Business Organizations Warren/10th ed. Outline
William D. Warren
Walt and Warren's Secured Transactions in Personal Property, 10th (University Casebook Series)
SECURED TRANSACTIONS[edit | edit source]
ATTACHMENT: A relationship between value and collateral with authenticated agreement concerning the security interest usually represented in the form of a security agreement.Authentication Requirement
- 9-102(a)(7): To sign or to present intent to adopt or accept a record, to attach to or logically associate with the record an electronic sound, symbol, or process. § 9-203(a): A security interest attaches to collateral when it becomes enforceable against the debtor.
- 9-203(b): A security interest is enforceable if: (1) value has been given, (2) debtor has rights or power to transfer, and (3) one of the following conditions are met: (i) authenticated security agreement describing the collateral, (ii) in secured party’s possession, (iii) security certificate delivered to secured party, or (iv) security party has control (for deposit accounts, electronic chattel paper, investment property, or letterof-credit rights)
The Composite Document Rule: Multiple document executed by the same parties, at or near the same time and concerning the same transaction or subject matter, to be read and construed together in a single contract. [In Re Bollinger Corp. (1980)]Description of Collateral (9-203(b)(3)(a))
- 9-108(a): A description is efficient if it “reasonably identifies what is described.” § 9-108 and 109: Generic descriptions are okay (like accounts, inventory) but not super generic (like everything debtor owes).
If specific property is listed in the financing statement, you cannot claim more in bankruptcy even though the security agreement may include more.After Acquired PropertyAn after-acquired property clause can be added except in consumer transactions and commercial tort claims. No new agreement is necessary when there is property acquired after the agreement. [§ 9-204(a)]There is a rebuttable presumption that a security interest in inventory or accounts receivable include after-acquired inventory or accounts receivable because of their constant outgoing and incoming nature.This presumption is rebutted when (1) the security agreement specifically says no after-acquired property included, (2) evidence of intent to limit, or (3) collateral doesn’t frequently turn over. [In Re Filtercorp, Inc.]Commercial Tort claims are not included. You can get proceeds from a lawsuit only if it damages the collateral you have an interest in. [Bayer CropScience] Proceeds Proceeds are automatically included in security interest.
- Acquisitions/Lease/License/Disposition (sell it)
- Collection/Distribution (payment on account)
- Other Rights Arising out of the Collateral
- Claims arising out of harm
- Insurance Obligation
To obtain proceeds, it must be a supporting obligation collateral: (§ 9-102(a)(78))
- Letter of Credit Rights
- Secondary Obligation 3. Performance of or payment 4. Account, etc.
Value: Almost anything can be consideration. New value under § 9-102(a)(57) is (i) money, (ii) money’s worth in property, services, or credit, (iii) release of an obligation.Rights in CollateralYou don’t have to have full rights in collateral to establish collateral. A parent company may grant an enforceable security interest in an asset of its subsidiary. [In Re WLHomes]
PERFECTION: Perfection is a legal conclusion indicating that a security interest is enforceable against a third party.
Choice of Law: The general rules under 9-301 is that the location of the debtor governs perfection, effect of perfection, and priority of security interest for intangible collateral. For tangible collateral in which perfection is by possession, the law of the location of the collateral governs perfection.But for tangible property in which perfection is by filing, the law of the location of the debtor governs perfection, but the location of the collateral governs the effects of possession and priority. Location of DebtorUnder § 9-307(b), a debtor that is an organization is located at its place of business. If it has more than one place of business, then at its chief executive officer. The location of an individual debtor is at their place of residence. For corporations, a corporation’s location is at its place of incorporation. Foreign registered organizations are located in D.C.Perfection in Consumer Goods?(1) By FilingThe filing must be authorized by debtor (usually inferred by the security agreement) only collateral listed in the security agreement. You must have the exact name of the (i) debtor, (ii) secured party, and (iii) collateral.Filing OfficeThe filing office may refuse for any of the reasons in 516(b) but could accept anyways. There could be some instances when someone relies on the absence of correct information, in that case, the person who relied is above the person who messed up the filing. Collateral must be described, and super generic is okay.
Perfection: Proceeds A perfected security interest in the original collateral automatically continues in the proceeds whether or not the financing statement mentions proceeds. (§ 9-315©)If a filed financing statement covers the original collateral, the security interest in the proceeds continues until the financing statement either lapses or is terminated (§ 9315(e)(1)) so long as (i) the proceeds are collateral in which a security interest may be perfected by filing in the same office in which the financing statement is filed AND (ii) the proceeds are not acquired with cash proceeds (9-315(d)(1)) [inventory -> $ -> equipment]A security interest in cash proceeds continues indefinitely, so long as it can be identified. (§ 9-315(d)(2))If the debtor uses cash proceeds to buy new collateral, such as inventory or equipment, the security interest continues in the collateral for 20 days UNLESS the financing statement indicates the type of collateral purchased. (Extensions to the 20 day rule are in § 9-315)Name of Debtors in Filings
Individual Debtors Option A: 44 states required (i) unexpired drivers license of state of principal residence, and (ii) personal name and surnameOption B: requires (i) individual’s name, (ii) surname and first personal name, and (iii) unexpired drivers license.Registered OrganizationsUse name that is registered on secretary of state’s database.Unregistered OrganizationsGeneral partnerships and sole proprietorships are filed under individual’s name or partnership’s name.Post-Filing ChangesTransfers of CollateralSecurity interests remain with transferred collateral (9-507) unless the secured party authorizes the sale free of the security interest. (9-315)[Don’t forget, if you can track proceeds, just take those not the collateral.]Entrusted Merchant RuleConsumers assume they are taking goods free and clear so we protect this assumption in 2-403(2).
- 9-507(a) provides that secured party’s financing statement remains effective with respect to the collateral that debtor sold even if “the secured party knows of or consents to its disposition.”
- 9-316(a)(3) provides that the security interest remains perfected for one year after transfer.
Name Changes: There is a 4 month grace period after a name change to fix the filing. You can leave it if its not misleading, but if the debtor’s name is different then its misleading.Change in Business Structure – New DebtorOne is a “new debtor” if it becomes bound as debtor under 9-203(d) by a security agreement previously entered by another person. They are not required to enter into a new agreement.
- 9-508(a) provides that a financing statement naming the original debtor is effective to perfect a security interest in collateral of the new debtor to the extent that the financing statement would have been effective had the original debtor acquired the collateral.
(2) By Possession
- 9-310(b)(6) empowers secured party’s to perfect by taking possession of goods, instruments, and documents of title. (Like a PLEDGE)
Secured party can hold personally or through an agent. An agent holder must have an agency agreement. Possession by a Bailee
- 9-313© says a secured party does not have a perfected security interest in property in possession of a third person unless the person (i) acknowledges that it holds possession of the collateral, (ii) for the secured party, and (iii) does so in an authenticated record (signed writing or electronic.)
(3) By ControlControl (9-314(a)) is an alternative wa of perfecting a security interest in the following types of collateral:Deposit Accounts (9-104); Electronic Chattel Paper (9-105); Investment Property (9-106); Letter-Of-Credit Rights (9-107).The key to the control concept is that the purchaser has the present ability to have the securities sold or transferred without further action by the transferor.
|Exclude others, cant control of dispose||You have the legal title (cant be transferred) and the underlying rights|
Deposit Accounts Control is the exclusive means of perfecting a security interest in deposit accounts as original collateral (9-312(b)(1))Control in deposit accounts can be obtained in three different ways (9-104(a)(1)-(3))
- When the secured party is the depository bank at which the account is held, 2. When the debtor, secured party, and bank agree in an authenticated record that the bank will comply with the secured party’s instructions with respect to that deposit account, or
- When the secured party becomes the bank’s customer with respect to the deposit account. (replaces the original owner)
Perfection in Consumer GoodsArticle 9 continues the rule that purchase money security interests in consumer goods is automatically perfected at the time of attachment, with no requirement of filing (9309(1))Why should you file anyways?Garage Sale Exception (take free unless filing)Outside of the Purchase Money Security Interest you need consentExceptions
- Automatic perfection does not apply to: motor vehicles, boats, and the like under certificate of title laws.
- Credit and debit cards are mostly unsecured. (Some retailers who issue their own credit cards retain security interests in their agreement.)
Goods Covered By Certificate of Title
- 9-311(a)(2) says filing a financing statement is neither necessary nor effective to perfect a security interest in a good in which certificate of title laws require security interests to be indicated on the certificate as a condition or result of perfection. (except when goods are held as inventory. Then, a secured party may perfect under normal rules applied to inventory.)
- 9-303©: the local law of the jurisdiction under whose certificate of title the goods are covered govern perfection.
If a certificate of title to a vehicle is issued by a state other than the state where the vehicle is required to be registered, a lien noted on the title is still valid. [Meeks v. Mercedes Benz Credit Corp. 8th Cir. 2001]A creditor need not reperfect its security interest in titled goods if the owner-debtor moves to another jurisdiction, so long as the certificate of title from the prior jurisdiction remains effective.PRIORITYOnce a security interest attaches, secured party wins over debtor and unsecure creditors.Perfected security interests win over unperfected security interests.First to File or Perfect RuleIf there are two perfected security interests, first to file rule governs. (9-322(a))Even if the security interest is unperfected, first to file will win as long as they eventually perfect. - Write down filing date and perfection date and pick who’s firstFuture AdvancesValue given by the creditor to the debtor after the initial security agreementIt is best practice to include a future advance clause in every security agreement to save priority. Future advances are included in the security agreement, not the financing statement. To make use of a future advance clause, the financing statement must include a broad description of the collateral to encompass future collateral. Future advances do not work with narrowly described collateral in the financing statement.Note: You can retrigger a no longer working financing statement with a new security agreement as long as it is within 5 years of the financing statement.PMSI or Purchase Money Security InterestsThis concept is favorable to senior lenders because it encourages business growth by financing for specific collateral such as equipment or inventory.
- 9-324(a): A PMSI in goods has priority over a conflicting security interest in the same goods and their identifiable proceeds if the PMSI is perfected (1) when the debtor receives possession of the collateral, or (2) within 20 days thereafter. (file financing statement)
PMSI in inventory grants priority under conditions in 9-324(b) with notice. The 20 day period begins when (1) the debtor has possession of the collateral and (2) the debtor is actually indebted to the creditor. [Brodie Hotel Supply, Inc. v. US 9th Cir. 1970]Transformation Rule Consumer Context Future advance and after-acquired clauses destroy PMSI. Business to BusinessFuture advances and after acquired clauses do not destroy OMSIs but additional collateral is not included in the PMSI super priority. PMSI in InventoryYou must send a notification to interested third parties when debtor gets possession or 5 years before. (don’t let them leave with the inventory) Notice must include (i) who sent it, (ii) intent to acquire PMSI, and (iii) the specific inventory.Lien Creditors
- 9-317(a)(2) says an unperfected security interest is subordinate to the rights of a lien creditor. A bankruptcy trustee is considered a lien creditor.
Conflict with a Future AdvanceBefore 45 days, a security interest is senior no matter what. After 45 days, the security interest is only senior if they had no knowledge of the lien.
- 9-323(b) concerns the priority of future advances and the 45 day rule.
Buyers and Lessees of Inventory and NoninventoryNoninventory
- 9-317(b) says buyers and lessees take subject to perfected security interests (default rule) and § 9-315(a) provides that the security interest continues in the goods sold or leased and in any identifiable proceeds.
What if they buy pre-perfection?
- 9-317(e) grants unperfected purchase money secured parties a 20 day relation back period after the debtor has received delivery of the collateral in which to perfect by filing.
I take free of security interest unless (i) I know, (ii) I didn’t give value, or (iii) they file within the 20 day relation back period. Inventory
- 9-320(a) says that buyers and leases of inventory collateral take free as long as buyer in the ordinary course of business and buyer purchases from entity who created the security agreement unless buyer knows the sale violates the secured party rights.
Buyers of Consumer Goods
- 9-309(a) provides for automatic perfection of security interests in consumer goods, defined as meaning goods that are used or bought for use primarily for “personal, family, or household purposes.” Therefore, a retailer who reserves security interests in consumer goods it sells but does not file in such transaction has a perfected security interest in those goods and therefore is prior to the rights of the buyer’s trustee in bankruptcy.
Take Free if at Delivery/Transaction: (important to find when buyer buys)
- (i) without knowledge of security interest
- (ii) for value
- (iii) for personal use
- (iv) before filing a financing statement
This sucks because no one at garage sales checks UCC filings. What is the delivery/transaction date?
- Execution of the sales contract (2-103(a), 2-106)
- Identification of the goods under it (2-501) [most courts]
- Passage of title of the goods (2-401(2)(3))
- Acceptance of goods (2-606)
Special Custom Goods When a buyer buys.Right to Replevin: upon identification in the contract
- Future goods when marked for delivery, or
- Goods are identified
Double DebtorsYou can only give a security interest in what you have.
- 9-325 says a creditor that has a perfected security interest in collateral has priority over a second creditor who later obtains a security interest in the same collateral through the operation of an after-acquired property clause even though the second creditor files its financing statement first.
D1 grants SP1 a security interest in business equipment and SP1 filed a financing statement covering the equipment in 2014. D1 sold the equipment to D2, not the buyer in ordinary course of business, and D2 took the equipment subject to SP1’s security interest. In 2013, D2 had granted a security interest in all of its equipment, now owned or thereafter acquired, to SP2 who promptly filed financing statement.
- Who is prior with respect to the equipment?
SP2 will claim after acquired property BUT SP1 will be correct in saying that SP2 took a security interest only to the extent that D2 has rights in the collateral, and the rights acquired from D1 were merely the equity that D1 may have had in the equipment over and above the amount of SP1’s security interest.RIGHTS TO PAYMENT/RECEIVABLESTo Note: Purchase Money Security Interests can only be created in goods and software and not in accounts.Accounts: FILE to perfectRights to payment arising from the disposition of any kind of property, including real property and intellectual property, as well as the rendering of services. (9-102(a)(2)) Chattel Paper: FILE or POSSESS to perfectA record evidencing a money obligation plus a security interest like installment contracts or leases. (9-192)Payment Intangibles: AUTOMATICALLY perfectsThe account debtor’s principal obligation is a monetary obligation like a bank loan.Promissory Notes: AUTOMATICALLY perfectsAn instrument that evidences a promise to pay money. (9-102(a)(65))PerfectionThe first to file or perfect rule applies (9-322(a)(1))Therefore, the buyer of accounts or chattel paper must file because if they don’t, seller can re-encumber it. Possession is NOT a means of perfect.Priority in ProceedsAccounts are proceeds of collateral in that your tab is proceeds of the beer you charged to it. Perfected to the extent security interests in your collateral is perfects.
- (i) filed because original collateral, (ii) same filing officer, (iii) proceeds are not acquired with cash proceeds
- Identifiable cash proceeds
- 21 day to file rule
- 9-309(2) Exception
There is an exception to the requirement that a security interest holder must file a financing statement tp perfect the interest in cases involving an assignment of accounts that was:
- An insignificant amount of the total outstanding accounts; and
- A casual or isolated transaction.
12% of their business was an insignificant portion of the account. [Tri-CountyMaterials, 1990]
- Chattel Paper and Instruments How do we know if the Chattel Paper is Proceeds?
You need to make a lending decision to make sure as a bank you are taking chattel paper outright and not as proceeds.In general terms, chattel paper is a record or records that evidence both a monetary obligation and a security interest in specific goods.Control of Chattel PaperPerfection is established by possession , or in the case of electronic chattel paper, by control.A secured parties control of electronic chattel paper may substitute for an authenticated security agreement for purposes of:
- Attachment under 9-203
- Perfection under 9-314, and
- A condition for obtaining priority under 9-330 (a for as proceeds, and b for not as proceeds)
How do you have control of chattel paper?If a system employed for evidencing the transfer of interests in the chattel paper reliably established the secured party as the person to which the chattel paper was assigned.Rex Financial Corp. v. Great Western Bank (1975)Under § 9-308, a purchaser of chattel paper who takes possession of the chattel paper has priority over prior credits who perfected by filing a financing statement if the prior creditors’ security interest is solely based on being proceeds of inventory. InstrumentsSuppose Bank takes a security interest in Debtor’s inventory and all the proceeds including accounts, chattel paper, and instruments. Bank perfected by filing. When Debtor sells some items of its inventory, it accepts a promissory note from buyers. (Under 3-104(a) their notes are intangible instruments and under 3-104(b) are instruments.) The question addressed by 9-330(d) is the priority between Bank and one who purchases an instrument from debtor.The purchaser of the instrument prevails if: (i) it gives value, (ii) takes possession, (iii) in good faith, and (iv) without knowledge that the purchase violates the rights of the secured party.Under 9-330(d), the purchaser would be prior to Bank even though it knew of the interest so long as it had no knowledge that the purchase would violate the bank’s rights.
- Deposit Accounts
A deposit account is a “demand, time, savings, passbook, or similar account maintained with a bank.” (NOT CDs, Money Market Funds, Mutual Fund Accounts, etc.)
- 9-109(d)(13) excludes security interests in deposit accounts as original collateral in consumer transactions. This just means it isn’t governed by Article 9. Common law or other state law could govern. They took serious the risk that consumers are prone to inadvertently granting a security interest in their checking account.
Priority in Deposit AccountsControl is the sole method of perfect.Attachment (9-203(b)(3)(D), Perfection (9-312(b)(1), 9-314(a), and Priority (9327) all depend on whether the secured party has “control” under 9-104.
- 9-104(a) A secured party has control of a deposit account if: (1) the secured party is the bank where the deposit account is maintained, (2) the debtor, secured party, and bank have agreed in an authenticated record that the bank will comply with instructions from the secured party directing disposition of funds without further consent of the debtor, or (3) the secured party becomes the bank’s customer with respect to the deposit account.
- Cash Proceeds
Priority of Cash ProceedsA transferee of money takes the money free of a security interest unless they collude with the debtor in violating the rights of secured party. 9-332’s protection does not require the transferee to give value or act in reliance on the money or funds from a deposit account received from the debtor.Zimmerling v. Affinity Financial Corp. (2014)A perfected security interest in funds is not extinguished if the funds are transferred to an escrow account pursuant to a court order. A transfer occurs only if equitable and legal title are transferred.Tracing ProceedsA debtor may drain an account by payments to transferees who take free of the security interest under 9-332 OR the debtor may commingle the proceeds in the account with non-proceeds making them hard to identify in accordance with 9315(a)(2).Once the money is gone in a deposit account, it doesn’t replenish. So, you must determine how low the deposit account went.DEFAULT & ENFORCEMENTThe event that triggers a secured party’s rights to enforce its security interest under 9-601(a) is the debtor’s default. The agreement of the parties describes the circumstances giving rise to default. Typical examples are failure to pay, breach of agreement, bankruptcy of debtor, reasonable insecurity.Acceleration ClauseA provision frequently included in loan agreements is an acceleration clause. The clause makes the entire principal and accrued debt due on default. The basic legal rule is that the lenders right to recover is only for its lossess resulting from the debtor’s failure to make interest payments.ModificationMany good faith change in the terms of the contract.WaiverVoluntary relinquishment of a known right. You can reinstate if you let them know. Repeated acceptance of late payments by a creditor who has the contractual right to repossess property imposes a duty on the creditor to notify the debtor that strict compliance with the contract terms will be required before the creditor can lawfully repossess the collateral. A pattern of waving defaults requires notice. [Moe v. John Deere Co. (1994)]EstoppelA (1) representation with (2) reasonable reliance, and (3) harm if changed. (Debtor must show the entire time you are claiming.) This is when you hold them to their word.EnforcementYou can go after the debt through a judgement and proceeds against collateral at the same time.
- Under § 9-610m the secured party may make a commercially reasonable sale of collateral consisting of goods at either a public or private sale and, under 9-615, apply the proceeds of the sale to satisfaction of the obligation secured by the security interest, with any surplus going to the debtor, OR
- In the case of a right to payment, such as an account, the secured party may proceed in a commercially reasonable manner under 9-607 to collect the amount owing by notifying the account debtor to make payment to the secured party. (They can go after both of these at the same time!)
Okefenokee Aircraft Inc. (2009)A secured creditor can retain a defaulting debtor’s collateral while pursuing an independent action for money judgement. The UCC does require that creditors who are in possession of collateral act in a commercially reasonable manner, which may include disposing of certain collateral in a reasonable period of time. In fact, debtors who are injured by a failure of a creditor to act in a commercially reasonable manner can recover damages against that creditor. (9-610(b)) It is not a defense but a counterclaim.
RepossessionThe right to extra-judicial self-help repossession set out in 9-609 is a traditional remedy in this country.Breach of PeaceFor public safety purposes, you cannot breach the peace while repossessing property. Breach of Peace is when (1) breaking and entering, or (2) when its reasonably likely to incite/have risk of violence. If you break into anything on the premises, that’s breach of peace. Risks of violence are breaking into dwellings or facilities, threats of violence, or forcible resistance of repossession.If you give permission to break and enter in the contract, you still cant break and enter.If breach of the peace occurs in a self-help repossession case, 9-625(b) subjects the secured party to liability for damages in the amount of any loss suffered by the debtor.There is no breach of the peace when the debtor failed to object to the repossession. [Williams v. Ford Motor Credit Co. (1982)]When can you break stuff? Judicial Repossession. A secured creditor who repossess collateral through government officials under a court order is not liable for damage to property caused by the removal of the collateral under § 9-604(d). [Cla-Mill East Holding Corp. (2006)]Under 9-609(a)(2), a secured creditor need not take possession of the collateral in order to sell it; it may render the collateral unusable and sell it on the debtor’s premises.
- 9-609© authorizes a secured party to require a debtor in default to “assemble the collateral and make it available to the secured party at a place to be designated by the secured party which is reasonably convenient to both parties.”
Disposition of Collateral
- 9-610(a) allows the foreclosure creditor to “sell, lease, license or otherwise dispose” of the collateral.
NotificationIf the secured party chooses to foreclose by extra-judicial sale, 9-611(a) and (b) provide that the secured party “shall send a reasonable authenticated notification of disposition” to the debtor, any secondary obligor, such as a guarantor, and, in nonconsumer cases, to certain other enumerated parties. You only need to prove noticed was dispatched, not received.
- 9-613 prescribed the contents of the notification in nonconsumer goods transactions and offers secured creditors a safe harbor notification.
|To whom?||When?||Saying what?||And if you get it wrong?|
|Mailed at least 10 daysprior|
|If substantially accurate/not seriously misleading = goodnotification|
|Reasonable Time (howlikely isredemption?)||All above PLUS- Liability for deficiently?- Phone #/Contact- Paying deficiency phone #/Contact for more information||If missing required information then error and is bad notification.|
SalesIf the secured party decides to dispose of the collateral, it may do so either by public or private proceedings so long as every aspect of the method of dispositions selected is commercially reasonable. (9-610(b), 9-627(b))In most instances, a secured party may not purchase at a private sale, but it may at a public sale. (9-610©)What is a public sale? (C. 7 to 9-610)A public disposition is one at which the price is determined after the public has a meaningful opportunity for competitive bidding. Meaningful opportunity is meant to imply that some form of advertisement or public notice must proceed the sale and that the public has access to the sale.When can a secured party buy at a private sale?The only case in which a secured party is allowed to buy at a private sale is one in which the collateral is of a kind that is customarily sold on a recognized market or the subject of widely distributed standard price quotations, like Kelley Blue Book.Commercially Reasonable (9-610(b))It must be commercially reasonable in every aspect of disposition.
- Sell in recognized market
- At peace in recognized market at relevant time
- In conformity with practice in the relevant trade (look to procedures, price could help if high)
- Court approval or creditors committee approval in bankruptcy § 9-627(a) provides that the fact that a higher price could have been obtained at a different time or in a different method from that selected by the secured party is not itself sufficient to preclude the secured party from establishing that the disposition was made in a commercially reasonable manner.
WM Capital Partners, LLC v. Thorton (2016)The requirement for a commercially reasonable disposition applies only once the secured party has possession, either actual or constructive, of the collateral. Declining a request to repossess the collateral does not amount to constructive possession.MarshalingThe doctrine of marshaling allows a junior secured creditor to require a senior secured party to proceed against collateral other than assets in which the junior secured party has a security interest.
Liability for Deficiency: Nonconsumer transactions
- 9-615(d) provides that after disposition of the collateral by the secured party, any surplus from the sale goes to the debtors, and the obligor is liable for any deficiency.The obligor owes the difference unless (1) no notice, (2) not commercially reasonable, (3) low price and sale to secured party related party at public sale.
Unless the secured party proves that compliance with the commercially reasonable requirements would have yielded a smaller amount, the amount that a complying collection, enforcement, or disposition would have yielded is deemed to be equal the amount of the secured obligation. Thus, the secured party may not recover any deficiency unless it meets this burden.Liability for Deficiency: Consumer TransactionsUnder § 9-616(b)(1), if after disposition the debtor is either entitled to a surplus or liable for a deficiency, the secured party may have to give the debtor a detailed explanation of how the surplus or deficiency was calculated. (if its even, no need for explanation.)The property always goes free of conditions. If the debtor is pissed about the sale, he should sue secured party, not the person who ended up with the property.Strict Foreclosure or the acceptance of collateral in satisfaction of debt.Secured parties can enjoy the benefits of strict foreclosure only if after default the debtor consents to the acceptance in satisfaction in record (9-620©(2)) or silence. Silence is satisfied by the secured party sending the debtor a proposal and if the secured party has not received an authenticated notification of the debtor’s objection within 20 days, the debtor is deemed to have accepted the secured party’s proposal. (90620©(2)) If the secured party wants to take in satisfaction of part of the outstanding debt, there must be an authenticated record with consent, cannot be satisfied through silence.Consumer Debtors Strict ForeclosureSection 9-620(g) forbids a secured party from accepting collateral in partial satisfaction of the obligation it secures in a consumer transaction. Nor is acceptance in satisfaction of consumer goods effective if possession of the collateral is still with the debtor. (9-620(a)(3))
- 9-620(e) requires that a secured party in a possession of consumer goods collateral must foreclose by disposition under 9-610 if the debtor has paid either 60% of the cash price or 60% of the obligation secured by the goods. If they have paid this much, we have to see if there is a surplus. Must be done within 90 days after disposition.
Effect of Disposition or Acceptance on Third PartiesEven though the notice is required, anyone entitled to share a surplus only if the foreclosing secured party received from the junior “an authenticated demand for proceeds before distribution of the proceeds is completed.” (9-615(1)(3)(A))Junior Lieners in Strict ForeclosureAcceptance in full by the secured party cuts off all rights of junior lienors.
- 9-622(a)(4) allows an acceptance of collateral by the secured party with the consent of the debtor to cut off all junior liens fairness requires that junior parties be allowed to prevent this from happening by objecting.
- 9-621(a) provides that the secured party must send notification of its proposal not only to parties who notify the SP they have an interest, but also by searching filing statements or certificates of titles.
They can stop the strict foreclosure by objecting within a period. (9-620(d). If they don’t notify, they can sue for damages.Collection of RightsThere is no requirement that the secured party must notify the debtor before it collects directly form the account debtors. There is a right to a commercially reasonable collection under 9-607© in true sales where there is a right of recourse. (ex. Bank tells OG debtor to only pay 50% of bill, is that commercially reasonable)Major’s Furniture Mart, Inc. (1979)When is it a true sale vs. security interest in accounts?The most relevant factor is whether the secured party retains a right of recourse against the debtor for the accounts. If there is no right to recourse, then the transaction is generally a sale of accounts. Right of Redemption
- 9-623 recognizes the debtor’s traditional right to redeem the collateral by paying the secured party before foreclosure the fully amount owing on the debt plus the expenses incurred by the secured party in repossessing and preparing the property for sale.
In consumer goods transactions, the debtor myst be given information about its right to redeem. (9-614(1)©)
LEASES AND CONSIGNMENT[edit | edit source]
What is a lease vs. secured transactions? Intent is irrelevant. Bright line rule from § 1-203.Non-cancellable plus one of these: (1) original term is the same as the economic life of the good, (2) lessee bound to renew, (3) lessee option to renew for economic life of good for no additional consideration, (4) lessee option to be owner for no additional consideration.The fundamental question is “whether the lessor retains a ‘meaningful residual interest’ in the property.
A full payout of the lease does not create a security interest. Whether a lessee assumes risk of loss of the goods or agrees to pay taxes, insurance, or service costs does nothing to distinguish leases from security agreement.A security agreement is not created merely because:It provides that a lessee has an option to renew or buy.The lessee has the option to renew the lease for a fixed equal rent or greater than reasonably predicted fair market rent.The lessee has an option to buy for a fixed price that is equal or greater than reasonably predictable fair market value.Lease Without the Option to Purchase or RenewPillowtex (3d Cir. 2003)A TRAC or terminal rent adjustment clause creates an open-end lease.In re Lightning Bolt Leasing (2016)A transaction is a security agreement as opposed to a lease if the lessee bears the entire burden and benefit of changes in the property’s value when the agreement terminates.SECURITY INTERESTS IN INTELLECTUAL PROPERTYIP usually falls within the definition of general intangibles (9-102(a)(42).In order to perfect a security interest in general intangibles, the secured creditor need only reasonably identify the collateral in the agreement (9-108(a)) and file a financing statement indicating the collateral covered (9-502(a)).CopyrightsA security interest in a copyright must be recorded in the USCO in order to be perfected.The copyright act preempts state law regarding the recording of interests in copyright. The Copyright Act grants a one month grace period for recording an interest in copyright.A security interest in an unregistered copyright is perfected by filing a financing statement pursuant to the UCC rather than recording with the USCO. TrademarksUnder the UCC, a security interest in a trademark is perfected by filing a financing statement, rather than by recording the interest in the USPTO. PatentA security interest in a patent is perfected by filing a financing statement with the state pursuant to the UCC rather than recording the interest in the USPTO.Under intellectual property law, assignment and the creation of a security interest is ineffective without the consent of the owner. Look to 9-408.SECURITY INTERESTS IN FIXTURESSection 9-102(a)(41) provides fixtures as being goods that have become so related to particular real property that an interest in them arises under real property law. Courts often require three elements for the recognition of a fixture: (1) physical annexation to the land; (2) adaptation for use with the land; and (3) annexation made with the intention to make a permanent addition to the land.An ordinary filed financing statement that perfects a security interest in a good continues to perfect the security interest after the good becomes a fixture. A security interest in a fixture can also be perfected by a fixture filing for against other debtors, not other creditors (must do UCC). (9-501)Always file both a UCC and Fixture filing. A UCC filing so you can perfect with debtor and be prior to other creditors. A fixture filing to be proper against realty interest creditors.
|Fixture Filing||UCC Filing|
|Against Who?||Party with a realty interest||Party with a security interest|
|Where?||Register of Deeds||State Filing Office|
|What?||1. State fixture2. Indicate to be filed in real property3. Describe real property4. Name of record owner||1. Name of secured party2. Name of debtor3. Description of collateral|
A fixture filing is ineffective against a secured creditor who has perfected a security interest in the affixed good by making a UCC filing. Fixture filings are only goof against realty interests that extend to the fixture.Construction MortgagesA construction mortgage has priority over other goods if becomes fixtures before construction is completed.Manufactured homes
- 9-334©(4) gives a security interest in a amanufactured home perfected under a state certificate of title statute property over conflicting interest of encumbrances or owners of the real property if the security interest is created in a manufactured home transaction.
FilingUnder 9-515(b), an initial filing with respect to manufactured home transaction is effective for 30 years if it indicates that it is filed in connection with a manufacturedhome financing.Enforcement of Fixture ActionsIf a creditor’s security interest in fixtures has priority over encumbrances and owners of real property, 9-604© allows the secured party to remove the fixtures from the real property. However, the secured party must reimburse for the cost of repair of any physical injury caused by the removal.Maplewood Bank and Trust (1993)A lienholder with a PMSI in fixtures has the option to repossess the goods, not priority in the foreclosure funds. The only remedy available is removal of the collateral, and you should be aware of that risk when extended credit to debtors.
FRAUDULENT TRANSFERS[edit | edit source]
Actual Fraud - Indicia of Fraudulent Intent
- Insider relationships between the parties; (relative, business partner)
- The retention of possession, benefit, or use of the property in question; (sell title but keep using car)
- The lack or inadequacy of consideration for the transfer;
- The financial condition of the party sought to be charged both before and after the transaction at issue;
- The existence of cumulative effect of the pattern or series of transactions or course of conduct after the incurring of the debt, onset of financial difficulties, or pendency or threat of suits by creditors;
- The general chronology of events and transactions under inquiry;
- An attempt of the debtor to keep the transaction secret.
- Insolvent sue to transfer
- Stripped needed capital for current transactions
- No ability to repay
- Insider relationship
In re Northern Merchandise (9th Cir. 2004)A debtor receives “reasonably equivalent value” from a creditor if the debtor ultimately receives from the creditor, either directly or indirectly, a benefit that is comparable to the consideration given by the debtor to the creditor. (Predatory Buy-Outs) Leveraged BuyoutA person may want to buy a corporation but lacks the money or collateral necessary to finance the purchase. If the target corporation has unencumbered assets, it may be possible to use those assets to provide most of the capital needed to make the purchase.LETTERS OF CREDITA letter of credit is an undertaking by one person to pay a specified person a stated amount of money or other value if that person presents documents to comply with the conditions specified by the undertaking. A standby letter of credit serves as security for the applicant’s performance of the underlying contract or transaction with the beneficiary. It is not a mechanism for payment of the contract price.FORMAL REQUIREMENTSAn instrument is a letter of credit if the conditions of the issuer’s obligation of on satisfaction of documentary conditions.Under the UCC, a document that required an actual default of another agreement to trigger performance is a guaranty contract rather than a letter of credit. (require affidavits, not default itself.)DURATIONA letter of credit is irrevocable unless it states otherwise. If there is no stated expiration date in a credit, it expired one year after issuance and if the credit purports to be perpetual, it expired five years after issuance. (5 year rule is mandatory)Evergreen ClauseSometimes letter of credit contain an evergreen clause which is a provision that automatically extends the credit past its expiration date unless the issuer or beneficiary gives notice that it is not to be extended.ISSUER’s DUTY TO HONOR/DISHONOR Strict ComplianceThe standard is to treat documents as complying if they less than literally, but more than substantially, comply with the credit’s terms. Strict compliance with the terms of a letter of credit is satisfied, despite minor discrepancies, if the draft request could not mislead the issuer. (four corners)Dishonoring a PresentationIf the documents are discrepant and the discrepancy allows the issuer to refuse honor, the issuer has a choice: it can waive its right to insist on a complying presentation and honor it OR it can dishonor the presentation.If dishonor, must notify within 7 days and have good faith.You must state all of the grounds for dishonor. You don’t raide, you waive.THE INDEPENDENCE PRINCIPLELetters of credit undertakings are completely separate from and independent of all other relationships, including the relationship out of which it arises. Letter of credits have nothing to do with the underlying transaction.Exception: Sanctions ClauseNo honor will be made that would violate laws and regulations. Flagged by OFAC? Don’t have to pay. ISSUER’S RIGHT TO REIMBURSEMENT/REMEDIES Reimbursement5-108(i) arms the issuer with a statutory right of reimbursement agains the applicant. The agreement usually also provides for reimbursement. Bank will hold hostage title documents as collateral for standby letters of credit.Subrogation, Restitution, Breach of WarrantyIf the security proves worthless and the applicant is insolvent, the issuer is unable to obtain reimbursement from the applicant. After Bank gets LoC called, they step into creditor rights and can use whatever rights creditor had. (subrogate) DAMAGES FOR WRONGFUL DISHONOR5-111(a): the beneficiary or any other presenter can recover from the issuer the face amount of the draw under the credit if the issuer wrongfully dishonors the draw. The presenter can also recover incidental damages but not consequential damages. No duty to mitigate for the presenter. wever, the applicant is required to mitigate damages if sued by beneficiary. FORGERY/FRAUDFraud is the single exception to the independence principle. Section 5-109(A) adopts material fraud test. Material fraud by the beneficiary occurs only when the beneficiary has no colorable right to expect honor and where there is no basis in fact to support such a right to honor.Bank may honor if it does so in good faith. To prevent the bank from paying you have to get an injunction. The underlying transaction can also cause fraud exception.Hook Point, LLC (2012)A court can enjoin the payment of a letter of credit if the beneficiary’s fraud has undermined the entire transaction and thwarted the legitimate purpose of the issuer’s independent obligation.Protected PresenterNo defense of fraud, they have to pay no matter if there are forged documents, fraud etc.Unprotected PresenterThe bank may honor even if they are told there is a fraud. Only option is injunction.TRANSFERS/ASSIGNMENTSSection 5-112(a) defines transfer of the beneficiary;s right to draw on the letter of credit. Transferring the credit changes the party who must present documents to the issuer for honor. (Default rule is not transferable)You can assign the proceeds of the letter of credit and the beneficiary still presents. Always assignable but the bank must consent. May not reasonably withhold consent if the letter of credit handed to the new person and the letter of credit must be presented to receive the money.
PAYMENTS AND CREDITS
NEGOTIABLE INSTRUMENTS[edit | edit source]
Holders: In most cases, a holder is the possessor of an instrument that is either payable to that person or indorsed to that person.
Merger Doctrine: The merger doctrine determines two important issues (1) who can enforce the instrument against the obligor, and (2) whom the obligor must pay to be discharged on the instrument.
The basic rule on enforcement from 3-301:A person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument. The right to enforce an instrument belongs to the holder of the instrument.
A negotiation is the transfer of a note’s possession, whether voluntary or involuntary.
Types of Endorsement: “Pay to Peter” identifies who is payable and is called a “special indorsement” (3-205(a)) Just a signature is called a “blank indorsement” and makes the note payable to the bearer.
Transfers If a note is delivered without indorsement, it can be considered a transfer or a transfer of the right to enforce if there was (1) delivery, (2) a voluntary transfer of possession, and (3) intent by the transferor to give to the transferee the right to enforce.
The transferee cannot enforce the note in his own right as holder and cannot negotiate it to someone else. But because it was a transfer, they obtain the right as holder to enforce the note. This is called the shelter doctrine.
In addition, if they buy the note for value, they obtain a specifically enforceable right to have the giver indorse the note so that they can become holder.
(a) an instrument is paid to the extent payment is made by or on behalf of a party obliged to pay the instrument, and to a person entitled to enforce the instrument.
(b) a note is paid to the extent payment is made by or on behalf of a party obliged to pay the note to a person that formerly was entitled to enforce the note only if at the time of the payment the party obliged to pay has not received adequate notification that the note has been transferred and that the payment is to be made to the transferee
A notification is adequate only if it is signed by the transferor or the transferee; reasonably identifies the transferred note; and provides an address.
Upon request, a transferee shall provide reasonable proof of transfer.Unless they comply with the request, a payment to transferor is okay.
Merger Doctrine and Securitization: Mortgages In Re Hwang (2008)An action must be prosecutes in the name of the real party in interest or the one with substantive rights . The servicer of a mortgage loan has to find the owner. Which is scary because mortgage loans are compiled and sold off so probably have hundreds of owners. Formal Requisites of Negotiable Instruments
What is a negotiable instrument?Order: a written instruction to pay money signed by the person giving the instruction. (Drafts)Promise: a written undertaking to pay money signed by the person undertaking to pay. (Note)Order RequirementA negotiable instrument must be made “to the ORDER of John Doe” and not “to John Doe.” You can also say to bearer. This creates a bright line test for determining negotiable instruments.
Certainty of Obligation
- The order or promise must be unconditional.
- The order or promise must be payable on demand or at a definite time.
- The order or promise must be to pay a “Fixed amount of money, with or without interest or other chargers described.”
Holders in Due Course
A holder in due course (3-302) takes free of some defenses of the obligor as well as claims of ownership. (A holder coming fairly by a bill or note has nothing to do with the transaction between the parties.)
What is a Holder In Due Course: The holder took the instrument (1) for value, (2) in good faith, (3) without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment or another instrument issued as part of the same series, (4) without notice that the instrument contains an unauthorized signature or has been altered, (5) without notice of any claim to the instrument described in section 3-306, (6) without notice that any party has a defense or claim in recoupment from 3-305(a).
Good Faith and Notice
Honest in Fact and Observance of Reasonable Commercial Standards of Fair Dealing
- A person has notice of a fact if the person (1) has actual knowledge of it; (2) has received notice or notification of it; or (3) from all the facts and circumstances known to the person at the time in question, has reason to know it exists.
- Good Faith is (1) honestly in face (subjective), and (2) the observance of reasonable commercial standards of fair dealing (objective).
Holder in Due Course Status lets the Holder take free from:
- You can give better than you have.
- Ordinary Defenses
- The right of a holder in due course to enforce an instrument is subject to the defenses stated in subsection (a)(1) (REAL defenses) but not subject to ORDINARY defenses in (a)(2) or RECOUPMENT in (a)(3).
- Section (a)(1) lists the defenses that may be asserted against even a holder in due course. With the exception of the defense of discharge in bankruptcy, all of the real defenses refer to an instrument that is made unenforceable in order to carry out some public policy of the state not related to the law of negotiable instruments (illegality), or to an instrument that does not represent a contract of the person who signed the instrument(infancy, duress, fraud in the factum)
- Defenses against HIDC: infancy, duress, illegality, “complete” fraud
- The right of a holder in due course to enforce an instrument is subject to the defenses stated in subsection (a)(1) (REAL defenses) but not subject to ORDINARY defenses in (a)(2) or RECOUPMENT in (a)(3).
- Recoupment is when the two parties who created the note owe one each other a debt so they set it off and the note ends up owing less. But if you sell the note, they are going to still want the full amount of the note.
Holders in Due Course in Consumer Transactions
The FTC enacted the holder rule to negate the holder-in-due course doctrine in sales of consumer goods or services. The rules also apply to leases of consumer goods. States that any holder of the contract is subject to all claims and defenses that the debtor has against the seller of the goods or services.Failure to include the notice is unfair and deceptive under FTC law.Fails to Include NoticeThe instrument has the same effect as if the instrument includes the statement, still assert all the defenses, the extent to which claims may be asserted against the holder or transferee is determined as if the instrument included such a statement. Transactions with FiduciariesA careless employer who hires an embezzler that engaged in check fraud cannot recover the amount embezzled from the careless bank that accepted the fraudulent checks unless the bank actually knew that employee was breaching its fiduciary duty.Jelmoli Holding v. Raymond James Financial Services (2006)There can be notice/bad faith if one knows that a person is violating their fiduciary duty through use of the instrument. The plaintiff must show knowledge by the taker, not just warning clues, that the person tendering the check is a fiduciary.Smith v. Olympic Bank (1985)Where a bank allows a check that is made payable to a guardian to be deposited in a guardian’s personal account instead of a guardianship account, the bank is NOT a holder in due course because it has notice that the guardian is breaching their fiduciary duty. ValueOnly a holder who takes the instrument for value can be a holder in due course. There can’t be value if the only value is given when the promise is performed.Partial PerformanceIf the promise of performance is partially performed, the holder may assert rights as holder in due course only to the fraction of the amount payable under the instrument equal to the value of the partial performance divided by the value of the promised performance. Amount already paid/full amount to be paid = X times value of performance = amount. [pro rata] Rights of Depository Bank in Deposited CheckWhen does a bank in which a check is deposited become holder in due course of that check? Accommodation Parties Requiring a third party as guarantor
|You sign as a cosigner in case OG doesn’t pay. There is an indirect benefit. You are jointly and severally liable. Full Reimbursement +Subrogation.||You get the direct benefit of the note as a cosigner. Direct Benefit. Ownership of the Goods, you are On the Title.|
Two people who sign a note as co-makers are jointly and severally liable to pay the note. (3-412)If two people are jointly and severally liable to pay an obligation and one of the obligors pays the entire amount, the normal rule, is that the burden is shared equally by the two obligors.The contribution rule is based on the assumption that the joint obligation was incurred for the joint benefit of the two obligors and that each should contribute equally in the payment obligation. But not true if one party had NO benefit.Is it surety relationship or accommodation party. As accommodation party, one can recover the full amount. He got full benefit, so he carries full burden. Signatures by RepresentativesA person is not liable on an instrument unless the instrument is signed personally by that person or by a representative who is authorized. To be an agent, you must sign unambiguously on behalf of the company. What is ambiguous? (1) company name, by person, (2) company, by person, treasurer, (3) person, treasurer, company name, (4) company name, and ONLY name is bad because cant tell if company liable or both are liable.People can assume agent if the company is written on the check. Accord & SatisfactionSections 3-311(a) and (b) provide that if the legend on the check is conspicuous and the claim is subject to a bona fide dispute, the claimant cannot receive payment of the check without agreeing to accord and satisfaction. If the claimant wishes to avoid settlement for the amount of the check, it may not cash the check or deposit it. You cant write on the check “I dispute” over the accord and satisfaction. That doesn’t work.Big Business/Corps/If you are a large organization, you may tell customers to direct debt disputes to a different office.
Basic Rule is Pay first, revoke later.
MIDNIGHT RULE: If you want to be able to revoke or dishonor later, pay by midnight same day. You are absolutely required to pay day, if not you owe face value.The next day, you can revoke, dishonor, or return by mail before midnight. Valid Reasons Why You Missed The Deadline Computer Down Suspension of Payment by Other bank War Failure of Equipment Other unforeseen circumstancesBlake CaseThe circumstances that bank faced were clearly foreseeable. Bank should have foreseen busy holiday season and their machine breaks often. Bank didn’t leave instructions for checks.The clock starts ticking when the payor bank receives the check. (Officer orBranch where account is held.) REGULATION CC Federal Reserve Regulation Extends Midnight Deadline Day 1: Midnight Rule – Pay Up Day 2: Raise Hell By Midnight (by mail if after business hours)CC Day 3: If receiving bank receives dishonor on day 3 before the end of the banking hours, communication is timely. WhyIn order to get it out, banks mailed it evening of day 2 and took forever to get there. They changes it so as long as it ends up there on Day 3, you are fine. NOTIFY DISHONORMENT When does the bank have to tell the customer their check has been dishonored? Day 3, bank receives revocation so they must tell by Day 4 midnight. Essex CaseIf the check is returned, the collecting bank may revoke a provisional credit if they return the check or notify the customer by midnight the next day. You can notify by mailing out by deadline. CHECK ENCODINGWhat if a check says $100 but it is encoded for $100,000. Whoever encoded it is liable, it’s a breach of warranty so actual damages. Go after bank if they dishonored it for wrongful dishonor.CREDITS AND DEBIT CARDSMerchant to Merchant Bank to Network to Issuer’s Bank to CustomerBankruptcy: Within 60 days and over $600 cannot charge on credit card luxury goods. Which is very debatable.A credit card is a card or any device used to obtain goods labor, or services on credit. An accepted card is a card that was requested and received, signed or used, or authorized another to use. A card holder is a person whom a card is issued or person agreeing to pay.
An unauthorized use is the use of a card without the cardholders consent through (1) actual, (2) implied, or (3) apparent authority. When is the HOLDER liable for unauthorized use?(1) Accepted card, (2) not in excess of $50, (3) issuer provides adequate notice of potential liability (4) means to notify theft or loss, and (5) method to IS authorized use. (1643(a))Spoof cards are not accepted cards. What matters is where the physical card is and not where the card numbers are being used.If someone fails to dispute the charges and the card is unsigned, then the thief has apparent authority and is therefore not unauthorized charges. DEBIT CARDS If you notify of loss within 2 days, you are only liable up to $50. If you don’t notify within 2 days, you are liable up to $500. If you fail to report within 60 days of statement, no limit, liable for everything. Minskoff v. AMEX (1996)Card company was only liable for a long fraudulent purchase from the time the credit card was issued until the company received the first statement containing the fraudulent charges. CARD HOLDER DEFENSES
(1) Billing Error 60 day limitStatement reflects (1) extension of credit not by holder, (2) goods or services not accepted by holder, or (3) goods or services not delivered.(2) Defense Elements, other issues with the transactionWhen a (1) card issued (open consumer credit), (2) defense against “seller”, (3) good faith attempt to resolve, (4) over $50, (5) in same state as cardholders address or within 100 miles. Where has a sale CONCLUDED?By Phone- where an offer has been accepted. (where the person who accepts is at)By Internet: Courts deem a contract to have been made where the parties to contract perform the last act necessary to complete the contract.CitiBank v. Mincks (2004)Because it is possible to not know as issue with a transaction until after 60 days, these defendants are cumulative. Even if it is for a business purpose, the defense applies as long as its on a consumer credit card.ELECTRONIC TRANSFERSSection 4A-108 provides that Article 4A does not apply to consumer electronic fund transfers governed by the EFTA. (point of sale with debit cards, ATMS, direct deposit, small dollar transfers by Western Union)
|Business to Business: Article 4A||Check: Article 3&4|
|Instruct Bank (delivery)||Give to Payee (delivery)|
Originator or sender who instructs originator’s bank to pay seller of beneficiary.Accepts
- (1) Originator is liable to originators bank for the amount
- (2) Execute the order, follow instructions to pay
- (3) Next bank, either intermediary bank or beneficiary bank
- (4) Once at beneficiary bank, they (1) accept, (2) credit seller, and (3) notifies seller. Completed!
SETTLEMENT[edit | edit source]
How do you settle? Through Cross Account which is when each bank will have an account at the other. Or by Common Account, where both banks have an account in a common correspondent bank. CHIPS: Clearing House Interbank Payment Systems They search the queue of payments orders for an offsetting order.FedWire: Only for banks in federal reserve, money goes from bank to local federal reserve. Swift: Global Financial Communications Systems Nothing to do with transferring money but just communications.WIRE TRANSFERS/PAYMENT ORDERS Trustmark Insurance Co. v. Bankone, AZ (2002)Payment orders is an instruction of a sender to a receiving bank, transmitted orally, electronically, or in writing, to pay, or to cause another bank to pay, a fixed or determinable amount of money to a beneficiary. (4A-103(a)(1))Requiring the bank to continually examine the account balance is a condition to payment other than the time of Payment. Payment order must not state a condition to payment of the beneficiary other than the time of payment. ACCEPTANCE OF PAYMENT ORDER By Receiving BankIf a receiving bank accepts a sender’s payment order, the sender becomes liable to the receiving bank for the amount of the payment order AND the receiving bank is obliged to issue a payment order complyin with the sender’s payment order. Accepted by Executing the order, like issuing a payment. By Beneficiary’s BankThe last receiving bank in the chain is the beneficiary bank. Section 4A-209(b) spells out when a beneficiary’s bank accepts. What is most common is when the beneficiery’s bank credits and notifies beneficiary. At this time, Beneficiary bank is liable to beneficiary for the amount. Th obligation is now discharged. The settlement between banks may occur later.
RECEIVER FINALITY Cancellation and Amendments
Cancellation Elements(1) Reasonable opportunity for (2) receiving bank to act before (3) it accepted.ORA communication by, the sender cancelling (or amending) a payment irder is effective to cancel or amend the order if: (1) notice of the communication is received at a time and manner (2) affording the receiving bank a reasonable opportunity tot act on the communication, and (3) before the bank accepts the payment order.AKA do sketchy payment orders in the A.M. MONEY-BANK GUARANTEEObligation of sender to pay is excused it: funds transfer is not accepted by beneficiary bank according to order. Obligator’s bank has the burden of obtaining a refund from the intermediary bank that it paid. Remember, the general rule is that originator owes when originator’s bank accepts the payment order. GARNISHMENTCreditors may garnish deposit accounts of debtor only so long as the funds remain in the deposit account. Secton 4A-503 limits the parties who may be enjoined from initiating of completing a fund transfer.
The section authorizes a court to restrain a person from issuing a payment order and from banks pushing it through. A creditor cant say STOP in the transit of a payment order. The funds once transferred no longer are property of the originator. ERRONEOUS EXECUTION OF PAYMENT ORDERS The sender with the mistake is liable. EXCEPTION to WRONGFUL PERSON or TOO MUCHIf money accidentally shows up in a persons account, they have to give it back unless the person is someone who you happen to owe money to. (overpayment or wrong person altogether)You don’t get consequential damages unless its in the agreement for failure of receiving bank to execute payment order. FRAUDULENT PAYMENT ORDERSThe general rule is that a payment order is effective as the order of the customer, whether or not authorized, if the security procedure is (1) commercially reasonable and the receiving bank (2) Çproves that it accepted the order in good faith (3) after verifying the order is in compliance with the security procedures.Whoever caused the fraud (released banking information) is liable. The burden of proof is always on the customer!!!