e)    Is it a Security Agreement?

(f)     Good Lawyering - Security Agreement should:

(i)      ID Parties, Describe Collateral, Grant SI, Specify Contractual Agreement, Esp. Default

b)       guy buys computer from store and seller makes him sign a conditional sales K which tried to reserve - - - title in seller until full pymt is really a security interest despite what the document itself said


(1)     A: this is a sec agreement qualifies as a SI that attached b/c he signed the K (authenticated); it described the collateral (computer) ; and value was given by seller

c)       title passes to buyer subject to SI of seller here

(a)     Rule – any reservation of title by seller is limited to a reservation of a security interest and title still passes to buyer.

(b)     PRF – best sec agreement would 1) expressly grant a SI 2) make provisions as to default and when sec party can go after the collateral

ii)       B.  The Financing Statement (“FS”) UCC-1, p. 861

(1)   §9-502(a)—The financing statement need not be signed by anyone, though it must identify the parties and indicate what collateral is covered.

(2)   9516—other requirements.

(3)   Document Filed by Secured Party in Public Office

(4)   PERFECTS Creditor’s Rights in Collateral

(5)   What’s Required?  9-502




(6)   1999 Simplification – FS does NOT have to be SIGNED – 9-502(a).  Why Not?

(7)   What are the limits on anybody filing a Financing Statement?


(9)   See Also 9-516 Other Filing Office Requirements

iii)     C. The Debtor’s Identity, p.

(1)   Problem 276, p. 862

(a)    a. Use the individual’s name, unless a dba is a “registered organization.”  §9-503--

(b)   b. 9503(4)(A) OC 2. 

(c)    Sole Proprietor & Trade Name

(d)   Which to use for Financing Statement?

(e)    What if Partnership?

(f)     Should a FS use a trade name or a sole proprietor’s individual name?

(g)    9-503(c):  A financing statement that provides only the debtor’s trade name does NOT sufficiently provide the name of the debtor.

(h)    What about a partnership?  9-503(a)(1) – A formal partnership is a “registered organization” and the FS must provide the name of the debtor indicated on the public record of the debtor’s jurisdiction of organization.  An informal partnership would be covered by 9-503(a)(4) and the Comment says:  if it has a name, use that; if it has no name, use the names of the partners.  When read together with the “trade name” provision, the best advice is to provide both the name of the informal partnership and the names of the individuals as additional debtors.  See instructions to UCC-1.

(2)   Problem 277, p.

(a)    F: real name: “Raymond F. Sargent, Inc.” Financing statement named: “Raymond F. Sargent Co., Inc.”

(b)   §9-506—“A financing statement substantially satisfying the requirements of this part is effective, even it if has minor errors or omissions, unless the errors or omissions make the financing statement seriously misleading.”

(c)    MA:  Here, the statement is effective, because the error is not “seriously misleading.”

9-506(c) Filing Office’s Standard Search Logic

Issues:  Debtor’s Identity

(a)    Debtor’s name is not exactly correct on financing statement.

(b)   This problem highlights the requirement to file the FS under the debtor’s correct legal name.  This is required by 9-503(a)(1) and by the practicality of computerized search.  9-506 says that if a search of the records would disclose a FS filed with minor errors/omissions, the FS is not “seriously misleading” and it will be effective.

(3)   Problem 278, Change in Debtor’s name, p. 862

(a)    9507(c), OC4.

(b)   MA: The SI is still good.

- lady borrowed from ONB who correctly filed FS as to her Inventory and Equipment.- she got married and changed name.   She borrowed another 50K from fin co.

did ONB lose SI b/c it failed to refile when her name changed ? no; but need to worry about after name change b/c 4 mo time period will run and will lose SI in inv and equip

(a)    What if the Debtor’s name changes after the FS is filed?  9-507(c)

(b)   IF the Debtor so changes name that a FS becomes “seriously misleading”, it remains effective for collateral acquired by the D before or within 4 months after the change.  To be effective for collateral acquired AFTER 4 months, the Secured Party must file an amendment to the Financing Statement.

(c)    Where there is actually a NEW debtor involved but the same collateral & same secured party, 9-508(b) has a similar four-month rule. 


(4)   Problem 279, p. 863—Last Nat’l Bank filed a FS in the proper place to perfect its SI in the accounts receivable of the American Electronics Store (AES).  When AES ran into financial difficulty, it sold its assets to a new electronics business, Voice of Japan.

What if the Creditor’s name changes after the financing statement is filed?

Creditor does not have to but may refile.  However, the assignment (or sale) itself may be A SEPARATE secured transaction that must meet UCC requirements.


(a)    Post-Filing Disposition of Collateral.  §9-507(a) OC 3.  “a financing statement remains effective even if the collateral is sold or otherwise disposed of.”

(i)      MA: So, AES and voice of Japan are still bound.

(b)   When a person becomes bound by another person’s security agreement.  §9-102(a)(56) (“New debtor” means a person that becomes bound as debtor under §9203(d) by a security agreement previously entered into by another person”), §9-203(d) and (e) OC 7, §9-508 (“a filed financial statement naming an original debtor is effective to perfect a SI in collateral in which a new debtor has or acquires rights to the extent that the financial statement would have been effective had the original debtor acquired rights in the collateral.”). 

(i)      MA: Still bound.

(c)    Assignment of perfected security interest. §9-310(c)(“filing under this section is not required”) and §9-511—secured party of record.

(i)      MA:  still bound.

(d)   Priority. 

(6)   Problem 280, p. 863

(a)    F: using someone else’s property as collateral.

(b)   §9-102(a)(28)(A)—(“debtor” is a person having an interest, other than a SI, in the collateral, whether or not the person is an obligor) §9-102(59)(“obligor” mean a person that (i) owes payment or other performance of the obligation (ii) has provided property other than the collateral to secure payment or other performance of the obligation, or (iii) is otherwise accountable in whole or in part for payment other obligation.”)

(c)    MA: So, both Robin and Richard are “Debtors” though only Robin is the “obligor.” 

(d)   Highlights the distinction between “Debtor” and Obligor”.  See discussion in point 1 above.

(e)    File financing statement in the name of the “Debtor” – even if he is not the one who owes money to the Creditor.

iv)     Description of the Collateral, p. 864

(1)   §9-108—sufficiency of description.  There are a variety of ways of describing the collateral so that a reasonable person would know what we’re talking about.  It could be listed, by category, by type of collateral (except commercial tort and consumer transaction), by quantity, computational, or formula... all of these are subject to the test of whether the identity of the collateral is objectively determinable. DESCRIPTION is Sufficient – even if not specific IF it REASONABLY IDENTIFIES Collateral

(2)   Problem 281, p. 864

(a)    “All personal property D now owns or ever owns or even hopes to own between now and the end of the world or his death, whichever occurs first.”

(b)   9108 (c) a descriptions of debtor’s property such as “all the debtor’s property”, do not reasonable identify.

(c)    §9-504 (“A FS sufficiently indicates the collateral that it covers if the financing statement provides: (1) a description in §9-108 or (2) an indication that the FS covers all assets or all personal property.”

(d)   The FS is designed to give notice to the world, but needn’t give every detail.  But in the security agreement, super-generic does not work.

(e)    §9-108 OC 2, 3, 4.

(f)     Investment property.  What would be want to be more specific about consumer investment property? Because we want to protect consumers.  9108e states that a description only by type is insufficient, you have to be more specific and tie it to a specific event. (e) a description only by type of collateral is insufficient description of commercial tort claims, and consumer transactions.  See OC 5.   You can’t use a future tort claim as collateral.  But what if we assign an interest in the tort claim immediately when we have it? All we know is that we have a claim, not the value, nor who may be responsible for it.  But it is possible to describe this for the purposes of art. 9.

(3)   Problem 282, p. 865

(a)    D borrows money for her business & Bank takes security interest in “inventory, accounts receivable, equipment, instruments, general intangibles, personal property”.

(b)   MA:  the jewelry was secured through possession, and therefore the bank lost it when it returned the jewelry to her, as the bank did in Halberstadt when the bank handed the jewelry over to the auctioneer, who by contract is the agent of the debtor.

(c)    CN: The FS says “personal property”.  What about the sufficiency of the description?  §9-108.  A specific listing would have won the case for them.  But they tried to describe it by type of collateral.  She’s an individual.  One question might be what the security agreement said, so it’s possible that it might be enough to put them on notice


Bank argues the jewelry is personal property.  At the time these cases were decided, the UCC required that FS describe the collateral by “item” or “type”, so the bank loses the argument that it has a prior perfected SI.  The courts might also have been (and they might now be) swayed by the bank’s poor judgment in releasing the jewelry from its control back to the debtor, with no clear way for other creditors to even suspect that it was subject to a SI.   It might be argued (and some of you in class did argue) that the Financing Statement could sufficiently “indicate” the collateral.  The nature of personal jewelry is such that other creditors are unlikely to be put on notice by the supergeneric description “all personal property” (what about her tooth brush and other personal items which are also personal property?).  In any event, the Security Agreement would have to “describe” the collateral. 

(4)   Floating liens.  Problem 283, p. 865

(a)    “inventory.”

(b)   §9-204(a) (deals with security agreement)—“a security agreement may create or provide for a SI in after-acquired property.  A SI does not attach to consumer goods or tort claims.  ... future advances.”  So you can provide for future advances but you must be specific.

(c)    §9-108 OC 3—“whether a description in a security agreement is sufficient to include after acquired collateral if the agreement does not explicitly so provide is a question of contract interpretation.”

(d)   §9-502 OC 2--“

(5)   Problem 284, p. 866

(a)    Description:  “Various equipment, see attached list.” But there is no list. This is insufficient.  a reasonable person wouldn’t be able to figure it out.

(6)   Problem 285, p. 866

(a)    Security agreement stated: “machinery, equipment, furniture and fixtures.”

(b)   FS says all this and adds “inventory & accounts receivable”.

(c)    Debtor and Creditor agree that they intended more expansive version.  Other Creditors complain.

(d)   Who wins?

(e)    9-203(b)  Courts have said this Creditor loses.  Why?  Other creditors were warned in FS?

(f)     Winning argument is that 9-203 says no SI will attach or be enforceable against the debtor and 3rd parties unless the collateral is described in the security agreement.  So even if the FS is more expansive, only the description in the security agreement will be enforceable.

(7)   Problem 286, p. 866

F “All equipment” should be sufficient – but since so much money is at stake, better to also describe this item specifically plus all other equipment.

(8)   Problem 287, p. 867

(a)    Is a document which leaves blank the person to whom a SI is granted a 9203 “security agreement”?

In the security agreement, the secured party’s name was left blank.  Will the courts use a complete financing statement that refers to this security agreement to supply the missing info?  1-201 Comment 3.  “Agreement” is governed by the law of contracts.  You might argue that they can be read together to piece together a complete security agreement, but don’t ever let this happen to you.

d)      Attachment of the SI, p. 867

i)        Attachment—Process by which SI becomes effective against the debtorPerfection is how the SI becomes effective against the rest of the world.

ii)       Steps for “attachment” under §9-203:

(1)   A SI must be “authenticated in a record,” not oral.  “authentication” can be signing. The security agreement must be authenticated, but the financing statement does not have to be signed.

(2)   the creditor must give value (see §1-201(44))

(3)   debtor must have some rights in the collateral.  (See foster brother problem, he had an agreement which is sufficient).

iii)     Read § 9203 and §9-204(after acquired property; future advances)

iv)     Thrift In v. ADE , Inc., p. 868

(1)   ADE—Auto Seller;  Thrift—financer; Devers—Auto dealer

(a)    ADE gave Devers possession of 3 autos;  Devers was to pay by check later; ADE retained titles.  Thrift has an SI in Devers’ inventory.

(2)   Classify collateral §9-102(a)(44)—Goods (consumer goods, inventory, equipment, farm products?)

(3)   INVENTORY:  Were the cars “inventory?”  yes.

(i)       “consumer goods”, [cars might be consumer goods, but not here].

(ii)    Equipment”, not here.

(iii)   “inventory”, yes.

(b)   The classes of goods are mutually exclusive: the goods can only be characterized as belonging in one of the four classes at the same time by the same person.

(c)    TEST:  the principle test to determine whether goods are inventory is that they are held for immediate or ultimate sale.  Here, although ADE and Devers intended Devers not to encumber the vehicles for immediate sale until ADE was paid, Devers nevertheless held the cars for ultimate sale. Therefore the cars were inventory.

(4)   ISSUE: Did SI attach?


(a)    The SI does not attach to the collateral until there is an agreement that it attach, value is given, and the debtor has rights in the collateral.

(b)   I:  Did Devers have rights in the collateral?

(c)    R: §2-401(1)—“any retention or reservation by the seller of the title in goods shipped or delivered to the buyer is limited to a reservation of a SI.”  When the debtor acquires possession of the collateral under a contract, he has acquired such rights in the collateral as to allow the security of his creditor to attach to the collateral, and this is true regardless of who maybe deemed to have title and to and ownership of such collateral.

(d)   Here, Devers acquired an interest in the collateral when it received possession of the cars from ADE pursuant to their contract.  Thrift’s SI attached at that time.

v)      Problem 288, p. 872

When Does the Security Interest ATTACH?

Jan. 6 - Security Agreement:  “all existing and after-acquired inventory in the store”

Jan. 6 – Loan is funded – he gets the money

Jan. 6 - Inventory is 4 guitars & 1 pitch pipe

            He also has a contract with TTMC for 40 trumpets to be delivered March 30

March 15 – Seller marks trumpets “For Shipment to Gabriel’s Store”

March 30 – Trumpets shipped & received


(1)   March 15 TTMC packaged 40 trumpets and marked them “For Shipment to Gabriel’s Trumpet Store.”

(2)   March 30—Gabriel receives trumpets and displays them in the store.

(3)   a. MA: Bank’s SI attaches on March 15 per 2501, when the goods are identified by the seller.

(a)    §9-203(a)—“A SI attaches to collateral when it becomes enforceable against the debtor with respect to the collateral.”

(b)   §2-501-The buyer obtains a special property and an insurable interest in goods by identification of existing goods as goods to which the contract refers.”

(4)   b. MA: It is possible to create a SI in after acquired property.

(a)    §9-502(d)—“A financing statement may be filed before a security agreement is made or a security interest otherwise attaches.”

(b)   §9-322(a)(1)—“Conflicting perfected SI’s rank according to priority in time of filing or perfection.”


9-203(a) & 2-501

Bank gave value immediately.

Agreement was properly signed.

Only requirement remaining for attachment depends on the subquestion:                                     When did Gabriel have rights in the collateral?

For guitar & pitch pipe – Jan. 6 is date of attachment.

For trumpets – March 15 – When goods are identified to the contract under 2-501 (since we didn’t study sales, you might not find this), this D has rights to the collateral and the SI will attach.

An argument could be made that the words “in store” postpone attachment (9-203) and so the SI did not attach until March 30.  Be clear with drafting to avoid questions like this.


What if FS is filed on Jan. 7?

No change in ATTACHMENT dates, but PERFECTION (as we discuss in the next chapter) occurs when FS is filed – Jan. 7.

The FS MAY be filed prior to attachment (done to ensure priority).

§9-502(d)  “A FS may be filed before a security agreement is made of a security interest otherwise attaches.”


If the bank does not fund the loan until March 31, there is no ATTACHMENT of a security interest until that time – when the bank (Creditor/Secured Party) has given VALUE.

What about loan commitment?  9-102(a)(68) & 9-323 – Priority Rules for Advances that we’ll discuss later.

vii)   The requirement that Debtor have rights to collateral.  In re Howell Enters., p. 873

(1)   Howell—Rice seller; Tradax—Rice seller; Schwartz –Rice purchaser –L/C Applicant.  Schwartz won’t deal directly with Tradax.

(2)   First National—Security creditor;  Perfected SI in Howell’s Accounts receivable.

(3)   Is this L/C an Account receivable? CN: but Howell was never out any rice, it never shipped the rice, the only party entitled to payment for the rice was Tradex. 

(4)   Did the debtor have an interest in the collateral?  CN: did Howell have an interest in the LC, which constituted an acct which they could pledge as collateral from First National? no, they had no interest in the L/C proceeds, they were just a pass through, offering their name only.  So Howell didn’t meet this test for the SI attaching.

(5)   Who wins? Tradax or the Bank? Tradax wins because the Bank’s SI attached only to Howells accounts receivable, and the LC was never an account receivable for Howell.

7)      Perfection of the Security Interest (Ch 20)—§9-308, p. 879

a)      ATTACHMENT is the process by which SI becomes effective against Debtor.

b)      PERFECTION – Process by which Creditor’s SI becomes effective against the rest of the world, especially later creditors

i)        9-203

ii)       Attachment

(1)   Security Agreement - Authenticated in a Record

(2)   CR must give VALUE

(3)   D must have rights in Collateral

iii)     Perfection of the SI;  If the “security interest” is PERFECTED, it is senior to later creditors – esp. B’cy TR

iv)     9-308 – First, it must ATTACH 9-203

v)      UCC Perfection Sections:  9-308 to 9-316

vi)     How to PERFECT:

(1)   By Filing a FS §9-310

(2)   By Possession (Pledge)

(3)   By Automatic Perfection

(4)   By Control

c)      I. Perfection by possession (pledge), p. 880

i)         §9-313 OC 2, 3, 4. 

ii)       Must be tangible.  Possession gives notice to the world at large.

iii)     Problem 289, p. 880—Escrow

(1)   Gracie owns Diamond, which is at museum;  Brown agrees to buy, makes down payment; Signed agreement gives Gracie a SI in his own diamond until all payments made.

(2)   How can he perfect?  Perfection by Possession

(3)   Goods in Possession of Third Party – 9-313.  Is Notice to the 3rd party enough? no.  What more is required? authenticated acknowledgements

(4)   What MUST the 3rd party do? nothing.

(5)   Here the diamond is physically located in the museum.

(6)   If the collateral is in possession of a third party, it’s not perfected unless the third party authenticates, but they are not required to, nor do they have a duty to confirm.  So this is a risky way of doing it.

iv)     9-313(c)—Gracie will take “possession” of the collateral only if the Museum “authenticates a record acknowledging that it holds possession of the collateral for the secured party’s benefit.”

v)      9-313(f)—“A person in possession of collateral is not required to acknowledge that it holds possession for a secured party’s benefit.”

vi)     9-313(g)—“If a person acknowledges that it holds possession for the secured party’s benefit: the acknowledgement is effective under subsection (c).”

(1)   MA: in other words, the Museum doesn’t have to acknowledge that it is holding the diamond for the benefit of Gracie, but if it does, then Gracie “takes possession,” and the security interest is perfected.

(2)   CN:  How could it be perfected?  under (c) (1) the Museum takes possession first, then authenticates, under (2) the museum takes possession after it authenticates.

vii)   Agency.  Is the 3rd party an agent of Secured Party (9-312) or a non-agent bailee (9-313)? Best advice:  Get acknowledgement

(1)   Compare 9-312 – Goods covered by negotiable or non-negotiable documents.  Such as a ware[house receipts]

(a)    Perfection by Possession

(b)   Warehouse receipt = document of title

(2)   9-312(c) – Goods covered by Negotiable Document

(a)    a SI in the Document has priority over a SI in the goods.  So you want perfection of the document.

(3)   9-312(d)—warehouse receipts, such as a grain document.  Perfect an interest in the grain, have the warehouseman issue a document in the interest of the secured party.  The farmer or bank can notify the warehouse.  It doesn’t specify which party can notify.  And here, notification will work to perfect the SI.  Look to OC 7 and examples, and OC 9.

(4)   Know difference between 9313 (OC 4) and 9312.  If you have any doubt as to which may apply, do both, get the acknowledgement and give notification. But

(a)    9-312 (c) or (d) apply to situation where the goods are in possession of a bailee who have issued a document of title covering the goods;

(i)      agent of secured party

(ii)    notification sufficient for perfection

(b)    9-313(c) applies to goods in possession of a third party who has not issued a document, and provides a method of perfection by possession when the collateral is possessed by a third party who is not the secured party’s agent.

(i)      not agent of secured party

(ii)    notification not sufficient for perfection; must authenticate acknowledgement.

(c)    Perfection by Possession?

viii)  Field Warehousing”— the warehouse comes to the goods, instead of vice versa.  Problem 290, p. 881

(1)   Fred’s hired the debtor’s own janitor and paid him $1 to be the field warehouseman.  Who creates WH receipt?  Debtor’s Janitor gets $1 to be field WHman?

a.       KD gets loan, pledges WH Receipt

b.      Bank takes possession of WH Receipt

(2)   This looks a little like a sham arrangement.  There was a warehouse receipt, but who writes it up? the warehouseman.  This receipt could be negotiable, you need it to claim the goods.

(3)   a. 9-312(c)—“while goods are in possession of a bailee that has issued a negotiable document covering the goods: (a) a SI in the goods may be perfected by perfecting a SI in the document.”

(a)    9313 OC 3.

(b)   MA: First, under §9-312(c), the bank would seemed to have “Taken possession.”  However, under 9313 OC3, a court may find that the person in possession – the janitor for Kiddie Delight – was “too closely connected or controlled by the debtor that the debtor has retained effective possession.”  If so, it’s a sham.  This is particularly probable in light of the meager pay - $1 – that Fred’s pays it’s custodian. 

(4)   b. Temporary Perfection.  yes.  Under 9-312(e), “a SI in certificated securities, negotiable documents, or instruments is perfected without filing or taking of possession or control for a period of 20 days from the time it attaches to the extent that it arises for new value given under an authenticated security agreement.”

(5)   c. no. What if D gets goods back to clean?  9-312(f).  Under §9-312(f)—the secured party can make the documents available to the debtor and still retain its SI for up to 20 days, but only if it’s for the purpose of “ultimate sale or exchange, or loading, unloading, storing....”  (g)  a perfected SI in an instrument, remains effective if it’s for these stated purposes of “ultimate sale or exchange, or presentation, collection, enforcement, etc.”

(6)   The warehouse as responsibility for its employees, so the bank would have to go after the warehouseman (Fred’s).

(7)   1.  Does Bank have perfected security interest in inventory?       OC3 to 9-313 & 9-312(c) – Question is POSSESSION

(8)   Does the Bank have a perfected security interest in the WH receipt even before the bank gets possession of it?

(9)   Negotiable Document

(10)                       Written, authenticated security agreement, D had rights & value was given        

(11)                       9-312(e) – TEMPORARY PERFECTION

(12)                       What if CR loses perfected position?

ix)     Problem 291, p. 882

(1)   Karate school pledges 36 promissory notes to NFC as collateral for loan; Signed security agreement, NFC takes possession of notes; School takes back one note to present it for payment (this is one of the “purposes under 9312(g)); School officer forgets for 6 months, School goes bankrupt

(2)   Does Bank have Perfected SI? 9-312(g), (h)

(3)   Listed Purposes – Temporary Perfection – How long? 20 days.

(4)   MA:  the Finance company would retained its SI for 20 days despite giving the note back to the debtor. 9-312(g).  But at the expiration of 20 days, Finance Co lost its perfection.  9-312(h)

(5)   Could Finance Co protect itself by filing a financing statement as to the promissory note?  MA:  Yes, under 9312(a) “a SI in ... negotiable instruments may be perfected by filing.” Would this be a good idea? yes.

(6)   CN: they can give it back, only for 20 days and for the stated purpose.  It was for the stated purpose, but both the president and the loan officer forgot about it, so the SI is lost.

(7)   What if there’s a gap period of unperfection? this could cause a lapse in perfection.  You want to make sure your perfection is continuous.

d)      Automatic Perfection --§9-309, p. 882

i)        A.  PMSI in Consumer Goods, p.

(1)   A PMSI in consumer goods is automatic because otherwise it would be too expensive and the seller would just include it into the purchase price.

(2)   “Purchase money interest.  §9-103.

(3)   Problem 292, p. 883 Aluminum siding salesman & the sewing machine

(a)    a. §9-204  -- A SI does not attach in after acquired property in consumer goods, unless they’re acquired within 10 days.

(b)   b. Yes, §9-103(a)(2)— “a PMSI means [1] an obligation of an obligor incurred as all or part of the price of the collateral or [2] for value given to enable the debtor to acquired rights in or the use of the collateral if the value is in fact so used.”  Thus, the PMSI applies not only to the seller but also to the lender.

(c)    c. No; the value must in fact be used to acquired the right or use of the collateral with the money. §9-103(a)(2).  How to protect against misuse? §3-110(d) make the check out to the payee.

(d)   d.  Finance Co has the PMSI, therefore it gets the sewing machine.

(e)    What is the bankruptcy trustee’s interest? it’s perfected on filing BR.

(4)   In re Short, p. 884[Graham likes this case.]

(a)    CN: Debtors borrow money and later the lender has them sign a new note.  Here, debtor hadn’t paid anything.  The loan was for a short period of time with a balloon payment at the end.  If the debtor can’t make the payment at the end, one option is to default at the end, and bank repossesses; another is to sign a new loan agreement.  Here, the bank failed to perfect a SI, so it had to rely on the PMSI.  Here, the parties did express intent to continue the PMSI but did not allocate [how much of the debt was for the PSMI and how much for the nonPMSI].  As a drafting matter, you want to be as explicit as possible, state that the parties intend for the PMSI to continue and give an allocation of the funds.

(b)   Debtors want to avoid Lender’s lien, i.e., get the furniture for free.  Bedroom furniture is exempt property.  Was this a PMSI?  If not, could it be avoided under BR Code 522(f)?

(c)    When a creditor consolidates a PMSI with a non PMSI loan, does he lose his SI? no, only “to the extent” it is not a PMSI.  This is the “dual status” rule.

(d)   Split of authority. Some courts hold that the PMSI is lost altogether.

(e)    Split

(i)      1.  PMSI automatically transformed into a non-PMSI when proceeds of renewal note are used to pay original note – “all or nothing”.  This is like a novation, one note is substituted for another note. 

2.      Dual Status” This is more favorable to the lender.– PMSI to the extent taken to secure purchase price – BUT how to allocate payments? 

a.       By agreement? yes, this is a possibility.  FIFO?  Forfeit if no agreement?

3.      Middle of the Road”, case by case – how much change has there been in the obligation?

b.      Renewal or Novation – Did parties state intent?  Do they intend a renewal of the loan or a brand new unsecured loan, or for the PMSI to continue?

(5)   Problem 293, p. 893

(a)    Bank has a perfected floating lien on all of Façade Motors equipment.  Façade Motors borrows a Persian rug from Persia, Inc, to see if it fits in its office.  Does the bank’s lien attach?

(i)      2-326(1) and (2).  Here the goods (rug) was delivered primarily for use, therefore it is a “sale on approval.” 2-326(1)(a).  as such, the rug is not subject to the claims of the buyer’s creditors until acceptance.  §2-326(2).

(b)   Façade decides to buy the rug; signs the K, makes down payment; and borrows the installment money from Flyby-Night Savins, giving it a SI in the rug.  Is this a PMSI? 

(i)      MA: No.  9-103(a) and OC 3—“The concept of a PMSI requires a close nexus between the acquisition of collateral and the secured obligation. Thus, a SI does not qualify as a PMSI if the debtor acquires property on unsecured credit and subsequently creates the SI to secure the purchase price.”


(6)   Proximity in time, intent of parties, and course of dealing in determining PMSI.  GE Capital Commer Auto Finance v. Spartan, p. 894

(a)    I: Whether by advancing Debtor the funds to purchase vehicles after Debtor itself had already paid for and received them, GMAC thereby acquired a PMSI in the cars that could defeat a previously perfected SI in all of Spartan’s inventory held by GECC? yes, GMAC has established that its post-purchase advance entitled it to a PMSI in the collateral such that it had priority over GECC’s prior “dragnet” lien.

(b)   CN:  Here, debtor had already purchased the car before they advanced the “purchase” money. 

(c)    TEST: whether the transactions were closely allied, proximity in time, intent of parties and course of dealing.  This was a usual practice.  The drafting attys messed up because the agreement didn’t provide for reimbursement, only advances, but the court overcame this by the course of dealing.

ii)       B.  Certain Accts and Other intangibles, p. 903

(1)   Automatic perfection.  §9-309(2) + OC 4  “§9-309(2) affords automatic perfection to certain assignments of payment intangibles as well as accounts. The purpose is to save from ex post facto invalidation casual or isolated assignments – assignments which no one would think of filing.”

(2)   In re Wood, p. 904

(a)    CN: Larkin loans his friend Wood, another lawyer, $10k.  In exchange, Wood assigns him the proceeds from two litigations.  Thus, the security for the loan is  A payment that the lawyer will receive on a contingency basis, but you can’t tell anyone about it. This is a secret lien issue.

(b)   The trial court imputed the knowledge to the lawyers.  Held, the fact that lender was an attorney didn’t make him ineligible for 9309(2)’s automatic perfection.

(c)    percentage test.  9-309(2)—.  “as assignment which does not transfer a significant part.  This would not permit an assignee to escape the filing requirements if he received a large portion of an assignor’s accounts whether or not the transaction was an isolated one.  This is a narrow exception to the filing requirement, not applicable if the transaction was in the general course of commercial financing.

(d)   casual and isolated transaction” test. OC 4.  Examine the circumstances surrounding the transaction, uncluding the status of the assignee, to determine whether the assignee was, in fact, casual and isolated.  Where the assignee is regularly engaged in commercial financing and routinely accepts assignments of accounts, perfectionby filing is required regardless of the actual amount of the accounts assigned.

iii)     Automatic perfection Sale of promissory notes.  §9-309(4).

(1)   Problem 294, p. 907

ONB sells promissory notes to LNB

Sale of Promissory Notes is an Art. 9 transaction

Who is Debtor? – seller.   Who is Secured Party?—buyer.

Must LNB file a Financing Statement?  Perfect by Possession?   9-309(4)

(a)    Must a financing statement be filed?

(2)   Securitization of mortgages,  sale on an interest in pool of mortgages, promissory notes, accts receivable, sale of  receivables—

(3)   Loan participation—Sale of part of loan.  Recourse and nonrecourse.  If there’s a problem with it can I get my money back.  nonrecourse is an assumption of risk.

Mortgage Warehousing – Bank makes loan to mortgage lender, taking SI in underlying mortgages.  Transfer with recourse/without recourse

9-309(3) & (4) - Automatic Perfection only works IF there is a SALE

(a)    IF in doubt?  9-310, 9-312

(b)   But 9309 only applies to sales.  But if there is any doubt, file it.

iv)     SUPPORTING OBLIGATION.  Problem 295, p. 908

NFC loans $20,000 to Portia Secured by AR;  NFC files Financing Statement; One Acct is guaranteed by mother of obligor

How to perfect security interest in Surety Obligation?  9-308(d)

(a)    9102(a)(77)(“supporting obligation” means a ...secondary obligation that supports the payment o an account.”)

(b)   9102(a)(71)(“Secondary obligor means an obligor to the extent that the obligor’s obligation is secondary.”)

(c)    9203(f)(“attachment of a SI in collateral attachment of a SI in a supporting obligation for the collateral”) OC 8 A SI in a supporting obligation automatically follows from a SI in the underlying, supported obligation.

(d)   9308(d)—“Perfection of a SI in collateral also perfects a SI in a supporting obligation for the collateral.”

(e)    CN:  A guarantee is a supporting obligation, and perfection in the one also perfects it in the guarantee.

e)      Perfection by filing, p. 908

i)        §9-310—Filing is the ONLY method of perfection EXCEPT:

(1)   possession 9313

(2)   automatic 9309

(3)   control 9314, 9312

(4)   Certificated of titled statute 9311

(5)   Goods in possession of bailee/certificates securities 9312

(6)   Proceeds 9315

(7)   Continued Perfection – 9-316

(8)   Temporary Perfection

(9)   Supporting Obligation – 9-308

(10)                       Mortgage – 9-308

ii)       A.  The Mechanics of Filing, p. 909

(1)   Why central filing vs Local filing?  SoS office.  On line search.

(2)   Problem 296, p. 909

(a)    Error by filing office.  Could depend on who caused the error?

(b)   Shakespeare is president of Hamlet Corp.  Elsinore lent Hamlet Corp $100k.  The clerk at the SoS office filed it under “Shakespeare” instead of “Hamlet.”  Later another finance co lent Hamlet co money, taking an SI in the same equipment.

(c)    Did Elsinore “file” first so that it has priority, or did it bear the risk of clerical error?

(d)   §9-516(1)—What constitutes filing.—“Communication of a record to a filing office and tender of the filing fee or acceptance of the record by the filing office constitutes filing.”

(e)    §9-517—Effect if indexing errors.  “The failure of the filing office to index a record correctly does not effect the effectiveness of the filed record.”  C2.  “The risk if on the one searching the record, not the one filing.”

(f)     The losing party should sue the state for negligence.

Who caused the error?

9-516(a), 9-517, 9-516(d)

Did EFC “file”?– 9-516(a)

Somebody loses – What recourse? Practical Note:  Get duplicate copy 9-523(a)


iii)     B.  Other filings, p. 910

(1)   “A FS is effective for 5 years” and then it lapses.  §9515(a).

(2)   Pub finance /mfg home related filing is effective 30 years §9515(b).

(3)   Continuation statement §9515 (d) and (e).  When can you file a continuation statement? §9515 (d) “only within 6 months before the expiration of the 5 year period.

(4)   How long must filing office retain filings?

How long is a filed Financing Statement effective?   9-515  

Public Finance/Mfg Home related filing?

Continuation Statement  9-515 (d) & (e)

When can you file?   Discuss Gap issues

How long must filing office retain filings? 9-522

Assignment Statement?  9-514

Partial Release of Collateral?  9-512

Correction Statement    9-518

Amendments – 9-509


(6)   Problem 297, p.

(a)    a. 5 years.  9515(a)

(b)   b. continuation statement.  9515(d), 9510(c).

(c)    c.  No. once it lapses, the FS ceases to be effective, and thereby becomes unperfected.  As such it loses its priority.  §9-515(c)

(d)   CN: if you don’t file your continuation statement , it’s as if you never filed.

(7)   Termination.  Problem 298, p.

(a)    §9-513  termination statement. 9-625(e)(4) Liability for failure to comply with 9513 in filing a termination statement.

(b)   9-509(d)(2)—“a person may file an amendment . . . only if: the amendment is a termination statement for a FS as to which the secured party of record as filed to file, the debtor authorizes the filing, and the termination statement indicates the the debtor authorized it to be filed.”

(c)    What procedures?

(d)   Consumer goods?

(e)    Open drawer concept.

(8)   Problem 299—Bogus financing statement,

(a)    Unauthorized bogus filing.  9513 OC 3, 9509 OC 3(“a person who files an unauthorized record in violation of (a)(1) is liable under §9625(b) and (e) for actual and statutory damages.” 

(b)   penalty? can debtor filing a termination statement,

(c)    9518- a person can file a correction statement if the person believes that the record is inaccurate or was wrongfully filed.


8)      Multi-State Transactions, p. 913

a)      Choice of laws 1-105.  General Choice of law, goes to party autonomy.

i)        “reasonable relation” test.  

ii)       §9-301 is controlling, domicile approach.  the law of the debtor’s location is the state in which the steps for perfection need to be taken.  §9-301(1).  If the property has a physical location, then the law of the state in which it is located controls priority. 9301(1) and (3).  9301(2)—where it has physical location.

iii)     Basic rule:  look to

(1)   Debtor’s location as Place of perfection

(2)   Collateral’s location as Effect of perfection.

iv)     Problem 300, p. 914

(1)   Residence in Wy, boat in Ohio.  Ohio law: whenever a consumer has paid more than 75% of a debt secured with consumer goods, the SI automatically disappears.  Wyo has no such law.

(2)   MA: creditor should file in Wyo because that’s where the creditor resides, but when the debtor has paid 75%, the creditor will lose its SI because the law of the jx in which the goods is located controls.  CN:  we file where the debtor is, but look to the location of the boat for the effect.

v)      Problem 301, p. 914

(1)   §9-307 --  they conduct their business both in NJ and in Baltimore, therefore, they have more than one place of business.  therefore, under b3, it’s place of business if where it’s chief executive office, Baltimore.

(2)   CN:  9307 OC 2.  “chief executive” office is not defined, but seemed to be where the conduct their affairs,; “where persons dealing with the debtor would normally look for credit information.”  But you may protect yourself by perfecting under the law of each jx.

(3)   CN:  When will the debtor be deed to be located in the DC? 9307(c).  IF Perfection occurs in an off shore jx, then you are deemed to be domiciled in Washington DC.

(4)   Example 1: Debtor is an English corporation with 7 offices in US and

(5)   Where is the Debtor’s Place of Business? 9307

(6)   STOPP

vi)     4 month grace period when debtor changed location.  Problem 302, p. 915

(1)   Change of debtor’s location to another jx.  9316(a).  the SI remain perfected for 4 months.  CN:  debtor is located in Illinois,  Does the bank lose it’s perfection by moving to Washington.  No.  Under 9316, as SI remains perfected until the earliest of 4 months to file in the jx, or when the perfection would have ceased under the law of the original jx.  So if I’m at the end of the 5 year period, (see §9515(a) above).  If the FS lapsed, I have 6 month window to file a continuation statement.  So I may not have a full 4 months. The 4 month grace period is designed to give you time to learn debtor has moved.

(2)   Merger.  9316(a)(3).  The perfection remains good for 1 year after merger.  CN: only if the original perfection hasn’t lapsed in the original state.

vii)   Problem 303, p. 916

(1)   Contest between 2 perfected creditors.

(2)   ONB–filed 1st in Ill.

(3)   LNB-filed 2nd in Ill.

(4)   LNB – promptly refiles in DC.

(5)   ONB waits 9months before filing in DC.

(6)   Who has priority? 9316(b) & Example 7 Retroactive Unperfection.  OC 3.

(7)   Ma:  Last national Bank will get priority over First national bank.

(8)   “Purchase” 1201(32)

(9)   “purchaser” 1201(33)

b)      II. Certificates of Title 9-303 & 9-337, p. 916

i)        Problem 304, p. 917

(1)   Lyle was domiciled in Michigan, bought his new truck in Pennsylvania, and told the dealer there that he lived in Indiana, because license and registration fees were cheaper there.  The dealer perfected his interest in Indiana.  Lyle went bankrupt and claims that the dealer was unperfected because its SI was not perfected in Michigan.

(2)   CN: 9303(a) “applies to goods covered by a certificate of title even if there is no relation between the jx under whose certificate of title the gods are covered and the goods or the debtor.” Thus, this section applies to certificates of a jx having no other contacts with the goods or the debtor; all you need is the piece of paper.  Accordingly, the truck dealer wins.

ii)       Problem 305, p. 917

(1)   Holly is a resident of Tex. but purchased her car in Oklahoma.  Both Texas and Oklahoma law required lien interests to be recorded on the certificate of title, which the dealer did.  Holly drove the car to Texas and obtained a certificate of title somehow, which did not show the lien.  Holly then sells the car to Innocent.  Dealer repossess the car.  Who should get it?

(2)   §9-303(b) “goods cease to be covered by a certificate of title at . . . the time the good become covered subsequently by a certificate of title issued by another jx”) and OC 6

(3)   §9-316(d)(this suggests that the Oklahoma certificate remains perfected) and (e) (under the best of circumstances, the OK dealer should have had 4 months to protect.) and OC 5

(4)   §9-337 and OC—this suggests that innocent purchaser takes free of the lien.  This will protect Neighbor but not the used car dealer. Otherwise, the Ok dealer has 4 months to perfect a new title.

iii)     Problem 306, p. 918

(1)   Armstrong buys yacht in state that does not have certificates of title for boats, requires filing.  ONB files.  Armstrong moves to a certificate of titles state, but he never gets a certificate.

(2)   How long will ONB’s perfection last?—here, the goods are never covered by a subsequent certificate of title.  9316e--

(3)   What if D moves from certificate of title state to a no certificate state?

(4)   9-316—SI remains perfected following a change in jxal law for: “the time perfection would have ceased under the law of that jx.”  Thus, 5 years in the original jx, or 4 months in the new jx.  Then under 9303 see if the goods become covered by a Certificate of title in a new jx. Here, they don’t, because he’s moving to a filing state.  §9-303 is an exception to the general rule.  But §9-337 protects innocent purchasers who are not in the business.

(5)   §9-322

9)      Priority—9-317, p. 919

a)      I. Simple disputes, p.

b)      Intro.  §9-317, an (unperfected) SI loses to:  holder of a priority interest under §9-322(priority among conflicting SI’s) and a lien creditor before SI is perfected or §9-203(b)(3) conditions are met & FS is filed, See OC 4.

i)        Buyer or lessee may take free IF value given & delivery taken without knowledge & before perfection.

ii)       9-317(e)  PMSI—When must seller file?

(1)   before or within 20 days after debtor receives delivery of collateral.  If so, PMSI wins over buyer, lessor, or lien creditor.

iii)     §9-322—(read commentary and Examples)—Conflicting SIs. Three rules: among two competing perfected SI’s, the first to file wins; among a perfected and unperfected SI, the perfected one wins; among two competing unperfected SI’s, the first to attach wins.

iv)     Problem 307, p. 919

(1)   Epstein borrowed 10k from ONB.  ONB never filed a financing statement.  A Martin’s Travel, a creditor, levies on the inventory.  Who gets paid first?

(2)   §9-317(a)(2)—A SI is subordinate to the rights of . . . a person who becomes a lien creditor before the earlier of the time . . . the SI is perfected.”

(3)   A “lien creditor” means a creditor that has acquired a lien on the property involved by attachment or levy.” §9-102(a)(52)—“

(4)   MA:  Martin’s Travel will get the money, not ONB. The lien creditor wins because ONB didn’t perfect.

v)      Problem 308, p. 920

(1)   §9-317—“An SI is subordinate to the right of ... a person entitled to priority under section 9322” §9-322(a)(2) and OC 3—“a perfected SI has priority over a conflicting unperfected SI.”

(2)   CN: First to file will win.  Bentham Bank filed first so it has priority.

vi)     First to file (not give value) wins.  Problem 309, p. 920

(1)   a. yes.  Both First and Last national Bank have security interests in the same collateral.

(2)   b. attachment is a prerequisite to perfection §9-308 and attachment cannot occur until the creditor gives value.  Which bank has the superior right to the inventory?  §9-322 OC 4, Example 1 (even though B gives value first, A has priority because it filed first.). “Filing may occur before the SI attaches.”

(a)    You can gain priority by filing a financing statement before the money goes out the door.  The attachment need not occur for priority to be established.  So, file immediately or before the money is given.

vii)   Future-advances.  Problem 310, p. 921

(1)   §9-204(c) and OC 5.  “Obligations covered by a security agreement may include future advances.”  “Collateral may secure future as well as present advances when the security agreement so provides.”

(2)   MA: nothing need be done. CN: notice filing lets you know that the security agreement covers future advances as well.  (NOTE: After-acquired property clauses don’t apply to consumer goods or commercial tort claims.)

viii)  Problem 311, p. 921

(1)   §9-204(c) “obligations covered by a security agreement may include future advances ... whether or not the advances are given pursuant to an agreement.”

(2)   §9-323(a) and OC 3 (“the time when an advance is made plays no role in determining priorities among conflicting SI’s except when a FS was not filed and the advance is the giving of valued as the last step for attachment and perfection.”), Example 1.  

(3)   CN: the first to files wins; but what if a creditor never filed a termination statement.  The world at large is on notice that there may be a SI.  Party files a new Security agreement but not a new financing statement, the first one is still out there.  Is it good? [yes]

ix)     Problem 312, p. 922

(1)   bank puts stamp collection in vault.  It has perfection by possession.  They give collection back. 

(2)   a.  Bank has priority because it has an SI through possession. §9-313.  Because possession makes that bank’s SI a perfected one, 9313, and priority among perfected SI’s is determined by the first to file or perfect, 9322, and the bank perfected first, the bank has priority.

(3)   b. §313(d)(perfection continues only while the secured party retains possession.), 9312(f) applies when goods are in possession of bailee (but bank/creditor is the bailee). CN:  §9-312(f) says the bank can give it back, but only “for the purpose of ultimate sale or exchange, or loading and unloading....”  Here, are they releasing it for the proper purpose? for ultimate sale? no, so they lose the SI.  They are unperfected and Dad is perfected, he filed a financing statement. 

(4)   c. MA: Father wins, because there was a lapse in perfection.  §9-308(c) – “An SI is perfected continuously if it is originally perfect by one method under this article and is later perfected by another method under this article, without an intermediate period when it was unperfected.”  [moreover, thought a security agreement was signed, the bank never filed an FS.  If it had filed a FS, it would have been continuously perfected and treated as though it had filed first.]

c)      Dragnet Clause— Under 9204(c) A security agreement may provide that collateral secured future advances whether or not the advances are given pursuant to commitment.  A dragnet clause  allows the SI to pick up unrelated obligations. 

i)        Gilmore test based on intention of the parties and the requirement that the later obligation be “related” “similar” or “of the same class as the original transaction.”  Is this still used?  See §9-204, OC 5—“the obligation need not be of the same or similar type as the earlier advances.”  A better method would be to specify the collateral in every loan agreement.

ii)       Problem 313, p. 922

(1)   D borrows money from the bank to buy cattle.  The Security agreement states that it is using the cattle as collateral not only for the PMSI but all other obligations now or hereafter owned to the bank.  The bank then issues him a creditor card.  He uses it to take a trip to Australian. 

(2)   9204 and OC 5.  It’s possible that the cattle would secure the credit card debt, particularly if they’re both used for a business purpose.  Even though this section suggests that the dragnet clause would cover this, but don’t rely on it, be specific about the collateral.

iii)     In re Wollin, p. 923

(1)   Dragnet Clauses under Oregon law.

(2)   R: No matter how the clause is drafted, the future advance to be covered must be of the same class as the primary obligation and so related to it that the consent of the debtor to its inclusion may be inferred.  Loans of the same character (i.e., all business loans or all consumer loans) do not necessarily meet the “same class” standard.  The future transactions must be so related to the primary loan “that the consent of the debtor to its inclusion may be inferred.

(3)   Here, we cannot find the VISA charges sufficiently related to the Pickup loan.  A loan to purchase a vehicle differs in the scope and solemnity from the miscellaneous charge typical of a VISA account.  It cannot be inferred that the debtor’s consent to have their vehicles secure the VISA acct.

(4)   CN:  auto loans and creditor card debt.  Held, no, they are not the same class.  The plain meaning argument was rejected.  It was narrowly construed.  The new version of the Code is very favorable to dragnet clauses, but this line of cases are still out there

iv)     Problem 314, p. 929

(1)   Probably not because that was not the parties’ intent.

(2)   CN: What happens when banks merge?  Debtor specifically keeps one class of debt at one bank, and another type of debt at another bank to avoid the effect of the dragnet clauses.  Then the banks merge.  It would be allowed under a strict reading of the dragnet clause, but it wouldn’t be equitable.  9204 OC 5.  Even though the security agreement, at the time they entered the transaction, they didn’t intend this.  But argue equity.

d)      PMSI’s—§9-317(e), p. 930

i)        A. The Basic Rule, p.

(1)   Consumer goods PMSI.  Where the collateral is consumer goods, no further steps are required for the PMSI to prevail over prior or later interests.  9309(1). 

(2)   All other PMSI’s.  For all other PMSI’s a SI must be perfected during a 20-day grace period following the buyer’s possession of the goods in order to take advantage of a relation-back of priority to that date.  §9-317(e) and §9-324(a).

(3)   §9-103—PM collateral is either goods or software, nothing else.  It can be consumer or non-consumer, it could be held by the seller of the goods or software, or by the bank who lends money for the purchase of the goods or software.

(4)   §9-309—PMSI has automatic perfection.  OC 3 “No filing or other steop is required to perfect a purchase money security interest in consumer goods.”  PMSI has priority over prior perfected SI’s in the same goods.  9324(a).  If Non-consumer goods, 20 day grace period to file for relations back.  §9-317(e) and

(5)   What if 2 PMSI’s? 9324(g), Price over value given, seller > lender.  What if you have two lenders?  go back to §9-322, first in time first in right.

(6)   INVENTORY PMSI §9-324(b) and (c)

(a)    PMSI [in inventory] takes priority over perfected SI in same collateral IF:

(i)      1. PMSI is perfected when Debtor gets possession of INVENTORY.

(ii)    2. holder gives authenticated NOTICE to conflicting SI holder. (so the other secured party can stop making advances)

(iii)   3. Other secured party gets notice not earlier than 5 years before Debtor gets inventory AND (so giving notice 6 years before debtor gets inventory won’t work)

(iv)  4. Notice states:  “Has or expected to acquire PMSI in INVENTIORY of D” and describes inventory.

(7)   Inventory Lender (inventory Financier).

(a)    Inventory turns over

(b)   lender makes periodic advances

(8)   PMSI

(a)    Seller of specific item of inventory

(b)   Lender to acquire specific item of inventory.

(c)    CN: What if you find that there’s already an inventory financer?  you may not want to make the loan. 

(9)   NOTICE protects the NonPMSI inventory Secured Party – If it gets notice, it won’t make further advances.  You can see the name of the other security holder, and you have to send him notice.  You have 20 days to file.  But the prior creditor has.. .

(a)    Notice to Conflicting Inventory Secured Party – Timing

(i)      §9-324 OC 5 – Notice.... “The perfected purchase money security interest achieves priority over a conflicting SI only if the holder of the conflicting SI receives a notification within five years before the debtor receives possession of the purchase money collateral.”

(b)   Where to send the notice OC 6.  to the address on the FS.

(c)    Consignments—PMSI §9-103(d). Notices that consignor has delivered or expects to deliver goods, properly described “on consignment” – sufficient.  Notice does not have to use the term “SI.”

(d)   Consignor’s interest vs. Other secured Party’s interest in goods.

(10)                       A PMSI gets priority over all other SI’s.

(a)    Problem 315, p. 930

(i)      Paramount Homes goes to furniture store and  buys furniture. Signs a security agreement.  First: is it consumer goods? no. business. 

(ii)    a.  MA: they have the policy not to file because usually furniture is consumer goods and therefore doesn’t require the filing of a SI to be perfected.  9309(1).  Doing so would be unnecessary expense.  here it is unwise because it’s not clear that the furniture would be classified as “consumer goods.”

(iii)   b.  MA: On June 10, Sophy’s will have priority.  On June 30, Bank will have priority. [bank has a 20 day grace period for non-consumer goods. The goods were purchased on June 8, so the bank has until June 28 to file, after which it loses it SI priority.]

ii)       Galleon Industries v. Lewyn Machinery, p. 931

(a)     Inadvertently, a machine was sent directly to the Buyer Galleon, instead of to the seller.  Seller sent him an invoice requiring payment in the next 30 days.  Buyer never paid.

(b)   Buyer Galleon had already entered into a security agreement with Bank which includes as collateral “all equipment and inventory owned or to be thereafter acquired.”

(c)    9204 provides that a dragnet SI attaches whenever the debtor acquires rights to the collateral covered by the Security agreement.

(d)   Because Seller sent an invoice asking for payment in the next 30 days, Buyer was a credit buyer.  A credit buyer acquires “right” in the property when possession is received from the seller.

(e)    Seller, if retaining title until payment, by delivery to a credit buyer reserved only a PMSI, such SI was never perfected by filing as required by §9-310(a).  Seller could have perfected its PMSI and received priority over the perfected SI of Bank by filing a financial statement at the time of delivery or within 20 days. §9-324(a).  Seller learned of the foreclosure and taking of possession by the Bank 2 days before it’s time to file had expired.  By filing at that time it could have gotten priority of the perfected SI of the Bank.

(f)     Because Buyer had sufficient rights, by delivery and sending of the invoice, the Bank’s SI attached.

(g)    CN: Lewyn’s agreement was for cash only.  No credit.  But manufacturer accidentally ships directly to buyer.  Lewyn sent an invoice saying net  30 days, this looks like company credit.  Could they have a PMSI?  yes.  There is a prior perfected SI held by a bank.  Nov 21 1969, Bank gets a security agreement covering equipment and inventory on after acquired property.  Lewyn could have checked the record and found this.  FS filed on Dec. 1, 1969.

(h)    june 22, 1970  Lewyn’s machine shipped

(i)      june 22 1970—lewyn’s invoice

(j)     bank forecloses on prior debt.

(k)   Lewyn says: “I retained title until paid.”  But title doesn’t mean anything.  Galleon had right in the machine.  9204 – vesting of rights in D, not passing of title.  Effect of invoice?  If you want to reserve title, you should still file an FS.

(l)      Lewyn had a PMSI – but never perfected by filing.

(m)  9309 (consumer goods automatic).  9317(e) file within 20 days.  9324—notice.  He had time to file—is this a lawyer issue? You should always file anyway, he still had two days to file.

(2)   Problem 316, p. 934

(a)    Store granted a floating lien over its inventory and equipment to Bank, which perfected its SI by filing a FS.

(b)   Store then bought a dog for $1200, paying $100 per month until paid off.  Seller and Buyer agreed that the store would not get title to Dog until all payments had been made.  When store stopped making payments, Bank seized all its assets, including Dog.

(c)    What remedies does Seller have?

(d)   MA:  the dog was “equipment.”  This is not consumer goods.  Agatha Shaw forgot to file.  She would be ok for 20 days.  She also has to give notice.  Store had not paid full price for dog, doesn’t matter.

(3)   Problem 317, p. 934

(a)    OC 3 to 9324

(b)   PMSI wins.

(c)    2-326(2)—“if delivered goods may be returned by the buyer even if they conform to the contract, the transaction is a “sale on approval” if the goods are delivered primarily for use.  Goods held on approval are not subject to the claims of the buyer’s creditor’s until acceptance.”

(d)   OC 3 to §9-324 – “”Once the lease is convered to a SI, filin a financial statement is necessary to protect the sellers SI.  The 20 day period does not commence unitl the goods become “collateral.”

iii)     B.  Inventory and Livestock, p. 935

(1)   Inventory.  9-324(b). Problem 318, p.

(a)    MCA had perfected SI in Inv of Clothing store.  Store owner contract to buy $4k in inventory.  Dec 10 sale, dec 11 notice.  PMSI filed Dec 11.  Goods delivered on Dec 12. 

(b)   a. Who has priority?  -- Madame because, notice and filed within 20 days.

(c)    b. If notice not received until Dec 12?  On time shot for Madame?  Notice is good for 5 years under 9324(b)(3).

10)  REVIEW—

a)      Scope of art. 9—“Security interests” in Personal property & Fixtures – §9101 (not real property).

b)      How to protect the Lender’s interest in Collateral?

c)      What do we want to avoid?  Ratner, secret lien.

d)      scope 9109, sale of intangibles, consignments, transactions regardless of form that creates a SI in personal property or fixtures by CONTRACT.  Is Materialman’s lien created by statute an Art 9 SI? no.

e)      Be Sure to identify (exam analysis):

i)        debtor

ii)       secured party

iii)     underlying obligation

iv)     collateral

f)        Definitions §9-102.

g)      Consignments and Art. 9. 

i)        Is it a disguised sale or true consignment?

ii)       Key: It is an art. 9 “security interest” that must be perfected to be protected IF the person to whom goods delivered is “not generally known by its creditors to be substantially engaged in selling goods of others” §9-109(a)(4) and OC 6.  Defined §9-102(a)(20).

h)      Leases & SI’s.

i)        Lease distinguished from SI.  Bright line test 1-203:

(1)   Transaction in form of lease creates a SI if lease is for a term and not subject to termination by lessee AND

(a)    Lease term=remaining life

(b)   Lessee bound to renew

(c)    option to renew for life with no or nominal consideration

(d)   Option to own.....

i)        Precautionary filing.  Play it safe.  §9-505.  Exclusion from art. 9. §9-109(c) and (d).

j)        Creation of SI

i)        First, Classify Collateral.  “Collateral” 9102(a)(12)

ii)       Property subject to a “security interest

iii)     Types of Collateral :  goods (movable)

(1)   Consumer goods, personal, family, household

(2)   Equipment—default

(3)   Farm products –D in “farming operation”

(4)   Inventory—leased, held for sale/lease, raw materials, WIP, material used or consumed.

(5)   Quasi-intangible property ”Piece of paper (Instruments /Promissory notes); investment property (stocks and bonds), documents (WH receipts/Bills of lading); chattel paper, L/C rights.

(6)   Intangible: no physical form.

(a)    Accounts

(b)   Deposit accts

(c)    General Intangibles

k)       Analysis

i)        First, is it covered by art 9?

ii)       Who are the parties?

iii)     Classify collateral

iv)     Review technical validity of the forms

(1)   1. Security agreement §9-102(a)(73)

(2)   2. Financing statement...

l)        Security agreement §9203

i)        Enforceable against D & 3rd parties IF:

(1)   Value given

(2)   D has rights in collateral AND

(3)   one of the following:

(a)    D has authenticated a security agreement with description of collateral

(b)   Possession.  Need not sign it, but must somehow authenticate it. The must also described the collateral.  Super-generic will not work in the Security agreement.

(c)    Control (deposit account)

m)    Financing Statement –UCC 1

i)        Document filed in Public filing office – SOS

ii)       Perfects creditor’s rights in Collateral

iii)     What’s required §9-502

(1)   Name of debtor

(a)    Debtor’s identity—what name to use?

(b)   Name change?

(c)    Collateral transferred

(d)   §9-507

(2)   name of secured party (if you have a PMSI you need to give him notice).

(3)   collateral indicated

iv)     Does a financing statement have to be signed? no.

v)      Extensive chapter 19 analysis posted.

vi)     Contract description of collateral required for Security agreement & Financing Statement.

n)      Perfection of SI

i)        Perfection by Possession

(1)   What is possession?

(2)   Goods in possession of Third Party?

(a)    Is notice to 3rd party enough?

(b)   When do we have to get acknowledgement?

(c)    Cf  §9312  and 9313.

(d)   §9-312 goods covered by a negotiable or nonnegotiable documents.   §9-313, where there is no document of title.

(e)    We need authentication, but we can’t make them authenticate it.

(f)     Temporary perfection for specific purposes §9-312(f).

(3)   What about motor vehicles? §9-311(a)(2)

(4)   What’s the problem with a gap in perfection?  You loss priority.

ii)       Automatic perfection

(1)   9309—perfection as soon as SI attaches 9203

(2)   PMSI in consumer goods

(3)   Supporting obligation 9308

iii)     Perfection by filing

(1)   This is the only method unless you fall into an exception §9-310

(2)   What if error in filing?

(3)   Mechanics of filing:

(a)    How long FS effective 9515

(b)   Continuation statement?  When can you file?

(c)    Termination Statement §9-513

(d)   Bogus Filings §9-513, 9509 OC 3

(e)    Can a D file a termination statement? yes.

iv)     Perfection by control 9314.

o)      Multi-state transactions

i)        conflicts provision.  9301

ii)       Where should we file FS?

(1)   Debtor’s location for where to perfect

(2)   Collateral’s location for effect of perfection.

(3)   9307

(4)   Place of business,

(5)   principal residence

(6)   One or more placed of business

(7)   Chief executive office

(8)   DC – certain non-USdebtrs.

p)      Priority

i)        Simple disputes

ii)       PMSI

(1)   Inventory and livestock

(a)    Inventory financier has perfected interest in existing and after acquired inventory.

(b)   D buys new inventory and gives seller PMSI

(c)    PMSI (super-priority wins IF

(i)      9-324(4 requiremnts)

1.      PMSI perfected when D gets possession

2.      Authenticated Notice sent to prior lien holders

3.      Prior lien holder receives notice within 5 years BEFORE D receives possession

4.      Content of notice: has ____PMSI in described inventory.

iii)     Kunkel v. Spragy National Bank, p. 936

(1)   2 creditors: same cattle as collateral

(2)   Hoxie feeders—PMSI

(3)   Bank—prior perfected SI? held, yes.

(4)   Did the debtor have “right in the collateral”?—Feed lot sold the cattle but kept the collateral.  Debtor never received the cattle.  Debtor could determine the sale price and if they could be sold.  Debtor also had the risk of loss. 

(5)   Remember §9203.  Hoxie kept the cattle -- D had some control.  Held, Bank did have SI.  PMSI wins even though no notice—why?

(6)   D files BR

(7)   Should the trustee win?  if BR was filed before perfection, but not under this fact situation.

(8)   Should the bank win?—because it had a prior SI.

(9)   Should the PMSI win?

(10)                       CT says: sale had occurred; but passage of title doesn’t control.

(a)    hoxie had constructively deliver cattle to D;

(b)   Morken had title to cattle;

(c)    Hoxie had SI and was bailee; D had “rights in collateral”  and  could give Bank a SI.

iv)     NOTES

(1)   Can the creditor have PMSI if it retains possession of inventory?  yes

(2)   Creditor with SI in inventory would be more likely to perfect by Filing –Why?

(3)   Timing of PMSI notice:  after cattle sold and slaughter; D never took possession  §9-324(b) and OC 5 “If the debtor never receives possession, the five year period never begins, and the purchase money SI has priority, even if notification is not given.”  It’s not as important to give notice because Debtor doesn’t have possession.

(4)   What about cash proceeds?  Even if there is a delay in payment, can it be a cash sale?

(5)   p. 946 about weigh and grade pricing.

v)      Conflicting PMSI’s—vendor wins.  Problem 319, p. 947

(1)   Has buys inventory and finances it two ways.  Standard gets a PMSI and Files.  MDNB also loans money to finance inventory and Files—part of proceeds pay standard.  Mar 28 – Hans contracts to buy 3k in goods, down payment of 1.5k.  Mar 28 – hans borrows 1.5k DP from MDNB

(2)   Both send notice

(3)   April 2 – goods delivered

(4)   Who wins? 9324(g) and OC 13.  Standard Wholesalers wins because it is the seller of the goods and therefore has a PMSI.  It enables him to acquire.  In OC 13 talks about favoring the vendor.  Equities favor the vendor

vi)     Consignment.  Problem 320, p. 948

(1)   What about consignor?  §9-103(d) and OC 6(the interest of a “consignor” is a PMSI in inventory), 9319.  Barbara’s interest is a PMSI in inventory. So she would have a super-priority PMSI, but she still doesn’t win, why not? Because she doesn’t follow the requirements of §9-324(b).

(2)   Barbara deliver pottery to Gallery for sale

(3)   ONB has floating lien on inventory

(4)   Can bank get her pottery?

(5)   Consignor is purchase money CR – §9103(d)

(6)   But she shed to follow 9324(b)

(7)   Could argue consignee was “generally known to sell goods of other’s” 9-102(a)(29) – so not art 9 consignment

(8)   Was it consumer goods?  No, art. 9 consignment

q)      III.  Control and priority, p. 948--2 types of collateral securing a loan.

i)        Investment property –§9-102(a)(49)

(a)    Certificated securities; uncertificated securities; Securities Entitlement (account with stockbroker); commodities contract and account.

(2)   How do we perfect and SI in investment property?

(a)    Filed financing statement, or

(b)   Control—this will not prevail.  Control could be:

(i)      take delivery with indorsements

(ii)    uncertificated – Deliver, records reflect that I have the SI in it.

(3)   Problem 321, p.

(a)    Goldbury buys 100 shares of stock.  BBB holds at Clearing Corp but marks its records.  ONB wants to loan money secured by stock

(b)   8106(d) OC 4

(c)    Have the account changed so the Bank owns the acct or 3rd party agreement.

(d)   9328(3)

(e)    First in time to control wins.

ii)       B.  Control over deposit accts, p. 950

(1)   Problem 322, p. 950

(a)    §9-104—Control of Deposit Acct.

(b)   Second party is LNB -- the bank holding the deposit.

(c)    2 party agreement:

(i)      bank will comply with instructions from secured party without D’s further consent.  9104(a)(2).

(ii)    Security party is named as owner of account. 9104(a)(3).

(d)   Priority – §9-327.

(i)      Control over non-control

(ii)    first in time to control wins

(iii)   BUT bank that holds the deposit wins (unless bank is named as acct holder 9104(a)(3))  Under 9-327 this sets up the priority  over a deposit acct.

(iv)  Control wins over not control; if two control, prior in time over later; if in a bank acct, then bank holders over everyone else.

r)       BUYERS, p. 952--

i)        General Rule.  §9-201(a)—Except as provided otherwise by the UCC, a security agreement is effective according to its terms between the parties, against purchasers of the collateral and against creditors.

ii)       Exceptions

(1)   9-320(a).  Buyer of Goods.  A buyer in the ordinary course of business . . . takes FREE of a SI created by a buyer’s seller, even if the SI is perfected and the buyer knows of its existence. (BIOCOB)

(2)   “Buyer in the Ordinary Course of Business”- §1-201b9 -- is a person who buys goods in good faith w/o knowledge…and seller cannot be pawn broker and seller must be in business of selling goods of that kind and in accordance with usual customary practices in that business (not farm products…primarily deals with inventory)

(3)   9-320e- Buyer doesn’t take free if CR has possession of the goods

(4)   When buyer will take free of prior SI in SLIDES** (9-320a and 1-201)…

(a)    BOC,

(b)   Doesn’t buy in BULK,

(c)    Does not take in satisfaction of prior debt,

(d)   Seller’s business is selling this kind of goods,

(e)    Good Faith and w/o knowledge that purchase will violate the security interest,

(f)     Not farm products,

(g)    Seller’s prior CR doesn’t keep possession,

(h)    Competing SI is created by Seller

(i)      ****Know this for exam

(5)   §9317(b)

iii)     Problem 324, p. 952

(1)   a.  MA: 9320(a)—as a buyer, Ms. Consumer takes free of the SI.

(2)   b.  MA: No, it makes no difference whether Ms. Consumer knows of the SI.  9320 OC 3. So, it wouldn’t matter if she had known that ONB had the perfected security interest in the inventory BUT it may matter what she did know about their interest (i.e. if a term in the security agreement would be violated b/c the agreement said No sales);

(3)   c. MA: Not in the ordinary course of business. This is debatable…there are many stores that frequently run liquidation sales, so look if store does this a lot to make her a buyer in the ordinary course of business;

iv)     Bad faith.  International Harvester v. Glenenning, p. 953

(1)   International had a SI in 3 tractors, executed by Barnes.  Int’l alleges conspiracy between Barnes and Glendenning.  Barnes pretending to sell Glendenning 2 tractors.  Glendenning took the tractors to Louisiana and sold them there.

(2)   I: was Glendennign a buyer in the ordinary course of business?

(3)   Glendenning was a former International employee and knew about their floor plan program.

(4)   Glen had known Barnes, an International dealer,  for 2 years.  Glen was approached about buying 3 of Barnes’ tractors for 18k.  He counter offered 16k, which Barnes accepted, though Glen knew they were worth 22k.  Barnes gave him a bill of sale stating he had purchased the three tractors for $24, 700 with cash payment of $16k and balance of $8,700. Also reciting that Glen traded in 4 tractors with values totaling $8,700, so the total consideration was shown as paid. The next day, Barnes wrote up a second bill of sale stating the same as the first, and Glen handed over the 16k.  Then the collection manager for Int’l called, questioning Glen about the transaction.  Glen told him he had traded in 4 tractors and paid 16k cash for the three.

(5)   Glen’s defense was that he was a BIOCOB under 9-320(a).

(6)   Held, Glen did not buy in good faith and therefore was not a buyer in the ordinary course of business.

(7)   Appeal for wrongful conversion of 3 tractors; P was a holder of a duly perfected security interest in 3 new International tractors

(8)   Was G a buyer in the ordinary course of business? No, G had many years of experience as a tractor dealer, a salesman and one of the most active traders of farm equipment in the County; he purchased the equipment for considerably less than its value and made no investigation of International’s security interest

(9)   Look on slides

(10)                       *Bad faith can sometimes alter Article 9 priorities

(11)                       [instert lease review here]

v)      Possession Prevents buyer from “taking free”.  Problem 325, p. 958

(1)   Deering MillikenàMill FabricsàTanbro Fabrics

(2)   Mill buys from Deering but leaves goods in Deerings possession.  Mill then sells to Tanbro.  Mill goes bankrupt.  Deering refuses to deliver to Tanbro.

(3)   9320(e) “Subsection (a) and (b) do not affect a SI in goods in the possession of the secured party under §9313.”  OC 8 “this prevents a buyer of goods collateral from taking free of a SI if the collateral is in the possession of the secured party.”

(4)   Before taking possession of fabrics, MF contracts with DM to buy them and sign security agreements; MF then sells the goods to T wholesaler and they pay MF for these; Textiles still sitting in warehouse and MF goes bankrupt; Who will win here? 9-320 OC 8...Buyer of goods collateral prevented from taking free of a SI if collateral is in possession of the secured party

vi)     Problem 326, p. 959

(1)   F ONB had a perfected SI in all cars on SM’s lot. SM owed money in past due insurance premiums to HT who came to buy a new car from SM. SM gave HT a check for the debt but then HT endorsed it back over to SM when he saw a new car he wanted to buy. Is HT a buyer in the ordinary course of business so as to take free of ONB’s SI? No, this is acquiring the goods in satisfaction of a prior debt so there cannot be a BIOCOB here.

vii)   First National Bank and Trust v. Ford Motor credit Co, p. 959

(1)   Ford Motor Credit had a floor plan with Dealer.  Dealer issued title to two of its cars to its officers and obtained a loan from the bank for the wholesale price, giving bank an SI in them.  Dealer then placed the cars in the new car lot.  The bank knew that these cars were not being sold in the ordinary course of business.

(2)   Held, the bank is a financier, not a buyer.

(3)   Floor plan arrangement- selling cars to individual purchasers so co. can pay off credit company and credit company has a PMSI in the cars

(4)   Do some of these purchasers take free of the companies SI? Are they buyer’s in the ordinary course of business? Did they buy in good faith and w/o knowledge that purchase would violate a security interest? The bank here worked very closely with dealership so are not BOC

(5)   If they  had been, bank could win with its PMSI in the cars and if a buyer in the ordinary course bought these cars

(6)   Analysis: 2 separate credit transactions (id parties and the collateral…

(a)    1. borrower is car co. and seller is car manufacturer and financer is credit company with a secured interest in inventory of the cars…

(b)   2. If purchased by a buyer taking free of the 1st security interest then move to 2nd transaction b/w company and the bank…bank did take a PMSI in the 3 cars but the borrowers were never buyers in the ordinary course of business b/c they worked within the company)

viii)  Problem 327, p. 965

(1)   LorriàArthuràAnn

(2)   A buys new car on credit from L’s car city which took a PMSI in the car. A was a used car dealer by profession but he had purchased the car for his own private use; but he parked the car in his lot and one day sold it for cash to Ann; A didn’t mention to her that it was his personal car; so Ann sued L’s car city demanding that it release title…Ann is a buyer in the ordinary course here; Is Lori’s out of luck here? The SI remains perfected in the proceeds so they should go back after Arthur for the proceeds

ix)     Problem 328, p. 965

(1)   Spa pledges 50 promissory notes; bank takes possession of the notes; Spa gets release of 10 notes to present for payment; Spa sells note to ONB…who wins? This goes to the 20 day grace period for taking the collateral back into possession for certain purposes…9-331- HDC of negotiable instrument not affected; Look at HDC’s defenses available under 3-305…

(2)   9312(g)-the SI in certificate or instrument remain good for 20 days if released for presentment for collection.

(3)   9331—a HDC takes priority over an earlier perfected SI as provided under 3-302, and 3-305.

x)      Problem 329, p. 965

(1)   9-320(b) & OC 5. This is meant to cover a sale of consumer goods by a consumer to a consumer.

(2)   MA: no, Voice of Japan cannot repossess, even though it has a PMSI in the receiver.  It has not yet filed a a financing statement, and the receiver was sold from one consumer to antoher, therefore Nancy takes free of the SI.

(a)    Can V get this from N? Is N protected in the ordinary course provision? …if buy (1) w/o knowledge (2) for value and (3) primarily for their personal use and (4) before filing of a financing statement (some stores have polices not to file financing statements); If V had a prior filed FS this section wouldn’t apply.

xi)     Problem 330, p. 966

(1)   a.  cf 9201, 9-401(b)(“An agreement between the debtor and secured party which prohibits a transfer of the debtor’s rights in collateral or makes the transfer a default does not prevent the transfer from taking effect.”) and 9-315(a)(1)(“a SI continues in collateral notwithstanding sale, lease, or other disposition unless the secured party authorizes the disposition free of the SI.”).

(2)   MA: buyer takes subject to the SI.  Not “ordinary course of business” because seller was not in business of selling ice cream machines, only ice cream.

(3)   b. yes, then the buyer could take free of the SI.  9-317(b)—“A buyer takes free of an SI if the buyer gives value and receives delivery of the collateral without knowledge of the SI and before it is perfected.”

(4)   c. Bank knows of and approves the sale.  9-315(a)(1)—buyer takes subject to the SI, “unless secured party authorizes the disposition free of the SI.” Thus, secured party may be able to go after collateral and the proceeds after it is sold to a buyer

xii)   Problem 331, p. 967

(1)   §2403, 9201(“except as provided in the UCC, a security agreement is effective against purchaser of the collateral”), and 9317(e)—If a person files a FS with respect to a PMSI before 20 days after debtor takes possession, the SI take priority over the rights of a buyer which arise between the time the SI attaches and the time of filing.”

xiii)  Problem 332, p. 967

(1)   Waiver of SI?  9-315(a)(1) Can purchaser take free from the security interest here? This is not covered by 9-320a b/c it is farm products; Graham would argue there is a waiver of the proior security interest or approval of the sale…

xiv) Clovis Nat’l Bank, p. 967—Bank waived its SI by

(1)   There is a farm products exception as mentioned in 9-320a.  Go to federal statute for preemption- FSA of 1985 (p. 1667 in code book).  Texas doesn’t have a central filing system under this act. 

(2)   §1631- deals with lenders to people engaged in farming operations…LOOK IN SLIDES

s)       V.  Leases, p. 982

i)        Lease defined  2A-103(1)(p)—“a transfer of right to possession for a period in return for consideration.”

ii)       Distinguished from SI  §1-203--

(1)   Bright line test:  It’s a SI IF for a term & lessee can’t terminate AND

(a)    Original lease term=economic life

(b)   lessee is bound to renew or buy

(c)    lessee has option to buy or extend for nominal value

(2)   if it is not a SI under this test, fact/circumstance

iii)     Problem 335, p. 982

(1)   ONB loans $ to HCC, HCC gives SI in equipment, including “after acquired.”  ONB files a financing statement.  HCC leases equipment to NCC.  IS NCC subject to ONB’s existing SI in equipment?

(2)   §2A-307—creditor takes subject to the leasehold interest unless his SI attached before the lease began in which case “a lessee takes a leasehold interest subject to a SI held by a creditor of the lessor.”  this makes it look like creditor will win.

(3)   §9-321(c) lessee in the ordinary course of business. “A lessee in ordinary course of business takes its leasehold interest free of a SI in the goods created by the lessor, even if the SI is perfected and the lessee knows of its existence.”  This doesn’t mean that the lessee is going to win, because it’s not in the ordinary course of business.  The construction company is not in the business of leasing goods.  So this provision will not defeat the bank’s prior SI under 2A-307.  Not ordinary course because it’s a one time lease situation.

iv)     Problem 336, p.  982

(1)   Sale leaseback—2A-308(3)—whether I structure it as a sale or leaseback, the result is the same, the same amount of money is being paid to the bank.  Usually people do this for tax purposes.  This looks like it’s not a true lease.

(2)   Hcc buys equipment, sells it to ONB, leases it back from bank.  HCC then borrows $ from ANB – collateral is equipment.

(3)   HCC defaults on lease, ONB tries to repossess.  ANB says, I have an interest in the same equipment. If true lease, ONB wins over ANB.  But is it a true lease?  This is a SI, not a true lease, because it’s for the entire economic life of the grading machine, therefore it’s a disguised sale. therefore ANB wins.  Here debtor retained possession of collateral.  It was an SI therefore it should have filed a financing statement.

(4)   ARTICLE 2A leases. §2A-308—nothing in this article impairs the right of creditors. 

t)        VI.  Article 2 Claimants -- Sales (of goods)

i)        When can the seller win over a subsequent creditor of the purchaser of goods?

ii)       Problem 337, p. 983

(1)   Rights of unpaid Seller.  Art. 2 & 9.  Jack buys luggage from Alligator Fashions.  PMSI & filed financing statement §9-103.  Priority §9­-324 (a) (PMSI wins over a nonPMSI) and (b)(PMSI in inventory)

(2)   Jack sells luggage to Mark for cash; and Jack misrepresents the product;  Mark revokes acceptance §2-608 (right to revoke) and claims SI §2-711(3) (on rightful rejection, the buyer has an SI in the goods).  Then seller says, “no, I assert a SI in the luggage because I paid for it.”  We have two competing SI’s the PMSI and the Article 2 SI.

(3)   Alligator Fashions  calls loan – can it repossess?

(4)   What happens long as Mark has possession?—“§9-110—A SI arising under 2-711 is subject to this article.  However, until the debtor obtains possession of goods: the SI is enforceable, and has priority over a conflicting SI created by the debtor.”   Until the original debtor gets it back, Mark is going to have priority.  But as soon as he gets it back, Mark loses the SI.  What does Mark have to do to perfect.

iii)     Problem 338, p.  984

(1)   Author decides to publish book. Gets an Order from Cowskin Books, it receives 200 books.  They can’t pay.  What can author do? §2-702—Seller’s remedies on Discovery of Buyer’s insolvency: if already delivered, seller can reclaim the goods.  Does misrepresentation matter?  Shipping costs?

(2)   What if Cowskin’s inventory subject to prior perfected SI?

(3)   What should the author have done?  PMSI & notice §9-324(b). CN: It looks like the prior perfected SI in inventory will win.  What should he do? go through the provisions of Art. 9 and consider it a  PMSI.  why?  he’s the seller of the books extending credit to enable the buyer to purchase the books. He’s ok for 20 days but then he should file.  Thus, he should do to be sure he’s not taking subject to the preexisting SI in inventory.  So he will win because a PMSI.  BR code might allow him to get the books from TRUSTEE.

iv)     In re Arlco, p. 985

(1)   CIT, holder of perfected SI in AR and INV, is a good faith purchaser for value.  Galey’s interest as Reclaiming Seller is subject to CIT’s rights

(2)   What could the seller do?  §9-324(b)

(a)    PMSI review.  PMSI in goods has “super priority” over prior perfected SI’s §9-324(a), if perfected when D takes possession OR within 20 days.

(b)   Consumer goods.  PMSI – don’t have to file, automatic perfection but  should file? §9-309.

(c)    Equipment PMSI – 20 days to file

(d)   Inventory PMSI §9-324(b) –special case.

(i)      PMSI holder must send authenticated notice within 5 years before D takes possession

(ii)    Notice required IF prior filing Financial statement.

u)      VII.  Statutory lien holders, p. 994

i)        When can the holder of a prior perfected lien find itself out of luck?  §9-333 (Possessory liens—priority over other SI’s).  Statutory lien for repairs.  Who wins?  Bank or repairman?  What if the car is in the shop?

ii)       Release of possession?

iii)     Does the creditor have to consent to repairs?  -- If I know Bank has an indorsement on my certificate of title, do I need the bank’s consent to have oil changed? no.

iv)     What if the charges are too high? §1-203.  can they keep my car until I pay this fee? They are subject to a good faith restriction.

v)      VIII. Fixtures, p. 995

i)        Intro: What are “fixtures”?  §9-102(a)(41)—“goods that have become so related to real property that an interest arises in them under real property law.”

(1)   Pure annexation test:  How hard to remove fixture from real property?  the harder to remove, the more it’s a fixture.

(2)   Intent of parties test:

(3)   Trade fixtures—necessary to business

(4)   Assembled industrial plant.  If it’s part of your operation and included in your physical plant.

(5)   Priority general rule is that fixture SI is subordinate to a conflicting interest of an encumbracner of the related real property other than the debtor.§9-334(c).

ii)       Where to file?  General rule.  With the real property record.  §9-501(b), if equipment, file UCC 1 with SOS; if fixtures, then file in the county clerk where the property is located.  What’s the solution?  File in both places.

iii)     Exception.  Transmitting Utility.  Problem 341, p. 999

(1)   §9-501(b)—File an SI in a fixture in the county clerks office

(2)   §9-102(a)(80)—“transmitting utility” means a person primarily engaged in the business of operating a rail road...”

(3)   CN: this includes a pipe,  What is the General Rule about Perfecting a Security Interest in Fixtures – Where to File?  Railroad is “Transmitting Utility”  9-501(b) – Central Filing

iv)     Problem 342, p. 1000

(1)   Simon borrows $4 M to build a building from CSB, granting CSB a mortgage in the real estate “ and all appurtenances or things affixed thereto, now present or after acquired.” The mortgage was filed in the real property records.


(a)    name of debtor,

(b)   name of creditor,

(c)    indicates collateral. 

(3)   But if fixtures  also 9502(b)—

(a)    indicate covers this type of collateral,

(b)   indicate to be filed in real property records,

(c)    describe

(d)   Name of Record Owner of Real Property IF D does not have interest in real property

(4)   FILED MORTGAGE is effective as financing statement re: FIXTURES IF 9-502(c)– indicates goods covered that are or will be fixtures

(5)   CN: Is the furnace a fixture? yes, it should be filed in the property records.

(6)   Is the mortgage effective as a FS? MA:  yes, record of the mortgage is effective as a financial statement.

(7)   Technical sentence to include:  9502(b)(2)—it must “indicate to be filed in the real property records” so people know where to look and the clerk knows where to file it.  Describe real property just as you would as it in a mortgage.

(8)   Will Blast prevail over CSB?

(a)    §9-334(d) PMSI in fixtures prevails over other encumbrances of real property “if the debtor has an interest of record in or is in possession of the real property and: the SI is a PMSI; the encumbrance arises before the goods become fixtures;  and the SI is perfected with fixture filing within 20 days of the goods becoming fixture.”

(b)   §9-334(h)—“A SI in fixtures is subordinate to a construction mortgage if a record of the mortgage is recorded before the goods become fixtures and the goods become fixtures before the completion of the construction.” OC 11 “(h) expressly gives priority to the construction mortgage recorded before the filing of the PMSI in fixtures.”

(c)    §9-334(e)(1)—A perfected SI in fixture has priority over a conflicting interest of encumbrancer or owner of real property if:”

(d)   9-339—This article does not preclude subordination by agreement by a person entitled to priority.”

v)      Problem 343, p. 1000

(1)   refrigerator, computer.  Fixture filing vs. Mortgage

(2)   Refrigerator

(3)   Computer for office use?

(4)   9-334(e)(2)—If readily removable, a holder of fixtures filing might win.  Only:  factory /officer machines, Equipment not primarily used in operation of real property, or replacement of domestic applicant that are consumer goods.

(5)   BUT refrigerator is not consumer goods and is original installation.  See OC 8.  This applies to situations were a consumer, or a renter, wishes to buy and install his own refrigerator. If the seller of the consumer good refrige perfects by any method then they’ll take priority over the mortgage.  This applies only to replacement of consumer goods, not original one.

(6)   9-334(f)(2)—“A SI in fixtures whether or not perfected, has priority over a conflicting interest of an encumbrancer or owner of the real property if the debtor has a right to remove the goods as against the encumbrancer or owner.”

vi)     Lewiston Bottled gas v. Key Bank, p. 1000

(1)   F: 90 AC’s purchased and installed in A hotel.  The Grand Beach is owned individually by DiBiase.

(2)   Held, Bank’s mortgage has priority over LBG’s PMSI in the units. 

(3)   in 1986, Bank loan 2.5 M in exchange for a mortgage on DiB’s property.  Recorded in county.  1987 – DiB buys AC’s in return for a PMSI.  The contract states the AC’s will remain personal property notwithstanding their attachment to real property.  Recorded with SOS and county, but in the name of Grand Beach Hotel, not as DiBiase. Later in 1987 Bank gives second loan, for second mortgage.

(4)   Fixture test:  1) physically annexed, 2) adapted to the use to which the real estate is put 3) annexed with intent to make it part of realty.  Held, the AC’s were installed into the wall and removal would leave a whole in the wall; the AC’s provided climate control for the comfort of the guests; intent of the parties is an objective test.  Held, these AC’s are fixtures.

(5)   Priority:  Bank’s first mortgage takes priority over LBG’s SI in the units unless LBG’s SI falls within one of the exceptions in 9-334.  9-334(d), but this requires perfection of the PMSI, and here it was never perfected because they didn’t do a fixture filing, which requires filing in the same place as a mortgage would and that the financing statement contain the name of a record owner.  Here, it was filed in the right place, but not in the name of the record owner.

(6)   CN: what was in the financing statement?  Name of the buyer, yes, Grand Beach; name of creditor, yes, indicate collateral; but if fixtures you need also 9502(b) the name of the record owner, who was DiBiase. [they left this out.]

vii)   Problem 344, p. 105

(1)   9-334(e)(3) “a perfected SI in fixtures has priority over a conflicting SI if the conflicting SI is a lien on real property obtained by legal proceedings.”

(2)   MA:  Simon’s creditors will have priority.

(3)   OC 9—“a perfected fixture SI takes priority over a subsequent judgment lien or other lien obtained by legal proceedings, even if no evidence of the SI appears in the relevant real–property records.”

(4)   CN: the fixture filing will win over the judgment lien because it was perfected before the judicial lien arises.

viii)  Problem 345, p. 1005

(1)   §9-334(e)(2)(C)—a perfected SI in fixtures has priority ... if before the good become fixtures, the SI is perfect by any method (ie, “fixture filing” or “UCC filing”) and the fixtures are readily removable replacement of domestic appliances that are consumer goods.”

(2)   CN:  tenant buys a refrigerator on credit from Easy Credit – PMSI.  9-334(f)(2)

(a)    Does the D have the right to remove?  examine the lease

(b)   Refrigerator is consumer goods and it is a replacement

(3)   Can be perfected by any method.

ix)     Problem 346, p. 1005

(1)   Tuesday buyer trash compactor on credit from Easy Credit.  Remodels kitchen to accommodate it.  Installed may 7.

(2)   9-309 OC 3—“A fixture filing is required for priority over conflicting interests in fixtures to the extent provided in §9334.”

(3)   On may 7, what do you advice Easy Cred?  do a fixture filing within 20 days.

(4)   EC has to file even though this is a PMSI in consumer goods because they will become fixtures.  9309 OC 3.

(5)   File before fixture installed or within 20 days.  9334(d)(3) and IF EC does this, it wins.

(6)   9334(e)(2)(c) does NOT apply because not replacement.

(7)   MA: no automatic perfections.

(8)   Should the FS contain, in addition to debtor’s name, the name of the owners?  9-502(b)(4)—“to be sufficient, a financing statement which is filed as a fixture filing and covers goods that are fixtures, must satisfy subjection (a) and also: if the debtor does not have an interest of record in the real property, provide the name of the record owner.”

(9)   MA:  yes. here, Tuesday (debtor) does not have an interest of record in the real property (He’s a tenant), and therefore the name of the owner (Simon) must be provided.

(10)                       9-334(d)—20 days.  Perfection occurs within 20 days of the goods becoming fixtures.

w)    Repossession/enforcement

i)        Problem 347, p. 1006

(1)   If you have priority you can get your fixtures. Pay for

(2)   Enforcement. 9-604 and OC 2—

(3)   (d)—reimburse other security holders, not the debtor, for the damage.  But you might end up paying more than you benefit.

(4)   Don’t’ have to pay replacement value or diminution.

ii)       Maplewood Bank v. Sears, p. 1006-{This case is overruled]

(1)     I: whether a first mortgage or a fixture financier is entitled to priority in the funds realized from a foreclosure sale of the mortgaged premises. Held, the first mortgage is entitled to priority

(2)     F: bank holds the first mortgage.  Sears holds a PMSI in fixture which when perfected has priority of the conflicting interest of an encumbrancer or owner of the real estate.  The PMSI of Sears in the goods or chattel which became fixtures gives it a “super priority” as to those goods or chattels which became fixtures.

(3)     What remedies are available to a PMSI lien holder upon deful by debtor?  9604 (old version) gives sears two options: removal of the fixtures or foregoing removal of the fixtures.  It does not entitle Sears to receive from the proceeds obtained at the foreclosure sale, the difference between the value of the realty with the new kitchen and the value of the realty after the new kitchen has been removed.

(4)   CN: Sears was a fixture financer, claims an interest in the remodeled kitchen and asked to be paid out of the foreclosure proceeds.  Held, you can get your fixture or not get it.  In other words, Sears could have gone down to rip out the kitchen.  But a house without a kitchen isn’t worth much to the mortgagee nor the.  and the used kitchen doesn’t do Sears any good.

iii)     NOTE 9604(b) is meant to overrule this case.  OC 3. It makes clear that a SI in fixtures may be enforced either under real property law or under any of the applicable provisions of Part 6, including sale or other disposition either before or after removal of fixtures.

x)      Accessions and Commingling, p. 1011

i)        Accessions.  §9-335--Accession occurs when goods are fixed to other goods (as opposed to realty).   can take a SI in accession.  SI continues when goods becomes accession.  SI in accession is subordinate to perfected SI in whole.  If priority, may  remove accession after default.  Reimburse other CR (not D) for physical injury.

ii)       Commingling.  9336

(1)   Eggs in a cake – identity is lost.  No SI in separate element.  If collateral is commingled, SI attaches to whole;  SI remains perfected IF perfected before.

(2)   What if more than one SI attaches to the product or mass?  Perfected over unperfected.  IF all are perfected:  Equal in rank in proportion to value of collateral at time of commingling.  EX: if eggs cost 200, flour 300, and cake sells for 1000, then I have 2/5ths of a 1000.  Hopefully worth more  secured then without.  Only get proportional interest not a windfall.  Look at examples in OC.  §9-336 Example 1,

y)      X.  Federal Priorities for debts & Taxes, p. 1012

i)        A. The Federal Priority Statute.  General federal priority – ALL federal claims.

(1)   Tax, Contract, federal insurance Loans, guaranties.  These are paid first in BR.  Statute is absolute.  But courts have subordinated some interest that are choate. Gordon v. Campbell.  3 part test for whether a prior lien is CHOATE:

(a)    ID of lienor

(b)   amount of lien

(c)    description of property

(2)   “all personal property used in business” not definite – Floating lien won’t win.

(3)   1953: Lien is Inchoate if Creditor has neither title nor possession.  CN: but is it possible to have a perfected SI without possession? yes, filing FS.

(4)   US SCT has not found prior liens CHOATE.  But Lower federal court held that Most SI’s perfected under art 9 are CHOATE & win over US claims.

ii)       B.  Tax liens—Basic Priority, p. 1014

(1)   Federal tax lien arises upon assessment.  Covers all taxpayer’s property, real/personal, now owned or after-acquired.  Secret lien?

(2)   Priority EXCEPTION: 

(a)    Purchaser,

(b)   Holder of SI,

(c)    Merchant’s Lien or

(d)   judgment liens. 

(3)   These will win over the IRS assessed tax lien, Until federal Tax lien Filed in accordance with State law.

(4)   US v. Estate of Romani, p. 1014

(a)    The federal priority statute provided that a claim of the US govt “Shall be paid first,” when a decedents’ estate cannot pay all its debts.  31 usc 3713.

(b)   I:  Whether that statute requires that a federal tax claim be given preference over a judgment creditor perfected lien in real property even though such a preference is not authorized by the Federal tax lien act.  26 usc 6321.

(c)    F:  judgment creditor had a lien on decedent’s estate for $490k.  Estate was worth only $53k. 

(d)   Held, the judgment creditor’s duly perfected lien has priority.

(e)    CN: General Federal priority

(f)     What about judgment creditor’s perfected lien on Real Property? 

(i)      Jan. 25, 1985 – Judgment granted and recorded. 

(ii)    Perfected – CHOATE – Nothing more to do. 

(iii)   IRS files a series of tax liens. 

(iv)  1913:  Federal Tax Lien shall not be valid vs. Mortgagee, Purchaser, or Judgment Creditor UNTIL Notice is FILED

(v)    Romani dies – Jan. 13, 1992

(vi)  Estate is insufficient

(vii) UNFILED TAX LIENS – Secret Liens

(viii)                       Prior perfected judgment lien wins

iii)     C.  Tax Liens and After-acquired property, p. 1024

(1)   Problem 351, p. 

(a)    On Jan 1 ONB Perfected SI in inventory, AR, instruments, Chattel paper of Auto Dealer.  Smiles Motors fails to pay federal tax.

(b)   IRS files Tax LIEN – OCT 1. 

(c)    Nov. 1 and Dec 1 – new shipment of cars arrive to Smiles Motors.

(d)   Does filing o Tax Lien Cut off bank’s floating lien?

(e)    Exception permitted for “Commercial financing”  - constitutes existing perfect security and takes priority over filed federal tax lien IF new collateral Acquired within 45 days after tax lien filed AND loan make without knowledge of tax lien filing.”

(f)     The November shipment would probably be protected but probably not the Dec. 1 shipment, because not within the 45 day period.

(g)    CN: Here, we are talking about the 45 day window because they perfected before the tax lien was filed.  Future advances can also fall within this 45 days window.

(2)   45 Day Rule--9323(b)

(a)    Advances made by a perfected art. 9 creditor win over intervening lien creditor, for 45 days after lien established.

(b)   9-323(d) –NON-ordinary course buyers are protected from an SI in  future advances made with knowledge of purchase OR “45 days after purchase.”

(c)    FLIP:  Secured creditor is protected for 45 days

(d)   9-323(e) You can make a commitment to make advances during the 45 day window.

(e)    9-323(f)  Lease

(f)     Read commentary about when the test is ADVANCE DATE or DATE of perfection.

(3)   Plymouth Savings v. IRS, p. 1026

(a)    Hospital owes Shirley.  Shirley owes Bank and IRS.

(b)   Bank files FS – 9/22/93

(c)    Bank loans$ --4/13/94, secured by cash proceeds from Services.

(d)   IRS assesses FICA liability 9/19/94 and FILES 12/19/94

(e)    IRS assesses FICA liability 2/2/95 and IRS files 2/14/95

(f)     3/31/95 contract between  Shirley and Hospital

(g)    Does she have to perform services within 45 days?

(h)    After Acquired property?

(i)      Court says Bank’s prior perfected SI may trump IRS filed lien.

(4)   Problem 352, p. 1033

(a)    PMSI 6 months after IRS filed tax lien against D.

(b)   Who wins?

(c)    Rev Rul. says PMSI.  PMSI attaches upon receipt.  Thus, at the time the taxpayer acquired the equipment, it is encumbered by the PMSI.  As soon as it comes into the hands of the debtor it already has the PMSI stuck to it.

(d)   SO a PMSI will have priority over the IRS lien even when the IRS has filed a lien, because it attaches as soons as it comes into the purchasers hands.

iv)     D. Tax Liens and Future Advances, p.

(a)    Future advances have priority for 45 days if (1) prior perfected SI in existing property secured the advance AND (2) no knowledge of filed tax lien.

(b)   IRC

(2)   Problem 353, p. 1034

(a)    Hat factory owned my Marie.  Bank finances; SI in all equipment.  Advances “from time to time as it thinks prudent”.  Financing statement filed. 

(b)   Aug 1, She owes $1,500.

(c)    Equipment: 2 machines.

(d)   Aug 1 IRS files lien.

(e)    Aug 31 – Bank loans another 10k.

(f)     This is within the 45 day window, secured by previously owned equipment owned before the IRS filed it tax lien.

(g)    What if someone buys the equipment out from under the bank?  This is not an ordinary course buyer because marie is in the business of selling hats not [equipment]....A non ordinary course buyer would win if the bank knew about the purchase and the bank has 45 days to make sure the machines are still on debtor’s premises.  9323(d).

(h)    What about BUYER of felt Press.  Does the bank know?

11)  BANKRUPTCY AND ART. 9, p. 1035

a)      The trustee’s status, p.

i)        Problem 354, p. 1036


b)      II. Preferences §547, p. 1037

i)        Problem 355, p. 1041

F June 8 – Business borrows $80k from ONB; SI in Equipment worth $100,000

July 18 – Bank Files Financing Statement

July 19 – Business Files Bankruptcy

Can the Trustee turn the Bank into an Unsecured Creditor on the theory that the DELAYED PERFECTION is a preference?--YES

IF Bank is perfected, extraordinary payments are not avoided.

What if the Bank were undersecured?  Would routine payments be preferential? NO – Ordinary Course.  547(c)(2).

ii)       Problem 356, p.

June 1 – Bank loans Kermit $1,000 to buy Banjo; Buys Banjo Nov. 15

Bank files Financing Statement on Nov. 20; Bankruptcy Petition – Nov. 21


Is this a Preference?  It is within 90 days

Is it a Voidable Preference?  NO.  547(c)(3)(PMSI)


iii)     Problem 357, p. 1042

(1)   §§544(a)(2), 547(c)(4)

John borrows $1,000 from Bank;  Signature Loan – No Collateral

Sept. 25 – John makes $500 payment to bank

Assume not in Ordinary Course

Oct. 4 – He borrows $300 more & gives SI in sword collection

Bank never files Financing Statement

Bankruptcy Filing – Nov. 8, 2013

CR has to give back $500 - $300 new advance = $200


(3)   Phase 1  2023

(a)    Dß$1k C

(4)   Phase 2  Sept 25, 2013

(a)    Dà $500ßNOT PROTECTED!!!!

(5)   Phase 3  Oct 4

(a)    Dß$300ßprotected by 547(c)(3)-“new value” “not secured”, debtor did not make an “otherwise unavoidable transfer”

(b)   DàSI (unperfected)

(6)   BR Nov 2013


c)      III. The Floating Lien in BR, p.

i)        §547(c)(5)—Test:  compare the debt/collateral ratio at two points: 90 days before the filing of the petition (or the first date within that period where a debt was owned if the loan was made within the 90 day period),  and the date of filing the petition.  There is a preference to the extent that the creditor’s position has improved within this period.

ii)       Problem 358, p. 1043

(1)   Debt: 20k

(2)   March 1, inventory $8.

(3)   May 28, BR, inventory worth 20k

(4)   PREFERENCE=$12k

iii)     In re Smith’s Home Furnishings, p. 1043


Bankruptcy & Article 9

Bankruptcy Code – Federal Law

Chapter 7 – Liquidation

Chapter 11 – Reorganization

Chapter 13 – Plan for Individuals w/ Regular Income

Chapter 12 – Family Farmers

Voluntary Bankruptcy Commenced by Filing a Petition in Bankruptcy in the Bankruptcy Court

Bankruptcy & Article 9

Automatic Stay – No more actions to collect pre-petition debt

Can’t Repossess by self-help or judicial process

9-609 Rights are Stayed

Must go through Bankruptcy Court

362 – Petition for Relief from Automatic Stay

Motion to Lift Stay

PRIORITIES in Bankruptcy

DISCHARGE is a fresh start for the Debtor


Bankruptcy Trustee

Bankruptcy Trustee – Chapter 7

Collects Property of Estate, Reduces it to Money, Pays Expenses of Bankruptcy & Creditors

Trustee under Ch. 13 or Ch. 12 – Disburses money paid in under the plan

Chapter 11 – Usually Debtor in Possession (DIP) – No Trustee

Plan Confirmed

Pre-Bankruptcy Creditors must file “Proof of Claim” in Ch. 7 Bankruptcy

Claim cannot be paid unless it is “Allowed”

Claims are Unsecured or Secured

Example:  Bank submits a Proof of Claim based on pre-petition debt of $10,000

            Collateral Security is valued at $5,000.

            Bank has a secured claim for $5,000 & unsecured claim for $5,000.

Secured Claims get paid first & Unsecured claims are paid pro rata (usually nothing or cents on the dollar)

Bankruptcy is the ultimate test for creditors

Importance of “Secured Claims”

Critical to Perfect a Security Interest under Art. 9

BUT subject to Trustee’s “Avoidance Powers

1.  BC 544 (a) – “Strong Arm” Clause – Trustee takes the position of a “hypothetical judicial lien creditor” at the moment of filing.  CN: if you haven’t taken all the perfection steps.

BUT BC 544 allows perfection after Bankruptcy to defeat the Trustee’s rights IF Article 9 gives retroactive effect to perfection.

2.  Subrogation of Trustee – 544(b):     Trustee Stands in the Shoes of an Unsecured Creditor who can defeat a secured claim. 

Moore v. Bay (1931):  A Security Interest Voidable under state law is voidable IN ITS ENTIRETY in Bankruptcy.  All Creditors get the benefit VOID AGAINST ONE, VOID AGAINST ALL  Bankruptcy Trustee’s Powers.


Voluntary & Involuntary Preferences; In Non-Bankruptcy:  Race of Diligence among CRs; Bankruptcy:  Equality of Distribution

5 Elements of a Voidable Preference

Transfer of an interest in property of the D:

1. To or for the benefit of a Creditor

2. For an antecedent debt

3. Made while D was insolvent

4. Made

A.  Within 90 Days before Filing Bankruptcy Petition; 

B.  Within 1 Year before Filing Petition IF INSIDER

5. Enables CR to receive more than CR would receive IF

Ch 7 Liquidation; Transfer had not been made; AND Creditor Received payment under Ch. 7 Rules


Why have a preference period?  Bankruptcy philosophy, even playing field for all creditors.

What is the EFFECT of the Trustee’s Avoidance of a Preferential Transfer?

If the preference was a payment in cash, the Trustee gets it back into the estate

If the preference was obtaining an Article 9 security interest, it is nullified

If the preference was a judicial lien, it is nullified

Exceptions to Preference Avoidance

Exceptions – BC 547

ONE:  Contemporaneous Exchange for New Value

Insolvent D can Buy Goods & Pay for them Contemporaneously


TWO:  Ordinary Course Payment of Debts

            When is it not ordinary course? 

            Medium of payment changed?



            Creation of Security Interest for NEW VALUE

            1.  Given at the signing of a Security Agreement describing the collateral

            2.  New Value given by Secured Party

            3.  To enable D to Acquire Collateral

            4.  Used by D to acquire Collateral

            5.  Perfected on or before 20 days after D gets possession


FOUR:   Creditor extends NEW Value and receives an interest in D’s Property IF Not otherwise avoidable


FIVE:   Perfected Security Interests in Inventory, Receivables or Proceeds of either are not avoided EXCEPT TO EXTENT:  Measure value of collateral 90 days before filing and on date of Filing & Secured Creditor cannot get more .

This addresses FLOATING LIENS


SIX:  Statutory Liens not avoidable under 545


SEVEN:  BFP of child support, alimony, etc.


EIGHT:  In consumer bankruptcy, aggregate payments of less than $600.


Fraudulent Transfers – BC 548 & Uniform Fraudulent Transfer Act

Trustee can avoid fraudulent transfers within one year of the Bankruptcy Filing

ACTUAL FRAUD – actual intent to hinder, delay, or defraud any entity to which the D was or became indebted

Badges of Fraud:  Insider Relationships; D Retains Possession; Inadequate Consideration; Financial Condition Before & After Transfer; Pattern; Chronology of Events; Secrecy


            D gets less than Reasonably Equivalent Value (REV) AND was insolvent on date of transfer.  Idea is not to deplete the estate and not get reasonably equivalent value


Foreclosure Sales as Fraudulent Transfers – less than reasonably equivalent value

DURETT (5th Cir. 1980) – BUT S CT 1994 focuses on Process not “Market value” BFP V. RTC. FMV can’t be determined from a forced sale because no willing buyer willing seller.

Problem 354

Korean Restaurant – many unsecured Creditors

April 17 – Bank loans $10,000 secured by Equipment

April 18 – Restaurant files Bankruptcy

1. One Hour Later, Bank Files Financing Statement

TRUSTEE Can Avoid Security Interest – Bank is Unsecured.  The SI never takes effect.

2. What if one second before?  Bank is OK, substantially contemporaneous exchange of value – not preference

3. What if PMSI? 20 days allowed to perfect.  9-320, 9321

Preferences – Problem 355

June 8 – Business borrows $80k from ONB

Security Interest in Equipment worth $100k.  Bank is oversecured.  This is avoidable.

July 18 – Bank Files Financing Statement

July 19 – Business Files Bankruptcy. 

Can the Trustee turn the Bank into an Unsecured Creditor on the theory that the DELAYED PERFECTION is a preference?—YES.  If you delay this long then it may not be an exchange for new value.  So the bank needs to file immediately.

IF Bank is perfected, extraordinary payments are not avoided.

What if the Bank were undersecured?  Would routine payments be preferential? NO – Ordinary Course.  Extraordinary payments is when you pay off a big chunk all at once.  If the bank is fuly secured, then it has a right to all of that collateral.  If Debtor pays off more of the loan, then it will deplete the assets of the estate but it will be a commensurate reduction in liabilities.

NEW Facts for this problem:

March 1—Debt $19k

Value of collateral $5k

May 28 – Debt 19k

Value of Collateral $20

Position improved $14k


March 1 – Debtor 12k

Colateral value 19k

May 28 00 Debt 22k

Collateral value 20

Undersecured amount is 2k at both mearus dates, so no avoidable preference.

Preferences – Problem 356

June 1 – Bank loans Kermit $1,000 to buy Banjo

Buys Banjo Nov. 15

Bank files Financing Statement on Nov. 20

Bankruptcy Petition – Nov. 21


Is this a Preference?  It is within 90 days

Is it a Voidable Preference?  NO.  because he filed within the 20 days.


Preferences – Problem 357

John borrows $1,000 from Bank;  Signature Loan – No Collateral

Sept. 25 – John makes $500 payment to bank; Assume not in Ordinary Course

Oct. 4 – He borrows $300 more & gives SI in sword collection;  Bank never files Financing Statement

Bankruptcy Filing – Nov. 8, 2013

CR has to give back $500 (no ord. course) - $300 new advance = $200

Preferences –Problem 358—Floating liens in BR

Bank has a perfected SI in inventory of Bookstore;  Bookstore owes bank $20k.

March 1—collateral worth 8k

May 28 Bookstore files BR petition

May 28—Collateral worth 20k

What can the trustee do?  547(c)(5)  bank has  perfected SI....

This is an improvement in position test.  An over-secured/fully secured claimant cannot improve his position, so if he is over-secured at 90 days before the floating lien.

Fraudulent Conveyances – Problem 359

Austin gives right to receive royalty payments to WIFE as collateral for the “the many debts I owe....”  the is fraudulent.


NonConsensual liens and the Trustee

BR trustee has power to avoid judicial liens acquired.....

12)  Proceeds, p. 1055

a)      I. The meaning of Proceeds, p.

i)        §9-102(a)(64)—“whatever is acquired in exchange for the collateral; whatever is collected; rights arising out of collateral; claims arising out of loss of collateral; insurance payable by reason of collateral.”  Basically anything resulting from the sale or exchange of the collateral but also under (e) insurance.

ii)       cash proceeds. 9-102(a)(9)

iii)     §9-315(a)(2)—“a SI attaches to any identifiable proceeds.” 

iv)     Is attachment of CR SI in proceeds automatic or must it be claims in a Security agreement? Automatic.  §9-203(f)(“Attachment of an SI gives you the right to the proceeds and is also an attachment to the supporting obligation”) and §9-315(c)(“A SI in proceeds is a perfected SI if the SI in the original collateral was perfected.”). 

v)      Problem 360, p. 1055

(1)   F: Rosetta and Champ Motors.  See §9-103 PMSI.  Bank has a perfected SI in the inventory of Champ motors.  9324(b) procedure.

(2)   Does the bank’s SI continue in the car it is delivered to Rosetta? §9-320(a), she buys in the ordinary course therefore she takes the car free of the SI.  But the bank is not totally out of luck, because they still have a SI in the proceeds, the check, the promissory note, and the trade in. §9-315(a) an SI continues in collateral, notwithstanding sale even if there’s some disposition of the collateral, unless we have an exception.

(3)   a. Does the Bank’s SI continue in the car once it is delivered to Stone? 

(a)    §9-320(a)—“a buyer in ordinary course of business, takes free of a SI created by the buyer’s Seller, even if the SI is perfected and the buyer knows of its existence.”

(4)   b. What are the proceeds of the car sale?  --old car, $200 check, promissory note.

(5)   Attachment automatic.  c. 9-203(f)—“The attachment of a SI in collateral gives the secured party the rights to proceeds proved by §9-315 and is also attachment of SI in the supporting obligation [guarantee].”  CN:  Once the bank has an attachment to the car, we have a right to the proceeds when the car is sold.  9315(c) and perfected SI in inventory gives an automatic SI in the proceeds.

vi)     Farmers Cooperative v. Union State Bank, p. 1056

(1)   Cockrum operated a farm. Union Bank had a SI covering “livestock, and supplies used or produced in farming operations whether now or hereafter existing or acquired.”

(2)   Coop had a PMSI for feed.  Cooperative filed a financing statement for each transaction, which covered “all of debtor’s hogs now owned or hereafter acquired, including offspring.”

(3)   Cockrum defaults on both obligations.

(4)   COOP claims it’s right to the hogs is superior to the Bank’s under 9-324(a), which provides that a PSMI has priority over a conflicting SI.  PMSI is defined in 9-103 as an SI

(a)    take or retained by the seller of the collateral, or

(b)   taken by a person who makes advances enabling the debtor to acquire rights in the collateral

(5)   Does COOP have a PMSI in the hogs? no, only in the feed.  But are the hogs “proceeds” of the feed, i.e., “whatever is received upon sale, exchange, collection or other disposition of the collateral or proceeds”? under 9315(a).

(6)   Held, ingestion and biological transformation of feed is not a type of “other disposition” within the contemplation of §____.  hog are not proceeds of feed.

(7)   COOP argues it should still win under 9-339—that an SI continues if the collateral is commingled with the mass.  Held,  the feed is not manufactured, processed, assembled or commingled; it has merely lost it’s identity through ingestion.

(8)   CN: Bank finances a farming operation.  the Bank takes an SI in farm products.  Farmer enter’s several SI’s with COOP for feed.  but the bank takes an interest in the livestock, and the COOP takes it in feed.  Though the bank may have an SI in all the farm products, the COOP has a PMSI in the feed which is a super priority.

(9)   So, if this were all, then the COOP would have priority.  But the hogs ate the feed.

vii)   Proceeds and cars.  Art 9 does not usually apply to SI in insurance policies as collateral UNLESS insurance payments are PROCEEDS .....  If a car owner sells a car and deposits money in bank account, that is proceeds and SI attaches. §9-315(a)(2) and §9-315(b)(2) tracing.

viii)  Problem 361, p. 1060

(1)   If a Creditor has a SI in Farmer’s crops, and the govt pays farmer not to grow any crops, are these payments proceeds?

(2)   What about govt payments NOT to grow crop?  Secured Creditor has perfected SI in crops--- IS govt payment proceeds? Court are split.  A good lawyer would spell it out clearly in the security agreement.

b)      II.  Priority in Proceeds, p. 1060

i)        Problem 362, p. 1060

(1)   Auto Audio sells and installs car stereo systems (Accessions).  Lender finances INVENTORY.  When AA sells in the ordinary course of business, it gets:

(a)    cash,

(b)   credit without a contract (AR), and

(c)    signed promissory note and security agreement (chattel paper). 

(2)   Financer makes a loan – Collateral is AR and chattel paper; Financer knew about Lender’s loan and inventory SI; Financer files a FS and has possession of chattel paper.  Lender gets inventory; both claim AR and chattel paper.  Are these proceeds of inventory?  yes.

(3)   Which creditor prevails?  Lender will get inventory.  But what about the AR and Chattel paper, which are proceeds of the inventory.

(4)   §9-322(a) AR

(a)    First to file or perfect

(5)   IF the bank filed first and re-perfects a SI in proceeds under §9-315(d) within 20DAYS, its priority would continue.  IF SI in AR filed in same place as inventory not need to re-file. 9315(a)—“SI attaches to any identifiable proceeds of collateral.”

(6)   Chattel paper –Financer wins §9-330.  §9-330(a)“A purchaser of chattel paper has priority over a SI in chattel paper which is claimed merely as proceeds of inventory subject to an SI IF: in good faith and in the ordinary course of the purchaser’s business (buying notes was Financer’s business), the purchaser gives new value and takes possession of the chattel paper.”

(a)    MA:  here, the chattel paper is claimed merely as proceeds of inventory, Financer has given new value, in the ordinary course of its business and it has taken possession, but HAS IT TAKEN IN GOOD FAITH if it “knew about the prior loan and inventory SI”?  Yes, only if it knew that it was taking in violation of the Lender’s security agreement.  If the bank really wanted to protect itself it could have taken a SI in the chattel paper.

(7)   9315(d)—A perfected SI in proceeds WILL become unperfected on the 21st day after interest attaches.

(8)   9-322(a) and (b)(“the time of filing as to a SI in collateral is also the time of filing as to a SI in proceeds.”)

(9)   Continued perfection.  So when do you need to filed again within 20 days to keep you SI in the proceeds?

(10)                       Usual situation:  Secured Lender. D sells collateral, gets gash.  As long as it’s cash, Lender can trace.  If D uses cash to buy something else, CR must refile.  But original filing could cover new item.  EX: original filing covers inventory and equipment.  D sells inventory, gets cash and buys equipment.  CN: this is second generation proceeds.  He may just buy new inventory, in which case you don’t have to worry about refilling.  Also, the original filing could spell out the new items.  If it doesn’t I will likely have to refile to continue to claim an SI in the second generation of proceeds.

ii)       Problem 363, p. 1060

(1)   A/C co borrows $15k from Financer to purchase new furnace – to be used as equipment (but it could be qualified as a fixture in which case you file with the county clerk) BUT AC co sells it to a customer and installed it.  Financer had an PMSI.  Was the sale to customer in the ordinary course such that the customer takes in the ordinary course?  it take free of, because the AC co is in the business of selling furnaces.  AC co gets 17k check and deposits it in bank.  So the Financer loses its SI in the furnace but they could get the SI in the proceeds.  BIOCOB.

(2)   Bank acct:

(a)    $81 orig balance

(b)   $17k cash proceeds check

(c)    balance $1,7081

(d)   Plus $5k deposit

(e)    balance $2,2081

(f)     minus $5,040 withdrawal

(g)    Balance $17,041

(3)   Are the proceeds still in the bank? §9-315(b) tracing.  Lowest intermediate balance.  It never dropped below $17k so the Financer can claim its proceeds.  If it had dropped $17k then the bank couldn’t claim this.  BUT 9340 favors depositary banks right of setoff over secured party unless control by acct in own name. If I’m the financer and I realize my proceeds are in the bank, I could probably get those proceeds unless the bank decides to setoff the proceeds, unless I have the bank acct in my own name.

(4)   General rule: in tracing commingled funds in which another had a legally recognized interest, called the lowest intermediate balance.

(5)   a. 9315(b)—if the proceeds are not goods, then the secured party can identify the proceeds by tracing., OC 3—lowest intermediate balance rule.

(6)   b. Bank’s Right of setoff funds which represent proceeds over this another party has an SI.  The bank’s right of setoff is not affected by a SI in a deposit account maintained with the secured party.  §9-340(b).

(7)   Explaining lowest intermediate balance:  common law rule used in  tracking trust funds.  under the UCC:  the fact that cash proceeds are deposited into an acct and commingled with other funds does not destroy their status as “proceeds” to which a secured party may have a claim.  If the D withdraws funds from an acct in which there are commingled funds.

iii)     HCC Credit v. Springs Valley, p. 1061

(1)   Tractor sales sold 14 tractors and used the $199,122 proceeds to pay off a debt it owed to Bank.  But HCC had a SI in the tractors and the proceeds from the tractors.  Because the payment to the bank was not in the ordinary course of business, HCC is entitled to the $199,122.

(2)   R: §9-315 provides that a” SI continues in any identifiable proceeds including collection received by the debtor.”

(3)   Pre 1999 revision case. HCC credit PMSI in tractors and proceeds.  Lindsey tractors agreed to pay HCC immediately upon sale of tractors, but did not require segregation into a separate acct.  Lindsey tractor sold 14 tractors.  Customer paid Lindsey 199,122.  $199,122 is proceeds of tractors.  Lindsey deposited the 199,122 into acct at bank.

(4)   22,870 balance