Fall 2008

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Vol 4, Issue 3

Commercial Paper, Electronic Funds, & Transfers

Negotiable Instruments & Holder in Due Course

Siemens Bldg. Techs., Inc. v. PNC Fin. Servs. Group Inc., 226 Fed. Appx. 192 (3d Cir. 2007) (unpublished opinion) – A bank’s head teller conspired with the drawer’s employee to cash fraudulent checks. The bank was not liable in a common-law fraud action under the doctrine of respondeat superior for the actions of its employee because the employee had no intent to serve the bank’s interests.

Orix Fin. Servs., Inc. v. LeClair, 2007 WL 633706 (S.D.N.Y. 2007) – A principal of a corporation who signed a note for the corporation was personally liable because the corporation did not have a valid charter.

In re RMM Records & Video Corp., 372 B.R. 619, 621 (Bankr. S.D.N.Y. 2007) – A note stating that it shall bear interest “to the date this Note shall have been repaid in full” at five percent was construed as containing no post-maturity rate; the court applied statutory rate of 9% after the stated maturity date.

Nat’l Title Ins. of New York, Inc. and Fidelity Nat’l Title Ins. Co. of New York, v. Spectrum Settlement Group, Inc., 831 N.Y.S. 2d 355, 61 U.C.C. Rep. Serv. 2d 401 (N.Y. 2006) – A payee of a check marked it “for deposit.”. The depositary bank deposited the check into an account of a person other than the named payee. As a result, the bank had not acted in a commercially reasonable manner. UCC § 3-419.

Jelmoli Holding, Inc. v. Raymond James Fin. Servs, Inc., 470 F. 3d 14, 61 U.C.C. Rep. Serv. 2d 291 (1st Cir. 2006) – When a fiduciary wrongfully takes the represented person’s funds, the person dealing with the fiduciary can still be a holder in due course, unless that person has knowledge of the fiduciary status. UCC § 3-307.

Ohio Savings Bank V. Duncanson, 2006 WL 2583413, 61 U.C.C. Rep. Serv. 2d 64 (D. Minn. 2006) – A holder of a note that is not a holder in due course takes the notes subject to the maker’s contractual defenses. UCC § 3-305. When a maker of a note never received the loan proceeds, because they had been stolen by the closing agent before becoming the property of the maker, the maker could raise that defense against the holder of the note.

In re Blasco, 352 B.R. 888, 61 U.C.C. Rep. Serv. 2d 142 (Bankr. N.D. Ala. 2006) – In the case of a contradiction between words and numbers in an instrument, the words prevail. UCC § 3-114. However, if the numbers “clarify” the words, then there is no “contradion,” and the words and the numbers can be read together.

Gem Global Yield Fund, Ltd. v. Surgilight, Inc., 2006 WL 2389345, 61 U.C.C. Rep. Serv. 2d 510 (S.D.N.Y. 2006) – A note will not be a “negotiable instrument” if it is “subject to” the terms of another document. A note provided that it was “subject to applicable conversion events” as stated in another agreement. Accordingly the note was not a “negotiable instrument.” UCC §§ 3-104 and 3-105.

Bennett v. Broderick, 2006 WL 3783437, 61 U.C.C. Rep. Serv. 2d 606 (Ind. Ct. App. 2006) – A lessor received a post-dated check for a security deposit. She argued that the check was invalid because her bank would not cash it for her. The court held that the lessor had no evidence that the check was invalid because she did not deposit the check. A drawee bank may disregard the date on a post-dated check and process and pay the check when submitted. UCC § 4-401.

Wilkins v. U.S. Bank, N.A., 514 F. Supp. 2d 1120 (W.D. Ark. 2007) – Individuals purchased an old trunk at an antique sale. When they opened the trunk they found bonds issued buy a railroad in 1919. In the circumstances, they could not qualify as holders in due course who would have taken the bonds free of any defenses of the maker of the bonds. A holder of bearer bonds who is not a holder in due course has no greater rights than his predecessor-in-interest. UCC §§ 3-302(a)(2), 3-303.

Comment: A holder in due course must take the instrument for value.

Sirius LC v. Erickson, 156 P.3d 539, 62 U.C.C. Rep. Serv. 2d 411 (Idaho 2007) – A note provided that it was payable “to [payee].” Because it was not payable “to the order of [the payee]” or “to bearer”, it was not a “negotiable instrument.” UCC §§ 3-104 and 3-109.

Balsbaugh v. Fidelity Brokerage Servs., LLC, 866 N.E.2d 1002 (Table), 2007 WL 1544396, 63 U.C.C. Rep. Serv. 2d 120 (Mass. App. Ct. 2007) – Homeowners did not suffer damages when they issued joint-payee checks that were endorsed by their landscaper and not by the other payee because the checks were used to pay actual obligations of the homeowners. UCC § 4-103.

Lopes v. Mellon Investor Servs. LLC, 2007 WL 4258189 (S.D.N.Y. 2007) – A payee of a check that has not received possession of the check does not have a sufficient property interest in the check to state a conversion claim when the check is handled without the endorsement of the payee. Former UCC § 3-420.

In re Foreclosure Cases, 2007 WL 3232430 (N.D. Ohio 2007) – The holder of a note acquired in a pool of notes could not maintain a judicial foreclosure action in the absence of providing some proof that the note had been transferred to it from the originator of the note.

Payment-in-Full Checks

In re Genuity, Inc., 2007 Bankr. LEXIS 2133 (Bankr. S.D.N.Y. 2007) – A party’s letter to the service provider listing deductions from invoices and stating that the enclosed check was to cover outstanding invoices did not meet the mutual assent requirements for accord and satisfaction because it did not include clear notice that acceptance of the offered amount would settle all outstanding claims.

Case Funding Network, L.P. v. Anglo-Dutch Petroleum Int’l, Inc., 2007 Tex. App. LEXIS 6293 (Tex. App. 2007) – Extremely detailed and conspicuous accord and satisfaction language related to settlement of claims was effective.

Ross Bros. Constr. Co., Inc. v. Markwest Hydrocarbon, Inc., 196 Fed. Appx. 412, 61 U.C.C. Rep. Serv. 2d 102 (6th Cir. 2006) (unpublished opinion) – A check tendered as payment in full must be tendered in “good faith.” A check can be tendered as payment in full in good faith, even though the person tendering the check acted in bad faith earlier in the transaction. UCC § 3-311.

Auto Glass Express, Inc. v. Hanover Ins. Co., 912 A.2d 513, 61 U.C.C. Rep. Serv. 2d 631 (Conn. App. Ct. 2006) – An insurance company sent a check as payment-in-full of an insurance claim. The insurance company routinely included the payment-in-full language on every check it sent with respect to an insurance claim. The court held that the automatic inclusion of the payment-in-full language did not prevent the insurance company from claiming that it was acting in good faith, as required by the payment in full provision of the UCC. However, the UCC also requires that the check, or a communication that accompanies the check, include a conspicuous statement that the check is offered as payment in full. This check included a conspicuous statement, but the statement itself did not reasonably indicate that the check was tendered as payment in full.

Electronic Funds Transfer

Zengen, Inc. v. Comerica Bank, 158 P.3d 800, 62 U.C.C. Rep. Serv. 2d 911 (Cal. 2007) – The chief financial officer of a company embezzled money by transferring funds to accounts under his control. The court concluded that a person who wants to object under UCC § 4A-405 to the payment of a payment order must do more than notify the bank that the payment order was fraudulent. The objector must object in some manner to the action of the bank in paying the payment order to fulfill the purpose of notifying the bank that the customer believes the bank is liable for the loss.UCC § 3-311.

I. Cruise.com Corp. v. Aliksanyan, 16 Misc. 3d 1119(A) (Table), 2007 WL 2231422 (N.Y. Sup. Ct. 2007) (unpublished opinion) – UCC Article 4A preempts common-law claims of breach of contract, conversion, and negligence relating to an electronic funds transfer. UCC §§ 4A-102; 4A-104.

Petty v. Citibank (S.D.) N.A., 218 S.W.3d 242, 246-47, 62 U.C.C. Rep. Serv. 2d 930 (Tex. App. 2007) – An obligor could not use UCC § 3-311 and its payment-in-full provisions where there was no “bona fide” dispute as to the amount owed. However, the court concluded that the UCC provision did not displace any available common law theories to prove an accord and satisfaction.

Jones v. Baltimore Life Ins. Co., 2007 WL 1713250, at * 3, 10, 12, 63 U.C.C. Rep. Serv. 2d 50 (E.D. Cal. 2007) – An insurer sent a beneficiary a check along with a letter that said “depositing or cashing of this check will release [the insurer] from paying this claim.” The court concluded that this did not generate an accord and satisfaction under UCC § 3-311 because the statement in the letter was not a “conspicuous statement to the effect that the instrument was tendered as a full satisfaction of the claim.”

Wolfe v. Eagle Ridge Holding Co., LLC., 869 N.E.2d 521, 526, 63 U.C.C. Rep. Serv. 2d 382 (Ind. Ct. App. 2007) – An obligor tendered a check as “payment in full” and satisfied all of the requirements of UCC § 3-311. The payee attempted to reserve its rights by stamping a reservation of rights on the check before cashing the check. The court held that the attempted reservation of rights was ineffective. UCC §§ 1-207, revised 1-207, and 3-311.