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Exam no questions on preemption (bank fees supplement)

Thursday, February 27 Chapter Six: Wrongdoing & Error Check kitingusing the delay period of bank collection (the float) to create money on empty accounts: o Involves opening 2 bank accounts in distant locations o And writing & depositing checks on the other account in each bank o Thus increasing the amount and using the slowness of the bank collection process to create the false appearance of assets Forgery of the payees name o BASICSTWO principles to keep in mind: 1. In Negotiation: the forgery of payees name or a special indorsees name no valid negotiation takes place no one taking the instrument thereafter can qualify as a holder If a check is payable to order of a named person only she can be a holder; this holder status is postponed until she gets possession. o If no valid indorsement by payee no one after qualifies as a holder, regardless of: How many times the instrument is subsequently transferred How good the forgery appears to be How innocent the later takers are How much value they paid o Check still the payees property and she could replevy it from the current transferee. Compare: If check was either made out to bearer OR if payee blank indorsed it before it was stolen: o Anyone in possession would be a holder and Could qualify as a HIDC Problem 109: GMA gifted PORTIA a $500 signed check, but it got stolen. THIEF forged PORTIAs named, then signed his below it. He deposited the check in his acct at CSB. Before check was presented, PORTIA had GMA stop payment so it was dishonored and returned to CSB. THIEF already withdrew the $ and fled. o Since CSB have value fot the check, is it a HIDC, thus can enforce the check against GMA per 3-414(b)? See 3-201 CSB cannot be a HDC there was no negotiation b/c there was a forgery of Portias signature Villain is not entitled to enforce the instrument Grandma has no obligation to CSB as an indorser under 3414 Drawer and indorser are liable to a holder CSB is not a holder CSBs only remedy is to charge back Villains account
Not presented by a H check not properly payable, gma didnt even have to stop payment on the check

2. PEEI: 3-301 Primary definition holdersomeone who takes pursuant to a valid negotiation But also look to (ii) it speaks of a non holder in possession of the instrument who has the rights of a holder. o These are people that the law thinks is worthy of protection Problem 110: What if before the check was stolen, she owed HELEN money, so she gave HELEN the check but forgot to indorse it. 3-203 Is HELEN a holder? No, bc of missing indorsementbut under Shelter Rule, she is a non-H with H rights Can she force PORTIA to indorse? She has a specifically enforceable right to the unqualified indorsement under 3-203(c) HELEN gave value for it

WARRANTY LIABILITY The aftermath of the forgers results in an adjustment of responsibilities between other parties dealing with the check.

There are THREE primary theories: o Properly Payable Rule 4-401 o Warranties rules (next up in this discussion) and o The ability if certain parties to sue in conversion (later discussed) Problem 111 This check is not properly payable under 4-401 b/c it was not cashed according to Moots instructions. Bank must recredit Moots account. ONB must look to presentment warranties in 4-208(a)(1) has to go against other parties in presentment chain Merchant Bank, Tower Drug and JC. None of these parties are holders (due to forgery) and none were entitled to payment or to enforce the draft ONB should give notice to MB w/in 30 days (doesnt lose rights but MB may defend by saying that She rewrote another check for LL bc she still had underlying obilation to pay LL
rent By taking check as payment, his rights suspended Underlying oblig of T only discharged if its paid to a holder Does 3-309 and 3-301 allow LL to enforce without possession? Yes bc it was lost/stolen/estroyed LL rest rt to be paid as PEEI and T would have to pay him even though checks already been paid once to a nonH. LLs rts survive Presentment war ordinary checks 4-208(a)(1)

Art 3 & 4 both have warranty sections and are substantively identical o Presentment warranties: 3-417 4-208 o Transfer warranties: 3-416 4-207 o Article 3 warranties control until the check is taken for deposit Then, Article 4 warranties take over at that time The difference between presentment and transfer warrantiesconsider a NI THREE stages of life: o First. Issuance (the creation of the ! and its handing over to the first taker No warranties are made on issuance o Last. Presentment (surrender to drawee for either acceptance or payment; at that moment: Presentment warranties are made by: 1. The entity physically making presentment AND 2. All prior transferors [giving the drawee a choice of defendants] o Second. Now consider this middle part: Transfer (every other move it makes for consideration between issuance and presentment) These give rise to transfer warranties These are aka suits off the instrument: They dont require possession as a prerequisite to suit Problem 112 o MB is not the drawee bank and cannot use the 4-208 presentment warranty o Could use the 4-207 transfer warranties to pursue the drug store: subsection 1 and 2 o MB must give notice to the drug store under 4-207(d) 30 days after notice (wont lose rights but losses of drug store due to delay can be a defense) o Statute of limitations on transfer warranty suit is 3 years from date of breach under 3-118(g) and 4-111 Problem 113 o Villain also breached a xfer warranty so drug store can sue Villain for breach of transfer warranty as well If forgery of payee apply warranty theories in this order: o Firstpresentment o Secondtransfer

CONVERSION LIABILITY A civil action for misappropriation of anothers property Problem 114: Bank takes a check, leaves, comes back, and wont pay the check or give it back. Can it simply keep the check? o No. That is conversion (In common law). Problem 115: stealing an indorsed check is conversion o What if person who converts the check (that is already indorsed/is a bearer instrument) takes it to a check-cashing store and the check cash gives value. The store becomes a HDC. And HDC cannot be sued for conversion under 3-420. Payee will be stuck and drawers obligation will be discharged when check is paid under 3-310. 3-420 Conversion is strict liability there is no negligence component

Effect: passes the loss back to wrongdoer OR the first person to trust him Damages: under both warrantiesrecovery of the loss suffered as a result of the breach, o But not more than the amount of the !, o PLUS expenses and loss in interest incurred as a result of the breach No attorneys fees are recoverable in MOST jurdx as expenses in the new version of the rules o No jurdx allows as damages

(a) says the CL of conversion is incorporated and applicable to NI Standingone whose property rights are adversely effected o Holder of NI, because she is its owner and has property rights of it therein Order instrument payee/person payee negotiated the ! to Delivery = property rights to payee o This payee has FOUR actions if: 1. Check is stolen 2. Name is forged AND 3. Instrument is paid by the drawee bank: o A. Conversion V. drawee bank OR V. anyone taking check after forgery If drawee forced to pay payee: o Drawee can then sue presenter for breach of presentment warranty for really not being a PEEI Presenter can then sue the transferor under transfer warranties Result: loss passes up the chain until it hits the forger or the first person to trust him o B. Replevy and drawers obligation Since its still the property of the payee, she can replevy from current possessor Probably the drawer bc hell have it stored as a cancelled check She must then cross off the forged indorsement, sign it, and present to drawee bank for payment If drawee: o Paysgreat o Does not pay dishonor payee can sue drawer on either: Drawers 3-414(b) obligation OR The underlying obligation o C. Quasi K By payee For money had & received Longer SOL than conversion o D. Negligence Art 3 preempts all CL theories no tort suits against bks handling forged checks Minority jurdx: some allow CL to supplement the code

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