BANK OFFICER'S

HANDBOOK
OF
COMMERCIAL
BANKING LAW
Fifth Edition

FREDERICK K. BEUTEL
Professor of Law, Enwritus, Uttiversity o f Nebraska
Member of the Nebraska Bar

MILTON R. SCHROEDER
Professor of Law, Arizona State Ut~iversity
Member of the Arizona Bar

WARREN, GORHAM & L A M O m

Uosron NCW York
 PREFACE

financial institutions has dictated an enlargement of the chapters dealing

) with the nature and regulation of commercial banking. These chapters,

1 which are now Part I of the Fifth Edition, not only provide an overview
of the gcneral regulatory framework but discuss important provisions of
b the Depository Institutions Deregulation and Monetary Control Act of SUMMARY OF CONTENTS
I 1980, the Financial Institutions Regulatory and Interest Rate Control
Act of 1978, and other recent legislation. The materials on commercial
paper have been reorganized into a separate Part I1 and the chapters Part I-The Nature and Regulation
describing the duties of bank and customer have been reorganized as of Banking: An Overview
Part 111. These two parts have the greatest continuity with the Fourth
Edition, but the material has been revised to focus primarily upon the /
Nature of Banking . . . . . . . . . . . . . . . . . . . . . . . 3 ./,
Uniform Commercial Code and developme'nts under it. Increased cov-
erage is given to credit card transactions and electronic fund transfers. The Federal Reserve System . . . . . . . . . . . . . . .
., Part IV contains an expanded discussion of the law relating to secured Federal Deposit Insurance . . . . . . . . . . . . . . . . . 45
transactions which is now governed by Article 9 of the U.C.C. This Part Federal Regulation of Banks . . . . . . . . . . . . . . . 53
provides a comprehensive outline of the methods for creating and en- Bank Competition and the Prohibition
forcing security interests in different types of collateral. It covers the Against Dealing in Securities . . . . . . . . . . . . . . .
.
numcrous changes effccted by the 1972 amcndmenls to Article 9 of the
Bank HoJding Companies . . . . . . . . . . . . . . . . . 1
U.C.C,It also givcs a bricf synopsis of the rcccntly cnactcd B:~nkruptcy
Reform Act. The continued growth of special regulatory law dcaling Savings Inslitutions . . . . . . . . . . . . . . . . . . . . . . . 1 19 /
with consumcr transactions has warranted establishing a separate Part Specialized Organizations With Banking
V in this edition to treat issucs rclating to such laws as thc Consumer Functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1439
Credit Protection Act and the Federal Trade Commission Holdcr in Due Sources of Con~mcrcialBanking Law . . . . . . . . 159 .
Course Rule-issues bankers must be familiar with.
In preparing this Fifth Edition we are deeply indebted to Mark
Sanford and Bill Richardson, students at the Arizona State University Part Il-Commercial Paper
Collegc of Law, who providcd research and editorial hclp in preparing
this manuscript for publication. Thcir contributions wcre invaluable. CUAPTER10. Commercial Paper and Its Transfer . . . . . . . . . . 173 1
We are also grateful for the outstanding support providcd by the stall
CIIAPTERI I. Elcnicntary Rcquircmcnts of Ncgotiablc
of the Arizona State University College of Law, and particularly for the Money Paper . . . . . . . . . . . . . . . . . . . . . . . . . . . 185 f
efforts of Betty Andre, Dorothy Swanton, and Sandra Mitchell. Dean
Alan Matheson of the College of Law has been especially supportive CHAPTER12. Other Types of Negotiable Paper . . . . . . . . . . . . 199
of this project. CHAPTER13. Forms of Indorsement and Transfer of
Negotiable Paper . . . . . . . . . . . . . . . . . . . . . . . . 2 13
CIIAPTER14. Liability of Parties to Commercial Paper
and Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 223
CHAPTER15. Holders in Due Course, Bona Fide Purchasers,
and Defenses to Negotiable Paper . . . . . . . . . . . 241
CHAPTER16. Negotiability of Commercial Paper With
Special Contracts . . . . . . . . . . . . . . . . . . . . . . . . 263
CHAPTER17. Interest and Usury . . . . . . . . . . . . . . . . . . . . . . . 285
CHAPTER18. Personal Security Devices and Suretyship
Defenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293
v
 SUMMARY OF CONTENTS

Part 111-Duties o f Bank and Customer

Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . . .
Mulunl Dutics of ihc Ilunk i~ndDcpsitor ..... TABLE O F CONTENTS
'Collection and Payment of Instruments .......
Presentment for Payment or Acceptance . . . . . . Page
Section
Protest, Notice of Dishonor, and Waiver . . . . . .
List of Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxiv
Collection of Documentary Drafts ........... Table of Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . M V

Bank's Liability on Its Own Instruments ......

New Payment Systems: Credit Cards and
Electronic Fund Transfers ................. Part I-The Nature and Regulation
Transactions With Fiduciaries . . . . . . . . . . . . . . o f Banking: A n Overview

i
i
Part IV--Secured Transactions and
Bankruptcy
Chapter 1
NATURE OF BANKING

CI, APTER 28. The Creation and Perfection of Security

Intcrests in Personal Property ..............
1-5
1-10
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Classification of Banks . . . . . . . . . . . . . . . . . . . . . . . . . .
3
5
1-15 The Emergence of the National
~ A P T E R 29. Types of Secured Transactions . . . . . . . . . . . . .
Government in Banking . . . . . . . . . . . . . . . . . . . . . . . . . 6
30. Priorities: Rights of Competing Creditors, 1-20 State Regulation of Banks . . . . . . . . . . . . . . . . . . . . . . . . 9
Purchasers, and Transferees ................ 1-25 An Outline of the National Banking System . . . . . . . . . . 14
3 1. Default and Enforcement of Security Interests .. 1-30 Correspondent Banking . . . . . . . . . . . . . . . . . . . . . . . . . . 15
32. Debt Adjustment and Bankruptcy . . . . . . . . . . . 1-35 Banks Changing From One System to the Other . . . . . . 17

Chnpter 2
Part V-Special Consumer Credit
Reglrlatiotls TIlE FEDERAL RESERVE SYSTEM
2-5 Thc Structure of thc Fcdernl Rcscrvc Systcm . . . . . . . . 19
:IMPTER 33. Crcdit Disclosure Regulation . . . . . . . . . . . . . . . 2-1 0 The Functions of the System . . . . . . . . . . . . . . . . . . . . . 20
ZHAPTER 34. Regulation of Other Consumer Credit 2-1 5 Board of Governors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Practices ............................... 2-20 Orders, Regulations, and Interpretations . . . . . . . . . . . . 23
IHAPTER 35. Preservation of Consumer Defenses 2-25 Open Market Operations ........................ 25
and Claims: The Holder in Due Course Rule . . 2-3 0 Federal Reserve Banks . . . . . . . . . . . . . . . . . . . . . . . . . . 27
'ableof Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-3 5 Directors of the Reserve Banks . . . . . . . . . . . . . . . . . . . 29
2-40 Powers and Duties of Reserve Banks . . . . . . . . . . . . . . . 30
ndex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2-45 Depository Functions of Reserve Banks . . . . . . . . . . . . . 30
2-5 0 Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
* 2-5 5 Discounts and Advances . . . . . . . . . . . . . . . . . . . . . . . . . 33
2-60 Check Collection and Fund Transfers . . . . . . . . . . . . . . 34

vii
 TABLE O F CONTENTS I TABLE OF CONTENTS

Page Section Page

Federal Reserve Note Issues . . . . . . . . . . . . . . . . . . . . . . 36 4-65 Environmental Regulation . . . . . . . . . . . . . . . . . . . . . . . 79
Examination of Banks .......................... 37 4-7 0 Transactions Involving Securities . . . . . . . . . . . . . . . . . . 79
Regulation of Interest and Dividends Paid by Banks . . . 38 4-7 5 American Banks Doing Foreign Business . . . . . . . . . . . 81
Credit Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 4-80 Foreign-Owned Banking Corporations . . . . . . . . . . . . . . 82
The Relationship of the Federal Reserve System
to Savings Institutions .......................... 40
The Comptroller of the Currency . . . . . . . . . . . . . . . . . . 41 Chapter 5
Bank Holidays . . . . . . . . . . . . . . . . . . . . . . . . .
...... 44
DANK COMPETITION A N D TIIE
PROIIIBITION AGAINST DEALING
Chapter 3 IN SECURITIES
FEDERAL DEPOSIT INSURANCE Branch Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
3-5 Thc Federal Deposit Insurance Corporation . . . . . . . . . 45 Consolidations nnd Mcrgers . . . . . . . . . . . . . . . . . . . . . . 90
3-10 Insured Deposits ............................... 46 lntcrlocking Dircctoratcs . . . . . . . . . . . . . . . . . . . . . . . . 91
3-1 5 Deposit Insurance Assessments . . . . . . . . . . . . . . . . . . . 48 Prohibition of Tying Arrangements . . . . . . . . . . . . . . . . 92
3-20 Permanent Insurance Funds . . . . . . . . . . . . . . . . . . . . . . 48 Banking and Antitrust Laws . . . . . . . . . . . . . . . . . . . . . 93
3-25 Tcrmination of Insurance . . . . . . . . . . . . . . . . . . . . . . . . 49 The Prohibition Against Dealing in Securities . . . . . . . . 95
3-30 Liquidation and ~eorganizationof Insured Banks ..... 50 Bank Scrvicc Corporations . . . . . . . . . . . . . . . . . . . . . . . 97
3-35 Bank Regulation and Supervision . . . . . . . . . . . . . . . . . . 51 Interstate Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Competition From Non-Bank Financial Institutions . . . 99

Chapter 4
Chnptcr 6
FEDERAL REGULATION O F BANKS
4-5 Federal Regulatory Agencies in General . . . . . . . . . . . . 53 BANK HOLDING COMPANIES
4-10 Federal Bank Examination-Financial Institutions Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Examination Council . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Prohibition of Non-Bank Aclivitics-Exemptions . . . . . 104
f-15 Prevention of Unsafe and Unsound Banking Activities Closely Related to Banking . . . . . . . . . . . . . . . 105
Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Hearings and Judicial Review of Board Decisions
b 2 0 Suspension or Removal of Directors or Under Section 4 ( c ) (8) . . . . . . . . . . . . . . . . . . . . . . . . . 111
Officers for Cause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Intcrstatc Activities of Bank Holding Companies . . . . . . 113
1-25 Dcrcgulation of Intercst and Dividends Bank Holding Companies and the Securities
PaidbyBanks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
4-30 Portfolio Regulation of Commercial Banks . . . . . . . . . . 59 Bank Holding Companies and Competition
35 Regulation of the Incidental Powers of inBanking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
National Banks ................................ 65
-40 Loans to Bank Officers and Directors .............. 66
5 Loans to Bank Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . 68 Chapter 7
-50 Financial Privacy for Bank Customers . . . . . . . . . . . . . . 69
SAVINGS INSTITUTIONS
-55 Financial Record-Keeping and Reporting of Currency
Transactions-The Bank Secrecy Act .............. 74 Savings Institutions Generally . . . . . . . . . . . . . . . . . . . . . 119
4-60 Local Credit Needs-The Community Savings and Loan Associations . . . . . . . . . . . . . . . . . . . 120
Reinvcstmcnt Act of 1977 ....................... 77 Regulation of Savings and Loan Associations . . . . . . . . 121

viii
I
 I
TABLE OF CONTENTS TABLE OF CONTENTS

Page Section Page

Promise or Order .............................. 186 13-15 Kinds of Indorsements . . . . . . . . . . . . . . . . . . . . . . . . . . 215
Unconditional ................................. 187 13-20 Blank Indorsement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
In Writing and Signed .......................... 190 13-25 Special Indorsement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
Certainty as to Sum . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190 1 3-30 A Qualified Indorsement . . . . . . . . . . . . . . . . . . . . . . . . 217
Kinds of Money ............................... 19 1 1 3-3s Restrictive Indorsements . . . . . . . . . . . . . . . . . . . . . . . . . 217
Demandpaper ................................. 192 13-40 Conditional Indorsements . . . . . . . . . . . . . . . . . . . . . . . . 218
Determinable Future Time ....................... 192 1 3 4 5 Rights of Restrictive Indorsees . . . . . . . . . . . . . . . . . . . . 219
Order or Bearer Paper .......................... 193 13-50 Bank's Power to Supply Missing Indorsement . . . . . . . . 220
Designation of Payee ........................... 195 13-5 5 Efiect of Restrictive Indorsements on Securities
Fictitious or Nonexisting Payecs ... ; .............. 195 nnd Conlnlodi~yPnpcr . . . . . . . . . . . . . . . . . . . . . . . . . . 220
Drawee Must Be Certain . . . . . . . . . . . . . . . . . . . . . . . . 196 Transfcr Without Indorsement . . . . . . . . . . . . . . . . . . . . 221
All Formal Requisites Must Be Met . . . . . . . . . . . . . . . . 196 Limit of Indorsees' Rights By Separate Contract . . . . . . 221
Ambiguous Terms and Rules of Construction . . . . . . . . 197

Chapter 12 Chnpter 14

OTHER TYPES OF NEGOTIABLE PAPER LIAUILITY OF PARTIES TO COMMERCIAL

PAPER AND SECURITIES
Other Types of Negotiable Paper . . . . . . . . . . . . . . . . . .
Negotiability of Commodity Paper at 14-5 Thc Naturc of Commercial Paper Contracts . . . . . . . . . . 223
ComrnonLaw ................................. 14-10 Primary and Secondary Liability . . . . . . . . . . . . . . . . . . 224
UniformLaws ................................. 14-15 Liabili~yof Makers and Acceptors of
Negotiability of Commodity Paper Under Negotiable Money Paper . . . . . . . . . . . . . . . . . . . . . . . . 225
Commercial Code .............................. 14-20 Acceptance on the Instrument . . . . . . . . . . . . . . . . . . . . 226
Identification of Documents of Title ............... 14-25 Acceptance by Separate Instrument . . . . . . . . . . . . . . . . 226
Carrier's Liability .............................. 14-30 Promises to Accept Nonexistent Paper . . . . . . . . . . . . . 227
Carrier's or Warehouseman's Lien ................. 14-35 Liability Caused by Impropcr Handling . . . . . . . . . . . . 227
Method of Transfer of Documents of Title .......... 14-40 KindsofAcceptances . . . . . . . . . . . . . . . . . . . . . . . . . . . 227
Nature of Negotiation . . . . . . . . . . . . . . . . . . . . . . . . . . 14-45 QualifiedAcceptances . . . . . . . . . . . . . . . . . . . . . . . . . . . 228
Stock Certificates .............................. 14-50 Effect of Acceptance on Liability of Othcr Partics . . . . . 229
Effect of Negotiation ..................... .
.... 14-55 Liability of Issuers of Securities . . . . . . . . . . . . . . . . . . . 230
14-60 Sccondary Liabili[y on the Papcr . . . . . . . . . . . . . . . . . . 231
Prior Statutes Making Corporate Bonds Negotiable .... 14-65 Indorser's Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231
Investment Securities Under the Commercial Code . . . .
Investment Securities Under the Commercial Code 14-70 Drawer's Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232
-1977 Amendments and Uncertificated Securities . . . . 14-75 Warranty of Transferors of Paper . . . . . . . . . . . . . . . . . 233
14-80 Warranties on Presentment of Negotiable
Paper for Performance . . . . . . . . . . . . . . . . . . . . . . . . . . 234
Chapter 13 14-85 Limitations of Liability in Warranty . . . . . . . . . . . . . . . 235
14-90 Limitation of Liability by Special Contract . . . . . . . . . . 235
FORMS OF INDORSEMENT AND TRANSFER 14-95 Liability of Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236
OF NEGOTIABLE PAPER 14-100 Illustrative Agency Cascs . . . . . . . . . . . . . . . . . . . . . . . . 237
Typcs of Transfer .............................. 2 13 * 14-105 Truske'sLiability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239
Nature of Indorscmcnt ..........................
2 14 14-1 10 Rcprcscntntivc Capacity . . . . . . . . . . . . . . . . . . . . . . . . . 240
...
Xlll
xii '
 'I'AIJI. E 01: CONTENTS

Chapter 15 Seclion Page

HOLDERS I N DUE COURSE. BONA FIDE 16-55 Provision for Sale or Holding of Collateral . . . . . . . . . . 274
PURCIIASERS. AND DEFENSES T O 16-60 Indexation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275
NEGOTIABLE PAPER 16-65 Negotiability by Mere Statement . . . . . . . . . . . . . . . . . . 275
16-70 Negotiability of Mortgages and Other
Page Title-Retaining Contracts . . . . . . . . . . . . . . . . . . . . . . . . 276
Holders in Due Course . . . . . . . . . . . . . . . . . . . . . . . . . . 241 16-75 Contracts in Mortgages-Effect on Negotiability
Requirements of Holding in Due Course . . . . . . . . . . . . 242 and Enforceability of the Notes . . . . . . . . . . . . . . . . . . . 277
Without Notice of Defects or Dcfenses . . . . . . . . . . . . . 243 16-80 Negotiability of Investment Paper . . . . . . . . . . . . . . . . . 278
Good Faith . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245 16-85 Registered Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278
Organizations and Agcncy . . . . . . . . . . . . . . . . . . . . . . . 247 16-90 Spccial Contracts in Bonds . . . . . . . . . . . . . . . . . . . . . . . 279
Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248 16-95 Negotiability and Effect of Stock Exchange Rules . . . . . 281
Bank Credit as Value . . . . . . . . . . . . . . . . . . . . . . . . . . . 250 16-1 00 Negotiability by Contract . . . . . . . . . . . . . . . . . . . . . . . . 282
Before It Was Overdue . . . . . . . . . . . . . . . . . . . . . . . . . . 252 16-105 Waivers of Defenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283
Purchaser of Overdue or "Stale" Negotiable Paper . . . . . 254
Kinds of Defenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254
Defects in Contractual Relations . . . . . . . . . . . . . . . . . . . 255
Other Agreements Affecting Defenses to the Chapter 17
Instrument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255 INTEKEST AND USURY
Wrongs in Contracting and Transfer ............... 256
Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257 State Usury Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285
Statutes Making Instruments Void ................. 258 Federal Preemption of State Usury Law . . . . . . . . . . . . 286
Rcsidcntial Real Property Loans . . . . . . . . . . . . . . . . . . 288
Usury Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258
Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259 Obligations of Depository Institutions . . . . . . . . . . . . . . 288
Lack of Causation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261
Business and Agricultural Loans of $25.000 or More . . 289
Holder in Due Course-Abolition in Other Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289
Consumer Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . 262 State Laws Overriding Federal Interest Limits . . . . . . . 290
Most Favored Lender Doctrine . . . . . . . . . . . . . . . . . . . 290
Interstnte Crcdit Activities of National Banks . . . . . . . . 290
The "Prime" Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291
Chapter 16
NEGOTIABILITY O F COMMERCIAL PAPER
Chnpler 18
WITH SPECIAL CONTRACTS
The Problem of Negotiable Notes . . . . . . . . . . . . . . . . . 263 PERSONAL SECURITY DEVICES AND
Acceleration Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264 SURETYSHIP DEFENSES
Promises to Do Additional Acts . . . . . . . . . . . . . . . . . . . 266 Types of Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293
Promises to Preserve Collateral or Other Security . . . . . 266 Simple Personal Security . . . . . . . . . . . . . . . . . . . . . . . . . 294
Acceleration on a Contingency . . . . . . . . . . . . . . . . . . . . 267 Suretyship Defenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295
Provisions in Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . 268 Discharge of Parties Primarily and Secondarily
Chattel Paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269 Liable on Negotiable Paper . . . . . . . . . . . . . . . . . . . . . . 296
Sealed Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 1 Suretyship. Guaranty. and Accommodation
Judgment Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272 Parties on Negotiable Paper . . . . . . . . . . . . . . . . . . . . . . 297
Waiver of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273 Use of Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . 300
xiv
 I
TABLE O F CONTENTS TABLE OF CONTENTS

Part Ill-Duties of Bank and Customer Seclion Page

20-95 Customer's Right to Withdraw Against Itenis
Chapter 19 Dcpositcd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 356
20-100 Duty of Depositor to Examine Monthly Statcnicnts . . . . 357
BANK ACCOUNTS
20-105 Customer's Duty to Rcport Forgcrics and Altcr a t 'Ions
Page When Checks Arc Rctaincd by the Bank . . . . . . . . . . . . 360
Basic Commercial Code Definitions . . . . . . . . . . . . . . . . 305 20-1 10 Depositor's Duty of Due Care . . . . . . . . . . . . . . . . . . . . 360
Definition of Bank and Branch Bank .............. 307 20-1 15 Ambiguous Instruments . . . . . . . . . . . . . . . . . . . . . . . . . 361
Nature of Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . 307 20-1 20 Banker's Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 362
Kinds of Accounts ............................. 309 Garnishment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364
Opening an Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 12
Contracts of Adhesion or Unconscionable
Agreements ................................... 3 12 Chapter 21
Forms of Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 19 COLLECTION AND PAYMENT OF
Termination of Relationship . . . . . . . . . . . . . . . . . . . . . . 321 INSTRUMENTS
Non-Deposit Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 324 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365
Relation of Depositor and Bank . . . . . . . . . . . . . . . . . . . 366
Choosing the Collecting Bank . . . . . . . . . . . . . . . . . . . . 368
Chapter 20 Intcrmcdiary and Collccting Banks . . . . . . . . . . . . . . . . 368
MUTUAL DUTIES OF TIIE BANK Conscqucnccs of Dclny or Othcr Failure to Act
AND DEPOSITOR Propcrly in Collecting the ltcni . . . . . . . . . . . . . . . . . . . 370
Sending Paper Direct to Payor . . . . . . . . . . . . . . . . . . . . 372
Bank's Right to Charge Customer's Accounl . . . . . . . . . 328 Medium of Payn~entUnder Commercial Code . . . . . . . 373
Improper Payment and Bank's Rights of Duties of Drawee or Payor Bank . . . . . . . . . . . . . . . . . . 373
Subrogation ................................. 328 Pnymcnt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 374
Liability of Bank for Refusal to Pay . . . . . . . . . . . . . . . . 329 Pnymcnt by Ncgotinblc Papcr and Its ElTcct on
Post-Dated Checks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333 the Underlying Transaction . . . . . . . . . . . . . . . . . . . . . . . 375
Stale Checks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333 Payor Bank's Right to Canccl Payment and
Stopping Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 334 Recover Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 377
Payment Stopped by Third Parties . . . . . . . . . . . . . . . . 338 Direct Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 378
Stopping Payment on Cashier's Checks. Bank Instruments Payable At or Through Banks . . . . . . . . . . 379
Drafts. and Certified Checks ..................... 340 Errors in Handling Computer Encoded Chccks . . . . . . 381
Identification of Payees and Indorsers .............. 341
Federal Reserve Rulings. Clearinghouse Rules.
Bearer Paper .................................. 342
and Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 383
Fictitious or Nonexisting Payees .................. 343
Miscredited Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . 347
Checks With Forged o r Unauthorized Signatures ...... 348
Alteration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350 Chapter 22
Altered Checks Which Were Complete When Signed ... 351 PRESENTMENT FOR PAYMENT OR
Instruments Issued With Blanks . . . . . . . . . . . . . . . . . . . 353 ACCEPTANCE
Obligation of Good Faith . . . . . . . . . . . . . . . . . . . . . . . . 354
J l i ~ n k 'Riglit
~ to Revokc Crcclits to Cirstorncr's Formnli~icsto Dc Mct n t Maturity . . . . . . . . . . . . . . . . . 385
Account and Charge Customer for Items Not Paid . . . . 355 Dctcrn~inationof Maturity . . . . . . . . . . . . . . . . . . . . . . . 38G
xvii
 TABLE O F CONTENTS TABLE O F CONTENTS
Section Section Page
22-1 5 Saturdays. Sundays. and Holidays ................. 24-1 5 Bank's Responsibilities for the Documents
22-20 Presentment for Payment . . . . . . . . . . . . . . . . . . . . . . . . and theGoods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 415
22-25 Formalities of Presentment . . . . . . . . . . . . . . . . . . . . . .
22-30 Placc of Prcsentmcnt . . . . . . . . . . . . . . . . . . . . . . . . . . .
22-35 Unusual Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chnptcr 25
22-40 When Presentment Is Not Required . . . . . . . . . . . . . . . . BANK'S LTADILITY O N ITS OWN
22-45 Time Allowed for Payment . . . . . . . . . . . . . . . . . . . . . . . INSTRUMENTS
22-50 Tenderof Payment .............................
22-55 Dishonor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25-5 Bank's Liability on Negotiable Instruments
22-60 Presentment for Acceptance . . . . . . . . . . . . . . . . . . . . . . . Gencrally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 417
22-65 Presentment as It Affects the Drawer's Liability . . . . . . . 25-10 Certificates of Deposit . . . . . . . . . . . . . . . . . . . . . . . . . . 418
25-15 Cashiers' Checks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 418
25-20 Money Orders and Travelers Checks . . . . . . . . . . . . . . . 419
25-25 Acceptance of Drafts . . . . . . . . . . . . . . . . . . . . . . . . . . . 420
Chapter 23 25-30 Certifying or Accepting Forged or Altered Paper . . . . . 422
PROTEST. NOTICE O F DISHONOR. 25-35 Mistake in Certifying . . . . . . . . . . . . . . . . . . . . . . . . . . . 423
AND WAIVER 25-40 Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423
25-45 Scope of Commercial Code Letter of
23-5 Nature of Requirement of Formalities at Maturity . . . . 399 Credit Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 427
23-10 Protcst . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400 25-50 Form of Lcttcrs of Crcdit . . . . . . . . . . . . . . . . . . . . . . . 427
23-15 Form of Protest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400 25-55 Issucr's Obligation to Its Customer . . . . . . . . . . . . . . . . 429
23-20 Time and Place of Protest . . . . . . . . . . . . . . . . . . . . . . . 401 25-60 Issuer's Obligation to Pay . . . . . . . . . . . . . . . . . . . . . . . 430
23-25 When Protest Is Unnecessary . . . . . . . . . . . . . . . . . . . . . 401 25-65 International Letters of Credit and
23-30 Notice of Dishonor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 402 Uniform Customs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431
23-35 Person Giving Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . 403 25-70 Rights of Remitters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 432
23-40 Persons Receiving Notice . . . . . . . . . . . . . . . . . . . . . . . . 404
23-45 Time Within Which Notice Must Be Given . . . . . . . . . . 404
23-50 Place for Addressing Notice of Dishonor ............ 406 Chnptcr 26
23-55 Cascs Where Notice Nccd Not Bc Givcn ............ 407 NEW PAYMENT SYSTEMS: CREDIT CARDS
23-60 Prcscntmcnt of Previously Dishonorcd Cllccks ........ 408 AND ELECTRONIC FUND TRANSFERS
23-65 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 408
23-70 Construction of Waivers . . . . . . . . . . . . . . . . . . . . . . . . . 410 26-5 Bnnk Credit Cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 434
23-75 Agrccmcnt for Chargcback as Waivcr . . . . . . . . . . . . . . 410 26-10 Truth-in-Lcnding Act Provisions Governing
23-80 Notice of Dishonor to Drawer . . . . . . . . . . . . . . . . . . . . 411 Crcdit Cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 436
26-15 Issuing Credit Cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . 437
26-20 Cardholder Liability for Unauthorized Use . . . . . . . . . . 437
26-25 Preservation of Cardholder Claims and Defenses . . . . . . 438
Chapter 24 26-30 Prohibition Against Set Off of Credit Card
Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 440
COLLECTION OF DOCUMENTARY D R A I T S
26-35 Terms of Credit Card Plans Affecting Merchants
24-5 Documentary Drafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 413 and Other Persons Who Honor the Card . . . . . . . . . . . 441
124-10 Bank's Duty to Present Draft and Notify 26-40 Duty of Sellers to Notify Issuers of Returned

I Customer of Nonpayment . . . . . . . . . . . . . . . . . . . . . . . . 414

xviii
3.. Goods and Other Credits . . . . . . . . . . . . . . . . . . . . . . . 441
 1
eclion
T A B L E O F CONTENTS
Page
TABLE O F CONTENTS

Part I V-Secured Transactions and

6-45 Electronic Fund Transfer Systems ................. 441
Regulation of Electronic Fund Transfers . . . . . . . . . . . .
Bankruptcy

I
50 443
-55 Scope of the Electronic Fund Transfer Act . . . . . . . . . . 444
-60 Unauthorized Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . 445 Chapter 28
-65 Error Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 446
.6.70 Financial Institution's Liability to Customers for T H E CREATION AND PERFECTION OF
Electronic Fund Transfers . . . . . . . . . . . . . . . . . . . . . . . 448 SECURITY INTERESTS IN PERSONAL
:675 Extcnt of Civil Liability of Institutions for PROPERTY
Electronic Fund Transfers ....................... 448 Poxr
16-80 Prcauthorizcd Trnnsfcrs nnd Stop Pnymcnt Rigllh . . . . 449 Introductinn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 473
!6-85 Suspcnsion of Obligations to Third Partics .......... 450 Scopc of Comnlcrcinl Codc . . . . . . . . . . . . . . . . . . . . . . 474
!6-90 Disclosure and Notice Obligations . . . . . . . . . . . . . . . . . 450 Lcascs and Consignments as Security Transactions . . . . 476
!6-95 Administrative Enforcement . . . . . . . . . . . . . . . . . . . . . . 45 1 The Security Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 477
16-100 Miscellaneous Restrictions on Electronic Purchase Money Security Interest . . . . . . . . . . . . . . . . . . 479
Fund Transfers . . . . . . . . . . . . . . . . . . . .
.... .
..... 45 1 Pcrfcction of Sccurity Intcrcsts . . . . . . . . . . . . . . . . . . . . 479
26-1 05 Issuing Access Cards .......................... 452 Filing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480
26-1 10 Relation to State Law . . . . . . . . . . . . . . . . . . . . . . . . . . . 453 Financing Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 482
26-1 15 Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 454 Termination Statements and Partial Releases
of Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 484
Assignment of Security Interests . . . . . . . . . . . . . . . . . . . 485

Chapter 27
TRANSACTIONS WITH FIDUCIARIES
Chapter 29
Nature of Fiduciary Rclalionsllip .................. 455
TYPES O F SECURED TRANSACTIONS
Duties of Fiduciary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 456
Special Duties of Fiduciaries Handling Funds T h e Pledge ................................... 487
or Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 457 Field Warehouse Systems . . . . . . . . . . . . . . . . . . . . . . . . 490
Duties of Third Parties Dealing With Fiduciaries . . . . . 458 Duties of a Pledgee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 491
Requirements of Value to Cut Off Rights Perfection of Security Interests by Filing . . . . . . . . . . . . 492
of Beneficiaries ................................ 459 Security Interests in Goods and Chattels ............ 493
The Nature of Notice of Breach of Consumer Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 494
Fiduciary Relationship . . . . . . . . . . . . . . . . . . . . . . . . . . 460 Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 495
Transfers of Negotiable Instrument by Fiduciaries .... 461 Farm Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 496
Deposits of Fiduciaries and Fiduciary Funds . . . . . . . . 463 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 497
Fiduciary Deposits Under Uniform Fiduciaries Act . . . . 465 Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 498
Deposits in Name of Two or More Trustees . . . . . . . . . . 465 General Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 499
Fiduciary Deposits Under Commercial Code ......... 466 ..
Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 499
Banks in Fiduciary Relation to Security Owners . . . . . . 466 Chattel Paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500
Uniform Act for Simplification of Fiduciary Documents of Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 501
Security Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 467 Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 501
Uniform Common Trust Fund Act ................. 468 Fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 505
Regulation of Trust Authority of National Banks . . . . . 469 Motor Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 507
xxi
 TABLE OF CONTENTS TABLE O F CONTENTS
Section Poge Section Page
29-90 Bank Accounts ................................ 507 32-30 Bnnkruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 539
29-95 Insurance Policies .............................. 509 32-35 Voluntary and Involuntary Pctitions in Bankruptcy . . . . 541
32-40 Rights and Powers of Trustccs in Bankruptcy . . . . . . . . 542
32-45 Sccurcd and Unsecured Creditors . . . . . . . . . . . . . . . . . 544
Chapter 30
PRIORITIES: RIGHTS OF COMPETING
CREDITORS. PURCIIASERS. AND
TRANSFEREES Part V-Special C o n s ~ o u c rCredit
130-5 Unperfected Security Interests . . . ; ................ 51 1
Regulatiorls
D3elo Conflicts With Other Perfected Sccurity Interests ..... 513
Po-15 Buyerof Goods ................................ 515 Chapter 33
. 30-20 Purchasers of Instruments. Chattel Paper.
Documents ......................... CREDIT DISCLOSURE REGULATION
.......... 516
30-25 Proceeds .......................... .......... 517 33-5 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 549
?30-30 Fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . .......... 518 33-10 Truth-in-Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 551
30-35 Rights of Unpaid Sellers of Goods . . . . . . .......... 520 33-15 Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 552
30-40 Conflicts With Liens Arising Under Other aws . . . . . . . 521 33-20 Closcd-End and Open-End Credit Arrangements . . . . . . 553
30-45 Commingled or Processed Goods . . . . . . . . . . . . . . . . . 522 33-25 Closcd-End Crcdit Disclosure Rcquiremcnts . . . . . . . . . 553
30-50 Subordination Agreements . . . . . . . . . . . . . . . . . . . . . . 522 33-30 Opcn-End Crcdit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 555
33-35 Consumcr Lcascs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 556
33-40 Disclosures in Real Estate Transactions . . . . . . . . . . . . . 558
Chapter 31 3 3-45 Rcscission Rights in Real Estate Transactions . . . . . . . . 558
DEFAULT AND ENFORCEMENT OF 33-50 Civil Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 560
SECURITY INTERESTS 33-55 Adriiinistrativc Enforccmcnt . . . . . . . . . . . . . . . . . . . . . . 5 62
33-60 Rcliancc on Modcl Forms . . . . . . . . . . . . . . . . . . . . . . . . 563
3 1-5 Default Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 523 33-65 Duty to Rcvisc Prior Disclosurcs . . . . . . . . . . . . . . . . . . 564
31-10 Repossession of the Collateral .................... 524 33-70 Regulation of Crcdit Advertising . . . . . . . . . . . . . . . . . . 564
31-15 Constitutional Limitations on Secured Party 33-75 EfTcct of Truth-in-Lcnding on State Law . . . . . . . . . . . . 565
Rcmcdics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 526 3 3-80 Credit Billing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 565
3 1-20 Disposition of Collateral After Dcfault . . . . . . . . . . . . . . 529
3 1-25 Retention of the Collateral in Discharge of
the Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 1 Chnptcr 34
3 1-30 Liability for Failure to Comply With Code .......... 532 REGULATION O F OTHER CONSUMER
CREDIT PRACTICES
Chapter 32 34-5 Thc Consumcr Credit Protection Act . . . . . . . . . . . . . . 569
DEBT ADJUSTMENT AND BANKRUPTCY 34-1 0. Rcstrictions on Garnishnlcnt . . . . . . . . . . . . . . . . . . . . . 569
34-15 Dcbt Collection Practices . . . . . . . . . . . . . . . . . . . . . . . . 570
32-5 Nature of Insolvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . 535 34-20 Crcdit Rcporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 571
32-10 Rcmedics for Insolvency . . . . . . . . . . . . . . . . . . . . . . . . . 536 34-25 Crcdit Discrimination . . . . . . . . . . . . . . . . . . . . . . . . . . . . 573
32-1 5 Waiver or Cancellation of Debts .................. 536 34-30 Unfair or Deceptive Practices-The Federal Trade
32-20 Assignment for Benefit of Creditors ................ 538 .4
Commission 1mprovcn)cnt Act . . . . . . . . . . . . . . . . . . . . 576
32-25 Receiverships .................................. 538 34-35 Plain English Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 576
xxii xxiii
 T A B L E OF C O N T E N T S

C h a p t e r 35
P R E S E R V A T I O N OF C O N S U M E R
D E F E N S E S A N D C L A I M S : THE H O L D E R
IN D U E C O U R S E RULE TABLE OF ABBREVIATIONS
Section Page
35-5 Introduction .................................. 579
35-10 ....
Abolition of H o l d c r in D u c C o u r s c Stntus b y FTC 580 1 ..................... Automatcd Clcaring Housc
35-15 Transactions C o v e r e d b y F I T R u l e . . . . . . . . . . . . . . . . 581 A.I.S. ..................... Automatic Investment Service
35-20 Preservation of Claims and Defenses U n d c r t h e A.L.I. ..................... American Law Institute
Uniform C o n s u m c r Credit C o d e . . ................. 583 A.L.R. .................... Amcricnn Law Rcports
35-25 O t h c r S t a t c L a w Limiling H o l d c r in D u c Ala. L. Rcv. ................ Alabnmn Law Revicw
Course Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 590 Am. Dec. .................. American Decisions
Am. Rep. .................. American Reports
T a b l e of Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . T-1 Ann. Cas. ................. Annotated Cases
Ariz. L. Rev. ............... Arizona Law Review
Ariz. St. L.J................ Arizona Statc Law Journal
Ark. L. Rcv. ............... Arkansas Law Kcview
A.T.M. .................... Automatcd Teller Machine
Banking L.J. ............... Banking Law Journal
B.C.A. .................... Fcderal Board of Contract Appeals
List of T a b l e s B.C.C. .................... Bank Collection Codc (American
Bankers Association)
Number Page
B.E.A. .................... Bills of Exchange Act (English)
1 . S t a t e B a n k Commissioners ......................... 11 B.H.C. .................... Bank Holding Company
2. Regulations of t h e B o a r d of G o v e r n o r s of the B.U.L. Rev. ................ Boston University Law Review
F e d e r a l Reserve System ........................... 24 Bus. Law. .................. Business Lawyer
I 3. Regulations of Comptroller of C u r r e n c y .............. 43 Calif. L. Rev. .............. California Law Review
1 4. Regulations of t h e Federal Deposit I n s u r a n c e Rut. Cam. L. Rev. .......... Rutgcrs Camden L a w Review
C o r p o r a t i o n .................................... 47 Case W. Res. L. Rev. ........ Case Western Reserve Law Review
5. M a x i m u m Limits on Insured Deposits . . . . . . . . . . . . . . . . 48 C.B.C.T. .................. Customer Bank-Communications
Terminal
6 . S t a t e E n a c t m e n t s of U C C a n d A m e n d m e n t s . . . . . . . . . . . 163
C.C.C. .................... Commodity Credit Corporation
7. H i e r a r c h y of R u l e s Binding o n B a n k s ............... 168
C.F.R. .................... Code of Federal Regulations
............
Clcv. St. L. Rev, Cleveland State Law Review
Colum. L. Rev. ............. Columbia Law Revicw
Com. L.J. .................. Commercial Law Journal
Conn. L. Rev. .............. Conneclicut Law Review
Corncll L.Q. ............... Corncll Law Quarterly
CRA ..................... Community Rcinvestnlcnt Act
DIDC .................... Dcposilory Institutions Deregulation
Commiltcc
DIDMCA .................. Dcpository Institutions Deregulation and
Monctary Control Act of 1980
E C O A .................... Equal Crcdit Opportunity Act
OFT ...................... Electronic Fund Transfer
F.D.L.R. ................... Fcdcrnl Banking Lnw Rcports ( C C H )

xxiv xxv
 TABLE OF ABBREVIATIONS TABLE OF ABBREVIATIONS
FCA ...................... Federal Credit Administration
PCA ...................... Production Credit Association
FCIA ..................... Foreign Credit Insurance Association PIN ...................... Personal Identification Number
FDCP .................... Fair Debt Collection Practices R.C.L. .................... Ruling Case Law
FDI ...................... Federal Deposit Insurance Act REA ...................... Rural Electrification Administration
FDIC ..................... Federal Deposit Insurance Corporation Reg. A to Z ................ Federal Reserve Regulations
.............
Fed. Res. Bull. Federal Reserve Bulletin RESPA ................... Real Estate Settlement Procedures Act
FHLB .................... Federal Home Loan Bank R.T.F.P.A. ................. Right to Financial Privacy Act
FHLBB ................... Federal Home Loan Bank Board
San Diego L. Rev. .......... San Diego Law Review
FHLBS ................... Federal Home Loan Bank System Santa Clara Law............. Santa Clara Lawyer
FHLMC ................... Federal Home Loan Mortgage SMSA .................... Standard Metropolitan Statistical Area
.....................
Corporation ........... Southern California Law Review
So. Calif. L. Rev.
FICB Federal Intermediate Credit Bank Stan. L. Rev................ Stanford Law Review
F.I.R.I.R.C.A............... Financial Institutions Regulatory and Stat. ...................... Unitcd States Statutes at Large
Interest Rate Control Act of 1978 Tenn. L. Rev. .............. Tennessee Law Review
F N M A .................... Federal National Mortgage Association Tex. L. Rev. ............... Texas Law Rcview
FOMC .................... Federal Open Market Committce of the TILA ..................... Truth-in-Lending Act
Federal Reserve System Tul. L. Rcv................. Tulane Law Review
F R B ...................... Board of Governors of the Federal U.B.L.A. .................. Uniform Bills of Lading Act
Reserve System U.C.C. .................... Uniform Commercial Code (Official
FSLIC .................... Federal Savings and Loan Insurance Text 1972)
Corporation U.C.C. (U.L.A.) ............ Uniform Commercial Code (Uniform
F. Supp.................... Federal Supplement Laws Annotated)
FTC ...................... Fcdcrnl Tratlc Conin~issior~ U.C.C.C. .................. Uniform Consumer Crcdit Codc
......................
17.2cI Pcdcrd I(cporlcr, Sccond Scrics U.C.M.A. ................. Unilorln Chnllcl Morlgngc Act
Ga. L. Rev................. Georgia Law Kcvicw U.C.S.A. .................. Uniform Conditional Salcs Act
Gco. L.J................... Georgetown Law Journal U.C.T.F.A. ................ Uniform Common Trust Fund Act
Geo. Wash. L. Rev.......... George Washington Law Review U. Chi. L. Rev.............. University of Chicago Law Review
Haw. L. Rev. .............. Harvard Law Review U. Cinn. L. Rev............. University of Cincinnati Law Review
Iowa L. Rev. ............... Iowa Law Review U. Colo. L. Rev............. University of Colorado Law Review
.................
Ill. L. Rev. Illinois Law Review U.F.A. .................... Uniform Fiduciaries Act
Kan. L. Rev. .............. University of Kansas Law Review U.F.C.A ................... Uniform Fraudulent Conveyances Act
Ky. L.J. ................... Kentucky Law Journal U. Fla. L. Rev.............. University of Florida Law Review
L.R.A. .................... Lawyers Reports Annotated U. 111. L.F. ................. University of lllinois Law Forum
L.R.A. (N.S.) .............. Lawyers Rcports Annotatcd (New Series) U.L.A. .................... Uniform Laws Annotated
Mich. L. Rcv............... Michigan Law Review U. Pa. L. Rev. .............. Univcrsity of Pcnnsylvanin Law Rcvicw
Minn. L. Rev. .............. Minnesota Law Review .............
U. Pitt. L. Rev, University of Pittsburgh Law Review
..................
Miss. L.J. Mississippi Law Journal U.S.A. .................... Uniform Sales Act
N.C.C.B. .................. National Consumer Cooperative Bank U.S.C. .................... United States Code
N.C.L. Rev................. North Carolina Law Review U.S.C.A. .................. United Slates Code Annotated
N.C.U.A. .................. National Credit Union Administration U.S. Comp. Stat. ............ Unitcd States Conipiled Statutes
Ncb. L. Rev. ............... Nebraska Law Review U.S.L.W. .................. United States Law Weck
N.I.L...................... (Uniform) Negotiable Instruments Law U.S.T.A. .................. Uniform Stock Transfer Act
Notre Dame Law. ........... Notre Dame Lawyer U.T.R.A. .................. Uniform Trust Receipts Act
NOW ..................... Negotiable Order of Withdrawal U.W.R.A. ................. Uniform Warehouse Receipts Act
Nw. U.L. Rev............... Northwestern University Law Review Vand. L. Rev. .............. Vanderbilt Law Review
N.Y.U.L. Rev............... New York University Law Review rc Vill. L. Rev. ............... Villanova Law Review
...............
Ohio St. L.J. Ohio State Law Journal Wash. & Lee L. Rev. ......... Washington & Lee Law Review
Or. L. Rev................. Oregon Law Review Wash. L. Rev. .............. Washington Law Review
xxvi xxvii
 TABLE OF ABBREVIATIONS

Wash. U.L.Q. .............. Washington University Law Quarterly

W. Va. L.Q. ............... West Virginia Law Quarterly
W. Va. L. Rev.............. West Virginia Law Review
Wm. & Mary L. Rev. ........ William & Mary Law Review
Wis. L. Rev................ Wisconsin Law Review
Yale L.J...................Yale Law Journal

PART I
The Nature and Regulation
of Banking: An Overview

xxviii
 Chapter 1
NATURE O F BANKING
Section Page
1-5 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1-10 Classification of Banks . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1-15 The Emergence of the National
Government in Banking . . . . . . . . . . . . . . . . . . . . . . . . . 6
1-20 State Regulation of Banks . . . . . . . . . . . . . . . . . . . . . . . . 9
1-25 An Outline of the National Banking System . . . . . . . . . . 14
1-30 Correspondent Banking . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1-35 Banks Changing From One System to the Other . . . . . . . 17

5 INTRODUCTION
Thc comnicrcial bank is the most common typc of banking insti-
tution. Its principal business is to accept deposits, make loans, collect
commercial paper, and arrange the transfer of funds. Most of the ma-
terial in this book will be devoted to these commercial banking functions.
Commercial banking functions arc not thc only activities thnt banks
perform. Thcrc arc many othcr typcs and [unctions of banks, such as
the reserve banks that are really bankers' banks; investment banks,
whose chief business is underwriting securities for large corporations;
and savings banks, which accept money, usually on time deposit, for the
purposc of encouraging savings. Thcrc arc also many specialized banks,
such .as land banks, foreign trade banks, and the like, that are chartercd
to enter certain kinds of business. The federal government has created
many such special banking organizations to carry out special federal
policies, and brief descriptions of some of these organizations are pro-
vided in a subsequent chapter.' Recent changes in federal banking law
have blurred some of these distinctions as dcscribed below.2
The abovc-mentioned types of banks should be carefully distin-
guished from the so-called trust company. A trust company is not really

.L See Chapter 8.
2 See 8 7-95.
g 1-5 OVERVIEW
a bank at all; instead of borrowing and lending money, it accepts funds
for the purpose of investment. The beneficial interest in such funds,
however, remains in the original owner and not in the bank itself. In
many statcs trust companics arc combincd with banks or arc allowed
to pcrform banking functions in addition to their duties as trustees.'
There are also a number of personal finance loan organizations,
authorizcd by the laws of the scvcral statcs, that loan small amounts of
money to consumers at higher than the usual legal rates. Since thesc
organizations normally do not accept deposits but dcpcnd upon thcir
owrl cr~pilelI I I I ~ol11cr S O U ~ C C Sof credit to furnish t l ~ cfutlds l o r lending,
they are not banks in the proper sense. Many banks have small loan
departments that make the same type of loans.'
It is not uncommon for a single large bank to exercise all of the
functions mentioned above, and in addition they often operate safe-
deposit and trust departments, but these are special branches of activity
that are not usually classified as commercial banking.
Until recently, the regulatory regimes under which banking in the
United States was conducted confined commercial banking functions to
those financial institutions that were organized as state or national banks.
The enactment of the Depository Institutions Deregulation and Monctary
Control Act of 1980, however, authorized some commercial banking
activities to be undertaken by thrift institutions as wcll as banks.n As
a result, there is a growing similarity of functions between commercial
banks and savings institutions. Under the Act, for example, savings and
loan associations, credit unions, and savings banks can now give their
customers checking privilege^.^
The laws and regulations that govern commcrcial banking arc
numerous and complex. The various types of financial institutions en-
gaging in commercial banking activities are matched by an equal di-
versity of statutes and regulations controlling the activities of these
institutions. At the federal level alone, responsibility for regulating
banking activities has bccn givcn to a numbcr of scparatc agcncics; whcn
regulatory autllority is shnrcd by st:~tcnntl tcclcrnl ngcncics, thc conl-
plcxity or tllc law is compounclcd. In addition, thc Inw governing thc
transactions of commcrcial banks is complcx. T l ~ cUniform Conlnlcrcial
The Depository Institutions Deregulation and Monetary Control Act of
1980 olsn pcrrnila a:cvitiga nnd lonn nssocintiona to crlgngc in trust r~ctivilics
under certain conditions. See 12 U.S.C.A. !j 146(n) (Wcst 1980).
* See 12 U.S.C. !j 85 (1976), Rockland-Atlas Nat'l Bank of Boston v.
Murphy, 329 Mass. 755, 110 N.E.2d 638 (1953).
See !j 7-95.
8 Id.
NATURE OF BANKING 3 1-10
Code (U.C.C.)' has brought a desirable uniformity to the legal treatment
of such activities as the collection of commerciaL paper and checking
accounts, but there is also an increasing numbcr of special purpose
statutes, frcqucntly intcndcd to provide spccial consumcr protection,
that affect the activities of commercial banker^.^ Moreover, there are
many new lcgal issues raised by technological developments in banking
(c.g., transfcrring funds electronically) that are not addrcsscd by the
U.C.C. Modern banking has become an enterprise where careful legal
cor~nsclis csscntinl. This book is intcntlctl to scrvc ns n guide for tllc
olficcr cngngcd in commcrcial banking transactions and the nttorncys
called upon to advise in banking matters.
8 1-10 CLASSIFICATION O F BANKS
Although originally there was a common-law right to enter the
banking business," the power and influence of banks'today are such that
banking is now universally recognized as an activity charged with the
public intcrest, subjcct to careful control by both state and federal laws
and administrative rules. In addition to laws prescribing various forms
of organization, all banks are responsible to and regulated by either the
state o r thc federal government, often by both at once, and frequently
by more than one federal agency. Such regulation includes the issuance
of a charter creating the legal organization (usually a corporation), the
inspection of the books of the bank, and numerous regulations about
the nature of the business conducted by the bank. When the charter is
issucd by thc state, such banks are known as state banks and their
busincss is supervised by officials usually called state banking comrnis-
sioncrs.
When the federal government issues the charter, such banks are
known as national banks and are governed by the federal banking laws
and by numcrous fcdcrnl administrative agcncics, which arc discussed
Iwlow."' All nntionnl brinks :lrc mcn~hcrsor lllc Fctlcrnl Rcscrvc Sys-
tcrn nnd must bc insurcd by thc Fcdcrnl Dcposit Insurance Corporntion
( F D I C ) . Stntc bnnks may choosc, but arc not rcquircd, to bccomc nlcnl-
7 SCCChnnlcr 9 nnd Pnrt 3.
SCCPnri5.
O State v. Scougal, 3 S.D. 55, 51 N.W. 858 ( 1 8 9 2 ) ; Chase Nat'l Bank
v. Sanford, 284 U.S. 660 (193 1 ); Northeast Factor & Discount Co. v. Jack-
son, 223 Ga. 709, 157 S.E.2d 731 ( 1967). See also 1 A. Michie, Banks and
Banking 5 I (pcrrn. ed. 1973).
CC l o See Chapters 2-4.
8 1-15 OVERVIEW
bers of the Federal Reserve System.ll (Even nonmember state banks
are subject to the regulatory authority of the Federal Rcserve Board to
some extent, however.)I2 Membership in the Federal Reserve System
also involves insurance of deposits by the FDIC, State banks may obtain
FDIC insurance without becoming members of the Federal Rcscrve
System.la A few state banks are neither insured by the FDIC nor are
they members of the Federal Reserve System.
There are, therefore, four classes of commercial banks: national
banks, state member banks, nonmember insured state banks, and non-
insured state banks. Subsequent chapters will show how this classifica-
tion scheme determines, in large measure, the laws and agencies that will
exercise regulatory authority.
5 1-15 THE EMERGENCE OF THE NATIONAL
GOVERNMENT IN BANKING
The complex structure of our modern banking system is the product
of controversies accompanying the development of banking, and partic-
ularly federal involvement in banking, that date from the first days of
our nation. Controversy first emergcd over the creation of a ccntral na-
tional bank. The first Secretary of the Treasury, Alexander Hamilton,
supported creation of a national bank. T h e first Secretary of State,
Thomas Jefferson, opposed it. Hamilton prevailed and Congress cre-
ated the First Bank of the United States, giving it a charter of twenty
years. The bank was not only the largest bank of the time, it was also
the largest corporation in the United States. The bank was located in
Philadelphia but had branches in other major cities."
The First Bank of the United States was a success. At that time,
the currency in circulation (except for coins and some greenbacks) con-
sisted mainly of notes issued by state banks. The notcs of thc First Bank
of the United States came to account for about 20 percent of the notes
in circulation, giving the national economy the benefit of a uniform
and reliable currency.l5
Some hostility to a central bank persisted, however, and to it were
added complaints of foreign domination and charges of unconstitution-
ality. The growing number of state banks joined the cause against the
First Bank of the United States, arguing that the national bank was not
11 The Federal Reserve System is discussed in Chapter 2.
See Chapter 2.
18 Federal deposit insurance is discussed in Chapter 3.
1 4 Johnson, Historical Beginning-The Federal Reserve 8 ( 1980).
l5 White, Banking Law 8 (1976).
6
NATURE OF BANKING 9 1-15
necessary in view of the increased number of state banks. T h e state
banks rescntcd the practice followcd by thc First Bank of rctiring from
circulation all state bank notes it received by returning them to the
issuing bank for payment. This practice required the state banks to
maintain larger reserves of funds than othcrwisc would have bcen necdcd.
Opposition to the First Bank became so strong that when Jefferson's
Republican party came into power in 1801, a bill to recharter the bank
failed, and the bank died when its charter expired in 181 1.18
After the First Bank's charter expired, the nation experienced
serious cconomic problems from the lack of an effective banking system.
Although a number of state banks cxistcd, the bank notes they issued
were often of dubious quality. The disruptions of the War of 1812
heightened the problem. Bank failures became common after 1809 l 7
and, with the expiration of the First Bank in 181 1, there was no central
bank to comc to the assistance of the weaker banks.I8 These and other
difficulties in managing the federal government's financial affairs without
a national banking mechanism persuaded a narrow majority of Congress
of the desirability of a national bank, and in 1816 Congress chartered
the Second Bank of the United States.lD
The Second Bank of the United States was larger than the first, and
many c a m to view it as too powerful, Prcsidcnt Andrcw Jackson nlnong
them. 'During Jackson's first tern1 as President, his political rival Henry
Clay convinced Congress to pass a bill extending the charter of the bank.
Clay, as a prcsidcntial aspirant, then hoped to exploit Jackson's expected
veto of the bill as a political issue in thc 1832 prcsidcntial clection. Thc
plan backfircd when Jackson's veto, accompanied by a ringing message
attacking thc constitutionality of thc bank, brought him widesprcad
popular support, and hc was reelected by a substantial margin. Four
years later, in 1836, the charter of the Second Bank of the United States
expired.20
Although the constitutionality of thc Bank was attacked during this
period, as early as 1819 thc U.S. Supreme Court had upheld thc powcr
of Congress to establish a national bank. Chief Justice Marshall, in the
historic case of McCullocl~v . Marylat~d,ruled that the chartering of the
First Bank of the United States was a mcasurc "necessary and proper"
to the exercise of Congress' fiscal powers under the Constitution to raise
revenue, borrow money, and regulate c o m m e r c ~ .Undcr
~ ~ the suprenlacy
la Id.
1' Id.
I R Id.at 9.
Johnson, note 14 supra, at 8 .
z0 Id. at 10; Whitc, notc 15 supra, at 16.
21 17 U.S. 316 (1819).
5 1-15 OVERVIEW
clausc of thc U.S. Constitution, which nlakcs thc laws of fhc United
States superior to state law, Chief Justice Marshall held that the estab-
lishment of the bank could not be restricted by inconsistent state Icgisla-
tion. This dccision was reaffirmed fivc years latcr in Osborn v . Bank oj
the United States.22
After the demise of the Sccond Bank of the United States, banking
was carried on through state-chartered banks. This period saw thc enact-
ment of state legislation authorizing "free banking." Much of this legis-
lation, which madc it easier to incorporate state banks, was patterned
aftcr the New York Frec Banking Act,of 1838. As a result, the numbcr
of state banks grew. It was no longer necessary to obtain a special statc
charter; anyone who met the minimum incorporation requirements could
establish a bank.
Thc systcm of local statc banks that subsequently cmcrgcd led to
problcms. Banks varicd grcatly in thc adcquacy of thcir capital nnd
rcscrves retaincd against bank notes and dcmand deposits. Some banks
engaged in risky lending policies. The bank notes issued by the indi-
vidual banks were of disparate quality. T h e amount of credit extended
by banks fluctuated erratically without regard to the needs of the
cconom y.28
Finally, in 1863, the Civil War increased prcssurc for a sound
financial and monetary system, and Congress adopted the National Bank
Act of 1863. This Act, together with amendments in 1864 and 1865,
reestablished a national banking system. It did not create a central
national bank, but it did provide for the charter of national banks. T o
insure the strength of thc new national banks the Act imposed require-
ments relating to reserves, the amount of notes that could be issued, and
restrictions on lending. In 1865, Congress imposed a tax on the notes
issued by state banks in order to make the notes issued by the national
banks thc currcncy o f the Unitcd Statcs. Thc constitutionalily of this
tax was affirmed by the Supreme Court in a dccision upholding in broad
terms congressional power to adopt appropriatc legislation to "sccure
a sound and uniform currency for the country." 24
It was cxpcctcd that thc tax on statc bank notcs would causc statc
banks either to convert to national charters o r to disappear, but ncithcr
of these expectations occurred. The increase in the use of checks as a
means of payment provided an alternative source of funds for the state
banks in the form o f dcmand deposits, and statc banks continucd to
cxist alongside thc ncw national banks.'"
2z 22 U.S. 738 ( 1824).
2a Johnson, notc 1 supra, at 10.
6.
2 4 Veazie Bank v. Fenno, 75 U.S. 533 (1859).
26 Johnson, note 14 supra, at 1 1.
NATURE O F BANKING 5 1-20
T h c lack of a ccntrnl banking systcm continucd to be n wcakncss
in the national economy. It was diflicult to shift bank reserves to meet
the crcdit nceds of the country, and the currency provided by the banks
was not flexible cnough to mcet denlands for it. Thc financial panic
of 1907 led to extensive examination of the nation's banking structure
and finally, after prolonged political debate and compromise, Congrcss
enacted the Federal Reserve Act. Under the Act, Congress authorized
the establishment of the Federal Reserve System. The Act did not
create a central national bank. Instead, thcrc were to be rcgional Federal
Rescrvc Banks, with a central Federal Reserve Board to supervise the
System. National banks would have to become members of the System,
and state banks would have the opportunity to become members.
The national banking system continued to come under pressure
despitc thc irnprovcments stcrnming from the Fedcral Rescrve Act. A
la& numbcr of bnnk failurcs occurrcd, and thc strcsscs of the Grcnt
Depression prompted Prcsidcnt Rooscvelt to declarc an emergency bank
holiday in March of 1933. When the banks reopened, a series of efforts
to increase national regulation and control of the banking industry
occurred. In the Banking Act of 1933, Congress established the Federal
Deposit Insurance Corporation (FDIC), through which qualified banks
would be insurcd. This Act, in addition to providing for insurance, also
imposed regulatory requirements designed to strengthen the banking
system. Although the insurance was originally limited to member banks
of the Federal Reserve System, Congress later cxtended it to state banks.
Although substantial changes have since occurred in the regulation
of banking, the basic framework of the U.S. banking systeni was put in
place with the adoption of the Banking Act of 1933. The Act provided
for a dual system of state banks and national banks. It gave the federal
government regulatory control over banking through the chartering of
national banks, administration of thc Fcdcral Rcscrvc Systcm, and supcr-
vision of banks insured by the Fcdcral Deposit Insurance Corporation.
§ 1-20 STATE REGULATION OF BANKS
Comprehensive federal banking legislation was not adopted until
passage of thc National Bank Act of 1863 and subsequent amendments
to that Act. Originally, all banks were controlled by statc law, either
common or statutory, and many states had constitutional provisions
governing thc banking busincss. As cxpcricncc with banking grcw, stntc
laws on thc subject proliferated to the point that thcre arc now myriad
statutes enfranchising banking corporations and creating departments of
state govcrnnicnt to rcgulatc, supcrvisc, and inspcct thcni.
Today thcrc is a dual, state and fcderal, system of banking rcgula-
tion. Statc law governs the regulation of state banks unless preempted
5 1-20 OVERVIEW NATURE OF BANKING 3 1-20
by federal law as a result of the supremacy clause of the U.S. Consti- these states the regulations are kept on file in the bank commissioner's
tution. Under the supremacy clause, federal law overrides conflicting office, which will usually send, on request, copies of the rules desired.
state law. Thus, in the case of state banks that are members of the The official addresses of the bank commissioners' ofices are contained
Federal Reserve System and state banks that are insured by the Federal in the Table of State Bank Commissioners.
Deposit Insurance Corporation (FDIC), there will be both state and
federal regulation of the banks' actions. State law covers all aspects of
TABLE 1. Stale Bank Commissioners
the banking business conducted by state banks: issuance of charters,
which set out in detail the powers necessary to carry on daily banking Alabama Florida
activities such as receiving deposits; prescribing the size of reserves to Supcrintendcnt Comptroller
protect depositors; making loans; investing in specified securities; owning Department of Banking Department of Banking and Finance
and managing real estate; trading in commercial paper; issuing circu- Montgomery, Alabama 361 30 Tallahassee, Florida 32304
lating bank notes; and financing businesses. Alaska
Each state has created a department of banking, under various Georgia
Director, Division of Banking Commissioner
titles, that supervises and regulates statc banks within its jurisdiction. Sccuritics and Corporations
Thcsc dcparlmcnts cmploy bank cxamincrs and othcr oficials to inspcct Dcpartmcnt of Banking and Finnncc
Dcpartment of Commercc Atlnnto, Gcorgin 30303
the operation of the state banks. Thc books of thcsc banks arc subjcct Juncau, Alnskn 99801
to periodic audits, and the banks themselves are requircd to issuc annual ' Hawaii
Arizorla
or semiannual financial statements, which are reported to thc banking Director
dcpartmcnt, and which may later be madc public. Superintendcnt of Banks
Banking Dcpartmcnt Dcpartment of Regulatory Agencies
Statc banking commissioners, in addition to chartering banks, su- Phocnix, Arizonn 85007 Wonolulu, Hawaii 96809
pervise and rcgulatc banks to insure thcir solvcncy and liquidity. If
Arka~~sas lrlal~o
audits disclose that the banks are not sound, the commissioner may
State Bank Commissioner Director
demand that more capital be raised either by assessment of the stock- Department of Finance
holders or from outside sources. If the commissioner deems the bank Bank Department, Department
of Commerce Boise, Idaho 83720
to bc bcyond solvcncy, hc may closc and liquidate it, distributing the Littlc Rock, Arkansas 72201
assets according to law to creditors, depositors, and, if anytiling remains, Illinois
Calilornia Commissioner
to the stockhoIders.lB
The state banking commissioners also have the power to make rules Superintendent of Banks Banks and Trust Companies
and regulations to carry out their duties and to implement the slatutes. Banking Departrncnt Springfield, Illinois 62701
San Francisco, California 94104
Thus the binding state rules governing the operation of banks may be Indiat~a
found in three sources: Colorado
Supervisor
Commissioner Banks and Trust Companies
(1) The constitution of the state; Division of Banking, Dcpartment Division, Dcpartment of
( 2 ) The statutes passed by the legislature; and of Regulatory Agencies Financial Institutions
( 3 ) The rules promulgated by the banking commissioners. Denver, Colorado 80203 Indianapolis, Indiana 46204
Conneclicut
The constitutions and the statutes are regularly published and should be Iowa
Commissioner
available at most law libraries; the regulations are a diflercnt matter. A Banking Department Superintendent
few states have official publications similar to the Federal Register, Hartford, Connecticut 061 15 Department of Banking
which is discussed in 3 9-45, or keep central files, as required by Des Moines. Iowa 50309
Delaware
statute, that contain the text of all the administrative regulations having Slate Bank Commissioner Kansas
the force of law. However, the majority have no such requirements. In Department of Administrative Commissioner
* Services State Banking Department
Dover, Delaware 19901 Topcka, Kansas 66612
 N A T U R E OF B A N K I N G
OVERVIEW
North Carolina Tennessee
TABLE 1. State Bank Commissioners
Commissioner Commissioner
(continued)
Banking Commission Department of Banking
Raleigh, North Carolina 27602 Nashville, Tcnncsscc 37219
Kentucky Missouri
Commissioner Commissioner North Dakota Texas
Department of Banking and Division of Finance, Department of Commissioner
Commissioner
Securities
- Consumer Affairs, Regulation and Department of Banking and Banking Department
Frankfort, Kentucky 40601 Licensing Austin, Texas 78705
Jeffcrson City, Missouri 65101 Financial Institutions
Louisiana Bismarck. North Dakota 58505
Utah
Commissioner Montana
Ohio Commissioner
Office o f Financial Institutions, Administrator
Superintendent Department of Financial Institutions
Department of Commcrce Financial Division, Department of
Division of Banks, Department Salt Lake City, Utah 84101
1 Baton Rouge, Louisiana 70804 Business Regulation
Helena, Montana 59601 of Commerce
Maine Vermont
Columbus, Ohio 43215
Superintendent Nebraska Commissioner of Banking
Bureau of Banking, Department of Director Oklal~oma Department of Banking and
Business Regulation Department of Banking and Finance Insurance
Commissioner
Augusta, Maine 04333 Lincoln, Nebraska 68509 Banking Department Montpelier, Vermont 05602
Maryland Oklahoma City, Oklahoma 73105 Virginia
Nevada
I Bank Commissioner Superintendent Oregon Commissioner of Financial
Department of Licensing and Banking Division, Department of Institutions
Regulating Superintendent of Banks Bureau of Financial Institutions
Commerce Department of Commerce
Baltimore, Maryland 21201 Carson City, Nevada 89710 Richmond, Virginia 23261
Salem, Oregon 973 10
I Massachusetts
New Hampshire Washington
Commissioner Pennsylvania
Bank Commissioner Supervisor of Banking
Department of Banking and Banking Commission Secretary of Banking Division of Banking, Department of
Insurance Concord, New Hampshire 03301 Department of Banking General Administration
Boston, Massachusetls 02202 Harrisburg, Pennsylvania 17 120 Olympia, Washington 98504
Michigan New Jersey
Rhode Island West Virginia
Commissioner Commissioner Deputy Bunking Cornmissioncr
Financial Institutions Bureau, Department of Banking Commissioncr
Trenton, New Jersey 08625 Department of Business Regulation Department of Banking
Dcpartment of Commcrce Providence, Rhodc Island 02903
Lansi&, Michigan 48909 Charleston, West Virginia 25305
New Mexico
Minnesota Direclor South Carolina Wisconsin
Commissioner of Banks Financial Institutions Division, State Treasurer Commissioner
Department of Commerce Commerce and Industry State Board of Financial Institutions O f i c e of Commissioner of Banking
St. Paul, Minnesota 55101 Department Columbia, South Carolina 29201 Madison. Wisconsin 53703
Santa Fe, New Mexico 87503
Mississip p l South Dakota Wyoming
Commissioner New York
Director Examiner
Department of Banking and Superintendent + Division of Banking and Finance Banking Division
Consumer Finance Supervision Banking Department Pierre, South Dakota 57501 Cheyenne, Wyoming 82002
Jackson, Mississippi 39205 Albany, New York 10047
 OVERVIEW
5 1-25 AN OUTLINE OF THE NATIONAL
BANKING SYSTEM
As a result of the historical development of banking in the United
States, there are three principal federal regulatory agencies that regulate
commercial banks: the Office of the Comptroller of the Currency, the
Board of Governors of the Federal Reserve System, and the Federal
Deposit Insurance Corporation (FDIC). There is some ovcrlap in
functions between these agencies, which at times has led to differing
views on the policies t o be followed in bank regulation. For the
most part, however, the agencies have cooperated in exercising their
re~ponsibilities.~'
Each of the agencies will be discussed in detail in subsequent
chapters.2E Briefly, The Office of the Cornptroller of the Currency is
responsible for chartering national banks. Its primary responsibility is
supervising the activities of the national banks.
The Board of Governors of the Federal Reservc System, of course,
has regulatory authority by statute over all the banks that arc members
of the Federal Reserve System and some authority over depository
institutions that are not mcmbers of the Federal Reserve System. In this
respect, the authority of the Board of Govcmors overlaps to some extent
the authority of the Office of the Comptroller of the Currency, since all
national banks must be members of the Federal Reserve System. Inso-
far as supervision of the banking activities of the member banks is con-
cerned, however, the Board of Governors has generally pursued a policy
of allowing the Comptroller of thc Currency to be responsible for the
examination of national banks that arc rncrnbcrs of ~ h Fcdcral
c Rcscwc
System. The Board of Governors, through the individual Fcdcral Rc-
serve Banks, is responsible for examining state member banks.
The FDIC has regulatory authority over the banks and other de-
pository institutions whose deposits are insured b it. Since the FDIC
insures the deposits of all member banks of the Federal Reserve System,
there is an overlap of authority between the Board of Governors of the
1 Federal Reserve System and the Office of the Comptmller of the Cur-
rency. T o avoid duplication of effort, the FDIC limits its supervision
to those state banks that are not members of the Federal Reserve
System but whose deposits are insured by the FDIC.
21 Hackley, "Our Baming Banking System," 52 Va. L. Rev. 565, 771
(1966).
InThc Board or Govcrnora of thc Fcdcrnl Rcscrvc Systcm and the
Comptroller of the Currency are discussed in Chapter 2, and the Federnl
Deposit Insurance Corporation is discusscd in Chapter 3.
NATURE OF BANKING s 1-30
There are also state banks that are neither members of the Federal
Reserve System nor have their deposits insured with the FDIC. These
statc banks arc rcgulatcd by the appropriate state banking agency. As
discusscd in Chaptcr 2 on the Fcdcral Rescrvc System, the Board of
Governors has some regulatory authority over even these institutions.
Additional agencies have regulatory responsibility for savings and
loan associations. Federal savings and loan associations are chartered
and rcgulatcd by thc Fcdcral Home Loan Bank Systcrn, to which they
are required to belong. Additionally, all federal savings and loan asso-
ciations must have their deposits insured by the Federal Savings and
Loan Insurance Corporation. This corporation has the responsibility of
determining that the associations it insures are following safe and sound
practices. Sincc the members of the Fcdcral Home Loan Bank Board
serve as the Trustees of the Federal Savings and Loan Insurance Cor-
poration, the two agencies pursue complimentary policies. The Federal
Savings and Loan Insurancc Corporation, howevcr, has the powcr to
insure the dcposits of savings and loan associations that are not members
of the Federal Home Loan Bank Board. Whcn such statc associations
obtain insurance from the FSLIC, they submit to the authority of the
corporation to examine and supervise their activities.
-
The manncr in which crcdit unions arc rcgulatcd is described in
Chapter 7.
t § 1-30 CORRESPONDENT BANKING
Corrcspondcnt banking is n systcn~of rclationships bctwccn banks
which cnablcs funds to bc transfcrrcd and chccks to bc paid from onc
part of the country to another. The largc distances between cities and
towns in the United States contributed to the development of the cor-
respondent banking system. In earlier days, to facilitate' the collection
and payrncnt of checks it was often convenient for a town (or com-
munity) bank to maintain an account with a larger metropolitan bank.
The community bank could use this account to make payrncnt to per-
sons within thc service area of the correspondent bank who had checks
that were drawn on the community bank. Having such an account could
also assist the community bank in collecting chccks that were drawn on
institutions locatcd within the service area of the correspondent bank.
Through a nationwide network of such correspondents, the banking
system developed a workable collection-payment mechanism.
The rclationship bctwcen the community bank and the corre-
spondcnt bank dcvclopcd to include thc provision of additional scrviccs
by thc corrcspondcnt banks. Anlong thc most important of thcsc wcrc
thc giving of i~ivcst~ncntndvicc and tllc lending of funds. Additionnlly,
8 1-30 OVERVIEW
the correspondent bank often made loans to officers of the small-town
community bank. Since the correspondent arrangement involved the
community bank maintaining a substantial interest-free demand deposit
with thc corrcspondcnt bank, thc corrcspondcnt bank gcncrally offered
the services below cost.
Since enactment of the Financial Institutions Regulatory and In-
terest Rate Control Act of 1978, correspondent banks must be careful
to avoid making loans to the officers, dircctors, and major stockholders
of their community bank customers on terms not generally available to
other customers.2o Similarly, the community bank may not make loans
to the officers, directors, o r principal stockholders of the banks where it
has a correspondent account on terms other than those generally avail-
able to its other customer^.^^ The Act does not prohibit such loans:
what jt proscribes is favorable treatment. N o loans may be made "unless
such extension of credit is made on substantially the same terms, in-
cluding interest rates and collateral as those prevailing at the time for
comparable transactions with other persons and does not involve more
than the normal risk of repayment o r present other unfavorable
features."
Violations of the Act carry a civil penalty of not more than $ I ,000
per day for each day during which the violation exists. These penalties
are assessed initially by the Cornptrollcr of the Currcncy for national
banks, the Board df dovernors of the Federal Reserve System for a
state member bank, and the Federal Deposit Insurance Corporation
(FDIC) for insured nonmember state banks.82
The Act further establishes reporting requirements whenever an
extension of credit is made to the executive officer o r major stockholder
of a bank that has a correspondent relationship with thc bank extending
the Both the person to whom the credit is extended and the
bank that the person receiving the credit is affiliated with must file
reports." These reporting requircmcnts apply only in thc case of banks
insurcd by the FDIC, but thc prohibition of thc Act against favorable
loans to ollicers, dircctors, and major stockholdcrs npplics to d l banks,
state and federal.36
The manipulation of correspondent balances to serve the private
2O 12 U.S.C. 5 1972(2)(A) (Supp. 111 1979). See 8 4-40.
30 12 U.S.C. I972(2) (A)(Supp. 111 1979).
8' Id.
82 12 U.S.C. § l972(2) ( F ) (Supp. 111 1979).
8%Id.
12 U.S.C. 8 1972(2)(G) (Supp. 111 1979).
85 12 U.S.C. 8 1841( c ) , 1971 (Supp. 111 1979).
16
NATURE OF BANKING '1-35
advantage of the officer of the bank also can give rise to criminal Iia-
bilities for misapplication of bank funds.86
, 5 1-35 BANKS CIIANCINC FROM ONE SYSTEM
TO THE OTHER
Sometimes banks find it desirable to change their status from state
to national bank or vice versa. At one timc, the requirement of mem-
bership in the Federal Reserve System, which carried with it (he obliga-
tion of maintaining reserves as set by the Board of Governors of the
Federal Reserve System, provided an incentive for national banks to
convert to state banks. The Depository Institutions Deregulation and
Monetary Control Act of 1980 removed this incentive by extending
reserve requirements to all banks.$'
A national bank desiring to convert to a state bank may do s o by
a vote of two-thirds of each class of its capital stock and by a majority
vote o f its board of director^.^^ Federal law also permits a national bank
to consolidate with or merge into a state bank in the state where the
national bank is located.80 Although the consolidation or merger is
allowed by fcderal law, it must also satisfy the law of the state in which
the national bank is located and, thus, must have the approval of the
statc banking authority.'O Such convcrsions o r nlergcrs are permissible
only in states where state law does not restrict state banks in converting
to national banks." Dissenting stockholders have the right to withdraw
from the association. In that event, their stock is appraised under the
supervision of the Comptroller of the Currency, and they are entitled
to bc paid thc appraised amount in cash for their stock.42 The stock so
purchased is then disposed of in accordance with the law of the state.
It is also possible for state banks to become national banks by
conversion or merger. Thc procedure for deciding upon the conversion
must be according to thc statc law. Whcn such a decision has bcen
Unitcd States v. Brookshire, 514 F.2d 786 (10th Cir. 1975); United
States V. Mann, 517 F.2d 259 (5th Cir. 1975). cert. denied 423 U.S. 1087
(1976). See Bell & Oliver, "Corrcspondent Bank Loans After the Financial
Institutions' Regulatory and Interest Rate Control Act of 1978," 34 Bus.
Law. 1347-1357 (1979).
12 U.S.C.A. 5 461 (b) (West Supp. 1981 ).
12 U.S.C. 5 214a (1976).
12 U.S.C. 8 215(a) (1976).
12 U.S.C. 8 214c (1976).
Id. Sce Ellis v. State Nat'l Bank, 434 F.2d 1182 (5th Cir. 1970),
cert. denied 402 U.S. 973 ( 197 1 ).
.
i
4 2 12 U.S.C. 8 Zl4a(b) (1976).
1 3 1-35
, OVERVIEW

I made, the state bank must meet the qualifications required of national
I banks and wiU become subject to the supervision of the Comptroller of
the Curren~y.'~
Mergers of state banks into national banks, national banks into
state banks, and national banks with each other will be further discussed
Chapter 2
! in a subsequent chapter."
THE FEDERAL RESERVE
SYSTEM
Page
The SLruclure of the Federal Reserve System . . . . . . . . . 19
The Functions of the System . . . . . . . . . . . .. . . . .
. ... 20
Board of Governors . .. . .. . . . . . . . . . .... .
,. . . . .. . 22
Orders, Regulations, and Interpretations . . .. .. . .. . . . 23
Open Market Operations . . ... . . .. . . .. . . .
.. .. . . . . 25
.
Federal Reserve Banks . . . . . . .. . .. . .
. . . . . . . . . .. . 27
..
Directors of the Reserve Banks . . . . . . . . . . . . . . . . . 29
. . . . . ..
Powers and Duties of Reserve Banks . . . . . . . . 30
Depository Functions of Reserve Banks . . . . . . . . . . . . . 30
Reserves ..................................... 31
. . . . . . . . . . ..
Discounts and Advances . . . . . . . . . . . . . 33
Check Collection and Fund Transfers .. ... ..... . .. . 34
Federal Reserve Note Issues . . . .. . . . . . . . .. .
.. . .. . . 36
Examination of Banks . .. .. . .
. . .. . .. . . . .. . . . .. . . 37
Regulation of Interest and Dividends Paid by Banks . . . 38
Credit Controls .. . .. . . . . . . . . . .. ... . . .. . .
. . . . .. . 38
The Relationship of the Federal Reserve System
. .
to Savings Institutions . . . . . . . . . . . . . . . . . ...... . 40
The Comptroller of the Currency . . . . . .. ...... ... .
. 41
Bank Holidays . . .. . . . . . . . . .. . . .
... . . . ... . . . . . . 44

TIfE STRUCTURE OF TIIE FEDERAL

RESERVE SYSTEM
As discussed in $ 1-15, the United States has continuously char-
tered national banks since the National Bank Act of 1863. After the
demise of the Second Bank of the United States in 1836, however, the
country did not have a central national bank. During the recession of
1907 it bccanle apparent that, because of this lack, the national banking
*system was seriously flawed. The banking system did not possess the
flexibility to channel funds from one region of the country to another
 3 2-10 OVERVIEW
when necessary to meet the requirements of national commerce. Prob-
lems arose not only because of the difficulty in arranging loans and ex-
tensions of credit between areas with excess reserves and those with
shortages, but also bccausc currency shortages inhibited the economic
growth of some regions. Accordingly, after extensivc study and intcnsc
political maneuvering, Congress passed the Federal Reserve Act in
1913, which created a ncw federal system of banking known as the Fed-
era1 Reserve S y s t ~ m . ~
I The Federal Reserve Act created a three-part structure: the Board
of Governors, the Federal Reserve Banks, and the member banks. The
Board of Governors acts as the governing .body of the Federal Reserve
i System. There are twelve Federal Reserve Banks. The country is di-
vided into twelve reserve districts, and each district has one Reserve
Bank. The Rcscrve Banks are bankers' banks in that their capital stock
is hcld by thc banks making up thc Fcdcrnl Rcscrvc Systcn~. Both statc
6 ,and national banks are members of the Federal Reserve Systcm. Na-
tional banks must be members; state banks may elect to become mem-
bers. The following sections of this Chapter describe the organization
and functions of the Federal Reserve System in greater detail.
!j 2-10 THE FUNCTIONS OF THE SYSTEM
T h e Federal Reserve System provides the institutional framework
in which a national banking systcm can opcratc to provide thc crcdit and
other mcchanisms ncccssary lo mcct thc cconomic dcn~nnds of thc
country. The Federal Reserve System regulates banks, providcs scrviccs
to improve banking cfiicicncy, rcgulatcs thc amount of crcdit and cur-
rcncy in thc banking system, and has a substantial voice in establishing
the country's economic policy. Some of the spccific functions o f the Fcd-
era1 Rcscrve Systcm arc listed below. These are discussed in more detail
in subsequent sections.
1 . Reserve requiremenrs. Member banks and other financial insti-
tutions are rcquircd to kcep rescrvcs at the Fedcral Rcscrvc Banks. Thc
power of the Board of Governors to adjust reserve requirements strongly
influences the supply of money in the e c o n ~ m y . ~
2. L o a m l o m e m b e r banks. The Federal Reserve Banks are a
source of funds for thc mcmbcr banks. Thc Fcdcral Rcscrvc Systcrn can
1 Federal Reserve Act Ch. 6, 5 1, 3 8 Stat. 251 ( 1913) (current version
at 12 U.S.C. 5 5 221 et s e q . ) .
=See Johnson, Hisrorical Beginnings-The Federal Reserve (1980);
Prochnow. The Federal Reserve Systetn ( 1959). See 1-1 5 for a discussion
of the history of banking regulation in the United States.
8 See 8 2-50.
FEDERAL RESERVE SYSTEM .-lo
effect economic policy by adjusting the interest rate on loans and the
tcrms under which such loans will be made.
3. T h e supply o f coin and citrretlcy. When additional coinage o r
currency is nccdcd, it is supplied through the Federal Reserve System.
In fact, most of thc nation's currcncy consists of Fedcral Rcscrvc notes
' issued by the Federal Reserve Banks.
4 . Inrerest rate regitlation. Until rccently, the Federal Rcscrve Sys-
tem established thc interest ceilings that mcmber banks could pay on
customer accounts. Congress recently enacted legislation providing for
the deregulation of control over interest rates. The deregulation is to be
achieved over a period of years; interim control of interest rate ceilings
is entrusted to an interagency committee on which the Federal Reserve
System is r e p r e s ~ n t e d . ~
t s slock pitrcliasc. Thc Fcdcral Rcscrvc
5 . Margiti r e q i ~ i r e t r ~ o ilor
Systcm has thc authority to regulate the "margin requirements" for stock
purchascs. These requirements dcterminc the extent to which stock may
be purchased with borrowed fund^.^
6 . Check collection and furid transfers. The Federal Reserve Sys-
tem providcs procedures for thc collec!ion and payment of checks and
I other instruments as well as electronic procedures for rapidly transfer-
ring funds from onc region of the country to an0ther.O
7 . O p e n trrarkcr actiotts. Thc Fcdcral Rcscrvc Systcrn can influ-
cncc thc na(ional cconomy by taking actions that expand o r contract
thc moncy supply. This is acconiplishcd by the purchase and sale of
U.S. Govcrnrllcnt sccuritics. Thc Open Market Cornmittcc of the Fcd-
cral Rcscrvc Systcrn is rcsponsiblc for thc operation of this policy.'
8 . Banker for (lie governnient. The Federal Reserve System also
acts as thc banker for thc U S . Govcrnmcnt. It handles financial trans-
actions for the U.S. Trcasury and provides the various services for trans-
actions involving U.S. Government and agency securitics.
9 . Batik sicpcrvisiorr. Thc Fcdcral Rcscrvc Systcn~has the author-
ity to supcrvisc the activities of all member banks. Since the C o m p
troller of thc Currency exercises supervisory responsibility for national
banks, the Fcdcral Rcscrvc System exercises primary supervision over
thc statc banks that arc rncmbcrs of thc s y ~ t c m . ~
See § 8 2-75,4-25.
IS U.S.C. 5 78g (1976).
,, aSce 5 2-60.
SCC1 2-25.
5 2-15 OVERVIEW
10. Bank holding companies. The Federal Reserve System has au-
thority to regulate the activities of bank holding c o m p a n i e ~ . ~
I I . Foreign banking. The Federal Reserve System has authority
to regulate the foreign transactions of its member banks as well as the
actions of foreign banks in the United States.'O
12. Consumer credit control. The Federal Reserve System has the
authority to regulate consumer credit undcr certain conditions to prc-
vcnt an excessive expansion of such credit from injuring the economy.ll
13. Truth in lending. Thc Fcdcral Rcscrvc System is rcsponsiblc
for issuing regulations that interpret and enforce the legislation dealing
with consumer credit transactions, popularly known as truth in lending.12
14. Unfair and deceptive practices. The Federal Reserve System
has the authority to define unfair and deceptive practices by banks, and
.to adopt appropriate rcgulations to prcvcnt thcm.18
5 2-15 BOARD O F GOVERNORS
The Board of Governors of the Fcderal Reserve System consists
of seven members appointed by the President by and with the advice and
consent of the Senate. Not more than one member may be from any
Federal Reserve District, as explained below, and their numbers are
distributed among agricultural, industrial, and commercial interests. The
members are required to devote full time to their duties on the Board "
at salaries and expenses prescribed by law. The term .of office of the
Board members is fourteen years, and appointments are staggered by
the President so that n o more than one shall expire within a period of
two years.16 The members are not eligibk for reappointment."
The President, again with the advice and consent of the Senate,
designates two members of the Board to serve as Chairman and Vice-
Chairman, each for a four-year term. The Chairman is the "active exec-
utive officer" of the Board.17 The lcngth of term and method of ap-
pointment makes the Board fairly free of temporary swings of political
sentiment that might influence its policies. 'The Board is required to
9 Scc Chapter 6.
lo SCC8 4-75, 4-80.
l1 See § 2-80.
l2 See Part V.
l a I S U.S.C. 5 57a(f) (Supp. I11 1979). See Part V.
12 U.S.C. 8 241 (1976).
l a 12 U.S.C. § 242 (1976).
16 Id.
1' Id.
FEDERAL RESERVE SYSTEM .,
make an annual report to the Speaker of the House of Representatives.lB
The Board and the Federal Open Market Committee must also report
to Congress annually on the condition of monetary and credit aspects
of the economy.1D
The Board does not depend on Congress for appropriations to sup-
port its activities; it may assess the Federal Reserve Banks to meet ex-
p e n s e ~ . The
~ ~ Board controls the operations of the Federal Reserve
Banks and makcs wlcs and rcgulations that have thc force of law for
the opcration of thc entire Fcdcral Reserve System, including the Fed-
cral Rcscrvc Banks, a11 national banks, and statc banks that may bc-
conic mctnbcrs of thc system. Thc Board d s o issucs mnny ncin~inistrn-
live decisions allecting the daily operation of the system and its members.
As explained in $ 2-70, the Board shares authority to regulate
banks with the Comptroller of the Currency and the Federal Deposit
Insurance Corporation. Each of these agencies has indcpendent statu-
tory authority undcr fcdcral law which, in some cascs, has rcsultcd in
an overlapping of responsibility.
I 5 2-20 ORDERS, REGULATIONS, A N D INTERPRETATIONS
The Board of Governors has issued extensive regulations to imple-
ment its various statutory responsibilities. These regulations are ini-
tially published in the Federal Register and arc subsequcntly codified in
the Code o f Federal Regularions. The Board also issues its Federal
Reserve Regdaliotts A-Z in pamphlet form, which contain explanatory
material not in the text of the regulations printed in the Code o f Federal
Regulalions. Before the Board may adopt a regulation it must comply
with the procedures prescribed by law for rule-making. When the Board
acts in accordance with the propcr procedures and adopts regulations
within its area of authority, the regulations have the force of law.
The Board also makcs numerous administrative decisions in rul-
ings in the course of conducting its business. These materials appear in
the Federal Register and in thc monthly publication of the Board, the
Federal Reserve Bulletin. Thc Board publishes numcrous studies and
data pertaining to the nation's economy and financial institutions. Much
of this information is published in the Federal Reserve B~rlletirr,which
has been issucd nionthly since 1915 and contains a running summary
of all thc busincss of the systcni and many statistics on general economic
conditions. Tlic Board also issucs fcdcrnl publications whicli arc listcd
as they appcar in the Federal Reserve D~cllc~ir~.
12 U.S.C. 5 247 (1976).
ri lo 12 U.S.C. 5 2258 (Supp. I11 1979).
20 12 U.S.C. $ 8 243, 244 (1976).
 OVERVIEW FEDERAL R E S E R V E S Y S T E M ,2-25

T h e table below lists the various regulations issued by the Board 12

of Governors showing the part of the Code of Federal Regulations in C.F.R.
PI. Subject Matter Regulation
which the regulation may be found.
245 Loan guarantees for defense production
250 Miscellaneous interpretations
TABLE 2. Regulations of the Board of G o v e r n o n of the 26'1 Rulcs regnrding availability of informntion
Federal Reserve System 261a Rules regarding access to and review of personal
information in systems of records
SUBCHAPTER A-BOARD O F GOVERNORS OF THE 261b Rules regarding public observation of meetings
FEDERAL R m E R V E SYSTEM 262 Rules of procedure
12 263 Rules of practice for formal hearings
264 Employee responsibilities and conduct
C.F.R.
Subject Matfer Regulation 264a Reserve Bank Directors-actions and responsibilities
PI.
264 b Rules regarding foreign gifts and decorations
20 1 Extensions of credit by Federal Reserve Banks 265 Rules regarding delegation of authority
202 Equal crcdit opportunity 266 Limitations on activities of former members
203 Home mortgage disclosures and ernployccs of the bonrd
204 Reserve requirements of depository institutions 267 Rules of organization and procedure of the
205 Electronic fund transfers Consumer Advisory Council
206 Securities of state member bank 268 Equal employment opportunity
207 Securities crcdit by persons other than banks, brokers, 269 Policy on unionization and collective
or dealers (Sec Regulation X ) bnrgaining for the Fcdcrnl Rcservc Banks
208 Mcmbcnhip of state bonking institutions in thc
Federal Rcscrvc Systcm SUBCHAPTER D-FEDERAL OPEN MARKET COMMITTEE
209 Issue and cancellation of capital stock of
Federal Reserve Banks 270 Open market operations of Federal
210 Collection of checks and other items and transfen of funds Reserve Banks
21 1 International banking operations 27 1 Rules regarding availability of information
2 12 Management official interlocks 272 Rules of procedure
2 13 Consumer leasing 28 1 Statements of policy
2 14 Relations with foreign banks and bankers
215 Loans to executive officers, directors, and principal SUBCHAPTER C-FEDERAL RESERVE SYSTEM
shareholders of member banks LABOR RELATIONS PANEL
216 Minimum security devices and procedures for 290 Definitions
Federal Reserve Banks and state member banks \ 292 Charges of unfair labor practices
217 Interest o n deposits 294 Procedures for resolving impasses
218 Relations with dealcrs in securities under Section 32, 295-299 [Reserved]
Banking Act of 1933
219 Reimbursement to financial institutions for
assembling o r providing financial records
Credit by brokers and dealers (See Regulation X)
§ 2-25 OPEN MARKET OPERATIONS
220
22 1 Credit by banks for the purpose of purchasing o r O p e n market transactions are probably t h e single most important
carrying margin stocks (See Regulation X) procedurc available to the Federal Reserve Systcm for implementing
224 Rules governing borrowers who obtain securities credit monetary policy. These transactions a r e conducted by the Federal Open
225 Bank holding companies and changes in bank control
Market Committee. Although the statutory authorization for the Com-
226 Truth in lending
Unfair o r deceptive acts or practices mittee did not exist until 1933, the history of the Committee goes back
227 rc
228 Community reinvestment as far as 1921. A t that timc, the separate activities of the individual
Is OVERVIEW
/Federal Reserve Banks in buying and selling government securities, pri-
'marily in the New York City market, tended to disrupt the securities
market, to the concern of the U.S. Treasury and the banking system.
The Committee was established to coordinate the open market actions
of the Reserve Banks.ll Thc Committce is now cstablishcd by statute
which providcs that the open markct operations of thc Fcdcral Rescrvc
System "shall be governed with a view to accommodating commercc and
business and with regard to their bearing upon the gencral credit situa-
tion of the country." 22
There are twelve members on thc Federal Open Market Com-
mittee. The sevcn members of the Board of Governors arc automati-
cally members of the Committee. The other five members of the
Committee are representatives of the twelve Reserve Banks. One mem-
ber is elected by the Board of Directors of the New York Reserve Bank,
one by the Boards of Directors of the Reserve Banks of Boston, Phila-
delphia, and Richmond, one by the Boards of Directors of thc Rcserve
Banks of Cleveland and Chicago, one by the Boards of Directors of the
Reserve Banks of Atlanta, Dallas, and St. Louis, and one by the Boards
of Directors of the Reserve Banks of Minneapolis, Kansas City, and
San Francisco. The Committee meets in Washington D.C.at least four
times a year.2a By tradition, the Chairman of the Board of Govcrnors
of the Federal Reserve System serves as Chairman of the Open Market
Committee. The President of the Federal Reserve Bank of New York
serves as Vice-chairman.
The Federal Open Market Committee directs all the opcn market
operations of the Federal Rescrve Banks. The Committee scts guide-
lines for the purchase and sale of governmcnt securities and other obli-
gations, such as bankers' acceptances, bills of exchange, bonds, notes,
and other types of commercial paper. These purchase transactions are
made for the account of the separate Federal Reserve Banks but are
generally executed by the New York Federal Reserve Bank, which acts
as agent for the Federal Reserve Banks.
Open market activities have an important impact on the economy
because they may be employed to expand or contract the amount of
bank credit in the monctary systcm. Whcn thc Fcdernl Rcservc System
engages in purchases of government securities o r other assets, the Sys-
tem is injecting additional bank credit into the economy. The funds
paid by the Federal Reserve System to the sellers of the securities even-
tually add to thc deposits of the member commercial banks. The in-
2' 3 Fed. Banking L. Rep. (CCH) 11 37,001.
2a 12 U.S.C. !j 263(c) (1976).
28 Id.
FEDERAL RESERVE SYSTEM -630
crease in deposits with the member banks in turn permits those banks
to cxpand thcir rescrvc accounts and therefore thcir lending capacity.
When the Federal Reserve Systcm sells securities the reverse process
occurs. The buyers of the securities withdraw funds on deposit with
thc nicnibcr banks in order to ncquirc thcm. Tllcrefore, funds arc
drained from the banking systcnl nnd tllc rcscrvc position of tllc nlcm-
bcr banks shrinks.14 Thc Fcdcral Opcn Market Comn~itteeis required to
include in its annual report to Congress details of its open market
tran~actions.~~
9 2-30 FEDERAL RESERVE BANKS
The backbone of the Federal Reserve System is a group of Federal
Reserve Banks and their branches. There are twelve of these Reserve
Banks located in twelve Reserve Districts covering the entire United
States; cach Rcserve Bank has territory and branches as authorized by
the Board of G o v e r n ~ r s ,located
~~ for thc convenience of the banking
community. The boundaries of these districts and their branch terri-
tories do not follow any political subdivisions but are set for the maxi-
mum efficiency of the Rescrve Banks. A map of the Federal Reserve
Districts is set out on thc next p a g ~ . ~ '
The Federal Rescrve Banks themselves are corporations chartered
by the federal government, and their certificates of organization are
filed with the Comptroller of the C u r r e n ~ y . ~ ~
Each Reserve Bank is a banker's bank: Its capital stock is held by
the national banks and state banks that arc nicmbcrs of thc Fedcral
Rescrvc Systcm. Each statc and national bank may bccome a member of
the System by subscribing to an amount of stock equal to 6 percent of
its capital and s ~ r p l u s . ~National
" banks are required to be members
of the Fcdcral Rescrve System and, thcrefore, must subscribe; state
banks may subscribe at will and can withdraw.30 Although the original
provisions of the Federal Reserve Act provided for the sale of non-
voting stock to the public, no stock was ever sold. All the stock of the
Reserve Banks is hcld by the member banks. National and state bank
24 See generally Board of Governors, The Federal Reserve System, Pur-
poses and Functions ( 1974).
26 12 U.S.C. li 247n ( 1976).
12 U.S.C. § § 222, 521 (1976).
27 12 U.S.C. § 222 (1976). T h c Doord has the power lo revise district
boundaries.
Is 12 U.S.C. 5 34 1 (1976).
i
2o 12 U.S.C. 5 1282 (1976).
12 U.S.C. 8 0 321, 328 (1976).
5 2-30 OVERVIEW F E D E R A L RESERVE SYSTEM 5 2-35
BOUNDARIES OF FEDERAL RESERVE DISTRICTS members of the Fedcral Reserve System are subject to examinations
AND TIiElR BRANCH TERRITORIES prescribed by the Board of Governors, who have power to delegate
thcir duty to the statcs for slate bank^.^' Because thc Comptroller of
the Currency has statutory authority to examine national banks, the
Board follows the practice of having the Comptroller exercise primary
responsibility for examination of national banks while the Board takes
responsibility for examining the state member banks. The Board has
general supervisory power over the Reserve Banksa2
Profits from the operation of the Reserve Banks up to 6 percent of
the face value of the capital stock are paid to the stockholder banks;
other surplus earnings now go into each Reserve Bank's surplus ac-
c0unt.~3 The stock also carries double liability for the debts of the
Reserve Bank,s4 but so far the operations have been profitable and no
assessment has been necessary.
The Reserve Banks are exempt from taxation by federal and state
govcrnmcnts except for rcal cstatc t a x c ~ . ~ ~

§ 2-35 DIRECTORS OF TIIE RESERVE DANKS

HAWAII
-Boundaries of Federal Reserve Districts
-Boundaries of Fcderal Reserve Branch
Territories
0 Board o f Governors of the Federal
Reserve System
O Federal Reserve Bank Cities
0 Fedcral Reserve Dranch Cities
* Federal Rcsene Bank Facility
6 12 U.S.C.
Each Fedcral Rcscrvc Bank has a ninc-mcmbcr board of dircc-
tors thnt guidcs thc daily busincss of thc Bank undcr thc Regulation
of the Board of Governors o f the Fedcral Reserve System. There are
three classes of directors, A, B, and C, and there are three directors for
each class. Class A dircctors may be bankers. Class B directors are
required to bc pcrsons cngagcd in agriculture, business, or industry.
A and B nvmbcrs arc elected by the stockholding mcmbcr banks. Class
C dircctors arc nnnicd by the Board of Govcrnors of the Fedcral Re-
serve Systcm. Thc chairman and vicc-chairman of the board of each
Federal Rcscrve Bank are dcsignated by the Board of Governors from
the class C The chairman also serves as the Federal Reserve
agent and is required to maintain a local office of the Board of GOV-
ernors at the Federal Reserve Bank. The Fedcral Reserve agent is the
official representative of the Board of Governors.-"
Each director's tcrm of oliicc is thrcc ycars; onc-third of the terms
expire each y ~ a r . ~ ~
a1 12 U.S.C. 5 8 325, 326 (1976).
az 12 U.S.C. 5 248(j) (1976).
12 U.S.C. 8 289 (1976).
12 U.S.C. 8 502 (1976).
86 12 U.S.C. 5 531 (1976).
$ 5 304, 305 ( 1976).
87 12 U.S.C. 5 305 (1976).
88 12 U.S.C. 8 308 ( 1976).
§ 2-40 OVERVIEW
Each branch of a Federal Reserve Bank has its own board of
directors. A majority of the directors for the branch arc appointcd by
the Reserve Bank with the remaining directors appointed by the Board
of Governors.
§ 2-40 POWERS AND DUTIES O F RESERVE BANKS
The twelve Fcdcral Reserve Banks and their branches, opcrating
under the supervision of the Board of Governors, perform a number of
banking functions. Some of the more important of these functions are:
(1 ) to hold the reserves of the member banks;
(2) to loan funds to member banks by advancing funds and dis-
counting commercial paper;
(3) to serve as a lender of last resort for the banking system,
generally in order to provide a source of emergency relief;
(4) to issue Federal Reserve notes which circulate as currency;
(5) to provide mechanisms and procedures for collecting checks
and transferring funds from one region of the country to
another;
(6) to engage in the examination of member banks to assure thcir
business is conducted in accordance with safe and sound bank-
ing principles; and
(7) to serve as the banker for the U.S. Government by handling
the financial transactions of the U S . Treasury and other gov-
ernmental agencies.
These functions are described in further detail in the following sections.
DEPOSITORY FUNCTIONS O F RESERVE IlANKS
$ 2-45
'I'hc Fcdcrnl I<cscrvc Bonks function as dcpositorics for the rc-
serves of membcr banks. Each member bank carrics a dcposit account
in ils regional Federal Reserve Bank, which it may draw checks against.'"
Deposits to this account will include advances from the Reserve Bank,
proceeds of collection of commercial paper, rediscount of commercial
paper, coins and currency, and othcr assets which the member bank
may turn over to the Reserve Bank for liquidation or collection. The
member bank may draw against the account when it needs funds or
coins and currency. As discussed in the following section, each member
FEDERAL RESERVE SYSTEM § 2-50
bank must maintain reserves at a minimum level established by the
Board of Governors.
The Fcdcral Rescrvc Act givcs the Federal Reserve Banks general
authority to receive deposits of government funds and to act as fiscal
agents of the United States when directed to d o so by the Secretary of
thc T r ~ a s u r y . ' Morcovcr,
~ except for temporary accounts, most govern-
mcnt corporations must maintain their accounts with thc Treasurer of
thc Unitcd Statcs, or with thc permission of the Sccrctary of thc Treas-
ury, with a Fcdcral Reserve Bank or other approved fcdcral deposi-
tory." In addition, therc are othcr specific statutes that make the Fed-
eral Reserve Banks depositories for specific government agencies.42
8 2-50 RESERVES
All member banks of the Federal Reserve System are required to
. maintain reserves for the payment of outstanding accounts. These re-
serves consist of ( 1 ) cash in the member banks' vaults and ( 2 ) the bal-
ance on deposit with the Federal Reserve Bank.43
Until enactment of the Depository Institutions Deregulation and
Monetary Control Act of 1980, only banks that were members of the
Fcdcral Rcscrve Systcni had to obscrvc the rescrvc rcquircmcnts. The
Act dran~aticallyenlarged the Federal Rescrve System's control over the
nation's depository institutions.
The Act defines depository institutions to include all banks, state
and national, that are insured by the Fcderal Deposit Insurance Corpo-
ration and all banks that arc cligiblc to apply for such insurance; all
savings and loan associations that are insured by the Federal Savings
and Loan Insurance Corporation and all savings and loan associations
that are eligible for such insurance; and all credit unions that are insured
or eligible to be insurcd under the Federal Crcdit Union Act."
All dcposi(ory i~~slitutio~is I~nvit~gtrnnsnction nccoutits or tion-
personal time dcposits must mnintnin r c s c r v ~ s . Transaction
~~ accounts
inclutlc clicckirig nccortti~s,NOW nccounts, nutotiintic trnnslcr nccounts,
and sliarc draft account^.^"
~- -
12 U.S.C. $ 5 342, 391 (1976).
"The Government Corporations Control Act § 302, 31 U.S.C. 5 867
(Supp. I11 1979).
4 2 See generally 1 Fed. Banking L. Rep. (CCH) 1 16,001.
'"2 U.S.C.A. 5 461 ( c ) (West Supp. 1981).
4 4 12 U.S.C.A. 5 461 ( b ) ( I ) (West Supp. 1981).
4 b 12 U.S.C.A. 5 461 ( b ) ( 2 ) (West Supp. 1981).
* 12 U.S.C.A. 5 461 ( b ) ( I ) (C) (West Supp. 1981). These diderent
types of accounts are explained in Chapter 18.
5 2-50 OVERVIEW
The Ac:t establishes reserve requirements which may be adjusted
within certain ranges by the Board of Governors. On transaction ac-
counts over $25 million the range is 8 to 14 percent with an initial ratc
of 12 percent. Reserves on accounts below $25 million are initially set
at 3 percent. The $25 million cutoff is subject to change on the basis
of an indexed f ~ r m u l a . ~ '
On nonpersonal time deposits, the Act establishes a range of zero
to 9 percent of required reserves with an initial rate of 3 p e r ~ e n t . ' ~
When at least five members find that extraordinary circumstances
are present, the Board of Governors may impose requircmcnts beyond
the statutory ranges for 180 days.4B The Board also may impose a s u p
plemental reserve requircment on transaction accounts within a range
of an additional zero to 4 percent on a finding that monetary policy can-
not be effectively implemented with reserves otherwise authorizcdPO
Such reserves must be uniform for all depository institutions and carry
intcrcst at thc avcrage ratc earned by the Fedcral Rescrve Sccurities
portl~lio.~~
The Act phases in these reserve requirements over cight years for
nonmember institutions and four years for member banks. To remove
any incentive for banks to withdraw from membership in the Federal
Rcserve System, the Act provides that any bank that was a membcr of
the Federal Reserve System on July 1, 1979 remains subject to thc
reserve requirements of the System notwithstanding its withdrawal from
member~hip.~~
Subject to Board regulation, member banks must hold thesc re-
scrvcs cithcr in vault cash o r in balanccs maintained at the rcgional
Federal Reserve Bank. In the case of nonmember dcpository inslitu-
tions, reserves may be held in the form of balances with other depository
institutions maintaining reserve balances at a Federal Reserve Bank or
a Fedcral Home Loan Bank or the National Credit Union Administra-
tion Central Liquidity facility. The institutions where these balanccs
have been deposited, in turn, must pass them through to a Federal
Reserve Bank.Os In this fashion, all reserves required under the Act will
ullimately be held by the Federal Reserve Banks and will be subject to
the control of the Federal Reserve System as it establishes reserve re-
quirements to carry out monetary policy.
47 12 U.S.C.A. § 461 (b) ( 2 ) (West Supp. 1981).
40 Id.
4 0 I2 U.S.C.A. 461 (b) ( 3 ) (West Supp. 1981).
bo 12 U.S.C.A. 461 (b) (4) (West Supp. 1981 ).
61 Id.
62 12 U.S.C.A. § 461(b)(8) (West Supp. 1981).
as 12 U.S.C.A. 8 461 (c) (West Supp. 1981).
FEDERAL RESERVE SYSTEM 0 2-55
The Board of Governors' authority to adjust reserve requirements
is an important tool in carrying out monetary policy. Changes in reserve
requirements will produce corresponding changes in 'the policies of the
depository institutions that maintain the reserves. When reserve ratios
are lowered, the depository institutions may increase their volume of
deposits and associated loans and investments. O n the other hand, when
reserve ratios are increased the volume of liabilities and credit the bank-
ing system can support on the reserve supply is reduced. Thus, when the
Board of Governors increases reserve requirements it is acting to restrict
thc money supply, nnd whcn it decreases reserve requirements it is
acting to expand the money s ~ p p l y . ~ 4
At one time the Reserve Banks werc in turn required to maintain
reserves covering their accounts with member banks. These reserves
originally were required to be in lawful money, gold, or gold certificates.
This requirement was then amended to include special drawing rights
as the rules on gold and gold certificate circulation changed. The reserve
requirements for thc Rcscrvc Banks, which werc originally 35 percent,
were later changcd to 25 pcrccnt in gold, gold ccrtificatcs, o r spccial
drawing right certificates. Currently, a percentage requirement has been
eliminated and replaced with the requircment that each Reserve Bank
issue notcs bcaring n distinctive letter and serial number assigned by
the Board of Governors to cach Rcscrve Bank.O5 Such notes must be
backed by adequate collateral as described in Q 2-65.
5 2-55 DISCOUNTS AND ADVANCES
There arc two melhods by which a nxmbcr bank borrows funds
from its Federal Rcserve Bank: by a discount or by an advance. Both
methods arc authorized by statute, but the most common method today
is the advan~e.~O
Both methods of borrowing require the member bank to give the
Federal Reserve Bank full collateral for the loan, Discounts and re-
discounts involve the transfer of eligible commercial paper to the Re-
serve Bank with the indorsement of the transferring member bank.
Technically, the Reserve Bank purchases the commercial paper from
the member bank. The law and the regulations of the Board define what
constitutes eligible paper.
See Board of Governors, The Federal Reserve System, Purposes and
Functions 78-80 (1974).
ri 6612U.S.C.5413(1976).
Oe 12 U.S.C. $ 5 343-347b (1976). See generally Bonrd of Governon,
The Federal Reserve System, Purposes and Firnc/ions ( 1974).
5 2-60 OVERVIEW
An advance is a loan evidenced by a promissory note of the bor-
rowing bank and secured by adequate collateral. The customary collat-
eral for thcsc advanccs arc U.S.Govcrnmcnt o r agcncy sccuritics. Sincc
many member banks maintain their holdings of these securities at the
Federal Reserve Bank for safekeeping, it is a convenient form of col-
lateral for such loans.
Usually, member banks borrow for very short periods only, often
no more than a few days. The purpose of the borrowing can bc to
make a temporary adjustment in a bank's reserves, enabling it to deal
with unexpected increases in loan demand o r sudden deposit losses, or
unanticipated problems in raising funds from the money market. The
Federal Reserve Banks scrutinize the borrowing process carefully to
make sure it is not for speculative purposcs. Mcmbcr banks may also
borrow from the Federal Rescrve Banks when seasonal credit demands
make it difficult for thcm to satisfy thc credit dcmands in thcir com-
munities. Also, the Fcderal Rcserve stands as a source of cmcrgcncy
credit to banks in times of financial crises.
Each Federal Reserve Bank sets a discount rate, which is the rate
of interest it will charge for member bank borrowing. This rate is
established by each Federal Reservc Bank under the review and guide-
lines of the Board of Governors. The Board of Governors can influence
the extent of bank borrowing, of course, by adjusting the discount rate.
Under the Depository Institution's Deregulation and Monetary
Control Act of 1980, the privilege of borrowing from the Federal Re-
serve Banks was extended to all depository institutions that are subject
to the reserve requirements of the Act. These institutions "shall be enti-
tled to the same discount and borrowing privileges as member banks." "
This provision opens up the Federal Reserve Banks' discount window
to thrift institutions. Moreover, in administering thc discount and bor-
rowing privilcgcs, the Act directs the Board to takc into account "thc
spccial nceds of saving and othcr dcpository institutions for acccss 10
discount and borrowing facilities consistent with thcir long-tcrm assct
portfolios and the sensitivity of such institutions to trcnds in thc national
money market." O8
8 2 6 0 CHECK COLLECTION AND FUND TRANSFERS
Thc Fedcral Rcscrve Banks play an important rolc in thc collcction
and exchange of funds. As part of this process, thc Fcderal Reserve
67 Depository Institutions Deregulation and Monetary Control Act of
1980, B 103, 12 U.S.C.A. 8 461 (b) (7) (West Supp. 1981).
68 Id.
F E D E R A L RESERVE SYSTEM 3 2-60
System operatcs clearing house facilities for collecting checks. This
systcm parallels the one authorized by the Uniform Commercial Code,
discusscd in Chnplcr 20, which may bc cstablishcd by agrcclncnt bc-
lwccn dcpository institutions. Thc rulcs for thc Fcdcral Rcscrvc clcaring
houses are issued by the Board of Governors. The Fedcral Reserve
Systcm has estimated that in 1979 the total number of deposit transfers,
almost all of which were made by check, amountcd to from 33 to 35
billion transfers. Out of this total, thc Fcdcral Rcscrve Systcm alone
proccsscd ovcr 15 billion chccks with a value of $8.5 trillion. During
the first part of 1980, the Federal Rescrve System handled transfer
orders involving over 40,000 depository institutions at a rate of 61.7
million items per banking day.6e
The Fcderal Rcservc collcction mcchanisms may also be used for
collcction of othcr instruments.
The Fedcrnl Rcscrvc Systcm has also dcvclopcd clcctronic mclhods
,
of translcrring funds. Onc such nlcthod is autonlatcd clcaring houscs
(ACHs). ACHs make payments for such items as payrolls and divi-
dends through electronic media, thus eliminating the handling of a large
volume o f paper checks, and can be used for making electronic settle-
ments bctwcen banks. Additionally, the Fcderal Reserve has an elec-
tronic funds transfcr systcm called Fcd Wire that enables the quick
transfer of funds from one member bank to another through debits o r
credits to the banks' reserve accounts. Fed Wire may also be used to
transfer government securities without the actual physical transfer of the
~ ~ 1979, Fed Wire handled over 3.5 million transactions
s e c u r i t i c ~ . In
involving over $64 t r i l l i ~ n . ~ '
The Depository Institutions Dcrcgulation and Monetary Control
Act of 1980 gcnerally opens the Fcdcral Reserve check clearance and
collection mcchanisms, as well as all other Federal Rcservc services, to
all depository institutions on the same tcrms as mcmber banks. The
Fcdcral Rcscrvc is rcquircd to establish pricing schedules for these
~ c r v i c c s .Sonlc
~ bclicvc that cornpctition from private organizations in
providing clcaring scrviccs will bc cncouragcd by having the Fcdcral
6B''The Fcderal Reserve and the Payments System: Upgrading Elec-
tronic Capabilities for the 1980s," 67 Fed. Rcs. Bull. 109, 1 l 1 , 1 14 ( 198 1 ).
SCCalso Burkc, The Federnl Rescrve Systcn~it1 nricf (1980).
o"Au~omatcdfrnnsfcrs arc discusscd in Chaptcr 2 5 . For n con~prehcn-
sive description of thc various electronic systems, sec Pcnney & Bnkcr, The
Law of Electronic Firtrd Transfer Systotts ( 1980). See gcnerally Board of
Governors, The Federnl Reserve Systettr, Prtrposcs n t d Frctlctiot~s( 1974).
ri O1 "The Fcdcral Rcserve nnd thc Paymcnts System: Upgrading Electronic
Capabilities for the 1980s," note 59 mpra, at 114.
U.S.C.A. 8 248(a) (West Supp. 1981).
8 2-65 OVERVIEW
Reserve System "unbundle" its service pricing and charge separately
for the services it makes a ~ a i l a b l e . ~ ~
§ 2-65 F E D E R A L RESERVE N O T E ISSUES
Like the national banks before them, the Federal Reserve Banks
are empowered to issue notes which circulate as lawful money. Under
the original Fedcral Rcscrvc Act thesc notcs wcre of two classcs: ( 1)
Federal Reserve Bank notes and (2) Fedcral Reserve notes. The for-
mer were issued on security of government bonds with issuing privileges
by various of thc Rcscrve Banks, but the praclicc was discontinucd by
law in 1945; 134 fcw if any of these notcs still remain in circulation.
The Fcderal Rcserve notcs now constitute almost all of the United
States papcr moncy and are thc backbone of the currency. These nolcs,
prinkd by the Trcasury or by Ihc mints, may bc issucd by the Fcdcrnl
Rcscrve agent, who is a mcmbcr of the board of directors of cach
Rcscrvc Bank. Undcr the direction of thc Comptrollcr of thc ~ u r r c n c y
and the Sccrctary of the Treasury, and upon rcqucst of the Rcscrve
Bank, the Fedcral Rcscrve agent issues thc notes in return for 100
pcrccnt collateral. The collateral may consist of:
( 1) Drafts and other commercial bills of cxchange,
( 2 ) Bills of exchange or bankers' acceptances purchased in open
market operations,
( 3 ) Special drawing right certificates in the international Exchange
Stabilization Fund,B5
( 4 ) Gold certificates, or
( 5 ) Other obligations of the United States.OB
At one time, the Reserve Banks were required to keep a portion of this
collateral in gold certificates, but that requirement has becn eliminated.07
Thc Federal Reserve notes thus issued may be held or paid out by the
Rcscrvc Banks as lawful moncy, and the collateral funds arc hcld for
their redemption. The notes themselves, thc obligation of the issuing
Reserve Bank and the U.S. Government, are redeemable at the U S .
Trcasury or at any Rcscrve Bank.
The collateral funds are required to be collected and replaced so
See Penney & Baker, note 60 supra.
63
3 Fed. Banking L. Rep. (CCH) 9 37.833.
""2 U.S.C. 5 467 ( 1976).
" 12 U.S.C. 5 412 (1976).
12 U.S.C. 5 4 13 ( 1976) (arncndcd 1980).
36
FEDERAL RESERVE SYSTEM . 2-70
that at all times their total is 100 percent of the outstanding Federal
Reserve notes owed by each Reserve Bank.BB T h e Federal Reserve
agents are empowered, under the direction of the Comptroller of the
Currency, the Regulations of the Board of Governors of the Federal
Reserve System, and the Secretary of the Treasury, to redeem current
notes and to replace those no longer fit for circulation.ee
8 2.70 EXAMINATION O F BANKS
The Board of Governors of the Fedcral Reserve System has general
supervisory authority over all member banks of the Federal Reserve
Systcm, as discussed in 8 2-15. Additionally, the Federal Rcservc Sys-
tcm has authority to conduct examinations of member banks to dcter-
mine if they are following sound banking practices. The authority to
conduct such exanlinations is shared to some cxtcnt with the Comp-
troller of tlic Currcncy. By statute, thc Comptrollcr has the authority
and is rcquircd to cxaniine cvcry national bank at least once cach ycar.I0
Each Fcderal Rescrvc Bank, subjcct to thc authority of the Board of
Governors, also has the power to conduct special examinations of mem-
ber banks within its d i ~ t r i c t . ~ 'Morcovcr, one of the powers of the
Board of Governors is to cxaminc the "accounts, books and affairs" of
the Reserve Banks and member banks.72 The Federal Reserve has
generally allowed the Comptroller of the Currency to exercise primary
responsibility for the examination of national banks.
State member banks are subject to e x a m i n a t i ~ n . ~The
~ statute
expressly provides that these examinations shall be made by direction
of thc Board of Govcrnors or thc Fcdcral Reservc Bank of the dis-
trict." Thus the Federal Rcserve System has the primary responsibility
for examining the state banks that are members of the Federal Reserve
System. The Federal Reserve Banks may approve examinations made
by state a u t h o r i t i ~ s . ~ ~
In addition to thc power to conduct bank examinations, the au-
thority of thc Board of Governors was recently expandcd under the
Depository Institutions Deregulation and Monctary Control Act of 1980.
Under that Act, the Board acquired the authority to require all depos-
8R 12 U.S.C. 8 5 412,413, 416, 467 (1976).
80 See 3 Fed. Banking L. Rep. (CCH) 9 37,818.
lo 12 U.S.C. 5 481 (1976).
12 U.S.C. 5 483 ( 1976).
72 12 U.S.C. 5 248(2) (1976).
12 U.S.C. 8 325 (1976).
* 74 Id.
lei 12 U.S.C. § 326 ( 1976).
37
8 2-75 OVERVIEW
itory institutions to report their liabilities and assets "as the Board may
determine to be necessary o r desirable to enable the Board to discharge
its responsibility to monitor and control monetary and credit aggre-
gates." Under the Act, the Board has access to data and rcports
supplied to other departments of the United States unless the law ex-
pressly provides otherwise.77
5 2-75 REGULATION OF INTEREST
AND DIVIDENDS PAID BY BANKS
The Board of Governors of the Federal Reserve System previously
exercised control over the amount of interest and dividends paid to cus-
tomers by the member banks under their supervision. This authority
was transferred t o an interagency Deregulation Committee in 1980.
The Deregulation Committee, discussed in 5 4-25, has been directed
by Congress to phase out the regulation of interest and dividend pay-
ments by 1986.
§ 2-80 CREDIT CONTROLS
On December 23, 1969, Congress cnacted a statute giving thc
Board of Governors of thc Fcderal Rcscrvc Systcm authority to imposc
credit controls, including (upon presidential authorization) the power
to ( 1 ) require transactions or persons o r classes of either to be licensed;
( 2 ) prescribe the maximum amount of credit which may be extended in
connection with any loan, purchase, o r other credit transaction; ( 3 )
prescribe thc maximum rate of intcrcst, maximum mnturity, minimum
periodic payment, o r any other specification o r limitation of the terms
and conditions of any extension of redi it.'^
Under the credit control statute, the Board of Governors cannot
cxcrcisc many of the powers granted it to regulate and control crcdit
until the President determines that this action is necessary to control
inflation. On March 14, 1980, President Carter made this determina-
tion and authorized the Board to exercise all the authority confcrred by
the statute.7g Upon receiving this authority, effective the same day, the
Board put into place a broad program aimed at constraining the amount
of credit.80 The Board took a number of actions designed to make the
12 U.S.C.A. 5 248(a) (2) (West Supp. 198 1).
77 Id.
12 U.S.C. $ 0 1901-1909 (1976).
Exec. Order No. 12,201,45 Fed. Reg. 17123 (1980).
See 45 Fed. Reg. 17924-17936 (1980).
I
I
!
i
FEDERAL RESERVE SYSTEM
extension of credit more expensive. A major part of the Board's pro-
gram consisted of consumer credit constraint measures that required
ks0
various consumer lenders to maintain special non-interest-bearing de-
posits of 15 pcrccnt on incrcascs ovcr basc nmount on many types
I of consumer credit. The program also included similar deposit require-
ments for certain liabilities held by nonmember commercial banks,
deposit requirements for money market mutual funds, voluntary guide-
lines on the growth of bank loans, and restrictions on access to the
Federal Reserve discount services. As the inflationary impact of these
credit sources eased, the ~ o a t drelaxed some of its credit constraints8'
and, in July 1980, announced plans to phase out these controls. This
announcement was in accord with an executive ordera2 revoking the
various powers granted in the earlier order, as of various dates ending
October 31, 1980.
The program adopted by the Board in 1980, although no longer
in effect, illustrates the extensive power conferred by the Act. The
voluntary credit restraint program applied to domestic commercial
banks, bank holding companies, finance companies that extended busi-
ness credit, and U.S. agencies and branches of foreign banks financing
U.S. residents. It provided that lending increases should be consistent
with announccd growth ranges for money and credit, with growth in
bank loans conforming to an uppcr limit growth rate of 6 to 9 perccnt.
Banks with slow grow111 paltcrns wcrc supposcd to confine thcir growth
to the lower portion. Banks werc also urged to restrain unsecured
consumcr lending, including credit card and other revolving credit al-
though no numerical guidclincs werc es~ablished. Automobile, home
mortgage, nnd homc improvcnicnt crcdit was trcatcd normally. Thc
program discouragcd financing for corporatc nlcrgcrs and takcovcrs
cxccpt whcrc justified by cficicncy considcrations, and discouragcd fi-
nancing for speculative commodity and other transactions.
The program did not establish guidelines on the terms and pricing
of bank loans, but it did urge lcndcrs to establish rates reflecting the
marginal cost of funds. Banks wcrc cxpcctcd to adjust thcir ratcs and
terms to accommodate the special needs of small businesses.
The program includcd extensive reporting. Banks and other finan-
cial institutions with assets over $1 billion were required to supply
monthly reports. Banks with asscts from bctwecn $300 million to $1
billion were rcquircd to supply quarterly reports.
The consumer credit restraint program covered not only commer-
cial banks but also finance conlpanies, credit unions, savings and loan
I * See 45 Fed. Reg. 3741 3 (1980).
82Exec. Order No. 12,225, 45 Fed. Reg. 45571 (1980).
 kl 2-85 OVERVIEW
associations, mutual savings banks, retail establishments, gasoline com-
panies, and travel/entertainment card companies. A broad range of
consumer credit was covered--credit cards, overdraft and check credit
plans, unsecured personal loans, loans secured by pre-owned borrower
collateral, open account and thirty-day credit arrangements. Automobile
loans, mobile home loans, furniture and appliance loans, and home
mortgage and improvement purchase money financing were not covered.
Creditors were required to file reports indicating the base amount of
crcdit outstanding and thcreaftcr to filc monthly rcports. As indicated
above, lenders had to maintain a spccial dcposit with a Fedcral Reserve
Bank or Federal Home Loan Bank or National Credit Union facility
equal to 15 percent of the amount by which the outstanding covered
consumer credit exceeded either $2 million or their base credit amount,
whichcver was larger.
The cxperiencc of this pcriod illustrates the far-rcaching powcrs
that the Board of Governors of the Federal Reserve Systcm may excrcise,
over all types of lenders to manage the amount of credit in the economy.
9 2-85 THE RELATIONSHIP OF THE FEDERAL RESERVE
SYSTEM TO SAVINGS INSTITUTIONS
The Federal Reservc Act of 19 13, which established the Federal
Rcscrve System, viewcd the system it was crcating as a network of
commercial banks. T h c Board of Governors and thc Federal Rcscrve
Banks were given functions rclatcd to thc regulation and control of tlic
nctwork of commercial banks that comprised the Fcdcral Rescrvc Sys-
tem. The Act did not provide for the Board or the Reserve Banks to
exercise any responsibility with respect to other depository institutions.
With the growth of the nation's economy, the Federal Reserve
System and the Board of Governors, particularly, came to scrve an
increasingly important role in determining the economic policy of the
country. Yet the existence of state banks that were not members of
the Federal Reserve System and of savings institutions that were not
subject to the regulatory authority of the Board of Governors, which in
modern times have come to comprise a substantial portion of the bank-
ing market, necessarily limited the ability of the Federal Reserve System
to control monetary conditions in the economy. At the same time,
concern developcd that the obligations placed on member banks to
maintain rescrvcs, as rcquircd by the Board of Govcrnors, cncouragcd
banks to withdraw from thc Fcdcral Rcscrvc Systcm. Also, a movcmcnt
k Rfi Scc 55 2-60, 2 6 4 5 .
bcgan to rcducc thc difTcrcnccs in functions betwccn commcrcial bnnks
and savings institutions allowing for freer competition bctwcen thcm
FEDERAL RESERVE SYSTEM 3 2-90
in areas such as the provision of checking and payment services, savings
accounts, and consumer lending.
The Depository Institutions Deregulation anh Monetary Control
Act of 1980 reflects thcsc changes and has accordingly worked a funda-
mental reorientation of the role of the federal government, through the
Federal Reserve Systcm, in banking.
( 1 ) All depository institutions (commercial banks, savings banks,
savings and loan associations, and crcdit unions) are permitted by the
Act to cngngc in providing customers with chccking scrviccs or thcir
equivalents through NOW accounts, and to enter the growing area of
electronic payment mechanism^.^^
( 2 ) The Federal Reserve System has acquired increased dom-
inance ovcr all of thc nation's depository institutions through both the
rcporting rcquircnlcnts which tlic Act imposcs and thc reserve require-
ments, which must be met by all depository institutions having transac-
tion accounts or nonpersonal time
( 3 ) The availability to all depository institutions of the services
of the Fcdcrnl Rcscrvc Systcm and thosc provided by the Reserve
Banks, such as the procedures for the collection of instruments and
transfer of funds, may anticipate a more complete integration of a
national payments and funds transfer network that will encompass a
broad range of depository institution^.^^
( 4 ) The ability of other depository institutions, which must main-
tain rescrvcs under thc Act, to utilize thc borrowing privileges offered
by the Fcdcral Rcscrve Systcm may also draw such institutions as
savings and loan associations and crcdit unions morc closcly under the
wing of the Federal Reserve S y ~ t e m . ~ "
5 2-90 THE COMPTROLLER OF THE CURRENCY
The Comptroller of the Currency is the chief officer of the Bureau
of the Comptroller of the Currency, which is located in the Department
of the Treasury. The Bureau is charged by law "with the execution of
all laws passed by Congress relating to the issue and regulation of a
national currency secured by United States bonds and, under the general
supervision of the Board of Governors of the Federal Reserve System,
of all Fcderal Reserve notes . . . ." Further regulatory authority,
83 SCC5 7-95 and Chnptcr 26.
8
' SCC5 2-50.
00 SCC§ 2-55.
8' 12 U.S.C. § 1 (1976).
41
3 2-90 OVERVIEW FEDERAL RESERVE SYSTEM
briefly described below in Table 3, is given to the Comptroller by spe- TABLE 3. Regulntions of the Comptroller of Currency*
cific statutes. Since these statutes vest the authority of the office in the
Comptroller, not in the Bureau, the power to regulate national banks is
vested by law in the Comptroller himself. Thus, for example, the regu-
lations in Chaptcr 1 o f the Code of Fcdcral Regulations arc promul- Pt. Subject Mntfcr
gated under the authority of the C o m p t r ~ l l e r . ~ ~
T h e Comptroller is appointed by the President, by and with the 1 Investment securities regulation
2 Disposition of credit life insurance income
advice and consent of the Senate, for a term of five years unless removed
3 National bank loans secured or covered by
sooner by the P r e ~ i d e n t . ~ "T h e Comptroller serves under the general governmental guaranties
direction of the Secretary of the T r e a s ~ r y , "and~ is rcquired lo make 4 Description of oflice, procedurcs, public information
a n annual report to Congress."' 5 Supplemental application procedures for charters,
T h e Comptroller must approve before a bank may be organized domestic branches, mergers, relocations, conversions,
t o d o business a s a national bank.@= Before issuing a certificate of ap- domestic operating subsidiaries, fiduciary powers,
proval, the Comptroller must conduct an inquiry into the condition of and title changes
the banking association and determine that it is lawfully entitled to com- 6 Lonns made by nationnl banks secured by obligations
mence the business of banking.03 of the United States
7 Interpretive rulings
Once the bank has become established as a national bank, the.
8 Assessment of fees; national banks; District of
Comptroller has extensive powers to regulate the activities of the bank. Columbia banks
Every national bank must make reports of condition to thc Comptroller 9 Fiduciary powers of national banks and collective
in such form and containing such information as the Comptroller pre- investment funds
scribes. The Comptroller may call for special reports whenever he 10 Municipal securities dealers
believes that such reports may be necessary to perform his supervisory 11 Securities Exchange Act disclosure rules
duties."' T h e Comptroller has the further authority to examine national 12 Recordkeeping and confirmation requirements for
banks and, pursuant to that exan~ination,"to administer oaths and to securities transactions
examine any of the officers and agents thereof under oath" in order to 13 Employcc stock option and stock purchase plans
make a "full and detailed report of the condition" of the bank.O"xam- 14 Changes in capital structure
IS Change in bank control
inations may be madc as oftcn a s the Complrollcr decms n c c ~ s s a r y . ~ "
16 Securities oflering disclosurc rulcs
Any rcfusal of Ihe bank to pcrnlit such a n examination or to supply the 17 Rcquircd notificntion to nonlinntc bnnk directors
rcquircd information may result in the forfciturc of all rights of the 18 Form and content of annual rcport to shareholdcn
bank.07 T h e Comptroller is authorized t o publish the rcport of his 19 R I I ~ CofS practice and procedure
examination of the bank.OB 20 International operations regulation
T h e Comptroller is also authorized to regulate the conversion and 21 Minimum security devices and procedures for
national and district banks
22 Lonns in areas having spccinl flood hnzards
23 Statements of business interest of directors and
8B12 C.F.R. Ch. 1, Pt. 1 (1980). principal oficers of national banks
12 U.S.C.8 2 (1976). 25 Community Reinvestment Act regulations
@O 12 U.S.C. 5 1 (1976). 26 Management official interlocks
@' 12 U.S.C.8 14 (1976). 27 Fair housing home loan data system
O2 12 U.S.C.5 26 ( 1976). 28 Federal branches and agencies of foreign banks
@a 12 U.S.C.8 27 (1976).
12 U.S.C.8 161 (1976).
See also Fed. Banking L. Rep. (CCH) for unoficial reproduclion of regulations.
@'

85 12 U.S.C.A. o 4si (wA supp. 1981).

@aId.
07 Id.
Id.
5 2-95 OVERVIEW
merger of national banks, the establishment of branch banks, and the
dissolution of banks.Q8
T h e Comptroller may grant national banks the authority t o engage
in trust activities.lDOThis authority may be revoked by the Comptroller
if the national bank "unIawfully o r unsoundly" exercises the authority.lO'
T h e Comptroller has authority to issue rules and regulations to
carry out the responsibilities of thc office.lo2
T h e Comptroller has the authority to declare bank holidays for all
national banks in any state o r any part of a state when an emergency
exists.'0a The emergency may arise from natural causes, such as floods
o r other natural devastation, o r can be man-rnadc, such as riots o r war.
When state banking authorities declare a bank holiday for all banks
chartered to do business within the state for either emergency o r cere-
monial reasons, the legal holiday automatically extends to national banks
located within that state unless the Comptroller issues a written order
specifically permitting the national banks to remain open.1M
All banks that are members of the Federal Reserve Systcm may be
closed or limited in the business that they may transact by a proclama-
tion of the President of the United States declaring an emergency.lo5
See 8 5-5.
loo12 U.S.C. 8 92a(a) (1976).
Io112 U.S.C.A. 5 92a(k) (West Supp. 1981).
Io2 12 U.S.C.A. !
j 93a (West Supp. 1981 ).
103 12 U.S.C.A. 8 9 5 ( b ) (West Supp. 1981).
104 Id.
1°5 12 U.S.C.A. 5 95(a) (West Supp. 1981).
Chapter 3
FEDERAL DEPOSIT INSURANCE
I'n~r
l'hc Fcdcral Vcposit Insuruncc Corporation . . . . . . . . . 45
Insured Deposils . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Deposit Insurance Assessments . . . . . . . . . . . . . . . . . . . 48
Pcrmancnt Insurance Funds . . . . . . . . . . . . . . . . . . . . . . 48
Termination of Insurance . . . . . . . . . . . . . . . . . . . . . . . . 49
Liquidation and Reorganization of Insured Banks . . . . . 50
Bank Regulation and Supervision . . . . . . . . . . . . . . . . . . 51
3 3-5 TIlE FEDERAL DEPOSIT INSURANCE
CORPORATION
Despite the many safeguards provided by the Federal Reserve Sys-
tem, many banks failed in the Great Depression of the 1930s. TO
strengthen the banking system and create public confidence in the banks,
Congrcss passcd the Banking Act of 1933, which established a system
of fcdcral guarantecs of dcposits in national banks. Thc vehicle f o r this
protection was the Federal Dcposit Insurance Corporation ( F D I C ) . T h e
original Act created a corpora&on with $ 1 5 0 million of stock sub-
scribed by the U.S. Trcasury and further stock purchased by the Federal
Reserve Banks.' This was later amended to replace the stock (which
was rcpaid) with n rcscrvc fund of $ 1 billion and powcr to borrow from
thc Trcasury up to $3 billion, at currcnt inlcrcst ratcs, when thc Director
of thc F D I C fclt it was n ~ c d c d .Today,
~ most conin~crcial banks arc
insured by the FDIC.=
T h e FDIC is managed by a three-member Board of Directors, con-
sisting of the Comptroller of the Currency and two other directors
appointcd by the Prcsidcnt, with the advice and consent of thc Senate.
Thc appointcd dircctors scrvc six-yci~rtcrnis, and otlc of 111c nppointccs
Banking Act of 1933, Ch. 89, 1 12B(c), 48 Stat. 162.
2 12 U.S.C. 5 1824 (1976).
a Sec § 4-5.
 3-10 OVERVIEW FEDERAL DEPOSIT I N S U R A N C E g 3-10

serves as chair mar^.^ T h e directors cannot hold office in o r own the TABLE 4. Regulations of the Federal Deposit Insurance Corporation
stock of any bank insured by the FDIC. T h e Board has rule-making
power to c a n y out the purposes of the law.6 T h e scope of these powers SUBCHAPTER A-PROCEDURE AND RULES O F PRACTICE
is indicated in Table 4, which sets forth the subject matter of the regula- 12 C.F.R.Pt. Subject Matter
tions issued by the FDIC. 300-302 [Reserved]
As the breadth of these regulations suggests, the F D I C has a 303 Applications, requests, submittals, and notices of
number of responsibilities. acquisition of control
304 Forms, instructions, and reports

I (1 ) It insures deposits.
(2) It supervises the liquidation of insolvent banks that it has
insured.
305-306
307
308
[Reserved]
Voluntary termination of insured status
Rules of practice and proccdurcs

i ( 3 ) It seeks to rehabilitate weak banks and to arrange measures

that will forestall bank failures a n d depositor losses.
(4) It exercises general supervisory authority over the statc banks
309
310

31 1
Disclosure of information
Safeguarding personal information in Federal Deposit
Insurance Corporation records
Rules governing public observation of meetings of the
that it insures but that a r e not members of the Federal Re- Corporation's Board of Directors
1 serve System. In this capacity, it has the power t o conduct
,
SUBCHAPTER B-REGULATIONS A N D STATEMENTS
bank examinations, to pass o n mergers and consolidations, to OF GENERAL POLICY
regulate the establishment of branches, as well as the power

I to exercise other regulatory control.

These functions are described in more detail in the following sections.

Minimum security devices and procedures for insured
nonmember banks
Assessments
Advertisement of membership
Interest on deposits
Clarification and definition of deposit insurance coverage
3 3-10 INSURED DEPOSITS Insurance of trust funds
Powers inconsistent with purposes of federal deposit
T h e Federal Deposit Insurance Corporation insures deposits in insurance law
national bonks, statc banks, nnd savings banks. All banks, stole Extcnsion of corporntc powcn
and national, that a r e members of the Federal Rcscrve System arc rc- [Kcscrvcd]
quired t o be insured. State nonmember banks may apply for insurance Securities of insured slate nonmember banks
with the FDIC. Most commercial banks havc F D I C insurance. Undcr Employec rcsponsibilitics and conduct
current statutes, each account in a bank insured by the F D I C is insured Unsafe and unsound banking practices
to a maximum of $100,000.6T h e amount of insurance has not always Fair housing
been this high. T a b l e 5 shows past maximum limits o n insurcd Loans in nreas having spccial flood hazards
[Rescrvcd]
deposits. Registration of transfer agcnts
T h e deposits insured include checking, savings, time, o r thrift ac- Applications for a stay or review of actions of bank
counts, certificates of deposit, letters of credit, and travelers checks.' clearing agencies
T h e insurance also covers other paper issued by the insured bank Insured state nonmcmbcr banks that arc municipal
for cash, items in the process of collection, and other accounts due securities dealers
cu~torners.~ Rccord-keeping and confirmation requirements for
securities transactions
Community rcinvcstment
4 12 U.S.C. 8 1812 (1976). Foreign banks
"2 U.S.C. 5 1817(c) (1976). Foreign activities of insured state nonmember banks
612 U.S.C. § 1821(a) (1976). Management official interlocks
712 U.S.C. 8 1813(1)(1) (1976), Reports on indebtedness of executive ofliccrs and principal
8 Id. shareholders to corrcspondent banks
5 3-15 OVERVIEW
TABLE 5. Maximum Limits on Insured Deposits
5 3-15 DEPOSIT INSURANCE ASSESSMENTS
T o provide security for the insured accounts, the FDIC is required
to assess each insured bank an annual amount equal to one twelfth of
one percent of the bank's deposit l i a b i l i t ~ .This
~ assessment is collected
semiannually and is calculated according to a statutory formula.10 Al-
though the basic annual ratc is one twelfth of one percent of adjusted
deposits, insured banks are entitled to a credit for a portion of thc
FDIC's assessment income after expenses and losses during the preccd-
ing year have been taken into account.ll This results in a substantially
lower effective assessment rate. Insured banks must file four reports
each year on the condition of the bank showing, among other matters,
the deposit liabilities of the bank.12
5 3-20 PERMANENT INSURANCE FUNDS
T h e funds accumulated by the F D I C for insuring deposits constitute
a permanent insurance fund.Ia These assets are the reserves that guar-
antee that the F D I C will be able to fulfill its insurance obligations. In
1980, the extent o f this fund was $ I 1.5 biIlion.l4 T h e Board of Direc-
tors of the F D I C may invest this money in U.S. bonds o r in other obli-
gations guaranteed by the United States, but such investments cannot be
made in amounts of over $100,000 at any o n e time without thc consent
of the Secretary of the T r e a s u r y . I V u r r e n t funds not s o invested may
be kept in a checking account with the Secretary of the Treasury or in
a Fedcral Reserve Bank designated by him.I0 Smaller accounts to be
12 U.S.C. § 1817(b) (1976).
'0 Id.
12 U.S.C. 5 1817(d) (1976).
11
l 2 12 U.S.C. 5 1817(a) (1976).
18 12 U.S.C. li 1821 ( n ) (1976 & Supp. 111 1979).
1 4 Federal Deposit Insurance Corporation, Annual Report ( 1980). .c
12 U.S.C. 8 l823(a) (1976).
'"2 U.S.C. 1 1823(b) (1976).
FEDERAL DEPOSIT INSURANCE ,3-25
used in liquidating banks may also be kept a t the discrction of the
Board.''
Profits, if any, from the operations of the F D I C go t o the U.S.
Treasury.
When needed for insurance purposes, the FDIC is authorized to
borrow from the Treasury u p to $ 3 b i l l i ~ n . ' ~The F D I C has not needed
to exercise this authority.
§ 3-25 TERMINATION OF INSURANCE
T h c F D I C has broad aulhority to tcrminatc thc federal insurance
of an insured bank whcn it believes the bank, its directors, o r trustees
have engaged in "unsafe o r unsound practices," o r are in an "unsafe
o r unsound condition," or are in violation of an applicable law, rule,
regulation o r order, or condition imposed by the FDIC.I9 T h e F D I C
is cntitlcd to demand, in coopcration with thc Comptrollcr of the Cur-
rency, the Board of Governors of the Fedcral Rcscrve System, o r a
statc regulatory agency, a correction of the improper practices. If such
practices are not corrected within the proper time limits, the F D I C may
terminate the insured status of the bank after first taking steps necessary
to protect the insured deposits.20 A hearing is provided for banks that
are subject t o the possibility of termination of i n s u r a n ~ e . ~ '
In addition to its power t o terminate federal insurance, the F D I C
may also issue cease and desist orders whenever it has reason to believe
that any state nonmember insured bank has engaged in an "unsafe or
unsound practice" or has violated any law, rule, regulation, or condition
imposed by thc FDICz2 A hearing is provided for a bank that is subject
to such orders.23
Banks that are not members of the Federal Reserve System may
voluntarily withdraw from insured status; 24 however, state banking reg-
ulation may require the bank to provide substitute safeguards. National
banks and state banks that are mcmbers of the Federal Reserve System
may not voluntarily Nccdlcss to say, the FDIC has proved
17 Id.
lR 12 U.S.C. 8 1824 (1976).
'"2 U.S.C. 5 1818(n) (Supp. I11 1979).
20 Id.
2' Id.
" 12 U.S.C. 5 1818(b) (Supp. 111 1979). Sce discussion at 85 3-35,
4-15.
12 U.S.C. 8 lRlR(b) ( 1 9 7 6 ) .
24 I2 U.S.C.§ 1818(a) (1976).
25 Id.
 8 3-30 OVERVIEW
so successful that few banks allow themselves the privilege of either
voluntarily or involuntarily withdrawing from their status as insured
banks. Whenever the FDIC involuntarily terminates the insured status
of a state member bank, the Board of Governors of the Federal Reserve
System is required to terminate the bank's membership in the Federal
Reserve System.26 Whenever the FDIC terminates the insured status
of a national bank, the Comptroller of the Currency is required to place
the bank in receivership.27
5 3-30 LIQUIDATION AND REORGANIZATION OF
INSURED BANKS
The Federal Deposit Insurance Corporation is the statutory re-
ceiver whenever the Comptroller of the Currency appoints a receiver
or closes a national bank. When a state bank is closed because of
inability to meet the demands of its depositors, the FDIC also may
serve as receiver with the cooperation of the appropriate state banking
a ~ t h o r i t y . When
~~ liquidation occurs, the depositors are immediately
paid in full up to the maximum limit of the federal guarantee of
$ 100,000.2D Whcn claims cxcccd $100,000, if asscts arc avnilablc to
satisfy thcsc claims in part, dividcnds may bc paid pro rala to t l ~ c
respective claimants.
The FDIC in its discretion may organize a new bank to assume
the insured deposits of the closed bank.30 When such a new bank is
organized, the FDIC is authorized to supply funds to the new bank for
thc expenses of operation and for the insured deposits assumed by the
ncw bank.3' The F D l C may scll capital stock of the ncw bank on such
terms as it deems advisable or the new bank may be consolidated with
another insured bank in the c o m m ~ n i t y .The
~ ~ new bank is a national
bank and the Comptroller of the Currency is involved in regulating its
practices.83
The FDIC may also take action to prevent banks from closing or to
rehabilitate banks that have closed. It may make loans to, purchase the
assets of, or make deposits in such banks.34 The FDIC may also be
I 2a 12 U.S.C. S 18 I8 ( 0 ) ( 1976).
28 12 U.S.C. 5 1821 (e) (Supp. 111 1979).
so 12 U.S.C. 5 1821(h) (1976).
12 U.S.C. 5 1821( j ) (1976).
12 U.S.C. 5 1821(k) (1976).
I 3a 12 U.S.C.A. 5 1821(i) (West 1980).
12 U.S.C. 5 1823(c) (1976).
FEDERAL DEPOSIT INSURANCE ,545
actively involved in trying to arrange the merger or consolidation of a
weak bank with another insured bank. When the FDIC believes that
a merger o r sale of assets is advisable to avoid a threatened loss, the
FDIC may make loans or purchase the assets of the bank to facilitate
the consolidation or sale.S6
5 3-35 BANK REGULATION AND SUPERVISION
In addition to insuring dcposits and scrving as the responsible
authority when bank solvency is threatened, the Federal Deposit Insur-
ance Corporation engages in the regulation of insured banks not subject
to regulation by the Board of Governors of the Federal Reserve System
or the Comptroller of the Currency. Some of the major regulatory
activities of the FDIC are described below.
1 . Exarilination of banks. The FDIC has authority to conduct
examinations of any insured state nonmember bank.36 In addition, the
FDIC may conduct special examinations of any insured bank, state or
national, whenever "in the judgment of the Board of Directors such
special examination is necessary to determine the condition of any
such bank for insurnncc purposcs." R7 The powcr to conduct examina-
tions includcs thc powcr to tnkc testimony undcr oath nnd to cxnniinc
thc aflairs of bank a f i l i a t ~ s . ~ ~
2 . Approval o f mergers and consolidationr. When an insured bank
merges or consolidates with another insured bank, any one of three
federal authorities may be involved-the Comptroller of the Currency,
thc Board of Governors of the Federal Reserve System, or the FDIC.
Selcction of the appropriate regulatory agency dcpcnds on the status of
the bank that will survive the consolidation. If the surviving bank
is not a member of the Fcderal Reserve System but is an insured bank,
the FDIC has the authority to approve or disapprove the mergerea0
3. Branch banks. No state insured bank that is not a member of
the Federal Reserve System may operate a new branch without the prior
consent of the FDIC.'O Similarly, no state nonmember insured bank
may move its main office or branch from one location to another or
operate a foreign branch without the prior consent of the FDIC."
12 U.S.C. 5 l823(e) ( 1976).
12 U.S.C. $ 1820(b) (Supp. 111 1979).
37 Id.
38 12 U.S.C. $ 5 1820(~)-1820(d) (SUPPXI1 1979).
8D 12 U.S.C. 8 1828(c) (1976 & Supp 111 1979).
"
12 U.S.C. 5 1828(d) (Supp. 111 1979).
Id.
 5 3-35 OVERVIEW

4. Regularion of the payment of interest and dividends on deposits.

T h e FDIC had authority to regulate the amount of interest and divi-
dends paid by slate nonmember insured banks on deposits.4a Under the
Depository Institutions Deregulation nncl Control Act of 1980, howcvcr,
the FDIC's authority was transferred to a n interagency Depository Insti- Chapter 4
tutions Deregulation Committee, s o that regulation of interest rates can
gradually be phased out by the ultimate expiration date of 1986.43
5. Regulation t o prevent unsafe and unsound banking practices. FEDERAL REGULATION
T h c FDIC has broad authority to regulate all insured banks because
of its statutory authority to terminate the insurance of any insured bank OF BANKS
that engages in "unsafe o r unsound practices," or that is in a n "unsafe
o r unsound condition." 44 As explained in a n earlier section, the F D I C Page
must cooperate with thc Board of Governors of the Federal Reserve Federal Regulatory Agencies in General . . . . . . . . . . . . 53
System and the Comptroller of the Currency when the insured bank is Federal Bank Exaniinalion-Financial Institutions
regulated by either of those a g e n c i e ~ . ' ~I n addition, the F D I C has the Examination Council . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
'
authority to issue cease and desist orders when any state nonmember Prevention of Unsafe and Unsound Banking
insured bank engages in "unsafe o r unsound practices." Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Suspension o r Removal of Directors or
Officers for Cause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
42 12 U.S.C. 5 1828(g) ( 1 ) (Supp. I11 1979).
48Deposit~ryInstitution Deregulation and Monetary Control Act of Deregulation of Interest and Dividends
1980, $5 203, 207(b) (2)-(3), 12 U.S.C.A. $5 3502, 3506 (Wcsl 1980). PaidbyBanks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
See 8 4-25 for a discussion of the Deregulation Committce. Portfolio Regulation of Commercial Banks . . . . . . . . . . 59
4i 12 U.S.C. 8 1818(a) (Supp. I11 1979). Regulation of the Incidental Powers of
See $ 3-25.
46
National Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
12 U.S.C. 5 I818(b) ( I ) (Supp. I11 1979). See First Nat'l Bank of
Loans to Bank Officers and Directors . . . . . . . . . . . . . .
'13 66
La Marque v. Smith, 610 F.2d 1258 (5th Cir. 1980); Indcpendcnt Bankers'
Ass'n of Am. v. Hcimann, 613 F.2d 1164 (D.C. Cir. 1979); Groos Nat'i Loans to Bank Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . 68
Bank v. Comptroller of Currency, 573 F.2d 889 (5th Cir. 1978); First Nat'l Financial Privacy for Bank Customers . . . . . . . . . . . . . . 69
Bank of Eden v. Department of Treasury, 568 F.2d 610 (8th Cir. 1978). Financial Record-Keeping and Reporting of Currency
The comparable authority of the other bank regulatory agencies is discussed Transactions-The Bank Secrecy Act . . . . . . . . . . . . . . 74
in 5 4-15.
Local Credit Needs-The Community
Reinvestment Act of 1977 . . . . . . . . . . . . . . . . . . . . . . . 77
Environmental Regulation . . . . . . . . . . . . . . . . . . . . . . . 79
Transactions Involving Securities .................. 79
Arncrican Banks Doing Foreign Business . . . . . . . . . . . 81
Foreign-Owned Banking Corporations . . . . . . . . . . . . . . 82

FEDERAL REGULATORY AGENCIES IN GENERAL

Most conimcrcial banks in the United States are subjcct to sonic
form of fedcral regulation under the constantly expanding scope and
jurisdiction of the federal "troika"-the Comptroller of the Currency,
thc Board of Govcrnors o f thc Fcdcral Rescrvc System and thc Federal
Deposit Insurance Corporation.
 9 4-10 OVERVIEW
As of September 30, 1980, the FDIC insured 14,416 commercial
banks, with assets of $1,462 billion, in the United States. Of these,
4,425 were national banks with asscts of $834 billion; 986 were state
member banks of the Federal Reserve System with assets of $256 bil-
lion; and 9,005 were statc banks insured by the FDIC but not mcnlbcrs
of the Federal Reserve System, with assets of $373 billion. There are
i very few banks that are not insured by the FDIC.'
Preceding chapters have discussed these three regulatory agencies
in greater detail. T h e Comptroller of the Currency is responsible for
chartering and examining national banks. Its organization and structure
are shaped accordingly, with most of its personnel engaged in regulatory
1 activity.=
The Board of Governors of the Federal Reserve System has re-
sportsibilities that extend beyond simple bank supervision. Although the
Board of Governors has regulatory responsibility and conducts examina-
. tions of the state member banks, its major concern is monetary policy-
the impact of the supply, availability, and cost of money upon national
employment, the productivity of the economy, and prices. Regulation
of depository institutions constitutes only a small part of the work of
thc Fcdcral Rcscrvc System.'
The Federal Deposit Insurance Corporation is responsible for in-
suring the deposits of banks and for rchabilitating financially weak
banks. Although thc F D I C has the power to examine nny insurcd bank
for insurance purposes, including banks under the supervisory control
of the Comptroller and the Federal Reserve System, in practice the cor-
poration rarely makes its own examination of national o r state member
banks, relying instead upon the reports of examinations made by the
Comptrollcr and thc Board of Governors of the Fedcral Rescrvc Systcm.
The FDIC does conduct supervisory examinations of statc nonmcnibcr
banks. It is the fcdcral rcgulatory agcncy with authority to supcrvisc
the practices of state nonmember insured banks.'
9 4-10 FEDERAL BANK EXAMINATION-FINANCIAL
INSTITUTIONS EXAMINATION COUNCIL
The three principal federal bank regulatory agencies, the Comp-
troller of the Currency, the Board of Governors of the Federal Reserve
System, and the Federal Deposit Insurance Corporation, conduct the
Fed. Res. Bull. A-17, 72 (Feb. 198 1).
2 The Comptroller of the Currency is discussed in Chapter 2.
a The Federal Reserve System is discussed in Chapter 2.
The Federal Deposit Insurance Corporation is discussed in Chapter 3.
54
FEDERAL REGULATION O F BANKS ,4-10
examination of banks under their respective jurisdictions. The C o m p
troller of the Currency has primary responsibility for national banks.=
The Federal Rcscrve System excrciscs supervisory responsibility ovcr
state banks that are nicmbcrs of thc Federal Rcscrvc system."^
Fcdcral Dcposit Insurnncc Corporation has authority to cxaminc all
insured banks, but concentrates especially on state nonmember insured
banks.'
The Federal Home Loan Bank Board has supervisory authority
and conducts examinations of insured savings and loan association^.^
Thc National Credit Union Administration exercises responsibility with
respcct to insured credit u n i o ~ s . ~
In 1978, the Financial Institutions Regulatory and Interest Rate
Control Act established a Financial Institutions Examination Council
to prescribe uniform standards for the examination of depository insti-
tutions that are subject to federal e ~ a m i n a t i o n . ' ~The Council consists
of the Comptroller of the Currency, the Chairman of the Board of
Directors of the Fcderal Deposit Insurance Corporation, a Governor
'
of the Board of Governors of the Federal Reserve System designated by
the Chairman, the Chairman of thc Federal Home Loan Bank Board,
r\nd tllc Cllnirniiln of tllc National Crcdit Union Adliiinistrntio~lDonrd.
The chairmanship of the Council rotates among the members every
two ycnrs.
Thc Council is responsible lor establishing uniform principles and
standards and report forms for the examination of financial institutions, . ..
..
to be applied b y the federal financial institutions regulatory agencies."
The Council al;o makes recommendations with respect to other super-
visory niattcrs. The Council dcvclops uniform reporting systems for
federally supcrviscd financial institutions, thcir holding companics, and
nonfinancial subsidinrics, and also is dircctcd by Congress to conduct
schools for cxaniiners. T o carry out its duties, thc Council has lcgal
access to all reports and records of the five regulatory agencies that are
members of the Council, including rcports those agencies have made
of the examination of financial institutions under their jurisdiction.
6 See 5 2-90.
6 See § 2-70.
7 See § 3-35.
8 See 8 7-20.
_
- 7 - " .
lo 12 U.S.C. 5 3301 (Supp. 111 1979).
l1 12 U.S.C. 5 3305(a) (Supp. 111 1979). The Comptroller General
of the United States has submitted a report to Congress recommending
rnensures for the consideration of the Council. Comptroller General of the
Uniled Stales, Federal Exatnbratiotts of Fitlancial Institutiot~s: Issiies tllat
Need to Be Resolved, GGD-81-12 (Jan. 6, 1981 ).
5 4-15 OVERVIEW
§ 4-15 PREVENTION OF UNSAFE AND
UNSOUND BANKING PRACTICES
The three major fedcral regulatory agencies, the Comptroller of the
Currcncy, thc Board of Governors of the Federal Reserve System, and
thc Fcdcral Dcposil lnsurancc corporation, in addition lo thcir otlicr
powers, have the authority to issue cease and desist orders in the exer-
cise of regulatory control over the institutions for which they are re-
sponsible. The power to do so is broad. T h e appropriate agcncy may
issuc ordcrs when there is "rcasonablc cause to bclievc that thc bank
or any director, officer, employee, agent,, o r other person participating
in the conduct of the affairs of such bank is about to engage in an
unsafe or unsound practice in conducting the business of such bank"
or is about to commit a violation of law or of the agency's regulation^.'^
The agency's authority extends to the activities of bank holding com-
panies and to subsidiaries of bank holding companies.Ia Ordinarily,
before a cease and desist order may become effective, a hearing must be
provided." When an emergency exists, however, the federal agency
may obtain an emergency order, which is effective immediately.16 In
this case, the bank o r other person subject to the emergency order may
apply within ten days to a U.S. District Court for a modification or
suspension of the order.I6
The regulatory agencies have considerable discretion in deciding
what constitutes "unsafe o r unsound banking practices." The courts, in
interpreting the banking acts, have held that Congress intendcd to com-
mit the definition of these practices to the expertise of the appropriate
regulatory agencies."
Violation of the terms of a final cease and desist order issued by
the FDIC carries a civil penalty of up to $1000 per day for each day
the violation continues.18 The penalty may be assessed against the
insurcd bank, its officers, directors, employees, agents, or other persons
who participated in the wrongful conduct. Violation may also lead to
thc suspcnsion or rcmoval of bank dircctors and ollic~rs.~"
l2 12 U.S.C. 8 l 8 l 8 ( b ) (1) (Supp. 111 1979).
la 12 U.S.C. 5 l 8 l 8 ( b ) (3) (Supp. 111 1979).
l4 12 U.S.C. 5 l 8 l 8 ( b ) (1) (Supp. 111 1979).
'"2 U.S.C. 8 l8l8(c) (1) (Supp. III 1979).
'"2 U.S.C. 5 18 18(c) (2) (Supp. I11 1979).
l T See Groos Nat'l Bank v. Comptroller of the Currency, 573 F.2d 889
(5th Cir. 1978); First Nat'l Bank of Eden v. Department of Treasury,
568 F.2d 610 (8th Cir. 1978); First Nat'l Bank of La Marque v. Smith, 610
F.2d 1258 (5th Cir. 1980).
l 8 12 U.S.C. 5 18 18(i) (2) (Supp. 111 1979).
l o 12 U.S.C. 5 18 18(e) (Supp. I11 1979). See $ 4-20.
56
FEDERAL REGULATION OF BANKS
$4-20 SUSPENSION OR REMOVAL OF DIRECTORS
OR OFFICERS FOR CAUSE
T h e thrce federal regulatory agencies have authority to suspend or
remove the directors and oRiccrs of banks.2n Thc appropriate agency
may clircct tlic rcniovnl of a dircctor or ofliccr for thc following rcnsons:
( 1 ) Violation of laws, rules, regulations, or a cease and desist
order of tlic agcncy;
( 2 ) Participating in any unsafe or unsound practice;
( 3 ) Committing a breach of fiduciary duty as director or officer,
including receiving personal financial gain by reason of such
violation of fiduciary duty; and
( 4 ) Engaging in conduct with respect to other insured banks or
business institutions in a dishonest fashion.21
If necessary to protect the interest of the bank or its depositors, the
appropriate federal regulatory agency may suspend the officer or director
from participating "in any manner in the conduct of the affairs of the
bank." 2 2 Similarly, when a director or officer is charged with a felony,
the appropriate fedcral agency may suspend the individual from further
participation in the affairs of the bank if the individual's continued
participation may pose a threat to the bank or its d e p ~ s i t o r s . ~ ~
After the order suspending or removing an officer or director be-
comes final, violation of the order by participation in the conduct of the
affairs of the bank or by exercising any voting rights in such bank may
result in a fine of $5,000 or imprisonment for not more than one year,
or both.24
$ 4-25 DEREGULATION OF INTEREST AND
DIVIDENDS PAID BY BANKS
I3nnks nritl otl~crdcposi~oryinslitutions hnvc bccn rcstrictcd by
llicir rcgulntory ngcncics in tlic nmount of intcrcst or dividends tlint
thcy may pay lo customers who havc accounts with thcrn. Banks that
are members of the Federal Reserve System have been subject to reg-
ulations of the Board of governor^.^^ Nonmember insured banks have
z0 12 U.S.C. $ 1818(e)(l) (Supp. 111 1979).
21 12 U.S.C. 5 18 l8(e) ( l ) , (2) (Supp. I11 1979).
22 12 U.S.C. 5 1818(e) (3) (Supp. 111 1979).
z3 12 U.S.C. 0 l8l8(g) ( 1) (Supp. 111 1979).
24 12 U.S.C. 5 1818(j) (Supp. 111 1979).
26 12 U.S.C. 5 371b (1976); 12 C.F.R. Pt. 217 (Reg. Q) (1980).
 5 4-25 OVERVIEW
been regulated by the Federal Deposit Insurance C o r p o r a t i ~ n . ~ ~ a v i n g s
and loan associations have been regulated by the Federal Homc Loan
Bank B ~ a r d . ~Federal
' credit unions have been similarly regulated.28
Banks that are members of the Federal Reserve System are for-
bidden to pay intcrcst on demand deposits, "directly or indirectly, by
any device whatsoever." A similar prohibition exists with respect to
the demand deposits of insured nonmember bank~.~OAs explained
below, however, these prohibitions have partially eroded under the
impact of new legislation. On accounts where interest may be paid,
Congress has directed the federal regulatory agencies to establish interest
ratc ccilings that maintain a diffcrcntial bctwccn insured banks nnd
savings and loan associations, which permits savings and loans to pay
a higher rate.a1 This feature also is scheduled to end.
The Depository Institutions Deregulation and Monetary Control
Act of 1980 changes this scheme by allowing all depository institutions
to create NOW accounts for eligible individuals and nonprofit organiza-
tions on which interest can bc paid but which also allow the customer
to draw checks.82 Additionally, all banks insured by the FDIC may tic
savings accounts to checking accounts for automatic transfers of funds
when the account holders are eligible individuals or nonprofit organi-
zations."
The Depository Institutions Deregulation and Monetary Control
Act of 1980 also puts in place a program for deregulating the control
of interest rates. In adopting this Act, Congress addressed two problems
that it believed the regulation of interest rates created for savers and
depository institutions: ( 1 ) when the market rate for money is highcr
than the legal rate for depository institutions, small savcrs are penalized
to the extent they d o not place their funds in alternative investments
and the depository institutions are injured to the extent they are unable
to compete with the alternative investments; (2) the structure of differ-
cnt maximum rates for differcnt classcs of dcpository 'institutions crcatcs
competitive imbalances. Congress' answer to these problems was to
deregulate the control of interest rates. Thus, the Depository Institu-
-
'"2 U.S.C. 5 183 l a (1976); 12 C.F.R. Pt. 329 (1980).
'7 12 U.S.C. § 1429b (1976); 12 C.F.R. Pt. 526 (1980).
12 U.S.C. 8 1763 (1976).
29 12 U.S.C. 5 371 a (1976).
12 U.S.C. 5 1828(g) (1976).
a 12 U.S.C.A. $ 461 note (West Supp. 1981).
82See 5 19-15.
83 12 U.S.C.A. 5 5 371a, l828(g) (2) (West Supp. 1981). See 5 19-15.
FEDERAL REGULATION O F BANKS 30
tions Deregulation Act of 1980 provides for the elimination, by April
1, 1986, of authority to rcgulatc and sct limitntions on the payment of
interest and dividends by member banks, insured banks, and other
depository institutions.a6
In thc intcrim bctwccn March 31, 1980 and April 1, 1986, thc
authority to regulate interest and dividends is transferred to an inter-
agency Depository Institution Deregulation Committee, which consists
of the Secretary of the Treasury, the Chairman of the Board of Gov-
ernors of the Federal Reserve System, the Chairman of the Board of
Directors of the Federal Deposit Insurance Corporation, the Chairman
of thc Fcdcral Homc Loan Bank Board, and thc Chairman of the Nn-
tional Crcdit Union Administration Board. Thc Comptroller of the Cur-
rency is a nonvoting member.30
In the Act, Congress has charged the Deregulation Committee "to
provide for the orderly phase-out and the ultimate elimination of the
limitations on the maximum ratcs of intcrest and dividends which may
be paid on dcposits and accounts as rapidly as economic conditions
warrant." Thc Act contains targcts for incrcasing the maximum in-
terest rates institutions may pay, and the Committee must vote on these
targets at intervals of eighteen months, three years, four years, five
ycars, nnd six ycars nfter cnactmcnt of thc Actaa8
On April 1, 1986, thc lcgislation that rcquircs thc Fcdcral R C S C ~ V C
Board to maintain an interest ratc differential between banks and thrift
institutions will be repealed.3n Until then, the Deregulation Committee
will be subject to the legislation's provisions.
8 4-30 PORTFOLlO REGULATION OF
COMMERCIAL BANKS
"Portfolio rcgulation" is a tcrm commonly uscd to dcscribc not only
the asset and liability regulation of banks, but also the regulation of the
Title I1 of the Depository Institutions Dcregulation and Monetary Con-
trol Act of 1980, Pub. L. 96-221 (codified at 12 U.S.C.A. § § 3501-3509
(West 1980)).
12 U.S.C.A. 8 3506b (West 1980).
12 U.S.C.A. 3502 (West 1980).
" 12 U.S.C.A. 5 3503(a) (West 1980).
12 U.S.C.A. 5 3504 (West 1980). The targets call for an increase for
passbook savings accounts at 18 months of onc-fourth of one perccntage point
and increases for all accounts of one-half of one percentage point annually,
beginning with the third year. The Committee, however, may decide to depart
from the targeted rates.
38 12 U.S.C.A. 8 35O6(b) ( 1 ) (West 1980).
r)
 3 4-30 OVERVIEW
services they may offer: the holding of loans and securities, interest
rates, the tcrms and condition of contracts, and the distribution of assets
and liabilities.
In general, a bank may:
( 1 ) .Discount and negotiate notes, drafts, bills of cxchange, and
other evidences of debt;
(2) Receive deposits, make unsecured loans and loans secured by
real estate and other security;
( 3 ) Buy, scll, and exchange coins and bullion; and
( 4 ) Exercise such incidental powers as may be necessary to carry
on the business of banking40 Moreover, a registered bank
holding company may acquire, and a bank may thercby be
affiliated with, a corporation the activities of which the Board
of Governors has dctcrrnincd to be so closcly rclatcd to bank-
ing o r managing, or controlling banks as to bc n propcr inci-
dent thereto, and which can reasonably be expected to pro-
duce net benefits to the public. See $ 6 1 5 .
The following is a summary of the major portfolio restrictions ap-
plicable to commercial banks."
1. Loans to a single borrower: National banks may not lend to
any one borrower (whether a person, co-partnership, association, or
corporation) an amount in excess of 10 percent of its unimpaired capital
stock plus 1 0 percent of the amount of its unimpaired surplus, unless it
is in connection with a current commercial transaction o r if secured by
Treasury ~ e c u r i t i c s . ~ ~
State-chartered banks are subject by state law to similar, though
generally more liberal, restriction^.'^
2 . Loans on o r purcl~areof o w n stock: Member banks are pro-
p-
40 Thc incidental powcrs of national banks arc discussed in 5 4-35.
Legal restrictions on state banks have their sources in statc law or in
federal law if the banks are Federal Reserve memben or are insured by the
Fcderal Deposit insurance Corporation. In a few situations, federal law ap-
plies to all banks. Somctirncs thc federal law is not inlcndcd to prccmpt or
displacc thc stafc law, so that state-charlcrcd banks may bc suhjcct to rcslric-
tivc provisions of both fcdcral and slatc law rclativc to ccrlnin activities. In
such a case, these banks must, in effect, comply with the most restrictive
provisions.
4 2 12 U.S.C. 5 84 ( 1976).
48 Conference of Slate Bank Supervisors, A Profile of Slate-Chartered
Banking 60-66 ( 197 1 ) (hereinafter cited as Profile).
FEDERAL REGULATION OF BANKS
hibitcd from granting loans on the security of their own outstanding
stock as colla(eral, or from purchasing or holding any such shares, ex-
ccpt to prcvcnt loss on n dcbt previously contrnctcd in good faith, in
which event the stock must be disposed of within six months."
State-chnrtcrcd banks arc generally sevcrely limited in this respect,
and such loans and purchases arc prohibitcd in most
3. Conflict of irtterest loans and investments:
( a ) Loans to oficers: Since 1978 there have been severe re-
strictions upon the power of rncmber banks nnd insured banks to make
loans to their officers and director^.'^
State-chartered banks in almost all states are subject to similar lim-
itations, ranging from a requirement that such loans be approved by, or
repoiled to, boards of directors to an absolute prohibition."
( b ) Loa11.r ro or prrrcha.ve of sccliritics of a/77liatrs: A mcrnbcr
' bank is prohibitcd (with certain limitcd cxceptions) from granting loans
to, o r purchasing securities from, any one afiliate in excess of 10 per-
cent of the bank's capital stock and surplus or, in the case of all of its
affiliates collectively, in excess of 20 percent. Such loans must be se-
cured by collateral whose market value must be equal to, or greater
than, the face amount of the loan, the exact requirement depending on
the nature of the ~ollateral.'~
( c ) L o a m ( o r gifts) to bank examiners: An insured bank is
prohibited from lcnding ( o r granting gifts) to a bank examiner who does
or might cxarnine the bank.4D
State-chartered banks are similarly prohibited "in certain states." 60
4 . Rcstrictiom o n real e s / a / e l o a m and invesfttienfs:National banks
have lcnding ceilings for real cstate loans. Their total loans secured by
real estatc rnortgagcs cannot exceed total capital stock and surplus, or
total savings and other timc deposits, whichever amount is greater.
44 12 U.S.C. 55 83, 324 (1976).
45 Encyclopedia of Banking Laws (Bailey ed. 1964 & Fonscca cd.
Supp. 197 1 ) (hereinafter cited as Et~cyclopedia).
12 U.S.C. $375~1(1976 & Supp. I11 1979). See 5 4-40.
~ ~
4 1 ~ n c ~ c l o ~ e r not;
l i a , 45 srcprn.
4 n 12 U.S.C. 5 371c ( 1976). 12 U.S.C. 1 1828(j) (Supp. 111 1979) lntcr
applicd thcsc restrictions to nll instrrcd banks.
18 U.S.C. 5 212 (1976). Scc, howcver, FDIC Statement of Policy,
"Loans to Corporation Examiners by National Banks, District Banks, and
State Member Banks." 38 Fed. Reg. 21210-2121 1 (1973).
C4
60 Gies. Maver & Eltin. Porrfolios Regulafions and Policies of Financial
 9 4-30 OVERVIEW
With respect to individual loans, conventional real estate loans are
generally limited to first mortgages on improved property. The loan-to-
value ratio varies according to the degree to which the real cstate is
improved, and may not exceed 90 percent of the appraised value of the
pledged real estate for periods not to exceed thirty years, provided the
entire principal is amortized over the life of the loan.
Real estate loans insured. or guaranteed or participated in by the
Federal Housing Administration and Veterans Administration, and cer-
tain other governmental agencies, are exempt from these restrictions on
conventional mortgages, although they are subject to the terms and con-
'
ditions prcscribcd by the agcncics.
Construction loans of sixty months' maturity or less are generally
exempt.61
State-chartcred banks are subject to varied rules. About two-fifths
of the states have no restrictions. The balancc generally specifics aggre-
gate limits on rcal cstatc loans and maturity, and loan-lo-value rntios
for individual convcntional mortgages of much thc same character as
federal law. A number of states restrict lending on properties that are
remotely locatcd. In such cases, favored loans arc typically those on
propcrtics located locally, in the statc, or adjoining states.82
5 . Ownership: National banks may own only such rcal cstate as is
necessary for their immediate accommodation in the transaction of busi-
ness, including bank premises, real property mortgaged to them by way
of security, o r conveyed in satisfaction of debts previously contracted,
etc. Other than bank premises, such real estate must be disposed of
within five years.68 Member banks may not invest directly o r indirectly
in bank premises an amount in excess of capital without thc permission
of the appropriate federal r c g ~ l a t o r . ~ ~
State-chartered banks are generally subject to similar restrictions
on the amount of real estate they may hold.88
6 . Loans o n stock and bond collateral: All banks are prohibitcd
from lending more lhan the maximum loan value cstablishcd by thc Fcd-
era1 Reserve for loans collateralized by those "cquity sccuritics" tradcd
on registered stock exchanges and by those of some 300 corporations
61 12 U.S.C.fj 3 7 1 (1976).
62 Profile, note 43 supra, at 67-73.
63 12 U.S.C.A.§ 2 9 (West Supp. 1981). The Comptroller may grant
permission to hold the real estate beyond five years if the bank has been
unable to disposc of it. Id.
" 12 U.S.C. fi 371d ( 1 9 7 6 ) .
O6 Encyclopediu, notc 45 supra.
FEDERAL REGULATION OF BANKS j
I 4-30
that are widely bought and sold in the over-the-counter market, pro-
vided the purpose of the loan is to purchase or to carry securitie~.~''
A member bank may not make a loan secured by stock or bond
collateral to any one interest in an amount in excess of 10 percent of
the bank's capital stock and surplus.67
7. Acceptances: A member bank may accept a draft or bill with a
maturity of six months or less against commercial- transactions. How-
ever, the aggregate of such acceptances may not exceed 50 percent of
thc bank's capital and surplus, unlcss permission is granted by the Board
of Governors; with permission, the aggregate may not exceed 100
percent.
The afsrcgate of acceptances arising in domestic transactions may
not cxcccd 50 percent of capital and surplus.6s
8 . Maximurn rates o\ interest on loans: Banks generally are lim-
ited in tlic intcrcst rntcs thcy mny chnrgc, The cxac! limitation dcpcnds
upon both state and fcdcrnl law. Chaptcr 17, Intcrcst and Usury, dc-
scribes thesc limitations.
9 . Reserves: M c n ~ b c rbanks and othcr depository institutions arc
rcquircd to maintain rcscrvcs in relation to deposits and to certain other
liabilities as cstablishcd by thc Fcdcral R c s e r v ~ . ~ ~
Most state-chartered banks also are subject to reserve require-
ments. Generally, they may be held in the form of vault cash, corre-
spondent balances and, in a number of states, in federal, state, or local
obligation^.^^
( a ) Cotl~rtlonstock: Member banks are prohibited from pur-
chasing common stock with some minor exceptions, such as Federal Re-
serve Bank, bank quarters, safety deposit corporation, small business in-
vestment companies, and Federal National Mortgage Association stock."
State-chartered banks in about two-fifths of the states are pro-
hibitcd from holding common stock. In about half thc remaining states,
the statutcs are silent; the balancc allows such investment, often irnpos-
ing limits.62
15 U.S.C.fjfj 788. 7 8 h ( 1976).
fl 12 U.S.C.!if 84, 248(rn) (1976).
58 12 U.S.C. 8 372 (1976).
b0 See 5 2-50.
60 Profile, note 43 sripro, at 57-57A.
rC " 12 U.S.C. 6 5 24, 335 ( 1 9 7 6 ) . SCCfj 5-30.
Profile, notc 43 sripm, nt 78-80A.
 !j 4-30 OVERVIEW
( b ) Investment securities: A member bank may buy invest-
ment securities (bonds, notes, and debentures) for its own account in
accordance with regulations of the Cornptrollcr of the Currency govcm-
ing such investments by national banks. Investments are limited to su-
perior, nonspeculative, marketable securities."a The total amount of
investment securities of any one obligor may not exceed 10 percent of
thc bank's capital stock and surplus."
State-chartered banks in about two-fifths of the states are subject
to similar restrictions regarding the quality and marketability of invest-
ment s e ~ u r i t i e s . ~ ~
(c) Pledging assets to secure public deposits: Banks are typi-
cally required to assure the safety of deposits of the U.S.Treasury and
state and local governments, usually by pledging assets. Eligible col-
lateral generally includes U.S. Treasury obligations, obligations guar-
anteed by the United States, state and local obligations, and obligations
of specified public authorities, among others.00
( d ) Futures, forward, and standby contracts for government
and agency securities: The federal banking agencies have guidelines for
banks engaging in futures, forward, and standby contracts for govern-
mcnt and agency s c c ~ r i t i c s . ~ ~
11. Liabilities and capital:
I (a) Interest on deposits: The control of interest paid by fed-
erally regulated depository institutions is being phased out. See § 4-25.
State-chartered banks in about one-third of the states are subject
to intcrcst rate maximums.a8
( b ) Indebtedness: A national bank is prohibited from being
indebted beyond the amount of its capital stock actually paid in and
undiminished by losses, plus 50 percent of its unimpaired surplus fund.
A major portion of liabilities is excluded by statute from counting as in-
dcbtcdness in determining the bank's limit.0o
(c) Capital: A bank or a proposed bank must meet legal (and
more significantly, supervisory) standards in order to be granted a na-
tional chartcr, mcmbcrship in thc Fcdcral Rcservc Systcm, or dcposit
Oa 12 U.S.C. $5 24, 335 (1976).
M Id.
05 Profile, note 43 supra, at 78, 80A; Encyclopedia, notc 45 supra.
12 U.S.C. 5 265 (1976).
0745 Fed. Reg. 181 16 (1980).
Profile, note 43 supra, at 58-59.
so 12 U.S.C. $5 82, 329 (1976).
FEDERAL REGULATION OF BANKS 3 4-35
insurance,1° and for opening branches, where otherwise permitted.''
State-chartered banks in all states are subject to statutory o r super-
visory capital requircmcnts for a charter. In states where branching is
permitted, statc-chartered banks must also generally meet additional
statutory or supervisory capital requirements to engage in branch bank-
ing, to open a branch, or both.T2
12. Financial services:
( a ) Divorcement of comniercial and investment banking: A
bank may not itself deal in securities, but a member bank may deal in
or underwrite obligations of the United States, certain obligations of
states and their political subdivisions, and federal agencies.18
A member bank may not be affiliated with a securities company
(an organization engaged principally in the issue, flotation, underwriting,
public sale, or distribution of securities).14 No directors, officers, or
employees of a member bank may serve a securities company in any
capacity.76
A member bank may not act as an agent for nonbanking organiza-
tions in making loans on s e c u r i t i e ~ . ~ ~
8 4-35 REGULATION OF T l l E INCIDENTAL
POWERS OF NATIONAL BANKS
National banks are authorized to undertake "such incidental powers
as shall be necessary to carry on the business of banking."'l Defin-
ing the scope of these incidental powers has been the subject of much
legal controvcrsy and ~ n c c r t a i n t y . The
~ ~ Cornptrollcr of the Currcncy
often has generously construed the authority conferred by this statutory
provision.
The scope of incidental powers of national banks is a sensitive area,
since any enlargement of the authority of the national banks would affect
the ability of statc banks to compete with the national banks. Generally,
lo 12 U.S.C. $ 5 51, 329, 1814, 1816 (1976).
1' 12 U.S.C. 5 5 36, 321, 1828(d) (1976 & Supp. 111 1979).
l 2Prolile, nolc 43 supra, at 52-55.
la 12 U.S.C. $ 5 24, 378 (1976 & Supp. I11 1979). See 5 5-30.
l 4 12 U.S.C. 5 377 (1976). Sce § 5-30.
T V 2 U.S.C. $ 78 (1976).
l0 12 U.S.C. 5 374a (1976).
lT12 U.S.C. 1 24, para. 7 (1976).
See National Retailers Corp. of Ariz. v. Valley Nat'l Bank, 41 1 F.
sup;. 308 '(D. Ariz. 1976), afl'd in part, dismissed i n part 604 F.2d 32 (9th
* Cir. 1979) (barring a national bank from marketing a retail information
service).
 5 4-40 OVERVIEW
the courts have taken into account the interest in competitive parity be-
tween the two banking systems.7D
One area in which difficulties have arisen concerns activities that
appcar to involve transactions in securities. As discussed in Q 5-30,
there is a general scheme in federal regulation of banking of separating
commercial banking and investment banking. Defining what activities
involve dealing in securities sometimes has proven troubles0me.~0
Another disputed area has been the provision of travel services.
Although the Comptroller issued a regulation authorizing national banks
to operate full-scale travel agencies, a federal court of appeals has held
that the regulation was not authorized by law.81
National banks are specifically authorized to act as insurance agents
when they are located in towns with a population of under 5,000.82 This
section has becn strictly construed. The courts have held that a bank
has no incidental power that would authorize it to conduct such a busi-
ness if located in a town of a larger size.RR Banks may arrange crcdit
lifc insurancc for borrowers from the bank without cngaging in imper-
missible insurance transactions, h o w e ~ e r . ~ '
$4-40 LOANS TO BANK OFFICERS AND DIRECTORS
Banks that arc mcmbcrs of the Fedcral Rcscrvc Systcm arc strictly
limited in the circumstances and manner in which they may extend credit
to any of their executive officers.85 Any crcdit given to a bank executive
70 Sce First Nat'l Bank of Logan v. Walker Bank, 385 U.S. 252 (1976).
See Investment Co. Inst. v. Camp, 401 U.S. 617 (1971); Dunne.
"Glass-Steagall Act-A History of Its Legislative Origins and Regulatory
Construction," 92 Banking L.J.38 (1975).
See Arnold Tours v. Camp, 397 U.S. 315 (1970), on retnatrd 428
F.2d 359 (1st Cir. 1970). rev'd 400 U.S. 45 (1970), on remand 338 F.
Supp. 72 1 (D. Mass. 1 972), ag'd 472 F.2d 427 ( I st Cir. 1972).
a 12 U.S.C.' 5 92 ( 1946). The provisions of 5 92, which were added
1 as a new paragraph of R.S. 15202 by Act of Sept. 7, 1916, Ch. 461, 39 Stat.
753, were omitted in the amendment of R.S. 5 5202 by Act of April 5, 19 18,
Ch. 45, 40 Stat. 512, and therefore this section has been omitted from the
Code. Section 92 has been considered by several courts since 19 18 as beinn
in effect, however. See Saxon v. ~ e o r ~ i a ~ sofs ' Insurance
n Agents, Inc., 395
P.2d 1010 (5th Cir. 1968). ,
saxon v. Georgia Ass'n of Insurance Agents, Inc., note 82 supra. See
also Alabama Ass'n of Insurance Agents v. Board of Governors, 533 F.2d
224 (5th Cir. 19761, vacated in part 558 F.2d 729 (5th Cir. 1977), cert.
denied 435 US. 904 ( 1977).
First Nat'l Bank of I-n Mnrqt~cv. Smith, 436 F. Strpp. 824 (S.D. Tcx.
1977), a r d in part, vacated in part 610 F.2d 1258 (5th Cir. 1980).
12 U.S.C. $ 5 37Sa, 375b (1976 & Supp. I11 1979).
66
FEDERAL REGULATION OF BANKS §4 0
oflicer must be promptly reported to the Board of Directors of the bank
and may be made only if:
( 1 ) T h c bank would be authorized to make it to othcr borrowers;
( 2 ) T h e loan is on terms not more favorable than those given
other customers;
( 3 ) T h e officer has submitted a detailed current financial state-
ment; and
( 4 ) T h e loan must be due and payable when the officer engages
in loan transactions which result in his borrowing an amount
exceeding the statutory g u i d c l i n c ~ . ~ ~
Banks are spccifically allowed to makc residential real estate loans up
to $60,000, education loans up to $20,000, and gcneral loans up to
$10,000 to thcir 0ficers.8~ Loans madc under this authority must be
rcportcd to thc supervisory agency." The bank may not cxtcnd credit
to a partnership in which the majority intcrest is controllcd by onc or
more of its executive officers.80
Additional limitations apply to loans or extension of credit to exec-
utive officers o r othcr pcrsons who control more than 10 percent of the
voting stock of the mcmber bank (or, in the case of banks located in
towns with a population of less than 30,000, 18 percent of thc stock.)
Thc total amount that may bc loancd to such a person, to any company
controllcd by him, o r to any political or campaign committee that is
controllcd by o r will bcncfit him, cannot cxcccd 10 percent of the paid
in capital stock and 10 percent of thc uninlpaircd sumlus fund of the
bank." Morcovcr, any loans to such pcrsons that would excccd $25,000
must bc approved in advance by a majority of the bank's entire board
of directon, with the interested party abstaining from parti~ipation.~'
Any loans that arc made must bc made on "substantially thc same terms.
including intcrest ratcs and collateral, as those prevailing at the time
for coniparable transactions with other persons and [do] not involve
more than thc normal risk of rcpaymcnt or prcscnt other unfavorable
features." O 2
Member banks are prohibited from paying an overdraft on an ac-
86 12 U.S.C. 5 375a(1) (1976).
12 U.S.C. $ 5 375a(2). 375a(3), 375a(4) (Supp. 111 1979)
88 12 U.S.C. 5 375a(9) ( 1976).
12 U.S.C. 5 375n(S) (Supp. 111 1979).
' n o 12 U.S.C. 5 375b(I) (Supp. 111 1979).
* 01 12 U.S.C. fi 375b(2) (Supp. 111 1979).
O 2 12 U.S.C. 5 375b(3) (Supp 111 1979).
 8 12-45 OVERVIEW
count at the member bank for an executive officer or director.Da Payment
of overdrafts, however, does not include payment of funds in accordance
with "writtcn prcauthorized, intcrcst-bearing cxtcnsions of crcdit." O 4
Thcrc are civil pcnaltics o l up to $1,000 pcr day for cach day dur-
ing which a violation of thcse provisions c o n t i n u c ~ .The ~ ~ pcnaltics arc
assessed by the Comptroller of the Currency whcn a national bank is
involved and by the Federal Reserve Board when a state member bank
is involved. Moreover, if the directors of any member bank knowingly
violate or permit any of its ofticers o r directors to violate the provisions
of 12 U.S.C. 5 375a limiting loans to executive oficers of the bank, thc
directors and oficers who agrce to. thc violation will be liable in their
pcrsonal and individual capacities for any damages suffered by the
bank, its shareholders, or any other persons as a result of the violation."6
Banks that are not members of the Federal Reserve System but that
arc insured by the Fedcral Deposit Insurance Corporation are subject to
the restrictions of 12 U.S.C. § 375b. which applies to executive officers,
directors, or any person who controls more than 10 percent of the voting
stock of [he bank.07 The same penalty provisions exist, but they arc
enforced by the F D I C o 8
All comn~ercialbanks, state and national, are lirnitcd in thc extent
to which they may make loans to executives, directors, and control per-
sons of correspondent banks. Any credit given must bc on "substan-
tially the same tcrms, including intercst rates and collatcral as those
prcvailing at the time for comparable transactions with other pcrsons"
and must "not involve more than the normal risk of repayment or
prescnt other unfavorable features." "" Special reports must be made
whcn credit is c ~ t c n d c d . ' Violation
~~ of thcsc provisions carrics a civil
pcnalty, asscsscd by tllc appropriatc fcdcral rcgulatory agcncy, of $1,000
for cach day thc violation c o n t i n u c ~ . ' ~ '
5 4-45 LOANS TO BANK AFFILIATES
Banks that are members of the Fcderal Reserve System are limited
in the amount of loans or credit that may be extended to affiliates of the
O3 12 U.S.C.5 375b(4) (Supp. 111 1979).
O4 12 U.S.C. 3 375b(6) (g) (Supp. 111 1979).
OS 12 U.S.C. § 504(a) (Supp. 111 1979).
no 12 U.S.C. 0 503 (Supp. 111 1979).
12 U.S.C. § 1828(j)(2) (Supp. 111 1979).
Os 12 U.S.C. 8 l828(j) ( 3 ) (Supp. I11 1979).
O9 12 U.S.C. § 1972(2) (Supp. 111 1979).
loo 12 U.S.C. § 1972(2)(G) (Supp. I11 1979).
lo' 12 U.S.C. 5 l972(2) ( F ) (Supp. 111 1979).
9 4-50
FEDERAL REGULATION O F BANKS
lending bank.I"z The term "affiliate" includes any bank holding com-
pany of which the member bank is a subsidiary and any other subsidiary
of such n bank holding company.'" Thc nggrcgntc amount of any loans
tllnt tuay bc mndc to an nfliliatc is limited to an amount no grcatcr than
10 percent of the capital stock and surplus of thc mcmber bank for any
one affiliate. The aggregate amount of credit extended to all afiliates
of the member bank cannot exceed 20 percent of capital stock and sur-
plus.1m Moreover, unless the loans or credit extended are secured by
fcdcral obligations or other collatcral acceptable to the Federal Reserve
Banks for rcdiscount, any loan o r extension of credit to an affiliate must
be sccured by collateral that has a market value more than the amount
of the loan. When the collateral consists of state governmental obliga-
tions, the collateral must be at least 1 0 percent more than the loan;
whcn othcr collateral is given, it must bc at least 20 percent more.lO"
Thcsc limitations on extending credit also apply to investments in the
obligations of any affiliate and also to the use of any affiliate's stock or
obligations as collateral security for loans or advances to any person.'06
5 4-50 FINANCIAL PRIVACY FOR DANK CUSTOMERS
Banks must exercise caution in divulging records of the financial
transactions of thcir customers. The circurnstanccs under which infor-
mation may be givcn to Icdcral agcncies is affected by federal statutes.
Thcrc also are state laws that affect the disclosure of i n f o r r n a t i ~ n . ~ ~ '
Fur[hermore, rights of privacy may exist undcr state law doctrines or
flow from cxprcss or inlplicd contractual relationship^.'^^
The Suprcmc Court considcrcd t l ~ ccxtcnt to which \LC Fourth nnd
Fifth Aniendn~cntsto tlic Constitution establish a privacy right for banks
and thcir customers in Uriited S/ate.r v. Miller'00 and Coli/orrlia Bor~kers
Ass'n v . S I ~ i r l t z . ~ ~ ~
'00 Id.
Scc People v. Muchmore, 92 CaI. App. Id 32, IS4 Cal. Rptr. 488 .
(1979) (upholding a state statute which allowed police to obtain bank records
without "otifying thc customer in advance): Nichols v. Council on Judictal
Complaints, 615 P.2d 280 (Okla. 1980). Sec genernlly Fischcr. "Finmcinl
Institutions and Privncy," 34 Bus. Law. $103 (1979); Note, "The ~ i g h tto
Financial Privacy Act," 28 DePaul L. Rev. 1059 ( 1979).
108 Sce Suburban Trust Co. V. Waller, 408 A.2d 758 ( M d . App. 1979).
rr. 100 425 US. 435 (1976).
110416 U.S. 21 (1974).
69
 P 4-50 OVERVIEW
Shultz upheld the constitutionality of the Bank Secrecy Act. That
Act, which is described in 9 4-55, requires banks to keep records of
certain financial transactions of their customers and imposes duties to
rcport certain forcign and domcstic financial transactions. The Court
first held that no due process right of the bank was violated by the re-
quirement that banks maintain records of transactions involving their
c u s t o m c r ~ .The
~ ~ ~Court thcn furthcr found that nothing in thc rccord-
kccping rcquircmcnts violntcd nny Fourth Amcndnlcnt privncy right of
thc banks since thc rccord-kccpjng provisions did not rcquirc that any
informntion bc discloscd to thc govcrnmcnt ("Acccss to thc rccords is
to be controlled by existing legal process." l12). The bank had no priv-
ilege against compulsory self-incrimination because the privilege does
not protect a corporation. The depositor-customers of the bank could
not claim a violation of thcir privilcgc against self-incrimination as a
result of the record-kecping requirements because the records involved
were created by a third party-the bank-and not by the customer.
The constitutionality of the reporting requirements of the Act were
also challenged in Shultz. The Court first upheld the constitutionality
of the foreign rcporting requirements. Because of the special concern of
Congress that foreign currency transactions and financial institutions
were being uscd to circumvent the enforcement of the laws of the United
States, the Court found the Act to bc reasonable and consistent with the
Fourth Amendment. The Court also considered the domestic reporting
requirements, concluding that there was no violation of any Fourth
Amendment rights of [he bank. Much of the information required to be
kept was information the bank already possessed o r would acquire in its
own intcre~ts."~The Court did not find it appropriate to decide whcthcr
the domestic reporting requirements violated any Fourth or Fifth
Amendment rights of the c ~ s t o m e r . " ~The Court also found it prema-
ture to resolve whether any Fifth Amendment rights of the customers
could be violated by the foreign reporting requirement^."^
The constitutionality of disclosure of records pcrtaining to customcr
transactions was faccd by thc Suprcmc Court in United States v. Mil-
l e r . l l V n Miller, the Court held that the Fourth Arnendmcnt did not
give a bank customer a right of privacy in records held by his bank.
The United States had served subpoenas upon Miller's bank ordering
the production of records involving transactions Miller had made. With-
Id. at 50.
l11 Id. at 52.
Id. at 67.
114 Id. at 69, 75.
l1"d. at 7 2 .
4 2 5 U.S.4 3 5 (1976)
FEDERAL REGULATION O F BANKS 5 4-50
out informing Miller, the bank produced the records. Subsequently,
Miller was indicted, and copies of checks obtained with the subpoenas
were used during the trial. Miller claimed that the procedures followed
by the govcrnmcnt to obtain his rccords to establish a criminal charge
against him violated his Fourth Amendment right to be free from un-
reasonable searches and seizures. Miller further argued, and the lower
court agrccd, that the subpoenas uscd to obtain the records were invalid.
Tlic Suprcnlc Court hcld thnt, rcgnrtllcss of wl~c~llcrtllc subpocnns wcrc
vnlidly issucd, Millcr hnd no privncy right to thc rccords hcld by thc
bnnk. Thc Court said: "All of thc docun~cntsobtnincd, including finnn-
cia1 statcmcnts and dcposit slips, contain only information voluntarily
convcycd to the banks and exposed to their employecs in the ordinary
course of business." The Court also said: "The depositor takes the risk,
in rcvcaling his anairs to nnothcr, that thc information will be con-
vcycd by that pcrson to the Government." l L 7 Even though the'infor-
mation is given to the bank on a promise of confidentiality, there is no
privacy right protected by the Fourth Amendment.l18
After the Miller decision, Congress moved to limit the circum-
stances under which federal agencies may obtain financial records. The
Right to Financial Privacy Act of 1978 'lo limits federal agency access
to thc financial records of customers of financial institutions. The Act
applics to all financial institutions-banks, savings and loan associations,
cre'dit card issuers, credit unions, consumcr finance agencies, and trust
companies. The financial institution may disclose information about its
customers to the federal agency only when one of the five following
conditions has been satisfied:
( 1 ) The customer has authorized disclosure;
( 2 ) The records are disclosed in response to an administrative
summons or subpoena;
( 3 ) The records are disclosed in response to a search warrant;
(4) Thc rccords arc discloscd in response to a judicial subpoena;
or
( 5 ) The records are disclosed in response to a written request that
follows the procedure set forth in the Right to Financial Pri-
vacy Act.lZo
Id. at 442-443.
118 Id.In a footnote, the Court suggested that a diRercnt case might be
presented if the bank had turned over the records in response to only an
informal oral request rather than in response to the legal compulsion of a
subpoena. 425 US. at 445 n.7.
1 l o 12 U.S.C.$ 5 3401-3422 ( S ~ p p 111
. 1979).
120 12 U.S.C.g 3402 (Supp. I11 1979).
 5 4-5. OVERVIEW
Thc Act cstablishcs specific procedures which the requesting agcncy
+
must follow in order to obtain information under any of the above
method^.'^' Notice must be given in advance to the customer unless an
emergency exists.122 The customer has a procedure for challenging the
request for the information.lZ3
The Right to Financial Privacy Act does not apply to the disclosure
of information under the following circumstances: '
(1) When the records disclosed are not identified as belonging to
a particular customer;
( 2 ) When thc disclosure is pursuant to examination or supervision
by the appropriate regulatory agency;
( 3 ) When the disclosure is authorized by the Internal Revenue
( 4 ) When a federal statute otherwise requires the disclosure;
( 5 ) When the govemment agency has authority under the Federal
Rules of Civil o r Criminal Procedure o r comparable rules of
other courts in connection with litigation to which the govern-
ment agency and the customer are parties;
(6) When the disclosure is pursuant to the order of an adminis-
trative law judge in a proceeding in which both the agcncy
nnd thc customcr nrc parties;
( 7 ) When thc govcrnmcnt agency is requesting for law cnforcc-
ment purposes only the name, addrcss, account number, and
type of account of any customer or group of customers asso-
ciatcd with a financial transaction o r class of transactions or
with a foreign country;
( 8 ) Whcn lhc financial rccords arc sought in connection with nn
investigation of the financia1 institulion itself;
( 9 ) When the agency seeks the information in administering a gov-
ernment loan or loan insurance program.lZ8
Disclosures made under the last two circumstances, when the bank
is being investigated or when the information is needed in connection
with a loan guarantee program, are subject to additional restrictions
limiting the use of the i n f ~ r m a t i o n . ' ~ *
12' 12 U.S.C. I P 3404-3408 (Supp. 111 1979).
Iz2 See 12 U.S.C. 8 3409 (Supp. 111 1979).
123 12 U.S.C. 5 341 0 (Supp. 111 1979).
I z 4 See United States v. McKay, 608 F.2d 830 (10th Cir. 1979).
I 2 V 2 U.S.C. 5 3413 (Supp. I11 1979).
I2O 12 U.S.C. 5 3413(h) (Supp. 111 1979).
FEDERAL REGULATION O F BANKS 5 4-50
Whcn records are obtained by a govemment agency under the Act
o r as "otherwise provided by law," the agency must pay the financial
institution assembling the record~.'~7The Board of Governors of the
Federal Reserve System has the authority to establish the rates and w n -
ditions for payment.128
Any agency o r financial institution that violates the Right to Finan-
cial Privacy Act is subject to a civil penalty of $100 plus any actual
damages, punitive damages when the violation is willful o r intentional,
and the reasonable attorney's fees of any successful c ~ m p l a i n a n t . ' ~ ~
Thc Right to Financial Privacy Act only limits acccss to informa-
tion by federal agencies.13o A court has held that the Act preempts state
regulation of disclosure of bank records.I3l
All federal agencies also must comply with the Privacy Act of
1974.132 Thus, this Act imposes an additional layer of requirements
for the federal regulatory agencies, but not for most depository insti-
tutions, as they would not be federal agencies?33
Under the Privacy Act, all federal agencies are limited in the ex-
tent t o which they can disclose any record of an individual maintained
by that agcncy.lS4 Unless the individual consents in writing, either a
court order is required or the disclosure must fall within one of the
limited exceptions provided in the statute.la5 The agencies must maintain
nn nccurnk nccounting of cnch disclosl~rcm n d ~ . ~ ~ V prequest, on an
individual may gain acccss to the rccords of any ogcncy that pcrtain lo
him.'" A procedure is provided for the individual to request a rcvi-
sion of rccords that hc believes are not "accurate, relevant, timely, or
complctc." l I R
12' 12 U.S.C. 8 3415 (Supp. 111 1979). The Act does not entitle the
bank to reimbursement when it is the target of the investigation. In re Grand
Jury Proceedings, 636 F.2d 81 (5th Cir. 1981).
12n 12 U.S.C. 5 34 15 (Supp. I11 1979).
IZ0 12 U.S.C. Q 3417 (Supp. 111 1979).
Iso See Nichols'v. Council on Judicial Complaints, 615 P.2d 280 (Okla.
1980).
lsl McGloshen v. USDA, 480 F. Supp. 247 (W.D. Ky. 1979) ( a state
statute rcgairing 10 days advance notice to the custonler held displaced by
federal law). See also SEC v. First Tenncsscc Bank N.A., 445 F. Supp. 1341
(W.D. Tcnn. 1978) (statc privacy sfatutc docs not apply to federal agencies).
 8 4-55 OVERVIEW
Each agency that maintains records on individuals may maintain
in its records only that information that is "relevant and necessary" to
accomplish a purpose of the agency as required by statute or executive
order of the President,13@ The agency must publish annually in the
Federal Register a notice describing the system of records it keeps."O
It has a duty to "make rcasonablc efforts to assure that such records are
accurate, complete, timely, and relevant for agency purposes" whenever
it gives out information about an individual to another person.I4l The
agency must try to notify an individual whose records are obtained under
compulsory legal process.142 The agency also must adopt rules that es-
tablish methods by which an individual may obtain access to the record,
request an amendment of it, and appeal adverse determinations on any
request for amendment.ld3
8 4-55 FINANCIAI, RECORD-KEISI'INC A N D REPORTING
OF CURRENCY TRANSA(JTIONS--THE
BANK SECRECY ACT
The Bank Secrecy Act requires banks to maintain financial rec-
ords of certain customer transactions. It also requires that banks as
well as their customers report certain foreign and domestic currency
transactions.
Congress adopted the Bank Secrecy Act from the conviction that
the growth of financial institutions-in the United States and the increase
in sophistication of financial transactions had been paralleled by a in-
crease in criminal activity which made use of these institutions and trans-
actions. While traditionally financial institutions voluntarily maintained
many records of their customers' transactions, some of the larger banks
began discontinuing or limiting the photocopying checks and other in-
struments. The absence of these documents impaired the ability of the
federal agencies to enforce criminal, tax, and other laws. Congress also
was concerned about the serious and widespread use of foreign financial
facilities located in "secrecy" jurisdictions for the purpose of violating
U.S. law.
It is the express purposc of the Act to require the keeping of rec-
ords that have a high degree of usefulness in criminal, tax, or regulatory
Ia0 5 U.S.C.8 552a(e) (1976).
140 5 U.S.C.5 552a(e) ( 1976).
14' 5 U.S.C. 1 SS2a(c) (6) (1976).
142 5 U.S.C. 5 552a(e) (8) (1976).
l d 85 U.S.C.5 552a(f) (19761.
5 U.S.C. 5 5 1730h, '1829b,1951-1959 (1976); 31 U.S.C. 5 5 1051-
1062, 1081-1083, 1101-1 105, 1121, 1122 (1976).
A 55
FEDERAL REGULATION OF BANKS
investigation^.^^^ As discussed in $ 4-50. the constitutionality of the
Act was upheld in California Bankers Ass'n v . Shul~r.'~'' The Secretary
of the Treasury is empowered to adopt such regulations as he may deem
appropriate to carry out the requirements and purposes of the Act.14'
1 . Record-keeping reqrrirerrlcnts for insured bar~ks.Under the Act,
the Secretary of the Trcasury by regulation may rcquire all banks in-
sured by the Federal Deposit Insurance Corporation to maintain the
following records:
(a) Rccords of the identity of persons having accounts with
the bank;
(b) Microfilm or other reproductions of instruments handled
by the bank;
(c) Records of transactions cngngcd in by individuals that must
be rcported under the Currency nnd Forcign Transactions Reporting
requirements of the Act; and
( d ) Such other records as thc Secretary of the Treasury may
deem necessary to carry out the purposes of this Act.ld8
2 . Record-keeping requirements for uninsured banks. When the
Secretary dcems it appropriate, he may require uninsured banks o r un-
insured "institutions of any type" to report changes that may occur in
the ownership, control, and management of such in~titutions.~~' The
Secretary also has authority to require the keeping of records similar to
those he can require for insured banks.'" This authority extends not
only to uninsured banks but also to any person who is engaged in the
business of redeeming checks or similar financial instruments, trans-
ferring funds, dealing in foreign currencies, operating a credit card
system, o r pcrfoming related function^.'^'
3. Record-keeping requirernents for thrift imti~llfionr.T h e Secre-
tary of the Treasury may prescribe regulations imposing record-keeping
requirements upon institutions insured by the Federal Savings and Loan
Insurance Corporation similar to thc record-keeping rcquirements im-
posed for insured banks.lB2
146416 U.S. 21(1974).
147 Scc 12 U.S.C.5 l829b(b) (1976);3 1 U.S.C.5 1053 (1976).
l 4 V 2 U.S.C. 5 1829b(b) (1976).
 5 4-55 OVERVIEW
4. Reporting of domestic currency transactions. Transactions in-
volving any domestic financial institution must be reported to the Secre-
tary of the Treasury at such time and in such manner and detail as he
may require "if they involve the payment, receipt, o r transfer of United
States currency, o r such other monetary instruments as the Secretary
may specify." ma
The Secretary may require reports of transactions t o be signed or
otherwise made, both by the domestic financial institution and by one
o r more of the other parties to the transaction^.^^' Domestic financial
institutions may be designated by the Secretary as agents of the Unitcd
States to rcccive thcsc r c p o r t ~ . ~ ~ ~ the
n d cregulations,
r only transac-
tions exceeding a certain amount must be repotted, and some trans-
actions are exempt.lbe
5 . Foreign tranractions reporting. T h e Secretary of the Treasury
is authorized to prescribe regulations requiring residents and citizens of
the United States, as well as non-residents doing business in the United
States, to maintain records and file reports concerning their transactions
and relationships with foreign financial agencies.'" The regulations re-
quire everyone who is subjcct to U S . jurisdiction to report on his annual
tax rcturn any financial intcrcst in o r autliority ovcr n bank, sccuri~ies,
o r other financial account in a forcign country.
6. Exporting or importing of monetary itl~ttuments. Any person,
whether as principal, agent, or bailee ( o r through an agent o r bailee),
who knowingly transports monetary instrumenls into or out of the
United States or receives such instruments in the United States from
places outside the United States in an amount exceeding $5,000 o n any
one occasion, must report the t r a n ~ a c t i o n . 1 ~By
~ regulation, certain
'" 31 U.S.C. 8 lo8 1 (1976).
'15'31 U.S.C. 1 1082 (1976).
lb631 U.S.C. 5 1083 (1976).
160An attempt to evade the Secretary's regulations by structuring a
$45,000 cash loan into five separate $9,000 transactions to escape the require-
ment for reporting all transactions over $10.000 resulted in criminal liability
in United States v. Thompson, 603 F.2d 1200 (5th Cir. 1979).
31 U.S.C. § 1121 (1976). See 31 C.F.R.8 103.24 (1980).
3 1 U.S.C. I 1 101 ( 1976). In United States v. Fitzgibbons, 576 F.2d
279 (10th Cir. 1978), cert. denied 439 U.S. 910 (1978), the court hcld that
the foreign currency transactions provisions of the Act did not prevent charg-
ing the defendant under the more severe false claims statute (18 U.S.C.
§ 1001) for failing to report the importation of Canadian currency and
lying on the customs declaration form. But see United States v. Anderez.
502 F. Supp. 67 (S.D. Fla. 1980).
A question on the customs declaration form asking if the dcclarant was
F E D E R A L REGULATION O F BANKS
transactions engaged in by banks in the transportation of monetary in-
struments are exempt from the reporting requirements. Instruments that
are transported without complying with the reporting requirements 'are
subject to seizure and forfeiture.'69
5 4-60 LOCAL CREDIT N E E D C T H E COMMUNIm
REINVESTMENT ACT OF 1977
In the mid-1970s, Congress was persuaded that legislation was
nccdcd to assure that financial institutions provided adequate service to
rhcir local communities. T h c problcm pcrccivcd by Congrcss was that
some financial institutions took deposits from their local neighborhoods
and communities but did not make credit available to those same areas.
It was charged that some financial institutions refused to make loans in
"red-lined" areas, and that often these areas presented no greater in-
vestment risks, but rather were simply oldcr areas of the community or
areas in which racial minorities resided. There was particular concern
expressed as to the failure of depository institutions to make residential
mortgagc loans available in such areas.
T o dcnl with thcsc problcn)~,Congrcss adopted first the Homc
Mortgagc Disclosure Act o l 1975.'"" Undcr this Act, cvcry dcpository
institution, ix., commercial bank, savings bank, savings and loan asso-
ciation, or credit union that makes federally related mortgage loans is
subjcct to record-keeping requirements if it has an office located within
a standard metropolitan statistical arca. Such dcpository institutions
must compile and maintain data showing the mortgage lending activity
of the institution according to census tract t o reveal the areas of its mort-
gage lending activity.lol The institutions must make the information
available to the public in accordance with the regulations of the Federal
Rcscrvc Board.lo2
T w o years later Congress cnacted the Community Reinvestment
Act of 1977.1e3 The Act expressly states that:
carrying more than $5,000 is not suficient to establish "knowing and willful"
importation of foreign currency without reporting. United States v. Granda,
565 F.2d 922 (5th Cir. 1978).
l a g 3 1 U.S.C. 5 1 102 ( 1976). For a discussion of the rights of persons -
against whom forfeiture has been initiated, see Iven v. United States, 581
F.2d 1362 (9th Cir. 1978); Unitcd Stntcs v. One 1964 MG, 584 F.Zd 889
(9th Cir. 1978).
100 12 U.S.C. $ 5 2801-2809 (1976).
181 12 U.S.C. $ 2803 ( 1976).
ir '62 Id.
'03 12 U.S.C. $ 5 2901-2905 (SUPP.III 1979)
77

8 4-60 OVERVIEW
"(1) regulated financial institutions are required by law to
demonstrate that their deposit facilities serve the convenience and
needs of the communities in which they are chartered to do
business;
( 2 ) the convenience and needs of communities include the
need for credit services as well as deposit services; and
( 3 ) regulated financial institutions have continuing and af-
firmative obligations to help meet the credit needs of the local
communities in which they are chartered." ls4
The purpose of the Act is "to require each appropriate Fedcral financial
supervisory agency to use its authority when examining financial insti-
tutions, to encourage such institutions to.help meet the credit needs of
the local communities in which they are chartered consistent with the
safe and sound operation of such institutions." lea
To carry out the Act, whenever a federal financial supervisory
agency examines a financial institution, the agency must assess the in-
stitution's record in meeting the credit needs of its community, including
its low and moderate income neighborhoods. This assessment must be
taken into account by the supervisory agency in evaluating any applica-
tion for a deposit facility by the i n ~ t i t u t i o n . ' ~The
~ Act applies to all
federal financial supervisory agencies: the Comptroller of the Currency,
the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, and the Federal Home Loan Bank
Board. The regulated financial institution whose activities must be
evaluated include all banks that are insured by the Federal Dcposit In-
surance corporation and all savings institutions that are insured by the
Federal Savings and Loan Insurance Corporation.
The evaluations of the efforts made by a depository institution in
meeting the credit needs of its community are relevant whenever the
institution applies to one of the federal regulatory agencies for approval
of a charter, deposit insurance, a branch office o r similar facility to ac-
cept deposits, the relocation of an office, a merger or consolidation with
another institution, o r the acquisition of shares o r assets of another
financial institution.161
le4 12 U.S.C. 5 2901 (a) (Supp. I11 1979).
12 U.S.C. Q 2901 (b) (Supp. I11 1979).
lea12 U.S.C. Q 2903 (Supp. 111 1979).
'0112 U.S.C. Q 2902 (Supp. 111 1979). See Note, "Community Bank
Regulations: Another Attempt to Control Red-Lining," 28 Cath. U.L. Rev.
635-661 (1979); Note. "Red-Lining, Disinvestment and the Role of Mutual
Savings Banks; A Survey of Solutions," 9 Fordham Urb. L.J. 89 (1980).
I
FEDERAL REGULATION O F BANKS k70
5 4-65 ENVIRONMENTAL REGULATION
Under the National Environmental Protection Act of 1969,1e8 all
federal agencies must consider the effect of their actions on the environ-
ment and undertake an environmental inlpact study for "[all] major
federal actions significantly affecting thc quality of the human environ-
ment." l m This application clearly extends to bank chartering.170 While
thc Act has bcen applicd only to such action by the Comptrollcr of the
Currency, its extension to grants of Federal Reserve membership, de-
posit insurance, etc., would seem analogous. In addition, there are a
number of state environnlental statutcs of comparable impact."'
It has been held that the Federal Reserve is not required to Ne an
environmental impact statement in connection with a bank holding com-
pany acquisition.17*
§ 4-70 TRANSACTIONS INVOLVING SECURITIES
Although banks that are members of the Federal Reserve System
are prohibited from generally engaging in the securities business, banks
still engage in many transactions that bring them within the ambit of
fcderal securities law.1l3 The major federal acts are the Securities Act
of 1933 (principally a truth-in-lcnding securities act regulating initial
issuance), the Securitics Exchange Act of 1934 (concerned with sec-
ondary distribution, securities credit, and insider trading), the Trust
Indenture Act l i O (concerning flotation of bonds), the Securities Invest-
ment Protection Act of 1970,171 the Investment Company Act (reg-
ulating nlutual funds), and the Investnlent Advisers Act (dcaling
with investment counsel). All these statutes bear on much of the bank-
er's everyday work, but only the high spoh are suggested below. This is
100 42 U.S.C. $ 4332(c) (1976).
'lo Country Club Bank of Kansas City v. Smith, 399 F. Supp. 1097
,. . .- . Mo.
(W.D. . ... 1975). But see First Nat'l Bank of Homestead V. Watson, 363
F. Supp. 466 (D.D.c. 1973).
111 Scc 2 Gmd, Treatise or1 E n v i r o n ~ r ~ e n t n
Lnw
l 5 9.07 (1975).
172 Plaza Bnnk of Wcstport v. Board of Govcrnon, 575 F.2d 1248 (8th
Cir. 1978)
173 ske 5 5-30.
1 7 4 15 U.S.C. $1 77a-77kk (1976 & Supp. I11 1979).
1 7 6 I5 U.S.C. $ 78a-78jj (1976 & Supp. 111 1979).
'70 15 U.S.C. § P 77ana-77bbbb ( 1976 & Supp. 111 1979).
'77 IS U.S.C. 5 5 78aaa-78111 (1976 & Supp. 111 1979).
' 7 8 15 U.S.C. $ 5 8Oa- 1-80a-52 ( 1976 R Supp. 111 1979).
'70 15 U.S.C. § § 80b-1-80b-21 (1976 & Supp. 111 1979).
 3 4-70 OVERVIEW
a field where timely consultation with legal counsel is indispensable.
Of the foregoing regulations, unquestionably the most familiar to
bankers are thc so-called margin requirements, which prescribe the per-
centage of market value of a security that a lender may advancc to a
customer for purchasing o r carrying thc security. Set by different reg-
ulations for banks,laObrokers,lal and other creditors,811 the initial mar-
gin requirements have ranged from 4 0 to 9 0 percent since first becoming
effective on November 1, 1937.
The Securities Exchange Act of 1934 requires that periodic reports
of proxy solicitation, etc., be made as to companies whose securities are
listed on a national securities exchange. It contains anti-fraud prohibi-
tions and constrains "insider" profit-making. Banks generally d o not
list their stocks on such exchanges and, consequently, were exempt from
the overall application of the law until the Securties Acts Amendments
of 1964. Under these changes, corporations with 750 (later 500) or
more stockholders with assets in excess of $1 million are subject to the
"rcgislration" provisions of the statutes.1R3Banks arc permitted to make
the rcquired reports to their federal supervisory authorities rather than
thc SEC. The federal banking regulatory agcncics have promulgated
regulations dealing with security-issuing banks under their jurisdiction.lW
Although bank securities were initially cxcmpt from the "registra-
tion" provisiotls of lllc 1934 Act, thc nnti-frnud provisions o l tllnl legis-
lation have always applied. For cxamplc, Section 10(B) makes it un-
lawful for any person to use "any manipulative or deceptive" practice
in connection with the sale of any security registered on a national secu-
rity exchange or any security not so registered.'86
The implications of the anti-fraud provisions bccan~capparent in
1.1. Care v . B ~ r a k , ' ~ O
in which the Supremc Court hcld that an indi-
vidual victimized by a violation of the Act ( o r rcgulation) could main-
tain a private lawsuit for damages. The thrust of this holding was
particularly sharpened in the famous Texas Gulf S u l p l ~ u r ~case,
~ ' which
made it actionable for anyone to use undisclosed "insider" information
in a securities transaction.
Liability to privatc lawsuits accordingly has made it cspccially
la0 12 C.F.R. Pt. 221 (Reg. U) (1980).
IB1 12 C.F.R. Pt. 220 (Reg. T ) (1980).
Isz 12 C.F.R. P t . 207 (Reg. G ) (1980).
la3 15 U.S.C. 5 781(g) (1) (1976).
I B 4 12 C.F.R. Pts. 1 1 , 12, 16 ( 1980) (national banks); id., Pt. 206 (state
membcr banks); id., Pt. 335 (nonmcmbcr insured banks).
ls5 15 U.S.C. 5 78j(b) (1976).
lee 377 U.S. 426 (1964).
l B 7SEC v. Texas Gulf Sulphur. 401 F.2d 833 (2d Cir. 1968).
FEDERAL REGULATION O F BANKS , 4-75
important for bankers, trust officers, and others serving as directors for
their own bank or for a customer corporation to avoid not only the fact,
but even thc appcarancc, of impropriety. This is cspccially truc sincc
"insider" information may be available almost as a matter of course
from credit files, loan applications, and thc like. Still another potential
liability under the expanded securities acts occurs for corporate directors
who may have signed an inaccurate prospectus.18s However, the scope
of private actions has been reduced by decisions requiring insider's in-
tent as an element of
One consequence of this pattern of regulation is that purchase of
a controlling interest in a bank with more than 500 shareholders is
within the scope of thc amended Securities Exchange Act, and, there-
fore, it is essential that an appropriate form be completed disclosing
information relating to the transaction. This form must be filed with the
appropriate federal supervisory agency, the bank, and the exchange
whcrc the sccurity is traded. However, it should be emphasized (in light
of the previous distinction bctwccn the rcgistra~ionand anti-fraud pro-
visions of thc statute) that a con~plctedisclosurc of all relevant trans-
action information should bc made to all persons solicited, irrespective
of whcthcr or not the bank involved has 500 shareholders.1Q0
Bank customcrs mny bc subject to thc rcquiremcnts of thc secu-
rities lnws in tllcir dcnli~lgswith bnnks, sincc stocks nnd Ix~tltlsnrc corn-
monly pledgcd as collateral for loans. In Rrrbin v . United Stnfes,IB1the
Supremc Court held that the plcdge of securities constituted a n "offer
or sale" within Section 1 7 ( a ) of the Securities Act of 1933 l Q 2because
it was a disposition of an interest in a security for value. T h e Court
uphcld thc customer's conviction for violating ~ h canti-fraud provisions
in Scction 17(a). Thc violalions consistcd of, anlong other ncts, sub-
mitting a fnlsc financial report to the bank and representing worthless
stock used as collateral as valuable.
5 4-75 AMERICAN BANKS DOING FOREIGN BUSINESS
Many American banks cngagc in foreign banking business. Foreign
banking activities are permitted under federal law and the laws of many
l R 8 &cot1 V. Bar Chris Constr. Corp., 283 F. Supp. 643 (S.D.N.Y. 1968).
18s Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 ( 1975) ; Ernsr
& Ernst v. Hochfcldcr, 425 US. 185 (1976).
--- Note.
lQo'+e .- "The Tender Trap: Purchase Oders nnd the Nurnbcn
Game," 92 ~ a n k i L.J.
i ~ 65 ( 1975).
101 49 U.S.L.W. 4103 (1981 1.
+ 101 12 U.S.C. 5 774 (1976).
 8 4-80 OVERVIEW
states. Federal ~ e s e r kBanks may open accounts, enter into corre-
spondent relationships, and establish agencies in foreign countries with
the approval of the Board of Governors.loa National banks, with the
Board of Governors' consent, may establish branches in foreign coun-
tries,1o4acquire stock in foreign banks,loUhold interests in corporations
that cngagc principally in intcrnational or forcign banking,'nn and orga-
nizc spccial banking corporations to cngage in intcrnational o r forcign
banking.lo7
T l ~ cFcclcral Deposit Insurance Corporation rcgulatcs thc cxtcnt to
which state nonmember insured banks may acquire intcrests in foreign
banks.lB8 The Federal Deposit Insurance Corporation must approve the
establishment o r operation of any foreign branch by a state nonmember
insurcd bank and may establish regulations governing the conduct of
such branches.1o@
Under new regulations adopted by the Board of Governors,2*
banksz0' may establish international banking facilities to accept deposits
from foreign customers and make foreign loans. These new intcrna-
,
tional facilities will be free from the reserve requirements and interest
rate controls that apply to domestic banks, enabling them to compete
with "offshore" branches, many of which are located in the Caribbean
I and in London, and with other foreign banking institutions. T o confine
I the new facilities to major commercial transactions rather than small-
scale personal transactions, deposits and withdrawals must be in excess
of $100,000. International banking facilities may only accept deposits
I that support the customer's operations outside the United States and
may only extend credit to finance non-U.S. operations.
1 8 4-80 FOREIGN-OWNED BANKING CORPORATIONS
The International Banking Act of 1978 provides for the control
and regulation of acfivifies of foreign banks in thc United S t a f c ~ . ~ ~ ~
l" I2 U.S.C. 9 358 (1976).
lo' 12 U.S.C. 9 601 (1976).
Id.
1se Id.
12 U.S.C. 4 611 (1976). See 5 8-15.
lB8 12 U.S.C. 0 l828( 1 ) (Supp. 111 1979).
loo 12 U.S.C. 5 l828(d) ( 2 ) (Supp. 111 1979).
46 Fed. Reg. 32426 (1981) (to be codified in 12 C.F.R. Pts. 204,
2 17 1,
201 "Banks" are defined under the new regulation to include "United
States depository institutions, Edge and Agreement Corporations, and
branches and agencies of foreign banks located in the United States."
'02 12 U.S.C. 5 3102-3 108 (SUPP. I11 1979).
FEDERAL REGULATION O F BANKS , 4-80
With the approval of the Comptroller, foreign banks may establish
either a federal branch bank o r a federal agency in the United States.
A branch may engage in all the banking activities permitted national
banks. An agency's powers are restricted. It cannot accept deposits
from U.S. citizcns or rcsidcnts.
A fcdcrnl brnnch may bc cstablishcd if thc statc in which the
branch is proposcd does not prohibit forcign banking and the foreign
bank is not opcrntinp stntc-cllnrtcrcd bank within that ~ t n t c .Whcn ~~~
thc fcdcral branch is established, it is subject to rcgulation by the Comp-
troller.z04 As a gcncral matter, foreign branches are subject to the same
regulation as domestic national banks.Zn6 The powcrs given a federal
agency are more limited than those for a federal branch: it may not
receive deposits or exercise fiduciary powers.z06 The rules for estab-
lishing a federal agency are more relaxed. A foreign bank cannot main-
tain both a federal branch and a federal agency in the same stale.207
Forcign banks may not engage in interstate banking and operate
fcdcral branches in more than onc statc unless the state in which it
proposes to opcrate the branch expressly pernlits it. The foreign bank
must also enter into an agreement with the Board of Governors to limit
the activities of the branch to those permitted for banking corporations
organized as Edge Corporations.208 Foreign banks are likewise limited
in operating state branches outside of thcir home state unless similar
conditions exist as arc required for national or state banks200
It is easier for a foreign bank to establish a federal agency if the
agency is permitted by the state in which it is proposed to be operated.210
Foreign banks are limited in the extent of the interests they may acquire
in the assets of domestic banks outside of thcir home For the
purpose of thcsc controls, the home state of a forcign bank that has
branches in more than one state is the state that the bank determines
to be its home state.212
Fcdcral brnnchcs of forcign banks must bc insurcd by the Federal
Dcposit Insurance Corporation if thcy acccpt dcposits of less than
$100,000 or cngngc in donlcstic rctnil banking n c t i v i t i c ~ . ~ ' ~
2n3 12 U.S.C. § 3 102(n) (Supp. 111 1979).
204 12 U.S.C. 5 3102(b) (Supp. 111 1979).
Id.
12 U.S.C. 5 3102(d) (Supp. 111 1979).
="' 12 U.S.C, 5 3 102(e) (Supp. 111 1979).
208 12 U.S.C. § 3lO3(a) ( 1 ) (Supp. 111 1979). See 5 8-15.
12 U.S.C. 5 3lO3(a) ( 2 ) (Supp. I11 1979).
210 12 U.S.C. 0 3IOj(a) (3) ( S ~ p p111
. 1979).
'I1 12 U.S.C. 5 3lO3(a) ( 5 ) (Supp. 111 1979).
21z 12 U.S.C. 5 3 103(c) (Supp 111 1979).
zla 12 U.S.C. 5 3104 (Supp. 111 1979).
5 4-80 OVERVIEW FEDERAL REGULATION OF BANKS
The transactions of an insured branch of a
The Board of Governors of the Federal Reserve System also has domesdc insured
supervisory authority over federal branches of foreign banks.214 The foreign bank are also subject to the record-keeping requirements of the
Board has the additional authority, after consultation and cooperation Currency and Foreign Transactions Repoding
with state rcgulstory authoritics, to rcgulatc statc brancllcs of forcign
banks.21n Thc Board may examine the branches or agencies, state or 226 U.S.C. 5 1 8 2 3 ( g ) (Supp. 111 1979)
12
federal, of foreign banks.Z1e 22112 u.s.c. g l829b (Supp. 111 1979). See 5 4-55: See generall~.
Foreign banks that maintain branches o r agencies in the United skiw & Fitzrimmons, "Impact of the International Bank~ngAct of 1978
States are subject to the provisions of the Bank Holding Company on Foreign Banks and Their Domestic and Foreign Afiliates." 35 Bus. Law,
Act 217 and so are restricted from engaging in nonbanking activities.21B
Thcre is, however, a grandfather clause that permits thcm to rctain,
until Dcccmbcr 31, 1985,2'Downcrship intcrcsts in nonbanking com-
panics in thc United States that rhcy held on September 17, 1978. For-
eign banks may continue after 1985 to engage in nonbanking activities
(either directly o r through affiliates) in which they had been engaged as
of July 26, 1978, unless the Board determines that it is necessary to ter-
minate this authority in ordcr "to prcvcnl unduc conccntrntion of re-
sources, dccrcascd o r unfair competition, conflicts of intcrcst, o r unsound
banking practices in the United States." 220
Foreign branches and agencies must comply with all state and
fcderal laws including those prohibiting d i s c r i m i n a t i ~ n . ~The
~ ~ Comp-
troller, the Board of Governors, and the Federal Deposit Insurance
Corporation have regulatory authority over foreign branchcs and agen-
cics as thcy do over dorncstic banks.222 Any foreign bank that main-
tains an oflice in the Unitcd States other than a branch bank o r an
agency must register with the Secretary of the Treasury.223
The Federal Deposit Insurance Corporation has authority to insure
branches of foreign banks.224 It can terminate the insured status of
foreign banks and regulate their activities in the interest of sound bank-
ing practices.225 Thc Corporation may even take action to reopen or
avert the closing of an insured branch of a foreign bank as it does with

12 U.S.C. 5 310S(a)(b) (Supp. 111 1979).

216 12 U.S.C. 1 310S(a)(l)(B) (Supp. I 1 1 1979).
2 1 V 2 U.S.C. 5 3 105(b) (Supp. 111 1979).
217 12 U.S.C. $ 5 1841-1850 (1976 h SUPP. I11 1979).
218 12 U.S.C. 5 3106(a) (Supp. 111 1979); see 5 6-10.
210 12 U.S.C. 5 3 lO6(c) (Supp. 111 1979).
220 Id.
221 12 U.S.C. 5 3106(a) (Supp. 111 1979).
222 12 U.S.C. 5 3 108 (Supp. 111 1979).
223 12 U.S.C. 5 3107(a) (Supp. I11 1979).
224 12 U.S.C. 5 1815(b) (Supp. 111 1979).
22n 12 U.S.C.$ 5 l 8 l 8 ( r ) ( 2 ) , 1818(r)(3) (Supp. 111 1979).
 Chapter 5
BANK COMPETITION AND THE
PROHIBITION AGAINST
DEALING IN SECURITIES
Secrion Page
5-5 Branch Banking .............................. 87
5-1 0 Consolidations and Mergers . . . . . . . . . . . . . . . . . . . . . . 90
5-15 Interlocking Directorates . . . . . . . . . . . . . . . . . . . . . . . . 91
5-20 Prohibition of Tying Arrangements . . . . . . . . . . . . . . . . 92
5-25 Banking and Antitrust Laws . . . . . . . . . . . . . . . . . . . . . 93
5-30 The Prohibition Against Dealing in Securities . . . . . . . . 95
5-35 Bank Service Corporations . . . . . . . . . . . . . . . . . . . . . . . 97
5-40 Interstate Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
5-45 Competition F r o m Non-Bank Financial Institutions . . . 99

§ 5-5 BRANCH BANKING

Branch banking is dcfined a s one bank carrying on its business at
a number of officcs in diffcrcnt locations in the same o r different cities,
states, o r even nations. Gcncrally, branch banking rcfcrs t o arrange-
ments for the creation of different offices of a bank that is o n c legal
entity. It usually docs not refer to arrangements by which separate bank
organizntions may bc affiliated through stock owncrship or other control
devices. Thcsc arrangements arc discussed in $ 5-10 on consolidations
and mergers and Chapter 6 on bank holding companies.
Federal law1 defines a "branch" to include "any branch bank,
branch office, branch agency, additional office o r any branch place of

1 12 U.S.C. 5 3 6 ( f ) (1976). This definition applies to national banks.

Under 12 U.S.C. 5 321 (1976), state banks that arc mcnlbcrs of the Fcdcral
Reserve System are subject to the same branching controls as national banks.
A similar definition of "branch" exists for the purposes of regulating state
nonmember banks insured by the Federal Deposit Insurance Corporation.
12 U.S.C. 5 1813(0) (Supp. 111 1979).
87
 5 5-5 OVERVIEW
business located in a n y state o r territory of the United States o r in the
District of Columbia a t which deposits a r e received, or checks paid, o r
money lent." These provisions have been broadly interpreted. I n one
case, the Supreme C o u r t held that a n armored c a r picking u p a cus-
tomer's deposits was a b r a n ~ h . Drive-in
~ facilities have provoked con-
siderable l i t i g a t i ~ n . ~Another area of controversy has been customer
bank communications terminals ( C B C T s ) located off the bank premises.
A t one point the Comptroller of the Currency ruled that a terminal es-
tablished in accordance with his regulations did not constitute a
branch.' This ruling provoked a number of lawsuits, and led to a court
decision that national banks must comply with the branch banking laws
in establishing computer-linked terminals which allow bank customers
t o withdraw cash from their accounts, transfer funds, and m a k e crcdit
purchase^.^
T h e Supreme C o u r t has held that the primary purpose of the
branch banking law is to proniotc conipctilivc cquality bctwccn statc
banks and national banks.8 In recognition o f this purpose, the courts
have liberally construed the definition of a "branch." F o r example, not-
withstanding the explicit statutory language classifying the character of
First Nat'l Bank v. Dickinson, 396 U.S. 122 ( 1969).
d S e e Commonwealth of Va. v. Farmers & Merchants Nat'l Bank, 515
F.2d 154 (4th Cir. 1975), cert. denied 423 U.S. 869 (1975); Dakota Nat'l
Bank dr Trust Co. v. First Nat'l Bank & Trust Co., 554 F.2d 345 (8th Cir.
1977), cert. denied 434 U.S. 877 (1977).
See Comptroller of the Currency, Relcase (Oct. 10, 1975).
Independent Bankers Ass'n of America v. Smith, 534 F.2d 921 (D.C.
Cir. 1976), aff'g 402 F.Supp. 207 (D.D.C. 1975). See also Illinois ex rel.
Lignoul v. Continental Ill. Bank & Trust Co., 409 F. Supp. 1169, (N.D. 111.
1975), a y d in part and rev'd in part 536 F.2d 176 (7th Cir. 1 976), cert.
denied 429 U.S. 871 (1976) ; State ex re/. Kostman v. First Nat'l Bank of
St. Louis, 405 F. Supp. 733 (E.D. Mo. 1975), nff'd per curiatn 538 F.2d 2 19
(8th Cir. 1976), cert. denied 429 U.S. 941 ( 1976). The current guidclincs
for the evaluation of electronic funds transfer systcms arc contained in Comp-
troller of the Currency, Banking Circular N o . 66 (April 16, 1976). The
Comptroller's current position with respect to automated teller machines may
be found at 41 Fed. Reg. 48333 (1976). Other decisions holding that an
off-premises ATM constitutes a branch are: Colorado ex rel. State Banking
Bd. v. First Nat'l Bank of Fort Collins, 540 F.2d 497 (10th Cir. 1976), cert.
denied 429 U.S. 1091 ( 1977) ; but see State ex rel. State Banking Bd. v. Bank
of Okla., 409 F. Supp. 71 (N.D. Okla. 1975). For an extensive discussion
of the issue, see Penney & Baker, T h e Law o j Electronic Fund Tratrsjer Sys-
t e m , 8 22.01 (1981).
V i r s t Nat'l nnnk of Lognn v. Wnlkcr nank L Trust Co., 385 U.S. 252
(19GG); First Nat'l Bank v. Dickinson, 396 U S . 122 (19G9).
BANK COMPETlTION 5 5-5
a branch upon the deposit-lending o r check-paying activity of such
office, it has been held that a n off-premises trust operation involving
none o f these activities is a branch and forbidden to national banks un-
less authorized by state 1aw.l
To promote competitive equality between federal and state banks,
federal law generally pcrmits a bank to establish a branch only when it
would b e expressly permitted by state law.R T h e Comptroller regulates
the establishnlent of branches by national banks.O T h e Board o f Gov-
ernors controls the establishment of branches by state member banks.1°
T h e Federal Deposit Insurance Corporation must approve the creation
of branch officcs by statc non-member insurcd banks." There are fur-
ther complications when the bank involved is created by nicrger o r con-
solidation with anothcr bank. I n general, the philosophy of the federal
law is to defer to the state law in ordcr to maintain conipetitivc equality
in the banking system.
Stntc brnncli bnnking lnws nrc vnrious but cnn bc rougllly clnssificd
into thrcc groups:
( 1 ) States that permit statewide branch banking.I2
(2) States that permit branch banking in limited areas.13
(3) States that prohibit branch banking.14
O n c state has no legislation o n branch banking.16
-
7 St. Louis County Nat'l Bank v. Mercantile Trust CO., 548 F.2d 716
(8th Cir. 1977), cert. denied 433 U.S. 909 (1977). Scc also Stalc ex rcl.
Leonard v. American Nat'l Bank & Trust Co., No. CIV-78-0304-E (W.D.
Okla..
- . July. 28. 1978) (an ofice which took loan applications but did not lend
funds was held to constitute a branch).
12 U.S.C.$ 8 3 6 ( c ) , 321, 1828(d) ( 1 ) (1976 & Supp. 111 1979).
Id.
l " I d . It also has nuthority over the creation of branches in foreign coun-
tries. Scc J 2-10.
12 U.S.C. $ J 3G(c), 321. l828(d) ( 1 ) (1976 & Supp. 111 1979).
l 2 Alaska, Arizona, California, Connecticut, Delaware, District of CO-
lumbia, Idaho, Maine, Maryland, New Jersey, Nevada, North Carolina,
Orcgon, Puerto Rico, Rhode Island, South Carolina, South Dakota. Vern~ont,
Washington. 1 Fed. Banking L. Rep. ( C C H ) \ 3106.
l a Alabama, Arkansas, Georgia, Hawaii, Indiana, Iowa, Kentucky, LOU-
isiana, Massachusetts, Michigan, Mississippi, New Hampshire. New Mexico,
New York, North Dakota, Ohio, Pennsylvania, Tennessee, Utah, Virginia,
Wisconsin. I d .
I 4 Colorado, Florida, Illinois, Kansas, Minnesota. Missouri, Montana,
Ncbrnskn. Oklnhomn. Tcxns, Wcst Virginin. I d .
rL l n Wyoming. I d .
 OVERVIEW
5 5-10 CONSOLIDATIONS AND MERGERS
Consolidations and mergers of banks are subject to the regulatory
iuthority of the federal banking agencies when a national bank, a mem-
x r bank of the Federal Reserve System, or an institution insured by the
>ederal Deposit Insurance Corporation is involved. In general, the fed-
:ral banking agency with regulatory authority will be that agency which
~ormallyhas authority over the successor institution. When there is a
:onsolidation or merger involving a national bank which results in a
~ationalbank, the prior approval of the Comptroller of the Currency
nust be obtained.16 The merging or consolidating banks all must be
~ c a t e din the same state.17 When the merger o r consolidation results in
state member bank, the Board of Governors must approve thc trans-
ction.I8 When the surviving bank is to be a nonmember insured bank,
?e approval of the Fedcral Deposit Insurance Corporation is neces-
ary.'" When any insured bank merges with a non-insured bank or
~stitution,the Federal Deposit Insurance Corporation must also grant
rjor appr0val.2~
~ e ~ o the r e federal regulatory agency concerned may approve a con-
~lidationor merger, it must consider the financial resources of the in-
itutions concerned as well as "the convenience and needs of the com-
unity to be served." 21 In addition, the agency is dircctcd not to
?prove any consolidation or mcrgcr that would havc a nlonopoly elfect
r would substantially lcssen c o n ~ p e t i t i o n .Unless
~~ an emergency exists,
re federal banking agency must give notice of the proposed transac-
on2"rior to granting approval and must request a report from the
.ttorney General on the competitive factors involved in the transac-
on.=' The fcdcral statutcs contain provisions dcsigncd to protect the
gl~tsof disscnting sharcholdcrs.
Bank mergers and consolidations are also subject to the antitrust
ws and rules governing interference with c o m p e t i t i ~ n . Evcn
~ ~ though
merger has been approved by the banking regulatory authorities, such
~provalwill not imniunize the institutions involved from prosecution
Ir violation of these laws. These regulations are discussed in 3 5-25.
12 U.S.C. 1 5 215, 215a (1976).
'7 Id.
'8 12 U.S.C. 1 l828(c)(2) ( B ) (1976).
lo 12 U.S.C. 8 l828(c) (2)(C) (1976).
20 12 U.S.C. 8 l828(c) (I ) (A) (1976 & Supp. I11 1979).
2l 12 U.S.C. 5 l828(c) (5) (1976).
22 Id.
23 12 U.S.C. 5 l828(c)(3) (1976).
24 12 U.S.C. 5 l828(c)(6) (1976).
26 12 U.S.C. 1 l828(c)(7) ( 1976).
90
BANK COMPETlTION 5 5-A-
Banks also may become affiliated with other banks and other finan-
cial institutions through the activities of bank holdirrg companies, as dis-
cussed in Chapter 6.
5 5-15 INTERLOCKING DIRECTORATES
There are a number of separate federal statutes that prohibit 0%-
ccrs, directors, and employees of banks from concurrently assuming
similar responsibilities at other financial institutions. Under the Clayton
Antitrust Act, no director, officer, or employee of any member bank of
the Federal Reserve System can jointly hold a position as a director,
officer, or employee of any other bank, savings bank, o r trust company
organized under federal or state law.2B This prohibition against holding
simultaneous positions docs not apply to any bank owned by the United
States, any bank in liquidation, a corporation principally engaged in for-
eign banking under agreement with the Board of Governors of the Fed-
eral Reserve System, a bank under common control, a bank in a sepa-
rate and non-contiguous area, and a bank engaged in a different class of
business from that of member banks.27 T h e Board of Governors of the
Federal Reserve System may, by regulation, permit an omcer, director,
or cmployec to serve in such capacity simultaneously at one other
instituti~n.~~
Undcr the Banking Act of 1933, officers, directors, or employees
of member banks of the Federal Reserve System are prohibited from
serving concurrently as an officer, director, or employee of companies or
partnerships engaged in securities underwriting or distribution except as
pcrnlittcd by thc Board of G o v ~ r n o r s . ~ ~
Undcr thc Public Utility Holding Conlpnny Act of 1935, no rcgis-
tercd holding company may have as an oficcr or director any executive
officer, director, or representative OF any bank except as the Securities
and Exchange Commission may permit by r e g ~ l a t i o n . ~ ~
Under the Federal Power Act, interlocking arrangements between
public utility companies and banks authorized to underwrite public util-
ity securities are prohibited, except as authorized by the Federal Power
Comn1ission.3~
The Depository Institutions Management Interlocks Act of 1978 82
15 U.S.C. 8 19 (1976).
28
ld.
27
z81d. See Reg. L, 12 C.F.R. 9 212.4 (1980).
12 U.S.C. 5 78 (1976). See Reg. R, 12 C.F.R. 1218.1 (1980).
IS U.S.C.1 79q(c) (1976). See 17 C.F.R. 5 250.70 (1980).
4' 16 U.S.C. 1 82Sd(b)(c) (1976 & Supp. I11 1979).
12 U.S.C. 8 8 1464, 1730, 1818, 3201-3207 (Supp. 111 1979).
 OVERVIEW
prohibits interlocking relationships between depository institutions. The
Act applies to commercial banks, savings banks, trust companies, sav-
ings and loan associations, industrial banks, and credit unions. It also
applies to bank holding companies and savings and loan holding com-
panics." Thc Act prohibits any managcn~cntoficial of n depository in-
stitution o r holding company from serving simultaneously as a manage-
mcnt official of any other depository institution o r holding company that
is unafilintcd if the two institutions have ofices within thc samc stan-
dard rnctropolitan statistical area or have offices in the same city or in
contiguous cities3' Although this provision would permit some inter-
locking relationships, no management official of a depository institution
with assets over $1 billion may serve as a management official of any
other non-affiliated depository institution with assets in excess of $500
million.36 Management officials whose service began before November
10, 1978 may continue to serve in their positions for a period of ten
years without violating the Administration of the Act is to be
enforced by the appropriate federal regulatory agency.87
3 5-20 PROIIIBITION OF TYING ARRANGEMENTS
( 1 ) Obtaining additional credit, property, o r service from the bank
(other than a loan, discount, deposit, or trust service);
(2) Obtaining additional credit, property, o r service from a bank
holding company or subsidiary of a-bank holding company of
the bank;
( 3 ) Providing additional credit, property, o r service to the bank
other than those "related to and usually provided in connec-
tion with a loan, discount, deposit or trust service";
( 4 ) Providing additional credit, property, o r service to a bank
holding company or subsidiary of a bank holding company of
the bank:
BANK COMPETITION
( 5 ) Prohibiting the customer from obtaining other credit, p r o p
erty, or service from a competitor of the bank, or a holding
company or subsidiary of a bank holding company of the
conipctitor otlicr tlinn rcc~uircrl~cnts
rcnsonnbly iwposcd in n
credit transaction to assurc the soundncss of thc c r ~ d i t . ~ "
5 5-25 BANKING AND ANTITRUST LAWS
In recent years, the antitrust laws have become an increasingly im-
portant part of banking law. Thc scope of tlic antitrust laws is broad,
and the application of the antitrust laws to banking is cxtcnsive. It is
not possible to summarize the impact of this body of law in this brief
scction except in a very general way. The relevant antitrust laws for
banks include the Sherman Act,40 the Clayton Act," the Federal Trade
Commission Act,'? the Bank Merger Act,43 the Bank Holding Company
Act," and other statutcs. There is also an extensive body of judicial
decisions interpreting this legislation.
In brief, thc Sherman Act pcnalizes both accomplished and at-
tempted monopolization and its concommitants of price-fixing, boycott,
dhizinn (\I s~lcstcn-itorics, ctc. Rankers nnict takc , m a t caw to a\vid
~ ~ \ y u n t i \ tqgwnwnts
. nith t \ p t \ ! \ - t ~ h \ ~ ( \ \ \ ~ k r i!\t*.tri~t,A\tts*
ngrwtwnts or othcr\visc) that n i i ~ h tg i w cvcn the 3pp3r3mxs ivf vk-
lating thc price-fixing constrnirrts of the Shcrrllan Act. Under the Act,
such violations can be prosecuted as criminal
The Clayton Act is directed against incipient monopoly and unfair
tradc practiccs such as tie-in sales and price discrimination directed to
that end. It has been noted that routinc and traditional bank practices
takc on a very different charactcr whcn vicwcd in light of the antitrust
laws, and practices such as conlpcnsating balances4"and primc rates4'
12 U.S.C. § 1972(1)-(5) (1976).
15 U.S.C. $ 5 1-7 (1976).
15 U.S.C. 5 5 12-27 (1976 & Supp. 111 1979).
'2 15 U.S.C. $ 141-58 (1976 & Supp. 111 1979).
43l5 U.S.C. 6 I8 (1976 PI Supp. 111 1979).
4 4 15 U.S.C. $ 8 1841-1850 (1976 8~ Supp 111 1979).
4 5 United States v. Hunterdon Co. T r u s t Co., 1962 Trade Cas. ( 70,263.
It has been held that banks may coopcrate to oppose a new charter without
,
inarrrin$ anritntrt liability. C r n r r a l R a n k of Clatton v. Cln!ton Rnnk.
r. fin?, I h~ (In \t.,*! Q-& b. <j-i A<.: F.-\i
db'hh'44.t I'.S Q I O \ t * b.
to: i s>b ZT. I 0 - ).,-c.
.Frt Austin S ,F.l.urnn. "T?w Antitnrt I n ? ~ l i z a t i \ wcf C'cnrwwtin,u
Bnlnnccs." 89 nnnking L.J. 675 (1972).
-i 4 7 S e e Nadler. "Compensating Dalances and the Prime at Twilight,"
- - -
Harv. Bus. Rev. ( ~ a n . - ~ e b1972).
.
93
 5 5-25 OVERVIEW
become questionable under antitrust scrutiny. The application of the
Clayton Act to bank mergers and holding company acquisitions was
cstablishcd in the celebrated Philadelphia National Bank decision in
1963. Thc Supreme Court held that Section 7 of the Clayton Act
applied to bank mergers and that neither the federal scheme of regula-
tion of banking nor the enactment of the Bank Merger Act immunized
banks from the application of the antitrust laws. In holding that Section
7 applied, the Court rejccted a broad d e f i n i t i ~ n 'of
~ the relevant market
which would be affected by thc rcduction of competition bctwccn thc
mcrging banks. In decisions since that time, the Court has rcfined its
analysis of the competitive effects of bank mergers.60
Antitrust concerns are also evident in both the Bank Merger and
Holding Conlpany Acts, which forbid acquisitions resulting in a m o n o p
oly (a Sherman Act violation) o r "substantially.. . lessen competition
. ..
. . unless. . . the anticompetitive effects . are clearly outweighcd in
the public interest by the probable effect of the transaction in mceting
the convenience and needs of the community to be served."
There is
further discussion of the application of these acts by thc federal bank
regulatory agcncics at $8 5-5, 5-10, and 6-35.
Banks are affected by the Federal Trade Commission Act 62 which
bans unfair and deceptive trade practiccs and givcs the FTC power to
adopt rulcs to prcvcnt such practiccs. T h c F T C cannot cxcrcisc cnforce-
ment authority over banks and savings and loan institutions that arc
under the regulatory jurisdiction of the federal banking agenciesPJ How-
cvcr, thc Board of Govcrnors of the Federal Reserve Systcm and the
Federal Home Loan Bank Board have the authority to adopt regulations
for banks and savings and loan associations to control "unfair o r dcccp-
tivc practiccs." " Morcovcr, whcn the FTC adopts a rulc of this nature,
the Board of Govcrnors and the Federal Home Loan Bank Board must
promulgate "substantially similar regulations" unless these bodies find
the practices are not "unfair or deceptive" or, as to banks, the Board
of Governors finds that adoption of the regulation would "seriously con-
flict with csscntial monctary and paymcnt systcms politics" of the
r statutc, thc F T C adopted regulations requiring ccr-
B ~ a r d . ~ V n d cthe
4B United States v. Philadelphia Nat'l Bank, 374 US. 321 (1963).
Id. at 360-361.
60 United States v. Third Nat'l Bank, 390 U S . 171 (1968); United States
v. Phillipsburg Nat'l Bank, 399 U.S. 350 (1970).
12 U.S.C. 5 5 l828(c) ( 5 ) . 1842(c) (1976).
62 15 U.S.C. 5 5 41-58 (1976 8 Supp. 111 1979).
63 15 U.S.C. 5 45(a)(2) (Supp. 111 1979).
15 U.S.C. 5 57a(f) ( 1 ) (Supp. I11 1979).
66 Id.
BANK COMPETITION 9 3-30
tain sellers and creditors to place a legend on consumer paper that
preserves thc defcnscs of the consumer.sB
Thcrc arc spccific statutes applying to banks that dcal with other
aspects of conlpctitivc practiccs, such as management interlocks, tying
arrangements, holding companics, regulatory approval of consolidations
and mergers, and securitics transactions. These statutes are discussed
in other parts of this Chapter and Chapter 6.
5 5-30 T I l E PROIIIIlITION AGAINST DEALING
IN SECURITIES
After the widespread bank closings of the Great Depression, Con-
gress concluded that, at least in part, responsibility for the bank failures
could be traced to the involvement of banks in securities transactions
that were unduly speculative o r dangerous to the financial reliability of
the banks. Through affiliations with securities firms and in other ways,
banks became embroiled in underwriting stock issues and partici-
pating in othcr securitics transactions. T o dcal with these perceived
abuscs, Congress cnackd a scrics of statutes dcsigncd to rcgulatc trans-
actions in sccurities. Among them was the Glass-Steagall Act of 1933,
which was intcndcd to rcniovc banks from thc sccuritics busincss.
T h c so-called Glass-Stcagnll wall f i 7 is a major charnctcristic of
U.S. banking. It attcmpts to crcatc a pcrmancnt separation betwccn the
busincsscs of invcstmcnt and commercial banking. The separation is
achicvcd through several components. Onc provision prohibits, under
criminal sanction, any person or firm in the securitics business (which
includcs the busincss of issuing, underwriting, selling, or distributing,
at wholcsalc o r retail, or through syndicate participation, stocks, bonds,
dcbcnturcs, notcs, or other sccuritics) from engaging "at the same time
to any extent whatever in the busincss of receiving deposits subject to
check o r to repayment under presentation of a passbook certificate of
d;posit, or othcr cvidence of debt, or upon request of the depositor." "
. Anothcr provision limits thc cxtcnt to which a national bank or a
state mcnibcr bank niny dcal in sccuritics. Both are restricted "to pur-
chasing and sclling . . . securitics and stock without recourse, solely upon
thc order, and for the account of, customers, and in no case for its own
account," cxcept "under such limitations and restrictions" as the C o m g
See 5 35-10.
67 Ch. 89, 48 Stat. 162 (distributed throughout Chs. 2, 3, and 6 of 12
U.S.C.). See Note, "Glass-Stengall-A History of Its Legislative Origins and
CL. Regulatory Construction," 92 Banking L.J. 38 (1975).
68 12 U.S.C. 5 378(a) ( I ) ( 1976).
 8 5-30 OVERVIEW
troller may prescribe.6B The Comptroller may adopt regulations allow-
ing banks to invest in securities, but, except for U.S. Government
obligations and certain other government securities, the bank cannot
hold for its own account investment securities of any one obligor or
maker that exceed at any time 10 percent of the bank's capital and
surplus.d0
In addition, member banks of the Federal Reserve are forbidden to
be "affiliated" with investment securities firms either by stockholding
arrangementse1 or interlocking personneleZ (i.e., having any common
officers, directors, or employees).
The impact of these provisions is, to scparate commercial banking
from investment banking, whose chief purpose it is to raise capital for
business or public enterprises by floating bond and other securities issues
for their client~.~3
Banks cannot avoid all dcalings with sccurities, howcvcr. Commcr-
cia1 banks traditionally have taken securities as collateral for loans and
sometimes are called upon to sell them as part of the process of fore-
closing on the collateral when default occurs. In addition, banks have
long provided trust services for their customers, including managing
investment accounts involving the purchase and sale of securities for
their customers. The Supreme Court has held that these sales activities
are not pr~hibited.~'O n the other hand, banks are prohibited from
operating a mutual fund for their customers, since underwriting of units
of participation in a mutual fund would constitute the underwriting of
securities, which is prohibited by the Act.Bs Defining what constitutes
a "security" often is a difficult task that, ultimately, can be resolved only
by the courts after litigation.e0
The application of the policies of the Glass-Steagall Act to bank
6a 12 U.S.C. $3 24, 335 (1976).
12 U.S.C. 3 24 (1976).
12 U.S.C. 5 377 (1976).
O2 12 U.S.C. 5 78 ( 1976).
" Invcstmcnt banking is described in 5 1-10.
Board of Governors v. Investment Co. Inst., 49 U.S.L.W. 41 61, 4165
n.32 (1981).
On Invcstmcnt Co. Inst. v. Camp, 401 U.S. 61 7 ( 1971 ).
" Recent controversies includc whcthcr or not commcrcial papcr should
bc vicwcd as sccurities for the purposc of ~ h Glass-Stcagall
c prohibition. Thc
Fccdcral Rcscrvc Board concluded it should not, but Ihc issuc is in litigation.
Sce Burcau of Nat'l Affairs, Washington Financial Reports A-17 No. 40 (Oct.
13, 1980). Similar questions were raised under state law with respect to a
special, interest-earning credit card plan proposed by Citicorp. See Bureau of
Nat'l Affairs, Wmhington Financial Reports A-13 No. 44 (Nov. 10, 1980).
BANK COMPETITION
holding companies has been a matter of dispute."' In Board of G o v -
ernors v . Investment C o m p a t ~ yI ~ r r t i t u t e ,the
~ ~ Supreme Court held that
a bank holding company could control an affiliate that served as an
investment advisor to a closed-end invcstn~entcompany. In the Itwest-
ttlent Cortipatry lttsfitule case, Board regulations prohibited the holding
company from issuing, underwriting, selling, or purchasing any securi-
ties. It could only provide advice. The Court reasoned that under these
circumstances serving as an invcstn~entadvisor did not violate the Glass-
Steagall Act. The Court further suggested that bank holding companies
have greater freedom to engage in securities related activities than
banks.OD
5 5-35 DANK SERVICE CORPORATIONS
Bank service corporations are organizations formed to permit a
number of banks to pool their bookkeeping, computer operations, post-
ing, interest calculating, mailing statements, clearing operations, and
other mass mechanical services.70 This work is often done by a separate
corporation serving many banks; but no bank is allowed to invest an
amount greater than 10 percent of its capital and surplus in the bank
service corporation.ll The Comptroller, the Board of Governors, and
the Federal Deposit Insurance Corporation have authority to conduct
examinations and regulate the activities of the service c o r p o r a t i ~ n s . ~ ~
Service corporations may not engage in "any activity other than the
performance of bank services for banks." i3 They cannot be operated
to give unfair competitive advantage to the banks owning stock in
them.14
A bank service corporation is not a branch bank within the mean-
ing of state law.'6
O7 Scc Shay, "The Emerging Fcdcral Rcscrvc Primacy in Bank Supcrvi-
sion," 90 Banking L.J. 662, n.30 (1974).
OR49 U.S.L.W. 4161 (1981).
an S ~ C chnptcr 6.
l o Scc 12 U.S.C. 4 5 1861-1865 (1976 & Supp. 111 1979).
I 2 U.S.C. 5 1862 (1976 & Supp. 111 1979).
12 U.S.C. $ 6 1861, 1865 (I976 & Supp. 111 1979).
l 3 12 U.S.C. 5 1864 (1976 & Supp I11 1979).
l 4 12 U.S.C. 6 1863 (1976 & Supp 111 1979).
l6Bank of Am. Fork v. G.L. Corp., 25 Utah 2d 25 1,

5 5-40 OVERVIEW
5 5-40 INTERSTATE BANKING
As discussed in P 5-5, banks are severely limited in the extent to
which they may open branches and engage in banking activities extend-
ing across state boundaries. Under the McFadden Act, national banks
may establish branches only to the extent that state banks are permitted
to branch, and national banks cannot establish branches beyond the
boundaries of the state in which they are located.7B As a result, the
extent to which commercial banks may operate branches depends upon
the law of the state in which the bank is located. Under the Douglas
Amendment to the Bank Holding Company Act,77 bank holding com-
panics also arc prohibitcd from acquiring banks in other states.
Traditionally, the Federal Home Loan Bank Board has followed
similar restrictions against branching for federal savings and loan asso-
ciations. Recently, it indicated a relaxation of its rules on intrastate
bran~hing.'~It also has proposed a limited experiment in interstate
banking in the Washington, D.C. rnctropolitan a r ~ a . ~ ~
The advcnt of rcmotc computcr terminals for conducting banking
transactions will increase the public demand for having financial ser-
vices convenicntly available. Existing restrictions against establishing
branches could interfere with banks providing the full rangc of thcsc
services to their customers.
Despite the prohibition against branching and conducting busi-
ncss beyond state boundaries, banking organizations have been able to
lawfully establish offices in other cities for services other than retail de-
posit taking. One report showed that Citicorp has 229 consumer finance
offices and mortgage outlets in 55 cities.80 If loan production offices and
Edge Act subsidiaries are counted, Citicorp has a total of about 4 0 0
offices in 38 states, Bank of America has 3 5 0 offices in 41 states, and
Manufacturers Hanover has 190 offices in 18 states.81 Amendments to
thc Bank Holding Act in I970 facilitatcd thc otTcring of thcse services
on a multistate basis through non-banking subsidiaries.B2
A recent report prepared by the Carter Administration on geo-
graphic banking restrictions condudcd that: "Whatever thcir bcncfits
in an earlier era, the administration regards existing geographic limita-
12 U.S.C. 5 36 (1976).
77 12 U.S.C. 5 1842(d) (1976).
18 46 Fed. Reg. 3909 (1981). See also 44 Fed. Reg. 11091, 36057
( l 9 7 9 ) , reprinted in 13 Wash. Fin. Rpts. at T-1 (I98 1).
'9 Id.
80 "Survey of International Banking," Economist, March 14-20, 198 1 ,
at 24; Fed. Res. Bull. 24 (March 14-20, 1981).
8' Id.
82 See 5 6-25.
1
BANK COMPETITION 5 3-45
!ions [on banking] as anachronistic in the competitive marketplace of
the 1980's." an The rcport recommended a relaxation of the restrictions
on branching, which establish geographic limitatiods and frustrate the
utilization o f electronic terminals. With the technological advances in
the provision of bank services which strain these prohibitions and the
growing compctition of non-bank institutions that are not fettered by
such constraints, the gap between the services bank customers will de-
mand and those the bank regulatory laws will permit banks to provide
is bound to lead to further examination and revision of the regulatory
framework for depository institutions.
8 5-45 COMPETITION FROM NON-BANK
FINANCIAL INSTITUTIONS
The Depository Institutions Deregulation and Monetary Control
Act of 1980 rcflccts the philosophy of cqual compctition bctwccn thc
nation's financial institutions (banks, savings and loan institutions, and
credit unions). Thus, the Act cstablishcs a process for phasing out the
limitations on intcrest which thcse institutions may pay depositors, it
allows all depository institutions to providc chccking and related ser-
vices, and it envisions a broad arca of compctition bctween commercial
banks and savings institutions, such as loans to consumers for home
purchases and consumer transaction^.^^ As part of this competitive
equality, thc savings and other depository institutions that have been
granted the additional authority to provide checking and related services
will come under the regulatory control of the Federal Reserve System
to some extcnt, and will be required to maintain reserves set by the
Board of Governors.
Other non-bank financial institutions also compete with commercial
banks and savings institutions to some extent. In thc recent pcriod of
high interest rates, competition from money-market funds for the savings
of depositors who otherwise would use the services of commercial banks
and savings institutions has been intcnsc. Moreover, there appears to be
a growing tcndcncy for these non-bank institutions to offer services
similar to those offered by banks and savings institutions. Major bro-
kerage houscs offer their customers diverse financial services. For ex-
ample, Merrill Lynch, Pierce, Fenner and Smith has a Cash Management
Account in which the customer receives interest on balances maintained,
checking facilities, a charge card, and lending privileges. The American
Report of the President, Geographic Reslriclion on Comnrercial Bank-
?ng in the United States (Jan. 198 1 ).
84 See 5 7-95.
5 5-45 OVERVIEW

Express Company, through its American Express card, sells travelers

chccks and has computer terminals at rcmotc locations. Sears Rocbuck,
with 2 6 million of its own credit card holders, owns one of the larger
savings and loan institutions. It has recently considered raising $200
million through the sale of notes to its credit card holders. Other non-
bank institutions also have indicated an interest in moving into the
Chapter 6
financial services market.m Reccnt mergers involving insurance com-
panies, securities firms, and other businesses providing financially related
services suggest that the future will present formidable competition to
BANK HOLDING COMPANIES
banks from large national firms offering diverse financial services.
Section Page
As the non-bank institutions are not regulated by the major reg-
ulators of banks and savings institutions, they are free from many of 6-5 Introduction .................................. 10 1
the requirements that depository institutions must follow. A principal 6-1 0 Prohibition of Non-Bank Activities-Exemptions ..... 104
one, of course, is the requirement of maintaining reserves with the 6-1 5 Activities Closely Related to Banking . . . . . . . . . . ..... 105
Federal Reserve System against deposits subject to checking o r equiva- 6-20 Hearings and Judicial Review of Board Decisions
lent services. The non-bank financial institutions do not have to bear Undcr Section 4(c) ( 8 ) . . . . . . . . . . . . . . . . . . . . . . . . . 111
the cost of maintaining non-interest bearing reserves. Furthermore, the. Interstate Activitics of Bank Holding Companies . . . . . . 113
limitations of the banking laws may inhibit banks and other depository Bank Holding Companies and the Securities
institutions from competing with the non-bank financial institutions as Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 15
fully as they might wish. Two key limitations on banks are the restric- Bank Holding Companies and Competition
tions against branching and interstate activitie~.~'Merrill Lynch, for inBanking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
examplc, has approximatcly 400 rctail oficcs across thc country.
Another limitation on banks is the prohibition against dealing in securi-
ties.87 Banks may be foreclosed from offering the same full range of $6-5 INTRODUCTION
financial services that brokerage houses can provide because some of
these services relate to securities transactions. The 1970 amendments to the Bank Holding Company Act of
The intensity of the competition has sparked a spirited debate 1956 ' dcfine a "bank holding company" as "any company which has
among the different providers of banking and financial services. Con- control ovcr any bank or over any company that is or becomes a bank
gress is interested in the issue, and changes in the regulatory structure holding company by virtue of this chapter." A company has "control"
of the banking industry may result. over a bank if it:

(1) Directly or indirectly owns, controls, or has power to vote at

8Qee Fed. Res. Bull. 24 (March 14-20, 1981). least 25 percent of any class of voting stock of the bank;
86 See 5 5-5. ( 2 ) Controls the election of a majority of thc directors; or
87 See § 5-30.
( 3 ) Excrciscs cithcr dircctly or indircctly a controlling influcncc
ovcr the mnnagcnlcnt or policics of thc bank, as dctcrrnined
by the Federal Reserve B ~ a r d . ~

At the end of 1978, bank holding companies had control of 4,244

banks with 26,972 oficcs, holding approxirnatcly 7 5 pcrccnt of all bank

Bank Holding Company Act Amendments of 1970, Pub. L. 91-607,

* 5 101(a), 84 Stat. 1760 (amending 12 U.S.C. 8 1841 (1964)).
2 12 U.S.C. 5 1841(a) (2) (1976).
56 5 OVERVIEW
deposits in the United state^.^ A rapid increase in recent years can be
seen by comparing figures from 1971, when bank holding companies
controlled 2,420 banks with 13,252 offices holding 55 perccnt of all
bank d e p o s k 4
The concepts of holding company organization were developed
early in the 1800s but it was not until the latter part of that century
that corporate bank holding companies became popular. The growth of
bank holding companies occurred primarily as a method for investors to
circumvent restrictive state branching laws.6 By the 1920s, bank hold-
ing companies had evolved into corporate giants with substantial finan-
cial power. Expansion continued into the latter part of the decade as
bankers acted defensively to protect their correspondent banking rela-
tionships and other sources of business from loss to existing holding
companies. The anticipation of a relaxation of the branch banking laws
also stimulated interest in developing bank holding company systems to
acquirc banks that could ultinlatcly bc opcratcd as intcgratcd b r a n c h c ~ . ~
The rapid growth of bank holding companies concerned indepcn:
dent bankers' groups as well as federal banking officials, who had no
authority to regulate such entities. The stock market crash of 1929
diverted much of this attention to a general restructuring of the banking
industry. The Glass-Steagall Act of 1933 contained few provisions
conccrning holding company regulation. It did rcquirc holding com-
panies to agree to divest any interest acquired in companies "engaged
principally" in the securities business before they could vote in the
selection of directors of affiliated banks.' This did little to restrict hold-
ing company movement into non-banking activities beyond encouraging
complete divorccmcnt from thc sccuritics b u s i n ~ s s ,and
~ in any cvcnt
holding companies could easily evade the requirement by refraining from
voting the stock of the bank affiliate^.^
For the next fifteen years, bank holding company growth was
minimal. Even so, at least one bill designed in some way to restrict
bank holding companics was introduced at every scssion of Congress
between I933 and 1955.1° Anticipation of the eventual passage of
8 Association of Bank Holding Companies, Bank Holding Company
Facts (Spring 1979).
Jessee & Seelig, Bank Holding Companies and the Public Interest 38
(1977) (hereinafter cited as Jessee).
Fischer, Dank Holding Companies 138 (1961 ).
Jessee, note 4 supra, at 6.
Banking Act of 1933, Ch. 89, 5 19(e), 48 Stat. 188. See Board of
Governors v. Investment Co. Inst., 101 S . Ct. 973 ( 1981 ).
Jessee. note 4 supra, at 8; Fischer, note 5 supra, at 59-62.
See Board of Governors v. Investment Co. Inst., note 7 supra.
lo Jessee, note 4 supra, at 8.
102
BANK HOLDING COMPANIES 5 6-5
regulatory legislation stimulated further bank holding company expan-
sion.ll Then, in 1956, prompted by a Third Circuit decision against
thc Fcdcral Rcscrvc Board, which had charged the Transamerica Cor-
poration with violation of the anti-monopoly provisions of the Clayton
Act because of commercial bank acquisitions,'* Congress passed the
Bank Holding Company Act of 1956. The legislation, enacted for the
purposes of controlling future expansion of bank holding companies and
the divestment of their non-banking interests, empowered the Federal
Reserve Board to grant or deny applications of bank holding companies
for the acquisition of more than 5 perccnt of thc voting shares of any
bank.13
The 1956 Act defined a bank holding company as a company
controlling "25 per centum or more of the voting shares of each of two
or more banks," thereby leaving one-bank holding companies exempt
from any regulation. As a rcsult, some large banks began utilizing the
onc-bank holding company as n vclliclc lor obtaining ncw invcstmcnt
outlcts. By 1970, onc-bank holding conipanics controlled 38 perccnt
of all conlnicrcial bank deposits and had acquired non-banking firms
engaged in mortgage banking, factoring, management consulting, and
credit c a r d ~ . ~ ~ i v c non-banking
rsc firms, such as Montgomery Ward,
Baldwin Piano, and S&H Grcen Stamps, also began forming one-bank
holding conlpanics."'Tllc fcar that banks, in combination with com-
merce and industry, could eventually rcsult in thc formation of a few
powerful financial centers dominating the U S . economy led to the
enactment of the 1970 amendments to thc Bank Holding Company Act
of 1956.17
The 1970 amcndnicnts rcstrictcd thc previously unrcgulatcd ability
of onc-bank holding companics to cngage in non-bank activities. It also
explicitly offered bank holding companics the opportunity to expand
into non-banking activities under the supervision of the Board of GOV-
ernors of the Fcdcral Reserve S y ~ t c m . ' ~Following this lead, holding
companics cxpandcd aggrcssivcly into non-banking arcas. Bctwccn
1970 and 1973, the number of bank holding companies owning non-
11 Id. at 9.
~ . Cora.
12Trnnsamerica
~ -
~ v. Board of Governom, 206 F.2d 163 (3rd Cir.
l953), cert. denied 346 U'.S. 901 (1953).
l 3 n n n k Holding Company Act of 1956, Ch. 240, 5 1842. 70 Slat. 133.
j 4 12 U.S.C. 5 1841 (1964) (amended 1970).
l a Goldberg & White, The Deregulation of the Banking and Securities
10 Id.
j7 B a n k Holding Company Act Amendments of 1970, Pub. L. 91-607,
+ Tit. I, 84 Stat. 1760.
' 8 Jessee, note 4 supra, at 38.
 g 6-10 OVERVIEW
bank subsidiaries increased from 531 to 721, and the number of non-
bank subsidiaries increased from 3,632 to 4,8 12.1°
fi 6-10 PROIlIUITION O F NON-BANK ACTIVITIES--
EXEMPTIONS
Section 4 ( a ) of the Bank Holding Company Act, as amended,
sets forth a general rule that a bank holding company cannot acquire
(and after two years from the date on which it became a bank holding
company, cannot retain) "direct o r indirect ownership o r control of any
voting shares of any company which' is not a bank." 20 Congress had
two reasons for prohibiting non-bank investments. First, a holding
company might use its banks to allocate available credit to customers of
its other subsidiaries rather than credit-worthy borrowers who are not
customers; second, the soundness of the holding company's subsidiary
bank might be impaired by investing its funds in non-banking affiliates,.
thereby risking the depositors' funds.21
The Act provides numerous exceptions to the general rule. Section
4 ( a ) (2) of the Act allows bank holding companies continuously en-
gaged in non-banking activities since June 30, 1968 to retain control of
such activities i n d e f i n i t e l ~ .If~ ~it appears that these exempted activities
will lead to an "undue concentration of resources, decreased o r unfair
competition, conflicts of interest, or unsound banking practices," the
Board of Governors is authorized to terminate the non-bank a c t i v i t i e ~ . ~ ~
If termination is deemed necessary, the holding company has ten years
to divest its interest^.^'
Scction 4 ( d ) authorizes thc Board to grant cxcmptions to one-bnnk
holding companies in existence since July 1, 1968 if divesturc would
cause undue hardship, such as disrupting existing business relationships
and thcrcby advcrscly affecting thc bank or community, o r forcing thc
sale of small locally owncd banks to purchasers not reprcscntative of
community intercsts.20aThe Board may also allow rctcntion of a bank
if it is so small in relation to both the holding company's interests and
the banking market to be served that the likelihood of it granting or
'9 Id.
12 U.S.C. 4 1843(a) (1976).
H.R. Rep. No. 609, 84th Cong.. 1st Sess. 1 (1955).
21
22 12 U.S.C. 4 l843(a) (2) (1976). Any holding company not so en-
gaged had until December 31, 1980 to divest. 44 Fed. Reg. 74920 (1979).
2S 12 U.S.C. 8 l843(a) (2) (1976).
24 Id.
26 12 U.S.C. 4 1843( d ) ( 1976).
BANK HOLDING COMPANIES 5 6-15
denying credit in furtherance of the holding company's other interests
is minimal.2e
Scction 4(c) spccificnlly excmpts labor, agricultural, o r horticul-
turnl organizations and family owncd bank holding companies, as wcll
ns thirtccn othcr octivitics closcly rclatcd to banking. Of the thirtccn
activitics included within this section, Section 4 ( c ) ( 8 ) is the only one
that authorizes non-bank b u ~ i n e s s e s . ~ ~
Section 4 ( c ) ( 8 ) of the 1970 amendments to the Bank Holding
Company Act reflects a compromise between the House and Senate
after nearly two years of debate.28 Prominent in the debate were the
criteria to be used for determining permissible non-bank activities:
The House bill took a somewhat restrictive approach, including a
"laundry list" of prohibited non-bank activities and a public benefits
tcsi; the Senate bill took a more liberal approach, rejecting the laundry
list and instcad leaving the detcrrnination of whcthcr activities wcre
"functionally rclated to banking" up to the Fedcral Reserve Board.2o
Both House and Senate, however, were in total agreement on the re-
quirement that a bank holding company's entry into a non-banking
activity must result in net public benefits when weighed against any
adverse effects, and that the holding company bear the burden of proof.30
Under Section 4 ( c ) ( 8 ) then, in order for a bank holding company
to engage in non-bank activities, the Federal Reserve Board, after due
notice and opportunity for hearing, must determine that the activity is
"so closcly rclatcd to banking or managing o r controlling banks as to be
a propcr incidcnt thcrcto" and that its subscqucnt pcrformancc as a
subsidiary "can rcasonably bc cxpcctcd to producc benefits to the public
. . . that outwcigh possiblc ndvcrsc cffccts." n'
In implcmcnting Scction 4 ( c ) ( 8 ) , the Fcdcral Rcscrvc Board, on
January 25, 1971, published Regulation Y, which contained a list of
ninc activitics dcemcd to be "so closcly related." 32 Thus a bank holding
Id. See Heller, H a n d b o o k of Federal Bank Holding C o t n p a n y Law
183 n.76 (1976).
12 U.S.C. 4 l843(c) (8) (1976).
Jessee, note 4 srcprn, at 48.
2g H.R. 6778, 91st Cong., 1st Scss., 115 Cong. Rcc. 33125 (1969); S .
6778, 9 1st Cong., 2d Sess., 1 16 Cong. Rec. 32 124 ( 1970). See Board of
Governors v. Investment Co. Inst., 101 S. Ct. 973 (1981).
30 Jessee, note 4 supra, at 30.
+ a t 12 U.S.C. 4 1843(c) (8) (1976).
82 12 C.F.R. 4 225.4 ( 1980).
 3 6-15 OVERVIEW
company applying for permission to engage in one of these activities,
since broadened to thirteen by subsequent amendments, does not have
t o satisfy the "so closely related" test but only show that the public
benefits will outweigh any adverse effects.
The activities are:
(1) Making o r acquiring loans and other extensions of credit
(including issuing letters of credit and accepting drafts) such as those
made by mortgage, finance, credit card, o r factoring companies;
( 2 ) Operating an industrial bank, Morris Plan bank, o r industrial
loan company as long as such entity does not both accept demand
deposits and make commercial loans;
( 3 ) Servicing loans and other extensions of credit;
( 4 ) Performing thc activities of a trust company, including those
of a fiduciary, agency, o r custodial nature, s o long as the institution does
not make loans or investments, or accept deposits which would be
employed in the manner of a general purpose checking account;
( 5 ) Acting as an advisory company for a mortgage or real estate
investment trust, an investment advisor to an investment company as
defined in Section 2 ( a ) (20)3a of the Investment Company Act of 1940,
or providing portfolio investment advice, general economic statistical
forecasting services and industry studies, and financial advice to state
and local governments;
( 6 ) Leasing personal property and equipment (including auto-
mobiles) on a non-operating basis or acting as agcnt, broker, o r advisor
in such leasing, wherc thc lessor expects to be cornpensated for his total
I
investment in the property by way of present and future transactions
with the lessee, i.e., "full payout" lease, o r the functional equivalent
of an extension of credit;
I (5th Cir. 1976), vacated in part 558 F.2d 729 (5th Cir. 1977), cert. denied
I ( 7 ) Making equity and debt investment in community welfare
projects;
( 8 ) Providing bookkeeping or data processing services for the
i internal operations of the holding company and its subsidiaries, along
I
with storing and processing other banking, financial, or related eco-
nomic data (these services may be provided under the servicing exemp-
tion of the Act, Section 4 ( c ) ( l ) ( C ) , without prior Board approval);
( 9 ) Acting as an insurance agent with respect to insurance for
" banks within the holding company system, and property damage and
.L
aa See Board of Governors v. Investment Co. Inst., note 29 supra.
BANK HOLDING COMPANIES 3 6-15
liability insurance directly related to an extension of credit or the provi-
sion of other financial services by a bank o r bank-related firm;
( 1 0 ) Acting as an underwriter for credit life and credit accident
and health insurance which is directly related to extensions of credit by
the bank holding company system;
(1 1 ) Providing couricr scrvice for internal operations of the hold-
ing company, for checks, commercial papers, documents, and written
instruments, and for audit and accounting media;
( 12) Providing bank management consulting advice to non-affili-
ated banks;
( 1 3 ) Sclling at retail money ordcrs (with a face value of less than
$1,000), travelers checks, and U.S. savings bonds.
Proposed amendments to this list include:
( 1 ) Real estate advisory and appraisal services; 3e
( 2 ) Check verification activity;
( 3 ) Providing management consulting advice to non-filiated fi-
nancial institutions;"" and
( 4 ) Furnishing consumer-oriented financial management courses
and instructional ma~erial.~"
The Board withdrew a proposal dealing with the underwriting of U.S.,
statc, and nlunicipal securities as actions by the Municipal Securities
In Alabama Ass'n of Ins. Agents v. Board of Governors. 533 F.2d 224
435 U.S. 904 (1978), the court held that the sale of insurance to the holding
compnny nnd its non-bank subsidinrics nnd thc sale of "convenience" insur-
ance wcrc invalid as they conflicted with 4 4 ( c ) ( 8 ) of the Bank Holding
Company Act. On remand, the Board determined that the sale of insurance
in communities with less than 5.000 people is "closely related" to banking, but
it restricted remote insurance activities. 44 Fed. Reg. 65051 (1979).
a5 De novo applications for this activity, as well as numbers 1 1 and 12
below, should be filed as applications for the acquisition of a going concern.
See Fint Tenn. Nat'l Corp., 38 Fed. Reg. 17542 (1973); Heller, note 26
supra, at 256, 321-322.
See Current Fed. Banking L. Rep. (CCH) 198,301.
43 Fed. Reg. 31936 (1978).
a8See 11973-1978 Transfer Binder] Fed. Banking L. Rep. (CCH)
a 96,903.
8943 Fed. Reg. 7440 (1978).
5 6-15 OVERVIEW
Rulemaking Board had since removed any uncertainty in the areasd0
The Board, as authorized in Section 4 ( c ) ( 8 ) , has differentiated
between activities commenced de novo and activitics commenced by the
acquisition of a going concern, as seen in Sections 225.4(b) ( 1 ) and
225.4(b)(2) of Regulation Y. With respect to the thirteen above
activities, the Board feels that "De novo entry by a bank holding com-
pany can reasonably be expected to produce benefits to the public and
that such benefits can reasonably be expected to outweigh possible
adverse effects within the meaning of Section 4(c)(8).19" A bank
holding company can engage de novo in any of the listed activities,
eithcr directly or indirectly, forty-five days after the holding company
has given its Reserve Bank notice of its intentions, unless the Board or
the Federal Reserve Bank to whom it has delegated authority acts to
delay the prop~sal.~Z
Upon application for the acquisition of shares of a company al-
ready engaged in one of the listed activities, the applying holding com-
pany must await the Board's determination of whether or not benefits
to the public will outweigh any adverse effects.43
The Board also reviews applications concerning activities not
among those listed in Rcgulation Y. If a holding company feels that,
under the surrounding circumstances of the case, an activity is closely
related to banking o r managing or controlling banks, it may file an
application in accordance with the procedures set forth for the acquisi-
tion of a going c0ncern.4~
Activities ruled on favorably by the Board in this manner include
the purchase, sale, and arbitraging of gold and silver coins,4b engaging
in the activity of a guaranty savings bank, operating a pool rcserve plan
for thc pooling of loss reserves of banks with respcct to their loans to
small businesses, and land escrow services.46 The Board also has anilia-
tions with savings and loan associations under consideration."
Non-bank activities not approved by the Board include real estate
brokerage, dcveloprncnt, and syndication; oil and gas activitics; p r o p
erty management; insurance premium funding; savings and loan asso-
ciations; general management consulting; trading in commodities; oper-
43 Fed. Reg. 5382 (1978).
41 3 Fed. Banking L. Rcp. (CCH) P 33,141 (proposed nrncndrncnt).
" 12 C.F.R.fi 225.4(b)(l) (1981).
4 3 12 C.F.R. 8 22SA(b) (2) (1981).
'4 The Board has 91 days to act on the proposal. See BankAmerica
Corp. v. Board of Governors, 596 F.2d 1368 (9th Cir. 1979).
'"ee 4 Fed. Banking L. Rep. (CCH) 98 43,086, 97,177.
'13 Heller, note 26 supra, at 257.
4 7 Current, Fed. Banking L. Rep. (CCH) (1 98,649.
BANK HOLDING COMPANIES -15
ating a travel agency; underwriting life insurance; and selling thrift
not~s.~~
Upon approval of any application for the acquisition of, or de
novo cngagcmcnt in, a non-banking activity, the Board irnposcs three
automatic conditions:
( 1 ) That the provision of any crcdit, property, or service will not
be subject to any condition which, if imposed by a bank,
would be an unlawful tie-in arrangement;
( 2 ) The activity approved cannot be altered in any significant
rcspcct (including location) from that proposed and acted
upon by tllc Board without complying with the dc novo pro-
cedures of Section 225.4(b) ( 1 ); and
( 3 ) No mcrgcr, or acquisition of assets othcr than those acquired
in thc ordinary course of business, can be consunlmated with-
out prior Board approval.40
As previously noted, in order for the Board to approve an appli-
cation for a non-bank activity, it must determine both that the pro-
posed activity is "closcly rclatcd" to banking, and that any adverse
effects arc outweighed by bcncfits to the public. In thc caw of activities
listed in Regulation Y,the "closely related" question is already affirm-
atively answered. For those activities that are not on the list the Board
must deternlinc whether the proposed activity is "closely related." If the
Board's determination is negative, it does not reach the further question
of the potential for public benefits.
Thc congrcssional intent behind the "closcly relatcd" test of the
1970 nmcndments is by no mcans clear, as the House and Senate Con-
lcrcnccs expressed difiering vicws regarding the cxpansivcncss of the
The court in Nnrional Co~rrierAss'n v . Board o f Goverrtorsb1
has interpreted the phrase as bcing a "substantial relaxation" of the
Board's restrictive approach prior to the 1970 amendments, but the
~ Courier court
Suprcrnc Court has not resolved this qucstion y c ~ . &The
articulated three connections that would bring an activity within the
"closely related" requircrnent:
4 R Hcllcr, note 2
C.F.R. 5 225.1 26.
G s r r p m , n t 259-261; Jcssce, note 4 sicpro, nt 35; 12
'"2 C.F.R. 5 225.4(c) (1980).
Jessee, note 4 srlpm, at 30.
5 16 F.2d 1229 (D.C. Cir. 1975).
+ alSce Board of Governors v. Investment Co. Inst., 101 S. Ct. 973
(1981).
 OVERVIEW
( 1 ) Banks generally have in fact provided the proposed services;
(2) Banks generally provide services that are operationally o r
functionally s o similar to the proposed services as to equip
them particularly well to provide the proposed services; and
( 3 ) Banks generally provide services that are s o integrally related
to the proposed services as to require their provision in a
specialized f01-m.~~
T h e Board successfully argued that the courier services in question, used
for transporting banking and financially related data processing ma-
terials, met all three of the above criteria. T h e court went on to hold,
however, that non-financially related courier services are impermissible.
The following year the Board applied the Courier test in determining
that the operation of a travel agency was not an activity closcly related
to banking6'
After finding an activity to be closcly related, the Board must
dclcrnlinc whether the activity is a "proper incident to banking," that is,
whether the performance of the non-banking affiliate "can reasonably
be expected to produce benefits to the public, such as greater con-
venience, increased competition, o r gains in efficiency, that outweigh
possible adverse effects, such as undue concentration of resources, de-
creased or unfair competition, conflicts of interests, o r unsound banking
practices." 6s Resolution of the public benefits test must be determined
on a case-by-case basis with reference to the particular facts surrounding
the proposed activity.68 The adverse and beneficial effects set out in
Section 4 ( c ) ( 8 ) are not intended to be exclusive but only to serve as
cxamplcs to be weighed. In the absence of any adverse factors, the
Board may approve a proposed acquisition even though no public
benefits are expected.67
A study encompassing Federal Reserve Board orders between
January 1971 and June 1976 dealing with applications by bank holding
companies for acquiring or engaging in non-bank activities concluded
that the existence of adverse competitive, financial, or managerial factors
was crucial to the Board. When the Board deterntined there were no
such adverse benefits, it usually found sufficient public benefits to justify
the application. O n the other hand, when there were substantial adverse
63 National Courier Ass'n v. Board of Governors, 516 F.2d 1237 (D.C.
Cir. 1975).
64 62 Fed. Res. Bull. 148 (1976).
12 U.S.C. 5 l843(c) (8) (1976).
""See Independent Bankers Ass'n v. Board of Governors, 516 F.2d
1206, 1216 (D.C. Cir. 1975).
Heller, note 26 supra, at 263.
BANK HOLDING COMPANIES
factors of this nature, the study reported no cases where the Board
found that the public benefits outweighed the adverse factors.6B
5 6-20 HEARINGS AND JUDICIAL REVIEW OF BOARD
DECISIONS UNDER SECTION 4(c)(8)
Section 4 ( c ) ( 8 ) provides that the Act's prohibitions against non-
bank expansion by bank holding companies shall not apply to "shares
of any company the activities of which the Board after due notice and
opporttrnity for hearing has deferrr~ined( b y order or regulation) to be
so closely rclatcd to banking o r managing o r controlling banks as to be a
propcr incidcnt thcrcto." nD
The 1970 amendments added the term "by order or regulation" so
that the Board could proceed "either by order in specific cases o r by
regulation in a gencral classification or catcgory of cases in order to
provide maxin~urn flexibility as n procedural matter in administering
this section." T l ~ cBoard hns promulgntcd I<cgulation Y to dcsignntc
activities it dccms to bc "closcly rclatcd" to bankings1
The 1970 amendments replaced the "due notice and hearing"
language of the 1956 Act with "due notice and opportunity for hear-
ing" so that "the Board would not be required to hold hearings in all
.
cases . . , but should hold hearings in all cases where a contest is
raised." When the Board has previously determined by regulation
that an activity is not "closcly related" to banking, or when the facts in
issue are concerned with general policy matters, no hearing is required.63
Jessee, note 4 supra, at 75.
6B 12 U.S.C. 5 1843(c) ( 8 ) (1976) (emphasis added).
B0 Conf. Rep. No. 1747, 91st Cong., 2d Sess. 15 (1970). Before 1970,
the Board had to hold a full adjudicatory hearing. See Independent Bankers
Ass'n v. Board of Governors, note 56 w p m , at 1213.
12 C.F.R. 225.4 (1981). Amendments that act to clarify or interpret
these regulations may be promulgated without prior notice or an opportunity
for hearing. See American Bancorp. v. Board of Governors, 509 F.2d 29 (8th
Cir. 1974) where the court found the Board's amendments regarding the
extent to which a bank holding company's subsidiary can provide financial
services to state and local governments came within the exemptions to the
notice and hearing requirements in the Act.
O2 Conf. Rep. No. 1747, note 60 supra, at 15-16.
" "I BankAmerica Corp. v. Board of Governor;, 491 F.2d 985 (9th
Cir. 1974), the court affirmed the Board's denial of BankAmerica's request
for a hearing on its application to engage in the "non-full payout" leasing of
computer equipment. The court found that BankAmerica had participated
fully in the Board's extensive public hearings prior to the adoption of Reg-
+ ulation Y, in which they had urgcd thc Board to include non-full payout
lensing in its list of "closcly related" activities.
g 6-20 OVERVIEW
However, when there is a factual dispute as to the "public bcnefits" of
an acquisition, it must be resolved in a trial-type hearing because the
resolution depends on the particular "adjudicative facts" peculiar to
each a p p l i c a t i ~ n . ~ ~
A court can review the Board's regulations, even when those reg-
ulations were not challenged at the time of promulgation, and set them
aside if they are "arbitrary, capricious, an abuse of discretion, o r other-
wise not in accordance of law."
The District of Columbia Court of Appeals, in Independent Bank-
ers Ass'n of Georgia v . Board of governor^,^^ confronted the issue
of whether or not the 1970 amendments affected the right of intercsted
parties to obtain a full adjudicative hearing in which to challenge an
application's approval o r denial. The court concluded: "As a rule a
party in interest may not be deprived of his right to have the facts aired
and tested in adversary proceedings-unless it is shown that none of
the facts matcrial to the ultimate decision are in dispute." O7 The agency
carries a heavy burden of justification to show that the parties could
gain nothing by a full adjudicatory hearing.
The Act providcs that "[alny party aggrieved by an order of the
Board under this chapter may obtain a review of such order in the
United States Court of Appeals within any circuit wherein such party
has its principal place of business, or in the Court of Appeals in the
.
District of Columbia. . ." It furthcr providcs that "a party who
would become a competitor of the applicant o r subsidiary thereof by
virtue of the applicant's or its subsidiary's acquisition... shall have the
right to be a party in interest in the proceeding and, in the event of an
adverse order of the Board, shall have the right as an aggrieved party
to obtain judicial rcvicw thcrcof as providcd in Section 1848. . a0 . ."
The purpose of this provision is to guarantee a "properly liberal attitude
.
concerning the right of competitors . . to have standing" so that "the
broadest possible forum [is] allowed for adversary proceedings to take
place in order that all issues may be aired complctcly." 70 T o be
"aggrievcd," a party must first pursuc its administrative rcmcdics bcforc
a4 Albama Ass'n of Ins. Agents v. Board of Governors, 533 F.2d 235
(5th Cir. 1976), vacated in part 558 F.2d 729 (5th Cir. 1977), ccrt. denied
435 U.S. 904 (1978).
I d , at 24.
516 F.2d 1206 (D.C. Cir. 1975).
I d . a t 1222.
12 U.S.C. f 1848 (1976).
O0 12 U.S.C. § 1850 ( 1976).
Conf. Rep. No. 1747, note 60 supra, at 29-30.
BANK HOLDING COMPANIES 15
the Board. Only after a party has exhausted its remedies can it request
judicial review."
8 6-25 INTERSTATE ACTIVITIES O F BANK
HOLDING COMPANIES
As previously discussed in 5 5-5, federal law prohibits federally
regulated banks from establishing branchcs outside the state within
which the bank is located unless permitted by state law. T o prevent
bank holding companies from evading this prohibition on interstate
banking, the Bank Holding Company Act forbids bank holding corn-
panics from controlling any additional bank outside of the state of its
principal operations unless the acquisition of such control "is spccifi-
cally authorized by thc statute laws of the state in which such bank is
Iocatcd, by language to that effect and not mcrcly by implication." 72
(Thc stale in which thc operations of a bank holding company's subsidi-
aries are principally conducted is the state in which the total deposits
of its banking subsidiaries are the largest.)78 The Bank Holding Com-
pany Act also allows the states to regulate bank holding companies and
their sub~idiaries.~'
The scopc of thesc provisions dealing with state regulatory power
was tcstcd in Lewis v . B.T. Itrvcstmcnt Mattagers I ~ r c . ~ ~ a n k Trust,
crs
a Ncw York bank holding company, sought to provide invcstrncnt
advisory services in the state of Florida through a subsidiary, Bankers
Trust Investmcnt Managers (BTIM). When Bankers Trust sought the
approval of the Board of Governors of the Federal Reserve System for
this operation, various Florida banking intcrcsts opposcd thc applica-
tion, and soon thcrcaftcr Florida cnactcd a statutc prohibiting out-of-
state holding companies from owning or controlling subsidiaries in
Florida that performed investment advisory services. Although the
Board of Governors obscrved that Bankers Trust's proposal would havc
a dcsirablc pro-compctitivc cflcct and probably would havc bccn grantcd
ordinarily, the Board ruled that the Florida statute controlled bccause
7' First Nat'l Bank of St. Charles v. Board of Governors, 509 F.2d 1004
(8th Cir. 1975).
7 2 12 U.S.C.A. 5 l842(d) (1) (West 1980).
73 Id.
l4 12 U.S.C.A. 5 1846 provides as follows: "The enactment by the Con-
gress of this chapter shall not be construed as preventing any state from
exercising such powers and jc~risdiction which it now has or may hereafter
have with respect to banks, bank holding companies, and subsidiaries
&hereof." 12 U.S.C.A. Fi 1846 (West 1980).
l5447 U.S. 27 (1980).
 5 6-25 OVERVIEW
the Bank Holding Company Act jmposcd an obligation on the Board
to defer to state law. T h e interpretation placed upon the Bank Holding
Company Act by the Federal Reserve Board, thus, gave state law con-
siderable scope to regulate bank holding companies and their activities.
The Supreme Court, however, rejected the Board's interpretation. It
held that the Florida legislation was an unconstitutional discrimination
against interstate commerce. In the Supreme Court's view, nothing in
the Bank Holding Company Act required deference to the Florida
legislation.
The Supreme Court's interpretation of the Act in Lewis is impor-
tant because it removes a wide range of bank holding company activity
from state control. T h e court said that Section 3 ( d ) of the Act,7B
which prohibits approval of a holding company application to control
a bank located outside the holding company's state of principal opera-
tions, did not apply to other activities. As the court said, "The structure
of the Act reveals that $ 3 ( d ) applics only to holding company acquisi-
tions of banks. Non-banking activities are regulated separately in 3 4,
which does not contain a parallel provision." 77 The Court then rejected
the argument that Section 7 of the which preserves state power to
rcgulate bank holding companies, gave Florida power to prohibit this
activity. The Court reasoned that this section of the Act was intended
to preserve existing state regulations of bank holding companies, "even
if they were more restrictive than Federal law," but it concluded that
there is "nothing in its language or legislative history to support the
contention that it also was intended to extend to the states new powers
to rcgulate banking that they would not have possessed absent the
Fedcral legislation." 7 " T h u s , although the states were free to regulate
holding companics bcfore the Bank Holding Company Act was cnactcd,
'1 that regulation was limitcd by the commcrcc clause of the Constitution.
The adoption of the Bank Holding Company Act should not be inter-
preted as giving the states any broader powers than they had before.
In the Depository Institutions Deregulation and Monetary Control
Act of 1980, Congress extended the provisions of Section 3 ( d ) of the
iI Bank Holding Company Act prohibiting acquisition of out-of-state
banks to the acquisition of interests in certain trust companies. This
limitation automatically expires on October 1, 198 1.80 Bank holding
I2 U.S.C.A. 5 1842(d) (West 1980).
l7447 US. at 47.
12 U.S.C.A. 5 1846 (West 1980).
447 U.S.at 49.
Depository Institutions Deregulation and Monetary Control Act of
1980, Pub. L. 96-221, Tit. VII, 5 712(c), 94 Stat. 852 (1980) (lo bc codi-
fied in 12 U.S.C. 1842(d) ).
BANK HOLDING COMPANIES ,' 6-30
companies have not been rcstricted in their ability to control subsidiaries
engaging in activities closely related to banking but which d o not con-
stitute banking, and as a result have created a vast national network of
financial services such as trust operations, investment advisory services,
loan processing centers, and credit card operations. For some bank
holding companies, if the prohibitions of the McFadden Act against
interstate branch banking are ever relaxed, it will be an easy matter to
achieve the creation of an interstate system of full service branch banks.
5 6-30 DANK IIOLDING COMPANIES AND
THE SECURITIES BUSINESS
The wall erected by Congress in the Glass-Steagall Act to separate
the business of commercial banking from the securities business has
been described in 3 5-30. Sections 16 and 21 of the Glass-Steagall Act
apply by their terms only to bunks.B1 Bank holding companies, of
course, may cngagc in activities "closcly related to banking" with the
approval of the Federal Reserve Board.82 T o what extent, then, may
bank holding companics cngagc in activities that would constitute se-
curities transactions?
In Board of Governors v. Investment C o . Insr.,m the Supreme
Court provided some guidance on how far the policies against engaging
in securities activities will extend to bank holding companies. The Court
of Appeals had concluded that the policies of the Glass-Steagall Act
should be read into the Bank Holding Company Act to enforce a rigid
separation between the securities business and commercial banking. The
Suprcnlc Court took a contrary vicw, indicating that the activity in
qucstion, thc provision of invcsttnent advisory serviccs to a closcd-cnd
investment company, would not constitute a violation of the Glass-
Steagall Act even if it were engaged in by a bank. The Supreme Court
also made important comments about the scope of the Bank Holding
Company Act. In the view of the Court, even if a bank would be in
violation of Glass-Steagall by engaging in these services, it would not
necessarily follow that a bank holding company would also be in
vi~lation.~'
8' 12 U.S.C. 5 5 24, 378 (1976 & Supp. 111 1979). See Board of Gov-
ernors v. Invcstment Co. Inst., 49 U.S.L.W. 41 61 n.24 (1981). ("We agree
with the Court of Appeals that Sections 16 and 21 apply only to banks and
not to bank holding companies.")
n2 12 U.S.C. I 1843(c) ( 8 ) (1976).
Rs49 U.S.L.W. 4161 (1981).
"Even i f we were to assume that a bank would violate the Clnss-
* Steagall Act by engaging in certain investment advisory services, it would
5 6-35 OVERVIEW
T h e Court reviewed the legislative history of the Bank Holding
Company Act a n d concluded that Congress did not intend that Section
4 ( c ) ( 8 ) of the A c t should be read "[als totally prohibiting Bank
Holding Companies from being 'engaged' in a n y securities-related activi-
tics;. . ." R" T h e C o u r t thcn concluded that thc Board had thc discrc-
tion to dctcrminc, in light o f its cxpcrtise, what sccuritics-rclatcd activ-
ities are closely related to banking and, thus, permitted under Section
4(c) (8).
5 6-35 BANK IIOLDING COMPANIES AND
COMPETITION IN BANKING
T h e Board o f Governors of the Federal Reserve System must
approve any action that creates a b a n k holding company, makes a bank
a subsidiary of a b a n k holding company, results in a bank holding com-
pany acquiring control o f more than 5 percent of the voting shares of
any bank, permits a b a n k holding company o r subsidiary t o acquire
substantially all of the assets of a bank, o r allows a bank holding com-
pany to merge o r consolidate with a n y othcr bank holding company.R0
I n passing upon such proposals, the Board is required to considcr both
competitive factors a n d banking factors. T h e Board cannot approve
a n y acquisition that would result in a monopoly o r whose effect may b e
t o substantially lessen c ~ m p e t i t i o n . ~ I' n addition, Congress has directcd
the Board to take into consideration, in evcry casc, thc "financial and
not follow that a bank holding company could never perform such services.
In both the Glass-Steagall Act itself and in the Bank Holding Company Act.
Congress indicated thnt n bank nfliliatc may cngagc in nctivitics thnt w o ~ ~ l d
bc impermissible for the bank itsclf. Thus, 5 21 of Glass-Steagall entirely
prohibits the same firm from engaging in banking and in the trndcnvrifing
business, whereas 5 20 does not prohibit bank alliliation with a sect~riticsfirm
unless that firm is "engaged principally" in activities such as undcnvriting.
Further, 5 4 ( c ) ( 7 ) of the Bank Holding Company Act, which authorizes
holding companies to purchase and own shares of investment companies,
permits investment activity by a holding company that is impermissible for
a bank itself. Finally, inasmuch as the Bank Holding Company Act requires
divestment only of the bank's non-banking interests, the 5 4(c) ( 8 ) exception
would be unnecessary if it applied only to services that a bank could legally
perform. Thus, even if the Glass-Steagall Act did prohibit banks from acting
as investment advisors, that prohibition would not necessarily preclude the
Board from determining that such advisory sewices would be permissible
."
under 5 4 ( c ) ( 8 )
Id. at 4165-4166.
Id. at 41 67.
12 U.S.C. 5 1842(a) (Supp. I11 1979).
12 U.S.C. 5 1842(c) (1976).
DANK H O L D I N G C O M P A N I E S
managerial resources and future prospects of thc company o r companies
and the banks concerned, and the convenience and needs of the com-
rnututy to be served." 88
T h e Board's discrction under these provisions has bccn tcstcd in a
scrics of cascs. The Board has clainicd that its powcr to considcr the
"convcnicncc and nccds of the community" givcs it a broad discrction
to disapprove proposals on grounds that competition would b e adversely
affected. Its position has been rejected by several courts, however. In
Mercantile Texas Corp. v . Board of governor^,^^ the court held that
the Board could not apply a more stringent standard to bank mergers
and consolidations under thc Bank Holding Company Act than the
standard ordinarily governing under the antitrust laws. T h e direction by
Congress to the Board t o consider banking factors in passing u p o n
acquisition proposals, in the court's view, was intended to include con-
siderations such as
"the general availability o f banking services, their adequacy f o r the
economic needs of the community, the geographical location of
banking facilities and all of the other indicia by which it c a n b e
dctermined that, notwithstanding anti-competitive effect, there is a
real social and economic necessity for additional banking service."
It was not intended to give the Board authority to consider additional
"undefincd anti-competitive factors." T h e Ninth Circuit h a s also
agreed with this position.02
88 Id. (emphasis added).
80 638 F.2d 1255 (5th Cir. 1981).
no Id. at 1262.
"1 Id.
O 2 Washington Mult~nlSav. v. FDIC, 482 F.2d 459 (9th Cir. 1973).
Scc generally, Austin, "The Evolution of Commercial Bank Merger Antitrust
Law," 36 Bus. Law. 297, 315 (1981).
 Chapter 7
SAVINGS INSTITUTIONS

Snvirlgs Institutions Ccncrnlly . . . . . . . . . . . . . . . . . . . . .

Savings and Loan Associations . . . . . . . . . . . . . . . . . . .
Regulation of Savings and Loan Associations . . . . . . . .
T h e Federal Home Loan Bank System . . . . . . . . . . . . . .
T h e Federal Homc Loan Bank Board . . . . . . . . . . . . . .
Federal Home Loan Banks . . . . . . . . . . . . . . . . . . . . . .
Member Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Federal Savings and Loan System . . . . . . . . . . . . . .
Powers of Federal Savings and Loan Associations . . . .
Federal Savings and Loan Insurance Corporation . . . . .
Changes in Control of Insured Savings Institutions . . . .
Savings and Loan Holding Companies . . . . . . . . . . . . .
Credit Unions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Federal Credit Union System . . . . . . . . . . . . . . . . .
Federal Credit Unions . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit Union Share Insurance . . . . . . . . . . . . . . . . . . . .
Central Liquidity Facility . . . . . . . . . . . . . . . . . . . . . . . .
Savings Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expansion of Savings Institutions Into
Commercial Banking Functions . . . . . . . . . . . . . . . . . . .

SAVINGS INSTITUTIONS GENERALLY

Thcre are diffcrcnt typcs of savings institutions . Of thcse. savings
and loan associations. credit unions. and savings banks are the most
common . These institutions may be chartered under state o r federal
law. and they are regulated by both state and federal agencies .
At one time. thesc savings institutions were strictly limited by their
cliar~ersand applicnblc law ns to tlic typcs of deposits thcy could accept
and in the types of loans and invcstmcnts they could make . These legal
* restrictions prevented savings and loan associations and other thrift
institutions from compcting with banks in the performance of conmer-
 8 7-10 OVERVIEW
cia1 banking activities. F o r example, savings institutions would not
allow their customers to draw checks against their accounts.
With the enactment of the Depository Institutions Deregulation and
Monetary Control Act of 1980,' savings institutions have been author-
ized to engage in a wider range of activities that permit them to compete
more directly with commercial banks. As a result, many savings institu-
tions now engage in activities that formerly only commercial banks
could provide. One area of commercial banking activity opened by thc
1980 Act is the provision of checking privileges to the customers of
the savings institution^.^ Thus, savings institutions will be subject to the
commercial law pertaining to the payment and collection of checks,
drafts, and other forms of commercial paper, including regulations gov-
erning the new electronic funds transfer systems that are described in
later chapters of this book.8
8 7-10 SAVINGS A N D LOAN ASSOCIATIONS
Savings and loan associations are institutions that were developed
to promote thrift and provide home financing for their members. The
major impetus behind the establishment of these institutions was the
inability of commercial banks to meet the increasing consumer demand
for home financing. These institutions are sometimes also known as
savings associations, building and loan associations, homcstead associa-
tions, and by similar names. Thc earliest savings and loan association
in the United States, one authority reports, was the Oxford Provident
Building Association of Philadelphia, which was organized in 183 1.
This association was patterned aftcr thc English Building Socicty, which
consistcd of a voluntary association of members who pooled savings in
order to create a fund for home loans to the m e r n b e ~ s . ~
Savings and loan associations may be chartered under state law or
under the provisions of federal law. There are two forms of organiza-
tion: the mutual association and the stock association. In thc mutual
form of organization, the voting rights and control of thc association
reside in the depositors and borrowers of the association. Thus, in a
technical sense, the accounts created in a mutual association are not
deposits but are shareholder accounts on which dividends, as opposed
1 94 Slat. 132 (codified in scattered sections of 12, 15 U.S.C.A. (West
Supp. 1980)).
See 5 7-95.
a See Chapter 26.
4 See Munn, Encyclopedia of Banking and Finance 661 (1962).
rC
SAVINGS INSTITUTIONS b-1 5
to interest, are paid. For most practical purposes, however, this charac-
terization makes little difference, since the accounts are eligible for in-
s u r a n c e . V n the stock form of organization, the association is controlled
by its stockholders as in the typical stock corporation.
Federal savings and loan associations may organize either as mu-
tual associations or as stock a~sociations.~Federal law provides that
"holders of savings accounts and obligors of an association shall, to such
extent as may bc provided by its charter o r by regulations of the board,
bc membcrs of the association, and shall have such voting rights and
such other rights as arc thereby provided." ' Under regulations of the
Fcderal Homc Loan Bank Board (the Board), the holders of savings
accounts and borrowers from the association have voting righk8 They
may, however, give proxies to the directors of the as~ociation.~The
Board's regulations also permit associations to organize as deposit
associations, which are similar to the mutual form of organization in
that borrowers and the holders of savings accounts have voting rights.1°
Federal mutual associations may convert to stock organizations."
Although Congress temporarily suspended the authority of the Board
to approve conversions from the mutual to the stock form of ownership,
this limitation expired on June 30, 1976.12
5 7-15 REGULATION O F SAVINGS AND
LOAN ASSOCIATIONS
Savings and loan associations may bc chartered under federal law
or state law. Federal institutions are all insured by the Federal Savings
and Loan Insurance Corporation (FSLIC),l"hcrcas stntc institutions
may elect to be so insurcd.14 Therc is also a Federal Homc Loan Bank
System, which is comparable to the Federal Reserve System, under the
6 Id.
12 C.F.R. Pts. 552, 556 ( 1980).
12 U.S.C.5 1464(b) ( I ) (Supp. 111 1979).
12 C.F.R. 1544.1(a) ( 1980) (no. 4 of Charter N ) .
Id.
lo 12 C.F.R. 6 577.1 (1980) ( 5 6 of Charter B).
l1 12 U.S.C. 5 l725(J) (1) 1976; 12 C.F.R. 5 552.2 (1980). However,
"an association which was formerly organized as a savings bank under state
law may not convert from the mutual to the stock form of ownership." 12
U.S.C. 1464(n) (Supp. 111 1979) (footnotes ornittcd).
12Sec 12 U.S.C. 8 1725(j)(1): York v. Fcdcrnl Homc Loan Bonk Bd.,
624 F.2d 495 (4th Cir. 1980), ccrt. denied 101 S. Ct. 621 (1980).
See 8 7-50.
l 4 See 5 7-50.
5 7-20 OVERVIEW
supervision of the Board and twelve regional federal home loan banks.16
All federal savings banks and savings and loan associations must be
members of the federal home bank system. State institutions may elect
to become members of the system if they meet the requirements estab-
lished by the Act and regulations of the board.
8 7-20 THE FEDERAL HOME LOAN BANK SYSTEM
The Federal Home Loan Bank System was created to provide
credit reserves for institutions that engage in home financing and savings.
The system is patterned after the Federal Reserve System. It consists of
the Board, which is an independent executive agency, and which admin-
isters the system.18 It also contains twelve regional fcderal home loan
banks.17 These banks are located in Boston, New York, Pittsburg, Cin-
cinnati, Indianapolis, Atlanta, Chicago, Des Moines, Little Rock, To-
peka, San Francisco, and Seattle. The federal home loan banks, in turn,
are owncd by the institutions that arc members of the system. Member
institutions may include any building and loan association, savings and
loan association, cooperative bank, homestead association, insurance
company, or savings bank which satisfies the eligibility requirernent~.'~
State-chartered institutions may also become members of the system.'@
All federally chartered savings and loan associations must become
member~.~O
5 7-25
THE FEDERAL HOME LOAN BANK BOARD
The Federal Home Loan Bank Board is an independent agency in
the executive branch of the federal g o ~ e r n m e n t .There
~ ~ are three mem-
bers on the Board who are appointed by the President with the advice
and consent of the Senate. No more than two of the members may be
from the same political party. The administrative functions of the Board
are vested in the chairman.22
The Board has authority to supervise the twelve regional fcderal
l5 See § 7-20.
12 U.S.C. 5 1437(b) (1976).
l 7 12 U.S.C. 5 1423 (1976).
l a 12 U.S.C. § 1424(;) (1976).
l o Id.
20 12 U.S.C. 5 1464(f) (1976).
21 12 U.S.C. § 1437(b) (1976).
" 12 C.F.R. 8 500.10 ( 1980). Scc also Rcorgnnization Plnn No. 6 of
1961, 75 Stat. 838.
SAVINGS INSTITUTIONS 30
home loan banksz3 It may adopt rulcs and regulations to execute its
policy, and it can suspend or remove any director, officer, or employee
of any Federal Home Loan The Board finances its expenses
through assessments of thc federal homc loan banks.25
The Board also regulates the activities of thc FSLIC.20 This func-
tion of insuring eligible institutions gives the Board additional super-
visory authority over savings institution^,^^ which it would not otherwise
have. This additional authority not only extends to member insured
institutions, but to nonmember insurcd institutions as well.
$7-30 FEDERAL IIOME LOAN BANKS
There are twclvc regional fcdcrnl homc loan banks.2R The Board
creates the districts in which the federal home loan banks operate, and
it may revise the district boundaries as n ~ e d e d .The
~ ~ capital stock in
the fcdcral homc loan banks is owncd by the mcmbcr savings nnd loan
institutions, which arc rcquircd to subscribc for a minimutll amount as
a condition of mcn~bersliip.~"A board of dircctors managcs cach fcd-
era1 home loan bank, which consists of fourtccn directors, eight of whom
are elected by the members of the Federal Home Loan Bank System and
six of whom are appointed by the B ~ a r d . ~In' large districts, the Board
may adopt regulations increasing the number of The elected
directors are designated as rcprescntativcs of a particular state. Each
position must bc filled by persons who are officers or directors of a
member institution located in that state.33 Elccted directors serve two-
year terms and appointed directors serve four-year terms.34 The Board
designates the chairman and vice-chairman from among the director^.^^
T h e federal home loan banks scrvc as depositories for the member
institutions.38 They may hold rcscrves of the member institutions that
28 12U.S.C. 1437(a) ( 1976). Scc also 12 C.F.R. 500.2 (1980).
2' 12U.S.C. 5 1437(a) (3976).
Zn 12U.S.C. 5 1438(b) (1976).
28 12U.S.C. 5 1725(a) (1976).
2' See 5 7-45.
2BSce 3 CCH Fed. Banking L. Rep. 1902.
2~ 12 U.S.C. .G 1423 (1976).
80 12 U.S.C. $ l42Sb(c) ( I ) (1976).
8 1 12 U.S.C. 5 1427(a) (1.976).
82 Id.
" 12 U.S.C. 5 1427(b) (1976).
3412 U.S.C. 5 1427(d) (1976).
I2 U.S.C. Q 1427(g) ( 1 9 7 6 ) .
* ~012U.S.C.§1425a(b)(197G).
5 7-35 OVERVIEW
are required for liquidity purposes.nT Thc fcderal homc loan banks are
authorized to make advances to their members on the security of home
mortgages o r obligations issued o r guaranteed by the United States sub-
ject to regulations of the Board.88 Under certain conditions federal home
loan banks may make advances to nonmember institutions who engage
in mortgage lending.8v The federal home loan banks also may assist in
the collection and settlement of checks, drafts, and other payment instru-
m e n t ~ . ' ~The banks are subject to reserve requirements based on the
amount of the current deposits of its members and its nct earning^.^'
The federal home loan banks may borrow money and issue bonds and
other obligations upon thc terms and conditions sct by the B ~ a r d . ' ~
$7-35 MEMBER INSTITUTIONS
Membership in the Federal Home Loan Bank System is open to
any building and loan association, savings and loan association, cooper-
ative bank, homestead association, insurancc company, o r savings bank
that meets the eligibility requirement^.'^ T h e institutions must be subject
to the banking regulatory laws of its jurisdiction and must make long-
term home mortgage loans. The institution is not eligible for member-
ship if in the judgment of the Board its financial condition is such that
"advanccs may not safcly bc rnadc," or the "charactcr of its manngc-
ment o r its homc financing policy is inconsistent with sound, economical
homc financing." 4 4 Fcdcrally chartered associations must become mcm-
bers. See $ 7-40.
Membership in the System carries certain obligations. NO institu-
tion may be retained in membership if it charges homeowners interest
and other fees that excced the lawful contract rate of in~crest.'~This
provision, howcvcr, has bccn held not to crcatc a private causc of ac-
t i ~ n . ' ~Members must also meet liquidity requirements established by
Id. See also 5 2-50, which describes the reserve requirements of in-
stitutions that have transaction accounts.
a8 12 U.S.C. 5 1430 (1976 & Supp. 111 1979).
89 12 U.S.C. 5 1430b (1976 & Supp. 111 1979).
12 U.S.C. 5 1431(c) (1976).
12 U.S.C. 5 5 1431(g), 1436 (1976).
42 12 U.S.C. 8 1431(a) (1976).
12 U.S.C. 6 1424 (1976).
4 4 12 U.S.C. 5 1424(a) (1976).
12 U.S.C. 5 1425 ( 1976). See Chapter 17 on usury.
4aGoldstone v. Southshore Fed. Sav. & Loan Ass'n, 402 F. Supp. 1291
(E.D.N.Y. 1975); Cooper v. Baldwin-Belmore Fed. Sav. & Loan Ass'n, 390
F. Supp. 874 (E.D.N.Y. 1975); Chevalier v. Baird Sav. Ass'n, 371 F. Supp.
1282 (E.D. Pem. 1974).
124
SAVINGS INSTITUTIONS 7-40
the Board." They will be subjcct to the regulations of the Board con-
ceming the rates of interest and dividends that may be paid on deposits
and the manner in which interest and dividends may be adverti~ed.'~
(The powers of the Board to set liquidity requirements and regulate
rates of interest and dividends extend to insured savings institutions as
well.)4v Member institutions are also subject to federal requirements
prohibiting d i s c r i r n i n a t i ~ n . ~ ~
5 7 4 0 TIIE FEDERAL SAVINGS AND LOAN SYSTEM
The Board may approve charters for federal savings and loan as-
sociation~.~'To be entitled to a charter, the applicants must be persons
of good character and responsibility. The Board must determine that "a
necessity exists for such an institution in the community to be served,"
that thcrc is a "rcasonablc probability of its usefulness and success,"
' and that the association "can be established without undue injury to
properly conducted existing local thrift and home financing institu-
tions." 62 Upon incorporation as a federal association, the association
automatically becomes a member of the federal home loan bank of the
district in which it is located.63 As indicated in 5 7-10, the association
may o r g a n i z ns cithcr a mutual form of association or as a stock form
of association.
The Board cxan~incsand supervises the operation of fcderal savings
and loan a s s ~ c i a t i o n s . ~The
~ Board has broad-ranging powers, com-
parable to those of the fedcral banking regulatory agencies. It may ob-
tain cease and desist orders to prevent "unsafe and unsound practices"
in conducting the business of an association or to prevent violations of
law, rulc, rcgulation, o r c l ~ a r t c r .Whcn
~ ~ thc conduct of an association
threatens to seriously weaken its own financial integrity, the Board may
exercise emergency powers to issue cease and desist orders that will
becomc effective prior to a hearing." The Board may also remove di-
rectors and oficcrs for violation of its regulations or for any breach of
12 U.S.C. 6 1425a (1976).
48 12 U.S.C. 5 1425b (1976 & Supp. 111 1979).
4" 12 U.S.C. 81 1425a. 142% ( 1976 & Supp. I11 1979)
O c 12 C.F.R.Pt. 528 ( 1980).
61 12 U.S.C.A. 5 l464(a) ( I ) (West 1980).
6 2 12 U.S.C. 5 1464(e) (1976).
a3 12 U.S.C. 5 1464(f) (1976).
5' 12 U.S.C.A. 5 I 4 6 4 ( a ) ( l ) (West 1980).
n5 12 U.S.C. 5 1464(d)(2) (Supp. I11 1979).
" 12 U.S.C. 5 1464(d)(3) (Supp. 111 1979).
5 7-45 OVERVIEW
fiduciary duty." The Board has the exclusive power to appoint a con-
servator or receiver for an association when it becomes insolvent, when
there is a substantial dissipation of assets due to unsafe o r unsound
practices, when the association is in an "unsafe or unsound condition to
transact business," when there is a willful violation of a cease and desist
order, or when there is a concealment of records or refusal to submit
records to the Board for examination." If the Board believes that there
is reason to appoint a receiver, the Board may make such appointment
"ex parte and without noticc."
Federal savings and loan associations are automatically covered by
insurance provided by the Federal Savings and Loan Insurance Corpo-
ration.OO Thus, all federal savings and loan associations are subject to
the additional powers given the Federal Home Loan Bank Board to
regulate insured institutions.al
State savings and loan institutions and state savings banks may
convert into federal savings and loan associations under rules estab-
lished by the Board.02 Federal savings and loan associations may like-
wise convert into state-chartered institution^.^^
7-45 POWERS OF FEDERAL SAVINGS
AND LOAN ASSOCIATIONS
Savings and loan associations originally were created to encourage
the accumulation OF personal savings and the financing of homes. In
recent years, the powers of savings and loan associations have expanded
to include authority to engage in transactions formerly reserved to com-
mercial banks. The Depository Institution Deregulation and Monetary
Control Act of 1980 was a key factor in enlarging thc authority of sav-
ings and loan associations as discussed in $ 7-95. Briefly, federal
savings and loan associations may exercise the following powers:
(1) Accept deposits and share accounts as authorized by the
B~ard.~'
67 12 U.S.C. 5 l464(d) (4) (A) (Supp. 111 1979).
68 12 U.S.C. § 1464(6) (A) (1976).
Id.
O0 12 U.S.C. 1 1726(a) (Supp. 111 1979).
See 5 7-25.
O2 12 U.S.C.A. 8 1464(i) (West 1980).
oa Id,
12 U.S.C.A. 8 l464(b) (1) (West 1980).
126
SAVINGS INSTITUTIONS 5 7-50
( 2 ) Borrow money and issue obligations as the Board may au-
thorize.05
( 3 ) Borrow money from state mortgage finance agencies as au-
thorized by the Board.Oa
( 4 ) Issue credit cards and engage in credit card operation^.^^
( 5 ) Act as depositories of public money of the United States and
as fiscal agent of the government for providing services in
conncction with thc collection of taxes nnd other obligations
owed the United States.a9
(6) Act as trustce of trusts organized for pension or profit-sharing
plans or individual retirement accounts that qualify.BB
( 7 ) Establish trust departments when consistent with state law
regulating state banks and trust companies. When an associa-
tion cstablishcs a trust department it is subjcct to special
rccord-keeping rcquirenlcnts and must segregate the assets
that are held in trust.;O Persons who arc the beneficial owners
of the trust assets have a separate lien on those segregated
assets to the extent of their account."
( 8 ) Make investments in state housing authorities subject to the
regulations of the FSLIC.12
( 9 ) Make such loans and investnlents as permitted by statute,
subject to the regulations of the Board.73
0 7-50 FEDERAL SAVINGS AND LOAN
INSURANCE CORPORATION
The Federal Savings and Loan Insurance Corporation (FSLIC) is
an instrumentality of the United States and has its principal office in the
District of Columbia. Its purpose is to insure the accounts of eligible
savings institutions. The Board has the statutory authority to direct and
operate the FSLIC."
B6 12 U.S.C. 5 l464(b)(2) (1976).
12 U.S.C. 8 l464(b) ( 3 ) (Supp. 111 1979).
O7 12 U.S.C.A. 1464(b) (4) (West 1980).
12 U.S.C. 5 1464(k) ( S ~ p p 111
. 1979).
O0 12 U.S.C. 5 1464(1) (Supp. I11 1979).
12 U.S.C.A. 5 1464(n) (West 1980).
12 U.S.C.A. 5 1464(n) ( 5 ) (West 1980).
12 U.S.C. $ 5 1469, 1470 ( 1976).
* la 12 U.S.C.A. 5 1464(c) (West 1980).
7 4 12 U.S.C. 5 1725(a) (1976).
g 7-50 OVERVIEW
The FSLIC insures the accounts of all federal associations and fed-
eral mutual savings banks. It also may insure the accounts of state
associations, building and loan societies, and cooperative banks that
meet the eligibility requirements.l"e F S L l d may refuse to accept an
application if it finds that the management of the applicant o r its financ-
ing policies arc "inconsistent with economical home financing" or with
the purposes of the federal savings and loan insurance legislation. It
must reject any application if it finds that "the capital of the applicant is
impaired or that its financial policies of management are unsafe." ' T h e
FSLIC also has the power to make adjustments to the financial state-
ments of applicants as it finds necessary. When an application is ac-
cepted, the applicant agrees to allow the FSLIC to conduct examinations
as it deems necessary, to pay the expense of those examinations, and to
make available information as the FSLIC may require.l1 The power to
examine insured institutions extends to affiliates of those institutions.18
In making examinations, the FSLIC can take testimony under oath and
issue subpoenas.79
Accounts that may be insured by the FSLIC include share, certifi-
cate, or deposit accounts as approved by the FSLIC.80 The amount of
insurance available has increased over time until now accounts may bc
insured up to an aggregate amount of $100,000 for any one mcmbcr or
i n v e ~ t o r . ~ Individuals,
' partnerships, associations, incorporations, and
governmental bodics are all eligible for the i n s u r a n ~ e . ~ ~
The FSLIC has the authority to establish reserves for its insuring
a c t i v i t i e ~ .Each
~ ~ institution that is insured by the FSLIC is assessed a
premium for insurance that initially is equal to one-twelfth of one per-
cent of the total amount of all the insured accounts of the institution.
This premium is then subject to adjustment by a statutory formula.84
The FSLIC may make further assessment against thc insured institutions
when ncccssary to pay losses and expenses up to onc-eighth of one
percent of the total accounts of the insured members.B6 The Board can
also require the insured institutions to place deposits with the FSLIC.86
12 U.S.C. 5 1726(a) (Supp. I11 1979).
7a 12 U.S.C. 8 1726(c) (1976).
77 12 U.S.C. 5 1726(b) (1976).
12 U.S.C. 5 1 7 3 0 ( m ) ( l ) (1976).
le 12 U.S.C. 5 1730(m) (2) (1976).
80 12 U.S.C. 5 1724(c) (1976).
12 U.S.C.A. 5 1728(a) (West 1980).
82 12 U.S.C.A. $ 5 1728(a), 1728(d) (West 1980).
8a 12 U.S.C. 9 1727 (1976).
84 12 U.S.C. 5 1727(b) (1976).
.L
12 U.S.C. 5 1727(c) (1976).
12 U.S.C. 8 1727(h) (1976).
SAVINGS INSTITUTIONS 5 7-50
T h e Board has regulatory responsibility over the insured institu-
tions. The power to conduct examinations has already been mentioned.
In addition, an insured institution must agree to limit its lending to an
arca of onc hundred milcs from its principal office except as otherwise
providcd by regulation of thc FSLICR7 Thc FSLIC regulatcs securities
issued by thc insured institution,BB and the sales, plans and practices, and
any advertising of the insured institutions.89 The FSLIC may require
the maintenance of such reserves as it deems necessary before any divi-
dends may be paid by the institution.OO
The Federal Savings and Loan Insurance Corporation has further
regulatory powers that stem from its ability to terminate the insured
status of the association when a proper ground for doing so exists.Q1
The grounds for termination are broad. The FSLIC may terminate in-
surance whenever an institution is engaged in an "unsafe or unsound
practice" or there is any violation of law o r the FSLIC's r ~ g u l a t i o n s . ~ ~
The FSLIC's powers in this respect are comparable to those of the Fed-
eral Deposit Insurance Corporation with respect to insured banks.B3
The FSLIC also has powers, like those afforded to the bank regu-
latory agencies, to issue cease and desist orders when institutions engage
in unsafc or unsound practices or violatc any law or rcg~lation.~'When
the conduct of thc institution is a scrious thrcat to thc condition of thc
institution, thc ceasc and dcsist ordcr may bccomc inlmcdiatcly effective
pcnding a l a k r hearing." TThc FSLIC may nlso rcniove dircctors and
oflicers when they participate in any unsafe or unsound practice or
breach their fiduciary duties.De
In thc event that it becomes necessary to liquidate an insured in-
stitution, thc FSLIC may act as a receivcr or assist in the orderly dis-
solution o r rcorganization of the association. The FSLIC is the statu-
tory dcsignatcd rcccivcr for all fcdcral saving and loan associations that
arc in dcfault.07 As rcccivcr, i t may takc ovcr thc assets of thc associa-
tion, take such action as niay be ncccssary to put it in a sound con-
dition, merge it with anothcr insurcd institution, organize a new federal
81 12 U.S.C.A. 5 1726(b) (West 1980).
88 Id.
80 Id.
80 Id.
91 12 U.S.C. 5 1730 (1976 & S ~ p p 111
. 1979).
n2 12 U.S.C. 5 l73O(b) ( I ) (1976).
93 See 5 3-35.
94 12 U.S.C. 8 1730(e) (Supp. 111 1979). See 5 4-15.
DV2 U.S.C. 5 1730(f) (Supp. I11 1979).
06 12 U.S.C. 5 1730(g) (Supp I11 1979).
07 12 U.S.C. 5 1729(b) (1976).
§ 7-50 OVERVIEW
association to take over its assets, or proceed to liquidate its assets.98
When the insured institution is not a federally chartered institution, the
FSLIC may, under the statute, act as a receiver upon appointment by
a court or other public a u t h ~ r i t y . If~ ~the FSLIC is appointed, it has
the same powers to deal with the insured institution as it does with re-
spect to federal association^.^^^ The FSLIC may exercise broad powers
to prevent default or to restorc institutions to normal o p ~ r a t i o n s . It~ ~ ~
may make loans, encourage mergers or consolidations, agree to assume
liabilities, purchase assets, and make contributions in order to rescue
endangered institutions.1°2
Insured institutions may not participate in lotteries.10n They must
observe record retention regulations established by the Secretary of the
Treasury that are similar to the requirements that exist for banks in
reporting currency transactions.lo4 Whenever a mortgage loan is made,
the identity of persons who receive the beneficial interest in the loan
must be known to the in~titution.~OJ
Accounts insured by the Federal Savings and Loan Insurance Cor- -
poration constitute lawful investments of the United States.lo6
As a result of the Depository Institutions Deregulation and Mone-
tary Control Act of 1980, insured savings institutions have expanded
powers. They may open NOW (negotiable order of withdrawal) ac-
counts, which allow depositors to draw checks against their deposit^.'^'
(See $0 7-95 and 19-20 for a discussion of NOW accounts.) Federal
savings and loan associations may operate remote service units for the
purpose of "crediting savings accounts, debiting such accounts, crediting
payments on loans, and disposition of related financial transaction^.'^^
Insured savings and loan associations have the benefit of the fed-
eral preemption of state usury regulations, which is discussed in Chap-
ter 17. Insured institutions are allowed to charge intercst on "any note,
bill of exchange, or other evidence of debt," interest at a rate of not
more than one percent over the ninety-day rate for discounting com-
0' Id.
o n 12 U.S.C. 4 1729(c) (1976).
'on Id.
l o l 12 U.S.C. !j 1729(f) (Supp. I11 1979).
102 Id.
lo3 12 U.S.C. 5 1730c (1976).
lo4 12 U.S.C. 5 1730d (1976). See 5 4-55.
I o n I2 U.S.C. 8 1730f (1976).
loB 12 U.S.C. § 1730b (1976).
lo7 12 U.S.C.A. $ 1832 ,(West Supp. 1981 ). See $ 5 7-95 and 19-20.
lo8 12 U.S.C.A. 5 l464(b) (1) (West 1980).
SAVINGS INSTITUTIONS 3 1-60
mercial paper at the Federal Reserve Bank of the district where the insti-
tution is located.lm
5 7-55 CHANGES IN CONTROL OF INSURED
SAVINGS INSTITUTIONS
The Federal Savings and Loan Insurance Corporation must be
notified in advance before there is any change in control of an insured
savings institution through purchase, assignment, transfer, pledge, or
other disposition of voting stock of the institution.l1° Control is defined
as the power "directly or indirectly to direct the management or pol-
icies" of the institution or to vote 25 percent or more of any class of
voting stock.lll If the FSLIC issues a notice of disapproval of the pro-
posed change, the acquiring party may request a hearingn2 The person
proposing to acquire the institution in giving notice of this proposal to
the FSLIC must also supply information relating to the background
of the individuals acquiring control, financial information, the terms of
the proposed acquisition, and other information the FSLIC may
request.lIa
The FSLIC may disapprove any proposed acquisition because of
its effects on competition, because the financial stability of the institu-
tion might be jeopardized, or because of failure to furnish information
to the FSLIC.l14 Willful violation of any of these requirements o r regu-
lations adopted by the FSLIC will subject the offender to a civil penalty
of up to $10,000 per day for each day during which the violation
continues.115
5 7 - 6 0 SAVINGS AND LOAN HOLDING COMPANIES
Savings and loan holding companies, like bank holding companies,
are subject to regulation. Thcy must rcgister with the FSLIC and pro-
vide such information as the FSLIC dcems n c ~ c s s n r y . ~Thcy
' ~ must file
Icm 12 U.S.C.A. 5 1730g(a) (West 1980).
11° 12 U.S.C. 0 1730(q) ( I ) (Supp. 111 1979).
12 U.S.C. !j l73O(a) ( 8 ) (8)(Supp. 111 1979)
1 1 V 2U.S.C. 5 l73O(q) (4) (Supp. 111 1979).
12 U.S.C. $ 1730(q) ( 6 ) (Supp. I11 1979).
I l 4 12 U.S.C. $ l73O(q) (7) (Supp. I11 1979).
116 12 U.S.C. $ l73O(q) (1 6) (Supp. 111 1979).
ri. 116 12 U.S.C. I 1730a(b) (1) (1976).
 i
5 7-40 OVERVIEW
reports with the FSLIC, maintain such records as it may prescribe, and
submit such examinations as the FSLIC deems appropriate.ll'
Holding companies are limited in their ability to acquire control or
merge with other insured or uninsured institutions. Before doing so,
holding companies must obtain prior approval from the FSLIC.l18 The
FSLIC is directed not to approve of any acquisition that would result in a
monopoly or have other serious anticompetitive effects that are not out-
weighed by other public interest consideration^.^^^ Further, the FSLIC
cannot approve acquisitions that would result in the formation of a hold-
ing company that controls insured institutions in more than one state.lZ0
The activities of holding companies are limited. They may not en-
gage in any activity that has thc purpose or cflcct of "evading" the laws
applicable to thc insured institutions they hold.Iz1 Holding companics
that hold more than one insured institution are limited to the following
business activities:
( 1 ) Furnishing management service for its subsidiary insured
institutions;
( 2 ) Conducting an insurance agency o r escrow business;
( 3 ) Managing or liquidating assets owned or acquired from its
subsidiary insured institutions;
( 4 ) Managing or holding propertics used by its subsidiary in-
stitutions;
( 5 ) Acting as a trustee under a deed of trust; or
(6) Furnishing such other services as the FSLIC may approve "as
being a proper incident to the operations of insured institu-
tions and not detrimental to the interests of saving account
holders therein." lZ2
The insured institutions that are subsidiaries of the savings and loan
holding companics arc also subjcct to special prohibitions.lZ3 Thcy may
not invest in the securities or obligations of any affiliate. They may not
engage in transactions with affiliates that involve certain extensions of
credit, purchase of securities, use of securities of the affiliate as collat-
eral, or guarantees of the affiliate's debt.12'
* 131
SAVINGS INSTITUTIONS 3 7-70
The FSLIC is authorized to issue rules and regulations in adminis-
tering its responsibilities with respect to savings and loan holding com-
p a n i e ~ . ' ~ Vmay
t conduct investigations, take testimony undcr oath,
issue subpoenas, and compel the attendance of witnesses in order to
carry out its investigatory r e s p o n s i b i l i t i ~ s . ~ ~ ~
§ 7-65 CREDIT UNIONS
Credit unions are cooperativc financial institutions that are orga-
nized by groups of persons who usually are interested in saving small
an~ountson a regular basis in order to have access to installment crcdit
made possible by their pooled savings. Quite often credit unions are
organized among pcrsons with some common bond of association, such
as common employment. In fact, it is a requirement to the establishment
of a federal credit union that the membership "be limited to groups
having a common bond of occupation or association, or to groups within
a well-defined neighborhood, community or rural district." 12'
Credit unions niay be organized undcr the laws of most states and
by federal law. Credit unions have been traced back as early as 1848
in Germany,12Rbut authority to establish federal credit unions did not
exist in the U.S. until 1934.12"Fcdcral crcdit unions originally wcrc
established as part of the Farm Crcdit System, but the Federal Credit
Union System is now administcred by a National Credit Union Admin-
istration, which is an independent agency in the executive branch of the
government.130
§ 7-70 T I I E FEDERAL CREDIT UNION SYSTEM
The structure of the federal regulatory system for credit unions
rcsemblcs that eslablishcd for banks and savings and loan associations.
There is a National Credit Union Administration that is an independent
agency in the executive dcpartment of the government. This administra-
tion is managed by the National Credit Union Administration Board.lsl
The Board has the authority to charter federal credit unions,132 and it
lZ6 12 U.S.C. § 1730a(h)(l) (1976).
Ize 12 U.S.C. 8 l73Oa(h) ( 2 ) (1976).
12 U.S.C.A. 1759 (West 1980).
l Z 8 Munn, ~ n c ~ c l o ~ e d i a~' ao n
f k i r ~ g aFinance
t~d 172 (1962).
12@Id.
I3O 12 U.S.C.A. 5 1752a(a) (West 1980).
12 U.S.C. 1752a(a) (Supp. I11 1979).
132 12 U.S.C. 1754 (Supp I11 1979).
5 7-75 OVERVIEW
conducts examinations and exercises general regulatory authority over
the federal credit unions.ln3
There is a system of share insurance for all federal credit unions
and eligible state credit unions,Ia4 T h e Board administers the insurance
program and has substantial regulatory powers over insured credit
unions.
T o assist in assuring the liquidity of credit unions, the National
Crcdit Union Liquidity Facility was crcatcd, which may make seasonal or
short-term credit available to its member credit unions as nceded.la6
Both state and federal credit unions may become members in the Cen-
tral Liquidity Facility. Thc Facility, through the Board, regulates cer-
tain activities as an incident to its credit extension functions.1ab More-
over, the Facility is authorized to act as a clearing house and t o assist
in the collection and settlement of checks and other payment instruments
drawn on o r issued by its members.187
The National Credit Union Administration Board, which adminis-
ters the fedcral credit union system, consists of three members appointcd
by the Prcsidcnt with the advice and consent of the Scnatc. No morc
than two members of the Board may be members of the same political
party.Iaa The President designates the T h e term of each
member is six years.140 Board members may not succeed themselves.
5 7-75 FEDERAL CREDIT UNIONS
A federal credit union may be organized by seven o r more natural
persons.141 The National Credit Union Administration Board must ap-
prove the organization of the credit union.142 Before approving thc
application, it must consider the "general character and fitness of the
subscriber" and the "economic advisability" of establishing the credit
union.143 Membership in the credit union consists of the original incor-
porators and those subsequently elected to membership.14' All members
1" 12 U.S.C. $ 5 1756, 1766 (Supp. I11 1979).
'84 12 U.S.C. !j 178 1 (Supp. 111 1979).
Ia6 12 U.S.C. 5 5 1795-17951 (Supp. 111 1979).
1aaSce 12 U.S.C.A. 5 1795(f) (West 1980).
187 12 U.S.C. 5 1795f(b) (1976).
'88 12 U.S.C. 5 1752a(b) (Supp. 111 1979).
l a 9 Id.
I4O 12 U.S.C. 5 1752a(c) (1976).
12 U.S.C. 5 1753 (1976 & Supp. 111 1979).
12 U.S.C. 8 1754 (Supp. 111 1979).
1 4 8 Id.
144 12 U.S.C. 0 1759 (Supp. 111 1979).
SAVINGS INSTITUTIONS 4 7-75
must own at least one share of stock and may be required to pay an
entrance f c e . " T h e mernbcrship must be limited to groups having a
"common bond of occupation o r association, o r to groups within a well-
defined neighborhood, community, or rural district." Members have
only one vote, rcgardlcss of how many shares they Mcmbers
can be expcllcd from the credit union by a two-thirds vote of the
membcr~hip.~'~
Thc mnnagemcnt of thc crcdit union is cntrustcd to a board of
directors, which is clcctcd by the n~embers,a credit committee, which
is also elected by the members, and a supervisory committee, which is
appointcd by thc board of dircctors. All pcrsons who serve on these
bodies serve without c o m p e n ~ a t i o n . ~ ~ Vboard
h c of dircctors appoints
the officers of the credit union.I6O No officer may be compensated other
than the treasurer.In1 The board is required t o meet monthly and is
charged with "the gcneral direction of the affairs of the Corporation." l n 2
The board of dircctors may, however, dclcgatc certain authority t o an
executive c o n ~ n l i t t c e .T~h~e~ crcdit committee is responsible for consid-
cring npplicntions for loans and lincs of ~ r c d i t . ' ~No' loan nlny bc mndc
to any member that would rcsult in that member being indebted to the
credit union in an amount that would exceed ten percent of the credit
union's unimpaired capital and surplus.166 T h e supervisory committee
is responsible for conducting an annual audit of the affairs of the credit
union.ln8 The supcrvisory committee has special powers to suspend
officers of the credit union o r members of the credit committee o r board
of directors pending a meeting of the members.167
T h e federal credit union is subject to the general supervisory au-
thority of the National Crcdit Union Administration Board, and must
submit to such examination as the Board may dcern proper.IEe The
credit union must maintain reserves in the amount prescribed by statute,
14n Id.
148 Id.
1 4 7 12 U.S.C. 5 1760 ( 1976).
12 U.S.C. 5 1764 ( 1976).
149 12 U.S.C. !j 1761 (Supp. I11 1979).
1" 12 U.S.C. § 1761a (Supp. I11 1979).
161 Id.
l n 2 12 U.S.C. $ 1761b (Supp. 111 1979).
168 Id.
l n 4 12 U.S.C. Q 1761c (Supp. 111 1979).
166 Id.
1" 12 U.S.C. !j 1761d (Supp. 111 1979).
* '67 Id.
12 U.S.C. 4 1756 (Supp 111 1979).
 5 7-80 OVERVIEW
I which may be increased or decreased a t the discretion of the Board.log
The Board may also regulate the dividends that a credit union may
1
pay.Ib0
The National Credit Union Administration Board has broad regu-
latory powers comparable to those of the other banking regulatory
agencies.Id1 Its powers extend to approval of mergers and consolida-
tions, to revocation of the charter of the credit union for violation of its
1 regulations, to administering the liquidation of credit unions, to estab-
lishing record-keeping and recording requirements, and to setting stan-
dards for the bonding of credit union employees and officials.ld2
Federal credit unions may convert to state credit unions.laa Like-
wise, state credit unions may convert to federal credit unions upon
complying with the requirements for federal credit unions.lb4
§ 7-80 CREDIT UNION SHARE INSURANCE
The National Credit Union Administration Board must insure the
accounts of all member federal credit unions.lbn It may also insure the
member accounts of credit unions organized under state law when such
credit unions meet the eligibility requirements.ldd Before approving ap-
plications of credit unions for insurance, the Board must considcr the
financial condition and management policies of thc applicant as well ns
the character and fitness of the applicant's managemcnt.ln' Upon a p
proval of the application, each applicant agrees to pay the reasonable
cost of such examinations as the Board may deem necessary to deter-
mine eligibility and to protect the insurance fund. The applicant must
also agree to provide the Board with all information the Board desires
in order to fulfill its regulatory responsibilities. Insured credit unions
maintain reserves as required by the Act, and must furthcr agree to pay
the premium charges for insurance.ld8 The credit union also agrees to
comply with the other regulations issued by the Board under its statutory
authority over insured credit unions.168 In addition, all insured credit
la9 12 U.S.C. 5 1762 (Supp. I11 1979).
lea 12 U.S.C. 5 1763 (West 1980).
18' 12 U,S.C. 5 1766 (Supp. 111 1979).
162 Id.
lea 12 U.S.C. 5 1771( a ) (1976).
l d 4 12 U.S.C. 5 177 1 ( b ) (Supp. 111 1979).
185l2 U.S.C. 5 1781 (a) (Supp. 111 1979).
188 Id.
lbl 12 U.S.C. 5 1781 (c) (1976 & Supp. 111 1979).
168 12 U.S.C. 5 178 1 (b) (Supp. 111 1979).
180 Id.
SAVINGS INSTITUTIONS 5 7-80
unions are required to make reports to the Board of their condition."O
Share insurance is financed by a national credit union share insur-
ance fund, which is held in the treasury of the United States.ll1 The
Secretary of the Treasury manages the investment of the fund,IT2which
is financed by insurance premiums assessed against the insured credit
unions. These premiums are calculated according to a formula that re-
quires insured institutions to pay an amount equal to one-twelfth of one
percent of the total amount of member accounts in the credit union,
subject to various a d j ~ s t m e n t s . ' ~The
~ fund also may be increased by
loans from the United States.I74
The Board has thc power to conduct exan~inationsof insured credit
unions.175 It may terminate the insurance of any credit union for en-
gaging in unsafe o r unsound practices o r violating Board regulations.176
Like the other bank regulatory agencies, i t has authority to issue cease
and dcsist orders to prevcnt violations or unsafe o r unsound practices,lT7
to remove directors o r officers for violations or breach of fiduciary
and to remove officers or directors who have been charged with
committing serious
The Board has the authority to regulate mergers, consolidations,
asset transfers and conversions of credit unions.180 It serves as the agent
for liquidating federal credit unions that are insolvent.18' It may be
appointed by a court or othcr nuthority hnving jurisdiction ns the ngcnt
to manage the liquidation of credit unions organized under state law.18"
The Board also has the authority to act to prevent liquidation by making
loans, acquiring assets, establishing accounts, and encouraging mergers
or sales of assets of insured credit unions.lB3
Member accounts in insured credit unions are insured to a maxi-
mum of $100,000 for each member.lR4 Insured credit unions are quali-
fied as depositories for the public money of the United States, and as
'lo 12 U.S.C. 5 1782(a) (Supp. I11 1979).
12 U.S.C. 5 1783(a) (Supp. I11 1979).
172 12 U.S.C. 5 1783(c) (Supp I11 1979).
I r a 12 U.S.C. 5 1782(c) ( 2 ) (1976).
17' 12 U.S.C. 5 1783(d) (I976 & Supp. 111 1979).
17"2 U.S.C. 5 1784 (Supp 111 1979).
'18 12 U.S.C. 5 1786(b) (Supp. 111 1979).
12 U.S.C. 5 1786(e) (Supp. 111 1979).
1 7 R 12 U.S.C. 5 1786(g) (Supp I11 1979).
12 U.S.C. 5 1786(h) ( S ~ p p 111
. 1979).
I R 0 12 U.S.C. 5 1785(b) (1976 & Supp. 111 1979).
I8l 12 U.S.C. 5 1787(a) (Supp. I11 1979).
182 12 U.S.C. 5 1787(b) (Supp. 111 1979).
.
i lR312 U.S.C. 5 1788 (1976 & Supp. I11 1979).
18' 12 U.S.C.A. 8 1787(c) (West 1980).
4 7-85 OVERVIEW
such, credit unions may be employed as the fiscal agent of the United
States.lB6
All insured credit unions are authorized to maintain share draft
accounts that allow the owners of the accounts to make withdrawals by
negotiable or transferable intcrcst to third-party payees. Thus, credit
unions may afford their shareholders privileges that are equivalent to
checking conveniences available at commercial banks. However, au-
thority to grant checking privileges is limited to accounts that are owned
by cithcr individuals or organizations of a nonprofit nature.1Be
Insured crcdit unions also have the benefit of the preemption of
state usury limitations as discussed in Chapter 17. Federal law permits
the credit union to charge, "on any loan," interest at a rate of not more
than one percent in excess of the discount rate on ninety-day commer-
cial paper in effect at the Federal Reserve Bank in the district where the
credit union is located or any higher rate allowed by the laws of the state
where the credit union is located.187
5 7 - 8 5 CENTRAL LIQUIDITY FACILITY
Congress has established a National Credit Union Central Liquidity
Facility to provide credit to member credit unions in order to meet their
various short-term and temporary credit needs.IBn The major function
of the facility is to make advances to its members to meet thcir liquidity
needs.IB9 The Board will not extend credit to credit unions for purposes
of expanding their loan
The Central Liquidity Facility is part of the National Credit Union
Administration and is managed by the National Credit Union Adminis-
tration Board.Ig1 T h e facility serves only member credit unions, which
may be chartered under state or federal law, and which subscribe to the
capital stock of the Facility. Each crcdit union must subscribe in an
amount not less than onc-half of one percent of the credit union's cap-
ital and surplus.1D2 T h e Facility may draw on loans from the Secretary
of the Treasury if it lacks sufficient funds to meet the liquidity necds of
its member credit unions.1g3
1" 12 U.S.C. 8 1789a (Supp. 111 1979).
lea 12 U.S.C.A. 5 1785(f) (West 1980).
12 U.S.C. 1 1785(g) (Supp. 111 1979).
l a B 12 U.S.C.A. 55 1795-1795i (West 1980).
lee 12 U.S.C.A. 5 1795e (West 1980).
l g O12 U.S.C.A. 5 l79Se(a) (1) (West 1980).
l g l 12 U.S.C.A. § 1795b (West 1980).
I e 2 12 U.S.C.A. 5 1795c(a) (West 1980).
lea 12 U.S.C.A. 5 1795e(b) (West 1980).
SAVINGS INSTITUTIONS g 7-90
In addition to its responsibility to meet the liquidity needs of its
member credit unions, the Central Liquidity Facilify, with authorization
of the Board, may assist in the collection and settlement of checks, share
drafts, o r other instruments of payment drawn on or issued by member
credit unions in the Facility.IB4 The Board has authority to establish
rules and regulations for the collection and settlement of such payment
items and to define the "rights, powers, responsibilities, duties and lia-
bilities, including standards relating thereto, of such entities and other
parties to any such itcnls or thcir collection and settlement." l o 6 The
legislation giving this authority to the Board allows the Board to adopt,
if it s o decides, general banking practices and, in instances where they
would not otherwise apply, "federal reserve regulations and operating
letters, the Uniform Commercial Code and Clearing House rules." lea
8 7-90 SAVINGS BANKS
Savings banks are financial institutions that originally were formed
to encourage savings among persons of modest means. These institu-
tions originated at a time when commercial banks did not serve this
function and other thrift institutions such as savings and loan asso-
ciations and credit unions were not as prevalent. One authority reports
that thc concept of a savings bank originated with Daniel Dcfoc in 1767,
who suggested the organization of "fricndly societies for provident habits
in general." I o T Savings institutions did not develop in the United States,
however, until the early 1 8 0 0 ~ . ~ ~ ~
Savings banks are usually organized as mutual savings banks. Un-
der this form of organization, there is no stock, although the institution
is a corporate entity. Many mutual savings banks are governed by a
board of self-pcrpetuating trustees. The depositors in the institution
under this approach are vicwcd as creditors of the bank and have no
voting power.IBB It is possible to organize savings banks as stock cor-
porations also.
Savings banks may be organized under state or fedcral law. Fed-
eral law appcars to recognize only mutual savings banks, however. The
circumstances under which a fedcral mutual savings bank may be char-
tered are limited. The Federal Home Loan Bank is authorized to a p
I e 4 I2 U.S.C.A. 5 1795f(b) (West 1980).
I g V 2 U.S.C.A. 5 l79Sf(b) ( 3 ) (West 1980).
108 Id.
Io7 Munn, note 128 supra, at 665.
.L , '08 Id.
Id.
5 7-95 OVERVIEW
SAVINGS INSTITUTIONS 5 7-95
credit activity in which savings institutions may engage is the issuance
prove charters for federal mutual savings banks when applicant banks
of credit cards and participation in credit card programs. Federal sav-
were previously organized as state mutual savings banks.200 Associations
ings and loan associations are authorized to provide credit card services
that were organized as savings banks under state law may not convert
for their customers.20D
from the mutual to the stock form of ownership as fcdcral associa-
Savings institutions also havc cxpnndcd thcir nc~ivitics to includc
t i o n ~ . ~ Under
(~' regulations of thc Federal Home Loan Bank Board, the
chccking and other payment services for their customers. All depository
charters and bylaws of federal mutual savings banks must make all the
institutions may permit their custoniers who are individuals o r nonprofit
holders of savings accounts and borrowers from the bank members in
organizations to draw checks against their savings accounts with such
the savings bank. Each member must be entitled to a vote for the board
institutions.210
of trustees, but proxies may be Federal legislation governing
As savings institutions enlarge thcir services to depositors to in-
savings and loan associations applies to federal mutual savings banks.20a
clude check-paying systems, it is likely that these institutions also will
Under federal law, federal mutual savings banks have additional author-
seek to develop services for their customers based on the new electronic
ity over savings and loan associations in that they may make "commer-
transfcr tcchnology. (These ncw developments arc discussed in Chap-
cial, corporate and business loans," up to 5 percent of their assets and
ter 26.) Congress already has specifically amended the legislation gov-
may accept demand deposits in connection with such relationships.lO'
erning thc chartering of federal savings and loan associations to make
Any mutual savings bank may become a member of the Federal Reserve
clear that federal savings and loan associations are not prohibited from
System20n o r a member o f a Federal Home Loan Bank.2od They are
establishing rcmotc scrvicc units through which association customers
eligible for deposit insurance by the Federal Deposit Insurance Corpora- .
may credit and debit their savings accounts, make loan payments, and
t i 0 1 1 , ~or
~ ~ instead may obtain deposit insurance through the Federal
handle other financial transaction^.^'^ Since the Federal Honie Loan
Savings and Loan Insurance C o r p o r a t i ~ n . " ~
Bank Board also has the authority to adopt regulations allowing the
customers of federal savings associations to withdraw o r transfer funds
from their accounts to other parties by nonncgotiablc orders o r author-
5 7-95 EXPANSION OF SAVINGS INSTITUTIONS izations, it would seem that thc Board has ample authority to provide
INTO COMMERCIAL BANKING FUNCTIONS for the creation of new payment systems that depended upon electronic
transmission rather than paper checks.212
Savings and loan associations and other savings institutions are
T h e increased activity of savings institutions in dealing with com-
competing with commercial banks on an increasingly broader range of
mercial papcr and in participating in the collection and transfer of
activities. One area of competition is in the lending and credit extension checks and other payment instruments as well as the dcvclopment of
activities of the savings institutions. As discussed previously in this
ncw pnymcnt technology bring savings institutions into closcr contact
chapter, at 8 7-45, federal savings and loan associations arc able to
with the broad body of commercial law governing such transactions
make loans for a variety of purposes although their powers are still not described in this book. Attorneys for savings institutions now must be
as broad as those of commercial banks. Another important area of
aware of the intricate body of statutory law, both state and federal, as
well as private agreements and agency regulations that govern the issu-

Zoo 12 U.S.C. 1 1 4 6 4 ( a ) ( l ) (West 1980).

20' Id. 12 U.S.C.A. $ 1464(b)(4) (West 1980). See 1 7-45.
'02 12 C.F.R. 1 576.4(c) (1980). M0 12 U.S.C.A. 8 1832 (West Supp. 198 1). The authority granted
U.S.C. !j 1462(d) (Supp. I11 1979). applies only to funds that are beneficially owned either by individuals or by
204 12 U.S.C.A. 5 5 1464(a) (2)-1464(a) (3) (West 1980). "an organization which is operated prinlarily for religious, philanthropic,
zoo 12 U.S.C. f 333 (1976). charitable, educational, or other similar purposes and which is not operated
208 12 U.S.C. f 1424 ( 1976). for profit." Id. All banks, state or national, and all savings institutions, state
20112U.S.C.f§ 1813(a), 1813(f), 1813(g), 1814, 181S(a) (1976 & or federal, may offer these Negotiable Order of Withdrawal accounts. 12
Supp. I11 1979). It does not appear from these sections that state nonmem- U.S.C. f 1832(b) (West Supp. 1981 ) . Federally insured credit unions have
ber mutual savings banks may obtain insurance from the Federal Deposit a similar authority. 12 U.S.C.A. f 1785(f) (West 1980). Sce f 19-10.
Insurance Corporation. 211 12 U.S.C. f 1 4 6 4 ( b ) ( l ) (West 1980).
2O8 12 U.S.C. 1726(a) (Supp. I11 1979). This section docs not appcar to
6-
212 Id. Sce Chaptcr 26.
apply to stateshartered savings banks.
140
Q 7-95 OVERVIEW

ancc, translcr, collcction, and pnymcnt of commcrciol papcr and the

rights of the parties to these instruments.
Furthermore, as savings institutions establish checking privileges
for their customers and become more closely involved with the collec-
tion of payment instruments, they will bccome subject to the rules and
regulations cstablishcd by thc Fcdcral Rcscrvc System for these trans- Chapter 8
actions. Thus, savings institutions will become increasingly involved in
dealing with yet another regulatory regime along with the framework of
private agreements and regulatory law which relate to it.218 SPECIALIZED ORGANIZATIONS
WITH BANKING FUNCTIONS
Section pwe
8-5 Organizations Exerting Some Banking Functions ...... 143
8-1 0 Investment Banks or Underwriters ................. 144
8-1 5 Edge Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
8-20 Industrial Banks or Morris Plan Banks . . . . . . . . . . . . . 144
8-25 Loan and Finance Companies . . . . . . . . . . . . . . . . . . . . 145
8-30 The Farm Credit System . . . . . . . . . . . . . . . . . . . . . . . . . 146
8-3 5 The Farm Credit Administration . . . . . . . . . . . . . . . . . . 147
8-40 Federal Land Banks and Federal Land Bank
Associations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
8-45 Fcdcral Intcrmcdiatc Crcdit Banks and
Production Credit Associations . . . . . . . . . . . . . . . . . . . 149
8-5 0 The Commodity Credit Corporation . . . . . . . . . . . . . . . . 150
8-5 5 Banks for Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . 151
8-60 Rural Electrification Administration . . . . . . . . . . . . . . . 152
8-65 Thc Federal Financing Bank . . . . . . . . . . . . . . . . . . . . . 153
8-7 0 National Consumer Cooperative Bank . . . . . . . . . . . . . . 153
8-75 Housing and Mortgage Credit Agcncics . . . . . . . . . . . . . 154
8-80 Special Purpose Federal Agcncics With Banking
Functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155
8-85 Foreign Banking Agencies . . . . . . . . . . . . . . . . . . . . . . . 156

§ 8-5 ORGANIZATIONS EXERTING SOME

BANKING FUNCTIONS
There are many financial organizations in this country chartered by
the states or the federal government that are often called banks but that
have bccn creatcd to perform some special function. These entities are
itoo
. numerous to discuss in detail, but some of them are described in
this chapter to distinguish them from the usual depository institution.
 OVERVIEW
8 8-10 INVESTMENT BANKS OR UNDERWRITERS
Investment banks o r underwriters are financial units whose chief
purpose is raising capital for business o r for public enterprises. These
so-called investment bankers are engaged in floating bond issues for their
clients. Many are corporations, others are simply common-law partner-
ships. They operate by purchasing o r guaranteeing the sale of new cor-
porate or public securities, which they then distribute to other financial
institutions or sell on the open market.'
$8-15 EDGE CORPORATIONS
Edge Corporations arc specialized corporations for intcrnntional
banking transaction^.^ Congress made provisions for the establishment
of these banking associations in order to enable the federally supervised
banking institutions to compete with foreign-owned institutions and to
assist in providing banking services necessary for U.S. foreign
'Edge Corporations are limited in their domestic activities. They may
"receive only such deposits within the United States as may be incidental
to, o r for the purpose of, carrying out transactions in foreign countries
o r dependencies o r insular possessions of the United States." ' The
Board of Governors of the Federal Reserve System must approve the
organization of these corporations and supervise their a c t i v i t i e ~ . ~A
majority of the shares of the capital stock of any corporation organized
in this manner must be held by U.S. citizens." Foreign banks may ob-
tain a controlling interest in the stock of such corporations with the prior
approval of the Federal Reserve Board and under the terms and condi-
tions it may prescribe.' T h e regulation of foreign banking is discussed
in 3 4-80.
8 8-20 INDUSTRIAL BANKS OR MORRIS PLAN BANKS
Industrial Plan Banks o r Morris Banks were originally established
t o provide credit on an installment loan basis t o wage earners. T h e first
such bank was chartcrcd in 1910 in Virginia by Arthur Morris. Thcsc
1For a discussion of banking and the securities business, see Chapter 5.
12 U.S.C. 8 61 l a (Supp. 111 1979); 12 U.S.C. f 615 (1976 & Supp. 111
1979).
"2 U.S.C. 61 l a (Supp. 111 1979).
4 12 U.S.C. 5 615 (1976 & Supp. 111 1979).
12 U.S.C. f 614 (Supp. I11 1979).
6 12 U.S.C. 5 619 (Supp. 111 1979).
Id.
SPECIALIZED ORGANIZATIONS 3 8-25
banks provided loans at higher than the nominal rate of interest by,
first, deducting the interest in advance from the loan and, second, re-
quiring the borrower to purchase on an installment basis (weekly o r
monthly) an "investment certificate" that, when paid in full, would be
liquidated and applied to the payment of the loan. Industrial banks are
created by special law in the states in which they are authorized, are
state-incorporated, and are usually regulated by the same officials who
supervise state banking.s Industrial banks have the power to accept and
solicit deposits, to issue investment certificates, and to make installment
loans.
At timcs, the question nriscs whclhcr o r not an industrial bank is
within the definition of a "bank" for purposcs of regulation. Bccausc
the deposits held by thc industrial bank arc not payable on dcmand, an
industrial bank may not be a bank for purposes of the Bank Holding
Company Act." The definition for the purposes of the Internal Revenue
Codc may not bc the same as thc bank regulatory
Industrial banks arc eligible for nlcnibcrship in tlic Federal Re-
serve System,I1 and are also eligible for federal deposit insurance.'?
$ 8-25 LOAN AND FINANCE COMPANIES
There are many organizations and companies that engage in the
business of lending money. They range from the industrial bank, dis-
cussed in 8 8-20, to the pawn shop or small loan company, and include
business finance companies, mortgage companics, and mortgage guar-
anty'companics. While these companies often compete with commercial
banks, they have quite different sources of funds for their loans. Most
do not accept deposits, like banks, but loan their own funds or obtain
funds from investors. T o the extent that these companies are regulated,
thcy arc subject to controls different from those applied to banks. F o r
BThere are statutes authorizing industrial banks in Arkansas, Colorado.
Kansas, Maine, Massachusetts. Michigan, Minnesota, New Hampshire. New
York, North Carolinn, Tennessee, Utah, Virginia, and Wisconsin.
"Scc Hcllcr, Ilnrldhook of Fctlcrnl Bnrik l l o l d i r ~ l :Cott~pntty L n w 6-7
(1976); 51 (Pt. 2) Fed. Res. Bull. 1539 (1965); 57 Fed. Res. Bull. 1042
(1971). See also 49 Fed. Res. Bull. 165 (1963).
'OMorris Plan Bank of New Haven v. Smith, 125 F.2d 440 ( 2 d Cir.
1942); Commissioner v. Ames Trust & Sav. Bank. 185 F.2d 47 (8th Cir.
1950). (The New Hampshire Supreme Court has concluded that a Morris
Plan is within the terms of the state statute allowing it to convert to a state
bank. Attorney General v. Manehester Morris Plan Bank, 213 A.2d 521
(1965).)
I' 12 U.S.C. 5 321 (1976).
* 12 Id.
5 8-30 OVERVIEW
example, most states have special statutes governing the licensing and
operation of finance companies that make consumer loans. Most of
these companies generate great quantities of commercial paper, which
are discounted and collected by commercial banks, as part of their lend-
ing activities. The liabilities of parties to this paper and its collection
and transfer are discusscd in Parts I11 and IV.
5 8-30 THE FARM CREDIT SYSTEM
The Farm Credit Act of 1971 consolidated former farm credit leg-
islation into a unified system under the supervision of the Farm Credit
Admini~tration.'~This Farm Credit System, which was first created in
1933, is intended to meet the special credit needs of farmcrs, ranchers,
and commercial fishing operators. Its provisions encourage farmers,
ranchers, and fishermen to participate in the management, control, and
ownership of a permanent system of credit for their agricultural require-
~ Farm Credit Systcm is compriscd of a number of different
m e n t ~ . ' The
institutions: Federal Land Banks, Federal Land Bank Associations,
Federal Intermediate Credit Banks, Production Credit Associations,
Banks for Cooperatives, and other institutions.16
There are twelve Farm Credit Districts in the Farm Credit System.
Each district has its own governing Farm Crcdit Board composed of
sevcn member^.'^ Thc mcmbers arc electcd by the Federal Land Bank
Associations, the Production Credit Associations, and the borrowers of
the Banks for Cooperativcs within each district. The Governor of the
Farm Crcdit Systcn~appoints one m c n ~ b c r .Thus,
~ the governing board
is clccted by thc farmcrs and ranchcrs who participate in the Farm
Credit System. The boards of directors of thc districts, in turn, serve
as thc boards of dircctors for thc Federal Land Banks, thc Fcdcral In-
tcrmcdiate Credit Banks, and the Banks for Cooperativcs in thcir re-
spcctive district~.~n The board of dircctors e s t a b l i s h ~rules
~ and rcgula-
tions govcrning thc banks and associations of the district and coordinates
the activities of the institutions within the district. It may provide for
joint officers and employecs for the institutions of the Systcm in its
district.1°
la 12 U.S.C. 5 2001, note ( 1 9 7 6 ) .
14 12 U.S.C. 5 2001 ( 1 9 7 6 ) .
l6 12 U.S.C. 5 2002 ( 1976).
'"2 U.S.C. 5 5 2221, 2222 ( 1 9 7 6 ) , as amended by Farm Crcdit Act
Arncndmcnts of 1980, Pub. L. 9 6 5 9 2 , Ij 501, 94 Stat. 3449 (hcrcinafter
citcd as F.C.A.A. of 1 9 8 0 ) .
l 7 12 U.S.C. 5 2223, as amended by F.C.A.A. of 1980, 5 502.
lB 12 U.S.C. 5 2224 ( 1 9 7 6 ) .
12 U.S.C. 5 2227 ( 1 9 7 6 ) .
SPECIALIZED ORGANIZATIONS 3 8-35
Recent amendments to the Farm Credit Act of 1971 authorize
lending institutions within the Farm Credit System to participate with
one another in making loans, and allow the varidus institutions within
the System to entcr into general loss sharing agreements between them-
selves.20 System banks are crnpowercd to organize federally chartered
corporations to perform functions and services which the banks them-
selves are authorized to perform under the Act. Further, the arnend-
ments specifically authorize Federal Land Banks, Federal Land Bank
Associations, Federal Intermcdiate Credit Banks, and Production Credit
Associations to sell to their members credit o r term life and credit
disability insurance appropriate to protect the loan commitment, and
other limited insurance necessary to protect the member's farm or
aquatic unit. Regulations required to be promulgated in connection
therewith will ensure against tie-ins, inefficient implementations, and
adverse effects on the rendering institution's other operations.
8-35 THE FARM CREDIT ADMINISTRATION
The Farm Credit Administration is an independent agency in the
executive branch of the government. It is responsible for supervising
and coordinating the Farm Crcdit System.*' The Administration must
make annual reports to Congress conccrning thc condition of the Sys-
T o cnsurc that the House and Senate comnlittees on agriculture
are kept apprised of the Administration's implementation of new and
existing powers authorizcd by statute, the Farm Crcdit Act Amendments
of 1980 rcquirc that proposcd and final regulations of the Administra-
tion be submitted to the congressional committees for review prior to
publication in the Fedcral Register and be subject to a two-House legis-
lativc v c t ~ . ~ ~
The Farm Credit Administration is controlled by the Farm Credit
Board.24 The Board consists of thirtccn nlcrnbcrs. One is appointed by
thc President from each of the twelve farm credit districts and the
thirteenth is designated by the Sccrctary of Agriculture. The Board
cstnblishcs gcncrnl policy for ~ h cguidancc of thc Farm Credit Adminis-
tration and examincs and supervises the institutions within the Farm
Credit System. The Board appoints the Governor of the Farm Credit
Po F.C.A.A. of 1980, $ 5 101, 114, 2 0 8 ( 3 ) , 301 ( 4 ) , 403 (to be codified
in scntlercd sections of 12 U . S . C . ) .
'
12 U.S.C. $ 5 2001-2259 ( 1976). Scc Korpcla, F e d e r d For111 L n w
Monrrol 501 (195G).
22 12 U.S.C. 5 2 2 5 2 ( 3 ) ( 1 9 7 6 ) .
ri
23 F.C.A.A. of 1980, 5 503 (to be codified at 12 U.S.C. 5 2 2 5 2 ) .
24 12 U.S.C. 5 2243 ( 1 9 7 6 ) .
5 8-40 OVERVIEW
Administration w h o is the executive official responsible for the admin-
istrative functions of the F a r m Credit A d m i n i s t r a t i ~ n . ~ V hPresident
e Credit Act of 197 1.30
must approve the appointment of the Governor and may remove him
from officeaZ0
8 8 4 0 FEDERAL LAND BANKS AND FEDERAL
LAND BANK ASSOCIATIONS
There are twelve Federal L a n d Banks, one in each F a r m Credit
District. T h c banks wcre originally created in 1916 by the Fcdcral
F a r m Loan Act a n d continue today under the F a r m Crcdit Act of 1971,
subject to supervision by the Farm Crcdit A d m i n i ~ t r a t i o n . ~ 7T h c banks
a r e fcdcrally chartcrcd instrumcntalitics of the Unitcd S t a t c ~ . ~ ~
T h e Federal L a n d Banks generally engage in mcdium- a n d long-
term lending. T h e y a r e authorized to m a k e real estate mortgage loans
to farmers, ranchers, a n d producers a n d harvesters of aquatic products
f o r any "agricultural o r aquatic purpose and other credit n e e d s . . . ,
including financing for basic proccssing and markcting. . . ."
statute provides that the term of the loan shall be not lcss than five
ycars nor more than forty." T h e loan shall bear intcrest a t such rate
as deterrnincd by the board of directors of thc bank with approval of
thc Farm Crcdit A d m i n i ~ t r a t i o n . ~ In
' sctting intcrcst rates a n d charges,
the bank must have the objective of providing credit a t the lowcst rea-
sonable cost o n a s o u n d business basis.32 Loans made b y the bank are
exempt from state usury laws.33 T h e b a n k also may provide technical
assistance to its borrowers and members.34
T h e F a r m Crcdit Act Amendments of 1980 authorize Federal
L a n d Banks to participate with lending institutions outside of thc Farm
Credit System in making loans t o eligible borrowers, thereby bringing
Federal Land Banks in step with Production Credit Associations and
2 V 2 U.S.C. 5 2244 (1976), as amended by F.C.A.A. of 1980, 5 504.
26 Id.
27 12 U.S.C. 85 201 1, 2012 (1976).
28 12 U.S.C. § 2011 (1976).
29 12 U.S.C. 5 201 8 ( l976), as amended by F.C.A.A. of 1980, 5 107.
Under the Farm Credit Act Amendments of 1980, loans guaranlced by a
government agency, as compared to loans not so guaranteed. may be in ex-
cess of 85% of the appraised value of the real estate security, but cannot
exceed 97% of the appraised value.
" 12 U.S.C. 5 2014 ( l976), as amcnded by F.C.A.A. of 1980, 5 103.
a ' 12 U.S.C. 5 2015 (1976).
a2 Id.
a3 F.C.A.A. of 1980, 8 403 (to be codified at 12 U.S.C. 5 2205).
a 4 12 U.S.C. 5 2019 ( l 9 7 6 ) , as amended by F.C.A.A. of 1980, 5 108.
SPECIALIZED ORGANIZATIONS § 8-45
Banks f o r Cooperatives, w h o were given such authority by the Farm
T h e Fcderal Land Banks d o not m a k e loans directly t o farmers
and ranchers but act through the Federal L a n d Bank association^.^^
T h e Fcderal Land Bank Associations arc chartcrcd instrumentalities of
thc United States. T h e members of the Association are farmers and
ranchers who desire to borrow nloncy from a Fcdcral Land Bank. T h e
mcmbers subscribe to stock in the Association depending upon the size
of the loan hcld by thc n ~ c m b c r . T~h~c Associations take applications
for Fcdcral Land Bank loans and disburse the proceeds of the loans to
thc b o r r o w c r ~ . ~ ~
D u e to thc dcclinc in rcccnt ycars in the number of small farms,
thc F a r m Crcdit Act A n i c n d ~ n c n t sof 1980 direct both Fcdcral Land
Bank Associations and Production Crcdit Associations (scc 5 8-45) to
preparc programs for furnishing sound and constructive credit to young,
bcginning, and small farnlcrs and r a n ~ h c r s . ~ O
T h c Fcdcral Land Banks obtain their loan funds from the sale of
bonds to thc public.4n Whcn thcrc is a n cnlcrgcncy crcdit nccd, thc
Thc
govcrnor of tlic F a r m Crcdit Administration may purchase stock in the
Fcdcral Land Banks for the United States as a temporary investment."
T h c Fcdcral Land Banks and Fcdcral Land Bank Associations are
cxcnipt from fcdcrnl, statc, and local ~ a x c s . ' ~
5 8-45 FEDERAL INTERMEDIATE CREDIT BANKS
AND PRODUCTION CREDIT ASSOCIATIONS
T h e r e are twclve Fcderal Intcrmcdiatc Crcdit Banks, one for each
F a r m Crcdit District. T h e y were originally established in 1 9 2 3 b y the
A g r i c u l ~ u r cCredit Act and continue undcr the F a r m Credit Act of 1971
as federally chartercd institution^.^^ T h e banks a r c authorized to make
short-lcrm loans to and discount agricultural paper for Production
Credit Associations, national and state banks, trust companies, savings
institutions, crcdit unions, incorporated livestock companies, a n d many
35 12 U.S.C. 5 2012 ( l 9 7 6 ) , as amended by F.C.A.A. of 1980, 5 101.
12 U.S.C. 5 2020 (1 976). Korpela, note 2 1 sripra, at 503.
37 12 U.S.C. 9 203 1 ( 1976).
12 U.S.C. 5 2033 (1976), as amcnded by F.C.A.A. of 1980, J 110.
R"FF.C.A.A.of 1980, J 403 (to he codilicd nt 12 U.S.C. J 2207).
Korpcln. note 21 sripm. nt 503. Mr~nn,T l t c Etrcyclopedin o j Bnt~kirrg
and Pitrnncc (1962). See 1 CCH Fed. Banking L. Rep. (1 1,534.
12 U.S.C. 5 2151 (1976).
4 2 12 U.S.C. D 2055 ( 1976).
* '"2 U.S.C. 5 2071 ( 1976).
8 8-50 OVERVIEW
associations of agricultural producers engaged in making loans to
farmers, ranchers, o r harvesters of aquatic pr0ducts.~4 The loans are
repayable in not more than ten years (fifteen years for aquatic loans)
at a rate of interest o r discount established by the board of directors of
the bank and approved by the Farm Credit Admini~tration.'~ The
interest on the loans is exempt from state usury regulation^.^^ As this
scheme indicates, the banks do not loan directly to farmers o r otherwise
conduct a general banking business but rather channel credit to farmers
and ranchers by purchasing the paper generated by the institutions that
d o directly extend agricultural credit.41 T h e Federal Intermediate Credit
Banks also may provide technical assistance and related services to
borrowers.48 The voting stock in the banks may only be held by Pro-
duction Credit Associations.
Production Credit Associations are initially created by farmers,
ranchers, or harvesters of aquatic products who subsequently borrow from
the Associations. T h e Associations provide short- and intermediate-
term loans for farm and ranch operations and rural housing. The
Associations d o not loan government funds, but discount loans made
to farmers and ranchers with the Federal Intermediate Credit Bank.4g
The Production Credit Associations are supervised by the district Fed-
eral Intermediate Credit Bank." Both the Federal Intermediate Credit
Banks and the Production Credit Associations are exempt from federal,
state, and local taxation.n1
5 8-50 THE COMMODITY CREDIT CORPORATION
The Commodity Credit Corporation (CCC) was created by executive
ordcr in 1933 as a Delaware Corporation. Since 1948 the Commodity
Credit Corporation has been an agency of the Unitcd States within the
Department of A g r i c ~ l t u r e . The
~ ~ purpose of the CCC is to stabilize,
support, and protect farm income and prices, to assist in the mainte-
nance of balanced and adequate supplies of agricultural commodities,
and to facilitate the orderly distribution o f agricultural commoditie~.~'
44 12 U.S.C. 1 2074 (1976), as amended by F.C.A.A. of 1980, 5 203.
46 12 U.S.C. 5 2075 (1976), as amended by F.C.A.A. of 1980, 8 204.
12 U.S.C. 5 2205 (1976). as amended by F.C.A.A. of 1980, 5 403.
- - note 21 supra. at 508; 4 CCH Fed. Banking L. Rep.
See Korvela,
(1 32,001.
' 8 12 U.S.C. 5 2076 (1976), as amended by F.C.A.A. of 1980, 5 205.
4BSee 12 U.S.C. 2096 (1976), as amended by F.C.A.A. of 1980,
5 207.
" 12 U.S.C. 1 2093 (1976), as amended by F.C.A.A. of 1980, 5 208.
n 1 12 U.S.C. $ 5 2079, 2098 (1976).
OZ 15 U.S.C. 5 714 (1976).
" Id.
SPECIALIZED ORGANIZATIONS 5 8-55
In order to carry out its income and price support functions, the
CCC is authorized to support prices of agricultural commodities through
loans, purchases, payments and other operations, and to perform other
functions to assist in the production, marketing, and sale of agricultural
commodities." The price support loan program is administered through
participating financial institutions, usually local banks, o r through the
local agricultural stabilization and conservation county committees.
'
The CCC is managed by a seven member board of directors. The
Secretary of Agriculture is ex-oficio director and chairman of the board.
The other six are appointed by the President with the advice and consent
of the Senate.6a The Corporation's capital stock of $100 million is
owned entirely by the Unitcd States.n8 Thc Corporation has the author-
ity to borrow in ordcr to carry out its programs.
5 8-55 BANKS FOR COOPERATIVES
There arc thirteen Banks for Cooperatives, a central bank and a
bank for each of the twelve Farm Credit Districts. The banks were
initially created by the Farm Credit Act of 1933 and continue as federal
chartered institutions under the Farm Credit Act of 1971 .07 The pur-
pose of thc banks is to provide a permanent source of credit on a sound
business basis for farnicrs' coopcrntivcs. Any association of farrncrs,
producers, or harvcstcrs of aquatic products that operates on n coop-
erative basis is eligible to borrow from these banks.08 Borrowing asso-
ciations arc required to buy stock in thc Bank for cooperative^.^^
The Central Bank makes dircct loans to district banks. It also
makes dircct loans to Iargc national and regional cooperatives. District
banks in turn serve farmers' associations in their areas by extending
" 15 U.S.C. 5 714 (1976).
nn IS U.S.C. 8 714g ( 1976).
I 5 U.S.C. 8 714e (1976).
6712 U.S.C. $2121 (1976).
8R12 U.S.C. 5 2129 (1976). Under the 1980 amendments, voting con-
trol of not less than 80% of borrowing cooperatives must be held by farmers.
producers, harvesters of aquatic products, or eligible cooperatives; in the case
of rural electric, telephone, public utility, a n d service cooperatives, and in
the case of certain local farm supply cooperatives, only 60% voting control
is necessary. 12 U.S.C. 5 2129 ( 1976). as amended by F.C.A.A. of 1980.
8 305. Further, the amendmcnts authorize the banks to make loans to for-
eign or domestic parties who transact business with stockholder cooperatives
with respect to thc export or import of commodities. 12 U.S.C. $ 2128
(1976). as amended by F.C.A.A. of 1980, $ 304.
69 12 U.S.C. $ 2130 (1976), as amended by F.C.A.A. of 1980, 5 306.
 58-60 OVERVIEW
i both loans and technical a s s i s t a n ~ e . ~Before the Farm Credit Act
Amendments of 1980, the district Banks for Cooperatives were author-
ized to lend only to eligible domestic cooperatives. As agricultural ex-
ports began to play an ever-increasing role in U.S. economy, however,
Congress recognized the need to expand the scope of the banks' services
to enable them to meet the international financial needs of their member
cooperatives. The banks, now authorized to provide the range of ser-
vices oficrcd by commercial banks, arc able to loan moncy to forcign
buyers, deposit funds in foreign banks, reccive and hold crcdit balances,
and cngagc in currcncy c x c h a n g ~ s .Thc
~ ~ banks obtain thcir loan funds,
in addition to capital and surplus, by selling bonds to the public and
obtaining loans from the Federal ~ntermediateCredit Banks and com-
mercial banks.02
The Central Bank is administered by a board of directors of thir-
teen persons. The twelve district Farm Credit Boards elect one member
each and the governor of thc Federal Credit Administration appoints
the thirteenth. The district Banks for Cooperatives are also administered
by a board of directors. In this case, the directors are those persons
who serve as members of the Farm Credit District b ~ a r d . ~
§ 8-60 RURAL ELECTRIFICATION ADMINISTRATION
The Rural Electrification Administration ( R E A ) was created by
executive order in 1935 and became a part of the Department of Agri-
culture in 1939.84 T h e R E A provides 100 percent financing for the
construction of rural electric facilities where central station elcctric
services do not exist, and also finances the acquisition and installation
of elcctrical and plumbing c q ~ i p m c n t , "and
~ tclcphonc facilitic~."~
The REA makes loans on an arca basis. A survey is madc of thc
area before any new loan is approved. Unless service to every structure
within the limits of expansion of the proposed system is contemplated,
the loan will not be approved.07 The funds for REA loans are appro-
priated as determined by Congress each year.da An REA administrator
12U.S.C. 5 2128 (1976), as amended by F.C.A.A. of 1980, 5 304.
See Korpela, note 21 supra. at 509.
H.R. Rcp. No. 96-3287, 96th Cong., 2d Scss. 20 (1980).
OZ See Korpela, note 21 supra, at 509.
12 U.S.C. 5 2123 ( 1976).
7 U.S.C. 5 901 ( 1976).
7 U.S.C. 5 905 (1976).
"7 U.S.C. $ 5 921-95Ob (1976).
See I CCH Fed. Banking L. Rep. 1 1,636.
O8 7 U.S.C. 5 903 ( 1976).
SPECIALIZED ORGANIZATIONS
is appointed by the President with the advice and consent of the Senate
for a ten-year term.60 All loans made by the R E A must be self-liquidat-
ing within a period of not more than thirty-five years.1° The interest
ratc on REA loans is established by federal statute and is considerably
below the market rate.ll
§ 8-65 TIIE FEDERAL FINANCING BANK
In 1973, Congress cstablishcd thc Fcdcral Financing Bnnk.72 Tlic
purposc for creating the bank was to coordinate federal borrowing pro-
grams with the economic and fiscal policies of the federal government.
Congrcss thought that such an institution could minimize the cost of
federal borrowing and assure that thesc borrowing programs could be
financed in a way which would minimize disruption through private
financial markcts and i n ~ t i t u t i o n s . ~ ~
,
Thc bank is a federal instrumentality and is undcr the general
supervision and direction of the Sccretary of the Treasury." The Secre-
tary is thc chairman of the bank's board of dircctors; there are four
other dircctors who are appointed by the President.15 The bank may
purchase and sell obligations of federal agencies.1° Before a federal
agcncy may issuc or sell any fedcral obligations, it must obtain the
approval of the Sccrctary of the Treasury for the method, source, timing,
terms, and conditions of the financing.17 The bank is exempt from
federal, state, and local taxation.7B It is required to make an annual
report to the President and C o n g r e ~ s . ~ ~
5 6-70 NATIONAL CONSUMER COOPERATIVE BANK
In 1978, Congress establishcd the National Consumer Cooperative
Bank.Rn Congress declared the Bank was needed because the develop-
ment of consumer and other self-help cooperatives had been hampered
7 U.S.C. 5 901 (1976).
70 7 U.S.C. 5 904 (1976).
7 U.S.C. $ 5 904.905 (1976).
71 12 U.S.C. $ 8 2281-2296 (1976 & Supp I11 1979).
'V 2 U.S.C. 1 2281 ( 1976).
12 U.S.C. 5 2283 (1976).
16 12 U.S.C. 5 2284 (1976).
lo 12 U.S.C. 5 2285 ( 1976).
77 12 U.S.C. 5 2286 (1976).
78 12 U.S.C. 5 2290 ( 1976).
+ 12 U.S.C. Ij 2292 (1976).
80 12 U.S.C. 5 5 3001-3050 (Supp. I11 1979).
8 a-7s OVERVIEW
by lack of access to adequate credit f a c i l i ~ i e s .The
~ ~ Bank is a federally
chartered i n s t i t u t i ~ n . ~It~ is governed by a fifteen-member board of
directors, appointed by the President with the advice and consent of the
Senate for three-year terms.8a Eight members of the board must be
appointed from officers of federal agencies. One member must be a
proprietor of a small business concern. The remaining mcmbcrs may
not be fcderal cmployccs, but shall have "cxtensivc cxpcricncc in the
cooperative field." The President may remove any member without
cause.86 The board elects its own chairman. The capital stock of the
Bank is both owned by the United States and by private borrowers and
cooperativ~s.~~
The Bank may make loans and provide technical services to eligible
cooperative^.^^ Only non-profit cooperatives are eligible for the benefits
of the Bank's lending programs.88
5 8-75 HOUSING A N D MORTGAGE CREDIT AGENCIES
' spin-off from the Federal National Mortgage Association. It carries
The federal government has established many programs that use
various financial techniques and create financial institutions to make
credit available to those who need housing. There are direct government
loan programs, programs for insuring and guaranteeing loans, and sub-
sidy programs, as well as othcr assistance programs. In addition, a
number of financial agcncics assist in the financing of housing and thc
flow of credit into mortgage markets. Some of the more important of
these agencies are:
( 1 ) The Federal Home Loan Mortgage Corporation. This Cor-
poration was established to purchase residential mortgages from fed-
erally insured savings and loan associations and other financial institu-
tions whose depositor accounts are federally insured. The board of
directors of the Corporation is composed of the members of the Fedcral
Home Loan Bank Board.BD The Corporation engages in the purchase
and sale of mortgage intcrests in order to channel credit into thc housing
market.
8' 12 U.S.C. 8 3001 (Snpp. I11 1979).
R2 12 U.S.C. 5 301 1 (Supp. 111 1979).
83 12 U.S.C. 8 301 3 (Supp 111 1979).
84 Id.
86 Id.
12 U.S.C. § 3014 (Supp. I11 1979).
12 U.S.C. $ 1 3012, 3018 (Supp. 111 1979).
8R 12 U.S.C. J 3015 (Supp. I11 1979).
80 See 5 7-25. 12 U.S.C. 8 5 1451-1459 (1976 & Supp. 111 1979).
SPECIALIZED ORGANIZATIONS $8-80
( 2 ) Federal Holtsing Admirrisfration. The Federal Housing Ad-
ministration is a unit of the Department of Housing and Urban Devel-
opment. It administers programs of mortgage insurance under the
National Housing Act and certain other housing assistance programs.
The Federal Housing Administration is directed by a commissioner who
reports to the Secretary of Housing and Urban D c v c l ~ p r n c n t . ~ ~
( 3 ) The Federal National Mortgage Association. The Federal
National Mortgage Association was established in 1938 to purchase and
sell FHA-insured and VA-guaranteed mortgages. By engaging in these
purchase and sale transactions, the Association channels funds for home
mortgage financing from the investors, to whom it sells the mortgages,
to the lending institutions from whom it purchased the mortgages. The
Association is owned by private investors, but is subject to regulation in
some respects by the Secretary of Housing and Urban D e v e l ~ p m e n t . ~ '
( 4 ) T f ~ Government
e National Mortgage Association. The Gov-
ernment National Mortgagc Association was created in 1968 as a
out various programs of the Dcpartrnent of Housing and Urban Devel-
opment involving special loan programs and the management of certain
government-held mortgage portfolios and other securities. It also pur-
chases mortgages that arise under certain of the federal programs for
providing housing for low and niodcmtc income faniilic~."~
5 8-80 SPECIAL PURPOSE FEDERAL AGENCIES
WITH BANKING FUNCTIONS
Often the fcderal government will establish a loan program, to be
administered by a special agency, in order to carry out the purposes of
some fcderal program. It is inipossiblc to list all of the agencics with
these o r related functions; however, some of them include:
( 1) The Solar Ettergy and Energy Conservatiorr Bonk. In 1980,
the Solar Energy and Energy Conservation Act of 1980 established a
bank within the Dcpartment of Housing and Urban Development to
encourage energy conservation and use of solar energy.83
( 2 ) The U.S. Synthetic Fuels Corporation. The Energy Security
Act of 1980 eslablished the U.S. Synthctic Fuels Corporation. This
- -
O0 42 U.S.C. 5 3533(a) (1976). See also 24 C.F.R. J 200 (1980).
12 U.S.C. 5 J 1716-1723e (1976 & Supp. 111 1979).
021d. See 12 U.S.C. J 1716b (1976 &Supp. 111 1979).
OS 12 U.S.C.A. $ 5 3601-3620 (West 1980).
r,
 9 8-45 OVERVIEW
Corporation is authorized to make loans in order to facilitate synthetic
fuel project^.^'
( 3 ) The Small Business Administration. The Small Business Ad-
ministration was established in 1953 as an independent agency, not
affiliated with any other department of the fcderal government. The
purpose of the agency is to assist small business enterprises, which it
may do by making loans and participating in lending agreements with
other financial institution^.^^
( 4 ) Veterans Adntinistration. The Vctcrans Administration was
crcatcd originally by cxccutivc ordcr in 1930, and is now in thc exec-
utive branch of the g o v ~ n l n i e n t . ~ " T I Vctcrans
~c Adnlinistration ndmin-
isters loan guarantee and insurance programs for the purchasc of homes,
farms, and businesses by veterans.
SPECIALIZED ORGANIZATIONS 5 8-85
( 2 ) Intert~ationalFinance Organizarions. In addition, there are a
number of international finance organizations, created by treaties or as
part of the United Nations, in which the United States cooperates, and
whose oficcrs the United States appoints. Aniong these are the Asian
Development Bank,Ioz thc Inter-American Development Bank,Io3 and
the World Bank.lo4 These organizations play little part in domestic
banking but their paper and securities often reach commercial banks
doing substantial foreign business.
In' 22 U.S.C. $ 9 285-2851 (1976 & S~tpp.111 1979). A bill t h n t would
nulhorizc US. nicriibcrship i n thc Alricnn Dcvclopmcnt U n n k is now pending
bcforc Congrcss. S. Rep. No. 97-36, 97th Cong., 1st Scss. (198 1 ).
l o 3 22 U.S.C. $ 5 283-2832 (1976 & Supp. 111 1979).
l o 4 22 U.S.C. $ 5 286286r (1976 & Supp. 111 1979). The World Bank
is also known as the International Bank for Reconstruction and Development.

Q 8-85 FOREIGN BANKING AGENCIES

The United States is a major participant in trade and commerce
with other countries and also has programs of economic and other
assistance with international ramifications. This involvement has led to
the creation of special purpose agencics which cxcrcise banking functions
relating to international trade and monetary policy.

( 1 ) Export-Import Bank. There are a number of federal agencies

L set up especially to control and encourage foreign banking. Chief among
these is the Export-Import Bank of the United States, which was created
to finance foreign trade. With all the powers of a commercial bank,
I it is an independent agency of the government with its officers ap-
pointed by the President by and with consent of the Senate.g8 The
capital stock of the bank is subscribed by the Secretary of the T r e a s ~ r y . ~ ~
In addition to the usual function of a bank, it can insure exports.loO As
1 originally constituted the bank was to expire in 1958 but this has been
extended a number of times; the latest termination date is September
30, 1983.1°'

R442 U.S.C.A. 4 s 87 1 1-87 19 (Wcst 1980 pamphlct).

'615 U.S.C. $ 9 63 1-647 ( 1976 & SUPP.111 1979).
0838 U.S.C. 1 2 0 1 (1976).
O7 12 U.S.C. 1 635 (1976 & Supp. I11 1979).
O8 12 U.S.C. § 635a (1976 & Supp. 111 1979). SCCReorganization Plan
No. 5 of 1953, 12 U.S.C. $ 635a (1976).
12 U.S.C. § 635b (1976).
loo 12 U.S.C. $ 8 635(c), 6353 (1976 & Supp. I11 1979).
lol 12 U.S.C. 8 635f (Supp. 111 1979).
 Chapter 9
SOURCES OF COMMERCIAL
BANKING LAW
Section Page
9-5 Sources of Law of the United States . . . . . . . . . . . . . . . . 159
9-10 Public Law; Constitutional Law . . . . . . . . . . . . . . . . . . 160
9-1 5 Federal Power Over Commercial Law . . . . . . . . . . . . . . 160
9-20 State Commercial Law . . . . . . . . . . . . . . . . . . . . . . . . . . 161
9-25 Uniform Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
9-30 Uniform Commercial Code . . . . . . . . . . . . . . . . . . . . . . . 163
9-3 5 Federal Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
9-40 Federal Administrative Board Rulings . . . . . . . . . . . . . . 166
9-45 Sources of Banking Laws and Regulations . . . . . . . . . . 167
9-5 0 Preemption of Federal Over State Rules . . . . . . . . . . . . 167
9-5 5 How Conflict of Laws Doctrines Work . . . . . . . . . . . . . 168

§ 9-5 SOURCES O F LAW OF THE UNITED STATES

The United States is a federation of states, and under the Constitu-
tion each state is a separate legal entity.' Thus, there may be at least
as many as fifty-one main sources of law, including the laws of each
of the fifty states and the law of the United States. Each of these
fifty-one "sovereignties" has, delegated much law- o r rule-making power
to its administrative agencies. In all, it has been estimated that there
are well over 100,000 units of government with law-making powers in
the United S t a t ~ s . ~
Since these so-called administrative agencies often perform identical
functions within fifty-one legal jurisdictions, the resulting confusion can
and does become cnormous. This is especially true where modem
business transactions that utilize electronic tcchnology constantly cross
physical jurisdictional boundaries with a rapidity undreamed of at the

U S . Const., Amcnd. X.
1 See
Anderson, Units 01 G o v e r n m e n t
2 in he U n i t e d States (Pub. Adm. Sent.
Monograph No. 83. 1942).
 OVERVIEW
time most banking and commercial laws were enacted. One of the chief
functions of lawyers is to untangle this maze of laws in order to give
busincssmcn a clcarcr understanding of the rules that govern particular
transactions. The doctrines that control the solution to thcse problems
are part of the subjects of law known as the conflict of laws and consti-
tutional law. The development of the law in individual cases lies within
the special ken of the legal profession; but the bank officer is entitled
to know some of the basic rules that will guide him in consulting with
his lawyer.
The area of law that determines whether federal or state law should
apply to a particular situation is called public law or constitutional law.
The Constitution of the United States is the supreme law of the land a
and provides guidelines for both state and fedcral law. The Constitution
reserves certain powers expressly and exclusively to Congress. The
authority to regulate matters outside of those reserved to Congress arc
delegated to the states.' For example, the general body of law dealing
with family relationships is reserved to the states. However, federal law
may still affect this reserved power. For example, under the rights
conferred by the due process and equal protection clause^,^ states may
not enact laws pertaining to family property that discriminate against
women. Also, although the Constitution authorizes Congress to operate
in a certain area, there may be cases where there is no clear indication
whether Congress has retained exclusive control over that subject.
Where Congress has not retained exclusive control, state law may oper-
ate concurrently with federal law in the samc area. Considerable uncer-
tainty arises, however, where Congress has not specifically excluded the
states in a particular area. As we have seen, this is precisely the case
with many laws governing the organization and regulation of banks.
5 9-15 FEDERAL POWER OVER COMMERCIAL LAW
T h e legal nature of the contracts and other documents involved in
bank transactions is governed by what is called commercial law. This
is an interesting combination of fcderal and state laws. The Constitu-
tion of the United States gives the Congress power to make laws govern-
ing "Commerce with foreign Nations, and among the several States, and
U.S. Const., Art. VI, cl. 2.
See U.S. Const., Amend. X.
6 U.S. Const., Amend. XIV, 8 1.
SOURCES O F BANKING LAW $ 9-20
with the Indian Tribes." a It was originally believed that this "com-
merce" power extended only to commerce that crossed state lines, and
not to purely intrnstntc trnn~octions.~Howcvcr, ns busincss hns cx-
pandcd, i t has been held that thc fcdcral powcr extcnds to any transac-
tion afiecting interstate c o r n m ~ r c e .This,
~ in the present state of com-
mercial operations, includes nlmost any business transaction.
Although i t now appcars that Congress has power over practically
any sort of busincss transaction, this power has only been exercised in
a few cases. Among thcse are consunier rights and fair trade practices,
which will be discussed in Part V. This trend of increased congressional
intervention in thc conlmercial ficld will probably be accelerated in the
future.
In banking, although Congress has power entirely to exclude the
states,O it has left much regulation of banking corporations and prac-
tically all the individual transactions to state law. There are, however,
fcderal laws dealing with special subjects. Examples are the federal
statutes on clcctronic fund transfers and crcdit cards discussed in
Chapter 26.
3 9-20 STATE COMMERCIAL LAFV
Sincc bcforc the founding of the American colonies, the law gov-
erning commercial transactions in Europe was a separate body of law.
During medieval and Renaissance times this law was known as the
Law Merchant. In both England and Europe it was administered by
a separate system of courts from that governing land and family mat-
~ Europe it is still a separate system of law governed by statutes
t e r ~ . ' In
known as con~n~ercial codes, which arc usually administered by special
commercial tribunals.
In England and the United States, due to the failure of the
common-law courts to understand business problcms, the commercial
law bccamc largely statutory. These statutes varied from state to state,
but thcy wcrc administcrcd by common-law courts with the result that
aU.S. Const., Art. I, 8 8, cl. 3.
7 Sce Gibbons v. Ogdcn, 22 U.S. (9 Whcat.) I, 65 (1824); c/. Paul v.
Virginia, 75 U.S. ( 8 Wall.) 168, 183 ( 1 868).
See Wichard v. Filburn, 3 17 U.S. I 1 l ( 1942) ; Moore v. Mead's Bread.
348 U.S. 115 (1954); Katzenbach v. McClung, 379 US. 294 (1964). For
the meaning of "commerce among" the states, see 1 Crosskey, Polilics and
the Corrstitrrtion. Chs. 1 ct scq. ( 1953).
Scc Vcazie Bank v. Fenno, 75 U.S. (8 Wall.) 533 (1869).
* l o For the historv of this development, see Bculel, Brannan's Negotiable
Instrtrnrents Law, PL'I (7th cd. 1948).
161
5 9-25 OVERVIEW SOURCES OF BANKING LAW J 9-30

the commercial law of the United States as a whole was in great con- 8 9-30 UNIFORM COMMERCIAL CODE
fusion. T o correct this the American Bar Association, through the
All of the state statutes mentioncd in the preceding section have
Commission on Uniform Laws, at the end of the nineteenth century
been repealed or superceded in whole or in part by a new codification
drafted and pushed for adoption in the various state legislatures many
of the commercial law promoted by the Commission on Uniform Laws
uniform statutes that at one time covered most of the field of commer-
and the American Law Institute. This statute, known as the Uniform
cial law. These uniform laws touched upon most of the everyday bank-
Commercial Code (U.C.C.), covers much of the same subject matter
ing transactions. These uniform laws, in turn, became replaced in large
of the Uniform Statutcs and other statutes mentioncd above. It has been
part by the Uniform Commercial Code.
adoptcd in all states (Louisiana has enacted only Articles 1, 3, 4, 5, 7,
8, and 11, however). Puerto Rico has not adopted the Code.18 Sincc
the Code is, thus, the major source of law for modern commercial
13 9-25 UNIFORM STATUTES
transactions, the discussion that follows will state the rules laid down
T h e requirements of commercial paper in the United Statcs arc by it. In some cascs it is uscful to consider the prior uniform statutes
governed almost wholly by statute. Before the adoption of the U.C.C., as an aid to understanding the Code. There is also commercial paper
the most important of these acts was the Uniform Negotiable Instru- still outstanding that was issued under p r e C o d e law. Where relevant,
ments Act, known officially as the Negotiable Instruments Law, which this pre-Codc law is discussed.
was adopted in all the statcs and tcrritories, and which codificd thc law T h c Codc was cxtcnsivcly amcndcd by thc Comrnissioncrs on Uni-
on negotiable papcr payablc in moncy. form Statc Laws and the Anicrican Law lnstitutc in 1972. These rc-
The nature of instruments payable in goods was governed by thrce visions principally dealt with Article 9 (secured transactions) and are
different uniform statutes: the Uniform Sales Act, the Uniform Ware- discussed in Part IV. In 1977, further revisions to Article 8 (investment
house Rcccipts Act, and thc Uniform Bills of Lading Act, which had sccuritics) wcrc rnadc. Thcsc revisions nrc discussed in 9 29-75. Al-
bccn adopted in most of the T h c law of transfcr and ncgotia-
tion of stock ccrtificatcs had bccn codificd in thc Uniform Stock Transfcr
Act, which was adoptcd in twcnty-five s t a t c ~ . *Many
~ of the statcs and T A B L E 6. Sfnfe Enncfnicnfs of UCC nnd Amendnients
territories that had not adopted this Act had local statutes governing the (as of February 1981)
question that were in many respects similar t o the uniform acts.
There were also a number of statutes in the various states covering EFFECTIVE DATES OF STATE ADOPTIONS
particular types of contracts, such as bonds, intcrim certificates, and 1972 1977
other paper payable in commodities. These latter statutes dealing with State UCC Arnendrnents Anlendnlent~
commodities are very old acts which antedate the Uniform Negotiable Alabama 1-1-67
Instruments Law and, in most cases, were repealed by it. Alaska 1-1-63
A r izan a 1-1-68 1-1-76
Arkansas 1-1-62 1-1-74
California 1-1-65 1-1-76
11 These statutes have been repealed in the states that have adopted the Colorado 7-1-66 1-1-78
Uniform Commercial Code. Connecticut 10-1-61 10-1-76
The Uniform Negotiable Instruments Law is still in force in Puerto Delaware 7-1 -67
Rico, P.R. Laws Ann., Tit. 19, $1 1-25 (1974), and American Samoa, A.S. District
Code, Tit. 12. 5 4 ( 1973). of Columbia 1-145
The Uniform Warehouse Receipts Act is still in force in Puerto Rico. Florida 1-1-67 1-1-80
P.R. Laws Ann., Tit. 10, $1391-432 (1976). Georgia 1-1-64 7-1-78
The Uniform Bills of Lading Act is still law in the United States for Hawaii 1-1-67 7- 1-79
interstate commerce. The federal statute known as the Pomerine Act was
one of the few uniform laws adopted by Congress. It still governs interstate Idaho 1-1-68 7-1-79
shipments and government transactions. See 49 U.S.C. O f 81-1 24 ( 1976).
l 2 It has been repealed in the states that have enacted the Uniform Com-
.
i
mercial Code. See U.C.C. $ 10-102. '8 See Table 6 for jurisdictions.
163
 OVERVIEW S O U R C E S O F BANKING LAW 5 9-35

TABLE 6. Slate Enactments of UCC and Amendments though a substantial nunlbcr of statcs havc adoptcd thc 1972 amcnd-
(continued) nicnts and a fcw statcs havc adoptcd tlic 1 9 7 7 anicndnicnts, thcrc arc
many statcs that havc not cnactcd tlicsc changes. Bccausc the amend-
EFFECTIVE DATES OF STATE ADOPTIONS nicnts makc significant changes in thc Codc, i t is csscntial to dctcrminc
1972 1977 which vcrsion of thc C o d c is in cficct. Of course, the lack of adoption
State UCC Amendments A ~nendntents of thcsc amendments by many statcs has crcatcd a situation where thcre
Illinois 7-2-62 7-1-73 is a lack of uniformity among the statcs in thcir basic commcrcial law.
Indiana 7-1-64 T a b l e 6 lists the states that have adopted the Uniform Commercial
Iowa 7-4-66 Codc, shows the cffcctive dates of adoption, indicates which states
Kansas 1-1-66 havc adoptcd thc I 9 7 2 a n d 1977 amendments, and further shows the
Kentucky 7-1-60
Louisiana* effcctivc datcs of thosc adoptions.
1-i-75*
Maine 12-3 1-64
Maryland 2- 1-64
Massachusetts 10-1-58 5 9-35 F E D E R A L LAW
Michigan 1-1-64 Since the uniform commcrcial statutes are, with the cxccption of

i
Minnesota 7- 1-66
Mississippi 3-3 1-68 the Fcdcral Bills o f Lading Act," all adoptcd by thc stntc o r territorial
Missouri 7- 1-65 Icgislaturcs, they d o not dircctly apply to the U S . Government. T h c
I Montana 1-2-65 federal law involves thrce typcs of cases:
1I Nebraska
Nevada
9-2-65
3-1-67 ( I ) Situations where the US. Government itsclf is a party to the
New Hampshire 7-1-61 transaction involved;
New Jersey 1-1-63 ( 2 ) Situations where the transaction is subject to a federal statutc;
New Mexico 1-1-62 and
New York 9-27-64
North Carolina 7-1-67 ( 3 ) Situations were thcre is a suit in a fcderal court arising from
North Dakota 7- 1-66 diversity of citizenship of the litigants.
I Ohio 7- 1-62
Oklahoma 1-1-63 In thc first situation, wlicrc tlic U.S. Govcrnmcnt is a party to thc
Oregon 9-1-63 transaction, thc Uniform Laws, including tlic Corilmcrcial Codc, bcing
Pennsylvania 7-1-54 state laws, d o not apply. T h c pertinent law derives from the Constitu-
Rhode Island 1-2-62 tion of the Unitcd Statcs,ln the fedcral statutes, thc regulations of the
South Carolina 1-1-68 particular d c p a r t n ~ c n t thc dccision of the fcdcral courtsli
South Dakota 7- 1-67 and, in somc cascs. tlic ilccisions of tlic rcg~rlaloryngcncics of thc Unitcd
Tennessee 7- 1-64 S t a t c ~ .Fcdcral
~~ govcrnrncnt cllccks, for cxanlplc, havc long bccn held
Texas 7-1-66 subject to fcderal law, a n d not to the Uniform Commercial Code,'"
Utah 1-1-66
Vermont 1-1-67
Virgin Islands 7-1 -65
Virginia 1-1-66 " 49 U.S.C. (is 81-124 ( 1976).
Washington 7-1-67 ' W U . Const., Art. VI.
Wcst Virginia 7-1 -64 I n Scc, c.g.. U S . Codc of Fctlcrnl RcguI n 1'Ions.
Wisconsin 7-1-65 ' 7 Clenrficld Trust Co. v. Unitcd States, 3 18 U S . 363 ( 1942); Unitcd

Wyoming 1-2-62 States v. Shimar. 367 U.S. 374 (1961 ).

Scc, c.g.. Stclla Chccsc Co. v. Chicago. St. P.. hl. R 0. Ry., 248 Wis.
Louisiana has not adopted Articles 2, 6 , and 9. The adoption of Articles 7 and 8 CL 196, 21 N.W.2d 655 (1946).
first became effective in 1-1-79. l1' Clearfield Trust Co. v. United States, note 17 supra.

165
 9-40 OVERVIEW
which is state law. T h e federal law applied by the courts, however, is
often patterned after the Code.lo
There are many cases when the second situation will exist, such as
where a federal statutc governs o r where the transaction occurs on a
fcdcral reservation. F o r example, if the transaction involvcs a bill of
lading for goods shippcd in interstate commerce, the Pomcrine Act 21
governs. In like fashion, there are many federal acts applying to special
businesses like National Banks where the regulation of government
agencies may be the ruling law.22 Federal and not state law applies to
business transactions on federal reservations, within the territories, and
in other arcas governed directly by the U.S. Government. In many
cases that arise in this situation, diligent search may not reveal any
federal statute, agency ruling, or decision that applies to the case in
hand. When this happens, the general law on the subject will often
indicate what the federal law ought to be. Here the federal courts and
agencies have held that the Code may be taken as evidence of such
law.2a
In the third position, where persons find themselves in federal
courts due to diversity of citizenship, the U.S. statutes provide that the
federal courts shall follow the law of thc statcs where the fcderal court
sits, unless thcre is reason for applying federal law where the dispute
also involves the first o r second s i t ~ a t i o n . ~ Law
' in this sense has been
interpreted to include the statutes and decisions of the state courts
intcrprcting state statutes.26 Since the Code has been adoptcd in all the
states but one this means that it will control in all cases of this class
where it is involved.
As a practical matter the Code is, with few exceptions, the basic
law in most commercial transactions.
5 9-40 FEDERAL ADMINISTRATIVE BOARD RULINGS
Banks, both state and national, are controlled in much of their
activities by the federal statutes such as, among others, those creating
the Board of Governors of the Federal Reserve System,28 the Comp-
Bank of America v. United States, 552 F.2d 302 (9th Cir. 1977).
" 49 U.S.C. f f 81-124 (1976).
22 See, e.g., the Federal Reserve Bulletin.
28 E.g., United States v. Wegematic Corp., 360 F.2d 674 (2d Cir. 1966).
24 28 U.S.C.A. f 1652 (West 1976).
25 Burns Mortgage Co. v. Fried, 292 U.S. 487 (1934).
28 12 U.S.C. $ 5 241-250 (1976 & Supp. 111 1979).
6.
SOURCES OF BANKING LAW !j 9-50
troller of the Currcncy," the Federal Deposit Insurance Corporation,28
and other banking agencics mentioned in Part I. These bodies are au-
thorized to issue regulations governing most of the activities of both
fcdcral and state banks within the areas of thcir jurisdiction. Thc general
franiework of this regulatory schcmc is dcscribed in Part I , but thc
details of thcsc regulations arc bcyond the scope of this book.
5 9 4 5 SOURCES OF BANKING LAWS AND REGULATIONS
As sccn from thc prcvious discussion, thc laws and rcgulations con-
trolling banking practices are numerous, complicated, and sometimes
conflicting. The sources of state rules have been set out in earlier
sections of this Chapter. The federal controls are somewhat more
unified but are still quite complicated and sometimes hard to find. The
statutory sources of ~ h claws passed by Congress arc well known; but
the regulations issued by the various agencics are a different matter.
Prior to 1935 thcse were published or kept in the filcs of the various
agcncics at thc discretion of the agcncics; but in 1935 Congress passed
the Fcdcral Rcgisrcr Act.2" which requircd that all agcncics' rulcs having
the effect of law should be published in the Federal Register, and there-
after codified in the Code o/ Federal Regdatiorrr. In 1946 the Federal
Administrativc Law Act similarly requircd thc procedural rulcs of thc
agcncics to bc so published and codified," so both arc now more easily
obtainable. Many fcdcral agcncics, like the Board of Governors of the
Fcderal Rcscrve System n~entionedabove, were in existence long before
the Fcderal Register Act, and they published agency literature in addi-
tion to that required by the Federal Register.
$9-50 PREEMPTION OF FEDERAL OVER STATE RULES
The interaction of thc laws and rulcs governing banking is not only
complicated but, in some cases, may be flatly contradictory. In dealing
with this situation thcre arc certain general rulcs that apply. An attempt
should always be made to interpret the laws and rules so that they can
be reconciled, thus giving effect to both. Quite often both state and
fcderal statutcs and regulations contain provisions indicating which shall
27 12 U.S.C. $ 5 1-20 (I976 & S U P P1 1 1 1979).
2R 12 U.S.C. f § 181 1-1832 (1976 & Supp. 111 1979).
2n 44 U.S.C. $ 5 1501-15 1 1 ( 1 976 & Supp 1 1 1 1979).
5 U.S.C. Bf 551-559 (1976 & Supp. I 1 1 1979).
167
5 9-55 OVERVIEW S O U R C E S OF BANKING LAW g 9-55

take precedence. In case n o such reconciliation is possible, the following notes issued in Florida. T h e case turncd o n the question of the nego-
table shows the order o f precedcncc o f various slate a n d fcdcral rules. tiabilily of the notes. Since the suit was in a federal court, the federal
law govcrncd. T h e fcdcral law3' stated that in such cases the law of the
state where thc court sits furnished the rules for dccision. T h e Pennsyl-
T A B L E 7. Hierarchy of Rules Binding on Banks
vania conflict of laws doctrine said the negotiability of a note depended
(Rules a r e stated in order of precedence.) o n the law of the state where it was made, s o thc court was referred t o
thc law of Florida. T h e statutes of Florida, ( a t that time the Negotiable
FEDERAL Instruments Law) govcrncd, but thc statutc was silcnt on the point s o
Constitution of United States thc casc was dccidcd o n thc basis of Florida court decisions.
Laws passed by Congress
Rules of federal agencies authorized by Congress
Implementation of powers delegated to state agencies by above 28 U.S.C. § 1652 ( 1976).
Rules of associations approved by federal law
Contracts made by federal agencies
Interpretations of above by decisions of federal courts
Intcrprctations of decisions of statc courts concerning above

STATE
State constitutions
State statutes
Regulations of state agencies
Bylaws of corporations created by above
Rules of voluntary associations
Legal contracts
Interpretations of decisions of state courts concerning above
Interpretations of federal courts in state matten
T h e r e is a further difficulty in determining whether state o r federal
laws apply t o a given transaction. I n many business situations state law
alone regulates the transaction. T h e general m l c a s stated above is that
the Constitution of the United Statcs from which all fedcral legal power
flows is limited t o the subject matter that it covers. A11 other transac-
tions are governed by state law.31 S o f a r a s regulation of banks is
conccrncd, there is concurrent jurisdiction of fcderal a n d statc power;
but in casc of conflict, thc fcdcral powcr is suprcmc, a s indicnted in
T a b l c 7.n2

5 9-55 HOW CONFLICT OF L A W S DOCTRINES WORK

Burns Mortgage v . Fried illustrates the interplay between the
various rules. T h i s w a s a suit in the federal court in Pennsylvania o n

81 U.S.Const., Amend. X.
32 U.S. Const., Art. VI, cl. 2.
292 U.S. 487 (1934).
 PART I1
Commercial Paper
 Chapter 10
COMMERCIAL PAPER
AND ITS TRANSFER
Page
Types of Commercial Paper . . . . . . . . . . . . . . . . . . . . . . 173
Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
Gold and Foreign Exchange . . . . . . . . . . . . . . . . . .. ... 176
.
Instruments Payable in Money . . . . . . . . . . . . . . . . . . . 177
..
Papcr Pnyablc in Commodities . . . . . . . . . . . . . . . . . . 179
Interests in Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
.
Instruments Payable in Securities . . . . . . . . . . . . . . . . . 180
. . .. .
Contract Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 1
.
Security Devices . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 18 1
e n t Certificates and "Trust Receipts" . . . .
~ ~ u i ~ mTrust
Dealing in Commercial Paper or Documents . . . . . . . . .
Legal Effect of Transfer of Property, Goods, or Contracts
Transferees Other Than Bona Fide Purchasers . . . . . . .

A bank's business is devoted to dealing in various types of money

and commercial papcr in the form of contracts and memoranda evi-
dencing contracts. Commercial paper that commonly appears in banks
falls into a number of general classes: instruments payable in money;
those payablc in goods; paper evidcncing interests in businesses; receipts
and promises to deliver securities of various types; instruments creating
contract rights in goods or real estate; and paper giving title to real estate.

$10-10 MONEY
Money has many definitions. Economists define money in terms of
its use as a medium of exchange.' The Board of Governors of the

* See Cochran, M o n e y , Banking, and the E c o n o m y 5 (4th ed. 1979)

173
5 10-10 COMMERCIAL PAPER
Federal Reserve System, in carrying out its responsibilities to monitor
the money supply of the nation, uses a set of definitions that includes
demand deposits and sometimes other deposits and asset^.^ T h e legal
definition of money is different still. In the U.C.C. money is defined
as "a medium of exchange authorized or adopted by a domestic or
foreign government as a part of its currency." The legal tender of the
United States is defined more narrowly. It includes "all coins and cur-
rencies of the United States" regardless of when coined o r issued.' It
also includes Federal Reserve notes, circulating notes of Federal Reserve
Banks, and circulating notes of national banking association^.^ Legal
tender must be accepted "for all debts, public and private, public
charges, taxes, duties, a n d dues."
The coins of the United Statcs include the nickel, copper penny,
subsidiary silver coins in ten, twenty-five and fifty-cent pieces, silver
dollars and clad coins in denominations of ten, twenty-five and fifty
cents, and a d ~ l l a r . There
~ are special issue coins such as the Eiscn-
hower dollara and coins issued to commemorate the bicentennial of the
American R e v o l ~ t i o n .There
~ also is a Susan B. Anthony dollar.1° The
gold coins of the United States were discontinued and withdrawn from
circulation on January 30, 1934."
The currcncy of the United Statcs includes Unitcd States notes,
trcasury notes of 1890, gold certificates, silvcr ccrtificatcs, Fcdcral Re-
scrvc notcs, and circulating notcs of Fcdcml Rcscrvc Bnnks and national
2 T h e Board presently measures the money supply in five ways: M-IA,
M-IB, M-2, M-3, and L. See, e.g., 67 Fed. Res. Bull., Table A3 (Aug.
1981) for definitions of these categories.
a U.C.C. J 1-201(24). See U.C.C. J 3-107 and Comment 1. The
U.C.C. definition includes foreign coin and currency.
3 1 U.S.C. J 392 ( 1976).
6See 12 U.S.C. $ 0 101-153 (1976) for a description of the authority
given
- national banks to issue circulating notes.
3 1 U.S.C. 5 392 ( 1976). Prior to 1933 there were special provisions
for each type of money, which determined its status as legal tender and con-
trolled its circulation. Act of May 12, 1933, c h . 25, $ 4 3 ( b ) ( l ) , 48 Stat.
52 (1933); Act of June 5, 1933, Ch. 48, J 2, 48 Stat. 113 (1933). Some
of the special statutes have not been repealed. There are special provisions
for gold certificates, 31 U.S.C. $ 3 405b, 453, 454 (1976 & Supp. I11 1979);
gold coins, 3 1 U.S.C. 5 457 (1976); silver coins, 31 U.S.C. 5 459 ( 1976);
and minor coins, 31 U.S.C. J 460 (1976).
Authority to mint clad coins, which are an alloy of copper and nickel,
is given by 31 U.S.C. J 391 (1976). Minting of the minor coins, the penny
and the nickel, is covered by 31 U.S.C. J 3 17 (1976).
31 U.S.C. S 324(b) (Supp. 111 1979).
31 U.S.C. 5 324d (1976).
lo 3 1 U.S.C. J 324b-1 (Supp. 111 1979).
rC
'I 31 U.S.C. 5 3lSb (1976).
174
TRANSFER AND NEGOTIATION ,10-10
banking association^.'^ At one time the currency of the United States
was backed by reserves of gold and silver. Gold certificates werc issued
against gold reservcs equivalent to 100 percent of the value of the
ccrtificatcs; silver ccrtificatcs werc backed by a 100 perccnt silver re-
serve; the treasury notes of 1890 were secured by both silver and gold;
Fcderal Rcscrve notcs were securcd by gold reserves equal to at least
25 percent of the issue and other c ~ l l a t e r a l . ~ ~
The United States has not been on the gold standard since 1934.
Since that ycar, federal legislation has prohibited redemption of cur-
rency in gold." Gold continucd to serve as rcserves for United States
notes, trcasury notcs, Fcdcral Rcscrvc notes, and Fcderal Reserve dc-
posits until Congress removed thc requircmcnt of a gold reserve for
Fcdcral Rcservc dcposits in 1965 and cndcd the gold reserve rcquirc-
nicnts for U.S. notes, treasury notes, and Federal Reserve notes in
1 9 6 8 . ' T o n g r c s s passed similar legislation dealing with silver reserves.
Since Junc 24, 1968, silvcr ccrtificatcs cannot bc rcdecmcd in silvcr
bullion.10 Lcgislation cnacted in 1967 climinatcd the requirement that
the Sccretary of thc Treasury maintain 100 percent silver reserves for
silver c~rtificatcs.'~
Nearly all of the currency in circulation today consists of Federal
Rescrvc notcs, issued by thc Fcdcral Rcscrvc Banks.'" Thcsc arc obliga-
tions of thc Unitcd Statcs as wcll as of thc issuing Fcdcral Rcscrvc
Lln~lks.~~' 'I'llcy ; ~ r cbnckcd by coll;~tcrnl thnt cquals 100 pcrccnt of thc
l 2 31 U.S.C. $ 4 4 4 (1976). U S . notes are those issued pursuant to fed-
eral law. 31 U.S.C. 5 5 401-403. 91 1 ( b ) (1976). Treasury notes of 1890
are notes issued under the Act of July 14, 1890. 3 1 U.S.C. 5 91 1 ( c ) (1976).
13The issuance of silver certificates was authorized by Act of June 19,
1934, Ch. 674, S 5, 48 Stat. 1178 (1934) (originally codified a t 31 U.S.C.
$ 8 405, 821: repealed by Act of June 4, 1963, Pub. L. 88-36, Tit. I, 5 1, 77
Stat. 54 (1963)). Issuance of gold certificates is authorized by 3 1 U.S.C.
$ 4O5b (1976). The Act of June 12, 1945, Ch. 186, 59 Stat. 237 (1945)
established the gold reserve requirement for Federal Reserve notes at 25
percent. Before this Act, the reserve rcquircment was 40 perccnt.
l 4 31 U.S.C. $ 408a (1976). The United States ofTicially adopted the
gold standard in 1900 with the Gold Standard Act of March 14, 1900.
There is an excellent description of the monetary history of the United
Statcs i n Cochran, note I srrpm. at 34-49.
I U c t of March 18, 1968, Pub. L. 90-269, 82 Stat. 50. Congress elim-
inated the requirement that Federal Reserve deposits be backed by a
reserve of gold certificates in 1965. Act of March 3, 1965, Pbb. L. 89-3,
79 Stat. 5 (1965). The reserve requirement originally was set a t 40 percent,
but was reduced to 25 percent in 1945.
'"331 U.S.C. f 405a-3 (1976).
I T Act of June 24, 1967, Pub. 1.. 90-29, J 1, 81 Stat. 77 (1967) (aniend-
ing 3 1 U.S.C. 5 4053- 1 ).
I n Board of Governors, T h e Federal Reserve Sysretn 23 ( 1974).
' " I2 U.S.C. 5 4 1 1 ( 1976).
5 10-15 COMMERCIAL PAPER
value of the notes and that consists of U.S. government securities and
certain types of commercial paper.20
5 10-15 GOLD AND FOREIGN EXCHANGE
As discussed in $ 10-10, although federal law has eliminated the
redemption of currency in gold since 1934 in domestic transactions,
gold continued to play an important role because of gold reserve re-
quirements which lasted until 1968, and because of international mone-
tary arrangements which pledgcd the Unitcd States to redeem the dollar
with gold in international settlements. For a considerable period of
time, federal law required the value of the dollar to be set at a fixed
amount per ounce of gold. This price was set at $35 per ounce in 1934,
and this became the rate established for foreign exchange in 1944, when
the United States became a member of the International Monetary
Fund.*l
International economic considerations eventually made it impos-
sible for the United States to maintain its international commitment to
redeem dollars in gold at the $35 per ounce price.22 In March 1968,
the members of the International Monetary Fund agreed to maintain a
two-tiered price system that separated the official price of gold, which
was the basis for international exchange, from the private market price
of gold, which was considerably higher. This step soon proved ineffec-
tive against stemming the foreign demand for U.S. gold, however. On
August 15, 1971, Prcsident Nixon suspended the convcrsion of thc
dollar into gold in international settlements. Four months later, the
United States entered into the Smithsonian Agreement, which realigned
cxchangc r a k s bctwcen currcncics and rcsultcd in an 8.5 pcrccnt dcval-
uation of the dollar as the price of gold rose to $38 an ounce. Little
more than one year later, in February 1973, the United States unilaterally
devalued the dollar another 1 0 percent by raising the price of gold to
$42.22. By the end of 1973, this structure collapsed. In November
12 U.S.C.A. 5 4 12 (West Supp. I98 1 ) . The process for issuing Fed-
eral Reserve bank notes is discussed in greater detail in 5 2-65.
21 Act of May 12, 1933, Ch. 25, $ 43(b) ( 2 ) , 48 Stat. 51 (1933); 1934
Proclamation No. 2072, 48 Stat. 1730 (1933). The price previously had
been set at $20.67 per ounce. The authority granted by the 1933 Act to fix
the value of the dollar expired in 1945. The Bretton Woods Agreements
Act of 1944, Ch. 339, 59 Stat. 512, ratified the international agreement
which set the foreign exchange rate at $35. See generally H. Rep. NO.
1095, 90th Cong., 2d Sess., reprinted in 119681 U.S. Code Cong. dr Ad.
News 1760, 1761.
22 See S. Rep. No. 94-1 148, 94th Cong.. 2d Sess. (1976), reprinted in
I19761 U.S. Code Cong. & Ad. News 5936-5945.
TRANSFER AND NEGOTIATION
1973, the governors of the central banks of Belgium, Germany, Italy,
the Netherlands, Switzerland, the Unitcd Kingdom, and the United
States terminated their 1968 agreement, which had established the two-
tier system for pricing gold. The central banks became free to deal in
gold in the private market. As a result, gold finally was removed as
the basis for thc international monetary system. Exchange rates between
currencies n o longer were tied to a fixed value in gold, but could float
in response to economic condition^.^^ Congress adopted legislation in
1976 to implcment these changes.24
As the Unitcd States moved away from the gold standard, rcstric-
tions on thc private ownership of gold were eliminated.26 Also, Icgisla-
tion in 1977 removed the gold clause prohibition for transactions on or
after October 28, 1977. This prohibition had made contract clauses
stipulating for payment of an obligation in gold or an amount of money
measured in gold ~nenforceable.2~
Today, gold is not legal tender, but a highly speculative commodity
subject to widely fluctuating prices. Banks should usc caution in en-
gaging in any gold transaction^.^^
9 10-20 INSTRUMENTS PAYABLE IN MONEY
These are handled by banks and fall into three general classes:
demand, short-term, and investment paper.
Demand and short-term paper arc found in two lcgal types: the
draft and the note. The draft, of which the chcck is an cxamplc, is the
z5 Id. Cochrnn, note 1 s i t p r n , n t 32, 46.
"Pub. L. 94-564, 90 Stat. 2660 (1976).
26Act of September 21, 1973, Pub. L. 93-1 10, 5 3, 87 Stat. 352, as
amended by Act of August 14, 1975, Pub. L. 93-373, 5 2, 88 Stat. 445; Exec.
Order No. 11,825, 40 Pcd. Reg. 1003 (1974) reprinted in 12 U.S.C.A.
§ 95a note (West Supp. 1981). The Gold Reserve Act of Jan. 30, 1934,
Ch. 6 , I f 3-4, 48 Stat. 337-340, vested title to gold in the United States
and gave the federal government power to regulate and license private acqui-
sition and use of gold. The Acts of 1973 nnd 1974 repealed thcsc provi-
sions. They provided thnt no law, regulation, or order in effect on thc
eflective date of the Acts "may be construed to prohibit any person from
purchasing, holding, selling, or otherwise dealing with gold in the United
Stales or abroad." Pub. L. 93-1 10, § 3(b), as amended by Pub. L. 93-373,
8 2, s u p r a .
Act of Oct. 28, 1977, Pub. L. 95-147, 5 54(c), 91 Stat. 1229. Thc
gold clailsc prohibition was enacted in 1933. Act of June 5, 1933, Ch. 48.
5 1, 48 Stat. 113.
27 See Policy Statement on Gold, FDIC Press Release No. 72-74 (Dec.
9. 1974); Fedcral Reserve Board Letter to All State Member Banks (Dec. 9,
%74); Comptroller of the Currency Banking Circular No. 58 (Dec. 9, 1974).
,IMO COMMERCIAL PAPER
most common form of commercial paper appearing in a bank. It is a
contract that normally includes three parties: the drawer, the drawee,
and the payee. It is an order by the drawer asking the drawee to pay a
certain sum of money to a third party.28 Drafts may also be two-party
papcr, in that the drawcr and payce, drawcr and drawce, or drawce and
payee may be the same person. There are also a number of drafts
commonly used by insurance concerns that have four parties. The agent
of the insurance company draws the draft on the company payable to a
beneficiary of a policy and payable at a certain bank o r a number of
banks. This contract is sometimes treated as a check on a bank and
sometimes simply as a draft on the insurance company with the rcquest
of the bank to pay it for the insurance company's account. This point
is discussed at $ 21-65.
The note, which is normally tweparty paper, is simply a promise
by the maker to pay a sum of money to the named payee. Notcs can be
drawn payable to the maker himself, but they cannot be enforced by
others until the maker indorses o r transfers the note.2B It is also possible
for a draft to be drawn in which the drawer, drawce, and payce are the
same person. When such a draft has been indorsed and transferred,
the holder may enforce it either as a draft o r a promissory note.a0
Money orders and certificates of deposit are also current in bank-
ing. The money order is a variation of a draft in which a bank simply
orders money paid to a named person o r bearer. Sometimes there is
no named drawee. In this case, the order is considered to be drawn
on the issuing bank. The certificate of deposit is simply a note of the
issuing bank which recites that an amount of money has been deposited
and will be paid by the bank to a named person o r bearer. These are
discussed in more detail in Chapter 25.
The letter of crcdit in a true sense is not a promise to pay money
but a promise to honor drafts which may be drawn upon the pcrson or
bank issuing the letter of credit. These letters take various forms and
may or may not be negotiable. Their legal effect will be discussed in
more detail in Chapter 25.
Investment papcr is similar to a promissory note cxcept that it
usually runs for a long term. It may be an unsecured promise, which
usually is called a note or debenture, o r it may take the form of a
secured promise, usually called a bond o r mortgage bond. The interest
payments on investment paper sometimes are evidenced by coupons fas-
tened to the bond o r note itself, which can be cut off and transferred in
2a U.C.C. $ 3 3-104(2) (a), 3-104(2) (b).
2OThis result was obtained under N.I.L. 8 184. The U.C.C. does not
change the result. See U.C.C. 3 3-201 for the rights of transferees.
O
' U.C.C. 8 3-1 l 8 ( 9 ) . SCCN.I.L. 8 130.
178
TRANSFER AND NEGOTIATION 5 10-30
the same manner in which the bond itself is transferable. Chapter 16
discusses some special problems that arise with this type of paper.
Different types of investment paper may be classified as negotiable in-
struments under Article 3 of the Code, as securities under Article 8, or
chattel paper under Article 9.
1 10-25 PAPER PAYABLE IN COMMODITIES
The most common types of paper payable in commodities are the
warehouse receipt and the bill of lading. The first is an agrccmcnt by
a warehousenlan to store goods and deliver them to a named person.
The bill of lading is a similar contract by a carrier to ship goods and
deliver them to a named person. Paper of this kind may be either two-
or three-party paper. The person delivering thc goods may contract to
have them returned to him or to his order, o r to a third person o r to his
order. The rights and obligations created by this paper are covered by
Article 7 of the U.C.C., which will be discussed in more detail in
Chapter 12.
Similar, and much more informal paper in the form of shipping
bills, way-bills, cotton tickets, wheat tallies, and the like issued by ware-
housemen and shippers often find their way into the hands of banks.
§ 10-30 INTERESTS IN BUSINESS
These may be evidenced by various types of paper. The chief
among these is the stock certificate, which is a statement issued by a
corporation to the effect that a named person is the owner of a certain
number of shares of stock in the corporation. Under the Commercial
Code, the certificate itself constitutes the ownership of the shares in the
corporation, but it is recorded in the transfer books of the corporation,
which is entitled to treat the person s o recorded as the owner.31 The
nature and effect of the transfer of this type of paper will be discussed
in Chapters 12 and 29.
Stock ccrtificates themselves sometimes are placed in trust for the
purpose of obtaining votes to control a corporation. Under such an
arrangement, the trustee often issues trust certificates for stock certifi-
cates that take various forms, depending upon the nature of the trust.
These ccrtificates usually constitute a claim only against the trustee and
not the corporation itself, but they vary with the particular agreement
behind each trust.
2* " U.C.C. 5 8-207; U.S.T.A. § 3.
179
5 10-35 COMMERCIAL PAPER
Shares in unincorporated businesses take a form similar to the stock
certificate and may include interests in unincorporated business trusts,
joint stock companies, and limited partnerships. Certificates of this type
were outside of the Uniform Stock Transfer Act, and the nature and
rights created by them are governed by the particular statutes of the
states in which they are issued. In general, however, like the stock cer-
tificate, they carry a share in the business of the company and a right to
take that part in its management, which may be allowed by charter and
Insofar as these shares are of a type commonly dealt with in
securities exchanges o r markets, or commonly recognized in any area
where issued or sold as a medium for investment, thcy may be subject to
the provisions of the Commercial Code.3y
When large corporations fail, it is common for their stocks and
bonds to be turned over to receivers o r depositaries acting as their
agents, who often issue certificates to the effect that they are holding a
certain amount of such stocks or bonds to be replaced by new securities
upon completion of the reorganization. These receivers' certificates
should be distinguished from receivers' certificates commonly issued for
loans or advances made to the receiver in his conduct of the reorganiza-
tion. The latter certificates are instruments for the payment of money
in the form of notes that usually take preference over all other claims
against the firm in receivership, while the other type is a mere claim for
securities deposited.
5 10-35 INSTRUMENTS PAYABLE I N SECURITIES
There arc many othcr instmmcnts similar to thc rcceivcrs' ccrtifi-
cate which are payable in securities. Thc most common of these is the
interim certificate, which is a reccipt issued on the organization of a
corporation or the floating of a security issue, which promiscs to deliver
to the holder of the receipt the stocks or bonds when they are issued.
Similar certificates somctimcs are issued to facilitate transfer of secu-
rities on the books of corporations, to evidcncc that sccuritics arc hcld
in escrow, or to take thc placc of voting trust certificates. Brokers and
dealers in securities sometimes issue receipts of this nature which arc
8 2 The shares of such unincorporated bodies are often nontransferable.
For example, undcr 5 24 of thc Uniform Limited Partnership Act, such trnns-
fers can be made only by changing the certificate of rcgislralion. On Ihc
other hand, the shares of New York joint stock companies and Massachusetts
business trusts are often freely transferable. See Warren, Corporate Advan-
tages Without Incorporation 328, 458 et seq. (1929).
83 U.C.C. 58-102 and Comment. See Karr, "Share Drafts and the Draft
Issue" 12 U.C.C. L. J. 65-76 (1979).
180
TRANSFER A N D NEGOTIATION le s o
also used in facilitating transfcr. These certificates niay be a simple
receipt o r a binding contract to deliver the securities to the holder. Most
of these contracts are of a nature that makes them subject to the pro-
visions of the Commercial Code?'
5 10-40 CONTRACT RIGHTS
Contract rights may be cvidcnccd in various forms. The most com-
mon form that c o n m into the hands of banks is the lease, which is an
arrangcnwnt bctwccn landlord and tenant for thc usc of propcrty for a
certain tinic; thc bill of salc, which is a contract for the sale of goods;
insurance politics; and other similar documents. Most of these instru-
ments carry no particular right in themselves, but are simply evidence of
agreements between the parties thereto. They sonletimes are pledged
with banks as security but have little value for this purpose unless fur-
ther contracts are entered into between the banker and the parties to the
pledged ~ o n t r a c t . ~ "
5 10-45 SECURITY DEVICES
Papcr carrying title to real estate or to chattels is often used as
sccurity for loans. Thc most common contracts of this form in rcnl
estatc transactions arc thc mortgagc and thc deed of trust. Popcr that
provides for a sccurity intcrcst in personal propcrty is now classified by
thc Commercial Code as a sccurity agreement." Security agreements
includc what undcr carlicr law was tcrnicd a chattel mortgage, condi-
tional snlcs agrccnlcnt, trust receipt, or othcr name." Somctinics thc old
terminology is still uscd. This is of no legal conscqucncc. If the Codc
rcquircmcnts arc nict, a valid sccurity intcrcst is created whatever thc
name These transactions are discussed in Part IV.
10-50 EQUIPMENT TRUST CERTIFICATES
AND "TRUST RECEIPTS"
Two ~ypcsof sccurity devices that apparently involve the common-
law trust are the equipment trust certificate and the "trust receipt." The
former is an arrangement whereby propcrty that is pledged for the pay-
=' Id.
35 The nature and effect of such contracts is discussed in Chapter 29.
3a U.C.C. § 9-105(1).
8 7 These were created under statutes repealed by the Commercial Code.
.L 8 8 S U.C.C.
~ ~ 9-102, 1-201 ( 3 7 ) .
181
 § 10-55 COMMERCIAL PAPER
ment of a loan is conveyed to a third person known as a trustee, who
holds title for the benefit of the lender and issues a document known as
a trust receipt, which is evidence of the arrangement. It is very common
for railroads in purchasing equipment to use the trust form. Equipment
trust certificates covering transactions for the financing of rolling stock
are issued to be passed from hand to hand in the same manner as other
commercial papcr, each ccrtificate constituting a claim on thc trustee
for a particular share of the equipment in trust.
The so-called trust receipt, issued in financing the shipment of
goods, is really a simple receipt for merchandise upon which a bank or
financing company has made a loan. Thcsc rcccipts arc madc in various
forms, but usually statc that titlc to goods on which thc advance is madc
is in the lender. Transactions of this kind were covercd by the Uniform
Trust Receipts Act, but this Act has been repealed by Article 9 of the
Commercial Code. Documents called "trust receipts," however, can be
valid as security agreements under the Code.8o
Q 10-55 DEALING IN COMMERCIAL PAPER
OR DOCUMENTS
The commercial paper mentioned above can often be transferrcd
in such a manner that, either by contract o r delivery, rights may be cre-
ated in the transferee. Almost all of them either are, or can be, made
negotiable by statute o r by contract between the parties if they meet the
i
requirements of law and are issued in the manner described in the fol-
lowing chapters.
Instruments of this type may come to the bank in a number of
capacities. The bank may be the maker or purchaser of such paper in
its own name, o r it may take in a representative capacity, in which case
it may be a bailee, agent, o r trustee for another. Under such circum-
stances, the bank may hold the document itself as a thing of value, which
is usually the case with money and instruments payable in money and
negotiable documents of title. Or it may hold the instrument as evi-
: dence of a contract right or as security for other documents.
11 10-60 I,ECAI, EFFECT OF TRANSFER OF
PROPERTY, GOODS, 011 CONTRACTS
Thcre arc four diflcrcnt types of transfcr of propcrty in goods or
contracts. Typical of these are the transfer of real estate, the sale of
rc
88 U.C.C. 5 9-102. See Chapter 28.
TRANSFER AND NEGOTIATION ,k0-60
goods, the assignment of contracts, and the negotiation of negotiable
paper.
When title to real estate is transferred by sale, the purchaser gets
only the rights of the seller, and such rights as may be created by state
recording statutes. He takes the land subject to every defect which ap-
pears on the oflicial land rccords, and only in rare instances is it pos-
siblc for him to gct any grcatcr right than thc sellcr had. Thc purchaser
of personal property o r chattels may get the title of his transferor or, if
the seller was an agent or acting in representative capacity, such right as
he had power to convey.'O A purchascr in good faith cuts off any claims
ngninst thc scllcr which might havc nvoidcd thc titlc. For cxnmplc, if
thc scllcr is acting in breach of contract or purchased the goods by fraud
o r is attempting to avoid a licn, the bona fidc purchaser for value takes
free o f such claims.41 But if the goods were lost or stolcn, the purchaser
even in good faith and for value cannot keep them against the true
owner.
Thc purchascr of a contract right by assignmcnt takes the right in
a representative capacity, that is, he stands directly in the shoes of the
person from whom he purchases and is subject to all defenses against
him and all claims of ownership except those involving sale in breach
of contract to sell to a third party and similar equities.42
The purchascr in good faith and for value of negotiable papcr gets
all the rights appcaring on the face of the paper itself, and he cuts off
all defenses against prior parties except incapacity to make the contract
appearing on the paper and certain aspects of illegal activity, which will
be discussed in Chapter 15 under dcfenses. Negotiation also conveys to
thc bona fide purchaser a complete titlc cutting off all claims of owner-
ship.43 Thus, negotiation even by a finder o r a thief conveys perfect
rights to the bona fide purchaser.
It should be notcd that the quality of transfer of negotiable paper
is very similar to that of money where the bona fide purchaser in all
cases gets title and complete rights against the obligors. In fact, some
money, such as national bank notes and Federal Reserve notes, takes the
form of promissory notes payable to order. The chief difference be-
tween moncy and negotiable paper is that money is alnlost always pay-
able to bcarcr, whcrcas ncgotiablc papcr may bc pcrynblc cithcr to bcarcr
or ordcr. Money also normally is backed by the credit of the sovereign,
whcrcns ncgotinblc papcr usunlly rcsts only upon tllc crcdit of thc parties
liable thcrcon, but it scrvcs many of the important functions of money.
'O U.C.C. 5 2-403.
" Id.
'2 A.L.I., Restatement ( C o n t m c t s ) C h . 7 ( 1 9 3 2 ) .
48 U.C.C. 5 5 3-304, 3-305, 7 - 5 0 2 , 8-202, and 8-301
5 1045 COMMERCIAL PAPER

There is a great commercial advantage to the purchaser who deals in

negotiable paper because of the protection given good-faith purchasers
from prior claims and defenses.

Chapter 11
5 10-65 TRANSFEREES OTHER THAN
BONA FIDE PURCHASERS ELEMENTARY REQUIREMENTS
It should be clearly understood that the advantages gained by the
transfer of goods, contracts, or negotiable instruments mentioned above OF NEGOTIABLE MONEY PAPER
apply only in the case of a purchaser in good faith who has paid value
for the instrument, and in the case of negotiable paper he must have
bought the instrument before maturity' in order to enjoy the special Section Page
benefits.'' 11-5 AdvantagesofNegotiability . . . . . . . . . . . . . . . . . . . . . . 185
A person who purchases with knowledge of defenses or under such 11-10 Requirements of Negotiability . . . . . . . . . . . . . . . . . . . . 186
conditions that he should have known about them, or a donee, gets only 11-15 Promise or Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186
the rights of the tran~fcror.'~One who takes negotiable paper after 11-20 Unconditional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187
maturity receives approximately the same rights from his transferor as 11-25 In Writing and Signed . . . . . . . . . . . . . . . . . . . . . . . . . . 190
the assignee of nonnegotiable paper would get from an assignor.4e But 11-30 Certainty as to Sum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190
any such purchaser from a previous holder in due course of negotiable 11-35 Kinds of Money ............................... 19 1
paper gets all the rights of his transferor." 11-40 Demandpaper ................................. 192
11-45 Dcterminable Future Time . . . . . . . . . . . . . . . . . . . . . . . 192
11-50 Order or Bearer Pnper . . . . . . . . . . . . . . . . . . . . . . . . . . 193
44 U.C.C. 5 5 3-302(c), 8-305, 3-201, 3-306, 7-504, 7-506, and 11-55 Designation of Payee . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
8-301 (1). 1 1-60 Fictitious or Nonexisting Payees .................. 195
46A.L.I., Restatement (Contracts) 5 174 (1932); U.C.C.5 5 3-302,
3-304, and 3-306. 1 1-65 Drawee Must Be Certain . . . . . . . . . . . . . . . . . . . . . . . . 196
4e U.C.C. $ 5 3-201, 3-306, and 8-301; Chafee, "Rights in Overdue Pa- 1 1-70 All Formal Requisites Must Be Met . . . . . . . . . . . . . . . . 196
per," 31 Harv. L. Rev. 104 (1918); Morrison, "Equities of Ownership and 11-75 Ambiguous Terms and Rules of Construction . . . . . . . . 197
Equities of Defenses on Overdue Paper," 5 Tulane L. Rev. 287 (193 1).
47 U.C.C.5 3-201 (1 ).

5 11-5 ADVANTAGES OF NEGOTIABILITY

As indicated in Chapter 10, the holder of negotiable paper has
many advantages over the transferee of other commercial paper. Among
these is the right to re-discount the paper with the Federal Reserve
Banks. As cxplained in 5 2-55, although the Federal Rescrve System
has eased the requirements that all paper taken for re-discount must be
negotiable, negotiability is still necessary to meet many other regula-
tions.' Negotiable paper is also useful in ordinary credit situations.
Every banker should be able to recognize it on sight. Paper payable in
moncy is of the type whcre negotiability is usually present. But other
forms of commercial papcr may be negotiable. This chapter will bc de-
5 11-10 COMMERCIAL PAPER
voted to explaining the requirement of negotiability of money paper and
the next will cover other types of paper that may be negotiable.
8 11-10 REQUIREMENTS OF NEGOTIABILITY
Except in cases where recent state statutcs attempt to protect con-
sumers (discussed in detail in Chapter 3 5 ) , the provisions of the Code
govcrn thc naturc and eflcct of most typcs of ncgotiablc papcr.
The Negotiable Instruments Law (N.I.L.) broadly covered the
whole field of negotiability. Any instrument that failed to meet its re-
quirements was automatically not negotiablea unlcss it has bccn madc so
by some other legislative enactment. Because the N.I.L. has been re-
pealed by the Commercial Code, it is now important to know the
N.I.L.'s requirements only as they affected long-term contracts, like
bonds, that were issued before the enactment of the Code.
Unlike the N.I.L., the Code does not attempt to cover all the law
of negotiable paper. It provides for certain named types of paper but
leaves other paper to be made negotiable by court d e c i s i ~ n . T
~ o be
negotiable under the Code, a money instrument must contain an uncon-
ditional promise o r order in writing, signcd by the person to bc charged,
to pay a certain sum of money on denland o r at a determinable future
time to thc order of a namcd pcrson or to bearer.'
9 11-15 PROMISE OR ORDER
No set words are necessary to meet the requirement that an instru-
ment contain a promise o r order. Any words are sufficient that show the
intent of the person drawing the instrument to make an order or
p r o m i ~ e .The
~ form of order that commonly appears in checks o r drafts
is simply "pay to the order of," but "please pay" "or "you are author-
ized to pay" are sufficient to constitute orders.
2 Manhattan Co. v. Morgan, 242 N.Y. 38, 150 N.E. 594 (1926);Harper
v. Pacific Power & Light Co., 143 Wash. 456, 255 P. 949 (1927);Toon v.
Wapintia Irrigation Co., 117 Ore. 374, 243 P. 554 (1926);Bcrcnson v. Lon-
don Fire Ins. Co., 201 Mass. 172,87 N.E. 687 (1909);Millnrd v. Grccn, 94
Conn. 597, 110 A. 177, 9 A.L.R. 1610 (1920); Bank of Cal. v. National
City, 141 Wash. 243, 251 P. 561 (1926).
U.C.C. 5 5 1-102(2) (b), 1-102(3), Comment 2; 5 3-104 and Com-
mcnts.
' U.C.C. !I3-104.
U.C.C. 5 3-104 and Comments.
"indsor Cement Co. v. Thompson, 86 Conn. 511, 86 A. 1 (1913).
See also Wheatley v. Strobe, 12 Cal. 92 (1859); U.C.C. 5 3-lO4( 1)( b ) .
See Sheets v. Coast Coal Co., 74 Wash. 327, 133 P. 433 (1913);
U.C.C. 5 3-104(l) (b).
186
NEGOTIABILITY REQUIREMENTS
"I o r wc promise to pay" is the usual printed form of the prom-
issory note, but such words as "I guarantee to pay" or "I agree to
'
pay" are suficient promises. On the other hand, 1 . 0 . U . ' ~and due bills
containing such statcmcnts as "duc to X $100" arc not p r ~ n i i s c s , 'but
~
nlcrc acknowlcdgnicnts of dcbt, whilc "borrowcd $100" or "rcccivcd
$100" and thc likc arc nicrc receipts, not promises." If the words arc
ambiguous, it is the policy of the Code to treat such paper as nonnego-
tiablc within Articlc 3.12
§ 11-20 UNCONDITIONAL
T o be unconditional, the promise o r order must stand on its own
fect without relying upon an outside document o r event. Provisions in a
check that it is to be paid "only if attached voucher is properly counter-
signed," l3 o r that "this note is payable when my contract is accepted" l4
rendcr the instruments conditional and therefore nonnegotiable.
But whcn such cxpressions arc mere statcments of thc transaction
from,which the instrument ariscs, such as statements of accounts found
in vouchcr chccks ("this chcck is in payment of the following ac-
count," In)), they are not conditions and d o not render the instrument
nonncgotiablc. If rcqucsts arc contained in tlic instrunicnt for an act re-
quired in the course of business for paynicnt of the instrument, such as
requests oftcn found on certificates of deposit, "payable on return of this
8 B ~ c v.e Westcott, 3 Barb. 374 (N.Y. 1848); U.C.C. 5 3-104, Com-
ment 5.
Byrne v. Byrnc, 209 Mass. 179, 95 N.E. 88 (191 1).
l o Currier v. Lockwood, 40 Conn. 349, 16 Am. Rep. 40 ( 1873); Shearer
v. Shearer, 84 Colo. 234,269 P. 19 ( 1928).
But, i f such expressions are coupled with such terms as "with interest"
or "payable," they were treated as promises under the N.I.L. Byrne v. Byrne,
note 9 slrpm; Wcbcr v. Jantzcn, 180 S.W. 432 (Mo. 1915); but not under
the U.C.C. 8 3-104. Commcnt 5.
l a Scc U.C.C. 5 8 3-102, Comnicnt 2, 3-104, Commcnt 5.
l 3 U.C.C. 5 3-105; scc Bcvcns v. London & S.W. Bank, 2 Q.B. 1029
(1900).
" U.C.C. 8 3-lOS(2). A note that contained a restriction to the effect
thnt it could not be trnnslcrrcd, plcdgcd, or nssigncd withorrt thc writtcn con-
sent of thc mnkcr wns not a ncgotiablc instrument bccausc the promisc to
pay was not unconditional. First State Bank at Gallup v. Clark, 570 P.2d
1144 (1977);see Dcvine v. Price, 152 N.Y.S. 322 (1915).
'"uperior Fin. Corp. v. John A. McCrane Motors, I I5 N.J.L. 401, 180
A. 842 (1935); Brown v. Cow Creek Sheep Co., 21 Wyo. 1, 126 P. 886
(1912);U.C.C. 8 3-105.
4 11-20 COMMERCIAL P A P E R
certificate properly endorsed," l 8 or the words on a check, "payable
when properly countersigned by the payee," " they do not constitute
conditions and therefore d o not affect negotiability of the paper. These
are not sufficient in themselves, however, to make the paper negotiable,
o r payable to order.18
Statements of the source of reimbursement of the account to be
charged d o not affect negotiability of instruments containing them. A
promise to pay out of a particular fund, however, renders the instrument
nonnegotiable.lB F o r example, "pay to the order of X and charge my
account" 20 o r "on account of contract" 21 d o not destroy negotiability,
but "pay out of my cotton returns" 22 o r "out of my account" 2a are con-
ditions because payment depends upon the existence of a balance in the
accounts and therefore they render the instrument nonnegotiable.
Notes issued by governmental bodies are often payable out of "pav-
ing funds," "school taxes," and other particular funds. The Code spe-
cifically exempts this paper from the particular fund rule and makes it
negotiable."
It should be noticed that all checks drawn upon bank accounts are
expected to be paid from the balance of the appropriate account, al-
though checks themselves contain no reference to such expectation and
a careful examination will show that they are unconditional orders.
When a bank pays on a check, even if the payment constitutcs nn ovcr-
drnlt, i t is not a violntlon o l tlic contract contnincd on the face of tlic
la Johnson v. Blackmon, 201 Ala. 537, 78 So. 89 1 ( 19 18) ;Sacred Heart
Church Bldg. Comm. v. Manson, 203 Ala. 256, 82 So. 498 (1919); McCor-
mick v. Hopkins, 287 Ill. 66, 122 N.E. 151 (1919); Gypsum Valley Nat'l
Bank v. Dillenbeck, 1 1 1 Kan. 98, 205 P. 1022 ( 1922).
IT Oklahoma State Bank v. Hanover Fire Ins. Co., 169 Okla. 116, 36
P.2d 43 (1934).
InU.C.C. 5 3-1 1O(2).
lBU.C.C. 5 3-105(1).
z0 Shepard v. Abbott, 17 Mass. 300, 60 N.E. 782 (1901 ); Hanna v.
McCrory, 19 N.M. 183, 141 P. 996 (1914); U.C.C. 5 3-105(l)(f).
First Nat'l Bank v. Lightner, 74 Kan. 736, 88 P. 59 (1906); Slaughter
v. Bank of Bisbee, 17 Ariz. 484, 154 P. 1040 ( 1916); Utah Lake Irrigation
Co. v. Allen, 64 Utah 511, 231 P. 818, 37 A.L.R. 651 (1924) with note;
U.C.C. 5 3-lOS(l)(b).
22Tomlin v. Neale, 76 Cal. App. .. 726. 245 P. 800 (1926); U.C.C.
5 3-105(2)(b).
23 Woodward v. Smith, 104 Wis. 365, 80 N.W. 440 (1899); Glendora
Bank v. Davis, 204 Cal. 220, 267 P. 3 1 1 ( 1928) ; Rector v. Strauss, 134 Ark.
374. 203 S.W. 1024 11918): U.C.C. 8- 3-10512)(b).
' 24 U.C.C. § 3 - l b ~ ( l ) ' ( g ) .
CL note 29 supra, at 253 el seq.
NEGOTIABILITY REQUIREMENTS y 11-20
check, and the bank may claim the amount from the depositorI2'Jshow-
ing clearly that the nature of the order requires the check to be paid
even though no balance exists.
Promissory notes of partners and unincorporated companies some-
times raise difficulties on the question of conditional promises. The
general rule of law is that a n instrument payable out of a particular
fund is not n e g ~ t i a b l e .If~ ~a partner in a business were to draw a note
payable out of only his share of the business, it would be from a par-
ticular fund and therefore n o n n e g o ~ i a b l e . ~ ~ a note that limits pay-
But
ments only to the assets of the partnership, exempting personal property
of the partners, is n e g ~ t i a b l e . ~ ~
It is a common practice to include in instruments descriptions of
the transaction from which they originate. If such statements are merely
descriptive of the transaction that gives rise to the instrument, they do
not constitute conditions. For example, "the transaction which gives rise
to this instrument is the purchase of goods from the drawer" does not
allect the negotiability of the draft on which it o p p c a r ~ . "Value~~ rc-
ceived in rent for the month of August" in a rent "this note is
in payment of the first installment of a contract," 3 1 and the like in
notes d o not destroy thcir negotiability, and abbreviated forms of such
statements, "value received as per contract," are all construed as mere
stnlc~iicnlsof thc trn~isnctionsnnrl (lo 1\01 prcvc~lt the instrunlcnl con-
toining tlicn~from being n ~ g o t i a b l c . ~ ~
25See Morse on Banks and Banking 8 360 (Voorhees, ed., 6th ed.
1948) and authorities there cited.
2a U.C.C. 5 3-1 O5(2) ( b ) .
" Tonilin V. Ncale, note 22 supra; U.C.C. 5 3-105(2) (b).
28 Hibbs v. Brown, 190 N.Y. 167, 82 N.E. 1108 (1907); Charles Nelson
Co. v. Morton, 66 Cal. App. 144,288 P. 845 (1930); U.C.C. 5 3-105(l) ( h ) .
2 B S ~ m courts
e had difficulty with this and similar phrases in trade ac-
ceptanccs. Scc 13 Federal Reserve Brillcrin 5 10 ( l927), but such statements
are now regarded as not aflecting the ncgotiability of the instrument. See
Berctel's Orantran Negoriable Insrrrtrnenls Law 272 (7th ed. 1948) (herein-
after cited as Ber~tel'sBrannan); U.C.C. § 3-105(I ) ( b ) .
noTyler v. Whitney Central Trust & Sav. Bank, 157 La. 249. 102 SO.
325; Note, 23 Mich, L. Rev. 901 (1924); Home Bank & Tntst Co. v. Davis.
134 S.C. 508, 133 S.E. 467 ( 1926); Wible v. Abraham, 218 Ala. 664, 120
So. 474 (1929): U.C.C. § 3-105(l)(b).
Continental Guar. Corp. v. Pcople's Bus Line, 31 Dcl. 595, 117 A.
275 (1922); Berry v. Brandt C. Downcy Co., 89 Ind. App. 545, 167 N.E.
136 (1929); U.C.C. 1 3 - 1 0 5 ( l ) ( b ) .
82 U.C.C. 5 3-105(l) ( b ) . Thc cases are collcctcd in Berrtel's Brannan,
5 11-25 COMMERCIAL PAPER
/
On the other hand, such provisions as "this is subject to and part
of said contract," n3 "payment to be made only as provided in con-
tract," and their abbreviation, "subject to contract," make the instru-
mcnts dcpcndcnt upon the terms of the contract and thcrcfore condi-
tional and n o n n c g ~ t i a b l c . ~ ~
A Florida case held that a mere reference in a note that it is being
secured by a mortgage does not render the note conditional. However,
when the terms of the mortgage "are by this reference made a part
hereof" of the note, the note is c o n d i t i ~ n a l .Other
~ ~ cases have stated
that par01 evidence may not be admitted to contravene the terms of a
written instrument appearing complete and unconditional on its face.
Oral conditions varying the terms of a n agrcemcnt were held inad-
rnis~ible.~~
9 11-25 IN WRITING AND SIGNED
The requirement of writing simply means that no agreement that
is oral can be negotiable. T h e term "writing" in the law includes long-
hand, typewriting, o r any form of printing.88 The signature, as has al-
ready been indicated, may be made by writing the name any place on
the paper,ae by mark, rubber stamp, printing, o r lithography, if it can bc
identified sufficiently and is intended to serve as a signature.'O
3 11-30 CERTAINTY AS TO SUM
To be negotiable under the Negotiable Instruments Law, an instru-
mcnt had to bc payablc in a sum of n ~ o n c y . ~Instruments
' pnyablc in
aa Jones v. First Nat'l Bank, 170 Miss. 857, 155 So. 173 (1934); U.C.C.
5 3-105(2).
34 Fayetteville Bldg. & Loan Ass'n v. Crouch, 115 W. Va. 651, 177 S.E.
532 (1934); U.C.C. 1 3-105(2).
8 5 T h authorities
~ nre collcctcd in Beutel's Uranr~an,note 29 supra, nt
253 et seq.
88 Holly Hills Acres, Ltd. v. Charter Bank of Gainesville, 314 SO.2d 209
(Fla. App. 1975).
" Trustccs of Tufts College v. Parlanc Sportswcnr CO., 342 N.E.2d 727
(Mass. App. 1976); Texas Export Dev. Corp. v. Schlcdcr, 519 S.W.2d 134
(Tex. Civ. App. 1975).
U.C.C. 8 1-201 (46).
as U.C.C. 5 1-201(35); see Estate of Donohoe, 271 Pa. 554, 115 A.
878 (1922).
U.C.C. $ 5 3-401 ( 2 ) , 1-201 (29); see Bretch v. White, I80 Okla. 69,
67 P.2d 945 (1937); Notes, 7 A.L.R. 672, 46 A.L.R. 1498.
N.I.L. 5 l ( 2 ) .
NEGOTIABILITY REQUIREMENTS y 11-35
goods, services, and the like could only be negotiable if covered by some
other s t a t ~ t e . ' ~As indicatcd in !j 11-10, the Commercial Code leaves
open the possibility that judicial decision may make i k r u m c n t s that are
payablc in goods and services negotiable; but to be negotiable within Ar-
ticle 3, they must be payable in m o n ~ y . ~ ~
T h e amount of the instrument is sufficient to meet the require-
ments of negotiability if it is stated or can be calculated by a simple
process of arithmetic and reference to the calendar at maturity. Thus,
instruments payable with intcrcst until maturity at a certain rate are
negotiable." Instruments payable with interest at a certain percent until
maturity (providing that the whole amount will bear a dZferent rate in
case of default) are equally negotiable, bccause the amounts can be
calculated both before and after d e f a u k 4 T h e r e are also a few provi-
sions in the statutes stating that an instrument may be negotiable when
it contains promises to pay in addition to its face value certain specific
business charges even though the exact amount of these charges is un-
known. For example, the promise to pay e x ~ h a n g e , 'cost ~ of collection,
o r attorney's fccs does not destroy n c g ~ t i a b i l i t y . ~ ~
§ 11-35 KINDS OF MONEY
A n instrument may be ncgotiable even though it contains a stipula-
tion that it is to be paid in a particular type of current money.48 The
most common form of stipulation of this nature is the gold clause, which
provides that bonds o r notes shall be paid in a certain amount of dollars
in gold of the current weight and fineness. Such a clause did not destroy
ncgotiability, even when the government prohibited the collection of
obligations in gold or its vnluc. Thc stipulation for gold money has
simply becn interpreted to mean the same amount of legal tender.'O A
4 2 Mnnhnttnn Co. v. Morgan, note 2 srcpm; Kirkpntrick v. Lebus, 184
Ky. 139, 2 1 1 S.W. 572 ( 19 19) ; Vnnnclt v. Rcilly-Hcn Auto Co.. 42 N.D.
607, 173 N.W. 466 (1919).
4 S U.C.C. 8 3-104(l) ( b ) ; see note 3 supra.
4 4 N.I.L. 5 2(1); U.C.C. 5 3-106; Note, 81 Banking L.J. 587 (1964).
4 K Commcrcinl Crcdit Co. v. Nissen, 49 S.D. 303, 207 N.W. 61 (1926);
Burns Mortgagc Co. v. Fried, 292 U.S. 487, 54 S. Ct. 813, 78 L. Ed. 1380,
92 A.L.R. 1193 (1934); U.C.C. 8 3-106(1).
4 0 U.C.C. 8 3-106(l) ( d ) .
47 U.C.C. 8 3-106(l) (e).
''U.C.C. 5 3-1 07.
4 R N ~ r m av.n Baltimore &O.R.R., 265 N.Y. 37, 191 N.E. 726,92 A.L.R.
&I523 (1934); see Note. 95 A.L.R. 1335; U.C.C. 8 3-107; Radue v. Zanaty,
293 Ala. 585, 308 So. 2d 242 ( 1975).
5 1140 COMMERCIAL P A P E R
contract to pay s o many ounces of gold, however, would be a com-
modity contract. Whether such a contract could be made negotiable
under the Commercial Code will be discussed in Chapter 16.
Promises to pay in "currency" o r "current funds" fl also do not
affect negotiability. Many instruments used in forcign cxchange specify
the particular type of money in which they are to be paid, for example
in English pounds sterling or French francs. Such provisions are valid
and d o not affect negotiability if such money can be currently had in
due course of business either at the place of drawing o r payment. For
example, an instrument payable in Italian lira in New Jersey may be
still
5 1 1 4 0 DEMAND PAPER
Instruments a r e on demand when they so state, o r say they are
payable at sight, o r on pre~cntation.~' If no time for payment is ex-
pressed, the instrument is presumed to be payable on demand and -
negotiability is not affected by the omission of a definite date.n4 An
instrument with blanks not filled in is not negotiable. See $ 20-80.
A note that states on its face, "On demand but no later than 180
days after date," creates ambiguity as to whether it is payable on de-
m a r ~ d .A~ ~NOW draft (negotiable order of withdrawal) which gives
the bank the right to require fourteen days' notice before making pay-
ment is not a check. Such an instrument is not "payable on demand." n6
8 11-45 DETERMINABLE FUTURE TIME
A n instrument is payable at a determinable future time if it is
payable on a certain day or period after date or after sight o r presenta-
t i ~ n . ~Instruments
' are also held to be negotiable when they are payable
Sce Beutel's Brannan, note 29 supra, nt 300; U.C.C. S 3-107.
61Feder v. Elliott, 198 Iowa 447, 199 N.W. 288, 36 A.L.R. 1353
(1929), with note; U.C.C. $ 3-107.
n2 Incitti v. Ferrante, 12 N.J. Misc. 840, 175 A. 908 (1933); U.C.C.
5 3-107(2).
U.C.C. $ 3-108.
6 4 I d . See also Keister v. Wade, 191 App. Div. 870, 182 N.Y.S. 119
(1920); Note, 20 Colum. L. Rev. 490 (1920); U.C.C. $ 3-108.
"Seattle First Nat'l Bank v. Schriber, 282 Or. 625, 580 P.2d 1012
(1978).
mPenn~ylvaniaBankers Ass'n v. Secretary of Banking, 392 A.2d 1319
(Pa. 1978).
U.C.C. 5 3-109(1).
NEGOTIABILITY REQUIREMENTS ,11-50
on o r before a specific day mentioned therein.nR Thus, an instrument
promising to pay in sixty days o r upon demand in case of default is
still n e g ~ t i a b l e .The
~ ~ effect of acceleration clauses of this nature will
be discussed in detail in Chapter 16.
By a strange bit of judicial dccision which was later codified in the
Negotiable Instruments Law, an instrument payable on the occurrence
of an event that is sure to happen might be negotiable,OObut an instru-
ment payable upon the happening of a contingency was not n e g ~ t i a b l e . ~ '
For example, under the Negotiable Instruments Law an instrument
payable "on my death" might be negotiable,02 but an instrument payable
"on my fiftieth birthday" was not negotiable because while death is
certain t o happen, death might occur before the birthday, making the
occurrence of the birthday a c o n t i n g ~ n c y . The
~ ~ Code makes all such
instruments nonneg~tiable,~' a great improvement.
3 11-50 ORDER OR BEARER PAPER
One of the most important requirements of a negotiable instrument
is that it be payable to order or to bearer.05 Most nonnegotiable instru-
ments arc quickly identified bccause of the absence of both of these
clauses.
T h e common printed forms are "pay to the order of," "pay to X
or order," "pay to bearer," "pay to X or bcarcr," and sometimes "pay
to the order of X o r bearcr." T h e first two are order instruments," all
the others are bearer i n s t r ~ m e n t s . These
~~ words, although the most
"U.C.C. 8 3-lO9(l) ( 9 ) .
Dorbecker v. Brandt C. Downey Co., 88 Ind. App. 557, 163 N.E. 535
(1928); Schmidt v. Pegg, 172 Mich. 159, 137 N.W. 524 ( 1912); La Due v.
Bird, 51 S.D. 507, 215 N.W. 490 (1927); Ashland Bldg. & Loan Co. v.
Kerman, 23 Ohio App. 127, 155 N.E. 245 ( 1926).
O0N.I.L. 6 4(3). Contrn U.C.C. § 3-109.
" N.I.L. 8 4(2) Conimcnt.
Sce I n re Estate of Knapp, 197 Iowa 166, 197 N.W. 22 (1924); Mc-
Clenathan v. Davis, 243 Ill. 87, 90 N.E. 265, 27 L.R.A. (n.s.) 1017 (1909);
Keeler v. Hiles' Estate. 103 Neb. 465, 172 N.W. 363 (1919).
63 Sce Keeley v. Hemmingway, 13 Ill. 604 (1 852).
U.C.C. § 3-109, Comment.
"U.C.C. 8 3-104(l)(d).
Bd U.C.C. § 3-1 lO(1).
e7 U.C.C. 5 3-1 11. Virginia has enacted a variation of this provision,
stating that an instrument payable both to order and to bearer is payable to
bearer. This is a complete reversal of the rule in the Official Text and pro-
iduces nonuniformity for Virginia or any other jurisdiction affected by the
variation. Sce U.C.C. Permanent Editorial Board, Report No. 3, at 64.
5 11-50 COMMERCIAL PAPER
commonly uscd, arc not absolutely ncccssary for ncgotiation. Any
expression carrying the same intent was suficicnt undcr pre-Code law.08
For example, the expression commonly found in certificates of deposit,
"on rcturn of this ccrtificatc propcrly cndorscd," was usually construcd
as making the instrumcnt payablc to o r d ~ r .T~h c~ U.C.C. providcs for
the opposite result.1° Under the Code, the terms of the instrument must
say it is payable to order.
"Negotiable and payable to X is also an order instrument under
pre-Code law.?' T h e sole phrase "this check must be presented at once"
has even been held suflicient to make the instrument a check and thcre-
forc ncgotiablc.12 On thc othcr hand, "pay to X o r his~assignccs" has
been held a very doubtful clause; undcr the Code, such an instrument
is not negotiable." And "pay to X's assignees only" clearly does not
meet the requirements of negotiability under the Code.16
Under the Code, it has been held that checks made payable to
the ordcr of a "depository account," followed by a number, are ordcr
instrumcnts and not bcarer instruments. T h c court stated that such a
designation of the payee does not fall within any of the categories men-
tioned in the Code for bearer instrument^.^^ A note not payable to
order o r to bearer is not a negotiable instrument, but it is not for that
rcason that it is outside thc scope of Article 3 of the Code. If its terms
d o not preclude transfer and it is otherwise negotiable, the note is within
Article 3."
68 N.I.L. 5 10.
do Forrest v. Safety Banking & Trust Co., 174 F. 345 (3d Cir. 1909);
N.I.L. §$ 1, 10, 184, 42; see Felton v. Commercial Nat'l Bank, 39 Ohio App.
24, 177 N.E. 52 ( 1930). Contra, Aufdcrhcide v. Mocllcr, 221 Mo. App.
442, 281 S.W. 965 ( 1926).
U.C.C. 8 3-1 10(2), Comment 5.
Essig v. Porter. 63 Ind. App. 3 18, 1 12 N.E. 1005 ( 19 16).
l2Peninsula Nat'l Bank v. Penderson Constr. Co., 91 Wash. 621, 158
P. 246 (1916); cf. U.C.C. 1 3-104(2) ( b ) .
18 N.I.L. 1 5 1 ( 4 ) , 8, 10. Thc oldcr cnscs were inclined to trcnt such
instruments as negotiable, but as the distinction bctween ncgotiation and
assignmcnt has become better recognized, the Code vicw is that such expres-
sions destroy negotiability. U.C.C. J 3-1 lO(1). Such an instrumcnt was
held negotiable in Murphy v. Arkansas & L. Land Co., 97 F. 723 (1 899).
Contra Zander v. New York Sec. Co., 39 Misc. 98, 78 N.Y.S. 900 (1902).
" U.C.C. 5 3-llO(1).
76 Note the wording of U.C.C. 5 3-1 IO(1).
76 Frost Nat'l Bank v. Nicholas & Barrera, 500 S.W.2d 906 (Tex. Civ.
App. 1973). But see Willets v. Phoenix Bank. 2 Ducr 121 (N.Y. 1853).
l 7Carpenter v. Payette Valley Coop., Inc., 578 P.2d 1074 (Idaho 1978);
see U.C.C. 8 3-805.
NEGOTIABILITY REQUIREMENTS 5lid0
§ 11-55 DESIGNATION O F PAYEE
Where an instrument is payable to a payee, he must be reasonably
designated. He may be any person not the drawer o r maker, the drawer
~ or morc payccs jointly, one or two of scvcral payees,
or m a k ~ r , ' two
o r the holder of an onice for the timc being.l0 For example, "pay t o
Jones and Smith" 80 o r "Jones o r Smith" are sufficient designation.
SO, also, "treasurer of the town of Framingham," 82 "trustees of Crozier
Memorial Funds," "executor of Brown's estate," can be cashed o r in-
dorsed by the person holding the indicatcd office at the time of the act,
nnd arc thcrcforc sufficient dcsipnntion of thc p ~ y c e . ~ ~
Instruments drawn or payablc to thc cashier o r fiscal oflicer of a
bank o r corporation are deemed payable to the corporation and may be
negotiated by the indorsement of that officer o r of the corporation
itself.84
"Pay to the order of . . . . . . . . . ." is an incomplete instrument.
Until it is fillcd in, the instrument remains n o n n e g ~ t i a b l e . ~ ~
5 11-60 FICTITIOUS OR NONEXISTING PAYEES
T h e casc of instrumcnts with blanks should be distinguished from
situations where the blank has been Nled in with the name of a fictitious
o r nonexisting person. For example, instruments reading, "pay t o the
order of o n sight," o r "pay t o cash" 87 are payable to bearer. These
If a note is payable to the maker, it must be indorsed by him before
it can be negotiated. Moorc v. Cary, 138 Tenn. 332, 197 S.W. 1093, L.R.A.
l9l8D 963 (1918); U.C.C. § 3-llO(1).
l 8 U.C.C. $ 3-1 10.
"N.I.L. 5 8 ( 4 ) ; Pnrk v. Parker, 216 Mnss. 405, 103 N.E. 936 (1914).
Voris v. Schoonover. 91 Kan. 530, 138 P. 607. 50 L.R.A. (n.s.) 1097
(1914); Union Bank v. Spies, 151 Iowa 178, 130 N.W. 928 (1911); Page v.
Ford, 65 Or. 450, 131 P. 1013 (1913). So also an instrument payable to
"X and/or Y" is negotiable by the indorsement of either or both. U.C.C.
§ 3-1 16. See Glens Falls Indemn. Co. v. Chase Nat'l Bank, 257 N.Y. 441,
178 N.E. 751 (1931).
RZ Quincy Mut. Fire Ins. Co. v. Internntionnl Trust Co., 217 Mass. 370,
104 N.E. 845, L.R.A. (n.s.) 1915B 725 (1915); U.C.C. § § 3-110(l)(e),
3-1 lO(2) ( f ) .
ssU.C.C. 8 3-110(l)(e).
U.C.C. J 3-1 lO(f); Johnson v. Buffalo Bank, 134 Iowa 731, 112 N.W.
165 (1907); Griflin v. Erskine, 131 Iowa 444, 109 N.W. 13 (1906).
85Tower v. Stanley, 220 Mass. 429, 107 N.E. 1010 (1915); U.C.C.
5 3-1 15.
U.C.C. $ 3-1 I I (c). However, instrumcnts are incomplete when they
sad, "pay to the order o f . . . on sight." U.C.C. § 3-1 15.
U.C.C. J 3-1 1 1(c) .
5 11-6- COMMERCIAL PAPER NEGOTIABILITY REQUIREMENTS ,11-75
/

situations should be distinguished from the cases where names are mis-
spelled or where instruments are made payable to persons operating
under a trade name, as, for instance, "pay Oregon Locators." Such
instruments may be negotiated by the indorsements of the persons in-
tended, either by using the name on the instrument .or by adding to it
their own names.8u Also, instruments payable to a body of persons,
whether incorporated or not, are considered to be payable to a desig-
nated person and can be negotiated by anyone properly representing
the body." Other fictitious payee paper is negotiable as indicated in
Chapter 20.
0 11-65 DRAWEE MUST BE CERTAIN
In the case of chccks and drafts, the drawec of the instrument must
bc sunicicntly dcsignatcd so that hc can be idcntificd and locatcd.O1
'l'l~us, nn it~atrumcnt may 1~ ncgotinblc il drrlwn on 11 singlc flrnl,
whcthcr incorporatcd or not,n2or on joint d r a w ~ c sbut
, ~ ~not on a succcs-
sive series of drawees. Some corporations keep accounts in a number of
banks, all of which appear on the face of their checks. This practice was
prohibited by the Negotiable Instruments Law, which made such checks
nonncg~tiable.~'Under the Commercial Code, such practices arc valid
and do not alfect negotiability."b Instruments drawn on individuals or
unincorporated bodies by their trade names are also s u f f i ~ i e n t . ~But
~ @'U'C
such expressions as "to Hvezda Pokroku No. 4 or any person by whom
transferred only by a s ~ i g n m e n t . The
~ ~ Code is more lenient. If the
instrument does not meet the formalities set out here, it is not within
the protection of Article 3; but it may be made negotiable by other
Articles of the Code, by commercial custom, or by contract between
the parties.''
0 11-75 AMBIGUOUS TERMS AND RULES
OF CONSTRUCJlON
The Code contains a number of rules to encourage free circulation
of money paper without resort to parol evidence. Thus, when there is
doubt as to whether an instrument is a draft or a note, it may be treated
as either.'" Again, handwritten terms control typewritten ones, which
in turn control printed terms. Generally, words control figures, but
i f the words arc ambiguous, figurcs control. Thus, an itcm drawn
f o r "ni~~ctcctihuntlrccl cigl~t 111111drctlninety six nncl 01/100" nnd
"$19,896.01" wns adjudgcd to be for the latter amount, the words being
awkward but not a m b i g u o ~ s . ' ~ ~
O8 N.I.L. $ 8 1-14.
O0 See authorities cited in note 3 supra. See also U.C.C. 5 3-805 Com-
ment.
.C
.. 5 3-118.
lo' Wills v. East Tex. Teachers Credit Union, 533 S.W.2d 918 (Tex.

I may be employed" is not a sufficient designation of the drawee.07

5 11-70 ALL FORMAL REQUISITES MUST BE MET

T o be ncgotiable, an instrument must meet each one of the formal
requirements mentioned in this chapter. If any one of thcm was missing,
under the N.I.L. it was automatically not negotiable and could be

88 Write Away Pen Co. V. Buckner, 188 Mo. App. 259, 175 S.W. 81
( 1915); see Frazier v. Cottrell, 82 Or. 614, 162 P. 834 (1917).
U.C.C. 5 3-203.
cm U.C.C. § 3-1 10( 1 ) (e).
" U.C.C. $ 3-102(l)(b).
On U.C.C. 5 3-1 10(l)(g).
Oa U.C.C. 5 3-102(l) ( b ) .
n 4 N.I.L. 5 128.
'' U.C.C. 5 3-lO2( 1)(b).
"N.I.L. $ 5 43, 191;U.C.C. 5 3-102.
O7N.I.L. $8 1 ( 5 ) , 128; Dugane v. Hvezda Pokroku No. 4, 119 N.W.
141 (Iowa 1909).
 Chapter 12
OTHER TYPES OF
NEGOTIABLE PAPER
Section
12-5 Other Types of Negotiable Paper . . . . . . . . . . . . . . . . . .
12-10 Negotiability of Commodity Paper at Common Law ...
12-1 5UniforrnLaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12-20 Negotiability of Commodity Paper Under
the Commercial Codc . . . . . . . . . . . . . . . . . . . . . . . . . . .
12-25 Identification of Documents of Title . . . . . . . . . . . . . . .
12-30 Carrier's Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12-35 Camcr's or Warehouseman's Lien . . . . . . . . . . . . . . . . .
12-40 Method of Transfer of Documents of Title . . . . . . . . . .
12-45 Naturc of Negotiation . . . . . . . . . . . . . . . . . . . . . . . . . .
12-50 Stock Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12-55 Effect of Negotiation . . . . . . . . . . . . . . . . . . . . . . . . . . .
12-60 Prior Statutes Making Corporate Bonds Negotiable . . . .
12-65 Investment Securities Under the Commercial Code . . . .
12-70 Investment Securities Under the Commercial Code
-1977 Amendments and Unccrtificated Sccuritics ....

§ 12-5 OTIIER TYPES OF NEGOTIABLE PAPER

T h e chief types of ncgotiablc papcr other than that payable in
money arc commodity paper, stock ccrtificatcs, interim certificates or
sccurity reccipts, and cquipmcnt trust certificates. If thcy are documents
of title, such as bills of lading and warehouse receipts, they are covered
by Article 7 of the Commercial Codc. If they are securities that are
traded on cxchangcs o r in thc "over the counter" market, they are
covered by Articlc 8 of the U.C.C.' Corporate bonds also will usually
fall within the Codc's coverage of secu~ities.~

U.C.C. 5 8-102(l) ( a ) Comment.

U.C.C. 5 8-102.

5 12-10 COMMERCIAL PAPER
Although commodity paper may take almost any form, it usually
appears in three standard types: the warehouse receipt issued by ware-
housemen, the bill of lading issued by trucks and railroads, and ocean
freight bills covering shipment of goods by steamer. T h e negotiability
of the last two is also affected by a federal statute: which covers all
shipments in interstate commerce, from any state o r territory, or s h i p
ments from any state o r territory to a foreign country.' This act is
similar to Articlc 7 of the Code, which would apply to purcly intra-state
transactions.
5 12-10 NEGOTIABILITY OF COMMODITY PAPER
AT COMMON LAW
Commodity paper of all types falls into two definite classes: nego-
tiable and nonnegotiable. The nonnegotiable bill of lading o r ocean
freight bill is known as a straight bill,6 whereas the ncgotiablc onc is
callcd an ordcr bilL0 Wnrchousc rcccipts also nrc eithcr ncgotiablc or
nonnegotiable but a r e not referred to as "straight" o r "order" receipts.'
The nonnegotiable or straight commodity paper is simply a receipt
for the goods given by the carrier o r warehouseman and has no signifi-
cance other than as evidence of the shipping c0ntract.O Ncgotiablc or
ordcr papcr has vcry important sccurity functions, for thc papcr itself
carries title to the goods and it embodies shipping o r storagc contracts."
Under the Code this papcr, whether negotiable o r not, is classified as a
''document of title." lo
At common law, the bona fide purchaser of negotiable commodity
paper who came within the terms of the contract received the right to
have the goods delivered by the carrier o r warehouseman1' and he re-
ceived such title to the goods as the person depositing the goods with the
carrier o r warehouseman had, or had power to convey.I2 Such rights,
8 49 U.S.C. 5 5 8 1-1 24 ( l976), known as the Pomerene Act.
49 U.S.C. $ 81 ( 1976).
'49 U.S.C. 1 82 (1976). U.C.C. 5 7-104.
'49 U.S.C. 5 83 (1976). U.C.C. 5 7-104.
7 U.W.R.A. $ 5 4, 5; U.C.C. 4 7-104.
49 U.S.C. 5 109 (1976); U.C.C. 5 7-501(5); but if i t is transferred, the
transferee has the right to notify the carrier to hold the goods for him in
accordance with the duties,of the contract owed to the transferor at the time
of notification. See U.C.C. 5 7-504.
" 49 U.S.C. 5 11 1 (1976); U.C.C. $ § 7-502, 7-503 & 7-504.
lo U.C.C. 5 1-201 ( 15) and Article 7.
" William T. Hardie & Co. v. Vicksburg, S. & P. Ry., 118 La. 253, 42
So. 793 (1907).
l ~ o m m e r c i a Bank
l of Selma v. Hurt, 99 Ala. 130, 12 So. 568 (1892);
Scheuermann v. Monarch Fruit Co., 123 La. 55, 48 So. 647 (1909).
I
TYPES O F NEGOTIABLE PAPER g 12-15
however, could be passed only by persons t o whom the bill had been
properly entrusted with power to sell it.18 If, however, the bill was
indorsed in blank, o r payable to bearer, the person to whom it had been
given for any purpose was said to have indicia of title and power to
convey to a bona fide purchaser full rights in the goods." But a t com-
mon law, a purchaser from a finder o r a thief, even though he might
have bought in good faith, received no rights in the bill and no proper
claim upon the warehouseman, the carrier, o r the goods.16 T h e courts
of thc various states were by no means uniform in their decisions on
this point, and the law was thrown into further confusion because a great
many states had adoptcd local statutcs which varied the nature of the
rights of tllc parties. T o remedy this situation, the National Conference
of Comrnissioncrs on Uniform Statcs Lawslo proposed a number of
statutcs that have becn widely adoptcd. They later cooperated with the
American Law Institute in drafting and promoting the U.C.C. which, as
indicated bclow, has recodificd and replaced thc earlicr uniform laws.
8 12.15 UNIFORM LAWS
T h e U.C.C. has replaced the uniform laws that governed the nego-
tiability of commodity paper in all U.S. jurisdictions cxccpt Pucrto Rico.
T h e version of the Uniform Warchouse Rcccipts Act still in force in
Puerto Rico provides that a bona fide purchaser can receive title to the
goods only when he purchases from a person entrusted with the docu-
ment. A finder or a thief cannot convey title either to the document o r
to the goods.17 Under the Uniform Bills of Lading Act and the Uniform
Warehouse Reccipts Act still in force in Pucrto Rico, a purchaser from
a findcr or thief might receive title to the goods covered by the document
of title if he fell within the contract appearing on the paper.18
laShaw v. Railroad Co., 101 U.S. 557 (1880); Commercial Bank v.
Lee, 99 Ala. 493, 12 So. 572 ( 1893).
1 4 Pollard v. Reardon, 65 F. 848 (1st Cir. 1895); Munroe v. Philadel-
phia Warehouse Co., 75 F. 545 (3d Cir. 1896); Commercial Bank v. Armsby
Co., 120 Ga. 74,47 S.E. 589 ( 1904).
'"haw v. Railroad Co., 101 U.S. 557 ( 1 880).
lo This is a largc committee of commissioners appointed from each state
which meets each year for the purpose of drafting and recommending statutes
for adoption by the various state legislntirres. Their recommended statutes
are published each year in the Handbook of the National Cotn~nissionerson
~ n i f o r r nL o w .
ri l 7 U.W.R.A. $ 5 40, 47. This is still the rule in Puerto Rico.
Is U.B.L.A. 5 5 31, 32 & 38; U.W.R.A. 5 5 40, 47.
20 1
§ 12-20 COMMERCIAL PAPER
It should be noted, however, that the federal version of the Uni-
form Bills of Lading Act, the Pomerene Act, is still in force on all
transactions in interstate commerce, which covers the great majority of
bills of lading. Under the Act, the bill of lading is negotiable in the
hands of a findcr or thief. Thus, although state law governing bills of
lading is now Article 7 of the U.C.C., there also is a federal statute
patterned after the Uniform Act that coexists with this state law and
applies to interstate transactions.
5 12-20 NEGOTIAnILITY OF COMMODITY PAPER
UNDER TIIE COMMERCIAL CODE
The classification of documents of title under the U.C.C. has been
broadencd greatly to include, in addition to bills of lading and ware-
house receipts, airbills, dock warrants, dock receipts, orders for delivery
of goods, "and also any othcr documcnt which in the rcgular course of
business or finance is treated as adequately evidencing that the person
in possession of it is entitled to receive, hold and dispose of the docu-
ment and the goods it covers," and which is issued by a bailee and
purports to cover goods in his p ~ s s e s s i o n . All
~ ~ the above-namcd com-
nlodity papcrs, wlicthcr o r not thcy arc ncgotiablc, arc classcd by thc
Code as documents of title and may bc negotiable or n o n n e g o ~ i a b l e . ~ ~
The formal requirements of such papers to be negotiable are discussed
in 5 12-25.
When a negotiable document of title is negotiated to a bona fide
purchaser, he gets title to the document in much the same manner as
does the holder in due course of negotiable money paper.21 Title to the
document also carries title to the goods,22 except that the true owncr
or one having a legal interest from whom the goods were stolcn or who
lost them and had nothing to do with issuing the document, does not
lose his original title or interest.13 There are also certain othcr cxcep-
tions to the rule that title to the document carries title to the goods,
but they are highly technical and not pertinent h e m z 4 The Commercial
Code repeals the Uniform Bills of Lading Act and the Uniform Ware-
house Receipts Act.26
la U.C.C. 5 1-201 ( 6 ) .
U.C.C. 5 7-401.
21 U.C.C. 5 7-502( 1 ) ( a ) .
22 U.C.C. 8 7-502( 1 ) ( b ) .
" U.C.C. 5 7-503.
24 See U.C.C. $ 5 7-205, 7-503 & 7-504.
26 See U.C.C. 55 10-102, 10-103; cf. 5 10-104.
TYPES O F NEGOTIABLE PAPER 3 12-25
5 12-25 IDENTIFICATION OF DOCUMENTS OF TITLE
Although most bills of lading and ocean shipping bills are printed
in standard forms approved by the Interstate Commerce Commission
or state Public Service Commissions, warehouse receipts may take
almost any lorm the warehousenlan dcsires. All such paper should meet
the following requirements: it should bear a date of issue or receipt of
the goods, a description of the goods, a statement of whether the goods
,arc delivered to a specific person or to his ordcr, the place where the
goods are to be shipped, in the case of a bill of lading or an ocean
shipping bill, where thcy arc reccivcd, and the signature of the carricr or
w a r c h o u ~ c m n n .In
~ ~addition, the warchousc rcccipt must carry the rate
of storage chargcs,27 and the bill of lading and ocean shipping bill
usually carry the freight rate. The warchouse receipt also must carry a
statemcnt of any advancement or claims against the go0ds.~8 The bill
of lading and occan shipping bill usually carry such statements. The
warehousc rcceipt should carry a serial numbcrZ0and bills of lading and
ocean shipping bills usually have similar idendfication marks.
The formal requisites of the ncgotiable and nonnegotiable docu-
ments arc almost the samc. The bill of lading and ocean shipping bill
arc made ncgotiable simply by printing "order bill" on them and speci-
fying that thc goods arc dclivcrablc to the ordcr of a ccrtain pcrson,
or to him or his assigns.80
T h e warehouse receipt is made negotiable simply by specifying that
the goods are deliverable either to bearcr or to the order of a named
person.3' Sometimes the words, "negotiable bill," or "negotiable docu-
ment" are also printed on the face of documents of title. It should be
noted that the negotiability of documents of title under the old Uniform
Laws including the Pomerene Act is controlled by the printed form.
Any attempt to make a negotiable bill nonnegotiable by writing in addi-
tional provisions to that effect was probably invalid.a2 Under those acts,
ocean freight bills, bills of lading in interstate commerce, and warehouse
rcccipts intended to be nonnegotiable must have the words "nonnego-
tiable" or "not negotiable" plainly upon their faces.aa The Code has no
" 4 9 U.S.C. 5 5 101-103; U.C.C. 5 5 7-104, 7-202.
2T U.C.C. 5 7-202(e).
z8 U.C.C. 5 7-202(i).
28 U.C.C. 5 7 - 2 0 2 ( ~ ) .
49 U.S.C. 5 8 3 (1976); U.C.C. 5 7-104.
8 ' U.W.R.A. 5 5; U.C.C. 5 7-104.
a 2 U.B.L.A. 8 5 ; U.W.R.A. 5 5; 49 U.S.C. 5 83 (1976). U.C.C. 5 7-104
is not clear on this point.
83 49 U.S.C. 5 86 (1976); U.W.R.A. § 7.
*
3 12-30 COMMERCIAL PAPER ' :
such provisions, so it would seem that any commodity paper not deliv-
erable to order or to bearer, or in the case of overseas trade to "a named
person or assigns," would be n~nnegotiable.~'Under the older acts in
the case of warehouse receipts, when it was doubtful whether the receipt
was negotiable or not, a bona fide purchaser who took it believing it ,
was negotiable was entitled to all the rights of a purchaser of a nego-
tiable receipt.85 Under the U.C.C., the opposite result is indi~ated.'~
Alterations of bills of lading and warehouse receipts are ineffective and
the documents are enforceable according to their original contra~ts.~:
, .
5 12-30 CARRIER'S LIABILITY
When a carrier or warehouseman issues a negotiable document of
itle, he is under the usual liability of the shipper or bailee of goods. In
rddition, by making the document negotiable, he undertakes to deliver
he goods to the holder of the document at the completion of the ship-
nent or the storage.a8 Negotiable ocean freight bills nre sometimes
ssued in sets providing that in case the first is not presented, the second
will carry the-rights. The second contains similar provisions in case of
lonprcscntment of the first. In these situations, the carrier is required
o perform the contract on behalf of the person first presenting any one
>f the set of bills. These bills had their origin at a time when the risk
)f loss was great. The bills were usually sent by different routes in
xder to make sure that the consignee received at least one copy. Rail-
.oads are prohibited from issuing bills in sets for inland shipmentsPg
4lthough order bills of lading habitually are issued in triplicate, the
;econd and third copies are always marked "duplicate" and "triplicate,"
ind are only evidence of the existence of the original. Only the original
:arrics title to thc goods. Warehouse receipts arc sometimes issued in
iimilar form. In case a camer or warehouscman issues documents of
See U.C.C. 5 7-1 04.
" U.W.R.A. 5 7; Manufacturers Mercantile Co. v. Monarch Refrig-
:rating Co., 266 Ill. 584, 107 N.E.885 (1915).
"U.C.C. 5 7-104(2).
a7 49 U.S.C. 5 93 ( 1976); U.C.C. f 9 7-208, 7-306. The person who
'raudulently and materially altered the bill and purchasen with knowledge
3f such fraud will probably lose d l rights thereon. See U.W.R.A. P 13.
an 49 U.S.C. 5 89 ( 1976) ; U.C.C. f 7--403. Where a warehouseman
releases goods under the purported authorization of the holder of the original
receipt without production of this original and it turns out that the'authori-
ati ion was forged, the warehouse remains liable. Turner v. Scobey Moving
b Storage Co., 515 S.W.2d 253 (Tex. 1974).
49 U.S.C. 5 84 (1976); cf. U.C.C. 5 7-304.
TYPES O F NEGOTIABLE PAPER h 5
title in sets without indicating that they are duplicates and triplicates,
he may be liable to bona fide purchasers of both copies for the value of
the goods.'O '
The carrier or warehouseman is liable'to deliver the goods to the
holder of the document of title, and discharges his liability if he does
so in good faith.4' Although the bona fide purchaser of a document of
title gets a clear title to the contract that appears therein, he may not
always get clear title to the goods themselves. He gets only the title
that the person delivering the goods to the camer or warehouseman had
or had power to convey. Thus, if the goods were delivered for storage
or shipment by a finder or a thief, the bona fide purchaser of the bill
r,
gets only the rights of the finder or thief.'Vnder these circumstances,
carriers sometimes are faced with adverse claims to goods. In this case,
they may discharge their obligations by offering to deliver the goods in
court and interplead the various claimants who can then indicate their
respective title^.'^
Any clause in a warehouse agreement purporting to exculpate the
warehouseman from a duty of reasonable care is inefIective and contrary
to the U.C.C."
3 12-35 CARRIER'S OR IYAREIIOUSEMAN'S LIEN
A carrier or warehouseman has a lien on the goods to cover his
freight and other charges. This lien gives him the right to hold the goods
themselves as security for the payment. In cases where the goods are
covered by documents of title, the warehouseman or carrier may enforce
his lien for all storage or freight on the goods covered. But liens for
other claims existing when the contract is issued or being made can be
clainlcd only for the chargcs appcnring on the face of the document.48
In addition to the right to hold the goods until the charges are paid, the
warehouseman has the power to foreclose the lien by selling the goods
at a special sale after first giving a notice to the parties involved con-
taining an itemized statement of his claim, a description of the goods,
and a notification of the time of the auction. He may then sell the
goods, satisfy his lien out of the proceeds, and return the balance to the
4049 U.S.C. 1 85 (1976); U.C.C. f 7-402.
U.C.C. 8 7 4 0 3 .
4 2 49 U.S.C. f 1 1 1 ( 1976); U.C.C. 5 7-503.
4s 49 U.S.C. $ 8 9 7 , 9 8 (1976); U.C.C. 5 7-603.
44 U.C.C. 5 8 7-202(3), 7-204(1) ; Kimberly-Clark Corp. v. Lake Ware-
house Div. of Lake Erie Rolling Mill, Inc., 47 App. Div. 2d 492, 375
 'st

91UO COMMERCIAL PAPER ['i A ; ' \ I

1
,$,
.. @
%
TYPES OF N E G O T M L E PAPER ,1245
.:.f:.
J
I b

i
" ' '*L.

holder of the document or the owner of the goods.'6 In cases of perishi ':I. Thereafter, title can be further transferred only by the indorsement of
able goods, the lien may be enforced by sale without notice where the . : 4.9 . this party.M
goods are in danger of losing their Val& o r being spoiled.47 ' T h e Unk $! Warehouse receipts are sometimes issued to bearer. Bills of lading
form Bills of Lading Act and the U.C.C.contain no detailed provision .. ,.:%Y+ and ocean shipping bills are almost always issued to order. But whether
1 for foreclosure of liens, but the carriers have similar rights that are , . .<:
c

].,!
9. the instrument is issued originally to bearer o r indorsed in blank, its
) governed by local statutes18 . ' * I c ir .f negotiation can be restricted by a special indorsement placed upon it by
I In order to assert a lien under Section 7-209 of the Code, the any holder.6n

I lienor must be engaged in the warehouse business.4g

I
L
,,I.L

' ,
a

5 12-40 METHOD OF TRANSFER OF DOCUMENTS " .'I
OF TITLE
Documents of title can be transferred in two ways, either by assign-
_IbU
ment or negotiation. Both negotiable and nonnegotiable d o c u m a d
title can bc transferred so that the transfcree nets the rights of the
transferor. This can be accomplished simply b; delivering the nego-
tiable o r nonnegotiable document payable to order without indorse-
by indorsing a nonnegotiable document,'ll o r by writing a
transfer on either, limiting the exchange t o an assignment only.62
Negotiable documents of title can, depending upon their form, be
negotiated either by delivery or indorsement. If the instrument originally
is payable to bearer, a s is sometimes the case in warehouse receipts, or
if it has been indorsed in blank, title to the instrument and the goods it
represents can be transferred by mere de1ivery.m If the holder desires
to transfer title t o a particular person, he may indorse the instrument,
specially indicating by name the person t o whom it is to be transferred.
'I
, I
+ ( /;
"U.C.C. $ 8 7-2 10, 7-308.
U.C.C. 8 8 7-206. ?!
49 U.S.C. 105, 106 (1976);cf. U.C.C. § § 7-308(6), 7-308(7).
In a recent Florida case, the plaintiff asked the defendant to pick up
the contents of his house and store them pending notification of an address
to which they would be shipped. No such notification was given, and after
more than two months, the defendant mailed a notice to the address the
plaintiff had given, but the letter was returned. The defendant sold the goods
to satisfy its lien for their storage but did not advertise the sale as required
by O 677.210 of the Florida Statutes Annotated. T o the plaintiffs action for
.<)
I
5 12-45 NATURE OF NEGOTIATION
The negotiation of the document gives to the bona fide purchaser
for value, and without notice of adverse claims, all of the rights appear-
I ing on the face of the contract and, as was indicated above, he gets such
title to the goods as the person originally depositing them with the
carrier or thc shippcr had or hnd powcr to convcy. Thus, if a fully
negotinble document payable to benrer o r indorsed in blank is stolen
from any holder, the bona fide purchaser gets a direct claim upon the
carrier or warehouseman for delivery of the goods according to all the
provisions of the contract contained in the d o c ~ m e n t . ~ ~
Under the Code, the bona fide purchaser of the negotiable docu-
ment of titlc gets full rights only if he purchased "in the regular course
of business." 87 Thus if it is shown that an otherwise bona fide pur-
chaser bought under unusual circumstances not in a regular business
transaction, he has only the rights of the person from whom he
purchased.58
. The fully negotiable document of title differs from the negotiable
instrument only in this respect, that the holder of the document is
0
a it:'
,, f c ,
claiming goods and may not necessarily get clear title to them through
( ( I
the document, but only the title of the person contracting with the
carrier o r warehouseman." The holder in due course of a negotiable
instrument payable in money gets a clear claim to the debt that appears
on the face of the i n s t r ~ m e n t ,but
~ ~ since the negotiable instrument
represents only a debt, he has no claim upon specific money o r chattels.
" 49 U.S.C. 8 108 ( 1976);
. U.C.C. 1 7-501 (3).
k; '*
55 U.C.C. 9 7-501 ( 3 ) .
.

Cf. Hutchings, Sealy & Co. v. Missouri K. & T.R.Co., 84 Kan. 479,
conversion of the goods, the defendant pleaded that it was not a warehouse-
man, but a carrier. The court held that a carrier may also be a warehouse-
man. Suddath Moving & Storage Co. v. Roure, 276 So. 2d 549 (Fla.:App.
bg ; 114 P. 1077 (1911);Squillante & Fonseca, Williston on Sales 1 292 (4th ed.
1973).
57 U.C.C. 5 7-501 (4).
1973). ( 1 &
% . #$ U.C.C. J! 7-504.
60 U.C.C. 58 7-504, 7-506.
" U.C.C. 0 7-501 (5).
52 U.C.C. 1 7-501, Comment 1.
I & '
1 ,
2.
4/
d
<'<
ir sion of
See Williston on Sales, note 56 supra, 5 421, for a complete discus-
this point.
49 U.S.C. $ 107 (1976);U.C.C. $5 7-501 (1). T-SOl(2). 4 ""U.C.C. $ 8 3-305, 8-202 & 8-301.
 rrr
1 . $
8 12-50 COMMERCIAL PAPER " ?( TYPES OF NEGOTIABLE PAPER 5 12-60

5 12-50 STOCK CERTIFICATES < 8

purchaser of a stock certificate, even from a finder or a thief, is entitled
to the shares of stock and the dividcnds as against thc true owner,8B
Under the Commercial Code and the Uniform Stock (Transfer but he cannot enforce this right against the corporation until he has
Act,"' no formal requisites are necessary for stock certificates. AU that <?
is provided is that transferable certificates issued by corporations are
,,
' notified it and caused the transfer to be made on the books.70 In the
-case of adverse claims by two parties, the,corporation has the right to
negotiable."* Such certificates are issued in various forms and usually ' (5)
-'( interplead'the competing claimants. : . . ,.
, . .
,
. , b . .'
ex, '

contain a statement that a named person is the owner of a certain'num- ,) : !, J),,l','l

:. . *
'!I + ; .: , ,, ., ,>
,
\ ,
.li.
. .. , s >.: ,,,,:
ber of shares of the issuing corporation as indicated by a registration Lr , I
.
, ' ;.
,
.:'
, ,
,
, < : I
I '
!I . . . # .'

on the books of the company. Stock certificates often have: on their , ,. ,' I . J i : .

backs a power of attorney by which the owner of the shares may order 5 12-60 , . PRIOR STATUTES MAKING CORPORATE 1

them transferred. Transfer of the certificate is possible when the owner . . . ' ' : BONDS NEGOTIABLE

! or his properly constituted representative signs this power of attorney.

If the owner desires to negotiate the certificate to a particular person,
he is named in the power of attorney, in which case he becomes the
, .
Many corpornte bonds, due to special provisions of contracts con-
tained therein, were nonnegotiable under the law in force before the
U.C.C. In an attempt to avoid such restriction, statutes were passed in

i owner of the certificate. It can only be further negotiated by his filling

in a similar power, but if the name of the transferee is left blank, the
certificate is payable to bearer and may be negotiated simply by d e
livery.= Under the Code, a security can also be an instrument issued
in such form that the rights to it belong to the bearer."'. Securities in
this form can be transferred without any indorsement.", , curities issued in the state of New York fully negotiable. These statutes
5 12-55 EFFECT O F NEGOTIATION
Negotiation of a stock certificate to a bona fide purchaser for value
carries title to the certificate itself and to the shares of stock in tbe
corporation it evidences,"" and also the right to have the ownership
changed on the transfer books of the company by issuing a new certifi-
cate."' The owner of the ccrtificatc is cntitled to the dividcnds, the right
to vote, and any other claims the stockholder may have. Insofar as the
corporation is concerned, however, this right is not effective until it has
received notice of the transfer of the ~ertificate."~Thus, the bona fide
81 This act also applies to all securities issued in states where it has been
adopted before the effective date of the Commercial Code; U.C.C.
102(2). See 8 9-30 for pertinent dates.
Q2 U.C.C. 8 8-105; Uniform Stock Transfer Act # 1 (hereinafter cited
as U.S.T.A.).
6' U.C.C. § 8-308; U.S.T.A. 58 1,5 & 20.
aU.C.C. 8 8-102(l)(e).
"6 U.C.C. 8-3 10.
67U.C.C. 5 5 8-401, 8-207.
"8U.C.C. 8 8-207; U.S.T.A. 5 3; Turnbull v. Longacre Bank, 249 N.Y.
159, 163 N.E. 135 (1928).
,,
.
i
a number of states making all bonds negotiable, regardless of the specific
provisions they contained." Such laws were enacted in M i n n e s ~ t a ~ ~
and New Y ~ r k . ~The
' New York law was especially broad and covered
bonds, trustee's certificates, and interest coupons attached to either
bonds or trust certificate^,^' thus making practically all corporate se-
are still in force for bonds issued before the effective date of the Com-
mercial Code.7u This covers many issues still actively traded on the
exchanges. Under the Code, as discussed in 5 12-70, corporate bonds
are negotiable. ,
"* U.S.T.A. 8 8 1, 5 & 7; Ptckinpnugh V. H.W. Noblc & Co., 238 Mich.
464, 213 N.W. 859 (1927); Turnbull v. Longacre Bank, note 68 supra;
U.C.C. § 8-302. The weight of authority at common law was that stock
certificates were not negotiable, see Annot., 52 A.L.R. 947 (1928);but this
has been changed by the Commercial Code. U.C.C. 5 8-105.
'1 , ~70Turnbullv. Longacre Bank, note 68 supra; U.C.C. 5 8-207.
"Minn. Stat. Ch. 416 (1927);N.Y.Com. Law, Ch. 630, $ 5 260-262
(1930). There were also statutes in a number of states before the N.I.L.
s 10- making bonds negotiable. For example, see Ill. Rev. Stat. 5 5 3, 4 (1845);
but such laws were probably repealed by the N.I.L. There were comparable
statutes in New York and other statu which made interim stock certificates
and equipment trust receipts negotiable. 1926 N.Y. Laws Ch. 764, $ 9 260-
262; 1930 N.Y. Laws Ch. 630, 5 5 260-262; 1927 Pa. Laws, $ 5 1-3; Pa.
Stat. Ann. Tit. 56, Ch. 5, 6 8 51 1-513 (Purdon); 1929 Utah Laws, Ch. 53
at 69.
l* 1927 Mfnn. Laws, Ch. 416.
'"N.Y. Corn. Law, Ch. 630,5 4 260-262 (1930).
Com. Law, Ch. 630, 5 260(3) (1930);U.C.C. 5 8-102.
* 74N.Y.
'8 U.C.C. 5 10-102(2). For these effective dates, see 4 9-30.
 . i
g 12-65 COMMERCIAL PAPER TYPES O F NEGOTlABLE PAPER 3 12-70
8 1 2 6 5 INVESTMENT SECURITIES UNDER THE ; .I % ,:I$' '1 negotiable as stock certificates, an important change in the laws of many
COMMERCIAL CODE ,' ,t. f:I~ c,! states. The "bearer form" is by its original terms payable to b e a r e P
The laws governing investment securities discussed in $ 5 12-50, and is negotiable by delivery.87 Any indorsement on such a security
12-55, and 12-60 have been codified partially in the U.C.C.'s Article 8
on Investment Securities. Although the Code, in states where it has been - does not limit its negotiability; it simply serves to give notice of what-
ever rights arc clearly shown on the face of the i n d o r ~ e m e n t .In
manner, an indorsement in blank on the back of a security in "registered
~ ~like
adopted, is supposed to repeal the Uniform Stock Transfer Act,'" it
should be noted that it may not apply to all stocks, bonds, and cor- form" does not change its nature but makes the certificate itself nego-
porate securities, but only to those "commonly dealt in upon securities tiable by delivery until it is again specially i n d ~ r s e d . ~ The
" ultimate
..
exchanges or markets o r commonly recognized. as a medium for property represented by such a certificate is still transferable only on the
books of the issuer.g0 The transfer of a security in "registered form"
investment," 77 or is "of a type" so traded although the particular se-
without the necessary indorsement gives the transferee only the rights
curity issue may not be.lB Although this rovers most investment paper
that comes to banks, there are many provisions of state laws, including of an assignee until he enforces his right to ind~rsement."~
those discussed above, dealing with interests in corporations and their
property which may still be in force to limit or alter the provisions of
the Code treated here.lD 9 12-70 INVESTMENT SECURITIES UNDER THE
Article 8 of the Code covers not only stocks and bonds, but also COMMERCIAL CODG-1977 AMENDMENTS
AND UNCERTIFICATED SECURITIES
. interim certificates, equipment trust certificates, warrants for either
money or property, and any other sort of paper commonly dealt with Article 8 of the Commercial Code was amended in 1977 to broaden
in security markets,80 which is one of a class or series of instruments its scope to cover securities that are not represented by a tangible, paper
evidencing participation or other interest in property or in an enterprise certificate, but consist only of an interest registered on the books of
o r which is an evidence of an obligation of the issuer.81 the company.D' The rules governing negotiable securities represented
Under the Code, securities are divided into two classes, "registered by a certificate remain basically unchanged. These securities are now
form" and "bearer form," 82 and all are negotiable instrument^.^^ The called "certificated securities" and include both registered and bearer
registered form includes both stocks and registered bonds,"' which are forms as provided in the orignal Article 8.08 These securities are nego-
transferable in a manner similar to that already described for stock tiable. All other interests in a business o r obligations of the issuer that
certificates.85 This makes certificates representing registered bonds as are not represented by a certificate are classified as "uncertificated
securities" when they are "of a type commonly dealt in on securities
exchanges or markets," are registered upon the books of the issuer or
I
U.C.C. § 10-102.
'8
an agent of the issuer, and are issued in a class o r series."' Uncertifi-
I U.C.C. 4 &102( 1) (a) (ii)
'7 .
Id. This obviously includes securities that would not actually be on
cated securities are not n e g ~ t i a b l e . ~ ~
'8 The transfer and pledge of uncertificated securities is discussed
sale in regular markets, but they may be like those that arc. Thus, forged in Chapter 29.
U.S. Treasury bills are investment securities as defined by 5 8-102 of the
U.C.C. Brannon v. First Nat'l Bank of Atlanta, 137 Oa. App. 275, 223 ,,
S.E.2d 473 (1976). See alao Morgan Ouar. v. Third Nat'l Bank, 529 F.2d
1141 (1st Cir. 1976); Colin v. Penn Cent. Nat'l Bank, 404 F. Supp. 638 88 U.C.C. 5 &102(l)(d).
(E.D. Pa. l975), u f d without opinion 544 F.2d 512 (3d Cir. 1976). 8'U.C.C. 58 &102(l)(d), 8-302(1).
I U.C.C. 9 8-101 Comment. M U.C.C. Q $ 8-301. 8-304.
U.C.C. 5 8-102 Comment. * U.C.C. 4 8-308 (2).
U.C.C. 58 8-102 and Comment 2. Although the definition is broad "0 U.C.C. 5 &102(1) (d), 8-207.
enough to cover it, this probably has nothing to do with paper circulating '' U.C.C. 8 8-307.
on commodity markets. "' U.C.C. 9 8-101 Comment (official reason for 1977 change).
82 U.C.C. 8 4 &102(1) (d), &102(1) (e). "8 U.C.C. 9 8-102.
U.C.C. § 8-105(1). "4 Id.
U.C.C. $5 8-101 Comment, &102(l)(d). rr. U.C.C. 4 8-105. See Q 9-30 for a list of the jurisdictions which have
See U.C.C. $ 8 8-207, 10-102(2). enacted the 1977 Article 8 amendments.
 Chapter 13
FORMS OF INDORSEMENT
AND TRANSFER O F
NEGOTIABLE PAPER
Section Page
13-5 Types of Transfer .............................. 2 13
13-10 Nature of Indorsement .......................... 214
13-15 Kinds of Indorsements .......................... 2 15
13-20 Blank Indorsement ............................. 21 5
13-25 Special Indorsement ............................ 21 5
13-30 A Qualified Indorsement ........................ 217
13-35 Restrictive Indorsements ......................... 217
13-40 Conditional Indorsements ........................ 21 8
13-45 Rights of Restrictive Indorsees .................... 219
13-50 Bank's Power to Supply Missing Indorsement . . . . . . . . 220
13-55 Effect of Restrictive Indorsements on Securities
and Commodity Paper .......................... 220
13-60 Transfer Without Indorsement . . . . . . . . . . . . . . . . . . . . 221
13-65 Limit of Indorsees' Rights By Separate Contract ...... 221

g 13-5 TYPES OF TRANSFER

All kinds of negotiable paper are transferable in much the same
manner with only slight variations in details and the liability of the
parties.
m e two principal ways of transfer are by indorsement or by
manual delivery without indorsement. Since the contract on the paper
itself is the right that is transferred, physical delivery of the paper is
necessary to complete negotiation.' In the case where the paper is
indorsed, a written indorsement completed by delivery is required.=

' 4 9 U.S.C.P 107 (1976); U.C.C. $ 5 3-202(1), 7-501(1)(2) & 8-309.

a49U.S.C.A.~107(1976);U.C.C.§§3-202(1),7-501(1)(2)&8-
309. .
 COMMERCIAL PAPER
Where the transfer is without indorsement, mere manual exchange is
sufficient to evidence the intent to transfer the paper.'
5 13-10 NATURE OF INDORSEMENT
The most common form of transfer of negotiable paper is by an
indorsement written on the instrument. To be effective under the Com-
mercial Code, the indorsement of money paper must be on the instru-
ment itself or on a paper firmly attached to it.'
Stock certificates o r securities under the Code may be transferred
by indorsement either on the certificate itself o r on a separate instrument,
but where the indorsement is by separate idstrument, an indorsement on
the certificate itself takes precedence over the separate ~ r i t i n g . ~
Indorsement of a document of title should also be on the paper
itself, but transfer by separate instrument is not covered by the Code
and may be effective. This problem often arises in cases where docu-
ments of title are attached to drafts or other negotiable instruments.
Sometimes the transferors indorse the negotiable instruments but fail to
indorse the documents of title. In such a case, the indorsement of the
negotiable instrument for which the document is pledged as collateral
security might amount t o an indorsement of the document of title as
well.O But the safest procedure is'to insist upon indorsement of both tho
document and the bill to which it is ~ t t a c h e d . ~
T o be valid, the indorsement must transfer the entire instrument,
unless part of it has been paid o r discharged, in which case the indorse-
ment must transfer the balance due.B It would be possible to sell part
of the stock or goods covered by certificates o r other security or docu-
ments of title, but this would require a special contract involving ar-
rangements with the corporation and the ~ a r r i e r . ~
49 U.S.C. § § 107, 109, 112, 113 (1976); U.C.C. 08 3-202, 3-201(3),
7-501(1)(2), 7-506, 8-307, 8-309.
U.C.C. 8 3-202(2); Lamson v. Commercial Credit Corp., 187 Colo.
382, 531 P.2d 966 (1975); Estrada v. River Oaks Bank & Trust Co.,550
S.W.2d 7 19 (Tex. Civ. App. 1977). . >
U.C.C. 4 8-308.
See 49 U.S.C. 112, 113 ( 1976) ; U.C.C. § 7-501 (4) ; Commercial
Bank of Keokuk v. Pfeiffer, 108 N.Y. 242. 15 N.E. 3 11 ( 1 888); American
Nat'l Bank v. Warren, 96 Misc. 265, 160 N.Y.S. 413 (1916); American
Trual & Sav. Bank v. Austin, 25 Misc. 454, 55 N.Y.S.561 (4898).
TThe problems raised by such pledges are further discussed in Chapter
29. See U.C.C. 4 7-50 l(4).
U.C.C. 4 3-202(3), cf. U.C.C. 8 &308(3).
I n such a case, the documents would have to be returned to the carrier
or warehouseman for cancellation and new documents would have to be
issued. See U.C.C. 0 0 7-403 (3), &308(3).
214
INDORSEMENT § 13-25
5 13-15 KINDS OF INDORSEMENTS
The most common forms of indorsements that appear on all types
of negotiable instruments are the blank and the special indorsement.
Indorsements may also be restrictive, qualified, o r c~nditional.'~The
latter usually appear only on bills, notes, and checks, but they could
be applied as well to any other form of negotiable paper.
5 13-20 BLANK INDORSEMENT
The blank indorsement is a transfer of the instrument by simply
signing the namc of the pnyec or thc indorscc without furthcr words.''
In the case of a stock certificate or other security, this is accomplished
by signing thc name in the proper blank on the power of attorney.'"
Paper with such an indorsement is thereafter transferable by delivery
and payable to bearer. Any holder desiring to make such an instru-
ment payable to himself o r some other person may do so by filling in
his own name o r the name of the person desired above the signature of
the blank indorsee and by adding such words as "pay to the order of." lB
In the case of the stock certificate or other security, the same result can
be achieved by completing the blank power of attorney over the sig-
nature. This is known as changing a blank indorsement into a special
indoqement.l4 After the instrument has been specially indorsed, when
money paper is involved, it no longer is bearer paper. It subsequently
can be negotiated only with the indorsement of the person named, as
discussed in § 13-25.
3 13-25 SPECIAL INDORSEMENT
A special indorsement indicates the person to whom or to whose
order the instrument is to be paid. After being so indorsed, it can be
further negotiated only by the indorsement of the special indorsee.16
This rule formerly held for all types of commercial paper except money
paper and securities payable originally to bearer. Such instruments
10 U.C.C. $ 8 3-204, 3-414 & &308(2). Under the Commercial Code
the tcrm restrictive indorscment includcs a conditional indorscmcnt. U.C.C.
4 3-205.
'1 49 U.S.C.A. 1 108; U.C.C. $ 5 3-204(2), 7-501 (1 ) & 8-308(2).
" U.C.C. 5 8-308 ( 1).
'8 U.C.C. § # 3-204(3), 8-308(2).
l4 U.C.C. 5 &308(2).
Is 49 U.S.C. 5 108 (1976); Uniform Stock Transfer Act (hereinafter
Efted as U.S.T.A.) § 21; U.C.C. 3-204(1), 7-501(3).
§ 13-25 C O M M E R C I A L , PAPER
remained payable to bearer and in spite of special indorsement could
still be negotiated by delivery.le Under the Commercial
case of money paper the special indorsement controls even when it
originally bearer paper; indorsement by the special indorsee is necessa
to further negotiate the instrument.17 The Code makes no such pro
sion for bearer securities. Special indorsements of bearer securities do
not prevent further negotiation; they merely serve to give'notice of
whatever facts appear thereon.I8 Where an instrument originally pay-
able to order has been indorsed in blank, making it a bearer instrument,
a subsequent special indorsement controls and thereafter the indorse-
ment of the special indorsee is necessary to further n e g o t i a t i ~ n . ~ ~
(
The most common forms of special indorsement are "pay t o X" o r
"pay to the order of X." Such expressions as "I hereby transfer my
rights to X" 20 and "I hereby assign to X" have caused some conflict
among the pre-Code cases, but the overwhelming weight of authority is
that such words constitute an i n d ~ r s e m e n t . ~ 'Under the Commercial
Code, it is clear that the addition of the words of assignment d o not
change the character of the i n d o r ~ e m e n t . Under
~~ the Code, words of
assignment, guaranty, o r limitation of liability d o not keep signatures
from being effective as indorsements.
It is a general rule that where there is doubt as to the capacity in
which a person signs an instrument, he will be regarded as an indorser,
unless he clearly indicates his intention to be bound in some other
c a p a ~ i t y . 2 ~Such an intention may be expressed in appropriate words
or indicated by the position on the instrument of the name oE the in-
dorsing party. For example, the expression "I guarantee the within
note," followed by a signature, may be either a n indorsement or a
guaranty, depending upon whether the person signing is the holder of
the instrument at the time he signs. If h e is, such a statement would
l8N.I.L. 5 40; see BeutePs Brannan Negotiable ~ n s t r u r n t hLaw 628
et seq. (7th ed. 1948) (hereinafter cited as Beutel's Brannan).
j7 U.C.C. 4 3-204(1).
. ,
18 U.C.C. 18 8-3 10 Commcnt, 1-201 (2), 8-304; cf. U.C.C. 8-308(2).
l o U.C.C. 1 3-2041 1): see BeutePs Brannan. note 16 supra.
copeland v. ~u;ke,'59 Okla. 219, 158 P. 1162 (1916. Contra, Gale
v. Mayhew, 161 Mich. 96, 125 N.W. 78 (1910).
21 To the effect that such signatures are effective as an indorsement,
see Prichard v. Strike, 66 Utah 394, 243 P. 114 (1926); Farnsworth V.
Burdick, 94 Kan. 749. 147 P. 863 (1915); Thorp v. Mindeman, 123 Wis.
149, 101 N.W. 417 (1904). Contra, Marion Nat'l Bank v. Harden, 83
W. Va. 119, 97 S.E. 600 (1918). See Annot., 44 A.L.R. 1353 (1926); 10
-
N.C.L. Rev. 306 (1932); Note, 81 Banking L.J. 447 (1964). I
I
'2 U.C.C. 18 3-202(4). 8-308(1).
U.C.C. 1 3-402 and Comment.
'! ' INDORSEMENT 3 13-3s
':. . '.,.
' - be an i n d ~ r s e m e n t .If~ ~not, it would be a mere guaranty of payment.'"
The indorsement or guaranty could be made special by simply indicating
the name of the person to whom the promise was made.
Tho indorsement of a n instrument to "cashier" o r other fiscal officer
of a bank o r corporation is a special indorsement t o the bank or corpora-
tion, and the instrument can further be negotiated either by the indorse-
, ment of the cashier or fiscal officer o r by the bank or corporation itself.28
§ 13-30 A QUALIFIED INDORSEMENT
A qualified indorsement is a transfer of title to the instrument by
which the indorser indicates his desire to limit his liability. Such an
indorsement is commonly made by adding over the signature such words
. as "with,out recourse," 27 o r ' L ~ i t h orecourse
~t and without warranty."
Such a qualification may be added t o any type of indorsement. Its
- effect upon the liability of the indorser will be discussed in detail in
Chapter 14. F o r the reasons indicated there, such qualifications usually
appear only on money paper. They may be added to special o r blank
indorsements and they are intended merely t o limit the liability of the
' indorser. They d o not prevent the holder from obtaining full rights as
a holder in due course.gg
6 13-35 RESTRICTIVE INDORSEMENTS
'
, Restrictive indorsements are of four types. T h e first type, which
. purports to prohibit further negotiation of the instrument, can be made
I , / /
Mangold 6r Glandt Bank v. Utterback, 54 Okla. 655, 160 P. 713,
1917B L.R.A. 364, 70 Okla. 315; 174 Pac. 592 (1916). Nordin v. Fint
Trust & Sav. Bank, 118.Cal. App. 697, 6 P.2d 92 (1931). Cady v. Bay City
. 1":
8;
5, 201 P. 179 (1921); M.J. Wallrich Land & Lumber Co. v. Ebenreiter,
216 Wia. 140, 256 N.W. 773, U.C.C. $ 3 4 1 6 ; Annot., 21 A.L.R. 1367
(1921 ); 10 Wis. L. Rev. 294 (1934).
P5 U.C.C. 8 3-416. See Noble v. BeemanSpaulding-Woodward Co., 65
Or. 93, 131 P. 1006 (1913); O'Neil v. Peaden, 228 Ala. 21, 151 So. 877
(1933).
, U.C.C. 9 3-1 17 Comment. See Johnson v. Buffalo Center State Bank.
134 Iowa 731, 112 N.W. 165 (1907); Quincy Mut. Fire Ins. Co. v. Inter-
national Trust Co., 217 Mass. 370, 104 N.E. 845 (1914).
U.C.C. 1 2-414.
28 Schmidt v. Pegg, 172 Mich. 159, 137 N.W.524 ( 1912).
* Dollar Sav. & Trust Co. v. Crawford, 69 W. Va. 109, 70 S.E. 1089,
33 L.R.A. (n.s.) 587 (191 1); Higby v. Bahrenfuss, 180 Iowa 316, 163 N.W.
247: (1917); Bederman v. Otisville Statc Bank, 5 Oh10 App. 178 (1916);
Robertson v. Budzier, 229 Mich. 619, 201 N.W. 949 (1925).
0 13-40 COMMERCIAL P A P E R
by adding to the signature of the indorser such an expression as "pay
X only." The second type vests title in trust for a third person and
is created by such expressions as "pay to X in trust for Y," "o r "pay
First Metropolitan Bank for account of Warner." The third type of
restrictive indorsement is one which is very common in banking. It
constitutes the indorsee the agent of the indorser. It may be made by
adding to the indorsement the expression "for c ~ l l e c t i o n " o~ r "as
agent." The Commercial Code adds to restrictive indorsements a
fourth classification, "conditional."
5 13-40 CONDITIONAL INDORSEMENTS
Any kind of indorsement may be made conditional by adding words
indicating that the instrument is to be transferred o r paid only on some
condition contained t h e r e i n P V o r example, "on arrival of the ship
Swallow," o r "This indorsement is made subject to all conditions of
a separate contract" are types of conditions. A conditional indorse-
ment does not destroy negotiability of the in strum en^.^^ Subsequent hold-
ers take subject to the expressed condition but may cut off equities o r de-
fenses of intervening parties. The maker o r other persons liable on the
instrument may ignore the condition and make payment to any holdcr,
who must keep the proceeds in accordance with the conditionPg
Restrictive indorsements should be distinguished from mere direc-
tions or notations written on checks indicating the disposition of the
proceeds or the source of the account. F o r example, the notations on
a cashier's check, "for account of Rochling Bank," 40 o r on a private
check, "for A. L. Pierson," 4' do not constitute a restrictive indorsement
o r create any agency.
U.C.C. 5 3-205(b).
" U.C.C. 5 3-205 (d).
Warner Piano Co. v. Henderson, 121 Ark. 165, 180 S.W.495 ( 191 5 ) ;
Gulbranson-Dickinson Co. v. Hopkins, 170 Wis. 326, 175 N.W. 93 (1919).
U.C.C. 5 3-205; Nyssa-Arcadia Drainage Dist. v. Fint Nnt'l Bank, 3
F.2d 648 (9th Cir. 1925); Smith v. Bayer, 46 Ore. 143, 79 P. 497 ( 1905).
U.C.C. 5 3-205.
86 The U.C.C. classifies such indorsements as restrictive. U.C.C. 0 0 3-
205(a), 3-206(4) & 3-302(1) (c).
Srnout, Chalmers on Bills of Exchange 1 16 ( 13th ed. 1964).
a7Randle~v. Gully, 128 Okla. 220, 262 P. 201 (1927).
U.C.C. 4 3-206( 1 )
U.C.C. 5 3-206.
. 49 U.C.C. 85 3-407, 3-206 & 3-603.
Equitable Trust Co. v. Rochling, 275 U.S. 248 (1927).
41 Pienon v. Swift County Bank, 163 Minn. 344, 204 N.W. 31 (1925).
INDORSEMENT 9 13-45
' § 13-45 RIGHTS OF RESTRICTIVE INDORSEES
The restrictive indorsement confers different rights depending upon
whether or not the indorsee is a bank. Unlike previous rules,'2 under the
Commercial Code restrictive indorsements d o not prevent further nego-
tiation of the paper. This is s o even where the indorsement specifically
tries to prohibit further neg~tiation.'~
Individuals who receive restrictively indorsed paper have: ( 1 ) the
right to receive payment of the instrument, the proceeds to be dispersed
in accordance with the i n d ~ r s e m e n t ;(2)
~ ~ the right to bring any action
thereon that the indorser could bring, and if he be a holder other than
the first indorsce or the person required to pay the instrument he may
also be a holder in due course in his own right;45 and (3) the power to
transfer the rights as such indorsee where the form of the indorsement
authorizes him to do so.4a
Banks, on the other hand, except when they are the first bank to
whom the itcm is given for collection or are the transferee of the person
who restrictively indorsed, are not bound by restrictive indorsements.
.In the case of restrictive indorsements that are indorsements in
trust o r conditional indorsements, the first indorsee under the restrictive
indorsemcnt, and thc party required to pay (when the payor is not a
bank), must conform to thc term of the indorscmcnt or bc liable to the
person for whose benefit the indorsement was made." Insofar as the
indorsee does conform, he may bccome a holder in due course of the re-
strictively indorsed paper cutting off defenses of previous parties.48
Thus, the restrictive indorser may change the nature of the obliga-
tion of the original parties without being guilty of alteration of the
original contract.4g
It is common for the restrictive indorsees to transfer their rights
in all cases. Under the Negotiable Instruments Law, all subsequent
indorsees acquired only the rights and title of the first indorsee under
the restrictive i n d o r ~ e m e n t . ~For
~ example, if an instrument was in-
dorsed "for collection," the indorsee-bank could further negotiate the
instrument," but every bank o r person receiving the instrument was
42 N.I.L. 8 5 36(1). 37.
U.C.C. 5 3-206( 1 ) .
44 U.C.C. 5 3-206(3).
46 U.C.C. 5 3-206 and Comment 4.
4' U.C.C. 8 5 3-205, 3-206, 8-304 d( 8-308.
4 7 U.C.C. g g 3-206(4), 3-603( 1 ) ( b ) .
U.C.C. 5 5 3-206(3), 3-206(4) and Commcnt 4.
60 N.I.L. 5 37.
61 Famelt V. National Life Ins. Co., 97 Ill. 1 1 (1880); Haskell v. Avery,
ri
181 Mass. 106, 63 N.E. I5 (1902).
1 13-50 COMMERCIAL PAPER

nder the duty to hold the proceeds for the benefit of the party indorsing i2

he instrument for c o l l e ~ t i o n .The

~ ~ nature of these duties and the effect
)f the U.C.C., which gives collecting banks much greater rights than
xdinary restrictive indorsees, will be discussed at length in Chapter 21.
4s indicated there, where the process of collection is camed on through
~anks,Article 4 of the Code wipes out all the distinctions in indorse-
nents and treats all alike for the purposes of the relation of the banks
,. "be-
.o their customers. This can only be changed by special contracts
ween the banks and their depositors.W ;, , z , r,c \ .
~ b .
b 13-50 BANK'S POWER TO SUPPLY
MISSING INDORSEMENT
, ,
; 6.
Under the U.C.C., banks may supply indorsements of their cus-
tomers which are needed to establish title to an item unless there is an
express statement on the item requiring the indorsement, such as
"payee's indorsement required." The bank must note on the instru-
ment that the customer's account was credited. Banks that are not de-
pository banksM may ignore restrictions on money paper.KE They are
only bound by the indorsement of their immediate transferee. . '
,
t' . \
J ,
0 13-60 ' TRANSFER WITHOUT INDORSEMENT
. .
The effect of transferring an instrument without indorsement is
similar in all types of negotiable paper. If the instrument is payable to
bearer or indorsed in blank, such a transfer, which is made by mere
deliveiy of the paper, constitutes a complete negotiation and a person
taking the instrument under these circumstances may be a holder in
due course.m
If the instrument is payable to the order of a particular person,
indorsed specially, or contains some type of restrictive or conditional
indorsement, the manual delivery without indorsement confers upon
the transferee such title as the transferor had in the instrument. If the
transfer is for value, it gives the transferee the right to have the indorse-
, I
ment of the transler~r.~'This right is to an unqualified indorsement and
may be enforced in court,ea but until such an indorsement is actually
placed on the instrument, the transferee is a mere assignee of title to the
papcr and cannot sue as a holder in due course or cut off rights other
than latent equities against prior par tie^,^ as explained in Chapter 15.
I
Where a check is made payable to more than one payee jointly, if
the indorsement of one payee is missing, the check is unenforceable."'
a

I
,
8 13-65
I ( < ,

LIMIT OF INDORSEES' RIGHTS

5 13-55 EFFECT OF RESTRICTIVE INDORSEMENTS
ON SECURITIES AND COMMODITY PAPER
The rules for restrictive indorsements stated above apply only to
money paper covered by Article 3 of the Commercial Code. Restrictive
indorsements on securities, stocks, bonds, and the like, covered by
Article 8 of the Code, constitute notice of the rights shown on the in-
dorsement to all subsequent parties," except an intermediary collecting
bank." Similar rules as to restrictive indorsements seem to apply to
commodity paperPg 1. ,id, , (
1 tract. It may be shown to have been a pledge as collateral security for
' '" 3 " BY SEPARATE CONTRACT
While a holder in due course of a negotiable instrument is entitled
to the contract rights appearing on the paper, the partics among them-
selves may make any indorsement or transfer subject to contract ar-
rangements. Under this rule every indorsement or other contract on a
negotiable instrument may be shown to have been conditional or for a
special purpose only and not for the purpose of transferring property
in the instrument.e6 For example, an indorsement or even the original
instrument may have been delivered or made as part of a larger con-

"Smith v. Bayer, 46 Or. 143, 79 P. 497 (1905). See Note, 22 Haw.

L. Rev. 150 (1908). U.S.C. 5 107 (1976); U.C.C. $ 5 3-202, 7-501(2)(a) & 8-310.
49
o8 U.C.C. 5 4-201 and Comment. , . '
U.S.C.fj 5 112, 113 (1 976) ; U.C.C. 5 3-201 (3), 7-506, & 8-307.
" 49
M U.C.C. 9 4-205. 8W.C.C. 5 5 3-201 (3), 7-506 & 8-307; see Simpson v. First Nat'l Bank,
66 For definition of terms, see U.C.C. 9 4-105 and § 19-5 below. 94 Or. 147, 185 P. 913 (1919); Lawrence v. Citizens' Bank, 113 Kan. 724,
" See U.C.C. 5 5 3 4 19, 3-603 ( 1) (b), 4-205, 4-201, Comment 6. For 216 P. 262 (1923).
the limits of these rights see Chapter 21. See note 60 supra.
67 U.C.C. 5 8-304. 6 4 American Nat'l Bank & Trust Co. v. St. Joseph Valley Bank, 389
mU.C.C. 5 5 4-104(g), 4-201(1). N.E.2d 379 (Ind. App. 1979).
Sea U.C.C. 8 4-502. U.C.C. 5 3-1 19.
8 13-65 COMMERCIAL PAPER

a loan,bb a gift," or its delivery may have been conditional o r in escrow,

that is, to be held until the occurrence of a certain Written
agreemcnts of this nature can always be used to show the true purpose
of the indorsement o r making of the instrument. For example, even
though an instrument may have been transferred by a qualified indoree-
Chapter 14
mcnt, it may be shown that thc parties had a written agreement to take
u p the instrument at any tirne.e@ Or, if the indorsement was in blank, it
may be shown that the transfer was only for a collateral security or o n
LIABILITY OF PARTIES
condition that certain goods be delivered.1° But oral agreements that
contradict the nature of the indorsement itself are invalid. F o r example,
TO' COMMERCIAL PAPER
it is not proper to show that a blank indorsement was intended t o be
qualified." Neither can a verbal agreement be offered to show that what
AND SECURITIES
appears to be an indorsement was not intended as an indorsement at all,
but as a mere rnemorandum,72 nor that the liability was t o be discharged Section Page
in some manner other than that indicated on the b s t r ~ m e n t ? ; , ~. , ,! - 4

f-,,
, I
The Nature of Commercial P a ~ e Contracts
r ........ 223
. +

I . . I , , ,:I.
.Primary and Secondary Liability ................. 224
Liability of Makers and Acceptors of
ebStover Bank v. Welpman. 323 Mo. 234, 19 S.W.2d 740 ( 1929) ;Mol-
sons Bank v. Hoekzerna, 240 Mich. 642, 216 N.W. 416 (1927); Continental
Negotiable Money Paper ........................ 225
Credit CO. v. Ely, 91 Conn. 553, 100 A. 434 (1917); Omaha Loan & Bldg. Acceptance o n the Instrument .................... 226
Ass'n v. Cocke, 101 Neb. 750, 165 N.W.146 (1917). Acceptance by Separate Instrument ................ 226
Reinhart v. Echave, 43 Nev. 323, 185 P. 1070, 187 Pac. 1006 (1929);
Guild v. Eastern Trust & Banking Co., 122 Me. 514, 121 A. 13 (1923);
Dougherty v. Salt, 227 N.Y.200, 125 N.E.94 (1919). ,,

88Wegner v. First Nat'l Bank, 42 N.D. 397, 173 N.W. 814 (1919);
Union Inv. Co. v. Epley, 164 Wis. 438, 160 N.W. 175 (1916).
Promises to Accept Nonexistent Paper .............
Liability Caused by Improper Handling
Kinds of Acceptances
............
...........................
Qualified Acceptances . . . . . . . . . . . . . . . . . . . . . . . . . . .
227
227
227
228
J
OD Central State Bank v. Fint State Bank, 276 S.W. 941 (Tex. Civ. App. Effect of Acceptance on Liability of Other Parties ..... 229
1925); see Annot.. 4 A.L.R. 794 (1919). a ! ii Liability of Issuers of Securities ................... 230
'OThe authorities are collected in Beulef's Brannan, note 16 supra,, at Secondary Liability o n the Paper .................. 23 1
366 et seq.
" Aronson v. Nurenburg, 218 Mass. 376, 105 N.E. 1056 (1914): Lake
Indorser's Liability ............................. 23 1
Harriet State Bank v. Miller, 138 Minn. 481, 164 N.W. 989 (1917); Phillips Drawer's Liability .............................. 232
v. Mcllrath, 203 Iowa 1126, 217 N.W. 429 (1928). Warranty of Transferors of Paper ................. 233
72 International Harvester Co. v. Beverland, 37 Idaho 782, 219 P. 201 Warranties on Presentment of Negotiable
(1923). Paper for Performance .......................... 234
7aLawther Grain Co. v. Winniford, 249 S.W.195 (Tex. Comm. App. Limitations of Liability in Warranty ............... 235
1923); Simons v. Douglas, 189 Ky. 644, 225 S.W.721 (1920). Parol con-
tracts for discharge made after the instrument has been issued may always Limitation of Liability by Special Contract .......... 235
be shown; but not those made at the same time cannot. The question of the Liability of Agents ............................. 236
liability of accommodation parties is discussed in Chapter 18. 14-1 00 Illustrative Agency Cases ........................ 237
14-105 Trustee's Liability .............................. 239
14-1 1 0 Representative Capacity ......................... 240

§ 14-5 T H E NATURE O F COMMERCIAL

PAPER CONTRACTS
When a pcnon dcals in comrncrcial paper, two types of liabilities
' h a y arise. First, he may become liable on the contract that is evidenced
3 14-10 COMMERCIAL PAPER
by the paper itself. This usually is called liability on the instrument.
Second, he may find himself subject to liability arising from the cir-
cumstances surrounding the transfer of the paper. This type of obliga-
tion may spring from ( 1) a larger contract of which the transfer of the
commercial paper may be only part of the performance, as for example
the transfer of a check given in payment of a debt; or (2) it may arise
from the act of transferring the paper where the law attaches liability
from the act of transfer itself. The latter type of liability is often called
warranty.
In liability on the instrument, the contract may be evidenced by the
written terms of the agreement the party has signed, or by additional
words he may add to his indorsement, some of which were discussed
in Chapter 13. In other cases, as when one writes his name in blank
on a piece of negotiable paper, the entire details of the liability may be
furnished by rules of law attaching to no more than the signature itself
and its position on the paper. It is, however, a clear rule of law that
no one is liable on negotiable paper unless his signature appears thereon.'
Most negotiable paper contains many signatures in diverse places.
Each of these signatures evidences some kind of legal obligation, so it
can be said that most negotiable paper is a bundle of contracts that
increases in number every time a new person adds his signature.
Liability arising from facts extraneous to the instrument is proved
by par01 evidence of what actually happened, a.9 in other cases .of*
contract.
i
,:
..
4 s
9 14-10 PRIMARY AND SECONDARY LIABILITY 1 r
The two types of liabilities on commercial paper are known as
primary and secondary liability. The person primarily liable is the one
who, according to the terms of the contract, is absolutely required ,to
perform it; most other parties are secondarily liable.'
The promisor on a note, bond, interim certificate, or certificate of
deposit, the acceptor of a draft, and the warehouseman and carrier on
documents of title are all primarily liable. The drawer of a check
or draft,' the indorsers and all other transferors of paper, sureties, guar-
antors, and others who are required to pay only if the persons primarily
1 U.C.C. 3 3401; National Bank of Bossier City V. Fornea, 272 SO. 2d
41 1 (La. App. 1973). arising under the Louisiana Negotiable Instruments
-
Law. The result should be the same under the U.C.C.
' U.C.C. 5 3-102(1) (d); cf. N.I.L. 3 192.
8 N.I.L. 55 61, 70 & 192; Fick v. Jones, 185 Wash. 365, 55 P.2d 334
(1936); U.C.C. 08 3413(2), 3-501.
LIABILITY O F PARTIES 8 1.. A!
-:
' (
liable fail to meet their obligation as set out in the paper, are usually
spoken of as secondarily liable.
. 5
8 14-15 LIABILI'IY OF MAKERS AND ACCEPTORS
OF NEGOTIABLE MONEY PAPER
The primary liability of carriers and warehousemen has been dis-
cussed in Chapter 12. There remains only the liability of the maker
of notes, the acceptor of checks and drafts, and parties to security con-
tracts. The liability of persons primarily liable on negotiable money
paper will be discussed in this section. The obligation of issuers of
securities will be covered in a later section.
The maker of or the person promising to pay notes, certificates of
deposit, and the like is required absolutely to perform according to the
terms of the promise. No presentation of the paper at maturity is
necessary to hold him.' But it is advisable to make a demand upon
such a party at maturity in order to establish rights to damages and costs
in cnse of failure to pay. A maker's liability is created from the moment
he or his properly qualified agent signs the paper.
The same rules apply to the liability of an acceptor. The acceptor
is the person on whom the draft or n check is drawn who has signified
the intention of carrying out the order of the drawer.6 Accepting a
check usually is called certification, and the liability created thereby is
similar in all respects to the accepting of a draf1.O The drawee of a
check or a draft is not liable on the instrument unless and until he
t
accepts it.'
Undcr thc Negotinble Instrumcnts Law, liability as an acceptor
could be created in four ways: by writing the acceptance on the bill
itsell; a by acceptance on a separate piece of paper; " by a promise to
,
accept before the instrument is drawn; lo and by improper dealing with
or handling of the in~trument.~'Under the Commercial Code, as is
also the case in England,'' to be liable as an acceptor, the drawee must
Tourteilotte v. Soulnier, 267 Mass. 361, 166 N.E. 879 (1929); Fint
Nat'l Bank v. Capps, 208 Ala. 235, 94 So. 112 (1922); Note, 23 A.L.R. 7;
U.C.C. 8 3-4 l3(2). .
sU.C.C. IrS 3-410, 3413(1).
U.C.C. 5 3-4 1 1.
' U.C.C. 5 8 3-409, 3-41 1 (2).
a N.I.L. 9 % 132, 133.
"N.I.L. 8 134.
l o N.I.L. 5 135.
N.I.L. 5 137.
* 1q.E.A. 8 17(1).

14-20 COMMERCIAL PAPER
write the acceptance on the draft.'-iability for the acts that constitute
the other types of acceptances mentioned above still remains. Instead
of being liable as acceptor in these cases, the drawee is held either on
the theory of contract o r tort. The results of such action are similar
and will be discussed in thc following scctions.
5 14-20 ACCEPTANCE ON THE INSTRUMENT
The common form of acceptance is by writing across the face of
the instrument such words as "accepted" or "certified" followed by the
signature of the drawee. But any other words arc sullicient to hold the
drawee as an acceptor if they do not express a negative nnswer to
the order to pay. For example, "good," "presented," "seen," o r "O.K.,"
togcthcr with a signature, are ~ u f i i c i c n t . ~In~ fact, the signature alone
of the drawee is a sufficient acceptance.'"
5 14-25 ACCEPTANCE BY SEPARATE INSTRUMENT
When the holder is entitled to an acceptance, he is entitled to have
it made on the face of the draft or check, and failure to give it consti-
tutes a dishonor.16 It was formerly a ,common practice, sanctioned by
the Negotiable Instruments Law, to accept drafts and checks by separate
i n s t r u r n e n t ~ . For
~ ~ example, a written answer to an inquiry concerning
the solvency of the drawer or the bank's intention to accept his drafts
could become an acceptance if it signified the intent to be bound. Such
expressions as "we will pay Jones' check" and "we will honor Smith's
draft" were clear acceptance^.'^ On the other hand, "White's check is
good" l8 and "we have funds to pay" were held not to constitute a o
c e p t a n c e ~ .Ambiguous
~~ statements in answer to direct inquiries such as
"will you accept Jones' check" were likely to be held acceptances. For
example, "forward your checks; they will undoubtedly be taken care
Is U.C.C. 3 3 4 1 0 ( 1 ) Comment.
14 U.C.C. 9 3 4 1 0 Comment 4; see Spear v. Pratt, 2 Hill 582, 38 Am.
Dec. 600 (N.Y. 1842). See Note, 48 A.L.R. 760.
.
1' U.C.C. 0 3-40 1 ( 1 )
'6 U.C.C. 5 3-4 10.
17 N.I.L. 9 134.
I n Farmera Bank v. Stapleton, 1 1 8 Kan. 755, 236 P. 828 (1925); Selma
Sav. Bank v. Webster County Bank, 182 Ky. 604, 206 S.W. 870 (1918);
Note, 2 A.L.R. 1136.
lo Flathead County Bank v. Fint Nat'l Bank. 282 F, 398 (1922).
20 Night & Day Bank v. First Nat'l Bank, 150 La. 954, 91 SO. 405
(1922).
LIABILITY O F PARTIES f 40
of," l1 "we will protect Jones' check," 22 and "Jones is good, send on
k
your paper," 23 in answer to such inquiries were all acceptances.
Since the Commercial Code does not recognize such acceptances,
the banks o r other drawecs making pron~isesof this kind are liable only
in damages to the pcrson to whom such reprcscntations are made.24
The recoverable damages in either case would be about the same, but
the rights thus created can, under thc Code, be transferred only by
assignment. Under the Negotiable Instruments Law they might have
been negotiated with the draft like any acceptance.
4 14-30 PROMISES TO ACCEIT NONEXISTENT PAPER
An incomplete, dishonored, or overdue bill may be accepted under
the U.C.C. by a signcd writing on the i n ~ t r u m e n t .Because
~~ the writing
must be on the instrument, it is impossible under the Code to accept
nonexistent paper or drafts before they are drawn. Such promises, in
writing, were binding as acceptances under the former Negotiable In-
struments Law,28 but they are binding in favor of later purchasers under
the Code only if they meet the requirements of letters of credit under
Article 5.27 See Chapter 25.
3 14-35 LIABILITY CAUSED BY IMPROPER HANDLING
T h e drawee may become liable in damages under the Commercial
Code by holding a draft too long when it is presented for acceptance or
payment, by refusing to return it upon the request of the holder either
accepted o r nonaccepted, or by destroying o r losing it." The nature and
efiect of such liability will be discussed in Chapter 21.
5 14-40 KINDS OF ACCEPTANCES
Acceptances fall into two clnsscs: the general acceptance, and the
qunlified acceptance. Thcsc two have to do with the nature of the lia-
1' First Nat'l Bank v. First Nat'l Bank. 210 F. 542 (1913).
22Commercial Bank v. First Nat'l Bank, 147 La. 925, 86 So. 342
(1920); Note, 13 A.L.R. 986.
" North Atchison Bank v. Gnrretson, 5 1 F. 168 ( 1892); cf. Colcord v.
Banco dc Tamnirlipns, 181 App. Div. 295, 168 N.Y.S. 710 (1918).
See U.C.C. 1§ 3-409, 3 - 4 1 0 and Comments.
" U.C.C. 5 3-410(2).
28 N.I.L. 5 0 135.
27U.C.C. $ 5 5-103(1)(a), 5-102(2) & 5-102(3).
''U.C.C. $13-409, 3-419 & 4-302.
5 14-45 COMMERCIAL PAPER
bility created by the acceptance. The general acceptance is a complete
assent to the order contained in the bill and creates full liability to pay
according to its terms.2g The qualified acceptance limits the acceptor's
liability in some manner.80 / I
,,, ! 1 , s ,.: 1 I
There was formerly a third type of acceptance, called acceptance
for honor. The acceptance for honor is a device little used in business
today, by which a third party can protect the credit of the drawer when
the drawee has refused to accept the bill and the bill has been protested.
The acceptor for honor is a person whose name did not appear on the
bill, but who agrees to pay it according to its terms. Such a person, after
accepting for honor, usually by writing on the bill "accepted for honor"
of a particular person, is under the same liability as any other acceptor.
An acceptance for honor might be general or qualified." .:I? : .:! '
I I * I .,I%
i ( 1
5 14-45 QUALIFIED ACCEPTANCES
An acceptance is qualified when it contains any sort of limitation.
upon the order expressed in the draft.
Any expression in the acceptance which makes it conditional con-
stitutes a qualified acceptance:' but statements identifying the trans-
action from which the acceptance arises should be carefully distinguished
from conditional acceptances. For example, it has been held that the
statement "we will pay McMillan's draft for 52 horses" is not a condi-
tional acceptance; it merely identifies the draft.88 But the statement "we
will honor draft for carload of pigs at eight cents" has been held con-
ditional because it requires that the animals be pigs, that is, swine of a
certain weight, and the amount is, of course, conditioned upon the total
. ,
- on the liability of prior parties.
U.C.C. 5 3 4 1 3. a s
U.C.C. 5 3-4 12.
See U.C.C. 5 3-410 Comment. Commercially, acceptances are also
classified as "eligible" or "ineligible" on the basis of their eligibility for pur-
chase in the open market by the Federal Reserve under its Regulation E.
The difference is usually significant only for obtaining the more favorable
money market rate attaching to "eligible" acceptances.
Another important distinction is whether the acceptance is issued pur-
suant to a "conventional" or a "standby" letter of credit, the latter being used
to finance intangibles rather than goods. The increasing use of the "standby"
letter of credit has led the Comptroller of the Currency to provide that the
aggregate amount of such acceptances must conform to the legal limitations
on loans to one borrower. See 12 C.F.R. Pt. 205; Hatfield, Bank Credits and
Acceptances 154-178 (5th ed. 1974); 12 C.F.R. 9 7.1.160.
" U.C.C. 8 3-41 2(1).
State Bank of Beaver Co. v. Bradstreet, 89 Neb. 186, 130 N.W. 1038,
39 L.R.A. (n.s.) 747 (191 1).
LIABILITY O F PARTIES t -50
weight of the pigs." The U.C.C. removes some of these questions be-
. cause it requires acceptances to be written on the face of the draft. See
$14-25. ' , t
A partial acceptance of the amount of the draft is also qualified.
Thus, accepting a $500 draft for an amount not over $200 would be a
qualified acceptan~e?~
It is quite common to indicate a place of payment on a draft. This
does not qualify the acceptance. But if the acceptance is to pay at a
particular place only, then it is qualified. For example, "pay at First
National Bank of Brownsville" is unqualified, but "pay at the Second
National Bank only" is q~alified.~'J
% Any limitation or change in the time of payment is also a qualified
acceptance. For example, "accepted to be paid as soon as proceeds of
hardware are available" is qualified." So, also, an acceptance of a
sight draft to be paid in sixty days would be qualified.88
Where there are two or more drawees the acceptance by one only
would be qualified unless he has authority to accept for the others!g
Under thc Commercial Code, when an acceptance is offered which
is qualified so that the obligation of the acceptor is not the same as the
terms of the draft, the holder who has presented the draft has the op-
,
tion of treating it as d i ~ h o n o r c d .See
~ ~ $ 14-50.
.
. 5 14-50 EFFECT OF ACCEPTANCE ON LIABILITY
OF OTHER PARTIES
A general acceptance of a draft does not change the liability of the
drawer and prior indorsers. But the certification of a check, or the qual-
ificd acceptance of either a check or a draft, has an important bearing
. When the holder of a check has it certified, the certification dis-
charges the drawer and prior indorsers in the same manner as if the check
had been paid fully.41 But, where the drawer of a check himself presents
State Bank v. Corn Exch. Bank, 220 Mo.App. 1062, 282 S.W. 86
(1926).
U.C.C. !i 3-4 12.
U.C.C. 5 3-412(2).
8' Milwaukee Corrugating Co. v. Traylor, 95 Ken. 562, 148 P. 653
(1915).
"U.C.C. 0 3-412.
"Id.
40 Id.
rs 41U.C.C.53-411.
 14-55 COMMERCIAL PAPER
it for certification, he is not discharged from his secondary liability."
The qualified acceptance, being a variation of the terms of the
draft, amounts to dishonor of the paper; the holder may refuse to take
a qualified acceptance and treat the bill as dishonored. If the holder
takes the qualified acceptance, all prior parties are discharged, unless
they have authorized o r assented to the qualified a c c e p t a n ~ e . ~When
~ quest to transfer, the issuer is under a duty to make the proper entries
the prior parties received notice of the qualified acceptance, they were
required under the Negotiable Instruments Law to express their dissent
within a reasonable time; otherwise they were regarded as having as-
sented to the qualification.44 Under the Commercial Code, any prior
party is discharged by the qualified acceptance unless he affirmatively
assents to the change.dE . I s ,
§ 14-55 LIABILITY OF ISSUERS OF SECURITTES
Corporations, governments, and other persons who issue securities,
under the Commercial Code, are required to perform the contracts con-
tained therein according to their terms, including those made part thereof
by reference to another document, or by laws o r regulations where they
d o not conflict with the face of the paper.'" Where the security is pay-
able in money, these duties run t o bona fide purchasers in the same man-
ner as the makers' liability to holders in due course of money paper."
Whether o r not they are payable in money, the security certificates are
negotiable and transferable in the same manner as money paper,'O and
the issuer must perform the obligations to a bona tide purchaser free
'=Id. See Sutter v. Security Trust, 96 N.J. Eq. 644, 126 A. 435, 35
A.L.R. 938 (1924); Davenport v. Palmer, 152 App. Div. 761, 137 N.Y.
Supp. 796 (1912); Randolph Bank v. Hornblower, 160 Mass. 401, 35 N.E.
850 (1894).
43 Lewis Hubbard & Co. v. Morton, 80 W. Va. 137,92 S.E. 252 (1917);
U.C.C. 5 3 4 1 2 ( 3 ) .
44 N.I.L. 9 i42.
4 8 U.C.C. 8 3-412(3) Comment 2. A lessee forwarded a certificd check
to the lessor for rent due. The check contained the following language on
the reverse: "Acceptance and Indorsement of this check constitutcs a full
and final settlement between lessor and lessee with regard to any obligation
by lessee to lessor under lease.. .." The lessor had the check certified but
didn't indorse it. The court held that the lessor's having the check certified
constituted an acceptance under the terms specified in the check even though
the lessor failed to sign or indorse the check. The lusor received payment
and the lessee was released. Kersh v. Manis Wholesale Co., 135 Ga. App.
943, 219 S.E.2d 604 (1975). . .
48 U.C.C. 5 8-202.
U.C.C. 8 8-301.
48 See Chapter 12.
LIABILITY OF PARTIES
from defenses and free from claims of other par tie^.'^ If the security is
registered in form, until the certificate has been negotiated and presented
to the issuer for transfer, the issuer is entitled t o treat the person regis-
tered on its books as owner for all purposes.E0 When the registered sccu-
rity certificate, properly indorsed, is presented to the issuer with a re-
in its records giving all rights to the new holder.61 After such notice, the
issuer is liable to the holder if it pays dividends or performs other duties
to the old holder of record.&'
5 14-60 SECONDARY LIABILITY O N THE PAPER
Secondary liability is of two types, the liability of the indorser and
the'liability of the drawer of money paper.6' This is the duty, on default,
to pay the money called for by the obligation on the i n s t r ~ m e n t .This
~~
secondary liability applies only to money paper. In the case of other
negotiable paper, there is no duty of an indorser to perform the principal
contract if the person primarily liable is in defaukE5
5 14-65 INDORSER'S LIABILITY
The indorser's secondary o r conditional liability attaches specially
to indorsers without qualification of negotiable money paper. Such in-
dorsers are liable to all subsequent holders to pay the face amount of
the paper, if it be dishonored by the person primarily liable. In the case
of drafts,, the indorser who, before acceptance, indorses a draft that is
entitled to be presented for acceptance also undertakes that the draft
will be accepted and paid. If there is failure of the drawee either to ac-
cept o r pay, the indorser must pay the instrument. This liability is con-
ditioned upon proper presentment of the paper at maturity and protest
and notice of dishonor.66 The formal requirements for this are discussed
'' U.C.C. 5 0 8-30], 8-302.
'O U.C.C. 8 8-207.
61 U.C.C. 8 5 8 4 0 1 through 8-406.
U.C.C. $ 3 8-207 Comment, 8-401 through 8-406; see Turnbull v.
Lawrence Bank, 249 N.Y. 159, 163 N.E. 135 (1928).
U.C.C. 5 3-102(l) (d).
64 U.C.C. 8 5 3-414, 3-412(2).
U.C.C. 5 5 7-505, &3O8(4).
U.C.C. 5 3 4 1 4 ( 1 ) . See Donnelly v. Garvan, 11 1 Conn. 626, 151
A. 168 (1930); Lane Cotton Mills Co. v. Kohler, 186 La. 469, 172 So. 530
(1937); M.R. Johnston Coffee Co. v. Page, 161 Md. 503, 157 A. 297, 82
A.L.R. 662 (1931); Note, 97 A.L.R. 593. For indorsers' liability on non-
q~gotiablepaper, see Note 79 A.L.R. 719.
 8 14-70 COMMERCIAL PAPER
in Chapters 22 and 23. If these formalities are not met, the indorser's
"
liability is discharged and can only be reinstated if he agrees to waive
the discharge. In absence of proper proceedings of dishonor o r waiver,
the indorser is under no obligation other than his warranties, which arise
at the time of delivery of the paper and attach without any'notice of
dishonor. In absence of agreement to the contrary, the indorsen are
liable to each other in the order in which their signatures appear on the
paper.68 . a
The indorser's conditional liability does not apply to qualified in-
dorsers. The indorsers of documents of title o r securities and assignors
of nonnegotiable paper d o not guarantee that the warehouseman, carrier,
or other party primarily liable will perform his ~bligation.'~In other
regards, their liability is similar to that of the indorser of money paper.
5 14-70 DRAWER'S LIABILITY i 8
a
The liability of a drawer on a draft is similar to that of an indorser.
He undertakes that upon presentation the instrument will be accepted,
or paid, or both as the case may be, and that if he is given proper notice
of dishonor he will pay the amount of the instrument to any holder or
'
subsequent indorser who may be compelled to pay it.w \
Although the drawer's liability is said to depend upon proper pre-
sentment and notice of dishonor, the drawer usually cannot avoid liabil-
ity even if the presentment o r notice is delayed beyond the time when it
was due.O1 The drawer is discharged only to the extent that the delay
caused the drawer loss of funds to cover the draft because the bank on
which the draft was drawn became insolvent.61 In order to avoid lia-
bility in this limited situation, the drawer must assign his rights against
the insolvent bank for payment of the check to the holder. In the lim-
ited situations where protest is necessary, however, any delay in making
it results in a complete discharge of the drawer.- (These problems are
discussed in greater detail in Chapters 22 and 23.) Otherwise, the
drawer is required to pay drafts on default of the d r a ~ e e . ~ '
I '
U.C.C. $5 3-501 (1) (b), 3-502.
0'
I 88 Wilson v. Turner, 29 N.C.App. 101,223 S.E.2d 539 (1976).
1 49 U.S.C.A. 5 115; A.L.I. Rcstatcmcnt (Contracts) % 175(2) (1932);
U.C.C. % $ 7-505, 8-308(4).
wU.C.C.53-413(2).
6' U.C.C. 0 3-502.
a= Id.
> ,-
" Id.
O4 U.C.C. 5 3-413(2). For a full discussion of this liability, see Beutel,
"The Liability of Secondary Parties Under the Uniform Commercial Code,
Drawers and Indorsen," 1 Rutgen Cam. L. Rev. IS (1969).
. . ,, LIABILITY OF PARTIES
', Although the case does not often arise, he could also be liable in
'
, ,&
'l!'.z:-
,+,\**
warranty as described below for the transfer of the paper in the same
* ,
,.a manner as is any other transferor.e6 H e is also precluded from denying
, I: to subsequent parties or to the indorsee the existence of the payee and
his capacity to indorse.ee For example, if the drawer made a check pay-
?(
'? able to an unlicensed corporation without power to contract and the
proper corporate officer subsequently indorsed it, he would not be able
. to deny the power of the corporation to transfer the instrument."' But
the drawer does not guarantee the genuineness of the payee's indorse-
ment and can always set up forgery where it exists.o8
8 14-75 WARRANTY OF TRANSFERORS OF PAPER
There are a number of warranties that attach alike to sale and
transfer of all commercial paper whether it is negotiable or not.
The first is that the instrument o r contract transferred is genuine
and what it appears to be.eg If it is forged or altered, the transferor is
liable for the resulting damages.1°
Second, the transferor undertakes that he has a good title and a
right to transfer it. If the instrument was stolen and was not bearer
papcr, which can be transferred by delivery alone, he is liable for result-
ing damages even if he did not know it.ll In the case of documents of
title, there is a warranty not only that the transferor has title to the doc-
ument, but also that he has title to the goods represented by it and the
right to transfer both the document and the goods. Where the goods are
sold by transfer of the document, the transferor makes the same war-
ranties as any seller of the goods themselve~.~"
The third warranty is that the transferor has no knowledge of any
fact that would impair the validity of the instrument or render it value-
less.la Under this warranty, he would be liable if he knew the instru-
U.C.C. 88 3-202(1). 3 4 1 7 ( 2 ) .
U.C.C. 93-413(3):
Cf. cases collected in BeuteJ's Brannan Negotiable lmtrumcnts Law
893 (7th ed. 1948) (hereinafter cited as Beurel'x Brannan).
Foege V. Merchants'-Laclede Nat'l Bank, 208 S.W. 854 (Mo. App.
1919).
a9 U.C.C. 6 5 3-417.4-207, 7-507(a) & &306(2) (b).
loCluseau v. Wagner, 126 La. 375, 52 So. 547 (1910); Hunt v. Sanden,
288 Mo. 337, 232 S.W. 456 (1921); First Nat'l Bank v. Kempner, 103 Okla.
237, 229 P. 840 (1924).
U.C.C. 5%3-417(2) ( a ) , 4-207(2) ( a ) , 7-507.2-312 & 8-306(2) (a).
1149 U.S.C.A. 0 114(d); U.C.C. 5 7-507.
la 49 U.S.C.A. 1 114(c); U.C.C. $ 5 3 4 1 7 ( d ) (e), &207(d) (el.
I
< ,
,l
8 14-80 , COMMERCIAL P A P E R '
ment was being transferred after breach of contract which made it sub-
ject to defense,14 o r if he had knowledge that the obligor was bankrupt.T6
But if he were innocent of these facts, he would be under no liability on
this warranty.16 , G .,
The fourth general warranty is that the transferor will d o nothing
to impair the value of the security he is t r a n ~ f e r r i n g . For
~ ~ example, if
he discharges the lien supporting a negotiable instrument, o r releases the
debtor on a nonnegotiable instrument he has transferred, he will be liable
in warranty.18
In the case of money paper, there is an additional warranty that
all prior parties have capacity to contract.lg Thus, if the maker of the
instrument is an infant o r a corporation contracting beyond its powers,
the transferor will be liable for the resulting damage.80 This warranty,
however, does not apply to persons negotiating public o r corporate secu-
rities other than notes, drafts, or checks.e1
,,
9 14-80 WARRANTIES ON PRESENTMENT OF
NEGOTIABLE PAPER FOR PERFORMANCE
When a holder of negotiable paper presented it to the person pri-
marily liable on the contract and received performance, by commercial
custom and court decisions he was liable to return the payment if he did
not have good title to the i n ~ t r u m e n t if, ~it~ had been materially altered,
o r if any necessary indorsement was If the signature of the
maker, drawee, o r drawer was forged, and the person primarily liable
74State Bank of Lehr v. Lehr Auto dr Mach. Co., 54 N.D. 608, 210
N.W. 89 (1926); Cressler v. Brown, 79 Okla. 170, 192 P. 417 (1920).
l6Spiegelman v. Eastman, 95 Cal. App. 205, 272 P. 761 (1928).
Bank of Otterville v. Bank of Boonville, 16 S.W.2d 702 (Mo. App.
1929).
U.C.C. Q $3-417(2), 4-207(2).
leHoge v. Ward, 109 W. Va. 515, 155 S.E. 644 (1930); A.L.I.R., Con-
tracts 226(1) (1932).
U.C.C. $5 3-4 l 7 ( 2 ) (d), &2O7(2) (d).
a0 Commercial Credit Co. v. Ward & Son, 215 Ala. 3 1, 109 So. 574
(1926); Commercial Credit Co. v. Blanks Motor Co.. 174 Ark. 274, 294
S.W. 999 (1927); Jacobs v. Brown, 259 Mass. 232, 156 N.E. 26 (1927).
8' U.C.C. Q 8-308 (4).
8 2 Hubbard v. Southern Pac. Ry., 256 F. 761 (5th Cir. 1919); Security
Sav. Bank v. First Nat'l Bank, 106 F.2d 542 (1939), 127 A.L.R. 116 with
note; Central Nat'l Bank v. Drostea Jewelry Co., 203 Mo. App. 646, 220
S.W. 5 11 (1920); Ozark Sav. Bank v. Bank of Brandeyville. 204,S.W. 570
(Mo. App. 1918).
"See N.I.L. 5 23; Insurance Co. of N. Am. v. Fourth Nat'l Bank, 12
F.2d 100 (1926), 28 F.2d 933 (1928), cert. denied 279 U.S. 853 (1929);
and see cases collected in Brutel's Brannan, note 67 supra, at 448.
LIABILITY OF PARTIES
paid the instrument, the holder in good faith could retain the payment
on the ground that as between two innocent parties the loss should fall
upon the one who could have prevented it o r who really knew the sig-
'
#',
nature.B4 The liability to return the payments o r other performance is
codified in the Commercial Code under warranties on presentment.86
5 14-85 LIMITATIONS OF LIABILITY IN WARRANTY
., r
Although the warranty liability attaches absolutely upon the trans-
fer. of paper, there are a number of limitations upon the obligation.
Where the tr'ansfer is by delivery only either of paper indorsed in blank
o r unindorsed paper, the warranties apply only to the immediate trans-
f e r e e ~ .But
~ ~ where the transfer is by indorsement, the warranties run
to all persons who take title through the i n d o r ~ e m e n t . This
~ ~ rule does
not apply to indorsements of documents of title o r securities under the
Commercial C ~ d e . ~Where
e the transfer of the paper is the return of
collateral, such as documents of title or stock certificates on the pay-
ment of the debt, the Code provides that the bank is not liable in
warranty.89
T h e parties between themselves may limit the liability in warranty
by a special contract. Such a contract should be in writing and should
state clearly the warranties that are intended to be released; otherwise
all those mentioned above apply automatically upon the transfer of the
paper without further agreement.g0 A transfer without indorsement o r
an indorsement without recourse, however, does not relieve the traas-
feror o r qualified indorser from liability in warranty.@'
5 14-90 LIMITATION OF LIABILITY BY
SPECIAL CONTRACT
T h e drawer may insert in the instrument an express stipulation by
which he limits his liability to any subsequent holder.@l Also, any party
M T b e authorities are collected and discussed in Beuleh Brannan, note
67 supra, at 904 et seq.
'
mU.C.C. $8 3 - % 1 7 ( l ) 4-207(1)
, & 8-306(1).
U.C.C. Q$3 4 l7(2), 6 2 O 7 ( 2 ) , 7-507 It 8-306.
U.C.C. $5 3-417(2), 4-207(2).
'8 U.C.C. Q Q 7-507, &3O6(2).
Og U.C.C. Q Q &306(3), 8-306(4). Banks only warrant their good faith
Vn
and authority when collecting documentary drafts. U.C.C. Q 7-508.
47; , 49 U.S.C. $5 114, 116 (1976) ; U.C.C. Q $ 3-417 and Comment 1,
&
ty?
, ' 4-207, 7-507, &306(4).
.
i el 49 U.S.C. B Q 114. 116 (1976); U.C.C. Q 7-507.
,$ U.C.C. 55 3-413(2), 7-507, 8-306(2). Indorsers can limit their
2 liability also. U.C.C. $5 3-414(1), 3-417(3) and Comments 1,9,4-207(3).
,ti;.,
?
5 14-95 COMMERCIAL PAPER
t o a negotiable instrument may change the nature of his liability either
by the particular types of indorsements mentioned in Chapter 13, o r by
writing o n the instrumcnt a special contract that makcs him liable in
s o m e capacity other than thc standard liability which grows o u t o f his
notmal position o n thc instrumcnt, as explained abovc.
§ 14-95 LIABILITY OF AGENTS
A person signing commercial paper a s a n agent may find himself
personally liable o n the papcr unless he takes precautions to see that the
signature is in the proper form a n d is properly authorized. T h e r e are
two difierent situations in which a n agent may be liable personally f o r
the contract appearing o n the paper, depending on whether o r n o t h e
was authorized to sign f o r his principal.
A n agent who is fully authorized to sign for his principal is not
liable o n commercial p a p c r if he adds to his signature words indicating
that h e signs o n behalf of a principal o r in a representative capacity.g3
A n authorized agent would not b e liable o n the following signa-
tures: "Jones & Co., b y Smith, agent" o r "Jones & Co., by Smith, pres-
ident," "Jones & C o , per Smith, agent" o r similar designation, and
"Smith, agent f o r Jones & Co." In these situations, the agent, if prop-
erly authorized, would not be liable o n t h e contract. T h e signature
shows that it is m a d e by a representative a n d the person w h o is repre-
sented as required b y t h e Commercial Code.04
Where the agent signs negotiable paper without authorization from
his principal, he is personally liable o n t h e obligation regardless of the
form in which he s i g n ~ . ~ T hliability
is attaches cven if h c is innocent of
thc fact that h c has n o a u t h o r i t y . " " B u t if thc purchaser of thc papcr
knows thc agcnt is without authority, hc cannot hold him if thc ngcnt is
acting undcr innocent m i ~ t a k e . " ~Also, i f it appcars from the face of thc
contract itself that the agent could not possibly havc authority, o r bc
liable upon it, hc will not b c held personally liablc on thc c o n t r a ~ t . " ~
U.C.C. 8 3-403 Comment.
93
U.C.C. 8 3-403.
O4
O5 U.C.C. 8 3-403(l); see Beutel. "Liability of an Unauthorized Agent,"
5 Tul. L. Rev. 281 (1931); Note, 81 Banking L.J.604 (1964).
oRA.L.I.R.,Agency, 11,p. 219 (1933).
Elison State Bank v. Montevideo Baseball Ass'n, 160 Minn. 341, 200
N.W. 300 (1924); Loveland v. Hanson, 172 Wis. 627, 179 N.W. 782 (1920);
Southern
" - .Supply
.. . -. .. . .--
Co. v. Mathias, 147 Md. 256, 128 A. 66 (1925).
r -9, t r o '.r r7r) r t o ? $\ 4 "";<
II 5 14-100
L I A B I L I T Y OF P A R T I E S
ILLUSTRATIVE AGENCY CASES
5 14-100
T h e modern tendency of courts to a d o p t the business point of view
in agcncy situations is shown by thc following cases:
Whcn a principal's nanlc docs not a p p c a r o n an instrument signcd
by a n agcnt whosc signaturc did not disclosc that hc signcd as agcnt but
only signed individually, thc principal is not liablc o n that instrumcnt.
This is s o even where the payee knew when the instrument was issued
that it was intended to b e the obligation of o n e who did not sign.OQ
Certain checks were signed with the n a m e of a corporation followed
by the names of two individuals, with each individual signature pre-
ceded by the word "by" and followcd by the words "authorized signa-
ture." T h e court held that only the corporation was liablc o n the checks
and that one of the signing individuals w h o was sued on the checks was
not personally Iiable.Io0 B u t in a situation where a note neither named
the person rcpresentcd n o r showed that the signature was given in a
represcntativc capacity, the word "by" prcceding the signature o n the
face of 111c note did not alone show that h e h a d signed in a representa-
tive capacity.101
Where a check was issued bearing the n a m e of an incorporated
travel agency, signcd by the president of that organization w h o did not
indicate his title o r representative status o n the check, it was held that
the payee (described as a n "immediate party"), who knew when the
check was taken that the prcsident had signed as an officer of the cor-
porate drawer, could not enforce payment of the check against the presi-
dent individually whcn the chcck was dishonored because of insufficient
funds in the corporate bank account.lo2
Where a check was issued by a company whose name appeared as
signatory, followcd by thc signature of two individuals without a n y titlc
OD Ness v. Greater Ariz. Realty, Inc., 21 Ariz. App. 231, 517 P.2d 1278
(1974), which quoted part of U.C.C. 5 3-401 Comment I . The case involved
a note, but the rulc applies wifh regard to a check signed by an individual
thnt docs not disclosc the nnmc of n purported principal for whom the nllcgcd
ngcnt is signing.
'OoSoutheastern Fin. Corp. v. Smith, 397 F. Supp. 649 (Ala. 1975),
where the court indicated that the checks basically fell within the rule of
5 3-404(3) of the U.C.C. and that any person seeing such checks would
regard them as only thc obligation of the corporation and not of any indi-
vidual signer, who clearly signcd as an agcnt. The court also indicated that the
individual signer should not be liable under an Alabama "bad check" law
conferring civil liability on one who issued a worthless check.
l o ' Giacalone v. Bernstein, 348 So. 2d 679 (Fla. App. 1977); U.C.C.
\, Pfrif- 8 3 4 O. -3-( -2.) .. . - . - - . - - .- ,
< ,,.
? ? -
.---,
 5 14-100 COMMERCIAL PAPER
o r other indication that they signed in a representative capacity, it was
held in a suit against one of the two individuals (whose signature was
affixed by a check-writing machine) that such individual was not liable.
The court said that it was clear from the evidence adduced that the
individual intended to sign only in a representative capacity, and that
the payee (who was suing on the check) knew of this intention, evi-
dence to that effect not being disputed by the payee.I03 It is important
to note that the action was between immcdiate parties.
A corporation owed money for delivery of merchandise on open
account. The creditor demanded a "personal note" from the president
and secretary of the debtor "as a condition to continued business." A
note was executed bearing the typed name of the corporation, followed
by the signatures of the two oficers, without any indication that they
had signed in a representative capacity. It was held that the evidence
in the case sustained a holding that the two individuals had signed in a
personal capacity and were personally liable. The Code permits it to be
established between the "immediate parties" that the signatures were
made in a representative capacity, where the principal is named. As the
signatures did not show "representative capacity," lo4 the court held that
the burden of proof was on the individuals to show affirmatively an
understanding with the payee that they were not personally liable. Such
a burdcn was not met in this instance.'06
A somewhat similar holding exists in another case involving a
check bearing on the left-hand side the printed name of an organization,
where the check was signed by an individual who did not add a title
o r other indication o f representative capacity. It was held to be for the
jury to decide whether the individual signer was personally liable, and
(the jury having held for liability) there was said to bc nothing in the
evidence to justify a conclusion as a matter of law that the individual
had signed in a representative capacity.'08
'O8Speer v. Friedlan, 276 So. 2d 84 (Fla. App. 1973).
lot U.C.C. 5 3-403 (2) (b).
106 Fannine v. Hembree Oil Co.. 245 Ark. 825, 434 S.W.2d 822 (1968).
The action-wa;by the payee of the'note against one of the individuals who
' -~-~
had sinned without including his title. The court observed that the note would
have had little value if it hi& been merely the note of the corporation alone,
and further observed that the individual was the most literate of all the per-
1 sons involved in the transaction. For other cases where par01 evidence was
admitted to show representative capacity between "immediate parties," see
Sullivan County Wholesalers, Ins. v. Sullivan County Dorms, 398 N.Y.S.2d
181 (1977): , . Medley Hardwoods, Inc. v. Novy, 346 So. 2d 1224 (Fla. App.
1977).
' 0 0 Carleton Ford, Inc. v. Oste, 295 N.E.2d 402 (Mass.App. 1973)
rC
238
LIABILITY OF PARTIES , -105
In another case with similar facts, it was held that the individual
signer of the check, who did not indicate his titlc, had the burden of
showing by evidence an understanding that hc was not to be hcld per-
sonally liable by the payee. The mere facts that the identity of the
corporate principal was printed on the upper left-hand part of the checks
involved and that there had been previous instances where the payee
had taken checks signed by other officers of the corporation wcre not
considered enough to negatc pcrsonal liability.107
Where a check bore the printed namc "Cessna Ranch" together
with an address and telephone number in the lower left-hand corner, but
was signed by an individual who failed to include any title o r other
indication of representativc capacity along with his signature, it was held
that thc bank which had takcn the check on deposit from the payee and
had permitted a partial withdrawal of the proceeds was entitled to the
extent of thc withdrawal to hold the signcr pcrsonally liablc. Sincc thc
bank was not an "inirnediate party," the court said that the signer could
not introduce evidencc of any agreement between the payee and the
signcr as to the capacity in which the clleck was signed.lo8
A company president who signed a corporate check without adding
his title or indicating his representative capacity was held personally
liable when the check failed to clear.Ion This may occur when the check
is not imprinted with the firm n a m ~ . ~ ~ O
Absence of "by" or "for" renders an individual signer of a cor-
porate obligation liable thcrefor.ll' Where a corporate president signed
a note of the firm receiving proceeds, absence of the corporation's sig-
nature on the note precluded its liability thereon under 5 3-401 of the
U.C.C., which provides that no one is liable on an instrument unless his
signature appears
§ 14-105 TRUSTEE'S LIABILITY
It is necessary for a person signing as trustee to indicate clearly
that the obligation is not his own if he desires to relieve himself of
personal liability. Such an indication can be rnadc by adding after thc
signaturc "as trustcc only and not pcrsonally liablc." In the case of
lo'
ln8
Griffin v. Ellinger, 530 S.W.2d 329 (Tex. Civ. App. 1975).
American Exch. Bank v. Cessna, 386 F. Supp. 494 (N.D. Okla. 1974).
'On GriRen v. Ellinger, 19 U.C.C. Rcp. 587 (Tcx. 1976).
"O A . J . Jackson Chcvrolet v. Oxley, 564 P.2d 633 (Okla. 1977).
Rotuba Extruders, Inc. v. Coppcs, 25 U.C.C. Rep. 765 (N.Y. 1978).
'I2 Weubke v. Richardson & Sons, Inc., 265 N.W.2d 57 (Wis. 1978).
i 14-110 COMMERCIAL PAPER

)usiness trusts, the personal liability can be removed by a signature

imilar to the Erst two mentioned above in 3 14-95, which are made safe
'or a trustee simply by replacing the word "agent" with "trustee." 118
Chapter 15
5 14-110 REPRESENTATIVE CAPACITY
The Commercial Code treats all persons signing as agents, officers
HOLDERS IN DUE COURSE,
of corporations, trustees, executors, or administrators as being in a
representative capacity and makes no distinction between their liability
BONA FIDE PURCHASERS,
on commercial paper so far as signatures are concerned.ll' If personal
liability is to bc avoided, the signature must show that it was made as
AND DEFENSES
a representative and identify who is represented. NEGOTIABLE PAPER
lrsThe authorities on trustees are collected and discussed in Beurel's
Brannan,note 67 supra, 429 et. seq. Section Page
11' U.C.C.$ 5 3-403, 1-201. 15-5 .
Holders in Due Course . . . . . . . . . . . . . . . . . . . . . . . . . 24 1
15-10 Requirements of Holding in Due Course . . . . . . . . . . .. 242
15-15 Without Notice of Defects or Defenses . . . . . . . . . . . . . 243
15-20 Good Faith ................................... 245
15-25 .. .
Organizations and Agency . . . . . . . . . . . . . . . . . . .. 247
15-30 Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248
15-35 . .
Bank Credit as Value . . . . . . . . . . . . . . . . . . . . . . . . . 250
15-40 Before It Was Overdue . . . . . . . . . . . . . . . . . . . . . . . .. . 252
1545 Purchaser of Overdue or "Stale" Negotiable Paper . . . . . 254
15-50 Kinds of Defenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254
15-55 Defects in Contractual Relations . . . . . . . . . . . . . . . . . . . 255
15-60 Other Agrcemcnts Aflecting Dcfcnses to the
. . . .
Instrument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255
15-65 Wrongs in Contracting and Transfer . . . . . . . . . . . . . . . 256
15-70 Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257
15-75 Statutes Making Instruments Void . . . . . . . . . . . . . . . . . 258
15-80 Usury Statutes . . . . . .. .. . . ..
. . . . . . . .. . .. . . . . . . . . 25 8
15-85 Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259
15-90 .
Lack of Causation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 1
15-95 Holder in Due Course-Abolition in
Consumcr Trnnsnctions . .. . .. . . . . . . . . ..... . . . . ... 262

5 15-5 IIOLDERS IN DUE COURSE

A person who is the promisee, an indorsee in possession, or a per-
gp with physical custody of an instrurncnt payable to bearer is called
 5 15-10 COMMERCIAL PAPER
a holder of the instrument.' A holder who is a bona fide purchaser of
negotiable money paper is known as a holder in due course. Under the
Commercial Code, a holder of securities or of documents of title who
&"
is in the position of a holder in due course of money paper is sometimes
\ called a bona fide p u r c h a ~ e r ,or
~ "hold& to whom a negotiable docu: -.:-.
ment of title has been duly &gotiated." a All three of these terms mean
substantially the same thing. ~ x c e as ~ tprovided in the recent statutes
of a few states, certain uniform statutes, and provisions for consumers'
protection discussed in Chapter 35, a holder in due course takes a
negotiable instrument free from any defect in the title of prior parties
and free from dcfcnses available to the prior parties among themselves.
He may enforce the instrument according to thc contract on its face
against all parties who appcar to bc liable thereon.'
There are, howcver, a few absolute defenses that can bc set up by
parties whose names appear on the instrument, even against a holder
in due course. These defenses are explained at the end of this chapter.
3 15-10 REQUIREMENTS OF IIOLDING IN DUE COURSE
In order to be a holder in due course, the person taking the instru-
ment must comply with at least five requirements. The instrument he
purchases must be complete and regular on its face. If it contains blanks,
apparent alterations, or crasurcs, i t will not bc a safc purchase. The
holdcr must have taken without any notice of infirmities in the contract,
claims against the title, or defenses on the part of prior parties. Such
taking must also be in good faith and in exchange for value given to the
prcvious party. The exchange also must have taken place before the
instrument was overdue.&
In the case of cutting off interests of third persons in chattels,"
in documents of title,' and in security interests in chattels and chattel
paper,a where such alienation is possible under the Commercial Code,
the person standing in the position of holdcr in due course must, in
149 U.S.C.A. 122; U.C.C. 8 1-201(20).
r a c e U.C.C. $ 5 8-302, 8-301 (2).
a See U.C.C. $5 7-501 (4), 7-501 ( 1 ).
49 U.S.C.A. 1 1 1; Uniform Stock Transfer Act 4 6 (hereinafter cited
as U.S.T.A.); U.C.C. $5 3-305.7-502, 8-202(4) & 8-303.
6 U.C.C. 18 3-302, 7-501 (4) & 8-302.
8 U.C.C. $ 0 2-403(2), 1-201 (9).
'U.C.C. 5 5 7-5Ol(4), 7-504(2)(b).
' U.C.C. $19-307(1), 9-308.
HOLDERS IN DUE COURSE ,15-15
addition to the above requirements of a bona fide purchaser, also have
purchased in the regular course of b u s i n e s ~ . ~
Whether a holder is a holder in due course is determined by the
facts at the time he acquires the paper. If he meets all of these standards
at the instant of exchange, he has the rights of a holder in due course
cvcn though he may learn of facts that would have prevented him
from being a holder in due course, had he known them at the time of
the exchange. For example, if he pays for an instrument in good faith
and bcforc maturity, and learns of a defense the next day, he can still
enforce it against the party claiming the defense at the time of maturity.'O
5 15-15 ~VITIIOUTNOTICE OF DEFECTS OR DEFENSES
Noticc of dcfects or defenses to prcvent a person from being a
holdcr in due course can be of two types: either that the person had
actual notice or knowlcdge of such facts or, from all thc facts and cir-
cunlstnnccs known to him nt thc tinlc in question, he had rcason to know
that such facts cxistcd.ll
Actual nolicc covers all facts appearing on the facc of the contract
itself.'* For example, if the instrument is signed "White, trustee," the
purchaser is charged with knowledge of the trust, and his rights may be
greatly liniitcd by thcse facts.13 At one time, the law charged purchasers
of papcr with constructive notice of facts appearing on public records,
suits in court, and thc likc. Undcr thc Comnlercial Code, a party
purchasing the negotiable paper is not bound by such facts unless he
actually knows thcrn or, in good faith, should have known them. The
cxistcncc of the rccord itsclf is not notice on thc instrumcnt,14 though
O U.C.C. $ 1-201 (9);sec notes 6, 7, and 8 supra; O.M. Scott Credit
Corp. v. Apex Inc., 198 A.2d 673 (R.I.1964); A1 Maroone Ford v. Man-
heim Auto Auction, Inc., 204 Pa. Super. 154, 208 A.2d 290 (1965).
l o Citizens Union Bank v. Thwcatt, 166 Ark. 269. 265 S.W. 955 (1924).
l1 U.C.C. § § 1-201 (25), 3-304(3).
l 2 U.C.C. § 34404( 1 ) ( a ) ; see Commercial Sec. Co, v. Donald Drug Co.,
115 S.C.48, 104 S.E. 312 (1920); Hughes & Co. v. Flint, 61 Wash. 460,
112 P. 633 (1911).
l a Owncs v. Nogel, 334 Ill. 96, 165 N.E. 165 (1929);Ford v. Brown,
114 Tenn. 467, 88 S.W. 1036 (1905);Dollar Sav. & Trust Co. v. Crawford,
69 W.Va. 109, 70 S.E. 1089, 33 L.R.A. (n.s.) 587 (1911). The effect of
dealing with a trustce is covered by the Uniform Fiduciaries Act, which is
discussed in Chaptcr 27.
l 4 U.C.C. $ 5 3-304(5), 8-304(2) & 9-309. Mitchell V. Pcrkins, 118
Kan. 449, 235 P. 1036 ( 1925); Fostcr v. Augustanna Collcgc, 92 Okla. 96,
.L 218 P. 335, 37 A.L.R. 854 (1923),with notc.
5 15-15 COMMERCIAL PAPER
it may act as notice f o r other purposcs in determining rights in the col-
lateral security for the instrument.16
T h e requirement that a holder in d u e course be free from knowl-
edge of facts a n d circumstances from which he has reason t o know of
the defenses covers a number of difficult situations. If a person pur-
chases paper with knowledge that thc transferor had taken part in
previous fraudulent transactions of the same nature as the o n e from
which the instrument arose, he is not a holder in d u e course, a n d may
b e subject to the defense that the transferor obtained the particular
instrument exchanged by fraud.'a But knowledge that the transferor has
failcd t o perform previous contracts docs not makc a purchascr subjcct
t o the defense of breach of contract' o n the instrument purchased."
Knowledge of the contract for which the instrument was given does not
charge the purchaser with knowledge of breach of that c o n t r a c t . ' V u r -
chasing under suspicious circumstances, o r with negligence in failing t o
examinc the facts, o r under such circumstanccs as would put a prudent
man on inquiry, would not in itself prevent the purchaser from being a
holder in d u e course unless he acted in b a d faith.lP In a lawsuit, how-
ever, such facts might be submitted t o a jury as evidence of bad faith.20
In like manner, whilc purchasc a t a discount does not in itself constitute
b a d faith,21 it may b e submittcd with surrounding circumstanccs as
cvidcnce of bad faith, sufficient t o put the purchascr o n notice of
d c f c n ~ e s . ~T
' o b c safe, a purchascr should use d u c carc in inquiring
about doubtful situations.
Knowledge that a payee o r holder of a check has a bad financial
record, has overdrawn his account, o r otherwise might generally be
lW.C.C. 5 9-301. Scc Part IV.
la U.C.C. 8 1-201 ( 2 5 ) ( c ) ; scc Arnctt v. Sandcrson, 25 Ariz. 433, 218
P. 986 (1 923); Stevens v. Cole, 127 Kan. 807, 275 P. 167 ( 1929); Stcvcns
v. Clintwood Drug Co., 155 Va. 353, 154 S.E. (1930); Kiftredge v. Grannis,
244 N.Y. 168, 1.55 N.E.88 (1926).
l 7 Jcwett v. Geiger, 263 Mass. 525, 161 N.E. 812 (1928).
18See Beurel's Brannan Negotiable I~tsrrut~ients Law 788 (7th ed. 1948)
(hereinafter cited as Beutel's Brannan); U.C.C. 8 3-304(4)(b).
l P See Beurel's Brannan, note 18 supra at 772.
z0 Barthelmess v. Cavalier, 2 Cal. App. 2d 477, 38 P.2d 484 (1934);
Kelly v. Industrial Operating Co., 329 Mo. 629, 46 S.W.2d 18 I ( 1932) ; NCW
York Bankers v. Duncan, 257 N.Y. 160, 177 N.E. 407 (1931).
21 Spires v. Jones, 212 Ala. 117. 101 So. 753 (1924); Ham v. Mcrritt,
150 Ky. 11, 149 S.W. 1131 (1912); McNamara v. Jose, 28 Wash. 461, 68
P. 903 ( 1902).
22 FOXRiver Valley Bank v. East, 229 Mich. 698, 202 N.W. 971 ( 1925);
Bccker v. Hart, 135 App. Div. 785, 120 N.Y.S.270 (1909); Land Fin. Corp.
v. Sherwin Elec. Co., 101 Vt. 114, 141 A. 598 (1928); Union State Bank
v. Savord, 186 Wis. 365, 202 N.W. 688 (1925); Stewart v. n o r n t o n , 116
Ariz. 107 (1977).
* (T9u.c.c.5 1-201 ( 19).
H O L D E R S IN D U E C O U R S E J-20
considered a "bad risk" docs not of itself preclude the person taking the
check from such payee o r holder from being a holder in due course.29
This rule has been applied in instanccs where a bank takes on deposit
a chcck from the payee-depositor and permits withdrawal of credit
bcfore the check is collected even though the payec's account balance
has bccn low o r previously overdrawn o r even though the bank knew
that the payee-depositor was experiencing financial problems a n d was
in a n overdraft position.24
Only actual knowledge o r disregard of suspicious circumstances
m a y constitute evidcnce of bad faith.25 I n a Ncw York decision, the
court hcld that nlthough thc purchase of rravclcrs chccks was not madc
in a normal commercial market o r that a higher price was paid because
of inflation, the issuer could not claim that plaintiff's assignor knew o r
should have known that the checks were stolen. T h e surrounding cir-
cumstances were only grounds for suspicion a n d conjecture.26
A n irregularity on the face of a note purchascd by plaintiff bank
prcventcd plaintifi from achieving the status of a holder in d u e course.
T h e note was susceptible to a t least two interpretations of the d u e date
and of thc ycar in which it would b e due, hence giving the holder notice
of dcfccts in the i n s t r u r n ~ n t . ~ ~
§ 15-20 GOOD FAITII
T h e requirements of good faith in the purchase of negotiable instru-
ments a r c A purchaser must take the instrument feeling in his
own mind that he is acting properly and in good faith. A s the Com-
mcrcinl Codc puts it, good faith is k n c s t y in fact.2D Thus, a pcrson
--_I_
--
who takcs thc instrunlcnt for thc purpose of defrauding crcditors or
23 Sf. Cloud Nat'l Bank & Trust Co. v. Sobania Constr. Co., 224 N.W.2d
746 (Minn. 1974), which hcld that the depository bank could recover on
the chcck from thc drawer who had stoppcd payment.
2 4 Commcrce Bank v. Edco Fin. Scrv., 379 F. Supp. 293 (E.D. Mo.
1974). aD'd per cr~rinvr503 F.2d 1047 (8th Cir. 1975). which likewise hcld
that the dcposifory bank could recover on two chccks from the drawer who
had stopped payment.
25 Gutckunst v. Continental Ins. Co., 13 U.C.C. Rep. 522 (2d Cir. 1973).
Scc also Mid-Continent Nat'l Bank v. Dank of Independence, 523 S.W.2d
569 (Mo. App. 1975).
2BScndcry v. Amcricnn Express Co., 16 U.C.C. Rep. 753 (N.Y. Sup.
Ct. 1975).
. 27 Firsf Nat'l Bank of Cinton v. Otto Huber & Sons, 394 F. Supp. 1284
(D.S.D. 1975).
2,U.C.C. 5 1-201(19) and Comment.
245
5 15-20 COMMERCIAL PAPER
aiding a fraud of creditors is not in _eMdJ@t_h. T h e same result follows
if he i s s u r e l c l o u J , for fear he
might find defenses. A person who acts with gross carelessness may
be taken to have acted in bad faith and will therefore be deprived of
the rights of a holder in d u e course.a1 But purchase of a n instrument
indorsed without recourse is not evidence of b a d faith.**
T h e fact that a b a n k teller took and cashed two checks of a cor-
poration drawn o n another bank, in violation of a n internal rule of the
cashing bank requiring the approval of the manager before such checks
should be cashed, was held to make n o difference in testing the good
faith of the bank. All that was necessary was that the bank takc the
checks in simple good faith, for value, and without noticc of a n y dis-
honor o r of any defense o r claim. When the bank met the "simple
honesty" test, it could b e a holder in d u e course and enforce pay-
ment of the checks against the drawer corporation, which had stopped
pa~ment.'~
Whcrc a bank took a chcck from thc paycc, who wns not a rcgulnr
customer of the bank, a n d issued its o w n cashier's check t o the payee
in exchange for the check, the bank having first telephoned the bank
o n which the check was drawn to verify the account and the sufficiency
of funds, it was held a s a matter of law that the first bank had acted in
good faith and was a holder in due course of the original check. A s a
holder in due course, the bank was hcld entitled t o enforce payment of
the check against the drawer, who had stopped payment. T h e court
noted that the act of stopping payment occurred after the first bank had
tclcphoned thc payor b a n k to verify thc account and thc sufticicncy
of funds."
~ . c . c , 5 I-201(25)(c); Iowa Nat'l Bank v. Carter. 144 Iowa 715,
123 N.W. 237 (1909); Walters v. Rock, 18 N.D. 45, 115 N.W. 51 1 (1908);
Paika v. Perry, 225 Mass. 563, 114 N.E. 830 (1917); Morris v. Muir, l 1 1
Misc. 739, 181 N.Y.S. 945, aff'd 191 App. Div. 947, 181 N.Y.S. 945 (1920).
8L Salem Trading & Fin. Co. v. Peterson, 48 R.I. 170, 136 A. 445
(1927).
az Robertson v. Budzier, 229 Mich. 619, 201 N.W. 949 (1925); Downs
v. Horton, 287 Mo. 414, 230 S.W. 103 (1921); Lcavitt v. Thurston, 38
Utah 351, 113 P. 77 (191 1 ) ; Banner Meat Co. v. Rieger, 125 Wash. 142,
215 P. 334 (1923); Worth Sav. Bank v. Foster, 175 Minn. 293, 221 N.W.
12 (1928).
Industrial Nat'l Bank v. Leo's Used Car Exch., Inc.. 291 N.E.2d 603
(Mass. 1973), where the court declared that the subjective test, o r that of
"honesty in fact" was all that was required, in order to establish the good
faith of the cashing bank.
Manufacturers & Traders Trust Co. v. Murphy, 369 F. Supp. 1 1
(W.D. Pa. 1974), which cited U.C.C. 5 3-302(1) and the definition of
"good faith" as "honesty in fact" in U.C.C. 5 1-201(19).
HOLDERS IN DUE COURSE
Under the "simple honcsty" test of good faith, a stockbrokerage
firm was not dcnicd holder-in-due-course status merely because it took
a check drawn by a corporation in the name of the firm as payee in
satisfaction of a debt owed the firm by a n individual customer ( w h o
was the remitter of the chcck) for stock purchased by that individual
customer for his own However, where a bank has had a n
unusually close relationship with the assignor of a note, and there are
othcr circumstances from which knowledge of the shaky nature of the
assignor can be imputed to the bank, there is justification according to
an Ohio court in finding that the bank has not taken the note in good
fnith. Thus, the bank is not cntitlcd to thc protcction afforded n holdcr
in d u e
Whcre unconscionable o r unfair contracts have bcen practiced by
payee-scllcrs, there is a tendcncy to hold that finance companies o r
banks, in closc business connection with a fraudulent payee, lack the
good faith necessary to give thcm thc rights of a holdcr in due course.
This tcndcncy, found in both court dccisions and statutcs, is discussed
. in Chapter 35.
5 15-25 ORGANIZATIONS A N D AGENCY
Sincc banks and corporations act entirely through agents, good
faith and notice to the bank o r corporation are tested by the state of
mind of thc agents o r officers who takc a n active part in the transaction
by which tllc instrun~cnts wcrc transfcrrcd. It is n gcncral rule that
noticc to, o r bad faith in, the agcnt o r oficer binds the c o r p o r a t i ~ n , ~ ~
Eldon's Super Fresh Stores, Inc. v. Merrill Lynch. Pierce, Fenner &
Smith, Inc., 296 Minn. 130, 207 N.W.2d 282 (1973). The court commented
that there were no facts known by the broker that might attract the applica-
tion of what is sometimes callcd the "red light" test, where in connection with
the taking of an instrument, there are "danger signals" from which may be
inferred the existence of a claim to the instrument on the part of another
person. It appeared that the individual customer, an attorney-secretary of
the corporation and an attorney for the president of the corporntion, had
improperly obtnincd nnd used the corporntc chcck for his own purpose, but
the brokerage firm had no knowledge of this.
r i t y Nat'l Dank v. Williams, 368 N.E.2d 1264 (Ohio App.
8 6 S ~ ~ ~ Cent.
1976). A former employee of the bank was a sales representative of the
assignor. The bank took a substantial number of notes from the assignor.
T h c olliccr of thc bank who had handled the notes resigned under prcssurc
because of deals that presumably includcd this one. The court determined
that the type of business the assignor conducted seemed to be almost inher-
ently surpcct.
n7 U.C.C. 5 1-201(27); see Bank of Con~mcrcev. Rnndell, 107 Neb.
+332, 186 N.W. 70, 21 A.L.R. 1360 (1921 ) ; Lundean v. Hamilton, 184 Iowa
g 15-30 COMMERCIAL PAPER
but if the agent o r officer is acting on his own behalf and against the
interests of the corporation, his state of mind is not chargeable to his
prin~ipal.~"
In cases where a large organization is involved, if notice is given
to the proper person in the organization, it is charged with that nolice
even if another person acting for the organization acts for it without
actual knowledge of such facts.8B The law puts the burden on the
organization to take reasonable steps to see that notice once received
gets to the person who acts for it.4o
§ 15-30 VALUE
Value which must be given in exchange for negotiable paper may
be anything that can be the subject matter of a simple ~ o n t r a c t . ~ A
' negotiable instrument f o r it o r makes an irrevocable commitment to a
holder who has given value is known as a holder for value, and may be
a holder in due course if he meets the other requirements discussed in
.
Q 15-10. A u r u m e n t taken in exchange for cash or chattcls of value,
d
-
chicks or negotiable paper,42 payment of G e e x i s t i n g debt o r over-
m as collateral security for a present o r pr 'ous debt," o r held
in enforcement of a Ii
-~rticle 3 of the
P
@ge, is held f o r valu .48 /
ercial Code deviates from the rule of the rest
of the Code, that any consideration suficient to support a simple con-
tract is value.46 Insofar as money paper falling under that article is
concerned, there is value given only to the extent that the consideration
907, 169 N.W. 208 ( 1918 ) ; Intcrnationnl Harvester Co. v. Wntkins, 127
Kan. 50, 272 P. 139 (1928); Note, 61 A.L.R. 687.
88 Arlington Brewing Co. v. Blucthenthal & Bricknrt, 36 App. D.C. 209,
1918C L.R.A. 901 (1918), with note; State Bank v. Droncn, 50 N.D. 583,
197 N.W. 150 (1924).
3B U.C.C. 5 5 1-201 (27). 8-304.
U.C.C. $ 5 1-201 (27), 8-304 Comment ( 1 ). Graham v. White-Philips
Co.. 296 U.S. 27 (1935) cited with approval
.. there.
' 4 1 U.C.C. g 11201 (44) ( d l .
@~.c.c. 1 1-201 (44); see Peoples Sav. Bank v. Smith. 210 Iowa 136.
230 N.W. 565 (1930); Goodale v. Thorn, 199 Cal. 307, 249 P. 1 1 (1926);
Penbrook Trust Co. v. Wiegand. 100 N.J.L. 353, 126 A. 404 (1924).
@u.c.c. 5 1-301 (44).
4 4 U.C.C. $ 8 3-303, 4-209; see cases cited in Beurel's Brannan, note 18
supra ,at 529.
&.c.c. 8 5 1-201 (44), 3-303(9), 4-208 & 4-209; see Griswold v.
Morrison, 53 Cal. App. 93, 200 P. 62 (1921); Continental Credit Co. v. Ely,
91 Conn. 553, 100 A. 434 (1917); Schwenker v. Johnson, 198 Wis. 300,
224 N.E. 117 (1929).
40 U.C.C. 1 1-20] (44) (d).
HOLDERS IN D U E COURSE 15-30
has been performed at the time the holder claims to be a holder for
value." Thus, a promissor bound on an executory contract is a holder
for vnluc only to the extent that hc has performcd his o b l i g a t i ~ n ;but
~~
Article 3 specifically provides that giving a negotiable instrument o r an
irrcvocablc commitment to a third party is value, as is payment of a
prior dcbt.'O
The fact that a check is acquired at a discount o r less than face
value does not, of itself, establish lack of value for purposes of deter-
mining whether a holder is a holder in due course.60
It has been held that a widow took certain cashier's checks for
value and was a holder in due course, where she took the checks in
partial payment for loans shc had made to a corporation of which she
and her latc husband had been the sole stockholder^.^^
Although a holder takcs the instrument for value "when he gives a
third person," 62 this principle has been held to apply only when the
commitment to the third person is made at the time the holder takes
the instrument. If the commitment is made after the holder takes the
instrument, no value is given and the holder cannot become a holder in
due course.8e
Where a bank takes a check on another bank in exchange for its
own cashicr's check, it is a holder for value of the first check. T h e act
of issuing the cashier's check comprises both the giving of a negotiable
instrument and the making of an "irrevocable commitment." 6 4
Onc is considered a holder in due course to the extent he has
performcd an executory promise.B8
A debt owed by the payee of a check to his indorser does not of
itself constitute value unless the indorscr takcs the check in full or
47 U.C.C. 5 3-303(a).
Korzenik v. Supremc Rndio Inc., 347 Mass. 309, 197 N.E.2d 702
(1964).
U.C.C. § 3-303(c) Comment ( 5 ) ; Texaco State Bank v. Hullinger.
220 N.E.2d 248 (111. App. 1966).
Illinois Valley Acceptance Corp. v. Woodard, 304 N.E.2d 859 (Ind.
~ p ' 1973).
~ . The same principle should apply if the person sued had given
a check instead of a trade ncceptnnce.
Bank of Lyons v. Schultz, 22 111. App. 3d 410, 318 N.E.2d 52 (1974).
82 U.C.C. § 3-303(c).
68 Bennett v. United States Fid. & Guar. Co., 19 N.C. App. 66, 198
S.E.2d 33 (1973).
6 4 Mnnufncturers & Trndcr Trust Co. v. Murphy, note 34 srcpra, which
cited U.C.C. 5 3-303(c) in support of its holding. See "Taking a Bank
Money Order for Value Under UCC Section 3-303," 63 Minn. L. Rev.
983-93 ( 1979).
68 Saka v. Mann Theatres, 575 P.2d 1335 (Nev. 1978).
5 15-35 COMMERCIAL PAPER
partial satisfaction of the debt. But if the indorser takes the check with
the understanding that the debt will be adjusted upon collection of the
check, he is not a holder for value.5o
In a Connecticut case, the court held that provisional credit made
by a bank against one of its customer's overdrawn accounts constituted
value although the credit entered was subject to a later withdrawal or
rcvcrsal of crcdit by the plaintiff. The bank took the inslrumcnt in
paymcnt tor on antcccdcnt obligntiori nnd rcccivcd n sccurity intcrcst
in the item and its proceeds.67
Onc is not considcrcd a holdcr of securities without having givcn
value. No value is given when bonds are rcccivcd as an inter vivos g i k n B
5 15-35 BANK CREDIT AS VALUE
When a depositor negotiates an instrument to the bank in return
for credit to his account, there is considerable difficulty in the state of
the law in determining whcthcr thc bank takcs as a mcrc assigncc o r as
a holder for value and, therefore, as a possible holder in due course.
A look at the history of the law helps in understanding the U.C.C.
provisions on this point.
A deposit that was not for collection, but for actual credit, would
seem to be a transaction in which the bank is a holder for valuc. Under
the Negotiable Instruments Law," sixteen states properly held that a
bank had given value as soon as it credited the account of the depositor
with the right to draw even though it reserved the right to charge back.e0
A large number of other states followed the old rule that existed
before thc adoption of the N.I.L., holding that mcrc crcdit t o the de-
positor's account was not value for the instrument transferred to the
bank until the amount of the instrument registered on the deposit slip
had actually been withdrawn. The law on this point was not very satis-
factory. At least three rules seemed to be applied by various courts in
-
Wilson Supply Co. v. West Artesia Transmission Co., 505 S.W.2d 3 12
(Tex. Civ. App. 1974), afl'd 51 1 S.W.2d 261 (Tex. 1974).
"Laurel Bank & Trust Co. v. City Nat'l Bank of Conn., 33 Conn.
Sup. 641, 365 A.2d 1222 ( 1976).
5s Friend v. Morrow, 558 S.W.2d 780 (Mo. App. 1977).
N.I.L. $ 8 25, 191.
OD Blacher V. National Bank, 151 Md. 514, 135 A. 383, 49 A.L.R. 1366
(1926). There were cases to this same effect in England, Arknnsas, Kcn-
tucky, Louisiana, Missouri, Nebraska, North Carolina, North Dakota. Okla-
homa, Oregon, Pennsylvania, South Carolina, South Dakota, Texas. Virginia,
and Washington, and in the federal courts of District of Columbia, and
Massachusetts. See Beufel's Brannan, note 18 supra, at 500 et seq.
HOLDERS IN DUE COURSE
different states, and sometimes by the courts in a single state, to deter-
mine when the amount was so drawn.
The first theory, called first-in, first-out, o r FIFO, worked as fol-
lows: If there was a balance in the account of $ 5 0 at the time a $100
instrument was offered for credit to the account, it would be necessary
for the depositor to draw out the $50 before the bank could be said to
give any value for the $100 instrument. If after honoring a check for
$50 tlic bnnk honorccl n sccond onc for $75, undcr lliis nrlc, though i t
had paid out $125, it would Imvc givcn only $75 value for the $100
check.
T h c sccond rulc was known as Inst-in, first-out, or LIFO. Using
the facts given abovc, when the bank honored the first check for $50,
it would have given $ 5 0 value for the $100 instrument deposited, and
the honoring of the second check would be value in full.
The third rule held that the bank would not have given value as
long as the balance remaining in the account was greater than the
amount of the instrument in question. In cases where the customer
habitually carries large balances, undcr this rulc, the bank might never
be a purchaser for value of an instrument offered for credit.
In practice, these three rules also held that a bank is a holder for
value only for the amount i t has paid out at the time it receives notice
of a defect in the title or dcfensc to the instrument deposited, and not
for the full amount of the instrument until it has paid its full face value.81
Some courts held that a bank might be a holder in due course for
the full amount of the instrument if any portion of its face value had
been withdrawn from the account.82 This rule, of coursc, was subject
to the complication that any one of the three tests above could be
applied in dctermining whether or not the bank has paid even a portion
of the amount. In short, although the language of the N.I.L. seemed
clear, the cases show confusing results.6s
Under the Commercial Code, the rules of bank credit as value are
still complicated. It is clear that where documents of title or securities
arc sold to a bank, o r collections are involved, the bank is a holder for
The cases are collected and discussed in Beurel's B r a n n a n , note 18
O1
supra, at 498 et seq.
O2 New Jersey Title Guar. Co. v. McGrath, 239 Mich. 404, 214 N.W.
195 (1927); National City Bank v. Macon Creamery Co., 329 Mo. 639, 46
S.W.2d 127 (1932); Old Nnt'l Dnnk v. Gibson, 105 Wnsh. 578, 179 P. 117,
6 A.L.R. 247 (1919).
08See Cifinns Nat'l Bank v, Fort Lee Sav. & Loan Ass'n. 89 N.J. Super
43, 213 A.2d 315 (1963); Universal Credit Corp. v. Guarantee Bank. 161
+ F. Supp. 709 (D. Mass. 1958). Contra, Texico State Bank v. Hallinger, 220
N.E.2d 248 (111. App. 1966).
 COMMERCIAL PAPER
value as soon as it gives credit, even if the credit is r e v ~ c a b l e . If
~~
money paper is involved, though the ordinary purchaser is a holder for
value only to the extent that the agreed consideration has been per-
lorrncd," banks stand in a more favorcd position. Under Article 4,
they have a security interest in the paper to the extent the credit has
been withdrawn, applied to a debt owed the bank, or has been irre-
vocably credited to the a c ~ o u n t . ~ V h cthey
n become a holder for value
to the extent of their security i n t e r e ~ t .When
~ ~ it is necessary to deter-
mine if a particular credit has been withdrawn o r applied in some other
way, the F I F O doctrine applies.08 This is discussed in Chapter 21.
Under all the acts, where negotiable paper is transferred to pay or
to sccure an overdraft o r a preexisting debt, the bank o r othcr transferee
becomes a holder for value to the extent of the credit or the lien.BD
The case of instruments deposited in banks in active checking
accounts should be distinguished from the situation in which a person
buys negotiable paper on installments. In this case, he becomes a holder
for value only to the extent of the amount of installments he has paid?O .
For example, if a person purchases a $1,000 bond, paying $500 cash
and agreeing to pay $ 5 0 0 a month later, until the second payment is
actually made, he is a holder for value only to the extent of one-half of
the bond.71
5 15-40 BEFORE IT WAS OVERDUE
To be a holder in due course, the purchaser of money paper must
take it before it is overdue. In the case of timc papcr, such a purchascr
is one who has taken it any day bcfore maturity o r who has received
transfer on the day of maturity.12 Aftcr the close of the busincss day
of maturity he can no longer be a holder in due course. Dcmand paper
is said to be overdue if it is purchased a n unreasonable timc aftcr issue.
The reasonableness of the time elapsed before such a purchase depends
on busincss practice and particular circumstances in the community in
~ ~ example, it was a general rule
which thc papcr is t r a n ~ f c r r c d . For
U.C.C. 5 5 1-201 ( 4 4 ) , 4-208( 1) (b) & 4-209.
6' U.C.C. 5 3-303.
0' U.C.C. 5 4-208( 1) (b).
d7 U.C.C. 5 5 4-209, 3-303 ( a ) .
" U.C.C. 5 4-208 ( 2 ) .
U.C.C. 5 5 1-201 (.4 4 .) (.b.) . 3-303(b), &2O8(i ) & 4 2 0 9 .
70 U.C.C. § 3-303.
" Dresser v. Missouri, Etc., R.R. Constr. Co., 93 U.S. 93 (1876).
72 Wilkin v. Usher, 123 Ky. 696, 97 S.W. 37 (1906); U.C.C. $ 5 3-302
( 3 ) , 3-503.
7' U.C.C. 5 3-304(3) (c).
HOLDERS IN DUE COURSE ,, 5 4 0
that checks on banks in the same city must be collected the next busi-
ness day after they are r c ~ c i v e d . ~ 'But in rural districts the purchascr
of a chcck within a week of its issuc might be a holder in due course.76
For out-of-town papcr, n rcnsonnblc limc was dctcrrnincd by thc ordi-
nary means of conveyance and transportation.
The Commercial Code makes an arbitrary presumption that within
the Unitcd States and its tcrritorics, a reasonable time for taking a
check is thirty days after issue.76 On other paper, the rules of custom
as set out here would still seem to apply. The presumption itself is also
subjcct to proof of contracts or custom to the contrary.77
In the casc of demand notes without interest, a purchascr within
thirty days might bc said to have takcn it bcfore it was 0verdue,~8but
after six months has elapscd a purchaser would normally not be a holder
in duc course.70 If, on thc othcr hand, the note bears interest, the
purchascr may be a holder in due course if he purchases over a year
e that the instrument bears interest indicates the
after its i s s ~ e . ~ " T hfact
intention that it will be outstanding longer than it would be if no interest
was required.
The requirement of purchase bcfore maturity usually does not apply
to documents of title, interim certificates, and stock certificates, but in
the casc of documents of title covering perishable goods, a purchase
too long after issuc of the docurncnts might carry with it noticc of
defects and prcvcnt the purchnscr from bcing a holdcr in duc course.
Under thc Code, there is no rcquircnxnt that to be a "bona fide
purchaser" of a security one must take it before r n a t ~ r i t y ; ~but ' if a
person otherwise n bona fide purchascr takes a stale security, he is
subjcct to both dcfcnscs and adverse claims of ownership good against
l 4 Anderson v. Elern, l l l Kan. 713, 208 P. 573, 23 A.L.R. 1202 ( 1922)
with note; BciirelD Bmtvran, note 44 sripra. a t 1296.
l6 Asbury v. Taube, 151 Ky. 142, 151 S.W. 372 (1912); Harnmond
Stntc Dank v. Pcrrin, 1 Ln. App. 108 (1924); Gordon v. Lcvinc. 197 Mass.
267, 83 N.E. 861, IS L.R.A. ( n s . ) 143 (1908); Matlock v. Schcucrrnan, 51
Or. 49, 93 P. 823, 17 L.R.A. (n.s.) 747 (1908).
7d U.C.C. 5 3-304(3) ( c ) .
77 U.C.C. 5 1-201 ( 3 1 ) .
78Scyn10ctr Rr Co. v. Artz. 5 La. App. 556 (1926); Kinlyrc Farmers
Coop v. Midland Nat'l Bank, 2 F.2d 348 (8th Cir. 1924); cf. Colona v.
Parksley Nat'l Bank, 120 Va. 812, 92 S.E. 979 ( 1917).
Amcricnn Nnt'l n n n k v. Pnttcrson. 145 Ln. 995. 83 So. 21 8 , 7 A.L.R.
1563 (1919); Stntc & City D a n k v. Hcdrick, 198 N.C. 374, 151 S.E. 723
(1930); Grossrnan v. Adelman, 103 N.J.L. 284, 135 A. 688, au'd 104
N.J.L.169, 138 A. 920 (1927).
80 McLean v. Dryer, 24 R.I. 599, 54 A . 373 (1903); cf. Franklin Bank v.
6 St. Louis Car Co., 321 Mo. 199, 9 S.W.2d 901, 6 0 A.L.R. 639 (1928).
U.C.C. 5 8-302.
 5 15-45 COMMERCIAL PAPER
his t r a n s f e r ~ r . T
~ h~ e rules for determining staleness are quite com-
plicated and vary from six months to two years after the dates of ma-
turity and other events the issuer is bound t o perform."
5 15-45 PURCHASER OF OVERDUE OR "STALE"
NEGOTIABLE PAPER
A purchaser of overdue negotiable paper stands approximately in
the position of an assignee of nonnegotiable paper. H e gets all the
rights of thc pcrson who transfcrrcd it to him. Thus, if thc transferor
was a holder in due course, the purchaser, after maturity, stands in the
position of an assignee of a holder in due course and has the rights of
such a holder in regard to all parties prior to him.84 One risk in taking
overdue paper is that prior indorsers may have been discharged by a
failure to make a timely presentment. This is discussed in Chapter 22.
A bank is entitled to pay any check in good faith notwithstanding
Section 4-404 of the U.C.C.,relieving duty as to a chcck over six
months old.B5
8 15-50 KINDS OF DEFENSES
Negotiable paper is, in a sense, a bundle of contracts. Each party
whose name appears on the paper by adding his name to it makes a
separate contract subject to the rights and duties indicated by the type
of obligation he assumes. T h e conditions surrounding the making of
such contracts may raise a number of defenses that he can assert against
subsequent parties. These defenses fall into two general classes: those
that may be cut off by a holder in due course; and absolute defenses,
which are good against all subsequent parties, even including a holder
in due course. The defenses cut off by holders in due course include all
the defects in the contractual relationship from which the instrument
came or under which it was transferred, wrongs of different kinds per-
I petrated upon the maker or transferor of the instrument, and illegal
I'
transactions either in the making or the transfer.86 Absolute defenses
U.C.C. 5 8-301 ( 1 ) .
82
See U.C.C. $ 5 8-202, 8-305.
U.C.C. $ 5 3-201, 3-207, 3-306 & 8-201; see Chaffee, "Rights in
Overdue Paper," 31 Harv. L. Rev. 1104 (1918).
na Charlcs Repusa & Sons v. Community State Bank, 360 So. 2d 231
(La. A.; 1978).-
49 U.S.C.A. 5 117; U.C.C. $ 5 3-304, 3-305, 7-502, 8-202, 8-301 6r
8-315.
HOLDERS IN DUE COURSE . A 0
cover situations where the instrument is made absolutely invalid by
statute, where the party being sued lacked either mental or legal ca-
pacity to become liable on negotiable paper, and where he can show
that the instrument from which the claim arises was neither his contract
nor was it caused by him to bc in circulation in its present form.
0 15-55 DEFECTS IN CONTRACTUAL RELATIONS
Dcfenses arising from the contractual relationship surrounding thc
insfrunicnt includc such situations as failurc to pcrform the contract
and dclibcratc brcach of the contract for which the instrument was
givcn. A pcrson liable on the instrument may also offer the defense that
his signing was without consideration, that is, that he transferred it as a
mere gift.87
In cascs where a person signs for accomnlodation of another, evcn
if he docs it gratuitously, hc is liable if thc instrumcnt is negotiated to a
. subsequent holdcr in accordance with thc agrccment under which he
signed, even though thc subsequent holder knew that he signed for
accommodation.s8 But if thc instrumcnt is negotiated in violation of the
purpose for which the accommodation party signed, he may offer this
violation of purpose as a defense against any but a holder in due
c o u r ~ c .For
~ ~ cxaniple, whcrc a slockholdcr in a corporation signs an
accommodation note for the purpose of paying certain debts of the
corporation to specific creditors and a bank that was not intended to
receive the paper knowingly takes it in payment of other debts, the bank
is not a holder in due course and cannot enforce the instrument against
him.OO
$15-60 OTHER AGREEMENTS AFFECTING DEFENSES
TO T11E INSTRUMENT
T h e Codc providesn1 that as bctwccn immcdiatc parties (obligor
and obligcc/transfcrcc) an instrumcnt may be modified or limited by
another writtcn agrecment executcd as part of the same transaction,
" U.C.C. $ 5 3-408. 3-415 & 8-202.
'' U.C.C. § § 3-4 15, 8-20 1.
Schlamp v. Mnneval, 196 Mo. App. 114, 190 S.W. 658 (1916);
Goblcs Coop Ass'n v. Albripht, 24R Mich. 68. 226 N.C. R76 (1929).
Wnrncr v. Fnllorl Conl Mincs Co., 246 Mich. 493, 224 N.W. 601
(1929); Red Wing Rubber Co. v. Hjcrmstad, 176 Minn. 425, 223 N.W.
682 (1929).
5 15-75 COMMERCIAL PAPER
The court differentiated between an agreement not to prosecute and
an agrcement to go along with a reduction of criminal charges.Io8
Although the conduct involved may be illegal, a holdcr in due
course can recover in most cases.lo9 Only when the law makes the
obligation to pay void, as discussed in $ 15-75, is the defense good
against a holdcr in due course.
§ 15-75 STATUTES MAKING INSTRUMENTS VOID
There are a number of situations where violations of law in the
transaction by which a pcrson bccamc a party to the instrument are
absolute defenses even against a holdcr in due course. Most of thcse
situations arise where statutes make instruments given in violation of
prohibitions "void" against all parties, or use similar expressions. Situa-
tions of this kind arise under the gambling laws of many states. A few
usury laws contain such prohibitions. Occasionally, ccrtain illegal trans-
actions of corporations may make their instruments absolutely void."O
The Commercial Code greatly simplifies these cases by making
such defenses good against a holder in due course wherever the law
"renders the obligation of the party a nullity." l S 1
3 15-80 USURY STATUTES
Usury statutes deserve special mention in light of the provisions of
the Commercial Code and numerous fedcral statutes.
The rates of interest that banks and othcr financial institutions can
legally charge and the effects of violations of thc statutes are governed
by the Depository Institutions Deregulation and Monetary Control Act
of 1980 112 and other statutes discussed in Chapter 17.
In the case of other businesses, the state and federal laws are very
complicated. They provide for different rates of interest depending upon
the nature of the business of both the borrower and lender, the type of
loan, the security given, and upon whether a consumcr is involved.
168Bank of Niles v. American State Bank, 14 Ill. App. 3d 729, 303
N.E.2d 186 (1973), which involved the Code.
log U.C.C. !i3-305 (2).
110 SCCBcutcl, "Thc Interpretation of thc Negotiable Instrumcnls Law
and Slatutcs Dcclaring Instruments Void," 83 U. Pa. L. Rcv. 744 (1935).
U.C.C. 5 3-305(2) (b).
Pub. L. No. 9 6 2 2 1 , Title V ( 1980).
rc.
HOLDERS IN DUE COURSE j 15-85
Maximum legal rates vary greatly. The penalties are also extremely
complicated and include forfeiture of excess intercst, or all interest, for-
fciture of all or part of the principal, declaring the whole transaction
void, providing criminal penalties, or a combination of penalties.
Whcre thc bank discounts such paper, it niay find itsclf in a number
of positions. If the papcr shows on its face that it is usurious, the bank
ncquircs thc pnpcr with notice of tllc illegality nnd has no greater right
than the original payce. If thc usury is not clear from the face of the
paper and it is otherwise negotiable, the bank discounting it may be a
holder in due course, cutting off the defense of illegality and recovering
the facc of thc But if the state usury statute made the original
transaction a nullity bccausc of usury, as indicated above, then the
discounting bank can recover nothing even if it is a holder in due
COUTS~.~~'
Where the state or federal statute makes part of the instrument
void, as, for exarnplc, the entirc or the exccss interest, thcre is doubt
undcr the Codc whcthcr the holdcr in due course discounting bank can
recover only the amount as reduced by the statute involved o r the face
of the instrument.11"
Whcn consumcr credit is involved, there is additional regulatory
control of the transaction under the fcdcral Consumer Credit Protection
Act and othcr consumcr protcction statutes. These are discussed in
Chapters 33 to 35.
§ 15-85 CAPACITY
Incapacity of the person entering the contract is almost always a
dclcnsc against a holder in due course. Incapacity may arise from two
sourccs: first, the natural condition of the individual entering the con-
tract, and second, the legal relation of the person or organization created
by law.
Natural incapacity is a defense of children under age against all
subsequent parties.ll6 But if an infant transfers an instrument to a
n 8 S ~ h l ~ i n g v.
e r Gilhoolcy, 189 N.Y. 1, 81 N.E. 619, 12 Ann. Cas.
1138 (1907); U.C.C. 5 3-305(2).
It' U.C.C. 3-305(2) (b).
For n coniplctc lcpnl nnd cconomic discr~ssionof usury, scc Dcnfcld,
"Money, Mot-tgngcs and Migraine-The Usury Hcadnche," 19 Case W. Rcs.
L. Rev. 8 19 ( 1968).
U.C.C. 5 3-305(2) ( a ) .
5 15-65 COMMERCIAL PAPER
except that a holder in d u e course cannot be affected by a limitation of
which he had no notice when he took the instrument and that a separate
instrument cannot affect the negotiability of a n instrument.
T h e Code does not state general rules as to when a n instrument
may be varied o r affected by par01 evidence. Such agreements can take
any form o r character, such as providing that on certain conditions the
instrument shall be discharged as not paid o r that it is a sham and
unenforceable. T h e rules on such agreements (often manifestly fraud-
ulent) are left to judicial decision. For example, where a payee agreed
that a check is not to b e effective and not presented until the drawer
has evidence of an insurance payment, presentment (with dishonor and
return) was a nullity because the check was invalid at that time.02 An
oral agreement not to enforce an instrument against an accommodation
indorser has been held u n e n f ~ r c e a b l eand,
~ ~ similarly, testimony was
barred to assert an agreement that payment of a note would be deferred
until receipt of federal funds.@' This must bc carefully distinguished
from the case of a failure of a condition precedent. Suppose an agree-
ment between two indorsers and a payee provided that renewal would
be granted if the renewal note was signed by five named individuals.
A resultant four-signature note would be void between the par tie^."^
Paradoxically, it has been noted that a conditional oral agreement not
to enforce may be cnforccablc, while a firm agreement may not bc.06
However, it is the law that, short of flagrant fraud, a pcrson who signs
o r delivers a note is held to liability thereon, irrespective of failure to
read or comprehend its contents.'" Also, a signature beneath a legend,
"Assenting to Terms," binds the signer to the whole instrument, not just
to the legend.P8
5 15-65 WRONGS IN CONTRACTING AND TRANSFER
&.
Where a person is induced to become a party to an instrument by
-,' ' .
fraud. i m ~ r o ~ force
er or fear, o r by mistake, he has a defense.80 For
example, if the seller of stock for a check falsely represents that he owns
Engelecke v. Stuehsler, 544 P.2d 582 (Or. 1975).
O3First Nat'l City Bank v. Cooper. 375 N.Y.S.2d 118 (1975).
84 Trustees of Tufts College v. Parlane Sportswear Co., 342 N.E.2d 727
(Mass. App. 1976).
Long Island Trust v. Rochrnan, 381 N.Y.S.2d 445 (1976).
08See Edmonds. "Commercial Paper, Bank Deposits and Collections,"
32 B U S . - ~ a w1103,
. 1.106 (1977).
07 Venahle v. Payne, 326 So. 2d 763 (Ala. App. 1976).
O8 Community Nat'l Bank v. Dawes, 18 U.C.C. Rep. 723 (Mass. 1973).
"'49 U.S.C.A. 5 117; U.C.C. 5 5 3-207, 3-306, 8-301 & 8-315.
HOLDERS IN DUE COURSE &-70
the stock,100 o r if an instrument is given under a threat of criminal
p r o s c c ~ t i o n , ' ~the
' instrument is subject to defenses. However, a n in-
strument given to settle a disputed claim subject to 4vil suit is valid.'02
B 15-70 ILLEGALITY
There are a number of statutes prohibiting certain types of activity.
Instruments issued in violation of these statutes are subject to defense.
Usury laws are a common example of this type of illegality. If a person
charges too high a rate of interest or violates the small loans acts, he may
bc required to forfeit either the principal o r interest, and may also have
to pay a penalty.'0s If the instrument was issued in violation of gambling
laws o r for bribery of public officials, the party s o issuing o r transferring
it has a defense.lo4
Under thc corporation laws of many states, known as the Blue Sky
Laws, selling stock without a license, improperly incorporating com-
panies, and doing business through foreign corporations not licensed in
the state is prohibited.IoK Instruments given in any of these transactions
are also subject to the defense of illegality. Where the statute makes
such transactions mcrcly illcgal, attaches a penalty, o r declares the in-
strument void bctwccn thc partics only, it can still bc cnforccd in thc
hands o f n holder in due c o u r s ~ . ' ~ ~
Whcrc an instrument is given for an agreement not to prosecute a
criminal action against a third person, the instrument is void.Io7 O n the
other hand, it has been held that a bank which takes a bank money
order from a person who had previously defrauded the bank by issuing
a worthless check, upon an agreement merely to reduce the charge
./ against that pcrson from a felony to a misdemeanor and to back a
' sentence of probation, is not barred from holder-in-due-course status.
loo Peoples State Bank v. Miller, I85 Mich. 565, 152 N.E. 257 (1915).
m ~ u a r d i a nTrust Co. v. Mayer, 19 F.2d 186 (8th Cir. 1927).
'02 Byron v. Byron, Heffernan & Co., 98 N.J.L. 127, 119 A. 12 (1922).
For cxnmplcs of slntufcs of this nnturc see N.Y. Conscrv. Lnw Ch.
21, 5 373 (Cnhill 1930); Gn. Code 5 5 1770(73), 1770(77) (Michie 1926);
Ala. Code 8 8567 (1923); 2 Cal. Gen. Laws Act 3757, 5 2 (Deering 1931);
W. Va. Code Art. 6. Ch. 47. 5 6 ( 193 1 ).
lo' See cases cited in Beutel's Bronnon, note 44 suprn. at 750.
'05 Statutes of this nature are to be found in Alabama, Arkansas, Colo-
rado. Florida. Idnho. Illinois. Kcntucky. Massachusetts, Michigan. Minnesota.
Mississippi. Missouri, New York, North Dakota, Tennessee, and Texas. See
Note, 12 A.L.R. 1379.
Io8 See Beutel's B r a n n a n , note 18 supra, at 753.
lo' Williarnsen v. Jernberg, 99 Ill. App. 2d 37 1, 240 N.E.2d 758 (1968).
.L involving a note and not referring to the Code.
5 15-95 COMMERCIAL PAPER

or representations caused innocent parties to take the paper believing

that it is good.la2 For example, if a person appearing to be liable on an
altered instrument or one obtained by fraud signs a renewal note know-

IiabJe to persons&&iu&e-~er _-
ing the facts,'" or if he reJrescnts that the void instrument is valid, he is
_ _-_ .- upon such represcntation~.~~'
relying Chapter 16
5 15-95 IIOLDER IN DUE COURSE--ABOLITION
NEGOTIABILITY OF
IN CONSUMER TRANSACTIONS COMMERCIAL PAPER WITH
Eflectivc May 14, 1976, the F T C r c q ~ i r c s 'that
~ ~ nll consumcr
credit contracts contain a notice in boldface type which prescrvcs the SPECIAL CONTRACTS
claims and dcfenses of the debtor against all assignees of the contract.
A number of states, South Dakotala8 and Kansasla7 included, have
special provisions that restrict rights of holdcrs in due course in con- Section Page
sumer transactions. These developments are discussed in Chapter 35. 16-5 T h e Problem of Negotiable Notes . . . . . . . . . . . . . . . . . 263
16-10 Acccleration Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264
la2 U.C.C. 5 5 3 4 0 4 , 8-3 1 1. 16-15 Promises i o Do Additional Acts . . . . . . . . . . . . . . . . . . 266
Green v. Harsh, 204 Ala. 520, 86 So. 392 (1920); Note, 34 Harv. 16-20 Prorniscs to Prcscrvc Collatcral or Other Security . . . . . 266
L. Rev. 671 (1921): Ector v. Osborne, 179 N.C. 667, 103 S.E. 388, 13 16-25 Acceleration on a Contingency . . . . . . . . . . . . . . . . . . . . 267
(1920), with note; see Note, 35 A.L.R. 1258.
enison-Gholson Dry Goods Co. v. Hill, 135 Tenn. 60, 185 S.W.
16-30 .
Provisions in Mortgages . . . . . . . . . . . . . . . . . . . . . . .. 268
16-35 Chattcl Papcr . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269
723 (1916); First Nat'l Bank v. Wolfe, 140 Md. 479, 117 A. 898, 25 A.L.R.
172 (1922), with note. 16-40 Scalcd lnstrumcnts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 1
Ia6 40 Fed. Reg. 53506 (Nov. 18, 1975). 16-45 .
Judgment Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272
188This involves an addition to the South Dakota version of U.C.C. 16-50 Waiver of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273
5 3-305, referring to other provisions added to the South Dakota Uniform 16-55 Provision for Sale or Holding of Collateral . . . . . . . . . . 274
Commercial Code, and relating to consumer paper. 16-60 Indexation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275
la7The Kansas provision is also a non-uniform variation of U.C.C.
5 3-305(2) ( f ) . 16-65 Ncgotiability by Mere Statement . . . . . . . . . . . . . . . . . . 275
16-70 Negotiability of Mortgages and Other
Titlc-Retaining Contracts . . . . . . . . . . . . . . . . . . . . . . . .
16-75 Contracts in Mortgages-Effect on Negotiability
and Enforceability of the Notes . . . . . . . . . . . . . . . . . . .
16-80 Ncgotiability of Invcstmcnt Papcr . . . . . . . . . . . . . . . . .
16-85 Rcgistcrcd Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1G-90 Spccinl Contracts in Bonds . . . . . . . . . . . . . . . . . . . . . . .
1 6-95 Ncgotiability nncl EfTcct of Stock Exchnngc Rulcs . . . . .
.
16-100 Ncgotiability by Contract . . . . . . . . . . . . . . . . . . . . . . .
.
16-105 Waivcrs of Dcfcnscs . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 TIIE PROBLEM OF NEGOTIABLE NOTES

Although cach bank is limited as to the total amount of i n d i ~
loans it may make in ratio to its rcscrves and thc kinds of paper and
q p c s of sccuritics it may purchase, depending upon whether it is a
5 15-85 COMMERCIAL PAPER
party who subsequently negotiates it to a holder in due course, the
holder in due course may keep the paper even though he has no contract
rights against the infant.l17 However, the infant may recover the value
of thc papcr o r the paper itself from his immcdiatc transfcrcc whether
o r not he knows of the infancy.""
Wherc a mental incompctcnt cxccuted a power of attorney whcrc
his name was affixcd to a note without consideration, thc note was
voidable at the elcction of the incompctcnt o r guardian cvcn though thc
notc was obtained for consideration and without fraud, at least as against
parties dealing with the holder of power.118 That the holder dealt with
the agent of the incompetent, and not directly with the incompctcnt him-
self, is i n c o n ~ e q u e n t i a l . ~ ~ ~
Insane persons can usually offer insanity as a defense and, in cases
where they have been interdicted-that is, declared insane by a court
of law and placed under guardianship-thcir signatures on instruments
outside of the guardianship cannot be the basis for any liability, even
as against holders in due course. As with a n infant, however, a subse-
qucnt holdcr in duc coursc who rcccivcd thc papcr from somconc othcr
than the insane person is entitled to keep it and enforce it against other
partics.I2l
Incapacity crcatcd by law ariscs principally from lhrcc sourccs:
marriagc, priva~ccorporations, and municipal corporations.
At onc tinlc thc contracts of niarricd wonicn wcrc uttcrly void,
cvcn as against holdcrs in duc course of ncgotiablc papcr. But this
disability has becn 'removcd by state statutes and case law. Fcderal law
prohibiting discrimination on the basis of sex in credit transactions also
assures women the right to contract independently for credit.Iz2
Whcrc corporations issue certificated sccuritics bcyond thcir powcrs
as providcd in thcir chartcrs, thc instrumcnt can be cnforccd by a good
faith p ~ r c h a s c r . ~ ~ W W l iac ngovernment agcncy issucs a dcfcctive or
invalid security, a good faith purchaser will be able to recovcr 3s long
" 7 U.C.C. 85 2 4 0 3 ( I ) , 3-207. There was some confusion on this
point where money paper is involved. See Beurel's Brannan, note 44 supm,
at 435.
I t a U.C.C. 5 53-207(2); see Bankers Trust Co. v. Dank of Rockvillc
Center, 114 N.J. Eq. 391, 168 A. 733 (1933).
!lo Lucas v. Whitely.
- . 550 S.W.2d 767 (Tex. Civ. App. 1977).
120 Id.
l Z 1U.C.C. 5 3-207; sce John P. Blceg Co. v. Peterson, 51 S.D. 502, 215
N.E.524, 41 Harv, L. Rev. 536 (1927).
1z2 See Chapter 34.
l Z 3 U.C.C. 5 8-202 and Comment. This changes prior law. See N.I.L.
$ 8 5 , 2 2 & 65.
HOLDERS IN D U E COURSE 5 15-90
as the agency was in substantial compliance or received substantial con-
sideration and the security was issued for a lawful purpose.'24
5 15-90 LACK OF CAUSATION
There arc a nunibcr of absolute defenses based upon thc fact that
the party against whom the clairn is made did not cause the paper in
the form upon which the dcmand is made to be in circulation. In such
cases the party whose name appears on the instrument is under n o
liability to any holdcr. Chief aniong these defenses are cases where the
instrument was forged o r made without authority of the party against
whom the claim was brought.lZ5 There can be no liability on a nego-
tiable instrument until thc person signs it,lz6 absent negligence o r
grounds for estoppel.127 Whcre an incomplete instrument is stolen from
a defendant and later completed and placed in circulation, under the
Codc thc instrumcnt is good as completed in the hands of a holder in
duc C O U ~ S C . ~ ~ ~
Whcrc the papcr has been altered in any material respect, it is void
in its ncw forni against prior parties,Izn but holders in duc course can
cnforcc thc instrurncnt according to its original provisions.180
Thcrc arc ccrtain rarc cnscs in wl~iclin pcrson may bc dcceivcd
into signing n ncgotioblc instruriicnt undcr thc bclicl that hc was signing
somc otlicr typc of contract. If hc acts reasonably and without negli-
gcncc, dcccit of this type is similar to forgery and is a defense against
all subsequent
Unlikc dcfcnscs making thc instrument absolutely void for illcgal-
ity, n pcrson who has n dcfcnsc of nbscncc of causation, fraud, or ilk-
gality niay prccludc hinisclf from sctting it up if hc has by his actions
l Z 4 U.C.C. 5 8-202 Comment. This chnngcs prior law. See N.I.L. $ 5 22,
65; Planters Bank v. Yazoo Coldwater Drainage Dist., 126 So. 9 (Miss.
1930); Bolton v. Wharton, 163 S.C. 242, 161 S.E. 454, 86 A.L.R. 1101
(1931), with notc.
12' U.C.C. 55 3-404, 8-202(3), 8-205 & 8-31 1.
12"U.C.C. § 3 4 0 1 .
U.C.C. § § 3-404. 3 4 0 6 .
lZ8U.C.C. 5 5 3-1 15 ( 2 ) , 3-407(3) and Comments, 7-208, 8-206( 1 ).
I r n 81 B.L.J. 403 (1964).
I3O49 U.S.C.A. 5 93; U.C.C. § $ 3-407, 7-208, 7-306 & 8-206(2).
1" First Nat'l Bank v. Hall; 169 Iowa 218, 151 N.W. I20 (1915);
Bothcll v. Miller, 87 Neb. 835, 128 N.E. 628 (1910); Harber v. Lincoln,
175 Okla. 221, 5 1 P.2d 967 ( 1935); Commerce Sec. Corp. v. Hays, 60 S.W.
2d 335 (Tcx. Civ. App. 1933), 12 Tex. L. Rev. 228 (1933): cf. Van Slyke
&Rooks, 181 Mich. 88, 147 N.E. 579 (1914); U.C.C. 5 3-305(2) (c).
5 1fLlO COMMERCIAL PAPER
national, state, savings, cooperative, or land bank, and although such
limitations are enforced by numerous federal and state statutes both
civil and criminal, there may occasionally be a requircment that the
paper taken by banks as contracts for loans be negotiable.
Much of the money paper that comes t o banks, either arising from
direct loans or transferred in discount transactions, contains various
types of cantracts in addition to the ordinary promise to pay. These
contracts are often of such a nature that they render the paper on which
they appear nonnegotiable. It is important that bankers be able to
recognize these contracts and know their effect upon the negotiability
of thc paper in which they are found.
T h e advantagcs in choosing ncgotiablc papcr arc numerous. It is
especially valuable in discount transactions because the bank discount-
ing such paper, if it is a holder in due course, cuts off defenses and is
protected in its rights from the claims of third parties.
Although nonnegotiable paper is eligible for rediscount at Federal
Reserve Banks,' negotiability can be important when other transfers
of thc papcr are made.
5 16-10 ACCELERATION CLAUSES
One common contract clause that somctimcs causes difliculty with
the negotiability of bank paper is the acceleration clause. This provi-
sion, that an instrument payable at a definite time may become due
and payable at an earlier date either upon the happening of some con-
tingency o r at the demand of some of the parties, takes many f o r m ~ .
It should bc distinguished from the ordinary demand paper in
which the party prinlarily liablc siniply promises to pny on dcmnnd, with
no date of maturity mentioned. T h e fact that an instrument is payable
on demand does n i t affect negotiabi1ity.l
The Negotiable lnstrumcnts Law provides that a ncgotiablc instru-
ment could be payable "on o r before a determinable future time speci-
fied therein," a and that no acceleration clause should render the
instrument in which it appears nonnegotiable. T h e courts, however,
took the position that any instrument that was accelerable at the caprice
of the holder was n o n n ~ g o t i a b l e . ~F o r example, instrumcnts with a
definite maturity and the provision that the payee o r holdcr may at his
I 1 2 U.S.C. 5 343 (1976); 12 C.F.R. Pt. 201, 9 9 1, 2a, b (1970).
2U.C.C. 55 3-lO4(l) ( c ) , 3-108.
a N.I.L.§ 4(2).
'See Chafee, "Acceleration Provisions in Time Paper," 32 Harv. L. Rev.
747 (1919).
264
SPECIAL LOAN CONTRACTS 5 16-10
option demand payment at any time,6 o r that "whenever the holder
terms himsclf insecure" he may demand payment, were uniformly held
n o n n ~ g o t i a b l e . ~If such instrumcnts wcre madc accelerablc on a con-
tingency over which thc holder had no control (such as provisions that
the instrument would become due and payablc on default of i n t c r e ~ t , ~
dcprcciation of the ~ o l l a t c r a l or , ~ failure of the makern), their ncgotia-
bility was not affected. Where the payee o r holder had the right to
dcmand payment upon the happening of contingencies that were beyond
his control, the instrument rcmained nego~iable.'~If the maker had the
right to make paymcnt at any time bclorc maturity, negotiability was
not
Thc U.C.C. providcs approximately the sanic rules for accclcrntion
as existed under prior law.'* It states that an instrument is negotiable
if payable "on or before a stated d a t e . . . or at a definite time subject
to any acceleration." It also allows for an "extension at the option of
the holdcr," o r "an extension at the option of the maker," o r "upon or
after a spccificd act or event." 'I It is hoped that this rewording of the
act will ovcrcornc thc hardship cascs whcrc the courts refuscd to allow
instrunicnts accclcrablc at thc caprice of thc holdcr to bc negotiable.
T h c Code states that a holdcr enforcing an acceleration clause
Pugel Sound State Bank v. Washington Paving Co., 94 Wash. 504, 162
P. 870 (1917).
Murrell v. Exchange Bank, 168 Ark. 645, 271 S.W. 21 (1925); Guio
v. Lutes, 97 Ind. App. 157, 184 N.E. 41 6 ( 1933); Holliday State Bank v.
Hofiman, 85 Kan. 71. 116 P. 239 (191 1 ); Oklahoma Slate B a n k v. First
Nnt'l Bank, 108 Okla. 272, 236 P. 581 (1925); Wcstern Fnrquhar Mach.
Co. v. nurnctl, A2 Or. 174. 161 P. 384 (1916).
' Dart Nnt'l Dank v. Burton, 258 Mich. 283, 241 N.W. 858 (1932);
McCormick & Co. v. Gem State Oil Co., 38 Idaho 470, 222 P. 286 (1923);
Annot.. 34 A.L.R. 867 (1923).
8Darf Nat'l Bank v. Burton, 258 Mich. 283, 241 N.W. 858 (1932);
West Point Banking Co. v. Gaunt. 150 Tenn. 74, 262 S.W. 38 (1924);
Annot.. 34 A.L.R. 862 (1924).
@ Bonart v. Rabito, 14 1 La. 970. 76 So. 166 ( 1917) ; General Morlgagc
Co. v. Dickey, 274 Mass. 207, 174 N.E. I76 (1931 ).
InDorbecker v. Brandt C: Downey CO., 88 I n d . ' ~ 557,~ ~ .163 N.E. 535
(1928); Schmidt v. Pegg, 172 Mich. 159, 137 N.W. 524 (1912); Ashland
Bldg. & Lonn Co. v. Kermnn. 23 Ohio App. 127, 155 N.E. 245 (1926); Illi-
nois Bankcn Life Assur. Co. v. Day, 178 Okla. 284, 62 P.2d 970 (1936);
La Due v. Bird, 51 S.D. 507, 215 N.W. 490 (1927).
General Mortgage & Loan Corp. v. Dickey, 274 Mass. 207. 174 N.E.
176 (1931); Norfhridgc v. Grenier, 278 Mass. 438, 180 N.E. 226 (1932);
Annot., 8 I A.L.R. 394 ( 1932).
l 2 U.C.C. 5 3-109(l)(a).
rc
I S U.C.C. 5 3-IOg(l ) ( a ) ( c ) .
I4 U.C.C. 5 3-lO9(l) ( d ) and Comment.
: I i
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5 16-30 C O M M E R C I A L PAPER
held negotiable because they contain n o direct promise to d o a n addi-
tional act, but merely a n acceleration of maturity upon thc happening
of a contingcncy that is outside the control of the holder.2e Some notes
even g o further and provide that o n depreciation of the collateral o r fail-
ure to keep property used as security in repair, the holder may demand
additional security, and that if it is not given, the maturity will be accel-
erated at his option. U n d e r the Negotiable Instruments Law, such paper
was negotiable &cause it did not contain a promise t o d o additional
acts but merely a provision f o r acceleration in case acts were not done.27
T h e debtor had his option either to d o the act o r pay the note. S o m e
oldcr cnscs, howcvcr, hcld that both o f thcsc nccclcration provisions
made instruments n ~ n n e g o t i a b l e . ~ ~
Under the provisions of the Commercial Code, discussed above,
all such papcr would seem clcarly to b e negotiable.
?j16-30 PROVISIONS IN MORTGAGES
Commercial loans a r e often secured by mortgages o r othcr collateral
papers that contain contract provisions affecting thc payment of thc intcr-
cst, agrccmcnts to kccp u p thc collatcral, and many othcr similar clauscs.
Although the provisions of thc mortgagc constitutc part of thc contract
bctwccn thc partics a n d , a s such, may aflcct the it is a gcncrnl
rule that the negotiability of the notc, cvcn though it rcfcrs to thc rnort-
gage, is not afTected by such provisions,JO a n d that a holder in d u e c o u n c
may enforce the note according to its terms in spite of the clauses con-
2a See Beulers Brannan Negotiable Insrruments Law 285 (7th ed. 1948)
(hereinafter cited as Beufel's Brannan).
27Kobey v. HofTman, 229 F. 486 (C.C.D. Kan. 1916). Commercial
Nat'l Bank v. May, 187 Iowa 188, 174 N.W. 646 (1919); Mechanics &
Metals Nat'l Bank v. Warner, 145 La. 1022, 8 3 So. 228 (1919); First Nat'l
Bank v. Stoneley, 11 1 N.J.L. 519. 168 A. 602 (1933); Empire Nat'l Bank
v. Highgrade Oil, Etc., Co., 260 Pa. 255, 103 A. 602 (1918).
28 Holliday State Bank v. HolTman. notc 6 supra; Kcrr v. Statrfcr, 52
S.D.223, 217 N.W. 21 1 (1927); Bright v. Ofield, 81 Wash. 442, 143 P. 159
(1914).
28 Union Bank & Trust CO. V. Himmelbauer, 56 Mont. 82, 181 P. 332,
57 Mont. 438, 188 P. 9 4 0 (1920); Bollenbach v. Ludlum, 84 Okla. 14, 201
P. 982 (1921).
saU.C.C. $ $ 3 - 1 0 5 ( l ) ( b ) , 3-119. Northwcs(ern Dnnk V. Ncnl. 248
S.E.2d 585 (1978); see Williamson v. Craig, 204 Iowa 555, 215 N.W. 664
(1927); Note, 26 Mich. L. Rev. 436; Moore & Co. v. Burling, 93 Wash. 217,
160 P. 420 (1916); Fidelity Trust Co. v. Mayhugh, 268 F. 712 (5th Cir.
SPECIAL LOAN CONTRACTS
taincd in the m ~ r ( g a g c . ~ Undcr l thc Ncgotiablc Instruments Law, of
coursc, such provisions would render the mortgage nonnegotiable, a n d
anyone attempting to enforce it by foreclosure would take as a n assignee
subject t o such provision^.^^ Under the Commercial Code, such provi-
sions alonc would not rendcr the mortgage nonnegotiable because nego-
tiability of mortgages is not covcrcd by Article 3 of the Code.a3 Where
the note contains a clausc that makes it "subject to" o r "part o f ' such a
mortgage, the note is nonnegotiable and passes only by assignment in
the samc manner in which the mortgage itself may be a ~ s i g n c d . ~ 'T h e
mere rcfcrcncc in a notc to its being sccurcd by a niortgngc docs not
nflccl its n ~ g o t i a b i l i t y . Howcvcr,
~~ whcrc a note sued on provided that
the terms of the mortgage securing it "arc by this reference m a d e a part
hereof," it was rendered n o n n e g ~ t i a b l e . ~ ~
8 16-35 CIIATTEL PAPER
There are all kinds of ncgotiablc paper o n the market supported by
sccurity contracts giving the l ~ o l d c rrights in ccrtain chattcls if the instru-
mcnt is not paid at maturity. Such instrurncnts usually comc to thc bank
by way of discount from commercial houscs o r rediscount from auto-
nlobilc dcalcrs or financing conlpanics. Somctimcs such papcr mcrcly
conlnins rcfcrcnccs to cxtrancous sccurity agrccmcnts, such as "this note
is sccurcd by chattel mortgage" of snnie date,37 o r "this note is identi-
fied with a conditional sales agreement." 38 Such provisions a r e mere
statements o f the transaction that gives rise to the instrument a n d d o
not affcct negotiability." Other instrumcnts contain portions of con- &-
tracts such a s bills of sale. T h e provition, "This trade acceptance covers
222 radio cabincts and benches which are absolutely guaranteed and a r e
Peapkc v. Paine, 253 Mich. 636, 235 N.W. 871 (1931); Page v. Ford,
65 Or. 450, 131 P. 1013 (1913); Annot., 75 A.L.R. 1205 (1913).
32 Garnett v. Mcyers, 65 Neb. 287. 94 N.W. 803 (1902); F i n t Nat'l
Bank v. De Jcrnett. 229 Ala. 564, 159 So. 73 (1 935).
U.C.C. § 3-104.
R4 U.C.C. 5 3-105(2). See Musto v. Grosjean, 208 Cal. 453, 281 P.
I022 (1929); Allison v. Hollembeak, 138 lowa 479, 114 N.W. 1059 (1908);
see also Berrtel's Bratrnan, note 26 supra, at 255 et seq.
U.C.C. § 3-lOS(1) (e).
8"olly Hills Acrcs, Ltd., v. Chnrtcr Dnnk of Gnincsvillc, 314 So. 2d
209 (Fln. App. 1975).
8 7 Security Trust & Sav. Bank v. Telford, 21 1 111. App. 149 (191 8 ) .
38 Commercial Credit Co. v. Summers, 154 Miss. 501, 122 So. 5 4 1
(1929).
"u.c.c. 5 3-lO5(l); see Annot., 28 A.L.R. 699 ( 1924)
Zc
5 16-35 COMMERCIAL P A P E R
to be replaced by the manufacturer if found damaged when the cartons
are opened," and others of this type did not render the instrument non-
negotiable40 under the Negotiable Instruments Law. But they seem to
contain another "promise" and would therefore not be negotiable
within Article 3 of the Code.
Much more difficulty is encountered in cases where the note or
draft offered for discount contains within its body a complete contract
of conditional sale, pledge, chattel mortgage, o r bailment lease. Instru-
ments of this kind are issued commonly by installment selling houses of
all types. Before enactment of the N.I.L., the courts were in consid-
erable confusion whether such paper could b e negotiable. It seems that
the N.I.L. intended to make such paper negotiable,'= but the courts were
not uniform in their interpretation. Conditional sales agreements con-
tained in an instrument that contained a n absolute promise to pay did
not affect negotiability where they were merely security for the instru-
ment." But if there was a provision that the amount payable on the
note was affected by any of the conditions in the conditional sales con-
tract, then the instrument was nonnegotiable.4' A similar rule applied
to other paper. F o r example, a contract of pledge on the back of a
negotiable instrument did not affect its neg~tiability.'~
The Commercial Code does little to settle the question of nego-
tiability of such paper as a hole.^'' It is necessary undcr the Code to
check each provision o f the security contract contained in the note to see
if it is F o r examplc, it is clear that if the instrument lists the
Coflin v. May, 104 N.J.L. 347, 140 A. 33 1 ( 1928); Continental Guar.
Corp. V. People's Bus Linc, 3 1 Dcl. 595, 1 17 A. 275 (1922).
U.C.C. 5 3-104(l)(b). Wickware v. National Mortgage Corp.. 570
P.2d 330 (Okla. 1977). A provision for rebate on partial repayments and a
provision that the security interest would secure future or other indebtedness
rendered a combined retail installment contract and security agreement non-
negotiable.
4 2 N.I.L. J $ 3 ( 2 ) , 5 ( 1 ) ; Note, 7 Tulane L. Rev. 607 (1933).
4a Ex parte Bledsoe, 180 Ala. 586, 61 So. 8 13 (1 9 13). Contra, Polk
.
Countv State
- Bank v. Wallen. 145 Minn. 149, 176 N.W. 496 (1920). See
Beutel's Brannan, note 26 supra, at 2 8 8 .
4 4 U.C.C. 13-105(2)(a); see Fleming v. Sherwood, 24 N.D. 144, 139
N.W. 101 (1912). Contra, Whitlock v. Auburn Lumber Co., 145 N.C. 120,
58 S.E. 909 (1907).
Farmers & Merchants Bank v. Davies, 144 La. 532, 80 SO. 713
(1919).
46 See U.C.C. 5 5 3-105 and Comments, 3-1 12, and especially 9-206( 1 1,
which cuts off all defenses where such paper is part of a sale and where the
note is otherwise negotiable.
47 See U.C.C. 8 3-105.
SPECIAL LOAN CONTRACTS ,1640
collateral and gives the holder the right to dispose of it on defaultId8o r
waives the benefit of laws intended for the protection of the obligor,4o o r
that an indorsement of the paper acknowledges full satisfaction of the
obligation of the maker o r drawer,u0 the negotiability of the entire paper
is not affected. But i f the instrument contains other promises, orders,
obligations, o r powers-for example, the power to enter on the premises
and remove the subject matter of a conditional sale-then it is not ne-
gotiablc under Article 3.61
In statcs where such chattel paper was formerly held negotiable
undcr the N.I.L., it is possible that the courts may continue to hold it
negotiable outside of Article 3.52 This will be discussed in detail later
in this chapter.
3 1 6 4 0 SEALED INSTRUMENTS
In a number of states, it is still customary to place seals on nego-
tiable instruments. This is usually done eithcr by sticking a colored seal
on the paper itself or by printing after the signature the word "seal," or
"L. S.," abbreviation for Locus Sigilli (the place of the seal). The pur-
pose of using the seal formerly was to save the holder the necessity of
showing that value was given for the issue of the contract. T h e sealed
instrument also had thc advantage of being protected by especially
liberal statutes of limitations.
Under the Co~nmcrcialCodc, tlic fact that an instrunlent is sealed
docs not affcct its negotiability. This is the same as the prior rule under
the Negotiable Instruments Law.63 Since sealed instruments are nego-
tiable, the nlajority of courts have held that they are subject to the same
dcfcnses as any olhcr ncgotinble instrunlent and the scnl bccomcs niean-
inglcss for proving value.n4
Before the Code, some courts took the same position in regard to
outlawing actions on such paper and held that the same statute of limi-
tations applied as to any other negotiable paper.== But other courts took
48 U.C.C. 5 3-1 1 2 ( l ) ( c ) .
40 U.C.C. § 3-112(l)(e).
"U.C.C. 4 3-1 1 2 ( l ) ( f ) .
" U.C.C. 5 3-104[1)(b).
n 2 Sec U.C.C. § § 3-104 Comments, 3-805 & Comments.
" N.I.L. 5 6 ( 4 ) ; U.C.C. 4 3-1 13.
8 4 Bergren v. Davis, 287 F. Supp. 52 (D. Conn. 1968); see 29 Yale L.
Rev. 345; Annot., 53 A.L.R. 1173 (1928); U.C.C. 5 3-113. The effect of
seals has been abolished by statute i n Alabama, Michigan, New Jersey, New
York. Oregon, and Wisconsin.
' 6 n 611 re Pirie, 198 N.Y. 209, 91 N.E. 587 (19 10); Caputo v. De Loreto,
*110 Conn. 413, 148 A. 367 (1930).
5 16-45 COMMERCIAL P A P E R
a contrary vicw on both p ~ i n t s . ~ " T h draftcrs
c of the Codc indicate that
it leaves this qucstion opcn." Other special statutes on sealed instru-
ments will apply if the jurisdiction has any.
Under the circumstances, it is fair to say that a seal does not ad-
versely affect the rights of any holder of a negotiable instrument, and,
in those jurisdictions that still have special statutes o r judicial rules re-
garding seals, a seal may give him greater rights than if it were not
present.
Numerous clauses are placed o n negotiable paper for the purpose of
aiding collection. T h e most prominent of these are the confessions of
judgmcnt, provisions that the dcbtor shall pay attorncys' fces and cost
of collection, waivers of rights of all kinds, and powers to sell collateral
securities. All are useful devices to speed collection and have little cffcct
on negotiability if kept within proper bounds.
5 16-45 JUDGMENT NOTES &
A judgment note is an ordinary promissory note that carries o n its
face a power of attorney to confess judgment against any o r all of the
partics in any court of rccord. Such clauscs arc void in somc statcs, but
whether void o r not they d o not affect negotiability of the notc in which
they appear if the power provides that judgment may be entered after
maturity.68 If, however, the power contains the right to confess judg-
ment before maturity, it is held to render the instrument n o n n ~ g o t i a b l e . ~ ~
F o r example, a provision that judgment may bc entered "for the amount
duc" docs not affect negotiability because the instrument must be mature
before any amount is due.00 But a powcr to confess judgment "at any
timc after datc" rendcrs thc instrument n~nncgotiablc.~'
-- -p
68 Kennedy v. Collins, 7 Del. 426, 108 A. 48 (1919); Grand Lodge of
Pythias v. State Bank, 79 Fla. 471, 84 So. 528 (1920).
67 U.C.C. 8 3-1 13 Comment.
N.I.L. 1 S ( 2 ) ; Newhall Sav. Bank v. Buck, 197 Iowa 732, 197 N.W.
986 (1924); Metropolitan State Bank v. McNutt, 73 Colo. 291, 215 P. 15 1
(1923); U.C.C. 3 3-112(l)(d).
GoJohnson v. Phillips, 143 Md. 16, 122 A.7 (1923); Volk v. Shoe-
maker, 229 Pa. 407, 78 A. 933 (191 1 ) ; First Nat'l Bank v. Russell, 124
Tenn. 618, 139 S.W. 734 (191 1 ) ; Muender v. Muender, 182 Wis. 417, 196
N.W. 773, Note 3 Wis. L. Rev. 105 (1924).
"U.C.C. $3-1 1 2 ( l ) ( d ) ; First Nat'l Bank v. Hustcd, 57 111. App. 2d
227, 205 N.E.2d 780 (1965); see Edclcn v. First Nat'l Bank, 139 Md. 422,
115 A. 602 (1921); Stewart v. Public Indus. Bank, 85 Colo. 546, 277 P. 782
(1929): McDonald v. Mulkey. 32 Wyo. 144, 231 P. 662 (1924).
U.C.C. 5 3-3 12( 1 ) ( d ) ; see generally Wooleyhan v. Grccn, 34 Dcl.
503, 155 A. 602 (1931).
SPECIAL LOAN CONTRACTS 16-50
It has bccn hcld thnt n powcr to confess judglncnt "as of nny
tcrm" 8 2 and "at any time hereafter" renders the instrument non-
negotiable. A power to confess judgmcnt "if it is not paid when due" e'
does not affect negotiability since the note did not authorize confession
of judgment prior to maturity.
An acceleration clausc providing that the note may be accelerated
and judgment confessed upon default in the payment of interest o r prin-
cipal does not affect n e g o ~ i a b i l i t y . ~ ~
As indicated in Chapter 11, promises to pay attorney's fees and
costs of collection d o not affect the certainty of the sum and therefore
d o not render thc notc nonncgotinble, regardless of whethcr they are
found in judgmcnt notcs o r in papcr not containing the confession of
judgment clause.00
9 16-50 WAIVER OF RIGIITS
In general, the parties to an instrument may by contract contained
in the note waive the benefit of any law intended for the protection of
the obligor.
T h c most common waiver is thc provision that all partics to thc
instrument waive presentment, protest, and notice of dishonor. Such
waivers d o not affect neg~tiability.~T
A waiver may cover other defenses. T h e chief of these is the de-
fense of sccondary parties o r sureties arising from extension of time by
rcncwal of the instrument. As explained at length in Chapter 18, changes
of this nature in the obligation are valid defenses to secondary parties
who d o not agree to them. Waiver clauses are oftcn inserted in promis-
sory notcs to prcvent discharges of this naturc. When such a provision
is a mere waiver of the right to discharge, such as "after maturity this
note may be extcndcd from time to time by any one or more of us with-
out thc knowledge or consent of any of the othcrs of us and after such
-
O2 Von Frank v. Hershey Nat'l Bank, 269 Md. 138, 306 A.2d 207
(1973).
83 Shatz v. Dunn, 18 Ill. App. 3d 390. 309 N.E.2d 702 (1974).
O 4 Broadway Management Corp. v. Briggs, 30 Ill. App. 3d 403, 332
N.E.2d 131 (1975).
86 U.C.C. $ 8 3-109(l) ( c ) , 3-1 1 2 ( l ) ( d ) ; see International Fin. Co. V.
Magilansky, 105 Pa. Supcr. 309, 161 A. 613 (1932).
U.C.C. !j 3-106(l) ( e ) ; see Beritel's Braman, note 26 supra, at 240
et seq.
U.C.C. 5 3-1 1 2 ( l ) ( e ) ; First National Bank of Elgin v. Usted, 57 111.
6 App. 2d 227, 205 N.E.2d 780 (1965); sce N.I.L. 5 5 5(3), 109-111 & 159.
 COMMERCIAL PAPER
extension the liaility of all parties shall remain as if no such extension
had bccn made," it does not destroy neg~tiability."~If it makes the ma-
turity of the instrument appear indefinite, however, the waiver provision
may adversely affect the instrument's negotiability within Article 3 of the
Code. For example, "that thc makcr and indorscrs scvcrally waive pre-
scntment and noticc of protest, and conscnt that time of payment may
bc cxtcndcd without noticc," though its busincss mcaning is only a
waiver, has been misinterpreted by some courts to make maturity un-
certain, thereby destroying negotiability. T h e weight of authority prior
to the Code viewed clauses of this nature as not affecting n e g ~ t i a b i l i t y . ~ ~
The Commercial Code adopts this rule.1°
3 16-55 PROVISION FOR SALE OR HOLDING
OF COLLATERAL
Clauscs in loans sccurcd by collateral providing that if thc principal
obligation is not paid at maturity, the holder may scll the collateral and
apply it to the debt due on the instrument, d o not affect negotiability."
If the power is to sell the collateral before maturity, then the instrument
is nonnegotiablc.12 T h e Commercial Code allows the negotiability of
so-called cross collateral provisions which provide for sale of collateral
even before maturity to protect other obligation^.^"
As mentioned in Chapter 19, bankers have no lien o n securities
pledged as collateral for special loans. Therefore, it is quite common to
place clauses in collateral notes providing that the collateral may be hcld
as sccurity for any othcr obligation due t o thc bank or to support any
other banker's lien. There may be a provision that the collatcral may
be sold to pay other obligations o r liens. None on thesc clauscs destroy
negotiability.l4 But the right to sell to pay othcr loans docs not in itsclf
give thc right to hold thc collateral for sccurity lor othcr loans not yct
U.C.C. 4 3-112(l)(e); cf. U.C.C. § 9-206.
The authorities are collected in Beurel's Brannan, note 26 supra, at
292 et seq.
U.C.C. $ 3-lO9( I ) ( d ) and Commcnt 5.
N.I.L. 5 5( 1 ) ; First Nat'l Bank v. Stonelcy, 11 1 N.J.L. 5 19, 168 A.
602 (1933); U.C:C. 5 3-112(l)(b).
72Moyer v. Hyde, 35 Idaho 161, 204 P. 1068 (1922); Annot.. 28
A.L.R. 695 (1922); Kimpton v. Studebaker Bros. Co., 14 Idaho 552, 94 P.
U.C.C. 5 3-1 12(I ) ( b ) Comment 1.
In re Liquidation of Canal Bank & Trust Co., 182 La. 421, 162 SO.
' l4
31, (1935); City Nat'l Bank v. Roberts, 266 Mass. 239, 165 N.E. 470
(1929); Chelsea Exch. Bank v. Warner, 202 App. Div. 499, 195 N.Y.S. 419
(1922); see Annots., 87 A.L.R. 615 (1933). 102 A.L.R. 1091 (1935).
* 80 U.C.C. 5 3-104 Comment 5.
SPECIAL LOAN CONTRACTS
due, and a bank so holding the collateral may be liable for resulting
losses.l6
5 16-60 INDEXATION
Indexation is an anti-inflationary dcvice which links payments made
under o contract-whcthcr of cmploynlcnt, rcnt, or loan-to selected
price indices in an effort to compensate for price level changes. When
prices rise, indexed payments correspondingly go up; when prices de-
cline, payments likewise go down. Cost-of-living escalator clauses are
cdntaincd in many collectivc bargaining agrccmcnts. There are serious
questions whcthcr a notc that contains an index o r variable rate provi-
sions is n e g ~ t i a b l e .The
~ ~ Commercial Code requires a negotiable instru-
ment to be payable in a sum certain.17
5 16-65 NEGOTIABILITY BY MERE STATEMENT
Promissory notes sometimes contain all o r many of the clauses dis-
cussed above. If anlong them there is any one that is not permitted by
the Code, the entire instrument is made nonnegotiable. Banks and other
firms making loans oftcn attempt to evade the effect of the undesirable
clauscs by placing in thc contract short statements that the instrument is
intended to be negotiable. Where the contract contains a clause that
would othcrwise render it nonnegotiable, statements of this type are not
effcctivc. For example, the words "this note is negotiable," o r "all par-
tics agree to trcat this as a negotiable instrument," have no effect on an
otherwise nonnegotiable i n ~ t r u m e n t . If
~ ~the objectionable clauses are
ambiguous, o r create doubt as to whcthcr they would render the instru-
mcnt nonnc~otiable,short statcments of the nature rncntioned above
hnvc bccn takcn to show thc intcnt of thc partics that the whole instru-
ment was to be n e g o t i a b l ~ . Howevcr,
~~ this result is doubtful under the
Commercial Code.80
7%arrctt v. Bank of Chelsea, 21 1 Mo. App. 238, 241 S.W. 87 (1922).
l8But scc I-lirschbcrg, "Indcx Vnluc Clnuscs-Thc Isrneli Expcricnce,"
92 Banking L.J. 158 (1975).
" U.C.C. 5 3-104(l)(b).
laManhattan Co. v. Morgan, 241 N.Y. 38, 150 N.E. 504 (1926);
Moore v. Vaughan, 167 Miss. 758. 150 So. 372 (1933); Motor Contract
Co. v. Van Der Volgen, 162 Wash. 449, 298 P. 705 (1931); U.C.C. 5 3-1 12
Comment 2.
N.I.L. § 10; Enoch v. Brandon, 249 N.Y. 263, 164 N.E. 45 (1928);
42 Harv. L. Rev. 115, 700 (1928-1929). See also Essig v. Porter, 63 Ind.
App. 318, 112 N.E. 1005 (1916).
 1670 COMMERCIAL PAPER
Since Article 3 of the Code only states what is negotiable or non-
negotiable within that Article, it leaves courts free to find paper that
does not meet the requirements of Article 3, o r other Articles of the
Code making such paper ncgotiable, to be negotiable by commcrcial cus-
tom or at common law.R1 This allows the possibility that thc negotiability
of unusual types of paper not covered by the Code may be recognized.
B 16-70 NEGOTIABILITY OF MORTGAGES AND
OTHER TITLE-RETAINING CONTRACTS
Cliattcl niortgagcs, conditional salcs, trust rcccipts, and nthcr ngrcc-
mcrlts lIi:~t crcillc sccurity ititcrcsts i n collntcrnl, wllcn uscd ns sccurity
for ncgotiablc instruments, may be transferred cithcr by ncgotiation or
assignment. As pointed out in Chapter 12, when these contracts are
madc part of a larger negotiable instrument, the whole instrument usu-
ally is held to be negotiablc. When the sccurity contract appears on a
separate document, it may also be transferred with the instrumcnt; and,
by the weight of authority, the transfer is by negotiation unless there
are certain provisions in the document which make negotiation im-
possible.82
Real estate mortgages, being themselves conditional conveyances,
arc usually in such form that thcy did not meet the requirements of the
Negotiable Instruments Act and were therefore nonnegotiablea8 under
that act. They are not covered at all by the Commercial Code, so their
negotiability is now governed by local law.
Although the form of mortgages varies in different states and is
determined by local laws and custom, a loan secured by a mortgage usu-
ally is covcred by two contracts: a negotiable notc and a scparatc con-
tract of mortgage. In many states, courts have held that where the note
is in such form that it is negotiable, the holder in due course of the note
may also take the mortgage contract which secures it by negotiation.
Other states have held that, even though the note is negotiable, the mort-
gage passes only by assignment. This is the overwhelming wcight of
a u h o r i t ~ . ~Although
' ncgotiation of the mortgagc to a holdcr in duc
coursc might cut off such claims as fraud bctwccn thc original lcndcr
and the borrowcr, it is clear that the purchaser of the notc, cvcn though
81 U.C.C. $ 5 3-104 Comments, 3-805 & Comments.
82 See U.C.M.A. 5 35; Beurel's Brannan, note 26 supra, at 260, 828 el
seq.
R q cN.I.L.
~ TITI I,3 & 5.
The authorities are collected in Britton, "Assignment of Mortgages."
R4
10 111. L. Rev. 337, and Berrtel's Brannan, note 26 supra, at 787, 828 et seq.;
see Note, 29 Neb. L. Rev. 606 (1959).
SPECIAL LOAN CONTRACTS 75
he may be a holder in due course of the notc and may take the mortgage
by negotiation, cannot, in enforcing the property rights in the mortgage
as distinguished from the personal rights on the note, cut off properly
rccordcd claims to the propcrty i ~ s e l f . ~ V h should is apply with equal
force whether the instrument being transferred is a real estate mortgage
or a security claim against a chattel that is subject to the filing require-
ments of Article 9 of the Code.a8
Where sccurity interests in chattels or contract rights are involved,
thc Commcrcial Codc has many provisions that may give the purchaser
of the security contract grcatcr rights than his transfcror had. For ex-
nnlplc, i f thc sccurity contract is part o l a contract of salc, tlic borrowcr
rimy wnivc his dcfcnscs nntl n hotin fitlc purclinscr of tlic sccurily con-
tract tnkcs frcc of such c l c f c ~ l s c s . ~If~ tlic buycr ;IS part of onc trans-
action signs both a ncgotiablc note and a sccurity agreement, a holder
in due coursc of thc note cuts off defenses the buyer might have had
to payment of thc note cvcn without any waiver clause in the
!
i 16-75 CONTRACTS IN MORTGAGES-EFFECT ON
NEGOTIABILITY AND ENFORCEABILITY
OF THE NOTES
Mortgagc and sccurity claims, both chattcl and rcal, are oftcn very
long and complicated contracts that contain many provisions in regard
to thc care and protection of the property, provisions against resale, and
details of all types which are determined by the particular transaction
involved. Corporatc mortgages sccuring bond issues arc oftcn ~ O C U -
nlcnts that run into hundreds of pages of such provisions. Contracts of
this nature, wliilc thcy may not allcct thc negotiability of the principal
notc, nre, cxccpt in rarc cascs of illcgality, binding upon any party who
attempts to foreclose thc claims covcrcd by the contract.
Purchasers of negotiable paper, although thcy nlay cnforcc the notes
as unsccurcd contracts wherc thcy are n ~ g o t i a b l c , ~ h rlimited
e in their
Federal Lnnd Dank v. Branscomb. 213 Ala. 567, 105 So. S R S (1925):
cf. Vance v. White, 180 Ark. 471, 21 S.W.2d 853 (1929); see Annot., 37
A.L.R. 860 ( 1925).
See Metropolitan State Bank v. McNutl, 73 Colo. 291, 215 P. 151
(1923).
U.C.C. 5 9-206(1). The Commercial Code is silent on this point
wherc consumer goods are involved. See U.C.C. 5 9-206 Commcnt 2.
R R U.C.C. TI 9-206( 1 ).
Page v. Ford. 65 Or. 450, 131 P. 1013 (1913); Cunninghanl v.
3..
Pressed Steel Car Co., 238 App. Div. 624. 265 N.Y.S. 256; an'd 263 N.Y.
671, 189 N.E. 750 (1934); 32 Mich. L. Rev. 403; U.C.C. 5 3-1 l 9 ( 2 ) .
277
5 16-80 COMMERCIAL PAPER
security rights by the provisions of the mortgage. No purchaser can be
certain of his security without complete examination of the underlying
documents.
Corporate mortgages often contain provisions that the security
rights set out in the bonds are enforceable only by trustees o r by a vote
of a certain percentage of the bondholders upon default. Such provi-
sions are enforceable against attempted foreclosures and may completely
destroy the liquidity of the security and the right of any individual bond-
holder to enforce his claims.o0
5 16-80 NEGOTIABILITY OF INVESTMENT PAPER
In order to determine the negotiability of bonds, debentures, and
long-term notes of municipalities and corporations, one need look no
further than the provisions contained upon the face of the paper. If
the bond was issued in New York, Minnesota, o r ~ a l i f o m i a ' b e f o r ethe
adoption of the Commercial Code, it is negotiable under the special stat-
utes of those states (if issued after their enactment) regardless of any
special provisions it contains?' If it was issued in any other state before
the adoption of the Commercial Code, o r issued in one of the three
states before the passage of the statutes, then its negotiability is governed
by the Ncgotiable Instruments The requirements of particular con-
tract provisions are discussed in the sections that follow.
5 16-85 REGISTERED BONDS
Many corporations issuing bonds for the protection of thc holdcrs
have provided a system of registration very similar to that required for
stock certificates. Before the Conimercial Code, bonds so registered
were nonnegotiable and could be transferred only upon the registration
books in accordance with the rules laid down by the registering author-
PO Moody v. Pacific S.S. Co., 174 Wash. 256, 24 P.2d 609 (1933);
Florida Nat'l Bank v. Jefferson Standard Life Ins. Co., 123 Fla. 525, I67 SO.
378 (1936); Annot., 108 A.L.R. 77 (1936). But see Cunningham v. Pressed
.- Div. 624, 265 N.Y.S. 256, ao'd 263 N.Y. 621, 189
Steel Car Co.. 238 ADD.
N.E. 750 (1934).
1930 N.Y. Laws, Ch. 630, $ 5 260-262 at 1144; 1927 Minn. Lnws, Ch.
416 at 588; 1937 Cal. Laws. Acts 860. 8Rlh. (Dccring).
O2 King Cattle Co. v. Joseph, 158 Minn. 481, 198 N.W. 798, adlrercd
lo, King Cattle Co. v. Joseph, 158 Minn. 488, 199 N.W. 437 (1924). Man-
hattan Co. v. Morgan, 242 N.Y. 38, 150 N.E. 594 (1926); see authorities,
Beu~el'sBrannan, note 26 supra, at 210 et seq.
SPECIAL LOAN CONTRACTS 'i-90
ity.03 Under the Commercial Code, they are negotiable in~truments.~'
Transfcr of bonds on the registry books can usually be effected by
indorsement and delivery of the certificate and presentment to the cor-
poration,O5 o r by powers of attorney by which a person selling the bond
o r putting it up for collateral security appoints the buyer o r lender his
attorney for thc purpose of having the bond transferred. These powers
of attorney usually are recognized by the registration authorities, but are
likely to be subject to rcvocation in thc same manner as any other powcr
of attorncy. In thc case of rcgistcrcd government bonds, the recognition
of such powers is determined by the rules of the administrative authority
governing r e g i s t r a t i ~ n . ~ ~
§ 16-90 SPECIAL CONTRACTS IN BONDS
The purchaser of a corporate bond is no longer safe in relying upon
either the negotiability of the bond, the contracts that appear upon its
. facc, o r the right to enforce it at maturity. A short provision containcd
upon the face of the bond that might escape the notice of even a careful
reader may incorporate into the bond all of the provisions contained in
the underlying mortgage contracts, which provisions may completely
change the nature and value of the bond as an investment.
The chicf dcvicc for incorporating the provisions of the mortgagc
into thc bond is the so-callcd subjcct-to clause, found in many corpo-
rate bonds of rccent issue. This clause takes many forms, some of which
are: "this bond is entitled to the benefits and subject to the provisions
of a mortgage" "this bond is issued undcr a certain trust agreen~cnt
to which rcfcrcncc is Iicrcby made for a statcmcnt of tlic tcrms under
which the dcbcntures arc issued, and the rights and obligations of the
company, of the trustee, and o f thc rcspcctivc holdcrs" "; and "to which
dccd of trust reference is hereby made with the same effect as is recited
a t length herein for the description of the property, the nature and extent
o"liss v. Bliss, 221 Mass. 201, 109 N.E. 148 (1915); Grosfield v.
First Nat'l Bank. 73 Mont. 219, 236 P. 250 (1925); Novoprutsky v. Morris
Plan Co., 319 Pa. 97. 179 A. 218; see Steffen & Russell, "Registered Bonds
and Negotiability," 47 Harv. L. Rev. 741 ( 1934).
" U.C.C. 5 5 8-105(1), 8-102(I)(c).
. O n U.C.C. 5 5 8-308, 8-207 & 8 - 1 0 2 ( ~ ) .
R Q c ~I Fcd. Rcg. 587 (1936).
See Mcrchnnts Nnt'l O n n k v. Dctroit Trust Co., 28 Micli. 526, 242
N.E. 739 (1932): Annot., 85 A.L.R. 350 (1933).
n8See Pacpke v. Paine, 253 Mich. 636, 235 N.W. 871 (1931). Contra,
Globe Indcmn. Co. v. Mississippi Valley-Merchants' State Trust Co., 226
Mo. App. 92. 41 S.W.2d 962 (1931).
rc
279
 C O M M E R C I A L PAPER
of the security rights of t h e holders and the terms and conditions upon
which the bonds a r e issued and secured." fin
Although clauses of this nature would render an ordinary short notc
nonnegotiable, the courts were in great confusion a s t o their effect upon
bonds. Under the Negotiable Instruments Act, the earlier cases wcre in
accord that such clauses rcndcred thc bonds containing thcm. nonncgo-
tiable.'"" But later decisions o n bonds issued outside of New York,
Minnesota, and California, whcrc thcy wcrc ncgotiablc in spitc of thcsc
clauscs, havc held such instruments ncgotiablc, pcrhaps d u c t o thc influ-
ence of the three states' laws.lol
If the bonds a r c ncgotiablc, thcn the rights of the lioldcr may
clcarly be aficctcd by provisions in thc rnortgagc, which hc usually can-
not see a t the time of purchase. His sccurity in the bond, cvcn though
ncgotiablc, may thus b e grcatly impaircd o r entirely dcstroycd. T h e
courts wcre in confusion a s to the extent to which the limitation in mort-
gage contracts could b c applicd to bonds containing clauscs of this na-
turc that had bccn hcld n c g o t i a b l ~ . ' ~ '
O n c of thc most dinicult and far-rcaching clauscs in bonds o r mort-
gages is thc so-called nonaction clause, which limits thc right t o cnforce
the bond as well as the sccurity t o a trustee o r to somc committee acting
only upon the vote of the majority of the bondholders. T h e arrangc-
men1 of provisions o f this kind falls into t w o general classes: where the
limitation of tlic right is placcd on thc bond itsclf, and whcrc thcy arc
found in the mortgage but not in the bond.
If the clause is set out completely in the bond itself, i t is effective
against the holder of the bond and might o r might not limit ncgotia-
b i l i t y . ' O V n the other hand, if the clause is of the type whcre "the
holder of the bond shall have no right of action except a s providcd in
@O Marine Nat'l Exch. Bank v. Kalt-Zimmers Mfg. Co., 293 U S . 357,
i
79 L. Ed. 427 (1934). Contra, Detroit Trust Co. v. Dctroit City SCW.CO.,
262 Mich. 14, 247 N.W. 76 (1932).
loo King Cattle Co. v. Joseph, 158 Minn. 488, 199 N.W. 437 (1924);
Annots. 14 A.L.R. 1126 (1921), 33 A.L.R. 1173, 37 A.L.R. 655 (19291,
61 A.L.R. 815; Aigler, "Recognition of New Types of Ncgotiablc Instru-
ments," 24 Colum. L. Rev. 563.
I n ' Paepke v. Painc, notc 98 srrpra; Pflucgcr v. Brondwny Trust & Sav.
Bank, 351 111. 170, 184 N.E. 318 (1932); scc authorities in Bcrrrel's Bmn-
nan, note 26 supra, at 256-259; Annot., 75 A.L.R. 1210 (1931).
I n 2 Lidgerwood v. Hale & Kilburn Corp., 4 7 F.2d 3 1 R (2d Cir. 1930).
limiting action on bond; Colsky v. Eyrcs Storagc Co., 178 Wash. 404, 34
P.2d 1 1 14 (1934). Contra. Oswinnzn v. Wcnglcr & Mnndcll. 3.58 111. 302,
193 N.E. 123 (1934): Mcndclson v. Kc:llty Mortgngc Corp.. 257 Mich. 442.
241 N.W. 154 (1932).
In3 N.I.L. 5 5; see Annol.. 108 A.L.R. 88 (1937).
SPECIAL LOAN CONTRACTS ' J-95
thc mortgagc," it would rcnder the bond nonnegotiable undcr the Nego-
tiablc lnstrumcnts Law, and the holder's right of action would b e deter-
mined b y the provisions of the mortgage.Io4
Whcrc the clause is contained only in the rnortgagc but not in the
bond, the courts arc in grcat confusion. If thc bond is held negotiable,
thcrc should bc a right to suc, rcgardlcss of limitation in thc m o r t g a g ~ . ' ~ "
If thc bond is nonncgotiablc, thc provisions of the mortgagc should con-
trol. T h c situation Ii:~s, howcvcr, bccornc s o conlplicatcd that cvcn
cxpcrt legal advicc and lawsuits thcn~selvcshave bcen unable to clarify
the rights of holdcrs of bonds as against stockholdcrs and othcr creditors.
A n d sccuritics nornlally sold o n thc cxchangc may bcconlc frozcn asscls
that cannot bc liquidated, when enforccnlcnt of thc contract becomes
ncccssary, cxccpt by long and tcdious litigation.Io0
A s previously indicated, the U.C.C. makes certificated securities in
securities exchanges o r investment markets negotiable.In7 This is also
truc of rcgistcrcd bonds that untlcr thc C o d c arc ncgotiablc as stock
c c r t i f i ~ a t c s . ~ nut
" ~ this docs not n m n that a bona fidc purchaser of a
bond o r othcr sccurity nccd look no furthcr than his ccrtificatc to dcter-
minc his rights, bccausc the C o d e slill preserves the effect of underlying
mortgages that arc refcrred t o in the certificate^.'^ But it does give b o n a
fide purchasers, as against previous holders, better title to the security
itsclf than was thc casc undcr thc Ncgotiablc Instruments Law.
5 16-95 NEGOTIADILITY AND EFFECT OF
STOCK EXCHANGE RULES
In addition to dificultics of enforcement, if corporate bonds a r e non-
negotiable, purchasers will take thcm subject to claims of prior partics
whcthcr thc partics a r e known o r unknown. If such securities a r e pur-
chased through regular members of thc New York and other recognized
stock cxchangcs, thc rules of thc cxchangc provide that in casc of ad-
vcrsc clainis by third partics thc brokcrs must rcplacc thc sccuritics sold
ln4 Moody v. Pacific S.S. Co.. 174 Wash. 256. 24 P.2d 609 ( 1933).
ln"C~nninghnnlv. Prcsscd Stccl Cnr Co., notc 89 srrprtr. Contra. Rit-
tcnhousc v. Lukcns Stccl Co., 1 I6 Pa. Supcr. 303, 176 A. 543 (1935).
"'"ee discussions in Oerttel's Orar~~rarr, notc 26 srrpra, at 669-670.
'"' U.C.C. 0 5 8-lO5(l). 8-102.
l o R U.C.C. $ 6 8-lO2(l) ( a ) ( i ) , 8-105.
Inn U.C.C. 5 8-202. Restrictions undcr thc fcrlcral sccuritics laws arc
not "rcstrictions inlposcd hy Ihc iss~lcr" within t l ~ c rncnt~ing nf U.C.C.
6 8-204. nnd fnilurc to notc thctii on thc facc of thc ccrtificatc givcs ritc
to no liability undcr thc Codc. Dcwitt v. Amcrican Stock Transfcr Co., 433
.P. Supp. 994 a~trrndrd,440 F. Supp. 1084 (S.D.N.Y. 1977).
3 16-105 COMMERCIAL PAPER

Suprcnlc Court hcld that although thc dcbtor ~ l l c g c dthc dcfcnsc o f mis-
rc,wc~c~~tntlion t , ~llnc scIIcr n3 to thc n ~ n o u n tof intcrcst to be chargcd,
111111 I I ~ " I I N P W I M I I I V I I I I I I I I ~ I I I I N I tlw ns~1gtlccpt~rsunrltto n provision in
tlw c * l u ~ l ~ . n rc r~t ln l l ~ ~ ythnt
. tlw I ~ ~ y cwoultl t. not nswrl ngni~~st nny nssigncc
II tlcYtl~~au I l l n t 110 IIIIHIII C I I I I I I I I I ~ I I ~ I I I NI I C~ n e l l c r - ~ r ~ a l g t n o r . ~ ~ ~
The provisions of 3 9-206 of the U.C.C. d o not precludc a dcfcnse
by the maker of a contract that the assignee had noticc of any claim or
defense. For that reason, in a case where the buyer claimed that he
never received a tractor for which he signed a note and chattel mort-
gage, the holder of the note who knew of this fact could not recover on
the note.Iz4 Section Page
Where the buyer executed a contract for a motor home, agreeing 17-5 State Usury Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285
not to assert as against the assigncc any dcfcnse or claims hc nlight havc 17-10 Fcdcral Preemption of State Usury Law . . . . . . . . . . . . 286
against the original sellcr, the buyer upon dcfault could not asscrt dc- 17-1 5 Residential Rcal Property Loans . . . . . . . . . . . . . . . . . . 288
fccts in the motor home as a defense. In this case, the assignee did not 17-20 Obligations of Depository Institutions . . . . . . . . . . . . . . 288
have notice of any claims o r defenses when he was assigned the contract 17-25 Business and Agricultural Loans of $25,000 or More . . . 289
from the seller.12" 17-30 Other Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289
Enforcement of an assignee's rights undcr an assiinmcnt rcquircs . 17-35 State Laws Overriding Fcdcral Interest Limits . . . . . . . 290
both notification of thc assignment and a dcmand that paynlcnts bc made 17-40 Most Favored Lender Doctrine . . . . . . . . . . . . . . . . . . . 290
to the a~signee.'~" 1 7 4 5 Interstate Credit Activities of National Banks . . . . . . . . 290
Waiver of defense clauses d o not run contrary to New York public 17-50 The "Prime" Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291

Waivcr clauses should not be confused with contracts attcmpting to

ni:~kc thc wholc contract ncgotiablc. In thc lattcr casc, if the contract Ii 17-5 STATE USURY LAFVS
is valid, a thief o r finder might pass good title to the whole contract to
a bona fide purchaser. But only in the case of waivers would thc con- Most statcs have laws which limit thc amount of intercst creditors
tract right still belong to the loser o r person from whom it was stolcn. may chargc on loans o r other credit transactions. These laws have an-
T h e waiver runs only to the benefit of assignees and only against de- cicnt roots. Through thc passagc of time, many exceptions and distinc-
fenses of the obligor on the security contract. tions havc been constructed which complicate thcir application. Except
for the application of federal law, which in some cases preempts local
usury regulation (see 17-10), each state's usury laws arc unique. Not
123 John Deere Indus. Equip. Co. v. Dclphia, 266 Or. 116. 51 1 P.2d only d o thc applicable ratc limitations differ, but there arc numerous
386 11973): cf. Motor Contract Co. v. Van Der Volgen, 162 Wash. 449,
298 P. 705'(1931). othcr dilfcrcnccs relating to thc covcragc of the laws. It is csscntial that
l Z 4Associates Discount Corp. of Iowa v. Fitzwatcr, 5 18 S.W.2d 474
lcndcrs consult local counscl as to thc law of their particular jurisdiction.
(Mo. App. 1974). In gcncral, usury amounts to thc cxnction of more than the legal
12%re v. Barnett Bank of Miami Beach, N.A., 330 So. 2d 250 (Fla. rate of intcrcst on a loan o r forcbcarancc of money with wrongful intent.
App. 1976). Although simple to state, thc nature of usury in practice is complex.
l Z eFirst Nat'l Bank at East St. Louis v. Board of Educ., School Dist. NO.
189, 68 111. App. 3d 21, 385 N.E.2d 81 1 (1979). Dctcrmining the lcgal ratc of intercst dcpcnds upon thc type of
12' Bankers Trust Co. v. Litton Sys., Inc., 599 F.2d 488 (2d Cir. 1979). transaction and thc identity of the creditor. In addition to the general
"legal" intcrcst limit, states usually havc different rate limitations1 for

Scc Denfield, "Moncy, Mortgngcs nnd Migraine-The Usury Hcad-

.+ache," 19 Case W. Res. L. Rev. 819 (1968); Rohner, "Problems of Federal-
3 17-10 COMMERCIAL PAPER
interest agreed upon in written contracts, for interest paid by corpora-
tions o r other large business enterprises (sometimes corporate borrowers
are completely exempt), for interest charged in consumer installment
transactions of various kinds, for interest charged o n real estate mort-
gages by approved financial institutions, a n d so forth.
Deciding how much interest the borrower has paid can b e compli-
cated. Charges for specific S e ~ i c e S ,such as filing fees and insurance
premiums, are not treated as interest. Charges that are not f o r specific
services, but a r e more i n the nature of a fee for making the loan, are
often regarded as interest although the law varies among jurisdictions
depending upon the nature of the ~ h a r g e .T~h e charging of points and
commitment fees has also been treated a s interesLa
A major exception which has been carved out is the "time-price"
doctrine, under which sellers of merchandise o r services are permitted
to charge a higher price for sales in which repayment will occur over
a period of time than when repayment is m a d e immediately in cash. T h e
difference is not regarded as interest. Even this exception is not with-
o u t its complications, because some states have refused t o extend the
cxccption to include revolving chnrgc nccount armngcmcnts.' Thus,
s o m e sellers' credit is exempt from usury regulation while others' is
regulated.
In short, usury limits a r c very much a mattcr of local Inw. Lending
institutions should b c carcful to consult with counsel to establish appro-
priate guidelines for each jurisdiction in which they d o business.
5 17-10 FEDERAL PREEMPTION OF STATE USURY LAW
T h c Dcpository Institutions Dcrcgulation and Monetary Control
A c t of 1980 made major changes in the usury limitations that apply to
ism in the Regulation of Consumer Financial Services Offered by Commercial
Banks." 29 Catholic U.L. Rev. 1, 31 3 (1979, 1980).
Benfield, note 1 supra; see Turner v, Wcst Memphis Fed. Sav. & Loan
Ass'n, 266 Ark. 530, 588 S.W.2d 691 (1979); Freeman v. Gonzales Co.
Sav. & Loan Ass'n, 526 S.W.2d 774 (Tex. Civ. App. 1975), afl'd 534 S.W.
2d 903 (Tex. 1976).
a Abramowitz v. Barnett Bank, 394 So. 2d 1033 (Fla. App. 1981):
P -e -oc~-l -ev.- Central
- - Fed. Sav. & Loan Asson. 46 N.Y.2d 41, 412 N.Y.S. 2d
815, 385 N.E.2d 555 (1978); Stedman v. Georgetown Sav. & Loan Ass'n,
595 S.W.2d 486 (Tex. 1979). But see Kissell Co. v. Gressley, 591 F.2d 47
(9th Cir. 1979): Arkansas Sav. & Loan Ass'n v. Mack Trucks, 263 Ark.
264, 566 ~ . ~ . 2 d ' 1 2(1978).
8 1980, 12 U.S.C.A. $0 86a note, 1730g note, 1735f-7 notes ( a ) ( 1 ) ( B ) , ( g )
Wisconsin v. J.C. Penney Co., 48 Wis. 2d 125, 179 N.W.2d 641
(1970). But see Fox v. Federated Dept. Stores, Inc., 94 Cal. App. 3d 867,
156 Cal. 893 (1979) ; Kass v. Garfinckel, 299 A.2d 542 (D.C.App. 1973);
t .L
INTEREST A N D U S U R Y -10
dcpository institutions of all kinds.& Formerly, national banks were al-
lowed t o charge the samc intcrcst as that provided by the state law for
banks in thc statc whcrc they wcre located, o r o n e percent more than the
nincty-day coniriicrcinl papcr ratc sct by thc Fcdcral Rcscrvc Bank in
thc Fcdcral Rcscrve District whcre thc bank is located, whichever was
highcr.0 In thc case of business o r agricultural loans in the amount of
$25,000 o r more, national banks could charge a t a rate of 5 percent
in excess of the discount rate o n ninety-day commercial paper.' When
thcsc limitations wcrc cxcccd~cd,federal law provided a penalty-the per-
son paying the illcgal ratc could recover twice the amount of interest
paid.s Undcr the new Act, thcsc rules relating to national banks are
extendcd, and othcr fcdcrally rcgulatcd depository institutions are freed
from thc constraints of state law.
T h e Act deternines what propcr interest rate may be charged o n
loans-a complex process. Depository institutions need to consult legal
counscl t o be certain thcy are satisfying thc requirements of the new Act.
Thcrc a r c dillcrcnt rulcs for diffcrcnt typcs of loans. In general, the Act
cstablishcs four cntcgorics: ( 1 ) rcsidcntial rcnl propcrty loans that nrc
sccurcd by first licris (within this cntcgory tlicrc nrc spccinl rulcs for mo-
bile homc loans); ( 2 ) obligations of the depository institution; ( 3 )
busincss and agricultural loans of $25,000 o r more; and ( 4 ) other loans.
T h c ninxiniuni inlcrcst rntcs vary according to thc typc of loan. Tlic rolc
of stntc law varics, ns wcll. Tlicrc is a fcdcral prccniption of statc intcr-
est limits, but it is not a total preemption, a n d the nature of the pre-
emption varies according to the type of loan. In some cases, the states
may cnact laws to override thc federal rules, nullifying the federal pre-
cniption.
Altliouph thc provisions of tlic Act a r c gcncrally cllcctivc April 1.
1980, t h y d o not apply to loans niadc bcforc that datc." Somc of thc
provisions of the Act are pcrmanent, but othcrs will terminate on April
1, 1983.1°
Uni-Scrv. Corp. v. Comm'r, 349 Mass. 283, 207 N.E.2d 906 (1965); Grigg
v. Robinson Furniture Co., 78 Mich. App. 712, 260 N.W.2d 898 (1977);
Sliger v. R.H. Macy & Co.. 59 N.J. 465, 283 A.2d 904 (1971).
9 4 Stat. 132 (codified in scattered sections of 12 U.S.C.A. (West Supp.
1981)).
12 U.S.C.A. 8 85 (Wcst Supp. 1981).
Id.
't 12 U.S.C. $ 86 (1976).
Dcpository Institutions Deregulation and Monetary Control Act of
(Wcst 1980).
In 12 U.S.C.A. fr 86a note (West 1980). The provisions for business
and agriculture loans cxpirc April I , 1983.
 $17-15 COMMERCIAL PAPER
§ 17-15 RESIDENTIAL REAL PROPERTY LOANS
Effective April 1, 1980, state law and constitutional provisions that
limit the "rate or amount of interest, discount points, finance charges,
o r other charges" on residential loans d o not apply if the loan is secured
by a first lien on residential real property, is madc aftcr March 3 1, 1980,
and is either insured under the National Housing Act o r madc by a
lender who is a federally insured or regulated institution.ll Thus, no in-
terest limitations exist with rcspcct to rcsidcntial first mortgage loans.
A state may specifically override these provisions, however, by enacting
a measure "which states explicitly and by its terms" that the state docs
not want them to apply to loans in its state.'' This override must be
adopted before April 1, 1983. If no override occurs, the preemption is
permanent.
Mobile home loans that are secured by a first lien are also within
the federal preemption of state usury laws, but further requiremcnts must
be met in order for the loan to qualify for federal preemption. The loan
must comply with consumer protection provisions prcscribcd by the Fed-
eral Home Loan Bank Board. These regulations must cover such mat-
ters as balloon payments, late charges, notice before repossession, and
interest refunds upon prepayment.la Even before the regulations become
effective, the statute requires mobile home loans to contain provisions for
refunding precomputed finance charges whcn the loan is prepaid.14
After March 31, 1980, states could further limit the application of
these provisions by adopting laws that limit "discount points" or other
charges.16
1 5 17-20 OBLlGATlONS OF DEPOSITORY INSTITUTIONS
Effective April 1, 1980, state laws that limit intcrcst on "any deposit
or account held by, o r other obligation" of depository institutions that
arc insured undcr the Fcdcral Deposit Insurance Act, the Fcdcral Credit
Union Act, thc Fcdcral Home Loan Bank Act, or the Nntional Hous-
ing Act were prccrnptcd.l" Thus, state usury li~wscannot npply to bonds
l1 12 U.S.C.A. 5 1735f-7 note (a) ( I ) (West 1980).
l2 12 U.S.C.A. 1 1735f-7 notes ( b ) ( 2 ) , (b)(3) (West 1980). There
are savings provisions for loans entered into before adoption of the override.
l 3 12 U.S.C.A. !j 1735f-7 note (c) (West 1980).
l 4 12 U.S.C.A. 5 1735f-7 note (d) (West 1980).
l6 12 U.S.C.A. 5 1735f-7 note (b) ( 4 ) (West 1980).
l 6 12 U.S.C.A. !j 1735f-7 note (a) ( 2 ) (A) (West 1980). This pro-
vision does not apply to institutions in Puerto Rico until April 1, 1986. 12
i*
U.S.C.A. $ 5 1735f-7 note (a) (2) ( B ) , 3506 note (b) ( 1 I ) (West 1980).
INTEREST AND USURY 3 17-30
and notcs issued by banks o r to interest paid on deposits and accounts.
This provision is not subject to state override and is permanent.
8 17-25 BUSINESS AND AGRICULTURAL LOANS
OF $25,000 OR MORE
For business and agricultural loans of $25,000 or more, state laws
limiting interest to lcss than 5 pcrccnt over the ninety-day commercial
paper ratc set by the Federal Reservc Bank for the Federal Reserve Dis-
trict in which the person is located are preempted, and the lender may
charge interest of up to 5 percent over the ninety-day commercial paper
rate." However, there is no express preemption in the Act if the state
interest limits are more than 5 percent over the ninety-day rate. This
interest rate provided by the federal law applies when the state interest
rate is lower. In these situations, where the federal rate applies, if the
lender charges more than 5 percent over the ninety-day commercial paper
ratc, fcdcral law provides a penalty-the entire amount of interest pro-
vided for in the loan is forfeitcd and the person who paid it is entitled
to recover double the amount of interest paid.18 These provisions relat-
ing to business or agricultural loans become effective April 1, 1980, and
terminate on either April 1, 1983, or such earlier date that the state
ovcrridcs them by adopting a measure that specifically indicates that it
does not want the provisions to apply.l9
8 17-30 OTIiER LOANS
Federally insured depository institutions are generally authorized to
make loans at a rate not more than one percent above the ninety-day
commercial papcr rate established by the Federal Reserve, or at such
highcr ratc as may bc permitted by state State laws that limit the
allowable intcrcst ratc to lcss than one pcrccnt over the ninety-day com-
mercial papcr rate nrc prccmptcd, but the state may override the federal
preemption by ndopting a mcnsurc thnt spccificnlly inclicntcs thnt it docs
not wnnt the prccrllption to ~ p p l y . ~'I'hcsc
' provisions bccnnlc clIcctivc
on April 1, 1980, and expire only when the state chooses to override
There is no deadline for thc state to act in deciding to override
the federal provisions.
l T 12 U.S.C.A. !j 86a(a) (West Supp. 1981). The ninety-day rate in-
cludes any surcharges imposed.
l 8 12 U.S.C.A. !j 86a(b) (West Supp. 1981).
'"12 U.S.C.A. !j 86a note (West Supp. 198 1 ).
12 U.S.C.A. $ 5 1730(g), 1785(g), 1831d (West 1980).
" Id.
22
12 U.S.C.A. I 1730g note (West 1980).
 17-35 COMMERCIAL PAPER
For all typcs of loans, if more than onc provision of law npplics to
the same loan, the highest rate
5 17-35 STATE LAWS OVERRIDING FEDERAL
INTEREST LIMITS
A number of states have taken advantage of the opportunity af-
forded by the federal law to override parts of the federal preemption of
their local usury control^.^'
Whcncvcr statc laws on usury have not bccn prccmptcd by thc fcd-
cral act, it is necessary to chcck tllc local statutcs carefully. As a result
of the recent high interest rates, many state legislatures are activcly en-
gaged in rcvising and eliminating existing usury provisions. Advice of
legal counsel should be obtained before setting loan rates.
$ 1 7 - 4 0 MOST FAVORED LENDER DOCTRINE
. controls.27
As discussed in 5 17-10, the interest rate that may bc charged by
national banks is statutorily relatcd to the intercst rate permitted in the
state wherc the bank is located unless there is federal preemption. Courts
have interpreted this incorporation of state interest rates as permitting
a national bank to charge the same ratc as any similarly situated lendcr
within thc state. This so-called most favorcd lender doctrinc will some-
times allow a national bank to charge a higher rate of intcrcst than slate
banks.25
5 17-45 INTERSTATE CREDIT ACTIVITIES
OF NATIONAL BANKS
National banks are allowed to charge interest on loans and othcr
credit transactions at the rate allowed by the laws of the state where the
bank is located or at the rate of one percent over the discount ratc for
ninety-day commercial papcr at the Rcserve Bank in thc Fcdcral Reserve
District where the bank is located, whichcvcr is g r c a t ~ r . ~ V T h u sthe
, in-
terest a national bank may charge is ticd to the bank's location. The
2312 U.S.C.A. 1 1735f-7 note (West 1980).
24 states are Hawaii, Iowa, Kansas, Minnesota, South Carolina, and
?he
Massachusetts. ( 1981) Secured Trans. Credit Guide (CCH) (i 402. See also
Federal Banking L. Rep. (CCH) ( 59,005 (1981 ).
lasee Northway Lanes v. Hackley Nat'l Bank, 464 F.2d 855 (6th Cir.
1972).
28 See 12 U.S.C.A. 5 85 (West Supp. 198 1 ).
.L
290
INTEREST AND USURY '-50
I
supreme Court has hcld that a bank may "export" this intcrcst rate to
othcr states which have lower lcnding rates. The Supreme Court of
Minnesota allowed a Nebraska bank to charge credit cardholders in
Minnesota at the interest rate established by the laws of Nebraska, the
statc of the bank's location, although Minnesota law mandated a lower
rate.27 In this case, both the bank and its credit card program were re-
garded as being located in Nebraska although the bank's service corpo-
ration would enter into agreements with banks and merchants in Min-
nesota and solicit accounts of cardholder~.~e
T h c ability to export the interest rate of a national bank's home
stntc has Icd 10 tlic relocation of tlic crcdit card progrnms of somc banks.
Although thc casc above was dccided bcfore enactment of the Monetary
Control Act of 1980, the provisions of the Act d o not change the result
reached by the
T h e state of Delaware has recently enacted banking legislation de-
signed to attract bank holding companies to locate in Delaware. One
fcnturc of thc Dclawarc banking Icgislation is liberalization of credit
9 17-50 TIIE "PRIME" RATE
T h e prime rate is the rate of interest banks charge their largest and
most creditworthy customers. It is an important economic indicator
financial analysts and economists usc in assessing the economy. It is
also uscd as an indcx for loans and othcr credit transactions, with the
amount of interest payable pegged to the prime rate.
A precise definition of what constitutes a bank's prime rate is illu-
sive. Several recent studies have concluded that the prime does not
rcflcct the lowcst interest rates available to corporate customer^.^^ A
study concluctcd by tlic Uonrd of Governors of the Fcdcrnl Rcscrvc Sys-
tem of largc New York City banks concluded that sixty percent of the
banks' business loans were below prime.31 This presents obvious diffi-
culties in interpreting loan agreements which tie the interest rate of the
loan t o a "prime" rate. Care should be taken to draft loan agreements
so that thcy specifically statc thc intcrcst ratc intended.
1 7 Marquette Nat'l Bank of Minneapolis v. First of Omaha Service Corp.,
439 U.S.299 (1978). Accord, Fischer v. First Nat'l Bank, 548 F.2d 255
(7th Cir. 1977).
"See Note, 3 U. Ark. L. Rev. 115 (1980); Note, 5 J. Corp. L. 189
(1979); Dobson, "Credit Cards," 1979 J. Bus. L. 331 (1979); Brophy,
"State Usury Laws and National Banks," 31 Baylor L. Rev. 169 (1979).
20 12 U.S.C.A. 5 5 85, 86 (West Supp. 1981).
30 Wash. Fin. Rep. (DNA) at A-3 (1981).
81 Id.
29 1
 Chapter 18
PERSONAL SECURITY DEVICES
AND SURETYSHIP DEFENSES
Secrion Page
18-5 Typcs of Sccurity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293
18-1 0 Si~nplcIkrsot\nl Sccurity Contracts . . . . . . . . . . . . . . . . 294
18-1 5 Surctyship Dcfcnscs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295
18-20 Discharge of Parties Primarily and Secondarily
Liable on Negotiable Papcr . . . . . . . . . . . . . . . . . . . . . . 296
18-25 Surctyship, Guaranty, and Accomniodation
Parties on Ncgotiablc Paper . . . . . . . . . . . . . . . . . . . . . . 297
18-30 Use of Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . 300

5 18-5 TYPES OF SECURITY

Although banks nmkc numcrous loans on unsccurcd notes, a large
quantity of thc papcr takcn by bankcrs has security. Sccurity dcviccs
fa11 into thrcc gcncral classcs: ( 1 ) thc pcrsonal sccurity, in which onc
party signs an instrunlcnt for thc accommodation of another; ( 2 ) the
collateral o r plcdgc contract, in which the borrower on presenting his
notc to thc bank as cvidcncc of thc dcbt also dclivcrs possession of nego-
tiablc or nonnegotiable moncy papcr, stocks, bonds, docurncnts of titlc,
or, occnsionally, cllattcls; and ( 3 ) contracts to rctain intcrcsts in chat-
tels, intangibles or real propcrty. Personal security interests are often
evidenced on some type of negotiable papcr; they will be discussed in
this chaptcr. Loans sccurcd by pcrsonal sccurity intcrcsts usually arc
cvidcnccd by a pronlissory notc, which promiscs to pay moncy. I f , in
ncltlition. thc loan is sccurcd by propcrty, a collatcrnl contract will bc
uscd. When the sccurity is pcrsonal propcrty, thc contract will be a
sccurity agrcemcnt such as a chattel mortgage, conditional sale, bailment
lease, o r an assignment of accounts or other interests in intangibles. It
 5 18-10 COMMERCIAL PAPER
will b e a real estate mortgage if real property is offered a s security.
These security arrangements are discussed in Part IV.
Q 18-10 SIMPLE PERSONAL SECURITY CONTRACTS
Personal security contracts are most common in small loans. Here
the borrower may have n o security other than the personal guarantee of
his loan by a third party. These personal security contracts a r e often
evidenced simply by indorsement o f the borrower's note. T h e y fall into
two general classes, very much alike, known as surctyship and guaranty.
Under both of these types of contracts, the person whose debt is bcing
guaranteed by anothcr is called the principal dcbtor, and thc pcrson
-- guaranteeing the d e b t is known as the surety. If the contract is o n e o f
suretyship, it involves a promise on the part of the surety t o pay the
principal debt a t maturity without any action whatsoever by the creditor
against the principal debtor. If the contract is o n e of guaranty, it is
nccessary for the crcditor t o takc s o m e nction ngninst thc principal
debtor before he can hold the guarantor.' T h c kind o f action necessary
depends upon the nature of the contract of guaranty. F o r example,
when there is a guaranty of payment, the creditor must demand payment
before hc can go against the guarantor in much the samc manner as is
required to hold the indorser of a negotiable instrument. If the guaranty
is o n e of collection, the creditor must exhaust his remedies against the
principal debtor before h e can hold the guarant0r.l
In all types of personal security contracts the debt is ultimately the
obligation of the piincipal debtor a n d not that of the surety. T h e surety
w h o has been called upon to pay the instrument has certain rights o r
claims against the principal debtor which m a y be enforced in two ways.
+
After the surety h a s paid the debt, h e may go against the principal
debtor and require him t o pay all that h e lost by being required t o meet
the debt. This right is known as reimbursement. F o r further protection,
after paying the debt the surety is entitled t o an assignment of the cred-
itor's rights against the principal debtor a n d can recover in the same
manner the crcditor himself could have recovered. This right is known as
subrogation.3 T h e surety nced not rely o n this right of subrogation, but
may use any other remedy to achieve reimbursement.'
1 See Saint v. Wheeler & Wilson Mfg. Co., 95 Ala. 362, 371, 10 So. 539,
541 (1891). See also U.C.C. 8 5 3-415, 3-416.
See Arnold. Suretyship and Guaranty Ch. 1 ( 1927).
8 Clark, The L a w of Secured Transactions Under the U n i f o r m Comnter-
cia1 Code 1-38 ( 1980).
'Anna Nat'l Bank v. Wingate, 63 111. App. 3d 676, 381 N.E.2d 19
(1978).
B 18-1\ SURETYS I EFENSES
, .n.9 L!L
\
~ i n c dhe sur&yJis usually one who gratuitously undertakes to pay
4
the debt of another, he is entitled to special consideration by the creditor,
P
and there are a grcat many instances in which his liability to the creditor
may be discharged. T h e most important of these are the so-called
surctyship dcfcnses arising from the variation of the risk. If the creditor
3
'
makes a binding contract with the principal debtor that in any way
changes the naturc of the obligation o r debt, the surety is irnmediatcly
/ 2 dischargcd. For example, if thc creditor alters the contract by extend-
p/d;Y64 ingQor shortening" the time of rna(urjlyL-~ddingto- o r ghanginx Lhe
pnrtics m h c c s ~ a c t or , ~ suurr_c*P~g collntcrnl sccurity without thc
- ---
c o n s c c ol_thc s u r ~ t y hc
, ~ is irnn~cdiatckd&c&rgcd. However, a surety
-
will be deemed to have w % i t k b G ;kht t o claim a discharge if he has
conscntcd to the conduct that constituted the impairment of collateral."
With the exception of rclcasc of collateral, gratuitous changes of this
naturc o r agrccnicntc thnt arc not binding a n thc crcditor do not dis-
chnrgc thc surety.'" I t is clcnr that any nct of tlic crcditor wliicli wholly
discharges the principal dcbtor would also dischargc the surcty. Dis-
charge by bankruptcy o r insolvency, howcvcr, does not release thc
surcty. Guarantors in some instances may bc dischargcd by failure to
givc propcr noticc of default."
T h e surety also has a right known as exoneration.12 which entitles
him t o requiri that the debt& pay the creditor t o pievent him from
suing the surety. In a few states the surcty, on proper notice, may ask
the creditor to join in such proceedings, and a failure to d o s o will result
in the dischargc of the ~ u r e t y . ' ~
~ ~~ ~
"cc Annots., 48 A.L.R. 715 (1927); 65 A.L.R. 1425 (1930); I08
A.L.R. 1088 (1937).
Manufacturers' Trust Co. v. Steinhardt. 265 N.Y. 145, 191 N.E. 867
(1934).
Elder, S ~ e n r n ~Lnw
s of S~iretyship5 6.5 at 1 13 (5th ed. 195 1 ).
RThc gcncrnl rulc of suretyship before the Negotiable Instrl~nientsAct
wns thnt the swcty was rclcascd to thc extc~ltof thc collateral rclcnscd only;
2 Brandt, Srtretysltip n t ~ dGlcnrnnty 4R8 (1891 ); but since thc act. whcrc
ncgotinble instruments are concerncd, many courts have granted complete
discharge on release of collntcral, while othcrs do not admit i t as a defense
on ncgotinblc paper. See conflicting cascs 48 A.L.R. 726 et scq. (1927); 65
A.L.R. 1427 (1930); 108 A.L.R. 1093 (1937). Delay in enforcing collateral
is not usually a defense. Felkner v. Smith 77 Utah 410. 296 P. 776 (1931 ) ;
Annot., 74 A.L.R. 124 (1931 ).
'U.C.C. 8 3-606.
l o Arnold, note 2 srcpra. Ch. 5. See also U.C.C. 3-605.
M. at 32 et seq.
l 2 Western Cas. A Ins. Co. v. Biggs 2 I7 F.2d I63 (7th Cir. 1954).
* I S Elder, S~rc~rtrs Lmv of Sltrefyslrip 1 68 (51 h cd. 195 1 ).
5 18-20 COMMERCIAL PAPER
3 18-20 DISCHARGE OF PARTIES PRIMARILY AND
SECONDARILY LIABLE ON NEGOTIABLE PAPER
It is possible for a person who is surety for another to be either
primarily o r secondarily liable on money paper depending upon the
form of the papers, which evidence the larger contract of suretyship o r
guaranty. If the surety has signcd thc note as a maker, acceptor, o r
indorser, he is primarily o r sccondarily liablc on the notc in the capacity
in which he has signed, but may still have his suretyship defenses against
parties who know of the s u r e t y ~ h i p . ' ~
Primary and secondary liability on negotiable papcr payable in
money vcry closely resemble that of principal and surcty, but the two
relationships should not be confused. As explained in Chaptcr 14, the
person primarily liable on an instrument is the one who by its terms is
absolutely required to pay the paper. Others are secondarily liable.
Parties secondarily liable, in absence of waiver, cannot be held without
propcr presentment, protest, and notice. They arc also dischargcd by
any act of the holder that will discharge a prior party, such as payment
of the instrument o r its gratuitous c a n ~ e l l a t i o n . Secondary
~~ parties may
also be discharged by cancellation of their own o r prior parties' signa-
ture,Ib and by a valid and legal tender of payment by a prior party.17
Like a surety, a party sccondarily liable may be dischargcd if the holdcr
rclcascs thc principal dcbtor on the instrument without cspccially rcscrv-
ing his right o f rccoursc against thc party sccondarily l i a b l ~ .Hc ~ ~may
also be released by any agreement binding upon the holder to extcnd
the time o r postpone enforcement of the instrument unless it is made
with the assent of the party sccondarily liablc, o r unlcss the right of
recourse against him is specially r c s ~ r v e d . ~ ~
l4 U.C.C. $ 5 3-413, 3-415, 3-416, 3-601, 3-602 & 3-606.
U.C.C. 5 5 3-601 ( I ) ( a ) , 3-601 (I ) ( c ) , 3-603, 3-604, 3-605; Ulster
Fin. Corp. v. Schroeder, 230 App. Div. 146, 243 N.Y.S. 682 (1930); Yubas
v. Makranshy, 300 Pa. 507, 150 Al. 900 ( 1930); U.C.C. 8 5 3-601, 3-604.
l a U.C.C. 5 3-604; see McCormick v. Shca, 50 Misc. 592, 99 N.Y.S.
467 (1906).
U.C.C. 5 3-604( 1) ( 2 ) ; sec Franklin Sav. & Trust Co. of Pittsburgh
v. Clark. 283 Pa. 212. 129 A. 56 (1925). But cf. Corely v. French, 154
~ e ~672, n . 294 S.W. 5 1 3 (1927).
l a U.C.C. 5 3-606; see Phoenix Nat'l Bank v. Hanlon, 183 Mo. App.
243, 166 S.W. 830 (1914); cf. Arlington Nat'l Bank v. Bennett, 214 Mass.
- - , 101 N.E. 982 (1913); Davis v. Gutheil, 87 Wash. 596, 152 P. 14
152.
- -
(1915); Note, 93 A.L.R. 368.
I R U.C.C. 5 3-606(1) ( a ) ; see National Park Bank v. Koehler. 204 N.Y.
174, 97 N.E. 468 (1912); Tuten v. Bowden, 173 S.C. 256, I75 S.E. 510
SECURITY AND SURETYSHIP
Persons primarily liable on the instrument can be discharged only
in the sarnc manner as parties liablc on other contracts, such as pay-
ment o r agreement for value to change the contract.20 They may also
be discharged by cancellationz1 or when the dcbtor becomes an owner
of the instrument in his own right.?* NO presentment, notice, o r demand
of any kind is necessary to hold a party primarily liable.23
§ 18-25 SURETYSHIP, GUARANTY, AND ACCOMMODATION
PARTIES ON NEGOTIABLE PAPER
Thc dcfcnscs of partics primarily and sccondarily liable to nego-
tiablc instrunicnts as sct out above may become greatly complicated by
thc fact that any party to a negotiable instrument may also be a surcty
o r a guarantor whether or not this fact appears on the face of the paper.
If any party to thc instrument writes words after his name indicating that
hc signs as a surcty o r guarantor (for cxamplc, if an indorser signs "I
guarantee the within instrument"), he is liable both as a guarantor and
as an indorser, and is subject to all thc rights and defenses he may have
in both ~ a p a c i t i c s . ~ So,
' also, a co-maker who adds after his name
"surcty" o r "guarantor" has all the obligations of such a surcty o r guar-
antor and all of his dcfcnscs against s u b s c q ~ ~ e npar
t tie^.^"
As cxplaincd in Chaptcr 15, a ncgotiablc instrunicnt may bc part
of a largcr contract and, cvcn though thc tcrnls of that contract d o not
appcar on the face of the papcr, thcy may be shown between the par-
t i ~ s . ~ " T h first
Undcr such circumshnccs, thc maker is both primaril
'"U.C.C. 5 3-601.
(-$+
c indorser may sign for the accommodation of the maker.
__--
able and prin-
U.C.C. 5 3-605; see McDonald v. Looniis, 233 Mich. 174, 206 N.W.
21
348 (1925); Saulcnas v. Penn, 287 Mass. 409, 192 N.E. 42 (1934).
22 U.C.C. $ 5 3-601 ( I ) ( c ) , 3-208; see Bailes v. Keck, 200 Cal. 697, 254
P. 573 (1927).
23 U.C.C. 8 3--4 13 ( 1 ) ; sce First Nat'l Bank v. Capps, 208 Ala. 235, 94
So. 112 (1922); Shaplcigh Hnrdwarc Co. v. Spiro, 141 Miss. 38. 106 SO.
209, nppcnlcd 153 Miss. 81, 1 I8 So. 429 (1928); Annot., 23 A.L.R. 7
(1923).
Bank of Italy v. Synlrncs, 118 Cal. App. 715. 5 P.2d 956 (1931 );
Hutson v. Rankin. 36 Idaho 169. 213 P. 345 ( 1922); see Annot., 33 A.L.R.
91 (1922).
25 ~ t c ~ h c v.
n sBowles. 202 Mo. App. 599. 206 S.W. 589 (191 8 ) ; Barrett
'
v. Vnughn & Co., 163 Vn. 811, 178 S.E. 64 (1935).
20 U.C.C. f f 3-306(b), 3-306(c), 3-207(2) & 3-408; see N.I.L. $ 8 16,
58. 119(4) 8 196. Thc cnscs are collected in Bc~ttel'sBrnnnan Negotinhle
Insfrcotierrts Law 559 et seq. (7th ed. 1948) (hereinafter cited as Deicfel's
Brannnn).
 COMMERCIAL PAPER
cipal debtor, whereas thc indorscr is secondarily liable a n d also surcty.
It is very common f o r pcoplc t o niakc ncgotiablc instrumcnts for thc
accommodation of o t h e r parties. Thus, the maker w h o is primarily
liable o n the instrument m a y in fact b e a surety for the first indorscr,
w h o is the real principal debtor, a n d w h o ultimately may be required to
pay the money to t h e lender. Again, instances often occur whcrc the
principal debtor o n a n obligation may not even appcar o n a negotiable
instrument. F o r example, Jones may m a k e an instrument payablc to
t h e First National B a n k for the purpose of sccuring a loan by the bank
t o Smith. In this circumstance, Jones is primarily liablc o n thc papcr,
but Smith is the principal dcbtor. T h e fact that the partics oftcn fail to
indicate thc true naturc of thc transaction has causcd a great dcal of
difficulty in court decisions involving surctyship dcfcnscs on ncgotiablc
paper.
Under the Code, a person who is a n accommodation indorscr does
not give the warranties of a gcncral indorscr a s long a s hc is not n
transferor of the instrument f o r consideration. This rulc has becn varicd
in New Y o r k in a provision s o broadly d r a w n a s to covcr any accommo- '
dation party, such a s a n indorser, drawer, makcr, or acceptor. T h c
warranties a r e that ( 1 ) all signatures a r c genuine a n d authorized, ( 2 )
the instrument has n o t been materially altered, ( 3 ) all partics had ca-
pacity t o contract, a n d (4) the accommodation party has n o knowlcdgc
of a n y insolvency proceeding instituted with respect t o the maker o r
acccptor o r the d r a w c r o f an unacccptcd i n ~ t r u n i c n t . T~ ~l ~ cPcrmancnt
Editorial Board has disapproved the Ncw Y o r k variation o n the ground
that accommodation partics should not givc w a r r a n l i c ~ . ~T~h c New
Y o r k provision, as it technically reads, will apply cvcn whcrc the
, accommodation party signs the instrument before it is completcd o r
signed by anyone else.
I A.2d 1377 (Del. 1977); see Hawkland, "Liability of Accommodation Parties
A n accommodation maker or acceptor is bound "priniarily" o n thc
instrument i n a contractual sensc without ncccssitating rcsort t o his
principal, while a n accommodation indorser may be liable only after
! 147 (1934); Annot., 93 A.L.R. 365 (1934).
presentment, notice of dishonor, a n d protest, and is "secondarily" liable
/ in the contractual sense in that his principal ought t o pay the instrumcnt
conditioned o n the principal's refusal.2o
2 7 N e w York adds subsection (6) to U.C.C. 5 3 4 1 5 , sctting forth the
above warranties. There is no equivalent provision in the Official Text of the
Code.
Scc Pcrmoncnt Editorinl Donrd for Ihc Utiiform Coriirlicrcinl Cotlc.
Report No. I , at 74, reprinted in Ut~i/ormCot~ttttercialCode vii (1962 ed.)
(West 1963).
z0 Warren v. Washington Trust Bank v. Waltcrs, 575 P.2d 1077 (Wash.
App. 1978).
SECURITY A N D SURETYSHIP $ 18-25
A spccific guaranty docs not accompany the debt when the obliga-
tion is transfcrrcd since it runs in favor of a named creditor only; con-
versely, a general guaranty runs with the obligation. F o r this reason, an
assignee of a debt of a bankrupt was denied recovery.80
I n thc case whcre indorsers arc also sureties, the defenses of both
indorsers a n d sureties a r e so similar that little commercial difficulty
arises." If proper action is taken to hold the indorser, in most cases
he will not have any suretyship defenses t o release him. Difficulties arise
in the second and third instances mentioned above where a maker or
co-makcr is a surety but this fact docs not a p p e a r on the paper. If such
papcr finds its way into the hands of a holdcr in d u c coursc, o r a person
taking iron1 a holdcr in d u c course without knowledge of the surctyship,
surctyship dcfcnscs a r e n o t available against him, a n d the m a k e r o r
co-maker surety can be hcld like any other niakcr of negotiable paper.g2
As bctwcen thc original partics t o thc surctyship contract, the decisions
arc in a vcry unsatisfactory state. Although the Negotiable Instruments
L a w seemed clcar that in such cases a person w h o is in fact a surety
should be allowcd to oBcr his dcfcnscs against persons not holders in
d u e coursc, a number of courts hcld that suretyship defenses were not
available o n behalf of persons who appcar t o b e liable primarily on the
paper. But the better rule a n d thc wcight of authority undcr the Act
were contrary." Thus, extension of time by a creditor not having the
rights of a holdcr in d u e course t o a co-maker o r payec who is in fact
thc principal dcbtor should discliargc the surety maker.84 Also, releas-
ing the collateral t o the party a c c ~ m m o d a t c d o, ~r ~divcrting a n accom-
niodation instrument from the purposc for which it was given by o n e
Finance America Private Brands, Inc. v. Harvey E. Hall, Inc.. 380
Under Article 3 . of The Uniform Commercial Code," 25 Prac. Law. 35
(1979).
U.C.C. 8 3-601; see National Bank v. Funke, 215 Wis. 541, 255 N.W.
82 Union Trust Co. v. McGinty, 212 Mass. 205, 98 N.E. 679 (1912);
Kuhn v. Groll, 118 Wash. 285, 203 P. 44 (1922); Continental Mut. Bank v.
Elliott, 166 Wash. 283, 6 P.2d 638 (1932).
BS Mueller v. Jagerson Fuel Co., 203 Wis. 453, 233 N.E. 633, 7 2 A.L.R.
1059 (1930), with note; see collection of materials on this p i n t in Beurel's
Brannnn, note 26 supra, at 1120 et seq.
34 On this point there is some doubt as to the eAect of granting time, but
the conclusion stnted rcprcsents thc correct mcnning of tllc Ncgotinhlc In-
strunicnts Lnw. Thc cnscs nre collcclcd in Annots., 4R A.L.R. 715 (1927);
65 A.L.R. 1425 (1930); 108 A.L.R. 1088 (1937). For the eflect of waiver
see Annot., 94 A.L.R. 1447.
In addition lo cnscs citcd in nolc 32 w p m , see Annots., 41 A.L.R.
* 277 (1926); 72 A.L.R. 389 (1931); 81 A.L.R. 1016 (1932).
$18-30 COMMERCIAL PAPER SECURITY AND SURETYSHIP

not having the rights of a holder in duc course,a0 should rcleasc a surcty will bc irrcvocablc as between the parties, its value as a security may be
maker or co-maker. dcstroycd by snlc of thc goods it covcrs to an innoccnt p u r c l ~ a s c r .This
~~
A holder in due course who discovers the facts of surctyship aftcr rule is particularly eflcctive where thc powcr of attorney covcrs goods
he has purchased the instrument, or one holding undcr him, ought to bc in the proccss of manufacturing or stocks and merchandise. Such powers
able to hold surcty makers and co-makcrs according to thc terms of thc of attorney, whcre the goods arc out of thc control of the pcrson holding
instrument, and it is probable that most of the courts would allow him the power, arc oftcn revoked by death of the person granting them.
to d o so.aT
The Commercial Code generally follows this approach since it
42 Id.
makes anyone who signs as an accommodation party liable in the ca-
pacity in which he signs, and any holder in due course without noticc
that the signature is as surety takes free of any suretyship defense.a8
Under the Code, any indorsement outside the regular chain of title
gives notice that it may be a signature as a surety.ag

8 18-30 USE OF POWER OF A'ITORNEY

It is sometimes the practice in executing loans secured by chattels
or nonnegotiable paper for the lender to require a powcr of attorney
from the borrower, giving him the right to transfer the collateral given
as security. These powers of attorney are not always effective for the
purpose for which they are attempted to be used. Wherc thcy deal with
chattcls, in many states thcy may bc construed as substantially crcating
a security interest which will bc governed by Article 9 of the Commcr-
cia1 Code. See Part IV for a discussion of Article 9.
Wherc physical posscssion of the propcrty plcdgcd is delivered to
thc lender togcthcr with thc powcr of attorncy, the lcndcr has what is
known as a powcr couplcd with an intcrcst. Thc powcr of attorncy is
usually irrcvocablc so long as thc goods rcnlain in thc possession of thc
plcdgcc. It may, thcrclorc, prove a uscful dcvicc for enforcing plcdgcs.
Enforccmcnt under such powers of attorncy is likcly lo bc held to thc
same standards as are required of any plcdgc, however, so litrlc advan-
tage is gained by the power>O If the goods are not in the possession of
the person holding the power of attorncy, it is still effective between thc
parties and their s u c ~ e s s o r s . ~Even
l though thc powcr provides thal it

3'3Hill V. May, 205 Iowa 948, 218 N.E. 946 ( 1 9 2 8 ) ; Warner v. Fallon
Coal Mines Co., 246 Mich. 493, 224 N.E. 601 ( 1 9 2 9 ) ; Grisim v. Live Stock
Bank, 167 Minn. 9 3 , 208 N.W. 805 ( 1 9 2 6 ) .
See discussion of this point in Beurel's Brannan, notc 26 supra, at
I 124 el seq.
See U.C.C. !j 5 3 4 1 5 , and 3-601 ( 2 ) , 3-606 and Comments.
U.C.C. 5 3 - 4 1 5 ( 4 ) .
'O A.L.I., Restatement (Agency) 5 5 138-1 39, 464 ( 1 9 5 8 ) .
41 Id.
300
 PART I11
Duties of Bank and Customer
 Chapter 19
BANK ACCOUNTS
Section Page
19-5 Basic Commercial Code Definitions . . . . . . . . . . . . . . . . 305
19-10 Dcfinition of Bank and Branch Bank . . . . . . . . . . . . . . 307
19-15 Nature of Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . 307
19-20 Kinds of Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309
19-25 Opening an Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 12
19-30 Contracts of Adhesion or Unconscionable
Agreements ................................... 312
19-35 Forms of Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 14
19-40 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 19
19-45 Termination of Relationship . . . . . . . . . . . . . . . . . . . . . . 32 1
19-50 Non-Deposit Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 324

5 19-5 BASIC COMMERCIAL CODE DEFINITIONS

T h e materials in this part, as previously indicated, deal with the
bank's relationship to its customer and for the most part involve the a p
plicntion of the Uniform Commercial Codc. Thc Commcrcial Code con-
tains definitions crucial to an understanding of its substantive provisions.
Because these terms are used in this and following chapters, a brief
description of the major definitions follows:

1. Depository Bank. This is the first bank to which an item is

transferred for collection. A depository bank may also be a payor bank
when the item deposited is payable by the bank in which it is deposited.'
2. Payor Bank. This is the bank that pays the item involved. The
'

payor bank of a draft or check will be the drnwcc. Pnymcnt must be

distinguished from cashing a check or purchasing it. When a ncgotiable
instrument is paid, the liability of the drawer, indorsers, and any other
party to the instrument is d i ~ c h a r g e d . ~

U.C.C.5 dlO4(a).
* ' U.C.C.5 4-105(b).
3 19-5 LIUTIES OF BANK & CUSTOMER
3. Infermediary Bank. This is any bank to which an item has been
transferred for collection. It does not include the depository or payor
bank, h o ~ e v e r . ~
4. Collecting Bank. This is any bank, other than thc payor bank,
~ dcpository bank that is not thc
that handles thc itcm for c o l l ~ c t i o n .A
payor bank can be a collecting bank.
5 . Presenting Bank. This is the bank that presents the itcm to the
payor bank for payment. A prcscnting bank can bc a dcpository bank
or any collecting bank.6
6 . Remitting Bank. This is any bank engaged in remitting the pro-
ceeds of an item to the depository bank. It includes any payor or inter-
mcdiary bank cngagcd in the remittance p r o c c s ~ . ~
7 . Ilern. An item is any instrument for the payment of money but
it docs not includc moncy itself, such as currency and coins. An item
may bc cithcr negotiable or nonneg~tiable.~
8 . Instrument. An instrument is a negotiable instrument within
Article 3 and may be a draft, check, note, o r certificate of d e p o ~ i t . ~
9 . Account. An account is any account with a bank and includes
a checking, time, interest, or savings a c c o ~ n t . ~
10. Cusfotner. A customer is any person "having an account with
a bank or for whom a bank has agreed to collect items." lo
1 1 . Midnight Deadline. A bank's midnight deadline falls at mid-
night on the banking day following the banking day when an item or
notice is received or when another time for taking action begins to run."
12. Banking Day. A banking day is a day on which the bank is
open to the public and carries on substantially all of its banking
functions.I2
13. Bank. A bank is "any person engaged in the business of
banking." l a
a U.C.C.5 4-1O~(C).
U.C.C.§ 4-105(e).
Id.
'U.C.C.§ 4--IOS(f).
7 U.C.C. 5 4-104fg).
8U.C.C.$ 9 3-102(l)(e).3-104(2).
U.C.C.5 4-104(l)(a).
l o U.C.C.9 4-104( I)(e).
U.C.C.5 4-104(l)(h).
l2 U.C.C.§ 4-1 O4( 1 ) ( c ) .
'3 U.C.C. $ 8 1-201 ( 4 ) , 4-104(4).
BANK ACCOUNTS 19-15
I
14. Clearing Hocc~e. A clearing house is any association of banks
or other payors who regularly clear items.14
15. Settle. T o settlc means to pay by cash, by clearing house set-
tlement, by charge or credit, by remittance, or by other means as in-
structed. Under thc Commercial Codc, settlcments are cithcr "provi-
sional," meaning thcy are subject to revocation, o r "final."
I 5 19-10 DEFINITION OF BANK AND BRANCH BANK
Thc Uniform Commercial Code's definition of bank is circular.
A bank "means any person engaged in the business of banking," l a yet
thcrc is no definition of banking.
Thc Codc's dcfinition docs not have to bc iiniitcd to institutions
chartcrcd as banks under federal and state banking laws. Since the Com-
mercial Code provisions on the collection and payment of instruments
are mcant to providc a comprchcnsive statutory scheme, the sound ap-
proach would include all depository institutions engaging in the collec-
tion and payment of instruments as subject to the Commercial Code pro-
visions. However, there is little law on this question.ll
Similarly, there is no definition of a branch bank in the Commer-
cial Code. The Code does provide that a branch or a separate office of
a bank should bc treated as a separate bank for purposes of computing
the deadlines in the Commercial Code and determining the place at
which presentment, notice of protest, and similar actions must be taken.I8
Apart from this, the Code is silent. The comments indicate that branches
might be treated as separate banks for some purposes but not others.Ig
Branch banking and its regulation are discussed in Section 5-5.
I 5 19-15 NATURE OF BANK ACCOUNTS
When money is deposited in thc normal way, the transaction
amounts to an unsccurcd loan given by the depositor to thc bank. Title
to the moncy or sccuritics offered for deposit passes to the bank and the
dcpositor has, simply, thc claim of on ordinary unsccurcd creditor against
'W.C.C.5 1-201 (4).
' 7 Cf. Congress Indus., Inc. v. Federal Life Ins. Co., 114 Ariz. 361, 560
P.2d 1268 (1977).
l R U.C.C.§ 4-106.
U.C.C.$ 4-106,Comments 1, 4, 5.
 D U T I E S OF BANK & C U S T O M E R
the bank,20 together with a n y rights that m a y develop o u t of the contract
a n d the general nature of the banking business.
When checks, o r o t h e r instruments payable by someone o t h e r than
the bank, are deposited, the Uniform Commercial Code2' presumes that
t h e bank is acting a s t h e agent of the'depositor for the purpose o f col-
lecting the instrument a n d that the risks of ownership remain with the
depositor.22 When t h e bank receives final payment, it becomes account-
able t o its customer f o r the item a n d a debtor-creditor relationship
exists.2a I t is possible for the bank t o become a purchaser of the item,
of coursc. Whcn this happens, the depositor loscs all claim against the
specific paper from the moment the bank credits his passbook o r accepts
the deposit slip.14 T h e Commercial C o d e provisions o n collection and
payment apply regardless of whether the b a n k is a n agent o r a p u r c h a s ~ r . ~ ~
T h e Commercial Code, however, gives the bank the'specific right to
charge back against the customer's account any loss caused b y the dis-
h o n o r of any paper d e p o ~ i t e d . ~ T" h e customer also carries all risk of
losses not caused by the bank's o w n negligence which occur in the col-
lection process.27 This will be discusscd in Chaptcr 2 1.
Somctirnes a qucstion can arisc as t o whether thc b a n k has rc-
ccived a dcposit cstablishing a dcbtor-creditor rclationship. F o r cxaniplc,
a depository institution was held not accountable for sums of cash that
were entrusted to o n c of its officers f o r deposit whcn thc moncy was
delivered outside the b a n k a n d in a social setting.28 Usc of night dcpos-
itories has raised problems a n d courts have regardcd thc bank a s a bailee
in this situation.2D T h e provisions of the Commercial C o d e forbidding
disclaimers of liability for failure t o exercise reasonable care only apply
to payment and collection, not bailments, b u t some courts nevertheless
have given effect to the C o d e principles.a0
20See 1 Morse on Banks and Banking 665 (6th ed.; Voorhees, ed.,
1928) (hereinafter cited as Morse on Banks).
21 Hereinafter referred to as the Commercial Code.
22U.C.C. $9 4 - 1 0 4 ( I ) ( g ) , 4-105(d), 4-201(1). All citations to the
Uniform Commercial Code in this chapter refer to the 1978 Oficial Text
(West 1978). See Chapter 21.
2a U.C.C. § 4-213(3) and Comment 9.
24 See Turner, "Depositor of Demand Paper as a Purchaser," 37 Yale
L.J.874 ( 1928). U.C.C. $ 9 4 2 0 6 , 4-209.
26 U.C.C. 5 4-201 ( 1) and Comment 1.
U.C.C. 5 4-212.
2' U.C.C. 5 4-201 ( 1 ) .
28 Sheldon v. First Fed. Sav. & Loan, 566 F.2d 805 ( I st Cir. 1977).
29See Bailey, Brady on Bank Checks 12.4 at 12-9 (5th ed. 1979)
(hereinafter cited as Brady on Bank Checks).
ao See Hy-Grade Oil Co. v. New Jersey Bank, 138 N.J. Supcr. 112, 350
A.2d 279 (1975), which collects decisions both ways on this point-both
BANK A C C O U N T S s 19-20
Gcneral bank dcposits should b c distinguished from instances where
a customer lcavcs sccuritics o r chattels in safekeeping. In such a situa-
tion, title to the goods o r chattels remains in the customer a n d the bank
is simply a bailcc with the duty of taking reasonable care of the secu-
rities. In case of loss o r destruction that is not the bank's fault, the risk
also remains with the
Banks also cngagc in trust transactions. F o r example, a trust is
crcated when thc trust department of a bank takcs securities to hold
a n d to manage for a customer. When a trust is established, legal title
pnsscs to tllc bank, which bccomcs a trustcc with a right to managc thc
propcrty and deal in the sccuritics of the customer, who remains the
beneficial owner of the propcrty. T h e customer in this situation is usu-
ally callcd a beneficiary.
Although the bank a s trustee has legal title to the property o r the
trust estntc, the trustee conducts the business f o r the benefit of the bene-
ficiary a n d must account to him for all profits a n d losses, less, of coursc,
a reasonnblc fcc for acting a s
It should be notcd that in thc cascs whcrc thc bank irrcvocably has
crcclitcd thc depositor's pcrsonal account, i t is ctitircly frcc to dcal with
tllc funds dcpositcd by tlic custonicr as it sccs fit. 'Tliis is bccausc thc
titlc passes cntircly to thc bank in thesc cases and, from then o n , thc
bank is liablc to its customer for thc credit givcn nnd the wliolc risk of
busincss opcrntion belongs to thc bank and not thc customer.
5 19-20 KINDS OF ACCOUNTS
Bank accounts may b e roughly classified as checking accounts, sav-
ings accounts, and specinl o r timc tlcposit accounts. Tlicrc also nrc N O W
under pre-Code law and undcr the Commercial Code. The court applied
Scction 4-103(1) of thc Uniform Conlnicrcinl Codc as not permitting such
a disclaimer in conncction with night dcpository service. See also Phillips
Honw Furnishing, Inc. v. Contincntal Bank. 31 Pa. Super. 174, 331 A.2d 840
(1974); Gillcn v. Maryland Nat'l Bank, 274 Md. 96, 333 A.2d 329 (1975)
(applying contract principles). But see Valley Nat'l Bank v. Tang, 18 Ariz.
App. 40, 499 P.2d 991 (1972), which might be said lo hold that the oper-
ation of a night dcpository service by a bank is not a part of the deposit and
collection process as such.
Riggs v. Bank of Camas Prairie, 34 Idaho 176, 200 P. 118 ( 1921 ) .
See Annots., 4 A.L.R. 1216 (1919), 17 A.L.R. 1217 (1922), I 8 A.L.R. 83
(1922).
32 For a brief discussion of the nature of the trustee's liabilities, see
*Loring, A Trrts~ec'sHnrrdbook (6th cd. 19G2). The effect of a bank's deal-
ing with trustccs is discussed in Chapter 27.
$19-25 DUTIES OF BANK & CUSTOMER
establish such automatic transfer accounts for their savings depositon
who arc individuals (subject to regulations established by thc Bonrd of
Governors of the Federal Reserve System) ."
6 . Share Draft Accounts. Share draft accounts, o r share accounts,
are accounts with a credit union.42 Credit unions are also authorized to
allow their members to draw from these accounts by negotiable order of
withdra~al.'~
§ 19-25 OPENING A N ACCOUNT
The opening of a n account in a bank involves only a simple con-
tract in which the depositor lends his money t o the bank in return for
an agreement on its part to pay back the amount either with o r without
interest, depending upon the nature of the contract. T h e exact relation-
ship is determined by the nature of the agreement signed by the bank
and depositor and the terms of such an agreement usually are binding
upon the parties, unless thcy involve an unfair advantage o r a violation .
of the banking laws.
It is customary for banks t o place standard contracts on deposit
slips and passbooks, which somctimcs attcrnpt to regulate in detail thc
nature of the transaction and the risks involved in collecting commercial
paper. These contracts are usually s o drawn as to give the bank the
maximum of protection in the circumstances but, unless they are espe-
cially called to the depositor's attention, they may not be binding upon
him.44 And even in some instances wherc he especially agrees, such con-
tracts, if unfair to the depositor, will not always be enforced by the
courts.46 T h e U.C.C. affects the validity of these agreements.
5 19-30 CONTRACTS OF ADHESION OR
UNCONSCIONABLE AGREEMENTS
Standard printed contracts, which the depositor is asked to sign
and which are made out in advance by the banks' lawyers, are common
41 12 U.S.C.A. $5 371a, 1828(g) (2) (West 1980 & Supp. 1981).
42 See generally 12 U.S.C.A., 5 1752 (West 1980 & Supp. 198 1).
12 ~.s.c.A.-5 1 7 8 5 ( f ) ( l ) (West 1980).
44 Ackenhausen v. People's Sav. Bank, 110 Mich. 175, 68 N.W. 1 1 8
(1896); Los Angelcs Inv. Co. v. Home Sav. Dank, 180 Cal. 601, 182 P. 293
(1919). See Annot., 5 A.L.R. 1193 (1919) on the eflect of such contracts.
45 Dunn v. Seamen's Bank, 118 Misc. 434, 194 N.Y.S. 41 6 (1922). See
also Llewellyn, "What Price Contract?-An Essay in Perspective," 40 Yale
L.J. 704, 731 (1931). U.C.C. 55 1-103, 4-103.
BANK ACCOUNTS '19-30
not only in commercial banking, but throughout the business world.
A wcll-known rulc of Inw incorporated in tlic Comnicrcial Codc40 is that,
between the partics, rules of law can be changed by agreement. Thus,
courts in the past have enforced contracts, signed by the parties, that
worked a hardship on one of the signer^.'^ Taking advantage of this
rule, eager lawyers for banks and for other businesses have created stan-
dard form contracts that give great advantages to the firms using them.
All sorts of waivers of legal rights and one-sided provisions now appear
in these forms, and are so notorious that a common expression is "Don't
sign until you have read the fine print." Nevertheless, customers of all
types of businesses are constantly called upon to sign contracts that
ncithcr thcy, nor the busincssn~cn,understand but that put the customer
at a great commercial disadvantage. Courts gradually have come to
realize that this is not fair.4R They now take a more liberal a t t i t ~ d e . ' ~
.--- -
Where such contracts are not negotiated by part& wjt
.-
powers and under&mn&n&" and wherc they work a h a
r aining
t
the parties, thcy arc known as contracts of adhesion o r unconscionable
contracts. Undcr the Co~nmcrcialCodc, courts rcfusc to enforce them -~ ~
against the e = y . O 1 T h e cffcct of unconscionable contracts ap-
- pearmg on bank statements o r on security agreements is further dis-
cussed in Part Vbn2
Sonictinics banks form contracts providing that tlic customer shall
not hold the bank liable for losscs caused by negligence or wrongdoing
on the part of the bank o r its employees. Agrcenients of this sort are
made illegal and void by the express provisions of the Commercial Code
'"U.C.C. $ 6 4-103, 1-103.
47 See Fort Knox Nat'l Bank v. Gustafson. 385 S.W.2d 196 (Ky. 1964).
4 R Sec Golgar, "The Contract of Adhcsion," 20 Am. J. Comp. L. 53,
58 ,(1972).
40 Sce Dewey, "Freedom of Contract: Is It Still Relevant?" 31 Ohio St.
L.J. 724 (1970).
w e e Overmyer v. Frick, 405 U.S. 174 (1972). wherc it was hcld
that there was equal bargaining power in negotiating a cognovit provision.
U.C.C. 5 2-302. See Fuentes v. Shevin, 407 U.S. 67 (1972); Williams
v. Walker Thomas Furniture Co., 35 F.2d 445 (D.C. Cir. 1965). See also
Doctert, "Appellate Restatement of Unconscionability; Civil Legal Aid a t
Work," 54 A.B.A.J. 1183 (1965). Section 2-302 of the Uniform Commcr-
cia1 Code, on unconscionable contracts, does not expressly apply to agree-
ments bctween banks and their customers. Although i t is contained in the
Comrncrcinl Codc nrticlc on the solc of goods, it probably npplics by analogy.
See U.C.C. $ 5 1-103, 1-203.
n 2 See Comment. "Unconscionability: Uniform Commercial Code Sec-
tion 2-302," 36 Alb. L. Rev. 114 (1971); Navin, "Waiver of Defense
* Clauses in Consumer Contracts," 48 N.C.L. Rev. 505, 531 (1970).
 I
5 19-35 DUTIES OF BANK & CUSTOMER
and are, therefore, u n e n f o r ~ e a b l e . ~Many
~ banks still have such stipu-
lations, which accomplish little more than create ill will on the part of
the customer, printed on their deposit slips or signature cards. Such
contracts may also be set aside by continued practice inconsistent there-
with in thc dcalings bctwccn thc bank and thc d c p o s i t ~ r . ~ ~
The Commercial Codc also spccifically providcs that the contrncts
bctwccn the bank and its depositors shall bc pcrformcd in good faith.E5
5 19-35 FORMS OF ACCOUNTS
Accounts may be opened in a number of forms: individual, joint,
alternative, partnership, corporation, and representative.
1 . Individual Accounts. The individual account, which is the sim-
plest form, is merely an arrangement where an individual has the right
to deposit and withdraw money. No special formality is necessary for
opcning such an account, unlcss the individual is a minor, is undcr in-
terdiction, or is under legal guardianship, in each of which case the bank
should receive authorization of the parent o r legal guardian before open-
ing such an account. If the bank fails to take these precautions, it may
find itself liable for conversion of the funds even though it has paid
them on the order o f the incompetent individual. This matter is largely
regulated by statute in the various states. A t one time, married women
had to receive permission from their husbands before opening bank
accounts, but this, of course, is no longer true. Married women are now
fully able to enter into contracts on their own. In addition, requiring
the consent of the spouse would violate federal law prohibiting credit
dis~rimination.6~
2. Joint Accounts. The Probate Code defines a joint account as
"an account payable on rcqucst to one or morc of two or more parties
whcthcr or not mcntion is madc of any right of survivorship." As this
dcfinition indicates, thcrc is mnrc than onc typc of joint account. In
somc arrangcmcnts, whcn one of thc joint parlics dies, his interest passes
to the surviving parties. Other arrangcmcnts havc no survivorship fca-
ture and the interest in the account passes to the estate of the dcceascd
party. Also, during the lifctimc of thc partics to the joint account, qucs-
58U.C.C. !j 4-103. See U.C.C. 1 1-103.
64Johnson V. First Nat'l Bank & Trust Co., 8 F. Supp. 788 (1934), afl'd
78 F.2d 535 (10th Cir. 1935). U.C.C. 5 5 1-103, 4-103.
66 U.C.C. 8 1-201(19), 1-203, 1-208; cf. Fort Knox Nat'l Bank v.
Gustafson, 385 S.W.2d 196 (Ky.1964).
68 I5 U.S.C. 5 1691a (1976); 12 C.F.R. !j 202.7 (1980) (Reg. B).
Uniform Probate Code !j 6-lOl(4).
BANK ACCOUNTS
lions can arise as to the respective interest of the parties in the account.
In some arrangemcnts, all parties must sign in order to make with-
drawals. In others, each has a right to draw separately against the
account. The extent of the interest of each of the parties in the account,
thc power of crcditors of one of thc parties to lcvy on funds in thc ac-
count, and the right of onc party (whcn thc account permits checking)
to stop paynient of chccks drawn by nnothcr arc also troublcsorne issues.
Whatcvcr thc arrnngcmcnt, the bank needs clear rules to guide it in mak-
ing payments so that it can avoid liability for improper payment of funds
in the account.
From the above discussion, it is clear that the relationship between
the parties to a joint account is not a simplc one. Although the parties
usually can accomplish their desired objectives by clearly defining their
respective rights in the deposit agreement, this clarity of intent is often
missing. In those cases, problems arise. Was a survivorship feature in-
tended? Were all parties to have a right of separate withdrawal? What
intercst docs each of the parties havc in the account?
The common law evolved rules of property to describe the relation-
ships between parties who held joint interests in property. One form of
joint ownership was known as the tenancy in common. Under this ar-
rangement, each joint tenant had a specific, although undivided, interest
in the corpus of the property (for example, the interest could be 30
percent, 50 percent, 75 percent, etc.). All tenants had an equal right to
the property and there was no survivorship feature. The other form of
joint ownership recognized by the common law was joint tenancy. In
this form, all the joint tenants had an equal interest in the property and
the interest of any one joint tenant passed to the survivors upon the joint
tenant's death. Thc common law presumed the creation of a joint ten-
ancy when the intent of the parties was unclear, but this presumption has
been reversed by statute in many states to create a presumption in favor
of tcnancy in common. Unfortunately, thesc comnlon-law rulcs d o not
apply well to bank accounts.B8 Joint bank accounts usually do not meet
thc tcchnicnl rcquircnlcnts ncedcd by common law for creation of joint
tenancics and the tenancy in common oftcn docs not serve the interests
of the parties because it lacks the survivorship feature.
Although thc common-law rulcs on joint propcrty intcrcsts d o not,
as a general rule, fit the joint-account situation well, the courts have
See generally Comment, "The Joint and Survivorship Bank Account,"
1957 U. Ill. L.F. 655 (1957); Note, "Joint Bank Deposits," 15 Cornell L.Q.
96 (1929); Nore. "Bank Accounts: Transfer of Property a t Death." 23 U.
Chi. L. Rev. 289 (1956); Kepner. "The Joint and Survivorship Bank Ac-
count," 41 Cal. L. Rev. 596 (1956). See also Raushenbush, Brown on
+Personal Property 5 8.8 (3d ed. 1975).
315
 9 19-35 DUTIES OF BANK & CUSTOMER
permitted parties t o establish the arrangements they dcsire b y contract.
Fortunately, in most states, the rights of parties to joint accounts a r e
controlled by statutes that clarify s o m e of these ambiguities.
T h e Uniform P r o b a t e Codc contains a comprehensive treatment of
~ ~ provisions create a series of presump-
multiple party a c c o ~ n t s .These
tions that apply t o joint accounts unless the parties give "clear a n d con-
vincing evidence" of a different intention. O n e presumption is that any
sums remaining o n dcposit at the death of o n e party to a joint account
belong to the surviving party o r parties.OO Another presumption is that
the joint account belongs, during the lifetime of all the parties, t o the par-
ties "in proportion t o the net contributions by each t o t h e sums o n
deposit." Whatever the legal relationships between the parties t o the
joint account, the b a n k will be protcctcd if it follows its deposit contract
provision^.^^ T h e b a n k is not required t o inquire as to the source of the
funds in the joint account o r the purposes for which any s u m withdrawn
is to b c used.""
O n e problem related to joint accounts concerns the rights of sur-.
vivors when o n e of the joint owners dies. When the account is opened
b y someone w h o is elderly o r ill w h o makes all dcposits t o the account,
but the name of another is included o n the account, does the party opcn-
ing the account intend to make a gift o f a n y of the account t o the other
person named? T h e second n a m e may have been added simply a s a con-
vcniencc in making dcposits a n d withdrawals with n o gilt i n ~ c n d c d . ~ '
Moreover, even when it is clear that a gift w a s intendcd, t h e person may
only have intended t h e interest t o pass u p o n the dcath of the party who
deposited the funds. These kinds of arrangements have bccn attacked
as not satisfying the legal formalities f o r transferring interests a t death.
T h e Uniform Probate C o d e assists in the resolution of these prob-
lems. It creates a presumption that persons w h o use joint accounts in-
I no Probate Code Q 5 6-101 through 6-1 13.
so Probate Code 5 6-104(a). (Although the Probate Code recognizes
I
the survivorship feature of joint accounts, there arc rights, which may bc
asserted by the deceased party's estate against survivon, for the payment of
taxes, debts, and administrative expcnscs, when the othcr assets of the estate
are insufficient. However, the bank can pay the survivor before any legal
claim to the account has been asserted by the representative of the estate
without fear of liability.)
e l Probate Code 5 6-103(a).
i
I O 2 Probate Code $8 6-102, 6-108.
\ a Probate Code Q 6-108.
See In re Estate of Michaels, 26 Wis. 2d 382, 132 N.W.2d 557
11965). A similar problem can exist with trust accounts. See 111 re Totten,
BANK ACCOUNTS 3 19-35
tcnd f o r the proceeds of the account to go to the survivor^.^^ I t makes
clear that transfers pursuant to joint account arrangements d o not have
to be nlcasurcd by the rcquircmcnts the law establishes for wills.a0 It
also recognizes a "payable o n dcath" account (P.O.D.), which is pay-
able to only one person during that pcrson's lifetime but which becomes
payable, upon his dcath, to one o r more other P.O.D. payees.07
T h e creditors of o n e party to the joint account have rights t o levy
against thc account, which rights have also bccn a source of problcnis.
( B a n k s face similar qucstions in excrcising sctoff rights against a joint
account whcn only one of the partics is indcbted to the bank.) Just be-
cause a n account is hcld jointly does not mean that all of the funds in
the account can be treated by creditors a s the exclusive property of any
o n c of thc dcpositors, for purposcs of satisfying that depositor's
Anothcr problem arises when o n e joint depositor tries to s t o p pay-
ment o n a check drawn by another joint dcpositor. In this situation, the
bank is caught in a crossfire. If it pays the check, it may bc subjcct to
claims, by thc joint dcpositor who attcniptcd to stop payment, against
improper paymcnt a n d cvcn against wrongful dishonor if subsequent
chccks a r c not paid a s a rcsult of the iniproper payment. If the bank
follows the stop payment instruction, it may b e liable to the joint depos-
itor w h o drew the check for wrongful dishonor. Obviously, the deposit
agrccmcnt should rcsolvc this problem. Absent agrecnicnt, unfortu-
natcly, thc law is not clcar.On
3. Parftlership Accoirnfs. Partnership accounts usually a r e opened
f o r thc purposc of handling the funds of a partncrship. Although any
general partner may act as agent f o r the partnership and, therefore,
could open an account for such a firm, it is safer in the case of a n un-
limited partnership if authorization for opening such an account is given
by all the nlcmbcrs of thc partncrship and, in the case of the limited
partnership, by the gcneral partners.
85 Probate Codc !j 6-104.
Probate Codc 5 6 - 1 06.
Probate Codc $ 5 6-101 ( l o ) , 6-104(b).
ORHaydcn v. Gardner. 238 Ark. 351, 381 S.W.2d 752 (1964); scc
Annots.. 1 1 A.L.R. 3d 1465 (1967). 68 A.L.R. 3d 192 (1976).
mCornpare Vallcy Bank & Trust Co. v. Weyerman Feathers, 30 Utah
2d 161, 514 P.2d 1282 (1973) (bank liable for wrongful paymcnt for not
following stop payment order issued by wife on check drawn by husband)
with Brown v. Eastman Nat'l Bank, 291 P.2d 823 (Okla. 1955) (bank not
liable for payment of chcck drawn by husband ovcr a slop paymcnt order
issucd by wife). Scc gcncrnlly Annot., "Bank's Liability for Its Paymcnt of
Checks Drawn By One Depositor Aftcr Stop Payment Order By a Joint
+. Depositor," 55 A.L.R. 2d 975 (1957). Stop payments are discussed in
§ 20-30.

8 19-35 DUTIES OF BANK & CUSTOMER
-- 4. Corporate Accounts. Corporation accounts can be opened in
the name of the corporation only by properly constituted officers of the
corporation. Although a corporation may be estopped from denying his
authority, w& it _allows a person to carry on a continuous course of
dealing, the safest way to open a corporation account is to receive a
resolution of the board or a written authorization by a responsible officer
under such a resolution for the opening of the account. In some states,
written authorization is necessary bcfore any agent can draw checks on
a bank a c c o u n t a a n d in all cases the bank may require written author-
ization if it desire^.^'
When an employee or other purported agent forges resolutions of
corporate authority, the resolutions are not effective to give the employee
powcr to act, by signing checks, on behalf of the c o r p o r a ~ i o n .Unless
~~
the corporation ratifies the employee's conduct, or is estopped because
of its own carelessness to challenge the actions taken, the signature can-
not bind the corporation and will not constitute its indorsement. A bank
that pays the proceeds of the check to the dishonest employee may be
liable to the corporation for conversion." e f'fp
-- 5 . Representative Accounts. Representative accounts may appear
in a number of forms. The most common are ,the ee!surt the executor,
the a_dministrator, the attorney, and the receiver, the latter three usually
operating under court order. Since officers of this type are dealing with
other people's money, it is necessary to take special precautions in the
handling of their accounts. Unless a person is declaring himself a per-
sonal trustee for another, it is safer for the bank to ask for the instru-
ment of trust under which he is operating before opening a trust account.
In the case of_co_uc o_ficers, the order of a court setting u p their author-
ity ought to-be investigated. Thc nature of such accounts and thc risk
involved in dealing w i t h fiduciaries of this type will be discussed in
-3 Chapter 27.
@or example, Ky. Laws Ch. 102, 9 19 (1904); but see Pienon v.
Union Bank & Trust Co., 181 Ky. 749, 205 S.W. 906 (1918); and S.D.
Rev. Code 5 1723 (1919); State Bank v. Weeks, 45 S.D. 693, 190 N.W.
806 ( 1922).
Scc Annot., 2 A.L.R. 175 (1919).
l2U.C.C. 8 3 4 0 4 .
See Nationwide Homes v. First Citizens Bank & Trust CO., 262 N.C.
79, 136 S.E.2d 202 (1964). See also Brady on Bank Checks, note 29 suprn,
§ 12.3. Contra Flo-Control, Inc. v. Northeast Bank, 150 Ga. App. 880, 258
S.E.2d 95 (1979), which reached a contrary result because of a special
statute exculpating the bank.
1
BANK ACCOUNTS 5 19-40
8 19-40 SIGNATURES
In tlic case of the ordinary chccking or conlmcrcial account, the
kc' bank is authorizcd to pay upon the order of the person whose signature
is rccordcd on thc signature cards kcpt for that purpose. The signature
card constitutes thc bank's contract with its depositor and contains the
tcrms that give the pcrsons named on the card authority to act on behalf
of ~ h dcpositor
c in making dcposits and withdrawals and signing instru-
mcnts. It has bccn hcld that a bank may propcrly refuse to pay a check
where the account to bc charged is not accurately described and where
the name of the signer is in a form different from that on the bank's
records of those authorized to sign." Having a corporation's authori-
zation to lct its agcnt draw chccks within ccrtain limits can shicld the
bank from liability, if the agcnt converts sums for his own a c c ~ u n t . ~ "
Accounts such as those indicatcd above are usually drawn upon
cithcr by usc of singlc, double, or facsimile signatures. In the case of the
single signaturc, the bank is simply required to pay upon the order of
thc indicated signature. Double signatures may be handled in one or two
ways. The bank may be authorizcd to pay on either signature, or only
when both signaturcs appear on the check. The facsimile signature is
a mechanical device used by some large businesses for signing checks.
It may be a rubber stamp o r a printed signature; both are entirely valid
for all
Bcforc the Commercial Code the law provided, in absence of agree-
ment to the contrary, that the bank was required to pay only when the
signature was placcd upon the check by a properly constituted ~ f f i c e r . ~ '
In case such a stamp got into the hands of a wrongdoer, or if the printed
signatures wcrc stolcn, the loss would fall upon the bank and not on the
+ d c p o s i t ~ r .This
~ ~ rulc of law has bccn changcd by thc Comnlcrcial Code,
Commonwealth Nat'l Bank v. Kennedy Co., 20 Utah 2d 83, 505 P.2d
298 (1973); scc U.C.C. § 3-203. Compare Roland v. Republic Nat'l Bank,
463 S.W.2d 747 (Tcx. Civ. App. 1971).
Allcn A. Funt Prods., Jnc. v. Chcmicnl Dank. 63 App. Div. 2d 629,
405 N.Y.S.2d 94 (1978), afl'd 47 N.Y.2d 741, 417 N.Y.S.2d 254, 390
N.E.2d 1 1 78 (1979).
'13 U.C.C. 5 s 1-201 (39), 3-401. See Toon v. Wapinitia Irrigation Co..
117 Or. 374. 243 P. 554 (1926); Carroll v. Mitchell-Parks Mfg. Co.. 60
Tcx. Civ. App. 263, 128 S.W. 446 (1910); Lexirigto~iv. Union Nat'l Unnk,
75 Miss. 1, 22 So. 291 ( 1897).
" N.I.L. 1 23; sce authorities cited in Bcrttcl's Brarrrrnn Negotinble In-
strrrttterits Low 469-470 (7lh cd. 1938) (hcrcinnftcr citcd ns Berttrl's Bran-
nan).
lRN.I.L. 5 15; Paul Goodall Real Estate & Ins. Co. v. North Birming-
ham Am. Bank, 225 Ala. 507. 144 So. 7 (1932).
rrc
 D U T I E S OF BANK & C U S T O M E R
which provides that t h e customer is liable if the misuse of the signature
has been caused by his o w n negligence or if h e has contributed substan-
tially t o the situation upon which the b a n k relied.'$ There still remain
cases where the unauthorized signature was created in circumstances be-
yond the control of the depositor, in which the bank m a y b e liable for
\ paying checks over facsimile signature^.^^ Under these circumstances,
the bank should protect itself either by insurance o r by a contract under
which the depositor assumes the risk of loss in cases where it is impos-
sible for the bank tellers to distinguish the proper from the improper use
of the facsimile signature.
I n a pre-Code case, a company authorized the use of a facsimile
signature plate bcaring thc signature of a n oflicer of thc company. A
check, signed in such a manner but without authority, was drawn indi-
vidually payable t o the oflicer and was dcpositcd with a forgcd indorsc-
ment of his signature. T h e bank upon which the check was drawn was
held not liable to the company, since a n agreement authorizing the pay-
nicnt of chccks s o signcd nbsolvcd thc bank of linbility. It was nlso hcld
that the depository a n d payor banks wcrc not liablc for thc forgcry o f .
the indorsement of the oficer, since the person who used the facsimile
plate intended the omcer t o have n o interest in the i n s t r ~ m e n t . ~ '
Under this rule, where a corporate depositor took proper action to
have payroll checks honored through facsimile signatures, a bank paying
checks bearing such facsimile signatures was deemed to have acted prop-
crly a n d might dcbit thc dcpositor's account. This was so, notwithsfand-
ing the fact that a n employee of the depositor was able t o fraudulently
obtain the facsimile signature plate a n d some blank payroll checks and
then proceeded without authority t o cash o r deposit some checks for his
own benefit. A n agreement protecting the bank was again given
A similar decision held a bank not liablc for paying over thc coun-
ter several stolen checks bearing the facsimile signature of a n authorized
officer of a depositor, since the bank h a d been authorized and directed,
in writing, to pay all checks bearing such facsimile signatures without
having to identify the persons presenting such checks t o the bank.88
U.C.C.5 3-406.
no Cf. Huntington County v. First-Grange Nat'l Bank, 20 Pa. D. & C.2d
(1959).
8' Phoenix Die Casting Co. v. Manufacturers & Traders Trust CO., 29
App. Div. 2d 467, 289 N.Y.S.2d 254 (1968). which should be decided the
same way under the Commercial Code.
82 Wilmington Trust Co. v. Phoenix Steel Corp., 273 A.2d 266 (Dcl.
1971), where the court held that the depositor was precluded from asserting
forgcry under Scction 3-404 of thc Uniform Commcrcial Codc.
Wall v. Hamilton County Bank, 276 So. 2d 182 (Fla. App. 1973).
BANK A C C O U N T S § 19-45
O n the other hand, where the manual signature of a n authorized
oflicer of a depositor company was essential, where the signature was
forged upon personalized printed checks o f the company obtained when
the company office was burglarized, and where amounts inserted by the
use of a protectograph machine were kept in a n unlocked drawer in the
company's office, it was held that a party taking the checks and later dis-
covering the forgery did not acquire any title t o the check. T h e alleged
carelessness of the company in leaving the check forms and the protecto-
graph machine unprotected did not constitute negligence contributing to
the forgery.s4
T h e court implied that the result might have been different, and
thc company hcld liablc, had n check-signing machinc (as distinguished
from a protcctograph that mcrcly fills in thc amount) bccn left out. How-
ever, this was merely a cnsc of a forged drawer's signature, discovercd
before thc checks were paid and, thus, was "wholly inoperative" as the
signature of the company. T h e nonsigning company was, therefore, not
linblc.
It seems obvious that a bank will be held liable to a depositor for
paying chccks bcaring a facsimile signature, when the dcpositor has taken
n o action to authorizc payment of checks s o signed. Thus, where a dis-
honest employee of a depositor forged forty-four checks on the drawer's
account through the use of a n old rubber stamp bearing the script signa-
ture of the dcpositor, the bank was considered negligent in paying such
chccks without rcfcrring to thc depositor's signnturc card on file with the
bank, which card did not authorize payment upon a rubber-stamp fac-
simile s i g n a t ~ r e . ~ ~
1 1 9 4 5 TERMINATION OF RELATIONSlIlP
T h e relationship of banker a n d depositor, being created by contract,
can be terminated in the same manner a t the will of either the bank o r
the depositor. T h e bank may terminate the relationship by notification
O4 Fred Meyer, Inc. v. Temco Metal Prods. Co., 267 Or. 230, 516 P.2d
80 (1973). which cited Section 3-406 of the Uniform Commercial Code but
held that provision inapplicable under the circumstances. It might be said
that the chccks resembled paychecks, and thus had an "extra" appearance
of authenticity, but they were signed by the purported drawer.
85 First Nat'l Bank & Trust Co. v. Cartright, 189 Neb. 805, 205 N.W.
2d 542 (1973). See West Penn Administration, inc. v. Union Nat'l Bank
of Pittsburgh, 15 U.C.C. Rcp. 428 (Pa. C.P. 1973); Brady on Bank
Checks, noie 29 supra. $ 22-8. See generally Parker, "Garnishment of the
Mnrricd Cotrplcs Bank Account: A Cnll for Rcviscd Signnturc Cnrds." 53
.L Fln. B.J. 500-502 (1979).
3 19-45 DUTIES O F BANK & CUSTOMER
and payment of the balance owed to the depositor, and the depositor may
d o s o by notification and by checking out the balance of his account.
But in the absence of notification, the mere fact that the depositor's
account was overdrawn would not terminate the relationship. In such a
situation, the overdraft represents a loan by the bank to the d e p o ~ i t o r . ~ "
In thc case o f individual accounts and partnerships, death o r incom-
petence of the individual o r of one of the partners automatically ter-
minates the right of the bank to honor checks.87 But it is usually held
that if a bank pays in good faith, without knowledge of the death, such
a paymcnt is valid.R8 T h e Cornmcrcial Code allows the bank to continue
to pay until it has received notice of the customer's death o r incompe-
tence and, even in cases whcrc the bank knows of the death, it may pay
o r certify checks drawn before death for ten days after that death, unless
it is ordered to stop by a person claiming an interest in the a c ~ o u n t . ~ '
This person may be a creditor o r relative and the bank has n o responsi-
bility to determine the validity of the claim.00 When the relationship is
terminated by death, the bank can settle upon order of the probate court,
upon order of an officer properly appointed by such a court, o r by pay-
ment to a person designated by statute t o receive such funds.
In the case of joint, joint and several, o r alternate accounts, the
rights of the survivors in the account when one of the parties dies will
dcpcnd upon thc gcncral property and probatc law of thc jurisdiction.
Undcr the Uniform Probate Codc, for example, thcre is a presumption
that the account goes to the survivors.01 If the bank pays innocently, not
knowing of the death, it is protected by the Commercial Code provision
mentioned above.
Whilc Cornmcrcial Codc Scction 4-405 has thc cffcct of nuthorizing
paymcnt from an account undcr some circumstances, notwithstanding
dcath o r incompetence, thc provision apparently docs not rcquirc a bank
to honor a check drawn by a representative of an incompetent person,
8'ISee U.C.C. 5 4-401 ( 1 ) ; Morse on Banks, note 20 supra, at 498-499.
87 Sec Fcezcr, "Dcath of a Drawcr of a Chcck," 14 Minn. L. Rcv. 124
(1930).
8BGlennan v. Rochester Trust Co., 209 N.Y. 12, 102 N.E. 537,
(1913); Annot., 52 A.L.R. 302 (1913). Balkam, "Payment of Bill of Ex-
change or Check by the Drawee After the Drawer's Death," 14 Ham. L.
Rev. 588 (1901); Zane, "Death of the Drawer of a Check," 17 Haw. L. Rev.
104 (1903).
U.C.C. 5 4-405. Sumitomo Shoji N.Y., Inc. v. Chemical Bank N.Y.
Trust Co., 47 Misc. 2d 741, 263 N.Y.S.2d 354 (1965), afl'd 25 App. Div.
2d 499,267 N.Y.S.2d 477 (1966).
U.C.C. 5 4-405, Comment 4.
Uniform Probate Code 5 6-104. See 5 19-35.
BANK ACCOUNTS -19-45
where there has been no judicial appointment o r qualification of the rep-
resentati~e.~~
Where a debtor delivered to his bank five cheiks on his account to
pay certain unsecured and unmatured notes, it was held that the bank
might properly apply the checks to pay the notes after the debtor's sud-
den death, cvcn when thc bank was aware of such death." In addition
to being notified of the fact of death, the bank must be ordered to stop
payment by a person claiming an interest in the account.04
, Whether or not payment of a check by a bank following the death
of thc drawcr is proper, it docs not necessarily follow that the person re-
cciving payment may keep it in every instance. In one case, a check was
drawn by a wife on a joint account kept with her husband and paid by
the bank after the wife's dcath. It was indicated that under local law
and the facts of the particular case, the surviving joint depositor (the
husband) could recover the payment from the person receiving it.06
In another case, it was pointed out that the Code provision dealing
with payment following the death of a customer merely protects the bank
making payment but does not prevent an executor or administrator of
the deceascd depositor's estate from recovering from the pcrson obtain-
ing paymcnt of a decedent's check, where such recovery is authorized
undcr a probate statute.O8
When an agent o r othcr pcrson signing n rcprcscntativc account
dies, the bank's authority to honor chccks is terminated in the same man-
ncr as in individual accounts, and no chccks may be drawn against the
account until a new representative is appointed by one who has authority
to open the account.
Thc right of thc bank to pay from any account may also be sus-
pcndcd by court action. This may take the form of an attachment of an
individual account by a crcditor of thc depositor. In this case, thc bank
may not honor any checks after attachment occurs and the bank has a
reasonable time to act on it.07 Bankruptcy o r receivership of the de-
02 Cf. Beaucar v. Bristol Fed. Sav. & Loan Ass'n, 6 Conn. Cir. 148, 268
A.2d 679 (1969).
0S In re Estate of Schcnck, 63 Misc. 2d 721, 31 3 N.Y.S.2d 277 (1970).
The decision indicated that final payment took place upon delivery of the
checks to the payor bank. The debtor was killed in an accident the day after
dclivcring the checks and another creditor of the debtor objected to the ap-
plication of the checks to pay the bank debt, without success.
O 4 Cirar v. Bank of Hartshorne, 567 P.2d 96 (Okla. 1977).
Blair v. Dnvis. 281 So. 2d 247 (Fla. App. 1973), which actually
invdlvcd a question of the proper venue of the legal action by the survivor
to recover the amount of the check from the payee.
sa Black v. Hart. 301 So. 2d 787 (Fla. App. 1974).
* U.C.C. 0 4-303.
5 19-56 DUTIES OF BANK & CUSTOMER BANK ACCOUNTS 19-50

positor also automatically suspends the right of thc bank to pay at his the same functional eflcct, it can be thc sellcr-depository in a repurchase
ordcr. Accounts so suspended can be rcopencd only by order of the agreement o r the buyer-depositor therein. A resale agreement would be
court o r properly constituted officers. the same arrangement, with the participants reversed.
In like manner, it is obvious that if the bank itself is thrown into Another point of departure between deposit and non-deposit
receivership, all power to pay is suspended from the moment the re- sources of working funds lies in the formalities of the structural and op-
ceivership order is properly served. In case of insolvency known to the crating arrangcmenls. In contrast to the provisions for signature cards,
bank officers, payment or receipt of deposits, even before notice of re- deposit agreements, passbooks, or chccks of the deposit arrangement, the
ceivership process, may subject the bank officers to both criminal and non-deposit one is usually characterized by informality and flexibility.
civil liabilities. It may involve little o r no documentation and is consummated largely
by tclcphonc. Remarkably cnough, and dcspitc thcir frequency and mag-
nitude, they have produced little litigation and the amount of applicable
5 19-50 NON-DEPOSIT LIABILITIES law, whether statutory, decisional, or regulatory, is quite sparse.
It is recommended strongly that counsel be consulted on any ar-
In recent years, banks have increasingly used short-term transac- rangements of the foregoing type and that when such transactions are
tions to obtain working funds that historically were provided by dcposits. undertaken, appropriate documentation be made,
These include so-called fedcral funds and repurchasc agrccmcnts. The
latter "rcpo" agrcernents are short-tcrm transactions in which a bank
receives funds against a "sale" of securities that do not leave its posses:
sion because it has agrecd concurrently to buy them back a day or so
later at the "selling price," plus the going market rate of intercst on trans-
actions of this type. Thus, although cast in the form of a purchase and
sale, it functions like a loan and repayment of funds. The purchase of
federal funds also are short-term transactions that, strictly speaking, in-
volve only the transfer of balances from one member bank to another
on the books of the Fcdcral Rcscrvc. The term, however, hns been wid-
cncd to apply to any short-term (onc-day) intcrbank transfer of funds
and even to a bank's non-deposit liability to a nonbank customer.
Sometimes the distinction between the foregoing transactions and
deposits is difficult to establish by an objective index. Nonethclcss, the
distinction is critically important as deposit interest ceilings (or prohi-
bitions) do not apply, nor are these obligations subject to reserve re-
quirements or to Federal Deposit Insurance assessments, since they are
uninsured. Because of the escape from interest controls on deposits,
some banks have found that "repo" arrangements are an attractive way
to compete with non-bank financial institutions for funds. The bank reg-
ulatory agencies have warned that ~ a u t i o nmust be used in entering into
these arrangements, as their use can raise substantial legal issues includ-
ing questions arising under the securities' laws.08
A bank may be on either side of these transactions, i.e., as the seller
(depositor) of federal funds, or the buyer (depository) of them. TO

See generally Hexter, "That Which We Call a Deposit." 26 Bus. Law.

1 (1970).
 Chapter 20
MUTUAL DUTIES OF THE
BANK AND DEPOSITOR
Section Page
20-5 Bank's Right to Charge Customer's Account . . . . . . . . . 328
20-1 0 Improper Payment and Bank's Rights
of Subrogation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328
20-1 5 Liability of Bank for Refusal to Pay ................ 329
20-20 Post-Dated Checks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333
20-25 Stale Checks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333
20-30 Stopping Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 334
20-35 Payment Stopped by Third Parties . . . . . . . . . . . . . . . . 338
20-40 Stopping Payment on Cashier's Checks. Bank
Drafts. and Certified Checks . . . . . . . . . . . . . . . . . . . . . 340
20-45 Identification of Payccs nnd Indorsers . . . . . . . . . . . . . . 341
20-50 Bearerpaper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 342
20-55 Fictitious or Nonexisting Payees . . . . . . . . . . . . . . . . . . 343
20-60 Miscredited Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . 347
20-65 Checks With Forged or Unauthorized Signatures . . . . . . 348
20-70 Alteration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350
20-75 Altercd Checks That Wcrc Complctc
Whcn Signed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351
20-80 Instruments Issued With Blanks . . . . . . . . . . . . . . . . . . . 353
20-85 Obligation of Good Faith . . . . . . . . . . . . . . . . . . . . . . . . 354
20-90 Bank's Right to Revoke Credits to Customer's
Account and to Charge Customer for Items
Not Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355
20-95 Customer's Right to Withdraw Against Items
Deposited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 356
20-100 Duty of Depositor to Examine Monthly Statements . . . . 357
20-105 Customer's Duty to Report Forgeries and Alterations
When Checks Are Retaincd by the Bank . . . . . . . . . . . . 360
20-1 10 Depositor's Duty of Due Care .................... 360
20-115 Ambiguous Instruments . . . . . . . . . . . . . . . . . . . . . . . . . 361
20-1 20 Banker's Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 362
rc*
20-125 Garnishment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364
'
I
§ 20-5 DUTIES O F BANK & CUSTOMER
II 5 20-5 BANK'S RIGHT TO CHARGE CUSTOMER'S
ACCOUNT
Under the Commercial Code, a bank may charge its customer's
account for "any item which is otherwise properly payable from that
account even though the charge creates an overdraft." 1 This rule ex-
pressly permits the bank to pay chccks drawn by its customer, even
though tlic custonicr's account docs not contain sumcicnt funds and
thereby creates a deficit in the account. The Code's reasoning is that
"the draft itself authorizes the payment for the drawer's account and
carries an implied promise to reimburse the drawee" bank.? A bank is
not required to pay a check which would create an overdraft, however,
because such a check is not "properly payable."
Apart from the overdraft problem discussed above, there is little
in the Commercial Code to explain when an item is "properly payable."
T h e most common problems involve altered checks,' checks with forged
i n d o r s ~ m e n t s ,chccks
~ where the drawer's signature has bccn forged,"
checks presented after the death of the drawer,' post-dated checks,O and
stale checks.O These problems are discussed in subsequent sections.
5 20-10 IMPROPER PAYMENT AND BANK'S RIGHTS
OF SUBROGATION
When a bank mistakenly pays a check that is not properly payable,
it must recredit the account of the customer for any charge made against
the account on the item involved.1° T h e bank does have rights of sub-
rogation when it makes a payment that is otherwise improper." Under
the Commercial Code, it is subrogated to rights that any holder in due
U.C.C. § 4-401 ( 1) (1978 version). Subsequent citations to the U.C.C.
refer to the 1978 tex!.
U.C.C. § 4-401, Comment 1. A bank's payment of a check was held
proper under Uniform Commercial Code Section 4-401, even though the
account did not have sufficient funds to cover the check and the check had
bccn dishonorcd previously. Lincoln Nat'l Dnnk & Trust Co. v. Peoples
Trust Bank, 379 N.E.2d 527 (Ind. App. 1978).
8U.C.C. § 4-401(1).
See 5 5 20-70 through 20-80.
Sca 5 20-65.
Id.
Sce 5 19-45.
q e e 8 20-20.
See f 20-25.
l o U.C.C. § 4-401.
l1 U.C.C. 8 4-407.
M U T U A L DUTIES
course, o r any other payee or holder, might have against the drawer or
maker of the i n s t r ~ m e n t . ' ~It also is subrogated t o any rights of the
drawer, or maker against other parties to the check, that might arise
out of the transaction for which the check was given.Is Under these
principles, whcn a bank pays an item improperly, but the payment is
made to a holder in due course, the bank has no liability to its customcr
for wrongful pnynicnt. Bccnusc tlic cuslonicr would be obligated to the
holder in duc course in any cvcnt (unless die customcr has a special
defense which would be good even against a holder in due course), the
customer cannot complain of the fact of payment by the bank.
One consequence of a bank's improper payment of an item may be
that whcn a subsequent item on the same account is prcsented for pay-
ment, the bank will dishonor it bccause the bank erroneously believes
the customer's account lacks the funds to cover the item. This may make
the bank liable for wrongful dishonor because the check would have
bccn paid if the bank had not made a mistake i n charging the customer's
account for the first check (which was not properly payable).14
5 20-15 LIABILITY OF BANK FOR REFUSAL TO PAY
T h e checking account normally involves a relationship between at
least three parties: the banker, the depositor, and the person to whom
the depositor, by his check, orders payment.
T h c bank is, of course, indcbted to the depositor, but the bank has
no obligation to the payee o r other holder. The bank is the drawee and
has not signed the check. Until the bank does sign the instrument,16
either by accepting or certifying it, the bank has no liability as a party
to the check to the h o l d ~ r . ~ T hbank's
e contract is with its depositor
to pay items that are "properly payable" and, upon breach of this
obligation, its liability runs to its customer.I8 Absent special circum-
stances, a check is not a n assignment to the payee of the debt owed by
the bank;19 therefore, the bank is under no obligation to the holder of
thc check, unless it acccpts or certifics the check.20 Even if the depositor
l2 Id.
l a Id.
l4 U.C.C. 5 4-402. Scc 5 20-1 5.
See U.C.C. 5 5 3-409, 3-4 10.
16"No pcrson is linblc on a n instrurncnt unless his signature nppcnrs
thcrcon." U.C.C. 5 3-401 ( 1 ) .
U.C.C. 5 4-40 1. See 8 20-5.
l 8 U.C.C. 5 4-402.
* l o U.C.C. 8 3-409.
20 Id.
 DUTIES OF BANK & CUSTOMER
and payee of the check arrange by contract to have the check operate as
a n assignment, the bank would owe no duty to the holder unless it was
notified of the provisions of this contract. Even then, as the bank's
duties to the third party are derived only from its duties to the depositor,
any claim a third party might have against the bank would be subject to
the bank's claim against the d e p o s i t ~ r .Thus,
~ ~ except in special circum-
stances equivalent to creating a special deposit, the bank, for refusing to
honor a check, is not liable to the check's holder; but where the agree-
ment to which the bank is a party creates such a special deposit, the bank
must hold the funds exclusively for payment to the third party or his
order.22
The bank, however, is under absolute liability to its depositor to pay
at the dcpositor's ordcr when the signcd ordcr corresponds with the sig-
nature on file at the bank, when it is within the amount of the money
o n deposit in the checking account, and when it is otherwise properly
p a ~ a b l e .A~ bank failing to honor a check properly drawn upon avail-
able funds is liable not only for breach of contract with its dcpositor but -
also for any rcsulting daniagcs that may follow. Thus, cvcn in thc case
of a mistaken rcfusal to honor a chcck drawn against sullicicnt funds, thc
bank may be liable in an action of slandcr of crcdit. Such cases may in-
volve damages far beyond the amount of the check, o r cvcn the total
amount in thc account, if the dcpositor can show matcrial damagc to his
business and credit caused by the bank's refusal to pay.24
Under the rule of the Uniform Commercial C ~ d e , ~ " h e bank is
liable for any damages proximately caused by the dishonor, even for
2' Rogers v. Harris, 76 Okla. 215, 184 P. 459 (1919); Peoples Nat'l
Bank v. Swift, 134 Tenn. 175, 183 S.W. 725 (1916); cf. Pierson v. Swift
County Bank, 163 Minn. 344, 204 N.W. 31 ( 1925).
z2 Morton v. Woolery, 48 N.D. 1132, 189 N.W. 232 (1922). Payne
Bros. v. Burnett, 151 Tenn. 496, 269 S.W. 27 (1925). See Annots., 24
A.L.R. 1107 (1923), 39 A.L.R. 1125 (1925). See also Annots., 31 A.L.R.
472 (1924), 39 A.L.R. 930 (1925).
23 U.C.C. 5 4-401 ( 1 ). See 5 19-5.
24 For a complete discussion of a bank's liability for dishonoring checks,
see Annots., 4 A.L.R. 947 (1919, 13 A.L.R. 305 (1921), 34 A.L.R. 205
(1924). 58 A.L.R. 732 (1929), and cases cited therein. See also U.C.C.
8 4-402 and Comment.
2a U.C.C. § 4-402. "A payor is liable to its customer for damages proxi-
mately caused by the wrongful dishonor of an item. When the dishonor
occurs through mistake, liability is limited to actual damages proved. If so
proximately caused and proved damages may include damages for an arrest
or prosecution of the customer or other consequential damages. Whcthcr
any consequential damages are proximately caused by thc wrongful dishonor
is a question of fact to be determined in each case."
rr.
MUTUAL DUTIES 3 2b15
damages due to arrest o r prosecution of the customer. When the dis-
honor is due to honest mistake on the part of the bank, the liability is
limited to the actual damages proved.2B The comments by the drafters of
the Commercial Code say that this provision rejects the pre-Code law
of some states, which lets business persons recover substantial damages
without proof of actual injury (on the theory that dishonor of the checks
is a "per se" defamation of the person's credit reputation) .27 By negative
implication, though, when the dishonor is intentional, the Code does not
restrict liability to "actual damages proved." 28
T h e Commercial Code has been applied to deny damages for mental
anguish o r emotional disturbance sustained by a customer after wrongful
dishonor. However, there is a decision that permitted recovery of puni-
tive damagcs, as well as damages for injury to the depositor's credit and
damages for mental anguish, in a case where wrongful dishonor was
found to have occurred under aggravated circumstances. In this instance,
a check on the account of a third person payable to the depositor was
cashed at the bank on a forgcry of the dcpositor's indorsement. The
bank on which the chcck was drawn rcturncd i t as inipropcrly signcd and
the chcck was charged against thc dcpositor's account. The dcpositor
had, in the meantime, written checks on his account. He notified an
olliccr of his bank of the forgery of his indorsement, but the bank re-
fused to take any action, and (as the court said) "the officer culled over
a uniformed guard." The bank thcn dishonored the checks on the ac-
count, marking them "paid in error" and "account closed." The court
held that the conduct of the bank was deliberate and in disregard of the
depositor's claim of right, thus justifying the damage award.%
A somewhat "in-between" position was taken by another court in
a case where a bank was found to have wrongfully dishonored certain
28 Id.
27 U.C.C. 5 4-402, Comment 3.
. 28See White & Summers, Uniform Commercial Code § 17.4 (2d ed.
1980) (hereinafter cited as Uniform Commercinl Code). The California
and Nevada enactnlents of the Code delete thc last two sentences of 5 4-402.
State Correlation Tables, U.C.C. Rep. 46, 281 (1979). The apparent intent
of the deletion is to restore the common-law rule allowing business persons
to recover damages on a defamation per se theory. Another apparent intent
is to attempt to stem the recent trend of case law permitting recovery of
damages where a customer is arrested following wrongful dishonor of his
check.
2BNorthshoreBank v. Palmer, 525 S.W.2d 718 (Tex. Civ. App. 1975).
The court stated that the statutory liability of a bank for wrongful dishonor
is "more in the nature of tort than contract" and justified the award on the
ground that the dishonor was deliberate and did not occur through mistake.
5 20-15 D U T I E S O F BANK & C U S T O M E R
corporate checks after reneging o n its promise t o make a loan to the
corporation. T h e b a n k was held liable for compensatory damages to
the husband a n d wife, w h o owned a n d operated the corporation; these
compensatory damages included damages for emotional distress caused
by certain "criminal a n d administrative investigations a n d charges as
well as various acts of harassment a n d vandalism" that followed the dis-
honor. T h e court said that the husband a n d wife "did not merely allege
a subjective state of discomfort at having their checks dishonored; rather,
they gave proof of objectively verifiable events which followed the dis-
honoring of their checks a n d which would have induced mental suffering
in a n y reasonable person." However, the court declined to award puni-
tive damages, since n o malice o n the part of the bank personnel was
found. Instead, it seemed there was a "bona fide disagreement" as to
how far the bank was required to go in helping the husband a n d wife
with their financial problems.a0
T h e bank's liability for wrongful dishonor runs only to its "cus-
tomer," who is the person o r entity who has the account with the bank.O1
Because of this definition, courts have held that individuals w h o were
partners o r officers could not recover for injuries to themselves for dis-
honor of checks d r a w n o n the partnership a n d corporate accounts.82
Liability for wrongful dishonor m a y arise because the bank mis-
takenly sets off a debt owed to the bank against the account o r pays a
check that is not propcrly payable and, thereby, reduces the funds in the
account to pay subsequent checks. If the bank subsequently dishonors
a check that would have been paid b u t for the erroneous charge to
the account, the dishonor is wrongful. T h e b a n k will be liable f o r dam-
ages t o its customer, regardless of its good faith in charging the ac-
count .8a
a0 Kendall Yacht Corp. v. United Cal. Bank, 50 Cal. App. 3d 949, 123
Cal. Rptr. 848 (1975). The court also held that the husband and wife, as
the only active principals of the corporation, might sue for wrongful dishonor
under the Code. Accord Sinwellan Corp. v. Farmer's Bank. 345 A.2d 430
(Del. 1975). In a wrongful dishonor suit resulting from miscrediting of a
deposit to a savings rather than a checking account, it was notcd that neither
the Uniform Commercial Code, nor pre-Code Michigan law, forccloscd
damagcs for mental anguish. Harvey v. Michigan Nat'l Bank, 19 U.C.C.
Rep. 906 (Mieh. C.P. 1974).
U.C.C. 5 4-104( I ) (e).
8 % o ~ ~ v.k ~Albuquerque Nat'l Bank, 76 N.M. 735, 418 P.2d 191
( 1966); Farmer's Bank v. Sinwellan Corp.. 367 A.2d 180 (Del. Super. 1976).
But see First Nat'l Bank v. Hobbs, 248 Ark. 76, 450 S.W.2d 298 (1970).
a3 See Loucks v. Albuquerque Nat'l Bank, note 32 srrpra: Coles Co.
Nat'l Bank v. First Nat'l Bank & Trust Co., 2 0 Ill. App. 3d 23, 312 N.E.
2d 643 (1974).
332
MUTUAL DUTIES .j 20-25
5 20-20 POST-DATED CHECKS
Post-dated checks a r e not properly payable before their In
many cases, however, there will b e n o practical liability to the bank, if a
post-dated check is paid by mistake, because the bank will be subrogated
to the rights of any holder of the check against the drawer.a6 If, as in
many cases, the holder is a holder in d u e course, the drawer will have
a n obligation to pay that cannot be avoided by most d e f e n ~ e s . ~ ~
5 20-25 STALE CHECKS
A bank may refuse t o pay a chcck that is more than six months
old.87 If it acts in good faith, it may pay checks presented more than six
months after their stated date.R8 T h e r e is considerable uncertainty as to
what constitutes "good faith" when the bank knows the check is stale,
particularly if customary banking practice is t o refuse payment. Some
take the view that, as a general rule, a bank should b e liable t o its cus-
tomcr for knowingly paying a stale check.89
California and Nevada have omitted the "in good faith" require-
m~nt.~O T h e District of Columbia provides that a bank may, at its o p
tion, pay a stale check in the absence of a n effective stop payment order."
T h e s e variations have been criticized o n the ground that they remove any
possible restraint o n payment by a bank u p to the time the statute of
limitations has run a n d might lead to nonuniformity in decisional law.
T h e District of Columbia variation is also criticized o n the ground that
it places o n the customer a burden of renewing a n expired stop payment
order, even though the check is stale.42
T h e Commercial C o d e draftsmen take the vicw that a bank should
not b e held liable to its customer for paying a check against which there
is a n expired stop payment order after the check has become stale.43
U.C.C. 5 3-1 l 4 ( 2 ) .
U.C.C. 5 4-407.
8eSce generally Chapter IS; see Uniform Commercial Code, note 28
supra, § 17-3.
U.C.C. 5 4-404.
88 Id.
8"ce Uniform Cotnmercial Code, notc 28 supra. 5 17-3.
4 0 State Correlation Tables, U.C.C. Rcp. 47, 281 (1979).
State Correlation Tables, U.C.C. Rcp. 102 (1979).
4 2 See Permanent Editorial Board for the Uniform Commercial Code,
Report Nos. 2 at 89, 90 and 3 at 80.
'Qee U.C.C. 5 4-403, Commcnt 7, which suggests that the last scntcncc
of Scclion 4-403(2), togethcr with the second clause in Section 4-404, re-
jects the reasoning of pre-Code cases, which hold a bank liable for paying
a stale check against which there had been an expired stop payment order.
 DUTIES OF BANK & C U S T O M E R
8 20-30 STOPPING PAYMENT
Since the relationship of bank a n d depositor creates a n implied
agreement, o n the part of the bank, to pay only o n the order of the de-
positor, the depositor m a y revoke this authority a t any time before pay-
ment. A bank that pays after receipt of a s t o p payment notice, either o n
a n individual check o r a n entire account, is liable t o the drawer f o r s o
doing because the check is not "properly payable." 4 4
To b e effective, a s t o p payment order must be received by the bank
"at such time and in such manner a s t o afford the bank a reasonable op-
..
portunity t o act. ." '"his doubtless means the customer must reason-
ably describe the check. What is "reasonable" may not be so clear.
S o m e inaccuracy in the description has been t ~ l e r a t e d . ' ~F o r example,
where the customer correctly named the payee a n d provided the date
a n d number of the check, but supplied the wrong amount, the court held
there was sufficient identification t o s t o p payment." With the use of
magnetic ink, character recognition, a n d computer processing, what
amounts t o a reasonable identification m a y depend upon the chcck-
searching system used b y the bank.48 I n any event, it would seem t o b e
appropriate for the b a n k a n d customer to enter into an agreement a s t o
the information necessary t o identify checks that should be stopped.
A stop payment o r d e r will not b e effective unless it is received by
the bank before the check has been paid. I n addition, it is necessary,
under the Commercial Code, that the stop payment order bc received not
only prior to final payment o r certification, o r prior t o some act indicative
of a decision by the b a n k to pay the item, but it is also necessary that
the stop payment order b e received in time t o enable the bank t o act o n
the item prior t o performance of one of the actions previously ~ p e c i f i c d . ' ~
T h i s principle was applied in a case where the drawcr of a chcck
4 4 U.C.C. f 4-403, Comment 8. See f 19-5. Pre-Code cases reach the
same result. Hiroshima v. Bank of Italy, 7 8 Cal. App. 362, 248 P. 947
(1926) (discussed in 15 Calif. L. Rev. 46, 234 (1926)); Miller v. Chatham
& Phoenix Nat'l Bank, 126 Misc. 559, 214 N.Y.S. 76 (1926); Wall v. Frank-
lin Trust CO., 84 Pa. Super. 392 (1924); Pease & Dwyer Co. v. State Nat'l
Bank, 114 Tenn. 693, 88 S.W. 172 (1905); Huffman v. Farmer's Nat'l Bank,
10 S.W.2d 753 (Tex. Civ. App. 1928).
U.C.C. 8 4-403 ( 1 ) .
"3See Bailey, Brady On Bank Checks f 20.7 (5th ed. 1979) (hereinafter
cited as Brady on Bank Checks). It has been said that an oral stop payment
order must describe the check with partiqularity. Sherrill v. Frank Morris
Pontiac-Buick, 25 U.C.C. Rep. 757 (Ala. 1978).
4 7 Elsie Rodriguez Fashions, Inc. v. Chase Manhattan Bank, 23 U.C.C.
Rep. 133 (N.Y.Super. 1977).
48See Uniform Commercial Code, note 28 supra, 5 17-5.
U.C.C. $ 5 4-303(1), 4-403(1).
M U T U A L DUTIES 5 20-30
appeared a t thc bank a t its opcning time o n Monday morning t o stop
payment o n a check dated some six days earlier. T h e bank employee
who received the stop payment order checked the records t o s e e if the
check h a d cleared before he gave the drawer a printed notice confirming
his request t o stop paymcnt. Howevcr, the chcck had been cashed on
the preceding Saturday morning, when the bank had been open for cer-
tain transactions; but such Saturday transactions h a d not yet been re-
corded o r processed through the bookkccping system of the bank a t the
time o n Monday morning when the bank employee receiving the stop
payment order had checked the records. T h e court held that the bank
did n o t have a reasonable time t o act o n the s t o p payment order and
that, in any event, the order had come too late when the bank h a d paid
the item in cash.60
Where a check given a s earnest money in a real estate transaction
was taken by the payee t o the bank o n which it was drawn, a n d there
exchanged for a cashier's check, t o the same payee, of an identical
. amount, it was licld that tlic original clicck was finally paid at the time
thc casliicr's check was issucd. T h e court said that the bank was not
required t o honor a stop payment order which was received the following
d a y a n d which came too latc, from its own custonicr (the drawer of the
original earnest-money check). Accordingly, the bank was not entitled
to recover the amount of the cashier's check from the payee.b1
In another case, the drawer of a check went t o the bank and ordered
that paymcnt bc stoppcd, taking this action a t 9 A . M . T h c bank certificd
the chcck at 10:40 A.M. the same morning, at the request of t h e payee.
It was held that the bank had sulficient time t o act o n the stop order and
that thc certification was inipropcr; thc court also held that the drawer
did not havc ttic burdcn of proving any ncgligcncc on thc part of thc
bank.62 A bank that received a stop payment order from a depositor a n d
then paid the check two days lalet, by issuing two treasurer's checks for
the s a m e amount, was not allowed t o charge the payee's account a n d was
held responsible for the 1 0 ~ s . ~ ~
Siniscalchi v. Valley Bank of N.Y., 79 Misc. 2d 64, 359 N.Y.S.2d
173 (1974), where the court cited Section 4-403 in support of its ruling.
Citizens & S. Nat'l Bank v. Youngblood, 135 Ga. App. 638. 219
S.E.2d 172 (1975).
mTusso v. Security Nat'l Bank, 76 Misc. 2d 12, 349 N.Y.S.2d 914
(1973). Thc court also-held that the bank could recover the amount of the
check from the payee in a third-party action.
63 Anthony Roberts Properties, Inc. v. Industrial Valley Bank Rr Trust
Co., 97 Montg. Co. L. Rep. 165, 16 U.C.C. Rep. 1088 (1973). nfl'd 228 Pa.
Super. 854, 322 A.2d 661 (1974) ( a memorandum opinion). T h e court
indicatcd, howcvcr, that the bank might bc subrogntcd to the drawer's rights.
* i f any, against the payec under Scction 4-407 of the Uniform Commercial
Code, but did not rulc on this point.
5 20-30 DUTIES O F BANK & CUSTOMER
Dcforc thc C o n ~ m c r c i a lCodc, a singlc s t o p paymcnt notice was
sufficient and did not need t o be rencwcd. U n d e r the Code, stop payment
orders have a limited duration--oral notices a r e only effective for four-
teen days; writtcn notices a r e only good for six months.64
Undcr pre-Code law, a bank was not cntitled to chnrgc thc account
of its customcr for a chcck paid ovcr a stop paymcnt ordcr, cvcn though
payment was made to a holder in d u e coursc w h o had a good claim
against the customer; n o r could the bank recover the amount paid from
a b o n a fide h ~ l d e r . ~ W n d ethe
r Commercial Code, the bank h a s rights
of subrogation both against its customer a n d third party payees a n d hold-
ers. These rights m a y insulate the bank from liability in many cascs
where payment is m a d e to a holder in d u e course, although the bank has
wrongfully failed t o h o n o r a stop payment order.5B
This subrogation provision was given effect in a case where a bank
paid a corporate check, signed by a dying president to his wife, over a
s t o p payment order given by the successor president of the corporation.
I n this instance, the b a n k was deemed t o have paid the check because of
failure to return it within t h e prescribed time limits o r to give timely no-
tice of dishonor. T h e c o u r t indicated right of subrogation was possible
evcn though the bank h a d not charged the account of thc corporate
drawer and, by not appealing a n ordcr of the trial court denying its right
to charge the account, h a d lost the right t o charge its drawer's account.n7
Where a bank pays a check over a s t o p payment order a n d the
drawcr demands that his account with the bank bc reimbursed for the
payment, the bank has, u n d e r this provision of the Code, a right of sub-
rogation against the payee for the loss suffered. However, if t h e bank
pays over a stop o r d e r a n d the drawer does not demand reimbursement
for the payment, the b a n k has n o subrogation right since it has n o t suf-
fercd any loss." W h e r e a wife placed a s t o p paymcnt ordcr o n a chcck
n4 U.C.C. 8 4-403(2).
n5Johnson v. First State Bank, 144 Minn. 363. 175 N.W. 612 (1920);
National Bank of N.J. v. Bcrrall, 70 N.J.L. 757, 5 8 A. 189 (1904). Cortrm,
National Loan & Exch. Bank v. Lachovitz, 13 1 S.C. 432, 128 S.E.I 0 ( 1925).
See Annot., 39 A.L.R. 1239 (1925). Cf. 8 0 Banking L.J. 1075 (1963); 81
Banking L.J. 624 (1964); U.C.C. 5 3-418.
U.C.C. 5 4-407. See 5 20-10.
~5' Sunshine v. Bankers Trust Co., 34 N.Y.2d 404, 314 N.E.2d 860, 358
N.Y.S.2d 113 (1974).
6 8 Aljax Corp. v. Connecticut Mut. Life Ins. Co., 458 Pa. 57. 333 A.2d
469 (1974). The court pointed out that under Section 4 - 4 0 7 ( ~ ) of the
Uniform Commercial Code, the bank would have subrogation rights with
respect to the January check but not with respect to the F e b n ~ a r ycheck.
The court then pointed out that final payment of the February premium
check had been made under Section 4-213(1) ( c ) and that the insurance
M U T U A L DUTIES ,LO-30
drawn b y her husband o n thcir joint account a n d thc bank paid thc
check over the stop order because of a failure in the bank's computer
system, the bank was held to have n o right of recovery from the hus-
band.68
I n o n e case, thc drawcr of n chcck givcn for thc purchase of n c a r
stoppcd payment, whcrcupon tlic pnycc nttcmpted to hold the bank li-
nblc. T h c bank cross-claimed against the drawcr. T h e court rcferrcd to
the C o d e "subrogation" provision and held that the payee's judgment
against t h e bank might b e reduced, by any amount that the drawer should
recover, because of difficulty in getting good title to the car.m
T h e C o d e provides that the burden of establishing the fact, a n d the
a m o u n t of loss resulting f r o m the payment of a n item contrary t o a bind-
ing s t o p payment order, a r e o n the customer. California a n d Nevada
have added a provision that limits the bank's liability to its customer to
the.customer's actual loss a s incurred from the payment of an item con-
trary t o a binding stop payment order, not t o exceed the amount of the
item, s o long as the bank is not negligent.e1
Since overdrafts a r e authorized by the Code, where a depositor re-
duces t h e balance in his account in lieu of stopping payment, a bank in-
advertently paying a check is entitled t o collect that amount from the
dcfaul ter.62
I n many instances, banks have attempted to relieve themselves of
the risk of paying checks that have been stopped by special agreement
with the depositor. Although some provisions of the Code may be varied
by agrecmcnt, and thcre doubtless is some leeway to define by agreement
the identification needed b y the bank to stop payment a n d to regulate
similar details, the Code takes the position that agreements exculpating
company had a right to withdraw the funds under Section 4-214(4)(a) of
the Code. The court further observed that Section 4-403 of the Code (con-
ccrning a custorncr's right to stop pnymcnt) wns irrelcvnnt, bccause thnt
provision was intended to deal with a customer's rights against his own bank
for improperly pnying an item.
b0 Valley Bank & Trust Co. v. Wcycrman Feathers, 30 Utah 2d 161, 5 14
P.2d 1282 (1973). The bank hnd sought recovery from the payee of the
check, as well as the husband, but the rights of the bank against the payee
werc not involved in the appeal described above.
e0 Johnson v. Eudora Bank, 257 Ark. 518, 517 S.W.2d 957 (1975). It
was not clear on what grounds the payee was permitted to sue the bank
after it had stopped payment, but the apparent basis was that thc bank had
retained the check too long.
State Correlation Tables, U.C.C. Rep. 47, 28 1 ( 1979).
6 2 Continental Bank v. Fitting, 114 Ariz. 98, 559 P.2d 218 (Ariz. App.
1977).
.
i
5 20-35 D U T I E S OF B A N K & C U S T O M E R
banks from liability for not following stop payment orders a r e i n ~ a l i d . " ~
Arizona, California, and Nevada have varied the C o d e provision
that gives "the customer" the right to s t o p payment by providing addi-
tionally that a n y customer, if there is m o r e than one, o r a n y person au-
thorized to sign checks o r make withdrawals, may stop payment.64 Such
variations have the effect of permitting o n e joint depositor t o stop pay-
ment o n a check d r a w n by the other joint depositor and, also, permit a n
authorized signing agent to stop payment of a check o n the principal's
account, even where the check is signed by another authorized agent.
This Arizona-California-Nevada rule was also adopted in a Utah
case, which impliedly recognized that a wife may properly s t o p payment
o n a check drawn by her husband o n their joint account. However, the
court recognized this right by virtue of a provision, which in effect made
each depositor the agent for the other depositor, in the deposit contract
between the joint depositors and the bank."&
Arizona, California, Nevada, Texas, and Utah rccognizc written
stop payment orders only, while the District of Columbia recognizes a n
oral stop payment o r d e r for only a limited twenty-four-hour period.a"
California, Nevada, a n d Texas also require that a stop payment order be
signed.#' California, Nevada, a n d Utah also a d d a provision that the
written order must describe the item to b e stopped.8B
5 20-35 PAYMENT STOPPED BY THIRD PARTIES
Since the payment of checks depends upon a contract bctwccn thc
depositor and the bank, third parties normally a r e not allowed to stop
payment o n checks. T h e r e are, however, a number of instances in which
the holder of a chcck may lose thc chcck, b e dcfraudcd, have it stolen
from him, o r have other claims to thc proceeds. In such a case, the right
t o payment may belong to the injured holder and not t o the person who
h a s possession of t h e instrument. I n this situation, under t h e former Uni-
a8 U.C.C. $4-403, Comment 8. See Brarly orr Dnnk Checks, notc 46
supra, 5 20.19; Uniform Cotnt~lerciulCode, notc 28 .wpm, B 17-2. For n
discussion of pre-Code law, see Note, "Stipulations Relieving Banks from
Responsibility f o r Failure to Obey Stop-Payment Orders," 39 Yale L.J.542
(1930). Such contracts were held valid in Tremont Trust Co. v. Louis
~ u r a c k 235
, Mass. 398, 126 N.E. 782 ( 1920).
64 State Correlation Tables, U.C.C. Rep. 21, 46, 281 (1979).
Valley Bank & Trust Co. v. Weyerman Feathers, 30 Utah 2d 161.
514 P.2d 1282 (1973).
88 State Correlation Tables, U.C.C. Rep. 21, 47, 281, 41 8, 430 (1979).
State Correlation Tables, U.C.C. Rep. 47, 28 1, 418 ( 1979).
.L
e8 State Correlation Tables, U.C.C. Rep. 281, 430 (1979).
MUTUAL DUTIES
form Negotiable Instruments Law, the bank could not safely m a k e pay-
ment if the injured holder gave notice in tirne.'I9 T o protect itself, the
bank would have to pay the money into court a n d interplead the parties.
Under the Commercial Code, the bank may, even if notified, still
m a k e payment to the person presenting the check as long a s the bank
makes sure the person is a "holder" of the check, subject t o two e x c e p
tions discussed below.70 T h e bank may elect not t o pay the check in
deference l o the wishes of the injured holder, as the Commercial Code
allows the bank to insist upon "indemnity deemed adequate" to itself as
a condition to refusing payment.71 If the bank is not willing to volun-
tarily refuse payment, the injured holder has the burden of taking action
t o prevent payment. H e has two alternatives-he may indemnify the
bank7* o r h e may bring suit to enjoin payment in a n action in which all
three parties (bank, injured holder, a n d the adverse claimant who pos-
sesses the check) are subject to the jurisdiction of the court.13
T h c r c nrc two cxccptions to the bank's frccdom to pay thc holder
who presents the check without liability to other claimants: ( 1 ) T h e
bank will be liable for not observing the terms of any restrictive indorse-
ment;" ( 2 ) T h e bank will remain liable if, in bad faith, it makes payment
t o a thief o r to someone w h o has obtained the instrument through a thief,
unless the person seeking payment qualifies as a holder in d u e course.76
N.I.L. § 88.
U.C.C. 13-603. See generally Sumitono Shoji N.Y., Inc. v. Chem-
ical Bank N.Y. Trust Co., 17 Misc. 2d 741, 263 N.Y.S.2d 354 (1965);
afl'd 267 N.Y.S.2d 477, Spinazzola v. Manufacturers Nat'l Bank, 28 Mich.
App. 207, 184 N.W.2d 265 ( 1970).
Comment 3 to Uniform Commercial Code Section 3-603 makes
clear that the bank is free to choose not to pay the instrument, even when
the instrument is not indemnified or enjoined. If the bank has liability on
the instrument, the holder may sue to compel payment and the bank will be
limited in its ability to assert the rights of the injured holder of the instru-
ment as a defense. U.C.C. $ 3-306(d). See 5 19-30.
l2The indemnity must be "deemed adequate" by the bank, under Section
3-603(1) of the Uniform Commercial Code, which seems to establish a
subjective test, but the bank is under a general obligation of acting in good
fnith, under Section 1-103 of the Uniform Commercial Code and should bc
wary of Inking nction which could be regarded as nn unrensonnblc rcjcction
of inden~nity.
73 When the check has been stolen, the party in possession will be un-
known in most cases. This creates an obvious problem in satisfying the Code
provision requiring jurisdiction over the adverse claimant. The purpose of
this section is to protect the bank against conflicting claims, and it would
appear possible for a court to satisfy this objective through indemnity condi-
tions although not in a position to conclusively adjudicate the rights of the
absent claimant.
74 U.C.C. § 3-603 ( 1 ) ( b ) . See Chapter 13.
7 B U.C.C. 4 3-603 ( 1 ) (a).
 DUTIES OF BANK & CUSTOMER
5 20-40 STOPPING PAYMENT ON CASHIER'S CHECKS,
BANK DRAF'IS, AND CERTIFIED CIIECKS
Problems involving attempts by third parties t o stop payment of
checks often arise in connection with cashier's chccks, bank drafts, and
certified checks. F o r example, Buyer m a y obtain a cashier's check from
his bank, made payable t o Sellcr, t o use in purchasing goods. After the
check is given to Seller, the goods are not delivered o r some other de-
fense arises as a result o f the sale transaction. C a n Buyer direct the bank
t o s t o p payment o n t h e cashier's check? T h e cases which h a v e been de-
cided in this area a r e confusing. Some of them may be criticized for not
following the Cornmcrcial Codc.
( 1 ) It is clear u n d e r the Commercial C o d e a n d the case law that
the injured claimant (Buyer in the example above) cannot compel the
b a n k t o stop payment of the cashier's check by mercly giving notice to
the bank. Cashier's checks, bank drafts, a n d certified checks a r e not like
ordinary checks because, with these instruments, the bank is liable as
t h e drawer or the acceptor of the instrument. T h e bank's signature a p
pears on the check a n d t h e bank is contractually bound under the Com-
mercial Code t o p a y t h e holder OF the check. Because the b a n k has a
legal obligation t o pay, the Commercial C o d e provisions giving custom-
ers the right to stop payment d o not apply.7B
( 2 ) Although the injured claimant (Buyer) cannot m a k e t h e bank
stop payment by giving notice, h e may use the provisions in the Code
(discussed in $ 2 0 - 3 5 ) for supplying indemnity o r enjoining payment.I7
These provisions contemplate the circumstance, given in the example
above, where the b a n k as a party to the instrument might be liable t o a
holder, a s it would b e undcr a cashicr's chcck, bank draft, o r certified
check.I8
16 Section4-402 of the Uniform Commercial Code expresses the policy
that the stop payment order is too late if the bank has taken any action
with respect to the check that would make it liable for payment under Code
Section 4-303. Thus, a customer cannot stop payment on a certified check.
See Comment 5. T h e same principle should apply when a cashier's check
o r bank draft is used, but the literal language of Commercial Code Section
4-403(1) does not fit. (The bank has not taken any action under Code
Section 4-303 with respect to these instruments.) Perhaps the reason the
language of Scction 4-403(1) appears inapt is that the provisions of Section
4-403 are not meant to apply to cashier's chccks or bank drafts. Cnshicr's
checks and bank drafts are not items payable f o r the account of the customer
as required in Section 4-403 ( 1 ).
7' U.C.C. 1 3-603.
See U.C.C. 3-603, Comment 3.
MUTUAL DUTIES _ 3-45
( 3 ) C a n the bank elect to refuse t o pay the holder on the request
of t h e injurcd claimant a n d raise, a s a defcnsc in any subsequent action
brought by the person in possession of the instrument, that the rights of
the injured claimant a r e superior? Unfortunately, the answer given by
the cases is not clear. T h e r e are numerous statements that the b a n k can-
not s t o p p a y m e n P but the Commercial Code seems to contemplate that
the bnnk could choosc t o rcfuse to pay if it was willing to assume the
risk of subsequent litigation.R0 If thc person in possession of the instru-
ment sues the bank o n its liability a s drawer o r acceptor, the Code limits
the right of the bank t o raise the rights of the injured claimant a s de-
fenses t o payment. Except f o r the defenses that ( I ) the person seeking
payment ncquired t l ~ cinstrumcnt Lllrough a thicf, o r (2) that paymcnt
would violate a restrjclivc indorserncnt, the injured claimant w h o is
asserting rights superior to the party presenting the check for payment
must intervene in the litigation and assert the claims t o the check him-
self.81 Of course, if the person presenting the check for payment has the
rights of a holder in d u e course, he thereby has a right, free from any
-
claim that may b e asserted by adverse parties, t o the i n s t r ~ r n e n t . ~Al-
~
though the Commercial C o d e thus seems t o permit the bank t o elect to
refuse payment, s o as t o allow the competing claimants t o litigate their
rights t o the instrument in a suit brought against the bank for payment,
the cases in this area a r e n o t clear and advice of counsel should b e
sought.a3
3 20-45 IDENTIFICATION OF PAYEES AND INDORSERS
Since the agreement between the bank and depositor is that the
bnnk must pay at the ordcr of the dcpositor, the bank is required t o
idcntify thc paycc o r holdcr of the ~ l i c c k . ~Paynicnt
' to the wrong pcr-
son is, thcrcfore, at the risk of the bank.8n
10 See generally Brndy o n Bnnk Checks, note 46 ncpra, 5 20.1 1.
e0 See U.C.C.5 3-306, Comment 5; 5 3-603, Comment 3.
U.C.C. 5 3-306(d).
8' U.C.C. § 3-305( 1 ).
83 See generally Brady o n Bnttk Checks, note 4 6 supra, 5 20.12; Unifortn
~ o t n r n e r c i n lCode, note 28 sttprn, 1 1 7-5.
bank may only pay items that are "properly payable" from its
customer's account. U.C.C. 14-401. Only items that are properly presented
are entitlcd 10 payment, scc U.C.C. $ 5 3-505, 3-507, and only a person
who qunlifics ns n holdcr cnn nmkc n propcr prcscntnicnt. U.C.C. 5 3-504.
Payment must be made to the holder in ordcr to discharge liability on the
instrument. U.C.C. 5 3-603.
86 This follows pre-Code law. Labor Bank & Trust Co. v. Adams. 23
* S.W.2d 814 (Tex. Civ. App. 1930); Schwarz v. Bank of Pittsburgh Nat'l
 5 20-50 DUTIES OF BANK & CUSTOMER
In cases where a check payable t o the order of a named payee car-
ries a number of indorsements, each one in the chain of title must be
genuine and properly authorized. If not, the bank cannot charge the
check against the drawer's account.86 Where there has been a n irregu-
larity in any one of the indorsements, the bank may have recourse against
the person who indorsed it to the bank o r who received payment.8T
In many instances, banks guarantee among themselves all prior in-
dorsementsf18 but, absent grounds for estopping the drawer from chal-
lenging the signature,80 the drawee-bank cannot charge the drawer's
account if one of the necessary indorsements is, in fact, a forgery.OO
A bank may require the person seeking payment t o identify himself
and to give evidence of authority to obtain payment when he seeks pay-
ment o n behalf of someone else.B'
8 20-50 BEARER PAPER
Wherc the drawer has ordered the bank to pay to "bcarcr" or to "a
named payee o r bearer," the bank is justified in charging the drawer's
account when it has actually paid out the money to any holder in good
faith.B2 Checks made payable to "cash," "current funds," "payroll," or
similar names that d o not purport t o be any persons, are also payable
to bearer.08
Ass'n, 283 Pa. 200, 129 A. 52 (1925); National Sur. Co. v. President &
Directors of Manhattan Co., 252 N.Y. 247, 169 N.E. 372 (1929); Atwell
v. Mercantile Trust Co., 95 Cal. App. 338, 272 P. 799 (1928) (discussed in
i
17 Calif. L. Rev. 308 (1929). 2 So. Calif. L. Rev. 387 (1928)).
See Chapters 10, 13, which discuss indorsement and transfer. The
Code follows pre-Code law in this respect. See National Sur. Co. v. Presi-
dent & Directors of Manhattan Co., note 85 supra. Schwarz v. Bank of
i Pittsburgh, note 85 supra.
8TU.C.C. 8 4-207. See U.C.C. 8 3-417. This follows pre-Code law.
State v. Broadway Nat'l Bank, 153 Tenn. 113, 282 S.W. 194 (1926) (dis-
cussed in 5 Tenn. L. Rev. 173 (1926)); Home Ins. c o . v. Mercantile Trust
Co., 219 Mo. App. 645, 284 S.W. 834 (1926); Philadelphia Nat'l Bank v.
1 Fullon Nat'l Bank, 25 F.2d 995 (N.D. Ga. 1928); Endlich v. Bank of Black
Creek, 200 Wis. 175, 227 N.W. 866 (1929); Insurance Co. of No. Am. v.
Fourth Nat'l Bank, 12 F.2d 100 (N.D. Ga. 1926), afl'd 28 F.2d 933 (5th
Cir. 1928), cerr. denied 279 U.S. 853 (1928).
88 These warranties arise automatically under Uniform Commercial Code
Section 4-207. See also Philip Gruner & Bros. Lumber Co. v. First Nat'l
"
Bank, 143 Miss. 454, 109 So. 274 (1926).
See U.C.C. $ 8 3 4 0 5 , 3 4 0 6 .
eo U.C.C. Q 3-404.
" U.C.C. 8 3-505 ( 1) ( b ) .
92 U.C.C. 8 3-603. See $ 5 20-5, 20-35.
'W.C.C. 0 3-1 1 1.
342
MUTUAL DUTIES 20-55
Where a check originally payable to the bearer is indorsed to a
special person, the bank must pay to such a person or his order and the
check is no longer payable to bearer.04 T h e manner in which other in-
dorsements can change the duties of the bank to the customer are dis-
cussed in Chapter 13.
5 20-55 FICTITIOUS OR NONEXISTING PAYEES
T h e provisions in the Commercial Code dealing with fictitious o r
nonexisting payeesn6 evolved from prior law and can best be understood
in light of the decisions reached in cascs dccided pre-Code. Under the
Uniform Negotiable Instrunients Law, chccks drawn to fictitious o r non-
existing payees known as such by the person drawing the check were
treated as bearer paper and charged to the account of the drawer, no
matter to whom payment was made in good faith,O@and no matter what
the chain of titlc was as shown by thc indorscrncnt.
, Cnscs ol this kind fcll into n nunibcr of clnsscs nncl wcrc thc source
of much dificulty and litigation. They usually arose from two causes:
Either the drawer, for some business reason, desired to keep the real
payee of his check secret, or some type of fraud o r embezzlement was
involved.
In the former case, the instrument was payable to bearer, even
though the payee was a real person, if the drawer intended him to be
fictitious. For example, a n order to pay John Doe or John Smith, which
the drawer intended to use in a fictitious capacity, was payable to bearer,
even though there was a real John Doe or John Smith doing business
with the drawer.OT
T h e embezzlement situations fall into a number of difficult cases.
If a dcfrauding clerk signed a number of payroll checks filled in with
names he intended as fictitious, the instruments were payable t o bearer
and the loss fell on the e m p l o y e r - d e p o s i t ~ r . ~If~ the checks were of a
type requiring double signatures, the fiction had to bc known to one o f
O4 U.C.C. 8 3-204. See Chapter 13 on indorsement and transfer.
O5 U.C.C. 8 3-405.
N.I.L. 18 9 ( 3 ) , 88.
O T Snydcr v. Corn Exch. Nat'l Bank, 221 Pa. 599, 70 A. 876 (1908);
Litchfield Shuttle Co. v. Cumberland Valley Nat'l Bank, 134 Tenn. 379.
183 S.W. 1006 (1916); Bartlett v. First Nat'l Bank. 247 Ill. 490, 93 N.E.
337 (1910); Meredilh v. Pound, 92 S.W.2d 698 (Mo. 1936).
08Goodyear Tire & Rubber Co. v. Wells Fargo Bank, 1 Cal. App. 2d
694. 37 P.2d 483 (1934) (discrlsscd in 48 Harv. L. Rev. 846 (1934) ) ; but the
result is contrary where the person signing does not know of the fraudr~lcnt
intent. City of St. Paul v. Merchant's Nat'l Bank, 151 Minn. 485, 187 N.W.
rc 516 (1922).
5 20-55 J U T I E S OF B A N K & C U S T O M E R
the employees who signed to hold the d e p o ~ i t o r ,but, ~ if either one
signed innocently but negligently, the loss fell o n the depositor (if the
bank used d u e care in cashing the checks) .Im
Another type of fictitious name that causes much ditTiculty is the
o n e in which a person receiving payment by check impersonates another
for the purpose of receiving money d u e t o t h e other. I n such situations,
if the drawer of the check and the impersonator were face t o face when
the check was delivered, t h e courts usually held that the drawer meant
to pay the man in front o f him and that the bank was justified in paying
to the impersonator or t o his order.101 But, if the transaction between
drawer and payee was not face to face, the courts usually held that the
payee was not fictitious a n d that the bank was justified in paying only to
the person intended by the drawer.lo2 I t is obvious in cases of this sort
that the bank's best protection is to insist upon careful identification of
persons to whom checks a r e paid, as it is impossible for the bank t o know
the intention of the depositor o r his agent when they drew t h e check.
T h e Commercial Code operates o n a n entirely different theory. It
provides that in all these cases where the names a r e fictitious o r the
drawer of the check o r the employer is defrauded by imposters, o r by his
own clerks using fictitious names for paper not payable to bearer o n its
face, a n y person may indorse in the namc of the fictitious o r defrauding
payee and such indorsement passes title, o r authorizes the bank to make
payrncnt according t o the face of thc i n s t r ~ m e n t . ~ ~ T Tdiffcrcnce
he be-
tween the two rules seems to be that, under the Negotiable Instruments
Law, where the payee's name was intended to be fictitious, the bank
could pay without a n y indorsement; but under the Code an indorsement
in the name of the fictitious o r defrauding payee is necessary and anyone
c a n s o indorse. T h e b a n k is protccted, when it pays in d u c a r c , accord-
ing to the chain of title appearing o n the indorsements and the loss falls
o n the depositor.
P. & G. Card & Paper Co. v. Fifth Nat'l Bank, 172 N.Y.S. 688 ( 1918).
lmTri-Bullion Smelting & Dev. Co. v. Curtis, 186 App. Div. 613, 174
N.Y.S. 830 (1919), afl'd 130 N.E. 921. See Beutel's Brnnnon Negorinhle
Insrrumenrs Law 317 (7th cd. 1948) (hcrcinnftcr cited as Bcrrrel's Brnnrion).
lo' McHenry v. Old Citizens National Bank, 85 Ohio St. 203. 97 N.E.
395 (191 1). First Nat'l Bank v. American Exch. Nat'l Bank. 170 N.Y. 88,
62 N.E. 1089 (1902); see Annots., 5 0 A.L.R. 75 (1914), 38 A.L.R. 1111
(1911).
lo2 Mercantile Nat'l Bank v. Silverman, 148 App. Div. 1, 132 N.Y.S.
1017 (191 I ) , afl'd 210 N.Y. 567, 104 N.E. 1134 (1914); Cohcn v. Lincoln
Sav. Bank, 275 N.Y. 399, 10 N.E.2d 457 (1937): City of New York v.
Bronx County Trust Co., 261 N.Y. 64, 184 N.E. 495 (1933).
lea U.C.C. 5 3-405 and Comment. See Brady on Bank Checks, note 46
supra, at 535. Fidelity Trust Co., 419 Pa. 78, 212 A.2d 222 (1965).
344
M U T U A L DUTIES
T h e Commercial C o d e rule dealing with imposters and unfaithful
employees does not apply t o all forgeries, but only to those within the
terms of the provision. Where a credit union issued its loan check to the
order of two payees (a borrower who represented that he was using the
loan to buy a car and a selling car dealer) and where the borrower col-
lected the check on a forgery of the car dealcr's indorsement, it was held
that the "imposter" rule of the Code did not apply, since the borrower
had impersonated n o onc. Instead, the borrower had presented a forged
purchase order to the credit union as the means of obtaining the loan.
T h e result was that the car dealer's indorsement was forged and a bank,
which took the check with the forged indorsement o n deposit, was held
liable to thc drawee o r payor bank that paid, and then made good t o its
dcpositor ( t h c credit union) the chcck in question.lo4
I t has been held that the "fictitious payee" rule of the Code applied
to a check with a forgery of both a drawer's signature and a n indorse-
ment; the court took the position that the forger intended the named
payee to have no interest in the check and indorsement in the payee's
narnc was considered legally valid and not forged.lo6
T h e "fictitious payee" rule of the Code was additionally applied in a
case whcrc so-called bill of sale drafts (considered by the court a s or-
dinary checks), drawn by a cattle dealer for the ostensible purchase of
cattle and naming a purported cattle seller as payee, were paid o n
forged indorscmcnts of thc pnycc nladc by thc drawcr-dealer, by thc
bank o n which it was drawn. T h e drafts were drawn to deceive the bank
and to obtain funds from a n account and a line of credit, extended by
the bank to enable the dealer to purchase cattle. T h e court held that the
particular drafts were not intended to be payable to the named payec and
that the indorscnicnts wcrc e f f c c t i v ~ . ~ ~ ~
T h e fictitious payee rule was not applied in the case of a wrong-
doing son of a firm's president, who obtained checks payable t o the firm
Lxt Gadsdcn Bank v. First City Nat'l Bank, 50 Ala. App. 576, 281
So. 2d 431 (1973). But see Perini Corp. v. First Nat'l Bank of Habersham
Co., 553 F.2d 398 (5th Cir. 1977).
Inn Actnn Lifc & Cns. Co. v. Hampton State Bank, 497 S.W.2d 8 0 (Tcx.
Civ. App. 1973). The court took the position that the forger might be
considcrcd n pcrson signing "as or on behalf of a .. . drawcr" within the
"fictitious payee" rule of Section 3 - 4 0 5 ( 1 ) ( b ) of the Uniform Commer-
cial Code.
'Oe Kansas Bankers Sur. Co. v. Bank of Odessa, 386 F. Supp. 555
(W.D. Mo. 1974). The action was by thc surety of the bank on which the
drnfts were drawn, against thc bank taking the drafts on forgcd paycc in-
dorscnicnts. Bccause of the rule of Scction 3-405(1) ( b ) of thc Code, the
indonemcnts were held elfective, thus they dcnied recovery by the drawee's
bank's surety on either a breach of warranty theory or a conversion theory.
5 20-55 DUTIES O F BANK & CUSTOMER
and, misrepresenting his identity but correctly stating his relationship,
indorsed the checks in its name with the suggestion that such indorsement
might be valid by reason of actual or apparent authority.lO'
O n the other hand, it was held that the "fictitious payee" rule,
though applicable, did not absolve a bank from liability where the presi-
dent of a company drew company checks to the order of a creditor of
the company but then deposited the checks in his personal account at the
bank, with indorsements of the creditor's name made without the credi-
tor's authority. The court, in effect, held that while the president had
drawn the checks to the ordcr of the creditor but intcndcd the lattcr to
have no interest in them, the transactions by which the president de-
posited the chccks payable to a third person in his own account wcre so
irregular as to call into question their validity and thus give the bank
notice of irregularity, depriving it of holder-in-due-course status.108
T h e Commercial Code extends the fictitious payee rules to situa-
tions where the name of the payee was supplied to the drawer of the
check by an agent o r employee who intended that thc payee have no
interest in the check.Iog These are the so-called padded payroll cases.
T h e Code carrics forward a rulc that is followcd by somc states undcr
thc Negotiable Instruments Law1I0 and adopts a policy that makes the
drawer of the check, as part of his risks of doing business, responsible
for supervising his agents and employees.
The Code "imposter" rule was applied in a case where an individual
named James F. Beaird, Jr., contacted a prospective investor in an oil
lease and represented himself to be an employee of a certain company
in the business of selling oil leases. The investor phoned the company
and was informed that the latter had an employee named James Baird.
The investor then obtained a cashier's check from a bank payable to
James Baird and delivered it to Bcaird. Bcaird thcn cashed thc check
at another bank where he was known, indorsing it twice in the names of
James Baird and James F. Beaird, Jr. T h e court held that the indorse-
ment of Beaird was effective and that there was no forgery."'
lo' Grimshaw v. First Nat'l Bank & Trust Co., 563 P.2d 117 (Okla.
1977).
1°8McConnico v. Third Nat'l Bank, 499 S.W.2d 874 (Tenn. 1973).
lo8U.C.C. 8 3-405 ( 1) (c).
N.I.L. 8 9(3), as amended.
Covington v. Penn Square Nat'l Bank, 545 P.2d 824 (Okla. App.
1975). See "U.C.C. Section 3-405: Of Imposters, Fictitious Payees, and
Padded Payrolls," 47 Fordham L. Rev. 1083-1 1 10 (1979) : "Thc Effcct of
Bank Misconduct on the Operation of the Paddcd Payroll Preclusion of
U.C.C. 1 3-405," 27 UCLA L. RCV.147-176 (1979).
MUTUAL DUTIES 5 ~0-60
A bank, in making a cashier's check payable to a purported seller
of a motor vehicle, is not guilty of negligence contributing to forgery or
alteration of the instrument, nor does the matter come within the so-
called impostor rule.112
The fictitious name situation should be distinguished from the one
where the drawer has simply misspelled or misdesignated the payee. In
either of these cases, the bank is justified in paying the person intended,
and may charge the drawer's account, even though the indorsement may
vary slightly from the name of the payee.lla For example, a check drawn
payable to Wcst Wisconsin Lirncstone Company may bc properly paid
undcr the indorsement, Wisconsin Lirnestonc Company.ll' However, a
bank o r transferee of paper payable to a misspelled name may, if it gives
value for the paper, require the indorsement in both the misspelled and
the proper name of the holder."&
.
5 20-60 MISCREDITED PROCEEDS
It follows, from the principle that thc bank must pay thc proper
person entitled to payment under the terms of the check,118that the bank
must properly credit the proceeds of the check when it is given to the
bank for deposit. In the case where the check is made payable to the
bank itself, the bank must act carefully. It has been held that the bank
will bc liable to its depositor when it takes a check, from an employee
of the depositor that is prcviously signed by the depositor and that is
made payable to the bank if it cashes the check or credits it to the
employee's account; the check must be applied to the credit of the
n 2Guaranty Trust Co. v. Federal Res. Bank of Kansas City, 454 F.
- - 488 (W.D. Okla. 1977).
SUPP.
"w.c.c. 1 3-203.
"4 First State Bank of Humbird v. Cox, 192 Wis. 566, 213 N.W. 290
(1927): cf. Joseph Milling Co. v. First Bank, 109 Or. 1, 216 P. 560 (1923).
See ~ " n o t . .29 A.L.R. 358 (1924).
U.C.C. 5 3-203.
""ee 5 19-35.
'I7 Pacific Indemn. v. Security First Nat'l Bank, 248 Cal. App. 2d 75,
56 Cal. Rptr. 142 (1967): Sun 'N Sand, Inc. v. United Cal. Bank. 148 Cal.
Rptr. 329, 582 P.2d 920 (1978); Bank of S. Md. v. Robertson's Crab
House, Inc., 39 Md. App. 707, 389 A.2d 388 (1978). 9 C.J.S. Bnnks nnd
. Banking 5 340. The topic of miscredited proceeds is considered in 13 Ga.
b, Rev. 677-685 (1979).
 D U T I E S OF BANK & C U S T O M E R
9 20-65 CHECKS WITH FORGED OR UNAUTHORIZED
SIGNATURES
Since the bank c a n pay only on the order of the person whose name
appears on the signature card, it follows that the bank cannot charge the
drawcr's account whcn his signaturc has bccn forgcd or uscd without his
authority.l18 T h e bank, a t its own pcril, must know and rccognizc its
depositor's signature.ll@ When it pays a n innocent holder for value of a
check upon which t h e drawer's signature has been forged, it cannot re-
cover the amount, even from the holder t o whom it paid.120 T h e Com-
mercial Code makes payment final when made t o a holder in d u c coursc
o r other person who h a s changed his.position in reliance o n thc pay-
ments.lZ1
When the forged signature is an indorsement (and not the drawer's
signature), the rules a r e somewhat different. If the forged indorsement
is a "necessary" indorsement, because it is a link in the chain of title,122
the bank cannot charge the drawer's account.123 But, in contrast to the
forged drawer's signature, the bank c a n recover from the person it
paid.lZ4 Payment over a forged indorsement also constitutes conversion
l18The check is not "properly payable." U.C.C. $5 3-404,4401. This
follows pre-Code law. Grubnau v. Centennial Nat'l Bank, 279 Pa. 501. 124
A. 142 (1924); Rubio v. First Nat'l Bank. 270 S.W. 1037 (Tex. Civ. App.
1925); Fourth & Cincinnati Trust Co. v. Johnson, 24 Ohio App. 129, 156
N.E. 462 (1927); First Nat'l Bank v. Wood County, 294 S.W. 324 (Tex.
Civ. App. 1927). a f d 299 S.W. 856 (1927).
An unauthorized signature is "wholly inoperative," absent ratification
or estoppel. U.C.C. 5 3-404.
12"U.CC. 81 3-417 and Comment 4, 3-418, 4-207. Scc Pricc v.
Neal, 3 Burr. 1354 (1 762); for the prc-Codc law, scc Security Conlmcrcinl
& Sav. Dank v. Southern Trust & Commerce Dank. 74 CaI. App. 734, 241 P.
945 (1925). Sce Deutel's Brartt~atr, note 100 supra, at 905. Annot., 12
A.L.R. 1089 ( 1921 ). See generally Brady on Bank Checks, note 4 6 supra,
8 8 22.12-22.20; Unifortn Cotnmercial Code, note 28 supra, 8 1 6 2 .
12' U.C.C. 5 3-4 18. This changes the pre-Code rulc, which had allowed
the bank to recover for mere negligence on the part of the holder. U.C.C.
5 3-418, Comment 4; see Brady on Bank Checks, note 46 supra, 5 22-20.
There is a further argument that the bank cannot recover, even when the
person receiving payment is not a holder in due course o r has not acted in
reliance. Apart from the requirements of 5 3-418. Section 4-301 makes
payment final. See Uniform Corntnercial Code, note 28 supra, 5 16-4.
l Z 2See Chapters 10, 13 on indorsements and negotiation.
lZ3The itcm is not "properly payablc." U.C.C. 14-40]. Scc Taylor v.
Equitable Trust Co., 269 Md. 149, 304 A.2d 838 (1973); Sumiton Bank v.
Funding Sys. Leasing Corp., 512 F.2d 774 (5th Cir. 1975).
l Z 4There is a warranty made by the person obtaining payment that he
has "good title." U.C.C. 6 5 3-417(1) ( a ) , 3-418, 4-207.
MUTUAL DUTIES
and thc payor bank will b e liable to the rightful owner of the check for
its amount.125
T h e C o d c provision makes any "unauthorized"'signatures, not just
forgcrics, invalid.12b T h c person whose name is signcd can ratify the sig-
nnturc o r b e cstoppcd from dcnying it.121 Furthermore, thc authority t o
sign niny bc irnplicd o r n p p o r ~ n t . ' Whcrc,
~~ nltcr a dissolution of a law
partnership by the withdrawal of o n e partner, the old account was kept
open b y the continuing partners, and a check drawn in favor of the
withdrawn partner and a continuing partner was indorsed with a rubber
stamp, in accordance with the old practice, for deposit in the old account,
it was held that the bank h a d acted properly in accepting the deposit and
later permitting its withdrawal by the continuing partners, since the in-
dorsement could be made by a n agent having actual implied o r apparent
authority a n d since the withdrawing partner had not put the bank o n
notice of any change in the practice.lZ0 Ratification will make the signa-
ture effective, but a joint payee, whose indorsement is forged by the
co-payee, could not b e held t o have ratificd the indorsements where it is
found h e had not been aware of the forgeries.Ia0 T h e affirmance required
t o create a ratification of a n unauthorized signature may arise from con-
duct that only can be rationally explained if there were a n election t o
treat a supposedly unauthorized act as, in fact, authorized.131
T h e forgery need not be o n the instrument itself. Where a savings
bank grants withdrawal paymcnts lo a person w h o does not represent
hinlsclf as thc dcpositor a n d who obtains payment upon thc strength of an
order purported to bc signed by tlw dcpositor, the bank may not charge
12W.C.C. !3 4 1 9 ( 1 ) ( c ) . This is consistent with pre-Code law. See
1.ouisvillc & Nnshvillc Ry. v. Citizens' Pc Pcoplcs' Nnt'l Bank, 74 Fln. 385,
77 So. 104 (1918); Spnt~ldingv. First Nnt'l Ilnnk, 210 App. Div. 216. 205
N.Y.S. 492 (1924). nD'd 239 N.Y. 586, 147 N.E. 206 (1924); Gordon
Fireworks Co. v. Cnpitnl Nnr'l Bonk. 236 Mich. 271, 210 N.W. 263 (1926).
I20U.C.C. 5 3-404(1). A signature by an agent that is in excess of
his authority has been held to be an unauthorized signature. Pine Bluff
Nat'l Bank v. Kesterson, 257 Ark. 813, 520 S.W.2d 253 (1975).
''1 U.C.C. 5 3-404( 1 ).
I28See U.C.C. $ 5 1-201 ( 4 3 ) , 3 4 0 4 , Comment 1; Equipment Distribs.
Inc. v. Charter Oak Bank & Trust Co., 34 Conn. Supp. 606, 379 A.2d 682
(1977).
12@ Keane v. Pan Am. Bank, 309 So. 2d 579 (Fla. App. 1975). The
court cited Section 3-419(3) of the Uniform Commercial Code, holding
that the bank had actcd with commercial reasonableness in making the check
paynble to two firm nwmbcrs on the indorscn~cntof the dissolved firm.
130 Unitcd Bank of Ariz. v. Mesa N.O. Nelson Co., 121 Ariz. 438, 590
P.2d 1384 (1979).
131 Fulka v. Florida Conim'l Banks, Inc., 371 So. 2d 521 (Fla. App.
rs 1979).
349
 § 20-70 DUTIES OF B A N K & CUSTOMER
the amount of the check against the account of the person whose name is
forged.ln2
Where both drawer's signature and that of spurious payee are forged
( o r where the latter is nonexistent), the former flaw is the critical factor
i n allocating loss and, absent applicable agreements, loss is borne by the
drawer o n the grounds that the finality policy of Section 3-418 of the
C o d e constitutes doubly forged checks, a s thcy bear only the forged
drawer's signature.la8
What constitutes a forgery is important for the purposes of bond
I
coverage. A "counterfeit" check has been held equivalent to a "forged"
check, within the meaning of the coverage term of a "discovery blanket
bond" that referred t o "forgery o r alteration of any instrument." In this
instance, the insured, a credit union, h a d arranged with its bank t o pay
checks impressed with facsimile signatures m a d e by a check-writing ma-
chine in the credit union's possession. T h e bank paid a number of
checks printed o n paper different from that of the checks of the credit
union a n d imprinted with a check-writing machine that impressed a fac-
simile signature "nearly identical" to that used o n the credit union's own
,
checks. T h e credit union was held a s entitled t o recover from the insur-
ance company under the blanket bond.lE4
8 20-70 ALTERATION
When the drawer's signature is genuine but other parts of the check
have been altered, either by filling in blanks or changing material provi-
sions of a n already completed check (such a s the amount or, in the case
of notes, the rate of interest), the situation is treated, under the Com-
mercial Code, as a n alteration.laO
Alterations can be authorized by the drawer o r maker o f the paper
o r they can be made without his consent. When the drawer authorizes a
l a aMaddox v. First Westroads Bank, 199 Neb. 81, 256 N.W.2d 647
(1977).
laa Perini Corp. v. First Nat'l Bank of Habersham, 553 F.2d 398 (5th
Cir. 1977). See also Baker, "The Perini Case: Double. Forgery Revisited
(Part I)," 10 U.C.C.L.J. 309 (1978).
l a 4MBTA Employees Credit Union v. Employers Mut. Liability Ins.
Co., 374 F. Supp. 1299 (D. Mass. 1974). As to kinds of losses which are
covered by a banker's blanket bond, see Annot., "What Are 'Securities, Docu-
ments o r Other Written Instruments' Within Terms of Bankers' Blanket
Bond Insuring Losses From Counterfeiting o r Forgery," 38 A.L.R. 3d 1437
11971).
laa U.C.C. 8 3-407. The Code rules have been used to help define the
crime of forgery. See State v. Rovin, 21 Ariz. App. 260, 518 P.2d 579
(1974).
M U T U A L DUTIES 5 20-75
holder t o fill in blanks o r change some term in the paper, there is n o
problem. T h e holder may enforce the instrument according to the au-
thority given to him.IR0 The bank o n which such a check is drawn may
pay it a n d may charge the account o f the drawer.IR7 T h e rules for un-
authorized alterations are discussed in 3 s 20-75 and 20-80. I t should
bc noted that a drawer o r maker of a n instrumcnt niay be precluded from
challenging a n altcration that is d u c to negligence o n his part, subsequent
ratification, o r any other ground for est0ppe1.l~~
A n instrument that is incomplete o r bcars visible signs o f alteration
s o as t o "call into qucstion its validity, terms o r ownership," gives notice
to anyone w h o takcs the instrumcnt that thcre is a defense o r claim to
it.'" T h i s prcvents the person who takcs it f r o m qualifying as a holder
in d u e course.
5 20-75 ALTERED CIIECKS THAT WERE COMPLETE
WIIEN SIGNED
Where a check is complete when signed but is subsequently altered,
such alteration by the holder discharges any party whose contract is
~ h c r e b ychangcd, unless that party assents o r is precluded from asserting
tllc d c f e n ~ e . ~ ' *However. thc bank paying such a n instrument in good
faith m:ty rccovcr from the drawcr thc amount originally specified on
I3".C.C. § 3-407(3). Undcr Uniform Cornrncrcinl Code Section
3-407, an altcration would bc neither matcrial nor fraudulent i f done with
the consent of the parties conccrncd. Sce American Bank & Trust Co. V.
Straughan. 248 So. 2d 73 (Ln. App. 1971); see Brrrdy or1 ilntrk Cheeks. notc
46 slcpm, ! i21.3. In In re Estate of Norris, 532 P.2d 1023 (Colo. App.
1974), a man who was in a hospital and terminally ill signed a check
in blank, but did not otherwise fill it in except to insert the figures "3,300"
after the word "for" in the lower left-hand comer. He gave the check
to a friend who was visiting him and asked the friend to give it to his
(the signer's) sister. The check was filled in for $3,300. The sister then de-
posited the check but it was not paid because the signer had died in the
meantime. In a claim by thc sister against the signer's estate, the court held
thnt the presumption that the chcck had becn propcrly complctcd hnd not
becn overcome, as there was no evidence regarding the amount to be filled
in except the cryptic "3.300" in the lower left-hand corner of the instrument.
The court cited Section 3-115 of the Code as supporting its holding. The
court also obscrved that the payor bank was not liable to the payee where
the drawcr was dcccascd and, furthermore, stated that the drawer's estate
had not met the burden of showing lack of consideration for the check.
I" U.C.C. § 4-40].
Ia8 See U.C.C. $ 9 3-406, 4-406.
* 130U.C.C.$3-304(1)(a).
"O U.C.C. 4 3-407(2).
 5 20-75 D U T I E S OF BANK & C U S T O M E R
the check. F o r example, if a check originally calling for $ 1 0 0 has been
raised t o $1,000 a n d paid in good faith, the b a n k may charge the drawer's
account only $100.141 I n all cases of payment of altered checks, the
bank may have 'recourse upon the persons to whom it paid for the
amount of the loss.142
Alteration of a check in any material respect by a holder voids the
check s o far a s the drawer is concerned, w h o thereafter is not required
to pay a t all unless it comes into thc hands of a holder in d u c course.
A holder in d u e course c a n enforce the check according t o its original
terms.14a T h e Uniform Negotiable Instruments L a w provides that, under
such circumstances a n d if the employee of a bank has changed the
amount, date, o r any o t h e r material part of the check (even innocently),
the bank cannot charge a n y portion of it t o the drawer's account, unless
the drawer authorizes o r assents t o the change."' Under the Commercial
Code, the alteration must be fraudulent a n d material; otherwise, the bank
c a n enforce the check according to its original provisions.145
Pencil notations in the margins of checks, indicating the amount
where the handwriting is doubtful o r noting part payments, are not altera-
tions within this rule a n d have n o effect whatever upon the i n ~ t r u m e n t . ~ ~ "
Negligence in completing a check that makes it easy to alter will
preclude the drawer f r o m challenging the alteration. But the bank that
pays such a check must act in "good faith and in accordance with the
reasonable commercial standards" of the payor's business.147
P,
l d lU.C.C. 5 4-401 ( 2 ) ( a ) .
U.C.C. 8 5 4-207, 3-417. See New York Produce Exch. Bank v.
Twelfth Ward Bank, 135 App. Div. 52, 119 N.Y.S. 988 ( 1909).
U.C.C. 5 3-407(3). Visible alterations may prevent the holder from
iI
qualifying as a holder in due course. U.C.C. 5 3-304( 1) ( a ) .
14' Hoffman v. Planters' Nat'l Bank, 9 9 Va. 480, 39 S.E. 134 (1901);
but, in some cases of innocent alteration, recovery may be had on the debt
for which the altered instrument was given. First Nat'l Bank v. Yowell, 155
Tenn. 430, 294 S.W. 1101 (1927).
U.C.C. 5 3-407 and Comment.
14" Merchants' Bank of Canada v. Brown, 86 App. Div. 599. 8 3 N.Y.S.
1037 (1903) ; Alexandria Bank & Trust Co. v. Honeycutt; 161 La. 261, 108
So. 475 (1926).
1 4 7 U.C.C. 5 3-406. An alleged salesman induced his victim to allow
him to fill in a check from the victim's checkbook, for $1.26 to pay for a
small purchase. He filled in the amount both in figures and in long hand
but left space to the left of the entries so that the check could be easily
raised. The check was then raised to $6,841.26. The check was later cashed
at the bank on which drawn. In an action to recover the difTcrcncc bctwccn
the original and raised amount of the check, a trial court judgment pcrmit-
ling recovery against the bank was reversed on the ground of "failure of the
court to instruct the jury on the provisions of the Uniform Commercial
M U T U A L DUTIES
8 20-80 INSTRUMENTS ISSUED WITH BLANKS
Instruments issued with blanks are subject t o slightly different rules.
Where a dcpositor draws a check and puts it into circulation with a n y
material part blank, a bank paying in good faith m a y charge the deposi-
tor's account for the manner in which the check is actually filled in,
whether it has been completed in accordance with his instructions o r not.
F o r example, if a dcpositor signs a check leaving the amount blank, in-
tending to make it for $10, a n d it is wrongfully filled in for $ 1 0 0 a n d
paid by the bank in good faith, the bank m a y charge the account for
T h e bank may pay the check, even when it knows the check
was filled in by someone other than the drawer, as long as the b a n k acts
in good faith and does not have notice that the completion is i m p r ~ p e r . " ~
T h e case of instruments issued with blanks should not be confused
with t h e situation in which the depositor has filled in the blanks but left
them in such a condition that they may b e easily altered. Under these
circumstances, if the instrument was subsequently altered, the c o m m o n
law p u t the loss o n the bank;'" under the Commercial Code, however,
the loss would probably fall o n the depositor.151
Under the Uniform Negotiable Instruments L a w , also, where a de-
positor signed his name to a n incomplete check that was subsequently
stolen from him without fault o n his part a n d was filled in for an amount,
the loss fell o n the bank.*n2 But if the bank could show that the drawer
carelessly left the signed instrument where it could easily b e picked u p
by a wrongdoer, a n d the b a n k paid as a result of such carelessness, it
could recover the resulting damage from the depositor.163 T h e C o d e
Code." In particular, the court referred to failure to have the jury instructed
"as to what reasonable commercial standards are." Williams v. Montana
Nat'l Bank, 167 Mont. 24, 534 P.2d 1247 ( 1 9 7 5 ) . See also Farmers State
Bank V. Ray, 565 S.W.2d 103 (Tex. Civ. App. 1978), rev'd 576 S.W.2d 607
(Tcx. 1979) (bank liable f o r paying raised check).
U.C.C. 5 4-401 ( 2 ) ( b ) . See $ 5 3-1 15, 3-407.
14' U.C.C. 5 4-401 ( 2 ) (b). This seems to establish a less restrictive
test for payor banks than f o r persons claiming as holders in due course. See
U.C.C. $ 3-304( 1).
l f i OLockwood Nat'l Bnnk v. Jennings, 381 S.W.2d 682 (Tcx. Civ. App.
1964). But, where the depositor by his negligence has caused a loss to the
bank there may be a recovery. The cases are collected in Annots., 22 A.L.R.
I139 (1923), 36 A.L.R. 327 (1925), 39 A.L.R. 1380 (1925), 6 4 A.L.R.
1108 (1929).
I n ' U.C.C. 5 3-406.
'" N.I.L. 5 15.
l n 3 S.S. Allen Groccry Co. v. Bank of Buchnnnn County, 192 Mo. App.
*476, 182 S.W. 777 (191 6 ) ; see also Annot., 43 A.L.R. 198; Britton, "Negli-
gence in the Law of Bills and Notes," 24 Col. L. Rev. 695 (1924).
5 20-85 DUTIES OF BANK & CUSTOMER
throws the loss upon the depositor in both the stolen-check case and the
lost-check case.164
A holder in due course always can enforce a completed instrument
according to its terms as completed.Im Thus, even if the bank o n which
the check is drawn refuses to pay it (perhaps bccause of a stop payment
order), a holder in due course can require the drawer to pay the amount
of the check as completed.
!j 20-85 OBLIGATION OF GOOD FATTH
I n addition to the above-mentioned obligations to its depositors,
a bank is required t o exercise due care and good faith in all dealings with
its customers. Thus, it must use due care in notifying a depositor of
overdrafts on collecting paper, of chargebacks o n collecting paper, and
of receipt of the depositor's goods and funds that may come into its
hands. In the absence of such reasonable notification, the bank may be
. day after which it learns that the check was not paid.I8* The bank need
liable for resulting injuries.15B So, it is also required to use due care in
dealing with valuables left in safe keeping, collateral securities, and other
properties of the customer that come into its possession.16T These liabili-
ties are attached by law, and courts would usually give no effect to con-
tracts by which banks attempt to relieve themselves of liability. for the
negligence of their employee^.^^ It should be noted, however, that if the
depositor's own negligence contributes to the loss, there is no liability on
the bank.I5O In absence o f negligence, the bank and its customer, under
the provision of the Commercial Code, may make contracts changing
these rules; but neither party can contract away their exercise of due care
and good faith.Ia0
lB4U.C.C. f 4-401 (2) ( b ) . See U.C.C. 8 s 3-1 15, 3-407, 3-603(2),
and Comments therein.
U.C.C. 5 3-407(3). See Saka v. Sahara-Nev. Corp., 92 Nev. 703,
558 P.2d 535 (1976).
U.C.C. f f 1-103. 1-203. For an able discussion of this liability
under pre-Code law, see 1 Morse on Banks and Banking f 252 (Voorhees,
ed., 6th ed.; 1928) (hereinafter cited as Morse on Banks).
Is7 See Morse on Banks, note 156 supra, Ch. 14.
See Annots., 5 A.L.R. 1206 (1920). 9 A.L.R. 1069 (1920); 111
Paton's Digest of Legal Opinions 3469 (Paton. ed., 1944); (hereinafter cited
as Paton's Digest); but cf. Trernont Trust Co. v. Burack, 235 Mass. 398, 126
N.E. 782 (1920). U.C.C. $4-103.
16B Kelly v. Emigrant Indus. Soc'y, 2 Daly 227 (N.Y. 1867).
looU.C.C. 1 4-103.
+
MUTUAL DUTIES - 20-90
5 20-90 BANK'S RIGHT TO REVOKE CREDITS TO
CUSTOMER'S ACCOUNT AND TO CHARGE
CUSTOMER FOR ITEMS NOT PAID
When a customcr deposits a check, the bank will, if the check is not
paid, have the right to charge back nny credit givcn to the customer, as
long ns the bank ncts properly in handling the check. When the check
deposited is drawn upon a bank other than the depository bank, there is
a presumption that any credit given to the customer for the check by the
depository bank is p r o v i ~ i o n a l . ' ~This
~ presumption applies even though
the credit given by the bank is subject to "immediate withdrawal as of
right o r is in fact withdrawn." l B 2 If, subsequently, the check is not paid,
the depository bank can revoke the credit it gave and charge back the
amount to its customer's account.103 In order to take advantage of this
right to charge back, the depository bank must act promptly in notifying
its customer o r in returning the dishonored check. The bank must return
the check or send notice to its customer before midnight of the banking
only "send" notice within the deadline; actual receipt of notice by the
customcr is not
T h e bank loses its right to charge back when it gives a final settle-
ment to its customer or when it receives a final settlement for the
Of coursc, the bank has a duty of duc care in handling the
check foi collection.1ei
When the check deposited with the bank is a check drawn upon that
bank, so that the bank is both the depository and the payor bank, the
bank must act promptly in deciding whether the check should be paid.
T h e bank is required to give at least a provisional settlement for the item
before "midnight of the banking day of receipt" and must decide before
midnight of the banking day following the day of receipt whether it will
choose to refuse to pay the item, in which case it must return the check
or send written notice o f its action.la8 If the payor bank holds the item
without observing these deadlines, the bank will be accountable for the
amount of the item.Ia0 After the bank becomes accountable for the item,
lel U.C.C. f 4-201 (1 ).
162 U.C.C. f 4-201(1). Of course, the parties can expressly agree to
treat the settlement as "provisional" or "final." Id.
'63 U.C.C. 8 4-212(1).
Id.
5
' U.C.C. 5 5 1-201 ( 3 8 ) , l-201(26); 4-212(1).
'Be U.C.C. § 4-212(1).
Id' U.C.C. 5 4-202. See Chapter 21.
U.C.C. f 4-301 ( 1) .
leuU.C.C. f 4-302.
 DUTIES O F BANK & CUSTOMER
any subsequent risk of not being able to collect it will be upon the bank,
not the customer.
T h e payor bank's right to charge back its customer's account also
terminates when the bank makes "final payment" of the itern.ll0 Under
thc Cornmcrcial Codc, final paymcnt occurs whcn thc bank
( 1 ) Pays the item in cash;
(2) Settles for the item without reserving a right to revoke or hav-
ing a right under statute or agreement to revokc;
( 3 ) Complctcs thc proccss of posting the itcm to the account of the
person to bc charged for it; or
( 4 ) Makcs a provisional scttlcmcnt tor 11ic itcm nnd fails to rcvokc
it in a timely fashion as permitted by statute or agreement.
When final payment occurs, the payor bank becomes accountable for
the amount of the item."'
5 20-95 CUSTOMER'S RIGHT TO WITHDRAW AGAINST
ITEMS DEPOSITED
When a customer deposits a check or other instrument with his
bank, he does not have an immediate right to withdraw the funds repre-
sented by the deposit. The bank does not have to permit the customer
to withdraw against the deposit until the bank determines that the item
will be paid.l12 When a customcr deposits a check, in his own bank
account, that is drawn upon a different bank, the depository bank ordi-
narily will give the customer provisional credit, or what the Code calls a
provisional settlement for the amount deposited. Under the Commercial
Codc, whcn a collecting bank gives a credit to its customcr, there is a
presumption that it is p r n v i ~ i o n a l . T~ h~e~ bank may revokc any provi-
sional settlement it has given and may charge back the amount to the
account of its c u ~ t o r n e r . ~The
~ ' customer does not have a right to draw
against the provisional credit until it becomes final and until the bank
has had a reasonable time to learn of its finality.116 T h e settlement be-
comes final wlicn the clicck is p:iid by t l ~ cpayor bank and the procccda
have been remitted t o the depository bank.17"
'lo .
U.C.C. 8 4-301 ( 1 )
lT1U.C.C. 8 4-213(1). See 8 21-45 o n final payment and 8 8 2O-9%
21-55 on payor bank's right to cancel payment.
"2 U.C.C. 8 4-21 3(4).
"8 U.C.C. 8 4-201 ( 1 ) .
174 U.C.C. 8 4-212. See 8 20-90.
'7s U.C.C. 8 4-2 13 ( 4 ) .
17aU.C.C. $ 5 4-211, 4-213.
MUTUAL DUTIES
When the customer deposits a check, in his own account, that is
drawn upon his bank (so that the depository bank is also the payor
bank), the bank must decide before its midnight deadline whether or not
to pay the check.lT7 If the bank decidcs to pay the item, the credit given
bccomcs available to tlic custonicr for withdrawal "at the opcning of tlic
bank's sccond bnnking dny following rcccipt of thc itcni." I T R
Thc right of the customer to make withdrawals against credits given
to his account are subject to any rights the bank might have to set off
the credit against some other obligation the customer owes the bank.lTB
!I20-100 DUTY OF DEPOSITOR TO EXAhllNE MONTIILY
STATEMENTS
It is periodically customary for banks to issue statements of account
to its customers at monthly intervals or at such times as they are re-
qucstcd. Such a statement is neither a contract nor a representation.
Like any other statement of account, it is binding neither upon the cus-
tomer nor upon the bank. Mistakes normally can be rectified and the
true state of account shown.lBOBut it is possible for the statement to b e
come a rcprescntalion that binds the bank or the depositor if either party,
by failing to act upon it, has caused loss to the other. For example, if
a bank reports that a certain instrument has been collected, if the bank
continues to pay the customer's account on that basis long after the
statemcnt has been rendered, and if the customer who relies on that
statemcnt has lost rights of recourse against previous parties, the bank
cannot set up the fact that the instrument was not collected.lsl
Sincc the bank is, in cases of paying forged and raised checks, abso-
lutcly liablc, the customer owes the bank a reasonable duty to investigate
stntemcnts and to notify it in case such improperly paid checks are con-
tained in the statement. At common law, i t was necessary for the bank
to show loss resulting from absence of notification before it could hold
the customer to the statement as issued. In attempting to relieve thern-
selves of this liability, banks often put notices on the monthly statements
that thcy must bc clicckcd or rcturncd in tcn days or thcy would bc rc-
gardcd ns correct. Or, in some instances, they rcquircd tlic dcpositor to
~-
-
U.C.C. § 4302.
U.C.C. 8 4-21 3(4) (b).
"W.C.C. $ 4-213(4).
IBoSome banks still balance passbooks instead of sending statements.
+The legal effect of the passbook is similar to that of the statement. See Morse
on Bankr, note 156 supra, at 291-295.
lsl Everest & Strode, The Law o f Estoppel 243 (3d ed. 1923).
 5 20-100 D U T I E S OF BANK & C U S T O M E R
sign a n agreement, upon receipt of the statement, providing that in the
absence of notification by the depositor, the statement would be regarded
b y the bank as correct. T h e courts generally held that neither t h e notice
nor the agreement was binding o n the customer under such circurn-
stances, unless the b a n k showed direct resulting 1 0 s s . l ~ Under
~ the Uni-
i form Commercial Code, bona fide, good faith contracts of this nature,
willingly made by the customer, arc probably e n f o r ~ e a b l e ; 'however,
a heavy burden of proof will be thrown o n the bank.
~~
i Prior to the Code, statutes in some states had been passed providing
that in cases of raised checks o r forgeries of the drawer's signature, the
drawer must notify the bank within thirty days ( o r some longer period)
o r suffer losing to have the account corrected.IB4 But these statutes usu-
1 ally did not apply t o instances where the indorsements were forged. In
such case, the depositor's right to recover from the bank was conditioned
o n surrendering the instrument to the bank,lBnas well as o n giving notice.
These statutes have been consolidated and restated in the Commer-
cial Code, which provides that whcn a bank scnds a statcmcnt, the cus:
tomer must use reasonable care and promptness to discover a n d notify
l E 2See Denbigh v. First Nat'l Bank, 102 Wash. 546, 174 P. 475 (1918);
Union Tool Co. v. Fnrmcrs & Merchants Nnt'l nnnk, 192 Cnl. 40, 21R P.
424 (1923); and see Annots., 15 A.L.R. 159 (1921), 28 A.L.R. (1924).
67 A.L.R. 1121 (1930), 103 A.L.R. 1147 (1936).
l8aU.C.C. 5 5 1-102(3), 1-205, 4-103. In N.Y. Credit Men's Adjust-
ment Bureau, Inc. v. Manufacturer's Hanover Trust Co., 41 App. Div. 2d
912. 343 N.Y.S.2d 538 (1973), the court gave effect to an agrecmcnt rc-
quiring the depositor to give written notice within thirty days of the mailing
or delivery of any statement of account that the signature upon any returned
itern was forged. The court held the agreement did not absolve the bank
for negligence, or lack of good faith o r ordinary care, but instead provided
a condition precedent to liability in the form of an abbreviated period of
limitations. See also Webster Schott Building, Inc. v, Manufacturer's Han-
over Trust CO., 32 App. Div. 2d 744, 300 N.Y.S.2d 1022 (1969), trroriorr
for leave to appeal denied 26 N.Y.S. 611, 258 N.E.2d 104, 309 N.Y.S.
2d 1028 (1970).
'84The standard length of time approved by the American Dnnkers
Association for this statute was six months. The shortest of those adopted
were Montana and Oregon, thirty days; Washington and North Carolina,
sixty days. Louisiana, Maine, and New Jersey allowed one year. Some
states also have statutes requiring suit to be brought within a short period.
For example, California and Wisconsin, one year; Maine, three years.
Statutes requiring some sort of action on the part of the dcpositor are still
in force in Louisiana. The others are superseded by the provisions of the
Commercial Code.
186Showers v. Merchants' Nat'l Bank, 293 Pa. 241, 142 A. 275 (1928)
(discussed in 4 2 Harv. L. Rev. 125 (1928), 38 Yale L.J. 257 (1928), Annot.,
6
60 A.L.R. 526 (1929)).
MUTUAL DUTIES m-100
the bank of any alterations o r forgeries o n his checks or their indorse-
ments. If the customer fails to d o this, the bank is liable neither f o r those
same forgcries nor for alterations paid thereafter in good faith and re-
turned with the later statement.
T h e theory underlying the Code is that if the customer had given
the bank tinicly notice, it would hnvc bccn nlcrtcd and could have pre-
vented paying the subscqucnt chccks passed by the person who altcrcd o r
forged the first check.lR0 T h e duty of the custonler to report forgeries is
diflerent when a forged indorscment is involved. Although the customer
should know his own signature and be able t o detect any forgery, this is
not necessarily true with respect to forgeries of indorsements. T h e cus-
tomer's failure to detect a forged indorscment will not preclude him from
challenging the bank's payment of the item, as long as he acts reasonably
in examining the statement and as long a s there was not a prior forgery
of his signature by the same forgcr o n any other check.'87 In any event,
if thc customer can establish that thc bank has exercised a lack of ordi-
nary carc in paying thc itcms that wcrc forgcd o r nltcrcd, thc loss will
remain on the bank.IRR T h e Comnlercial C o d c further establishes an ab-
solute statute of limitations for reporting forgeries and altered items.
Regardless of due care o n the customer's o r the bank's part, the loss will
fall on the depositor if h e does not report his unauthorized signature or
any nllcrntion on thc f;lcc or back of tlic itcm within onc ycnr o r i f he
fails to rcport unautl~orizcdindorscrncnts within thrcc
18Q U.C.C. $4-407. Sce Fcderal Ins. Co. v. Groveland State Bank, 37
N.Y.2d 252, 333 N.E.2d 334, 372 N.Y.S.2d 18 (1975), whcrc the court
applied the duty to examine bank statements to a bank that was the issuer
of chccks. A custon~er's report of forgery to a bank need not take a special
form. See American Home Assurance Co. v. Scnrsdale Nat'l Bank & Trust
Co., 9 6 Misc. 2d 715. 409 N.Y.S.2d 608 (1978).
I B 7 U.C.C. 5 4-407( 1 ) .
'88 U.C.C. 5 4-407(3). In Nu-Way Scrv. Inc. v. Mercantile Trust Co.
Nat'l Ass'n, 530 S.W.2d 743 (Mo. App. 1975), the court found that the
company had not exercised reasonable care in examining its bank statement
and cnncclled checks for forgeries, wherc the bookkeeper merely reconciled
the nniounts of the cnnccllcd chccks mathenintically but never cxaniincd the
checks for forgerics or alterations nnd did not compare the chccks with the
company chcckbook. The court also held that the bank had cxercised reason-
able care in paying the item since the forgerics were well done.
In the same case, the bank was liable for paying olrered checks, nol-
withstanding the customer's failure to exercise reasonablc care in reporting
the nltcrations, because "the alterations were maladroitly pcrformcd nnd thc
changes so egregious as to call for the rcproval of the bank clerk" who
handlcd thc payment of the chccks. Sec also G . Rr R. Corp. v. Anicrican SCC.
k Trust Co., 523 F.2d 1164 (D.C. Cir. 1975); Parsons Travel, Inc. v. Hoag
and Northwest Nat'l Bank, 18 Wash. App. 588, 570 P.2d 445 (1977).
I B 9 U.C.C. 5 4-406(4).
359
 5 20-105 D U T I E S OF BANK & CUSTOMER
9 20-105 CUSTOMER'S DUTY TO REPORT FORGERIES
AND ALTERATIONS WHEN CHECKS ARE
RETAINED BY THE BANK
A s banks shift to electronic means of transferring funds a n d mak-
ing payments, ncw systcms for permitting the collection of chccks with-
o u t physically transferring the checks have emerged.IQ0 These check-
truncation systems provide for the retention of the checks a t various
points in the banking systcm. Undcr o n c approach, thc chccks a r e hcld
by the payor bank. Under another, the bank of deposit detains the
check. Although the customer receives a statement with information
about his account a n d about the transactions involving it, tile checks he
has drawn will not be returned to him with the statement.
Undcr the Commercial Codc, the customer's duty to discover and
report unauthorized signatures or alterations normally ariscs because thc
bank sends the customer a "statement of account accompanied by items
paid." lQ1 Sending only a statement is not enough t o trigger the cus-
tomer's duty to report, under this provision.
Tlic Codc also providcs that thc customcr will havc a duty t o report
unauthorized signatures o r alterations when the bank either "holds the
statement and items pursuant to the request or instruction of its cus-
tomer" o r reasonably "makes the statement and items available" to the
customer.102 These alternatives also a r e difficult to implement in a
check-truncation system. A major problem exists when the checks arc
I not t o b e held by the customer's bank but a r e retained elsewhere in the
system by the depository banks. I n this case, the customer's bank is not
"holding" the items for the customer and it is questionable if the items
a r e reasonably "available." Probably the only solution is for the bank
, and customer to enter into a n agreement in which the customer accepts
I a duty to report forgeries and alterations, although the cancelled checks
i to supervise bookkeeping); Dominion Constr., Inc. v. First Nat'l Bank, 271
will not be returned with the statement.103
I Md. 154, 315 A.2d 69 (1974) (carelessness in naming joint payees).
I
5 20-110 DEPOSITOR'S DUTY OF DUE CARE
In addition to thc duty to cxarninc the statcmcnts whcrc they exist,
the dcpositor also owcs thc bank a gcncrnl duty of d u e carc under the
circumstances. Thus, whenever the bank can show that it has bcen
caused loss in dcaling with thc dcpositor's papcr d u e to his carclessncss,
1 9 V h e s e systems arc described in Penney & Baker, The Low 01 Elec-
tronic Fund Transjer S y s t e m Q 2.01 ( 1980).
ID1U.C.C. 5 4-406(1) [emphasis added).
19*U.C.C. B 4-406( 1 ) .
I B 3 For an excellent discussion of these problems, see Penny & Baker.
note 190 supra, 5 2.02.
MUTUAL DUTIES b .+115
it may recover from the d e p o s i t ~ r . ~ ~Such
' situations may arise from
carelessness of the depositor in properly describing the payee and in
situations similar to the fictitious and nonexisting payee cases discussed
above. When the bank, acting reasonably in its attempt to carry out the
depositor's carclcss o r negligent order, has erred, the loss falls on the
dcpositor.'""
8 20-1 15 AMnIGUOUS INSTRUMENTS
Occasionally, depositors and others dealing with banks draw checks
and other instruments in ambiguous form. Sometimes this is inadvertent
and sometinics it is done intentionally by altering checks on othcr banks,
o r other standard contracts, to conform with the intention of the party
drawing thc instrument. Undcr thcse circumstances, a number of rulcs
a r e provided by law to protect the parties.
When thc sum payable, expressed in writing, differs from that in
figures, the writing controls.10B When a printed contract has been filled
in o r has bccn changcd by handwriting, the writing controls the printing
and, if fillcd in by a typcwritcr, thc typcwritcr takes prcccdcncc ovcr the
printing. I n like manner, i f the instrument is typewritten and contains
insertions in longhand, the writingcontrols. n u t marginal notations, either
o n chccks o r other contracts, are not part of the instrument, unless it is
clcar from their location that they arc intended to be made part of it.1QT
ID4SeeU.C.C. $ 5 3-404, 3-406, 4-103; Park State Bank v. Arena Auto
Auction, Inc., 59 Ill. App. 2d 235, 207 N.E.2d 158 (1965).
I o 5 Examples of situations where the carelessness of the depositor re-
sulted in the loss falling upon him are George Whalley Co. v. National City
Bank of Cleveland. 55 Ohio App. 2d 205, 380 N.E.2d 742 (1977) (failure
U.C.C. $ 3-1 18(d). Wisconsin has added a provision to its version
of the Commercial Code, that figures imprinted by means of a special pro-
tective device (such as a checkwriting machine) shall control handwritten,
typewritten, and other printed words or figures.
I n 7 U.C.C. 5 3-1 18. The prc-Codc nuthoritics arc collected in Boutel's
Bmnnnrt, note 100 , w p m , nt 279.
Memornndn nflixcd on chccks such as "Void Thirty Days Aftcr Dafc,"
o r "Not Good For Over $500," can limit the authority of the bank to pay
such checks.
Wisconsin has varicd the Code by adding a provision that memoranda
on thc face o r back of the instrument (whether signed or not), that are
material to the contract, and that are made nt the time of the dclivery of the
instrument are part of thc instrument. Parol cvidence is admissible to show
the circumstances under which the memoranda were made. The Wisconsin
+ variation has been disapproved by the permanent Editorial Board for the
Uniform Conlmercial Code. See Report No. 2 at 57.
3 20-120 D U T I E S OF BANK & CUSTOMER
When the instrument is not dated, it is considered as dated a t the
time it was issued and, if interest is specified without a date from which
it runs, it is considered a s beginning from t h e time of issue.lQ8
If a signature is placed o n a negotiable instrument in such a manner
that thc capacity in which the party intended t o sign is unclear, the signa-
ture will be treated a s a n i n d o r ~ e m e n t . ' ~If the instrument is not nego-
tiable, the s a m e result would probably ~ b t a i n . ~
5 20-120 BANKER'S LIEN
A s a result of t h e relationship between t h e bank a n d the customer,
a considerable amount of the customer's property often comes into the
hands o f the bank. I n addition t o the amounts o n deposit for which the
b a n k is indebted to t h e customers, instruments sent in the regular course
of business f o r collection, bills of lading, a n d other securities normally
find their way into the hands of the bank. W h e n this paper comes t o the
b a n k in the general course of business, t h e bank is said to have a lien o n
them for debts arising o u t of ordinary business transaction^.^^^ This lien
gives the bank a first claim on the customer's account, o r o n other prop-
erty in the bank's possession, for debts arising in the ordinary course of
business. F o r example, if an instrument deposited for credit is dis-
honored o n being sent for collection, the bank, if it alrcady has given
credit, may excrt its licn by charging thc customcr's a c c o ~ n t . ~ ~the Vf
customcr's account is overdrawn, cornnlcrcial papcr in tllc bank's hands
m a y be held until the customer pays t h e
When the securities held o r taken by the bank are negotiable, the
bank is a holder for value to the extent that it has given credit available
for withdrawal as of right, and it m a y b e a holder in d u e course of such
paper if it otherwise meets the requirements of holding in d u e course.2"'
T h e banker's lien, however, docs not arise from separate contracts or
special deposits.205 F o r example, collateral security o n a special loan, in
''8U.C.C. fi 3-1 18 ( d ) .
'" U.C.C. 8 3-402.
200 See U.C.C. 5 3-805.
201 See U.C.C. 5 4-203, which gives the bank a security interest for
value advanced pending collection of negotiable instruments and other papcr.
Other rights of setoff and lien arise under general banking law principles.
202 See . 1 4-2 12: see 8 8 20-90. 2 1-55.
- - - U.C.C.
- - " Coop Elevator, Inc. v. State Bank, 236 N.W.2d 674 (Iowa 1975) (no wrong-
See discussion of bankers' lien in M o r s e on Banks, note 156 suptn,
- ~
Ch. 22.
20( U.C.C. 8 4-209; and see further discussion in Chapter 15.
los Morton v. Woolery, 48 N.D. 1132, 189 N.W. 232 (1922); Payne
V. Burnett, 151 Tenn. 496, 269 S.W. 27 (1925). See Annots., 24 A.L.R.
1101 (1923), 39 A.L.R. 1125 (1925).
MUTUAL DUTIES $ 20-120
absence of contract to the contrary, is not subject to the banker's lien.lOO
F o r this reason, many banks insert special provisions in their loan con-
tracts stating that the collateral may b e held for all debts of the customer
arising o u t of that o r a n y other transaction.
T h e banker's lien o n securities is lost when the bank parts with
posscssion t o either the custonler o r a third party. T h e banker's lien
against accounts is a self-executing right which allows the banker to
charge the account of the customer f o r debts arising in the ordinary
course of banking207 However, care must be used in exercising this
right in light of the constitutional limitations o n creditors' remedies.208
T h e banker's lien should be distinguished from the setoff, which is
a statutory right given in most states a n d which permits mutual debts to
b e set off against each other. F o r example, if a bank has m a d e a direct
loan to a depositor, it does not in absence of contract have a lien upon
his chccking account for the amount of the debt, even when it is due, but
it does have a right of setoff. Upon notifying the customer, t h e bank
.
could set off the account against the debtS2Og A bank cannot offset an
account when it has o r should have knowledge that the funds belonged
to someonc other than the d c p o ~ i t o r . ~T' ~h e right of the bank to excrt
both its liens and its setoffs, by charging the customer's account a n d by
2W SCCAnnot., 68 A.L.R. 912 ( 1930).
m7 Kellcr v. Commercial Crcdit Co., 149 Or. 372, 40 P.2d 1018 (1935).
Scc Annot., 9 6 A.L.R. 1240 (1935).
208 See 8 31-15.
20B K n ~ g e rv. Wells Fargo Bank, 11 Cal. 3d 352, 113 Cal. Rptr. 449,
521 P.2d 441 (19741, permitted a bank to set off a credit card debt against
the customer's account and held that there was no violation of constitutional
due process in making such setoff without notice to the customer. The court
reasoned that although there was a state statute permitting the setoff, the
making of the setoff was "private action" and not "state action" for purposes
of the due process clause of the Constitution. See also Meyer v. Idaho First
Nat'l Bank, 96 Idaho 208, 525 P.2d 990 (1974) (setoff of a note that was
in default); Fletcher v. Rhode Island Hosp. Trust Nat'l Bank, 496 F.2d 927
(1st Cir. 1974), cert. denied 4 19 U S . 1001 ( 1974).
For a discussion of a bank's right to sct off a joint account for a dcbt
owed by one party, see 9 Cap. L. Rev. 413-417 (1979).
See Paine-Erie Hosp. Supply, Inc. V. Lincoln First Bank, 82 Misc. 2d
432, 370 N.Y.S.2d 370 (1975) (no wrongful dishonor of checks after ac-
count had been set off in partial satisfaction of a demand note); Farmers
ful dishonor when account had been set off as a result of the bank's accelera-
tion of payment on notes under an insecurity clause); I n re Applied Logic.
576 F.2d 952 (2d Cir. 1978) (bank's role in formulating debtor's refinancing
did not deprive bank of setoff in bankruptcy).
CL
210 Pan Am. Nat'l Bank V. Holiday Wines & Spirits, Inc., 580 S.W.2d
7 (Tcx. Civ. App. 1979).
 1
5 20-125 OUTIES O F BANK & CUSTOMER

using other means, is to a large extent determined by local law and

statutes. It should be exercised only with the greatest care and upon
advice of local counsel.
Chapter 21
5 20-125 CARNISIIMENT
COLLECTION AND PAYMENT
d
Garnishment is a legal process for collecting ebts in which a credi-
tor, desiring to collect money owed him by ha debtor, may attach an-
other debt owed by a third person to his debt r. The garnishment pro-
cedure is usually by a court writ to enforce a judgment against the
dcbtor, in which the court orders the third party to pay thc creditor.
OF INSTRUMENTS
Section Page
Such payment by the third party discharges both debts to the extent of 21-5 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365
the amount paid. Since a bank is a debtor to its customers, the customers' 2 1-1 0 Relation of Depositor and Bank . . . . . . . . . . . . . . . . . . . 366
creditors may garnish the customers' accounts by serving court ordcrs 2 1-1 5 Choosing the Collecting Bank . . . . . . . . . . . . . . . . . . . . 368
o n the bank to pay the creditor instead of the customer. When this is 21-20 Intermediary and Collecting Ranks . . . . . . . . . . . . . . . . 368
done, the bank, at the risk of contempt of court, must impound the 21-25 Consequences of Delay o r Other Failure to Act
-
amounts of the garnishment writs until the court settles the rights o f the Propcrly in Collecting the Item . . . . . . . . . . . . . . . . . . . 370
parties and until the court acts it may not pay drafts or customers' orders 21-30 Scnding Paper Direct to Payor . . . . . . . . . . . . . . . . . . . . 372
out of these funds.211 21-35 Medium of Payment Under Commercial Code . . . . . . . 373
Some jurisdictions have allowed creditors to use the garnishment 21-40 Duties of Drawee or Payor Bank . . . . . . . . . . . . . . . . . . 373
procedure before obtaining a court judgment. Although garnishing 2145 Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 374
funds before judgment is an ancient common-law practice, its validity has 2 1-50 Pnymcnt by Negotiable Paper and Its Effect on
been cast into serious doubt by the U.S. Supremo Court whcn it is cxer- the Underlying Transaction . . . . . . . . . . . . . . . . . . . . . . . 375
cised prior to judgment against the debtor and without giving the debtor 21-55 Payor Bank's Right to Cancel Payment and
notice and opportunity to be heard. In Sniadach v. Farnily Finance Recovcr Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 377
C ~ r p . , the
~ l ~Supreme Court held that the Wisconsin statutory procedure 2 1-60 Direct Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 378
for garnishing a debtor's wages prior to judgment violated due process 21-65 Instruments Payable At or Through Banks . . . . . . . . . . 379
becausc it deprived the debtor of property without prior notice and op- 2 1-70 Errors in Handling Computcr Encoded Chccks . . . . . . 381
portunity to be heard. This decision was the beginning of an extensive 21-75 Federal Rcscrvc Rulings, Clearinghouse Rules,
and confusing scrics of decisions in the U.S. Supreme Court and other and Agrcemcnts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 383
courts. These decisions are discussed in 3 3 1-15.
The bank, on receiving a writ of garnishment, will not always be
able to tell whether the writ is valid or is unconstitutional. In either case, 5 21-5 INTRODUCTION
to avoid liability to its customer or to the court, the bank should immc-
diatcly notify the customcr and should turn the case ovcr to lcgal counsel. This chnptcr discusses thc proccss by which banks collcct pnymcnt
on negotiable instruments for their customers and the rights and duties
of those involved in the collection process. The basic law governing this
2'1 See U.C.C. 5 4--303. process is Article 4 of the Con~mercialCode, but it is not the only source
*I2 395 U.S. 337 (1969).
of law. A vast number of collections occur through the Federal Reserve
System. (For furthcr discussion, sec 9 2-60.) Thc Board of Governors
of the Fcderal Reserve System has promulgated regulations that govern
its collection procedures. The Commercial Code provides that Federal
* Rcscrvc regulations are binding upon all parties concerned, whether
 § 21-10 D U T I E S O F BANK & C U S T O M E R
there has been a specific agreement o r not, a n d that they supercede the
provisions of the Code. (See 3 21-75.) Fortunately, the C o d e is gener-
ally consistent with these regulations.
I Banks also collect payments through clearinghouse associations.
I T h e s e associations adopt their own rules, which also a r e binding upon
the parties and which supercede the provisions of the Code. (See
1 3 21-75.) Finally, t h e emergence of electronically transmitted payment
, instructions and transfcrs has Icd to a ncw body of law. Thcsc transac-
tions a r e largely outside the coverage of t h e Commercial Code. Instead,
the rights of the parties a r e established by private agreement a n d , t o some
1 extent, by special federal and state legislation. T h e Code, of course, recog-
nizes the effectiveness of these agreements t o the extent that they may vary
from the terms of the Code. (See 5 21-75.) T h e new systems of elec-
tronic funds transfer a r e discussed in Chapter 26. Because the Com-
mercial Code remains the basic body o f law offering a comprehensive
view of the collection and payment process, this chapter gives primary
emphasis to t h e Code.
5 21-10 RELATION OF DEPOSITOR A M ) BANK
When a depositor places various items in the hands of his banker,
either as dcposits o r a s items for collcction, the Commercial Codc allows
the parties to m a k e a n y agreement they desire covering their relationship,
provided that the agreement does not attempt to relieve the bank of re-
sponsibility for its o w n negligence o r exercise of bad faith.' Contracts of
' U.C.C. O 4-103(1). See N.Y. Credit Men's Adjustment Bureau, Inc.
V. Manufacturer's Hanover Trust Co., 41 App. Div. 2d 912, 343 N.Y.S.2d
538 (1973) (agreement enforced requiring the depositor to give notice of
forgeries within thirty days of mailing the statement of account); State ex rel.
Gabalac v. Firestone Bank, 46 Ohio App. 2d 124, 75 Ohio Op. 108, 346
N.E.2d 326 (1975) (unilateral notice on bank's statement, requiring report-
ing of errors within ten days, not enforced); Valley Nat'l Bonk v. Tang, I8
Ariz. App. 40. 499 P.2d 991 (1972) (UCC provisions against disclaimers do
not apply to night depository arrangements bccausc thcy ore not part of the
collection and deposit process); Hy-Grade Oil Co. v. New Jersey Bonk. 138
N.J. Super. Ct. 112, 350 A.2d 279 (1975) (agreement disclaiming liability
f o r negligence in a night depository service not effective).
In bank of Wyandotte v. Woodrow, 394 F. Supp. 550 (W.D. Mo.
1975), a payor failed to follow a Federal Reserve operating letter requiring
the wiring of advice of nonpayment when a debit item of $1,000 or more
was involved. T h e court indicated in dicta that failure to observe the Fed-
eral Reserve procedure might subject the payor bank to liability for any
loss resulting from its delay in giving notice of nonpayment. Federal Re-
C O L L E C T I O N OF I N S T R U M E N T S
this nature must be clearly set out,? while Federal Reserve regulations
a n d opcrating letters, clearinghouse rules, a n d the like are binding o n
the parties whether or not thcy asscnt to tlicm."
In absence of agreement o r regulations, the Commercial C o d e estab-
lishes rules governing the collcction proccss. Regardless of the indorse-
ment's nature o r form, and whether the paper is deposited o r simply
given to pay thc customcr's obligation to the bank, the bank becomes the
depositor's or custo~ncr'sngcnt for purposcs of collcction unlcss tllcrc is
a clcar contrary intcnt. TIic papcr is still owned by tlic depositor and the
bank handles it at the customer's risk.' But the depository bank, and all
subscqucnt banks handling thc paper, havc all the rights of holders in
d u e course for any liens they may have on the p a p e r , V o r any advances
they havc made, o r for covering any loss they may suffer in the collection
proccss. These rules apply, even though the bank may have purchased
the item and is its 0wner.O
Since the banks a r e agents for collection, they have certain duties
that include presenting o r sending the items for payment, receiving pay-
ment, and rcmitting thc proceeds. In cnsc of dishonor, thc bank has a
duty to make proper protcst and to givc notice to the partics sccond-
arily liablc on the paper.' T h e Conlmcrcial C o d e has adopted the Mas-
sachusetts r u l e . W h c r e tlic papcr is payable in a distant city, the dc-
pository o r collecting bank is mcrcly rcquircd to forward the pnpcr and
is not linblc lor any act of banks to which it is scnt-providcd it obcys the
instructions it rcceivcd when taking the So, in all states today,
whcn losscs occur during thc collcction process of a n instrument de-
posited for that purpose, the owner has a claim only against the bank
causing the loss. All banks in thc proccss of collcction are subagents o f
tlic owncr nnd arc dircctly rcsponsiblc to Iiirn.Io Tlicrclorc, although tlic
c7
serve regulations have been held binding upon Federal Reserve System non-
members that use Federal Reserve clearing proccdurcs. Community Bank
v. Federal Reserve Dank, 500 F.2d 282 (9th Cir. 1974). cert. dcnied 419
U S . I08 ( 1974); nrtrcrtdcd 525 F.2d 890 ( 1975).
2U.C.C, $5 1-102(3). 1-201(3), 1-201(11).
W.C.C. 5 &IO3(2), 4-103(3). 4-103(4).
U.C.C. 6 4-201 ( 1 ) . Scc Jones v. Commonwealth Bank Rc Trust Co.,
0 0 Pa. D. Rr C. 143 (1976). (Holdcr status of dcpository bank is a question
of fact to be resolved on a case-by-case basis).
U.C.C. $ 4-201 ( 1 ) and Comment. See U.C.C. $ 5 4-208, 4-209.
U.C.C. $ 4-201.
U.C.C. 5 4-202.
"ec 8 21-20.
O U.C.C. $ 5 4-202(3), 4-203.
ri l o U.C.C. 5 4-202(3) and Comment 4.
 21-15 D U T I E S OF BANK & C U S T O M E R
depository bank is not liable for any othcr bank's negligence o r insol-
vency while handling t h e item, it is liable to the depositor for its own lack
of care."
5 21-15 CIIOOSING THE COLLECTING BANK
Sincc the bank in the collecting process through which the instru-
ment is sent for final collection is usually directly liable t o the depositor,
it is the duty of each bank through whose hands the instrument passes
t o carefully choosc the bank that shall make final collection.12
At common law, whcn an instrurncnt was drawn o r niadc pnyablc
o n a bank in a city which had two o r more banks, the papcr was required
to b c scnt to o n c o t h c r than thc drawcc o r payor. If the instrument
was sent directly to the drawee o r payor for collection, any loss resulting
from failure of the proceeds to be returned fell to the bank sending the
instruments, on the theory that it was improper to ask a bank to collect
from itself.Ia T h e Commercial Code allows the transmitting bank, in ac-
cordance with Federal Reserve regulation o r clearinghouse rules, to send
the item directly to the drawee o r to use any other reasonably prompt
method of c ~ l l e c t i o n . ' ~
§ 21-20 INTERMEDIARY AND COLLECTING BANKS
A number of banks may be involved in the process of collecting
paper. F o r example, a buyer from Champaign, Illinois, may give a check
drawn o n a Champaign bank to a merchant in Winetka. T h e merchant
will deposit the check in his Winetka bank, the Winctka bank may then
send it through clearings to its Chicago correspondent bank, the Chicago
correspondent will send it to a second Chicago bank that is a correspon-
dent of the Champaign drawee bank, and the second Chicago bank will
then send the paper to the Champaign bank. (Whcn all o r some o l the
" U.C.C. 8 4-202( 1).
'2 Id.
l a Minneapolis Sash & Door Co. v. Metropolitan Bank. 76 Minn. 136,
78 N.W. 980 ( 1 899). See Annots., 27 A.L.R. 248 (1895); 44 A.L.R. 504
(1899); 2 A.L.R. 194 (1906), 18 A.L.R. 441 (1909); Turncr, "Dank
Colleclions-the Direct Routing Practice," 39 Yale L.J. 468 (1930).
j4 U.C.C. 5 4-204. The Commercial Code, in this respect, follows the
business practices that developed under Federal Reserve regulations and
special state statutes. See Fed. Res. Reg., J Series 8 5 (1981); Townsend,
"The Bank Collection Code," 8 TuI. L. Rev. 21, 46 (1933).
COLLECTION OF INSTRUMENTS
banks a r e members of a common clearinghouse, the numbers of banks
needed t o handle the instrument may be reduced.) Under the Commer-
cial Code, each of the collecting banks, while it has the check, is the
agcnt o f thc dcpositorlVor collection. T h c Winctka bank is called thc de-
pository bank and, in this example, i t also is a collecting bank. T h e
two Chicago banks are intermediary banks o r collecting banks and the
Champaign bank is thc payor bank.I0
Although each of thc intermcdiary banks is dircctly responsible to
the original depositor, they a r e in n o way bound to carry out the deposi-
tor's instructions to the depository bank.17 Neither are they bound by
any of the indorsements appearing on the paper, including restrictive
indorscnicnts, niadc by pcrsons othcr than the bank acting as their immc-
diate t r a n s f ~ r o r . ' ~T h e only duty of the intermediary banks is to credit
thc account of thc trnnsnlitting bank, to follow its spccial instructions if
any,lD and to see that the papcr is forwarded to the next bank in the
chain of collection before the midnight deadline,20 which is midnight of
t h e next business day after receipt of the paper.21
A s banks, they have a lien on the paper for the amount of the
credit givenZZand, even though it is restrictively indorsed, may be hold-
ers in d u e course of the paper.23
T h e collecting banks are, of course, directly liable to the original
depositor for any losses caused by their negligence o r improper handling
o f the but they are not liable for losses caused by delays beyond
"
their control o r by delays of a day incurrcd by bona fide attempts to
collect.26
'5 U.C.C. 5 4-201 ( 1) .
lo U.C.C. 1 4-105. Sec the description of these definitions in Section
19-5.
U.C.C. 5 4-203.
l7
l8 U.C.C. § § 3-206(2), 3-419(4). See U.C.C. $ 5 4-203, 4-205(2).
l o U.C.C. § § 4-203, 4-205(2).
20 U.C.C. 8 4-202(2).
U.C.C. 4-1 04 ( 1 ) ( h ) .
22 U.C.C. 5 4-208(1); Citizens Nat'l Bank v. Fort Lee Sav. dr Loan
Ass'n, 89 N.J. Super. 43, 213 A.2d 315 (1965).
2"U.C.C. 5 4-209. SCCU.C.C. 5 3-2O6(4).
24 U.C.C. $ 5 4-103( 1 ), 4-201. 4-202(3). On the question of cn~tsation.
scc Mnrcoux v. Van Wyk, 572 F.2d 651 (8th Cir. 1978), cerr. disr~lisscd
439 U.S. 801 (1978).
" U.C.C. 5 4-lOA(2).
2"LJ.C.C. 5 4-108(1). A collecting bnnk is not nn insurer of collection
nor is it responsible for the mistakes of its customer. Madsen v. Walker
Bank & Trust Co., 28 Utah 2d 438, 503 P.2d 121 3 (1972). See also Der
Ghazarian v. Banco da Lavoura de Minas Gerais, S.A. 16 U.C.C. Rcp. 771
(1975).
§ 21-25 D U T I E S OF B A N K & C U S T O M E R
5 21-25 CONSEQUENCES OF DELAY OR OTHER FAILURE
TO ACT PROPERLY IN COLLECTING THE ITEM
Under the Commercial Code, the holder of a negotiable instrument
has a duty t o present the instrument for payment in a timely fashion. An
instrument that has a stated time for payment should be presented for
payment on that date.27 When the instrument is payablc o n demand, if
indorsers are to be held liable in the case of subsequent dishonor of the
instrument, presentment for payment must be made within a reasonable
time after thc indorsement was made.2R In the case of uncertified checks,
the Code sets up rebuttable presumptions that prcsentmcnt within thirty
days after the date the check is written is a reasonable period of time
within which to hold the drawer liable and that presentment within seven
days after indorsement is sufficient time f o r holding the indorsers liable.
T o meet these deadlines, the customer need only begin the process of
bank collcction within those pcriods whcn a check is involvcd. In other
words, presentmcnt o n the drawee docs not actually havc to occur in
order to meet thc dcad1incs.m
T h c drawcr of chccks o r drafts payable at n bank, togcther with the
maker of notes o r the acceptor of drafts payable a t a bank, arc, if thcy
assign their rights against the bank t o the holder, discharged from liabil-
ity to the extent of any loss caused by delay. For example, if the drawee-
bank should fail during the interval and pay only 50 percent o n the
claims o f creditors, the drawer of a check o r draft, the makcr of a note,
o r the acceptor of a draft payable a t the bank would be discharged from
all liability by assigning his rights to this dividend ( a s against the insol-
vent bank) to the holder of the instrument.JO Indorsers of checks, drafts,
and notes are entirely discharged. O n e major consequence, then, of un-
reasonable delay in prescnting a n item for payment is that if the itcm is
subsequently dishonored, the holder will not have recourse against prior
ind~rsers.~'
Delay in presentment may be excused. It is excused when there is no
notice that it is due, when it is unreasonable to make presentment within
the time available, when payment on the item has been stopped, or when
presentment is waived." A holder in d u e course who does not know
" U.C.C. 5 3-503 ( 1) (c).
28 U.C.C. 5 3-503( 1) (e).
*' U.C.C. 5 3-503 (2).
'0 U.C.C. 5 3-502( 1 ) (b).
a1 U.C.C. 5 3-502(1)(a). The discharge of liability is only on the
obligation as indorser. It would not affect thc liability of an indorscr for
breach of his warranty that the signatures on the item were not forged.
'2 U.C.C. 5 3-5 1 1.
* (1928).
C O L L E C T I O N O F INSTRUMENTS ,21-25
about the dclay in prescntment is not bound by a prior discharge in
liability.83
When a collecting bank is handling a n item for collection, the bank
generally will be under a duty to act more promptly than the above time
pcriods suggest. Thc collecting bank has a duty to use ordinary care and
to act promptly in collecting the item o r forwarding it for presentment.
If the bank acts before its midnight deadline (midnight o n the banking
day following the day it received the item), the Commercial Code treats
the bank action as timely.84 O n the other hand, if the bank delays be-
yond its midnight dcadlinc, the bank will havc the burden of proving
that its dclay was reasonable. Failurc to establish the reasonableness of
the dclay may, to the extent of any loss caused by its delay, make the
bank liable to its customer for the amount of the item.8s In addition to
liability for delay, banks have been held strictly accountable for failing
t o make proper p r e ~ c n t m e n t .Of
~ ~course, when the delay does not cause
any loss and thc item is subscquently dishonored, the bank may havc
rights to charge thc item back to its customer's account (as discussed in
9 20-90). If thcrc has bccn no discharge of indorscrs, as discussed
above, it may have rights against thc prior indorscrs.
In cascs where thc instrunlent presented lor collection is dishonored,
it is the duty of the collecting bank to give proper notice of dishonor.
Failurc to give notice or to rcturn the dishonored paper by the bank's
midnight deadline will result in a loss of the right to charge back the
customer's account.B7
At common law, it was the duty of the collecting bank to collect
cash o r legal tender. Any other medium was taken at the risk of the col-
lector. F o r example, if the collecting bank accepted credit or a check or
draft o n another bank, the parties secondarily liable on the instrument
wcrc discharged" and if the draft o r check failcd of collection, the col-
n3 U.C.C. 5 3-602.
a4 U.C.C. 8 4-202(2). In Wilhclm Foods, Inc. v. Nat'l Bank of North
America, 388 F. Supp. 1376 (S.D.N.Y. 1974), the court held that a bank
collecting drafts on a non-bank drawec had not failcd to exercise ordinary
care when it rctaincd the drafts in an efTort to get payment for periods of
four lo twenty-five days, givcn the previous history of the bank's dealings
with the drawec.
a6 U.C.C. 55 4-202(2), 4-103(5).
a 0 U.C.C. 8 4-202(1) ( a ) .
U.C.C. 5 4-212. Compare U.C.C. $ 4-202, which makes the bank
liable for any loss caused by the delay in giving notice of dishonor. See
5 23-30.
N.I.L. 5 120, The cascs arc collcctcd in Annot., 52 A.L.R. 994
3 21-30 D U T I E S OF B A N K & C U S T O M E R
lecting bank had to m a k c good o n the loss.no T h e existence of custom o r
clearinghouse rules allowing banks t o accept drafts o r credit o n the books
of another bank was n o t binding o n depositors who had not agreed to
such methods.'O T h e Commercial Code not only makes such clearing-
house rules o r private agrcements effcctivc but it also specifically author-
izes collecting banks t o acccpt the following:
A remitting bank's check drawn o n s o m e other bank;
A check d r a w n o n a remitting b a n k that is a .member of the
same clearinghouse;
A charge, with the collecting bank, on a n account of the remit-
ting bank; o r
Any bank instrument, when collection is being m a d e from
other than a bank?'
Having made the collection, the bank is under the duty t o remit at
once t o the person w h o sent the item for c ~ l l e c t i o n . ' ~Even under the
C o d e rule, which makes the correspondent bank liable for losses it di-
rcctly causes t o the o w n e r of the paper, remitting the procecds to a sol-
vent correspondent w h o sent the item is a proper discharge of its duties.43
5 21-30 SENDING PAPER DIRECT TO PAYOR
Under the Commercial Code, a collecting bank does not, when a
drawee o r payor is a b a n k o r when Federal Reserve regulations o r clear-
inghouse rules authorize it, violate its duty of c a r e by sending a n instru-
ment direct to that person.44 When the drawee bank is in the s a m e town
a s the collecting bank, it is proper c a r e t o present the instrument for pay-
ment over the counter, through the clearinghouse, through the Federal
Reserve Bank, o r by a n y other customary means.46
an Virtue v. Danbury Statc Bank. 205 Iowa 392, 218 N.W. 58 ( 1 9 2 8 ) ;
Hommcrbcrg v. Statc Uank, 170 Minn. 15, 212 N.W. 16 ( 1 9 2 7 ) ; Annot.,
61 A.L.R. 739 ( 1 9 2 9 ) .
'"Federal Reserve Bank v. Malloy, 2 6 4 U.S. 160 ( 1 9 2 4 ) . See cases
cited in Beutel's Drannan Negotiable Instruments Law 1302 (7th ed. 1948)
(hereinafter cited as Beutel's Brannan).
'l U.C.C. $ 5 1-201 ( 3 ) , 4-103,4-211.
4 2 Remittance is discussed in 121-35.
U.C.C. 54-21 1. Cf. Boykin v. Bank of Fayettcvillc, 118 N.C. 566,
24 S.E. 357 ( 1 8 9 6 ) , National Citizens' v. Citizens' Nat'l Bank, 119 N.C. 307,
25 S.E. 971 ( 1 8 9 6 ) .
" U.C.C. 5 4-204(2).
'W.C.C. 5 4-204, Comment.
372
C O L L E C T I O N OF I N S T R U M E N T S 5 21-40
21-35 MEDIUM OF PAYMENT UNDER COMhlERCIAL
CODE
T h e Commcrcial C o d e has greatly changed the common-law rule as
to t h e medium of payment the collecting bank m a y accept. It is n o w
propcr, undcr thc Codc, t o acccpt cash, cliccks, o r drafts, of cithcr thc
drawee o r the payor o n any bank, o r a check of any otllcr bank n o t
drawn o n the drawee o r t h e payor.40 Also approved are the customary
settlements, such as cancelling clearinghouse balances, and, furthermore,
thc collecting bank may accept credits in p a y n ~ c n t s . ~When
' the bank
acts a n d remits promptly, it will not bcar the loss if payment by these
means fails.dR T h c itcm being collcctcd will be regarded as having been
dishonored and thc bank will have the right to charge back its customer's
account.4B
. 5 21-40 DUTIES OF DRAWEE OR PAYOR BANK
When items for collection a r e sent directly to the drawee-bank, the
bank is under a dual capacity-to act as agent for the owner to collect
from itsclf and, also, to pay the instrumcnt, as it is the drawee o r the
person primarily liable o n that instrument. Whether the instrument com-
ing t o the bank is indorsed for collection o r comes indorsed in blank,
the payor-bank's duties a r c thc samc.
I f the instrumcnt is presented through the clearinghouse, the pre-
liminary scttlemcnt takes place in accordance with the clearinghouse
rules a t the time the items cleared a r e exchanged a n d the bank has the
time allowed by the clearinghouse rules f o r checking the instruments a n d
returning them if dishonored. Otherwise, the credits given o n the ex-
change o f items become final a n d the instruments a r e regarded as paid.60
W h c n thc instrumcnt is prcscnted by mail, the bank has t h e time
allowed in the lettcr or, by agreement bctwecn the parties, m a y decide
whether it will accept o r dishonor the paper." If n o time is stated, then
the bank, under the Commercial Code, has until the close of business
the ncxt day to dccidc whethcr to pay." TThc Board o f Govcrnors of the
Fcdernl Rcscrvc Systcnl has its own rulcs lor clcarillgs ~ h r o u g h thc
Federal Reserve Banks" but, in general, thcy closely resemble those set
U.C.C. 8 6 2 1 1 .
'7 Id.
4R U.C.C. Fc 4-21 l ( 2 ) .
'O U.C.C. 8 4 - 2 1 1 ( 3 ) .
60U.C.C. 5 4 - 2 1 3 ( 1 ) ( c ) .
g1 U.C.C. 5 5 4 - 2 1 3 ( 1 ) , 4-103.
* h2 U.C.C. $ 5 4-213, 4-301.
63See 12 C.F.R. 210 ( 1 9 8 0 ) (Reg. J ) .
 D U T I E S OF BANK & CUSTOMER
out in the Code. I n the collection provision under the Commercial Code,
the bank has until midnight of the day it receives the item t o settle for
it6' and until midnight of the next business d a y to pay, t o return it, o r t o
send notice of dishonor.66 ( A collecting bank may grant the payor bank
a o n e d a y extension without discharging parties secondarily liable.b8)
T h e time may be extended for a longer period in case of emergency?'
A s previously indicated, the time may b e further extended by agreement
o r clearinghouse rules,68 although the matter is not entirely free from
doubt." If the bank fails to act within this time, it is "accountable for
the amount of" the item.OO If the instrument is properly presented for
acceptance, failure t o act within thc time allowed for acceptance will
make the bank accountable.O1 Under the Commercial Code, refusal to
pay o r t o return a n instrument amounts t o a conversion o n t h e part of
the bank and it is liable f o r the amount of the i n s t r ~ m e n t .In
~ ~practice,
the bank's duties are about the same under the Commercial Code as
they were under the previous Negotiable Instruments Law.
$2145 PAYMENT
Under the Commercial Code, the liability of any party is discharged
t o the extent of his payment o r of other satisfaction of the obligation,
cven though it is madc with knowledgc of another person's claim, s o
long as the payor docs not in bad faith pay a thief or his assignee, o r
does not pay in violation of the terms of a restrictive indorsement. T h e
U.C.C. § § 4-103. 4-301.
'W.C.C. 10 4-104(h), 4-302.
6W.C.C. 5 4-108(1).
67 U.C.C. 5 4-108(2). m e effect of a computer breakdown upon the
bank's duty to make a prompt return of dishonored checks is not clear. In
Port City State Bank v. American Nat'l Bank, 486 F.2d 196 (10th Cir.
1973), the delay was excused. But see Sun River Cattle Co. v. Miner's Bank,
164 Mont. 237, 521 P.2d 679 (1974). s u p p . o p . 164 Mont. 479, 525 P.2d
19 (1974).
A8 See West Side Bank v. Marine Nat'l Elrch. Bank, 37 Wis. 2d 661, 155
N.W.2d 587 (1968).
U.C.C. 5 4-301 ( 1 ) imposes an absolute requirement on the bank of
acting before its midnight deadline. See also 5 4-213(4) (b). U.C.C. 5 4-103
may be viewed as modifying these limits, howcver. Sce Wcst Side Bank V.
Marine Nat'l Exchange Bank, note 58 supra.
U.C.C. 5 4-302; Rock Island Auction Sales v. Empire Packing, 32
Ill. 2d 269, 204 N.E.2d 721 (1965).
U.C.C. $ 4-302(b).
" U.C.C. $ 5 3-419, 4-302; Note, 82 Banking L.J. 241 (1965).
C O L L E C T I O N O F INSTRUMENTS .-50
only remedy of a person who has claims on such papcr is to supply satis-
faction indemnity o r obtain a n injunction against p a y ~ n c n t . " ~
Collecting banks are not bound by the terms of prior restrictive
indorsementso4so long as they follow the instructions of their immediate
t r a n s f ~ r o r s . ~ V a y o r - b a n kare,
s of course, bound by the restrictive in-
dorsements, a s well as by the instructions of their immediate transfer-
ors.OO In addition, thcy have the protection of clearinghouse rules, Fed-
eral Reserve directives, o r special contracts made with depositors.a7
T h e Commercial C o d e has clarified the law as to the time payment
takes place. Under the Code, payment becomes final when the first of
thc following cvcnts happcns: T h c itcm is paid in cash; the item is set-
tled for and the right t o rcvoke the settlement waived; the process of
posting the item to the account of the person t o be charged therewith is
completed; o r a provisional scttlcment is made for the item a n d is not
rcvoked within the time allowed by agreement, law, o r clearinghouse
r u l ~ s .When ~ ~ the payor-bank is also the bank in which tlic paper was
deposited and i f that paper has not bccn paid or dishonored before the
opening of the sccond banking day following its receipt, thc customer
has the right to withdraw against thc credit givcn for tlic itcm.OD
8 21-50 PAYMENT BY NEGOTIABLE PAPER AND ITS
EFFECT ON T l i E UNDERLYING TRANSACTION
A t common law, it was the general rulc, in abscncc of agrecnient t o
tho contrary, that payment of obligations by negotiable instruments was
only conditional. When the instrument was not paid, the holder could
revert to his rights against the persons liable o n the original debt.1°
When the parties agreed that a negotiable instrument was to be taken
O3 U.C.C. $ 5 3-601(3), 3-603. Scc § 20-35. Payment in due coursc.
which was required under the Negotiable Instrumenls Law, has not been
adopted by the Commercial Code. See N.I.L. 5 88.
O4 U.C.C. 6 5 3-206(2), 4-205(2).
8u U.C.C. 5 4-203.
O0 U.C.C. § $ 3-206(2), 3-206(3), 3-206(4), 3-603.
O1 U.C.C. $4-1 03.
O8 U.C.C. 5 4-213.
o W . C . C . 5 4-213(4) ( b ) . See 5 20-95; Edwards, "Recovery of Final
Payments Under the Uniform Commercial Code," 6 Ohio N.L. Rev. 341
(1979).
Dakin v. Rayly, 290 U.S. 143 (1933); It1 rr Wcgman Piano Co., 221
F. 128 (D.C.N.Y. 1915); Sanitary Can Co. v. National Pickle & Canning
Co., 191 Iowa 1259, 184 N.W. 354; Bergman v. Granstein, 235 Mass. 378,
126 N.E. 657 (1920). Sce Annots., 18 A.L.R. 532 (1921), 30 A.L.R. 647
(1924).
 D U T I E S OF BANK & C U S T O M E R
a s final payment, t h e underlying contract o r obligation for which the in-
strument was given was discharged by the delivery of the instrument.
Thereafter, the instrument constituted the only contract bctween the
parties.ll
T h e Commercial C o d e continues the common-law rule that payment
by check is c ~ n d i t i o n a i .Under
~~ the Commercial Code, payment of a n
obligation by a negotiable instrument simply suspends the operation of
the contract so paid 73 and, if the check given in payment is dishonored,
the debtor may be held o n either the underlying contract o r the instru-
ment. But payment by a n instrument upon which a bank is drawer,
maker, o r acceptor discharges the underlying contract, and the only re-
course of the holder will be on the instrument against the bank."
I n cases where instruments drawn o n banks are presented for pay-
ment, as was pointed out in Chapter 20, the bank is not liable upon such
a n instrument until it accepts o r certifies it. Prior to the Commercial
Code, however, a number of courts had held that payment by check,
draft, or other negotiable instrument amounted to an acceptance of the
original i n s t r ~ m e n t . Under
~~ this rule, t h e bank might be liable o n both
instruments, just as it would be in the case of a note o r accepted draft
mentioned above. U n d e r the Commercial Code, a payor bank in this
situation might b e viewed as having settled for t h e item presented to it
for payment without having reserved the right to revoke.Ie
I n the process of collection, the Commercial Code allows collecting
banks to take settlements for items sent for collection in checks, cashiers'
checks, authority t o charge the account of the remitting bank, and any
Central High School v. Union Free School, 272 N.Y. 13, 3 N.E.2d
617 (1936); Wells Oil Co. v. Mnrcus Oil & Supply Co., 206 [own 1010. 221
N.W. 547 (1928); cf. Advance-Rumcly Thrcshcr Co, v. Hcss, 85 Monl.
293, 279 P. 236 (1929). Scc Annols., 18 A.L.R. 733 (1922), 19 A.L.R.
599 (1922), 36 A.L.R. 470 (1925), 61 A.L.R. 739 (1929). 65 A.L.R. 1151
f' 1930).
li U.C.C. 5 8 2-5 1 1 ( 3 ) , 3-802.
la U.C.C. 5 3-802(1) (b).
l4 U.C.C. 1 3-802(1) ( a ) . See Harris v. Hill, 129 Ga. App. 403. 199
S.E.2d 847 (1973). The person paid must acccpt the chcck aa payment. See
Tennanl v. Salterfield, 216 S.E.2d 229 (W.Va. 1975). Scc also Stream v.
C.B.K.Agronomics, Inc., 79 Misc. 2d 607, 361 N.Y.S.2d 1 10 ( 1974), tndf'd
48 App. Div. 2d 637, 368 N.Y.S.2d 20 (1975); Delaware State Bank v. Pat-
ton, 513 P.2d 868 (Okla. 1973); Balmoral Arms v. Rutkin, 104 N.J. Super.
354, 250 A.2d 5 0 ( 1969).
l6Oregon Iron & Steel Co. v. Kelso State Bank, 129 Wash. 109, 224
P. 569 (1924). Contra, Hanna v. McCrory. 19 N.M. 183, 141 P. 996
(1914).
' 3 U.C.C. 5 4-21 3 (1 ) ( b ) .
1 A
COLLECTION O F INSTRUMENTS 21-55
other agreed upon method of payment.77 But, it also gives the collecting
bank receiving payment in such media the right to charge back if the
chcck o r other credit memorandum is not ultimately paid.lR T h u s , the
risk of loss by failure of payment of the check o r credit given a s remit-
tancc is placed squarely o n thc owncr of the item that the bank was col-
I ~ c t i n g .H~ e~ has only a claim on the bank issuing the paper o r credit.
T h c collecting bank still has reason to b e careful about the type of
instrument it authorizes for use by the remitting bank in settlement. If
the collecting bank authorizes use of a non-bank obligation, a cashier's
check of the remitting bank, o r any other instrument that is the primary
obligation of the remitting bank, the collecting bank receives a final set-
tlement a t the time it takes the instrument.80 T h i s makes the collecting
bank accountable t o its customer for t h e item being c01lected.~~When
the collecting bank receives such an instrument from a remitting bank,
but h a s not authorized the remitting bank t o use it, the collecting bank
may safely accept it in settlement so long a s it acts promptly t o collect
the rcn~ittanccinstrument. If thc bank acts to collect or present the re-
mittance instrument before its midnight deadline, the provisional settle-
ment the collecting bank gave to its customer for the item will remain
provisional until the remittance instrument is finally paid.82
5 21-55 PAYOR DANK'S RIGFIT TO CANCEL PAYMENT
AND RECOVER PROCEEDS
Under the Commercial Code, there a r e certain situations in which
a payor bank may revoke the settlement that it has given for a n item
presented to it for payment. It may then recover the amount of the
credit o r the procceds Ihnt it has paid. However, the payor bank is not
cntitlcd to rccovcr thc nniount of its pnynicnt if i t has "pnid cnsh ovcr
the counter" for thc itcni prescntcd to i t . n T h i s is treated as a "final"
pay men^.^'
When the bank gives a "provisional" settlement for the item pre-
77 U.C.C. fi 4-2 1 1.
lR U.C.C. 5 4-212.
70 See Comments to U.C.C. 5 5 4-21 1 , 4 2 1 2 .
a0 U.C.C. 8 4-21 l ( 3 ) ( b ) .
8' U.C.C. § 4-213(3).
82 U.C.C. § 4-21 l ( 3 ) ( a ) . Delay beyond the midnight deadline in col-
lecting or presenting the remittance instn~mentwill make the collecting bank
accounlable to its customer. U.C.C. § 4--21 l ( 3 ) ( c ) .
R3 U.C.C. 5 4-301 ( 1 ) .
* U.C.C. 8 4-213(1)(a). See 5 21-40.
 D U T I E S O F BANK & C U S T O M E R
sented for payment, which may b e by credit o r by use of a check, draft,
I COLLECTION O F INSTRUMENTS
o r other remittance instrument, the bank m a y revoke the settlement and
may recover any payment it has made if it acts in a timely fashion.86
T h e bank must act before it has d o n e anything that would be regarded
a s final payment a s discussed in 5 21--45. I t also must act before its
midnight dcadlinc (midnight of thc banking d a y following thc bank's
receipt of the item) b y either returning thc item o r giving written notice
of dishonor when it is impossible to return the itcmR6 Undcr the Com-
mercial Code, the bank's right to revoke the settlement that it has given
is absolutely barred if the bank does not meet these deadlines, and it
makes n o difference whether payment is m a d e to a holder in d u e course
o r other person w h o acted in r e l i a n ~ e . ~ '
Payor banks may havc additional rights to rccovcr against prior
parties for breach of warranties that arise under the Commercial Codc
when the instrument is presented for payment. F o r example, as discussed
in Chapter 14, a person who presents a check for payment warrants that
h e h a s a good title t o t h e item, that he has n o knowledge of a forgery of
I $21-65
. certain banks. Prior to the Commcrcial Code, a statcmcnt o n the note
the drawer's signature, a n d that the item has not been materially al-
~ered.~~
Collecting banks, which give a provisional settlement to their cus-
tomers for items they a r e handling for collection, also have the right to
revoke thc scttlcmcnt and, if thcy act in a timely fashion, to rccovcr any
payments that havc bccn made.- Whcn the collecting bank rcccivcs a
negotiable instrument a s payment for the item i t has presented, the set-
tlement given by the collecting bank to its customer does not become
final until the instrument given in payment is actually paid. If that in-
strument is dishonored whcn it is presented for payment, the collecting
i1'
bank will b e able t o revoke the settlement it originally gave t o its cus-
tomer for the item presented for payment.*O
5 21-60 DIRECT RETURNS
When items given the collecting bank fail of final settlement, the
collecting bank has two alternatives to pursue. I t may reverse the proc-
1 ess of collection by returning the paper sent for collection through chan-
nels by which it c a m e and, thus, send notice of dishonor in accordance
( @'
U.C.C. § 4-301 ( 1).
U.C.C. 5 4-301 ( 2 ) .
8' U.C.C. 4-301. See White & Summers, Unilorm Cotntnercial C o d e
Ch. 16 (2d ed. 1980). See 11 20-90, 2 1 4 0 .
U.C.C. 5 4-207( 1).
ag U.C.C. 5 4-2 12. See § 20-90.
go U.C.C. $5 4-211(2), 4-212(1).
with clearinghouse rules;B1 o r it may make a direct return to the deposi-
1-65
tary bank if such return is authorized either by law o r by agreement.
Such a direct return consists of returning the dishonored collection item
together with a draft o n the depositary bank for amount of the item.
T h e depositary bank then pays the draft and charges its customer.B2
Clearinghouse credits previously set u p are not disturbed.
T h e scction of the Commercial Code authorizing such direct returns
was made optional. It has been adopted in forty-two jurisdictionso3 a n d
omitted in eight.84 In states where this provision has not been adopted,
direct returns may b e used when they are authorized by agreement o r
by clearinghouse rules.B6
INSTRUMENTS PAYABLE A T OR TIiROUGII
BANKS
It is common business practice to make notes o r drafts payable at
o r accepted draft that it was payable at a certain bank was equivalent t o
an order upon the bank to pay the instrument, for the account of the
principal debtor, at maturity.B8 Although there was some doubt o n the
point, instruments payable through banks should have been subject to
thc s a m e r u l ~ Whcn
. ~ ~ such a n instrumcnt appcarcd for payment, thc
bank was entitled to treat it, at maturity, as a check upon the account of
thc person primarily liable and to pay it a c c ~ r d i n g l y .If,
~ ~in the account
of the person primarily liable, there was a sufficient amount to cover the
instrument a t maturity, the law treated this as a tender that would dis-
@' U.C.C. 5 4-301.
g2 U.C.C. § 4-212(2).
O8 Alabama, Alaska, Arizona, Arkansas, Colorado, Connecticut. Dela-
ware, Florida. Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa. Kansas, Ken-
tucky, Maine, Maryland, Mnssachusctts, Michigan. Minncsota, Mississippi,
Missouri, Montana, New Hampshire, New Mexico, New York. North Dakota,
Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina. South Dakota,
Tennessee, Texas, Utah, Vermont, Virgin Islands. Virginia, Washington, West
Virginia, and Wyoming. U.C.C. (U.L.A.) 54-212(2), note at 103 (1977).
California, District of Columbia, Nebraska, Nevada, New Jersey, Ore-
gon, and Wisconsin. U.C.C. (U.L.A.) § 4-212(2), note at 103 ( 1977).
O6 U.C.C. § 4-212 Comment 4.
Be N.I.L. fi 87.
First Nat'l Bank & Trust Co. v. First Nat'l Bank, 260 Ky. 581. 86
S.W.2d 325 (1935); cf. Agricultural Nat'l Bank v. Great Am. Indernn. CO..
287 Mass. 414, 192 N.E. 8 ( 1934) ; see Beutel's Brannan, note 40 supra, at
1039-1043.
N.I.L. 5 87; Peninsula Nat'l Bank v. Hans Pederson Const. Co., 91
*Wash. 158, 246, 621 (1916). See Beutel's Brannan. note 40 supra.
 DUTIES O F BANK & CUSTOMER
charge all parties secondarily liable, whether o r not the account was
charged o r thc instrumcnt was marked paid.On Some courts even went s o
far a s t o treat notes a n d drafts payable a t banks a s checks upon the bank.
Although persons primarily liable o n a n instrument a r e n o t presently
discharged by failure of proper demand a n d notice, when the instrument
was payable at a bank, these courts held that, because the instrument
was equivalent t o a check, if the bank failed t o pay a t maturity, the per-
s o n primarily liable was discharged to the extent of the loss. F o r exam-
ple, if a note for $1,000 was payable a t a bank, and there was a sufficient
balance in the indorser's account t o cover the note a t maturity, a bank's
failure to pay it a n d subsequently t o discontinuc payrncnt would causc
the loss to fall o n the owncr of thc note." T h c wcight of authority,
howcvcr, was t o thc circct that a pcrson primarily liablc, cvcn o n an in-
strument payable a t a bank, was not discharged t o any extent b y failure
t o charge his account.101
T h e Commercial C o d e has changed these rules. When a n instrument
of a n y kind is payable a t a bank, the maker-drawer o r acceptor is dis-
charged to thc extcnt of thc loss causcd by t h c failurc t o prcscnt o n time.'" .
T h e Commercial Code also specifically provides that a statement on
a n instrument using t h e words "payable through" ( a certain b a n k ) sim-
ply designates the n a m e d bank a s a collecting agent a n d does not au-
thorize it to pay the instrument.103 T h e bank, in this case, will have the
rights a n d duties of a collecting bank.Io4
If a note or acceptance states that it is "payable at" a bank, the
Code allows states t o adopt two possible alternatives. First, it is equiv-
alent t o a draft drawn o n the bank or, in the alternative, the statement
docs not crcatc a n order o r authorization t o thc bank to pay it but mcrely
N.I.L. 5 5 87, 70, 1 2 0 ( 4 ) ; Franklin Sav. & Trust Co. v. Clark, 283
Pa. 212, 129 A. 56 ( 1925). Contra, Corcly v. Frcnch, 154 Tcnn. 672, 294
S.W. 513 (1927): see Beutel's Brannan, note 4 0 supra, at 990.
loo N.I.L. $ 5 70, 87, 186; Tatum v. Commercial Bank & Trust Co., 193
A h . 120, 69 So. 508 ( 19 16); Bank of California v. Starrett, 1 10 Wash. 23 1,
188 P. 410 (1920).
I n ' Ringhampton Pharmacy Co. v. First Nat'l Rank. 13 1 Tcnn. 7 1 1 . 176
S.W. 1038 (1915). Scc also Morlcy v. University of Dctroit, 263 Mich.
126. 248 N.W. 570 (1933). 269 Mich. 216. 256 N.W. 861 (1934), crrt.
dotied 294 U.S. 718 (1935). Scc cascs and discussion in L)errtrl's Dmt~ttatt,
note 40 supra.
'02 U.C.C. 5 3-502( 1) ( b ) .
'Oa U.C.C. 5 3-120.
l o 4 See Wilhelrn Foods, Inc. v. National Bank of N.A.. 382 F. Supp.
605 (S.D.N.Y. 1974). On the liability of such banks for breach of warranty
when an indorsement is forged, see Montgomery v. First Nat'l Bank, 265
Or. 55, 508 P.2d 428 (Or. 1973); 238 E. 34th St. Corp. v. Continental Ins.
Co., 75 Misc. 2d 493, 347 N.Y.S.2d 618 (1972).
380
COLLECTION O F INSTRUMENTS _ .i-70
designates a place of p a y m e n t . l O V i n c t e e n jurisdictions have adopted
thc first i n t ~ r p r e t a t i o n , ~ ~ % n thirty-one
d states have adopted the sec-
ond,I0' thus continuing a n d accelerating the split of authority that ex-
isted o n this point before the Code.loR This leaves some doubt a s to
what m a y happen in the states adopting the second alternative, when
such a n instrumcnt comes t o the bank o n time but is not paid when the
maker has funds on deposit there. I n such a situation, the bank should
notify its depositor that such paper is being presented for payment.
S 21-70 ERRORS IN IIANDLING COMPUTER ENCODED
CllECKS
T o d a y most checks a r e encoded with magnetic ink to enable elec-
tronic machinery t o read the checks without manual handling a n d visual
decision-making. T h e encoded numerals identify the bank against w h o m
the check is drawn, the account t o bc charged, a n d , usually, the number
of thc chcck. Whcn thc chcck is prcscnted for dcposit, it is encoded by
the depository bank t o idcntify the amount of the check. Thereafter, the
check c a n b e electronically handled for collection. Although this method
does not protect against forgeries o r matters that might be revealed by
a visual inspection of the check, banks may well decide that the savings
t o be obtained through greater efficiency in processing the checks m o r e
than offset the losses that m a y occur a s a result of failing t o m a k e a
visual inspection of individual checks. Obviously, however, a bank's re-
liance upon the encoding will not relieve it from the liability, established
undcr thc Commercial Codc, for paying instruments that are forgcd o r
altcrcd. Regardless o f the coding, the clicck would not be propcrly pay-
able.lm
'OW.C.C. 5 3-121.
Ion Alaska, Connecticut, Delaware, District of Columbia, Hawaii. Ken-
tucky, Maine, Massachusetts, Nevada, New Hampshire, New Jersey, New
York. North Dakota, Ohio, Pennsylvania, Rhode Island, Texas, Vermont,
Virgin Islnnds, and Wyoming; U.C.C. (U.L.A.) 1 3-1 21 nt nolc 1 18 ( 1977).
In' Alnhnrna, Arizonn. Arkansas, Cnlifornin, Colorado, Floridn, Idnho,
Illinois, Indinnn. Iown, Knnsns. hlnrylnnd, Michignn. Minncsotn, Mississippi.
Missouri, Montana, Nebraska, Ncw Mcxico, North Carolina. Oklahoma. Orc-
gon, South Carolina, South Dakota, Tennessee, Utah, Virginia. Washington,
West Virginia, and Wisconsin. Virginia gives the bank the right to consider
it an authorization to pay. U.C.C. (U.L.A.) 5 3-121 at 407, Supp. (1962)
at 158 (1968).
Io8 Cf. Baldwin's Bank v. Smith. 215 N.Y. 76, 109 N.E. 138 (1915);
Corely v. French, 154 Tenn. 672, 294 S.W. 513 ( 1 9 2 7 ) ; U.C.C. $ 5 3-604(2),
3-604 ( 3 ) .
l o o U.C.C. 5 4-401. See 5 20-5.
5 21-70 D U T I E S OF BANK & CUSTOMER
I t is possible for a bank to make an error in encoding the amount
of the check. T h e encoded amount may be either more or less than the
amount of the check itself. As between the payor bank and its customer,
the Commercial Code rule seems clear: T h e bank may only charge its
customer's account t o the extent the check is "properly payable." I1O If
an error was made in encoding the check in a large amount, the bank
would b e obligated to credit the account for the excess that was charged.
By the same token, absent special circumstances in which the customer
changes its position in reliance upon the error of the bank, the payor
bank should be able to charge its customer when it mistakenly debits the
account for an amount less than the actual amount of the check. T h e
check is a direction to the bank to pay the amount of the check and en-
titles tlic bank t o cliargc thc customcr lor it cvcn wlicn it cor~stitutcsnn
overdraft.l11
T h e ability of a payor bank to rccover against prior collecting banks
when it sulTcrs a loss as a rcsult of an error in encoding is more prob-
lematic. When the payor bank has paid an excess amount to the collect-
ing bank, it has been suggested that it might be entitled t o recover the
excess amount o n a theory of restitution. This approach has its difficul-
ties, however, because the collecting bank will not have been responsible
for the mistake and probably will no longer be holding the funds. There
would be no breach of the warranties of transfer or presentment in this
situation either.l12 Perhaps recovery could be had against the bank that
made the encoding error, on general equitable principles recognized un-
der the commercial Code (as long as they are not in conflict with the
Code)
In the case where the payor bank had, because of an encoding er-
ror, charged its customer for less than the true amount of the check, the
bank likely will become liable to prior parties for the full amount of the
check because the check will have been finally paid. T h e bank will not
have given notice of dishonor in iime.l14 If the bank is unable t o recover
the excess amount from either its customer or prior collecting banks, can
it recover from the bank who made the encoding error? The Commercial
Code does not ofier a solution although, again, equitable principles
might suggest placing the loss on the bank that made the error.116
"0 U.C.C. 5 4-401.
1'' U.C.C. 5 4-401.
'I2 See U.C.C. 5 4-207; see Chapler 14.
U.C.C. 5 1-103.
' I 4 U.C.C. 5 4-301. SCC6 23-45.
ll"ce Penny & Baker, The Law of Elecrronic Fund TranrJer Systems,
1 1.02(2)(c) (1980).
CL
COLLECTION O F INSTRUMENTS 8 5
When a customer deposits a check and his bank makes an error in
encoding it, the customer may have an action against the bank for failure
to exercise ordinary care in handling the item for collection.118 In any
event, if the item is finally paid, the depository bank will become ac-
countable to the customer for the amount of the check.l17 If the deposit-
ing customer obtains a greater credit than he would be entitled to as a
rcsult of the encoding error, perhaps the depository bank will have an
action in rcstitution against the depositing customer. Again, the Com-
rncrcial Code olTers no ,solution, but gcncral equitable principles can
supplement the provisions of the Code.IlB
5 21-75 F l ~ l ) l i l t A I , R1I:SIiRVIS HUI,INGS, CLEARINGIIOUSE
RULES, A N D AGREEMENTS
T h e rulcs stated in this chapter arc subject to change by regulations
of tllc Board of Govcrnors of thc Fedcral Reserve and by
clearinghouse rulcs, whether or not they are assented to by all the par-
ties.120 Agreements between the partics are, of course, binding upon
them s o long as they d o not attempt to contract away negligence, good
faith, and the like.lZ1 Banks also may use general banking practices as
evidence of proper performance of their 0b1igations.I~~
These rules and agreements arc the basis for the rights and duties
of the parties in transfcrring funds electronically. Article 4 of the Com-
mercial Code generally applies to the collection and payment of "items,"
which are defined as "instrurncnts," I z 5 and is not adequate to cover the
new methods of payment and fund transfers that eliminate the movement
of paper ~ l i e c k s . ~ ~ ~
U.C.C. 8 4-402.
11' U.C.C. 5 4-213(3).
l L 8U.C.C. f 1-103. There are excellent discussions of the problems
presented by encoding errors in Bailey, Brody on Bank Checks, $ 9 15.24-
15.28 (5th ed. 1979); see Penny and Baker, note 115 srcpra, 11.02(2).
110 U.C.C. f 4-103(2); West Side Bank v. Marine Nat'l Bank, 37 Wis.
2d 661, 155 N.W.2d 587 (1968). An exanlplc of such a Federal Reserve
regulation varying the rules that would otherwise apply under the Code
would be the amendment of Regulation 1, in early 1972, reqt~iringpayor
banks to make payment in immediately available funds for checks presented
to thcm by Fcdcral Reservc Banks. 12 C.F.R. 210.9 (1980).
l Z o U.C.C. 5 4-103(2).
'2' U.C.C, 4 5 1-102(3), 1-203, nnd 4-103.
12? U.C.C. $ 5 1-205, d l 0 3 ( 3 ) , and ( 4 ) .
U.C.C. 5 4-104(I)(g).
124SceChapter 26.
383
 Chapter 22
PRESENTMENT FOR PAYMENT
AND ACCEPTANCE
Section Page
2 2-5 Formalities to Be Met at Maturity . . . . . . . . . . . . . . . . . . 385
22-10 Determination of Maturity . . . . . . . . . . . . . . . . . . . . . . . 386
22-15 Saturdays, Sundays, and Holidays . . . . . . . . . . . . . . . . . 387
22-20 Presentment for Payment . . . . . . . . . . . . . . . . . . . . . . . . 387
22-25 Formalities of Presentment . . . . . . . . . . . . . . . . . . . . . . 389
22-30 Placc of Presentment . . . . . . . . . . . . . . . . . . . . . . . . . . . 390
22-35 Unusual Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 392
22-40 When Presentment Is Not Required . . . . . . . . . . . . . . . . 393
22-45 Time Allowed for Payment . . . . . . . . . . . . . . . . . . . . . . . 394
22-50 Tenderof Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395
22-55 Dishonor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396
22-60 Prcsentmcnt for Acccptancc . . . . . . . . . . . . . . . . . . . . . . 396
22-65 Presentn~cntas It Affects thc Drawer's Liability . . . . . . . 397

5 22-5 FORMALITIES TO BE MET A T MATURITY

As indicated in Chapter 14, there are two types of liability on nego-
tiable instruments payable in money-primary and secondary. Makers
of notes and acceptors of drafts are primarily liable. Indorsers, and all
othcr parties to negotiable paper of any kind, are secondarily liable.
Their liability is conditional. Drawers of checks and drafts, although
they are classed in the Commercial Code as "secondary parties," are
subject to a sort of liability that has combined characteristics of both
primary and secondary liability. This will be explained in more detail at
the cnd of this chapter.
No special formality is necessary for charging parties primarily li-
able on money paper.2 Except for the liability in warranty arising from

' U.C.C.5 3-102(l) (d).

6 U.C.C. 5 3-41 3 ( l ) ; cf. U.C.C. 1 3-502(1). See Farber v. Sackett.
255 Mass. 569. 152 N.E. 5 4 (1926): . . Union B a n k v. Sullivan. 214 N.Y. 332.
I08 N.E.558 (1915).
$2t10 DUTIES OF B A N K & C U S T O M E R
the transfer of instruments, parties secondarily liable o n money paper
c a n usually be held t o their conditional liability only if the holder meets
certain formalities a t maturity of the instrument. These formalities are
known as presentment, protest, and notice of dishonor. T h e require-
ments of the law must b e followed strictly in these respects o r the right
of recourse against the parties secondarily liable may be lost (unless they
have waived the requirements either before o r after maturity).
5 22-10 DETERMINATION OF MATURITY
Demand paper is mature the moment of issue and the maker is li-
able to pay it a t any time within the statute of limitation^.^ When a datc
of maturity is stated, the instrument matures o n the date indicated.'
Drafts are sometimes payable "at sight." I n this case, the papcr matures
a s soon as it is shown t o the person required to make payment. If the
instrument is payable a certain number of days after date, after sight, o r
after happening of a specified event, maturity is calculated by excluding
t h e day from which t h e time is t o begin t o r u n and by including the day
~ example, a n instrument dated January 5 and payable
of ~ a y r n e n t .For
in thirty days matures o n February 4. W h e n an instrument contains n o
date of maturity a n d n o time for payment is expressed, it is payablc o n
demands6 But when a n instrument payablc a dcfinitc number of days
aftcr date is issucd with that datc blank, it will bc considcrcd ns nn in-
complete instrument; under the Commercial Code, it cannot be enforced
until completed. W h e n it is completed b y filling i n that which normally
would be the date of issue, in accordance with the authority given, the
instrument can be enforced.'
T i m e paper must be presented for payment o n the date stated as
payable. Demand paper must be presented for payment within a reason-
able time after the attachment of drawer's a n d indorsers' l i a b i l i t ~ . The
~ l o California, for example, has adopted a non-uniform U.C.C. 5 3-123.
consequences of delay in presentment a r e discussed in 922-20.
a U.C.C. 5 8 3-108, 3-122, 3-503. See First Nat'l Bank v. Capps, 208
Ala. 235, 94 So. 112 (1922).
U.C.C. 5 3 - 5 0 3 ( 1 ) ( ~ ) .
U.C.C. 5 3-503( 1 ) ( c ) . See Lewy v. Wilkinson. 135 La. 105, 64 SO.
1003 ( 1914): Krasnow v. Krasnow, 235 Mass. 528, 149 N.E. 32 1 (1925).
Although the U.C.C. has no provision for the computation of time, no
change from prior law was intended. U.C.C. 8 3-503, Comment 7.
U.C.C. 5 3-108. Keister v. Wade, 191 App. Div. 870, 182 N.Y.S.
119 (1920).
U.C.C. 5 5 3-1 14 and Comment 2, 3-155.
.
U.C.C. 8 5 3-503 ( 1) ( c ) , 3-503 ( 1 ) (e)
6
PRESENTMENT AND ACCEPTANCE 2-20
3 22-15 SATURDAYS, SUNDAYS, AND HOLIDAYS
When the maturity d a t e of an instrument falls on a Sunday o r o n a
holiday, the instrument is payable o n the successive business day. When
a time instrument matures o n a Saturday, which is not a full business
day, it should be presented for payment o n the successive full business
day? S o m e statcs have special legislation governing holiday and Saturday
bank transactions.1°
5 22-20 PRESENTMENT FOR PAYMENT
A s indicated above, presentment for payment is not required f o r
holding the parties prin~nrily liable on ncgotiablc instruments but it is
necessary for holding indorsers and, in some instances indicated bclow,
f o r holding drawers.
If a n instrument is not payable on demand, it must be presented o n
the d a y it falls due." Presentment eithcr the d a y before12 o r the day
after maturity18 is not sunicient.
Demand instruments must be presented a reasonable time after their
issue in order to hold the drawers and a reasonable time after indorse-
ment in order to hold the indorsers. Reasonable time is determined by
the naturc of the busincss and the particular circunistances involved."
Cliccks, sincc thcy arc intcndctl for in~nictliatepnymcnt according
to thc usual business custom, should bc presented thc ncxt busincss day
after receipt15 or within the time covered by the normal collection pro-
m U.C.C. § 3-503(3). See Grace v. Dunn, 17 1 Okla. 85, 42 P.2d 13 1
( 1935); Long v. Alder, 169 Tenn. 422, 88 S.W.2d 102, 802 ( 1935) ; Annot.,
102 A.L.R. 433 (1935).
Other states have adopted the so-called Saturday Afternoon Bank Transac-
tions Act. See Bailey, Brady on Bank Checks 5 13.15 (5th ed. 1979) (here-
inafter cited as Brady on Bank Checks); Pnron's Digest of Legal Opinions,
Supplement, Appendix, "Holidays, Saturdays, and Sundays" (Paton, ed.,
1944) (hereinafter cited as Paron's Digest). T h e following states have
ndoptcd stntutcs of this kind: Arizona, Connecticut, Dclnware, Idnho, Illi-
nois, Indiann, Louisiana. Maine, Maryland, Michigan, Mississippi, Missouri,
Montana, New Jcrscy. New Mexico, New York, North Carolina, Oregon,
Pennsylvania, Rhole Island, South Dakota, Tenncsscc, and Vcrmont.
I ' U.C.C. Ii 3-503 ( I ) (c).
l 2 Scc Long v. Alder, 169 Tenn. 422, 88 S.W.2d 802 (1935).
l a Sce Lewy v. Wilkinson, 135 La. 105, 64 So. 1003 (1914); E. E.
Rivet & Sons v. Durand, 53 R.I. 48, 163 A. 476 ( 1932).
" U.C.C. 8 3-503 ( 2 ) .
l6 Gordon v. Levine, 194 Mass. 418, 80 N.E. 505 (1907); Continental
Bank & Trust Co. v. Detroit Trust Co., 262 Mich. 497, 247 N.W. 728
 DUTIES OF BANK & CUSTOMER
cesses between the places where the check is delivered and where it is
payable.'" Failure to properly present a check completely discharges in-
dorsers but a drawer is discharged only when the drawer is deprived, by
the insolvency of the drawee bank, of funds to pay the draft and, even
then, the drawer is only discharged if h e assigns his rights against the
bank to the holder.17 For example, if a check for $ 1 0 0 is held for an
unreasonable length of timc, during which time the drawee bank fails
and pays a dividend on liquidation of only 4 0 percent, the indorsers are
completely discharged and the drawer will be discharged upon assigning,
to the holder, his right to a claim of $lOO.lR If the drawee bank was
solvent but the check was dishonored for other reasons, the indorsers
still would be discharged because of the delay but the drawer would re-
main liable.
What constitutes a reasonable length of time is determined by com-
mercial practice. T h e Code sets a presumption that a check must be
presented within a week after indorsement, o r collection must be started,
to hold an indorser; the presentation or collection of a check within thirty
days after issue is necessary to hold the drawer.IB T h e presumption, of
course, may be rebutted by proving contrary current business practices.20
It is therefore wise t o start both checks and demand drafts on the process
of collection the day after they are received.
Demand notes and certificates of deposit, although mature as issued,
are obviously intended to run for some time. Although they may be pre-
sented at once, the holder will not lose his rights against the indorsers if
hc holds them for some lime. T h e length of time elapsing between the
issue of such paper and the date on which it must bc presented in order
to hold the parties secondarily liable depends upon the custom of the
particular locality in which the paper is circulated. If the instrument
bcars no inkrest, it must bc prescntcd within a shorter timc than if it
does. When interest is specified, the period ovcr which the interest is
payable is important. For example, if interest were payable in six-month
installments, presentment clearly would not be necessary before six
- -
( 1 9 3 3 ) . See Oeutel's Brnnnnn Negotiable Instrutncnts Law 1296 (7th cd.
1948) (hereinafter cited as Beutel's Brartnan).
l a M a n & Co. v. Bankers Credit Life Ins. Co., 224 Ala. 249, 139 SO.
421 ( 1 9 3 1 ) ; Maryland Title & Guar. Co. v. Alter, 167 Md. 244, 173 A. 200
( 1 9 3 4 ) ; Loux v. Fox, 171 Pa. 68. 33 A. 190 ( 1 8 9 5 ) .
l 7 U.C.C. 5 3-502. See Grist v . Osgood, 521 P.2d 368 (Nev. 1974).
U.C.C. $5 3-501, 3-502(1) ( a ) , 3-501 ( 1 ) ( b ) . See Swift & CO. v.
Miller, 62 Ind. App. 3 12, 113 N.E. 447 ( 1 9 1 6 ) ; Nuzurn v. Sheppard, 87 W.
Va. 234, 104 S.E. 587 ( 1 9 2 0 ) ; Annot., 1 1 A.L.R. 1024 ( 1 9 2 0 ) .
lB U.C.C. $ 3-503 ( 2 ) .
U.C.C. $ 5 1-201 ( 3 l ) , 1-205.
PRESENTMENT AND ACCEPTANCE
months; and if it were payable in yearly installments, presentment at any
time,within a year would certainly be enough.21
When overdue paper is still in circulation after maturity, it is held
subject to the same rules as any other demand paper.22 If time paper is
held beyond malurity, without being presented, the indorsers are, of
codrse, discharged; but anybody indorsing thereafter may be held by pre-
sentment, within a reasonable time after such indorsement. The same
rule applies to stale checks. For example, if a check with one indorser
is held by Jones for sixty days, the indorser is already discharged as in-
dicated above. If Jones then indorses t o a bank, which presents the
check to the drawee on the next day, the prompt presentment gives the
bank the right to hold Jones on his indorsement but should not revive
the liability of the first indorser unless the bank takes without notice of
Jones' delay. Under the Commercial Code, persons indorsing after ma-
turity are not entitled to presentment and notice of dishonor.2J N o one
who takes an instrument after it is due can be a holder in due course.24
9 22-25 FORMALITIES OF PRESENTMENT
In order to complete presentment, a number of formalities must be
carefully observed. The instrument must be presented by the holder
himself or by someone acting on his behalf, such as an agent or a col-
lecting bank.2a Presentment must be made to the person primarily liable
himself or, in his absence, to his agcnt, to one at his place of business,
or to one a1 the place of payment indicated on the i n s t r u m ~ n t .Present-
~~
ment to the drawer of a check would not bc proper.27
At thc time of presentment, the instrument must be exhibited to the
person required to make payment and, at the same time, a definite pay-
2' Broadway Bank & Trust Co. v. Longley, 116 Conn. 557, 165 A. 800
( 1 9 3 3 ) ; State of N.Y. Nat'l Bank v. Kennedy, 145 App. Div. 669, 130
N.Y.S. 412 ( 1 9 1 1 ) ; First Nat'l Bank & Trust Co. v. Lugar, I 4 Nat. Misc.
303, I 8 4 A. 399 ( 1 9 3 6 ) . See cases cited in Beufel's Brannan, note 15 supra.
22U.C.C. 5 3 - 5 0 2 ( 1 ) ( e ) , See Arnthauer v. Johnson, 138 Kan. 729,
27 P.2d 241 ( 1 9 3 3 ) : Torgerson v. Ohnstad, 149 Minn. 46, 182 N.W. 724
( 1 9 2 1 ) ; Morgnn V. Hoffman. 76 Mont. 396, 247 P. 326 ( 1 9 2 6 ) .
23 U.C.C. 5 3-501 ( 4 ) . See Berrtel's Brannan, note IS supra. at 997-
1000.
24 U.C.C. $ 5 3-302(1) (c), 3 - 3 0 4 ( 3 ) .
2W.C.C. 5 3-504. See Fowler Paver Co. v. Bert Jones Sales Book Co..
183 111. App. 310 ( 1 9 1 3 ) ; Caine v. ~orkrnan,106 Cal. App. 636, 289 P. 929
(1930).
28 U.C.C. $ 3 - 5 0 4 ( 3 ) . See Geibe v. Chicago-Lake State Bank, 160
Minn. 89, 199 N.W. 514 ( 1 9 2 4 ) .
27U.C.C. 5 3 - 5 0 4 ( 1 ) . See Auerbach v. Barrett, 214 App. Div. 279,
ri- 212 N.Y.S. 141 ( 1 9 2 5 ) .
g 2230 D U T I E S OF BANK & C U S T O M E R
ment demand must be made upon him.le M e r e informal talksm o r re-
quests over the telephonea0 are not sufficient presentment. U n d e r the
I PRESENTMENT A N D ACCEPTANCE
Negotiable Instruments Law, presentment by letter was not alloweda'
but, under the Commercial Code, presentment by mail, through the clear-
inghouse, or by any means ngrccd upon o r determined by commcrcinl
custom, is sunicicnt. In thc bank collcction proccss, tlic mctliods of col-
lection discussed in Chapter 2 1 (including notice by mail in certain
cases) are also approved methods of presentment under the Code.82 The
reason the instrument must be exhibited is because the payor is entitled
t o have it delivered t o him when h e pays it o r to have any partial pay-
ment noted o n the i n s t r ~ m e n t . ~ ~
Presentment must be made at a reasonable hour o n a business day.
F o r example, if it is payable at a bank, it must b e presented during bank-
ing hours o r during the customary time for clearing, if such customary
time takes place after banking hours.84
§ 22-30 PLACE OF PRESENTMENT
Presentment for payment must b e m a d e at the place specified in
the i n s t r ~ m e n t . If~ ~a n instrument is payable a t a given bank, present-
ment anyplace else would not be s ~ f f i c i e n t .When
~ ~ the instrument speci-
I A&. Div. 555, 114 N.Y.S. 42 (1908); Engen v. Medberry Farmers' Equity
28 U.C.C. 5 3-505. See Porter v. East Jordan Realty Co., 210 Mich.
398, 177 N.W. 987 (1920); Reichert v. McQuade, 217 App. Div. 779, 216
N.Y.S. 729 (1926); Tillamook County Bank v. International Lumber Co.,
106 Or. 339, 211 P. 183 (1922); Annot., 11 A.L.R. 963 (1920).
lfiState of N.Y. Nat'l Bank v. Kennedy, 145 App. Div. 669, 130 N.Y.S.
412 (191 1); cf. Toll v. Monitor Binding & Printing Co., 26 F.2d 51 (8th
Cir. 1928).
Robinson v. Lancaster Foundry Co., 152 Md. 8 1, 136 A. 58 ( 1927);
Gilpin v. Savage, 201 N.Y. 167,94 N.E. 656 (1911); Note, 37 Yale L.J.258
(1927).
8' Willard State Bank v. Clark, 11 1 Kan. 439, 208 P. 549 (1922); Case
v. McKinnis, 107 Or. 223, 213 P. 422 (1923).
s2 U.C.C. g! 3-504(2)(a), 3-103(2), 4-103, 4-210(2); see generally
Brady on Bank Checks, note 10 supra, at 5 5 13.7-1 3.10.
88 U.C.C. 9 3-505 ( I ) (d). See Maddock v. McDonald, 1 11 Or. 448,
227 P. 463 ( 1924).
a4 U.C.C. $ 5 3-503(4) and 3-504(2) ( b ) . See Columbian Banking CO.
V. Bowen, 134 Wis. 218, 114 N.W. 451 (1908).
'5 U.C.C. 5 3-504(2) ( c ) . Commercial Trust Co. v. New England Mac-
aroni Mfg. Co., 247 Mass. 366, 141 N.E. 285 (1924); Schlesinger v. Schultz,
110 App. Div. 356, 9 6 N.Y.S. 383 (1905); Engen v. Medberry Farmers'
Elev. Co., 52 N.D. 410, 203 N.W. 182 (1925).
ae U.C.C. 5 3-504(2) ( c ) . See Eagle Lumber Co. v. Oil States Lumber
Co., 154 La. 854, 98 So. 270 (1923); Ironclad Mlg. Co. v. Sackin, 129
390
2-30
fies o n its face that it is payable at a bank, it is sufficient if the instrument
is a t the bank during the day of maturity a n d if it is ready to be deliv-
ered upon payment." In that case, it is the duty of the holder to have
it there a n d the duty of the makcr to have funds t o meet it. However,
thc maker Iias until the close of banking hours o n the day of maturity to
provido funds." REnicr p r c s e ~ l l ~ ~ tii~o n~dltlisl~onorfor lnck or ruritls is
p r e n ~ a t u r c . ~ ~ o l l e c t ibanks
ng (but not non-bank parties) arc author-
ized to present items a t any place designated by thc payor bank.40 This
allows use of a central processing center o r other arrangement for check
tr~ncation.~'
It is customary for banks in many cases to send out notice that time
instruments are due o n certain days in the future. Bcforc the enactment
of the Commercial Code, this notice did not take the place of formal pre-
sentment and, if the instrument did not specify o n its face that it was
payable at the bank, the notice was ineffectual.42 Whether o r not such a
notice would be an effectual presentment under the Code would dcpend
upon whether it was mailed in time to arrive o n o r before the day of
Elev. Co.. 52 N.D. 410. 203 N.W. 182 (1925); Annot., 39 A.L.R. 915
(1925).
U.C.C. $ 8 3-503(4), 3-504(4). See Rosenthal v. Levine, 128 Me.
447, 148 A. 675 (1930); Phillips v. Cunningham, 148 Tenn. 164, 253 S.W.
354 (1923); Farmen & Merchants Bank v. Wcffald, 200 Wis. 5, 227 N.W.
234 (1929); see Oerctei's Branrran, note 15 srcpra, at 1006.
'8 U.C.C. 8 3-506(2).
an U.C.C. 5 3-503. See German-Am. Bank v. Milliman, 31 Misc. 87,
65 N.Y.S. 242 (1900).
4 O U.C.C. 5 4-204(3).
4 1 Sec Idnh-Best, Inc. V. First Scc. Bank of Idaho, 99 ldnho 517. 584
P.2d 1242 (1978); ofl'd alter ret,rn,rd 101 Idaho 402. 614 P.2d 425 (1980).
All Code jurisdictions have enacted the above provision permitting present-
ment at a central processing center or other place where the payor bank
desires presentment to be made except Alaska. Nebraska, and Oklahoma.
However, California, Nevada, and Oregon have varied the provision to permit
the sending of itcms to the place of business of or to any place designated
by those lo whom items mny be scnt directly, undcr the Codc provision
permitting direct sending. Cnlilornia and Oregon also have amended the
"presentment" section of Article 3 to permit presentment at a placc desig-
nated by the party who is to pay o r accept, as well as through a clearing-
house. Such variations appear functionally equivalent to the Official Text of
the Code, but the California and Oregon expansions of the "presentment"
section of Article 3 broaden the place-of-presentment concept by permitting
presentment by anyone, not merely by a collecting bank, at a place desig-
nated by the party who is to accept or pay. The Permanent Editorial Board
for the UCC has criticized these changes. Report No. 2 at 65-66.
42 Willard State Bank v. Clark, 11 1 Kan. 439, 208, P. 549 (1922);
 3 2t35 DUTIES O F BANK & CUSTOMER
maturity.4a T h e bank must comply with any request to exhibit the in-
strument, t o establish authority t o obtain payment, etc." T h e Code pro-
I PRESENTMENT A N D A C C E P T A N C E
vides that when the person who is required to pay does not take appro-
priate action by the close of the business day after maturity or, in the
case of demand paper, does not take action o n the third business day
after the notice was sent, the bank may treat the paper a s dishonored
and may take the proper procedures to hold the i n d o r ~ e r s . ' ~
If no place of payment is indicated, b u t the instrument contains the
address of the person to make payment, the instrument must be pre-
sented a t that address.'" When n o place of payment is specified and n o
address appears o n the instrument, it ,should be presented a t t h e usual
place of business o r a t the residence of the person to make payment. In
, any other case, the instrument must be presented t o the person to make
I payment wherever h e can be found and, if h e cannot be found, it is suffi-
: cient to present it at his last known place of business o r residence."
5 22-35 UNUSUAL CASES
When the persons primarily liable o n the instrument a r e partners
and n o place of payment is specified, presentment to any one of them is
sufficient, even though the partnership has been d i s ~ o l v e d . ' ~Under the
Negotiable Instruments Law, when two o r more persons who were not
partners were primarily liable o n a n instrument and no place of payment
was specified, payment by any one of them would discharge the instru-
ment. If there was n o payment, presentment had t o b e m a d e to all
before the parties secondarily liable could be held.4g T h c Commercial
C o d e provides that presentment t o any o n e of the liable parties is sufIi-
cienL60
When the person primarily liable o n the instrument is dead or is in
insolvency proceedings that began after issue of the instrument, present-
ment is e x c ~ s e d . ~ '
48U.C.C. 5 4-2 1 O( 1 ) .
" U.C.C. 5 5 4-2lO( 1), 3-505.
4 6 U.C.C. 5 4-210(2). See also 5 5 3-505, 5-1 l 2 ( 3 ) , and 5-1 l 4 ( 4 ) ( b ) .
40U.C.C. 5 3-504(2)(c). See Finch v. Calkins, 183 Mich. 298, 149
N.W. 1037 (1914).
4 7 U.C.C. 5 3-504(2) (c).
U.C.C. 4 3-504(3).
N.I.L. 1 78.
U.C.C. 5 3-504(3) (a).
O1 U.C.C. 5 3-5 1 1( 3 ) . See Reed v. Spear. 107 App. Div. 144. 94 N.Y.
1007 (1905); Friedberg v. Mechanics Bank, 135 Misc. 194, 237 N.Y.S.
378 (1929).
When the instrument has been lost, the owner may recover from
22-40
those liable for it upon proof of o w n e r ~ h i p . In
~ ~such a casc, the payor
is entitled to a bond t o indemnify him against possible loss through de-
mand by some other holder.
$22-40 WHEN PRESENTMENT IS NOT REQUIRED
There are a number of instances in which delay or failure t o make
presentment may be excused. When delay is caused by circumstances
beyond the control of the holder and is not d u e to his default, miscon-
duct, o r negligence, late presentment may be sufficient if it is made as
soon as the cause of the delay ceases to operate.03 Presentment may be
dispensed with entirely when, after the exercise of reasonable diligence,
~ ~may also be excused if the drawee is a
presentment is i m p o s ~ i b l e . It
fictitious personm or if presentment has been w a i v ~ d . ~ ~
There are also certain cases in which the parties secondarily liable
are not entitled to presentment, even though it can be made. Thus, pre-
sentment for payment is not required for charging the drawer when he
has n o right to expect or to require that the drawee or acceptor will pay
the instrument." For example, when the drawer has himself stopped
payment o r has n o money on deposit with the drawee-bank, and when
no arrangcmcnt has been made for payment and the drawer knows of
these facts, he is not cntitled to have the instrument p r e ~ e n t e d .(There
~~
is sonic old law, which thc U.C.C. seems to changc, that insuflicicnt
funds are not enough to excuse presentment.") A n indorscr is not entitled
to have the instrument presented when the instrument was made wholly
o r partly for his nccomniodation and when he has no reason to expect
- - -
62 U.C.C. 5 3-804. See Household Finance Corp. v. Johnson, 56 Ohio
App. 2d 14, 381 N.E.2d 215 (1978) ("preponderance of evidence" test ap-
plied). For the pre-Codc law, see Wooten v. Bell, 196 N.C. 654, 146 S.E.
705 ( 1929). Sce Bettrel's Brartnan, note 15, at 1005.
88 U.C.C. 8 3 - 5 l l ( I ) .
84 U.C.C. 1 3-5 1 1 ( 2 ) ( c ) . Scc Cnrter v. Jcnnings. 134 Miss. 263, 98
SO. 687 (1924); Llewellyn. "Supervening Impossibility of Performing Con-
ditions Precedent in the Law of Negotiable Paper," 23 Colum. L. Rev. 143
(1923).
U.C.C. 5 3-5 1 l ( 2 ) ( b ) .
U.C.C. 5 3-5 11 ( 2 ) ( a ) .
n7 U.C.C. 5 3-51 l ( 2 ) ( b ) .
6aId. See Usher v. A S . Tucker Co., 217 Mass. 441, 105 N.E. 360
(1914); Tonne v. Horace State Bank, 49 N.D. 770, 193 N.W. 934 (1923).
Compare U.C.C. 1 3-51 1( 2 ) , with Simonoff v. Granite City Nat'l
Bank, 279 111. 248, 116 N.E. 636 (1917). But see Gilman v. F. 0. Bailey
Carriage Co., 127 Me. 9 1, 141 A. 321 (1928); Note, 24 Mich. L. Rev. 498.
8 22-45 DUTIES OF BANK & CUSTOMER
that it will be paid if p r e ~ e n t e d .For
~ example, when the directors and
stockholders of a bank indorse a note to cover worthless assets of the
bank, with the understanding that the note is to be held by it, they are not
entitled to have it presented at maturity."
An indorser who has indorsed the instrument after maturity is
ncithcr entitled to prcsentmcnt nor is he entitled to notice of dishonor.""
5 22-45 TIME ALLOWED FOR PAYMENT
The Commercial Code establishes a general rule that payment of
any instrument propcrly prcscntcd for payment must be made by the
close of b u ~ i n e s s . ~ V previously
s explaincd in Chapter 21 on bank col-
lections, this r u 1 e . i ~slightly modified when the instrument is presented
for credit to an account on the books of the bank or when the bank set-
tles for the item by using a remittance instrument or some other means.
In these cases, if the payor bank makes a provisional settlement for the
instrument before midnight of the day of receipt, it will have until mid-
night of the following banking day to decide whether to dishonor the
item and to revoke the provisional settlement it previously made.''
Clearinghouse rules and agreements between banks may further extend
the bank's time.""lso, when a customer deposits, with his bank, an
item that is payable by that bank and when the bank finally pays the
item, the customer's right to draw against or withdraw the credit does
not arise until the opening of the second banking day following receipt of
the item."'
The Commercial Code does not provide for any "days of grace,"
which existed under former law in some jurisdictions, but the Code does
recognize some situations where payment may be refused without the
occurrence of dishonor of the instrument. The bank has a right to defer
payment pending "reasonable examination to determine whether it is
properly payable." e7 It may require identification of the person making
presentment and proof of his authority to act.ea It can require produc-
o0 See Atlantic Refining Co. v. Nucar Forwarding Corp., 1 1 N.J. Misc.
541, 167 A. 677 (1933);U.C.C. 4 3-511.
Union Bank v. Sullivan, 214 N.Y. 332, 108 N.E. 558 (1315); cf.
Lane Cotton Mills v. Kolher, 186 La. 469, 172 So. 530 (1937);see cases cited
in Bcurel's Brannan, note 15 supra, at 1010, n. 52.
'2 U.C.C. 8 3-50 1 ( 4 ) .
" U.C.C. 8 3-506(2).
a U.C.C. $5 4-301 (I),4-301(2).
'5 See 5 21-70.
U.C.C. 8 4-213(4) (b).
" U.C.C. 5 3-506(2).
'8 U.C.C. 5 3-505.
PRESENTMENT AND ACCEPTANCE 22-50
tion of the i n ~ t r u m e n t .Payment
~ may properly be delayed under emer-
gency condition^.^^ A collecting bank can agree to extend the time for
payment in a good-faith attempt to obtain payment.71 There a r e also
special rules for documentary drafts and letters of credit.72
3 22-50 TENDER OF PAYMENT
As indicated in Chapter 21, payment of negotiable instruments can
be made in cash or in any other manner agreed upon by the parties.
When there is no agreement, or when there is a dispute as to the amount
to bc paid or the necessity of payment, it is important that an offer to
pay be made in the proper form. Such an offer is known as a tender of
payment.
Tender, to be valid, must be an offer of payment in legal money
and that money must be exhibited by the person making the tender.
Credit, checks, cashiers' checks, certified checks, and the like are not
legal tender.7a If tender is accepted, the debt is, of course, paid and the
instrument must be surrendered to the payor. If tender is refused, cer-
tain important legal consequences follow. Although the refusal to accept
a tender will not discharge the liability of parties primarily liable, it
stops the running of interest and damages in case of later suit." It also
discharges indorsers and all other parties secondarily liable on the in-
~trument.~b
As indicated in Chapter 21, a provision that an instrument is pay-
able at a bank may amount to an order on the bank to pay the instru-
ment at maturity. If the parties primarily liable have a large enough
balance in their checking account at the bank to pay the instrument, this
eo I d .
U.C.C. 5 &lO8(2).
" U.C.C. 5 &lO8(l).
7 2 U.C.C. 55 4-502, 5-1 12.
'"nnots., 1 1 A.L.R. 811 (1921), 23 A.L.R. I284 (1923),46 A.L.R.
914 (1927), 51 A.L.R. 393 (1927). The Code has no provision in the
Articles on negotiable instruments and bank collections on what is a proper
tender. In thesc circumstnnces, gcncrnl lcgnl nrles should prcvail. U.C.C.
5 1-103. Article 2 of the Code on Snlcs of Goods perniits tender to bc ninde
in the manner customary in the community, unless the payee demands legal
tcnder. This rule might influence the development of the general law.
74 U.C.C. 5 3-604(1). See Moore v. Allon, 196 Ala. 158, 71 So. 681
(1916); National Bank v. Erion-Haines Realty Co., 213 App. Div. 54. 209
N.Y.S. 522 (1925)modilied on rehearing, 224 App. Div. 642,232 N.Y.S. 57
(1928); Maddock v. McDonald, 1 1 1 Or. 448, 227 P. 463 (1924).
75U.C.C. $ 3-604(2). See Franklin Sav. & Trust Co. v. Clark, 283 Pa.
212, 129 A. 56 (1925);contra. Corley v. French, 154 Tenn. 672,294 S.W.
513 (1927). See Beutel's Brannan, note 15 supra, at 968 n. 52.
 5 22-55 ULJTIES OF BANK & CUSTOMER
is equivalent to a tender, whether the bank actually charges the account
or not.16 When instruments are payable at any other particular place,
the fact that the money was there and was ready to be paid constitutes a
sufficient tender, whether or not demand has actually been made."
§ 22-55 DISHONOR
A n instrument is dishonored by nonpayment when it is duly pre-
sented for payment and payment has been refused or cannot be ob-
tair~ed.'~Promises to pay in the future must be treated as dishonor19
and offers to pay in other than legal tender may be treated as dishonor,
as well, if the holder so desires. When, as indicated above, presentment
is excused and the instrument is overdue and unpaid, it must be treated
as d i s h o n ~ r e d .After
~ ~ a n instrument has been dishonored, as explained
in Chapter 23, notice must be given at once to charge parties secondarily
liable.
When an instrument is dishonored, the holdcr may sue either on
the instrument or on the underlying obligation for which the insLrurnent
was given.81
5 22-60 PRESENTMENT FOR ACCEPTANCE
Acceptance of a draft by a drawee constitutes a legal contract to
pay the draft and occurs when the drawee signs it.82 There are certain
situations in which instruments must be presented for acceptance in or-
der to hold the parties. Thus, if an instrument is payable after sight or
after presentment, it must be presented for acceptance or negotiated
within a reasonable time.83 If a draft is payable elsewhere than at the
residence o r place of business of the drawee, or if the draft so stipulates,
it must be &esented for a ~ c e p t a n c e . T~ h~e holder of a time d& has
la U.C.C. 3 3-604(3). See Fonvood v. Magness, 143 Md. 1, 121 A.
855 (1923); cf. Hostutler v. Alldredge, 235 S.W. 953 (Tex. Civ. App. 1921).
U.C.C. b 3-604(3). See Florence Oil & Refining Co. v. First Nat'l
Bank, 38 Colo. 119, 88 P. 182 (1906); Kuhlmeyer v. Butz, 215 Ill. App.
4 1 4 (1919).
U.C.C. § 5 3-507. 4-301.
See red ow v. ~ o l l 108 , Conn. 489, 143 A. 849 modified on rehear-
I
lD
ing, 1 1 1 Conn. 261, 149 A. 772 (1928); Annot., 6 2 A.L.R. 293 ( 1 9 2 8 ) .
"U.C.C. $ 8 3 - 5 0 7 ( 1 ) ( b ) , 3-511(3).
U.C.C. 5 5 3-410. 3-41 1 . 3-41 3. Scc Chapter 14.
U.C.C. § 3-802. Criterion Ins. Co. v. Fulgham, 219 Va. 294, 247
S.E.2d 404 ( 1 9 7 8 ) .
'a U.C.C. S 3-503 ( 1 ) ( b ) .
U.C.C. 5 3-501 ( 1) ( a ) .
PRESENTMENT AND ACCEPTANCE
the option of presenting it to the drawee for acceptance at any time on
o r before the date it is payable.B6
The formalities of presenting an instrument for acceptance are the
same as those required for presentment for payment, except that the party
to whom presentment for acceptance is made may wait until the close
of the next business day without dishonoring the i n s t r ~ m e n t .The ~ ~ ac-
ceptance must be given in the form and manner indicated in Chapter 14.
The holder may extend the time for acceptance one more business day
without dishonor occurringR7
Intentional failure to return the instrument within the time allowed,
as indicatcd in $ 21-25, will make the bank liable for the i n ~ t r u m e n t . ~ s
However, in cases where the instrument has been properly presented but
is not accepted within the prescribed time, the person presenting it must
treat the instrument as dishonored or he loses his right of recourse
against the indorser~.~D
When an instrument has been dishonored by nonacceptance, the
holder has an inimediatc right of rccourse against the drawers and in-
dorscrs and prcscntment for payment is not n c c ~ s s a r y . ~If ~he so de-
sires in the case of time drafts, however, he may again present the in-
strumcnt for payment at its maturity and may take the same steps to
hold the secondarily liable parties as he would have taken had there been
no dishonor by n o n a c c ~ p t a n c c . ~But if proper noticc and prolcst have
been given at nonacceptance, the subsequent presentment for payment
is not necessary and is purely optional on the part of the holder.92
8 22-65 PRESENTMENT AS IT AFFECTS TIIE
DRAWER'S LIABILITY
As indicated above, although the drawer is a "secondary party" un-
der the Commcrcial Code, the drawer is in an anomalous position as far
as presentment is concerned. With one exception, failure to present for
payment does not discharge the drawer.g3 T h e exception has to do with
either drafts or notes payable at a bank. If presentment for payment is
unreasonably delayed and the bank fails in the meantime, the drawers,
U.C.C. I § 3-50 1 ( 1 ) (a), 3-503 ( 1 ) ( a ) .
86Sce authorities cited in notes 10 and 1 1 supra.
'' U.C.C. 5 3-506(2).
U.C.C. 8 3 - 4 1 9 ( 1 ) .
U.C.C. $ 5 1 ) ( a ) , 3-501, 3-502.
'"'U.C.C. $ 5 3-507(2), 3-51 l ( 4 ) .
o r U.C.C. 5 3-501 ( I ) ( a ) .
RZU.C.C.§ 3-511(4).
* D8U.C.C. $ 5 3-501(1), 3-502(1)(b).
397
8 22-65 DUTIES OF BANK & CUSTOMER

makers, or acceptors of such paper can discharge their liability by giving

to the holder a written assignment of a portion of their account equal to
the amount on the face of the paper. Thereafter, the holder must look
to the bank for p a ~ m e n t . ~Otherwise,
' the drawer remains liable on the
draft.06 Chapter 23
The requirements and formalities of presentment are the same to
hold both drawers and indorsers.
PROTEST, NOTICE OF
"U.C.C. $0 3-501 ( l ) ( c ) , 3-502(1)(b). DISHONOR, AND WAIVER
Id. See Beutel, "Liability of 'Secondary Parties' Under the Uniform
OK
Commercial Code, Drawers and Indonen," 1 Rut.-Cam. L. Rev. IS (1969).
Section
23-5 Nature of Requirement of Formalities at Maturity . . . . .
231-10 Protest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23-1 5 . .. .
Form of Protest . . . . . . . . . . . . . . . . . . . . . . . . . . .
23-20 .
Time and Place of Protcst . . . . . . . . . . . . . . . . . . . . . .
23-25 When Protcst Is Unnecessary . . . . . . . . . . . . . . . . . . . . .
23-30 Notice of Dishonor . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2 3-3 5 Person Giving Notice . . . . . . . . . . . . . . . . . . . . . . . . . . .
23-40 Persons Rcceiving Notice . . . . . . . . . . . . . . . . . . . . . . . .
23-45 Time Within Which Noticc Must Bc Givcn . . . . . . . . . .
23-50 Placc for Addressing Noticc of Dishonor . . . . . . . . . . . .
23-55 Cases Where Notice Need Not Be Givcn . . . . . . . . . . . .
23-60 Presentment of Previously Dishonorcd Checks . . . . . . . .
23-65 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23-70 Construction of Waivers . . . . . . . . . . . . . . . . . . . . . . . . .
23-75 Agreement for Chargeback as Waivcr . . . . . . . . . . . . . .
23-80 .
Notice of Dishonor to Drawer . . . . . . . . . . . . . . . . . . .

§ 23-5 NATURE OF REQUIREMENT OF FORMALITIES

AT MATURITY

In order to hold parties secondarily liable, such as indorsers nnd

drawcrs, it is ncccssary for [lie pcrson holding thc instrunicnt at maturity
to meet all the requirements of prcsentmcnt, protest (when necessary),
and noticc of dishonor. Failure in any one of these particulars auto-
matically relcnses indorscrs. T11c circunistanccs undcr which drawers
are released from liability are more limitcd, but even drawers may be
discharged. For example, undcr the Commercial Code, failure to make
6
a necessary presentment discharges the drawer when the drawee becomes
3 23-10 3TIES O F BANK & CUSTOMER
insolvent during the delay1 and failure to make a necessary protest is a
complete d i ~ c h a r g e . ~
8 23-10 PROTEST
Protest is a formal declaration by a holder that an instrument has
been dishonored. The Commercial Code8 requires protest only of drafts
that, on their face, are drawn or payable outside of the United States, its
"territories, dependencies, and possessions," and Puerto Rico.' There
are procedural advantages in making a protest, however, because it cre-
ates presumptions of dishonor and notice of dishonor. Banks, however,
can obtain the benefit of these presumptions without the formality of
protcst through the use of any oficial stamp or writing on thc instrumcnt,
or any accompanying writing, that states the instrument is dishonored
and gives a sufficient reason therefor.=
Although protest is usually made before a notary public, it can be
ma& by any U.S. consul, vicc consul, or othcr pcrson nutliorizcd by thc
law of thc placc whcrc thc instrunlcnt is d i s h ~ n o r c d . ~
The formality of protest is not necessary when the bank exercises
its right to revoke a provisional settlement and charges back its custom-
er's account for items that have not been paid.'
0 23-15 FORM OF PROTEST
The protest is a written statement, made under seal,8 either attached
to the dishonored instrument or containing a copy of it. It must contain
U.C.C. $6 3-501 ( I ) ( c ) , 3-501 (2) ( b ) , 3-502(1) (b). Cf. Rodriguez
v. Hardouin, 15 La. App. 113, 131 So. 593 (1930); Kuflick v. Glasser, 114
N.Y.S. 870 (1909); Fick v. Jones, 185 Wash. 365, 55 P.2d 334 (1936).
U.C.C. $5 3-501(3), 3-502(2).
a Prior to the Commercial Code, protest was needed on all drafts pay-
able in a different state than the state of presentment. N.I.L. 5 152; Williams
v. Painsville Nat'l Bank. 143 Ky. 781, 137 S.W. 535 (1911); Mischnick v.
Dime Sav. Bank, 260 Mich. 639, 245 N.W. 541 (1932); Gorsche v. First
Nat'l Bank, 233 Mich. 428, 206 N.W. 992 (1926); Amsinck v. Rogers, 189
N.Y. 252, 82 N.E.134 (1970).
' U.C.C. 5 3-501 ( 3 ) .
' U.C.C. 8 3-510(b).
U.C.C. 5 3-509. Compare U.C.C. 5 3-508 on notice of dishonor. There
are general rules on notice, however. See U.C.C. $5 1-201(38), 23-50.
Mercantile Bank & Trust Co. v. Hunter, 31 Colo. App. 200, 501 P.2d
486 (1972).
U.C.C. 8 3-509. See London & River Plate Bank v. Carr, 54 Misc.
94, 105 N.Y.S. 679 (1907); cf. Gethins v. Breeyear, 252 Mass. 326, 147
N.E.876 (1925).
400
PROTEST, DISHONOR & WAIVER ' '3-25
a statement of the time and place of presentment, of thc fact thai present-
ment was made, of the nature of the demand, and of the answer given,
if any. If the dishonor was due to the fact that the drawee or acceptor
could not be found, this should also be stated. Whcn presentment has
been dispensed with or excused, this should be stated. The cause or
reason for protesting the instrument should also be i n d i ~ a t e d . ~
I 3 23-20 TIME AND PLACE OF PROTEST
T h e Commercial Code contains no specific rule on where a protest
must be made, although Section 3-509, n. 3 of the Code assumes it is
at the place of dishonor. This is consistcnt with prior law, where a draft
had to bc protcstcd at the placc whcrc i t was dishonored. Whcn it was
payable at a place other than the rcsidcncc or place of business of the
drawee, it had to bc protested at the place where it was expressed as
payable; no further presentment for payment or demand on the drawee
was ncccssary .lo
Undcr thc prc-Codc law, the protcst had to bc completed on tlic
day of dishonor." There were, however, certain situations in which the
number of drafts dishonored late in the afternoon made it impossible for
a notary to complete work during that day. In such a situation, it was
proper for the notary to make a note on the draft of the dishonor, and
cotnplctc tlic protcst Intcr, but tlic protcst would hnvc to bc dntcd ns of
thc date of noting the draft. At a later date, thc entire proceedings wcre
changed.12 The Commercial Code continues the practice of allowing the
officer to note the protest on the instrument but extends the time limit.ls
The Commercial Code also relaxes the deadlines for giving notice.
Banks must protest before their midnight deadline but other persons
have until midnight of the third day after dishonor, or receipt of notice
of dishonor, to protest.''
I 5 23-25 WHEN PROTEST IS UNNECESSARY
Protest is dispensed with in any of the circumstances explained be-
low in which notice of dishonor need not be given.I6 Delay in noting or
U.C.C. 5 3-509.
lo N.I.L. 5 156.
l 1 N.I.L. 5 155; U.C.C. 5 3-509(5).
l 2 NIL 5 155; McPherson v. Wirth, 12 Sess. Cas. 942 (Scotland 1885).
IS U.C.C. 5 3-509(5) and Comment 8.
l4 U.C.C. $ 5 3-508(2), 3-509(4). See Universal C.I.T. Credit Corp.
v. Farmers Bank, 358 F. Supp. 317 (E.D. Mo. 1973).
l 6 U.C.C. 5 3-51 l ( 2 ) . See 5 23-10.
+
 DUTIES OF BANK & CUSTOMER
protesting is excused whcn delay is caused by circumstances beyond the
control of the holder a n d not imputable to his default, misconduct, or
negligence. When the cause of delay ceases to operate, the instrument
must be noted o r protested with reasonable diligence.ld Howevcr, where
the instrument is lost o r wrongfully detained, it must be protested. In
such a case, protest should be o n a copy o r a written statement contain-
ing particular facts about it.IT As stated in § 23-10, protest is not
needed for domestic drafts.
5 23-30 NOTICE OF DISHONOR
Whether the instrument requires protest o r not, notice of dishonor
must be given to each indorser liable o n the paper unless legally excused,
and anyone to whom such notice is not given cannot be held o n his con-
ditional secondary liability18 unless h e has waived this condition. Un-
like protest, no special form of notice is required. Anything that is suffi-
cient to bring the dishonor to the attention of the parties secondarily
liable is s a t i ~ f a c t o r y . ' ~T h e notice itself may be written or merely oral,
but it must identify the instrument and indicate the naturc of the dis-
honor.20 If the instrument was protested, a copy of the protest is suffi-
~ i e n t . ~Notice
' may be given personally, by telephone,22 by telegraph,2a
or through the mail,Z4 and the form is immaterial so long as it conveys
la U.C.C. 5 3-51 l ( 1 ) . See Lewis v. Chelsea Exch. Bank. 137 Misc.
153, 241 N.Y.S. 639 (1930); Ellenbogen v. State Bank, 119 Misc. 71 1, 197
N.Y.S. 278 (1922); cf. Kardynal v. Grezezinski, 225 Mich. 421, 238 N.W.
2 13 ( 193 1 ) ; Llcwcllyn, "Supervening Impossibility of Performing Condition
Prcccdcnt in the Lnw of Neyotinblc Pnpcr," 23 Colum. L. Rcv. 142 154-161
(1923); U.C.C. § 3-51 1.
l 7 U.C.C. 5 3-509(2).
l a U.C.C. 1 3-501 ( 2 ) . Sce N.I.L. 5 89; Swift & Co. v. Miller. 62 Ind.
App. 3 12, 113 N.E. 447 ( 19 16); Beutel's Brannan Negotiable Insrrumenrs
Law 1052 (7th ed. 1948) (hereinafter cited as Beurcl's Brannan).
lo U.C.C. 1 3-508. See Wilson v..Peck, 66 Misc. 179, 121 N.Y.S. 344
(1910).
20 U.C.C. 5 3-508(3). When oral, it must be given in a reasonable
manner. See Rosenthal v. Levine, 128 Me. 447, 148 A. 675 (1930); Mar-
shall v. Sonneman, 216 Pa. 65, 64 A. 874 (1906); but cf. Grayson County
Bank v. Elbert, 143 Ky. 750, 137 S.W. 792 (191 1 ) (Kentucky rule).
21 Cohen v. Sovalsky, 124 Misc. 368, 208 N.Y.S. 46 (1925).
22 Blue Ribbon Garage v. Baldwin, 91 Conn. 674, 101 A. 83 (1917);
American Nat'l Bank v. National Fertilizer Co., 125 Tenn. 328, 143 S.W.
597 (1911).
28 Caine v. Foreman, 106 Cal. App. 636, 289 P. 929 (1930); Jurgens
v. Wichmann, 124 App. Div. 531, 108 N.Y.S. 881 (1908); Fielding v.
Corry. 1 Q.B.268 (1898).
" U.C.C. 1 3-508(3). See N.I.L.$ 96; Bovay v. Fuller, 63 F.2d 280
PROTEST, DISHONOR & WAIVER
the necessary i n f o r m a t i ~ n . Unless
~~ a bank is involved, the notice may
be oral. Banks should give writtcn notice of dishonor as discussed bclow.
Neither presentment, protest, nor notice of dishonor is necessary to
chargc a n indorser who has indorsed after m a t ~ r i t y . ~ f l
When a bank exercises its right to revoke a provisional settlement
and charge back its customcr account for a n item that is dishonored, it
must give notice of dishonor as well.27 When a payor bank exercises the
right to charge back it must either return the item or send written notice
of d i s h ~ n o r . ' ~When the collccting bank charges back, the Code is not
clear whether the notice must be ~ r i t t e n .T~h e time for giving notice
will be governed by Ihe Code provisions on bank collection^.^^
fj 23-35 PERSON GIVING NOTICE
Notice may be given by the holder of a dishonored instrument, by
his agent, o r by any other person who brings the facts to the attention o f
the partics secondarily liable.81 The notary who protests the instrument
is also a proper person to give notice.R2 When a bank is agent for col-
lection, it may give notice.83 When such notice comes to the attention of
(8th Cir. 1933); Doherty v. First Nat'l Bank, 170 Ky. 810, 186 S.W. 937
(1916); Myers v. Bibee Grocery Co.. 148 Va. 282, 138 S.E. 570 (1927).
26 U.C.C. § 3-508(3). Cf. Clark v. O'Neal, 23 1 Ala. 577, 165 SO. 853
(1935); Winn v. Batton 152 So. 349 (La. App. 1934); see Beutel's Brannan,
note 18 supra, at 1063-1065.
28 U.C.C. 5 3-501 ( 4 ) .
27U.C,C.$5 4-212(1), 4-301(1)(b). See 5 5 20-90, 21-50.
2R U.C.C. !4-301 (I ) ( b ) . Scc Available Iron & Metal Co. v. First
Nnt'l nnnk, 56 111. App. 3d 516, 13 111. Dcc. 940. 371 N.E.2tl 1032 (1977);
Security Trust Co. v. First Nnl'l Bank, 79 Misc. 2d 523, 358 N.Y.S. 2d 943
(1974); Security Bank t Trust Co. v. National Bank & T n ~ s tof Shawnee,
47 Okla. B.A.J. 876. 19 U.C.C. Rep. 211 (1976) (Federnl Reserve rules
allowing oral notice control).
29 U.C.C. 8 4-212(1). See Laurel Bank & Tmst Co. v. Sahedi, 32 Conn.
Sup. 172, 345 A.2d 53 (1975) (oral notice effective). Valley Bank &
Trust Co. v. First Sec. Bank, 538 P.2d 298 (Utah 1975) (written notice
required ) .
80 See 8 20-90.
U.C.C. 5 3-508(1). See Grenda v. Kitchen, 270 Mass. 559, 170
N.E. 619 (1930); Reed v. Spenr, 107 App. - . Div. 144, 94 N.Y.S. 1007
(1905).
82 U.C.C. 5 3-509(3). See Caine v. Foreman, 106 Cal. App. 636, 289
P. 929 (1930); Phillips v. Cunningham, 148 Tenn. 164, 253 S.W. 354
(1923).
83 U.C.C. 5 3-508(1). See Gleason v. Thayer, 87 Conn. 248, 87 A.
790 (1913); Lewis v. Chelsea Exchange Rank, 137 Misc. 153. 241 N.Y.S.
639 (1930); cf. Farmers' Nat'l Bank v. People's Nat'l Bank, 263 Pa. 266,
* 106 A. 311 (1919).
5 23-40 DUTIES OF BANK & CUSTOMER
prior parties within the proper time, it is effectual for the benefit not
only of the person o n whose behalf it was given but also for all parties
involved subsequently t o the one receiving it.84
$23-40 PERSONS RECEIVING NOTICE
Notice is effective when given to the person whose name appears on
the instrument or to any agent acting o n his behaKa6 Notice left with a
third person, however, who is not the agent of the party t o be charged,
is not sufficienLae I n the case of partnership paper, the principles of
partnership law make notice to any onc of the partners sufficient." How-
ever, where persons are not partners but are jointly liable on the paper,
each individual, unless one of them has authority to act for the others,8B
must be given notice. In such a case, only the indorsers actually notified
can be held to have received adequate notice.39 Where the party to re-
ceive notice is dead, and his death is known to the person giving notice,
the notice must be given to the executor o r administrator (if one can be .
found) and, if not, notice may be sent to the last residence o r place of
business of the deceased.'O Where a party has been adjudged bankrupt
o r has made an assignment for the benefit of creditors, the notice may
be given either to the party, his trustee, or his assignee."
9 23-45 TIME WITHIN WHICH NOTICE MUST BE GIVEN
Although the form of notice is not essential, the time within which
it must be sent is strictly limited by law. It may be given immediately
after the dishonor and must be sent within the prescribed time.42 Notice
before dishonor, even though it is certain that the paper will not be paid,
84 U.C.C. 8 3-508(8).
U.C.C. 5 3-508( 1 ) .
as American Exch. Nat'l Bank v. American Hotel Victoria Co., 103
ADD. Div.- -372. 92 N.Y.S. 1006 (1905); American Nat'l Bank V. National
- - r r - - -
Fertilizer Co., '125 ~ e n n 328,. 143 ~ . ~ . - 5 (191
9 7 1).
Kensington Nat'l Bank v. Ware, 32 Pa. Super. 247 (1906); cf.
Defiler v. Loudenback. 233 Ill. App. - - 240 (1924); U.C.C. 5 3-508(5).
See U.C.C. 5 31508(1).
a9 U.C.C. $5 3-502( 1 ) ( a ) , 3-508( 1 ). See N.I.L. 8 s 68, 100; Doherty
v. First Nat'l Bank, 170 Ky. 810, 186 S.W. 937 (1916).
4 0 U.C.C. 5 3-508(7). See Second Nar'l Bank v. Smith, 91 N.J.L. 531,
I03 A. 862 (191 8 ) ; cf. First Nal'l Bank v. Carpenter, 3 N.J. Misc. 779,
130 A. 435 (1925); In re Marwilz Estate, 286 Pa. 191, 133 A. 220 (1926).
" U.C.C. 5 3-508(6).
4 2 U.C.C. 5 3-508(2); N.I.L. 102.
PROTEST, DISHONOR & WAIVER !3-45
is of no effect;'= and notice given after the prescribed time has elapsed
is also equally inellecti~e.~'
Under the Commercial Code, the time allowed for banks to give
notice is before their midnight deadline (midnight of the next business
day following d i ~ h o n o r ) . ~ V n d i v i d u a lhave
s until midnight of the third
business day after d i s h o n o r . ' T h e s e rules are also subject to change
under the Code provisions for bank collections, which may give collect-
ing banks a longer time, where provided by agreement, by clearinghouse
rules, by Federal Reserve regulation^,'^ or when the bank can establish
reasonableness under certain circumstance^.^^
Delay in giving notice of dishonor, like delay in presentment, may
bc cxcuscd by circun~stanccsbeyond tllc control of the holdcr and not
caused by his default o r misconduct. But when the cause of the delay
is removed, notice must be given with reasonable For exam-
ple, delay due to the reasonable search for an indorser's address,
where none was given, is excusable unless the delay is u n r e a s ~ n a b l e . ~ ~
Unforeseen ernployec absenteeism docs not automatically trigger this pro-
vision." Nor are delayed returns of dishonored items caused by employee
illnesses, Christmas overloads, o r machine breakdown, none of which
alonc or in combination constitute "circun~stancesbeyond [the] control"
of the bank.02
When a person who is secondarily liable on an instrument receives
notice, he has three business days after receiving notice of dishonor to
give notice to prior parties. The same is true for other prior parties who
give notice of dishonor to parties prior to t h e m s e l v e ~ . ~ ~
' V e e Horton v. Wilson, 175 N.C. 533, 95 S.E. 904 (1918); Case V.
McKinnis, 107 Or. 223, 21 3 P. 422 (1923).
Sce Bredow v. Woll, 108 Conn. 489, 143 A. 849 (1928); Sicgcl V.
Dubinski, 56 Misc. 681, 107 N.Y.S. 678 (1907); Jones v. Carolina Nat'l
Bank, 114 S.C. 11, 103 S.E. 27 (1920); see Beurel's Brannan, note 18 supra,
at 1069.
"U.C.C. $5 3-508(2), 4-104(l)(h).
'O U.C.C. 5 3-508(2).
4 7 As indicated in Chapter 9.
'' U.C.C. $ 5 4-202(2), 4-212.
4n U.C.C. 5 3-5 1 1 .
"Cf. The Elrnville, P. 319 (England 1904); Studdy v. Beesty. 60 L.T.
Rep. 647 (England 1889).
61Rich v. Franklin Sav. Bank, 18 U.C.C. Rep. 451 (N.Y. Sup. Ct.
1975).
6* Blake v. Woodford Bank & Trust Co., 555 S.W.2d 589 (Ky. App.
1977).
83 U.C.C. 5 3-508(2). Sce N.I.L. 5 107; Emerson Rr Buckingham Bank
v. Gcrmnn Am. Tnlst Co., 65 Colo. 398, 176 P. 472 ( 19 18); Williams V.
,, Paintsville Nat'l Bank, 143 Ky. 781, 137 S.W. 535 ( 191 1).
5 23-50 JUTIES OF BANK & CUSTOMER
F o r example, if a b a n k that is agent for collection gives notice of
dishonor only to the person depositing the instrument, the depositor, in
turn, can give notice to prior indorsers and can hold them liable to him
even though the bank failed t o notify Every person receiving
notice of dishonor should immediately give such notice to prior parties
who might be liable t o him; otherwise, they may be discharged by failure
to receive n ~ t i c e . ~ W h etimely
n notice has been given by any party, the
notice operates for the bcnefit of all parties w h o have rights o n the in-
strument against the party notified.68
5 23-50 PLACE FOR ADDRESSING NOTICE OF DISfIONOR
T h e Commercial C o d e provisions provide that written notice is
given "when sent." 67 It does not have to b e received t o have been timely
and to have been "given" properly by the bank." When the party to be
notified has become insolvent after the instrument is issued, notice may
be given to the party, t o the bankruptcy trustee, o r to any other repre-
.
sentative of the estate.08 When the party is dead or incompetent, notice
may be sent to his last known address o r may b e given to his personal
r e p r e s e n t a t i ~ e .In
~ ~other cases, the general rule under the Code is that
notice should be sent "in the case of a n instrument to a n address speci-
fied thereon o r otherwise agreed, o r if there be none, to any address rea-
sonable under the circumstances." I n giving notice, thc bank must act
reasonably in a manner calculated t o inform the person c o n ~ e r n e d .T~o~
send written notice thc bank must "dcposit in tlic ninil o r dclivcr for
transmission by any other usual means of communication with postage
o r cost of transmission provided for and properly addrcssed . . . ." a
As indicntcd nbovc, it is not ncccssnry tlint thc pcrson nclunlly
have knowledge o f the facts."' I f a person actually receivcs the notice
within the time allowed, the notice is effective, even though it was im-
properly sent o r there were other defects in the manner of giving it."
Gleason v. Thayer, 87 Conn. 248, 87 A. 790 (1913).
b6 Emerson & Buckingham Bnnk V. German Am. Trust Co., 65 C O ~ O .
398, 176 P. 472 (1918); Case v. McKinnis, 107 Or. 213 P. 422 (1923).
" U.C.C. § 3-508(8).
U.C.C. 1 3-508(4).
68 Id.
U.C.C. § 3-508(6).
U.C.C. 8 3-508(7).
'' U.C.C. 3 1-201 (38).
'2 U.C.C. 4 1-201 (26).
"W.C.C. § 1-201 (38).
* U.C.C. § § 1-201 ( 2 6 ) , 3-508(4).
'W.C.C. 5 1-201 (38).
PROTEST, D I S H O N O R & W A I V E R p55
8 23-55 CASES WIIERE NOTICE NEED NOT BE GIVEN
Although it i; safer and better practice t o give notice of dishonor
in all cases, notice of dishonor is not required to b e given t o the drawer
wherc the drawer and drawee are the same person, o r when the drawee
is a fictitious person o r one not having capacity t o contract.O0 Notice
need not be given to the drawer when he has stopped payments7 o r
when h e has no right t o expect or require that the drawee o r acceptor
will honor the instrument, as, for example, when h e has n o account in
thc 'drawcc bank o r whcn he knows that thc bank has failed.08 When
the drawcr is the pcrson to whom the instrument is properly prcscnted
for pnymcnt, he also necds n o notice.an
Indorsers need not bc given notice of dishonor when the drawee was
a fictitious pcrson, o r was a person having no capacity to contract, and
when the indorser was aware of the fact at the time he indorsed the in-
s t r ~ m e n t .T~h~e test, under the Commercial Code, is whether the party
to be charged has "no reason to expect o r right to require that the instru-
ment be accepted o r paid." 71
Notice of dishonor is excused when, after the exercise of reasonable
diligcncc, it does not reach o r cannot be given t o the parties sought for
~ h a r g i n g . ' ~In determining what is reasonable diligence, the courts re-
quire that the party giving notice exhaust all the usual sources OF informa-
tion. Examining the city directory is not enough, where the location of
thc party to be notified could have becn discovered by questioning an-
other party to the ins~runicnt.'Vurtlicr, i t is not sulficicnt to send noticc
t I;tlo\vs t11c ~ I ~ I C I I . C S Sof IIic ~wt.lyIn IIC
to o ~ i cpnrry to 1111 i ~ i s t ~ u n i c nw110
" U.C.C. 9 3-5
" U.C.C.
2-501 ( 1
1l(2)
).
(11). Scc N n l l ~ r n n lCtrplrcr 11111thV. I ) I I V ~ YC I I ~ I I I \ I Y
Bnnk, 47 Utnh 236, 152 P. 1180 (1915).
' 8 Dcmatcis v. Vezu. 49 Cal. App. 453, 193 P. 793 (1920); Jones v.
Board of Educ., 242 App. Div. 17, 272 N.Y.S. 5 (1934); cf. Mazukiewicz
v. Hanover Nat'l Bank, 240 N.Y. 317, 148 N.E. 535 (1925), cert. denied
270 U S . 643 ( 1925); U.C.C. 8 3-51 l ( 2 ) ( b ) .
so U.C.C. 5 3-5 1 l ( 2 ) ( b ) .
70 Id.
U.C.C. 4-51 1 ( 2 ) ( b ) . This test may bc more libcrnl than the prc-
Codc cases, which rcquircd giving noticc cvcn whcn the indorscr knew the
drawee or mnkcr was insolvent. See National Non-Theatrical Motion Picture
Bureau v. Old Colony Trust Co., 270 Mass. 34, 169 N.E. 508 (1930);
Brunett v. Everts. 56 S.W.2d 863 (Tex. 1933); Annot., 87 A.L.R. 1392
(1933).
7 2 U.C.C. 5 3-5 11 ( 1 ). See Llewellyn, "Supervising Impossibility of Per-
forming Conditions Precedent in thc Law of Negotiable Paper," 23 Colunl.
L. Rev. 142, 145 (1923).
7a Bost v. Rexine Co., 8 F.2d 795 (D.C. Cir. 1925). Mechanic v. Elgie
.L Iron Works, 98 Misc. 620. 163 N.Y.S. 97 (1917).
5 23-60 DUTIES O F B A N K & CUSTOMER
charged." It is necessary, in such a case, for the person sending notice
t o inquire of all parties. If h e does this, notices sent out after the address
is discovered are valid, even though they were sent a t a later d a t e than
req~ired.~"
5 23-60 PRESENTMENT OF PREVIOUSLY DISHONORED
CIiECKS
There is a split of authority concerning the duty to dishonor re-
presented checks. O n e school of thought says that if the item was prop-
erly dishonored the first time, it is not bound by its midnight deadline
whcn thc ilcm is r c - p r c s c n t c d . l ~ l o w c v e r ,the otlicr scliool bclicves tlierc
is little reason for treating the re-presented item any difTcrently from the
originally presented item. It would apply the same rules and time con-
straints t o both situations, since to d o otherwise would put the dcposi-
tory bank at a true d i ~ a d v a n t a g e . ' ~
§ 23-65 WAIVER
Any o r all of the steps required in presentment, protest, a n d notice
of dishonor may be w a i ~ e d . ~ Iaf all are waived, conditional secondary
liability is finally fixed from the moment of maturity.79 Waivers may be
l4University Press v. Williams, 48 App. Div. 188, 62 N.Y. 986 (1900).
76 First Nat'l Bank v. Gray, 101 N.J.L. 179, 127 A. 201 (1925).
Leaderbank v. Central State Bank, 202 Kan. 450, 450 P.2d 1 (1 969);
Goodman v. Norman Bank of Commerce, 55 1 P.2d 661 (Okla. App. 1976).
l1 Wiley v. People's Bank & Trust Co., 438 F.2d 513 (5th Cir. 197 1 ),
modified on rehearing, 462 F.2d 179 (5th Cir. 1972); Blake v. Woodford
Bank & Trust Co., 555 S.W.2d 589 (Ky. App. 1977); Sun River Cattle Co.
v. Miners Bank of Mont., 164 Mont. 237, 521 P.2d 679 (1974), supp. op.
164 Mont. 479, 525 P.2d 19 (1974).
18U.C.C. $3-511(1). SeeHallv.Crane,213Mass.326, 100N.E.554
( 19 13) ; Hayward v. Empire State Sugar Co.. 105 App. Div. 21, 9 3 N.Y.S.
447 (1905), aff'd 191 N.Y. 536, 84 N.E. 11 14 (1908).
Hough v. State Bank, 61 Fla. 290, 55 So. 462 (19 11 ); Commercial
Fin. Corp. v. Gale, 105 Vt. 3, 162 A. 899 (1933). Under prior law, waiver
of these requirements was not a contract; no special formalities were re-
quired and no value was needed. Waiver was simply a n indication that the
party secondarily liable did not intend to stand upon his right to due dili-
gence. N.I.L. I 109; County Sav. Bnnk v. Jacobson, 202 lown 1263, 211
N.W. 864 (1927); Burgettstown Nat'l Bank v. Nill, 213 Pa. 456, 63 A.
186; Annot., 3 A.L.R. (N.S.) 1079 (1906); see Beurel's Brannan, nole 18
supra, at 1081. The Commercial Code has no express provisions on these
points and probably continues the prior practice. See U.C.C. 8 1-103.
408
I PROTEST, D I S H O N O R & W A I V E R -65
written, oral,80 o r deduced from conduct,81 a n d may be made either be-
fore o r after default.B2 Waivers before default are usually, but not neces-
sarily, embodied in the instrument.
If the waiver is "embodied in the instrument itself," it binds all
parties, whether their signatures appear o n the face o r the back of the
i n s t r ~ m e n t . ~ V hrule
i s does not require the waiver to be on the face o f
the instrument to bind all parties as was sometimes required before the
C o d c R 4 Whcrc tlic wnivcr is writkn nbovc t l ~ csignaturc of a particular
indorser, however, it binds only him.8n
When a waiver is made after dishonor, it is not binding, unless the
person waiving his rights knows the facts.R0 It is not necessary that the
onc mnking tlic wnivcr know tlic legal e r e c t of tlic fncts; it is suflicicnt
thnt lic know that tlie instruliicnt has bccn dishonored and that h c hns
received n o Written o r oral statements that the party will not
cnforcc his riglits or that tic is willing lo pny, in spitc of them, a r c sur-
ficient waivers. Part p a y m ~ n t promises
,~~ to pay,Rn adniissions of liabil-
U.C.C. 8 3-51 1, Comment 3. See Washington Horse Exch. CO. v.
Bonner, 180 N.C. 20, 103 S.E. 907 (1920); Dillon v. Bron, 96 Kan. 189,
150 P. 553 (1915).
Simonoff v. Granite City Nat'l Bank, 279 111. 248, 116 N.E. 636
(1917); Linthicum v. Bagby, 131 Md. 644, 102 A. 997 (1917); Rinehart v.
Lucas, 119 W. Va. 466, 190 S.E. 772 (1937).
R 2 Bowen v. Fnrley. 256 Mass, 23, 152 N.E. 7 0 (1926); Orthwein v.
Nolkcr. 290 Mo. 284, 234 S.W. 787 ( 192 1 ) .
8a U.C.C. 3 3-511(6). See Appleton & Eldridge v. McCarthy, 104
N.J.L. 432, I38 A. 11 1, 140 A. 918 (1928); see Beutel's Brannan, note I 8
supra, at 1090.
8' N.I.L. $5 110, 191; First Bank in Medford v. Wolfson, 27 1 Mass.
292, 171 N.E. 460 (1930); cf. Hurlburt v. Quigley, 57, 180 Cal. 265, 180
P. 613 (1919); Mocrs v. Stalkcr. 194 Iowa 1354, 191 N.W. 175 (1922)
tt~odifiedon rehearing, 200 N.W. 189 (Iowa 1924); Central Bank v. Scioto-
ville Mill. Co.. 79 W. Va. 782, 9L S.E. 808 (1917); see Beutel's Brannan.
nole 1 8 supra, at 1092; U.C.C. 5 3-5 1 1(6).
U.C.C. 8 3-5 1 1 ( 6 ) . See N.I.L. 5 1 10; Murray v. Nelson, 145 Tenn.
459. 239 S.W. 764 (1922); Annot., 21 A.L.R. 1392 (1922). Cf. Stuhldreher
v. Dunncmiller, 26 Ohio App. 388, 158 N.E. 556 (1927).
Besee Aebi v. Bank of Evansville, 124 Wis. 73, 81, 102 N.W. 329
( 1905); Bergmann v. Puhl, 195 Wis. 120, 217 N.W. 746 (1928); cf. Hurl-
burt V. Bradley, 194 Conn. 495, 109 A. 171 (1920); Note, 29 Yale L.J. 793.
R 7 County Sav. Bank v. Jacobson, 202 Iowa 1263, 21 1 N.W. 864 (1927);
Burgcttstown Nat'l Bnnk v. Nill, 213 Pa. 456, 63 A. 186; Annot., 3 A.L.R.
(N.S.) 1029; sce Ocrr~rl'snrorinnrt, notc l R .rrcpra, at 1082.
Mary Couts nrrlnctt Trust v. Snnir~cls. 59 S.W.2d 35R (Tcx. Civ.
App. 1933); see cnscs citcd in Beutel's nronnan. nole 18 supro, at 1013-1017.
Fashion Hat Frame Co. v. Ringel, 81 Cal. App. 556, 254 P. 275
(1927); Richardson v. K u l p , 81 N.J.L. 123, 78 A . I062 (191 1 ) ; Wein-
CL bergcn v. McConncll, 192 Wis. 539, 213 N.W. 313 (1927).
 23-70 l U T I E S OF BANK & CUSTOMER

ity,OOsigning or offering of renewal notes,'" and definite arrangements to

I PROTEST, DISHONOR & WAIVER

contracts made directly with the depositor, that the bank shall have the
-80

make payment all have been held to constitute valid waivers.02 Mere right to charge back the amount of the item against the depositor's bal-
advice as to how to collect or discussions about the unpaid instrument, ance if it is not collected. These contracts, like other standard contracts
however, are not s ~ f f i c i e n t . ~ ~ made by the bank, are valid loo but are likely to be strictly construed by
the courts and d o not necessarily constitute waivers of presentment, no-
tice, and dishonor. The Commercial Code gives banks statutory charge-
8 23-70 CONSTRUCTION OF WAIVERS back rights but the bank must act in a timely fashion and must give
One may waive part or all of the formalities required of the holder notice to exercise these rights. See $ 5 20-90,21-55.
at m a t ~ r i t y . ~ 'For example, one might waive notice but not present-
rnet~t."~Waivers of protest under the Commercial Code automatically
include waivers of presentment, of protest, and of notice of dishonor.a0 Q 23-80 NOTICE OF DISIIONOR TO DFUWER
Some courts have held that waivers of presentment alone should waive Under the Code, it is necessary to give notice of dishonor to hold
noticeo7 but others. have held otherwi~e.~aWaiver of notice alone does the drawer to his secondary liability, but, like failure of presentment for
not necessarily waive p r e ~ e n t m e n t .In
~ ~cases of doubt as to the extent of payment, failure to give notice of dishonor discharges the drawer of a
the waiver, it is safer to go through all formalities. Even when the waiver check o r draft only to the extent of the loss caused by the insolvency of
is complete, it is often useful for the sake of the record to go through the bank upon which the instrument is drawn.lo1 In this case the drawer
the formalities of presentment, protest, and notice. must assign his rights in the account in the defunct drawee bank to the
holder, as would the maker of a note or the acceptor of a draft payable at
the bank. This must be in the amount of the draft and will relieve him
Q 23-75 AGREEMENT FOR CHARGEBACK AS WAIVER from further liability. Otherwise, he will remain liable on the draft.lo2
In many cases, banks have an agreement with their customers,
either through custom of dealing, statements printed on deposit slips, or loo Davics & Vincent v. Bank of Commerce, 27 Ariz. 276, 232 P. 880
(1925).
lo'U.C.C. $ 5 3-501 ( 2 ) ( b ) , 3-502(1) ( b ) .
First Nat'l Bank v. Tamaqua Mfg. Co., 7 Pa. Super. 39 (1919); First lo2U.C.C. 5 5 3-50 I(2) ( b ) , 3-502( 1 ) ( b ) . See Beutel, "The Liability
Nat'l Bank v. Anderson, 125 Va. 102, 99 S.E. 561 (1919). of 'Secondary Parties' Under the Uniform Commercial Code, Drawers and
Genesee County Sav. Bank v. Rosenthal, 265 Mich. 291, 251 N.W. Indorsers," 1 - ~ u tCam.
. L. Rev. 15 ( 1969).
334 (1933); cf. Lockport Exch. Trust Co. v. Hyde, 274 N.Y. 1, 8 N.E.2d
38 (1937); Annot., 110 A.L.R. 1145 (1937); see Beurel's Brannan, note 18
supra, at 1087-1089.
p 2 K ~ h lv. Schlichtemeier, 14 F.2d 593 (8th Cir. 1926); Carmen V.
Higginson, 245 Mass. 51 1 , 140 N.E. 246 (1923).
O8 First Nat'l Bank v. Turner, 10 N.J. Misc. 90, 157 A. 665 (1931);
McMillian v. Montgomery, 121 Or. 28, 253 P. 879 (1927); see Note, 30
Mich. L. Rev. 967.
See Williams v. Peninsular Grocery Co.. 73 Fla. 937, 75 SO. 517
(1917).
Harris v. Schafler, 149 Misc. 1 , 266 N.Y.S. 701 (1933); Bacr V.
Hoffman, 150 App. Div. 473. 135 N.Y.S. 28 (1912).
U.C.C. 5 3-5 1 l ( 5 ) . See Frank-Taylor-Kendrick Co. v. Voissement,
142 La. 973, 77 So. 895 (1918); Brooks v. American Nat'l Bank, 103
S.W.2d 246 (Tex. Civ. App. 1937).
97Baurneister v. Kuntz, 53 Fla. 340. 42 So. 886 (1907).
O B Hall v. Crane, 2 13 Mass. 326, 100 N.E. 554 ( 19 13).
OOBaerv. Hoffman. I50 App. Div. 473, 135 N.Y.S. 28 (1912). Hay-
ward v. Empire State Sugar Co., 105 App. Div. 21, 93 N.Y.S.449 (1905).
a f d 191 N.Y. 536, 84 N.E. 1114 (1908). 6.
410
 Chapter 24
COLLECTION OF
DOCUMENTARY DRAFTS
Scctlon Page
24-5 Documentary Drafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 413
24-10 Bank's Duty to Present Draft and to Notify
Customer of Nonpnymcnt . . . . . . . . . . . . . . . . . . . . . . . . 4 14
24-15 Bank's Responsibilities for the Documents
andtheGoods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 415

5 24-5 DOCUMENTARY DXAFTS

A documentary draft under the Comnlercial Code is any draft ac-
companied by merchandise paper or other documents, which are to be
delivered to the person designated in the draft upon compliance with the
terms of the instrument.' The draft may be negotiable or n ~ n n e g o t i a b l e . ~
Frequently, the document that accompanies the draft will be a bill of
lading, a warehouse receipt, or some other document of title. Typically,
the drawer of the draft wants to delay transfer of the goods, represented
by the bill of lading or the warehouse receipt, until the drawee pays o r
accepts the draft. T o accomplish this, the drawer gives the draft and
the accompanying document of title to a bank for collection. T h e bank
will forward the documents through customary banking channels to a
bank, which then will present the documents to the drawee for payment
or acceptance according to the terms of the draft. When the drawee
complies with thc tcrms or the drnlt, by paying or by accepting it, the
bank releases the bill of lading to the drawee and remits the payment o r
the acceptcd draft to the person entitled to it. This givcs the drawer the
security of retaining control of the goods until the drawee pays or ac-
cepts, and it givcs the drawee assurance that control of the goods will
pass to him on payment.

U.C.C. 5 6 1 0 4 ( l ) ( f ) .
rr. =Id.
6 24-10 ,dTIES OF BANK & CUSTOMER
When banks handle documentary drafts for collection, their rights
and responsibilities are substantially the same as those involved in col-
lecting checks and other instruments, as explained in the preceding chap-
ters. A documentary draft is a n instrument for the payment of money,
and so falls within the definjtion of a n "item," collection of which is gov-
erned by the rules of the Commercial Code.=
When a draft is drawn and secured by a bill of lading o r other
commodity paper, it usually is only part of a larger contract covering the
sale or transfer of the merchandise represented by the documents. T h e
negotiations for this underlying contract have been made directly be-
tween the consignor and the consignee of the merchandise. T h e collect-
ing bank ordinarily h a s n o notice of their terms. Under these circum-
stances, then, it is extremely important for the bank transferring or
collecting such paper t o follow carefully the instructions of the drawer of
the draft and t o transmit them properly t o correspondent banks. Failure
to follow such instructions may result in breach of contract by the con-
signor o r the consignee and corresponding liability o n the bank for
damages.'
5 24-10 BANK'S DUTY TO PRESENT DRAFT AND TO
NOTIFY CUSTOMER OF NONPAYMENT
When a bank takes a documentary draft for collection, it must either
present the draft to the drawee for payment o r acceptance or it must send
the draft through collection channels so that it may be properly pre-
~ e n t e d .The
~ bank must act promptly and use ordinary care in present-
ing the draft." When the draft, o r other set of instructio'ns by the bank's
customer, directs the bank t o present the draft "on arrival" o r "when the
goods arrive" (or when the documents use similar language), the bank
may wait to present the draft until it believes that the goods have arrived.'
When the bank has presented a documentary draft and the draft
has not been paid or accepted in due course, the bank has a duty t o
promptly notify its c u ~ t o m e r . This
~ duty is placed o n the bank even
when it has purchased the draft from the customer and is no longer acting
U.C.C.5 4-lO4( 1 ) (g).
U.C.C. $ 8 4-201, 4-202, 4-203. See U.C.C. 5 4-103 on the measure
of liability. See also Lord v. Hingham Nat'l Bank, 186 Mass. 161, 71 N.E.
312 (1904); Northwestern Nat'l Bank v. People's State Bank, 109 Kan. 506,
200 P. 278 ( 192 1 ) ; Annot., 19 A.L.R. 555 ( 1922).
W.C.C. 5 4-501.
a U.C.C.5 4-202.
' U.C.C.5 4-502.
' U.C.C. 5 4-501.
DOCUMENTARY DRAFTS g 15
as a n agent for collection; this is so the customer can find out whether
the underlying commercial transaction, for which theadraft was given, is
going through as planned? When the draft calls for payment "on ar-
rival," the drawee will not have any duty to pay o r accept until the
goods have actually arrived. His refusal to pay or accept will not con-
stitute dishonor, but the bank must notify its customer of the refusal.lo
Having given this notification, the bank has n o duty t o present the draft
a second time untiI it receives instructions to d o s o o r until it learns that
the goods have arrived.ll
5 24-15 BANK'S RESPONSIBILITIES FOR THE
DOCUMENTS A M ) THE GOODS
T h e documents that accompany a documentary draft are usually a
form of security for payment of the draft. In a typical transaction, the
drawer will not want the bill of lading or other paper transferred to the
drawce until the drawee has made payment or accepted the draft. I t is
the duty of the bank in dealing with the paper to preserve the security.
The bank should strictly follow the instructions of its customer as to
release of the documents.12 Unless otherwise instructed, when the terms
of the draft require payment in three or less days after it is presented to
the drawce, the bank should not release the documents to the drawee
until after the draft is paid.lR When tlic draft is payable more than three
days nftcr prcscntnicnt, the bank must dclivcr the docunlents to the
drawee o n acceptance of the draft." Releasing the underlying docu-
ments to the drawee without receiving payment or acceptance of the
draft may result in a loss of the custon~er'ssecurity for the draft, and the
bank will be liable for its lack of care in handling the documents.'Vn
some cases, the drawee or purchaser of the underlying goods may have
the right to inspect the goods bcforc making p a ~ m e n t . ' ~Unless the bank
is instructed otherwise, however, it must fallow the rules stated above
and not release the documents until there is proper payment or accep-
tance.
U.C.C. 5 4-501 and Comment.
lo U.C.C.5 4-502.
1' Id.
l2 U.C.C. § 4-503.
U.C.C. 5 4-503(a). See U.C.C. 5 2-514.
'4 Id.
l5U.C.C. 5 4-202. See Northwestern Nat'l Bank v. People's State Bank,
109 Kan. 506, 200 Pac. 278 (1921). See Annot.. 19 A.L.R. 555 (1922).
rc See U.C.C. 8 8 2-5 12. 2-5 13, 2-514.
8 24-15 3 U T I E S O F BANK & CUSTOMER

The draft may designate a referee, with whom the bank may con-
sult for instructions, in the event that the draft is dishonored by refusal
either to pay or to accept." The bank is not required to consult with
the named referee but, if it docs not, it must use diligence and good faith
to discover the reason for the draft's dishonor; it then must notify its
Chapter 25
customer of the dishonor and of the results of its inquiry and must
request further instructions.IR
The presenting bank has no obligation with respect to the goods
BANK'S LIABILITY ON ITS
represented by the documents. The bank's only obligation is to follow
"reasonable instructions seasonably received." In following such in-
OWN INSTRUMENTS
structions, it has a right to be reimbursed, for any expenses it might incur,
as well as a right to prepayment or indemnity for its expenses.le When Section Page
a bank has given timely notice of dishonor to its customer and has re- 25-5 Bank's Liability on Negotiable Instruments
quested instructions, yet the customer does not give the bank instructions Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 17
within a reasonable time, the bank may "store, sell, or otherwise deal Certificates of Deposit . . . . . . . . . . . . . . . . . . . . . . . . . . 4 18
with the goods in any reasonable manner." The bank will have a lien Cashiers' Checks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 18
upon the goods, or upon their proceeds, for its expenscs in storing or Moncy Orders and Travelers Chccks . . . . . . . . . . . . . . . 4 19
dcaling with the goods.2' Acceptance of Drafts . . . . . . . . . . . . . . . . . . . . . . . . . . . 420
A person who transfers a bill of lading or other document of title Certifying or Accepting Forged or Altered Paper . . . . . 422
normally makes warranties to the transferee that the document is a genu- Mistake in Certifying . . . . . . . . . . . . . . . . . . . . . . . . . . . 423
ine one and that he does not know of any fact detracting from the docu- Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423
ment's validity or value.22 When a collecting bank transfers a bill of Scope of Commercial Code Letter of
lading or a document of title as part of a documentary transaction, how- Credit Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 427
ever, the bank does not make these warranties. The bank only warrants Form of Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . 427
that it is acting in good faith and that it has the necessary authority to Issuer's Obligation to Its Customer . . . . . . . . . . . . . . . . 429
transfer the documents.23 It makes no difference, in determining the Issuer's Obligation to Pay . . . . . . . . . . . . . . . . . . . . . . . 430
scope of the bank's warranties, that the bank may have purchased the International Lcttcrs of Credit and
documentary draft or made advances against it.24 Uniform Customs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 1
Documentary drafts are frequently drawn against lettcrs of credit. Rights of Remitters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 432
When this occurs, additional responsibilities exist. These are discussed
in Chapter 25.

BANK'S LIABILITY ON NEGOTIABLE

l7 U.C.C. 8 4-503 (b) . INSTRUMENTS GENERALLY
Id.
'' U.C.C. 9 4-503. Banks use various types of commercial paper in making remittances
20 U.C.C. 8 4-504 ( 1 ) . and for other transactions. The liability of thc bank on such instruments
2' Id.
22 U.C.C. 5 7-507. is the same as that of other parties. It will not be liable unless it has
U.C.C.3 7-508. signed the instrument; the nature of the liability depends upon the ca-
2' Id. pacity in which the bank signs the instrument. The bank may be a
drawer, acceptor, maker, or indorser of a negotiable instrument and its
liability will be the same as other parlies who sign instruments in these
capacities. The rules governing the liability of such parties are discussed
,
in Chapter 14.
5 25-10 AUTIES O F BANK & C U S T O M E R
T h e holders of paper o n which the bank is obligated, whether they
are holders in d u e course o r not, a r e simply general creditors of the
bank. In the absence of special circumstances, they have n o greater
claim against the bank because they hold a cashier's check o r certificate
of deposit than any other creditors, a n d they d o not take precedence in
insolvency over general creditors.' Holders of cashier's checks and bank
drafts would not b e treated under the law a s depositors and, therefore,
would not ordinarily fall under the protection of deposit insurance
statutes.' T h e Commercial Code contains a provision that gives a pref-
erence in insolvency to certain bank customers who have not received a
final settlement from a collecting bank,3 but this provision would not
prevail over the federal law applicable t o both bankruptcy and the regu-
lation of national banks.'
5 25-10 CERTIFICATES OF DEPOSIT
A certificate of deposit may be either negotiable or nonnegotiable.
A negotiable certificate of deposit is simply dcfincd by thc C o d e as a
writing that complies with the other requirements of the C o d e for ne-
gotiability and that constitutes "an acknowledgment by a bank of receipt
of money with an engagement t o repay it." ti Although it was sufficient,
undcr pre-Codc law, t o makc thc ccrtificate ncgotiablc by stating that it
would bc paid "on rcturn of thc certificate properly indorsed." it is not
cnough to d o this undcr the Commercial C0dc.O T h e ccrtificate must
state that it is payable to order o r to bearer and meet the other require-
ments of negotiability.'
4 25-15 CASIfIERS' CHECKS
A cashier's check is a draft drawn by the bank upon itself. T h e
bank is both drawer a n d drawee. Because the bank has signed t h e in-
Leach v. Battle Creek Sav. Bank, 202 Iowa 875,211 N.W. 527 ( 1926);
Downey v. Citizens' State Bank, 100 ind. App. 158, 194 N.E.743 (1935);
cf. Goodycar Tirc & Rubbcr Co. v. Hanover Statc Dank, 109 Kan. 772. 204
P. 992 ( 1921 ) (discussed in 22 Colum. L. Rev. 672 (1922) and Annot., 21
A.L.R. 680 (1922)).
Franklin Trust Co. v. City of Philadelphia, 11 1 Pa. Super. 158, 169
A. 452 (1933) ; Kidder v. Hall. 113 Tex. 49. 25 1 S.W. 497 (1923).
a U.C.C. 5 4-214(4).
S e e Jennings v. United States Fidelity & Guaranty Co., 294 U.S. 216
(1935).
U.C.C. 5 3-104(2) (c).
U.C.C. 5 3-1 lO(2).
See Thomas v. Estate of Eubanks, 358 So. 2d 709 (Miss. 1978).
BANK'S OWN INSTRUMENTS -20
strument as a drawer, it has a liability o n the check as a drawer. T h e
effect of drawing the draft o n itself, however, is to make the bank pri-
marily liable for paying it. Therefore, under the Commercial Code, the
holder of this instrument may treat it as the equivalent of a note m a d e
by the bank and hold the bank liable as a maker without need for pre-
~ e n t m e n t . ~Problems involving attempts to s t o p payment o n cashiers'
checks a r e discussed at § 20-40.
§ 25-20 MONEY ORDERS AND TRAVELERS CHECKS
M a n y OF the instruments that a r e called money orders a r e simply
drafts drawn by the bank either on itself o r o n a correspondent. W h e n
the money order is drawn o n the bank itself, it has the same legal status
a s the cashier's check.O If the money order is drawn on another bank, it
has the same legal effect as a draft. In either case, in order to be negoti-
able, it must meet the essential requirements of negotiability under the
Commercial Code, which are discussed in Chapter 16. O n these so-
called "bank moncy orders," thc bank signs the instrument as thc drawer.
It will, therefore, be liable t o the holder of the instrument as a drawer or,
in the case of the money order drawn o n itself, in the same fashion as
when it draws a cashier's check.
In some cnscs, banks allow customers themselves to draw money
orders ngainst thc bank. T h e customcr pays the bank in advance for the
face amount of the moncy order and is issued an instrument which has
blanks for the customer to sign, for the insertion of the name of the
payee, and for the date. W h e n the blanks are filled in, the instrument will
be a negotiable instrument if it is payable to order o r t o bearer a n d has
the other essential requirements for negotiability. T h e "personal money
order" should have the same effect as a n ordinary check drawn o n the
bank. T h e bank has not signed the money order and, therefore, under
the Commercial Code would not be liable o n it. However, the case law
is not consistent on this point. A number of courts have taken the view
8 U.C.C. 5 3-1 18(a). Undcr prc-Code law, this rulc nlso applied to
drafts drawn on branch banks. The central bank became liable on the in-
strument in the same fashion as a maker of a promissory note. See Erskine
v. N e m o u n Trading Corp., 239 N.Y. 32, 145 N.E. 273 (1924): see Amer-
ican Hominy Co. v. National Bank, 294 Ill. 223, 234, 128 N.E. 391, 395
( 1920) ; Brctrel's Brannan Negotiable Inslr~rments Law 1226-1 228 (7th
ed. 1948) (hereinafter cited as Beutel's Bmnnon).
Osee Rose Check Cashing Serv. v. Chemical Bank N.Y. Trust CO., 40
Misc. 2d 995, 244 N.Y.S.2d 474 (1963). See also Bailey, "Bank Personal
Money Orders as Bank Obligations," 81 Banking L.J. 669 (1964); Note, 82
&anking L.J. 73 (1965).
5 25-25 DUTIES OF BANK & C U S T O M E R
that the personal money order is like a personal check, and is not a
bank obligation.1° Other states have taken the view that the money order
is like a bank obligation."
Travelers checks a r e instruments that are purchased from a bank
o r other organization, such as the Amcrican Express Company; it is con-
templated that thc purchascr will sign at the time of purchasc nnd thcn will
countersign at the time the instrument is cashed. Use of this procedure
permits the party w h o cashes the traveler's check t o compare the signa-
tures, thereby protecting him against taking a stolen instrument. T h e cx-
act nature of a travelers check as a negotiable instrument is a matter sub-
jcct to some question. It may be classified a s a draft drawn by the issuing
company o r bank upon itsclf. T h c issuing company cnn bc vicwcd ns
having signed the instrument since its name usually will appear o n the
instrument, a n d it will be the issuing party. Under this approach, the
issuing company would be liable o n the traveler's check when it comes
in the hands of someone who can claim to be a holder. This could occur
when blank travelers checks are stolen, signed by the thief, countersigned,
and transferred t o someone who takes them in good faith a n d for value.
It could also occur when the original purchaser countcrsigns the travelers
checks, and they a r e then stolen and transferred to a good faith purchascr
for value. However, if the original purchaser has signed the travelers
check but not countersigned it and if the i n s h m e n t is subsequently
stolen and the countersignature forged, the forgery could be viewed as
analogous to a forged indorsement. U n d e r this approach, the purchaser
would not acquire title t o the instrument and could not enforce the liabil-
ity of the issuer.la
5 25-25 ACCEPTANCE OF DRAFTS
Undcr the Commercial Codc, acceptance of a draft is thc drawceis
signed engagement to honor the draft. T h e acceptance must be writtcn
10 See Garden Check Cashing Service v. First Nat'l City Bank, 25 App.
Div. 2d 137,267 N.Y.S.2d 698 ( l966), ofl'd per c~trlntr~ l R N.Y.2d 94 I. 223
N.E. 2d 566, 277 N.Y.S.2d 141 (1966): Krom v. Chcnlicnl Ihnk N.Y.
T n ~ s tCo., 38 App. Div. 2d 871, 329 N.Y.S.2d 91 (1972); Thompson v.
Lake County Nat'l nank, 47 Ohio App. 2d 249, 353 N.E.2d 895 (1975).
11 Bank of Niles v.American State Bank. 14 111. App. 3d 729, 303 N.E.
2d 186 (1973) (the court did not discuss the form of the instrument involved
o r whether it had becn signed by the issuing bank); Thompson Poultry, Inc.
V. Fint Nat'l Bank, 199 Neb. 8, 255 N.W.2d 856 (1977); Bank of El Paso
v. Powell, 550 S.W.2d 383 (Tex. Civ. App. 1977). See generally Bailey.
Brady on Bank Checks 5 1.16 (5th ed. 1979) (hereinafter cited as Brady on
Bank Checks).
I q e e generally Brady on Bank Checks, note supra, 8 1.14.
BANK'S OWN I N S T R U M E N T S j-25
on the draft and may consist of the drawee's signature alone.18 A draft
may still bc accepted, however, even though it has not becn signcd by
the drawer, is incomplete, is overdue, o r has been d i ~ h o n o r e d . ' ~When a
bank certifies a check, it constitutes an acceptance.]" bank has n o
obligation to ccrtify a check.1B
A s indicatcd in Chnptcr 14, when a bank acccpts a draft it becomes
the primary liability of the bank-all other parties continue t o be sec-
ondarily liable. But when a holder obtains the certification of a check,
the parties prior to such holder, including the drawer, are entirely dis-
charged by the certification.17 When, however, the drawer himself has
the chcck ccrfificd, he is not dischnrgcd but remains secondarily liable.18
Undcr pre-Codc law, wllcn persons other than drawcrs or holdcrs o r
thcir properly qunlificd rcprcscntntivcs procurcd certification, thc courts
werc not in agreement as to whether or not the prior parties were dis-
charged.l9 Under the Commercial Code, discharge of prior parties occurs
only when a holder procures c e r t i f i ~ a t i o n . ~A~ bank which has certified
a check becomes primarily liable upon it in a manner similar to its lia-
' bility upon its own cashicr's chcck.
A drawer loses the right to stop payment after a check has been
~ ~s discussed in $ 20-40, the drawer can prevent the bank
c c ~ t i f i e d .A
from paying the chcck either by supplying adequate indemnity or by en-
joining payment in a legal action.22 Also, as discrissed in $ 2 0 4 0 , thc
ccrtifying bank should be able to elect to refuse payment so that its cus-
tomer, who is claiming a right to the chcck, may assert that claim in any
litigation brought by the holder of the check against the bank. If the
check is in the hands o f a holdcr in due course, however, that holder will
have a title to the check which is superior to the claim of the customer.23
l3 U.C.C. 8 3-410.
l4 U.C.C. 5 3-410(2).
l EU.C.C. 5 3-41 1.
U.C.C. 5 3-41 1 ( 2 ) .
" U.C.C. 8 3-41 1. See Windsor, "The Certified Check," 81 Banking
L.J. 480 (1964).
l R Rnndolph Nnt'l nnnk v. Hornblowcr, 160 Mnss. 401, 3.5 N.E. 850
(1R94); Strnusq v. Miltcnhcrgcr, 119 hlicc. 534. 197 N.Y.S. 599 ( 1 9 2 2 ) ;
Dcal v. Atlantic Const Linc. 225 Ala. 533, 144 So. 81 (1932). Sce Annot..
86 A.L.R. 463 ( 1933).
'"Liptcn v. Columl)in Tmsl Co.. 194 App. Div. 384, 185 N.Y.S. 19R
(1920). Contra. State Bank v. Mid-City Trust Rr Sav. Bank. 295 Ill. 599,
129 N.E. 498 (1920); Annot., 12 A.L.R. 989 (192 1 ); see Be~itel'sBmnnan,
note 8 s u p r a , at 13 10.
20u.C.C,fi 3-411(1).
21 U.C.C. 5 4-403(1), 4-303(1) ( a ) .
22 U.C.C. 5 3-603.
* 23 U.C.C. 8 3-305 ( 1 ).
§ 25-30 uLTTIES OF BANK & CUSTOMER
If the adverse claimant t o the check neither puts u p satisfactory indem-
nity nor obtains a n injunction against the bank, the bank is free t o go
ahead a n d pay the check without fear of double liability-as long as the
bank does not make a bad faith payment to a holder w h o acquired the
check by theft o r through 9 thief a n d as long a s payment is not incon-
sistent with the terms of a restrictive i n d o r ~ e m e n t . ~ ~
§ 25-30 CERTIFYING OR ACCEPTING FORCED
OR ALTERED PAPER
A bank's acceptance of an instrument is a n engagement t o pay that
instrument according t o its terms a t the time of the a ~ c e p t a n c e .Thus,
~~
when there is a n alteration raising the amount of the check o r draft that
was made bcfore acceptance o r certification, the bank has cngagcd to pay
the check o r draft in t h e raised amount. Similarly, if the name of the
payee has been changcd bcfore certification, persons tnking by indorse-
ment after certification through the altcred payee may recover from the
bankaZ6 If the instrument is altered after the bank accepts it, the normal
rules o n alterations apply as discussed in $ 20-70. T h e bank will
b e discharged from its liability if it is a material alteration unless the
instrument is in the hands of the holder in d u e course. T h e holder in
d u e course will be able t o enforce the instrument according t o its origi-
nal tenor at the time the bank accepted the i n s t r ~ r n e n t . ~ ~
A bank which certifies a check o n which the drawer's signature is
forged is liable on its certification. T h e certification or acceptance is final
in favor of a holder in d u e course or other person who has in good faith
relied o n it.28 T h e only exception t o the finality of the acceptance is for
breach of warranty when the instrument is presented t o the bank for
acceptance or payment. N o warranty is breached when a check with a
forged drawer's signature is presented, as the only warranty made in this
situation is that the holder has a good title. N o warranty is made that
the drawer's signature is genuine.=
" U.C.C. 5 3-603.
z5U.C.C. § 3-413( 1 ).
2 8 T h i ~is consistent with the prior law. See N.I.L. 8 62; National City
Bank v. Nat'l Bank of Republic, 300 111. 103, 132 N.E. 832 (1921 ); Wells
Fargo Bank v. Bank of Italy, 214 Cal. 156, 292 P. 281, 4 P.2d 781 (1930).
See Notes, 31 Yale L.J.522 (1922). 35 Haw. L. Rev. 749 (1922); Annot.,
22 A.L.R. 1157 (1923).
27 U.C.C. § § 3 4 0 7 ( 2 ) , 3-407(3).
2n U.C.C. 5 3 4 1 8 .
20 U.C.C. § 3-41 7( I ), 4-207(1). See Mortirner Agcncy, Inc. v. Un-
derwriters Trust Co., 73 Misc. 2d 970, 341 N.Y.S.2d 75 (1973) (holding
B m K ' S OWN I N S T R U M E N T S 5 '0
T h e bank will not bc liable to one who has taken the instrument
after the forgery of an indorsement which is necessary to title. Persons
who present a n instrument t o the bank for acceptance or payment war-
rant t o the b a n k that they have good title.80
A s indicatcd in $ 5 20-70 and 20-75, a bank that makcs a good
faith payment of an altered check is entitled to charge the account of its
customer according to the original tcrms of the i n s t r ~ m e n t . ~ '
Whenever the drawee accepts a draft with conditions or qualifica-
tions, the holder is entitled to refuse the acceptance and treat the draft
a s dishonored." If this happens, the drawee is entitled to have his ac-
ceptance cancelled.a3 T h e Commercial Code states that this result ob-
tains whenever the proffered acceptance "in any manner varies the draft
as presented." T h e drafters of the Code intended this rule to cover all
situations involving "conditional acceptnnccs, acceptances for part of the
'amount, acceptances t o pay at a different timc" a n d to any other engage-
ment which changes the essential tcrms of the draft." Under this view,
lnngungc plnccd on certified cliccks staling flint the chcck is "certified as
originally issued" may be viewed as a qualified acceptance which the
holder is entitled to treat as a dishonor of the instrument.
5 25-35 MISTAKE IN CERTIFYING
W h e n a bank has ccrtificd a check by mistake, either because of
the state of the holder's account or for othcr reasons, the mistake is n o
defense against subsequent holders in due course o r others who have
changed their position on account of the c e r t i f i c a t i ~ n . ~ "
8 25-40 LETTERS OF CREDIT
A letter of credit is a written promise by the issuer of the credit to
pay drafts o r other demands for payment which conlply with the terms
that the certifying bank could not recover from the collection bank for breach
of warranty when the check had a forged drawer's signature); Banca Com-
merciale Italiana Trust Co. v. Clarkson. 274 N.Y. 69, 8 N.E.2d 281 (1937).
3oU.C.C. 5 3 - 4 1 7 ( 1 ) ( a ) .
U.C.C. 5 4-401 (2) ( a ) .
"U.C.C. 5 3-412(1).
83 Id.
84 Id.
U.C.C. 5 3-4 12, Comment 1.
S5
U.C.C. f 3-418. Sec Rockland Trust Co. v. Southshore Nat'l Bank,
&I66 Mass. 74, 314 N.E.2d 438 (1974).
 9 2540 DUTIES OF BANK & CUSTOMER
of the credkal No special form, other than that the credit must be in
writing and signed by the issuer, is necessary to make the lettcr of credit
binding upon the issuer.88 A letter of credit may be issued by banks,
individuals, or firms, and may be conditional or unconditional, revocable
o r i r r e v ~ c a b l e .The
~ ~ party issuing the letter of credit is liable to the per-
son entitled to payment under terms of the credit.40
The letter of credit, thus, involves at least three parties: the issuer,
who is the party obligated to pay when the terms of the credit are satis-
fied; the customer, the party who requested the issuance of the credit and
who usually is using the credit to satisfy an obligation to some third per-
son related to a scparate transaction; and the bencficiary, who is the per-
son entitled to payment under the terms of the credit and whose right to
payment is based upon some underlying business relationship with the
~ustomer.~'
Other parties may become a part of the letter of credit transaction.
Under the Commercial Code, the right to draw under a credit can be
transferred or assigned when the credit is expressly designated as trans-
ferable or a s ~ i g n a b l e .When
~~ the credit states that it is non-transferable
or non-assignable, the beneficiary may assign his right to the proceeds
under the letter of credit. In this case, the assignee, in effect, obtains a
security interest in the letter of c r ~ d i t . ' ~Such an assignment of "pro-
ceeds" only does not transfer the right to perform under the letter of
credit or to obtain payment.44
The obligation of the issuer may be "confirmed" by another party.
For example, a New York bank might issue a letter of credit and a bank
in California, where the beneficiary is located, might confirm the credit
of the New York bank so as to give the beneficiary the advantages of
being able to rely on the obligation of a local bank. When a bank con-
firms a credit, it becomes liable for payment of the credit. The Commer-
cial Code provides that a confirming bank cngagcs ei~hcrthat it will itsclf
- which will be subject to the Code rules.)
" See generally U.C.C. 8 5-103(l) (n). See also Annots., 30 A.L.R.
1310 (1924), 53 A.L.R. 57 (1928).
8' U.C.C. f 5-104.
"U.C.C. 8 8 5-103, 5-106.
4 O U.C.C. 5 5-1 14(1). For a general discussion of rights involved, see
Finkelstein. Legal Aspects of Letters of Credit (1930); McCurdy, "Com-
mercial Letten of Credit." 35 Haw. L. Rev. 539, 715 (1922); Campbell,
"Guaranties and the Suretyship Phases of Letters of Credit." 85 U. Pa. L.
Rev. 175 (1936); Thayer, "Irrevocable Credits in International Commerce,"
36 Colum. L. Rev. 1031 (1936); 37 Colum. L. Rev. 1326 (1937).
" U.C.C. 8 5-103.
"U.C.C. 5 5-1 l 6 ( l ) .
U.C.C. 5 5-1 16.
See U.C.C. f 5-1 16, Comments 1, 2, and 3.
BANK'S OWN INSTRUMENTS - -40
honor the crcdit which has been issued or that the credit in fact will be
honored by thc issuer.4n The confirmation must be in writing and signed
by the confirming bank.j8 Confirmation of a credit is different than merely
advising a party that a credit has been issucd. Mere notification of the
issuance of a crcdit will not makc thc bank liable to the ben~ficiary.'~
The letter of credit obviously is a useful commercial instrument for
assuring payment. It was first extensively used in international transac-
tions where great distances separated the sellers and buyers of goods, and
both parties needed the assurance which could be obtained from a reli-
able bank that upon proper performance of the underlying contract pay-
nicnt would bc forthcoming. Thc popularity of thc lcttcr of crcdit now
extends to purely domestic transactions. A bank may be asked to issue
a letter of credit to assure the performance of its customer under do-
mestic sales contracts or other transactions. Letters of crcdit have been
used as substitutes for performance bonds, deposits, or guarantees for
the performance of other obligation^.^^ One example is the so-called
"standby letter of credit," which is issued by a bank to be drawn against
only in the event of a default in some underlying contract by the bank's
customer.
The letter of credit is a direct obligation of the issuing bank to the
bcncficiary.'D Thc issucr must honor dcniands for payments or drafts
drawn which comply with the terms of the credit regardless of whether
the underlying contract between the customer and the beneficiary is
properly performed, subject to limited e x c e p t i ~ n s This
. ~ is because the
letter of credit is designed to require payment by the issuer on the basis
of the docun~entspresented to the issuer. T h e standard definition of a
letter of credit in the Commercial Code makes clear that a credit is a let-
ter of credit when the issuer is a bank "if the credit requires a documen-
tary draft or a documentary demand for payment." n1 (Under the Code,
credits conspicuously dcsignatcd as lcttcrs of crcdit arc also treated as
lctters of credit, thus permitting a flexible definition of the instruments
A letter of credit in legal form is not a guarantee nor a third party
beneficiary contract. If it were, the cxistcncc of defenses and clainis in
the underlying contract between the customer and the beneficiary might
'W.C.C. 8 5-103(l) ( f ) .
4' U.C.C. fi 5-1 04.
'' U.C.C. 8 S-lO3(l) ( d ) .
See generally White & Summers, Unilornl Commercinl Code. 5 18-1
(2d ed. 1980) (hereinafter cited as Uniforttl Commercial Code).
49 U.C.C. $5 5-lO3(l) ( a ) , 5-1 l 4 ( l ) .
6 U.C.C. 5 5-1 l 4 ( l ) .
6' U.C.C. 8 5-102(l)(a).
§ 25-40 DUTIES OF BANK & C U S T O M E R
bc available to the bank a s issuer and justify refusing payrncnt to the
beneficiary. Under the letter of credit, as discussed further in § 25-60,
the bank has a direct obligation to pay regardless of the underlying con-
tract between the customer a n d the beneficiary as long as the documents
presented satisfy the terms of the credit.
T h e expanded role of the letter of credit raises legal problems at
times. Some of the transactions in which letters of credit are used closely
resemble guarantee transactions. If the credit is characterized a s a guar-
antee, the issuing bank could refuse payment because of defects in per-
formance of the underlying contract; such a result destroys the funda-
mental understanding of the letter of credit a s an obligation undertaken
by the issuing bank which is independent of the underlying commercial
contract. Also, it may result in complications for thosc depositary insti-
tutions which may be prohibited by banking regulations from guarantce-
ing their customers' obligation^.^^ There has been extensive litigation on
the question of whether a letter of credit constitutes a guarantee, and the
spccific facts of each transaction must be carefully e x a r n i n ~ d . ~ ~
From the bank's standpoint, qucstions may also arise as t o whether
letters of credit should b e viewed as extensions of credit subject t o loan
limits, restrictions o n loans to affiliates, o r limitations on loans to single
borrowers.E4
a2 See New Jersey Bank v. Palladino, 77 N.J. 33, 389 A.2d 454 (1978).
" See Wichita Eagle & Beacon Publishing Co., Inc. V. Pacific Nat'l
Bank of San Francisco, 493 F.2d 1285 (9th Cir. 1974); Republic Nat'l Bank
of Dallas v. Northwest Nat'l Bank of Ft. Worth, 566 S.W.2d 358 (Tex. Civ.
App. 1978). rev'd 578 S.W.2d 109 (Tex. 1978); Bank of N. Carolina v.
Rock Island Bank, 570 F.2d 202 (7th Cir. 1978); Dubuque Packing Co. v.
Fitzgibbon, 599 P.2d 440 (Okla. App. 1979). See generally Barclay's Bank
v. Mercantile Nat'l Bank, 481 F.2d 1224 (5th Cir. 1973), cert. distnissed
414 U.S. 1139 (1974) ; Wichita Eagle & Beacon Publishing Co. v. Pacific
Nat'l Bank, 493 F.2d 1285 (9th Cir. 1974); United Technologies v. City
Bank, 469 F. Supp. 473 (S.D.N.Y. 1979); American Bell Int'l v. Islamic
Republic of Iran, 474 F. Supp. 420 (S.D.N.Y. 1979); KMW Int'l v.
Chase Manhattan Bank, 606 F.2d 10 (2d Cir. 1979). Examples of standby
letters of credit may be found in American Empire Ins. Co. v. Hannan
Nat'l Bank, 409 F. Supp. 459 (N.D. Pa. 1976); National Sur. Corp. v.
Midland Bank & Trust Co., 408 F. Supp. 684 (D.N.J. 1976), rev'd 551
F.2d 21 (3d Cir. 1977); Beathurd v. Chicago Football Club, Inc., 419 F.
Supp. 1133 (N.D. 111. 1976); Prudential Insurance v. Marquette Nat'l Bank,
419 F. Supp. 734 (D. Minn. 1976).
See 39 Fed. Reg. 28,974, 29,178, 29,9 I 6 ( 1974); Comptroller's Re-
lease dated July 1, 1974; International Dairy Queen, Inc. v. Bank of Wadley,
407 F. Supp. 1270 (M.D. Ala. 1976). See generally Arnold & Bransilver,
"The Standby Letter of Credit," 10 U.C.C.L.J. 272 (1978); Verkuil "Bank
Solvency and Guaranty Letters of Credit," 25 Stan. L. Rev. 71 6 (1973).
BANK'S OWN I N S T R U M E N T S b -=-SO
5 25-45 SCOPE OF COMMERCIAL CODE LETTER
OF CREDIT PROVISIONS
T h e Commercial Code applies t o some letters of credit, but not t o
all letter of credit transactions. International transactions may b e gov-
erned by other rules as discussed in $ 25-65. Even more important,
New York, which is the h o m e jurisdiction for a large number of banks
which issue letters of credit, has added a provision to the Commercial
Code that provides that the parties may, by agreement, or course of deal-
ing o r usage of trade, m a k e the letter of credit subject to the Uniform
Customs and Practices for Commercial Documentary Credits adopted by
the International Chamber of Commerce rather than by the Commercial
Code." Even when the Commercial Code applies, the Code makes clear
that it does not purport to codify all aspects of letters of credit. I t takes
the view that the law o f letters of credit is still d e ~ e l o p i n g .I~n~this situ-
ation, usage of trade a n d the development of business practices with re-
spect t o letters of credit will be important in filling the areas which are
not spccificnlly covcrcd by thc cod^.^^
§ 25-50 FORM OF LE'ITERS OF CREDIT
A s previously indicated, a letter of credit must be in writing and
signed by the issuer.68 A telegram is a sufficient writing if it identifies the
sender by a n authorized authentication, which m a y be by o C O ~ C . ~ ~
N o consideration is necessary t o establish a credit o r to enlarge it
o r otherwise modify its terms.60
Usually the letter of credit is a "documentary" credit which calls
for payment against the presentation of specified documents. W h e n the
issuer is a bank, a letter of credit may call for payment against a n y type
of document.al T h e document may be a bill o f lading, which was the
a a T h e provision adopted by New York, as well as Alabama and
Missouri, reads as follows: "Unless otherwise agreed, this Article 5 does
not apply to a letter of credit or a credit if by its terms or by agreement
course of dealing or usage of trade such letter of credit o r credit is subject
in whole or in part to the Uniform Customs and Practice for Commercial
Documentary Credits fixed by the thirteenth or any subsequent Congress of
the International Chamber of Commerce." State Correlation Tables U.C.C.
Rep. 31 1, 256, 3 (1979).
U.C.C. 5 5-102, Comment 2.
67 See generally Uniform Commercial Code, note 48 supra, 5 18-3.
U.C.C. 5 5-104(1).
6' U.C.C. 5 5-104(2).
" 60 U.C.C. 5 5-105.
U.C.C. 5 5-102(l)(a).
5 25-50 DUTIES OF BANK & CUSTOMER
principal document called for in the traditional international letter of
credit transaction, but also it can be a warehouse receipt, an inspection
certificate, or a certificate of p ~ r f o r m a n c e . Whcn
~ ~ the issuer is a party
other than a bank, the crcdit will be vicwcd as a lctter of credit when
thc documcnts arc documcnts of title-bills of lading, warchousc rcccipts,
and the like.Oa
The Commercial Code also pcrmits the parties to establish a lettcr
of credit obligation which does not fall within the guidelines described
above, as long as it conspicuously designates the credit as a lettcr of
credit.e4 This permits the issuance of a "clean" letter of credit which does
not condition payment upon presentation of documents. It also gives
the parties flexibility in structuring letter of credit arrangements to meet
their commercial needs.o6
The letter of credit must be distinyishcd from guarantees, which
are agreements to make advances and other arrangements. See 5 25-
40. The Commercial Code provides that its Article 5 on lctters of
credit does not apply to these other forms of transactions unless the re-
quirements discussed above are satisfied.0o Thus, at least in part, the
form of the transaction will determine whether Article 5 governs. If it
does, the legal consequences will be quite different from those which
would apply if the transaction were treated as one of simple guaranty or
third party beneficiary contract.'J7
A letter of credit may be cithcr a "notation crcdit" o r a "straight"
letter of credit. T h e notation credit is used when it is expected that there
will be a number of separate payments made under the credit. Persons
who receive drafts drawn against the credit from the beneficiary or other-
wise pay the beneficiary on the strength of the credit are required to
makc a notation on the lettcr of crcdit as to thc aniount they have paid
or drawn.aR In this fashion, subsequent persons who deal with the bene-
ficiary on tlic strcngth of thc lcttcr of crcdit will know thc amount of
credit which remains to be drawn against. Failure to note the amount
e2U.C.C. 5 5-102(l)(a) and Comment 1. See New Jersey Bank V.
Palladino, 77 N.J. 33, 389 A.2d 454 (1978), for a discussion of what wrilings
constitute a suficient documentary demand.
U.C.C. 5 5-lO2(l) ( b ) .
U.C.C. § 5-1 02( 1 ) (c). "Credit" is defined by the U.C.C. as "an en-
gagement by a bank or other person made at the request of a customer and
[otherwise within Article 51.. .that the issuer will honor drafts or other
demands for payment upon compliance with the conditions specified in the
credit." U.C.C. 5 5-103(l) (a).
See U.C.C. 5 5-102, Comment I .
" U.C.C. 5 5-102(2).
See 5 25-45.
ri
O8 U.C.C. !j$ 5-108(1), 5-IO8(2).
BANK'S OWN INSTRUMENTS 2-55
on the letter of crcdit makcs the person liable in damages to the bank
issuing thc crcdit if any loss occurs as a result of the failure to make the
notation.00 An early cxamplc of this typc of lcttcr of crcdit was the
traveler's lcttcr of credit which was givcn to a traveling purchaser who
had a numbcr of pcoplc from wlion~hc cxpcctcd to purchnsc goods.70
When a notation lettcr of credit is uscd, the issuing bank niay justifiably
refuse to pay any drafts drawn against it until it receives evidence of
notation on the lettcr of credit.ll
Letters of crcdit may be either revocable o r irrevocable, although
usually the parties will want the crcdit to be in irrevocable form. If the
letter is irrevocable, the issuer cannot revoke the credit or refuse to
honor drafts after the credit has been sent to the customer or beneficiary,
or after authorized written advice of its issuance has been given to the
bcncfi~iary.'~If thc crcdit is rcvocablc, thc issucr may modify o r revokc
it without the consent of the customer o r b ~ n c f i c i a r y . The
~ ~ letter of
credit should state whether it is revocable or irrevocable. The Commer-
cial Code docs not provide a rule for interpretation if the credit is silent
on the matter.
5 25-55 ISSUER'S OBLIGATION TO ITS CUSTOMER
A letter of credit will ordinarily be used to further a commercial
contract bctwccn the issuing bank's custorncr and thc beneficiary. Thc
issuing bank has no rcsponsibility for any pcrformance of the underly-
ing contract between the custorncr and the beneficiary,14 but it does have
responsibility for examining the documents presented to make sure they
comply with the terms of the letter of credit. As against its customer, the
issuing bank must act in good faith, obscrvc gencral banking practices,
and follow thc tcrms of thc lcttcr of crcdit a g r c ~ m c n t . ~ " T h ebank
will not havc to engngc in any investigation of thc pcrfornlnncc of the
underlying contract or inspect thc goods which are represented by the
documents, but it must carefully examine the documents to ascertain
"that on tllcir face they appear to comply with thc tcmis of the crcdit." l a
Subjcct to a contrary agreement, the bank assumes no responsibility for
the genuineness or falsification of documcnts which appcar to the bank
U.C.C. 5 5-108(2)(a).
70 Sce U.C.C. 5 5-108. Comment 2.
7' U.C.C. 5 5-lO8(2) ( b ) .
72 U.C.C. 5 5-106.
73 Id.
74 U.C.C. 5 5-109(1).
75 Id.
7' U.C.C. 5 5-109(2).
 5 2540 DUTIES OF BANK & CUSTOMER
to be regular on their face, as long as the bank has no notice of irregu-
larity."
When drafts o r other documents are sent for collection, the bank
will not be responsible for the acts of other parties. If documents are
lost in transit, the bank is not liable.18
The issuing bank may be liable to its customer for wrongfully dis-
honoring drafts drawn against the credit.79 However, when a docu-
mentary draft or demand for payment under a letter of credit is made,
the bank has until the third banking day after receipt of the documents
to pay.80 The delay will not constitute dishonor. If the presenter "ex-
pressly or impliedly" consents, the bank may delay payment further.
When the bank properly pays a draft under a letter of credit, the
issuer has a right to immediate reimbursement from its customer.~l When
it accepts a dtaft under the credit, it is entitled to be given funds for pay-
ment "not later than the day before maturity" of the acceptan~e.~'
5 25-60 ISSUER'S OBLIGATION TO PAY
The issuing bank must honor drafts drawn against a letter of credit
or other demands for payment when they comply with the terms of the
credit.8a As previously indicated, the bank's duty to pay arises when the
terms of the documents presented on their face comply with the terms
of the redi it.^' Apart from the exceptions discussed below, the bank
has no right to refuse payment to one otherwise entitled to payment on
the grounds that the underlying contract for sale, or other contract, be-
tween the customer and beneficiary has not been properly p e r f ~ r m e d . ~ ~
Although these rules are easily stated, there can be troublesome
legal questions as to whether there has been compliance with the terms
of the credit. Some courts have applied a strict test." Questions of
waiver, estoppel, and cure can arise.
There are three limited exceptions to the issuing bank's duty to pay
l1 Id.See U.C.C. 5 5-1 l4(2).
U.C.C. 8 5-lO9(l) ( b ) .
U.C.C. 1 4-402. See 1 25-40.
8O U.C.C. § 5-1 12.
U.C.C. 5 5-1 l4(3).
82 Id.
U.C.C. 1 5-1 14(1).
a4U.C.C. $1 5-109, 5-114(2).
86U.C.C. 8 5-ll4(l).
Besee Marine Midland Grace Trust Co. v. Banko del Pais, S.A., 261
F. Supp. 884 (S.D.N.Y. 1966). See generally Unifortn Commercial Code,
note 48 supra, 8 18-6.
BANK'S OWN INSTRUMENTS s ~ - 6 5
when presented with documents which appear on their face to conform
to the credit. These exceptions are: ( 1 ) when the documents presented
are not genuine or are invalid or there is no right to transfer them; ( 2 )
when the documents are forged or fraudulent; or ( 3 ) when there is
"fraud in the transaction." 87 Even in these situations, the issuer must
honor the drafts presented when they are prescnted by persons who are
in the position of a holdcr in due course.88 Moreover, the bank does not
have to become embroiled in controversies with its customers over
whcther i t should pay. If the bank acts in good faith, it is free to honor
drafts drawn notwithstanding notification from the customer of fraud,
forgery or other defects until the customer enjoins payment in an appro-
priate ~ o u r t .Ncedless
~ to say, what constitutes "fraud in the transac-
tion" is not always nor is i t always clcar what circumstances will
bring the othcr cxccptions into play. In thcsc cascs, if the bank acts in
good faith, it may go ahead and pay unless the customer obtains a court
order enjoining the payment.
5 25-65 INTERNATIONAL LETTERS OF CREDIT
AND UNIFORM CUSTOMS
As the Commercial Code is the law of the state that enacts it, it
docs not apply to all aspects of international letters of credit. Here, the
laws of many countries may be involved because the buyer, the seller of
goods, and the financing banks may be located in different nations; there-
fore, usages of the trade may be the basis of the ultimate rules of law.
Thcse customs have been authoritativcly collected by the International
Chamber of Commerce in a document known as the Uniform C u s t ~ r n s . ~ '
Most standard forms used for letters of credit in international trade have
a clausc incorporating the Uniform Customs by reference into the con-
tract. Although letters of credit undcr the Uniform Customs function
similarly to those under the Commercial Code, there are differences.
The customs also may be evidence o f trade usage which can supplement
thc rules set out in the cod^.^^
U.C.C. 8 5-ll4(2) ( b ) .
"OSce Szlejn v. Hcnry Schrodcr Banking Corp., 177 Misc. 719. 31
N.Y.S.2d 63 1 (1941), which found fraud in a case where documents called
for the shipment of bristles but the material shipped was rubbish.
01 See Uniform Custom ond Practices for Documentary Credits, I.C.C.
- -
Ur~ifortnC~tsrortls(rev. ed. 1962).
" 02 See Gewolb, "The Law Applicable to International Lettcrs of Credit,"
1 1 Vill. L. Rev. 742 ( 1966).
§ 25-70 DUTIES OF BANK & CUSTOMER

8 25-70 RIGHTS OF REMITTERS

Persons who purchase negotiable instruments from banks for the
purpose of transmitting funds are called remitters. According to com-
mercial custom, a remitter might purchase a draft payable to himself and
then indorse it to the party to whom he desires to send the funds, or, he
Chapter 26
might purchosc papcr payablc dircctly to thc party, lcnving his own nnmc
out. In the former case, the remitter has the same rights and liability NEW PAYMENT SYSTEMS:
as any other person who has indorsed negotiable paper. Whcn the remit-
ter's name does not appear on the paper made directly payable to a third CREDIT CARDS AND
party, the remitter has no liability on the instrument because he has not
signed it in any capacity.Oa The remitter can be liablc to subscqucnt ELECTRONIC FUND TRANSFERS
parties in warranty for negotiation of thc papcr when hc delivcrs it to thc
payee, however, because he is a transferor of the i n s t r ~ m e n t . ~ ~
Section Pnge
26-5 .
Bank Credit Cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . 434
U.C.C.8 3-401. 26-1 0 Truth-In-Lending Act Provisions Governing
O 4 U.C.C. § 3-417(2). See Beutel, "Rights of Remitters." 12 Minn. L.
Rev. 584 (1928); Moore, "The Rights of a Remitter of a Bill or Note," 20 .
Credit Cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... 436
Colum. L. Rev. 749 (1920).
'
26-1 5 Issuing Credit Cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . 437
2620 Cardholder Liability for Unauthorized Use . . . . . . . . . . 437
26-25 Preservation of Cardholder Claims and Defenses . . . . . . 438
26-30 Prohibition Against Set Off of Credit Card
Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 440
26-35 Terms of Credit Card Plans Affecting Merchants
and Other Persons Who Honor the Card . . . . . . . . . . . 441
26-40 Duty of Sellers to Notify Issuers oE Returned
Goods and Other Credits . . . . . . . . . . . . . . . . . . . . . . . 441
26115 Electronic Fund Transfer Systems . . . . . . . . . . . . . . . . . 441
26-50 Regulation of Electronic Fund Transfers . . . . . . . . . . . . 443
26-55 Scopc of the Electronic Fund Transfer Act . . . . . . . . . . 444
26-60 Unauthorized Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . 445
26-65 . .
Error Resolutjon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 448
2670 Financial Institution's Liability to Customers for
Electronic Fund Transfers . . . . . . . . . . . . . . . . . . . . . . . 448
26-75 Extent of Civil Liability of Institutions for
Electronic Fund Transfers . . . . . . . . . . . . . . . . . . . . . . . 448
26-80 Prcauthorized Transfers and Stop Payment Rights .. .. 449
2&85 Suspcnsion of Obligations to Third Parties . . . . . . . . . . 450
26-90 Disclosure and Notice Obligations . . . . . . . . . . . . . . . . . 450
26-95 .
Administrative Enforcement . . . . . . . . . . . . . . . . . . . . . 45 1
26-100 Miscellaneous Restrictions on Electronic
.
Fund Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 1
26-105 Issuing Access Cards . . . . . . . . . . . . . . . . . . . . . . . . . . . 452
26-1 10 .
Relation to State Law . . . . . . . . . . . . . . . . . . . . . . . . . . 453
.L
26-1 15 Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 454
5265 DUTIES OF BANK & CUSTOMER C R E D I T CARDS AND EFI's d6-5

5 2 6 5 BANK CREDIT CARDS for transactions exceeding a certain amount. The merchant agreement
with the bank also establishes the terms on which the bank will purchase
Credit cards are big business. One authority estimates that in re-
the sales slips obtained by the merchant in transactions using the card
cent years as much as 16 percent of all retail sales were made by use of
and sets the discount rate. When this relationship is established, the mer-
some kind of credit card. There are different kinds of credit cards. Many
chant then regularly deposits the sales slips generated through use of the
retail stores have their own credit cards and large retailers, such as Sears
card with the bank and receives the appropriate credit from the bank at
Roebuck and J.C. Penney, have established extensive networks for credit
the discounted price for them.
card transactions with their customers. There are travel and entertain-
The bank that purchases the sales slips from the merchant then has
ment cards, such as those issued by American Express, Diner's Club,
the responsibility of obtaining collection of the slips (if it is not the bank
Carte Blanche, and oil companies. Some of these have expanded their
that issued the card and holds the account of the cardholder). Each card
scope so they may be used in a broad range of credit transactions. In
systcm has established procedures for accomplishing these clearings. It
more rcccnt ycars, banks and other financial institutions have begun issu-
opcratcs in a fashion similar to clcaringhouscs that handle check collcc-
ing credit cards. The numbcr of transactions handled through bank credit
tion. In most cases, the clearing is accomplished electronically without
cards has grown rapidly and today the bank credit card is a major sup-
transfer of the paper sales slips.
plement to the checking account as a method of directing payment to
T h e precise legal characterization which should be given to these
third partics as well as a device for extending credit.
bank credit card transactions is not clear. Some have viewed the credit
There are two major bank "credit card systems," Mastercard
. card as an instrument which is similar to the letter of credit. It also has
(Mastcr Charge) and VlSA U.S.A. Both systems involve four parties to
bccn vicwcd ns a process by which drafts are drawn against the card
the transaction. Thcre is, first, a card issuing bank. This bank will estab-
issuing bank which are accepted in advance by the bank through the
lish an account with the customer to whom it has issued the card and
credit card. The exact legal characterization may not be of great practi-
agree with that customer on the amount of credit to be made available,
cal importance because the rights and duties of the parties involved are
thc terms for payment, and the rate of interest to be charged. The issu- controlled by contract. The cardholder cnters into an agreement with
ing bank may or may not be the financial institution where the customer
the issuing bank. The merchant enters into an agreement with the bank
maintains a checking account or other account. Sometimes a link be- which receives the charge slips. The banks that are members of the
tween the checking account and the credit card account is created to
systcrn also are bound by agreements and the rules and regulations of the
cover overdrafts in the customer's checking account.'
bank card associations.
The cardholder o r customer of the bank, then, is entitled to use the
The Commercial Code does not govern credit card transactions. (It
card as a means of payment at establishments that have agreed to honor
may, however, apply to the underlying sales transaction for which the
the card. Usually the cardholder will be billed on a monthly basis for card was used.) The card itself is not a negotiable instrument, and the
charges to his account and will be provided an option of paying his ac-
charge slips which the customer executes in using the card ordinarily are
count in full without interest charges o r paying an agreed upon portion
not worded to comply with the Code's requisites for a negotiable instru-
of the account with finance charges being assessed. Thus, the card com-
ment either.
bines the features of both a credit arrangement and a method of payment.
Bank credit cards are affected by regulatory legislation. The most
The major bank credit card systems provide the customer with a monthly
important at the federal level is the Truth-In-Lending Act. This Act con-
statement describing the transactions involving his account, but do not
tains provisions which apply not only to the credit aspects of the bank
return the credit card slips executed by the cardholder when using the
credit card, but also to other issues which affect use of bank cards.2
card.
Merchants and other establishments who accept the card as payment
must enter into an agreement with a bank, which is a member of the See generally South, "Credit Cards: A Primer," 23 Bus. L. 327 (1968);
system, that they will follow the procedures established for using the card. Note, "Credit Cards, Distributing Fraud Loss," 77 Yale L.J. 1418 (1968):
Thc mcrchant may bc rcquircd, for example, to obtain advance approval Dobson, "Crcdit Cnrds," J. of nus. L. 3 3 1 (1979); "nnnk Crcdil Cnrds nnd
thc Consumer: Programming Justicc Into the Cnshless Society," 7 Val. U.
L. Rev. 503 (1973); "Rank Crcdit Cnrds and Entcrprisc Liability," 21
Scc gcncrally Pcnncy & Bakcr, The Law of Elecrronic Fltrrd Trar~slcr U.C.L.A. L. Rev. 278 (1973); Clcvclnnd, " B a n k Crcdit Cnrds: Iss~tcr.Mer-
S y s t e m 1 1.01(3) (1980). * chants, and Users." 90 Banking L.J. 719 (1973); Commcnt, "Unnuthorizcd
 5 24-10 oUTIES OF BANK & CUSTOMER
As a result of litigation involving BankAmericard, the major bank
card systems now follow a practice of allowing banks to issue cards of
both systems. Thus, some banks may issue both Mastercard and VISA
U.S.A. The BankAmericard litigation involved the validity of a regula-
tion which prohibited banks from issuing cards of other systems. The
court did not view the regulation as a per se violation of the antitrust
laws, but did remand it for a trial to determine whether the prohibition
would be viewed as an unreasonable restraint on competition after all the
facts were considered. The case was then settled, and after the settlement
banks were allowed to freely issue cards of both major system^.^
9 26-10 TRUTH-IN-LENDING ACT PROVISIONS
GOVERNING CREDIT CARDS
The Truth-In-Lending Act contains a number of provisions which
have important consequences for credit card transactions. Of course, to
the extent that the credit card involves a consumer credit transaction it
may be subject to the general regulatory provisions of the Federal Con-
sumer Credit Protection Act. These provisions are discussed in Chapters
3 3 and 34. In addition, there are some provisions of the federal Act
which apply specifically to credit card transactions. These will be dis-
cussed in this chapter in the sections that follow.
At the outset, it should be noted that the federal legislation exempts
from its application credit transactions that are "for business or com-
mercial purposes" or which are to government bodies o r organizations.'
Use of Credit Cards and Some Related Questions: What Problems Remain?"
62 Ky. L.J. 881 (1973); Comment, "Applicability of the Law of Lctlcrs of
Credit to Modern Bank Card Systems," 18 Kansas L.R. 871 ( 1970);
"Apportionment of Credit Card Fraud Loss," 4 U.C.D. L. Rev. 377 (1971);
Brandel & Leonard, "Bank Charge Cards: Need Cash or Need Credit," 69
Mich. L. Rev. 1033 (1971); "Bank Credit Cards and the Usury Laws," 4
U.C.D.L. Rev. 335 (1971); Clontz,"Bank Credit Cards Under the Uni-
form Commercial Code," 87 Banking L.J. 888 (1970); Weistart, "Consumcr
Protection in the Credit Card Industry: Federal Legislative Controls." 70
Mich. L. Rcv. I475 (1972); Notc. "Linbility of Credit Cnrd Issuer for Fnil-
ure to Disclose Tcrms as Required by Truth-in-Lending Act," 26 U. Miami
L. Rev. 461 (1972); "Preserving Consumer Defenses in Credit Card Trans-
actions," 81 Yale L.J. 287 (1971 ).
Worthen Bank & Trust Co. v. Nat'l Bank Americard, Inc.. 485 F.2d
1 15 (8th Cir. 1973), cert. denied 415 U.S.9 18 ( 1974). See the discussion in
I
$
Penney & Baker, note I supra, TI 1.01, 20.02.
IS U.S.C.5 I603 (1976). (This exemption has been amended effec-
tive April 1, 1982 to cover transactions that are "primarily" for these pur-
poses or entities.)
CREDIT CARDS AND EFTS LZ0
8 2 6 1 5 ISSUING CREDIT CARDS
The Truth-In-Lending Act prohibits issuing credit cards unless they
are issued in response to a customer's request or application for a card.6
When the customer has previously received a credit card which he has
acceptcd by signing, using, or authorizing another to use it, the issuer
may send a credit card to the customer to renew or to serve as a substi-
tute for the previously issued card without the prior request of the
cu~torner.~
11 26-20 CARDHOLDER LIABILITY FOR UNAUTIIORIZED
USE
A cardholder's liability for unauthorized use of his card is limited
under the federal Act. An unauthorized use is any use which the card-
holder does not authorize and from which the cardholder does not receive
any benefits7 Of course, when the cardholder authorizes the use, the
cardholder is responsible for the charges incurred. The authority may be
either "actual, implied, or apparent" from the circumstance^.^
T h c federal act limits the liability of the cardholder for unauthorized
use in several ways. ( 1 ) Thcre is no liability unless the card issuer has
given the cardholder adequate notice of the cardholder's potential liabil-
ity and has provided the cardholder with a description of a method for
notifying the issuer of loss o r theft of the card.O (2) The cardholder has
no liability for any unauthorized use that occurs after the cardholder
has given the issuer notice of the loss, theft, or other circumstances
whicl~niny produce nn unnuthorizcd use of thc card.1° The notice is
adequate when the cardholder follows thc procedures reasonably required
to give notice whether or not the card issuer in fact does receive notifica-
tion.I1 ( 3 ) Tlic cardholder will be liablc only for the use of credit cards
that he has accepted.I2 This means that the card must bc one which the
cardholder has either requested and received, signed, used, or authorized
another to u s e . l V 4 ) The cardholder's liability for an unauthorized use
cannot exceed fifty dollars.14 If a dispute arises between the cardholder
" I S U.S.C. 1 1642 ( 1976).
12 C.F.R.f 226.13(a) ( 2 ) (1981).
' 15 U.S.C. § 1602(0) ( 1976).
8 Id.
" 15 U.S.C.A. 5 1643(n) (West Supp. 1981).
lo Id.
*
'1
'I
l3
Id.
Id.
IS U.S.C. 8 1602(1) (1976).
l 4 15 U.S.C.A. $ 1643(a) (West Supp. 1981 ) .
 DUTIES OF BANK & CUSTOMER
and the card issuer as to the authorized use of the card, the card issuer
has the burden of proving that use of the card was in fact authorized.
When the use was not authorized, then the card issuer has the burden of
proving that the conditions of liability for the unauthorized use of the
card have been met.lb
The parties may agree to further reduce the liability of the card-
holder. The Act also expressly permits state law to restrict the liability
of the cardholder even further.l8 The parties may not agree to impose
greater liability upon the cardholder." T h e card issuer may enter into
agreements with a business or organization which has ten or more em-
ployces who have been issued the credit card, which makes the business
or organization liable for unauthorized use of the cards. T h e organiza-
tion cannot shift the loss to its employees h ~ w e v e r . ~ s
Thcrc arc criminal pcnaltics which includc a finc of up to $10,000
or imprisonment for u p to ten years for criminal fraud involving use of a
credit card.le
5 26-25 PRESERVATION OF CARDHOLDER CLAIMS
AND DEFENSES
The Truth-in-Lending Act contains provisions that expressly pre-
serve cardholder claims and defenses arising out of the commercial trans-
action for which the credit card was uscd in certain circumstanccs. For
example, a cardholder may use a credit card to buy an appliance from a
merchant. If the appliance is defective, the cardholder has a claim
against the merchant for breach of warranty. If the cardholder simply
purchased from the merchant on credit, he might try to resist paying the
merchant by setting off the claim against the amount owed. Having used
a credit card in payment, has the cardholder lost the right to stop pay-
ment to the merchant?
The federal Act provides that the claims and defenses that a con-
sumer has arising out of transactions in which the credit card is used
will be effective against the bank or other party who issued the credit
card as part of an open end consumer credit plan.20 The card issuer's
liability is limited somewhat, however. First, the cardholder must have
made a good faith attempt to try to resolve the problem with the mer-
l"5 U.S.C. 5 1643(b) (1976).
18 15 U.S.C. Q 1643(c) ( 1976). See also 15 U.S.C.A. 5 1610 (West
Supp. 1981).
15 U.S.C. Q 1643(d) (1976).
I5 U.S.C. 5 1645 ( 1976).
19 I5 U.S.C. 5 1644(f) (1976).
l o 15 U.S.C. 5 1666i(a) (1976).
CREDIT CARDS AND EFTS -25
chant who honored the credit card. Second, the cardholder cannot assert
claims and defenses against the issuer in transitctions which involve
small amounts of money. The Act gives the cardholder the right to assert
claims and dcfenses against the issuer only when the initial transaction is
over fifty dollars.21 Third, the underlying transaction which gave rise to
the claim or defense must have occurred within the same state as that
where the cardholder maintains his address or within 100 miles of the
~ a r d h o l d e r This
. ~ ~ limits the issuer's responsibility for transactions that
are within an area where it may be possible to obtain redress against the
mcrchant for the underlying transaction without undue problems. The
fifty-dollar limitation and the geographic limitation do not apply when
the issuer of the credit card is also the scllcr or related to the seller. Thus,
the liniitations would not apply to use of an oil company crcdit card at
nny of the company's frnnchiscd dcnlcrs throughout thc country nor
would they apply to use of a credit card of a national retail chain. The
monetary and geographic limitations are also ineffective when the card-
holder has obtained the card through a mail solicitation of the card is-
suer.23 Finally, the issuer's liability under the federal Act is limited to
t l ~ camount of crcdit which is outstanding with rcspcct to the underlying
transacti~n.~'The Act provides a method for determining the amount
of credit which remains outstanding when finance charges and partial
payments are in~olved.~6Under regulations adopted by the Board of
Govcrnors, the cardholdcr is entitled to withhold payment to the card
issuer up to thc amount of crcclit which is o u t ~ t a n d i n g . ~ ~
The federal provision applies only to transactions where the credit
card was uscd as a mcans of payment or extension of credit.2T There-
fore, the cardholder's right to assert claims and defenses against the issuer
does not arise in transactions involving check guarantee cards, debit
cards, or overdraft plans.2R
The relation between this provision dcaling with the preservation of
claims and defenses against the card issuer to the provisions of the
Truth-in-Lending Act on resolution of billing errors is not clear. If a
dispute arises between the bank and the cardholder over a charge the
cardholder believes to be improper because of a claim or defense arising
out of the underlying transaction, it is possible to regard the charge as a
2' Id.
22 Id.
23 Id.
24 I5 U.S.C. 5 1666i(b) (1976).
Id.
20 I2 C.F.R. 5 226.12(c) (1981) (Regulation 2 ) .
27 15 U.S.C. 5 lGGGi(n) (1976).
6
28 See Regulation Z 5 226.12(c) at n. 24.
 2630 uUTIES OF BANK & CUSTOMER
matter subject to the billing error resolution procedures of the
It should be noted, however, that the preservation of defense provisions
contain no time limit for asserting claims defenses against the card issuer
but there is a deadline for asserting billing errors under the ActaR0
The Act does not prevent a cardholder from raising claims or de-
fenses arising from the underlying transaction in situations where the
geographic and other conditions of the Act are not met. The Act does
not compel the cardholder to give up any rights which he might have
under the terms of the agreement with the card issuer or under general
legal principles. In this aspect, the characterization of the transaction
could be important. If the obligation of the cardholder is like that of a
customer under a letter of credit, defects in the underlying transaction
will not be a defense to the duty to reimburse the issuer. O n the other
hand, if the transaction is viewed as a standard checking transaction, the
cardholder may be viewed as having rights against the bank analogous
to the stop payment right. Obviously, this is a matter that should be re-
solved in the agreement between the cardholder and the card issuer.
5 26-30 PROHIBITION AGAINST SET OFF OF
CREDIT CARD OBLIGATIONS
When the cardholder maintains deposit accounts with the issuer of
the credit card, problems may arise over the right of the issuer to set off
debts owed under the credit card plan against the deposits of the card-
holder. The Act generally prohibits such setoffs. Setoffs are allowed only
when the deductions are made in connection with a written authorization
by the cardholder which allows periodic payments to be automatically
dcductcd from the c:~rdlloldcr'sdeposit account. Howcvcr, this nction nlny
not be taken with rcspcct to any outstanding disputed amount upon the
request of the ~ a r d h o l d e r . ~This
' provision does not prevent the bank
from utilizing any remedy that might be given the bank, by state law, to
attach the funds of the cardholder in the institution by following pro-
cedures available to creditors generally.82
* See 15 U.S.C.8 1666 ( 1976).
nosee Lincoln First Bank, N.A. v. Carlson, 103 Misc. 2d 467, 426
N.Y.S.2d 433 (Sup. Ct. 1980). The court also suggested that the card-
holder might be able to retain defenses. even though the underlying trans-
action occurred more than 100 miles from his mailing address, when the card
issuer failed to comply with provisions of the statute dealing with correcting
billing errors.
15 U.S.C. 8 1666h(a) (1976).
82 15 U.S.C. § 1666h(b) (1976).
CREDIT CARDS AND EFTS
5 26-35 TERMS OF CREDIT CARD PLANS AFFECTING
MERCHANTS AND OTHER PERSONS
\VH0 HONOR TI1E CARD
The Act prohibits a card issuer from requiring a seller to contract
for other scrviccs from or open other accounts with the bank as a con-
dition to participation in the crcdit card plan.na
In crcdit card plans where the scllcr is a person other than the issuer
of the credit card, the card issuer cannot prohibit a seller from offering
discounts to customers who pay for goods and services by methods other
than by use of thc crcdit card." Whcn a scllcr offers such a discount, it
will not constitute a finance charge for the purposes of usury controls
under state law,a6 nor will it constitute a finance charge for the purpose
of disclosure so long as the discount is not in excess of 5 percent.3e
At one time, the Act prohibited sellers from imposing a surcharge
on cardholdcrs who use credit cards for payment but this prohibition
terminated on February 27, 198 I .37
52 U 0 DUTY OF SELLERS TO NOTIFY ISSUERS OF
RETURNED GOODS AND OTHER CREDITS
The Act places a duty upon sellers who have acceptcd a credit card
as paymcnt to promptly notify thc card issucr when the seller accepts
the return of the goods or gives the cardholder credit for the transac-
tion." Upon receipt of the notice, the crcdit card issuer must credit the
account of the c a r d h ~ l d e r . ~
# 2645 ELECTICONIC FUND TICANSIV3IC SYSTEMS
With the availability of sophisticated clcctronic tcchnology, finan-
cial institutions have been developing new techniques that aid their cus-
tomers in transferring funds, paying third parties, and drawing upon lines
of credit. These systems eliminate the physical transfer of paper checks
and rely instead upon elcctronic transmission and data-processing equip-
ment. The development of these systems is still in its infancy, but it is
. R3 15 U.S.C. 3 1666g (1976).
84 I5 U.S.C.A. 5 1666f(a) (Wcst Supp. 1981).
Sn IS U.S.C. 5 1666j(c) ( 1976).
36 15 U.S.C. 5 1666f(b) (West Supp. 198 1 ).
n 7 I5 U.S.C. j! 16G6f(a) ( 2 ) (West Supp. 198 1).
15 U.S.C. 8 1666e (1976).
* Id.
 DUTIES O F BANK & CUSTOMER
not too early t o realize that it will bring sweeping changes, not only in
I CREDIT CARDS A N D EFTS
the way that depository institutions d o business, but also in the regulatory
framework affecting these transactions.
This book will not attempt a detailed discussion of electronic fund
transfer systems.40 However, a number of systems are i n operation which
deserve brief mention. Some banks have experimented with check trun-
cation systems where checks are rctaincd a t various points in the bank
collection process rather than bcing physically transferred to thc payor
bank and rcturncd t o thc customer after p a y m ~ n t . ~Thcrc
' arc a numbcr
of automatcd clcaringhouscs ( A C H ) . Thcsc clcaringhouscs cngagc in
clcaring functions similar to those involved in payment by paper chccks
except that the information is transferred electronically-usually on
magnetic tape exchanged between nicmbcr banks of thc clcaringhousc
but also by direct electronic communication. T h e Fcdcral Reserve Sys-
tem has provided facilities t o encourage the creation of thcse ACHs.
T h e y may be uscd, for example, t o allow a large employcr to make di-
rect payroll payments t o employees by crediting the accounls of the em-.
ployccs at banks which are members of the A C H .
This system c a n also be uscd for handling debits from bank cus-
tomer accounts to make mortgage payments, insurance payments, and
other recurring obligations. T h e A C H Associations have developed rules
for their clearing operations. A national automatcd clearinghouse asso-
ciation, formed in 1974, has developed rules for inter-regional electronic
fund transfer.42
1 T h e fcdcral govcrnmcnt has a direct dcposit program in which
Social Security a n d other payments a r e directly credited to the accounts
t of payees through use of the automated clearinghouse^.^^ Privatc insti-
tutions and employers, as previously mentioncd, may make direct de-
posits to their employees' accounts electronically a t banks connected
with a n automated clearinghouse. S o m e banks have systems available
which permit their customers t o make payments to third parties. T h e
depository institutions are often instructed to make these payments
through the use of automated teller machines or, even, by using the tele-
phone. I n some systems, the customer is able t o give its bank thcse in-
structions by using nn clcctronie tcrrninal at thc plncc whcrc thc custonlcr
buys the goods. T h e s e terminals a r e called point of salc terminals
(POS)." I n addition, the Federal Reserve System has systems for elec-
40 Scc gcncrally, Pcnncy & Bakcr, notc 1 supra.
41 Pcnney & Bakcr, note 1 supra, 2.01. Scc 20-100. Sce gcncrally
Special Report, "Operations and Automation," ABA Banking J. (May 1981 ).
"See Penney & Baker, note 1 supra, ( 3.03(3).
43 See Penney & Baker, note 1 supra, Q 5.02.
4 4 See generally Penney & Baker, note 1 supra, Q 7.01.
tronically transferring funds between Reserve Banks and automatically
26-50
adjusting the debits and credits in the accounts of the banks which trans-
fer such funds. T h e Federal Reserve System's electronic transfer pro-
cedures are extensively utilized for interbank transfers of large amount^.'^
5 26-50 REGULATION OF ELECTRONIC FUND
TRANSFERS
There is n o comprchensive regulation of electronic fund transfer
systems cornparablc to that provided by Articles 3 and 4 of the Com-
mercial Code for negotiable instruments and bank collections, although
there has been discussion of amending the C o d e to provide for these new
payment systems. T h e Commercial Code itself, in Articles 3 a n d 4, gen-
erally applies to "negotiable instruments" and "items," neither of which
contemplate an electronically transmitted payment order. Nevertheless,
since the Commercial Code provides the general framework of legal
regulation for bank collection and payment, it will doubtless serve as a
source of law, at least by analogy, for resolving problems associated
with electronic fund transfers.
I n 1978, Congress enacted the Electronic F u n d Transfer Act. Al-
though this Act is not a comprehensive treatment of electronic fund
transfers, it does provide guidelines for dealing with certain important
problems. T h e Act establishes disclosure requirements and rules for doc-
umcnting transactions. It also contains provisions for dealing with pre-
authorized transfcrs, resolving errors made b y the financial institution,
determining liability f o r unauthorized transfers and failure t o make
transfers as instructed, a n d distributing liability for malfunctioning sys-
tems that affect underlying customer obligations. These subjects are
discussed in greater detail in succeeding sections.
Other federal statutes also cover aspects of electronic fund transfer
transactions. When credit transactions a r e involved, federal consumer
statutes, such as the Truth-in-Lending Act, may b e relevant. States, too,
may regulate electronic fund transfers as long a s the regulation is not
inconsistent with thc fedcral Act.40 Statc law may afford consumcrs
grcatcr protcc~ionthan the fcdcrnl Act." T h e fcdcral Act applics only
to consumers, that is, natural persons, thus leaving a broad area of com-
mercial transfers uncovered by the Act.4B
4n Sce 5 2-60.
4 8 15 U.S.C.A. 5 1693q (Supp. 111 1979).
47 Id.
.c 48 I 5 U.S.C. 5 1693a(5) (Supp. 111 1979); see 15 U.S.C. 5 1693 (Supp.
111 1979).
 26-55 DUTIES OF BANK & CUSTOMER
5 26-55 SCOPE OF THE ELECTRONIC FUND
TRANSFER ACT
There is no generally accepted definition of what constitutes an
electronic fund transfer. F o r the purposes of the Electronic Fund Trans-
fer Act, the term is defined as a transfer of funds "other than a transac-
tion originated by check, draft, o r similar paper instrument, which is
initiated through a n electronic terminal, telephonic instrument, or com-
puter, or magnetic tape, s o as to order, instruct, or authorize a financial
institution t o debit o r credit an account." 49 T h e definition thus does not
reach the typical checking transaction that would be covered by the
Commercial Code. It also would not covcr check truncation arrange-
mcnts bccausc thcsc arc transactions at least "originatcd by check." The
federal Act further provides that the term is to be understood to include,
although it is not limited to, point of sale transfers, automated teller ma-
chine transactions, direct deposit or withdrawal of funds, and transfers
initiated by telephone.60 T h e Act does not cover:
(1) Check guarantee or authorization systems which d o not di-
rectly debit o r credit consumer's accounts;
( 2 ) Fund transfers between dcpository institutions o r Federal Re-
serve Banks which are not "designed primarily t o transfer
funds on behalf of a consumer";
( 3 ) Transfers to buy or sell securities through rcgistcred brokers;
(4) Automatic transfers between savings accounts and checking
accounts to cover overdrafts o r maintain minimum balances;
(5) Transfers, initiated by telcphonc to an oficcr of a financial
institution, that are not undertaken pursuant to a prearranged
plan.
T h e Act applies to all financial institutions, state or federal, in-
cluding banks, savings and loan associations, mutual savings banks,
credit unions or other institutions that hold consumer accounts." As pre-
viously indicated, the Act applies t o consumer transactions. A consumer
is defined a s a "natural person," and thus, does not include corporations,
trusts, or othcr artificial entitiesab2
Under the definitions adopted by the Act, the Act will covcr the
use of cash dispensing machines, point of sale terminals, and automated
15 U.S.C. 1693a(6) (Supp. I11 1979). IS U.S.C.A. B 1693a(6)
(Supp. I11 1979).
Id.
60
15 U.S.C. 5 1693a(8) (Supp. I11 1979).
62 15 U.S.C. $ 1693a(S) (Supp. I11 1979).
C R E D I T CARDS AND EFTS I 60
teller machines. The definition does not reach all bank card transac-
tions. A n electronic fund transfer docs not include any use of a bank
card, which creates a paper instrument that is to be physically transferred
for collection, rather than electronically t r a n ~ f e r r e d . ~ V c b cards
it and
other cards used to obtain access to a customer's account are clearly
covered by the definition, howevereE4
5 26-60 UNAUTITORIZED TRANSFERS
Under the Electronic Fund Transfer Act, a n unauthorized electronic
fund transfer is one that is made from a consumer's account but is ini-
tiated by someone othcr than thc consumcr without "actual authority to
initiate such transfer and from which the consumer receives no bene-
fit."" It does not include someone to whom the consumer gave his ac-
cess card unless the consumer notifies the financial institution that the
person is not authorized to make transfers. It also does not include
transfers involving attempts by the consumer to defraud the financial
institution.
T h e basic rule is that when there is an unauthorized transfer, the
financial institution must recredit the consumer's account.nB However,
there are exceptions to this general rule which may make the consumer
liablc for the unauthorized transfer. Tlicsc cxccptions are sct forth bc-
low. Thcre are two preconditions before a consumer may be liable.
First, the card or other means of access must have been one which the
consumer acceptedb7 Second, the issuer must have provided the con-
sumcr with a nlcans of personal identification in addition to the card,
such a s a signature, photograph, fingerprint, o r electronic or mechanical
c ~ n f i r n i a t i o n . ~If thcsc preconditions arc satisfied, a consumer can be
liable for up to $50 for each unauthorized transfer.go This ceiling may
be reduced and, thus, further limit the customer's liability i f he promptly
reports, to thc financial institution conccrncd, that his card is lost or
that other circumstances exist that might lead to a n unauthorized trans-
fer. Once the consumer gives notice to the financial institution, the con-
sumer's liability cannot exceed the amount transferred prior to the time
15 U.S.C. F, 1693a (Supp. 111 1979).
" 15 U.S.C. 5 l693a(6) ( A ) (Supp. 111 1979).
IS U.S.C. F, l693a( 1 1 ) (Supp. 111 1979).
" l5 U.S.C. 5 l 6 9 3 f b ) (Supp. 111 1979).
lS U.S.C. 5 1693g(a); see 15 U.S.C. l693n( I ) (Supp. I11 1979).
" 15 U.S.C. 5 1693g(a) (Supp. 111 1979).
09 15 U.S.C. 5 1693g(a) ( 1 ) (Supp. 111 1979). Since [he ceiling applies
to "an unauthorized transfer." when a series of such transfers occurs the
* maximum liability may be substantially greater.
8 26-65 DUTIES OF BANK & CUSTOMER
of giving notice. T h e financial institution does not actually have t o re-
ceive the customer's notification if the customer has taken the steps
which the financial institution has established pursuant to the Act for
giving notice to the i n s t i t ~ t i o n . ~ ~
T h e ceiling o n the consumer's liability may be increased under cer-
tain circumstances. F o r example, if the consumer fails to report a n
unauthorized transfer to the bank within sixty days after receiving a
stntcnxnt of account, tlic consunlcr will bc linblc for nll lossca cstnbliahcd
by the financial institution as avoidable if notice had been received
within the sixty-day period."' Moreover, when the unauthorized trans-
fcr arises from the theft or loss of an ncccss card, tllc consumcr must
report the loss of the card to the institution within two business days
after learning of the loss or theft. If the consumer delays beyond the two
business day period, the consumer will b e liable for any unauthorized
transfers which occurred after the two-day period but before the institu-
tion has notice. T h e liability of the consumer in these situations where
thcrc has becn a failure to give notice to the bank may not exceed a
total of $500.62
T h e Act requires the financial institution to bear the burden of
proving that the consumer authorized the transfer or, in cases where the
transfer was not authorized, that the conditions justifying imposing lia-
bility o n the consumer have been satisfied.63
The financial institution must disclose to the consumer, a t the time
the consumer subscribes to an electronic fund transfer service, what the
consumer's liability for unauthorized transfers will b e and how such
transfers should be reported to the in~titution.'~T h e financial institution
has the burden of establishing that thcse disclosures were made before
a consumer is liable for a n unauthorized t r a n ~ f e r . ~ "
$26-65 ERROR RESOLUTION
T h e Electronic F u n d Transfer Act contains provisions establishing
procedures for the resolution of matters that the consumer believes con-
stitute errors in his account as a result of electronic fund transfer trans-
actions.dn After the consumer notifies the institution of a n alleged error,
the institution has a duty to investigate to dcterminc whcthcr an error
O0 12 U.S.C. 5 1693g(a) (Supp. 111 1979).
Id.
IS U.S.C. 4 l693g(a) (Supp. 111 1979).
O2
I5 U.S.C. 5 1693g(b) (Supp. I11 1979).
IS U.S.C. 5 1693c(a) (Supp. III 1979).
15 U.S.C. 5 1693g(b) (Supp. I11 1979).
IS U.S.C. 1 l693f (Supp. 111 1979).
446
CREDIT CARDS AND E F T S -65
has occurred and report its Iindings to the customer within ten business
days.d7 T h e institution may require the customer to give written con-
firmation of the alleged error if it notifies the customer of this require-
ment when the oral notice is given to the bank.68 When the institution
determines a n error occurred, it must correct the error within one busi-
ness day after coming to that dctcrmination, including crediting interest
when applicab1e.m
Tlic firiancinl institution niny avoid tlic fcn-clay dcndlinc by giving
tlic consunicr provisional credit for tllc amount claimed to bc i n crror
while it completes its investigation. T h e investigation must be concluded
within forty-fivc days, undcr this approach, but the customer must have
full usc of the funds provisionally crcditcd under this procedure.70
Wlicn the financial institution concludes that there was n o error, it
must deliver an explanation of its finding to the consumer within three
business days after it concludes its investigation."
T h e financial institution will be liable to the consumer for treble
,
demagcs i f a court finds that the financial institution has ( 1 ) knowingly
and willfully concluded that thc consumcr's nccount was not in crror
whcn it was unreasonable t o draw this conclusion from the evidence
available; ( 2 ) failed to provisionally credit the consumcr's account
within the ten-day period mentioned above, and ( 3 ) either did not make
a good faith investigation of the error or did not have a reasonable basis
for bclicving the account was not in Errors subject to this reso-
lution procedure include incorrect electronic fund transfcrs to o r from
the consumer's account, omissions from the consumer's statement of
electronic fund transfers affecting the account, computational errors,
reccipt of incorrect amounts o f money from a n electronic terminal, con-
sumcr rcqucsts for infornlation or clarification about an clcctronic fund
transfer, and other errors prescribed by regulations of the Board of Gov-
ernors of the Federal Reserve System.73 A s previously mentioned, un-
authorized transfers also arc errors and the financial institution has a
duty to investigate them. Although the Act could be clearer, it appears
that when thc financial institution determines that a n unauthorized trans-
fer has been made, the institution will not have t o recredit the account
if it can sustain the burden of proving that the consumer was liable for
thc amount of the unauthorizcd transfer."
15 U.S.C. 5 1 6 9 3 f a ) (Supp. 111 1979).
Id.
1 S U.S.C. 5 1693f(b) (Supp. 111 1979).
15 U.S.C. 4 1693f(c) (Supp. 111 1979).
" I5 U.S.C. 4 lh931(d) ( S ~ p p111
. 1979).
7V5 U.S.C. 4 l693f(c) (Supp. 111 1979).
I5 U.S.C. 5 1693f(f) (Supp. 111 1979).
* 7 4 15 U.S.C. 5 1G931(b) (Supp. 111 1979).
447
5 26-70 DUTIES OF BANK & CUSTOMER C R E D I T C A R D S AND E F T S

5 26-70 FINANCIAL INSTITUTION'S LIABILITY TO nor greater than $IOOO.ROWhcn the action is brought as a class action,
CUSTOMERS FOR ELECTRONIC FUND the mininlum recovery limits are not applicable t o members of the class
TRANSFERS and the total recovery of the class for the same failure to comply with
the Act cannot exceed the lesser of one percent of the defendant's net
T h e Electronic F u n d Transfer Act contains provisions that make worth, o r $500,000.R1 T h e court is directed to take into account in fix-
the financial institution liable for failing to make a transfer of funds in ing the amount of liability the frequency, persistence, nature, and will-
circumstances comparable to those where the bank wrongfully dishonors
fulness of the n o n c ~ n i p l i a n c e . ~ ~
a check.'= When the consumer properly instructs the bank to make a n
G o o d faith is a defense to actions brought t o impose liability under
electronic fund transfer a n d the account has sufficient funds to b e trans-
the Compliance with regulations of the Board o r use of Board
ferred o r the transaction is within a n established credit limit, the financial
disclosure forms also constitutes a defense.R4 T h e person may avoid lia-
institution will be liable for failing t o make the t r a n s a c t i ~ n . ' ~The finan- bility by offering to correct any failure t o comply with the provisions of
cial institution will b e liable under thc federal Act in other situations as the Act and by paying the appropriatc amount of damages to the injured
well, such as ( 1 ) when the institution fails to make a n electronic fund consumer.85 When an action is brought undcr the Act in bad faith or to
transfer, because the institution has previously failed to credit a deposit
harass. the defendant may obtain reasonable attorncys' fees.86
of funds to the consumer's account that would have provided sulficient
funds for the transfer7t (this provision is broad enough to cover failure
to credit deposits which are made by means other than electronic fund 5 26-80 PREAUTIIORIZED TRANSFERS AND STOP
transfers); o r (2) when the financial institution fails to stop payment on PAYMENT RICIITS
a preauthorized transfer, from the consumer's account, that the con-
sumer properly instructed the institution not to pay.78 It is ncccssary undcr the Electronic Fund Transfcr Act for preau-
Unlike the rulcs for wrongful dishonor in the Commcrcial Codc, thorized transfers from a consumer's account to bc authorized in writing.
tho financial institution llns an nbsolutc dcfcnsc to liability. if it can A copy of thc nutliorizntion must bc provided to tlic consumer whcn the
show that its failurc rcsultcd from circu~iistanccsbcyond ita control, nnd nutliorizr~tionis n ~ n t l c .When
~ ~ tlic aniount of thc Iwnsfcrs from t l ~ ccon-
if it can show that it exercised reasonable diligencc o r that thc fnilurc sun~cr'snccount vnry, cithcr tlic fin:uicinl iristitution o r tlic pnycc must
was caused by a technical malfunction known to the consumer at the provide notice to the consumcr, before cach transfer, of the amount and
time of attempting to initiate the electronic fund transfer. When the in- must date the transfer that will be c ~ m p l c t e d . ~ ~
stitution makes an unintentional good-faith error, the Act, consistent T h e Act gives a consumcr the right to stop payment of any preau-
with the Commercial Code provisions o n wrongful dishonor, limits thc thorizcd transfer. Thc consumer need only notify the institution orally
liability of the institution to "actual damages proved." '* o r in writing at any time u p to three business days before the scheduled
datc o f the transfer.Ro Thc institution is entitled to require written con-
firmation of any oral notification within fourteen days of that oral noti-
5 26-75 EXTENT OF CIVIL LIABILIIT OF INSTITUTIONS fication, if the consumer is told of this r ~ q u i r e m e n t . ~ ~
FOR ELECTRONIC FUND TRANSFERS
Under the Electronic Fund Transfer Act, except as limited with
R0 IS U.S.C. 5 l693rn(a) ( 2 ) (Supp. I11 1979).
respect to errors describcd in $ 26-70, the bank will be liable t o con- . R' Id.
sumers for actual damages, costs, and attorncys' fecs and, when the ac- R2 15 U.S.C. 5 1693m(b) (Supp. I11 1979).
tion has been brought b y an individual, for a n amount not less than $100 R V S U.S.C. 5 I693m(c) (Supp. 111 1979).
R 4 IS U.S.C. § 1693m(d) (Supp. 111 1979).
R 5 I5 U.S.C. 5 1693m(e) (Supp. I11 1979).
l"5 U.S.C. 8 1693h(a) ( 2 ) (Supp. I11 1979). R"5 U.S.C. 5 1693m(f) (Supp. 111 1979).
'13 I 5 U.S.C. § 1693h(a) (Supp. 111 1979). R7 I5 U.S.C. 5 I693c(n) (Supp. 111 1979).
l1 15 U.S.C. f l 6 9 3 h ( a ) (2) (Supp. I11 1979). R R I5 U.S.C. 8 1693e(b) (Supp. I11 1979).
l a I S U.S.C. 5 1693h(a) ( 3 ) (Supp. I11 1979). 15 U.S.C. 5 1693e(a) (Supp. 111 1979).
15 U.S.C. f 1693h(c) (Supp. 111 1979). Id.
rC.
5 26-85 DUTIES OF BANK & CUSTOMER
5 26-85 SUSPENSION OF OBLIGATIONS TO
THIRD PARTIES
Under the Electronic Fund Transfer Act, a person who has agreed
to accept payment by means of an electronic fund transfer cannot claim
that the consumer is in default of an obligation if a malfunction in the
system prevcnls making the ~ransfcr."' Thc consun~cr'sobligation is "sus-
pended" until the malfunction is c o r r e ~ t e d .The
~ ~ person to whom pay-
ment was to be made may revive the obligation, however, by making a
written demand for payment after the malfunction has o c c ~ r r e d . ~ ~
5 26-90 DISCLOSURE AND NOTICE OBLIGATIONS
Under the Electronic Fund Transfer Act, the financial institution
providing the service must disclose to the consumer, at the time of con-
tracting for the fund transfer service, the information bearing on the
consumer's liability for unauthorized transfers, the procedures for giv-
ing notice of unauthorized transfers, the charges that will be made, the
consumer's right to slop payment of preauthorizcd transfers, thc con-
sumer's right to documentation of transfers, the institution's liability for
failure to follow the provisions of the Act, and the circumstances in
which the institution will disclose information concerning the consumer's
account to third person^.^' When there is any change in the terms of the
consumer's account that affects these mattcrs, the consumer must bc
notified in writing prior to the ~hange.~G
When an electronic fund transfer is made from an eicctronic ter-
minal, the financial institution must provide written docun~entationof
the transfer to the customer.gB The documentation must set forth the
amount and date, as well as thc typc, of transfer, the identity of the con-
sumer's account, the identity of any third party to whom the funds were
transferred, and the identification of the terminal used. Preauthorized
transfers also are subject to documentation requirements but, in this case,
the documentation may be either positive notice when the credit is made
or negative notice when the credit is not made as ~ c h c d u l c d . In
~ ~addi-
tion, the financial institution must provide cach consumer with a pcriodic
statcrnent of account.
nl 15 U.S.C. 5 16933 (Supp. 111 1979).
O2 Id. See U.C.C. J 3-802, Comment 3.
Ba Id.
D4 15 U.S.C. 5 l(i93c(a) (Supp. 111 1979).
O5I5 U.S.C. 5 1693c(b) (Supp. 111 1979).
15 U.S.C. 5 1693d(a) (Supp. I11 1979).
97 Id.
CREDIT CARDS AND EFTS 5 - -100
The documentation required by the federal Act is admissible as
evidence in any legal proceeding as evidence that the transfer was made
and, according to the Act, "shall constitute prima facie proof that such
transfer was made."
5 26-95 ADMINISTRATIVE ENFORCEMENT
T h e Board of Governors of the Federal Reserve System has the
authority to prescribc regulations to implement the purposes of thc Elec-
tronic Fund Transfer Act.Oe The Board also has h e authority to issue
model clauses that financial institutions may use to comply with the dis-
closure requirements of the Act.lo0 Use of these model clauses will con-
stitute a defense to an action brought against the institution to impose
civil liability for violation of the disclosure requirements.'O1
Power to administer the Electronic Fund Transfer Act is given, in
the case of national banks, to the Comptroller of the Currency and, in
the case of member banks of the Federal Reserve System that are not
national banks, to the Board of Governors of the Federal Reserve Sys-
tem; in thc case of banks that are not members of the Federal Reserve
System and are insured by the Federal Deposit Insurance Corporation,
power is given to the Board of Directors of the Federal Deposit Insur-
ance Corporation. The Federal Home Loan Bank Board and the Ad-
ministrator of thc National Credit Union have comparable administrative
responsibilities for tho institutions under their authority.lM
5 26-100 MISCELLANEOUS RESTRICTIONS ON
ELEnRONIC FUND TRANSFERS
The Electronic Fund Transfer Act forbids any person from condi-
tioning a grant of credit to a consumer on that consumer's agreement to
repay by means of a preauthorized electronic fund transfer.lo3 It also
prohibits anyone from requiring a consumer to establish an account for
receipt of clectronic fund transfers with a particular institution as a con-
dition of cnlploymcnt or of rcccipt of a govcrnment bcncfit.lM
0 8 I5 U.S.C. 5 1693d(f) (Supp. I11 1979).
on 15 U.S.C. 5 1693b (Supp 111 1979).
loo Id.
lnl I5 U.S.C. 5 !693m(d) (Supp. I11 1979).
lo2 15 U.S.C. 5 16930 (Supp. I11 1979).
6 1°3 15 U.S:C. 5 1693k (Supp. 111 1979).
1w Id.
45 1
 6 26105 DUTIES O F BANK & CUSTOMER
The Act makes invalid any writing o r agreement that attempts to
waive rights on any cause of action created by the
5 26-105 ISSUING ACCESS CARDS
The Electronic Fund Transfer Act limits the circumstances under
which a bank or other institution may send bank cards or other means
of access to consumers on a n unsolicited basis.'O6 It is permissible
to send a card or other access device to a consumer in response to a re-
quest or application of the consumer and to renew or replace already-
issued cards that the consumer has accepted.I0'
In order to send a card on an unsolicited basis to the consumer, the
institution must distribute cards which are not validated. This means
that the card may not be used to initiate a n electronic fund transfer with-
out some further step taken by the consumer to validate the card.lo8 In
addition, the institution must make disclosure to the consumer of his
rights and liabilities as discussed in Q 26-90. It must provide a clear
explanation that the card has not been validated and what rnust be done
in order to dispose of it if the consumer so desires. The card must be
able to be validated "only in response to a request o r application from
the consumer, [and] upon verification of the consumers identity." Ion
Cards sent to rencw cards previously issucd or to substitute for
previously issued cards may be sent o n an unsolicitcd basis only when
the original card was one that was "acccptcd" by the c o n s ~ m c r . l An
~~
accepted card is one that the consumer has "requested and received or
has signed o r has used, or authorized another to use." l l 1
Whcn an unsolicited card is scnt to a consumer, it cannot bc a vali-
dated card. This mcans that it may not be a card that can bc used to
initiatc an clcctronic fund transfcr without furthcr action by thc con-
sumer. The consumer must request o r apply for validation of the card
through a procedure that will verify the consumer's id en tit^."^ One
method of implementing these provisions is for the issuing institution to
refrain from sending a consumer's PIN (personal identification number)
with the card and to rcquirc thc consunicr to subscqucntly acquire it in
order to validate the card.
lo6 IS U.S.C. 5 16931 (Supp. 111 1979).
Ioe 15 U.S.C. 5 1693i(b) (Supp. 111 1979).
lo' I5 U.S.C. 5 1693i(a) (Supp. 111 1979).
Io8 15 U.S.C. 5 l693i(c) (Supp. I11 1979).
loo I5 U.S.C. 5 1693i(b) (4) (Supp. 111 1979).
110 15 U.S.C. 5 1693i(a) (2) (Supp. 111 1979).
111 15 U.S.C. 1 1693a(1) (Supp. 111 1979).
ri
112 15 U.S.C. 5 1693i(b) (4) (Supp. 111 1979).
CREDIT CARDS AND EFTS
T h e Truth-in-Lending Act also contains rules dealing wirh the dis-
tribution of credit cards. These rules may overlap with those in the
Electronic Fund Transfer Act on the issuance of access cards whcn
the card combines features of both a crcdit card and an access card. T h e
Electronic Fund Transfer Act does not contain any provision which
clarifics which rulcs npply whcn thcy ovcrlnp. Thc Doard, howcvcr, has
adopted rcgulations on this point.Ilg
An electronic fund transfer may involve an extension of credit.
When this occurs, the Truth-in-Lending Act may apply. The Electronic
Fund Transfer Act, however, makes clear that its provisions are to gov-
ern a consumcr's liability for unauthorized electronic fund transfer and
an extension of credit pursuant to an agreement between the consumer
and the financial institution to extend credit when the consumer's ac-
count is o ~ c r d r a w n . ~ ~ ~
A consun~er's liability for unauthorized electronic fund transfers
may be limited even more than is provided by the Electronic Fund
Transfer Act. The consumer and the financial institution are authorized
to c n k r into an agreement which further limits the consumers liability.
Also, under the federal Act, any "othcr applicable law," which includes
state law, limiting the consumcr's liability must be given effect." 11"
T h c Electronic Fund Transfer Act has been implemented by the
Board of Governors of the Federal Rescrve System in Regulation E. In
addition, national banks may bc concerned with regulations issued by the
Coniptrollcr of the C u r r ~ n c y . " ~Fedcral Savings and Loan Associations
will bc conccrncd with rcgulations adopted by the Federal Home Loan
Bank Board dealing with remote service units and transactions involving
point of sale transfers o r automatcd teller machine^."^
$26110 RELATION TO STATE LAIV
T h e Electronic Fund Transfer Act provides that state laws relating
to electronic fund transfers are invalid only to the extent they are incon-
sistent with the federal Act.11R It expressly provides that state law may
givc consumers greater protection than the fcderal Act affords. Thus,
state law may limit thc liability of consumers for unauthorizcd clcctronic
fund transfers beyond that granted under the federal Act.
"3 12 C.F.R. 8 226.13 (1981) (Regulation Z).
I5 U.S.C. 5 1693g(c) (Supp. I11 1979).
I l a IS U.S.C. 5 1693g(d) (Supp. I11 1979).
116 See Comptroller of the Currency, Banking Circular No. 66 (April
16, 1976).
'1745 Fed. Reg. 24446 (1980).
118 15 U.S.C. $ 16934 (Supp 111 1979).
§ 2 6 115 DUTIES OF BANK & CUSTOMER

When questions arise as to whether a state law is consistent with

the federal Act, a procedure is provided for the Board of Governors of
the Federal Reserve System to rule on the matter. In cases where the
Board determines that state law is inconsistent with the federal Act,
financial institutions will be immune from any liability under that state
Chapter 27
law, cvcn if it is later dctermined that the Board's determination was
crronco~s.~~@ TRANSACTIONS WITH
Q 2 6 1 1 5 ENFORCEMENT
FIDUCIARIES
The Board of Governors of the Federal Reserve System has the au- Section Page
thority to adopt regulations to implement the purposes of the Act.120 The 27-5 Nature of Fiduciary Relationship . . . . . . . . . . . . . . . . . . 455
various federal banking regulatory agencies have authority to adminis- 27-1 0 Duties of Fiduciary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 456
tratively enforce the Act. The Comptroller of the Currency has enforce- 27-15 Special Duties of Fiduciaries Handling Funds
ment authority for national banks; the Board of Governors of the Fed- orSecurities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 457
eral Reserve System has authority over member banks of the Federal 27-20 Duties of Third Parties Dealing With Fiduciaries ..... 458
Reserve System other than national banks; the Federal Deposit Insurance 27-25 Requirements of Value to Cut Off Rights
Corporation has authority over banks it insures that are not members of of Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 459
the Federal Reserve System; the Federal Home Loan Bank Board has 27-30 The Nature of Notice of Breach of
enforcement authority over the institutions which are subject to the regu- Fiduciary Relationship . . . . . . . . . . . . . . . . . . . . . . . . . . 460
latory authority of the Board or are insured by the Federal Savings and 27-35 Transfers of Negotiable Instrument by Fiduciaries . . . . . 461
Loan Insurance Corporation; and the administrator of the National 27-40 Deposits of Fiduciaries and Fiduciary Funds . . . . . . . . 463
Credit Union Administration enforces the Act against federal credit 2745 Fiduciary Deposits Undcr Uniform Fiduciaries Act . . . . 465
unions.121 27-50 Deposits in Name of Two or More Trustees . . . . . . . . . . 465
T h e Act does not exempt creditors from complying with state con- 2 7-5 5 Fiduciary Deposits Under Commercial Code . . . . . . . . . 466
sumer credit laws unless the state law is inconsistent with the federal 27-60 Banks in Fiduciary Relation to Security Owners . . . . . . 466
Act. Effective April 1, 1982, the Act provides that the Board of Gov- 27-65 Uniform Act for Simplification of Fiduciary
ernors may, upon application of a creditor, rule whether a stale law is Security Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 467
inconsistent with the federal Act. When the Board determines that the 27-70 Uniform Common Trust Fund Act . . . . . . . . . . . . . . . . . 468
state provision is inconsistent, creditors will be required to follow the 27-75 Regulation of Trust Authority of National Banks . . . . . 469
Board's interpretation and will not incur liability under the state law
even though the Board's determination may be later determined to be
in error.lZ2
0 27-5 NATURE OF FIDUCIARY RELATIONSHIP
Willful violation of the Act carries criminal pcnal~ica. Violations
can result in a iinc of not more than $5,000 or imprisonment for not When onc pcrson conducts busincss for anothcr in n rcprescntative
more than one year o r both.lZa capacity, whether gratuitously or for profit, the one who acts for the
other is said to act in a fiduciary capacity. The person for whom he acts
is usually called the principal or beneficiary. The relationship between
''9 Id. the parties is termed a fiduciary relationship. The term fiduciary, then,
'20 15 U.S.C, 5 1604 (1976).
15 U.S.C. 8 1607(a). includes any sort of trustee, exccutor, adn~inistrator,guardian, receiver,
122 15 U.S.C. 5 1610(a) (West Supp. 1981). assignee for the benefit of creditors, an agent, a partner when acting for
l28 15 U.S.C.0 161 1 (1976). other partners, an attorney, officers and directors of public and private
CL. corporations, public oficials, and any other person who acts as an agent
 1 FIDUCIARY TRANSACTIONS
or deals with property on behalf of another.' Corporations, partnerships,
and other business units may also act as fiduciaries.' In such a case, the
officers of such organizations acting as fiduciaries are really in a double
fiduciary capacity. They owe duties, first, to the corporation which em-
ploys them and, second, to the person for whom the corporation or busi-
ness unit acts. Trust officers of banks, and trust companies when repre-
senting clients, and clerks, agents, and officers of banks when collecting
instruments for depositors, are subject to such fiduciary duties.' The
corporation or business unit itself is also in a fiduciary relationship with
its clients and depositors in such situations.'
/ 8 27-10 DUTIES OF FIDUCIARY
The details of the duties of fiduciaries vary, depending upon the
closeness of the relationship between the parties and the extent to which
the principal or beneficiary is dependent upon the fiduciary and confides
in him. In gcneral, howcvcr, undcr thc common law and rulcs of cquity
it can be said of all cases that the fiduciary owes his principal the strictest
loyalty, that he must exercise the utmost good faith, and that he must
do nothing to prejudice the interest of his principal or benefi~iary.~ Con-
tracts made in his representative capacity must be for the benefit of his
principal or beneficiary, and all profits arising out of the relationship be-
long to the principal." The fiduciary cannot use his position to make a
profit for himself, and if he does so, he must turn it over to his principal
or his beneficiary.' H e is not allowed to compete with his principal in
business concerning the subject matter of the relationship.We cannot
as fiduciary make contracts with himself as an individual and sell prop-
erty with which he is entrusted, unless he has special permission of his
principal or beneficiary and conducts the transaction at arm's length and
under conditions of full disclosure?
1 U.F.A. 5 1.
2 Id.
BSee First Nat'l Bank of Tucker v. Hall, 143 Ga. App. 300, 238 S.E.2d
284 (1977) (lending oficcr who knew of improper loans liablc to bank).
Sce Tettcnborn, "Fiduciary Duties of Banks," 1980 J. Bur. L. 10
(1980).
6 Restatement (Second) of Trusts 5 170 (1959) (hereinafter cited as
Trusrs); Restatement (Second) of Agency 5 387 (1958) (hereinafter cited as
Agency) ; Loring, Trustees Handbook 67 (6th ed. 1962).
Trusts, note 5 supra, 5 5 172, 181, 182.
' Id., Q 203; Agency, note 5 supra, $ 5 388, 404.
8 Agency, note 5 supra, 5 393.
O Trusts, note 5 supra, 5 170(2); Agency, note 5 supra, 5 389; Loring,
note 5 supra, at 68.
i )15
Unless spccifically agrced upon, he cannot represent interests that
conflict with those of his principal or beneficiary in the matters in which
he is employed.1° For example, he cannot without permission of his
principal accept commissions from third parties who deal with his prin-
cipal through him and, if he does accept such commissions, he must sur-
render them to the principal.ll In fact, any profit he may make of any
nature arising from violation of the duty or loyalty to his principal be-
longs to the principal, and he must account for it or its value to his prin-
cipal or beneficiary.lZ
Any property of the principal or beneficiary that comes into the
hands of the fiduciary as a result of the relationship must be kept sep-
arate and treated with special care to protcct the interests of thc principal
in the same manner and skill that he would use in, administering his own
propcrty.l"ut, if the fiduciary treats it as his own or mingles it with
his own property, he is guilty of conversion.14
Although any of these duties may be varied by contract between the
parties and though the principal may relieve the fiduciary of many of
time strict duties, no contract of this naturc is cffcctivc to rclicve thc
fiduciary of liability for breach of duty in bad faith, done intentionally
or with reckless indiffcrence to the interests of the principal. Neither can
the principal by contract waive his right to claim any profit which the
fiduciary has derived from thc breach of his duty.16
8 27-15 SPECIAL DUTIES OF FIDUCIARIES
HANDLING FUNDS OR SECURITIES
When in the course of his duties, funds or securities of the principal
or beneficiary come into the hands of the fiduciary, he is under a duty
to keep them separate from his own and to see that they are properly
designated as the property of his prin~ipal.~"While a fiduciary can prop-
erly.make deposits of funds coming into his hands, it is a duty to take
reasonable care in selecting a bank and to properly earmark the deposit
to show his principal's interest. For example, if he deposits the money
in his own personal account and the bank should fail, the loss would fall
- - - -
lo Agency. note 5 supra, 5 391.
l1 fd, 5 5 392,394,403.
l2 Trusts, note 5 supra, 5 205(b); Agotcy, note 5 stcpm, $5 403, 404.
l a Trusts, note 5 supra, 5 5 174, 179; Agency, note 5 supro, $ 8 402(f),
404.
Agency, note 5 supra, $ 5 398, 402.
l4
l6 Trusts, note 5 supra, Q 222; cf. id., § 2 16.
l a Trusts, note 5 supra, 5 179; Agmcy, note 5 supra, $ 8 72 Comment e,
* 398.
 5 27-20 D U T I E S OF BANK & C U S T O M E R
o n the fiduciary.17 But, if he properly indicated the nature of the account
as, for example, " A , agent for B," or "T, trustee," and the like, the ac-
count is held a t the risk of the p r i n ~ i p a l . ' ~
T h e fiduciary has no right to leave the funds of his principal in a
bank that he knows is in a dangerous financial condition. I n cases de-
cided bcfore federal deposit insurance, it sometimes was held that a
trustee could not make time deposits. Now, deposits that earn interest
in federally insured institutions are generally thought a prudent invest-
ment and sometimes are specifically allowed by statute.10 T h e fiduciary
is liable to his beneficiary for the principal amount of any sum improp-
erly deposited and interest from the moment of breach of the fiduciary
relati~nship.~~
T h e general responsibilities of fiduciaries under the common law of
trusts and agency are supplemented by additional requirements under the
federal securities laws. Directors and other "insiders," for example, are
prohibited from taking advantage of nonpublic information in thc pur-
chase and sale of securities of corporations with which thcy are con-
n~cted.~~
I $27-25
5 27-20 DUTIES OF THIRD PARTIES DEALING
WITH FIDUCIARIES
Businessmen, banks, and agents acting in fiduciary capacities arc
notoriously careless in regard to the technical requirements of handling
fiduciary funds. T h e y often deal with them as if they were their own
and, thus, are guilty of technical breaches that often result in serious
1 liability when there is any interruption of the normal course of business.
Courts o f law and equity, on the other hand, continue to bc as strict in
applying liability as many businessmen are careless in carrying o u t their
duties.
Absent grounds for estoppel o r transfer to a good faith purchaser,
discussed below, pcrsons dealing with fiduciaries beyond their powcr or
authority must always return t o the principal o r beneficiary whatever
thcy h a w rcccivctl in thc transaction and, sincc any act clone by thc
fiduciary k y o n d his powcr is void, the third party can nmkc no clnim
l 7 Trusts, note 5 s u p r a , $5 179, 180 and Comments a, b and illustrations.
Id., 5 204.
I n Trrrsts, note 5 srrprn. 5 5 180, 227.
2"Tr~r.rtsts, note 5 s u p r a . 5 207; A g e n c y ,
notc 5 srrpra. $ 8 398 Com-
mcnt d, 402, 903.
21 SEC v. Tcxas Gulf Sulphur Co.. 4 0 1 F.2d 833 (2d Cir. 1968). Scc
Bishop, "Derivative Suits Against Bank Direclors: New Problems, New Strat-
egies," 97 Banking L.J. 158 (1980).
FIDUCIARY T R A N S A C T I O N S .7-25
. for loss against the principal.22 Undcr these circumstances, it is always
proper for one dealing with a fiduciary to demand and receive full evi-
dence of the authority and power under which he acts; persons failing to
get such proof act at their peril so far as concerns holding the property
of the principal or b e n e f i ~ i a r y . ~ ~
Third parties accepting transfers of property and other things of
valuc from fiduciaries, even where they act within their authority, may
find themselves liable for the fiduciary's breach of duty where, in fact, it
exists in the transaction whether they know it or not unless they have
purchased in good faith f o r value and without notice of the breach o f
duty.24 If they meet these standards, they are protected in the same man-
ner as if they had dealt directly with a competent principal.26
REQUIREMENTS OF V A L U E T O CUT OFF
RIGHTS OF BENEFICIARIES
Undcr thc c o ~ i ~ m o n - l arule,
w the pcrson purchasing troni a fiduciary
must actually part with some tangible and valuablc propcrty in return
for the thing purchased in order t o be entitled to the rights of a pur-
chaser for value.2e A mere promise to deliver something valuable in the
future or a contract obligation is not Neither is cancellation
of a n antecedent debt o r tfic acccpting of the property as security for an
antecedent but actual payment of money or delivery of chattels
constitutes va1ue.D Also, the release of commercial security30 or the
change of legal position, such as becoming validly indebted to a third
person in return for the transfer of property from the benefi~iary,~'
stitutes the giving of value.
Where a third person has entered into a contract with a fiduciary
con-
in good faith, notice of breach o f duty by the fiduciary received a t any
time before complete payment is sufficient to charge him with liability
t o the beneficiary." For example, if a person has bought property from
Za Trrcsts, note 5 srtpm, 5 5 164. 186: cf. A g e n c y , note 5 strpm. $ 8 140,
141; O~rlichv. Grovcr. 33 N.J.I.. 463. 97 A m . Dcc. 728 ( 1 8 6 8 ) ; Pninc v.
Sheridnn Trust Rc Snv. Bnnk. 342 111. 342, 174 N.E. 368 (193 1 ) .
25 Sce Mechern, O ~ t t l i n e sof fire Law of A g e n c y 5 243 ( 4 t h ed. 1952).
24 Trusts, note 5 srcpm, 5 5 288-93.
26 Trusts, note 5 s u p r a , 5 s 284, 287.
Trusts, note 5 s u p r a , 5 5 298, 301.
27 Trrrsts, note 5 srrpm, 5 302.
2R Trrrxts, note 5 w p m , $ 5 304, 305.
Trrtsts, notc 5 srrpm, 5 8 298-300. .
no T r ~ t s t snotc
, 5 srrpm, 4 5 3 0 5 ( 2 ) ( h ) , ( c ) nnd ( 3 ) .
Trusts, note 5 srrpra, 5 302 Comment k.
* 82 Trusts, note 5 s u p r a , 5 5 301, 303, 3 1 1 , 3 12.
 3 27-30 DUTIES OF BANK & CUSTOMER
a fiduciary on a promise t o pay $1,000, has paid $500 cash, and then
receives notice that the fiduciary acted in breach of duty lo his principal,
he must hold the balance of the payment subject t o the rights of the prin-
cipal and cannot claim to be a purchaser for full value of the property."
T h e Commercial C o d e has special rules o n what constitutes value.
These rules are discussed in Q 27-35.
3 27-30 THE NATURE OF NOTICE OF BREACH
(r'p OF FIDUCIARY RELATIONSHIP
J
A third party is charged with -notice of a fiduciary's wrongful acts
*
in a transaction in any situation in which h e knew or should have known
that the fiduciary was acting i m p r ~ p e r l y . ~ Thus,
' he is charged with no-
tice of the wrongful act if he knows that a trustee is acting in brcach of
trust o r knows that h e is acting in a n irregular o r unusual way, as, for
example, if the trustee is paying large amounts of the trust funds to him-
self o r if he is dealing with fiduciary funds as if they were his own.8b
Most courts insist u p n applying the rules of notice vcry strictly and, in
any situation in which a fiduciary is varying from the proccdurc rcgnrdcd
by the courts as proper, they tend to hold that !he third party should
have made inquiry and, if inquiry would have shown thc brcaeh of duty,
the resulting losses must bc borne by the third party.
Statutes and recording acts also establish proccdures that make cer-
tain actions of fiduciaries like receivers, trustees in bankruptcy, and ex-
ecutors matters that will be deemed by third parties to have notice,
whether o r not the facts are actually known t o them.aa
Under these circumstances, persons dealing with businessmen act-
ing carelessly in regard t o their fiduciary duties may find themselves
liable for breaches of duty in transactions actually carricd o n in the
normal way of doing business but contrary t o the strict requirements of
the law.37 For example, if a trustee known t o be such is carrying trust
funds in his individual account in the bank and paying them out on
checks to himself, the bank may be held liable, if he is in fact acting in
breach of trust and the circumstances are such that the bank should
aa Trusts, note 5 supra, $ 303, illustration 1; cf. N.I.L. 8 54; Dresser v.
Missouri, Etc., R.R. Constr. Co., 93 U.S. 92 (1876).
Trusts, note 5 supra, !j 297.
8 V r r r s r s , note 5 supra, $ 296; Bischoff v. Yorkville Bank, 218 N.Y.IOG,
112 N.E.759 (1916). See U.C.C. 3-304(2).
'I, Trusts, note 5 supra, $ 297(b); Fidelity & Deposit Co. v. Queens
County Trust Co., 126 N.Y. 225, 123 N . E 370 (1919).
n7 Trusts, note 5 supra, !j 326.
FIDUCIARY TRANSACTIONS L7-35
, h a v e known of the breach.88 As a practical matter, the third party
should insist upon full disclosure of the powers of the fiduciary, use
every care in checking the transaction, and act in the highest good faith
in all dealings with known fiduciaries.
5 27-35 TRANSFERS OF NEGOTIABLE INSTRUMENT
BY FIDUCIARIES
Under the Conimcrcial Code, a holder in due course must take the
instrument in "good faith" and without "notice" of a claim o r defense
to it..90 T h e Code definition of good faith is simply "honesty in fact" or
what some disparagingly call the "pure heart, empty head" test.'O No-
tice, however, is carefully distinguished by the Code from "actual knowl-
edec."
" Notice also exists when "from all the facts and circumstances 1
known . . . at the time in question [a person] has reason to know that it
cxists."
When a transferee of a negotiable instrument from a fiduciary knows
that a fiduciary is the transferor, this by itself does not give notice that
thc bcncficinry rnny hnvc a claim against thc instrumcnt. In this casc.
the transferee can bccome a holdcr in duc coursc if all the othcr rcquire-
mcnts for bcing a holder in due coursc arc met and then will take frec of
any actual claim thc bcncficinry might have because the fiduciary actcd
in cxcess of a u t h ~ r i t y . ' ~Howcver, i f the transfcrec has actual knowl-
edge that the fiduciary has negotiated the instrumcnt for his own personal
benefit o r in breach of his duty to the beneficiary, the transferee will be
deemed to have notice, cannot become a holder in due course and will .
be subject to the claim of the b e n e f i ~ i a r y .T~h~e difficult cases, of course,
are the ones in between where there is no actual knowledge of breach of
duty by thc transferee but thc circumstances arc suspicious. T h e Code
88 Knowledge that the fiduciary is personally benefitting from the trans-
action or is in breach of any duty to the principal prevents the bank from
bcing a holder in due course, U.C.C. 5 3-304(2), and subjects it to the
claims of the principal. U.C.C. 5 3-306( 1 ) . Just knowing that a fiduciary
is involvcd is not enough, however. U.C.C. 5 3-304(4)(e). See $27-35
below. See also Fidelity Deposit Co. v. Queens Co. Trust CO., 226 N.Y.
225, 123 N.E.370 (1919);U.F.A. (U.L.A.) 5 9,at 154,n. 9 (1932);Trrrsts,
note 5 supra. $ 324.
U.C.C. $3-302.
'O U.C.C. 5 1-ZOl(19).
" U.C.C.5 1-201 (25).
4 2 U.C.C. $ 3-304(4)(e). For a general discussion of transfer of in-
+
struments by fiduciaries, see Bailey, Brady o n Bonk Checks $ 5 8.15-8.20 (5th
ed. 1979).
4 3 U.C.C. $ 3-304(2).
8 27-35 DUTIES O F BANK & CUSTOMER
definition of notice as includes good "reason to know" would thus seem
to allow the beneficiary to assert a claim against the transferee in a
proper case. The comments of the Code drafters indicate that they in-
tended to follow the Uniform Fiduciaries Act in this respect.44 See
9 2745.
The Code's treatment of what constitutes value also is complicated.
T h e general definition of value includes any consideration sufficient to
support a contract and even satisfaction of an antecedent d e b t . ' V h e
definition of value for the purpose of defining who is a holder in due
course is more limited. In this case, the consideration must actually have
been performed, but payment of a prior debt also qualifies.46 Finally,
there is a special definition applicable to banks. Under that definition, a
bank gives value by crediting the depositor's account when the credit is
available for withdrawal as of right;" Cases that have considered who
should qualify as a good faith purchaser for value from a fiduciary at
common law and under prior statutes have applied a stricter standard.
Giving bank credit that has not been withdrawn and satisfying preexist-
ing debts has sometimes not been enough.48
T h e Uniform Fiduciaries Act is the law in a number of states.'# It
has not been repealed by the Commercial Code. In fact, comment to the
Code indicates the drafters intended to make the Code consistent with
the Act. The Uniform Fiduciaries Act deals principally with matters of
good faith in the transfer of negotiable instruments, and covers deposits
in banks by fiduciaries as well. It attempts to define the nature of good
faith and notice and settle liabilities of banks dealing with agents, trus-
tees, and other fiduciaries.60
Under this Act, where instruments expressly payable to fiduciaries,
such as " A , agent for B," and "T, trustee for C," are transferred under
proper indorsement, it is not necessary to inquire whether the agent
'' U.C.C. 1 3-304, Comment 5.
46 U.C.C. 1 1-201 (44).
46 U.C.C. 1 3-303.
47 U.C.C. 5 4-208.
48SeeSquire v. Ordemann, 194 N.Y. 394, 87 N.E. 435 (1909);Hall v.
Windsor Sav. Bank, 97 Vt. 125, 121 A. 582 (1923). Marine Nat'l Exchange
Bank of Milwaukee v. Kaltzimmers Mfg. Co., 293 U.S. 357 (1934). See
Annot., 100 A.L.R. 60 (1936).
'#The law has been adopted in twenty-six jurisdictions: Alabama, Ari-
zona, Colorado, District of Columbia, Hawaii, Idaho, Illinois. Indiana, Louisi-
ana, Maryland, Minnesota, Missouri, Nevada, New Jersey, New Mexico,
New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Dakota,
Tennessee, Utah, Virgin Islands, Wisconsin, and Wyoming. 7A U.L.A. Supp.
19 ( I98 1 ). Arkansas, California, Kentucky, Oregon, and Washington have
adopted parts of the act.
See Commissioner's note, 7A U.L.A. 127 ( 1978).
FIDUCIARY TRANSACTIONS ,~7-40
nctcd in breach of duty. The trnnsfer is good, and thc purchaser is n
holdcr in due course, unless he knew of the breach of duty or acted
under such circumstances as amounted to bad faith: For example, if
he purchascd knowing that the agent was a trustee and no more, he would
be a holdcr in due course. But, if he suspcctcd that the trustee was acting
in breach of faith but refused to inquire, he would be acting in bad faith /
and would not have the rights of a holder in due course." The same rule
applies to checks drawn by a fiduciary as such on a fiduciary account 1
payable to a third person." But in both of the above cases, if the third
party took the instrument in payment of a debt of the fiduciary to him
or in security for such a debt or in a transaction for the benefit of the
fiduciary, the person taking the instrument would know the fiduciary
was personally benefitting from the transaction, so the holdcr would take /
subject to any claims of thc beneficiary or principal whether or not he
inquired if the fiduciary was guilty of an actual brcach of dutyaE3
Where a check drawn by a fiduciary payable to himself as " A , agent
for P" is indorsed by him, the holder may be a holder in due course in /
all cases whcther the procc_edssar~divcrt&or ce_personal account of
the fiduciary or not, if the holdcr acted without notice and in good faith.
Here he is under no duty to inquire unless the circumstances are suspi- /
cious. The single fact that the paper drawn on the fiduciary account is
payable to the fiduciary himself is not suspicious because the holder is
entitled to the presumption that the fiduciary is properly paying himself
out of the trust account.n4
5 27-40 DEPOSITS OF FIDUCIARIES AND
FIDUCIARY FUNDS
It is a common practice for fiduciaries to kecp two or more ac-
counts in thc same bank. One is in the fiduciary capacity, such as " A ,
trustee," " A , agent for X," or " A , attorney," and another a personal
account. Or, sometimes the fiduciary may simply keep a personal ac-
count in which he improperly carrics all the funds. The existence of a
fiduciary account or the acccptancc o[ instruments payablc to, and in-
dorsed by, a fiduciary are notice of the existence of the relationship, but
not necessarily of any breach of duty by the fiduciary.66
" U.F.A. $ 4.
n2 U.F.A. $ 5; Union Bank v. Girard Trust Co., 307 Pa. 488, 161 A.
865 (1932).
6 3 U.F.A. § $ 4, 5.
E 4 U.F.A. $6; and see Commissioner's note, 7A U.L.A. 144-145
(1978).
6o See Annot., 61 A.L.R. 1389 (1929).
I § 27-40 DUTIES OF BANK & CUSTOMER
At common law, whcre the bank receives funds depositcd in the
fiduciary's personal account in breach of trust, whether or not it knew
of the breach at the time of the deposit, it must hold these funds for the
principal or beneficiary when notified of the breach. If the balance at the
I
time of notification is larger than the amount of funds in default, the bank
must not allow drawings beyond the amount improperly deposited. If the
balance in the account is less than the amount claimed by the principal or
beneficiary due to breach of trust, the bank must hold the entire account
for the benefit of the p r i n ~ i p a l .In
~ ~case of dispute between the fiduciary
and his principal the bank may relieve itself of liability to either by paying
the amount of the deposit into court and interpleading both parties.
As to the liability of the bank that receives trust funds in a personal
account knowing thcm to bc trust funds, the courts do not agree. The
majority held that such funds could be checked out at the order of the
fiduciary on his personal check without liability to the bank unless it
knew, or should have known, that the fiduciary was acting in breach of
duty.6T A minority of the courts, however, held that since the original
deposit of the trust funds to the personal account was a technical breach
of duty, the bank must inquire of the principal or beneficiary whether the
payments from the accounts are authorized and failure so to inquire will
make it liable for any losses to the principal or beneficiary due to actual
breach of duty on the part of the fiduciary.08
Where the account is properly labeled so as to show the fiduciary
relationship, the bank, without notice of $falcati%s, can properly pay
out all funds at the regularly authorized order of the fiduciary without
liability69 except in those cases where the fiduciary drew chccks on the
account to pay debts which he owcd to the bank. In this case the bank
accepts such payments at its peril.80
Whcrc thc fiduciary transfers Cuntls from n fiducinry nccount to his
own pcrsonal account, the bank is frcc in most states to pay funds from
this account by his personal check without question." But, a minority
make it a duty of the bank to inquire and, upon failure to do so, it is
Trusts, note 5 supra, 8 302( 1 ) .
6T Id., 5 324 and Comments.
See Bischoff v. Yorkville Bank, 218 N.Y. 106, 112 N.E. 759 (1916);
But see Barry v. Hensley, 170 Tenn. 598, 98 S.W.2d 102 (1936).
Trusts, note 5 supra, 5 324, Comment g. Whiting v. Hudson Trust
Co., 234 N.Y. 394, 138 N.W. 33 (1923).
O0 Trusts, note 5 supra, $8 269, 324 Comment h; Bischoff v. Yorkville
Bank, 21 8 N.Y. 106, 112 N.E. 759 (1916); Allen v. Puritan Trust Co., 21 1
Mass. 409,97 N.E. 916 (1912).
O1 Trusts, note 5 supra, 5 324 Comment g; Allen v. Puritan Trust Co.,
21 1 Mass. 409, 97 N.E. 916 (1912); Havana Central Ry. Co. v. Knicker-
bocker Trust Co., 198 N.Y. 422,92 N.E. 12 (1910).
4 64
FIDUCIARY TRANSACTIONS 27-50
linblc to thc principal or bcncficiary if such a manipulation of funds was
in fact a breach of trust.02
The effect of the Uniform Fiduciaries Act and the Commercial Code
on these common law rules is considered in $ 5 27-45 and 27-55, which
follow.
5 27-45 FIDUCIARY DEPOSITS UNDER UNIFORM
FIDUCIARIES A C T
Under the Uniform Fiduciaries Act, money deposited in a named
fiduciary account or in the name of the principal where the fiduciary has
the right to draw may be paid out upon propcr check of the fiduciary on
checks paynblc to himsclf or n third party without liability to thc bank
unless it acts with knowledge that he is committing a breach of fiduciary
duty o r under such circumstances that its actions amount to bad faith.e3
If, however, such chccks are used to pay personal debts of the fiduciary
to the bank, the bank is liable to the principal if the fiduciary in fact
committed a breach of duty regardless of the good faith of the bank.e4
Whcrc the fiduciary deposits funds in his pcrsonal account that are
known to be, or upon their face appear to be, trust funds, the bank may
pay out such funds upon his personal check without inquiring whether
he is committing a breach of his obligation as fiduciary, and the bank is
not liable to the principal for any such breach unless it receives or pays
the deposit with actual knowledge of breach of duty or with knowledge
of such facts that its actions amount to bad faith.e5
5 27-50 DEPOSITS I N NAME O F m V 0 O R MORE
TRUSTEES
At common law, it was sometinics held that where an account was
in the name of two or more joint trustees or fiduciaries that it was a
breach of duty for one trustee to authorize the other to draw the funds upon
his individual check.eB And banks paying under such circumstances
might be held liable for the resulting dnmagcs, if a breach of fiduciary
duty actually existed on the part of either Under the Uniform
p ~ p ~
ez Bischoff v. Yorkville Bank, 218 N.Y. 106, 112 N.E. 759 (1916).
as U.F.A. $ 8 7, 8; see New Amsterdam Gas Co. v. National Banking
Co., 119 N.J. Eq. 540, 182 A . 824 (1936).
64 U.F.A. $8 7, 8; Colby v. Riggs Nat'l Bank, 92 F.2d 183 (D.C. Cir.
1937).
"W.F.A. 8 9.
Tnrrtsts. note 5 srrpra, $ 184.
.s O7 See Annot., 61 A.L.R. 967 ( 1929).
 5 27-55 DUTIES O F BANK & C U S T O M E R
Fiduciaries Act, a bank paying in good faith under such circumstances
is not liable to the beneficiary, and such transactions a r e valid as to all
innocent holders.B8
5 27-55 FIIIUCIARY DEPOSITS UNDER
COMMERCIAL CODE
There a r e a n u m b e r of provisions of the Commercial C o d e that are
likely to affect the liability of banks for fiduciary accounts. Where one
acting in a fiduciary capacity draws checks showing the fiduciary relation,
the Commcrcial C o d e has abolished the requirement of payment in due
course.B9 If this section is broadly applied, the bank would be under no
liability for paying fiduciary paper, even with knowledgc of the relation-
ship and the breach thereof, if it did not act i n bad faith o r contrary to
a court restraining order. Although the banks in the collcction process
a r e sometimes held to b e in a fiduciary relationship t o the depositors,
under the Code, they may ignore all information contained in indorse-
ments, s o long a s they follow the instructions of their immediate trans-
ferors.1° Whether o r not the courts will extend these sections t o relieve
the banks of former liabilities for improper dealing in paper drawn on
fiduciary accounts is doubtful.
5 27-60 IIANKS IN FIDUCIARY RELATION TO
SECURITY OWNERS
Banks acting in thcir trust dcpartmcnts, of course, havc all the nor-
mal fiduciary obligations discusscd above toward thc bcncficiarics. In
cxccuting thcsc dutics, it is oftcn ncccssary for thc bank to transfcr se-
curitics hcld by cstatcs which thcy administcr, o r which arc hcld by thc
bank itself f o r bencficiarics of thcir trust operations. In such situations
the securities arc oftcn registercd in tlic namc of the bank as "trustce,"
"administrator," "cxecutor," and like titlcs indicating fiduciary capacity.
Transfcr agcnts for such sccuritics, in ordcr to protcct thcmsclvcs from
liability for breach of trust," have been accustomed 10 ask such fidu-
ciaries for elaborate proof of their authority to transfer the securities.
U.F.A. 8 10.
U.C.C. 5 3-603 Comment, repealing N.I.L. 8 88.
U.C.C. 8 5 4-203, 4-205(2).
See First Nat'l Bank of Biddeford v. Pittsburgh F.W. & C. Ry., 31
F. Supp. 381 (E.D. Pa. 1939); Harris v. General Motors Corp., 288 N.Y.
691, 43 N.E.2d 84 (1952). U.C.C. 5 8-406.
FIDUCIARY TRANSACTIONS 5 27-65
This is to protcct themsclvcs from the duty to replace the stock if it is in
fact transferred in breach of trust.
On the other hand, if the bank, as is often the case, is a transfer
agent for a corporation, then it must get such proof from persons holding
stock in fiduciary capacity when they ask for transfer.72 These require-
nlcnts havc ottcn rcsultcd in burdcnsonlc rcports nnd long dclnys to
achieve a n ordinary transfer o f securities.
T h c Uniform Fiduciaries Act attcmptcd t o remedy the situation by
protecting the transfer agent from liability f o r the known fiduciary's
breach of faith iE the transferor acted in good faith and without actual
knowledge of the wrong;13 but this failed to stop the requirements of
burdcnsomc reports of facts, authorities, and the like.74 S o the Com-
mercial C o d e now provides that the transfer agent is under n o duty to
inquire about adverse claims unless they a r e presented in writing a rea-
sonable time before transfer75 o r appear in documents presented t o the
translcror a t the time o f demand for transfer.7B If the security is regis-
tered in the name of a fiduciary as such the transferor is under n o duty to
inquire a s to the nature o f the relationship, whether o r not there is a
breach of trust, and h e is not charged with notice of lack of authority o r
of court H e is under a duty to transfer o n a n "appropriate"
assurance of the genuineness o f the signature of the registered holder and
of his authority to t r a n ~ f e r . ' ~
5 27-65 UNIFORM ACT FOR SIhfPLIFICATION OF
FIDUCIARY SECURITY TRANSFERS
T h i s Act, which has bccn adoptcd in thirty-seven j u r i s d i c t i ~ n s ,is~ ~
not usually rcpcalcd by thc Conlmercial Code. It provides further that,
l 2Thc problcms and law arc discusscd in dctail in Christy, "Rcsponsi-
bilitics in thc Transfer of Stock," 53 Mich. L. Rev. 701 (1955): Conrad. "A
New Deal for Fiduciary's Stock Translers," 56 Mich. L. Rev. 843 (1958).
la U.F.A. 8 3.
"See 9 C U.L.A. 90, Comrnissioncr's Note 7A U.L.A. 710 (1978).
U.C.C. 6 8-403.
7dU.C.C. § 4 0 3 ( 1 ) .
l 7U.C.C. 5 8-403(3) (c).
U.C.C. 5 8-402. The assurance may be a court certificate, a docu-
ment showing the appointment, or "other evidence reasonably deemed by
the issuer to be appropriate." U.C.C. 8 8-402(3) (b).
Alabama, Arizona, Colorado, Delaware, District of Columbia, Florida,
Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland,
Michigan, Minnesota, Mississippi. Missouri, Montana, Nebraska, Nevada,
New Jersey, New York, North Carolina, North Dakota, Rhode Island, South
* Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, West
Virginia, Wisconsin, and Wyoming. 7 A U.L.A. 709 (1978).
5 27-70 DUTIES O F BANK & C U S T O M E R FIDUCIARY TRANSACTIONS s 4-75

in case of assignment by a fiduciary, the transfer agent may assume that
the fiduciary of record is within his authority, is not in breach of his
duties, has complied with his controlling contracts, and the agent is not
required to examine any records.'O H e is, of course, still liable if the
transfer is a forgery.'l I
These statutes greatly reduce the formalities previously thrown
around the transfer of securities by fiduciaries. T h e Stock Transfer Asso-
ciation has a set of rules governing fiduciary transfers under these stat-
u t e ~ These
. ~ ~ rules under the Commercial C o d c have the effect of law be-
tween members a n d their clients.83 Where the Code but not the Act for
Simplification of Fiduciary Sccurity Transfers has bccn adoplcd, thc rulcs
of the Stock Transfcr Association may scrvc a s a good guiclc for thc ncccs-
sary procedures in transfers and will probably prevail over the provisions
of the Code themselves because of the C o d e provisions, which make busi-
ness practices a n d agreements ~ o n t r o l l i n g . ~ ~
5 27-75 REGULATION OF TRUST AUTIIORITY
OF NATIONAL BANKS
T h e Comptroller of the Currency has the authority to revoke the
trust powers of a national bank when the bank has "unlawfully o r un-
soundly exercised" the trust powers granted to it o r has failed for five
consecutive years to exercise its trust powers o r otherwise has not com-
plied with its trust requirements. Before the revocation may become
effective, the Comptroller must give the bank notice of his intention t o
revoke and conduct a hearing.87
12 U.S.C.A. 92a (West Supp. 1981)

5 27-70 UNIFORM COMMON TRUST FUND ACT

A t common law, a trustee was not allowed t o mingle trust funds
but had to keep separate bank accounts for each trust. I n order t o avoid
the complications of accounting a n d the difficulty of making separate in-
vestments for each fund, banks a n d trust companies handling numerous
trust accounts are n o w allowed by the Uniform Common Trust Funds
Act, adopted in the majority of the states,86 t o create common investment
trust funds t o cover the assets of numerous trust funds. T h e y may then
prorate the income, gains, and losses among the various trusts involved.
T h e act requires the banks or trust companies to make proper account-
ing to the courts f o r the management of the joint

8OUniform Act for Simplification of Fiduciary Security Transfers

(U.L.A.) 5 3.
- U.C.C. 5 8-205; cf. U.C.C. 5 8-208.
82See, e.g., Christy & Appel, The Transfer o/ Stock. A-106 (5th ed.
1975).
'W.C.C. 5 5 1-102(2)(b), 8-318(3).
"U.C.C. 5 5 1-102(2), ( 3 ) , 1-103, 1-205.
86 Alabama, Alaska, Arizona, Arkansas, California, Colorado, Dist. of
Columbia. Florida, Hawaii, Idaho, Illinois, Iowa. Kansas, Maine. Massachu-
setts, Michigan, Mississippi, Missouri, Montana, Nebraska, Nevada, New
Hampshire, New Mexico. North Carolina. Ohio, Oklahoma, Oregon, South
Dakota, Tennessee, Texas, Utah, Washington, West Virginia, Wisconsin and
Wyoming, 7 U.L.A. Supp. 15 (1980).
Ed U.C.T.F.A. 5 2.
 PART IV
Secured Transactions and Bankruptcy
 Chapter 28 ,

THE CREATION AND

PERFECTION OF SECURITY
INTERESTS IN PERSONAL
PROPERTY
Section Pnge
28-5 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 473
28-10 Scopc of Commercial Code . . . . . . . . . . . . . . . . . . . . . . 474
28-15 Lcases and Consignments as Sccurity Transactions .... 476
28-20 The Security Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 477
28-25 Purchase Money Security Interest . . . . . . . . . . . . . . . . . . 479
28-30 Pcrfection of Security Interests . . . . . . . . . . . . . . . . . . . . 479
28-3-5 Filing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480
28-40 Financing Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 482
28-45 Termination Statements and Partial Releases
of Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 484
28-50 Assignment of Security Interests . . . . . . . . . . . . . . . . . . . 485

I $28-5 INTRODUCTION
When a creditor takes an interest in a debtor's personal property
as collateral to secure an obligation owed by the debtor to the creditor,
the transaction will, in most cases, be a secured transaction governed by
Article 9 of the Uniform Comniercial Code. Because many different
kinds of property can serve as collateral for obligations, the law relating
to these transactions is complex and must take into account the different
characteristics of the collateral concerned. Before the Commercial Code,
and depcnding upon the type of collateral involved, there were many
separatc statutes that applied, including the Uniform Trust Receipts Act,
the Uniform Conditional Sales Act, the Chattel Mortgage Acts, the Fac-
tors Lien Acts, the Assigntncnt of Accounts Rcccivablc Acts, nnd others.
All of this prior legislation is supcrscdcd by the Commercial Code. Some-
*times the tcrms used under the former statutcs are still used in business
5 28-10 SECURED TRANSACTIONS
transactions. This will not impair the validity of the security interests
created because the Commercial Code will apply regardless of the termi-
nology used.' As long as the parties intend a security transaction, it does
not make a difference that their agreement is called a chattel mortgage, a
conditional sales agreement, or a trust agreement.2
The Code provisions on secured transactions were extensively re-
vised in 1972. The states that adopted the 1972 changes are listed in
the table in 9 9-30. The subsequent sections discuss thc Codc as revised
by these 1972 amendments. The major changes made by the amend-
ments are mentioned where relevant, but bankers operating in states that
have not yet adopted the 1972 amendments should consult counsel; it is
not possible to cover all the changes in a'book of this nature.
5 28-10 SCOPE OF COMMERCIAL CODE
Although there are exceptions, discussed below, the general policy
of the Code is to provide a comprehensive framework for all transactions
involving security interests in pcrsonal propcrty. Any transaction that'
creates a security interest in any kind o f personal property (goods, bills
of lading, warehouse receipts, instruments, accounts, contract rights, etc.)
falls within the scopc of Article 9 unless specifically e x c l u d c d . V sc-
curity intcrcst is siniply dcfincd as "an intcrcst in personal propcrty or
fixtures which sccurcs pnyrncnt or pcrforni;~nccof an obligation." ' This
includes a scllcr's rctcntion of title until Iic obtnins paynicnt for goods
sold. It also includes transactions which, according to their form, do not
state that they are security transactions but which are "intended" to
create security interest^.^
The Commercial Codc applies "to any salc of accounts or chattel
paper" unless one of the exceptions applies." Thus, a financier who buys
the accounts of a business or takes an absolute assignment, without right
of recourse against the assignor, is subjcct to the rules of thc Commercial
Code. Likewise, a bank or other financier who purchases chatlcl paper
is engaging in a transaction controlled by Code rules.
There are twelve transactions to which the Code does not apply:
1 . Security interests governed by federal stat11 tes. Federal statutes
governing mortgages on ships, liens on aircraft, assignments of copy-
U.C.C. 5 9-102(2). All U.C.C. references in this Chaptcr are to the
Uniform Commercial Code 1978 Official Text (West 1978).
2 Id.
W.C.C. 89-lO2( 1 ) ( a ) .
' U.C.C. 51-201 (37).
W C C . . $ 5 9-102(l)(a); 1-201(37). See 5 28-15.
U.C.C. 5 9-lO2( 1 ) ( b ) . See 5 29-65 for a definition of chattel paper.
474
PERFECTION OF SECURITY INTERESTS J 28-10
rights, and assignments of patents prevail over the Commercial Code.
In some cases, these federal statutes may not regulate all the rights of the
parties and the Commercial Code may, in part, be used for guidance.l
2. Landlord liens. These liens are created under other state law.
The Code has no application to their creation or e n f o r ~ e m e n t . ~
3 . Liens for services or materials provided. These liens, such as
garagemcn's liens or warehousemen's liens, are not covered by Article
9 except to the extent that they may conflict with interests created under
Article 9.@
4 . Assignmenfs of claims for wages, salary or employment compen-
sation. These are not covered by the Code.lo
5 . Transfers by governmental agencies. The creation of security
interests in property of governmental bodies is not covered by the Code.
6. Certain isolated sales of accounts or chattel paper. When the
sale of accounts occurs as part of a sale of a business, when an assign-
ment is made for the purpose of collection only, when a right to payment
under a contract is assigned to the person who is going to perform the
contract, or when a "single account" is assigned to satisfy a prior debt,
the Code does not apply.ll
7. Insrrrancc policies. Gcncrnlly, insurnnce policies nrc not affected
by tlic Codc. Thcrc nrc limited circunlstnnccs, whcn insurnncc policics
insure collateral subjcct to a security interest,12 in which the Code
applies.
8 . Judgments. The Code does not apply to rights based upon
judgments.18
9. Rights of setofl. The Code does not apply to rights of setoff.''
10. Real estate interests. Except as related to fixtures, the Com-
mercial Code has no application to real estate interests such as leases,
. rights to rents, or other transfers of real p r ~ p e r t y . ' ~
1 U.C.C. § 9-104(a).
8 U.C.C. 5 9-104(b).
9 U.C.C. § 9-104(c). See 5 9-310.
l o U.C.C. 9 9-104(d).
'1 U.C.C. 9 9-104(f).
1' U.C.C. 9 9-lM(g).
1' U.C.C. 5 9-104(h).
1 4 U.C.C. 5 9-104(i).
* 1sU.C.C. 5 9-104(j).
 3 28-15 SECURED TRANSACTIONS
1 1. Tort claims. T h e Code does not apply to tort claims.16
12. Bank accounts. Except as bank accounts may constitute pro-
ceeds of collateral, the Code does not apply."
5 28-15 LEASES AND CONSIGNMENTS AS SECURITY
TRANSACTIONS
Sometimes a lease can function like a security transaction. A lease,
which may allow the lessee to purchase equipment on credit terms, may
instead be arranged to give the lessee enjoyment of thc cquipmcnt during
its useful life while also offering a deferred payment. The lease may pro-
vide that the lessee assume the burdens, normally assumcd by the owner,
of maintaining and insuring the equipment and may further provide that
the equipment become the property of the lessee, for little additional pay-
ment, at the end of the lease. In such cases, it is reasonable to view thc
lease as essentially a security transaction. When this is so, Article 9 of
the Code applies. T h e lessor will be regarded as a sccurcd party; the
lease agreement will be treated as a security agreement; and the lessee
will acquire the rights of a debtor. This has thc very scrious consequcnccs
of making the transaction subject to Code requirements for pcrfection
of security interests. Unless the secured party/lessor takes action to per-
fect his security interest (normally by filing a financing statement, as dis-
i cusscd in $ 9 28-30, 28-35) the Icssor/sccurcd party will only have an
unperfected security interest, which will be subordinate to the claims ol
lien creditors, trustees in bankruptcy, or other secured parties.I8
Not every lease of pcrsonal property is a security transaction. This
depends upon the facts of each case.'* There are two guidelines, how-
I ever. First, a purchase option in the lease does not, by itself, make the
lease a security transaction. Second, a purchase option that can be exer-
cised for "no additional consideration or for a nominal consideration"
does make the lease a security t r a n s a ~ t i o n . ~ ~
Before a bank accepts as collateral any paper that, on its face, ap-
pears to be an equipment or other lease of pcrsonal property, carcful
consideration should be given to whether the lease might be a security
transaction. It is possible, undcr the Code, to filc a financing statcrncnt
pcrfccting a sccurity intcrcst in lcascd goods without admitting that the
U.C.C.5 9-lO4(k).
l7 U.C.C.8 9-104(1). See 5 30-25 infra.
lR SCC 5 30-5.
l o U.C.C.8 1-201 (37).
20 Id.
PERFECTION O F SECURITY INTERESTS 18-20
transaction is a sccurity transaction rather than a true This may
be useful when other considerations may indicate that a lease is prefer-
able to a secured transaction, for example, when the provisions of the
Internal Revenue Code or the Bankruptcy Act affect the transaction, or
in any other situation when the issuc of whether a true lease is created
might be relevant.
Similar problcnls cxist for those who scll goods on c ~ n s i g n m c n t . ~ ~
Howcvcr, cvcn when a consignrncnt is not trcatcd ns a sccurity transac-
tion undcr Article 9 of thc Code, it is advisable to follow the Code rules
on filing a financing statement in order to protect the consignor against
the claims of other creditors of the c ~ n s i g n e e . ~ V hdoes
i s not mean that
filing a financing statement will constitute an admission that the con-
signment is a security t r a n ~ a c t i o n . ~ ~
5 28-20 TIIE SECURITY AGREEMENT
T h e Conimcrcial Code makes a security agreement effective be-
tween the parties, against purchasers of the collateral, and against credi-
tors unlcss the Code provides to the contrary.26 Thus, the general rule is
that sccurity agrcements are cnforccable. When the collateral is not in
the possession of the sccured party, the agreement, with a description of
the collateral, must be in writing and must be signed by the debtor.28 The
sccurity agrecnlcnt must also dcscribe land when the collateral is crops
or t i n ~ b c r .Possession
~~ of the collateral by the secured party, as in the
casc of a pledge, constitutes a substitute for a signcd, written agreement.28
Three conditions must be met to have an enforceable security inter-
cst:
( I ) Thcre must be a written sccurity agreement signed by the
debtor or the secured party must have possession of the col-
lateral;
( 2 ) The secured party must have given value (which may be either
the advance of funds or only a binding commitment to advance
funds) ;29 and
2' U.C.C.8 9-408.
22 U.C.C.$ 5 9-102, 1-201 (37)
23 U.C.C. 5 5 2-326. 9-1 14.
2 4 U.C.C.8 9-408.
25 U.C.C.§ 9-20].
20 U.C.C.5 9-203(1 ) (n) .
2' Id.
28 U.C.C.8 9-203( 1 ) (a).
* 29 U.C.C.5 1-201 (44).
8 28-20 SECURED TRANSACXIONS
( 3 ) The debtor must have rights in the c01IateraL~~
When these three events occur, the security interest is said to "attach,"
and it becomes enforceable. The terms of enforcement depend upon
the provisions of the security agreement and the rights granted under
the Commercial Code. See Chapter 31 for furthcr discussion.
The description of the collateral in the written security agreement
does not have to be a specific de~cription.~'It is not necessary to the
validity of the agreement to describe the collateral item by item. It is
enough that the description "reasonably identifies what is described."
The comments make clear that requirements under pre-Code law for de-
tailed, serial-number types of descriptions have been eliminated.a2
The security agreement may provide for a broad blanket security
interest that reaches property acquired by the debtor after the security
agreement is executed and that secures advances made by the secured
party after the making of the agreement, regardless of whether the se-
cured party was bound to make those advances.8a However, the secured.
party cannot obtain an automatic interest in property acquired by a con-
sumer more than ten days after receiving value from the secured party.84
Because of these provisions, it is not necessary to have separate security
agreements for each advance the creditor makes. One agreement can
cover all future advances, whether obligatory or optional, but it will be
advisable to have appropriate evidencc of each advance the agreement
secures. Similarly, when the collateral constantly changes, there is no
need to execute a new security agreement with each change in the col-
lateral. A single master agreement can cover all property, whenever ac-
quired, as long as the agreement properly describes the collateral.
The Codc'n libcral provisions rclnting to thc requircmcnts for de-
scribing the collateral may cause uncertainties when othcr parties wish to
determine what property of the debtor is subject to the security interest
of the secured party. There is a procedure in the Code that permits
the debtor to send a statement, indicating the amount he believes to be the
unpaid indebtedness and the collateral covered, to the secured party. The
secured party then just approves or corrects the statement ~ u b r n i t t e d . ~ ~
(Third parties will need to be careful in relying upon such statements.
Doubtless, common-law estoppel principles could arise, but the Code it-
U.C.C. 5 9-203 ( 1 ).
a U.C.C. 1 9-1 10.
" U.C.C. 5 9-1 10 and Comment.
" U.C.C. 5 9-204.
.c
8' U.C.C. 5 9-204 (2).
8' U.C.C. 1 9-208.
PERFECTION OF SECURITY INTERESTS 5 28-30
self does not make the secured party's approval of the statement binding
as to third parties.)?"
A security agreement automatically gives the secured party a se-
curity interest in any proceeds that derive from the sale or transfer of the
~ o l l a t e r a l .Proceeds
~ are discussed in $ 30-25.
5 28-25 PURCHASE MONEY SECURITY INTEREST
T h e Uniform Commercial Code contains special rules that favor
purchase-money sccurity interests. A purchase-money sccurity interest
can arise in two ways. The first is when the seller of the collateral takes
a security interest in the goods or other property sold to secure its p r i ~ e . ~ s
T h e second is when a third-party financier makes advances or otherwise
provides value so that the debtor may acquire rights in ~ o l l a t e r a l .An
~~
example of this situation is a bank loan enabling the debtor to purchase
a car from an automobile dealer. If the bank has the debtor enter into a
security agreement, which gives the bank a security interest in the car,
thc bank's intercst will bc a purchase-money security intercst because the
loan was uscd by the dcbtor to buy the car. It is important in cases of
this second type that the value given by the third party "in fact" be used
to enable the debtor to obtain rights in the collateral.40 One way of
accomplishing this is to disburse the funds of the loan directly to the
scllcr of fhc collatcral.
Undcr the Commercial Code, purchase-money security interests are
often favored over other types of security interests. See discussion in
5 30-10 on priorities and 3 28-30 on perfection of security interests in
consumcr goods.
5 28-30 PERFECTION O F SECURITY INTERESTS
In general, n security interest must be perfected in order to be
superior to the claims in the collateral of third-party purchasers and credi-
tors. Although a security agreement is enforceable unless the Code pro-
vidcs to the ~ o n t r a r y , ~the
' rights of many third-party creditors and pur-
chasers are superior to the right of a secured party who holds an unper-
30 U.C.C. 5 9-208(2). See U.C.C. 5 1-103.
37 U.C.C. 5 9-203(3).
U.C.C. 5 9-I07(a).
an U.C.C. § 9-107(b).
Id.
U.C.C. 8 9-201.
479
 SECURED TRANSACTIONS
..I fected security interest. See Chapter 30. A perfected security ,interest is
one that has attached, as described in 8 28-20, and for which the secured
party has completed the additional steps required for perfection under
the Code.
There are three ways in which a security interest may be perfected
under the Commercial Code. The first is by filing a financing statement
at the public office designated by state law. The second is by the secured
party's taking possession of the collateral. Thc third is when the trans-
action qualifies as one where perfection occurs a u t ~ m a t i c a l l y . ~
The
~ only four months after the change.
classification of the collntcral will determine which method of perfection
is applicable. Some types of collateral may be perfected by more than
one method. Goods, for example, may be perfected either by filing or
by possession and, in a proper case, perfection may arise automatically.
Security interests in other types of collateral may be perfected only by
one of these methods. For example, the only way to perfect a security
interest in an account is by filing. The proper methods for perfecting
security interest in the different types of collateral are discussed in
Chapter 29.
5 28-35 FILING
The Commercial Code requires secured parties to file a financing
statement to perfect security interests in certain types of collateral in
order to provide notice to creditors, buyers, or other third parties who
deal with the debtor.43 Possession of the collateral is permitted as an
alternative method of perfection for some types of collateral because the
drafters of the Code believed that creditors and other third parties would
obtain notice of the possible interest of the secured party from the fact of
the secured party's possession of the collateral.
The place for filing a financing statement depends upon the type of
collateral involved. There are three alternative provisions in the Code,
so state law is not uniform. Depending upon the alternative enforced in
the state, filing may have to be made at a central office of the state, such
;IS thc Sccrctnry of Stntc, n t n county omcc, or nt thc ofice whcrc real
cstatc records arc kept." The last applies when the collatcral is fixtures,
timbcr, minerals, or the like. In some states, filing in two officcs is neces-
~ a r y . ' ~The proper place of filing, in some cases, is determined by the
debtor's residence, the place of business, or the location of the collateral.
42 U.C.C. 5 9-303.
4 3 See U.C.C. 5 9-402, Comment 2.
4 4 U.C.C. 5 9-401.
46 Id.
480
PERFECTION O F SECURITY INTERESTS ,28-35
Because of the variations, the law is not uniform from state to state as to
where filings should be made, and local counsel should be consulted.
When a filing is made in the proper place(s), a subsequent change
in residence of the debtor, location of the collateral, or debtor's place of
business will not destroy the perfection of the security interest.4e This
rule applies only to different filing ofices within the same state. It does
not cover circumstances where more than one state may be involved in
the tran~action.~'An alternative provision makes the filing effective for
When a securcd party makes a filing in good faith but files in the
wrong office, the filing will be effective as to any collateral for which it
is proper.48 It is also effective to create a perfected security interest in
the collateral against persons who have actual knowledge of the contents
of the financing statement.4e
A financing statement is considered filed when it has been accepted
for filing by the appropriate filing oficer and when the filing fee has been
tendered." The filing remains effective for a period of five years and
then lapses." (Some states, however, have adopted different periods.)
When the filing lapses, the security interest will become unperfected as
of that date, unless some other method of perfection applies.52 The
period of perfection may be extended by filing a continuation statement
within six months before the filing lapses.53 The continuation statement
must identify the original statement by file number, must state that it is
still effective, and must be signed by the secured party. It is not neces-
sary to have the signature of the debtor on a continuation ~ t a t e m e n t . ~ '
The continuation statement extends the effectiveness of the original state-
ment for five additional years, and then lapses, unless another continua-
tion statement is filed.65
The filing officer is required to index the financing statements ac-
cording to the name of the debtor and to make the document or a micro-
film available for public inspection." An optional provision of the Code
requires the filing officer to provide copies of statements on
'"U.C.C. 5 9-401 ( 3 ) .
4' U.C.C. 5 9-401, Comment 6; 5 9-103.
'8 U.C.C. 8 9-401 ( 2 ) .
4e Id.
U.C.C. 5 9-403 ( 1 ) .
" U.C.C. 5 9-403(2).
62 Id.
U.C.C. 5 94O3(3).
64 Id.
6 6 Id.
U.C.C. 5 9-403 ( 4 ) .
* 5TU.C.C.§9-407.
5 28-40 SECURED TRANSACTIONS
5 28-40 FINANCING STATEMENTS
The Code adopts a philosophy of "notice filing." Under this ap-
proach, it is not necessary to make public all the terms of the security
agreement between the secured party and the debtor. It is sufficient no-
tice to third parties to file an abbreviated statement with less information.
In Code terminology, this statement is called a "financing statement." 'a
T h e financing statement ordinarily will be a different document than the
written security agreement but a security agreement may be filed as a
financing statement when it contains all of the information the Code re-
quires for financing s t a t e m e n t ~ . ~ ~
A financing statement must give the names of the debtor and the
secured party, must be signed by the debtor, must give an address of the
secured party from which information about the security interest may be
obtained, and must contain "a statement indicating the types, o r describ-
ing the items, of collateral." O0 By requiring only a description of the
"types" of the collateral, the Code expressly permits the parties to use
general classifications and to avoid the detailed, item-by-item description
of the collateral. The financing statement must give additional inlorma-
tion for special types of collateral. When the collateral is crops, a de-
scription of the land must be given to provide notice to parties who deal
with the real estate involved.01 When the collateral is timber, minerals,
oil and gas, or, in some circumstances, fixtures, the financing statement
must also describe the real estate.82 In some states, the financing state-
ment must contain a legal description of the real estate,03 must recite
that the financing statement will be filed in the real estate records relat-
ing to the property, and, when the debtor does not have an interest of
record in the real estate, must show the name of the record owner.84 A
real estate mortgage covering items of personal property or fixtures can
be effective as a financing statement if it satisfies the Code requirements
for a financing ~ t a t e m e n t . ~ ~
The proper name of the debtor to use is the individual, partnership
or corporate name. It is not necessary to use trade names or the names
of individual partners.Q8 When the debtor changes his name o r a debtor
- .
6aU.C.C. 0 9-402.
U.C.C. 19 4 0 2 ( 1 ) .
60 Id.
81 Id.
U.C.C. 8 9-402(5).
88 Id.
Q4 Id.
d5 U.C.C. 9-402(6).
OQ U.C.C. 1 9-402(7). This is a clarification made by the 1972 Amend-
ments.
482
PERFECTION O F SECURITY INTERESTS 1-40
organization changes its identity, the financing statement filed under the
old name remains efiective as to any collateral acquired by the debtor
before the change and also for new collateral acquired within four
months thereafter." A new financing statement may be filed by the se-
cured party before the four month period expires to assure perfection as
to subsequently acquired c ~ l l a t e r a l . ~ ~
A Xerox, carbon, or other reproduction of a financing statement (or
a qualifying security agreement) may be used as a financing statement
when the security agreement allows copies to be filed or when the orig-
inal document already has been filed in the state.B0 This should make it
easier for secured parties to file financing statements in multiple offices
within the same state when there is a question as to which is the proper
office.
In some situations the secured party may file a financing statement
without the signature of the debtor. This is permitted when the follow-
ing circumstances occur:
. (1) The collateral is brought into the state from another state or
location of the debtor within the state has changed. (The
financing statement must explain these circumstances.)
(2) The filing is made to perfect a security interest in proceeds
when the original collateral was subject to a perfected security
interest. (The financing statement must describe the original
collateral in this case.)
( 3 ) A previous filing on collateral has lapsed.
( 4 ) A new filing is necessary because of a change of name or a
change in identity of the debtor.1°
The Code permits the parties to file a financing statement in ad-
vance, before entering into a security agreement and before taking any
of the other steps required for attachment of the security interest." This
allows the secured party to make an early filing of a financing statement
to establish a priority date for subsequent transactions. One filing is
enough, as long as the collateral is adequately described; it is therefore
unnecessary to refile on each of a series of transactions. The financing
statement can encompass transactions "not in existence and not contem-
plated at the time the notice was filed, if the description of collateral in
the financing statement is broad enough to encompass them." l2 F o r the
U.C.C. 1 9-402(7).
Qa Id.
QB U.C.C. § 9-402( 1 1.
70 U.C.C. § 94O2(2).
U.C.C. 19-402( 1 1 .
* l2U.C.C. 3 9-402. Comment 2.
483
 SECURED TRANSACTIONS
same reasons, the financing statement will bc effective to cover after ac-
quired property and any future advances under the security agreement.
The financing statement does not have to state that future advances or
after acquired property are covered;13 nor does it have to say that pro-
ceeds are covered.74
The Code drafters intended that the financing statement bc eflec-
tive "even though it contains niinor crrors which are not seriously mis-
leading." '6 There is a growing body of law on what constitutes a minor
error under this p r o v i s i ~ n . ~ ~
5 28-45 TERMINATION STATEMENTS AND PARTIAL
RELEASES OF COLLATERAL
When the debtor has no outstanding obligation to the secured party
and the transaction is over, the debtor is entitled to make a written de-
mand for a termination statemcnt from the secured party stating that he
no longer claims an interest in the property of the debtor.77 On proper
demand, the secured party must send the debtor a termination statemcnt
disclaiming a security interest in the collateral covered by the financing'
statement concerned; the statement is identified by the file number of
the original financing statement. T h e debtor is entitled to a termination
statement for each office in which the original financing statement was
filed.7B
When the financing- statement covers consumer goods, the secured
party's responsibilities are greater. Within one month after discharge of
the obligation, the secured party must file a termination statement with
each office where the original financing statement was filed. When the
debtor makes a written demand for a termination statement, it must be
filed sooner-within ten days of the demand.l9 Failure to satisfy these
responsibilities will subject the secured party to liability for $100, plus
any loss caused by violation of these rules.m
Financing statements can be amended. Both thc dcbtor and the
secured party must sign a writing containing the amendment." An
78 Id.
la U.C.C.5 9402(8).
See Clark, The Low of Secured Transactions 1 2.10 (1980);White
k Summcn. [Inifor,n Cornrnerciol Code (1 23-16 (2d cd. 1980).
78 Id. - " U.C.C.$9-405(3).
Id.
Id.
81 U.C.C.5 9-402(4).
PERFECTION O F SECURITY INTERESTS
amcndmcnt, unlikc a continuation statement, docs not extend the period
o f elTectivencss of the financing s t a t e n ~ c n t .When
~ ~ the amendment adds
new collateral to the financing statement, i t is effective as to the added
collateral only from the date of the filing of the amendment.88
It is possible to release the collateral from the financing statement
on file. The statcment of release need be signed only by the secured
party but i t must contain ;I description of tlic collateral bcing rclcascd,
the name and address of the debtor, the name and address of the se-
cured party, and the file number of the original financing ~ t a t e r n e n t . ~ ~
5 28-50 ASSIGNMENT OF SECURITY INTERESTS
Security interests may be assigned. When the security interest is a
pcrfectcd security interest, it is not necessary to take any further steps
to continuc the perfection against creditors of and transferees from the
original d ~ b t o r . ~ Vninny
n situations, howcvcr, thc assignee will want to
take further steps to protect his position against parties who might deal
with thc assignor without knowing of the assignment of the security in-
terest. When the security interest has been perfected by filing, the Code
permits the parties to assign all or part of the secured party's rights un-
der the financing statement by filing a notice of the assignment in the
place wherc thc original financing statement was filed.86 Upon the filing
of the assignment, the assignee becomes the secured party of record.R7
After this filing, only the assignee will be able to file a termination state-
ment, a rclcase, or an amendment to thc financing statement.
When there is an assignment of an account, contract, chattel paper,
or general intangible, the assignee may want to give notice to the party
who was obligated to make payment under the account or other obliga-
tion. If there is no notice that payment must be made to the assignee,
a dcbtor may continuc to pay thc a s s i g n ~ r . ~ W o r e o v cunless
r, thc agrec-
mcnt bctwecn thc account dcbtor and the assignor provides to the con-
trary, the assignee will be subjcct to any defense or claim, accrued bcfore
notice of tllc assignment, by thc account debtor against the assignor.8R
Such dcfcnses may bc waived by ngrecment, The assignment
82 Id.
83 Id.
13' U.C.C.§ 9-406.
""U.C.C.5 9-302(2).
"W.C.C.§ 9-405.
U.C.C.8 9-31 8 ( 3 ) .
.L U.C.C.§ 9-318(1)(b).
'O U.C.C. 5 9-3 18( 1 ) .
3 28-50 SECURED TRANSACrrIONS

cannot prevent the account debtor and the assignor from modifying their
contract in good faith insofar as it involves any right to payment that has
not yet been fully earned by p e r f ~ r m a n c e . The
~ ~ modification, if in
good faith and it in accordance with reasonable commercial standards, Chapter 29
will be effective notwithstanding notice of the assignment but in those
circumstances, the good faith requirement will probably sharply curtail
the parties' freedom to make m0difications.8~ TYPES OF SECURED
Assignments of some obligations are classified under Article 9 as
secured transactions. See $0 28-10, 29-50. An assignment of accounts, TRANSACTIONS
for example, is a secured transaction.Oa When the seller of goods sells
an item to a purchaser, retaining a security interest in the goods sold,
Section Page
the paper taken by the seller that contains the security agreement and the
obligation of the buyer to pay constitutes chattel paper. The assignment 29-5 The Pledge . . . . . . . . . . . . . . . . . . . . . . . 487
of this chattel paper to the assignee also is a secured transaction under 29-1 0 Field Warchouse Systems . . . . . . . . . . . . 490
the Commercial Code?' In these transactions, the assignee needs to take 29-15 Dutics of a Pledgee . . . . . . . . . . . . . . . . . 49 1
the appropriate steps to perfect a security interest in the accounts and 29-20 Perfection of Security Interests by Filing 492
chattel paper to protect himself against the claims of creditors and other 29-25 Security Interests in Goods and Chattels 493
transferors from the assignor. When the collateral is chattel paper, the 29-30 Consumer Goods . . . . . . . . . . . . . . . . . .. 494
safest procedure, of course, is for the secured party to take possession of 29-3 5 .
Equipment . . . . . . . . . . . . . . .. ....... 495
the paper.96 29-40 Farm Products . . . . . . . . . . . . . . . . . . . . 496
- -
29-45 Invcntory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 497
29-50 Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 498
9' U.C.C. 0 9-3 l 8 ( 2 ) .
Id.
29-55 .
General Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . .. 499
92 29-60 Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 499
98 U.C.C. 9 9-102. See 1 28-10.
~4 U.C.C. § 9-102(l)(b).
29-65 . .
Chattel Paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500
0 6 U.C.C. 9 9-308. See $ 5 29-65, 30-20. 29-70 Documents ofTitle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 501
29-75 Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 1
29-80 . .
Fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 505
29-85 Motor Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 507
29-90 Bank Accounts . ... ..
. .... .. . . ... . . .. . . . . . . . . . . 507
29-95 .
Insurance Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 509

5 29-5 THE PLEDGE

T h e plcdge is a security arrangement with ancient roots. Under it,
the debtor delivers property to the secured party to be held as collateral
security for the obligation owed. The property pledged can be of many
different types. Common examples are stocks and bonds, chattel paper,
and goods. Whatever property is used as the collateral, the common
thread to this transaction is that the sccurcd pnrty takes possession of it
and holds it until the obligation is discharged. The rights of the secured
party and the debtor in this arrangement are determined by their agree-
* ment and the Code.
487
5 29-5 SECURED T R A N S A m I O N S
Under the Commercial Code, a plcdgc is one pcm~issiblcmethod
of creating a security interest.' Morcover, under the Codc, when thc
secured party has possession of the collateral, the formal rules for cre-
ating an enforceable security interest are relaxed. It is not necessary to
have a written security agreement signed by the debt0r.l T o have a valid
pledge, however, the secured party must have obtained possession of the
collatcral by written agreenlenf with the debtor-involuntary seimrc by
the secured party is not recognized as a pledge.'
T h e Commercial Code does not define "possession" of the collat-
eral.4 Under cases prior to the Code, problems arose when the secured
party was lax in exercising dominion over the collateral, as in cases
where the debtor was allowed to continue to use and dispose of the col-
lateral. The Code does not changc any of the prior common-law rules,
which limited the extent to which the debtor could havc access to and
control of the collateral without jeopardizing the secured party's pos-
session. (Of course, when the collateral is property in which a security
intercst may be perfcctcd by filing, thc sccured party may pcrfcct a se-
curity interest in that fashion and the debtor's control over the collatcral
then will have no affect on the validity o r perfection of the security
interest.)
Possession of the collateral is another method of perfecting a secu-
rity intercst in that collatcral. When the security interest is perfected in
this manner, it is not necessary to file a financing statcmcnt.Vt is im-
portant to note, however, that there are some types of collatcral in which
it is not possible to perfect a security interest by possession. T h e kind of
collateral in which security interests may be perfected by possession in-
clude the following: goods, checks, notes, instruments, (but not ccrtih-
cated securities), money, negotiable bills of lading, negotiable warehouse
receipts, and chattcl paper." sccurity intcrcst in a lettcr of credit can
only bc obtained by taking possession of the writing.' Sccurity interests
in securities (stocks and bonds, etc.) are subject to spccial rules dis-
cussed in 5 29-75.
The secured party can take possession of the collateral through an
agent.' One form of agency is a bailment. When the collateral is held by
U.C.C. 15 1-20] (7),9-102(2). All U.C.C. references in this Chapter
are to the Uniform Commercial Code 1978 Official Text (West 1 9 7 8 ) .
U.C.C. 1 9-203(1)(a).
3 Id. The 1972 amendments clarified the Code in this respect.
4 U.C.C. 5 9-205. Comment 6.
U.C.C. § 9-302( 1 ) ( a ) .
U.C.C. 5 9-305.
'
U.C.C. 65 5-1 16, 9-305.
U.C.C. § 9-305, Comment 2.
TYPES O F SECURED TRANSACTIONS 1 5 29-5
a bnilcc, notificntion to the bnilcc of the secured party's interest in the
collatcral is suficient to perfect a sccurity intercst in that collateral, as
long as the property held by the bailee is not subject to a negotiable doc-
ument of title (such as a negotiable bill o f lading or warehouse receipt).*
When the property is covered by a negotiable document of title, the only
way to perfect a security interest in the goods is to perfect a security in-
terest in the document of title.1° Although, in some cases, a security
intcrcst in a negotinblc docunlcnt of titlc may be pcrfcctcd by filing, it is
safer to take possession of the documents (taking possession is discussed
at $ 3 29-70'30-20).
Placing the collateral in the possession of an escrow agent, who
serves as agent for both the secured party and the debtor, should be
eflcctive to perfect a security intcrest in the collateral. Thc arrangement
gives noticc of the secured party's interest. At least one court, however,
held that such an arrangement is not cffective.ll
There are certain kinds of collateral in which a security interest
cannot bc pcrfectcd by possession. When thc collateral consists of ac-
counts or gcncral intangibles, the only way a secured party may perfect
a security interest is by filing a financing staternent.12 It would make no
difference whether the agreement was called a pledge or whether one
party took possession of a writing that purported to be something other
than an intangible; if the collateral falls within the Commercial Code
classification, as an account o r gcncral intangible, the only way in which
a sccurity intercst may be perfected is by filing. A discussion of perfec-
tion by filing is at $ $ 29-20, 29-55.
Once a security interest is perfected by possession, that perfection
continues only for as long as the secured party retains possession of the
collateral. There are certain narrow exceptions to this rule, which per-
mit a temporary period of perfection without either filing or p o s s e s s i ~ n , ~ ~
but these exceptions opcratc only in spccial circumstances. T h e security
intcrest bccomes perfected at the tinic that possession is taken. It does
not relate back to an earlier time." When the collateral is such that a
sccurity interest may be perfected by filing as well as by possession, there
is nothing to prevent the secured party from perfecting a sccurity intcrest
' U.C.C. § 9-305.
lo U.C.C. § § 9-304, 9-305.
l1 Slein v. Rand Constr. Co., 400 F. Supp. 944 (S.D.N.Y. 1975). See
also I I I re Dolly Madison, 351 F. Supp. 1038 (E.D. Pa. 1972). otf'd 480
F.2d 917 (3rd Cir. 1973); Note, 5 Rut.-Cam. L. J . 336 (1974). But cf.
In re Estate of Hinds, 10 Cal. App. 3d 1021, 89 Cal. Rptr. 341 (1970); I Gil-
more, Seclrrity Interests in Personal Property § 7.2 (1965).
l 2 U.C.C. 19 9-302( 1 ), 9-305 and Comment 1.
3r
U.C.C. § 9-304(5).
l 4 U.C.C. 19-305 and Comment 3.
3 29-10 SECURED TRANSACIIONS
in both ways. This may have some advantage for the secured party in
case possession is ever relinquished.
0 29-10 FIELD WAREHOUSE SYSTEMS
One variant of the pledge is the field warehouse arrangement. This
form of security arose prior to the Commercial Code. It was often used
for obtaining a security interest on goods in thc process of manufacture.
Under this scheme, unfinished goods in the process of manufacture, as
well as finished goods not yet sold, were put in the possession o f a sep-
arate bailcc or trustcc. Normally, thc placc whcrc thc goods wcrc hcld
was thc factory where thcy wcrc being proccsscd, or thc company's usual
warehouse for storing the goods before sale. The theory of the field
warchouse arrangement was that the trustee took posscssion of the col-
lateral on behalf of the secured party-thc debtor had access to the
goods only under the control of the secured party according to the spc-
cific terms of thc sccurity agrecmcnt. In order for the ficld warehousc
to be a valid security arrangement, the transaction had to create a valid
bailment or entrustmcnt. This required that posscssion of the collatcral
be in the trustee or bailee, rather than the debtor. The existcnce of pos-
session often could be attacked whcn thc sccurcd party was lax in en-
forcing control over the goods and allowed the debtor free access to the
collateral and rights to use and dispose of it.I5
Under the Commercial Code, the field warehouse still may be an
appropriate method of obtaining a sccurity interest in collatcral. As dis-
cussed in 1 29-5, thc pledge in which the secured party takes posscssion
of the collateral is a method rccognizcd under the Code for obtaining
and perfecting a security interest. Possession may be by a bailce o r agcnt
as well as by the secured party personally.18 The Code docs not define
what is "possession," either by the secured party or by an agcnt. The
comments to the Code indicate that the prior law on what constitutes
possession will continue to be relevant.17 In most cases, it will be to the
advantage of the secured party to perfect a security interest by filing a
financing statement, rather than relying upon the uncertainties of estab-
lishing a possession which satisfies the common law rules. When the
security interest is perfected by filing, it will make no diffcrcncc whether
the debtor has access to o r use of the c o l l a ~ e r a l . Of
~ ~ course, allowing
the debtor access to the collateral may create a risk that the debtor might
I V e e U.C.C. 5 9-205, Comment 6.
lo U.C.C. 5 9-305 and Comment 2.
l 7 U.C.C. 5 9-205, Comment 6.
l BU.C.C. 5 9-205.
TYPES O F SECURED TRANSACTIONS 6 29-15
transfer the collateral to a good-faith purchaser, who would obtain rights
in thc collateral superior to thosc of thc sccured party.
§ 29-15 DUTIES OF A PLEDGEE
When collateral is in the possession of a secured party, the secured
party has a duty to use reasonable care in its custody.1B When there is a
failure of reasonable care, the secured party will be liable to the debtor
for any loss caused thereby.20 Failure to exercise reasonable care, how-
ever, does not result in a loss of the security interest in the collateral.21
Whcn thc collatcral is an instrument or chattel papcr, rcasonablc
carc includes taking stcps necessary to prcscrvc rights against prior par-
ties.22 A secured party may have to collect periodic interest, take steps
to collect instruments, preserve rights against parties secondarily liable
o n thc instrument, and take other steps to maintain the value of the
~ollateral.~"
T h c partics can cnter into an agreement as to the terms under which
the secured party will hold the collatcral. In the absence of an agrec-
ment, the sccured party is entitled to recover reasonable expenses in-
curred in caring for it.2' The expenses incurred by the secured party are
sccurcd by the If thc collatcral is accidentally lost o r dam-
aged without fault of the secured party, the risk of loss is on the debtor
to the extent it is not covered by insurance. This means the debtor has
the responsibility for insuring the c ~ l l a t e r a l . Whcn
~~ the collateral pro-
ducts furthcr profits or incrcasc in valuc, this additional value may be
heid by thc sccured party as additional security,27 but, if the profits are
moncy, the money must either be applicd to rcduce the obligation owed,
or be remittcd to the debtor.28
The sccured party has a duty to keep the collateral in an identifiable
form, unlcss it is of a fungible naturcam He is permitted to repledge the
collateral, but this repledge may impair the debtor's right to redeem the
"U.C.C. 5 9-207(1).
2' U.C.C. 5 9-207(3).
2' Id.
" U.C.C. 8 9-207 ( 1 ) .
28See generally Clark, The Law of Secured Transactions Under The
Uniform Conmercial Code (i 7.14 ( 1980).
24 U.C.C. 5 9-207(2) ( a ) .
" Id.
2' U.C.C. !j 9-207(2) ( b ) .
'' U.C.C. 5 9-207(2) (c).
28 Id.
6
@
' U.C.C. 5 9-207 ( 2 ) (d) .

fj 29-20 SECURED TRANSACTIONS
collateral by fulfilling the obligations owed by the debtor to the secured
party.80
5 29-20 PERFECTION OF SECURITY INTERESTS
BY FILING
As discussed in Chapter 28, filing a financing statement is one
method of perfecting a security interest in certain kinds of collateral.
i
Security interests in collateral classified as accounts o r general intangibles
can be perfected only by filing.a' When the collateral is goods, chattel
paper, or negotiable documents, a secured party may perlcct a security
interest by filing a financing statement32 o r by taking possession of the
c ~ l l a t e r a l . ~I n~ some cases, taking possession may be the preferable
method in order to reduce the risk that third-party transferees or other
claimants may obtain superior rights to those of the secured party.$'
When the collateral is money or instruments (notes, drafts, checks, etc.),
1 which no financing statement is filed, to be made without the
it is not possible to perfect a security interest by fling. The only method
of perfecting a security interest in this collateral is by taking possession
of it, because it is s o n e g ~ t i a b l e . ~ ~
Filing also may be important to assure the secured party of a per-
fected security interest in proceeds arising from the c ~ l l a t c r a l . ~ ~
There are certain transactions where the Commercial Code defcrs
to other filing o r registration systems and makes these alternative systems
the equivalent of filing a financing statenlent undcr the cod^.^' In some
stares, for example, motor vehicles are covered by a certificate of title.
T o obtain a security interest in a vehicle covered by such a certificate of
title, the state law often requires that the secured party note the security
intcrcst on the ccrtificatc. When this is rcquircd, compliance with the
ccrtificatc of title regulations is, undcr thc Code, the equivalent of filing
a financing statcmcnt." Similar results obtain for collateral that would
be covered by registration systems established under federal law or trea-
ties of the United state^.^^
There are a few limited situations where a secured party's security
80 U.C.C. 4 9-207(2)(e).
8' U.C.C. 5 4 9-302, 9-305.
32 U.C.C. 4 9-302.
aa See U.C.C. 1 9-305. See 1 28-5.
84 See Chapter 30.
85 U.C.C. 5 9-304(l).
38 U.C.C. 4 9-306. See § 30-25.
8' U.C.C. 8 9-302(4)
$8 U.C.C. 4 9-302(3) ( b ) .
89 U.C.C. § 9-302(3) ( a ) .
492
TYPES O F SECURED TRANSACTlO? 5 29-25
interest will be automatically perfected, without either filing a financing
statement or taking possession of the collateral. These situations occur
when, as foUows:
( 1 ) A security intcrcst is temporarily pcrfccted in certain transac-
tions involving instruments, documents, and proceeds.40
(2) A sccurity intcrcst involves the assignrncnt of a trust or a de-
ccdcnt's c s t a t ~ . ~(' I n jurisdiction whcrc trusts are uscd as
c o m n ~ r c i a l financing dcviccs, this rule may present prob-
lems.)'*
( 3 ) The sccurity intcrcst is a purchase-money security interest in
consumer goods (other than motor vchiclcs, which are subject
to rcgistration rcquircments and fixtures) .43
(4) An assignment of accounts is madc, which, by itself or with
other assignments to the same assignee, does not transfer "a
significant part of the outstanding accounts of the assignor." "
This has the effect of permitting isolated assignments, for
risk that they might be viewed as unperfected security inter-
ests which would be unenforceable against lien creditors and
good-faith purchasers.
(5) Thc security interest of a collecting bank is in instruments that
it is collecting and security interests that arise under other
Articles of the C ~ d e . ' ~
( 6 ) An assignrncnt that is madc for thc bcncfit of all crcditors of
thc t r a n s f ~ r o r . ~ ~
5 29-25 SECURITY INTERESTS IN GOODS
A N D CIIAITELS
Sccurity intcrcsts in goods niay bc pcrfcctcd cithcr by filing or by
taking possession of the collateral.47 In the case of a purchase-moncy
security interest in certain kinds of consumer goods, perfection will occur
"U.C.C. 4 9-302(1)(b).
" U.C.C. 5 9-302( 1 ) ( c ) .
4 2 In Arizona, there is a nonuniform variation that requires the filing of
a financing statement to perfect a security interest in a subdivision trust, which -
is a special financing device used in some real estate transactions.
43 U.C.C. 8 9-302( 1 ) ( d ) .
" U.C.C. 5 9-302( 1 ) ( c ) .
'W.C.C. 4 9-302( 1 ) ( f ) .
'O U.C.C. 4 9-302( 1 ) (g).
C '' U.C.C. 5 5 9-302, 9-305.
5 29-30 SECURED TRANSACTIONS
automatically, without either filing or pos~ession.'~(See § 28-25 for an
explanation of purchase-money security interesb.) Even when the col-
lateral is consumer goods, filing will be necessary when the collateral is
a motor vehicle subject to a state law registration requirement. (See
$ 2 9 4 5 . ) Filing is also necessary when the collateral is a fixture and
governed by the special rules on security interests in fixture^.'^
Under the Code, goods are defined as all things that a r c movable.60
But this definition does not include money, documents, instruments, nc-
counts, chattel paper, general intangibles, minerals, o r the like. Goods
also include standing timber that is to be cut, growing crops, and animals
both born and yet to be borna6'
Under the Code, goods are classified in the following four categories:
consumer goods, equipmcnt, farm products, and inventory." Thc rulcs
dealing with the perfection of security interests and competing priorities
in the collateral vary, depending upon the classification of the goods.
T h e classification depends upon the holder's particular use of the goods
and each classification is exclusive of the others. Thus, a n automobile
would be inventory in the hands of the car dealer, equipment in the hands
of a business that bought the car for use by its sales force, and consumer
goods in the hands of someone who purchased the car for personal
travel.68
8 29-30 CONSUMER GOODS
Consumer goods are those "used o r bought for use primarily for
personal, family o r household purposes." 64 In most cases, goods that
fall into this category will be easy to classify, but borderline situations
will arise. The drafters of the Code indicate that "in borderline cases-
a physician's car o r a farmer's jeep which might be either consumer
goods or equipment-the principal use to which the property is put
should be considered as determinative."
When a purchase-money security interest is obtained in consumer
goods, it is neither necessary to file a financing statement nor to take
48U.C.C. 8 9-302(1) ( d l .
49Id. See 5 30-30.
6oU.C.C. 8 9-105(1) (h).
61 Id.
62 U.C.C. 5 9-109.
68 See 8 5 29-30 through 29-45.
64U.C.C. 5 9-109(1).
68 U.C.C. 5 9-109, Comment 2.
TYPES O F SECURED TRANSACTION 5 29-35
possession of the goods in order to perfect a security interest in them.
Only when the consumer goods consist of a motor vehicle o r a fixture to
bc attached to the real estatc will filing possibly be r e q ~ i r e d . ~ Thus,
e
any pcrson dealing with propcrty owncd by a consumcr should bc cer-
tain to investigate whether that property is subject to an outstanding
security interest even though there is no financing statement on file.
Although the purchase money security interest in consumer goods will
bc pcrfcctcd without filing, thcrc nmy bc siti~ntionsinvolving lnrgc vnluc
consumer items whcrc the sccurcd party will want to file anyway. Filing
a financing statcmcnt gives the sccurcd party grcatcr proicction against
pcrsons who might bc regarded as good-faith purchnscrs of thc collateral
from the debtor. Wllcn a financing statemcnt is on filc, tllcse purchasers
will not take frcc of the sccurcd party's intcrcst in thc goods.R7
When the collateral is consumer goods, the secured party will be
limited in the extent to which he may claim after-acquired property as
additional security for the obligation. An aftcr-acquired property clause
will bc effective against a consurncr only when the consumer-debtor ac-
quires rights in this proper[y within ten days after the secured party has
cxtendcd value to the c o n ~ u n i c r . ~ ~
Consumer transactions are subjcct to many further consunler pro-
tection laws, both fedcral and state, which are discussed in Part V.
5 29-35 EQUIPMENT
Goods are classified as cquipmcnt if they are "used or bought for
use primarily in business." Business includes farming or one of the pro-
fessions. When the debtor is a nonprofit organization or a governmental
agency, the goods arc also classifcd as When goods do not
fall within the definitions of the other three classifications (inventory,
farm products, or consumer goods) they are to be treated as equipment.OO
Security intcrcsts in cquipmcnt may be perfcctcd either by the se-
cured party taking possession of the collateral or by filing a financing
s t a t ~ m e n t . ~Bcforc
' thc 1972 amendments to Article 9, it was unnec-
cssary to filc a financing statemcnt to pcrfcct n purchase-moncy sccurity
intcrcst in farm cquipmcnt with n purchase price not in excess of
'' U.C.C. 5 9-302 ( 1 ) ( d ) .
" U.C.C. 8 9-307(2).
U.C.C. § 9-204(2).
" U.C.C. 5 9-1 O9(2).
" Id.
U.C.C. $ § 9-302, 9-305.
 SECURED TRANSACTIONS TYPES O F SECURED TRANSACTIONS 5 29-45
$2,500." This provision was climinatcd by the 1972 amendments and a ness.1° Howcver, if the secured party authorizes the sale, expressly or
financing statement must be hlcd to perfect all sccurity interests in farm otherwise, the buyer will take free of the security interest."
~quipment.~~

5 29-45 INVENTORY
5 29-40 FARM PRODUCTS Goods are inventory when they are held by a person for sale or
lease or are to be furnished under a contract of service.72 Inventory also
Farm products include crops, livestock, supplies used in farming
includes raw materials, work in process, or materials used or consumed
operations, and products of crops o r livcstock in thcir unmanufactured
in a business.73 Inventory is not equipment.
state. The goods must be in possession of a debtor who is engaged in
A security interest in inventory may be perfected by the secured
some form of farming."' Farm products cannot be equipment or inven-
party's taking possession of the collatcral or fling a financing statement.
tory." In some cases, it may be difficult to distinguish farm products
Sincc in most cases the debtor will want to retain possession of the in-
from equipnlcnt. (Equipnicnt includcs goods uscd in the business of
vcntory in order to make it available for sale, the only practical method
farming; see fi 29-35.) In these cascs, the only safe coursc is to follow
available, unless some form of field warehousing is adopted (see 5 29-
the rules for both kinds of collateral.
lo), will be to perfect the security interest by filing. The Code's liberal
Since farm products are goods, the secured party may perfect a se-
rules, which allow the security agreement to cover after-acquired prop-
curity interest by either taking possession or filing.0a In somc cases, for
erty and to extend to future advances, enable the parties to execute a
the sccurcd party to have an enforceable security intercst, the security
single sccurity agrccmcnt that will crcatc a sccurity intcrcst in all the in-
agreement must contain a dcscription of thc land involved. This is true .
ventory of the debtor, whenever acquired. Similarly, it will be necessary
when the collateral consists of crops growing, or to be grown, or timbcr
to file only one financing statement in order to perfect the security in-
to be cut.07 Also, the financing statement may have to contain a descrip-
terest in the collateral, whenever a c q ~ i r e d . ~ '
tion of the real estate. This will be required whcn the collatcral consists
Pcrsons who engage in financing inventory must take into account
of crops growing, or to bc grown, or timbcr to be cut."m Dcpcnding upon
that allowing the debtor to scll the inventory to purchasers gives the
the jurisdiction, whcn the collatcral is growing crops, the financing statc-
debtor the power to cut off the security interest of the secured party in
ment may have to be filed with the county office where the land is lo-
the collateral. Any transfer of the collateral that the secured party au-
cated. Filings as to standing timber, minerals, and some fixtures must
thorizes in the security agreement "or otherwise" will result in the trans-
be in the office for recording real estate mortgages." Persons who pur-
feree or buyer taking the collatcral free from the security interest.76
chase farm products from a pcrson cngagcd in farming operations nlust
Thus, regardless of the terms in any written agreement between the se-
exercisc caution. Although purchasers in the ordinary coursc of busi-
cured party and the debtor, when the secured party permits the debtor
ness gcncrally take free of any security intercst crcatcd by thcir scllcr, to exercisc control ovcr the inventory (as normally will be the case) and
buycrs from farmcrs arc not so protcctcd. (Sce f 30-15 for a dcfinition to makc salcs to buyers, thc sccurcd party is likely to be regarded as hav-
of buycrs in ordinary course.) The sccured party's intcrcst in thc farm ing "authorized" the sale of the collateral and the buyers of the collateral
products is effective even against a buyer in the ordinary coursc of busi-
will take free of any interest claimed by the secured party.'" In any
event, the Code protects buyers in the ordinary course of business, re-
gardless of what the secured party authorize~.~'A person who buys in
" U.C.C. 8 9-302( 1 ) ( c ) .
Scc also U.C.C. 5 9-307(2). which in its forrncr vcrsinn trcntcd n
good-faith purchaser of farm equipment similarly to the good-faith p~~rchascr U.C.C. S 9-307( 1 ). See 1 30-15.
o f consurnCr goods (discussed in 1 29-30). " U.C.C. 5 9-306(2).
72 U.C.C. 5 9-109(4).
U.C.C § 9-109(3).
78 Id.
"5 II~.
0' U.C.C. $ 5 9-302. 9-305. 74 See 5 28-35.
~7 U.C.C. 5 9-203( 1 ) ( a ) .
75 U.C.C. 5 9-306(2).
68 U.C.C. 5 5 9-402( 1 ). 9-402( 5 ) .
78 Id.
on U.C.C. 5 9-401. i 77 U.C.C. 4 9-307( 1 ).
I
1
§ 29-50 SECURED TRANSACTIONS
I the ordinary course of business takes free of any security interest created
by the seller, even though the buyer knows that the goods were subject
to the security interest.78 A buyer in the ordinary course of business is
someone who buys in good faith from someone who is in the business of
selling goods of that kind.'$ (See Q 30-15 for a definition of buyer in
ordinary course of business.)
Because the financing of inventory oftcn involves the salc of thc col-
lateral, this form of financing usually involves security interests in the
proceeds of the collateral as well, including accounts, money, instru-
ments, chattel paper, and other property produced when the inventory is
sold. There are special rules, discussed in Q 30-25, that govern the se-
curity interests in proceeds.
5 29-50 ACCOUNTS
An account is any "right to payment for goods sold or leased or for
services rendered which is not evidenced by an instrument or chattel
paper, whether or not it has been earned by performance." The only
way in which a security interest in an account may be perfected is by
filing, except in those limited situations where perfection arises auto-
mati~ally.~'Prior to the 1972 amendments, the Code recognized a clas-
sification of obligalions called "contract rights." R2 A contract right was
any right to payment under a contract not yet earned by perf~rmance.'~
This classification was eliminated by the 1972 amendments and what
formerly were contract rights are now classified either as accounts or as
general intangibles. It should be noted that the definition of an account,
under the Code, is much broader than what might traditionally be
thought of as an "account receivable" by acco~ntants.~'
As discussed in Q 28-10, most transactions involving the assign-
ment of accounts will fall within the scope of the Commercial Code,
which is broadly drafted to apply to transfers of accounts that are abso-
lute in f ~ r m . ~ V n l e sthe
s transaction can clearly be classified as one
that falls under one of the exemptions from Article 9 coverage, it should
be treated as within the scope of the A r t i ~ l e . ~ ~
Id.
'0 U.C.C.5 1-201 (9).
no U.C.C.§ 9-106.
See U.C.C.5 9-302. See 5 29-20.
'' U.C.C.0 9-1 06.
88 Id.
84 See U.C.C.# 9-106.
mU.C.C.5 g-l02(l)(b).
See Q 28-10.
i*
TYPES OF SECURED TRANSACTION? ', 5 29-60
Accounts often are proceeds of in~entory.~'When this is the case,
security intcrests that have been created in the inventory can continue
into the accounts that arise from the sale of the inventory. This may
create situations where there are conflicting claims by two or more se-
cured parties. These problems arc discussed in Chapter 30.
li 29-55 GENERAL INTANGIBLES
A gcneral intangible is any personal propcrty that is not within the
classifications of goods, accounts, chattel paper, documents, instruments,
and money. Thus, a general intangible is what is left over after the other
classifications of the Code do not apply.88 It includes legal claims. Ex-
amples of general intangibles arc goodwill, litcrary rights, rights to per-
form, and othcr miscellaneous contract rights.R9 The only way in which
a security interest in a general intangible may be perfected is by filing.90
3 29-60 INSTRUMENTS
An instrument includes all those things that constitute negotiable
instruments--e.g., checks, drafts, notes, and certificates of deposit. It
also includes a certificated security (see $ 29-75). In addition, an in-
strument includes "any othcr writing which cvidcnces a right to the pny-
ment of money" but is not a security agreement or lease as long as the
writing "is of a type which is in ordinary course of business trans-
ferred by delivery with any necessary indorsement or assignment."
This definition of instrument is broader than the use given the term in
the Code articles on negotiable instruments. It obviously covers instru-
ments that are not negotiable.
A security interest in an instrument may be perfected by taking
possession of the instrument, by filing, and in certain limitcd circum-
stances, automatically for a temporary period of up to twenty-one days.02
Unless the secured party takes possession of the instrument, however, a
security interest that is perfected by filing or is under the temporary per-
fection rules may be cut off by the debtor's transfer of the interest to
good-faith purchasers or o t l w transfcrccs. Undcr lhc Codc, any pcrson
who purchases an instrument for new value and in the ordinary course
5
" U.C.C. 9-306.
U.C.C.5 9-106.
In.
"* U.C.C.$ 5 9-302,9-305.
U.C.C.5 9-lW(l)( i ) .
O2 U.C.C.$ 5 9-304,9-305.
499
5 29-65 SECURED TRANSACTIONS
of business will be free from the security interest if he acts with-
out knowledge that the instrument is subject to a security interest.g3
Since under the Code, a purchaser includes someone who obtains a se-
curity interest in the instrument, a second lender may obtain rights supe-
rior to those of the first secured party by taking possession of the instru-
ment.04 If the instrument is negotiable, it can be negotiated to a holder
in due course, who also would take free of any security intcrest claimed
by filing by a secured party.B6
5 29-65 CHATTEL PAPER
Chattel paper is a writing or group of writings that contain both a
debt and a security interest in goods or a lease of goods. For example,
when a consumer purchases a refrigerator from a sellcr on credit and
signs a promissory note along with a separate security agreement giving
the seller a security interest in the refrigerator, the note and security
agreement together constitute chattel paper. By itself, the note would
have bccn clnssificd as an "instrurncnt" (scc 8 29-60). Whcn the note
is combined with thc sccurity agrcemcnt, the Code treats i t ns "cliattcl
papcr." O8
As this cxanipk illustrates, chattcl papcr is likcly to bc nssignnblc
and transferable and may share many of tlic aspects of negotiability that
instruments have. Accordingly, many of the rules for chattcl paper arc
similar to those for instruments. A security interest in chattcl paper may
be perfected either by filing a financing statemcnt or by taking posscssion
of the paper?'
As in the case of instruments, the secured party will be in a safer
position by taking possession of the chattel paper. This is because the
purchaser of chattel papcr who gives ncw value for it and who takes
possession of it in the ordinary course of his business will takc free of
any security interest perfected only by filing in the chattel paper, as
long as the purchaser acts without knowledge that the paper is subject
to a security interest.08 If the purchaser has notice of the sccurity inter-
est or of assignment to the secured party, he will only be able to acquire
an intcrest, in the chattcl papcr, that is subject to the secured party's
intere~t.~~
U.C.C.5 9-308.
@' U.C.C.5 5 1-201(31),1-201 (33).9-308.
O6 U.C.C.5 9-309.
@' U.C.C.3 9-105(l)(b).
@' U.C.C.5 5 9-304,9-305.
U.C.C.5 9-308(a).
U.C.C.5 9-308 and Comment 3.
TYPES O F SECURED TRANSACTIONS 9-75
Whcn a secured party takes chattel paper as security, the secured
party may find it advisable to give notice to the person obligated on the
chattel papcr to make payment directly to the secured party. Until such
notice is given, the account debtor may continue to make payment to the
assignor of the paper.'O0
§ 29-70 DOCUMENTS OF TITLE
T h e Code uses the term "documcnt" to mean a document of title
that is a bill of lading, a warehouse receipt, or another instrument, given
by a bailee and representing goods in the bailee's possession that he
promises to deliver to the persons named in the document.101 A docu-
mcnt of title may be ncgotiable or nonnegotiable.
While the goods are in the possession of a bailee who has issued a
negotiable document covering the goods, the only way a security may be
perfected in the goods will be by perfecting a security interest in the
document.y02 Of course, to the extent that the goods werc subject to a
valid sccurity intcrcst, that security intcrest will continue. Once the goods
ore in tllc posscssion of tlic bnilcc nntl n ncgotioblc documcnt of titlc
issued, the docurncnt of title controls thc goods. A pcrfcctcd security
intcrcst in tlic doctrmcnt may bc obtnincd cithcr by filing or by taking
possession of the docunlcnt.Io3 Fnilurc to takc posscssion of the docu-
mcnt of title m y rcsult in a loss of thc sccurity intcrcst, howcvcr, bc-
cause when thc documcnt is duly ncgotiatcd to a transferee who pur-
chases it in good faith without notice of any defense or claim to it and
for value in the regular coursc of busincss or financing, the transferee
takes free of the security interest.'04
Whcn the goods are in the posscssion of a bailee who has not issued
a ncgotinble documcnt covering the goods, a security intcrest niay be
pcrfcctcd by notifying the bailec of thc sccurcd party's interest, by having
the bailee issue a docurncnt in the secured party's name, or by fling as to
the goods.lo6
5 29-75 SECURITIES
Stocks and bonds and similar instrumcnts are classified as sccuritics
by the Code. Prior to 1977, the Commercial Code, by applying its rules
loo U.C.C.5 9-318. See 5 28-45.
lol U.C.C.5 5 1-201 (15). 9-102(l)(a).
Io2 U.C.C.5 9-304(2).
'05 U.C.C.8 5 9-304,9-305.
lo' U.C.C.5 5 7-501 (4),9-309.
ri*
'On U.C.C.5 9-304(3).
50 1
8 29-75 SECURED TRANSACTIONS
on security interests,lod treated a security as an "instrument." As in the
case of instruments, except for brief periods of temporary perfection, the
only manner in which a security interest could be perfected was by tak-
ing possession of the security.107 The typical way for establishing a secu-
rity interest in securities was through a pledge.lo8
Under the pre-1977 Code, a secured party could obtain a secu-
rity interest in securities of the debtor, when there was a signed security
agreement, without taking possession of the securities, but the security
interest would be unperfected.lm In this case, absent competing claims
of third-party purchasers and other creditors, the secured party could
enforce the security interest against the debtor.l10 However, the claims
of a creditor who had only an unperfected security interest would be
subordinated to the claims of any other secured party who had perfected
a security interest by taking possession of the security or to the claims of
any bona fide purchascr of the security.lll
The system described above for perfecting security interests in
securities obviously assumes that the security will be represented by a
tangible certificate that can be transferred and held by thc secured party.
This is not always the case. Spurred by the technological revolution in
electronic data processing and by the need for speed and efficiency in
handling large volumes of paper transactions involving securities, there
has been a growing use of arrangements that give persons an interest in
a company or that describe an obligation of the company not evidenced
by a paper certificate, but only registered on the books of the enter-
prise.llz T o deal with this development, the Code's Article 8 o n invest-
ment securities was extensively amended in 1977. As a result, it now
distinguishes between "certificated securities," which are represented by
a tangible instrument, and "uncertificated securities," which are not r e p
10BU.C.C. 5 9-105(l) ( i ) .
'07 U.C.C. 5 5 9-304( 1 ), 9-305.
1°8 See 8 29-5.
looU.C.C. 5 5 9-203, 9-303.
*loU.C.C. 5 9-201.
I l l U.C.C. 3 5 9-301. 9-309. See also U.C.C. $ 9-308, which gives a
purchaser, in the ordinary course of business, righb superior to those claim-
ing an interest in the security by temporary perfection, either by taking pos-
session or by establishing an interest in proceeds of inventory.
112 An examplc is the recommendation, on September IS, 1975, of the
American Bar Association's section of corporation, banking, and business
law, to amend the Model Business Corporation Act to permit the issuance
of corporate stock in uncertificated form. The reporters for the amended
Article 8 noted that Federal Reserve Banks operate the most significant un-
certificated securities system in operation for handling transactions in United
S1nte.q bonds. Reporters Comment, Uniform Cotnmerciol Code, App. I
(West 1978).
TYPES OF SECURED TRANSACTIONS 5 29-75
resented by such an instrument, the transfer of which is simply registered
upon books maintained by or on behalf of the issuer.u8 As of the writing
of this book, many states have not adopted the olficial Article 8 revisions
(see Table 7, $ 9-30) but more state adoptions may be expected in the
near future,
Under the 1977 amendments to the Code, Article 8, not Article 9,
controls most aspects of security interests in securities.ll' Article 8 gov-
erns the enforceability, attachment, perfection, and tcrmination of secu-
rity interests in ~ecurities."~Article 9 governs in other respects, such as
in its rules on the responsibilities of a pledgee.l18
(1) Certificated Securities. Certificated securities are stocks, bonds,
and the like. The new Article 8 defines them as instruments that are
issued in "bearer or registered form"; that are of the type commonly
traded on securities exchanges or markets or recognized as a medium for
investment; that are one of a class or series; and that provide evidence
of a share, a participation, or another interest in an issuer's property
enterprise, or obligation.ll' Certificated securities are negotiable instru-
~ ~ the Commercial Code's Articlc 8 on investment securities
n ~ c n t s . lBut
governs the instruments rather than thc articles on negotiable instru-
ments.llQ
The definition of certificated security is sufficiently broad so that i t
may sweep under its coverage instruments that, on first impression, might
not be thought of as securities. The definition does not require that the
intcrest in qucstion actunlly be tradcd upon a sccurities cxclinngc or
other market. It is enough, as the conln~entsindicate, that the interests
are " 'of a type' commonly traded in those markets." lZ0 When the in-
terest is classified as a security, it is governed by Article 8, rather than
by Article 9, on questions, as described above, of enforceability and per-
fection of security interests. The rules in Articles 8 and 9 for perfecting
security interests in instruments and securities are comparable, as they
both require possession, but there are some differences .
As a general rule, a security interest in a certificated security is per-
l r 3 U.C.C. 5 5 8-lO2(l)(a), 8-102(l)(b). For a n nnnlysis of the ncw
Article 8,sec Coogan "Secr~rityInterests in Investment Securities Under Re-
vised Article 8 of the Uniform Commercial Code," 92 Hnrv. L. Rev. 1013
(1979).
f14 U.C.C. 6 9-203(1); see also U.C.C. 09 9-3O2(l) ( f ) , 9-304( 1 ).
9-304(4), 9-305. 9-309.
U.C.C. f 8-32 1.
11' U.C.C. § 8-32 1 (3).
"'U.C.C. 5 8-102(1).
U.C.C. 5 8-105.
"OU.C.C. 8 R-102(l)(~).
* Iz0 U.C.C. 6 8-102, Comment 2.
5 29-75 SECURED TRANSACTIONS
fccted in the same way as under the prior version of the Code. The se-
cured party must take possession, ar, when the security is in the hand of
a bailee, give notice to the bai1ee.l" It is possible for a security interest
to be temporarily perfected, as was the case under the former version of
the Code,'12 for a period of twenty-one days without possession by a
secured party. When the certificated security is transferred outright to
the secured party, n o written security agreement signed by the debtor is
needed to make the security interest enf0rceab1e.l~~A written security
agreement signed by the debtor and describing the collateral is required
when the security is in the possession of a bank or broker holding the
security in an account for the debtor (who is the banker's or broker's
customer) or when the security is h e l d b y some other third person.12'
The new Article 8 makes a significant change in requiring that the
secured party or the secured party's agent possess the certificated secu-
rity, not only to perfect a security interest (in cases where the temporary
perfection rules do not apply) but also for the security interest to attach
and to be enforceable.I26 Under the previous version of Article 8, al-
though the security interest would not be perfected until the secured
party took possession, the secured party would have in the sccurity an
unperfected security interest, which could bc enforced against the debtor
as long as a sufficicnt written security agreement existed and there were
no third parties with superior rights to the collateral.128
( 2 ) Uncerrificated secitriries, The major change wrought by the
1977 amendments to Article 8 is the treatment given "uncertificated sc-
curities." The scope and application of the new rules are complex, and
banks should seek the advice of counsel as to their precise requirements.
In general, the amendments take the position that there arc two ways
for perfecting a security interest in an uncertificated security. The first
method is by actually having the intcrcst transferrcd to the secured party
on thc books of tllc company that issued the Thcrc arc pro-
visions in the Code that govern the procedures for accomplishing this
registration and that specify the duties oE the issuer to register the trans-
lzl U.C.C. § § 8-321(1), 8-313(1)(a), 8-313(l)(c), 8-313(l)(e),
8-313(l) (h).
12* U.C.C. 55 8-321 ( 2 ) , 8-321(4). Compare U.C.C. 5 9-304.
123 U.C.C. § 8-32] (3) ( b ) .
Iz4 U.C.C. § § 8-313(h) (i), 8-313(8) (ii), and Comments 2, 3. Corn-
pare U.C.C. 5 8-3 13( 1 ) ( e ) , which does not require a written security agree-
ment when the security is held by a third person other than a bank or a
broker who acknowledges that he is holding for the secured party.
U.C.C. 5 8-32 1 ( 1) .
I" U.C.C. $ 8 9-20], 9-203.
U.C.C. $ 5 8-321(1), 8-313(1)(b).
TYPES OF SECURED TRANSACTIONS 8 29-80
fer.IzR The second method is by registration of pledge.Ils This involves
proccdurcs similar to those for thc outright transfer but preserves the
rights of the security's registered owner to vote and to exercise certain
other powers.130
Although the dcfinition of an unccrtificd securitylR1parallels that of
a certificated security, thcre are two key differences. First, the interest is
one that is not represented by an instrument; instead, it is registered on the
books of the issuer. Second, the interest must be one that is of a type
commonly dcalt in on securities exchangcs or markets. It is not enough
that it is recognized as a medium for invcstment, as in the case o f the cer-
tificated security.lX2The omission of the "media of investment" language
was intended to prevent the dcfinition from being too broad. If this lan-
guage had been included in the definition, interests such as bank accounts
niight have fallen within it. They cannot, however, undcr the language
used by the Code, because they are not of a type commonly traded.133
Prior to the 1977 amendments to Article 8, the rules applicable to
perfection of a security interest, in what is now defined as an uncertifi-
catcd sccurity, were not clear. The definition of security in Article 8
contcmplatcd a security that was evidenced by a c e r t i f i ~ a t e . ~It
~ ' is pos-
sible that such interests would have been viewed as general intangibles
undcr Article 9.15"ut a security intercst in a general intangible is per-
fectcd by filing a financing statement.1Ja This procedure has obvious de-
ficicncics, since it does not provide actual notice to the issuer of the
sccurity. A safer approach might be the outright transfcr of the interest
to the secured party on the books of the issuer. Even here, if the secured
party fails to file a financing statement, the transaction might be attacked
as one creating an unpcrfected security interest in general intangibles.
Obviously, great care should be employed in dealing with interests
that might qualify as "unccrtificatcd securities," whether under new
Articlc 8 or thc fornlcr version.
5 29-80 FIXTURES
Fixtures are goods that have become so related or connected to real
estate that, under the real estate law of the jurisdiction, persons who have
I2R U.C.C. $ 5 8-308(4), 8-308(7), 8-40], 8-408.
12' U.C.C. § § 8-32 1 ( 1 ) .
'"U.C.C. $ § 8-108, 8-207, 8-308, 8-401, 8-408.
U.C.C. 5 8-102(I) ( b ) .
13' U.C.C. 5 8-102( 1 ).
133 U.C.C. § 8-102, Comment 2.
I" U.C.C. § 8-102(l) ( a ) .
I a n U.C.C. 9 9-106.
r ~ . j3' U.C.C. Q 9-302( 1 ).
I 5 29-80 SECURED TRANSACTIONS
an interest in the real estate also acquire an interest in the
Since transactions involving fixturcs have some fcaturcs that arc closc to
real estate transactions, the Code has spccial rulcs for fixtures. Sccurity
interests in fixtures are created in the same way as security interests in
other personal property but to perfect a security interest in fixtures it is
somctimcs ncccssary to makc a "fixlurc filing." I n n A fixturc filing is a
filing in thc oflicc whcrc rcal cstatc tnortgagcs would bc filcd or re-
corded.1aP The financing statement must mcct spccial requirements, such
as a requirement that a description of the involved real estate be in-
~luded.l+~
The Code's rules governing fixtures were extensively revised by thc
1972 amendments. Prior to these amendmcnts, the only way that a
security interest in fixtures could be perfected was by a fixlure filing.
Under the new amendments, there are certain categories of fixtures where
a security interest may be perfected by ordinary Article 9 mcthods. When
the goods are "readily removable factory or office machines," the security
interest may be perfected by an ordinary filing.I4' Similarly, whcn ~ I I C
fixtures are "readily removable replacements of domestic appliances
which are consumer goods," the security interest may be perfected by
any method, including the automatic perfection for purchase-money se-
curity interests in consumer goods,142 allowed by the Code for perfecting
security interests in consumer goods. T o the extent that the secured
party is only concerned about conflicting interests in the fixtures arising
from liens obtained by judgment creditors o r othcr legal procccdings on
the real estate, perfection by the ordinary means of filing undcr the Code
will be ~ u f i c i e n t . ~ ~ ~
The rules governing priority between secured parties who claim an
interest in fixtures and other persons who claim an interest as owners of
the real estate, or creditors with an interest in the real estate, are com-
plex. They were extensively reviscd by the 1972 amendrncnts. Counscl
should be consulted bcforc engaging in any transaction involving fix-
1~rcs.l~~
lE7 U.C.C. 5 9-313(1)(a).
'8 U.C.C. $ 9-3 l3( 1 ) (b).
189 Id,
I4O U.C.C. § 94O2(5).
14' U.C.C. 5 9-3 13(4) (c).
Id.
142
'43 U.C.C. 9-3 1 3 (4) (d) .
"(The Code fixtures rules and a description of the changes made by
the 1972 amendments are described in dctail in Schrocder, "Security Interests
in Fixtures," 1975 A r k St. L.J. 319 (1975).
TYPES OF SECURED TRANSACTIONS s 29-90
5 29-85 MOTOR VEIIICLES
Motor vehiclcs rcquirc registration in most statcs and are the sub-
ject of special state legislation that provides for the issuance of a cer-
tificate of title showing the ownership interests in the vehicle. When this
is thc case, thc Codc rulcs on pcrfcction of sccurity interests arc modified
to nccommodatc the ccrtificatc-of-titlc r e q u i r ~ n i c n t s . ~ ~ ~ c c uinter-
rity
csts in the motor vchiclc will bc perfected only by notation of thc sccurity
intcrest, in compliance with the certificate-of-title law of the jurisdic-
t i ~ n , " on
~ the certificate of title. The compliance with the special cer-
tificate-of-titlc requircments is then regarded by the Code as "equivalent
to the filing of a financing statement" and will perfect the security interest
in the vehicle. The Code, however, continues to govern the transaction.
It applies to questions involving the validity and enforceability of the
security interest, to priorities between the secured party and other cred-
itors, and to rights of purchasers of the c01lateral.l~~Prior to the 1972
amendments, the Code was unclear as to the extcnt to which its provi-
sions should give way to the requirements of the motor vehicle laws.
Motor vehicles are not the only type of collateral subject to cer-
tificate-of-title statutes. There are statutes of this nature that apply to
mobile homes, boats, farm tractors, trailers, and similar items. The Code
provisions are drafted so that the rules discussed in this section apply to
any type of collateral that is covered by a certificate of title.148 Financing
this type of collatcral involves the interplay of two sets of laws and,
often, substantial questions arise relating to interstate conflicts. Counsel
should be consulted for guidelines on how to proceed.
§ 29-90 BANK ACCOUNTS
Although the Code excludes the transfer of interests in bank ac-
counts from the covcragc of Article 9 , this is a limited exclusion only.14D
It is possible for a security intcrest to cxist in a bank account when that
bank account consists of "proceeds" of c ~ l l a t c r a l .A~ ~
bank
~ account is
treated as cash proceeds.lE1 As long as funds in the account may bc
idcntificd as k i n g dcrivcd from the sale or exchange of collateral, a sc-
"'U.C.C. 5 9-302(3).
14' U.C.C. 8 9-302(4).
147 Id.
"8 U.C.C. 5 9-302(3) (b) .
1'' U.C.C. 4 9-104(1).
Id.
lE1 U.C.C. 5 9-306( 1 ).
ri

SECURED TRANSACTIONS
curity interest in the original collateral will continue and will follow the
proceeds into the bank account.16z The security interest will be a pcr-
fected security interest so long as the interest in the original collateral
was a perfected security interest.lG3
In order for the security interest to continue into the bank account,
the interest in the bank account must be "identifiable" as cash proceeds
of the c01lateral.l~~The Code does not define what is identifiable. Some
have argued that any commingling of proceeds with funds not constitut-
ing proceeds destroys the identifiability of the proceeds.'" An argument
can be made, and has been accepted by some courts, that tracing meth-
ods used in the law of trusts could apply to enable the secured party to
idcntify what portion of the bank account constituted proceeds.lm From
the standpoint of the sccurcd party who wants to protect the sccurity
interest in proceeds deposited in a bank account, the safe procedure
would be to require that the bank account contain only proceeds; there
would be, therefore, no question as to the identifiability of the funds in
the account as proceeds.
The security interest that can arise in bank accounts may conflict
with the depository bank's right of setoff. The Code states that its prol
visions on secured transactions do not apply to any right of setoff.lD7
The matter is not clear, however, because of the Code's provision stating
that a sccurity agreement generally will be effective against all other
creditors unless specifically provided to the contrary.16R This approach
has been accepted by some courts.1fin
When the debtor becomcs insolvent, the Code has special rules that
permit the secured party to claim an interest in bank accounts into which
proceeds from collateral have been dcposited.Io0 In this situation, the
bank's right of setoff is superior in those accounts where proceeds have
ln2 U.C.C. $ 5 9-306(2), 9-306(3).
Ina U.C.C. $ 9-306(3) (b).
la'U.C.C.$ 5 9-306(2), 9-306(3) ( b ) .
See 2 Gilmore. note 1 1 supra, $ 24.4, at 736 (1965).
lb5
Brown & Williamson Tobacco Corp. v. First Nat'l Dank. 504 F.2d
998 (7th Cir. 1974); Univcrsal C.I.T. Credit Corp. v. Farmcrs Bnnk of
Portagcvillc, 358 F. Supp. 317 (E.D. Mo. 1973). Scc Clnrk, note 23 slrpra,
a 10.3 (1980).
16' U.C.C. § 9-104 (1).
1' 3 U.C.C. 5 9-201.
See Citizens Nat'l Bank v. Mid-States Dev. Co., 380 N.E.2d 1243
(Ind. App. 1978); Annot., 3 A.L.R. 4th 998 (1981) (effect of U.C.C. Ar-
ticle 9 uvon conflict, as to funds in debtor's bank account, between secured
creditor and bank claiming right of setoff).
'00 U.C.C. $ 9-306(4).
I
I
TYPES OF SECURED TRANSACTIONS 5 29-95
been commingled with other funds.101 The validity of this provision
against the trustee in bankruptcy is disputed.
The Code rules discussed above, governing proceeds and security
interests in bank accounts, were the result of substantial revisions made
by the 1972 amendments. It was still possible, before the amendments,
for a security interest to be claimed in bank accounts. The revisions
made by the 1972 amendments clarify the rights of the secured party.
Q 29-95 INSURANCE POLICIES
Although thc Codc generally excludes from its coveragc of secured
transnctions any npplication to insurance politics, a sccurity intcrcst may
arise in an insurance policy to the extent that amounts payable under the
policy by reason of loss or damage to the collateral are treated as pro-
ceeds.la2 The amounts payable under the policy will constitute "pro-
cccds" only to the cxtcnt that the policy is payable to one of thc parties
to thc security a g r c ~ m e n t . ~ ~ ~
The following example may illustrate the operation of the Code's
rule. Assume the collateral is a motor vehicle. The vehicle is security
for a loan made by Secured Party A in the amount of $1,000. It also is
sccurity for Sccurcd Party B , who is junior in priority to A , for a dcbt of
$ 1.200. There is a policy of insurance on the vehicle for $1,000, payable
to Debtor who owns the vehicle. If the vehicle is damaged and, under
the policy, $1,000 bccomcs payable, the proceeds of the policy constitute
"proceeds of the collateral." Secured Party A will be able to claim the
entire $1,000 because his security interest has priority. On the other
hand, if Secured Party B had taken the precaution of having an insurance
policy on the vehicle that was specifically payable to B, then the pro-
cccds of that policy would not bc considcrcd as procccds of the collateral
so far ns the transaction bctween A and Debtor is concerned. The policy
is pnyablc to sonleone othcr than the parties to the sccurity agreement
between A and Debtor. Therefore, Secured Party B could claim all of
the amount payable under that policy.
lo' Id.
'" U.C.C. $ 0 9-104(g), 9-306( 1 )
10.9 Id.
 Chapter 30
PRIORITIES: RIGHTS OF
COMPETING CREDITORS,
PURCHASERS, AND
TRANSFEREES
Section Pnge
30-5 Unperfcctcd Security Interests . . . . . . . . . . . . . . . . . . . . 511
30-10 Conflicts With Other Perfected Security Interests . . . . . 513
30-15 Buyer of Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 15
30-20 Purchasers of Instruments, Chattel Papers,
Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 516
30-25 Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 17
30-30 Fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 518
30-35 Rights of Unpaid Sellers of Goods . . . . . . . . . . . . . . . . . 520
30-40 Conflicts With Liens Arising Under Other Laws . . . . . . 521
30-45 Commingled or Processed Goods . . . . . . . . . . . . . . . . . . 522
30-50 Subordination Agreements . . . . . . . . . . . . . . . . . . . . . . . 522

5 30-5 UNPERFECTED SECURITY INTERESTS

The sccured party who fails to perfect a security interest in the col-
lateral is vulnerable to other creditors, purchasers, or transferees who
have claims to the collateral. Although the general rule of the Code is
that a security agreement is effective between the parties "against pur-
chasers of the collateral and against creditors" except as otherwise pro-
vided,' there are exceptions where a person with an unperfected security
interest will lose to the claims of third parties. The unperfected security
interest is inferior to the following claimants:

U.C.C. 5 9-201. All U.C.C. references in this Chapter are to the Uni-
* form Commercial Code 1978 Official Text (West 1978).
 5 30-5 SECURED T R A N S A m I O N S
( 1 ) Another secured party who has a perfected security interest
in the c ~ l l a t e r a l . ~It does not matter that the party with the
perfected security interest had n ~ t i c eof the prior unperfected
security i n t e r e ~ t . ~
( 2 ) Lien creditors who obtain a lien on the collateral before the
security interest is perfected.' A lien creditor is a creditor who
obtains a lien on the property by attachment of the collateral,
levy, or other judicial proceeding. A trustee in bankruptcy is
viewed as a lien creditor under the Code." Prior to the 1972
amendments to the Commercial Code, the lien creditor had to
be without knowledge of the security interest. This require-
ment was eliminated by the 1972 amendment^.^
) A buycr o f thc collateral who givcs value and rcccivcs dclivcry
of the collateral without knowledge of the security interest and
before it is perfected, when the collateral is goods, instruments,
documents, chattel paper, o r farm product^.^ T h e buyer of
farm products must be in thc ordinary course of business to
prevail. The buycr of the other typcs of goods may bc a pur-'
chaser in bulk or not in thc ordinary course of b u s i n e ~ s . ~
( 4 ) A buyer in the ordinary course of business of goods. Except for
the buyer of farm products in the ordinary course of business,
thcse buyers take free of any security interest including per-
fected security interests: created by the seller of the goods.
) A buyer of consumer goods. When a consumer buys consumer
goods, from a seller of consumer goods, that are subject to a
security interest not perfected by a filed financing statement,
the buyer takes free of the security interest in the goods, if he
buys without knowledge of the security interest, for value, and
for his own personal use.1°
(6) A good faith transferee of accounts and general intangibles.
i A person who is not a secured party, but who acquires an in-
terest in accounts and general intangibles for value, without
knowledge of the security interest and before it is perfected,
I on January 1, 1981, rather than filing a financing statement, the priority
2 U.C.C.f f 9-301 ( 1 ) ( a ) , 9-312.
a See U.C.C.§ 9-312(5)(a).
4U.C.C.f 9-301(l)(b).
' U.C.C.f 9-301(3).
U.C.C.f 9-301(l)(b).
' U.C.C.f 9-301 (1)( c ) .
8 Id.
' U.C.C.f 9-3O7(1 ) a
cL
' 0 U.C.C.f 9-307(2)
PRIORITIES 30-10
will take an interest in that collateral that is superior to the
unperfected security interest.ll
The Code provides a ten-day grace period for a secured party to
perfect a purchase money security interest in the collateral. (Purchase-
money security interests are discussed in $ 28-25.) In this case the se-
cured party has ten days, after the debtor receives possession of the col-
lateral, to perfect the sccurity intcrest by filing a financing statement.12
If the security interest is perfected within thcse ten days, the rights of the
secured party are superior to the claims of any transferee in bulk or lien
creditor that arose between the date of the attachment of the security in-
terest and the time of the filing.13 This provision permits a secured party
to sell or to finance thc sale of collatcral to a dcbtor. This allows the
securcd party to givc thc dcbtor immcdiatc posscssion and, then, to com-
plcte the steps required for perfecting the security interest in the col-
lateral after delivery to the debtor. It should be noted that this grace pe-
riod does not apply to rights that may be asserted by claimants other
than trnnsfcrecs in bulk or lien crcdilors. Tlierc is a comparable grace
period that applics to clainls of competing sccured parties. This is dis-
cussed in h 30-10.
$30-10 CONFLICTS \VWH OTIIER PERFECTED
SECURITY INTERESTS
When there is more than one perfected security interest in the col-
lateral, the general rule of the Code is that priority is determined by the
respective dates of filing or of perfection of the security interest. The
first secured party either to file or to perfect has priority. Thus, when A
holds a security interest in equipment that was perfected by a filing on
January 1 , 198 1, and B holds a pcrfccted security interest in the same
equipment, perfected by a filing on March 1, 1981, A has priority be-
cause he filed first. Under the Code, the date of filing the financing state-
ment establishes priority, even in cases where the remaining steps for
attachment of the security interest to the collateral have not yet taken
place.
If, in the above example, A had taken possession of the collateral
date for A would still be January 1. (This assumes that the other steps
for perfection of A's security interest were completed by January 1,
1981.) T o continue with the same example, if A then files a financing
l1 U.C.C.P 9-301 (I)(d).
'2
'8 Id.
.,
U.C.C.§ 9-301(2).
5 13
 SECURED TRANSACTIONS
statement on April 1 and releases the equipment to the debtor after the
filing, A will retain the priority previously established by possession. Un-
der the Code, priority dates from the time A first perfected a security
interest in the collateral, which was January 1, 1981, because A had a
continuously perfected security interest in the equipment since that
date.14
A secured party with a purchase-money security interest has a fav-
ored position under the Code. When the collateral is other than inven-
tory, a person with a perfected purchase-money security interest takes
priority over any other person with a conflicting security interest in the
same collateral. The following example illustrates the operation of the
rule. Assume that X has a blanket security interest in all of debtor's
equipment, including any equipment that might be acquired at a later
date, and that X has filed a financing statement perfecting this security
interest on January 1, 1981. Assume further that Y finances the sale
of a new piece of equipment to debtor and that he acquires a purchase-
money security interest in that equipment that is perfected by a filing on
March 1, 1981. Under the rules that give special priority to purchase:
money security interests, Y has priority so long as Y perfected thc secur-
ity interest by filing a financing statement within ten days of the time the
debtor received the new piece of equipment.t6 This purchase-money pri-
ority provision gives the debtor some freedom from the restrictions of
the blanket prior encumbrance held by X. It promotes purchase-money
' financing because it relieves Y from the task of checking what prior se-
curity interests may be claimed against debtor before financing the sale
of the new equipment. The priority given to the holder of the purchase-
money security interest also extends to any proceeds of the collateral in
which the purchase-money security interest was held when the goods are
not inventory."'Thus, in thc cxaniple above, if debtor swnps the cquip-
ment in which Y holds the purchase-money security interest for some
other equipment, Y's priority continues into this new equipment.
When the collateral is inventory, there is a similar purchase-money
priority provision.17 In this case, however, the secured party seeking to
claim the benefit of the special priority must take additional steps. One
of the most important of these is to give notice to the holder of any con-
flicting security interest, in the inventory, that is perfected by a filed
financing statement.IS Also, a purchase-money security interest must be
I4 U.C.C. 4 9-3 l2(S) ( a ) .
1' U.C.C. 19-3 l 2 ( 4 ) .
18 Id.
1' U.C.C. 1 9-3 l 2 ( 3 ) .
" U.C.C. 5 9-312(3) (b).
.
i
PRIORITIES § 30-15
perfectcd at the time the debtor receives possession of the inventory.IB
A similar purchase-money priority rule exists for goods delivered on con-
signment, according to the 1972 amendments to the Code.2o
When a purchase-money security interest has priority in inventory,
the priority carries over into any "identifiable cash proceeds" received
before delivery of the inventory item to a buyer.21 Thus, if inventory is
sold and an account is established representing the amount owed by the
buyer to the seller, the secured party with the purchase-money security
interest cannot claim priority in the account, even when it is identifiable
as proceeds, because the account is not "cash proceeds." 22 On the other
hand, if cash or a check is received on sale of the inventory, the holder
of the purchase-money security interest could claim priority in these
procceds so long as they are "identifiablc" and received by the debtor
"on or before the delivery of the inventory" to the buyer.23 Prior to the
1972 amendments to the Code, the rules were unclear as to whether the
purchase-money priority extended into proceeds obtained upon the sale
of the inventory.
There also is a special rule for a security interest perfected in crops,
when the secured party has given the debtor new value to enable the
debtor to produce the crops during the current production season and
when the value is given not more than three months before the crops are
plantcd. In this casc, the perfected security intcrest in the crops will
take priority over an earlier perfected security interest, to the extent that
the carlicr security interest secures older obligations of the debtor that
were due more than six months prior to the planting of the crops.24
5 30-15 n W E R OF GOODS
Spccial protcction is given the buycr in ordinary coursc of business
of goods other than farm products.26 Such a buyer takes free of any
security interest that the seller created in the goods, even though the
security interest is perfected and even though the buyer knows the secur-
ity interest exists.20 In order to be a buyer in the ordinary course of busi-
ness, the purchase must be from someone who is in the business of deal-
lo U.C.C. 9-3 12(3) ( a ) .
'O U.C.C. 9-1 14.
" U.C.C. 5 9-3 l 2 ( 3 ) .
22 See U.C.C. § 9-306( 1 ) .
23 U.C.C. 8 9-31 2(3).
'' U.C.C. 8 9-3 12(2).
'' U.C.C. 0 9-307 ( 1 ) .
' Id.
0
jI 9 30-A SECURED TRANSACTIONS
1 ing in goods of that kind.27 Thus, this provision primarily applies to buy-
ers who purchase goods that, in the hands of the seller, constitute
inventory.
I The buyer will be in the ordinary course of business when he buys
in good faith and without knowledge that the sale violates any ownership
rights or security interest of a third party.28 Under these limitations, the
buyer takes free of any security interest "if he merely knows that there is
a security interest which covers the goods." However, the buyer who
knows, "in addition, that the sale is in violation of some term in the
security agreement not waived by the words or conduct of the secured
party" will take subject to the security intere~t.~"Howcvcr, thcrc prob-
ably will not bc many situations whcrc a waiver or estoppel cannot be
found when the secured party entrusts the goods to a debtor who is in
thc business of selling thcm.
Buyers of goods will also take free of any security interest created
by the seller when the sale or disposition of the goods has been authorized
by the secured party.R0 Authority to sell may be found in thc security
agreement or "otherwise." "
This leaves open the possibility that a pur-
chaser of goods could establish that, under the circumstances, the se-
cured party should be cstoppcd from dcnying au~hority,in the debtor,
to sell the collateral.
5 30-20 PURCIIASERS OF INSTRUMENTS, CIIA'lTEL
PAPER, DOCUMENTS
As previously discussed, instruments, chattel paper, and documents
have elements of negotiability that make them frccly transferable (see
$ 5 29-60, 29-65, and 29-70). Becausc of thc transfcrablc naturc of
this papcr, purchasers to whom it is duly transferred can acquire rights
that are superior t o those of any party claiming a security interest per-
fected, in these types of collateral, by filing. A holder in due course of
a negotiable instrument takes free of the claims of any other persons, in-
cluding secured parties, to the i n s t r ~ m e n t . A
~ ~holder of a negotiable
document of title who has received it by negotiation comparable to that
which creates rights of a holder in due course on instruments also takes
title to the document free of the claims of secured par tic^.^ Thc filing
" U.C.C. 5 1-201 (9).
28 Id.
29 U.C.C. 3 9-307, Comment 2.
U.C.C. 1 9-306(2).
8' Id.
" U.C.C. $ 5 3-302, 9-309.
a3 U.C.C. 5 8 7-501, 9-309.
PRIORITIES 30-25
of a financing statement under the Code does not constitute notice o f the
security interest to holders of instruments or to purchasers of negotiable
documents of title.84
When the collateral consists of chattel paper or instruments, pur-
chasers of this paper who give new value and who take possession in the
ordinary course of business have priority over persons with any security
interest, in the paper or instrument, created by filing. The purchaser
must act without knowledge that the paper or instrument is subject to a
security interest, however.86 When the claimed security interest in the
chattel paper or instruments arises because the paper or instrument con-
stitutes the proceeds of inventory that were subject to a perfected secu-
rity interest, the purchaser's rights will be superior, even in cases where
the purchaser knows that the paper or instrument was subject to the
sccurity interest.80
Under thc Codc, a purchaser includcs sorncone who obtains n se-
curity interest in the collateral.37 Thus, a second secured party may
obtain priority over an earlier secured party when the second party takes
possession of the paper or instrument and when he otherwise qualifies
under these rules.a8 These rules make a filing a hazardous method for
perfecting security interests in chattel paper, negotiable documents, or
instruments.
3 30-25 PROCEEDS
"Proceeds" includes whatever is rcccived when the collateral is sold,
exchanged, or disposed of otherwise.sQ Proceeds may be either cash pro-
ceeds (moncy, checks, bank accounts, and the like) or noncash pro-
ceed~.'~ For example, if a debtor sells his car (in which his bank has a
security interest) for a buyer's check in the amount of $800, buyer's
promissory note for $3,000, and a used motorcycle, the check, note, and
motorcycle are all proceeds.
T h e general rule under the Code is that a security interest will con-
tinue in any identifiable proceeds of collateral.41 Thus, if the security in-
terest in the collateral was perfected originally, the security interest in the
proceeds will also be a perfected security interest for ten days after re-
ceipt, by the debtor, of the proceeds and will continue beyond the ten days
8' Id.
86 U.C.C. § 9-308(a).
8% U.C.C. 5 9-308(b).
87 U.C.C. $1 1-201(9), 1-201 (33).
" U.C.C. 5 9-308.
U.C.C. 6 9-306(1).
* 40 Id.
41 U.C.C. 5 9-306(2).
 30-30 SECURED TRANSAmIONS
as a perfected security interest when any one of the following occurs:
(1) The financing statement on the original collateral is filed in the
office where a security interest would be perfected by filing on
the proceeds;
( 2 ) The financing statement covers the original collateral and the
proceeds are identifiable cash proceeds; or
( 3 ) A security interest in the proceeds is perfected before the ten
days expire.'=
i These rules represent a substantial revision of the Code prior to the 1972
amendments. Under the earlier version of the Code, it was thought that
i
security interests could exist in collateral where there was no adequate
notice to third parties. Special rules are provided when the debtor be-
comes insolvent. These rules allow the secured party to trace his security
interest into the bank accounts of the debtor.4J
As with security interests in other types of collateral, the mere fact
that a secured party has a perfected security interest in proceeds does
not automatically give the secured party priority. The other priority rules
discussed in this chapter dealing with different types of collateral will
apply to proceeds as well. The general rule is that the date of filing or
perfection as to the original collateral will be the date of filing or perfec-
tion as to proceeds for purposes of applying the first to file or perfect
rule?4 As previously discussed in $ 30-10, purchase-money priorities
sometimes carry over into proceeds.
It is important to note that, under the Commercial Code, a security
agreement will give the secured party a n interest in proceeds regardless
of whether the agreement expressly so state^..'^ Also, since the 1972
amendments, there is no requirement that the financing statement filed
on the original collatcrnl mention p r o c ~ e d s . Any
~ ~ pcrson cxnmining n
financing statement must be aware that the security interest also extends
to proceeds. Prior to the 1972 amendments, the financing statement had
to indicate that proceeds were claimed.
§ 30-30 FIXTURES
Goods are fixtures when they become so related to the real estate
that a person who has an interest in the real estate also obtains an inter-
4'U.C.C. § 9-306(3).
4W.C.C. 5 9-306(4). See 5 29-90.
4'U.C.C. § 9-312(6).
4' U.C.C. 5 9-203.
44 U.C.C. 5 9-402.
+ " U.C.C.
518
PRIORITIES 5 30-30
est in the goods. This may happen whcn the goods, such ns nn elevator
o r a central heating unit, become permanently attached to the land (this
depends upon local 1 ~ 7 ) .
The Commercial Code contains an elaborate set of rules designed
to govern priorities between persons who claim security interests in goods
and persons who claim interests in goods as a result of their interest in
the real estate. These rules were extensively revised by the 1972 amend-
ments to the Code. As a general rule, the priority goes to the party who
is first in time. A security interest that is perfected by a fixture filing48
will have priority over the interest of any owner of the real estate, or
creditor with an interest in the real estate, whcn (1) thc security intcrcst
is perfected before the real estate claimants acquire an interest of record
in the real estate and ( 2 ) the secured party has priority over the real
estate claimants' predecessors in title as
A secured party can obtain a purchase-money security interest that
has priority over any interest of a competing real estate claimant.60 T o
obtain this priority, the security interest must be perfected by a fixture
filing before the goods become fixture^.^' (In certain cases, the secured
party will have a ten-day grace period after the goods become fixtures
within which to make a fixture filing.)
In addition to these general rules, comparable to the ordinary pri-
ority rules of the Code, there are several special rules that apply to fix-
tures. When the collateral consists of "readily removable factory or
office machines" or "readily removable replacements of domestic appli-
ances which are consunler goods," the secured party will obtain priority
if the security interest is perfected bcfore the goods become fixtures.62
In this situation, the security interest may be perfected by any method
allowed by the Code, including an ordinary filing.03 See 28-30. When
the conflicting claimant is a creditor who holds n lien on tlic real estate
ns n rcsult of n j u d p c n t or other legal procccding, the sccurcd party nlso
has priority if tllc security interest was perfected by any method allowed
by the Code.&'
Special rules protect construction mortgages. Security interest in fix-
tures are subordinate to the holder of a recorded construction mortgage
when the goods become fixtures before the completion of c o n s t r u c t i ~ n . ~ ~
--
" U.C.C. 5 9-313(1).
See 5 28-35.
49 U.C.C. 5 9-3 l 3 ( 4 ) ( b ) .
UJ2.c. 5 9-313(4) ( a ) .
61 Id.
6 2 U.C.C. 8 9-3 13 ( 4 ) (e) .
Id.
" U.C.C. 5 9-3 13 ( 4 ) ( d ) .
5 9-3 13 ( 6 ) .
1
i, 830-35 SECURED TRANSACTIONS
7 PRIORITIES
1 It is possible for the party with an interest in the real estate to con-
sent in writing to the security interest in the fixture or otherwise to dis-
claim an interest in the goods as fixt~res.6~
When the secured party establishes priority, the secured party has
the right, on default, to sever the collateral from the real estate." This
will require the secured party to reimburse any holder of an interest
in the real estate who is not the debtor for the cost of repairing physical
!, damage to the property." The secured party is not obligated to make
any payment for diminution in value of the real estate caused by the
absence of the goods removed, however." The secured party can be
compelled to give security before being allowed to sever the ~ o l l a t e r a l . ~ ~
As indicated abovc, thcsc rulcs wcrc cxtcnsivcly rcviscd by thc 1972
an~cndn~cnts.I n somc instanccs, thc rcvisions wcrc clarificntions of whnt
was originally intended. In other instances, the 1972 provisions estab-
lish major new rules for priority.
Goods that are "ordinary building materials incorporated into an
improvement on land" are not fixture^.^' Such materials become part of
the real estate, and the only way one can obtain an interest in them is by
following appropriate procedures under real estate security law.e2
§ 30-35 RIGHTS OF UNPAID SELLERS OF GOODS
Ordinarily, someone who sells goods o n credit without securing an
interest is simply a general creditor of the buyer. The seller retains no
title to or interest in the goods. Any attempt by the seller to reserve title
is treated as an effort to create a security interest and must comply with
the provisions of Article 9 to be effective.e3
When a seller contracts for a cash sale but the buyer fails to pay on
delivery of the goods, the seller has a right to reclaim the goods from the
buyer under Article 2 of the Commercial C ~ d e . ~When ' the buyer pays
by a check that subsequently is dishonored, this rule also applies.86 In
some cases, the goods may be sold to a buyer who has given a security
interest in them to some secured party. In these cases, the unpaid seller's
" U.C.C. 8 9-313(5).
67 U.C.C. 8 9-313i8j.
68 Id.
'0 Id.
60 Id.
U.C.C. 8 9-3 13 ( 2 ) .
e2 See generally Schroeder, "Security Interests in Fixtures." 1975 A r k
St. L.J.319.
m L ! U.C.C.5 5 1-201(37). e l 0 2
+ Code 5 24-9
a Sec L1.C.C. S D 2-50?. 2-51 1 .
U.C.C. 4 2-511 (3).
5 30-40
right of reclamation conflicts with the security interest. Who has the
best claim to the goods? This question has attracted.considerable atten-
tion, but produced uncertain results. In one case, the court held that
the cash seller was entitled to prevail.ea In another widely reported de-
cision, the Fifth Circuit en bmc held for a financing bank over the claim
of the unpaid sellers."'
Persons who sell goods to buyers who become insolvent immedi-
ately after receipt of the goods have a limited right to reclaim the goods
under the Commercial Code.08 It is possible for similar conflict to arise
between a seller of the goods who is entitled to reclamation because of
thc buyer's insolvency and n secured party who claims a security interest
in thc goods. Undcr thc rcnsoning of tllc Fifth Circuit, thc sccurcd party
would prcvnil.OO
5 3 0 4 0 CONFLICTS WITH LIENS ARISING UNDER
OTHER LAWS
Sometimes collateral subject to a security interest may become sub-
ject to a lien arising under common law, or other law apart from the
Commercial Code. Liens given to persons such as garagemen, and other
people who provide materials or perform services with respect to the
collateral, are examples. T h e Commercial Code makes these liens supe-
rior to the security interest in the collateral so long as the lien claimant
furnishes the services or the materials in the ordinary course of busi-
ness?O The security interest prevails only when there is an express stat-
utory direction to the contrary?'
There are other situations where Code security interests may con-
flict with other liens. The landlord's lien is an example. The Commer-
cial Code does not apply to landlord's liens and there is no rule in the
Code to govern priority between these conflicting claimants. Another
ae First Nat'l Bank of Elkhart County v. Smoker, 153 Ind. App. 71,
286 N.E.2d 203 (1972).
e7 In re Samuels & Co., 526 F.2d 1238 (5th Cir. 1976), c u t . denied
429 U.S. 834 (1976). See generally Clark, The Law o f Secured Transac-
t.-- n ~Under the Uniform Comn~ercialCode ( 8.4(5) ( 1980).
i o .-
-
oa U.C.C. 1 2-jo2(2).
eo In re Samuel & Co.. 526 F.2d 1238 (5th Cir. 1976), cert. denied
429 U.S. 834 (1976). It should be noted the Packers and Stockyard Act
has been amended to reverse the result in the Samuels case. 7 U.S.C. 8 196
(1976). But see In re American Food Purveyors, Inc.. 17 U.C.C. Rep. 436
(N. D. Ga. 1974). See generally White & Summers, Uniforrtl Commercial
( 2 d ed. 1980).
lo U.C.C. 8 9-3 10.
71 Id.
 5 30-45 SECURED TRANSACTIONS

area of conflict that has proven troublesome is that involving rights of

equitable subrogation, such as those rights claimed by sureties on con-
struction performance bonds. These conflicts are not governed by the
Code, either, and the local law of each state will c o n t . 0 1 . ~ ~
Chapter 31
5 30-45 COMMINGLED OR PROCESSED GOODS
Security interests in goods that subsequently become manufactured
DEFAULT AND ENFORCEMENT
into another product, or become commingled with other goods to become
part of another product, are not lost by the transformation of the goods
OF SECURITY INTERESTS
-they continue into the product p r ~ d u c e d . ' ~The security interest must
have been originally perfected. Then, when the new product produced Section Page
as a result of thc manufacturing or thc asscmbly is one in which thc orig- 31-5 Dcfault Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 523
inal goods have lost their identity, the security interest attaches to the 31-10 . .
Repossession of thc Collateral . . . . . . . . . . . . . . . . . . 524
completed manufactured or processed product. 3 1-1 5 Constitutional Limitations on Secured Party
The security interest will also continue into the product when Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 526
the financing statement on the original goods covers the product into 31-20 Disposition of Collateral After Default . . . . . . . . . . . . . . 529
which they have been manufactured, processed, or assembled. In this 31-25 Retention of the Collateral in Discharge of
case, it makes no difference that the original goods may remain identi- the Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 1
fiable; the security interest attaches to the final product and the security 31-30 Liability for Failure to Comply With Code . . . . . . . . . . 532
interest in the orignal goods used in the processing, manufacturing, or
assembly is lost.74 When there is more than one security interest that
attaches to the product, all of the security interests rank equally in pri- $j 31-5 DEFAULT GENERALLY
ority; their interest in the collateral is prorated according to the propor-
tion of the claim to the total cost of the product. Under this rule, the Default occurs when the conditions constituting default, as stipu-
time when the security interest in each separate component becomes per- lated in the security agreement, arise.' Subject to the Code's good-faith
fected or Ned is irrelevant-all security interests share on a pro rata rules, the security agreement may stipulate those actions of the debtor
basis.'b or those other circumstances that will constitute a defauk2 T h e agree-
ment may contain an "acceleration" clause establishing that the debtor's
obligation will become due at the "will of the secured party" or when
$j 30-50 SUBORDINATION AGREEMENTS the secured party "deems himself insecure" but, under the Commercial
Code, these clauses can be exercised only when the secured party "in
Thc Commcrcial Codc rules on priority may be varied by agree- good faith believes that the prospect o f payment or performance is im-
ment between the parties.1° Any secured party who is concerned about paired." a Howcvcr, thc burden of establishing Jack of good faith is on
the priority of his security interest may enter into an agreement with the debtor.'
the other persons who claim an interest in the collateral to clarify their When default occurs, the secured party has the following options.
respective rights. H e may proceed to obtain a judgment against the debtor for the obliga- -
tion and may then utilize the normal procedures available to creditors
'*See generally Clark, note 67 supra. Q q 1.7, 1.8 (discussing surely's
right of subrogation, landlord liens, and other excluded transnctions). U.C.C. 5 9-501 ( I ) . All U.C.C. references in this Chapter nre to the
78U.C.C. 5 9-315(1)(a). Uniform Commercial Code 1978 Oficinl Text (West 1978).
"U.C.C. 5 9-315(1)(b). 2 Id.
'W.C.C. 8 9-315(2). + a U.C.C. 8 1-208.
''
U.C.C. 5 9-3 16. 4 Id.
523
5 31-10 SECURED TRANSACTIONS
for enforcement of judgments. He may use the provisions providcd in
the Commercial Code and may therefore take possession of the c ~ l l a t e r a l . ~
H e may have further rights provided by the security agreement.O The
rights and remedies of the secured party are cumulative and nonexclu-
sive.'
Although the Code ordinarily allows the parties to modify the way
its rules apply by agreements made in good faith, there are some rules
on the rights and duties of the parties on default that cannot bc changed
by agreement. The rules requiring the secured party to account for any
surplus money rcccived from the sale of collatcral, from dealing with
the method of disposing of collateral, from treating the rights o f the
sccured party to retain the collateral as a discharge of thc obligation,
from giving the dcbtor the right to rcdccm thc collateral, and from gov-
erning the secured party's liability for failure to comply with the Code
procedures cannot be varied by agreement.8
9 31-10 REPOSSESSION OF TIIE COLLATERAL
Onc of the more important rights of a sccurcd party, which distin-
guishes secured from unsecured creditors, is thc right to usc the collateral
as a source of payment for the obligation when default occurs. Although
the Commercial Code gives the secured party all the rights and remedies
that may be generally available to unsecured creditors,P the secured party
may also take steps to obtain possession of the collateral when default
occurs (assuming that the secured party does not already have posses-
sion).I0 Upon obtaining possession, the secured party may retain the
collateral in satisfaction of the obligation in some cases (see 3 31-25)
or may resell it and may then apply the proceeds of the sale to the
obligation.
T h e right to take possession of the collateral arises when default
occurs.ll The existence of a default is preconditioned o n the right to
retake the collateral. In determining whether a default exists, not only
must the terms of the security agreement be considered but, also, attcn-
tion must be given to the possibility that the course of dealing betwccn
the parties or other conduct may have created a waiver, estoppel, modi-
W.C.C. 8 9-50 1 ( 1) .
8 Id.
7 Id.
8 U.C.C. 5 9-501 ( 3 ) .
9 U.C.C. !j 9-501 (1).
'0 U.C.C. 8 9-503.
11 Id.
DEFAULT AND ENFORCEMENT 5 31-10
fication, or other ground for asserting that default has not occurred.
The secured party also must act in good faith in deciding whether to
declare a default.12
The Code permits the secured party to repossess the collateral by
self-help when that may be done without "breach of the peace." '8 Nu-
merous cases, both under the Code and prior to the Code, have dealt
with the question of what constitutes a breach of the peace." A secured
party's unconscnted entry into the debtor's home to retake collateral, or
the secured party's forcible scizure of the collateral from the debtor's
posscssion, will be a brcach of thc pcacc undcr the usual rules but there
will bc no brcach of the peace when thc debtor voluntarily consents to
the removal.lVt is important to carefully consult the law of each juris-
diction on this qucstion, as thc issue of what constitutes a breach of
peace is one for decision on a case-by-case basis and definitions vary
among the states.
Alternatively, the secured party may utilize judicial process to take
possession of the ~ o l l a t e r a l .Typically,
~~ this will be by an action in the
nature of rcplcvin. These remedies have bccn challenged on constitu-
tional grounds. These issues are discussed in Q 3 1-15.
Of coursc, when thc sccurcd pnrty is alrcady in posscssion of the
collateral, no furthcr action is necessary to obtain possession of it. The
secured party is subject to the obligations, discussed in 3 29-15, to pre-
serve and maintain the ~ o l l a t e r a l . ~ ~
The security agreement may provide that the debtor, upon default,
asscmblo tlic collatcral and make it available to the secured party at a
place designated by the secured party as reasonably convenient.I8 The
secured party is permitted to take possession of the collateral by render-
ing equipment unusable.19 The secured party also may dispose of col-
lateral on the debtor's premises by following the procedures provided for
disposition of the collateral.20
See U.C.C. 8 1-203.
l2
U.C.C. 5 9-503.
l8
"See White & Summen, The Uniform Contrtrercinl Code 5 26-6 ( 2 d
ed. 1980) (hcreinnftcr rcfcrrcd to ns Urtiforrrl Corrrrrrcrcinl C o d e ) ; Clark,
The Law of Secured Transacrions Under the Uniform Commercial Code
d' 4.5 (1980).
1"d.
U.C.C. § 9-503.
la
IT .
U.C.C. B § 9-501 ( 1 ) 9-207.
l 8 U.C.C. $9-503. See Clark Equip. Co. v. Armstrong Equip. Co. 431
F.2d 54 (5th Cir. 1970), cert. denied 402 U.S. 909 (1971) (allowing the
secured pnrty to obtnin nn injunction rcquiring nssernbly of thc collnleral).
+ l o U.C.C. 5 9-503.
a0 Id.
 SECURED TRANSACTIONS
8 31-15 CONSTITUTIONAL LIMITATIONS ON SECURED
PARTY REMEDIES
Since the United States Supreme Court decided the case of Snia-
dach v. Family Finance C ~ r p . , ~serious
' constitutional issues have sur-
rounded use of creditors' remedies involving seizure of property of the
debtor without prior notice or judicial proceeding. Sniadach involved
the garnishment of wages of the debtor before a judicial judgment was
obtained. The court held that, absent "extraordinary situations," due
process requires giving notice to the debtor and allowing an opportunity
to be heard prior to seizure of the property. Because the state garnish-
ment statute did not afford these safeguards, the court held it uncon-
stitutional.
Three years later the Supreme Court decided Fuentes v. Shevin.12
This case involved the validity of the replevin remedy. The creditor ob-
tained from the clerk of the court, a writ of replevin, ex parfe, directing
the sheriff to seize the property in which the creditor claimed an interest.
Under the statute, it was not necessary to give prior notice to the debtor
or to hold a hearing. The court held that this procedure also violated
due process. As in Sniadach, there had to be notice and a hearing before
seizure.
Subsequently, in 1974, in Mitchell v. W. T . Grant Co., the Court
upheld a Louisiana statute that contained a procedure similar to re-
p l e ~ i n . Under
~~ the Louisiana statute, however, there were safeguards
for the protection of the debtor that were absent in Frrenfes. Among thc
diflerences referred to by the Court was the fact that the Louisiana
statute required the creditor to set forth spccific facts justifying the cred-
itor's claim-not just to provide conclusory allegations. It was required
that the application for the remedy be made t o a judge, not a clerk of
the court. The Louisiana statute gave further protection to the debtor
by requiring a prompt hearing after the seizure.
Although some observers of the Court thought that Mitclrell might
have marked a retreat from the broad principles indicated in Sniadach
and Fuenfes, this conclusion was proved wrong in North Georgia Fin-
ishing, Inc. v . Dl-Chem Inc.14 In that case, the Supreme Court held as
unconstitutional a Georgia garnishment statute which permitted a cred-
itor to garnish funds in a bank account before judgment and without no-
tice to the debtor. As the debtor in Di-Chem was a corporate business
debtor, the case put to rest any notion that the constitutional due process
21 395 U.S. 337 (1969).
22 407 U.S. 67 (1972).
"
Mitchell v. W. T. Grant Co., 416 U.S. 600 ( 1974)
419 U S . 601 (1975).
,,
526
DEFAULT AND ENFORCEMENT s 31-15
protections of Sniadnclr and Fr~cntesapply only to consumcr debtors.
Di-Chem followed Striudoch in finding thc garnishment procedures lack-
ing in due process but it also distinguished Mitchell on the grounds that
the safeguards existing in the Louisiana statute were not present in the
Georgia garnishment statute in Di-Chem. Thus, although Di-Chem
makes clear that the due process limitations on creditor's remedies are
to be taken seriously, it pcrpetuates the ambiguity in the law as to what
may bc needed in order to liavc a rcmcdy that will pass constitutional
muster.
As a result of these decisions by the Supreme Court, it seems clear
that a crcditor should move cautiously before exercising any remedy to
seize goods of the debtor before the crcditor has obtained a judgment
against thc dcbtor. In most instances, it will be necessary to give notice
and providc an opportunity for a hcaring before property can be seized
prior to judgment. Indeed, this is reflected in the revisions made by most
states in their replevin proccdures, which require some kind of pre-
scizurc hcaring.
Thc application of the constitutional principles announced by tlic
Supreme Court in these cascs to the remedies given secured parties by
the Commercial Code has attracted considerable attention. Under the
Code, upon default, the secured party is entitled to repossess the col-
lateral either by self-help, when that can be done without breach of the
pcacc, or by appropriate judicial a c t i ~ n . ~ V hcustomary
e procedure
cmploycd whcn thc crcditor uscd lcgal proccdurcs was the rcplcvin
rcnicdy. As indicatcd abovc, it is clcar that, in most cnscs, bcfore this
rcmcdy can bc salcly uscd prior to judgn~cnt against the dcbtor, thc sc-
curcd party must givc notice to the debtor and somc sort of pre-seizurc
hearing must be held. T o a creditor, thc consequences of using an un-
constitutional procedure are serious. The crcditor could be liable under
fcdcrnl statutes for violating the civil rights of thc debtor.20 Although
onc court has hcld that there was no civil rights act violation whcn the
creditor used the Pennsylvania replevin statutc later invalidated by the
Supreme Court in Fuente~,~' liability has been imposed upon a creditor
for using a dcfectivc replevin statute, after the Court had decided
Fltetrtes, similar to thc one used in that case.28
T h e Code's self-help rcposscssion provision has gcncratcd consid-
erable litigation. If statutory rcplcvin proccdurcs are unconstitutional
when no notice or hearing is afforded, why shouldn't the even more un-
supervised and potentially abusive remedy of self-help repossession be
26 U.C.C. 9 9-503.
l"42 U.S.C. 5 1983 (Supp 111 1979).
2 T Kachcr v. Pittsburgh Nat'l Bank, 545 F.2d 8 4 2 ( 3 d Cir. 1976).
Guzman v. Western State Bank, 5 4 0 F.2d 948 (8th Cir. 1976).
3 31-15 SECURED TRANSACTIONS
unconstitutional? The courts that have considered the question have re-
jected the attacks o n t h e self-help repossession remedy. Six U.S.Circuit
Courts of Appeal have held that the C o d e provision is constitutional.
T h c Suprenie C o u r t has denied certiorari in four of these cases.2g
T h e reason given by the courts for rejecting the constitutional at-
tack is that a creditor's use of the repossession remedy does n o t involve
any "state action." T h e d u e process clause only applies to "state action."
I t does not limit purely private conduct.a0 Because the Commercial
C o d e is a state statute a n d contains a provision indorsing thc self-help
remedy, there is a t least the gloss o f state action when this remedy is
employed. T h e decided cases reject this line of reasoning, but the Su-
preme Court has n o t decided the question. In Flagg Bros., Inc. v .
Brooks," the Court rejected an attack o n the constitutionality of a ware-
houseman's lien provided under Section 7-210 of the Commercial Code,
for unpaid storage bills. T h e court, notwithstanding the statutory provi-
sion creating the lien, held that n o state action was involved. T h e court
reasoned that the C o d e provision only codified a remedy that existed
apart from the statute a t common law. Also, in Jackson v . Metropolitan
Edison C O . , ~the~ S u p r e m e Court found the d u e process clause did not
apply to an action by a public utility to unilaterally cut off electric ser-
vice of its customer following a dispute over the amount owed the utility.
Although the utility was a regulated monopoly a n d the utilization of the
scrvicc cutoff had been approvcd by the state utility commission in a
rate tariff hearing, the court said n o state action was involved.D3
Calderon v. United Furniture Co., 505 F.2d 950 (5th Cir. 1974);
Gary v. Darnell, 505 F.2d 741 (6th Cir. 1974); Turner v. Impala Motors.
503 F.2d 607 (6th Cir. 1974); Gibbs v. Titelman, 502 F.2d 1107 (3d Cir.
1974). ccrt. denied sub notn Gibbs v. Garvcr. 419 U.S. 1039 ( 1974); Brnnt-
ley v. Union Bank & Trust Co., 498 F.2d 365 (5th Cir. 1974), cert. denied
419 U.S. 1034 (1974); Nichols v. Tower Grove Bank, 497 F.2d 404 (8th
Cir. 1974); Nowlin v. Professional Auto Sales. Inc., 496 F.2d 16 (8th Cir.
1973), cert. denied 419 U.S. 1006 (1974); James v. Pinnix, 495 F.2d 206
(5th Cir. 1974); Shirley v. State Nat'l Bank of Conn., 493 F.2d 739 (2d Cir.
1974). cert. denied 419 U.S. 1006 (1974); Adams v. Southern Cal. First
Nat'l Bank, 492 F.2d 324 (9th Cir. 1973). cert. denied 419 U.S. 1006
(1974); Bichel Optical Laboratories, Inc. v. Marquette Nat'l Bank, 487
F.2d 906 (8th Cir. 1973).
aoThe eases are collected in Annot., "Validity. Under Federal Consti-
tution and Laws, of Self-Help Repossession Provisions of 5 9-503 of Uniform
Commercial Code." 29 A.L.R. Fed. 481 (1976).
436 U.S. 149 (1978).
a 2 4 1 9 U.S. 345 (1974).
A number of state court decisions also havc upheld the constitution-
ality of the Code self-help repossession provision. Kipp v. Cozens, 40 Cal.
App. 3d 709, 115 Cal. Rptr. 423 (1974); John Deere Co. v. Catalano, 186
* B8 U.C.C. § 9-SO4(l) ( b ) .
DEFAULT AND E N F O R C E M E N T s 31-20
T h e remedy of setoff often used by banks has also been challenged
a s violating due process because it is used without notice o r hearing
prior to its exercise. Nonetheless, the procedure has been upheld based
o n thc same reasoning as those cases which uphcld the self-help repos-
session remedy.84
A s this discussion of the state of the law indicates, there remain
s o m e very substantial uncertainties in the law pertaining to creditor's
remedies. T h e Supreme Court has not ruled definitively o n the u s e of
self-help repossession. T h e safe course, a n d the o n e that may engender
the most good will, would be to use judicial process and to conform t o
the notice and hearing requirements established for these procedures.
A n y deviation should b e undertaken only after seeking advice of counsel
a s to the risks involved.
5 31-20 DISPOSITION OF COLLATEML AFTER
DEFAULT
After obtaining possession of the collateral upon dcfault, the se-
cured party may sell, lease, o r otherwise dispose of it and use the pro-
ceeds of the disposition t o satisfy the ~ b l i g a t i o n .T~h~e sale may be of
the property in its then present condition, o r after any "commercially
reasonablc preparation o r processing." Proceeds from the disposition
go first, towards satisfying expenses of the secured party in taking pos-
session and disposing of the collateral, including reasonable attorney's
fees a n d legal expenses;37 second, t o satisfy the indebtedness secured by
the security interest concerned;R8 and third, t o satisfy any indebtedness
which is subordinate to the security interest being enforced when the
Colo. 101, 525 P.2d 1153 (1974); A&S Excavating, Inc. v. International
Harvester Credit Corp., 31 Conn. Supp. 152, 325 A.2d 535 (1974); King
v. South Jersey Nat'l Bank, 66 N.J. 161, 330 A.2d 1 (1974); Cook v. Lily,
208 S.E.2d 784 (W. Va. 1974); Melara v. Kennedy, 541 F.2d 802 (9th
Cir. 1976); McDufTy v. Worthmore Furniture, Inc., 380 F. Supp. 257 (E.D.
Va. 1974); Helfinstine v. Martin, 561 P.2d 951 (Okla. 1977).
Kruger v. Wclls Fargo Bank, 11 Cal. 3d 352, 113 Cal. Rptr. 449, 521
P.2d 441 (1974); Fletcher v. Rhode Island Hosp. Trust Nat'l Bank, 496
F.2d 927 (1st Cir.) cert. denied. 419 U.S. 1001 (1974); Nietzel v. Farmers
and Merchants State Bank. 307 Minn. 147, 238 N.W.2d 437 (1976). There
is a comprehensive discussion of the constitutional problems involved with
these creditor's remedies in Clark, note 14 supra, (iy 4.5(1), 12.5(4).
U.C.C. 5 9-504( 1).
" Id.
3 r U.C.C. S 9-504( 1 ) ( a ) .
529
 5 31-20 SECURED TRANSACI'IONS
secured party receives a written notice of the junior interest before com-
pleting distribution of the proceeds.89 When a surplus exists, the secured
party must account to the debtor for it unless the transaction was a sale
of accounts or chattel paper. If the security transaction was such a sale,
the debtor is entitled to the surplus only when the security agreement so
provides; otherwise it is presumed that the sale was absolute.40
When disposition of the collateral does not produce enough pro-
ceeds to satisfy the expenses of disposition and the indebtedness secured,
the debtor will remain liablc for the deficiency unless the security agree-
ment provides ~ t h e r w i s e . ~ 'If the secured transaction was an absolute
assignment or sale of accounts or chattel paper, however, the debtor
will be liable for a deficiency only when the security agreemenl s o stipu-
The procedures established by the Code for disposing of the col-
lateral are critical, and close consultation with counsel is essential. There
is a general requirement that "every aspect of the disposition including
the method, manner, time, place and terms must be commercially reason-
able." 43 The secured party must give notice to the debtor of the time
and place of any public sale or notice of the time after which a private
I sale or disposition will be made. In the case of collateral other than
consumer goods notice must be given to any other secured party from
whom the secured party has received written notice of a claim of an in-
terest in the collateral.44 When the collateral is perishable or will quickly
dcclinc in value as a rcsult of any dclay, notification need not be given.4n
This is also true when the collateral is of a "type customarily sold in a
recognized market." (This presumably applies to collateral for which
there is a standard price established by a public market, such as a stock
exchange or commodities exchange.'O)
T h e secured party is permitted to buy the collateral at any public
sale.47 The secured party also may purchase the collateral at a private
sale when the collateral is of the type customarily sold in a recognized
market or is the subject o f widely distributed standard price quotation^.'^
Apart from the requirement of commercial reasonableness, there is
little specificity of the type of noticc, how it should be sent and the pro-
'' U.C.C. § 9-504 ( 1) (c) .
40 U.C.C. 1 9-504(2).
4 1 Id.
4 2 Id.
'8 U.C.C.8 9-504(3).
" Id.
45 Id.
4a See Clark, note 14 supra, 1 4.8(7).
47 U.C.C. 8 9-504(3).
48 Id.
DEFAULT AND ENFORCEMENT ,1-25
cedures for conducting any sale. This is an area where problems can
arise and the law may vary between jurisdictions. In any case, local
counsel should be c o n s ~ l t e d . ~ ~
A properly conducted sale will transfer all of the debtor's rights to
the purchaser and will discharge the security interest which is being en-
forced as well as any subordinate security interest or lien." The pur-
chaser takes free of all of these interests even though there may be a
defect in the procedures required for disposing oJ the collateral as long
as the purchaser buys in good faith in thc case of any private disposition,
or has no knowledge of the defects and is not in collusion with the se-
cured party in the case of a public sale.n1
T h e debtor has a right to redeem the collateral at any time before
the collateral has been disposed of or before the secured party has en-
tered into a contract for its disposition." The debtor must tender to the
secured party satisfaction of all obligations secured by the collateral, as
well as all expenses incurred by the secured party including reasonable
attorney's fees and legal expenses." Secured parties who hold security
interests junior to the enforcing secured party may also exercise a right
to redeem the collateral by following the same p r o c e d ~ r e s . ~ ~
fj 31-25' RETENTION O F TI1E COLLATERAL IN
DISCHARGE O F THE OBLIGATION
The Codc allows thc securcd party to clcct to rctnin the collateral
in full discharge of the obligation in certain cases." The rules for con-
sumer goods in this respect are different from those for other collateral.
When consumer goods are involved, and the consumer-debtor has paid
either 60 percent of the cash price of a purchase-money security interest
or 60 percent of the loan in the case of othcr security interests, the Code
compels the securcd party to dispose of the collateral within ninety days
after taking possession of knOIn this case, the provisions on disposition
of collateral (discussed in 3 3 1-20) must be followed. Failure to dispose
of the collateral subjects the secured party to liability to the debtor for
conversion or othcr injury." The consumer-debtor may waive or modify
See generally Clark, note 14 supra Il 4.8.
PO U.C.C. 5 9-504(4).
5' Id.
52 U.C.C. fj 9-506.
58 Id.
84 Id.
'6 U.C.C. 8 9-505.
+ '6 U.C.C. 5 9-505 ( 1 ).
'' U.C.C. 5 8 9-505(1), 9-507(1).
 5 31-30 SECURED TRANSACTIONS DEFAULT AND ENFORCEMENT

these rights in writing affer default occurs. It is not possible to waive cially unreasonable." Further, following the customary procedures
this provision in the security agreement o r prior to default.68 used by dealers of the type of property involved or obtaining the price
In cases where the collateral is not consumer goods o r in cases in- current in any recognized market for the collateral constitutes a disposi-
volving consumer goods where the 60 percent payment has not been tion that is commercially r e a s ~ n a b l e . ~ ~
satisfied, the secured party may retain the collateral in satisfaction of the
obligation by sending a written notice to the debtor proposing to retain
the collatcral. In cascs involving collatcral othcr than consumcr good%, 86 U.C.C. § 9-507(2).
6' Id.
notice also must be sent to other secured parties who have notified the
secured party of their interest in the c ~ l l a t e r a l . If~ ~any person who is
entitled to receive notification objects to the secured party's retention of
the collateral, the secured party must dispose of ir under the procedures
discussed in 5 31-20.00 The dcbtor may waive receipt of this notice
after, but not prior to, default.81

5 31-30 LIABILITY FOR FAILURE TO COMPLY

WITH CODE
Failure to comply with the Commercial Code provisions on repos-
session and disposition of the collateral will result in liability of the sc-
cured party to the debtor and other secured parties who suffer loss as a
result of the failure to comply.62 When consumer goods are involved,

'i
there is a statutory penalty under which the debtor has a right to recover
an amount not less than the sum of any credit service charge, plus 10
percent of the principal amount of the debt.Oa In addition to these pro-
visions, courts have held that failure to comply with the Code proce-
dures may result in the loss of the secured party's right to a deficiency
judgment.b4 In appropriate cases, the secured party's conduct may give
rise to liability in tort based on conversion or other wrong committed.
Some creditor conduct may even be punishable as a ~ r i r n c .When ~~ a
1 consumer is involved, the standards for debt collection practices under
federal and state statutes must also be followed.
The Commercial Code does provide that failure to obtain the bcst
price does not make a disposition of the collateral by itself "commer-

U.C.C. 5 fj 9-501 (3), 9-SOS(1).

6g U.C.C. fj 9-505(2).
60 Id.
8' Id.
U.C.C. P 9-507(1).
88 Id.
See generally Uniform Commercial Code, note 14 supra; ( 2 6 1 5 ;
Clark, note 14 supra, 4.12.
For example, the Consumer Credit Protection Act establishes criminal
penalties for extortionate collection practices. 18 U.S.C. $ 5 89 1-896 ( 1976).
 Chapter 32
- DEBT ADJUSTMENT AND
BANKRUPTCY
Page
Nature of Insolvency . . . . . . . . . . . . . . . . . . . . . . . . . . . 535
Remedies for Insolvency ......................... 536
Waiver or Cancellation of Debts . . . . . . . . . . . . . . . . . . 536
Assignment for Benefit of Creditors . . . . . . . . . . . . . . . . 538
Receiverships.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 538
Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 539
Voluntary and Involuntary Petitions in Bankruptcy . . . . 541
Rights and Powers of Trustees in Bankruptcy . . . . . . . . 542
Secured and Unsecured Creditors ................. 544

3 32-5 NATURE OF INSOLVENCY

There are many reasons why a debtor may default on payment of
an obligation. Among these are situations where he is unable to pay
because his assets are "slow" or "frozen." Any businessman may recog-
nize cases where the person liable on a contract or account is unable to
pay at maturity because there are included in his assets too large a col-
lection of things that are not easily liquidated such as real estate, ac-
counts receivable not yet due, large inventories, and other property of
great value but incapable of ready sale. In such a situation, the debtor
may be able to meet his obligation by making further contracts extending
the time of their maturity, by mortgaging the slow assets, or by floating
ncw loans. Such arrangements nre coninion in business and involve little
more than new contracts to meet the situation where the "slow" debtor
may be able eventually to pay his obligations in full. Beyond this is the
situation where the debtor is insolvent and where extraordinary remedies
are needed.
Thcrc arc various definitions of insolvency. Thc Conimercinl Code
,defines a person as insolvent "who either has ceased to pay his debts in
the ordinary course of business or cannot pay his debts as they become
5 32-1 0 SECURED TRANSAaIONS
due" or is insolvent within the meaning of the Federal Bankruptcy Law.'
T h e Bankruptcy Code defines insolvency as a financial condition such
that "the sum of such entity's debts is greater than all of such entity's
property, at a fair valuation," subject to certain a d j ~ s t m e n t s . ~
5 32-10 REMEDIES FOR INSOLVENCY
The legal remedies for insolvency are numerous and complicated.
It is essential, beforc a bank oficcr attempts to solve thc problcms raiscd
by the insolvency o f a debtor or a customer, that he obtain compctcnt
legal advice. There are, however, certain lcgal rules and procedures
with which it would bc wise to bccomc acquainted.
Problems of extracting an insolvent dcbtor from his financial dilcm-
mas have many means of solution ranging from the extremely simplc to
the very c ~ m p l e x . Among
~ these arc waivcr or cancellation of claims,
composition with creditors, assignment for the benefit of crcditors, re-
ceivership, and bankruptcy. These may rest in simple contracts between .
the debtor and some o r all of his creditors, equity proceedings in court,
and statutory remedies for particular kinds of cases. T h e process may
be administered by individuals choscn by agreement or by officials ap-
pointed by state or federal courts. The attempt in all cases is to discharge
the debtor of the burdens of his obligations with the least possiblc loss to
his crcditors, so that the dcbtor may start ancw on his busincss venture.
5 32-15 WAIVER OR CANCELLATION OF DEBTS
Waiver or cancellation of debts is the simplest form of discharge.
It may consist of a n agrccmcnt whcrcby a crcditor agrccs not to collcct
one or more debts. As a general rule, waivers of this sort arc of little
use in discharging debts unless they are accompanied by the type of con-
sideration that would be necessary to support a binding contract. This
requires giving something of value for the agreement. Thus, a promise
to discharge a due debt of $1,000 for nothing, or even for $500, would
not be binding upon the creditor. But. if the debtor agreed to give the
creditor collateral to secure thc reduced amount, the original debt would
be discharged and the ncw $500 sccured obligation would bc binding on
both parties.'
There are several important cxccptions to this rule. Onc involvcs
the cancellation of negotiable paper such as notes, checks, or other in-
1 U.C.C. § 1-20 1 (23).
2 I 1 U.S.C. 5 101 (26) (Supp. 111 1979).
8 United States v. Richardson, 469 F.2d 114 (D.C. Cir. 1972).
4 Resfatemen( (Second) of Contracts §I 73, 89 (1980).
BANKRUPTCY 9 32-15
struments. Liability on thcse instruments may be discharged, without
giving any value, simply by the creditor cancelling the instrument or sur-
rendering it to the debtor." When a person's liability is discharged on a
negotiable instrument, the pcrson is also discharged from any liability
on the underlying debt o r obligation.0
Another important exception to the general rule, which requires
consideration in ordcr to discharge a dcbt, arc thc provisions in the
Commercial Codc that allow a person to waivc or rcnouncc any claim or
right the pcrson has as a rcsult of anothcr party's breach of a commercial
contract.' A waivcr o f such rights is cffcctivc rcgardless of whcihcr any
consideration was givcn for the waiver as long as it is in writing and is
signcd and delivered by the party making the w a i v ~ r .The ~ person scek-
ing to enforce thc wnivcr, of coursc, must comply with thc Codc provi-
sions on good faith.' Furthermore, undcr the Commercial Code, con-
tracts may be modified without any c o n ~ i d e r a t i o n .The ~ ~ contract can
require that only modifications made in a signcd writing will be effective,
but waivers will be recognized, cvcn whcn a contract contains this re-
quirement if a person makes n material change of position in reliance on
tho waivcr.ll (The provision in the contract requiring changes to be in
writing, unlcss it is a contract betwcen merchants only, must be sep-
arately signcd when a form contract is u s ~ d . ) ' ~
'Whcn thc amount of an oblignlion is disputed in good faith, an
agrccmcnt may be mndc which scttlcs the dispute. That agreement will
bc binding without any furthcr c o n s i d c r a t i o n . ' ~ c c e p t a n c cof a check
stating that it is in full payment, whcn the amount to be paid is in dis-
pute, will be regarded as an agreement to the settlement proposed."
There must bc a bona fide dispute as to the amount owed, however. If
the amount of the obligation is not in disputc, the crcditor may accept
the chcck and still hold thc dcbtor for thc balance of thc amount owcd.l5
U.C.C. 5 3-605. The cancellation must be made on the face of the
instrument, in a signed writing, or by surrender of the instrument to the per-
son liable on it. U.C.C. § 3-605(1). The cancellation must be intentional.
A mistaken cancellation is ineffective. See People's Bank of S. Carolina, Inc.
v. Robinson, 272 S.C. 155, 249 S.E.2d 784 (1978). An oral renunciation
is not cffcctive. Everton v. Blair, 99 Idaho 14, 576 P.2d 585 (1978).
U.C.C. 5 3-802(1) ( b ) . See § 21-45.
U.C.C. 5 1-107.
Id.
V e e U.C.C. 8 1-107. Comment.
' O U.C.C. 8 2-209 ( 1 ) .
" U.C.C. 5 2-209(5).
'' U.C.C. 5 2-209(2).
'"ee R c s t a f e ~ ~ ~(Second)
ettt o/ C o ~ l t m r t s.6 73 ( 1980).
l4 Sce Bailey, Brady otr Bank Clrecks 5 4.10 (5th ed. 1979).
'5 Id.
 5 32-20 SECURED TRANSACTIONS
In cases where the amount is in disputc, obviously, the crcditor cannot
safely collect the check to apply it towards satisfaction of thc obligation,
nor can he retain the check, without running the risk that it has been
accepted in satisfaction of the ~bligation.~"Under the Commercial Code,
there is a provision that permits a party to preserve his rights by making
clear that the tendered performance has been accepted "without preju-
dice" or "under protest." l T This suggests that the creditor could in-
dorse the check with the statement that it was being accepted "without
prejudice" and the creditor, then, would not be bound to the offered
settlernent.18 The exact scope of this section is not clear, however, be-
cause general contract principles are to the contrary.I9
5 32-20 ASSIGNMENT FOR BENEFIT OF CREDITORS
t
The simplest means of discharging an insolvent dcbtor is by volun-
tary assignment. In this arrangement, the debtor simply calls a meeting
of his creditors and proposes a plan to assign all his assets to pay his
debts. Each creditor agrees to take a percentage of his claim out of the
proceeds of the assets assigned, in full settlement of the whole debt.
Arrangements of this sort are binding because each creditor's agreement
to accept less is based on the other creditor's sacrifice of a similar per-
centage to discharge the entire i n d e b t e d n e s ~ .T~ o~ be binding upon all,
no creditor should receive any advantage over the others.21
Such assignments may be administered by the dcbtor himself, by a
trustee or receiver appointcd by agrcemcnt of thc partics, or by a court of
equity. When the assets are thus liquidated, and the proceeds divided as
agreed, the creditors who joined have no further claim upon the debtor.
But, creditors who d o not join the composition may enforcc thcir orig-
inal claims in full, even though the debts to the creditors who joined the
composition are discharged by less than the full amount of the claim.
5 32-25 RECEIVERSHIPS
Receiverships may be of a number of classes and can be based upon
voluntary agreement of the parties or upon state or federal statutes. The
receiver, no matter how appointcd, takes over control of, and title to,
18 Id.
'7 U.C.C. $ 1-207.
'8 I d .
19 Restatement (Second) of. Contracts $ 8 58, 59 ( 1980).
See ,
5 84(b).
2o I d .
21 See Hanover Nat'l Bank v. Blake, 142 N.Y. 404, 37 N.E. 5 19 (1 894)
BANKRUPTCY
the debtor's p r ~ p c r t y . ' ~He has power to sell it either n t public or pri-
vate sale, to assemble the proceeds, nnd to pay the unsecured creditors
pro rata. Secured creditors have specific rights to thcir collateral which
the receiver cannot destroy, however (as discussed in § 32-45).
Sometimes, state laws provide for the liquidation of corporations
by receivers. In such a case, the corporation may be dissolved by law,
by the termination of its franchise, or for reasons other than insolvency.
When this occurs, the receivers have powers granted by state statute to
liquidate the assets and to first pay off the creditors and then, in the case
of solvent corporations, to pay off the stockholders.
T h e United States Constitution provides that Congress shall have
the authority to make laws on the subject of b a n k r u p t ~ y . It ~ ~also pro-
vides that the states have no power to impair the obligation o f con-
t r a c t ~ . ~ Given
' these provisions, there are often questions as to the ex-
tent of state authority to adopt laws dealing with i n s o l v e n ~ y . ~ When
~
state law conflicts with the Federal Bankruptcy Law, the federal law pre-
vails because of the supremacy clause of the United States C o n s t i t u t i ~ n . ~ ~
- The problem is more complicated, however, because federal law defers
to state law in many instances, thus creating an interplay of state and
federal laws that makes it difficult to determine the extent to which state
law governs.
I 5 32-30 BANKRUPTCY
Bankruptcy is based wholly upon fcdcral statutes. Thcsc arc long
and complex, and are administered through the federal courts. It is im-
possible in a text of this sort to give a detailed or accurate summary of
the which, in most cascs, must bc administcrcd under the super-
vision. of competent lcgal counsel. However, there are certain general
features of the law with which the businessman should be acquainted.
Effective October 1, 1979, the Bankruptcy Reform Act of 1978 re-
placed the prior Federal Bankruptcy Act. The new Bankruptcy Code,
as it is usually called, contains a number of different procedures for the
22 Bumb v. Bennett. 51 Cal. 2d 294, 333 P.2d 23 (1958).
U S . Const. Art. I, 5 8.
24 US. Const. Art. I. J 10.
25See I n re Wisconsin Builders Supply Co., 136 F. Supp. 439 (E.D.
Wis. 1955), rev'd 239 F.2d 649 (7th Cir. 1956).
26 See 5 9-50.
2TTexts that might be useful are McLachlan, Bankruptcy (1956);
lawyers sources: Collier, Collier on Bankrriptcy ( 15th ed.) ; Rernington,
Bankruptcy (5th ed. 1950) ; Mulder & Forrnnn, Bonkrriptcy and Arrartge-
d n e n t Proceedings (4th ed. 1964); Gilmore, Security Interests in Personal
Property ( 1965).
$32-30 SECURED TRANSACTIONS
relief of the debtors. Chapter 7 of the Code covers liquidation of the
debtor's property, both voluntary and involuntary, and is the section
comparable to the "straight bankruptcy procedure" under the former
Act. Chapter 9 of the Code is concerned with the adjustment of debts
of a municipality. Chaptcr 11 of the Code covers reorganizations in
which thc objectivc is to rehabilitate thc debtor to continue in busincss.
This Chaptcr is available to individuals and partnerships as wcll as
corporations. Chaptcr 13 of the Code is similar to the former "wagc-
earner" provisions of the old Bankruptcy Act, but now has been cx-
panded to cover any "individual with regular income."
All the bankruptcy procedures are administered through the fed-
eral courts. Thcre is a U.S. Bankruptcy Court which is part of cach U.S.
District Court.28 T h e judicial officer who presides over the bankruptcy
court is called the bankruptcy judge." The bankruptcy judge, under the
new Bankruptcy Code, performs all functions which formerly were donc
by the referee in bankruptcy or the special master. The ofice of bank-
ruptcy judge is different from that of a U.S. District Judge. The bank-
ruptcy judge does not have life tenure,30 as does a U.S. District Judge.
Before the Bankruptcy Code, the U.S. District Judge was rcquired to
perform many of the functions essential to bankruptcy procecdings. Un-
der thc new Code, the bankruptcy judge may scrve as an appcllatc judgc
o n a three-judge panel that hears appeals from decisions of the bank-
ruptcy court.a1
Under the Bankruptcy Code, the bankruptcy court has broad juris-
diction over the debtor and any transactions involving the dcbtor once
the bankruptcy case has commenced. T h e court has exclusive jurisdic-
tion of "all of the property, wherever located, of the debtor." a2 It also
has jurisdiction over all civil proceedings which arise under the Bank-
ruptcy Code or arise in "related" cases.a3
The officer who is charged with administering the dcbtor's estate,
28 28 U.S.C. 4 151 (Supp. I11 1979).
2P 28 U.S.C. $ 5 151, 152 (Supp. 111 1979). The provisions creating the
new bankruptcy court become effective April 1, 1984.
28 U.S.C. 5 153 (Supp. 111 1979).
8' 28 U.S.C. $ 5 160. 1334 (Supp. 111 1979). Undcr 28 U.S.C.A. 5 160
(West 1974 & Supp. 1981), thc co~rncilof ench fcdcrnl judicinl circuit mny
designate panels of three bankruptcy judges to hear appeals from the hank-
mptcy court for the district within the circuit. See 28 U.S.C.A. § 1482(a)
(West 1974 & Supp. 1981). District courts have jurisdiction of bankruptcy
appeals only when there is no special bankruptcy panel for the particular
federal judicial district. Appeals from either a designated panel or a district
court will be heard by the Circuit Court of Appeals within that circuit. 28
U.S.C.A. 5 1293 (West 1974 & Supp. 198 1 ).
28 U.S.C. 5 147 1 ( e ) (Supp. 111 1979).
28 U.S.C. 5 1471(b) (Supp. 111 1979).
BANKRUPTCY fj 32-35
collecting the property of the estate, reducing the property to money,
and distributing the available funds to creditors is called the trustee.34
Prior to the ncw Bankruptcy Code, this officer sometimes was called a
receiver. The new Code only uses the term "trustee."
T h c bankruptcy proccss rcquircs thc trustcc to takc charge of thc
nsscts of the bankrupt, liquidate the nsscts, and, nftcr dcducting cxpcnscs,
distribute the procccds to t l ~ ccrcditors in the form of dividcnds. Whcn
this is donc, thc dcbtor is discliargcd of his usual dcbts and may start
business a n c ~ . ~ V u r i nthe
g course of the bankruptcy proceeding, sig-
nificant disputes between the trustee and creditors of the debtor as well
as bctween the creditors may arise regarding their respective rights in
the property of the dcbtor's cstate. Somc of tlrcsc problcnis arc discusscd
in $ $ 3 2 - 4 0 , 3 2 4 5 .
In reorganization cases, the debtor's assets are not entirely liqui-
dated. Undcr the guidance of the Court, the obligations of the insolvent
debtor are readjusted. There may be a complete realignment of the
debtor's corporate and financial structure, including reductions in un-
secured debts, bonded indebtedness, corporate stocks, and changes in
relation to subsidiary companies. When this is accomplished, either by
agreement of the parties or pursuant to the powers of the Bankruptcy
Court, the asscts are rcturncd to the rcorgnnizcd debtor entity, and it
continues busincss in its reorganized form. Under the new Bankruptcy
Code, the reorganization provisions are available to all types of entities,
including individuals, partnerships, and corporation^.^^ A plan of rc-
organization may bc proposed by the dcbtor or, after the expiration of
four months, creditors may propose a plan of r e o r g a n i ~ a t i o n . ~Reor-
~
ganization cases can be voluntarily Ned by the debtor or, in a case where
the debtor does not voluntarily file, by his creditor^.^^ Plans of reor-
ganization may affect the rights of creditors with security interests in the
asscts of thc d ~ b t o r . ~ "
5 32-35 VOLUNTARY AND INVOLUNTARY PETITIONS
IN BANKRUPTCY
Bankruptcy or reorganization takcs two general forms. If the
dcbtor dcsircs to be rclicvcd of thc burdcns of his dcbts, he may, on his
own nrotion. filc a pctition in bankruptcy.'* In this instancc, thc court
1 I U.S.C. $9 704, 1 104, 1 lo6 (Supp. I11 1979).
n6 I l U.S.C. 8 727 (Supp. 111 1979).
I I U.S.C. $ 5 101 (3O), 109(d) (Supp. 111 1979).
R 7 I I U.S.C. 5 1121 ( S ~ p p 111
. 1979).
38 Id.
rc 30 See l l U.S.C. 5 1 129(b) ( 2 ) (Supp. I11 1979).
1 1 U.S.C. 5 301 (Supp. 111 1979).
§ 3240 SECURED TRANSACTIONS
takes over the debtor's assets, calls in the creditors, and carries out the
bankruptcy procedures. This process is known as voluntary bankruptcy,
and its counterparts also apply in corporate reorganization.
In cases where the debtor does not desire to go into bankruptcy,
creditors on their own motion may file an involuntary petition in bank-
r ~ p t c y . ~The
l new Bankruptcy Code eliminates the former requirement
of establishing that the debtor committed acts of bankrupt~y.'~The
number of creditors required to file an involuntary petition varics from
one to three depending upon the amount of the debtor's obligations and
the size of the creditor's claims. The debtor can oppose the petition and
force a trial of the facts bcfore the bankruptcy judge.'"
Involuntary bankruptcy is a special weapon available to crcditon
who do not want to join in a general composition or assignment for the
benefit of creditors, who want to prevent the debtor from transferring
his assets or who want to force a reorganization of the debtor.
132-40 RIGHTS AND POWERS OF TRUSTEES
IN BANKRUPTCY
The trustee in bankruptcy takes charge of the debtor's property,
liquidates it, and distributes the proceeds to the creditors. H e is the rep-
resentative of the debtor's estate and assumes title to all of the debtor's
property, legal and equitable, as of the time of the filing of the petition
in bankruptcy." T h e trustee succeeds to all contract rights of the
dcbtor and to any claims the debtor had against other persons.4s The
trustee may assert any dcfenses against persons who havc claims against
the dcbtor, which defenses, under other circumstances, could have been
used by the debtor. These defenses include the use of statutes of limita-
tions, statutes of frauds. laws concerning usury, ~ t c . ' ~
In addition, the trustee has wide-ranging powers to gather o$er
property into the estate of the debtor to be made available for the dis-
tribution to creditors. The major powers are listed below.
( 1 ) Trustee ax lien credifor. Thc trustee has, as of the date the
pctition in bankruptcy is filcd, nll thc rights and powcrs that a lien
creditor might have, if that licn crcditor had obtnincd n licn on the
property at the time the bankruptcy case commenced, to set aside or to
" I 1 U.S.C.§ 303 (Supp. 111 1979).
42 Id.
Id.
43
1 1 U.S.C. 5 5 541, 704 (Supp. 111 1979).
44
46 Id. See Segal v. Rochelle, 382 U.S. 375 (1966).
rs.
11 U.S.C.5 541 (e) (Supp. 111 1979).
542
BANKRUPTCY 0 32-40
void any transfer of property of the This provision is of great
importance to secured parties because a lien creditor is superior to a
sccurcd party who only has an unpcrfected security i n t ~ r e s t . ' ~Thus,
the trustee undcr this provision can set asidc all security interests created
by'the debtor that are unperfected as of the commencement of the bank-
ruptcy proc~eding.~Q
( 2 ) Trustee ar srrccessor to the rights o f msec~rredcreditors. The
trustce also can nsscrt thc rights that any unsccurcd crcditor who has a
claim against the dcbtor might exercise.60 This will permit the trustce
to void debtor's transfers of interests in his property that could not have
bccn avoidcd by an ordinnry licn crcditor but which, as against a par-
ticular crcditor of thc dcbtor, are void.
( 3 ) Trrrstee's power to ser aride preferential fransfers. When a
debtor who is insolvent transfers property shortly before bankruptcy to
satisfy a prior debt, the trustee has the authority to set aside the transfer
and recovcr the property for the benefit of thc estate, in order to prevent
the transferee-creditor from obtaining an advantage over all other cred-
itors." Transfers made by the debtor within ninety days before the date
of the filing of the bankruptcy petition for an antecedent debt are vul-
nerable undcr this provision." But additional transfers may be set aside,
when the creditor is related to the debtor, within one year of the date of
filing o f the p c ~ i t i o n . The
~ ~ precise scope of the trustee's powers to set
aside prefcrcnces is complcx but must be considered in cvaluating the
effcctivcncss of any security interest in collateral of a person who may
bccome a b a n k r ~ p t . ~ '
( 4 ) Tncstee's power lo n~rllifyfra~cdrlenf transfers. The trustee
may set aside any transfer of property made by the debtor "with actual
intent to hindcr, dclay or dcfraud" any ~ r c d i t o r . ~ T T htransfer
c must
have bccn made within one year beforc the date of the filing of the pcti-
1 l U.S.C. 5 544(a) (Supp. 111 1979).
'' U.C.C. § 9-301.
"* Thc Bnnkruptcy Code carefully describes the type of creditor whose
rights thc trttstcc cnn cxcrcisc. Generally, it is nn ordinary creditor who has
ol)tnincd n licn hy jutlicinl proccctlinp wliiclr nn ortlinnry contrnct creditor
could obtain. Thc Ihnkruptcy Code also givcs thc (rustcc the powcrs, which
certain good-faith purchasers might have, to set aside certain transfers. 1 1
U.S.C. 544 (Supp. 111 1979).
" 1 1 U.S.C. § 544(b) (Supp. I11 1979).
in 1 l U.S.C. 5 547 (Supp. I11 1979).
" I I U.S.C. § 547(b) (4) (Supp 111 1979).
" !A. I I U.S.C. 5 5 101 ( X ) ,547(b) (4) (Supp. I11 1979).
* These provisions were substantially different prior to the 1978 Act.
11 U.S.C. 5 548(a)(1) (Supp. 111 1979).
 SECURED TRANSAaIONS
tion.68 The trustee also may set aside certain transfers, within a year of
the bankruptcy filing, when the debtor was insolvent on the date of the
transfcr and when the debtor received less than a "rcasonably equivalent
value" for the property tran~ferred."~
( 5 ) Trustee's power to set a i d e statutory liens. The Bankruptcy
Code gives the trustee power to avoid certain liens that attach to the
propcrty of thc debtor and that first bccomc clTcctivc against thc debtor
when a petition in bankruptcy is filed, or other action in taken against
the debtor, because of the debtor's i n s o l ~ e n c y . ~ ~
When the trustee sets aside a transfer of an interest in property of the
debtor, the transferee may have rights under the new Bankruptcy Code.
Thc trustee cannot recover propcrty from a person who is not the first
transferee and who took the propcrty in good faith, for value, nnd with-
out knowledge of the avoidability of the transfer.60 All persons who
have received a debtor's transfer of property in good faith are given a
lien, on the recovered property, to secure improvements made by them
to the property.''"
3 32-45 SECURED AND UNSECURED CREDITORS
When the assets of debtors are distributed by the bankruptcy court
to creditors, it becomes important to determine priority of payment
among the creditors. The Bankruptcy Code establishes priorities for
paying claims."' Expenses incurred in administering the estate of the
debtor and conducting the bankruptcy proceedings have first claim.82
After this, other claims, depending upon their nature, follow. Unless
the creditor has a claim which falls within one of these special categories
which are given priority, the creditor who has an unsecured claim re-
ceives the proceeds of the estate only after all other payments are made.
The secured creditor, one whose obligation is secured by a security in-
terest in collateral which is enforceable against the trustee and not sub-
ject to any of the trustee's avoiding powers, is in a much different posi-
tion. Although the trustee has certain powers, even with respect to
certain secured creditors discussed below, generally the secured creditor
can recover the collateral or its equivalent from the trustee to usc in
satisfaction of the obligation.
"Id.
6' 11 U.S.C. 5 548(a) (2) (Supp. I11 1979).
6 8 1 1 U.S.C. 5 545 (Supp. 111 1979).
fin "1 U.S.C. 5 550(b) (Supp. 111 1979).
1 1 U.S.C. !j 55O(d) (Supp. I11 1979).
CL
I1 U.S.C. 55507, 726 (Supp. 111 1979).
'2 Id.
544
BANKRUPTCY
In order for the secured creditor to effectively assert a security in-
terest in property of the debtor against the trustee, the secured party
niust be sure the security will survive all of thc trustee's powers to avoid
the transfer of interest in thc dcbtor's propcrty discussed in $ 32-40.
For example, the sccurity interest must bc perfected at the time of the
filing of thc pctition of bankruptcy in order to hold up against the trust-
ee's power to void transfers that arc not cffcctivc against licn creditors.
Thcrc arc otlicr situations, which nrc more complcx, wlicrc n sccurity
intercst created under the Commercial Codc may be subject to challenge
by the trustee. These situations will not be discussed in detail here but
there are excellent treatments of these problems in other
The new Bankruptcy Code gives the trustee power to deal with
propcrty of the tlcbtor in which valid sccurity itltcrcsts cxist in ccrtain
circumstances. Thc Bankruptcy Codc contains provisions that force the
secured party to seek the approval of thc bankruptcy court before taking
any steps to repossess or dispose of collateral. Under the Bankruptcy
Code, upon the filing of a pctition in bankruptcy, all acts "to create,
pcrfcct, or enforce" any sccurity intcrcst against the estate of the debtor
are automatically stayed." The sccured party may be able to obtain a
termination of this stay, but this rcquircs an appeal to the court.e6 When
the debtor continues in business while bankruptcy proceedings are pend-
ing, the bankruptcy court may give the debtor the "use, sale, or lease"
of the propcrty in which the sccurity intcrest The creditor is
not without rights to rcsist this action but this also involves an appeal to
the bankruptcy court.a7 Furtlicr, whcn the debtor is reorganized, there
is a provision that permits thc reorganized debtor to use the secured
party's collateral, by giving the sccured party what the Bankruptcy Code
calls the "indubitablc equivalent" of the secured party's intcrest in the
~ o l l a t e r a l . " The
~ key to resolving these various disputes between a se-
cured party and a trustee will be the manner in which the Bankruptcy
Code provision requiring "adequate protection" to the interests of se-
cured partics is applied.a8
O3 See Clark, The Law 01 Secrcred Transactions Under tlre Uniforttr
Cotnrnercial Code, Ch. 6 (1980); White & Summers, The Urriform Cotn-
nrercial Codc, C h . 24 (2d cd. 1980) (hcrcinnftcr cited as Unifortn Corntner-
cia1 C o d e ) ; Gilmore, note 27 srcpm.
O 4 1 1 U.S.C. !j 362(a) ( 4 ) (Supp. J J J 1979).
" I I U.S.C. !j 362(d) (1 ) (Supp. 111 1979).
" " II U.S.C. 5 363 (Supp. 111 1979).
O7 SCCI I U.S.C. § 363(e) (Supp I11 1979).
O R I I U.S.C. 5 1 I D ( b ) (2) (Supp. 111 1979).
On 1 1 U.S.C. § 361 (Supp. I11 1979). This problem is the subject of an
excellent discussion in Unifortn Corntnercial C o d e , note 63 supra, § 24-8.
 PART V
Special Consumer Credit Regulations
 Chapter 33
CREDIT DISCLOSURE
REGULATION
Section Pnge
33-5 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 549
33-10 Truth-in-Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 1
33-15 Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 552
33-20 Closcd-End and Opcn-End Credit Arrangcnicnts . . . . . . 553
33-25 Closcd-End Credit Disclosure Requirements . . . . . . . . . 553
33-30 Open-End Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 555
33-35 Consumer Leascs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 556
33-40 Disclosures in Real Estate Transactions . . . . . . . . . . . . . 558
33-45 Rescission Rights in Real Estate Transactions . . . . . . . . 558
33-50 Civil Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 560
33-55 Administrative Enforccrnent . . . . . . . . . . . . . . . . . . . . . . 562
33-60 Reliance on Model Forms . . . . . . . . . . . . . . . . . . . . . . . . 563
33-65 Duty to Rcvisc Prior Disclosures . . . . . . . . . . . . . . . . . . 564
33-70 Regulation of Credit Advertising . . . . . . . . . . . . . . . . . . 564
33-75 Effect of Truth-in-Lending on State Law . . . . . . . . . . . . 565
33-80 Credit Billing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 565

li 33-5 INTRODUCTION
Historically, thc consumer has been at a great commercial disad-
vantage undcr our lcgal system. The original approach of the common
law was excniplificd by tlic maxim caveat e~trptor-"Let thc buycr bc-
ware." Undcr this approach, tllc seller of goods had only thc obligations
to the buycr that wcrc cxprcsscd in their contract for sale, and no more.
Lacking thc econoniic powcr to bargain for terms that would protect his
intcrcst, tlic consumcr had no recourse whcn ~ h goods
c provcd defectivc.
In those circumstanccs when thc law did afford consumers' rights, form
contract provisions, which waived such rights, cfTcctively nullified thc
law's prolcction.
+ AS a rcsult of thesc and other practices considered unfair to con-
549
3 33-5 CONSUMER CREDIT
sumers, particularly in the field of credit practices, the last fifteen years
have sccn an explosion of laws designcd t o redress the balance betwecn
the consumer and thc commercial partics with whom hc deals. Laws
have been enacted o n the state and federal levels, administrative agencies
have adopted regulations with consumer protection goals in mind, and
courts have become more sensitive t o the problems consumers confront.
O n the state level, many statutes have been enacted to protect con-
sumers. A comprehensive Uniform Consumer Credit Code was promul-
gated by the National Conference of Commissioners on Uniform State
Laws in 1968 and revised in 1974. Referred to as the U.C.C.C., this
Code substantially influenced subsequent consumer legislation, but has
actually bccn enactcd by only a relativciy few numbcr of states.' Even
where it has been adopted, the modcl Code provisions havc becn sub-
stantially revised. T h e National Conference of Commissioners on Uni-
form State Laws also has approved a Uniform Consumer Sales Practices
Act, which covers deceptive and unconscionable consumer sales prac-
tice~.~
On thc fcdcral levcl, thc Consumer Credit Pro~cctionAct is perhaps
the major consumer legislation.Vhis Act contains provisions on con-
sumer credit cost disclosure (commonly referred to as truth-in-lending),
crcdit reporting, discrimination in credit, debt collection practices, limi-
tation on garnishment, crcdit card transactions, and clcctronic fund
transfcrs. T h e Magnuson-Moss Warranty Federal Trade Commission
Improvement Act also contains important consumer protection provi-
s i o n ~ .These
~ and other federal statutes that apply to consumer credit
transactions will be briefly discussed in the scctions which follow.
The following states have adopted the 1968 Act: Colorado, Idaho.
Indiana. Oklahoma, South Carolina, Utah, Wisconsin, and Wyoming. U.L.A.
223 (1978).
The following states have adopted the 1974 Act: Iowa, Kansas, and
Maine. Id. at 583:
2 Uniform Consumers Sales Practices Act. 7A U.L.A. 1 (1978). The
following states have adopted this act: Kansas, Ohio, and Utah. Id.
3 IS U.S.C. $5 1601-1 693r ( 1976 & S u p p I11 1979). The Depository
Institutions Deregulation and Monetary Control Act of 1980 was enacted
on March 31, 1980. Title VI of the Act, known as the Truth-in-Lending
Simplification and Reform Act, amends the various sections.of the Consumer
Credit Protection Act, codified in I5 U.S.C., with which this chapter deals.
Except for the amendment to IS U.S.C. 5 1607 dealing with administrative
enforcement, which took effect on March 31, 1980 these arnendmcnts do
not take cflcct until March 31. 1982. As 15 U.S.C.A. $ 5 1601-1693r (West
1974 & Supp. 1981) contains both the 1980 amendments which will lake
effect in 1982 as well as the former provisions of the Truth-in-Lending Act,
subseauent citations in this chaoter to the Consumer Credit Protection Act
rr,
will idfer to the U.S.C.A. venidn.
See IS U.S.C.A. 5 S7a (West Supp. 1981).
DISCLOSURE REGULATION 33-10
5 33-10 TRUTII-IN-LENDING
Title I of thc Consumer Credit Protcction Act is popularly relcrred
to as the Truth-in-Lcnding Act.& This Act iniposcs an obligation upon
cach creditor who enters into a consumcr credit transaction to "disclose
clearly and conspicuously" information concerning the terms of credit
e ~ t e n d e d . The
~ form of disclosure rcquired is regulated by the Board
of Governors of the Federal Reserve System.l The statutes only provide
a basic fran~cwork. The precise dutics placcd upon creditors can be un-
derstood only by reference to the detailed provisions of the Board's
regulations.
T h e approach of the Truth-in-Lending Act is to force disclosure of
credit tcrms. The Act does not requirc a creditor to extend credit on any
particular tcrms; crcdit may bc extcndcd at any lcgal ratc as long as thc
disclosures mandated by truth-in-lending arc made. The philosophy un-
derlying this approach is that adequate disclosure will enable consumers
to judge for themselves the desirability of entering into any particular
crcdit transaction and to shop among creditors for the best terms.
Whcthcr or not this is a realistic philosophy is a matter of some dispute.
In 1976, thc Truth-in-Lending Act was amended to cover most con-
sumcr lease transactions involving not more than $25,000. Although
prior to thc 1976 amendments, Icase transactions that were the equiva-
lent of crcdit sales wcrc subjcct to thc Act's disclosure r c q ~ i r e m c n t s thc
,~
1976 leasing provisions greatly extendcd the scope of the Act.
In 1980, Congress enacted the Truth-in-Lending Simplification and
Rcform Act as part of the Depository Institutions Deregulation and
Monctary Control Act. Except for provisions giving the enforcement
agcncics powcr to rcquirc crcditors to makc rcstitution to consunicrs, thc
Siniplification and Reform Act does not become effective until October
I , 1982. Onc feature of the Simplification and Rcform Act is a require-
ment that the Federal Reserve Board issue modcl disclosure forms. Al-
though creditors are not required to usc thc model forms, they will be
autoniatically in compliance with the disclosure provisions of the Act
if they d0.O Creditors are entitled to use these forms prior to the effec-
tive date of the Simplification and Reform Act.1°
15 U.S.C.A. 5 1601 note (West Supp. 198 1 ).
15 U.S.C.A. 5 163 1 ( a ) (West Supp. 1981 ).
IS U.S.C.A. 5 5 1604, 1631, 1632 (Wcst Supp. 1981). The Board's
regulations are contained in Regulation Z, 12 C.F.R. Pt. 226 (1981). The
Board also issues interpretations of Regulation Z. In Philbeck v. Tirnmers
Chevrolet, Inc., 499 F.2d 971 (5th Cir. 1974), the court held that Board
interpretations should be given "great deference."
IS U.S.C.A. 5 1602(g) (Wcst 1974 Pc Supp. 1981). Scc 5 33-35.
IS U.S.C.A. 5 1604(b) (Wcst Supp. 1981).
l o IS U.S.C.A. 5 1604(d). For an excellent discussion of the Truth-in-
Lending Act, see Landers, "The Scope of Coverage of the Truth-in-Lcnding
Act," 1976 Am. B. Foundation Research J. 565 (1976).
5 33-15 CONSUMER C R E D I T
5 33-15 SCOPE
The Truth-in-Lending Act requires creditors to make disclosure
when they extend consumer credit." Thus, the transaction must involve
a "creditor" and "consumer credit." Consumer leases were given cover-
age by the Act in 1976.12 Howcver, the Act expressly exempts four
transactions:
( 1 ) Crcdit cxtcndcd for busincss or comnicrcial purposcs o r to gov-
ernmental agencies or to organizations;
( 2 ) Transactions in which the amount financed is over $25,000
unless it involves real property;
( 3 ) Sccuritics o r commodities transactions involving broker-dcalers
registered with the Securities and Exchange Commission; and
(4) Transactions regulated by Public Utility commission^.^^
T h e Simplification and Reform Act of 1980, effective October 1, 1982,
exempts all agricultural transactions." Until then, the Act covcrs credit
transactions for agricultural purposes up t o $25,000.16
Consumer credit is credit extended to a natural person "primarily
for personal, family, household, o r agricultural purposes." "Agricul-
tural" is deleted in Regulation Z, Section 226.2 and is deleted from thc
Act effective in 1982. The definition is similar to that for consumcr
goods under Article 9 of the Commercial Code." Because the require-
ment is only that the consumer use be the "primary" purpose, there can
be transactions within the disclosure requirements of the Act where goods
have some business use. The classification of agricultural uses was
eliminated from the definition of consumer credit by the Simplification
and Reform Act.
The definition of creditor is more involvcd. The Act applics when
the credit extcndcd cithcr is payablc undcr tlic agrccmcnt in more than
four installments, o r is crcdit for which the paymcnt of a finance charge
is rcquircd.18 T h e credit may be part of a loan, sale of propcrty or
services, or "otherwise." A creditor, then, is one who cither regularly
11 I5 U.S.C.A. 9 I63 1 (West Supp. 1981).
l 2 Id. See 5 33-35.
15 U.S.C.A. J 1603 (West 1974 & Supp. 1981).
1' 15 U.S.C.A. 5 1603 (West 1974 & Supp. 1981).
"'15 U.S.C.A. 5 1603(5) (West Supp. 1981).
18 15 U.S.C.A. 5 I602(h) (West 1974 & Supp. I98 1 )
.
U.C.C. 5 9-1 09 ( 1 )
1s 15 U.S.C.A. 5 1602(f) (West Supp. 1981 ).
'0 Id.
DISCLOSURE REGULATION 5 33-25
extends such consumer crcdit or rcgrtlarly arranges for the extension of
such crcditZ0--in othcr words, sonlconc in thc busincss of providing
crcdit. The Act does not define who constitutes an arranger of credit, but
it must be somconc who "regularly" docs so.2'
T h e disclosures required by the Truth-in-Lending Act vary depend-
ing upon whether the credit extended is classified as "closed-end" o r
"open-end." Open-end crcdit is crcdit cxtended under an arrangement
in which the creditor contemplates repeatcd transactions. A finance
charge is generally computed from timc to time on the outstanding bal-
ance of the credit, and the amount of credit that may be extended to the
consumer continues to be available up to the credit limit approved when-
ever the dcbtor reduces the outstanding balance.22 A common example
of an opcn-end credit plan is the revolving charge account in which the
holder of the account has discretion fo make installment payments on
the outstanding obliga~ions.
Closed-end credit is dcfined simply as credit other than open-end
~ r e d i t . ~ Vis t crcdit that is extendcd for a specific pcriod of timc. The
total amount of credit is fixcd, and thc dates when payment is due are
established in advance.
8 33-25 CLOSED-END CREDIT DISCLOSURE
REQUIREMENTS
Undcr the Truth-in-Lcnding Act, as arncndcd by thc Simplification
and Rcforril Act of 1980, wlicn the transaction is n consumcr crcdit sale
o r loan, thc following disclosures must be
Id.
2A
Id. 12 C.F.R. J 226.2 (1981) (Regulation Z). Sce Bright v. Ball
Mernorinl Hosp. Ass'n, 463 F. Supp. 152 (S.D. Ind. 1979), aff'd 616 F.2d
328 (7th Cir. 1980); Gernstn v: Hihcrnin Nnt'l n n n k . 41 1 F. Supp. 176
(E.D. Ln. 1975). afl'd i ~ port
t m t r l r r v ' d i l t ptrrt 575 F.2d 580 (5th Cir.
1978); Eby v. Reb Realty Inc., 495 F.2d 646 (9th Cir. 1974). The Board
regulations also stipulate that one can be an "arranger of credit only when
the person extending the credit is not a creditor." 12 C.F.R. 1 226.2 ( 1981)
(Regulation 2).
22 12 C.F.R. B 226.2 (1981 ) (Regulation Z ) .
an See 45 Fed. Rcg. ROG48 (1980); 46 Fed. Reg. 20848 ( 1981).
15 U.S.C.A. 5 l638(a) (1) (West Supp. 1981); 12 C.F.R. J 226.8
* (1981) (Regulation Z).
5 33-25 CONSUMER CREDIT
(1) The identity of the creditor.
( 2 ) The amount financed.
(3) A statement informing the consumer of his right to a written
itemization of the amount financed, which includes a space
for a "yes" or "no" indication to be initialed by the consumer.
In the alternative, "a separate written itemization."
( 4 ) The finance charge.
( 5 ) The annual percentage rate.
(6) If the annual percentage rate may increase, an explanation
of the circumstances and limitations that will govern the
change.
(7) The payment schedule. The number, amount, and due dates
or period of payments scheduled to repay the total of pay-
ments.
( 8 ) T h e total of all payments. That is, the sum of all of the
amounts paid under the payment schedule.
( 9 ) Any "demand" feature of the obligation.
(10) The total sale price in any credit sale of property or services.
This is the "total of the cash price of the property o r services,
additional charges, and the finance charge."
(1 1 ) A statement indicating the consumer's right, if any, to a re-
bate o f financing charges upon refinancing or prepayment
when the finance charge is precomputed, and a statement in-
dicating the existence of any penalty provisions upon refi-
nancing, prepayment, or acceleration.
(1 2) Late payment charges.
(13) A statement indicating that a security interest has been taken
in the propcrty purchased o r in other property identified by
item or type.
(14) Insurance.
(1 5 ) Certain fees and charges related to security interests.
(16) A statement telling the consumer to refer to the contract doc-
ument for information about the rights under the deal.
(17) In mortgage transactions, a statement indicating whether the
mortgage can be assumed.
(1 8 ) Any required deposit.
Prior to the Simplification and Reform Act of 1980, the Truth-in-
Lending Act not only required more extensive disclosure but also distin-
guished between consumer credit sales and consumer loan transactions
in its disclosure requirements.
+
DISCLOSURE REGULATION j 33-30
The disclosures required by the Act must be made before the credit
is extended.2B An exception is provided when the transaction is com-
puted by mail order, telephone order, or other electronic communica-
tions. In these cases, the creditor may delay disclosure until the due
date of the first payment.26 This exception applies, however, only when
the request for credit is made without personal solicitation by the creditor
and the essential terms of the transactions have been set forth in printed
materials distributed to the public or available in a sales catalog.2' There
also is an exception for residential mortgage transactions, which permits
a creditor to send a good faith estimate of the disclosures required under
the Act as long as a corrected statement is provided at the time of closing
and settlement of the mortgage t r a n s a ~ t i o n . ~ ~
§ 33-30 OPEN-END CREDIT
In opcn-end consumer credit plans, the iollowing disclosures must
be made in an initial disclosure statement:20
( 1 ) The finance charge. The conditions under which a finance
charge will be imposed including specifically:
( a ) When the charge begins to accrue and any free period of
credit;
( b ) The periodic rntcs used in computing thc financing charge;
(c) The method for determining the balance upon which the
finance charge is imposed;
( d ) The method of determining the amount of the finance
charge, including any minimum or fixed amount.
( 2 ) Identification of other charges which may be imposed and
their method of computation.
( 3 ) A statement that a security interest has been taken in property
purchased as part of the transaction or other property, identi-
fied by item or type, when this is the case.
( 4 ) A statement describing the procedures to be followed in the
case of billing disputes, the duties imposed upon credit card
issuers, and the rights of thc consumer.
26 IS U.S.C.A. 5 1638(b)(l) (West 1974 & Supp. 1981).
28 IS U.S.C.A. 5 l638(c) (West 1974 & Supp. 1981).
2' Id.
2V5 U.S.C.A. § 1638(b)(2) (West 1974 & Supp. 1981).
15 U.S.C.A. 5 1637(a) (West 1974 & Supp. 1981); 12 C.F.R. Q 226.6
(1981).
555
 CONSUMER C R E D I T
The disclosures described above must be made to the debtor before
any account is opened.30 In addition, with each bill, the creditor must
make the following d i s c l o s ~ r e s : ~ ~
( 1 ) The previous balance. The outstanding balance at the begin-
ning of the statement period.
(2) Identification of transactions. T h e amount and date of each
extension of credit during the period briefly identified.
( 3 ) The total amount creditcd to the account during the period.
( 4 ) The rates used in assessing finance charges.
( 5 ) The balance on which the finance charge was computed and
a statement of how the balance was determined.
(6) The amount of any finance chargc addcd to the account
during the pcriod.
( 7 ) The total finance charge expressed as an annual percentage
rate.
( 8 ) Identification of any charges other than finance charges.
( 9 ) T h e outstanding balance at the end of the period.
(10) The date when paymcnt must be made to avoid additional
finance charges.
( 1 1) T h e proper address for notice of billing errors.
I n addition, once a year, the creditor must send the consumer a
statement repeating the description of rights and responsibilities with re-
spect to billing errors and credit card transactions required in the initial
disclosure statement.82
9 33-35 CONSUMER LEASES
Prior to 1976, thc disclosure provisions of the Truth-in-Lending
Act applied to leases only to the extent that such leases camc within the
definition of a "credit sale." The 1976 amendments grcatly extcnded the
covcrage of the Act to include consumer leases. Undcr the amcnd-
ments, a consumer lease is any lcase of personal property by a natural
person for over four months and which is for a total obligation that does
not exceed $25,000. T h e transaction must be entered into primarily for
"personal, family, o r household purposes." It is covcrcd by the Act
whcthcr or not a purchasc option is part of thc a r r a n g c n ~ c n t . ~ ~
an 15 U.S.C.A. 5 1637(b) (West 1974 & Supp. 1981).
Id. 12 C.F.R. 5 226.7 ( 1981) (Regulation 2).
as 15 U.S.C.A. 1 1637(a) (7) (West Supp. 1981).
83 15 U.S.C. 8 1667 (Supp. 111 1979).
DISCLOSURE REGULATION
When thcre is a consumer lease transaction, before consummation
of the lease, the lessor must give the lessee a dated written statement that
discloses the following information about thc lease:84
(1 ) A description of the leased property.
( 2 ) The total amount of any payment required at the beginning
of the lease.
( 3 ) Thc number, amount, and duc dates of paymcnts scheduled,
including the total amount of these periodic payments.
( 4 ) The amount to be paid for official fees.
( 5 ) The amount of other charges payable by the lessee not in-
cluded in the periodic payment with a description of thc
charges, including the amount of the lessee's liability at the
end of the term.
( 6 ) A description of thc insurance provided o r paid for by the
lessor or required of the lessee.
(7) A statement identifying all express warranties and guarantees
made by the manufacturer or lessor.
( 8 ) Identification of the party responsible for maintaining or
servicing the property and thc standards used for wear and
use.
(9) A description of any security interests held or retained by the
lessor with an identification of the property to which the
security interest attaches.
( 1 0 ) Penalties or charges for late payments and default.
( 1 1) A description of any purchase option terms.
( 1 2 ) A statement of conditions allowing thc lessee or lessor to
tcrminatc thc lcasc bcforc thc end of thc statcd tcrnl and thc
amount oE any pcnalty or othcr chargcs for early termination.
( 13) A statement that the lcsscc shall be liable for the difference
bctween the estimated valuc of the property and its realized
valuc at early tcrniination or tile end of thc lcasc tcrm, if such
liability exists.
( 1 4 ) Whcre the lessce's liability at early termination or at the end
of the lease term is based on the estimated value of the leased
property, a statcnicnt of the Icssee's right to obtain, at the
Icsscc's cxpcnsc, a binding appraisal from an indcpcndcnt
third party.
46 Fed. Reg. 20952 (1981) (to be codified at 12 C.F.R. 5 213.4
* (Regulation M ) ) .
5 33-40 CONSUMER C R E D I T
(15) Where the lessee's liability at the end of the lease term is
based upon the estimated value of the leased property, a cal-
culation of the difference between the value of the leased
property at the beginning of the lease and the total lease obli-
gations, an explanation of when the estimated value at the end
of the lease will be presumed unreasonable, and a statement
that the lessee can consent to any final adjustment concerning
this liability.
5 33-40 DISCLOSURES IN REAL ESTATE
TRANSACT1ONS
The Truth-in-Lending Act applies to consumer credit transactions
that involve real estate. As discussed in $ 33-15, the $25,000 limitation
upon transactions subject to the provisions of the Act does not apply in
the case of residential real estate transactions. The information that
must be disclosed generally is the same as that required in other consumer
credit transactions, as described in § Q 33-25, 33-30. In addition, how-
ever, when the transaction results in a lien on the consumer's residence,
the consumer has a spccial right of rescission. This rcscission right is
discussed in 3 33-45.
Two other federal statutes impose disclosure requirements on real
estate transactions: the Interstate Land Sales Full Disclosure Act,"' and
the Real Estate Settlements Procedures Act.a8 These Acts also require
extensive disclosure and cannot be described in any detail hcrc. In gen-
eral, the Interstate Land Sales Full Disclosure Act requires anyone who
sells 100 or more lots of unimproved land in interstate commerce to
register with the Department of Housing and Urban Development and
comply with other disclosure requirements. The Act is patterned after
the registration and disclosure requirements in the federal securities laws.
The Real Estate Settlements Procedures Act applies to federally related
mortgage transactions involving residential dwellings. The Act requires
lenders to provide borrowers with a uniform settlement statement which
itemizes the charges imposed and makes other disclosures.
5 33-45 RESCISSION RIGHTS IN REAL ESTATE
TRANSACIlONS
Consumer credit transactions involving the creation of a security
interest in the principal residence of the debtor were thought by Congress
,,
DISCLOSURE REGULATION 5-45
to be so consequential to the debtor that a right of rescission should be
provided.RT In such transactions, the consumer has an absolute right to
cancel the deal until midnight of the third business day following either
consummation of the transaction or delivery to the consumer of a state-
mcnt disclosing the consumer's right to rescind and a form for accom-
plishing the rescission, whicl~ever is This is an absolute right
givcn to the consumcr. It does not dcpcnd upon the cstablishn~cntof any
breach of conduct or violation of the Act by the crcditor. Because the
rescission period runs from the time the required disclosure and rescission
forms are supplied, the time within which the consumer may rescind the
transaction can extend for a considerable period after the consummation
of the crcdit transaction. There is a limitation, howevcr. The right to
rcscind tcrtninatcs thrcc ycars from thc date of consummation of the
transaction or whcn thc propcrty is sold, whichever occurs firstang
The rcscission right docs not apply to transactions in which the con-
sumcr is obtaining credit to finance thc purchase or construction of a
r e s i d e n c ~ . ~It" also docs not cover a refinancing of an existing obligation
by thc snmc crcditor which docs not involvc any further advnnces.4'
Bccausc of thc broad dcfinition of "dwelling." thc right to rescind
includcs any structure containing onc to four family housing units, n
mobile homc, and individual units of condon~iniumsor c o ~ p e r a t i v c s . ~ ~
Upon giving notice of rescission, the consumer is not liable for any
amount, including any finance charge, and the security interest in the
property is void.4J The crcditor is obligated to return any down payment
or othcr propcrty givcn by thc consurncr within twenty days.44 The con-
sumcr may keep any property which has bccn transfcrrcd to him by the
crcditor until the crcditor returns thc consumer's down payment and
executes appropriate documents to erase any record of the security inter-
est. Upon thc creditor's compliance with thcsc obligations, the consumer
must tcndcr back thc propcrty of thc creditor unless return is "im-
practicable or inequitable"; i t is thcn sufficient for the consumer to
tendcr its reasonable value.4K The consumer may tender return of the
propcrty at the location of the property o r the residence of the consumer,
whichcvcr the consun~crelects. Undcr the Simplification and Reform
aT 15 U.S.C.A. 9 1635 (West 1974 & Supp. 1981) .
aa 15 U.S.C.A. 1 1635(a) (West 1974 & Supp. 1981).
15 U.S.C.A. 8 1635(f) (West 1974 & Supp. 1981).
4n 15 U.S.C.A. fi l635(c) ( I ) (A) (West 1974 & Supp. 1981).
4' 15 U.S.C.A. 5 l635(e) ( I ) ( B ) (West 1974 & Supp. 1981).
4 2 15 U.S.C.A. $ 5 1602(v). 1602(w) (West 1974 & Supp. 198 1 ).
'"5 U.S.C.A. fi 1635(b). 12 C.F.R. 1226.9(d) (1981).
4 4 15 U.S.C.A. 9 I635(b) (West 1974 & Supp. 1981 ).
Id.
 33-50 CONSUMER CREDIT
Act of 1980, effective October 1, 1982, if the creditor fails to take pos-
session of the money o r property within twenty calendar days after the
tender, the consumcr may keep it without any furthcr o b l i g a t i ~ n . ~ ~
5 33-50 CIVIL LIABILITY
Creditors who fail to comply with the requirements imposed by the
Truth-in-Lending Act or Regulation Z, which implements the Act, are
liable for any actual damages caused as a result of the violation, for costs
(including reasonable attorney's fees in any successful action), and for a
statutory pcnalty in the case of an individual action>7 T h e statutory
penalty is twice the amount of any finance chargc involved in the trans-
action or, when a consumer lease is involved, 25 percent of the total
amount of the monthly payments under the lease. In all cases the penalty
is confined to a range of a minimum of $100 to a maximum of $1000.48
The statute does not give a penalty or minimum recovery when a class
action is brought. T h e total recovery in a class action for claims based
upon the same failure t o comply with the Act by the same creditor is a
maximum of $500,000 or one percent of the net worth of the creditor,
whichever is less.'"
When there are multiplc failures to disclose the information required
by the Act to a particular consumer, that consumcr has only onc cause
of action for damage^.^" T h e statutory penalty cannot be multiplied by
each violation. Similarly, when one consumer credit transaction or lease
involves more than one consumer who is obligated, there can only be one
recovery of the statutory penalty for all of the obligor^.^'
A creditor will have no liability when prompt action is taken to cor-
rect any error made. Under the Simplification and Reform Act of 1980,
if the crcditor takes action within sixty days after discovcring an error
and acts prior to the receipt of any written notice of the error from .the
obligor and before any action has been initiated against him for violation
of the Act, the creditor will have no liability. But the creditor must give
notice to the person concerned of the error and make adjustments needed
to assure the consumer will not be required to pay any amount in excess
of the charge actually disclosed.
4d Id. 12 C.F.R. 9 226.9(d) ( 1981) (Regulation 2).
47 I5 U.S.C.A. 9 1640(a) (West 1974 & Supp. 1981). Any violation of
the Board's regulations is a violation of the Act.
15 U.S.C.A. 9 1640 (West 1974 & Supp. 1981 ).
5 U.S.C.A. 9 l64O(a) (West Supp. 198 1 ).
no 15 U.S.C.A. 9 1640(g) (West 1974 & Supp. 1981).
6t 15 U.S.C.A. 5 I64O(d) (West Supp. 198 1 ).
DISCLOSURE REGULATION
A creditor also has a defense to any action brought by a consumer
for violation of the disclosure requirements if the creditor shows that the
violation was not intentional and resulted from "a bona fide error not-
withstanding the maintenance of procedures reasonably adapted to avoid
any such errors." Examples given by the Simplification and Reform Act
of 1980 include clerical, calculation, computer malfunction and pro-
gramming, and printing Errors in legal judgnlcnt as to the
creditor's obligations under the Act are not within this defense.63
Consumers are not permitted to offset any amount for which a
creditor might be liable under the Act against amounts owing by the con-
sumcr to thc crcditor until the creditor's liability has bccn dctermincd by
judicial action." Thus, the consumer cannot use the creditor's violations
of the Act as an excuse for nonpayment of the debt. Under the Simpli-
fication and Reform Act o f 1980, the consumer is permitted to set up
the violation of the creditor as a "defense o r counterclaim" to an action
brought by the creditor to collect the debt.b6 This is probably intended
as a clarification of, not a change in, the prior law.
In certain cases, assignees of creditors who fail to comply with the
provisions of truth-in-lending may be liable for the violations of their
assignor. An action may be maintained against the assignee when the
violation is "apparcnt on thc face of the disclosure statemcnt" except
when the assignment was involuntary." When an action is brought
against an assignee of a creditor, the consumer's execution of a written
statemcnt acknowledging receipt of the disclosure statement is "conclu-
sive proof" that the statement was delivered to the consumer and that
the creditor complied with the Act in all respects "apparent from the face
of the disclosure statement."
A consumer who has the right to rcscind a transaction, however,
may d o so against any a ~ s i g n e e .Prior
~ ~ to the Simplification and Reform
~2 15 U.S.C.A. f l64O(c) (West Supp. 198 1).
as Id.
64 Id.
15 U.S.C.A. 5 1640(h) (West Supp. 1981). See gencrally Hernandez
V. O'Neal Motors, Inc., 480 F. Supp. 491 (D.N.M. 1979). rev'd 638 F.2d
153 (10th Cir. 1980); Smith v. No. 2 Galesburg Crown Fin. Corp., 615 F.2d
407 (7th Cir. 1980); Ray v. Acme Fin. Corp.. 367 So. 2d 186 (Miss. 1979) ;
Teel v. Thorp Credit Inc., 609 F.2d 1268 (7th Cir. 1979); Haynes v. Logan
Furniture Mart, Inc.. 503 F.2d 1161 (7th Cir. 1974); Ratner v. Chemical
Bank New York Trust Co.. 329 F. Supp. 270 (S.D.N.Y. 197 1 ).
" 15 U.S.C.A. 8 1641( a ) (West 1974 & Supp. 1981 ).
" lS U.S.C.A. I 1641 ( b ) (West 1974 & Supp. 1981).
.L 6B 15 U.S.C.A. 5 1614(c) (West Supp. 1981).
1 5 33-55 CONSUMER C R E D I T
1
i A c t of 1980, in cascs involving security interests in rcal property, the Act
required the consumer t o establish that t h e assignee and the original
creditor were in a "continuing business relationship." This requirement
has been eliminated by the amendments of t h e Simplification a n d Reform
Of course, the assignee can qualify a s a creditor in his o w n right be-
cause h e is engaged in arranging credit within the definitions of the
T h c Truth-in-Lcnding Simplification a n d Rcform Act of 1 9 8 0 nar-
rows the liability of the creditors in another fashion. T h e statutory pcn-
alty, which is available in individual actions involving violation of the
disclosure requirements, applies only to certain disclosures: annual per-
ccntngc ratc; amount financcd; finnnce charge; total of paymcnts; nuni-
bcr, amount, and d u c datcs of paymcnts; a n d the statcnicnt describing
the security interest."l
3 33-55 ADMINISTRATIVE ENFORCEMENT
Enforcement of the A c t is entrusted in the case of national banks
t o thc Comptroller of t h e Currency; in the c a s e of banks that a r c mcm-
bcrs of the Federal Reserve System (other than national banks) t o the
Board of Governors; in t h e case of banks insurcd by the Fcdcral Deposit
Insurance Corporation (other than the banks included above) t o the
Board o f Directors o f the F D I C ; in the case of institutions insured by
thc Federal Savings a n d L o a n Insurance Corporation o r chartered by the
Fcdcrnl Homc L o a n Bank Board to thc Fcdcral H o m c L o a n Bank
Board; and in the casc of federal Crcdit Unions t o the administrator o f
the National Credit Union A d m i n i s t r a t i ~ n .A~ ~violation of the Truth-in-
Lending Act constitutes a violation o f the acts giving general regulatory
power to these agencies a n d triggers any enforcement aulhority available
under those provision^.^^
Under the Simplification a n d Reform A c t of 1980, the enforce-
" See Rogers v. Frank Jackson Lincoln-Mercury, 458 F. Supp. 1387
(N.D. Ga. 1978), nff'd 621 F.2d 130 (5th Cir. 1980); Jcnnings v. Edwnrds,
454 F. Supp. 770 (M.D.N.C. 1978), nff'd 598 F.2d 614 (4th Cir. 1979);
Joscph v. Norman's Health Club. Inc., 532 F.2d 86 (8th Cir. 1976); Childs
V. Ford Motor Credit Co., 470 F. Supp. 708 (N.D. Ala. 1979).
On I5 U.S.C.A. 5 1602(f) (West Supp. 1981). See 5 33-15.
" I5 U.S.C.A. 5 1 h4O(a) (West 1974 & Supp. 1981).
R2 IS U.S.C. 5 l hO7(a) (1976).
O3 I S U.S.C. 5 1 GO7 ( b ) ( 1976).
*
DISCLOSURE REGULATION d 33-60
ment agencies can require those who violate the Act by inaccurately dis-
closing a n annual pcrcentage rate or finance charge to make restitution to
the consumer involvcd. Unlike the other provisions of the Simplification
a n d Reform Act, thcse became immediately effective with enactment of
the A c t o n March 3 1, 1980. These amendments establish a range of
tolerance o r margin of error for which restitution will not be required
unless the errors are willful. T h e enforcement agency does not have t o
ordcr rcstitution in cases wherc the error is of a minor nature a n d did
not result from:
( 1 ) A clear a n d consistent pattern o r practice of violations;
( 2 ) Gross negligence; o r
( 3 ) A willful violation inlcndcd to nlislcad the pcrson t o whom
the credit was extended.04
T h e enforcement agency cannot ordcr a creditor t o make an adjustment
that would "have a significantly adverse impact upon the safety o r sound-
ncss of the crcditor." In tlicsc cases, howcvcr, thc agcncy may requirc
a partial restitution o r a series of adjustments over a period of time. T h e
enforcement agency must follow the procedures for obtaining a cease a n d
desist order in order to rcquire the creditor t o n u k e r e s t i t u t i ~ n . ~ ~
3 33-60 RELIANCE ON MODEL FORMS
Under the Simplification and Reform Act of 1980, the Board is re-
quired to publish model disclosure forms 2nd clnuscs for usc by credi-
tors.07 T h e crcditor is not requircd t o use thcse nlodcl forms, but if he
does h e shall be deemed t o be "in compliance with the disclosure provi-
sions" o f thc Act othcr than those specific numerical disclosures depend-
ing upon the particular t r a n s a c t i ~ n . T~ h~ e creditor may change the for-
mat of the model form when it does not affect "the substance, clarity, o r
meaningful sequence of the disclosure." T h e forms may be used by
creditors before the effective date of the Simplification and Reform Act
amendments in 1982.
O4 15 U.S.C.A. $ 5 I607(e) ( I ) , 1607(2) (West 1974 & Supp. 1981).
'"5 U.S.C.A. 8 1607(e) ( 3 ) (West 1974 & Supp. 1981 ).
Id.
15 U.S.C. 5 1604(b) (West 1974 & Supp. 1981 ) .
8"d.
Id.
9 33-65 CONSUMER C R E D I T
5 3 M 5 DUTY TO REVISE PRIOR DISCLOSURES
When a creditor discloses information required by the Act which is
an accurate disclosure when made, but when subsequent acts or events
makc the disclosure inaccurate, there is n o violation of the Act.1° The
creditor does not have to make a revised disclosure statement. Therc
are certain situations in open-end credit arrangements, however, where
Board regulations requirc additional disclosures when the crcdit terms
change o r a new credit feature is added to the consumer's a c c ~ u n t . ~ '
Also, in closed-end transactions, when a refinancing occurs or a subse-
quent consumer assumes an obligation, the creditor must make further
disclosures.'*
5 33-70 REGULATION OF CREDIT ADVERTISING
T h e Truth-In-Lending Act has disclosure requirements when credit
plans are advertised.la As a general matter, no advertisement can be
used which states that a specific amount of credit will be available, or
that only a specified down payment will be required unless the creditor
"usually and customarily arranges" for consumer credit on these terms.74
When a creditor advertises that a specific finance charge is available for
a n open-end credit plan, the advertisement also must contain disclosures
clearly showing any other charges that may be imposed, including the
annual percentage rate that may be applied, and any membership or par-
ticipation fee that the creditor may impose.76 In closed-end plans, when
the creditor advertises the rate of finance charge, the rate must be stated
as an annual percentage rate.18 When the advertisement refcrs to the
amount or percentage of any down payment, the number of payments or
period of repayment, the amount of any payment, or the amount of any
financc charge, the advertisement must also statc: ( 1 ) the amount or
pcrcentagc of the down payment, ( 2 ) the tcrms of repayrncnt, and ( 3 )
lo 15 U.S.C. 5 1634 ( 1976).
12 C.F.R. 5 226.7 ( 1981) (Regulation Z).
12 C.F.R. 5 226.20 (1981) (Regulation Z ) .
lasee, e.g., IS U.S.C.A. 51 1663, 1664 (West 1974 &Supp. 1981).
7 4 15 U.S.C. § 1662 (1976). See also 12 C.F.R. 5 226.lO(d) ( 1981 ),
which requires any advertisement of open-end credit plans to state only those
terms that actually are or will be arranged by the creditor. There is a similar
requirement for closed-end plans. 12 C.F.R. 5 226.lO(c) (1981).
l f 5 15 U.S.C.A. 8 1663 (West 1974 & Supp. 1981 ); 12 C.F.R. 8 226.10
(c) (1981).
1' 3 IS U.S.C.A. 1 1664(c) (West 1974 & Supp. 1981 ). 12 C.F.R. 5 226.
10(d) (1981).
5 64
DISCLOSURE REGULATION 33-80
thc annual pcrccntngc rate.17 Similar regulations apply to the advertising
of consumcr lease transaction^.^^
T h e Truth-in-Lending Simplification and Reform Act of 1980 re-
quires creditors to state the rate for finance charges only in terms of the
annual pcrccntagc rate whcn responding to oral inquiries about the cost
of
§ 33-75 EFFECT OF TRUTII-IN-LENDING
ON STATE LAW
T h e federal Truth-in-Lending Act overrides state laws that require
the disclosure of credit information only when the state law is incon-
sistcnt with the provisions of the federal Act.80 A procedure is estab-
lished under the Simplification and Reform Act of 1980 that permits a
creditor to seek a ruling from the Board of Governors of the Federal
Reserve System when the creditor is in doubt as to the validity of a state
disclosure provision. If the Board then determines that the state-required
disclosure is inconsistent with the federal Act, creditors located in the
state need not make disclosures under the inconsistent state law. The
creditors will be protected by the Board's determination from any liability
under the law of the state for failure to comply with state law even when
the Board's determination may subsequently be reversed or determined
to bc i n ~ a l i d . ~ '
T h e Truth-in-Lending Act does not otherwise affect the laws of
any statc that dcal with the typcs, amounts, or rates of charges permitted
in that stnfc i n connection with the cxtcnsion of consumcr Thus,
state usury provisions and regulation of consumer finance agencies under
state law arc not effcctcd by the Truth-in-Lending Act.
5 33-80 CREDIT BILLING
T h c Truth-in-Lending Act contains provisions thnt rcgulate thc
procedures used by creditors to bill consumers and that give consumers
77 15 U.S.C.A. 1 1664(d) (West 1974 & Supp. 1981); 12 C.F.R. 5 226.10
(d) (1981); see also 12 C.F.R. 5 226.1001 (1981).
7R 15 U.S.C. 5 1667c (Supp. I11 1979); 12 C.F.R. 5 226.10(g) (1981)
(Regulation M ) .
, 7 V 5 U.S.C.A. 5 1665a (West Supp. 1981).
15 U.S.C.A. 5 1610(a) (West 1974 & Supp. 1981).
8' Id.
I5 U.S.C. 5 IGlO(b) (1976).
§ 33-80 CONSUMER CREDIT
rights when a dispute arises as to the amount owed.8a When a creditor
receives a written notice from a consumer stating that the bill sent to the
consumer contains a n error, the creditor is required to determine whether
an error has been made and to report the findings of this investigation to
the con~umer.~'T h e creditor must respond within certain time limiu
established in the Act. The creditor is first required to acknowledge re-
ceipt of the notice within thirty days unless the dispute is resolved before
that t i m e . 8 V e creditor then has two billing cycles (which cannot be
more than ninety days) after receipt of the notice from the consumer to
cithcr correct thc account or send a writtcn explanation to the consumer
stating the reasons why thc crcditor bclicvcs the account is a c ~ u r a t e . ~ "
Until these procedures have been completed, the creditor cannot take any
action to collect thc amount in d i s p ~ t c .Howcver,
~~ if thc crcditor makcs
clear to the consumer that payment of the disputed amount is not re-
quired, the creditor may continue to send statements to the consumer
that include the amount in dispute and any financing charges computed
on it.BBThe creditor may treat the disputed amount as a use of the credit
limits extended to the consumer.80 The creditor cannot close the account
because of the consumer's failure to pay the amount indicated as an
error.B0
When the consumer debtor gives notice that the billing statement
reflects goods not delivered to the consumer in accordance with the agree-
ment made at the time of the transaction, the creditor is under an obli-
gation to determine that "such goods were actually delivered, mailed, or
otherwise sent to the obligor" before the crcditor can send the consumer
a statement indicating that the account is accurate.O1 Under the Act, any
item on a billing statement representing "goods or services not accepted"
or "not delivered" to the consumer in accordance with the agreement
made at the time of the credit transaction is a billing error subject to the
procedures set forth
Billing errors that are subject to the procedures of the Act include
computational errors, the inclusion of credit which was not given, failure
as 15 U.S.C.A. 5 1666 (West Supp. 1981).
84 15 U.S.C.A. 3 1666(a) (Wcst. Supp. 1981).
86 15 U.S.C.A. 4 l666(a) (3) ( A ) (West. Supp. 1981 ).
86 15 U.S.C.A. 5 l666(a) (3) ( B ) (West. Supp. 198 1).
87 Id.
88 15 U.S.C.A. 5 1666(c) (West Supp. 1981).
BB 15 U.S.C. 5 1666(d) (1976).
" Id.
15 U.S.C.A. 5 1666(a) (West Supp. 1981).
I5 U.S.C.A. 5 1666(b) ( 3 ) (West Supp. 1981).
*
DISCLOSURE REGULATION 0 33-80
to properly reflect payments made, charges for goods or services not ac-
cepted or delivered, and extensions of credit for which the consumer re-
quested additional clarification "including documentary evidence." O 3
In order to trigger the billing error resolution procedures, the con-
sumer niust give notice to the creditor within sixty days after the creditor
has sent a statement to the consumer.o4 Failure to comply with the Act's
billing error requirements will lead to the forfeiture of the creditor's right
to collect the amount that the consumer has indicated is erroneous and
any finance charges on it up to a maximum o f $50.O"
Whcn thc crcditor rcccivcs a noticc of a billing error, thc crcditor
may not rcport or thrcatcn to report adversely on the consumer's credit
rating to any person." Whcn the creditor complies with the error rcsolu-
tion proccdurcs, thc consumcr must bc allowcd thc normal number of
days permitted under the credit agreement to make payment of the re-
solved When the consumcr continues to dispute the amount
owed after receiving a report from the creditor that the account is accu-
rate, the creditor may not report to any third party that the consumer's
account is delinquent in payment unless the creditor also reports that the
amount is in dispute and notifies the consumer of each party to whom
thc crcditor is reporting information concerning the d ~ l i n q u e n c y .If~ ~the
creditor makes a report of delinquency to any party, the creditor must
make a supplemental report to those persons when the credit dispute is
resolved.QB
When the credit plan gives the consumer a period of free credit be-
fore any finance charge will be imposed, the billing statement must be
sent to the consumer at least fourteen days before the date when the
finance charge will become effective.loO The creditor is obligated to
credit promptly payments received under open-end credit plans.'O1 It
must also promptly refund the portion of any payment exceeding the out-
standing balancc of thc account when the consumer so requcsts, or credit
the excess payment to the consumer's account.102 Under the Simplifica-
tion and Reform Act of 1980, when the excess credit balance remains in
O3 15 U.S.C.A. 5 l666(b) (West Supp. 1981 ).
O4 15 U.S.C.A. 1 1666(a) (Wcst Supp. 1981).
R6 15 U.S.C. 8 1666(e) (Wcst Supp. 1981) .
I5 U.S.C. 5 1666a(a) (West. Supp. 1981 ).
B7 Id.
I5 U.S.C. § 166ha(b) (West Supp. 1981).
O0 15 U.S.C. 5 1666a(c) (West Supp. I98 1).
loo 15 U.S.C. I 1666b(a) (West Supp. 1981).
l o l 15 U.S.C. 5 I66Gc (Wcst Supp. 1981 ).
lo2 15 U.S.C. 5 1666d (West Supp. 1981).
5 33-80 CONSUMER CREDIT
the account for more than six months and is over one dollar, the creditor
is required to make a good-faith effort to refund the amount to the con-
~umer.'~~
There are special rules that apply to issuers of credit cards. These Chapter 34
rules have been discussed in Chapter 26 o n credit cards,
- REGULATION OF OTHER
los IS U.S.C.A. 8 1666d (West Supp. 1981).
CONSUMER CREDIT PRACTICES
Section Page
34-5 Thc Consumer Credit Protcction Act . . . . . . . . . . . . . . . 569
34-10 Restrictions on Garnishment . . . . . . . . . . . . . . . . . . . . . 569
34-15 Debt Collection Practices . . . . . . . . . . . . . . . . . . . . . . . . 570
34-20 Credit Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 1
34-25 Credit Discrimination . . . . . . . . . . . . . . . . . . . . . . . . . . . 573
34-30 Unfair o r Deceptive Practices-The Federal Trade
Commission Improvement Act .................... 576
34-35 Plain English Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 576

§ 34-5 THE CONSUMER CREDIT PROTECTION ACT

In nddition to thc disclosure rulcs discussed in Chapter 33, the Con-
sumer Credit Protection Act1 regulates other consumer credit practices.
It restricts the use of garnishment, regulates consumer credit reports,
prohibits discrimination in the extension of credit, and imposes standards
upon debt collection. This chapter will bricfly review these provisions.

5 34-10 RESTRICTIONS ON GARNISHMENT

T h e Consumer Credit Protcction Act restricts the cxtent to which a
~ o gcncral rule, crcdi-
crcditor may garnish earnings of a c o n s u n l ~ r . As
tors may garnish up to 25 percent of the consumer's weekly disposable
earnings or up to the amount the consumer's weekly disposable earnings
exceed thirty times the federal minimum hourly wage, whichever is less.=
When the garnishment is undertaken as the result of a judicial order to

15 U.S.C.A. $ 8 1631-1665, 1671-1677 (West 1974 & Supp. 1981 ).

15 U.S.C. § 1671 (1976).
CL
IS U.S.C. 5 1673 (1976 & Supp. 111 1979).
1 O T H E R CREDIT PRACTICES
g 34-15 CONSUMER C R E D I T
1 enforce a support obligation, a greater percentage of the debtor's dispos-
able income may be garnished.' Disposable earnings are defined as the
balance of an individual's earnings remaining after deductions required
by law have been withheld.& Garnishments of earnings to collect state or
federal taxes are not subject to the restrictions of the act.6 Orders of
bankruptcy courts are similarly exempt.'
Although the Act speaks in terms of garnishment of earnings, and
does not specify that the garnishment must be n procedure directed at an
employer, courts have held that garnishment restrictions d o not apply to
earnings deposited in a bank a c c o ~ n t . ~
The Act also prohibits any employer from discharging an employee
because his earnings have been subjected to gnrnishnlcnt for nny orre in-
d e b t e d n e s ~ . Employer
~ violations of this provision can result in a fine of
up to $1,000 or imprisonment for up t o one year, o r both.1° There are
no private remedies under the Act for violation of thesc restrictions on
garnishment. T h e Secretary of Labor has authority to enforce these pro-
visions of the Act."
Zj 34-15 DEBT COLLECTION PRACTICES
Congress enacted the Debt Collection Practices Act in 1977 to con-
trol abusive, deceptive, and unfair debt collection procedures used by
many debt collectors. This Act is a subchapter of the Consumer Credit
Protection Act.I2 I t applies to procedures used by debt collectors in col-
lecting debts in consumer credit transactions.
The Act has little application lo banks or financial institutions be-
cause its provisions d o not apply to creditors who act t o collect debts
owed to them.18 T h e Act controls "debt collectors." A debt collector is
someone who regularly collects debts due to another person o r who is
engaged in a business whose principal purpose is to collect debts." A
15 U.S.C. 5 1673(b) (1976 & Supp. 111 1979).
15 U.S.C. 5 1672(b) ( 1976).
a 15 U.S.C. 5 1673(b)(1) (1976 & Supp. 111 1979).
'Id.
8 Usery v. First Nat'l Bank of Arizona, 586 F.2d 107 (9th Cir. 1978);
Dunlop v. First Nat'l Bank of Arizona, 399 F. Supp. 855 (D.C. Ariz. 1975);
John 0.Melby & Co. Bank v. Anderson, 88 Wis. 2d 252, 276 N.W.2d 274
(1979).
@15 U.S.C. 5 1674(a) ( 1976).
l o 15 U.S.C. 5 1674(b) (1976).
l1 I5 U.S.C. 5 1676 (1976).
I5 U.S.C. 5 5 1692-16920 ( S ~ p p I11
. 1979).
l a 15 U.S.C. Q 1692a(4) (Supp. 111 1979).
l 4 15 U.S.C. 5 1692a(6) (Supp. I11 1979).
5 34-20
creditor is not within these definitions. T h e definition does not apply
even when the creditor acquires a debt by assignment from another per-
son as long as the assignment is not after the debt is in default and not
solely for the purpose of collecting the debt for another.15
Debt collectors to whom the Act applies are restricted in their com-
munications with third parties about the consumer's debt.16 Their com-
munications with the debtor must be at a reasonable time and place and,
when thc consumer is rcprcscntcd by an attorney, with the attorney
rather than the debtor.'' Upon receipt of a written notice from the con-
sumer, the debt collector must stop any further communication with the
consumer except to give notice of the pursuit of a specific creditor's
rcmcdy.lA The Act prohibits harassing o r abusive tactics, false or de-
ceptivc rcprcsentations, and unfair or unconscionable means of collect-
ing the debt.'@ The provisions of the Act are generally enforced by the
Federal Trade Commission except that the banking regulatory agencies
have jurisdiction over the depository institutions subject to their
a~thority.~
3 34-20 CREDIT REPORTING
The Federal Fair Credit Reporting ActZ1 regulates the activities of
consumer reporting agencies and users of credit reports prepared by these
agencies. A consumer reporting agency is any person who for a fee, or
on a cooperation nonprofit basis, "regularly engages" in the practice of
assembling o r evaluating consumer credit information for the purpose
of furnishing consumer reports to third parties.22 The definition, thus,
does not include someone who assembles information for his own pur-
poses. There must be dissemination of the information to third parties.
A consumer report is any written, oral, or other communication by
a consumer reporting agency about a consumer's creditworthiness, char-
acter, general reputation, and so forth that is to be used in establishing
the consumer's eligibility for consumer-credit, insurance, employment, or
for certain other limited purposes.23 Reporting on one's own transactions
l 6 I5 U.S.C. 5 1692a(4) (Supp. I11 1979). See Kizer v. Finance Am.
Credit Corp., 454 F. Supp. 937 (D.C. Miss. 1978).
15 U.S.C. 5 1692b (Supp. 111 1979).
" IS U.S.C. 5 1 6 9 2 ~(Supp. I11 1979).
' 8 Id.
I @ I5 U.S.C. 5 5 1692d, IG92e, l692f (Supp. 111 1979).
20 15 U.S.C. 5 16921 (Supp. 111 1979).
21 15 U.S.C. 5 1681-16811 (1976 & SUPP.I11 1979).
22 15 U.S.C. § 1681n(f) (1976).
28 15 U.S.C. 5 1681a(d) (1976).
5 34-20 CONSUMER CREDIT
with the consumer is not a consumer report under the Act.14 Also, au-
thorization of the extension of credit through the use of a credit card is
not treated as a consumer r e p ~ r t . ~ T r a n s a c t i o nins which a third party
makes a request for extension of credit to a consumer also are not cov-
ered as long as the third party advises the consumer of the person to
whom the request for the extension of credit was made and the third
party makes the required disclosure^.^^
Consumer reporting agencies are limitcd in thc circumstnnccs under
which they may issue a consumer report.ZT The permitted purposes in-
clude those approved in writing by the consumer as well as any submis-
sions to persons who intend to use the information in connection with a
credit transaction involving the c o n s ~ m e r . ~ 8The reporting agency is
under an obligation to eliminate obsolete information from its report.2*
The agency must, upon the request of the consumer, disclose to the con-
sumer the nature of information in its files, the sources of the information
(except for certain investigative reports), and the recipients of any
reports made by the agencyea0
The Act provides a procedure for resolving disputes bctwecn the
agency and the consumer as to the accuracy of any information in the
file.8' When the dispute cannot be resolved, the consumer is entitled to
file a brief statement setting forth the nature of the dispute. The state-
ment must, in turn, be transmitted to all persons who subsequently
receive a consumer rcport containing the disputed i n f o r m n t i ~ n .The ~~
consumer reporting ngcncy also is limited in the extent to which it may
disclose adversc information contained in investigative reports regarding
a consumer's character or general reputation in subscquent reports?'
Users of consumer reports also are subject to regulation by the Act.
A person cannot arrange for the preparation of an investigative report
on a consumer's general reputation and character unless it is clearly dis-
closed to the consumer that such a report may be made and unless the
consumer is informed of his right to request information on the nature
of the investigati~n.~'The only exception to the duty to make such dis-
25 Id.
2' 1s U.S.C. 8 1681b (1976)
28 Id.
29 15 U.S.C. 5 1681c (1976 dr Supp. 111 1979).
'0 IS U.S.C. I 1681g (1976).
IS U.S.C. 5 1681i (1976).
82 15 U.S.C. 5 1681i(c) (1976).
aa I5 U.S.C. 8 16811 (1976).
84 IS U.S.C. 5 1681d(a) (1976). .L.
OTHER CREDIT PRACTICES 5 34-25
closure is when the purpose of the report is related to employment for
which the consumer has not specifically applied.86
When the consumer is denied credit because of information con-
tained in a consumer report from a consumer reporting agency, the
creditor who has used the report must advise the consumer of this and
give the name and address of the consumer reporting agency to the con-
s ~ r n e r .Moreover,
~~ when credit is denied because of information on a
consun~cr'scredit or gcncrnl rcputntion thnt is obtained from a pcrson
other than a consumer reporting agency, the creditor must disclose the
nature of the information to the consumer upon the consumer's written
request.a7 The right of the consumer to make such a request must be
disclosed to the consumer at the time the adverse action is communicated
to the con~umer.~a
There are civil penalties under the Act for failing to comply with
its provisions. When the non-compliance is willful, any consumer re-
porting agency or user of information may be liable to the consumer in
an amount equal to any actual damages sustained, plus punitive damages
and costs including attorncy's fees.3B When the violation is not willful
but occurs as a result of the negligence of the reporting agency or user
of information, punitive damages cannot be recovered. However, the
consumer retains his right to recover any actual damages sustained plus
costs and attorncy's fees.'"
The Fcdcrnl Trade Commission has gcncral nuthority to enforce
tlic provisions of thc Act." The cnforcemcnt nuthority over depository
institutions is cntrustcd to the fcdcral rcgulatory agencies who have gcn-
era1 jurisdiction over t h e m d 2
8 34-25 CREDIT DISCRIMINATION
The Equal Credit Opportunity Act makes it unlawful for any cred-
itor to discriminate against any applicant with respect to any aspect of a
credit transaction on the basis of "race, color, religion, national origin,
sex, marital status, or age." It also is unlawful to discriminate because
an applicant's income derives from public assistance or because the ap-
'
n6 Id.
a8 1s U.S.C.8 1681m (1976).
IS U.S.C.5 1681m(b) (1976).
88 Id.
IS U.S.C. 5 168111(1976).
'O 15 U.S.C.5 16810 (1976).
15 U.S.C.5 1681s (1976).
'2 Id.
51"' U.S.C.5 1691(a)(l) (1976).

5 34-25 CONSUMER CREDIT
plicant has, in good faith, exercised a right under the Consumer Credit
Protection Act.44 As this broad prohibition indicates, the Act is not lim-
ited to consumer credit transactions although the regulations imposed
pursuant to the Act d o treat commercial transactions differently than
consumer transaction^.^^ The Act does not define discrimination, but it
has been suggested that discrimination is any practice that has a discrim-
inatory effect.4a
T h e Act provides that it is not discrimination for a creditor to do
the following:
(1) T o inquire about marital status when the inquiry is to deter-
mine the creditor's rights and remedies and not to determine
creditworthiness;
(2) T o inquire about the applicant's age or whether income derives
from public assistance when the inquiry is for the purpose of
determining the amount and probable continuance of income
levels, credit history, or other elements of creditworthiness as
provided by Board regulations;
( 3 ) T o use an "empirically derived credit system" that considers
age when the system is "demonstrably and statistically sound"
in accordance with Board regulations as long as the system
does not assign a negative weight to the age of elderly appli-
cants;
(4) T o inquire into the age of an elderly applicant when age is be-
t ing used by the creditor to favor such an appli~ant.~'Also, a
creditor does not violate the Act by refusing credit extended
as part of a special credit program limited by law to economi-
cally disadvantaged persons or limited to members of a non-
f profit organization or for other special purposes approved by
the B ~ a r d . ' ~
I
Pursuant to the provisions of this Act, the Board of Governors of
the Federal Reserve System has adopted extensive regulations dealing
.. with the information that may be sought from an applicant for credit
and the procedures used in evaluating application^.^^ These regulations
are too extensive t o be repeated here. They generally limit the circum-
44 15 U.S.C. 5 1691 ( a ) (2) (3) (1976).
45 See 12 C.F.R. 5 202.3 (1980) (Regulation B).
'Osee generally Bacr, "The Equal Credit Opportunity Act and the
'Effects Test,' " 95 Banking L.J.241 (1978).
'' 15 U.S.C. 4 1691 ( b ) (1976).
413 IS U.S.C. 5 169 1 (c) ( 1976).
49 12 C.F.R. 5 5 202.5, 202.6 (1980) (Regulation B).
574
O T H E R CREDIT PRACTICES
stances undcr which the creditor may ask about an applicant's marital
status, spouse, or former spouse. There also are restrictions on inquiries
into incomc derived from alimony, child support, or maintenance pay-
ments. The Board has prepared model application forms. If a creditor
uses them, the creditor will be deemed to be in compliance with the dis-
closure requirements of the Act.50
A creditor cannot refuse to grant a separate, individual account to
a crcditwortliy applicant on the basis of scx, marital status, or on any
other prohibited basis.81 When the credit is to be secured by a lien or
security interest in property, however, it is not discrimination to request
the signaturc of both parties to a marriage for the purpose of creating a
valid security interest in the property, passing clear title, or waiving
rights in thc propcrty that niay exist as a result of state property law.82
A creditor is gcncrally required to notify credit applicants of the ac-
tion taken on the application within thirty days of the completed applica-
tion." Whcn thc creditor takes adverse action on the application, the
creditor must either provide the applicant with a statement of reasons
for the action or give the applicant a writtcn notice disclosing the appli-
cant's right to a statement of reason^.^' Then, upon a timely request by
the applicant, a written statement of reasons must be supplied.55 Ad-
verse action means more than simply denial or revocation of a credit.
It includcs a change in the terms of existing credit arrangements, a re-
fusal to grant crcdit in substantially the amount requestcd, or a refusal to
grant credit on substantially the terms sought." It does not apply to
credit refusals under existing credit arrangements where the applicant is
dclinqucnt or in default.n7
Enforcement of the Act is entrusted in the case of depository insti-
tutions to the federal regulatory agcncies that have general jurisdiction
over them." The Federal Trade Commission has general enforcement
authority over all transactions not committed to a particular regulatory
agency.n0 Creditors who fail to comply with the provisions of the Act
are liable in damages to the aggrieved applicant for actual damages and
punitive damages in an amount up to $10,000 in individual actions, and
12 C.F.R. 5 202.5(e) (3) (1980) (Regulation B ) .
12 C.F.R. 4 202.7(n) ( 1980) (Rcgulation B ) .
" I 5 U.S.C.! 1691d(n) (1976).
E3 15 U.S.C. 5 1691 ( d ) ( 1976). 12 C.F.R. 5 202.9 ( 1980) (Regulation
B).
54 15 U.S.C. 5 1691 ( d ) ( 1976).
="In.
IJa Id.
Id.
6'
IS U.S.C. 5 1691c(a
+ Eo15U.S.C.$1691c(c
3 34-30 CONSUMER CREDIT
u p to $500,000 or one percent of the net worth of the creditor, which-
ever is less, in the case of class action^.^ In addition to equitable and
declaratory relief,"' the successful applicant may also recover costs and
reasonable attorney's fees.82 A creditor's actions undertaken in good
faith and in conformity with the official rules and regulations of the
Board constitute a defense to any liability that might otherwise be im-
posed by these provision^.^^
5 34-30 UNFAIR OR DECEPTIVE PRACTICES--TIIE
FEDERAL TRADE COMMISSION
IMPROVEMENT ACT '
This Acte4 requires the Federal Reserve Board to prescribe regula-
tions to prevent banks from engaging in unfair or deceptive practices
that affect commerce, including those which are unfair or deceptive to
consumers. It provides that whenever the Federal Trade Commission
prescribes rules under the parent act, the Federal Reserve Board must,
within sixty days after the rules come into effect, adopt substantially
similar rules unless it finds that such acts or practices by banks are not
unfair or deceptive, or implementation of similar regulations would con-
flict with the monetary policies of the Board.
The implementation of the regulations regarding banks insured by
thc FDIC is lelt to the appropriate federal supcrvisory agency. The law
requires each such agency to establish a separate division of consumer
affairs responsible for receiving and taking appropriate action and com-
plaints.
It should be noted that savings and loan associations, credit unions,
and other thrift institutions are also subject to FTC rules.
3 34-35 PLAIN ENGLISII LAWS
Mass-market legal transactions (consumer loans, credit sales, and
the like) require preprinted, unnegotiated contract forms. But consum-
ers can no more expect contract terms adapted to fit their particular re-
quirements than they can expect to have their appliances custom-made.
Realizing that standard forms, normally drafted by creditors or sellers,
15 U.S.C. § 169 1e (1976).
8' Id.
8' Id.
1 5 u . s . ~J! . 1691e(e) (1976).
Federal Trade Commission Improvement Act of 1975 §202(a), 15
04 - . - -
U.S.C. 8 57a (1976 & Supp. I11 1979).- See 8 2-10.
OTHER CREDIT PRACTICES
will not necessarily be understood by the consumer-debtor, many states
have enacted consumer-protection laws giving the courts the power to
enjoin the use of agreements that are deceptive or that breach standards
of fair dealing. Even without such statutes, courts have regularly used
their inherent equity powers to strike down boiler-plate clauses, hanging
their opinions on such legal pegs as absence of consent, fraud, uncon-
scionability, or some similar doctrine.
Possibly, the latest word on conscionability and consumer contracts
appears in Section 5.108 of the Uniform Consumer Credit Code ( 1 974).
This gives a court, as a matter of law, the right to enjoin unconscionable
conduct and award damages that may have been sustained. In determin-
ing whether conduct is in fact unconscionable, the Code sets up a series
of standards, one of which is: "inability to understand the language of
the agreement." Lawyers should take this language seriously in drafting
consumer agreements.
New York State has enacted a law that went into effect on June 1,
1978 requiring that basic consumer contracts be in easily understand-
able l a n g ~ a g e . ~ V hstatute
e covers residential leases and contracts for
money, property, or services used primarily for "personal, family or
household purposes." These must be:
(1) "Written in non-technical language and in a clear and coherent
manner using words with common and everyday meanings;
( 2 ) "Appropriately divided into and captioned by its various sec-
tions."
Connecticut also has enacted a "plain-English" law.68 Other states have
such legislation under c~nsideration.~'
N.Y. Gcn. Oblig. Lnw § 5-702(b). See Note, "New York's Plain
English Lnw," 8 Fordham Urb. L.J. 451 (1979-1980).
Conn. Substitute House Bill NO. 5739, effective June 30, 1980.
See Siegel, "Simplicity: An Old Solution With Continuing Appeal,"
Nat'l L.J., Sept. 25, 1978. See also Blurnberg, "Lawyers Can Write Clearly
and Coherently," 51 N.Y.S. B.J. 478-481 (1979); Plack, "Plain Language
Movement: An Overview With Recent Developments," 36 Mo. B.J. 40-47
(1980).
 Chapter 35
PRESERVATION OF CONSUMER
DEFENSES AND CLAIMS: THE
HOLDER IN DUE COURSE RULE

Section Page
35-5 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 579
35-10 Abolition of Holder in Due Course Status by FTC . . . . 580
35-15 Transactions Covered by FTC Rule . . . . . . . . . . . . . . . . 581
35-20 Preservation of Claims and Defenses Under the
. Uniform Consumer Credit Code . . . . . . . . . . . . . . . . . . 583
35-25 Other State Law Limiting Holder in Due
Course Rights

5 35-5 INTRODUCTION
When a consumer signs a negotiable note as part of a credit or pur-
chase transaction under the Commercial Code, the transfer of the note
to a person who qualifies as a holder in due course will result in the con-
sumer being obligated to pay the note notwithstanding any legal claim
the consumer may have had against the party to whom the note was
originally given. For example, suppose a consumer purchases an auto-
mobile from a used car dealer. The consumer pays for the car in part
by signing a negotiable promissory note. T h e dealer then discounts this
notc to n finance company. If thc cnr is worthless, t l ~ cconsumer has a
claim against thc dcalcr for brcach of warranty. In sonic cases, the con-
sumcr might cvcn have a right to rclurn thc car and dcmnnd n rcfund.
If thc dcnlcr sucs the consunicr for the purchase price, the consurncr can
setoff against thc dealer's claim the damages caused by dealer's breach
of warranty. However, none of these rights can be exercised against the
finance company to whom the note was transferred if the finance com-
pany qualifies as a holdcr in due course.' A comparable result follows

U.C.C. 5 3-305. See Chapter IS.

579

5 35-10 CONSUMER CREDIT
when the consumer signs a purchase agreement with the dealer which
contains a clause providing that upon the assignment of the contract the
consumer waives any defenses o r claims which might be asserted against
the original seller.
The harsh results these rules have produced for consumers who
generally were not in any position t o bargain over the loss of thesc rights
have led to broad restrictions on the applicability of holder in due
I course and waiver of dcfcnse provisions in consumer transactions.
I Even before the enactment of special statutes dealing with this problem,
courts have been sensitive to protect consumers from these results. A
leading case is Unico v. Owen,l in which the court held that a n assignec
1 of a note and sales agreement did not have holder in due course status
because the assignee was closely connected to the seller of the goods.a
Today, there are many special consumer credit protection statutes that
deny holder in d u e course status or comparable rights t o creditors in
consumer transactions.'
Without doubt, however, the most far-reaching challenge to the
holder in due course doctrine was launched by the Federal Trade Corn-
mission. It has proniulgated rules that effectively nullify the holder in
due coursc status o n most consumer credit transactions. These rules arc
discusscd in thc following sections o l this chapter. It should bc notcd
that the authority of thc FTC to engagc in this regulation is the subjcct
of heated debate.O
$35-10 ABOLITION OF HOLDER IN DUE COURSE
STATUS BY FT%
T h e FTC rule o n preservation of consumers' claims and defenscs is
simplc in o p e r a t i ~ n . Any
~ person who sells o r leases goods or services
to consumers must bc surc that any c o n s u n w crcdit contract cxecutcd
by the consumer in connection with the transaction contains a notice pre-
- -- p
' 50 N.J. 101. 232 A.2d 405 (1967).
a For a general discussion of these problems, see Countryman, "The
Holder In Due Course and Other Anachronisms in Consumer Credit," 52
Tex. L. Rev. 1 (1973); Kripke, "Consumer Credit Regulation: A Creditor-
Oriented Viewpoint," 68 Col. L. Rev. 445 (1968); Rohner, "Holder in Due
Course in Consumer Transactions: Requiem, Revival, o r Reformalion?" 60
Cornell L. Rev. 503 (1975); Rosenthal, "Negotiability-Who Needs It?" 71
Col. L. Rev. 375 ( 197 1); Note, "Consumer Protection-The Role of Cutoff
Devices in Consumer Financing," 1968 Wis. L. Rev. 505.
* See, e.g., Uniform Consumer Credit Code $ 3.307.
6See generally White & Summers, Uniform Commercial Code $ 14-8
(2d ed. 1980) (hereinafter cited as Uniform Commercial Code).
16 C.F.R. $ 4 3 3 (1981).
- -
I
HOLDER IN DUE COURSE RULE ,5-15
I scribed by the FTC.' Any consumer credit contract taken by the seller
must contain this notice:
NOTICE
ANY HOLDER O F THIS CONSUMER CREDIT CON-
TRACT IS SUBJECT T O ALL CLAIMS AND DEFENSES
WHICH THE DEBTOR COULD ASSERT AGAINST T H E
SELLER OF GOODS OR SERVICES OBTAINED PURSUANT
HERETO OR WITH T H E PROCEEDS HEREOF. RECOV-
E R Y HEREUNDER BY THE DEBTOR SHALL NOT EX-
CEED AMOUNTS PAID BY T H E DEBTOR HEREUNDER.
1
When the seller accepts in payment the proceeds of any purchase money
~ loan, the consumer credit contract must contain this notice:
ANY HOLDER O F THIS CONSUMER CREDIT CON-
TRACT IS SUBJECT T O ALL CLAIMS AND DEFENSES
WHICH T H E DEBTOR COULD ASSERT AGAINST T H E
SELLER OF GOODS OR SERVICES OBTAINED WITH
T H E PROCEEDS HEREOF. RECOVERY HEREUNDER BY
THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID
BY THE DEBTOR HEREUNDER.
The effect of placing this legend on the instrument is to incorporate this
provision into the terms of the instrument. As a result, if the instrument
otlwrwise would have been negotiable, the notice destroys negotiability
becausc it makes payment conditional upon the absence of a claim o r
d e f e n ~ e . It
~ also will be effective to nullify any clause contained in the
agreement that purports t o waive the consumer's defenses and claims
against the seller. Thus, without directly challenging the validity of state
law, the FTC has effectively nullified it by requiring usc of a notice that,
undcr gcncral contract principles and [hc Uniforni Commercial Codc,
will operate to destroy holdcr in due course status.
5 35-15 TRANSACTIONS COVERED BY FTC RULE
I n ordcr for the FTC rule to apply, thc transactions must involve a
consumer who is acquiring goods or services for personal, family, or
household use.@ Any such transaction in which a "consun~ercredit con-
tract" is used will impose obligations upon the seller to make sure that
16 C.F.R. 5 433.2 (1981 ).
. . 8U.C.C. 5 5 3-104(l)(b), 3-105(2).
16C.F.R. 5 433.l(b) (1981).
 CONSUMER C R E D I T
the contract contains the notice. A consumer credit contract is defined,
inclusively, as "any instrument which evidences o r embodies a debt"
arising from a purchase money loan transaction o r a financed sale.10
A financed sale is easiest to define. It is simply the extension of
credit to a consumer in a way constituting a credit sale under the Truth-
in-Lending Act." When a seller of goods o r services does so on credit,
taking a consumer credit contract as part of the transaction, this consti-
tutcs a financed sale.
A purchase money loan, on the other hand, is "a cash advance
which is received by a consumer" in return for a finance charge as de-
fined in the Truth-in-Lending Act. It must be used to purchase goods or
services from a seller who either refers consumers to the creditor making
the advance, o r who is affiliated with the creditor "by common control,
contract, or business arrangement." Thus, the purchase money loan in-
volves an advance by a third-party creditor to a consumer who uses the
proceeds to make a purchase of goods o r services from the seller. In this
situation, the consumer credit contract will be executed by the consumer
and the creditor, but the seller has an obligation to make sure the con-
tract contains the required notice. This follows from the provision in
the regulation that prohibits the seller from accepting as payment for
any consumer sale o r lease the proceeds of a purchase money loan un-
less the consumer credit contract contains the required n o t i ~ e . ' ~
The provisions of the rule, thus, bring within their coverage arrange-
ments between sellers and creditors where there is any extensive degree
of cooperation in providing financing for the goods o r services sold or
leased by the seller. Under the terms of the regulation, the affiliation
between seller and creditor need only be "by common control, contract,
or business arrangement." 18 The contract can be either oral or written,
formal or informal, so long as it contemplates "cooperative o r concerted
activity" between the seller and creditor in providing financing."
The terms of the rule apply only to sellers. Creditors have no duty
to see that the notice appears on the contract. The FTC has proposed a
rule which would extend the obligation to creditors.16
Although the impact of the rule on creditors is indirect, it is still
substantial. Any creditor who engages in discounting paper that arises
from consumer transactions will be deprived of holder in due course
1016 C.F.R. 8 433.1(i) (1981).
1116 C.F.R.5 433.1 (e) (1981).
1 2 16 C.F.R. § 433.2(b) (1981).
18 I6 C.F.R. 1 433.1( d ) (19811.
l 4 16 C.F.R. 8 433.l(f) (1981).
lB40Fed. Reg. 53530 (1975). But the authority of thc Federal Trade
Commission does not extend to banks. See IS U.S.C. 9 45(a)(2) (1976).
HOLDER IN DUE COURSE RULE
status if the notice appears upon the paper. Moreover, in most cases,
the creditor will know that the paper it is discounting arose as a result
of a consumer transaction just from the nature of the business of the
assignor of the paper. In such a case, it is probable the creditor would
be held to know that the F T C notice was required on the paper, and
therefore may be viewed as lacking the good faith needed to be a holder
in due course even when the lcgend is missing.'0
Tlic conscqucncc of ti~kingconsumcr pnpcr govcrncd by tllc FTC
noticc will be that any dciense the consumer might have against the
seller of the goods or services can also be asserted as a defense to pay-
ment to the creditor. Of course, this assumes that the consumer has a
valid defense against the seller arising from breach of warranty or other
brcach of contract. It is important to notc that the FTC notice also
makcs the creditor subject to claims the consumer has against the seller.
This provision may require a creditor to refund amounts to the consumer
that the consumcr has paid under the contract. The notice limits the
extent of any claim that the dcbtor can assert against the creditor to
"amounts paid by thc dcbtor" undcr thc contract. Although it is not
clcar from the language, this limitation could include amounts paid by
the consumcr undcr the contract to pcrsons othcr than the creditor-for
example, payments made to the seller bcfore the contract was assigned
and, perhaps, depending upon the wording of the contract, down pay-
ments made to the seller.
5 35-20 PRESERVATION OF CLAIMS AND DEFENSES
UNDER THE UNIFORM CONSUMER
CREDIT CODE
The pervasiveness of the FTC holder in due course rule makes
much state legislation on this subject moot. The F T C rule, of course,
does not purport to override any local law on the subject. Thus, these
laws may provide additional rights and duties. Also, they may reach
transactions not covered by the FTC rule. The Uniform Consumer
Credit Code (U.C.C.C.) is a comprehensive attempt to deal with this
subject. Drafted prior to the FTC rulc, many of the purposes of the
U.C.C.C. provisions have now bcen sntisficd by thc FTC rulc. Ncvcr-
thclcss, it dcscrves considcration because of its attempt to deal with the
holder in due course problem in a comprehensive way.
U.C.C. 8 3-302. See generally U n i f o r m C o m r ~ e r c i a lCode, note 5
srcpm, at1143; Note, "The FTC's Preservation of Consumers' Claims and
Defcnscs: Consumer Security or Consunler Fraud?" 1 1 Val. L. Rev. 263
+ (1977).
583
8 35-20 CONSUMER CREDIT
The U.C.C.C. is the first attempt by a uniform law to eliminate the
holder in due course. The first draft of the U.C.C.C.(1968 Act) was
promulgated by the National Conference of Commissioners on Uniform
State Laws in 1968. It was an attempt to cure many of the deficiencies
present in the U.C.C., oriented as it was to cater to the needs of the busi-
ness world rather than the consumer. The 1968 Act met with scant suc-
cess, being adopted by only eight states, while being specifically rejected
by two others.17
Since the time when it was first proposed, the U.C.C.C. has gone
through a number of Revisions, with the present draft (1974 Act) vary-
ing substantially from the 1968 Act.
The 1968 Act contains two sections that affect' negotiability and
consumer dcfcnscs in consumer credit transactions. Section 2.403 dcals
with waiver of defense clauses. Section 2.403 provides:
"In a consumer credit sale or consumer lease,1' other than a sale or
lease primarily for an agricultural purpose, the seller o r lessor may
not take a negotiable instrument other than a check as evidence of
the obligation of the buyer or lessee. A holder is not in good faith -
if he takes a negotiable instrument with notice that it is issued in
violation of this section. A holder in due course is not subject 10
the liabilities set forth in the provisions on the effect of violations
on rights of parties (Scction 5.202) and the provisions on civil ac-
tions by the Administrator (Section 6.1 13) ."
Section 2.404, which is concerned with the waiver of defenses clause
in consumer credit transactions, contains two alternatives. Alternative
A, while not prohibiting the use of such clauses in a consumer credit
sale o r consumer lease, provides that they will be unenforceable. The
assignee's liability, however, will be limited to the amount owing at the
time the consumer asserts his defense or claim against the assignee. In
addition, the buyer o r lessee can only use the provisions of this section
to assert his rights as a matter of defense to or setoff against a claim by
the assignee. He can not use these rights as a mcans to void o r rescind
the original contract, nor can he recover any money that he has paid
to the assignee prior to the time he has asserted his claim o r defense.
" North Dakota and Connecticut. See Note, "Consumer Defenses and
Financers as Holders in Due Course," 4 Conn. L. Rev. 83, 102, n. 108 ( 1971 ).
This supplementation is based on Hadak & Carter, "The Erosion of the
Holder in Due Course Doctrine: Historical Perspective and Development,"
9 U.C.C.L.J. 165 (1976). See also Note, "Regulation Z and the UCCC:
The Bewildering Maze of Credit Disclosure Provisions," 1979 B.Y.U.L. Rev.
394-406.
lB U.C.C.C. $8 2.104 (Consumer Credit Sale Defined); 2.106 (Con-
sumer Lease Defined) (1968 Act).
.L
HOLDER IN DUE COURSE RULE
Alternative B is divided into three subsections. Subsection ( 1 )
permits the continued use of waiver of defenses clauses in consumer
transactions but permits the buyer to render such clauses unenforceable
if he notifies the assignee of any claim o r defense he may have against
the original seller within ninety days after the assignee has notified him
that the contract has been assigned. If the assignee is related to the
seller this ninety-day cutoff provision does not apply and such an assignee
will be liable for the life of the contract. Both the notification by the
assignee to the buyer that the contract has been assigned and the notifi-
cation by the buyer to the assignee that he has claims or defenses against
the original seller must be in writing. Subsection ( 2 ) lists a number of
situations in which the assignee will be held not to have acted in good
faith. Subsection ( 3 ) h i t s thc nssignce's liability to thc amount still
outstanding on the contract when the buyer informs the assignee that he
has a claim or defense against the seller. This subsection also provides
that the buyer can only assert his rights against the assignee as a shield
and not as a sword.
The 1974 Act makes considerable changes in the consumer credit
transactions area. The Act contains four provisions that pertain to nego-
tiability and the consumer. Section 3.307 deals with the holder in due
course; Section 3.403 pertains to credit card transactions; Section 3.404
is conccrncd with thc wnivcr of dcfcnscs clarlsc; and Scction 3.405 treats
dircct loans.
"With rcspcct to a consurncr credit salelo or consumer
(ex-
cept a sale or lease primarily for an agricultural purpose), the cred-
itor may not take a negotiable instrument other than a check dated
not later than ten days after its issuance as evidence of the obliga-
tion of the consumer."
Section 3.403 subjects the issuer of a credit card to all the defenses
and claims the cardholder may have against the original seller o r lessor
if the scllcr or Icssor is "licensed, franchiscd, or pcrnlittcd by the card
issuer to d o business undcr the trade name o r designation of the card
issuer or person related to the card issuer." Certain criteria must first
be met before liability can attach to the card issuer. First, the original
amount owing to the card issuer must exceed fifty dollars. Second, the
residence of the cardholdcr must be within 100 miles of where the trans-
action occurred or within the same state. Thc phrase "in the same state"
is optional and does not need to be adopted. Third, the cardholder must
U.C.C.C. § 1.301 (12) (Consumer Sale Defined) ( 1974 Act).
20 U.C.C.C. 5 1.301 (14) (Consumer Lease Defined) (1974 Act).
585
5 35-20 CONSUMER CREDIT
mako a good-faith2' attempt to obtain satisfaction from the seller. Fi-
nally, oral noticc to thc issucr will bc cflcctivc unless Ihc issucr rcqucsts
written confirmation and the buycr fails to give such writtcn confirmation
within fourteen days. T h e credit card issucr is only liable for the amount
owing at the time the cardholder asserts a claim or defense against the
original seller. Any agreement made between the cardholder and the
issuer to disclaim any of the provisions of Section 3.403 is unenforce-
able.22
Section 3.404 eliminates the effect of the waiver of defenses clause.
It also provides that even if a third party has taken a negotiable instru-
ment in violation of Section 3.307 such person will still be subject to any
claims and defenses the buyer or lessee may have against the seller or
lessor. T h e assignee will only be liable for the amount outstanding at the
time the buyer or lessee notifies him of his defenses or claims against the
original seller or lessor. Before the buyer or lessee can collect from
the assignee, he must make a good-faith effort to obtain reasonable sat-
isfaction from the seller or lessor. Any agreement to circumvent the pro-
visions of this section is unenforceable. Oral notice by the buyer or
lessee to the assignee will be effective unless the assignee requests written
confirmation and the buyer or lessee fails to supply such written confir-
mation within fourteen days.
Section 3.405 subjects a lender, other than a credit card lender, to
all claims and defenses of the buyer or lessee if the following conditions
exist:
( 1 ) The lender knows that the seller or lessor arranged for the ex-
tension of crcdit by the lender for a commission, brokerage, or
referral fee;
(2) The lender is a person related to the seller or lessor, unless the
relationship is remote or is not a factor in the transaction;
( 3 ) The seller or lessor guarantees the loan or otherwise assumes
the risk of loss by the lender upon the loan;
(4) The lender directly supplies the seller or lessor with the con-
tract document used by the consumer to evidence the loan, and
the seller o r lessor does not participate in the preparation of
the document;
(5) The loan is conditioncd upon thc consumer's purchasc or lease
of the property of the seller or lessor, but the lender's payment
of proceeds of the loan to the seller or lessor does not establish
that the loan was so conditioned; or
U.C.C.C. 5 1.1 10 (Good Faith Defined) (1974 Act).
22 Compare the federal rules on credit cards discussed in Chapter 26.
586
HOLDER IN DUE COURSE RULE 35-20
( 6 ) Thc lender, before he makes the consumer loan, has knowledge
or, from his coursc of dcnling with the particular scllcr or
lessor or his records, notice of substnntinl complaints by other
buyers or lessees of the particular seller's or lessor's failure or
refusal to perform his contracts with them and of the particu-
lar seller's or lessor's failure to remedy his defaults within a
reasonable time after notice to him of the complaints.28
T h e consumer must first make a good-faith attempt to obtain rea-
sonable satisfaction from the seller or lessor before he can proceed
against the lender. The buyer or lessee is permitted to give the lender
oral notice unless the lender requests written confirmation. In that case,
unless the buyer complies with the lender's request for written confirma-
tion, the buyer or lessor's oral notification will be ineffective. The lend-
er's liability is limited to the amount outstanding on the loan at the time
the buyer or lessor asserts his claims or defenses.
It is somewhat of an anomaly that the U.C.C.C., which is designed
. to be a set of provisions for uniform state laws governing the area of
consumer transactions, is anything but uniform. O f the states that have
enacted the U.C.C.C., no two have exactly the same provisions regarding
the holder in due coursc and its related areas, the waiver of defenses
clause, the interlocking direct loan, and the lender credit card transac-
tion. This is all the more ironic since one of the primary purposes for
which the U.C.C.C. was proposed was to clear up the confusion created
by states enacting their own laws in these areas that were different in
every state. Now the U.C.C.C. is being used by the states to create the
very thing it was designed to prevent: nonuniformity.
A rundown of the various states and the form of the sections they
have enacted will show how nonuniform they are. Only four states, In-
diana, Oklahoma, Utah, and Wyoming, have adopted Section 2.403 of
the 1968 Act. Idaho, while adopting the 1968 Act, uses the wording
found in the I974 Act's Section 3.307 for its Section 2.403. Colorado
adopts a section it labels Section 2.403, but it does not comport with
the model act. This section does not eliminate negotiable instruments as
does the model, but only makes such paper subject to a ninety-day cut-
off period. This section also requires that such paper have the words
"Consumer Paper" writtcn on its face.
T h e three states that have enacted Section 2.403's counterpart in
the 1974 Act, Iowa, Kansas, and Maine, have all used different wording.
Iowa has adopted the model act verbatim. Maine has changed the time
period on the check to seven days instead of the ten days suggested in
23 U.C.C.C. 5 8 3.405(l)(a)-(f) (1974Act).
rr.
5 35-20 CONSUMER C R E D I T
the model. Kansas, on the other hand, uses no time period at all but
limits such checks t o currently dated ones. One would think that with
differences so minor the states are trying very hard to make their statutes
nonuniform.
As for Section 2.404 of the 1968 Act, two states, Idaho and Utah,
have enacted Alternative A. Indiana, Wyoming, and Oklahoma have all
adopted Alternative B, but each of them deviates from the ninety-day
cut-off period suggested by the model. Indiana reduces this period to
sixty days, Wyoming to forty-five days, and Oklahoma to thirty days.
Colorado adopts the equivalent to Alternative A of Section 2.404 but
labels it subsection (2) of Section 2.403.
Kansas adopts the 1974 Act's counterpart to Section 2.404 of the
1968 Act, Section 3.404, and it comes closest to the model with only a
few minor word changes. Maine adopts a section similar to the model
Section 3.404 but labels it Section 3.403. In addition, the Maine statute
makes no provisions for notification of the assignee, and thus it is un-
certain whether o r not written notification is required. Iowa, rather than
climinate the uncnforceability of thc waiver of dcfenses clausc as the
model suggests, subjects such clauses to a thirty-day cutoff period if the
assignee is not related to the seller o r lessor. It, like the Kansas statute,
requires that the assignee be notified in writing unlike the model which
permits oral notification of the buyer's or lessee's claims o r defenses.
The 1968 Act docs not covcr intcrlocking direct loans or credit
card transactions, while the 1974 Act treats them in Sections 3.405 and
3.403, respectively. All three of the states adopting the 1974 Act enact
legislation similar to the model Section 3.405. Iowa adopts the section
almost word for word but makes written notice mandatory instead of
permitting oral notice as in the model. Kansas also adopts the model
almost word for word, but like Iowa requires written notice to the lcndcr
whcn the buycr or lessor has a claim or defense. In addition, undcr the
Kansas version, if the lcndcr knows of the buycr or Iessec's dcfcnse or
claim the consumer can send notice to the seller o r lessor instead of to
the lender. Maine's enactment is also similar to the model, but Maine
includes credit card lenders in this section and i t does not have a separate
credit card section as d o the other two states.
Kansas adopts Section 3.403, dealing with crcdit card lenders, but
it severely limits those card issuers who will be covered under the statute.
The only time a card issuer will be liable is when the card was used as
part of a home solicitation sale. As credit cards are almost never used
in these situations the statute appears to have little effect. Iowa's Sec-
tion 3.403 comes closest to the model and has only minor word changes.
As mentioned above Maine does not have a separate section dealing with
credit card transactions but incorporates them in the section treating
lenders.
HOLDER IN DUE COURSE RULE
The 1968 Act, although it has significance because it is a first at-
tempt to eliminate the holder in due course and waiver of defenses
clauses, is ineffective bccause it still permits direct loan lenders and
lender crcdit card companies to insulate themselves from consumer dc-
f e n s e ~ . ~Furthermore,
' the holder in due course is not completely elim-
inated by Section 2.403 for it still provides that a purchaser who takes
such paper without knowledge that i t is consumer paper issued in viola-
tion of the section will still have holder in due course status. Although
the possibilily of this happening is rare, it is still preferable to remove this
loophole entirely. Although the Alternative A to Section 2.404 which
eliminates the waiver of defenses clause in consumer credit transactions is
a fine section, Alternative I3 which limits unenforceability to a ninetyday
period leaves much to be desired. Obviously, this section was proposed
as a conipromisc to busincss interests, but its value to the consumer is
slight. For one thing, unless the merchandise is the type in which a defect
shows up immediately, ninety days is siniply insufficient time in which to
apprise thc consumer that he may have purchased defective goods. Also
thc average consumer is not aware of the law of contract, he may not
even know what is meant by an assignment, and when he receivcs a no-
tice telling him his contract has been assigned he will probably not be
aware of the legal implications involved. If the merchandise proves to
bc defective near the end of the ninety-day period, he may not realize
that he is rcquircd to notify the nssigncc in writing bccnuse he still bc-
licvcs he is only dealing with the merchant. And if ninety days is insuffi-
cient time, the sixty-day, forty-five day, and thirty-day cutoff periods
adopted by Indiana, Wyoming, and Oklahoma certainly are much too
short.
Section 3.307 of the 1974 Act appears to eliminate the defect of
Section 2.403 of thc 1968 Act as it no longer givcs holder in due course
status to thc innocent purchascr of consumer paper who is not aware of
what lie is buying. It might still bc suggested that the Act require the
words "Consumer Paper-Not Negotiable" or some similar wording be
put on such instruments.
Section 3.404 which prohibits the enforceability of a waiver of de-
fenses clause is an excellent section. Thc 1974 Act no longer provides
for an altcrnative scction that limits unenforceability of such clauses to
a prescribed numbcr of days, and this is a break for the consumer. Iowa,
however, in adopting the 1974 Act, limits unenforceability to thirty days,
a definite step backwards.
2' Littlefield, "Preserving Consumer Defenses: Plugging the Loophole
in the New UCCC," 44 N.Y.U.L. Rev. 272 (1969).
$35-25 CONSUMER CREDIT
The 1974 Act, unlike the 1968 Act, treats direct loan lenders and
credit card issuers, a big plus for the consumer. These sections also re-
move the loopholes by which creditors could circumvent the 1968 Act.
T h e model Act is excellent in both areas, and so are the acts of the states
adopting sections similar to the model. T h e Kansas Section 3.403 on TABLE O F CASES
credit card lenders, however, is of little consequence since credit cards
are almost never used in home solicitation sales. T h e section appears to
be little more than window dressing.
[ R e f e r e t ~ ~ eare
O n the whole, the 1974 model Acts are a boon to the consumer. A Allcn A. Funt Prods.. Inc. v.
Even though the sections may vary from state to state, the consumer is
A & S Excavating, Inc. v. International
far better off under them than he was before. Harvester Credit Corp.
While Section 3-306 of the U.C.C:prohibits authorizations to con- .................... 31-20n.33
fess judgment, usually called cognovit notes, such instruments have been Abbott, Shepard v. ..... 11-12 n.20
Abraham, Wible v. . . . . . . 11-20 n.30
voided otherwise, notwithstanding failure to do s o by the Supreme
Abramowitz v. Barnett Bank
Court.26
..................... 17-5n.3
Ackenbausen v. People's Sav. Bank
.................... 19-25n.44
§ 35-25 OTHER STATE LAW LIMITING HOLDER Acme Fin. Corp., Ray v.
.................... 33-50n.55
IN DUE COURSE RIGHTS
Adams, Labor Bank &Trust Co. v.
As indicated at the beginning of Part V, there are many specialized ................... 2 M 5 n.85
consumer protection statutes. These statutes are by no means uniform Adams v. Southern Cal. F i n t Nat'l
and vary greatly in the degree of protection afforded to the consumer.
Bank ............... 3 1-15 n.29
Some statutes are limited to specific consumer transactions, such as home
Adelmau, Grossman v. .. 15-40 11.79
Advance-Rumely Thresher Co, v.
solicitation sales o r other special transactions. A few states have special Hess ...............21-50 n.71
laws that abolish o r sharply restrict the holder in due course doctrine.28 Aebi v. Bank of Evansville
In view of the great variety of these statutes and the rapid changes being .................... 23-6511.86
Aetna Life & Cas. Co. v. Hampton
made in this area of the law, banks will be wise to consult local counsel
State Bank ......... 20-55 n.105
as to the possible existence of local laws affecting the rights of those who Agriculturnl Nat'l Bnnk V. Grcnt
engage in the busincss of discounting or rediscounting consumer paper. Am. Indem. Co. ..... 21-65 n.97
A. J. Jackson Chevrolet v.
Oxley ............ 14-1 00 n. 11 1
28 Isbell v. County of Sonoma, 21 Cal. 3d 61, 145 Cal. Rptr. 368, 577 Alnbnma Ass'n of Ins. Agents v.
Board of Governors .... 4-35 n.83;
P.2d 188 (1978), cert. denied 439 U.S. 996 (1978); D.H. Overmyer Co.
v. Frick Co., 405 U.S. 174 (1972). 6-15 n.34; 6-20 ns. 64, 65
28 E.g., Alaska and Vermont, which have prohibited the holder in due Albany State Bank v. Anthony
course doctrine in certain consumcr transactions. ................... l L 2 0 11.23
Albright, Gobles Co-op. Ass'n v.
.................... 15-55n.89
Albuquerque Nat'l Bank, Loucks v.
................ 20-15 n.32, 33
Alder, Long v. ......... 22-15 n.9;
22-20 n. 12
Alexandria Bank & Trust Co. v.
Honeycutt .......... 20-75 n.146
Aljax Corp. v. Connecticut Mut.
Life Ins. Co. ........ 20-30 n.56
x to secrion~(§).I
Chemical Bank ...... 19-40 n.75
Allen Grocery Co., S.S., v. Bank of
Buchanan County ... 20-80 n.153
Allen v. Puritan Trust
Co. ............ 27-40 ns. 60, 61
Allen, San Joaquin Fin.
Corp. v. .......... 16-100 11.112
Allen, Utah Irrigation
Co. v. .............. 11-20 n.21
Allison v. Hollembeak . . . 16-30 n.34
Allredge, Hostutler v. . . . 22-50 n.76
Al Maroone Ford v. Manhcim Auto
Auction, Inc. . . . . . . . . . 15-10 n.9
Alter, Maryland Title & Guar.
Co. v. .............. 22-20 n.16
Alton, Moore v. . . . . . . . 22-50 n.74
American Bancorp. v. Board of
Governors ........... 6-20 n.61
American Bank & Trust Co.
v. Straughan ....... 20-70 n.136
American Bell Int'l, Islamic
Republic of Iran v. . . . .25-40 11.53
Amcricnn Empire Ins. Co. v.
Hannan Nat'l Bank ... 25-40 n.53
American Exch. Bank v. Cessna
. . . . . . . . . . . . . . . . . 14-100 n.109
Amcrican Exch. Nat'l Bnnk v.
Amcrican Hotel Victoria
Co. ................ 23-40 n.36
Anlcricnn Exch. Nat'l Bnnk. First
Nat'l Bnnk v. ....... 20-55 n.lO1
American Express Co.,
Sendery v. .......... 15-15 n.26
American Food Purveyors, Inc., In re
....................30-3511.69
American Home Assurance Co.
v. Scarsdale Nat'l Bank &
Trust Co. ........ 20-100 n.186
American Hominy Co. v.
National Bank . . . . . . . . 25-10 n.8
 TABLE OF CASES
[References are to sections
American Hotel Victoria Co.,
American Exch. Nat'l
Bank v. .............23-40 n.36
American Nat'l Bank & Trust
Co. v. Saint Joseph Valley
Bank ............... 13-60 11.64
American Nat'l Bank & Trust Co.,
State ex rel. Leonard V. ... 5-5 n.7
American Nat'l Bank.
Brooks v. ........... 23-70 n.96
American Nat'l Bank v.
National Fertilizer
CO. ...... 23-30 n.22; 2 3 4 0 n.36
American Nat'l Bank v. Patterson
. . . . . . . . . . . . . . . . . . . 15-40 n.79
American Nat'l Bank, Port City
State Bank v. ........ 21-40 n.57
American Nat'l Bank v. Warren
.................... 13-10 n.6
American Sec. & Trust Co.,
G . & R . C o r p . v. . . . . 20-100n.188
American State Bank, Bank of Niles
v. ...... 15-70 n.108; 25-20 n. 1 l
American Stock Transfer Co.,
Dewitt v. .......... 16-90 n.109
American Trust & Sav. Bank
v. Austin ............ 13-10 n.6
Ames Trust & Sav. Bank,
Comm'r v. ........... 8-20 n. 10
Amsinck v. Rogers ...... 23-10 n.3
Arnthauer v. Johnson ... 22-20 n.22
Anderez, United
States v. ........... 4-55 n.158
Anderson v. Elem . . . . . . 15-40 n.74
Anderson, John 0. Melby &
Co. Bank v. ......... 34-10 n.8
Anna Nat'l Bank
v. Wingate ........... 18-10 n.4
Annis v. Pfeiffer ....... 14-95 n.98
Anthony, Albany State
Bank v. ............ 16-20 n.23
Apex Inc., 0. M. Scott Credit
Corp. v. ............. 15-10 n.9
Appleton & Eldridge
v. McCarthy ........ 23-65 n.83
Applied Logic, I n re ... 20-120 n.209
Are v. Barnett Bank of Miami
Beach, N.A. ...... 16-105 n.125
Arena Auto Auction Inc., Park
State Bank v. . . . . . . 20-100 n.194
Arkansas & La. Land Co.,
Murphy v. .......... 1 1-50 n.73
TABLE OF CASES
(§).I [Relerences are ro secriom (§).I
Arkansas Sav, & Loan Ass'n V. Baldwin-Belmore Fed. Sav. & Loan Bank o f Camas Prairie, Riggs v.
Mack Trucks ......... 17-5 n.3 Ass'n, Cooper v. ...... 7-35 n.46 ................... 19-15 n.31
Arlington Brewing Co. Baldwin, Blue Ribbon Garage v. Bank of Chelsea, Garrett v.
v. Bluenthenthal & ................... 23-30 n.22 ................... 16-55 n.75
Brickart ............ 15-25 n.38 Baldwin's Bank v. Smith Bank of Commerce, Davies &
Arlington Nat'l Bank . . . . . . . . . . . . . . . . . . 21-65 n.108 Vincent v. . . . . . . . . . 23-75 n.lOO
v. Bennett .......... 18-20 n. 18 Ball Memorial Hosp. Ass'n, Inc. Bank of Commerce v. Randell
Armstrong Equip. Co., Clark Bright v. ........... 33-15 n.21 . . . . . . . . . . . . . . . . . . . 15-25 n.37
Equip. Co. v. ....... 31-10 11.18 Balmoral Arms v. Rutkin Bank of El Paso v. Powell
Arnett v. Sanderson .... 15-15 n.16 ................... 21-50 n.74 ................... 25-20 n.11
Arnold Tours V. C a m p .... 4-35 n.81 Baltimore & 0. Ry., Norman v. Bank of Evansville, Aebi v.
Aronson v. Nurenburg ... 13-65 n.71 . . . . . . . . . 10-10 n.15; 11-35 n.49 ................... 23-65 n.86
Arrshy Co., Commercial
............
Bancn Commerciale Italiann Trust
Co. v. Clnrkson ...... 25-30 n.29
Bank of Fayetteville, Boykin v.
Bank v. 12-10 n.14 . . . . . . . . . . . . . . . . . . . 21-25 n.43
Artz, Scymour & Bnnco de Lnvourn dc Minnl Gcrais, Bank of Hnrtshome, Cirar v.
Co. v. .............. 15-40 n.78 S.A., DenGhnznrinn v. . . . . . . . . . . . . . . . . . . . 19-45 n.94
Ashland Bldg. & Loan Co. v. . . . . . . . . . . . . . . . . . 21-20 n.26 Bank of Independence, Mid-Continent
Kerman ... 1 1 4 5 n.59; 16-10 n.10 Banco d e Tamaulipas, Colcord v. Nat'l Bank v. ........ 15-15 n.25
Asbury v. Taube ....... 15-40 n.75 ................... 14-25 11.23 Bank of Italy, Hiroshima v.
Associates Discount Corp. of Iowa Bank America Corp. v. Board of ................... 20-30 n.44
v. Fitzwater ....... 16-105 n. 124 Governors . . . . . . . . . . . 6-1 5 n.44 Bank of Italy v. Symmes
Atlantic Coast Line, BankAmerica Corp. v. Board of . . . . . . . . . . . . . . . . . . . 18-25 11.24
Deal v. ............. 25-25 n. 18 Governors ........... 6-20 n.63 Bank of Italy, Wells Fargo Bank v.
Atlantic Refining Co. v. Nucar Bankers Credit Life Ins. Co., Marx ................... 25-30 n.26
Forwarding Corp. .... 2 2 4 0 n.60 & Co. v. ............ 22-20 n. 16 Bank of Lyons v. Schultz
Attorney General v. Manchester Bankers Trust Co. v. Bank of ................... 15-30 n.51
Morris Plan Bank ..... 8-20 n.10 Rockville Center .... 15-85 n. 1 18 Bank of Milwaukee v. Kaltzimmen
Atwell v. Mercantile Trust Bankers Trust Co. v. Litton Sys., Mfg. Co. . . . . . . . . . . . 27-35 n.45
Co. ................ 20-45 n.85 Inc. . . . . . . . . . . . . . 16-105 n.127 Bank of Niles v. American State
Auburn Lumber Co., Banken Trust Co., Sunshine v. Bank ... 15-70 11.108; 25-20 n.11
Whitlock v. ......... 16-35 n.44 ................... 20-30 n.57 Bank of N. Carolina v. Rock Island
Auerbach v. Barrett ..... 22-25 n.27 Banko del Pais, S.A., Marine Midland Bank . . . . . . . . . . . . . . 25-40 n.53
Aufderheide v. Moeller ... 11-50 n.69 Grace Trust Co. v. ... 25-60 11.86 Bank of Odessa. Kansas Bankers Sur.
Augustnnna College, Bank of Am. Fork v. G.L. Corp. Co. v. ............ 20-55 n. 106
Foster v. ........... 15-15 n.14 . . . . . . . . . . . . . . . . . . . . 5-35 11.75 Bank of Oklahoma, State ex re/. State
Austin, American Trust & Bank of America v. United States Banking Dd. v. . . . . . . . . . 5-5 n.5
Sav. Bankv. .......... 13-10n.6 .................... 9-35 11.20 Bank of Otterville v. Bank of
Available Iron & Metal Co. V. Bank of Bisbee, Slaughter v. Boonville . . . . . . . . . . . 14-75 n.76
F i n t Nat'l Bank ..... 23-30 n.20 ................... 11-20 11.21 Bank of Pittsburgh Nat'l Ass'n,
Avery, Haskell v. ...... 1 3 4 5 n.51 Bank of Black Creek, Endlich v. Schwartz v. . . . . . 20-45 ns. 85, 86
................... 20-45 n.87 Bank of Rockville Center, Bankers
Bank o f Boonville, Bank of Trust CO. V. ....... 15-85 n.118
B Ottervillo v. ......... 14-75 n.76 Dank of S. Md. v. Robertson's Crab
House ............. 20-60 n. 1 17
Baer v. Hoffman . . ...
23-70 ns. 95, 99
Bank of Brandeyville, Ozark Sav.
Bank v. ............ 14-80 n.82
Bank of the United States,
Bagby, Linthicum v. 23-65 n.81 Osborn v. ................ 1-15
Bahrenfuss, Higby v. ...
13-30 11.29 Bank of Buchanan County, S. S. Allcn
..... Bank of Wadley, International Dairy
Bailes v. Keck ........
18-20 11.22 Grocery Co. v.
Bank of Cal. v. National City
20-80 n. 153 Queen, Inc. v. ....... 25-40 n.54
Bailey Carriage Co., F. O., Gilman V. Bank of Wyandotte v. Woodrow
................... 22-40 n.59 + . . . . . . . . . . . . . . . . . . . . 11-10 n.2 . . . . . . . . . . . . . . . . . . . . 21-10 n.l
Dnker, Deming Nnt'l Dank v. Bnnk of Cnl, v. Starrett Banner Ment Co. v. Rieger
................... 22-30 n.39 .................. 21-65 n.lOO ................... 15-20 11.32
 TABLE OF CASES
[References are t o sections ($).I
Barak. J . I . Case v ........... 4-70
Bar Chris Constr . Corp., Escott v .
................... 4-70 n.188
Barclay's Bank v . Mercantile Nat'l
Bank .............. 25-40 n.53
Barnett Bank. Abramowitz v .
..................... 17-5 n.3
Barnett Bank of Miami Beach. N.A.,
Are v............ 16-105 n.125
Barrett. Auerbach v . . . . . 22-25 n.27
Barrett v. Vaughn & C o.
................... 18-25 n.25
.......
Barry v . Hensley 27-40 n.58
Barthelmess v . Cavalier ... 15-15 n.20
Bartlett v . First Nat'l Bank
................... 20-55 n.97
Battle Creek Sav. Bank. Leach v.
..................... 25-5 n.1
Batton. Winn v ......... 23-30 n.25
Baumeister v . Juntz .... 23-70 11-97
Bay City Land Co., Cady v .
................... 13-25 n.24
Bayer. Smith v ......... 13-35 n.33.
13-45 n.52
Bayly. Dakin v ......... 21-50 n.70
Beard Sav. Ass'n. Dhevalier v .
.................... 7-35 n.46
Beathurd v . Chicago Football Club.
Inc................ 25-40 11.53
Beaucar v. Bristol Fed . Sav. & Loan
Ass'n .............. 19-45 n.92
Becker v . Hart ........ 15-15 11.22
Bederman v . Otisville State Bank
................... 13-30 11-29
Beeman-Spaulding-WoodwardCo.,
Noble v............ 13-25 n.25
Beesty. Studdy v ........ 23-45 n.50
Bell. Wooten v ......... 22-35 11.52
Bcnnett. Arlington Nat'l Bank v .
................... 18-20 n.18
Bennett. Bumb v . . . . . . . 32-25 n.22
Bennett v . United States Fid . &
Guar. Co........... 15-30 n.53
.
Berenson v London Fire Ins . CO.
.................... 11-10 n.2
Bergmann v . Puhl ...... 23-65 n.86
Bernstcin. Giacalone v .
................. 14-100 11.101
Berrall. National Bank of N.J. v .
................... 20-30 n.55
TABLE OF CASES I
[References are to sections (§).I
.
Berry v . Brandt C Downey Co . Board of Governors. Bank America
Gorp. v .............. 6-15 11.44
Briggs. Broadway Management
................... 11-20 n.31 Corp. v . . . . . . . . . . . . 16-45 11.64
Bevens v . London & S.W. Bank Board of Governors. First Nat'l Bank Bright v . Ball Memorial Hosp . Ass'n.
................... 11-20 n.13 of St. Charles v . . . . . . . 6-20 n.71 ................... 33-15 n.21
Beverland. International Harvester Board of Governors. Independent Bright v . Offield ....... 16-25 n.28
Co v . ............... 13-65 11.72 Banker's Ass'n of Ga . v . Bristol Fed . Sav. & Loan Ass'n.
Bibce Grocery Co., Myers v . ......... 6-15 n.56; 6-20 & n.60 Beaucar v. . . . . . . . . . . 19-45 n.92
................... 23-30 n.24 .
Board o f Governors v Investment Co. Broadway Bank & Trust C o. v .
Bichel Optical Laboratories. Inc . v . Inst . . . . . 5-30 & n.64. 6-5 ns . 7. Longley ............ 22-20 n.21
Marquette Nat'l Bank . . 3 1-15 n.29 9; 6-15 ns. 29. 33. 52; Broadway Management Corp . v .
Binghampton Pharmacy Co . v . First 6-30 11.81 Briggs . . . . . . . . . . . . . 1 6 4 5 11.64
Nat'l Bank ......... 21-65 n.lO1 Board 'of Governors. Mercantile Tcxas Broadway Nat'l Bank. State v .
Bird. La Due v ........ 11-45. n.59. Corp. v.................. 6-35 ................... 20-45 n.87
16-10 n.10 Board of Governors. National Courier Broadway Trust & Sav. Bank.
Bischoff v. Yorkville Bank ... 27-30 Ass'n v . . . . . . . . . . . 6-15 & 11.53 Pflueger v . . . . . . . . . . 16-90 n.101
n.35; 27-40 ns . 58. 60. 62 Board of Governors. Plaza Bank of Bron. Dillon v . . . . . . . . . 23-65 n.80
Blacher v . National Bank Westport v .......... 4-65 n .172 Bronx County Trust Co., City of
................... 15-35 n.60 Board of Governors. Transamerica N.Y. v . . . . . . . . . . . . 20-55 n.102
Black v . Hart......... 19-45 '11.96 Corp. v . . . . . . . . . . . . . . 6-5 n.12 Brooks v . American Nat'l Bank
Blackman. First Nat'l Bank v . .
Bollcnbach v . Ludlum . 16-30 11.29 ................... 23-70 n.96
................... 16-20 n.20 Bolton v. Wharton .... 15-85 n.124 Brooks. Flagg Bros .. Inc. v . . . 31-15
Blackmon. Johnson v .... 11-20 n .16 Bonart v. Rabito ........ 16-1 0 n.9 Brookshire. United States v .
Blair v . Davis ......... 19-45 n.95 Bonner. Washington H o n e Exch . .................... 1-30 n.36
Blair. Everton v . . . . . . . . . 32-15 n.5 C o. v ...............23-65 n.80 Brown & Williamson Tobacco Corp .
Blake. Hanover Nat'l Bank v. Bost v . Rexine ........ 23-55 n.73 v . First Nat'l Bank . . 29-90 n.156
................... 32-20 n.21 Bothell v . Miller ...... 15-90 n.131 Brown v . Cow Creek Sheep Co.
.
Blake v Woodford Bank & Trust Bovay v. Fuller ........ 23-30 n.24 ................... 11-20 n.15
C o. . . . . . 23-45 n.52. 23-60 n.77 Bowden. Tuten v ....... 18-20 n .19 Brown. Cressler v. . . . . . 14-75 n.74
Blanks Motor Co., Commercial Credit Bowen. Columbia Banking C o. v . Brown v . Eastman Nat'l Bank
Co. v .............. 14-75 n.80 ...................22-25 n.34 ................... 19-35 n.69
Bledsoe. Ex parte ...... 16-35 11-43 Bowen v. Farley ....... 23-65 11.82 Brown. Hibbs v . . . . . . . . 11-20 n.28
Bleeg Co., John P. v . Peterson Bowles. Stephcns v. . . . . . 18-25 n.25 Brown. Jacobs v. . . . . . . . 14-75 n .80
.................. 15-85 n.121 Boykin v . Bank of Fayetteville Brown. Merchants' Bank of Canada v.
..........
Bliss v . Bliss 16-80 n.92 ................... 21-25 n.43 . . . . . . . . . . . . . . . . . . 20-75 n.146
Blue Chip Stamps v . Manor Drug Dradlcy. Hurlburt v . . . . . 23-65 n.86 Drucc v . Wcscott . . . . . . . 1 1-1 5 n . 8
Stores ............. 4-70 n .189 Bradstrect. State Bank of Beaver Brunett v . Everts ....... 23-55 n.71
Bluenthenthal & Brickart. Arlington Co. v .............. 1 4 4 5 n.33 Brunnett Trust, Mary Couts. v .
Brewing C o. v ....... 15-25 n.38 Brandon. Enoch v. . . . . . 16-65 n.79 Samuels ............ 23-65 n.88
Blue Ribbon Garage v . Baldwin
................... 23-30 n.22
Brandt C . Downey Co., Berry v .
................... 11-20 n.31
.
Bryer McLean v. . . . . . . 15-40 n.80
Bryon v . Bryon. Heffernan & C o .
...
Board of Educ.. Joncs v 23-55 n.68 Brannon v . First Nat'l Bank of . . . . . . . . . . . . . . . . . . 15-65 n.102
Board of Educ . School Disl . NO. 189. Atlanta ............ 12-70 n.78 Bryon, Heffernan & Co., Bryon v .
First Natl' Bank at E. St . Louis v . Branscomb. Federal Land Bank v . .................. 15-65 n.102
................. 16-105 n.126 ................... 16-70 n.84 B. T. Investment Mortgage Inc.,
Board of Governors. Alabama Ass'n Brantley v. Union Bank & Trust Lewis v .................. 6-25
of Ins. Agents v . . . . .'. 4-35 n.83. ................... 31-15 n.29 Buckner. Write Away Pen C o . v .
.
6-15 n.34; 6-20 ns 64. 65 Bredow v . Woll . . . . . . 22-55 n.79. ................... 11-60 n.88
Buck, Newhall Sav . Bank v .
Board of Governors. American 2 3 4 5 n.44
h n c o r p . v . . . . . . . . . . . 6-20 n.61 Brceyear. Gcrthins v . . . . . 23-15 n.8 . . . . . . . . . . . . . . . . . . . 16-45 n.58
Board of Governors. BankAmerica *Bretch v . White . . . . . . . . 11-25 11.40 Budzier. Robcrtson v . . . 13-30 n.29.
Corp. v ............. 6 2 0 n.63 Brewer v . Foshee ...... 13-25 n.25 15-20 n.32
 TABLE OF CASES
[References are to secliom (51.1
Buffalo Bank, Johnson v.
......... 11-55 n.84; 13-25 n.26
.......
Bumb v. Bennett 32-25 n.22
Burack, Tremont Trust Co. v.
.................. 20-85 n.158
Burgettstown Nat'l Bank v. Nill
.............. 23-65 ns. 79, 87
Burke, Copeland v. . . . . . 13-25 n.20
Burling, Moore & Co. v.
.................... 6-13 n.30
Burnett, Payne Bros. v.
........ 20-15 11.22; 20-12 n.205
Durnett, Wcstcrn Farquhar Mach.
Co, v. ............... 16-10 n.6
Burns Mortgage Co. V. Fried
.... 9-35 n.25; 9-55; 11-30 n.45
Burton, Dart Nat'l Bank v.
................. 16-10 ns. 7, 8
Butz, Kuhlmeyer v. ..... 22-50 n.77
Byrne v. Byrne ... 11-15 ns. 9 & 11
Cady V. Bay City Land CO.
................... 13-25 n.24
Caina v. Foreman ..... 22-25 n.25;
23-30 n.22; 23-35 11.32
Calderon v. United Furniture CO.
................... 31-15 n.29
California Bankers Ass'n v. Shultz
................... 4-50; 4-55
Calkins, Finch v. ....... 22-30 11.46
Camp, Arnold Tours v. ...4-35 n.81
Camp, Investment Co. Inst. V.
........... 4-35 n.80; 5-30 n.65
C & S Nat'l Bank, Gunn V.
................... 16-10 n.15
Capital Nat'l Bank, Gordon Fireworks
Co. v. ............ 20-65 n. 125
Capps, First Nat'l Bank v.
......... 14-15 n.4; 18-20 n.23;
22-10 n.3
Caputo v. Dc Loreto ...1 6 4 0 n.55
Carey, Moore v. ....... 11-55 n.78
Carleton Ford, Inc. v. Oste
................. 14-100 n.107
Carlson, Lincoln First Bank, N.A. v.
................... 26-25 n.30
Carmen v. Higginson ... 23-65 n.92
Carolina Nat'l Bank. Jones V.
................... 23-45 n.44
TABLE OF CASES
[Referencesare lo seclion. ($).I
Carpenter, First Nat'l Bank V. Chase Nat'l Bank v. Sanford City Nat'l Bank v. Roberts
................... 23-40 n.40 ..................... 1-10 n.9 . . . . . . . . . 16-20 n.20; 16-55 n.74
Carpenter v. Payette Valley Coop., Chatham & Phoenix Nat'l Dank. City Bank, United Technologies v.
Inc. ............... 11-50 n.77 Miller v. ........... 20-30 n.44 ................... 25-40 n.53
Carr, London & River Plate Bank V. Chelsea Exch. Bank v. Lewis City Nat'l Bank of Conn., Laurel Bank
.................... 23-15 n.8 .............. 23-25 ns. 16, 33 & Trust CO. V. ....... 15-30 n.57
Carroll v. Mitchell-Parks Mfg. CO. Chelsea Exch. Bank v. Warner City of N.Y. v. Bronx County
....................
. . . . . . . 19-40 11.76 ................... 16-55 n.74 Trust Co. . . . . . . . . . 20-55 n.102
Carter, Iowa Nat'l Bank V. Chemical Bank, Allen A. Funt Prods., Clark Equip. Co. v. Armstrong
................... 15-20 n.30 Inc. v. ............. 1 9 4 0 n.75 Equip. Co. . . . . . . . . . . 31-10 n.18
......
Carter v. Jcnnings 22-40 n.54 Chemical Bank N.Y. Trust Co., Clark, Fint State Dank at Gallup v.
Cartright, F i n t Nat'l Bank & Trust Krom V. . . . . . . . . . . . . 25-20 n. 10 . . . . . . . . . . . . . . . . . . . 11-20 n.14
Co. v.. .............. 19-40 n.85 Chcniicnl Dank N.Y. Trust Co., Clark. Franklin Sav. &Trust Co. v.
Casc v. McKinnis ..... 22-25 11.31 ; Rnlncr v. . . . . . . . . . . . 33-50 n.55 . . . . . . . 18-20 n.17; 21-65 n. 99;
22-30 n.42; 2 3 4 5 ns. 43, 5 5 Chemicnl Bnnk N.Y. Trust Co.,
Catalano, John Decre V. .. 3 1-1 5 n.33 Rose Check Cashing Sew. v. Clark v. O'Neal . . . . . . . 23-30 n.25
22-50 n.75
Cavalier, Barthclmcss v. . . 15-1 5 n.20 .................... 25-20 n.9 Clnrkson, Rnnca Commercinle Italiann
C.B.K. Agronomics Inc., Stream v. Chcmical Bank N.Y. Trust Co., Trust Co. v. ......... 25-30 n.29
................... 21-50 n.74 Surnitomo Shoji N.Y., Inc. v. Clark, Willard State Bank v.
Centennial Nat'l Bank, Grubnau v; ......... 19-45 n.89; 20-35 n.70 . . . . . . . . . 22-25 n.3 1 ; 22-30 n.42
.................. 20-65 n.118 Chicago Football Club, Inc., Clayton Bank, Central Bank of
Central Bank of Clayton V. Clayton Bcathurd v. ......... 2 5 4 0 n.53 Clayton v. . . . . . . . . . . . 5-25 n.45
Bank ............... 5-25 n.45 Chicago-Lnkc St. Bank, Geibe v. Clcarfield Trust Co. v. Unitcd Stntcs
Central Bank v. Scrotoville ................... 22-25 n.26 . . . . . . . . . . . . . . . . 9-35 ns. 17, 19
Milling Co. ......... 23-65 n.84 Chicago St. P.. M. & 0. R. Co.. Clintwood Drug Co., Stevens v.
Central Fed. Sav. & Loan Ass'n, Stella Checsc Co. v. . . . 9-35 n.13 . . . . . . . . . . . . . . . . . . . 15-15 n.16
People v. ............. 17-5 n.3 Childs v. Ford Motor Credit Co. Cluscar~v. Wagncr ..... 14-75 n.70
Central High School v. Union Free ................... 33-50 11.59 Coast Coal Co., Shccts v. . . 11-15 n.7
School ............. 21-50 n.71 Childs, Mobley v. . . . . . . 14-95 n.98 Cocke, Omaha Loan & Bldg. Ass'n v.
Central Nat'l Bank v. Droslea Cirar v. Bank of Hartshorne ................... 13-65 n.66
Jewelry Co. ......... 14-80 n.82 . . . . . . . . . . . . . . . . . . . 19-45 n.94 Comn v. May ......... 16-35 n.40
Central State Bank v. First Citizcns' & Pcoplcs' Nat'l Bank, Cohcn V. Lincoln Sav. Dank
State Bank ......... 13-65 n.69
Louisville & Nashville Ry. v. . . . . . . . . . . . . . . . . . . 20-55 n.102
Central State Bank, Leaderbank V.
.................. 20-65 n. 125 Cohen v. Sovalsky ...... 23-30 n.21
................... 23-60 n.76 Citizens' Bank, Lawrence v. Colby V. Riggs Nat'l Bank
Cessna, American Exch. Bank v.
. . . . . . . . . . . . . . . . . . . 13-60 n.62 . . . . . . . . . . . . . . . . . . . 27-45 11.64
................. 14-100 n.109
Citizens Nat'l Bank v . Curtis
. . . . . . . . . . . . . . . . . . . 16-40 n.54 Colcord v. Banco de Tamaulipas
Charter Bank of Gainesville, Holly . . . . . . . . . . . . . . . . . . . 14-25 11.23
Hills Acres, Ltd. v. ... 1 1-20 n.36;
Citizens Nat'l Bank v. Fort Lee Sav. &
Cole, Stevens v. . . . . . . . 15-15 n.16
Loan Ass'n ......... 1 5-35 n.63;
16-30 n.36 Colin v. Pennsylvania Cent. Nat'l
Charter Oak Bank & Trust Co., Citizens Nat'l Dank v. Mid-States
21-20 11.22
Bank . . . . . . . . . . . . . . 12-70 n.78
Dcv. Co. . . . . . . . . . . 29-90 n. 159 Collins, Kcnncdy v. .... 16-40 11.56
Equipmcnt Distribs., Inc. v.
20-65 n.128
Chase Manhattan Bank, Elsie
Citizcns Nat'l Dank, National
Citizens v. .......... 21-25 n.43
Colona v. Parksley Nat'l Bnnk
. . . . . . . . . . . . . . . . . . . 1 5 4 0 n.78
Rodriguez Fashions, Inc. v.
20-30 n.47
Citizens & S. Nat'l Bank v. Youngblood
. . . . . . . . . . . . . . . . . . . 20-30 n.51
Colsky v. Eyres Storage Co.
. . . . . . . . . . . . . . . . . . 16-90 n.102
Chaso Manhattan Bank, KMW
.............
Citizcns' State Bank, Downcy v. Columbia Banking Co. v Dowcn
Int'l v. 25-40 n.53 . . . . . . . . . . . . . . . . . . . . . 25-5 n.1 . . . . . . . . . . . . . . . . . . . 22-25 n.34
Chase Nat'l Bank, Glen Falls Indemn. Citizens Union Bank v. Thweatt Columbia Trust Co., Lipten v.
Co. v. .............. 11-55 n.81 .L. ................... 15-10 n.10 ................... 25-25 n.19
 TABLE OF CASES
[References arc to secriom
Commerce Bank v. Edco Fin. Serv.
................... 15-15 11.24
Commerce Sec. Corp. v. Hays
.................. 15-90 n.131
Commercial Bank & Trust Co.,
Tauntum v. ........ 21-65 n.lOO
Commercial Bank v. Armsby CO.
................... 12-10 n.14
Commercial Bank v. First Nat'l
Bank .............. 14-25 n.22
Commercial Bank v. Hurt
................... 12-10 n.12
Commercial Bank v. Lee
................... 12-10 n.13
Commercial Bank v. Pfeiffer
.................... 13-10 n.6
Commercial Credit Co. v. Blanks
Motor Co. .......... 14-75 n.80
Commercial Credit Co., Keller v.
................. 20-120 n.207
Commercial Credit Co. v. Nissen
................... 11-30 n.45
Commercial Credit Co. v. Summers
................... 16-35 n.38
Commercial Credit Co. v. Ward
& Son ............. 14-75 n.80
Commercial Credit Corp., Lamson v.
.................... 13-10 n.4
Commercial Fin. Corp. v. Gale
................... 23-65 n.79
Commercial Nat'l Bank, Felton v.
................... 11-50 n.69
Commercial Nat'l Bank v. May
................... 16-25 n.27
Commercial Sec. Co. v. Donald
...........
Drug Co. 15-15 n.12
Commercial Trust Co. v. New
England Macaroni Mfg. CO.
................... 22-30 n.35
Commonwealth Bank & Trust CO.,
Jones v. ............. 21-10 n.4
Commonwealth Nat'l Bank v.
Kennedy Co. ....... 19-40 n.74
Community Bank v. Federal Reserve
Bank ............... 21-10 n.1
Community Nat'l Bank v. Dawes
................... 15-60 n.98
Community State Bank, Charles
Regussa & Sons v. ... 15-45 n.85
TABLE OF CASES
($).I [Rejerences are t o sections (Zj.]
Comptroller of the Currency, Groos Covington V. Penn Squarc Nat'l Bank Davis v. Gutheil . . . . . . . 18-20 n. 18
Nat'l Bank v. ....... 3-35 n.46; .................. 20-55 n.111 Davis, Home Bank &Trust Co. v.
4-15 n.17 Cow Creek Sheep Co., Brown v. . . . . . . . . . . . . . . . . . . . 11-20 n.30
Congress Indus.. Inc. v. Federal Life ................... 11-20 0.15 Davis, McCleanathan v.
Ins. Co. ........... 19-10 n.17 Cox, First State Bank of Humbird v. ................... 11-45 11.62
Connecticut Mut. Life Ins. Co., Aljax .................. 20-55 n.114 Dawes, Community Nat'l Bank v.
Corp. v. ........... 20-30 n.56 Cozens, Kipp v. ....... 31-15 11.33 ................... 15-60 11.98
Continental Bank & Trust Co, v. Craig, Williamson v. .... 16-30 n.30 Day, Illinois Bankers Life Assur. Co.
....
Detroit Trust Co. 22-20 n.15 Crane, Hall v. ........ 23-65 11.78; V. . . . . . . . . . . . . . . . . . 16-10 n.10
Continental Bank v. Fitting 23-70 n.98 Deal v. Atlantic Coast Line
................... 20-30 n.62 Crawford, Dollar Sav. & Trust Co. v. . . . . . . . . . . . . . . . . . . . 25-25 n.18
Continental Bank, Phillips Home . . . . . . . . . 13-30 n.29; 15-15 n.13
.
Furnishing, Inc. v. ... 19-15 n.30;
21-10 n.1
Cressler v. Brown ..... 14-75 n.74
Dcere, John, Indus. Equip. Co. v.
Dclphia . . . . . . . . . . 16-105 n. 123
Criterion Ins. Co. v. Fulgham
Continental Credit Co. v. Ely ................... 22-60 n.82
Dccrc, John v. Catalano
................... 31-15 n.33
........ 13-65 n.66; 15-30 n.45 Crouch, Fayetteville Bldg. & Loan Demer v. Loudenback . . 23-40 11.37
Continental Guar. Corp. v. People's Ass'n .............. 11-20 n.34 De Jernet, First Nat'l Bank v.
Bus Line ........... 11-20 n.31; Cumberland Valley Nat'l Bank, ................... 16-30 n.32
16-35 n.40 Litchfield Shuttle Co. v. Delaware State Bank v. Patton
Continental Illinois Bank & Tmst CO., ................... 20-55 n.97 . . . . . . . . . . . . . . . . . . . 21-50 11.74
Illinois ex rel. Lignoul v. ... 5-5 n.5 Cunningham v. Pressed Steel Car Co. Dc Loreto, Caputo v. ... 1 6 4 0 n.55
Continental Ins. Co., Gutekunst v. ................. 16-90 n. 105; Delphia, John Deere Indus. Equip.
.................... 15-1511.25 16-70 n.88 Co. v. ........... 16-105 n.123
Continental Mut. Bank v. Elliott Cunningham, Phillips v. .. 23-35 n.32 Demateis v. Vezu ...... 23-55 11-68
.................... 18-3011.32 Currier v. Lockwood . . . . 1 1-15 n. 10 Deming Nat'l Bank v. Baker
...........
Cook v. Lily 31-15 n.33 Curtis, Citizens Nat'l Bank . . . . . . . . . . . . . . . . . . . 22-30 n.39
...
Coolidge v. Saltmarsh 1 6 2 0 n.22 .................... 16-40n.54 Dcnbigh v. First Nat'l Bank
Cooper v. Baldwin-Belmore Fed. Snv.
.........
Curtis, Tri-Bullion Smelting Rr Dcv. . . . . . . . . . . . . . . . . . 20-100 n.182
& Lonn Ass'n 7-35 n.46 CO. v. ...,......... 20-55 n. 1 00 DcnGhnznrian v. Bnnco dc Lnvo~lrnde
Cooper, F i n t Nnt'l City Bank v. Minal Gcrnis, S.A. . . . . 21-20 n.26
.................... 15-60n.93 Dcnison-Gholson Dry Goods Co. v.
Copeland v. Burke..... 13-25 n.20 Hill . . . . . . . . . . . . . . . 15-90 n. 134
Coppes, Rotuba Extruders. Inc. v. Dakin v. Bayly ........ 21-50 11.70 Department of Treasury, First Nat'l
................. 14-100 n.112 Dakota Nat'l Bank & Trust Co. v. Bank of Eden, S.D. v. .. 3-35 n.46
Corely v. French ...... 18-20 n.17; First Nat'l Bank &Trust Co. Detroit City Sew. Co., Detroit Trust
21-65 ns. 99, 108; 22-50 11.75 ...................... 5-5 n.3 Co. v. .............. 1 &-90 n.99
Danbury State Bank, Virtuc v.
Corn Exch. Bank, State Bank v.
................... 21-25 n.39
Detroit Trust Co., Continental Bank &
................... 14-45 n.34
Darnell, Gary v. ....... 31-15 n.29
Trust Co. V. ......... 22-20 n. 15
Corn Exch. Nat'l Bank, Snyder v. Detroit Trust Co. v. Detroit City Sew.
Dart Nat'l Bank v. Burton Co. ................ 16-90 n.99
................... 20-55 n.97
. . . . . . . . . . . . . . . . 16-10 ns. 7, 8
......
Corry, Fielding v. 23-30 n.23 Davenport v. Palmer ... 14-50 n.42
Detroit Trust Co., Merchants Nat'l
Bank v. ............. 16-90 n.97
Cottrell, Frazier v. ..... 11-60 0.88 Davies & Vincent v. Bank of Devine v. Price ........ 11-20 n.14
Council on Judicial Complaints, Commerce . . . . . . . . . 23-75 n. 100 Dewitt v. American Stock Transfer Co.
....
Nichols v. 4-50'ns. 107, 130 Davies, Farmen' Bank v. .........:......... 16-90 n.109
Country Club Bank of Kansas City V. .................... 16-35 n.45 Dhevalier v. Beard Sav. Ass'n
Smith............. 4-65 n.170 Davis, Blair v. . . . . . . . 19-45 n.95 . . . . . . . . . . . . . . . . . . . . 7-3511.46
County of Sonoma, Isbell V. Davis County Dank, National Copper D. H. Ovcrmeyer Co. v. Frick Co.
................... 35-20 n.25 Bank v. . . . . . . . . . . . . 23-55 n.67 . . . . . . . . . 19-30 n.50; 35-30 n.25
County Sav. Bank v. Jacobson Davis, Glendora Bank v. Di-Chem Inc., North Ga. Finishing,
.............. 23-65 ns. 79, 8 7 * . . . . . . . . . . . . . . . . . . 71-20 n.23 1nc.v. .................. 31-15
 TABLE OF CASES
[References arc to sections
Dickey. General Mortgage & Loan
Corp . v .......... 16-10 ns . 9. 11
Dickinson. First Nat'l Bank v .
................... 5-5 ns. 2. 7
Dillenbeck. Gypsum Valley Nat'l
Bankv .............. 11-20n.16
Dillon v . Bron ......... 23-65 n.80
.
Dine Sav Bank. Mischnivk v .
..................... 23-10n.3
.
Doherty v First Nat'l Bank
......... 23-30 n.24. 23-40 n.39
Dollar Savings & T r u s t C o. v .
Crawford ........... 13-30 n.29.
15-15 n.13
Dolly Madison. I n re ..... 29-5 n.1 l
Dominion Constr., Inc . v . First Nat'l
Bank ............. 20-110 n.195
Donald Drug Co., Commercial Sec.
C o. v............... 15-15 n.12
Donnelly v . Gavan ..... 34-65 n.56
Donohoc. Estate of . . . . . 1 1-25 n.39
Dorbecker v. Brandt C . Downey C o.
......... 1 1 4 5 n.59. 16-10 n.10
Dougherty v . Salt ...... 13-65 11.67
Dougherty. Viajes Iberia. S.A. v .
.................. 14-100n.103
Douglas. Simon v . . . . . . 13-65 n.73
Dowholonek. Mazurkiewicz v .
................... 16-20 11.22
Downey v . Citizens' State Bank
......................25-5 n.1
..
Downey Co., Brandt C Dorbecker v .
........ 11-45 n.59. 16-10 n.10
Downs v . Horton ....... 15-20 n.32
Dresser. Hibernia Bank v .
.................... 16-20n.21
Dresser v . Missouri Etc . R.R. Constr.
C o................. 27-25 n.33
Dronen. State Bank v .
....................15-25n.38
Droslea Jewelry Co., Central Nat'l
Bank v ............. 14-80 n.82
Dubinski. Siegel v . . . . . . 23-45 n.44
Dubuque Packing C o . v . Fitzgibbon
....................25-40n.53
Duncan. New York Bankers v .
.................... 15-1511.20
Dugane v . Hvezda Pokroku NO. 4
....................11-65 11.97
Dunlop v . First Nat'l Bank of Ariz .
..................... 34-10n.8
T A B L E OF C A S E S
(P).] [References are to sectiom (§).I
Dunnemiller. Stuhldreher v . Elliot. Feder v ......... 11-35 n.51 Eudora Bank. !ohnson v .
.................... 23-65n.85 Elliott. Continental Mut . Bank v . ................... 20-30 n.60
..........
Dunn. Grace v 22-15 n.9 .................... 18-3011.32 Everton v . Blair ........ 32-15 n.5
Dunn v . Seamen's Bank for Sav . Ellis v . State Nat'l Bank of Ala . Everts. Bnlnett v . . . . . . . 23-55 n.71
.................... 19-2511.45 ..................... 1-3511.41 Exchange Bank. Murrell v .
Dunn. Shatz v ......... 1 6 4 5 n.63 Ely. Continental Credit C o . v . .................... 16-10 n.6
Durand. E . E . Rivet & Sons v . ........ 13-65 11.66; 15-30 n.45 Eyres Storage Co., Colsky v .
....................22-20n.13 Emerson & Buckingham Bank v . ..................16-90 n.102
German Am . Trust C o.
............... 2 3 4 5 ns . 53. 55
Emigrant Indus . Soc'y, Kelly v .
Eagle Lumber C o. v . Oil States Lumber .................. 20-85 n.159
Co ................. 22-30 n.36 Empire Nat'l Bank v . Highgrade
Eastern Trust & Banking Co., Oil . . . . . . . . . . . . . . . . 16-25 11-27 Fallon Coal Mines Co., Warner v .
Guild v ............. 13-65 n.67 Empirc Parking. Rock Islnnd ......... 15-55 n.90. 18-30 n.36
East. Fox River Valley Bank v . Sales v. . . . . . . . . . . . . 2 1 4 0 n.60 Family Finance Corp., Sniadach v .
.................... 15-1511.22 Empire State Sugar Co., ................ 20-125; 31-15
East Gadsden Bank v. First City Nat'l Hayward v . . . . . . . . . 23-65 n.78. Fanning v . Hembree Oil C o.
Bank .............. 20-55 n.104
. 23-70 11.99 ................. 14-100 11.106
East Jordan Realty Co., Porter v . Employers Mut . Linb. Ins . Co., MBTA Farbcr v . Sackett . . . . . . . . 22-5 n.2
....................22-25 n.28 Employees Crcdit Union v . Fnrlcy. Bowcn v . . . . . . . . 23-65 11.82
Easlman Nat'l Bank. Brown v . .................. 20-65 n.134 Farniers & Merchants Bank
.................... 19-35n.69 Endlich v . Bank of Black Creek v . Wefllad .,........ 22-30 n.37
Eastman. Spiegelman v . ................... 20-45 11.87 Farmers & Merchants Nat'l Bank,
................... 14-75 n.75 Engelecke v . Stuehsler . . 15-60 n.92 Commonwealth of Virginia v .
East Tex . Teachers Credit Union. Engcn v . Medberry Farmers' ...................... 5-5 n.3
Wills v . . . . . . . . . . . . 11-75 n.101 Elev . C o . . . . . . . . . . . . 22-30 n.35 Farmers & Merchants Nat'l Bank,
.
Ebenreiter. M J . Wallrich Land & Enoch v . Brandon ...... 16-65 n.79 Union Tool C o . v . . . 20-300 n .182
Lumber C o v . ....... 13-25 11.24 Epley. Union Inv. Co . v . . . 13-65 n.68 Farmers & Merchants State Bank,
Eby v . Reb Realty. Inc . Equipment Distribs., Inc. v . Charter Nietzel v ............ 3 1-15 11.34
................... 33-15 n.21 Oak Bank & Trust C o . Farmers & Stockmens Bank of
Echave. Reinhart v..... 13-65 n.67 .................. 20-65 n.128 Clayton. N.M., McKay v .
Ector
. .
.....
v . Osborne 15-90 n.133 Equitable Trust Co. v . Rochling ................... 16-10 n.lS
Edco Fin . Serv., Commerce Bank v . ................... 1 3 4 0 n.40 Farmers' Bank v . Davies
................... 15-15 n.24 Equitablo Trust Co., Taylor v . . . . . . . . . . . . . . . . . . . . 16-35 n.45
Edelen v. First Nat'l Bank .................. 20-65 n.123
................... Farmer's Bank. Sinwellan Corp. v .
1 6 4 5 n.60 Erion-Haines Realty Co., National ............... 20-15 ns. 30, 32
Elbert. Grayson County Bank v . Bank v . . . . . . . . . . . . . 22-50 n.74
................... 23-30 n.20 Ernst & Ernst v . Hochfelder Farmers Bank v. Stapleton
......
................... 14-25 n.18
Eldon's Super Fresh Stores, Inc. v . ................... 4-70 n.189
Merrill, Lynch. Pierce, Fenner & Erskine. Griffin v. . . . . . . 11-55 11.84 Farmers Bank. Universal C.I.T.
Smith. Inc .......... 15-20 n.35 Erskine v . Nemours Trading Corp. Credit Corp. v . . . . . . 23-20 n.14.
Elem . Anderson v . . . . . . 15-40 n.74 .................... 25-10 n.8 29-90 n.156
~ l ~ i e ' 1 r oWorks,
n Mechanic v . Escott v . Bar Chris Constr . Corp . Farmers Coop Elevator, Inc. v .
................... 23-55 n.73 ................... 4-70 n.188 Slate Bank ........ 20-1 20 n.209
Elison State Bank v . Montevideo Essig v. Portcr ........ 1 1-50 n.71. Farmer's Nat'l Bank, Huffman v .
Baseball Ass'n ...... 14-95 11.97 16-65 11.79 . . . . . . . . . . . . . . . . . . . 20-30 n.44
.
Ellenbogen v State Bank Estrada v . River Oaks Bank & Farmers' Nat'l Bank v . Peoplc's
................... 23-25 n.16 Trust C o . . . . . . . . . . . . . 13-10 n.4 Nat'l Bank .......... 23-35 n.33
Ellinger. Grifin v . Eubanks, Estate of. Thonms v . Farn~ersState Bank v . Ray
........... 14-100 ns . 108. 110 .................... 25-10 n.7 . . . . . . . . . . . . . . . . . . 20-75 n.147
 TABLE OF CASES
[Relerences are to sections
Fashion Hat Frame C o. v. Ringel
................... 23-65 n.89
Fawsett v. Nat'l Life Ins. C o.
................... 13-45 n.51
e . & Loan Ass'n
~ a y e t t k v i l ~Bldg
v. Crouch .......... 1 1-20 n.34
FDIC. Washington Mutual Sav. v .
.................... 6-35 n.92
Federal Home Loan Bank Board.
York v . . . . . . . . . . . . . . 7-10 n.12
Federal Ins . C o. v . Groveland
State Bank ........ 20-100 n.186.
Federal Land Bank v . Branscomb
................... 16-70 n.84
Federal Life Ins . Co., Congress Indus .
Inc. v .............. 19-10 n.17
Federal Reserve Bank. Community
Bank v .............. 21-10 n.1
Federal Reserve Bank v . Mallory
................... 21-25 11.40
Federal Reserve Bank of Kansas City.
Guaranty Trust C o . v .
.................. 20-55 n.112
Federated Dep't Stores. Inc.,
Fox v ................ 17-5 n.4
Feder v . Elliot ......... 11-35 n.51
Felkncr v . Smith ........ 18-1 5 n.8
. v . Lugar ............
Felton v Commercial Nat'l Dank
................... 11-50 n.69
Fenno. Veazie Bank v . . . . 9-15 n.9
Ferrante. Incitti v . . . . . . . 11-35 n.52
Fick v . Jones . . 14-10 n.3; 23-5 n .1
Fidelity & Deposit C o . v . Queens
County Trust CO. . . . . . . . . 27-30
ns . 36. 38
.
Fidelity Trust C o . v Mayhugh
................... 16-30 n.30
Fidelity Trust Co., Philadelphia Title
Inc . C o . v . . . . . . . . . 20-55 n.103
Fielding v. Corry ...... 23-30 n.23
Fifth Nat'l Bank. P.& G . Card &
Paper C o . v .......... 20-55 n.99
Filburn. Wickard v . . . . . . . 9-15 n.8
Finance Am . Credit Corp., Kizer v.
................... 34-15 n.15
Finance Am . Private Brands. Inc. v .
Harvey E. Hall. Inc. . . 18-30 n.30
.......
Finch v . Calkins 22-30 n.46
Firestone. State ex rel., Gabalac v .
.................... 21-10 n.1
(JJ.1
First Bank in Medford v . Wolfson
................... 23-65 n.84
. . . . .
First Bank, Joseph Milling Co. v .
.................. 20-55 n.114
First Citizens Bank & Trust Co.,
Nationwide Homes v . . . 19-35 n.73
First City Nat'l Bank. East Gadsden
Bank v............ 20-55 n.104
First Fed . Sav. & Loan. Sheldon v.
................... 19-15 11.28
First Grange Nat'l Bank. Huntington
County v ........... 19-40 n.80
.
First Nat'l Bank v American Exch .
.
Nat'l Bank ........ 20-55 n 101
First Nat'l Bank v . Anderson
................... 23-65 n.90
First Nat'l Bank & Trust CO.
v . Cartright ......... 19-40 n.85
First Nat'l Bank & Trust Co., Dakota
Nat'l Bank & Trust C o. v . . . 5-5 n.3
First Nat'l Bank & Trust C o. v. First
Nat'l Bank .......... 21-65 n.97
First Nat'l Bank & Trust Co.,
Grimshaw v . . . . . . . . 20-55 n.107
First Nat'l Bank & Trust Co.,
Johnson v ........... 19-30 n.54
First Nat'l Bank Rr Trust Co.
22-20 11.21
First Nat'l Bank & Trust Co., National
Bank v ............. 20-15 n.33
First Nat'l Bank at E. St. Louis v .
Board of Educ . School Dist .
No . 189 .......... 16-105 n.126
First Nat'l Bank. Available Iron &
Metal C o. v . . . . . . . . . 23-30 n.20
First Nat'l Bank. Bartlett v . ................... 11-20 11-33
................... 20-55 n.97
First Nat'l Bank. Binghampton
Pharmacy Co . v .....
First Nat'l Bank v . Blackman
................... 16-20 n.20
21-65 n.101
First Nat'l Bank, Brown & Williamson
.
Tobacco Corp v. . . . 29-90 n.156
First Nat'l Bank v . Capps
. . 14-1 5 n.4; 18-20 n.23; 22-10 n.3
First Nat'l Bank v . Carpenter
................... 23-40 n.40
First Nat'l Bank. Commercial
Bank v ............. 14-25 n.22
First Nat'l Bank v . De Jernet
6.
................... 16-30 11.32
T A B L E OF C A S E S
[Rejerences are to sectiom
First Nat'l Bnnk. Denbigh v .
................. 20-100 n.182
First Nat'l Bank v . Dickinson
.................. 5-5 ns. 2. 7
First Nat'l Bank. Doherty v .
......... 23-30 n.24. 23-40 n.39
First Nat'l Bank. Dominion Constr.,
Inc. v . . . . . . . . . . . . 20-1 10 n.195
First Nat'l Bank. Edelen v .
................... 16-45 n.60
.
First Nat'l Bank v First Nat'l Bank
................... 14-25 n.21
First Nat'l Bank. First Nat'l Bank &
Trust CO. v .......... 21-65 n.97
First Nat'l Bank. Fisher v .
............... 17-45 ns. 26. 27
First Nat'l Bank. Flathead County
Bank v . . . . . . . . . . . . . 14-25 n .19
First Nat'l Bank. Florence Oil
Co. v . . . . . . . . . . . . . . . 22-50 n.77
First Nat'l Bank. Gorsche v .
.................... 23-10 n.3
First Nal'l Bank v . Gray
................... 23-55 n.75
First Nat'l Bank. Grosfield v .
................... 16-80 n.92
First Nat'l Bank v. Hall
.................. 15-90 n.131
.
First Nat'l Bank v Hobbs
................... 20-15 11.32
First Nat'l Bank v . Husted
................... 16-45 n.60
F i n t Nat'l Bank in St . Louis. State
ex re1. Kostman v . . . . . . . 5-5 n.5
First Nat'l Bank. Jones v .
First Nat'l Bank v. Kemnper
................... 14-75 n.70
First Nat'l Bank v. Lightncr
................... 11-20 n.21
First Nat'l Bank. Marcoux v .
................... 21-20 n.24
First Nat'l Bank v . McCartan
................... 1 6 2 5 n.27
First Nat'l Bank. Montgomery v .
.................. 21-65 n.104
First Nat'l Bank. Night & Day
Bank v . . . . . . . . . . . . . 14-25 n.20
First Nat'l Bank. Nyssa-Arcadia
Drainage Dist . v . . . . . 13-35 n.33
(§).I
First Nat'l Bank of Ariz., Dunlop v .
.................... 34-10 n.8
First Nat'l Bank of A r k . Usery v .
.................... 34-10 n.8
First Nat'l Bank of Atlanta.
Brannon v ........... 12-70 n.78
First Nat'l Bank of Cinton v . Otto
Huber & Sons . . . . . . . 15-20 n.27
First Nat'l Bank of Edcn. S.D. v .
Dcpartmcnt of Treasury
. . . . . . . . . . 3-35 11.46; 4-15 11.17
First Nat'l Bank of Elgin v . Usted
. . . . . . . . . . . . . . . . . . . 16-50 n.67
First Nat'l Bank of Elkhart County
v . Smoker . . . . . . . . . . 30-35 n.66
First Nat'l Bank of Ft . Collins
Colorado ex re1. State Banking
.
Bd . v . . . . . . . . . . . . . . . . . . 5-5 n.5
First Nat'l Bank of Habersham. Perini
Corp. v . . . . . . . . . . . 20-55 n .104;
20-65 n.133
First Nat'l Bank of Homestead
v . Watson .......... 4-65 n.170
First Nat'l Bank of La Marque
v. Smith ... 3-35 11.46. 4-15 11.17.
4-35 n.84
First Nat'l Bank of Logan v . Walker
Bank & Trust Co. . . . . 4-35 n.79.
5-5 n.6
First Nat'l Bank of St. Charles v .
Board of Governors . . . 6-20 11.71
First Nat'l Bank of Tucker v . Hall
..................... 27-5 n.3
First Nat'l Bank, Oklahoma State
Bank v . . . . . . . . . . . . . . 16-10 n.6
First Nat'l Bank. Philip Gruner &
Bros . Lumber Co . v . . . 20-45 n.88
First Nat'l Bank v . Pittsburgh Ry .
................... 27-60 n.71
.
First Nnt'l Bank Rubio v .
.................. 20-65 n.118
First Nat'l Bank v . Russell
................... 16-45 n.59
First Nat'l Bank, Security Sav.
Bank v . . . . . . . . . . . . . 14-80 11.82
First Nat'l Bank, Security Trust
Co. v ............... 23-30 n.28
First Nat'l Bank, Sirnpson v .
................... 13-60 n.62
First Nat'l Bank. Spaulding v .
.................. 20-65 n.125
 TABLE OF CASES
[References arc to sections ($).I
First Nat'l Bank v . Stoneley
......... 16-25 n.27. 16-55 n.71
First Nat'l Bank v . Tamaqua
Mfg . Co............ 23-65 n.90
F i n t Nat'l Bank. Thompson Poultry.
Inc. v . . . . . . . . . . . . . . 25-20 n.11
First Nat'l Bank v . Turner
. . . . . . . . . . . . . . . . . . . 23-65 11.93
First Nat'l Bank. Wegncr v .
................... 13-65 n.68
F i n t Nat'l Bank v . Wolfe
.................. 15-90 n.134
First Nat'l Bank v . Wood County
.................. 20-65 n.118
First Nat'l Bank v . Yowell
.................. 2&75 n.144
First Nat'l City Bank v Cooper .
................... 15-60 n.93
First Nat'l City Bank, Garden Check
Cashing Serv. v . . . . . . 25-20 n.10
First of Omaha Service Corp.,
Marquette Nat'l Bank o f
Minneapolis v . . . . . . . . . . . . 17-45
First Sec . Bank of Idaho, Idaho Best.
Inc. v.............. 22-30 n.41
First Sec . Bank. Valley Bank & Trust
Co. v ............... 23-30 n.29
First State Bank at Gallup
v . Clark ............ 11-20 n.14
First State Bank. Central State
Bank v ............. 13-65 n.69
First State Bank. Johnson v .
................... 20-30 n.55
First State Bank of Humbird
v . Cox ............ 20-55 n.114
First State Sav. Bank v . Russell
................... 16-20 n.23
First Tenn . Bank N.A. Memphis,
SEC v.............. 4-50 n .I 3 1
F i n t Tenn . Nat'l Corp. . . 6-15 n.35
.
First Trust & Sav Bank, Nordin v . Foshee. Brewer v.......
................... 13-25 n.24
First Westroads Bank, Maddox v . ...................
.................. 20-65 n .132
Fisher v. First Nat'l Bank
............... 17-45 ns . 26. 27
Fitting. Continental Bank v .
................... 20-30 n.62
Fitzgibbon. Dubuque Packing
Co. v ............... 25-40 n.53
TABLE OF CASES
[Referencesare to sectioru ($).I
Fitzgibbons. United States v .
................... 4-55 n.158
.
Fowler Paper Co. v Bert Jones Sales Gale. ~ommer'cialFin . Corp . v .
Book C o. . . . . . . . . . . . 22-25 11.25 ................... 23-65 n.79
Fitzwater. Associates Discount Corp.
of Iowa v ......... 16-105 n.124
Fox v . Federated Dep't Stores Inc .
..................... 17-5 n.4
. G . & R . Corp . v . American Securities
Flagg Bros., Inc . v . Brooks .. 31-15 & Trust Co. . . . . . . . 20-1 0 0 n .188
Fox. LOUXv. . . . . . . . . . . 22-20 n .16 Garden Check Cashing Serv. v . First
Flathead County Bank v First . Fox River Valley Bnnk v. Enst .....
Nat'l Bank .......... 14-25 n.19 Nat'l City Bank 25-20 n.10
.
Fleming v Shewood ... 16-35 11.44 . . . . . . . . . . . . . . . . . . . 15-15 n.22 Gnrdner. Hnyden v . . . . . 19-35 n.68
Frnnklin Dank v . Snint Louis Gnrfinckcl. Knss v . . . . . . . . 17-5 n.4
Flctchcr v . Rhodc Island Hosp . Trust Car C o. . . . . . . . . . . . . 15-40 n.80
Nat'l Bank....... 20-120 n.209. Garnctt v. Meyers ...... 16-30 n.32
Franklin Sav. Bank, Rich v . Garrctson. North Atchison Bank v .
3 1-15 n.34
................... 23-45 n.51
...
Flint. Hughes (G C o. v 15-15 n.12 Frnnklin Sav. (t Trust Co . v . Clnrk
................... 14-25 n.23
FbControl. Inc. v . Northeast Dnnk Gnrrctt v. Bnnk of Chclscn
................... ........ 18-20 n.17; 21-65 11.99; ................... 16-55 n.75
Florence Oil Co. v . First Nnt'l Dank
19-35 n.73
Frnnk-Tnylor-Kcndrick Co .
22-50 n.75 .
Gamer Gibbs v. . . . . . . 31-15 n.29
Gnry v. Dnrncll . . . . . . . . 31-15 11.29
................... 22-50 n.77 v . Voissement ....... 23-70 n.96
Florida Commercial Banks. Inc.,
............ Franklin Trust C o. v. City
Gaunt. West Point Banking
Co. v. . . . . 16-10 n.8. 16-20 n.20
Fulka v 20-65 n.131 of Philadelphia ........ 25-5 n.2 Gavan. Donnelly v. . . . . 14-65 n.56
Florida Nat'l Bank v . Jefferson Franklin Trust Co., Wall v .
Standard Life Ins . Co. Geibe v . Chicago-Lake St . Bank
................... 20-30 n.44
................... 16-75 n.89 ................... 22-25 n.26
Foege v . Merchants1-Laclede Frazicr v . Cottrcll ...... 11-60 11.88 Gcigcr. Jewett v. . . . . . . 15-15 n.17
Freeman v . Gonzales Co. Sav. &
Nat'l Bank .......... 14-70 n.68 Loan Ass'n ........... 17-5 n.2
Gem State Oil Co., McCormick &
Ford v. Brown ........ C o. v . . . . . . . . . . . . . . . 16-10 n.7
15-15 n.13
French. Corely v . . . . . . 18-20 n . 17; General Mortgage & Loan Corp.
Ford Motor Credit Co., Childs v . 2 1-65 ns . 99, 108; 22-50 n.75 v. Dickey . . . . . . 16-10 ns 9 & 1 1.
................... 33-50 n.59 Frick Co., D. H . Ovcrmeyer Co. v . General Motors Corp., Harris v .
Ford. Page v .......... 11-55 n.81.
16-30 n.3 1 ; 16-70 n.88 ......... 19-30 n.50; 35-30 11.25 ................... 27-60 n.71
Friedberg v . Mechanics Bank Genesee County Sav . Bank .
Foreman. Caine v ..... 22-25 n.25. ................... 22-35 n.51 v . Rosenlhal ........ 23-65 n.91
23-30 n.22; 23-35 n.32
Fornea. National Bank of Bossier
.
Fried Burns Mortgage C o. v.
. . . . . 9-35 n.25; 9-55; 11-30 n.45
Georgetown Sav. & Loan Ass'n.
Stedman v . . . . . . . . . . . . 17-5 n.3
City v ................ 14-5 n.l Friedlan. Speer v . . . . . 14-100 11.104 Georgia Ass'n of Ins . Agents Inc., .
Forrest v. Safety Banking & Friend v . Morrow . . . . . 15-30 11.58 Saxon v . . . . . . . . . 4-35 ns . 82. 83
T n ~ s tCo. . . . . . . . . . . 11-50 n.69 Frost Nat'l Bank v . Nicholas .
Gerasta v . Hibernia Nat'l Bank
Fort Knox Nat'l Rank v . Gustafson & Barrcrn .......... 11-50 n.76 . . . . . . . . . . . . . . . . . . . 33-15 n.21
.... 16-10 n.16. 19-30 ns . 47. 55 Fucntes v . Shevin ..:... 19-30 n.5 1; German-Am . Bank v. Milliman
Fort Lee Sav. 8 Loan Ass'n. Citizens 3 1-15 .................... 22-30 n.39
Nal'l Bank v . . . . . . . 15-35 n.63. Fuligham. Criterion Ins . Co . v .
German Am . Trust Co., Emerson &
21-20 17.22 ................... 22-60 n.82 Buckingham Bank v. . . . . . 23-45
.
Forwood v Magness .... 22-50 n.76 Fulka v . Florida Commercial
ns . 53, 55
13-25 n.25 Banks. Inc ......... 20-65 n .13 1
Gerthins v. Breeyear ..... 23-15 n.8
Foster v . Augustanna College Fuller. Bovay v . . . . . . . . 23-30 11.24
Giacalonc v . Bcrnstcin
15-15 n.14 Fulton Nat'l Bank. Philadclphin Nnt'l
Bank v . . . . . . . . . . . . . 20-45 11.87 . . . . . . . . . . . . . . . . . 14-100 n.101
Foster. Worth Sav. Bank v. Gibbons v . Ogden ........ 9-15 n.7
................... Funding Sys. Lcasing Corp., Sumiton
15-20 n.32
Dnnk v . . . . . . . . . . . . 20-65 n . 123 Gibbs v. Gnmcr ....... 31-15 n.29
F o u r ~ h& Cincinnnti Trust C o. Funke. Nntionnl Bonk v . . . 18-30 n.3 1 Gibhs v . Titclmnn ...... 31-15 11.29
.........
v . Johnson 20-65 n .118
Gibson. Old Nat'l Bank v.
Fourth Nat'l Bank. Insurance Co. G . . . . . . . . . . . . . . . . . . . 15-35 11.62
.
of N Am . v........ 14-80 n.83. Gabalac. State e x rel., v . Giihooley. Schelsinger v .
20-45 n.87 * Firestone Bank . . . . . . . 21-10 n.1 .................. 15-80 n.113
 TABLE OF CASES
[References are to seclionr
Gillen v. Maryland Nat'l Bank
................... 19-15 n.30
Gillespie v. Riley Management Corp.
................... 18-15 n.13
Gilman v. F. 0.Bailey Carriage Co.
................... 22-40 n.59
.......
Gilpin v. Savagc 22-25 n.30
Girard Trust Co., Union Bank V.
................... 27-35 n.52
Glasser, Kuflick v. ........ 23-5 n.1
G. L. Corp., Bank of Am. Fork V.
.................... 5-35 n.75
Gleason v. Thayer ..... 23-35 n.33;
23-45 n.54
.
Glendora Bank v. Davis . 11-20 n.23
Glen Falls Indemn. Co. v. Chase
Nat'l Bank .......... 11-55 n.81
Glennan v. Rochester Trust Co.
................... 19-45 n.88
Globe Indemn Co. v. Mississippi
Valley-Merchants State Trust CO.
................... 16-90 n.98
Gobles Co-op Ass'n v. Albright
................... 15-55 n.89
Goldstono v. Southshore Fed. Sav. &
Loan Ass'n .......... 7-35 n.46
Gonzales Co. S. & L. Ass'n,
Freeman v. ........... 17-5 n.2
Goodale v. Thorn ...... 15-30 n.42
Goodman v. Norman Bank
of Commerce . . . . . . 23-60 n.76
Goodyear Tire & Rubber Co. v.
Hanover State Bank .... 25-5 n.1
Goodyear Tire & Rubber Co. v. Wells
Fargo Bank ......... 20-55 n.98
Gordon Fireworks Co. v. Capital
Nat'l Bank ......... 20-65 n. 125
Gordon v. Levine ...... 15-40 n.75;
22-20 n.15
Gorsche v. First Nat'l Bank
.................... 23-10 n.3
Grace v. Dunn......... 22-15 n.9
Graham v. White-Philips CO.
................... 15-25 n.40
Granda, United States v.
................... 4-55 n.158
Grand Lodge of Pythias V.
State Bank .......... 16-40 n.56
Granite City Nat'l Bank, Simonoff v.
......... 22-40 n.58; 23-65 n.81
Grannis, Kittredge v. ... 15-15 n.16
TABLE O F CASES
(§).I [References are to sections (§).I
Gray, First Nat'l Bank v. Gtrio V. Lutcs .......... 16-10 n.6 Hanovcr Fire Ins. Co., Oklahoma
................... 23-55 11.75 Gulbranson-Dickenson Co. v. Hopkins State Bank v. . . . . . . . 11-20 n.17
Grayson County Bank v. Elbert ................... 13-35 n.32 Hanover Nat'l Bank v. Blake
................... 23-30 n.20 Gulich v. Grover ....... 27-20 n.22 . . . . . . . . . . . . . . . . . . . 32-20 n.21
Great Am. Indemn. Co., Agricultural Gully, Randles v. ...... 13-40 n.37 Hanover Nat'l Bank, Mazukiewicz v.
Nat'l Bank v. ....... 21-65 n.97 Gunn v. C & S Nat'l Bank
. . . . . . . . . . . . . . . . . . . 16-10 n.15
. . . . . . . . . . . . . . . . . . . 23-55 n.68
Greater Ariz. Realty, Inc., Hanovcr State Bank. Goodyear Tire
Ness v. ............ 14-1 00 n.99 Gustnfson, Fort Knox Nnt'l Rnnk v. Pr Rubbcr Co. v. . . . . . . . 25-5 n.1
Green v. Harsh ....... 15-90 n.133 .... 16-10 n.16; 19-30 ns. 47, 55 Hanson, Loveland v. . . . 14-95 n.97
Green, Wooleyhan v. ... 1 M 5 n.61 Gutekunst V. Continental Ins. Co. Hans Penderson Co., Peninsula Nat'l
Grenda v. Kitchen..... 23-35 n.31 . . . . . . . . . . . . . . . . . . . 15-15 n.25 Bank v. . . . . . . . . . . . . .21-65 11.98
..
Grenier, Northridge v. 16-10 n.11 Gu~heil.Davis v. . . . . . . . 18-20 n. I 8 Harber v. Lincoln .... 15-90 n. 131
....
Gressley, Kissell Co. v. 17-5 n.3 Guzman v. Western State Bank Harden, Marion Nat'l Bank v.
Grezenzinski, Kardynal v. . . . . . . . . . . . . . . . . . . . 31-15 n.28 . . . . . . . . . . . . . . . . . . . 13-25 n.21
................... 23-25 n.16 Gypsum Valley Nat'l Bank Hardie & Co., William T. v. Vicksberg
Griffin V. Ellinger v. Dillenbeck ........ 1 1-20 n.16 S. & P. Ry. . . . . . . . . . 12-10 n.11
............ 14-100 ns. 108, 110 Hardouin, Rodriguez v. ... 23-5 n.1
......
Griffin V. Erskine 11-55 n.84 Harper v. Pacific Power & Light Co.
Grigg v. Robinson Furniture C a . . . . . . . . . . . . . . . . . . . . 11-10 n.2
..................... 17-5 n.4 EI Harris v. General Motors Corp.
Grimshaw v. First Nat'l Bank & . . . . . . . . . . . . . . . . . . . 27-60 n.71
Trust Co........... 20-55 n.107 Hackley Nat'l Bank, Northway
Lanes v. . . . . . . . 17-45 ns. 26, 27
Harris V. Hill ......... 21-50 n.74
Grisim v. Live Stock Bank Harris, Rogers v. . . . . . . 20-15 n.21
.................... 18-30 n.36 Hale & Kilburn Corp.,
Lidgcrwood v. ...... 16-90 n. 102
Harris v. Schafler . . . . . . 23-70 n.95
Grist v. Osgood....... 22-20 n.17
Hall v. Crnnc . . . . . . . . . 23-65 n.78;
Harris Trust & Sav. Bank, Strtrgis Nat'l
...
Griswold v. Morrison 15-30 n.45 Bank v. . . . . . . . . . . . . 16-10 n.1 l
Groll, Kuhn v......... 18-30 11.32 23-70 11.98 Harsh, Green v. ...... 15-90 n. 133
Groos Nat'l Bank v. Comptroller of Hall, First Nat'l Bank v. Hart, Becker v ....... 15-15 n.22
the Currency......... 3-35 n.46; .................. 15-90 n.131 Hart, Black v. . . . . . . . . 1 9 4 5 n.96
4-15 n.17 Hall, First Nat'l Bank of Harvey v. Michigan Nat'l Bank
Grosfield v. First Nat'l Bank Tuckcr v. . . . . . . . . . . . . . 27-5 n.3 . . . . . . . . . . . . . . . . . . . 20-15 n.30
................... 16-80 n.92 Hall. Inc., Harvey E., Finance Am.
Private Brands, Inc. v. .. 18-30 n.30
Haskell v. Avery . . . . . . 13-45 n.51
Grosjean, Musto v...... 16-30 n.34 Havana Central Ry. Co. v.
.
Grossman v. Adelmau . 15-40 n.79 Hall, Kidder v. . . . . . . . . . . 25-5 n.2 Knickerbocker Trust Co.
Groveland State Bank, Federal Ins. Hall v. Windsor Sav. Bank ................... 27-40 11.61
Co. v. ............ 20-100 n.186 ................... 27-35 n.45 Hayat v. M Z Enterprises
Grover, Gulich v. ...... 27-20 n.22 Hamilton County Bank, Wall v. . . . . . . . . . . . . . . . . . . . 12-30 n.44
Grubnau v. Centennial Nat'l Bank ................... 19-40 n.83 Hayden v. Gardner . . . . 19-35 n.68
.................. 20-65 n.118 Hamilton, Lundean v. ... 15-25 n.37 Haynes v. Logan Furniture Mart., Inc.
Gruner & Bros. Lumber Co., Philip v. Ham V. Merritt ........ 15-15 n.21 ................... 33-50 n.55
.....
First Nnt'l Bank 20-45 n.88 Hammond Stntc Dank v. Pcrrin Hays, C o m n v x c Scc. Corp. v.
Gruntnl v. Nat'l Sur. Co. ................... 15-40 n.75 . . . . . . . . . . . . . . . . . . 15-90 n.131
.................. 16-95 n.110 Hampton State Bank, Aetna Life & Hayward v. Empire State Sugar Co.
Guarantee Bank, Universal Credit Cas. Co. v. ........ 20-55 n. 105 ........ 23-65 n.78; 23-70 n.99
Corp. v. ............ 15-35 n.63 Hanlon, Phoenix Nat'l Bank v. Hazard, Nussear v. ..... 16-20 n.2 1
Guaranty Trust Co. v. Federal Reserve ................... 18-20 n.18
.
Bank of Kansas City . 20-55 n. 1 12
Hanna v. McCrory . . . . 1 1-20 11.20;
Hedrick, State & City Bank v.
. . . . . . . . . . . . . . . . . . . 15-40 n.79
Guardian Trust Co. v. Mayer
.................. 15-65 n.lO1 Hannan Nat'l Bank. American Empire
21-50 11.75 Heimann, Independent Bankers' Ass'n
of Am. v. . . . . . . . . . . . 3-35 n.46
Guild V. Eastern Trust & Banking CO. * Ins. Co. v. .......... 2 5 4 0 n.53
................... 13-65 n.67 Helfinstein v. Martin . . . 3 1-15 n.33
 TABLE OF CASES
[References are to secrionr
Hembree Oil Co., Fanning V.
................. 14-100 n.106
Hemmingway, Keeley v.
................... 11-45 11.63
Henderson, Werner Piano Co. v.
................... 13-35 11.32
Hensley, Barry v. . . . . . 27-40 n.58
Hernandez v. O'Neal Motors, Inc.
................... 33-50 n.55
Hershey Nat'l Bank, Von Frank v.
................... 16-45 n.62
Hess, Advance-Rumely Thresher
Co. v. ............. 21-50 n.71
Hibbs v. Drown . . . . . . . 11-20 n.28
Hibernia Bank v. Dresser
................... 16-20 n.21
Hibernia Nat'l Bank, Gerasta v.
................... 33-15 n.21
Higby v. Bahrenfuss ... 13-30 n.29
Higginson, Carmen v. .. 23-65 n.92
Highgrade Oil, Empire Nat'l Bank V.
................... 16-25 n.27
Hiles, Estate of, Keeler v.
................... 11-45 n.62
Hill, Dcnison-Gholson Dry Good3
Co. v. ............. 15-90 n.134
Hill, Harris v. . . . . . . . . 21-50 11.74
Hill v. May . . . . . . . . . . 18-30 n.36
Himmelbauer, Union Bank & Trust
Co. v. ............. 16-30 n.29
Hinds, Estate of. I n re ... 29-5 n.1 l
Hingham Nat'l Bank, Lord v.
i1 ..................... 24-5 n.4
Hiroshima v. Bank of Italy
................... 20-30 n.44
Hjermstad, Red Wing Rubber Co. v.
................... 15-55 n.90
Hoag & N.W. Nat'l Bank, Parsons
Travel. Inc. v. ..... 20-100 n.188
Hobbs, First Nat'l Bank V.
................... 20-15 n.32
Hochlcldcr, Ernst & Ernst V.
................... 4-70 n.189
Hoekzema, Molsons Bank v.
................... 13-65 n.66
HolTrnan, Baer v. . . 23-70 ns. 95, 99
HofTman, Holliday State Bank V.
. . . . . . . . . 16-20 11.21; 16-25 11.28
Hoffman. Kobey v. ..... 16-25 n.27
Hoffman, Morgan v. ... 22-20 n.22
($).I
Hoffman V. Planters' Nat'l Bank
.................. 20-75 n.144
Hogc v. Ward ......... 14-75 n.78
Holiday Wines & Spirits, Inc., Pan Am.
Nat'l Bank v. . . . . . 20-120 n.210
Hollembeak, Allison v. .. 16-30 n.34
Holliday State Bank v. Hoffman
........ 16-20 n.21; 16-25 11.28
Holly Hills Acres, Ltd. v. Charter
.
Bank of Gainesville . 11-20 n.36;
16-30 n.36
Home Bank & Trust Co. v. Davis
................... 11-20 n.30
Home Ins. Co. v. Mcrcantilc Trust Co.
................... 20-45 n.87
Home Sav. Bank, Los Angeles Inv.
Co. v. ............. 19-25 n.44
Hommerberg v. State Bank
................... 21-25 n:39
Honeycutt, Alexandria Bank & Trust
Co. v. ............ 20-75 n.146
Hopkins, Gulbranson-Dickenson
Co. v. ............. .13-35 11.32
Hopkins, McCormick v.
................... 11-20 n.16
Horace State Bank, Tonne V.
................... 22-40 n.58
Hornblower, Randolph Nat'l Bank v.
......... 14-50 n.42; 25-25 n. I8
Horton, Downs v. ..... 15-20 n.32
Horton v. Wilson ...... 23-45 11.43
Hostutler V. Aliredge ... 22-50 n.76
Hough v. State Bank ... 23-65 n.79
Household Fin. Corp. v. Johnson
................... 22-35 n.52
Hubbard v. Robert Wallace CO.
................... 1 6 2 0 11.22
Hubbard v. Southern Pac. Ry.
................... 14-80 n.82
Huber, Otto & Sons, First Nat'l Bank
.-Cinton
of - ~ v. ........ 15-20 n.27
Fludson Trust Co., Whiting V.
................... 27-40 11-59
Hufiman v. Farmer's Nat'l Bank
................... 2&30 n.44
Hughes & Co. v. Flint . . . 15-15 11.12
Hullinger. Tcxico State Bank V.
......... 15-30 n.49; 15-35 n.63
Hunterdon County Trust Co., United
States v. ............. 5-25 n.45
TABLE OF CASES
[References are to sections ($).I
Hunter, Mercantile Bank & Trust Nat'l Dank . . . . . . . . . 14-80 n.83;
Co. v. .............. 23-10 n.7 20-45 n.87
Huntington County v. FirstGrange International Dairy Queen, Inc. v.
Nat'l Bank ......... 19-40 n.80 Bank of Wadley ..... 25-40 n.54
Hunt v. Sanders ....... 14-75 11.70 International Fin. Co. v. Magilansky
Hurlburt v. Bradley . . . . 23-65 n.86 . . . . . . . . . . . . . . . . . . . 16-45 n.65
Hurlburt v. Quigley . . . . 23-65 n.84 International Harvester Co. v.
Hurt, Commercial Bank v. Ueverland . . . . . . . . . . 13-65 n.72
................... 12-10 n.12 International Harvester Co. v.
Hustcd, First Nat'l Bank v. Watkins . . . . . . . . . . . . 15-25 11.37
................... 16-45 n.60 International Harvester Credit Corp.,
A & S Excavating Inc. v.
Hutchings, Sealy & Co. v. Missouri K.
. . . . . . . . . . . . . . . . . . . 31-15 n.33
Rr T.R. . . . . . . . . . . . . . 12-45 n.56
Intcrnntionnl Ixmber Co., Tillnrnook
Ilutson V. Rankin ...... 18-25 n.24
Hvezda Pokroku No. 4, Dugane v.
County Bank v. . . . . . 22-25 n.28
International Trust Co., Quincy Mut.
................... 11-65 11.97 Fire Ins. Co. v. ..... 11-55 n.82;
Hyde, Lockport Exch. Trust Co, v.
................... 23-65 11.91 Investment Company Inst.,13-25 n.26
Board of
Hyde, Moyer v. ....... 16-55 n.72 Governors v. ...... 5-30 & n.64;
Hy-Grade Oil Co. v. New Jersey
6-5 ns. 7, 9; 6 - 1 5
Bank .... 19-15 n.30; 21-10 n.1 ns. 29,33, 52; 6-30
Invcstrnent Company Inst v. Camp
I . . . . . . . . . . . 4-35 n.80; 5-30 n.65
Iowa Nat'l Bank v. Carter
Idnho ncst Inc. v. First Scc~rritynnnk . . . . . . . . . . . . . . . . . . . 15-20 n.30
of Idaho . . . . . . . . . . . 22-30 n.41 Ironclad Mfg. Co. V. Sackin
Idaho First Nat'l Bank, Meycr v. . . . . . . . . . . . . . . . . . . . 22-30 n.36
................. 20-120 11.209 Isbcll v. County of Sonoma
Illinois Bankers Life Assur. Co. ................... 35-20 n.25
v. Day ............. 16-10 n.10 Islamic Republic of Iran, American
Illinois Valley Acccptance Corp. v. Bell Int'l v. ......... 25-40 11.53
Woodard ........... 15-30 11.50 Ivers v. United States . . . 4-55 n.159
Impala Motors, Turner v.
...................
Incitti V. Ferrante ...... 11-35 n.52
31-15 n.29
Indcpendent Bankcrs' Ass'n of Am. v. Jackson Lincoln-Mercury, Frank,
Heimann ............ 3-35 n.46 Rogers v. .......... 33-50 n.59
Independent Bankers Ass'n of Am. v. Jackson v. Metropolitan Edison Co.
Smith .................5-5 n.5 ........................ 31-15
Independent Banker's Ass'n of Ga. v. Jackson, Northeast Factor & Discount
Board of Govcrnors . . . 6 - 1 5 11.56; Co. v. ............... 1-10 n.9
6-20 & n.60 Jncobs v. Drown . . . . . . . 14-75 n.80
Industrinl Nnt'l Bank v. Leo's Uscd Jacobson, County Sav. Bnnk v.
Car Exch., Inc. . . . . . 15-20 n.33 . . . . . . . . . . . . . . 23-65 ns. 79, 87
Industrial Operating Co., Kelly v. Jagerson Fuel Co., Mueller v.
................... 15-15 n.20 . . . . . . . . . . . . . . . . . . . 18-30 n.33
Industrial Valley Dnnk & Trust Co., Jnnics v. Pinnix . . . . . . . 3 1-15 n.29
Anthony Roberts Properties, Jnc. v. Jantzcn. Wcbcr v. . . . . . 11-1 5 n.1 l
................... 20-30 11.53 J. C. Penney Co., Wisconsin v.
Ynsurance Co. of N. Am. v. Fourth ..................... 17-5 n.4
 TABLE OF CASES TABLE OF CASES

[References are to s ~ c I ~ o(51.1

~U [References are to sectionr (§).I
Jefferson
--..- Standard Life Ins. CO., Kimberly-Clark Corp. v. Lake Lake County Nat'l Bank,
Florida Nat'l Bank v. Warehouse Div. of Lake Erie Thompson v. . . . . . . . 25-20 n.10
................... 16-75 n.89
Kacher v. Pittsburgh Nat'l Bank
................... 31-15 n.27 Rolling Mill, Inc. .... 12-30 n.44 Lake Harriet State Bank v. Miller
Jennings, Carter v. ..... 22--40 n.54 Kaltilmmers Mfg. Co., Bank of Kimpton v. Studebaker Bros. Co. ................... 13-65 n.71
Jennings, Lockwood Nat'l Bank V. Milwaukee v. ....... 16-90 n.99;
................... 16-55 n.72 Lake Warehouse Div. of Lake Erie
.................. 20-80 n.150 27-35 n.45
King Cattle Co. v. Joseph
........ 16-80 n.91; 16-90 n.100 Rolling Mill, Inc., Kimberly-Clark
Jennings v. United States Fidelity & Kansas Bankers Sur. Co. v. Bank of Corp. v. ........... 12-30 n.44
Guaranty Co. ......... 25-5 n.4 ............ King v. South Jersey Nat'l Bank Lamson v. Commercial Credit Corp.
Jernberg, Williamsen v.
Odessa
Kardynal v. Grezezinski
20-55 n.106 ................... 31-15 n.33 .................... 13-10 n.4
.................. 15-70 n.107 ................... 23-25 n.16
Kintyre Farmer's CO-dp v. Midland
Nat'l Bank ......... 15-40 n.78
Lancaster Foundry Co., Robinson v.
.......
Jewett v. Geiger 15-15 n.17 Kass v. Garfiinckel ....... 17-5 n.4 Kipp v. Cozens ........ 3 1-15 n.33
................... 22-25 n.30
-. Case v. Barak .........
4-70
1
... I. ~

Katzenbach
- v. McClung ... 9-15 n.8 Kirkpatrick v. Lebus ... 11-30 n.42
Land Fin. Corp. v. Sherwin Elec. Co.
John 0.Melby & Co. Bank V.
-

Keane v. Pan Am. Bank . . . . . . . . . . . . . . . . . . . 15-15 n.22

Andenon ............ 34-10 n.8 .................. 20-65 n.129 Kissell Co. v. Gressley .... 17-5 n.3 Lane Cotton Mills Co. v. Kohler
Johnson. Amthauer v. .. 22-20 11.22 Keck, Bailes v. ........ Kitchen, Grenda v. .... 23-35 n.31 . . . . . . . . . 14-65 n.56; 22-40 11.61
18-20 n.22 Kiltredge v. Grannis ... 15-15 n.16
Johnson v. Blackmon . . . 11-20 n.16 Keeler v. Hiles, Estate of Laurel Bank & Trust Co. v. City Nat'l
Johnson v. Buffalo Bank ................... 11-45 n.62
Kizer v. Finance Am. Credit Corp. Bank of Conn. ...... 15-30 n.57
......... 11-55 n.84; 13-25 n.26 Keeley v. Hemmingway .................... 34-15n.15 Laurel Bank &Trust Co. v. Sahedi
Johnson v. Eudora Bank ................... 11-45 11.63 KMW Int'l v. Chase Manhattan Bank . . . . . . . . . . . . . . . . . . . 23-30 n.29
................... 20-30 n.60 Keistcr v. Wade ...... ................... 25-40 11.53 Lawrenco Bonk, Turnbull v.
11-40 n.54; Knnpp, Estnte of, I n re . . 11-45 n.62 ................... 14-55 n.52
Johnson v. First Nat'l Bank & 22-10 n.6
Trust ...........
- -- . Co.
- . 19-30 n.54 Keller v. Commercial Credit CO.
Knickerbocker Trust Co., Havana
Central Ry. Co. v. ... 27-40 11.61
Lawrence v. Citizens' Bank
Johnson v. First State Bank ................. 20-120 n.207 Kobey v. Hoffman .... 16-25 n.27
. . . . . . . . . . . . . . . . . . . 13-60 n.62
................... 20-30 n.55 Kelly v. Emigrant Indus. Soc'y Koehler, National Park Bank v.
Lawther Grain Co. v. Winniford
. . . . . . . . . . . . . . . . . . . 13-65 n.73
Johnson. Fourth & Cincinnati Trust .................. 20-65 n.159 . . . . . . . . . . . . . . . . . . . 18-20 n.19 Laycoch v. Kenney .... 10-10 n.17
Co, v. ............ 20-65 n. 1 18 Kelly v. Industrial Opcrating CO. Kohlcr, Lane Cotton Mills Co. v.
................... 15-15 11.20 Lcach v. Dnttlc Creek Sav. Bnnk
Johnson, Household Fin. Corp, v.
................... 22-35 n.52 Kelso State Dank, Oregon Iron & Steel
......... 14-65 n.56; 22-40 11.61 ..................... 25-5 n.1
Koncnik v. Supreme Radio, Inc.
Johnson v. Phillips ..... 1-5 n.59 Co. v. ............. 21-50 n.75 ................... 15-30 n.48
Leadcrbank v. Central State Bank
Johnson, Schwenker v. . . 15-30 n.45 Kemnper, First Nat'l Bank V. ................... 23-60 n.76
Kostman, State e x rel., v. First Nat'l Leavitt v. Thurston . . . . 15-20 n.32
Johnston Coffee Co. v. Page ................... 14-75 n.70 Bank in St. Louis ....... 5-5 n.5 Lebus, Kirkpatrick v. . . . 11-30 n.42
................... 1&65 n S 6 Kendall Yacht Corp. v. United Cnl. Krasnow v. Krasnow ... 22-10 n.5
Jones v. Board of Educ. Bank .............. 20-1 5 n.30 Krom v. Chemical Bank N.Y. Lee, Commercial Bank v.
................... 23-55 n.68 Kennedy V. Collins ..... 16-40 n.56 Trust Co. ........... 25-20 n.10
. . . . . . . . . . . . . . . . . . . 12-10 n.13
Jones v. Carolina Nat'l Bank Kennedy Co., Commonwealth Nat'l Lehr Auto & Mach. Co., State Bank
................... 23-45 n.44 Bank v. ............ 19-40 n.74
Kruger v. Wells Fargo Bank
...... 20-120 n.209; 31-15 n.34 of Lehr v. ..........
14-75 n.74
Jones v. Commonwealth Bank & Kennedy, Melara v. .... 31-15 n.33 Kuflick v. Glasser ........ 23-5 n. 1 Leonard, State e x re!., v. American
Trust Co............. 21-10 n.4 Kennedy. State of N.Y. Nat'l Bank V. Kuhlmeyer v. Bufz ..... 22-50 n.77 Nat'l Bank & Trust Co. ... 5-5 n.7
Jones v. Fick ... 14-10 n.3; 23-5 n.1 ......... 22-20 n.21; 22-25 n.29 .
Kuhl v. Schlichtemeier . 23-65 11.92 Leo's Used Car Exch.. Inc., Industrial
Jones v. First Nat'l Bank Kenney, Laycoch v. .... 10-10 n.17 Kuhn v. Groll ......... 18-30 n.32 Nnt'l Bank v. ....... 15-20 11.33
................... 11-20 n.33 Kerman, Ashland Bldg. & Loan Co. V. Kulp, Richardson v. ... 23-65 n.89 Levine, Gordon v. . . . . . 15-40 11.75;
Jones, Bert, Sales Book Co., Fowler ......., 1 1 4 5 n.59; 16-10 n.10 22-20 n. l 5
Paper Co. v. ........ 22-25 n.25 Kerr v. Staufer ........ 16-25 n.28 Levine, Rosenthal v. . . . 22-30 11.37;
Jones, Spires v. ........ 15-15 11.21 Kersh v. Manis Wholesale CO. L 23-30 n.20
Jose, McNamara v. . . . . 15-15 n.21 ................... 14-50 n.45 Labor Bank & Trust Co. v. Adams Lewis v. B.T. Inv. Managers Inc.
Joseph, King Cattle CO. v. . . . . . . . . . . . . . a . m . . 2. d 4 5 n.85 6-25
........ 16-80 n.91; 16-90 n.lOO Kensington Nat'l Bank v. Ware . . . . . . . . . . . . . . . . . . . . . . . a .

................... 2 3 4 0 n.37 Lachovitz, National Loan & Exch. Lewis, Chelsea Exch. Bank v.
Joseph v. Norman's Health C h b Inc. Bank v. ............ 2 6 3 0 n.55
................... 33-50 n.59 Kesterson. Pine Bluff Nat'l20-65 Bank v. . . . . . . . . . 23-25 n.16; 23-35 11.33
J u n e , Baumeister v. .... 23-70 n.97
.................. n.126 La fme v. Bird ....... 11-45 n.59; Lewis Hubbard & Co. v. Morton
Jurgens v. Wichmann ... 23-30 n.23 Kidder v. ...........
Hall 25-5 n.2 16-10 n.10 ................... 14-50 11.43
T-2 1
 TABLE OF CASES TABLE OF CASES

[References are t o sections (§).I [References are to sections (§).I

Lewy v. Wilkinson ...... 22-10 n.5:
22-20 n. 13
Lexington v. Union Nat'l Bank
. . . . . . . . . . . . . . . . . . . 1 9 4 0 n.76
Liberty Discount & Sav. Bank,
Morrison v. . . . . . . . . . . . 13-5 n.3
Lidgerwood v. Hale & Kilburn Corp.
.................. 16-90 n. 102
Lightner, First Nat'l Bank v.
................... 11-20 n.21
Lignoul, Illinois ex rel., v. Continental
Ill. Bank & Trust Co. .... 5-5 n.5
Lily, Cook v. ......... 3 1-15 n.33
Lincoln First Bank, N.A. v. Carlson
................... 26-25 n.30
Lincoln First Bank, Paine-Erie Hosp.
Supply, Inc. v. .... 20-120 n.209
Lincoln, Harber v. .... 15-90 n.131
Lincoln Nat'l Bank & T r u s t Co, V.
Peoples Trust Bank ..... 20-5 n.2
Lincoln Sav. Bank, Cohen v.
.................. 20-55 n.102
Linthicum v. Bagby .... 23-65 11-81
Lipten v. Columbia Trust CO.
................... 25-25 n.19
Liquidation of Canal Bank, In re
................... 16-55 n.74
Litchfield Shuttle Co, v. Cumberland
Valley Nat'l Bank ... 20-55 n.97
Litton Sys., Inc., Bankers Trust Co. V.
................. 16-105 n.127
Live Stock Bank, Grisim v.
................... 18-30 n.36
Lockport Exch. Trust Co. v. Hyde
............I...... 23-65 n.91
Lockwood, Currier v. ... 1 1-15 n.10
Lockwood Nat'l Bank v. Jennings
.................. 20-80 n.150
Logan Furniture Mart., Inc., Hayes v.
................... 33-50 n.55
London & River Plate Bank v. Carr
.................... 23-15 n.8
London & S.W. Bank, Bevens v.
................... 11-20 n.13
London Fire Ins. Co., Berenson v.
.................... 11-10 n.2
Longacre Bank, Turnbull V.
........... 12-55 ns. 68, 69, 70
Long v. Aldcr ......... 22-15 n.9;
22-20 n. 12
Long Island Ins. Co., 238 E 34th St. v.
.................. 21-65 n.104
Long Island Trust v. Rochmnn
................... 15-60 n.95
Longley, Broadway Bank & Trust
Co. v............... 22-20 n.21
Loomis, McDonald v.... 18-20 11.21
Lord v. Hingham Nat'l Bank
..................... 24-5 n.4
Los Angeles Inv. Co. v. Home Sav.
Bank .............. 19-25 n.44
Loucks v. Albuquerque Nat'l Bank
............... 20-15 ns. 32, 33
Loudenback, Deffler v. .. 23-40 n.37
Louisville & Nashville Ry. v. Citizens
& Pcoples' Nat'l Bank
.................. 20-65 n.125
Loux v. Fox.......... 22-20 n.16
Loveland v. Hanson .... 14-95 n.97
Lucas, Rinehart v. ..... 23-65 n.81
Lucas v. Whitely ....... 15-85 ns.
119, 120
Ludlum, Bollenbach v. .. 16-30 n.29
Lugar, First Nat'l Bank & Trust Co. v.
................... 22-20 n.21
Lukens Steel Co., Rittenhouse v.
................... 16-90n.105
Lundean v. Hamilton ... 15-25 n.37
Lutes, Guio v. ......... 16-10 n.6
Mack Trucks, Arkansas S. & L.
Ass'n v. .............. 17-5 n.3
Macon Creamery Co., National City
Bank v. ............ 15-35 n.62
Macy, R. H. & Co., Stinger v.
..................... 17-5 n.4
Maddock v. McDonald
........ 22-25 n.33; 22-50 n.74
Maddox v. First Westroads Bank
.................. 20-65 n.132
Madsden v. Walker Bank & Trust CO.
................... 21-20 n.26
Magilansky, International Fin. CO. v.
................... 16-45 n.65
Magnes, Forwood v..... 22-50 n.76
Makranshy, Yubas v. ... 18-20 n.15
Mallory, Federal Rcservc Bank v.
................... 21-25 n.40
Manchester Morris Plan Bank,
Attorney Gcneral v. . . . 8-20 n.10
Mnncvnl, Schlnmp v. ... 15-55 11.89
Mnngold & Glnndt Bnnk v. Uttcrback
................... 13-25 11.24
M~nhntlnnCo, v. Morgnn
......... 11-10 n.2; 11-30 11.42;
16-65 n.78; 1 6 8 0 n.9 1
Manheim Auto Auction, Inc., A1
Maroonc Ford v. ..... 15-10 n.9
Manish Wholesale Co., Kersh v.
................... 14-50 n.45
Mann Theatres, Saka v.
................... 15-30 n.55
Mann, Unilcd Stales v. . . . 1-30 n.36
Manor Drug Stores, Blue Chip
Stamps v. .......... 4-70 n.189
Manson, Sacred Heart Church Bldg.
Comm. v. .......... 1 1-20 n. 16
Mnnufacturers & Traders Trust Co. V.
Murphy ........... 15-20 n.34;
15-30 n.54
Manufacturers & Traders Trust Co.,
Phoenix Die Casting Co. v.
................... 19-40 11.81
Mnnufacturer's Hnnovcr Trust Co.,
New York Creditmen's Adjustment
Burcau, Inc. v. ... 20-100 n.183;
21-10 n.1
Manufacturer's Hanover Trust Co.,
Webster Schott Building Co.,
Inc. v. ........... 20-100 n.183
Manufacturcrs Mercnntile Co. v.
Monarch Refrigerating Co.
................... 12-25 n.35
Manufacturers Natll,Bank,
Spinazzola v. ....... 20-35 n.70
Manufacturers' Trust Co. v. Steinhardt
.................... 18-15 n.6
Marcoux v. First Nat'l Bank
................... 21-20 11.24
Marcus Oil & Supply Co., Wells Oil
Co. v. .............. 21-50 n.71
Marino Midland Grace Trust Co. V.
Banko del Pais, S.A. . . 25-60 n.86
Marine Nat'l Exch. Bank, West Side
Bank v. ....... 21-40 ns. 58, 59;
21-70 n.119
M i n c Nnt'l Exch. Bank v. Kalt-
Zimmers Mfg. Co. . . . 16-90 n.99
Marion Nat'l .Bank v. Harden
. . . . . . . . . . . . . . . . . . . 13-25 n.21
Mnrquctto Nnt'l Bnnk, Bichcl Opticnl
Laborntorics v. . . . . . . 31-15 n.29
Marquctte Nat'l Bank of Minneapolis
v. First of Onlaha Service Corp.
. . . . . . . . . . . . . . . . . . . . . . . . 17-45
Marquette Nat'l Bank, Prudential
Ins. v. .............. 25-40 n.53
Marshall v. Sonneman . . . 23-30 n.20
Martin, Helfinstein v. ... 31-15 n.33
Marwitz, Estate of, In re
................... 2 3 4 0 n.40
Mnrx & Co. v. Bankers Credit Life
Ins. Co. . . . . . . . . . . . . 22-20 n. 16
Maryland, McCulloch v. ...... 1-15
Maryland Nat'l Bank, Gillen v.
. . . . . . . . . . . . . . . . . . . 19-15 n.30
Maryland Title & Guar. Co.
v. Alter . . . . . . . . . . . . 22-20 n. 16
Mathias, Southern Supply CO. V.
................... 14-95 11.97
Matlock v. Scheurerman
................... 15-40 n.75
May, Coffin v. . . . . . . . . . 16-35 n.40
May, Commcrcial Nat'l Bank v.
................... 16-25 n.27
Mayer, Guardian Trust CO. V.
.................. 15-65 n.lO1
May, Hill v. .......... 18-30 n.36
Mayhugh, Fidelity Trust Co. V.
................... 16-30 n.30
Mazukiewicz v. Hanover Nat'l Bank
................... 23-55 n.68
Mazurkicwicz v. Dowholonek
................... 16-20 n.22
MBTA Employees Credit Union v.
Employers Mut. Liability Ins. CO.
. . . . . . . . . . . . . . . . . . 20-65 n.134
McCnrtan, First Nat'l Bank V.
. . . . . . . . . . . . . . . . . . . 16-25 n.27
McCarthy, Appleton & Eldridge v.
. . . . . . . . . . . . . . . . . . . 23-65 n.83
McClcanathan v. Davis . . 11-45 n.62
McClung, Katzenbach v. . . 9-15 n.8
McConnell, Weinbergen V.
. . . . . . . . . . . . . . . . . . . 23-65 n.89
McConnico v. Third Nat'l Bnnk
. . . . . . . . . . . . . . . . . . 20-55 n.108
McCormick & Co, v. Gem State
Oil Co. ............. 16-10 n.7
 TABLE OF CASES T A B L E O F CASES

[References are to sections (§).I [Referettces are to scctiotts (§).I

.
McCormick v Hopkins .. 1 1-20 n .16 Mercantile Bank & Trust CO. Mid-Continent Nat'l Bank v. Bank Molsons Bank v . Hoekzerna
.
McCormick v Shea .... 18-20 n .16 v . Hunter ............ 23-10 n.7 of Independence . . . . . 15-1 5 n.25 . . . . . . . . . . . . . . . . . . . 13-65 11.66
Mercantile Nat'l Bank. Barcliay's Midland Bank & Trust Co., National
McCrane. John A., Motors. Superior
............. Monarch Fruit Co., Scheuermann v.
Fin . Corp . v ......... 11-20 n.15 Rank
...... v 25-40 n.53 Sur. Corp . v . . . . . . . . . 25-40 n.53 . . . . . . . . . . . . . . . . . . . 12-10 n.12
McCrory. Hanna v ..... 11-20 11.20. .
Mercantile Nat'l Bank v Silverman Midland Nat'l Bank, Kintyre Farmer's Monarch Refrigerating Co.,
21-50 n.75 ..................
...... 20-55 n.102 Co-op v . . . . . . . . . . . . . 15-40 11.78 Manufacturers Mercantile Co . v .
.
McCulloch v Maryland ...... 1-1 5 Mercantile Texas Corp . v Board
.............
. Mid Slate's Development Co., Citizens . . . . . . . . . . . . . . . . . . . 12-25 11.35
McDonald v . Loomis ... 18-20 n.21 of Governors 6-35 Nat'l Bank v. . . . . . . 29-90 n .159 Monitor Binding Co., Toll v .
McDonald. Maddock v . Mercantile Trust Co., Atwell v . Miller. Bothell v . . . . . . . 15-90 n .13 1 ................... 22-25 n.29
......... 22-25 n.33. 22-50 n.74 ................... 20-45 n.85 Miller v. Chatham & Phoenix Montana Nat'l Bank. Williams v .
McDonald v. Mulkey . . . 16-45 n.60 Mercantile Trust Co., Home Ins . Nat'l Bank ......... 20-30 n.44 .................. 20-75 n.147
.
McDuffy v Worthmore Furniture Inc. C o. v ............... 20-45 11.87 Miller. Lake Harriet State Bank v . Montevideo Baseball Ass'n. Elison
...................
......... 31-15 n.33 Mercantile Trust Co., Nu-Way Service ..................... 13-65 11.71 State Bank v . . . . . . . . . 14-95 n.97
McGinty. Union Trust C o. v . Inc. v ............. 20-100 n.188 Miller. Peoples State Bank v . Montgomery v . First Nat'l Bank
...................
........ 18-30 n.32 Mercantile Trust Co., St . Louis Nat'l . . . . . . . . . . . . . . . . . . 15-65 n.100 . . . . . . . . . . . . . . . . . . 21-65 n.104
McGloshen v . United States Dep't Bank v ................ 5-5 n.7 Miller. Schumacher v . . . 16-20 n.22 Montgomery. McMillian v .
.......
of Agriculture 4-50 n .131 Merchants' Bank of Canada v . Brown Miller, Swift & Co . v. . . 22-20 n.18. . . . . . . . . . . . . . . . . . . . 23-65 n.93
McGrath, New Jersey Title Guar. .................. 20-75 n.146 23-30 n . 18 Moody v . Pacific S.S. Cn .
CO. v............... 15-35 n.62 Merchants'-Laclede Nat'l Bank.
.............
. Miller, United States v . . . . . . . . 4-50 . . . . . . . . 16-75 n.89; 16-90 n.104
.
McHenry v Old Citizens Nat'l Bank
..................
Foege v 14-70 n.68 Milliman. German-An1. Bank v . Moore v . Alton . . . . . . . . 22-50 n.74
20-55 n.lO1 Merchant's Nat'l Bank, City of . . . . . . . . . . . . . . . . . . . 22-30 n.39 Mooro & Co . v. Burling . . 16-30 n.30
.
McKay v Farmers & Stockmens Bank ...........
St. Paul v 20-55 n.98 Milling Co., Joseph. v . First Bnnk Moorc v . Carey . . . . . . . 11-55 11.78
.....
of Clayton, N.M. 16-10 n.15 Merchants Nat'l Bank v . De~roit . . . . . . . . . . . . . . . . . . 20-55 n.144 Moore v . Mead's Bread . . . 9-15 n.8
.
McKay, United States v ............
Trust C o 16-90 n.97 Miltenberger. Strar~ssv. . . 25-25 n.18 Moore v . Vaughan . . . . . 16-65 n.78
................... 4-50 n.124 Merchants' Nat'l Bank, Showers v . Milwat~kecCorrugating Co . v . Trnylor Morgan Guar . v. Third Nat'l Bank
......
McKinnis, Case v 22-25 n.3 1; ................. 20-100 n.185 . . . . . . . . . . . . . . . . . . . 14-45 n.37 . . . . . . . . . . . . . . . . . . . 12-70 n.78
22-30 n.42; 2 3 4 5 ns . 43, 55 Meredith v . Pound ..... 20-55 n.97 Mindemnn. Thorp v . . . . . 13-25 11.21 Morgan v . Hoffman ..... 22-20 n.22
McLean v. Bryer ...... 15-40 n.80 Merrill, Lynch. Pierce. Fenner & Mincr's Bnnk of Mont., Sun River Morgan, Manhattan Co. v .
McMillian v . Montgomery Smith, Inc., Eldon's Super Fresh Cattle C o . v ........ 21--4 0 11.57. ......... 11-10 n.2; 11-30 n.42;
................... 23-65 n.93 Stores, Inc . v......... 15-20 n.35 23-60 n.77 16-65 n.78; 16-80 n.91
McNamara v . Jose ..... 15-15 n.21 Merritt. Ham v ......... 15-15 n.21 Minneapolis Sash & Door C o. v . Morley v. University of Detroit
McNutt. Metropolitan State Bank v . . ..........
Mesa N 0. Nelson Co., United Bank Metropolitan Bank ... 21-15 n.13 ................... 21-6511.101
......... 16-45 n.58. 16-17 11.85 of Ariz. v 20-65 n.130 Mischnick v . Dime Sav. Bank Morris v. Muir ........ 15-20 11.30
McPherson v. Wirth .... 23-20 n .12 Metropolitan Bank, Minneapolis Sash .................... 23-10 n.3 Morrison, Griswold v. . . 15-30 n.45
McOuade. Reichart v . . . 22-25 n.28 & Door Co. v........ 21-15 n.13 Mississippi Vallcy-Merchants State Morrison v. Liberty Discount &
~ead's read. Moore v . . . 9-15 n.8 Metropolitan Edison Co., Jackson v .
........................
..
Trust CO Globe Indem . C o . v .
. . . . . . . . . . . . . . . . . . . 16-90 n.98
Sav. Bank . . . . . . . . . . . . 13-5 n.3
Mechanic v . Elgie Iron Works 31-15 Morris Plan Bank of New Haven
.................... 23-55 n.73 .
Metropolitan State Bank v McNutt
.........
Missouri Etc . R.R. Constr . Co., v . Smith . . . . . . . . . . . . . 8-20 n .10
Mechanics & Metals Nat'l Bank 1 6 4 5 n.58. 16-70 n.85 Dresser v . . . . . . . . . . . 1 5-35 n.7 1 : Morris Plan Co., Novoprutsky v .
..........
v . Warner 16-25 n.27 .
Meyer v Idaho First Nat'l Bank 27-25 n.33 . . . . . . . . . . . . . . . . . . . 1 6 8 0 n.92
Mechanics Bank. Friedberg v . ................. 20-120 n.209 Missouri K . & T.R., Hutchings. Sealy Morris Pontiac-Buick, Frank,
Sherrill v . . . . . . . . . . . . 20-30 n.46
................... 22-35 n.51 .
Meyer. Fred. Inc . v Temco Metal
........... .
& C o. v ............. 12-45 n.56
Morrow, Friend v . . . . . . 15-30 11.58
Medberry Farmers' Elev. Co., Prods . C o 1 9 4 0 n.84 Mitchell-Parks Mfg. Co., Carroll v .
...... Mortimer Agency, Inc . v . Underwriters
. v
Ennen ............ 22-30 n.35 Meyers. Garnett v 16-30 n.32 .................... 19-40 n.76 Trust Co . . . . . . . . . . . . 25-30 11.29
Medley Hardwoods. Inc . v . Novy Mitchell v . Perkins . . . . . 15-15 n.14
Michaels. Estate of. I n re Morton, Charles Nelson Co . v .
.................
..... 14-100 n.106 ................... 19-35 n.64 Mitchell. v . W . T. Grant ................... 11-20 n.28
Melara v . Kennedy..... 31-15 n.33 Michigan Nat'l Bank. Harvey v. .................. 31-15 & n.23 Morton, Lewis Hubbard & C o. v.
.....
Mellrath. Phillips v 13-65 n.71 ................... 20-15 n.30 Mobley v . Childs ...... 14-95 11.98 . . . . . . . . . . . . . . . . . . . 14-50 n.43
Mendelson v . Realty Mort . Corp. .
Mid-City Trust & Sav Bank. Slate *Her. Aufderheide v . . . 1 1-50 n.69 Morton v . Woolery .... 20-1 5 n.22.
.................. 16-90 n.102 Bank v ............. 25-25 11-19 Moers v . Stalker . . . . . . . 23-65 n.84 20-1 20 11.205
 TABLE OF CASES TABLE OF CASES

[References are ro secrionx ($).I [References are lo secfionr (§).I

Motor Contract Co. v. National Bank of N. America, Neal, Northwestern Bank v. Noble v. Beeman-Spaulding-
Van Der Volgen .... 16-65 n.78; Wilhelm Foods Inc. v. . . . . . . . . . . . . . . . . . . . 16-30 11.30 Woodwnrd Co. . . . . . . 13-25 n.25
16-100 n.112 ........ 21-25 n.34; 21-65 n.104 Neal, Price v. ........ 20-65 n. 120 Nolker, Orthwein v. . . . . 23-65 n.82
Moyer v. Hyde ....... 16-55 n.72 National Bank of N.J. v. Berrall Nelson Co., Charles v. Morton Nordin v. First Trust & Sav. Rank
...
Muchmorc, People v. 4-50 11.107 ................... 20-30 n.55 ................... 11-20 11.28 . . . . . . . . . . . . . . . . . . . 13-25 n.24
Mucllcr v. Jagcrson Fuel Co. Nntiannl Bnnk of Republic, Nntionnl Nclson, Mr~rrnyv. ...... 23-65 n.85 Normnn v. Dnltirnorc Pc 0. Ry.
................... 18-30 n.33 City Bank v......... 25-30 n.26 Nelson v. Southworth . . . 13-25 n.21 . . . . . . . . . 10-10 n.15; 11-35 n.49
.....
Mueller, Pierik v. 15-85 n.123 National Citizens v. Citizens Nemoun Trading Corp., Norman Bank of Commerce,
....
Muender v. Muender 16-45 n.59 Nat'l Bank.......... 21-25 n.43 Erskine v. ........... 25-10 n.8 Goodman v. ........ 23-60 n.76
........
Muir, Morris v. 15-20 n.30 National City Bank v. Macon Ness v. Greater Ariz. Norman's Health Club Inc..
Mulkey, McDonald v... 16-45 n.60 Creamery Co. ....... 15-35 n.62 Rcalty, Inc. ........ 14-100 11.99 Joseph v. ........... 33-50 n.59
Munroe v. Philadelphia Warehouse Co. National City Bank v. National Bnnk
................... .........
New Anisterdnm Gas Co. v. Nntionnl Norris, Estntc of, In re .. 20-70 n.136
12-10 n.14 of Republic 25-30 n.26 Dnnking Co. . . . . . . . . 27-45 n.63 North Atchison Bank v. Garretson
Murphy v. Arkansas & L. Land Co. National City Bank, Bank of
................... 11-50 n.73 Cal. v. .............. 11-10 n.2
New England Mncaroni Mfg. Co., ................... 14-25 n.23
Commercial Trust Co. v. Northeast Bank. Flo-Control,
Murphy, Manufacturers & Traders National City Bank of Cleveland, ................... 22-30 n.35 Inc. v. ............. 19-35 11.73
Trust Co. v. ........ 15-20 n.34; George Whalley Co. v. Newhall Sav. Bank
15-30 n.54 ................. 20-110 n.195 v. Buck . . . . . . . . . . . . 16-45 n.58
Northeast Factor & Discount Co.
v. Jackson . . . . . . . . . . . . 1-10 n.9
Murphy, Rockland-Atlas Nat'l Bank National Copper Bank v. Davis New Jeney Bank, Hy-Grade Oil
of Boston ............. 1-5 n.4 County Bank ........ 23-55 n.67 Co. v. . . . . 19-15 n.30; 21-10 n.1 North Ga. Finishing Inc. v.
Di-Chem Inc. ........... 31-15
Murray v. Nelson . . . . . . 23-65 n.85 National Courier Ass'n v. Board New Jeney Bank v. Palladino
Murrell v. Exchange Bank of Governors ...... 6-15 & 11.53 ......... 25-40 n.52; 25-50 n.62 Northridge v. Grenier . . . 16-10 n.11
.................... 16-10 n.6 National Fertilizer Co., American New Jersey Title Guar. Co. Northshore Bank v. Palmer
Musto v. Grosjean ..... 16-30 n.34 Nat'l Bank v. ...... 23-30 n.22; v. McGrath ......... 15-35 n.62 . . . . . . . . . . . . . . . . . . . 20-15 n.29
Myers v. Bibee Grocery Co. 23-40 n.36 New York Bankers v. Duncan Northway Lanes v. Hsckley
................... 23-30 n.24 National Life Ins. Co., Fawsett v. ................... 15-15 n.20 Nat'l Bank ...... 17-45 ns. 26, 27
MZ Enterprises, Hayat V. ................... 13-45 n.51 New York Creditmen's Adjustment Northwestern Bank v. Neal
................... 12-30 n.44 National Loan & Exch. Bank Bureau, Inc. v. Manufacturer's ................... 16-30 n.30
N
v. Lachovitz ........ 20-30 n.55 Hnnover Trust Co. Northwestern Nat'l Rank v. People's
National Mortgage Corp., ........ 20-100 n.183; 21-10 n.1 State Bank .. 24-5 n.4; 24-15 n.15
Nagel, Owens v. ....... 15-15 n.13 Wickware v. ........ 16-35 n.41 New York Produce Exch. Bank v. Northwest Nat'l Bank of Ft. Worth,
National Bank, American Hominy National Motion Picture Bureau V. .
Twelfth Ward Bank . 20-75 11.142 Republic Nat'l Bank of Dallas v.
Co. v. ...............25-10 n.8 Oklahoma Colony Trust Co. New York Sec. Co., Zander v. . . . . . . . . . . . . . . . . . . . 25-40 11.53
National Bank Americard, Inc., ................... 23-55 n.71 ................... 11-50 n.73 Novoprutsky v. Morris Plan Co.
Worthen Bank & Trust Co. v. National Park Bank v. Kochler Nicholas & Barrcra, Frost Nat'l . . . . . . . . . . . . . . . . . . . 1G-80 11.92
..................... 26-5 n.3 ................... 18-20 n.19 Bank v. . . . . . . . . . . . . 11-50 n.76 Novy. Medley Hardwoods, Inc. v.
National Bank & Trust of Shawnee, National Pickle Co., Sanitary Can Nichols v. Council on Judicial . . . . . . . . . . . . . . . . . 14-100 n.106
Security Bank & Trust CO. v. Co. v. .............. 21-50 n.70 Complaints . . . 4-50 ns. 107, 130 Nowlin v. Professional Auto Sales, Inc.
................... 23-30 n.28 National Retailcrs C o p . of Ariz. v. Nichols v. Tower Grove Bank . . . . . . . . . . . . . . . . . . . 31-15 n.29
National Bank, Blachcr V.
................... 13-35 n.60 Nntional Vnllcy Nnt'l Bnnk ..... 4-35 n.78 ................... 31-15 n.29 Nucnr Forwnrding Corp.. Atlantic
Sur. Co., Gruntal V. Nictzcl v. Fnrnlcrs nnd Mcrchnnts Ref. Co. v. . . . . . . . . . 22-40 n.60
National Bank v. Erion-Haines ..................
Realty Co. . . . . . . . . . 22-50 n.74
16-95 n.l10 Stntc Bnnk . . . . . . . . . . 31-15 n.34 No. 2 Galcsburg Crown Fin. Corp.,
Smith v. . . . . . . . . . . . . 33-50 n.55
National Bank v. First Nat'l Bank dr National Sur. Co. v. President & Night Rc Dny Bnnk v. F i n t
..
Trust Co. ........... 20-15 n.33 Directors of Manhattan Co. Nnt'l Bank . . . . . . . . . 14-25 n.20 Nurcnburg. Aronson v. 13-65 n.71
.
National Bank v. Funke . 16-30 11.31 .............. 20-45 ns. 85, 86 Nill, Burgcttstown Nnt'l Bnnk v. Nusscnr v. Haznrd . . . . . 16-20 n.21
National Banking Co., New National Sur. Corp. v. Midland Bank ...............23-65 ns. 79, 87 Nu-Way Service Inc. v. Mercantile
Amsterdam Gas Co. v. & Trust Co.......... 25-40 11.53 Nissen, Commercial Credit Co. v. Trust Co. ......... 20-1 00 n. 188
................... 27-45 n.63 Nationwide Homes v. F i n t Citizens ................... 11-30 n.45 Nuzum v. Sheppard .... 22-20 n. 18
National Bank of Bossier City Bank & Trust Co..... 19-35 n.73 .4 Noble & Co., H. W., Peckinpaugh v. Nyssa-Arcadia Drainage Dist. v.
v. Fornea ............. 14-5 n.1 Neale, Tomlin v. .. 11-20 ns. 22, 27 ................... 12-55 n.69 First Nat'l Bank ..... 13-35 n.33
 TABLE OF CASES TABLE OF CASES

[References are to sectiom (§).I [References are lo sections (§).I

0 Patton, Delaware State Bank v. People's Sav. Bank, Ackenhausen v.
................... 21-50 n.74 ................... 19-25 n.44
Offield, Bright v. ....... 16-25 n.28 Pacific Indern. v. Security First Paul v. Virginia ........ 9-15 n.7 People's Sav. Bank v. Smith
Ogden, Gibbons v. ....... 9-15 n.7 Nat'l Bank ........ 20-60 n.117 Payette Valley Coop., Inc., ................... 15-30 n.42
Ohnstad, Torgerson v. .. 22-20 n.22 Pacific Nat'l Bank of San Francisco. Carpenter v. ........ 11-50 11.77 Peoples State Bank v. Miller
Oil States Lumber Co., Eagle Wichita Eagle & Beacon Publishing Payne Bros. v. Burnett . . 20-15 n.22; .................. 15-65 n.lOO
Lumber Co. v. ...... 22-30 11.36 Co., Jnc. v. ......... 25-40 n.53 20-20 n.205 Pcoplcs Trust Bank, Lincoln Nat'l
Oklahoma Colony Trust Co., National Pacific Power & Light Co., Harper V. Payne, Venahle v. . . . . . 15-60 n.97 Bank & Trust Co. v. . . . . 20-5 n.2
Motion Picture Bureau v.
.................... 11-10 n.2 Peaden, O'Neil v. ..... 13-25 n.25 Perini Corp, v. First Nat'l Bank of
................... Pacific S.S. Co., Moody v. Paepcke v. Paine ....... 16-30 n.3 1; Habersham Co. ... 20-55 n.104;
23-55 n.71
....... 16-75 n.89; 16-90 n.104 1 6 9 0 ns. 98, 101 20-65 n.133
Oklahoma State Bank v. First Padgett, Weatherbee v.. . 18-20 n.22 Perkins, Mitchell v. .... 15-1 5 n. 14
...........
Nat'l Bank 16-10 n.6
Page v. Ford ......... 11-55 n.81;
Pease & Dwyer Co. v. State Nat'l
Bank .............. 20-30 n.44 Perrin, Harnrnond State Bank v.
Oklahoma State Bank v.,Hanover Fire 16-70 n.88 ................... 15-40 n.75
Ins. Co. ............ 11-20 n.17 Peckinpaugh v. H. W. Noble & Co.
Page, Johnston Coffee Co.v. ................... 12-55 11.69 Perry, Paika v. ........ 15-20 n.30
Old Citizens Nat'l Bank, McHenry v. ................... 14-65 n.56 Peck, Wilson v. . . . . . . . 23-30 n.19 Peterson, John P. Bleeg Co. v.
.................. 20-55 n.101 Paika v. Perry........ 15-20 n.30 Pcgg, Schmidt v. ..... 11-45 n.59; . . . . . . . . . . . . . . . . . . 15-85 n.121
Old Nat'l Bank v. Gibson Paine-Erie Hosp. Supply, Inc. V. . 13-30 n.28; 16-10 n.10 Pcterson, Salcm Trading & Fin. Co. v.
................... 15-35 n.62 .
Lincoln First Bank .20-I20 n.209 Pcnbrook Trust Co. v. Wicgnnd . . . . . . . . . . . . . . . . . 15-20 n.31
Omaha Loan & Bldg. Ass'n v. Cockc Painc, Pacpcke v. ..... 16-30 n.3 1 ; . . . . . . . . . . . . . . . . . . . 15-30 n.42 Pfciffcr, Annis v. . . . . . . 14-95 n.98
................... 13-65 n.66 16-90 ns. 98, 101 Penderson Constr. Co., Peninsula Nat'l Pfeiffer, Commercial Bank v.
.......
O'Neal, Clark v. 23-30 n.25 Paine v. Sheridan Trust & Sav. Bank v. ............ 11-50 n.72 .................... 13-10 n.6
One Gold Rooster, United States v. Bank .............. 27-20 n.22 Peninsula Nat'l Bank v. Hans Pflueger v. Broadway Trust &
................... 10-10 n.18 Paintsville Nat'l Bank, Williams V. Penderson Co. . . . . . . 21-65 n.98 Sav. Bank . . . . . . . . . 16-90 n.lO1
O'Neal Motors, Inc., Hernandez v. ......... 23-10 n.3; 23-45 11.53 Peninsular Grocery Co., Willianis V. Philadelphia, City of, Franklin Trust
................... 33-50 n.55 Palladino, New Jcrscy Bank v. ................... 23-70 n.94 Co. v. ............... 25-5 n.2
O'Neil v. Peaden ...... 13-25 n.25 ........ 25-40 n.52; 25-50 n.62 Penn, Saulenas v. ...... 18-20 n.21 Philadelphia Nat'l Bank v. Fulton
One, United States v. ... 4-55 n.159
...
Palmer, Davenport v. 14-50 n.42 Penn Square Nat'l Bank, Covington V. Nat'l Bank ......... 20-45 n.87
Ordernann, Squire v. ... 27-35 n.45
Palmer, Northshore Bank v. .................. 20-55 n . l l l Philadelphia Nat'l Bank, United
Oregon Iron & Steel Co. v. Kelso
................... 20-15 n.29 Pennsylvania Bankers Ass'n v. States v. ...... 5-25 & ns. 48, 49
Pan Am. Bank, Keane V. Secretary of Banking . . 11-40 n.56 Philadelphia Title Ins. Co. V.
State Bank ......... 21-50 n.75 .................. 20-65 n. 129 Pennsylvania Cent. Nat'l Bank, Fidelity Trust Co. . . . 20-55 n.103
Orthwein v. Nolker .... 23-65 n.82 Pan Am. Nat'l Bank v. Holiday Wines Collin v. ........... 12-70 n.78 Philadelphia Warehouse Co.,
Osborn v. Bank of the United States & Spirits, Inc. .... 20-120 n.210 People v. Central Fed. Sav. & Munroe v. ......... 12-10 n.14
........................ 1-15 P. & G . Card & Paper Co. v. Fifth Loan Ass'n. .......... 17-5 n.3 Philbeck v. Tirnmers Chevrolet, Inc.
.....
Osborne, Ector v. 15-90 n.133 Nat'l Bank ......... 20-55 n.99 People v. Muchmare ... 4-50 11.107 . . . . . . . . . . . . . . . . . . . . 33-10 n.7
........
( Osgood, Grist v. 22-20 n.17 Parker, Park v. ........ 11-55 11.80 People's Bank & Trust Co., Wiley v. Phillipsburg Nat'i Bank, United
Park v. Parker ....... 11-55 n.80 ................... 23-60 11.77 States v. ............ 5-25 11.50

I Oste, Carleton Ford, Inc. v.

................. 14-100 n.107
' Oswianza v. Wengler & Mandell
Parksley Nat'l Bank, Colona V.
................... 15-40 11.78
People's State Bank, Northwestern
Nat'l Bank v. ........ 24-5 n.4;
Phillips v. Cunningham . . 22-30 n.37;
23-35 n.32

1 .................. 16-90 n.102

Otisville State Bank, Baderman v.
................... 13-30 11.29
Park State Bank v. Arena Auto
Auction, Inc. ..... 20-1 10 n. 194
Parlane Sportswear Co., Trustees of
Tufts College v. ... 11-20 n.37;
People's Bank of South Carolina, Inc.
v. Robinson ......... 32-15 n.5
People's Bus Line, Continental Guar.
24-15 n.15 Phillips Home Furnishing, Inc. v.
Continental Bank .... 19-15 n.30;

Phillips, Johnson v. .... 16-45 n.59

21-10 n.1

........
Owens v. Nagel 15-15 n.13 15-60 n.94 Corp. v. ........... 11-20 n.31; Phillips v. Mellrath . . . . 13-65 n.71
1 Owen, Unico v. ............. 35-5 Parsons Travel, Inc. v. Hoag & 16-35 n.40 Phoenix Bank, Willets v.

I Oxley, A. J. Jackson Chevrolet v. Northwest Nat'l Bank Pcoplc's Nnt'l Bank, Farmers' Nnt'l . . . . . . . . . . . . . . . . . . . 11-50 n.76
................. 14-100 n.111 ................. 20-100 n.188 Bank v. . . . . . . . . . . . . 23-35 n.33 Phoenix Die Casting Co, v.
Ozark Sav. Bank v. Bank Patterson, American Nat'l Bank v. Rbples Nat'l Bank v. Swift Manufacturers & Traders
of Brandeyville ...... 14-80 n.82 ................... 15-40 n.79 ................... 20-15 n.21 Trust Co. . . . . . . . . . . . 19-40 n.81
 TABLE OF CASES TABLE OF CASES

[References are to sections ($).I [References are to sectiom (g).]

Phocnix Nat'l Bank v. Hanlon
................... 18-20 n.18
Phoenix Steel Corp., Wilmington
Trust Co. v. ........ 19-40 n.82
Pierik v. Mueller ..... 15-85 11.123
Pierson v. Swift County Bank
......... 1 3 4 0 11.41; 20-15 n.21
Pierson v. Union Bank & T r u s t Co.
................... 19-35 n.70
Pine Bluff Nat'l Bank v. Kestcrson
.................. 20-65 n.126
Pinnix, James v. ....... 31-15 11.29
Pirie, I n re ........... 16-40 n.55
Pittsburgh Nat'l Bank, Kacher v.
................... 31-15 n.27
Pugct Sound Stntc nank v.
Washington Paving Co.
..................... 16-10 n.5
Puhl, Bergmann v. ..... 23-65 n.86
Puritan Trust Co., Allen v.
.............. 27-40 ns. 60. 61
Q ................... 19-40 n.74
Quccns County Trust Co., Fidelity
& Deposit Co. v. .... 27-30 n.36
Quigley, Hurlburt v. ....23-65 n.84
Quincy Mut. Fire Ins. Co. v.
International Trust CO.
Rcichnrt v. McQundc . . . 22-25 n.28
Rcilly-Hcrz Auto Co., Vannctt v.
................... 11-30 n.42
Reinhart v. Echave . . . . 13-65 n.67
Republic Nat'l Bank of Dallas v.
Northwest Nnt'l Bank of
Ft. Worth .......... 25-40 n.53
Republic Nat'l Bank, Roland v.
Rexine, Bost v. ........ 23-55 n.73
Rhode Island Hospital Trust Nat'l
Bank, Fletcher v. ..
Richardson & Sons, Inc., Weubke v.
................. 14-100 n.113
Roberts Propcrtics. Inc.. Anthony v.
Industrinl Valley Bank &
Trust Co. .......... 20-30 n.53
Rochelle, Segal v. ...... 32-40 11.45
Rochester Trust Co., Glennan v.
................... 19-45 n.88
Rochling, Equitable Trust Co. v.
. . . . . . . . . . . . . . . . . . . 13-40 n.40
Rochman, Long Island Trust v.
. . . . . . . . . . . . . . . . . . . 15-60 n.95
Rock Island Bank, Bank of N.C. v.
20-120 n.209; . . . . . . . . . . . . . . . . . . . 25-40 n.53
31-15 n.34 Rock Island Sales v. Empire Parking
. . . . . . . . . . . . . . . . . . . 21-40
-- . n.60
~~

........ 11-55 n.82; 13-25 n.26

Pittsburgh Ry., First Nat'l Bank v.
................... 27-60 n.71
Planters Bank v. Yazoo Coldwater
Drainage Dist. ..... 15-85 n.124
Planters' Nat'l Bank, Hoffman v.
.................. 20-75 n.144
Plaza Bank of Westport v. Board
of Governors ....... 4-65 11.172
Polk County State Bank v. Walters
................... 16-35 n.43
Pollard v. Reardon . . . . 12-10 n.14
Port City State Bank v. American
Nat'l Bank ......... 21-40 n.57
Porter v. East Jordan Realty Co.
................... 22-25 n.28
Porter, Essig v. ....... 11-50 n.71;
16-65 n.79
Pound, Meredith v. . . . . 20-55 n.97
Powell, Bank of El Paso v.
................... 25-20 n.11
Pratt, Spear v. ........ 14-20 n.14
President & Directors of Manhattan
Co., National Sur. Co. v.
.............. 20-45 ns. 85, 86
Pressed Steel Car Co., Cunningham v.
. . . . . . . 1 6 7 0 n.88; 16-90 n.105
Price, Devine v. ....... 11-20 n.14
Pricc v. Neal ........ 20-65 n.120
Prichard v. Strike . . . . . . 13-25 11-21
Professional Auto Sales. Nowlin v.
................... 31-15 n.29
Prudential Ins. v. Marquctte
Nat'l Bank ......... 25-40 n.53
Public Indus. Bank, Stewart v.
................... 16-45 n.60
Richardson v. Kulp . . . . 23-65 n.89
Rockland-Atlas Nat'l Bank of Boston
v. Murphy . . . . . . . . . . . . 1-5 n.4
Richardson, United States v. Rockland Trust Co. v. Southshore
.................... 32-10 n.3 Nat'l Bank .......... 25-35 11.36
Rich v. Franklin Sav. Bank
Rock, Walters v. ...... 15-20 n.30
Rabito, Bonart v. ....... 16-10 n.9 ................... 23-45 n.51 Rodriguez, Elsie, Fashions. Inc. v.
Radue v. Zanaty ...... 11-35 n.49 Rieger. Banner Meat Co. v.
................... 15-20 n.32 Chase Manhattan Bank
Railroad Co., Shaw v. . . . . . . . . . . . . . . . . . . . 20-30 n.47
.............. 12-10 ns. 13, I5 Riggs v. Bank of Camas Prairie
Rodriguez v. Hardouin ... 23-5 n.1
Rand Constr. Co., Stein v. ................... 19-15 n.31
Rogers, Amsinck v. ..... 23-10 n.3
.................... 29-5 n.11 Riggs Nat'l Bank, Colby v.
................... 27-45 n.64
Randell, Bank of Commerce v. Rogcrs v. Frank Jackson
................... 15-25 n.37 Riley Management Corp., Gillcspie v. Lincoln-Mercury .... 33-50 n.59
Randles v. Gully ...... 13-40 n.37 ................... 18-15 n.13 Rogers v. Harris ....... 20-15 11.21
Randolph Nat'l Bank v. Hornblower Rinehart v. Lucas ...... 23-65 n.81 Roland v. Republic Nat'l Bank
........ 14-50 n.42; 25-25 n.18 Ringel, Fashion Hat Framc Co. v. ................... 19-40 n.74
Rankin, Hutson v. ..... 18-25 n.24 ................... 23-65 11.89 Rooks, Van Slyke v. . . . 15-90 n.131
Ratner v. Chemical Bank N.Y. Rittenhouse v. Lukens Steel Co. Rose Check Cashing Serv. v. Chemical
Trust Co. .......... 33-50 n.55 .................. 16-90 n.105 Bank N.Y. Trust Co. ... 25-20 n.9
Ray v. Acme Fin. Corp. Rivcr Oaks Bank & Trust Co., Rosenthal, Genesee County Sav.
................... 33-50 11.55 Estrada v. . . . . . . . . . . 13-10 n.4 Bank v. ............ 23-65 n.91
Ray, Farmers State Bank v. Rivet, E.E., & Sons v. Durand Rosenthal v. Levine
.................. 20-75 n.147 . . . . . . . . . . . . . . . . . . . 22-20 n.13 .............. 23-30 ns. 20, 37
Realty Mort. Corp., Mendelson v. Roberts, City Nat'l Bank v.
Rotuba Extruders, Inc. v. Coppes
.................. 1 6 9 0 n.102 ................... 16-20 n.20;
. . . . . . . . . . . . . . . . . 14-100 n.112
....
Reardon, Pollard v. 12-10 11.14
Robertson v. Budzier . . 13-30 11.29;
16-55 n.74
Rorm, Suddath Moving Rr
Reb Realty, Inc., Eby v. Storage Co. v. ...... 12-35 n.49
................... 33-15 n.21 15-20 n.32
Rovin, State v. . . . . . . . 20-70 n.135
.....
Rcctor v. Strnuss 11-20 n.23 Robertson's Crab House, Bank of
S. Md. v. . . . . . . . . . . 20-60 n.117 Rubin v. Unitcd States ...... 4-70
Red Wing Rubber Co. v. Hjermstad
................... 15-55 11.90 Robinson Furniture Co., Grigg v.
..................... 17-5 n.4
Rubio V. First Nat'l Bank
. . . . . . . . . . . . . . . . . . 20-65 n.118
Reed v. Spear........ 22-35 11.51;
23-35 11.31 Robinson v. Lnncastcr Foundry Co. Russcll, First State Sav. Bnnk v.
Regusa, Charles, & Sons v. ................... 22-25 n.30 . . . . . . . . . . . . . . . . . . . 16-20 n.23
Community State Bank Robinson, People's Bank of S.C., Rutkin, Balmoral Arms v.
................... 15-45 n.85 ,Inc. v. .............. 32-15 n.5 ................... 21-50 n.74
 TABLE OF CASES
[References a r e 10 SCCIJON(§).I
Sackett, Farber v ......... 22-5 n.2
Sackin. Ironclad Mfg . C o. v .
................... 22-30 n.36
Sacred Heart Church Bldg . Comm .
v . Manson .......... 11-20 n.16
Safety Banking & Trust Co.,
Forrest v ........... 11-50 n.69
Sahara.Nev . Corp., Saka v .
.................. 20-80 n.155
Sahedi. Laurel Bank & Trust CO. v .
................... 23-30 n.29
Saint Cloud Nat'l Bank & Trust Co . v .
Sobania Constr . C o . . . 15-15 n.23
Saint Joseph Valley Bank. American
Nat'l Bank & Trust C o. v .
................... 13-60 n.64
Saint Louis Car Co., Franklin Bank v .
................... 15-40 n.80
Saint Louis County Nnl'l Bank v .
Mercantile Trust C o. . . . . 5-5 n.7
Saint Paul. City of v . Merchant's
Nat'l Bank .......... 20-55 n.98
Saint v . Wheeler & Wilson Mfg . C o.
.................... 18-10 n.1
Saka v . Mann Theatres . . 15-30 n.55
Saka v . Saharn.Nev . Corp .
.................. 20-80 n.155
Salem Trading & Fin . C o. v . Peterson
................... 15-20 n.31
Salt. Dougherty v...... 13-65 n.67
Saltmarsh. Coolidge v .
................... 16-20 n.22
Samlnier. Tourtellotte v . . . 14-1 5 n.4
Samuels & Co., I n re
.............. 33-35 ns . 67. 69
Samuels. Mary Couts Brunnett
Trust v............. 23-65 n.88
Sanders. Hunt v. . . . . . . 14-75 n.70
....
Sandenon. Arnett v 15-15 n.16
Sanford. Chase Nat'l Bank v .
..................... 1-10 n.9
Sanitary Can C o. v . National
Pickle Co........... 21-50 n.70
San Joaquin Fin . Corp . v . Allen
................. 16-100 n.112
Sattefield. Tennant v. . . 21-50 11.74
Saulenas v . Penn ...... 18-20 n.21
Savage. Gilpin v ....... 22-25 n.30
TABLE OF CASES
[References are l o seclions (§).I
.
Savord Union State Bank v .
................... 15-15 n.22
Secretary of Banking. Pennsylvania
Bankers Ass'n v . . . . . 11-40 n.56
Shenvood. Fleming v . . . 1 6 3 5 11.44
Shcvin. Fuentes v . . . . . 19-30 n.51.
Saxon v . Georgia Ass'n of Ins . SEC v . Texas Gulf Sulphur C o. 31-15
Agents. Inc. . . . . 4-35 ns . 82. 83 ........ 4-70 n.187. 27-15 n.21 Shimer. United States v .
Scarsdale Nat'l Bank & Trust CO., Security Bank &Trust Co . v . Nat'l . . . . . . . . . . . . . . . . . . . . 9-35 n.17
American Home Assurance Co . v . Bank & Trust of Shawnee Shirley v . State Nat'l Bank of Conn .
................. 20-100 n.186 ................... 23-30 n.28 . . . . . . . . . . . . . . . . . . . 31-15 n.29
Schafler. Harris v . . . . . . 23-70 n.95 Security Cent . Nat'l Bank v . Williams Shocmaker. Volk v . . . . . 16-45 n.59
Schenck Estate of. I n re . . . . . . . . . . . . . . . . . . . 15-20 n.36 Showers v. Merchants' Nat'l Bank
................... 19-45 n.93 Security Commercial & Sav . Bank v . . . . . . . . . . . . . . . . . . 20-100 n.185
Scheurerman. Matlock v . Southern Trust & Commerce Bank Shultz. California Bankers Ass'n v .
................... 15-40 n.75 . . . . . . . . . . . . . . . . . . 20-65 n.120 . . . . . . . . . . . . . . . . . . . 4-50; 4-55
Scheuermann v . Monarch Fruit Co . Security First Nat'l Bank, Pacific Siegel v . Dubinski . . . . . 23-45 n.44
................... 12-10 11.12 Indemn . v . . . . . . . . . 20-60 n.117 Silverman. Mercantile Nat'l Bank v .
Schlamp v . Maneval . . . 15-55 11.89 Sccurity Nat'l Bank, Tusso v . . . . . . . . . . . . . . . . . . . 20-55 n.102
Schlcder. Texas Export Dcv . Corp . v . . . . . . . . . . . . . . . . . . . . 20-30 11.52 Simons v . D o ~ ~ g l n.z. . . . 13-65 n.73
................... 11-20 n.37 Sccurity Sav . Bank v. First Nnt'l Bank Simpson v . First Nnt'l Bank
.
Schelsinger v Gilhooley . . . . . . . . . . . . . . . . . . . 14-80 n.82 . . . . . . . . . . . . . . . . . . . 13-60 11.62
.................. 15-80 n.113. Sccurity Trust & Sav. Bank v. Telford Siniscalchi v . Valley Bank of N.Y.
. ...
Schlcsinger v Schultz 22-30 n.35 . . . . . . . . . . . . . . . . . . . 16-35 11.37 . . . . . . . . . . . . . . . . . . . 20-30 n.50
...
Schlichtcmcicr. Kuhl v 23-65 n.92 Security Trust Co. v . First Nnt'l nnnk Sinlon Stntc Bnnk. Tscmclis v.
.
Schmidt v Pegg ...... 11-45 n.59. . . . . . . . . . . . . . . . . . . . 23-30 n.28 . . . . . . . . . . . . . . . . . . . 18-20 n.19
13-30 n.28; 16-1 0 n .I0 .
Sccurity Tnlst Sutter v . Sinwellan Corp . v . Farmer's Bank
Schoonover. Voris v . . . . 11-55 n.81 . . . . . . . . . . . . . . . . . . . 14-50 n.42
Segal v . Rochclle . . . . . . 32-40 n.45
.
. . . . . . . . . . . . . . . 20-15 ns . 30 32
Simonoff v . Granite City Nat'l Bank
Schriber. Seattle-First Nat'l
Bank v ............. 11-40 n.55 Selma Sav . Bank v . Webster County . . . . . . . . . 22-40 n.58. 23-65 n.81
Schrodcr Bnnking Corp., Sztejn v . Bank . . . . . . . . . . . . . . 14-25 n.18 Slaughter v . Bnnk of Bisbce
................... 25-60 11.90 Sendcry v . Anlcricnn Bxprcss C o . . . . . . . . . . . . . . . . . . . . 11-20 n.21
Schroeder. Ulster Fin . C o p. v . . . . . . . . . . . . . . . . . . . . 15-15 11.26 Sligcr v . R.H. Macy & Co .
................... 18-20 n.15 Seymour & C o. v. Artz . . . . . . . . . . . . . . . . . . . . . 17-5 n.4
Schultz, Bank of Lyons v . . . . . . . . . . . . . . . . . . . . 15-40 11.78 Smith. Baldwin's Bank v.
................... 15-30 n.51 Shapleigh Hardware Co. v . Spiro . . . . . . . . . . . . . . . . . . 21-65 n.108
...
Schultz. Schlesinger v 22-30 n.35 ................... 18-20 n.23 Smith v . Bayer . . . . . . . 13-35 n.33.
Schumacher v Miller. ... 16-20 n.22 Shatz Y . Dunn . . . . . . . . . 1 6 4 5 11.63 13-45 n.52
Schwartz v . Bank of Pittsburgh Nat'l Shaw v. Railroad Co. Smith. Country Club Bank of Kansas
Ass'n .....,... 20-45 ns. 85. 86 .............. 12-10 ns . 13, I5 City v . . . . . . . . . . . . . . 4-65 n.170
.
Schwenker v Johnson . . 15-30 n.45 Shea, McCormick v . . . . . 18-20 n .16 Smith. Felkner v . . . . . . . . 18-15 n.8
Scrotoville Milling Co., Central Shearer v . Shearer . . . . . 11-15 n.10
Smith. First Nat'l Bank of
Bank v ............. 23-65 n.84 Sheets v . Coast Coal C o. . . 11-15 n.7
La Marque v . . . . . . . . . 3-35 n.46.
Sheldon v . First Fed . Sav. & Loan
Scobey Moving & Storage Co., 4-15 n.17; 4-35 11.84
Turner v........... 12-30 n.38 ................... 19-15 11.28
.
Scott. O.M., Credit Corp v Apex Inc . Shclper, Universal C.I.T. Credit Smith. Independent Bankers Ass'n
.................... 15-10 n.9 Corp . v . . . . . . . . . . . . . 16-10 n.15 of Am . v . . . . . . . . . . . . . . . 5-5 n.5
Seamen's Bank for Sav., Dunn v . Shepard v . Abbott ..... 1 1-20 n.20 Smith. Morris Plan Bank of New
................... 19-25 n.45 Sheppard, Nuzurn v . . . . 22-20 n.18 Haven v . . . . . . . . . . . . . 8-20 n.10
Seattle-First Nat'i Bank v . Schriber Shcridan Trust & Sav. Bank Paine v . . Smith v . No . 2 Galesburg Crown
Fin . Corp . . . . . . . . . . . 33-50 n.55
................... 11-40 n.55 ................... 27-20 n.22
.
SEC v First Tenn . Bank N.A. Sherrill v . Frank Morris Pontiac-Buick Smith. People's Sav. Bank v .
Memphis ........... 4-50 n .13 1 ................... 20-30 n.46 . . . . . . . . . . . . . . . . . . . 15-30 n.42
Second Nat'l Bank v . Smith Sherwin Elcc . Co .. Land Fin . Corp . v . Smith. Second Nat'l Bank v.
................... 23-40 n.40 * . . . . . . . . . . . . . . . . . . . 15-15 n.22 . . . . . . . . . . . . . . . . . . . 23-40 n.40
 TABLE OF CASES
[References are to secrions
Smith, Southeastern Fin. Corp. v.
................. 14-100 n.100
Smith, Woodward v. .... 11-20 n.23
Smoker, First Nat'l Bank of Elkhart
County v. .......... 30-35 n.66
Sniadach v. Family Fin. Corp.
................ 20-125; 31-15
Snyder v. Corn Exch. Nat'l Bank
................... 20-55 n.97
Sobania Constr. Co., Saint Cloud
Nat'l Bank & Trust Co. v.
................... 15-15 n.23
Sonneman, Marshall v. .. 23-30 n.20
Southeastern Fin. Corp. v. Smith
................. 14-100 n.lOO
Southern Cal. First Nat'l Bank,
Adarns v. ........... 3 1-15 h.29
Southern Pac. Ry., Hubbard v.
................... 14-80 n.82
Southern Supply Co. v. Mathias
................... 14-95 n.97
Southern Trust & Commerce Bank,
Security Commercial & Sav.
Bank v. ........... 20-65 n. 120
South Jersey Nat'l Bank, King v.
................... 31-15 11.33
Southshore Fed. Sav. and Loan Ass'n,
Goldstone v. ......... 7-35 n.46
Southshore Nat'l Bank, Rockland
Trust Co. v. ........ 25-35 n.36
Southworth, Nelson v. .. 13-25 11.21
Sovalsky, Cohen v. . . . . . 23-30 n.21
Spaulding v. First Nat'l Dnnk
.................. 20-65 n.125
.........
Spear v. Pratt 14-20 n.14
Spcar, Reed v. ........ 22-35 n.51;
23-35 n.31
Speer v. Friedlan ..... 14-100 11.104
.
Spiegelman v. Eastman . 14-75 n.75
Spies, Union Bank v. ... 11-55 n.81
Spinazzola v. Manufacturers Nat'l
Bank .............. 20-35 n.70
Spires v. Jones ......... 15-15 n.21
Spiro, Shapleigh Hardware Co. V.
................... 18-20 n.23
Squire v. Ordemann .... 27-35 n.45
Stalker, Moers v. ...... 23-65 n.84
Stanley, Tower v. ...... 11-55 11.85
Stapleton, Farmers Bank v.
................... 14-25 n.18
(P).]
Starrett, Bank of Cal. v.
.................. 21-65 n.100
State & City Bank v. Hedrick
................... 15-40 n.79
State Bank v. Corn Exch. Bank
................... 14-45 n.34
State Bank v. Dronen ...
State Bank, Ellenbogen v.
.... c . . . . . . . . . . . . . .
State Bank, Farmers Coop Elevator,
Inc. v. ...........
State Bank, Grand Lodge of Pythias V.
................... 16-40 n.56
State Bank, Hommerberg v.
...................
State Bank, Hough v. . . . 23-65 n.79
State Banking Bd., Colorado ex rel.,
v. First Nat'l Bank of Ft. Collins
......................
State Banking Bd., State ex rel., V.
Bank of Oklahoma ...... 5-5 n.5
State Bank v. Mid-City Trust &
Sav. Bank .......... 25-25 11.19
State Bank of Beaver Co. v. Bradstreet
...................
State Bank of Lehr v. Lehr Auto &
Mach. Co. ..........
State Bank v. Weeks .... 19-35 n.70
State v. Broadway Nat'l Bank
................... 20-45 n.87
State N a t l Bank of Conn., Shirley v.
...................
Stntc Nnt'l Dank, Pcnsc & Dwyer
Co, v. ..............
State of N.Y. Nat'l Bank v. Kennedy
......... 22-20 n.2 1 ; 22-25 n.29
State v. Rovin ........
State v. Scougal..........
Staufer, Kerr v. ........ 16-25 11.28
Stedman v. Georgetown Sav. & Loan
Ass'n ................
Steinhardt, Manufacturen' Trust
Co. v. ...............
Stein v. Rand Constr. Co.
....................
Stella Cheese Co. v. Chicago St. P.,
M. & 0.R. Co. ......
Stephens v. Bowles ..... 18-25 n.25
Stevens v. Clintwood D N Co.
...................
TABLE OF CASES
[References a r e t o sections
Stevens v. Cole ........ 15-1 5 n. 16
Steward v. Thornton . . . . 15-15 11.22
Stewart v. Public Indus. Bank
................... 16-45 n.60
Stoncley, First Nat'l Bank v.
......... 16-25 n.27; 16-55 n.71
15-25 n.38 Stover Bank v. Welpman
................... 13-65 n.66
23-25 n.16 Straughan, American Bank & Trust
Co. v. . . . . . . . . . . . . 20-70 n.136
20-120 n.209 Stream v. C.B.K. Agronimics Inc.
................... 21-50 n.74
Strauss v. Miltenberger . . 25-25 n.18
Strauss, Rector v. ...... 11-20 11.23
21-25 n.39 Strike. Prichard v. . . . . . . 13-25 n.21
Strobe, Whcatley v. ..... 11-15 n.6
Studdy v. Beesty ....... 23-45 n.50
5-5 n.5 Studebaker Bros. Co., Kimpton v.
................... 16-55 n.72
Stuehsler, Engelecke v. .. 15-60 n.92
Stuhldreher v. Dunnemiller
................... 23-65 n.85
Sturgis Nat'l Bank v. Harris Trust &
14-45 n.33 Sav. Bank ........... 16-10 n. 11
Suburban Trust Co. v. Waller
14-75 n.74 ................... 4-50 n.108
Suddath Moving & Storage Co.
V. Roure ............ 12-35 n.49
Sullivan County Dorms, Sullivan
County Wholesalers, Inc. v.
31-15 n.29 ................. 14-100 n.106
Sullivnn County Wholcsnlcrs, Inc. v.
20-30 n.44 Sullivnn County Dorms
................. 14-100 n.106
Sullivan, Union Bnnk v. . . 22-5 n.2;
20-70 n.135 22-40 n.61
1-10 n.9 Sumitomo Shoji N.Y., Inc. v. Chemical
Bank N.Y. Trust Co.
. . . . . . . . . 19-45 11.89; 20-35 n.70
17-5 n.3 Sumiton Bank v. Funding Sys. Leasing
Corp. ............. 20-65 n. 123
18-15 n.6 Summers, Commercial Credit Co. v.
................... 16-35 n.38
29-5 n.11 Sun 'N Sand. Inc. v. Unitcd Cal. Bank
..................20-60 11.117
9-35 n.18 Sun River Cattle Co. v. Miner's Bank
......... 2 1-40 n.57; 23-60 n.77
~ Sunshine v. Bankers Trust Co.
15-15 n.16 6 . . . . . . . . . . . . . . . . . . . 20-30 n.57
($).I
Superior Fin. Corp. v. John A.
McCrane Motors .... 11-20 n.15
Supreme Radio Inc., Korzenik v.
.................... 15-30 n.48
Susscll, First Nat'l Bank v.
. . . . . . . . . . . . . . . . . . . . 164511.59
Sutler v. Security Trust . . 14-50 11.42
.
Swift & Co. v. Miller . 22-20 n.18;
23-30 n.18
Swift County Bank, Pierson v.
......... 13-40 n.41; 20-15 11.21
Swift, Peoples National Bank v.
. . . . . . . . . . . . . . . . . . . 20-15 n.21
Symmes, Bank of Italy v.
. . . . . . . . . . . . . . . . . . . 18-25 n.24
Sztejn v. Schroder Banking Corp.
................... 25-60 11.90
Tamaqua Mfg. Co., First Nat'l
Bnnk v. ............. 23-65 n.90
Tang. Valley Nat'l Bank v.
.......... 19-15 n.30; 21-10 n.1
Taube, Asbury v. . . . . . . 15-40 n.75
Tauntum v. Commercial Bank &
Trust Co. .......... 2 1-65 n. 100
Taylor v. Equitable Trust Co.
. . . . . . . . . . . . . . . . . . 20-65 n.123
Telford, Security Trust & Sav. Bank v.
. . . . . . . . . . . . . . . . . . . 1 6 3 5 11-37
Temco Metal Prods. Co., Fred Meyer.
Inc. v. ............. 19-40 n.84
Tcnnnnt v. Snttcrncld . . . 21-50 n.74
Texns Export Dcv. Corp. v. Schleder
. . . . . . . . . . . . . . . . . . . 11-20 11.37
Texas Gulf Sulphur, S E C v.
. . . . . . . . . 4-70 n.187; 27-15 11.21
Texico State Bank v. Hullinger
......... 15-30 n.49; 15-35 11.63
Thayer, Gleason v. .... 23-35 11.33;
23-45 n.54
Third Nat'l Bank, McConnico v.
. . . . . . . . . . . . . . . . . . 20-55 n.108 .
Third Nat'l Bank, Morgan Guar. v.
................... 12-70 11.78
Third Nat'l Bank, United States v.
. . . . . . . . . . . . . . . . . . . . 5-25 n.50
Thomas v. Estate of Eubanks
. . . . . . . . . . . . . . . . . . . . 25-10 n.7
 TABLE OF CASES
[References arc t o sections
Thomas, Walker, Furniture Co.,
Williams v. ......... 19-30 n.51
Thompson v. Lake County Nat'l Bank
................... 25-20 n.10
Thompson Poultry, Inc. v. First Nat'l
Bank .............. 25-20 n.11
Thompson, George, United States v.
................... 4-55 n.156
Thompson, Windsor Cement Co. v.
.................... 11-15 n.6
Thorn, Goodale v. ...... 15-30 n.42
Thornton, Steward v. ... 15-15 11.22
Thorpe Credit Inc., Tie1 .v.
................... 33-50 n.55
Thorp v. Mindeman .... 13-25 11.21
Thurston, Leavitt v. .... 15-20 n.32
Thweatt, Citizens Union Bank V.
................... 15-10 n.10
Teel v. Thorpe Credit Inc.
................... 33-50 n.55
Tillamook County Bank v.
International Lumber Co.
................... 22-25 n.28
Timmers Chevrolet, Inc., Philbeck v.
.................... 33-10 n.7
Titelman, Gibbs v. ..... 31-15 n.29
Toll v. Monitor Binding Co.
................... 22-25 n.29
Tomlin v. Neale . . . 11-20 ns. 22, 27
Tonne v. Horace State Bank
....................22-40 n.58
Toon v. Wapintia Irrigation Co.
.......... 11-10 n.2; 19-40 n.76
Torgerson v. Ohnstad ... 22-20 n.22
Totten, In re .......... 19-35 n.64
.
Tourtellotte v. Samlnier . 14-15 n.4
Tower Grove Nat'l Bank, Nichols v.
................... 31-15 n.29
Tower v. Stanley ....... 11-55 n.85
Transamerica Corp. v. Board of
Governors ............ 6-5 n. 12
Traylor, Milwaukee Corrugating Co. V.
..................... 14-45 n.37
Tremont Trust Co. v. Burack
.................. 20-85 n.158
Tri-Bullion Smelting & Dev. Co.
v. Curtis .......... 20-55 n. 100
Trustees of Tufts College v. Parlane
Sportswear Co. ...... 1 1-20 n.37;
15-60 n.94
(§).I
Tsesmelis v. Sinton Slate Bank
................... 18-20 n.19
Tucker, A.S., Co., Usher v.
................... 2 2 4 0 n.58
Turnbull v. Lawrence Bank
................... 14-55 11.52
Turnbull v. Longacre Bank
............ 12-55 ns. 68, 69, 70
Turner, First Nat'l Bank v.
................... 23-65 n.93
Turner v. Impala Motors
................... 31-15 n.29
Turner v. Scobey Moving & Storage
Co. ................ 12-30 n.38
Turner v. West Memphis Fed. Sav. &
Loan Ass'n........... 17-5 n.2
Turner, Wilson v. ...... 14-65 n.58
Tusso v. Security Nat'l Bank
................... 20-30 n.52
Tuten v. Bowden ....... 18-20 n. 19
Twelfth Ward Bank, New York
.
Produce Exch. Bank . 20-75 n.142
238 E. 34th St. v. Long Island Ins. Co.
.................. 21-65 n.104
Tyler v. Whitney Central Trust &
Sav. Bank ..........
11-20 n.30
Ulster Fin Corp. v. Schroeder
................... 18-20 n.15
Underwriters Trust Co., Mortimer
......
Agency, Inc. v. 25-30 11.29
Unico v. Owen ............. 35-5
Union Bank & Trust. Brantley v.
.................... 31-1511.29
Union Bank & Trust Co. v.
Himmelbauer ........ 16-30 n.29
Union Bank & Trust Co., Pierson v.
................... 19-35 n.70
Union Bank v. Girard Trust Co.
................... 27-35 n.52
Union Bank v. Spies .... 11-55 n.81
Union Bank v. Sullivan . . 22-5 n.2;
2 2 4 0 n.61
Union Free School, Central High
School v. ...........
21-50 n.71
.
Union Inv. Co. v. Epley . 13-65 n.68
Union Nat'l Bank, Lexington V.
................... 19-40 n.76
TABLE OF CASES
[References are t o sections
Union Nat'l Bank of Pittsburgh, West
Penn Adm'r, Inc. v. .. 19-40 n.85
Union State Bank v. Savord
.................... 15-15n.22
Union Tool Co. v. Farmers &
Merchants Nnt'l Bank
................. 20-100 n.182
Union Trust Co. v. McGinty
................... 18-30 n.32
UniService Corp. v. Comm'r
..................... 17-5 n.4
United Bank of Ark. v. Mesa N.O.
Nelson Co. . . . . . . . . 20-65 n. 130
Unitcd Cel. Dank, Kendall Yncht
Corp. V. ............ 20-15 n.30
United Cal. Bank, Sun 'N Sand,
Inc. v. ............ 20-60 n. 117
United Furniture Co., Calderon v.
................... 31-15 n.29
United States Dep't of Agriculture,
McGloshen v. . . . . . . . 4-50 n. 131
United States Fidelity & Guaranty Co.,
Bennett v. .......... 15-30 n.53
United States Fidelity & Guaranty Co.,
Jennings v. ........... 25-5 n.4
United Technologies v. City Bank
................... 25-40 n.53
Universal C.I.T. Credit Corp. v.
Farmers Bank ...... 23-20 n.14;
29-90 n. 156
Universal C.I.T. Credit Corp. v.
Shelper ............. 1 6-1 0 n. 15
Universal Credit Corp. v. Guarantee
Bank .............. 15-35 n.63
University of Detroit, Morley v.
.................. 21-65 n.lO1
University Press v. Williams
................... 23-55 n.74
Usery v. First Nat'l Bank of Ariz.
.................... 34-10 n.8
Usher v. A.S. Tucker Co.
................... 22-40 n.58
Usher, Wilkin v. ....... 15-40 n.72
Usted, First Nat'l Bank of Elgin v.
................... 16-50 n.67
Utah Irrigation Co. v. Allen
................... 11-20 n.21
Utterback, Mangold & Glandt Bank v.
CL ................... 13-25, n.24
(§).I
Valley Bank & Trust Co. v. First Sec.
Bank .............. 23-30 n.29
Valley Bank & Trust Co. v. Weyerman
Feathers ..... , . . . . . 19-35 n.69;
20-30 ns. 59, 65
Valley Dank of N.Y., Siniscalchi v.
................... 20-30 n.50
Valley Nat'l Bank, National Retailers
Corp. of Ariz. v.. ..... 4-35 n.78
Valley Nat'l Bank v. Tang
. . . . . . . . . . 19-15 n.30; 21-10 n.1
Vance v. White ........ 16-70 n.84
Vand Der Volgen, Motor Contract
Co. v. .. 16-65 11.78; 16-100 n.112
Vannett v. Reilly-Herz Auto Co.
................... 11-30 n.42
Van Slyke v. Rooks ... 15-90 n.131
Vaughan, Moore v. .... 16-65 n.78
Vaughn & Co., Barrett v.
................... 18-25 n.25
Veazie Bank v. Fenno ... 1-15 n.24;
9-15 n.9
Venahle v. Payne ...... 15-60 n.97
Vezu, Demateis v. ...... 23-55 11-68
Viajes Iberia, S.A. v. Dougherty
................. 14-100 n.103
Vicksberg S. & P. Ry., William T.
Hardie & Co. v. . . . . . 12-10 n. 11
Virtue v. Danbury State Bank
. . . . . . . . . . . . . . . . . . . 21-25 n.39
Voissement, Frank-Taylor-Kendrick
Co. v. .............. 23-70 n.96
Volk v. Shoemaker . . . . . 1 6 4 5 n.59
Von Frank V. Hershey Nat'l Bank
................... 16-45 n.62
Voris v. Schoonover .... 11-55 n.8 1
Wade, Keister v. ...... 1 1 4 0 n.54;
22-10 n.6 -
Wagner, Cluseau v. .... 14-75 n.70
Walker Bank, First Nat'l Bank of
Logan v. ..... 4-35 n.79; 5-5 n.6
Wallace, Robert, Co., Hubbard v.
. . . . . . . . . . . . . . . . . . . 16-20 n.22
Waller, Suburban Trust Co. v.
. . . . . . . . . . . . . . . . . . . 4-50 n.108
 TABLE OF CASES
[References are to sections ($).I
' Y Yowell, First Nat'l Bank v.
.................. 20-75 n.144
Yazoo Coldwater Drainage Dist.,
....
Planters Bank v. 15-85 n. 124
Yubas v. Makranshy.... 18-20 n.15

I,
York v. Federal Home Loan Bank Bd.
....................
Yorkville Bank, Bischoff v.
7-10 n.12 z INDEX
. . 27-30 n.35; 27-40 ns. 5 8 , 6 0 , 6 2 Zanaty, Radue V. ...... 11-35 n.49
Youngblood, Citizens & S. Nat'l Zander v. New York Scc. Co. [References are to sections ( 3 ) .]
Bank v. ............ 20-30 n.51 ................... 11-50 11.73
Acceptor
nccommodating party, 18-25
Accelerable paper bank as, 25-5
See nlso Maturity definition of, 14-15
judgment notes. 16-55 liability, 14-15
Acceleration from moment of signature, 14-15
clnuscs. I 6-5, 16- 10, 1 6-45 Acccss cards. See Credit cards
contingency, negotiation. 16-25 Accommodation
demand paper distinguished, Sre nl.70 Suretyship
16-10 tlcfcnsc of, 15-55
Acceptance defense of parties to, 15-55, 18-25
See also Certification effect on notice of dishonor, 23-60
certified checks, 25-25 presentment precluded, 22-40
Commercial Code, under, 14-15 warranties, 18-25
conditional, 14-45 Accommodating party
discharge of prior parties, 25-25 liability on instrument, 15-55, 18-25
drafts, 4-30,25-25 Accounts
effect of, on liability of other See also Agent; Fiduciaries;
parties, 14-50 Statement
elements of, 14-40 agents' death, 19-35
eligiblc vs. ineligible, 14-40 alternative, 19-25
forged or altered paper, 25-30 automatic transfer. 19-20
for honor, 14-40 bank deposit's nature, 19-5
form of, 14-20 bank's right to charge customer's
general, 14-40 accounts, 20-5
kinds of, 14-40 instruments payable through
letters of credit, and, 25-55 accounts, 2 1-65
liability, 14-40, 14-50 contracts of adhesion, 19-30
Negotiable Instruments Law under, corporation, 19-35, 19-40
14-15 written authorization necessary,
on the instrument, 14-20 19-35
partial, 14-45 credit in as value, 15-35
presentment for. See Presentment death of depositor, 19-35
for acceptance demand accounts, 19-20
promises to accept nonexistent fiduciary, 19-35
paper, 14-30 formalities of opening, 19-25
qualified. 14-45 forms of, 19-35
separntc instn~mcntfor, 14-25 functional classification. 1-10
trustee. See Fiduciaries garnishment of, 20-125
i* unqualified form, 14-40 indivitlual. 19-35
Acceptance of drafts, 19-40 joint, 19-35, 20-30
I- 1
 INDEX
[References are t o sections ( 8 ) .]
Accounts (cont'd)
joint and several, 19-35
kinds of, 19-20, 19-35
limited partnership, 19-35
married women, 19-35
miscredited proceeds, 20-60
nature of collections distinguished,
19-5
negotiable order of withdrawal
( N O W ) , 7-50, 7-90, 19-20
nondeposit liabilities, 19-50
opening of, 19-25
partnership, 19-35
receivable
buyer takes free of, 30-5
defined, 29-50
security interest in, 29-50
representative, 19-35, 19-45
secured party may tap, 30-25
security interest in, 29-90
share draft, 19-20
signature cards, 19-40
survivorship rights, 19-35, 19-45
termination of relationship. 19-45
unconscionable agreements, 19-30
withdrawal against items deposited,
customer's rights, 20-95
Automated clearing houscs ( ACHs) ,
2-60
Administrators. See Fiduciaries
Advances
borrowing from Federal Reserve
Bank, 2-55
Federal Home Loan banks, 7-30,
7-35
future, under security agreement,
28-20
gold unacceptable collateral, 10-10
purchase money loan, 35-15
Advertising
consumer credit disclosure, 33-70
Federal Home Loan Bank Board
regulation, 7-35, 7-50
Affiliates of bank, loan limitations, 4-45
Agency. See Agent; Fiduciaries
Agents
See also Fiduciaries
agent's state of mind binds principal,
15-25
banks as, 21-10
collateral held by, 29-5
death of agent, 19-45
deposit in name of, 21-45
forms of signatures, 14-95
good faith requirement. 15-25
indorsee for indorser. 13-35
liability for principal, signature,
14-95
illustrative cases, 14-100
representative capacity, 14-1 10
signature without authorization
liability on paper, 14-95
Agreement
See also Contracts
affecting defenses to instrument,
15-60
direct returns may be authorized,
16-75
illegal, 15-65
supercedes rules of law, 21-75
unconscionable, 19-30
verbal agreements
alteration of instruments by, 15-60
indorsements, effect on, 13-65
nonnegotiable, 1 1-25
Agricultural loans. See Farm loans
Air Bills. See Commodity paper
Alabama
Blue Sky Laws, 15-70
branch banking, 5-5
direct return of dishonored
instrument, 21-60
instrument "payable at" a bank,
designation of place of
payment. 21-65
letter of credit provisions, 25-45'
Uniform Act for Simplification of
Fiduciary Security Transfers,
27-65
Uniform Common Trust Fund Act,
27-70
Uniform Fiduciaries Act, 27-35
Alaska
branch banking, 5-5
direct return of dishonored
instrument, 21-60
holder in due course doctrine, 35-25
instrument "payable at" a bank,
equivalent to draft. 21-65
resentment, place of, 22-30
Uniform Common Trust Fund Act,
27-70
INDEX
[References are to sections ( 5 ) .]
Alteration. 20-70, 20-75
See also Forgery
acceptance of instrument, 25-30
assent by drawer. 20-70
bank's employees, 20-70
checks
authorized o r not, 20-70
certified checks, 25-30
complete when signed. 20-75
customer's duty to report, 20- 105
original amount payable, 20-75
rules, interpretation, 20-1 15
signature on, 20-55
timely notice, 20-100
under check truncation, 20-105
defensc of, 15-90
surety's, 18-15
holders in due course, 15-85
- instrument with blanks. See Blanks
marginal notations, 20-75
standard contracts, 20-1 15
transferor's liability, 14-75
warranty against, 14-95
Ambiguous instruments
effect on negotiability, 16-65
negotiable money paper, 11-75
rules of interpretation, 11-75,
20-1 15
American Bankers Association
statute, limitation on reporting
erroneous bnnk statcmcnts,
20-100
statute limiting stop payment orders,
20-30
travelers checks. See Travelers
chccks
American Bar Association
Commission on Uniform Laws. See
Uniform Laws Commission
antitrust laws, 5-10, 5-25
Arizona
branch banking, 5-5
direct return of dishonored
instrument. 21-60
holiday and weekend bank
transaction, 22-1 5
instrument "payable at" a bank,
designation of place of
payment, 21-65
,, security interest perfection, trust
variation, 29-25
subdivision trust, 29-20
stop payment orders, 20-30
Uniform Act for Simplification of
Fiduciary Security Transfers,
27-65
Uniform Common Trust Fund Act,
27-70
Uniform Fiduciaries Act, 27-35
Arkansas
Blue Sky Laws, 15-70
branch banking, 5-5
direct return of dishonored
instrument, 21-60
industrial banks, 8-2
instrument "payable at" a bank,
designation of place of
payment, 2 1-65
Uniform Common Trust Fund Act,
27-70
Uniform Fiduciaries Act, 27-35
Asian Development Corporation, 8-85
Assets
assignment to creditors, 32-20
bankruptcy trustee administers,
32-20, 32-40
distribution, 32-45
slow, 32-5
transfer, in bankruptcy, 32-40
Assignee
See also Fiduciaries
debton defenses against, 28-50,
35-20
liability under disclosure law, 33-50
non-negotiable paper purchaser,
overdue paper and. 15-45
rescission against, 33-50
transferee of security without
indorsement, 12-70
waivers of defense. 16- 105
Assignee for thc benefit of creditors
fiduciary relationship, 32-20
Assignment
bank failure, dishonored checks,
22-65
checks as, 20-1 5
"debt collecting." and, 34-15
documents of title, 12-40
effect of transfer of rights, 10-60
indorsement and, distinguished,
13-25
letter of credit, 25-40
 INDEX
[References are to secfions
Assignment (conr'd)
security interest. 28-50
transfer of security without
indorsement, 12-70
Assignment for the benefit of
creditors, 32-20
nature of, 32-20
Assignor
bank's relationship with,
good faith, 15-20
Attachment. See Fiduciaries; Power
of attorney
Attorney
See al.ro Power of attorney
deposit in name of, 27-40
fiduciary relationship, 27-5
See also Fiduciaries
Attorney's fees
promise to pay, negotiability,
16-50
Automated teller machines (ATMs) .
See Customer Bank Communi-
cations Terminals (CBCTs)
Automated transfers. See Electronic
fund transfers
Automatic transfer accounts, 19-20
Automobile. See Mobile homes;
Motor vehicles
I Bad faith
See also Good faith; Notice
fiduciary deposits, 27-50
holder in due course, 15-15
1 notice on negotiable paper, 15-15
payment in, 20-35
purchaser of negotiable instrument,
15-20
Bailee
See also Pledge; Safekeeping
bank as, 10-55
Bailment
collateral undcr pledge, 29-5,
29-10
goods undcr security interest,
29-70
night depository as, 19-1 5
safekeeping by bank as, 19-15
( 6 ) .]
Bailment leases
See also Security interest
nature of, 28-15
Bank
charters, 1-10, 1-20
Code definition, 19- 10
credit, as value, 15-35
directors. See Fiduciaries
holidays. See Holidays
securities
antifraud laws, 4-70
' Federal Reserve Bank stock,
2-30
savings and loan holding
companies, 7-60
Bank accounts. See Accounts
Bank credit as value, 15-35
Bank examiners
gifts or loans to, 4-30
Bank holding companies, 6-5, 6-35
bank related activities, 6-10,
6-1 5, 6-20, 6-25
competition in banking and,
6-15, 6-20, 6-35
defined, 6-5
federal agency's cease and desist
order.
- . 4-1 5
federal laws, history, 6-5, 6-15,
6-30
Federal Reserve System and, 6-5
growth and expansion of, and
activities, 6-5, 6-25
history, 6-5
interstate activities, 6-25
muttistate acquisitions. 5-40
non-bank activities prohibited,
6-10
exemptions, 6-10, 6-15
hearing and review of decisions,
6-20
one-bank companies, 6-5, 6-1 0
securities business and, 5-30,
6-30
suspension of by federal agencies,
6-5
Bank Holding Company Act of 1970,
6-5, 6-25
Bank olficcrs
See also Fiduciaries
fiduciary capacity, 27-5
loans to, 1-30, 4-40,27- 10
INDEX
[References w e to sections ( 5 ) .]
Bank officers (conr'd)
suspension or removal of for cause,
4-20
Bank Secrecy Act, 4-55
Bank service corporations, 5-35,
6-15
Bank statements
as representations, 20-1 10
depositor's duty to check, 20-1 10
Bankers
acceptances, collnteral, Federal
Reserve notes, 2-65
Banker's lien, 20-1 20
See also Licn
loss of possession, 20- 1 20
nature of, 20-1 20
self-executing right, 20-1 2 0
Banking
activities closely related to, bank
holding companies, 6-1 5, 6-20
antitrust laws restraints, 5-10,
5-25
Federal Trade Commission
regulates, 5-25
bank service corporations, 3-35
branch banking. 5-5
commercial banking, savings
institutions expansion into,
7-95
competition. See Competition
correspondent banking, 1-30
day, Code definition, 19-5
foreign banking
agencies, 8-85
business. See Foreign banking:
Bankruptcy Reform Act of 1978,
Banks
Foreign bankc
functions, sp&ialized organizations
with. 8-5. 8-85
intentate.banking,~5-40
national banking system, 1-25
banks changing from one system
to another, 1-35
national government in, emergency,
1-15
naturc of, 1-5, 1-35
practices
unsafe and unsomd, prevention
of, 3-35,4-15,4-20, 7-40,
* 7-50
Banking Act of 1933, 1-15, 3-5,5-15
Bankruptcy, 32-5, 32-45
acts of, 32-35
bank account suspension on, 19-45
Bankruptcy Reform Act of 1978,
32-30
Commercial Code priorities, 32-15
corporate reorganizations, 32-30
debt adjustment and, 32-5, 32-45
discharge, 32-15
distribution of assets, 32-45
exclusive powen of Congress,
32-25
federal law basis, 32-30
ndministrativc procedl~res.32-30
involuntary petitions, 32-35
creditors required, 32-35
order of priority of claims, 32-45
preferred claims, 32-40
priority of claims under Bankruptcy
Code, 32-45
receivers. receivership, 32-25
pbwers of. 32-40
reorganization of, 32-30
secured creditors, 32-45
state law governs, 32-45
surety, effect on, 18-15
trustee, 32-40
powers of, 30-30, 32-40
rights of, 32-40
unsecured creditors, rights, 32-45
voluntary or involuntary petitions.
32-35
wage earner plans, 32-30
32-30
See also Individual classes of banks
acquisitions of, savings institutions,
7-55,7-60
American, doing business with
foreign, 4-75
Asian Development Bank, 8-85
Banks for Cooperatives, 8-55
certificates of deposit. See
Certificate of dcposit
classification of, 1-10
commercinl hanks, trust company
nnd, distingc~ished.1-5
Commodity Credit Corporation,
8-50
 INDEX
[References are lo secfiom ( 8 )
Banks (cont'd)
competition from non-bank
financial institutions, 5-45
consolidations and mergers, 5-10
credit as value, 15-35
crcdit unions, 7-65, 7-85
customers of, right of privacy,
4-50
deceptive practices by, 5-25, 34-30
depositor and mutual duties, 20-05,
20-1 25
directors. See Bank directors;
Fiduciaries
dividends paid by, regulation,
2-75.4-25
Edge Corporations, international
banking, 8-15
environmental law and, 4-65
examination of, 2-70, 4-10
Federal Deposit Insurance
Corporation, 3-35
Federal Reserve System, 2-70
Export-Import Bank, 8-85
failure
drawer's liability, 14-70
federal
agencies, special purpose, 8-80
banking agencies, 8-85
intermcdiate crcdit banks, 8-45
land banks, 8-40
regulation of, 4 - 5 , 4 4 0
Federal Deposit Insurance Corpora-
tion rcgulation and supervision,
3-30, 3-35
Fcdcral Financing Bank, 8 4 5
Federal Home Loan Banks, 7-20,
7-35
Federal Home Loan Mortgage
Corporation, 8-75
Federal National Mortgage
Association, 8-75
fiduciary capacity, 27-5
See also Fiduciaries
fiduciary relation to security
owners, 27-65
functions, 1-5
Government National Mortgage
Association, 8-75
holder in due course. 15-5, 15-20
housing and mortgage credit
agencies, 8-75
.I
industrial banks, 8-20
insolvency of, 19-45, 25-5
instruments payable a t o r through,
21-65
Inter-American Development Bank,
8-85
intercst paid by, regulation, 2-75,
4-25
interlocking directorates prohibited,
5-1 5
intermediate, for collection on
payment of instruments, 21-20
investment banks, 8-10
joint stock companies, 11-20
knowledge of breach of fiduciary
relationship, 27-30
liability for
loss of rights against indorses, '
chargeback, 23-60
payment from trust fund, 27-70
refusal to pay, 20-15
liability on
instruments drawn o n them,
21-50
its own instruments, 25-5, 25-70
negotiable instruments, 25-5
liquidation and reorganization,
insured banks, Federal Deposit
Insurancc Corporation action,
-3-30
.-
loan and finance companies, 8-25
miscrcditcd procceds by, 20-60
Morris Plnn Ilanks, 8-20
National Consumer Cooperative
Bank, 8-70
necessity to give notice of dishonor,
23-30
paper payable at, notification to
depositor, 21-65
partnerships, invcstmcnt bnnking,
1-5, 8-10
payment by, improper, 20-10
presentment at. 22-30
production credit associations,
8-45
protest before midnight deadline,
23-20
record-keeping, financial, 4-50
4-55, 7-50
INDEX
[References are to sections ( 8 ) .]
Banks (cont'd) money paper, negotiability, 11-50
relation with depositor trndcr spccinl indorsement, 20-50
Uniform Commercial Code, Beneficiary
-
2 1 10 See also Fiduciaries
Rural Elcctrific~tion rights of, 27-10
Administration, 8-60 vnlue rcquired to cut off rights,
savings and lonn associations, 27-25
7-10, 7-15 Bill
savings banks, 7-70 improper handling of, liability
savings institutions, 7-5,7-95 caused by, 14-35
See also Savings banks; Savings Billing
institutions See also Credit cards
Small Business Administration, disputes, resolution procedures,
8-80 33-80
Solar Energy and Energy Bills. See Drafts
Conservation Bank, 8-80 Bills of exchange. See Drafts
specific organizations with banking Bills of lading
functions. 8-5. 8-85 See also Documents of title;
state regulation of, 1-20 Pomerine Act
stop payment, 20-30 defined, 10-25
transactions involving securities, duplicate bills prohibited, 12-30
4-30, 4-70, 5-30, 6-30 negotiability, 12-10, 12-20
transfer agents of corporations, nonnegotiable, 12-10
27-60 standard forms, 12-5
See also Transfer agents straight bill nonnegotiable, 12-10
tying arrangements pFohibited, Bills of Lading Act
5-20 See also Federal statutes; Pomerine
underwriters, 8-10 Act; Uniform laws
U.S. Synthetic Fuels Corporation, still in force in Louisiana and
8-80 United States, 9-25
Veterans Administration, 8-80 Blank indorsements, 13-20
World Bank, 8-85 Blanks
Bnnk Sccrccy Act, currcncy See nlso Altcrntion
trnnsections reporting under, instruments issucd with. 20-80
4-55 mnt~tritymissing, 22-10
Bank Service Corporations, 5-35 Blue Sky Laws, 15-70
Banks for Cooperatives, 8-55 Board of Governors of Federal
financing farm cooperatives, 8-55 Reserve System
sources of capital, 8-55 administrative decisions. 2-20
Bearer anti-inflation program, 2-80
forms of instrument pnynble to. bnnk holding compnny rcgulntcd
1 1-50, 1 1-60 by, 6-20
Bearer instruments bank reserves regulated, 11-5
documents of title as, 12-40, 12-45 See nlso Federal Reserve
negotiability Comptroller of the Currency, 2-90
special indorsement, effect, 13-25 credit controls of, 2-80
securities as, 12-50, 12-65 duties of, 2-1 5
Bearer paper jurisdiction, 9-40
checks payable to, 20-50 membership, 2-15
negotiability, 11-50 orders, 2-20
intent of drawer, 20-55 organization, 2-15
 INDEX
[References are to secrions ( 8 ) .I
Board of Governon of Federal
Reserve System (conr'd)
powen, 2-1 5,2-80
rediscount rates, 12-5
regulations, 2-15, 2-20, 21-75,
26-1 15
for consumer's protection, 2-80
publication, 2-20
table, 2-20
rules for time of payment, 2-15,
2-20, 21-40
rulings, 2-1 5
Boats, security interest, 29-85
--
Bona fldc purchaser
See also Good faith; Holder in
due c o u n e
automobile certificate may control
title, 29-85
of goods
waiver of defenses by, 16-105
rights by negotiation, 12-45
rights in
bonds with underlying mortgage,
16-90
commodity paper, 12-10, 12-15,
12-20
documents of title, 12-25, 12-30,
12-45
property, 10-60
securities, 14-55, 16-95
security devices, 16- 100
stock certificates, 12-55
security after maturity. 15-40
transferees other than, of
commercial paper. 10-65
Bonds
See also Investment paper;
Securities
corporation, negotiability by
statute, 12-60
formal requirements for. See
Negotiable paper
government, registered, 16-85
issued before Commercial Code,
12-60
negotiability of, 11-10
by contract. 16-100
Commercial Code regulations,
12-5
corporate bonds, by statute,
12-60
mortgage contract and, 16-75,
16-90
municipal bonds, 16-80
nonaction o r "subject to" clause,
16-90
prior statutes, 12-60
registered securities, 16-85
special contracts in bonds, 16-80,
16-90
stock exchange rules, efiect,
16-95
registered securities, 12-70, 16-85
registry book, transfer on, 16-85
spccial contrncts in
contracts in note distinguished,
16-90
Borrower
limitations on loan, 2-80
Borrowing
See also Loans
member banks, from Federal
Reserve Banks, 2-55
Boycott provisions
letters of credit and, 25-40
Branch banking
See also Foreign banking;
International banking;
Interstate banking
customer bank communication
terminals (CBCTs), 5-5
definition, 5-5, 19-10
Federal Deposit Insurance
Corporation approval of
branch required, 3-35
Federal Reserve Board of
Governon' controls, 5-5
foreign banks, 4-80
holding companies and, restrictions,
6-5
state laws on, 5-5
Breach of the peace, 31-10, 31-15
Building and loan associations, 7-10
See also Savings and loan
associations
Building materials
security interest, 30-30
Bureau of thc Comptroller of the
Currency, 2-90
Business
interests in, commercial paper
transfer, 10-30
INDEX
[References are to sections ( 9 ) .]
Business Custom
See also Custom
time for payment of checks, 22-20
Buyer. See Bona fide purchaser;
Purchaser
California
amcndrncnt to U.C.C. on wrongful
dishonor or chccks, 20-1 5
branch banking, 5-5
direct return of dishonored
instrument omitted, 2 1-60
forgery of drawer's signature
notifying bank, 20-100
good faith requirement, stale
checks, 20-25
holiday and weekend bank
transactions. 22-1 5
instrument "paynble at" a bank,
designates place of payment,
21-65
negotiability of bonds, 16-80,
16-90
prcscnlmcnt, place of, variation,
22-30
stop payment orders, 20-30
Uniform Common Trust Fund
Act, 27-70
Cancellation
debts. 32-15
negotiable paper, 21-55, 32-15
payment tokens, 2 1-15
Capacity
corporations, 15-80
defense against holder in due
course, 15-80
incapacity
ns defense, 15-85
created by law, 15-80
effect on bank accounts, 19-35,
19-45
nature of. 15-80, 15-85
indoner, 13-25
representative, liability, 14-100
lrnnsfcror warrants prior parties'.
14-75
* Capital
bank requirements, 4-30
nondeposit, 19-50
Carriers
See al.to Bills of lading; Documents
of title
liability of, 12-30
lien by, 12-35
Cashier
checks drawn by, 25-15
indorscnicnt of instrument to,
13-25
instrl~mcntspayable to, 11-55
Cashier's chccks
See also Checks; Drafts
"effective ns a nolc," 25-1 5
not lcgnl tender. 22-50
stopping payment, 20-40
CBCTs. See Customer Bank
Communication Terminals
Causation
lack of as defense, 15-90
Cease and desist orders
federal agencies issuance. 4-1 5
Federal Deposit Insurance
Corporation issuance, 3-25,
3-35, 4-15
Federal Home Loan Bank Board's,
7-40, 7-30
Centralized processing center, 22-30
Certificate of deposit, 25-10
defined. 19-20,25-10
holder's rights, 25-10
negotiability, 25-10
money paper, 1 1-50
"on return of this certificate,"
not negotiable, 25-10
presentment, 22-20
Certificates of title, 29-85
control security interest, 22-70
Certification
See nlso Acceptance
altered paper, 25-30
forged paper, 25-30
form of, 14-20
mistake in. 25-35
offer of, dishonor, 25-55
Certification of checks, 25-25
mistake in certifying. 25-35
Certified check
See nlso Acceptance; Certificntion
acceptance, 25-25
bank's liability thereon, 20-15
bank's right to pay, 25-25
 INDEX
[References are to sections
Certified check (cont'd)
certification after death, 19-45
"certified as originally issued,"
dishonor, 25-30
forged or altered, 25-30
liability of parties, effect on,
14-50
not legal tender, 22-50
stopping payment, 20-40
Chargeback
after midnight deadline, 23-60
after payment, 2 1-45 '
agreement for as waiver, 23-75
bank's right
dishonored check, 20-90
effect of delay, 21 -25
under Commercial Code, 19-15
collection of paper at depositor's
risk, 23-75
due care and notification, 20-80
notice of dishonor. 23-30,23-55
on dishonor of payment instrument.
23-55
right of collecting bank on
dishonor of remittance, 2 1 4 5
right to under Commercial Code,
19-15
Chattel. See Goods
Chattel mortgages
See also Chattel paper; Collateral;
Security interest
negotiability, 16-35
Chattel notes
negotiability, 16-35
Chattel paper
See also Collateral; Documents
of title
defined, 29-65
history of negotiability, 16-35
negotiability of, 16-35, 16-70
power of attorney on, 18-30
security interest in, 29-65
priority, 30-20
Checking account
bank's liability for refusal to pay,
20- 15
nature of, 19-20
Checkless society
Federal Reserve wire transfer,
21-75
(§).I
Checks
See also Instruments; Negotiable
Paper
acceptance, disputed amount, 32-15
acceoting- forged o r altered, 25-30
s
alteration, 20170, 20-75
whcrc negligently drawn. 20-75
ambiguous instruments, 20-1 15
assignment. 20-1 5
bank's liability, payment refusal,
20- 15
certification of, 25-35
forged o r altered, 25-30
clearance and collcction, Federal ,
Reserve System function, 2-60
computer encoded, errors in
encoding, 21-70
counterfeit, 20-65
credit unions use of, 7-80
defined, 19-15
drawn against savings accounts,
draw; b; fiduciaries, 27-45,27-50,
27-55
forged, 20-65,2530
formal requisites for. See
Ncgoliablc paper
government, federal, federal law
governs, 9-35
identification of indoners and
payees, 6-25
improper payment consequences,
20-10
issued with blanks, 20-80
kiting, 14-17
liability when payable to bank,
20-60
maturity of. See Mnturity
medium of payment, 21-35
money paper, 1 1-20, 1 1-50
notes payable at banks as, 21-85
not legal tender, 22-50
overdrafts, payability, 20-5
payable to
"current funds," 20-50
"cash." 20-50
"payroll," 20-50
..
oayment at or through bank, 21-65
presentment for payment, time
limits, 22-20
post-dated, 20-20
INDEX
[References are to sections ( 5 ) .]
Checks (cont'd) chattel paper as, 28-50, 29-65
re-presentcd, after dishonor, 23-60 consumer goods, 29-30
savings institutions use, 2-85, 7-5, described on
7-95 financing statement, 28-40
stale checks, 20-25 security agreement, 28-20
slop payment, 20-30 statement of release, 28-45
Check-signing machines, 19-40 disposition
Civil liability after default, 3 1-20
creditors failure, Truth-in-Lending bankruptcy court approval, 32-45
Act compliances, 33-50 on default. 31-20, 31-30
Civil rights, 3 1-15 equipment, 29-35
Claims farm products, 29-40
adverse claims Federal Reserve notes, 2-65
checks, 20-35, 20-40 fixtures, 29-80
documents of title, 12-30, 12-45 priority of claims, 30-30
securities, 15-40, 16-95 severance from real estate,
preservations of under Uniform 30-30
Consumer Credit Code, 35-20 holding of clauses in instruments,
Class actions
16-55
disclosure violations, 33-50 instruments, 29-60
discrimination, 34-25
inventory, 29-45
electronic transfer losses, 26-75 sale by debtor, 29-45
Clayton Act, 5-25
life insurance policy as, 29-95
Clearinghouse loans to bank affiliates, 4-45
automated, 26-45
perishable goods, 2 9 4 0
defined, 19-5 possession by pledgee, bailee, o r
dishonor of instn~mcnts,22-55
tnlstee
drafts or checks accepted, 2 1-25 debtor's access, 29-5, 29-10
presentment through, 22-30 duties of holder, 29-15
Clearinghouse rules pledge, 29-5
assent of all membcrs not 4necessary,
sale by debtor, 2 9 4 5
2 1-85 when required o r preferable,
collection of instruments, 21-20, 29-20
21-75, 21-85 power to sell bcforc maturity,
control collec~ionprocess, 2 1-10 16-60
direct returns may be authorized, proceeds. 30-25, 3 1- 10, 3 1-25
21-60 See also Proceeds of collateral
Federal Reserve System. 2-60. 2-85 sale of collateral, 3 1-20
paymcnt of instruments,. 21-75 use after default, 31-20
supercede law, 2 1-75
Closed-end credit. See Credit; promises to keep up, o r preserve
negotiability, 16-15, 16-20,
Closed-end credit
Coins. See Money 16-25
Collateral provision for sale of negotiability,
16-60
Collatcrnl
See ~ 1 . ~ 0 security;
Security interest purchase by secured party, 3 1-20
accounts as, 28-50 redemption by debtor o r junior
bankruptcy, eflcct of on, 32-45 secured party, 3 1-20
release of. 28-45
.
i bank's rights in, 20-120
changes in, 28-20, 28-45 effect on suretyship, 18-25
suretyship defense, 18-15
reorganization plan, effect, 32-45
 INDEX m E X

[References arc to sections ( 8 ).I [Rejerences are to sections ( I ).]

collecting banks, 21-1 5,21-20 Collection of instruments (cont'd) cost of, promise to pay
Collateral (cont'd)
choosing of, 21-1 5 medium of payment (cont'd) negotiability, 16-55
repossession, 3 1-10
direct presentment to payor bank, credits, 21-35 debt, practices, 34-15
bankruptcy court approval,
2 1-30 drafts, 21-35 delays, 2 1-25
3245
duties in timely presentment and midnight deadline, defined, 21-20 devices for aiding negotiability,
constitutional law, 3 1-15
payment, 21-25 morning clearings, 21-40 16-55
liability for Code violations, negotinble paper, payment by,
31-30
-.- duties under Uniform documentary drafts, 24-5, 24-10
21-50
~

procedures upon default, 31-10 Commercial Code, 21-25 duties of banks, 21-10
liability for losses, delay of payor bank Federal Reserve
retention secured party's discharge
of obligation, 3 1-25 presentment, 16-25 liability for debt discharged by bank, 21-15
return of warranty, 14-85 returns of dishonored paper, negotiable instrument, role in, 2-60, 21-5
sale of, 16-55, 30-15 21-60 21-50 rulings, 2 1-75
price, 3 1-30 right to revoke settlement, 21-55 errors in electronic processing, risk of loss, 19-25
rights and liabilities in types of 2 1-70 Colorndo
upon default, 31-20 payment in good faith, 21-45
securities as, 4-70, 5-30 payments, 21-50 Blue Sky Laws, 15-70
types-of payment acceptable, rights and duties in check, branch banking, 5-5
type of determines perfection -.

method, 28-30 21-35 payment, 20-90 direct return of dishonored

warranty on transfer, 14-85
Collateral security
See also Pledge; Security devices
banker's lien thereon, 20-120
indorsement for, 13-65
Collecting banks
See also Collection; Collection of
instruments
defined, 19-5
Collection of instruments, 2 1-5,
21-75
See a l ~ o Chargeback
afternoon clearing, 2 1-40
any reasonable prompt method,
21-15
banks as agents, 21-10
bank's duties
accepting checks in payment,
21-10,21-25
accepting credit in payment,
21-25
demand paper, 2 1-25
lcgal tender, 2 1-25
liability for subagent's default,
16-20
maturity at presentment, 21-25
method of remitting. 21-35
notice of dishonor, 21-25
overdue paper, 2 1-25
warranty liability, 21-25
clearinghouse, 2 1-75
clearinghouse rules conclusive,
21-75
contract between parties control, '
21-10
delay, liability for, 21-25
depository banks
action on dishonored returns.
2 1-60
defined, 19-5
explained, 21-20
liability for errors in electronic
processing. 2 1-70
Depository Institutions Deregulation
and Monetary Control Act
of 1980,2-85
direct return, 21-60
direct to payor, 21-30
duties of payor bank, 2 1-40
clearinghouse rules control,
21-55.21-75
duty to cancel payment and
recover proceeds, 2 1-55
Federal Reserve rulings, 21-75
finality of credit, 21-35
instructions through depository
bank not binding on
intermediary banks, 2 1-20
instruments payable atlthrough
banks, 2 1-65
intermediary bank, explained,
2 1-20
laws governing, 21-5, 25-10
medium of payment, 21-35
cash. 21-35
checks, 21-35
clearinghouse balances, 2 1-35
right to cancel payment and
recover proceeds 2 1-55
time limit for paymen( 22-45
unacceptable as collecting
bnnk. 21-15
presentment by mail, 21-40
extension of time by agreement,
21-40
time allowed for payment,
clearinghouse rules, 21-40
relation of depositor to bank
Commercial Code, 2 1- 10
return of dishonored items, 21-60
risk of loss on original owner,
21-35
sending paper direct to payor,
21-30
clearinghouse rules, 2 1-40
duties of drawer, 2 1-40
negligence, 21 -30
statutes authorizing direct returns,
2 1-60
Collections
See also Clenringhottse:
Collection of instruments,
Debt collection
bank's liability, 21-10
bank's responsibility for loss in,
2 1-20
choosing collecting bnnk, 2 1-15
collecting bank as holder in due
+ course, 2 1-35
collections through clenringhouse,
21-15
instrument, 21-60
industrial banks, 8-20
instrument "payable at" a bank,
designates place of payment,
21-65
Uniform Act for Simplification of
Fiduciary Security Transfers,
27-65
Uniform Common Trust Fund
Act, 27-70
Uniform Consumer Credit Act of
1968, 33-5, 35-20
Uniform Fiduciaries Act, 27-35
Commercial banking law, sources of,
9-5, 9-55
banking laws and regulations,
sources, 9-45
commercial law
federal power over, 9-15
state, 9-20
Uniform Commercial Code, 9-30
constitutional law, 9-10
federal
Inw. 9-35
over statute rules, preemption.
9-50
power over commercial law, 9-15
Federal Administrative Board
rulings, 9-40
uniform statutes, 9-25
United States, sources of law of,
9-5
Commcrcinl banks
classes, 1- 10
 INDEX INDEX

[References arc to sections (!).I [References are to sections ( 6 ) .]

Commercial banks (cont'd)
federal regulation, 4-5
portfolio regulation, 4-30
Commercial Code
See also subject desired, this index;
the following are only special
changes instituted by the
Code
acceptance
form of compared to Negotiable
Instruments Law. 14-25
ambiguous terms and rules of
construction
Article 4 bank collections, 6-15
duties of collecting bank, 21-25
bank credit as value, 15-35
bonds issued prior to negotiability,
12-60
chattel papcr, negotiability of,
16-35
collecting bank duties, 21-25
collection process under, 2 1-5,
21-10
commodity paper coverage, 12-20
contracts securing negotiable
papcr, waiver of rights, 16-50
corporate bond, negotiability of,
12-60
coverage of negotiability, I I-10
definition of terms, 19-5
demand paper time of presentment,
22-20
depositor's duty to satisfy bank.
20- 100
documents of title
definition expanded, 12-25
excusable delays in presentment
and collection, 22-40
federal law and, 9-35
fictitious payees, new rules, 6-35
filing security interest, amended,
28-35
history. 9-30
indorsement
special controls blank, 13-25
instruments payable at banks,
2 1-65
interim certificates, 10-35
letters of credit not acceptance,
25-40
1-14
liability for dishonoring checks,
20-15
negotiability
bonds, 16-90
by contract. 16-100
by mere statement, 16-65
commodity paper, 12-20
commodity paper, change in
rules, 12-25
formal requisites requirements,
11-10
investment securities, 12-65,
12-70
notes of governmental bodies,
11-20
outside of, 16-35
outside of article, 16-65
securities. 12-5
notice of dishonor under, 23-30 .
obligation a nullity, 15-65
overdue demand of paper,
presumptions, 15-40
payment in due course abolished,
27-55
payment under, 2 1-42
"pay to assignees," ncgotiablc, 11-50
promises to accept under, 14-30
promises lo preservc collateral,
16-20
protest, requirements, 23-10
real estate mortgage, negotiability
not covered, 16-70
registered securities change in law,
12-70
regular course of business
requirements for negotiation
of documents of title, 12-45
relation of bank and depositor
under, 21-10
renewal of stop payment required,
20-15
representative capacity, liability,
14-100
restrictive indorsements
new rules, 13-45, 13-50
rule changes limited, 3 1-5
sealed instruments, 16-40
security interest. 28- 10, 29-50
code violations, 3 1-30
defined, 28-10
personal property, 28- 10,29-50
Commercial code (cont'd)
shares in unincorporated business,
negotiability, 10-30
similarity to previous uniform
statutes, 9-30
states adopting 1972 and 1977
Amendments, table, 9-30
states adopting, table, 9-30
sums certain in money, different
rules from Negotiable
Instrument Law, 11-30
time limit on stale checks, 20-25
value
bnnk credit as, 15-35
rules, 15-30
waivers of defenses approved, 16-105
warranties on presentment, 14-80
warranty
indorsement of documents or
securities, 14-80
Commercial custom
negotiability of security interest
under, 16-100
negotiability under, 6-65
Commercial law
congressionnl control of, 9-1 5
failure of courts to wdcrstand,
cITcc~,9-20
fcdcrnl jurisdiction, 9-1 5,9-20,
9-35
state control of, 9-20
Commercial loans
See also Special contracts
problem o f negotiability, 16-5
"Con~merciallyreasonable"
procedures, 3 1-20, 3 1-30
Commercial paper
See also particular type of paper
desired, this index
bank as maker o r purchaser of,
10-55
banker's lien on, 20- 120
dealing in, 10-55
equipment trust certificates and
"trust receipts." 10-50
liability of parties to, 4-5, 14-100
nature of contracts, 14-5
negotiability of, with special
contracts, 16-5. 1 G- 105
real estate, litlcs to, 10-45
relation to larger contracts, 14-5
transfer, 10-55, 10-65
types, 10-5
contract rights, 10-5, 10-40
gold and foreign exchange, 10-5,
10-15
instruments payable in money,
10-5, 10-20
instruments payable in
securities, 10-5, 10-35
interests in business, 10-5,
10-30
paper payable in commodities
(commodity paper), 10-5,
10-25
security devices, 10-5, 10-45
Commodities
gold as, 10-15
paper payable in, commercial
paper, 10-25
Commodity Credit Corporation, 8-50
Commodity markets
negotiability of paper dealt in,
12-70
Commodity paper
See also Bills of lading; Dock
clcnrnnce certificates;
Documents of title; Ocean
freight bills; Warehouse
receipts
bona fide purchasers' rights, 12-30
Commercial Code coverage, 12-20
commercial paper, 10-5. 10-25
negotiability
Commercial Code. 12-10
common law, 12-10
uniform laws. 12-15
restrictive indorsement of, 13-55
Common Law
court's failure to understand
commercial law, effect. 9-20
documents of title, effect, 12-10
negotiability under, 16-65
Community Reinvestment A c t of
1977, 4-60
community credit needs, loans,
4-60
Competition
bank holding companies and, in
banking, 6-15, 6-20, 6-35
branch banking law promotes, 5-5
 INDEX
[References are to sections
Competition (conf'd)
Depository Instruments
Deregulation and Monetary
Control Act of 1980 promotes
-
amone financial institutions,
5-45
-
meraer o r consolidation, effect,
5-10, 5-25
non-bank institutions giving. 5-45
effect, lack of regulation, 5-45
repurchase transactions, 5-45
technology increasing
cornpetition, 5-40
savings and loan holding companies,
7-60
Composition with creditors
See also Assignment; Bankruptcy;
Insolvency
insolvency cases, 32-1 0, 32-1 5
relation to bankruptcy, 32-20
Comptroller of the Currency, 2-90
annual report, 2-90
appointment, 2-90
bank holding companies, 6-30
bank holidays set by, 2-95
Bureau of Comptroller, 2-90
Federal Deposit Insurance
Corporation board members,
3-5
mergers, 5- 10
organization, 2-90
powers, 2-90
regulations, 2-90
banks, 2-90
incidental powers of national
banks, 2-90
list, 2-90
power to promulgate, 2-90
rule, 2-90
revocation of trust authority,
national banks, 2-90.27-95
Computers
See also Automated teller machines
, - - . . Customer bank
(ATMsl:
communication terminals
- -
(CBCTs); Electronic fund
transfers
savings and loan use, remote units,
7-95
terminals, units, branch banking
and, 5-5, 5-40
( 5 ) .]
Conditional sales, 10-45
See also Collateral security interest
negotiability of contract, 16-35,
16-70
Conditional Sales Act. See Uniform
laws
Conflict of interest
fiduciaries, 27-10
lonns o r invcstmcnts, 4-30,4-40
Conflict of laws, 9-55
operation of, 9-55
order of preemption of rules and
regulations, 9-50
Connecticut
branch banking, 5-5
direct return of dishonored
instrument, 21-60
holiday and weekend bank
transactions, 22-15
instrument "payable at" a bank,
21-65
NOW accounts, 19-20
plain English law, 34-35
Uniform Consumer Credit Code
Act of 1968, 35-20
value, definition of. 15-30
Consignment goods
security interest, 28-1 5
priority of purchase money,
30-10
Consolidation and mergers, 5-10
See also Mergen and consolidations
Constitutional law
See also Federal law; State law;
Conflict of laws
bankruptcy, 32-25
central banks of U.S.,1-15
commerce clause, 9-15
commerce clause and holding
companies, 6-25
impairment of the obligation of
contract, 32-25
relation to commercial law,
9-10
jurisdiction of federal and state
statute, 9-10, 9-50
privacy for customers' records,
4-50
secured party remedies, 3 1-15
INDEX
[References are to sections ( 5 ) .]
Consumer
See also Consumer credit;
Electronic Fund Transfer Act;
Holder in due course; Truth-
in-Lending Act
caveat etiiplor, 33-5
Community Reinvestment Act, 4-60
credit, 33-20, 33-25, 33-70
crcdit hilling. 33-80
credit disclosure regulations.
33-65
credit discrimination, 34-25
Crcdit Protection Act, 34-5
credit reporting, 34-20
debit collection practices, 34-15
defenses preserved, 35-20
garnishment, 34-5
holder in due course, abolished,
35-10, 35-20, 35-25
interest rate, 2-80
Nntionnl Consumer Cooperative
Bank, 8-70
notes, model forms, 33-60
plain English laws, 34-35
protection, electronic transfers,
26-60, 26-65
real estate, 33-40, 33-45
restitution to, 33-55
truth-in-lending, 33-10, 33-75
unfair business practices, 2-10,
34-20
usury. 15-75
wnivcr of defenses, 35-20
Consumer credit. Chapters 33 to 35
See also Credit cards; Credit
reporting; Debt collection;
Discourse requirements,
Holder in due course;
Security interest; Truth-in-
Lending Act
claims and defenses under Uniform
Consumer Credit Code of
1968. 35-20
closed-end, 33-20, 33-25
contracts
defined, 35-1 5
notices required on by Federal
Trade Commission, 35-10.
35-15
+ plain English required, 34-35
defined, 35-15
denial must be explained, 34-20,
34-25
disclosure requirements, 33-25
discrimination in, 34-25
federal agencies' role, 34-30
leases, 33-35
legislation, 33-5, 35-5
open-end, 33-20. 33-30
prncticcs, rcgulnlion. 34-5. 34-35
restrictions on lender, 34-25
Consumer credit control, 2-80
Consumer Credit Protection Act.
33-5, 34-5
See also Truth-in-Lending Act
consumer credit reporting, 35-5
Debt Collection Act, 34-15
exempt transactions, 26-10
garnishment restrictions, 34-10
protects credit cardholder, 26-20
Consun~crgoods
collateral, 29-30
defined, 29-30
fixtures
priority of claims, 30-30
retention of collateral. 3 1-25
secured party's liability, 31-30
security interest in, 29-30
buyer takes free of, 30-5
nndelivered, billing disputes, 33-80
Consumer leases, 33-35
Consumer loans
crcdit controls. 2-R0
Consumers Credit Code. See Uniform
laws
Contract
capacity to, 15-85
Contract rights
defined, 29-50
evidences of, 10-40
pledged as security interest, 10-40
purchaser by assignment, 10-60
purchaser of chattel paper, 16-70
Contracts
adhesion, or unconscionable.
19-30, 34-35
waivers, 16-105
alteration of
See also Alterntion
bnnks nnd depositors. 19-25, 19-30
contractual relation defects, 15-55
effect on negotiability, 16-70
 NDEX
[References are
Contracts [cont'd)
form
alteration of. 20-1 15
standard hank account. 19-25,
19-30
standard consumer, 34-35
unfair, 19-25
in commercial loans
effect on negotiability, 16-5
indexation. 16-60
in mortgages, negotiability, 16-75
married women, 15-80
modifications, 32-1 5
negligence waived, 19-25
negotiability by, 16-10 0
standard forms, 19-35
transfer of, legal effect, 10-60
unconscionable effect on bad faith,
15-20
unfair advantage, 19-30
void for unfairness, 19-30
waiving debts, 32-15
warranty limitation, 14-85
wrongs in. 15-60
Conversion
retention of forged indorsement,
20-5 5, 20-65
Cooperative financial institutions.
8-55, 8-70
See also Credit unions; Savings and
loan associations
Corporate bonds
See also Bonds; Securities
negotiability of, 12-5, 12-60
Corporate reorganization
assets not entirely liquidated,
32-30
Corporate securities
See also Bonds; Sccurities
negotiability in New York, 12-65
Corporate stock
See also Securities; Stock
certificates
realignment in corporate
reorganization, 32-30
Corporations
bank accounts, 19-35
banks as transfer agents, 27-60
bonds. See Bonds
capacity to contract, 15-85
See also Blue S k y Laws; Capacity
IO sections ( 9 ) .]
commonest banking form, 1-20
debtor and secured party, on
financing statement. 28-40
double fiduciary capacity, 27-5
good fnith of agents of o f i c c n ,
15-20, 15-25
legal nature, 1 - 1 0
liquidation by receiver, 32-25
mortgages of, 16-75, 16-90
notice to, 15-25
-reorganization plans, 32-30
signature authorizations, 19-40
stock on books, transfer of, 12-55,
14-55, 29-75
unlicensed drawer's liability, 14-70
wrongful dishonor, by bank, 20-15
Correspondent banks, 1-30
See also Collection of instruments .
collections, 21-20
Counsel
See also Legal advice
advice on nondeposit liabilities.
19-50
Court orden. See Attachment
Courts
See al.ro Common law
deposits of trust funds, 27-40
fcdcrnl
bankruptcy jurisdiction, 32-30
fiduciaries. attitudes toward,
27-20
jurisdiction over commercial law,
9-35
orders attaching accounts. 19-45
rclation to commercial law, 9-20
Credit
advertising, regulation, 33-70
arranger of credit. 33-15
hank credit *s val&. 13-35
billing, 33-80
refund of excess balance, 33-80
closed-end credit
advertising disclosures, 33-70
defined, 33-20
disclosure requirements. 33-25,
33-65
discrimination, 34-20
finance charge, 33-20, 33-30
needs, community's, 4-60
open-end credit
advertising disclosure, 33-70
INDEX
(References ore f o sections
Credit (conr'd)
open-end credit (conr'd)
defined, 33-20
disclosure requirements, 33-30,
33-65
pre-conditions for grnnting
forbidden, 26-100
tcndcr, insuficient, 22-50
tying arrangements, prohibited, 5-20
value, 15-30.. 15-35 - -
Credit cards
bank issued, 26-5
billing
error resolution, 26-25
procedures, disclosures, 33-30
discounts and surcharges to buyers,
26-35
issuer's barring of prohibited,
26-35
federal savings and loans issue,
7-45. 7-95
fraud. 26:20 -
holders
claims and defenses, preservation
of. 26-25. 35-20
Jiabiliry,
fraud, 26-20
unnuthorized use, 26-1 0 0
intercst rate
location affects, 17-45
issuance
ncccss cards, 26-60, 26-1 0 5
request or application, 26-15,
26-20, 26-1 05
issuen
liability under Uniform Consumer
Credit Code of 1968, 35-20
mail distribution increases
liability, 26-25
rights and liabilities against
claims, 26-25
setoffs by, prohibited from
without permission, 26-30
liability for employee use, 26-20
Credit
loss o r theft reporting, 26-20
negotiability, 26-5
operation of, 26-5
returned goods o r credits on. seller's
duty. notification of issber,
26-40
(§).I
terms
contract with holder/vendor, 26-5
plans, affect honorees, 26-35
Truth-in-Lending Act. 33-10
~ o v c r n i n g26-
. I0
Trulh-in-Lending Simplification and
Rcforrn Act, 33-10
unnuthorized
transfers, 26-60
use, 26-20
Uniform Commercial Credit Code,
doesn't cover, 26-5
Credit controls and interest rates
credit controls, 2-80
Federal Reserve Board o f
Governors' authority, 2-80
Credit disclosure regulations, 33-5,
33-80
administrative enforcement, 33-55
credit advertising regulation, 33-70
credit, open-end.. 33-30
~-
~
disclosure requirements, closedend
credit, 33-25
leases, consumer, 33-35
liability, civil, 33-50
model forms, reliance on, 33-60
real estnte transactions, 33-40
scope. 33-1 5
truth-in-lending, 33-10, 33-70
Crcdi tors
See also Assignment for the benefit
of creditors; Bankruptcy;
Insolvency; Unsecwed
creditors
defined, 33-15
Depository Institutions Deregulation
and Monetary Control Act of
1980, 2-80
meeting of insolvency, 32-10
priorities between, 30-5, 30-50
related to debtor, 32-40
restitution to consumer, 33-55
rights on bank paper, 13-20
secured vs. unsecured, 32-45
reporting, 34-20
agencies
defined, 34-20
dispute resolution, 34-20
obligations to consumer, 34-20
consumer report defined. 34-20
debt collector's, restricted, 34-15
 INDEX
[References are t o sections ( 8 )
Credit reporting (cont'd)
disclosure requirements, 34-20
during billing disputes, 33-80
Credit unions, 7-65
bank share draft accounts, 19-20
Federal Credit Unions, 7-75
Federal Credit Union System,
7-70
effect of Depository Institutions
Deregulation and Monetary
Control Act of 1980 on, 2-85
examination, 4-10,7-80
history, 7-65
National Credit Union
Administration, 7-65
savings institutions, 7-65
share insurance, 7-80
unfair practices, 34-30
Criminal offenses
See also Blue Sky Laws; Forgery;
Fraud
illegality, 15-70, 15-75
incomplete instruments, 1 1-55
i
insufficient funds, 1 1-55
secrecy laws to combat, 4-55
suspension or removal, directors o r
officers for cause, 4-20
t Currency
See also Gold
Federal Reserve notes, 2-65
negotiability, 11-35
presentment of paper, 22-30
U.S., history of, 1-15, 10-10
i
world markets, 10-1 5
Currency transactions
record-keeping and reporting
requirements, 1-15. 10-10
Bank Secrecy Act, 4-55
domestic currency, 4-55
foreign transactions, 4-55
monetary instruments,
exporting/importing, 4-55
C u ~ t o m c rDank Communications
Terminals (CBCTs)
as branch banks, 5-55
automated teller machines, 5-5,
26-45,26-55
Customers
See also Accounts; Consumer
credit; Depositors; Privacy,
right of duty to examine bank
statements, 20-1 0 0
.I
Customer loans
negotiability of, necessity, 11-5
Damages
cut off by tender, 22-50
date. See Maturity
Date
rules for lack of, 20-1 15
Days of Grace, 22-45
See also Payment, time allowed for
abolished, 22-45
Death
depositor's, effect on account.
19-45
function of court in payment of
accounts, 5-35
notice of dishonor and, 23-40,
23-50
payment from account after. 19-45
beison primarily liable excuses
presentment, 22-35
of attorney, revoked upon
18-30
promises to pay on, 1 1-45
survivor in, joint accounts, 19-35,
19-45
Debit cards, 26-55
Debt adjustment, 32-5, 32-45
See also Assignment for the Benefit
of Creditors; Bankruptcy;
Cancellation of debts;
Insolvency
bankruptcy and, 32-5, 32-45
financing statement as evidence,
28-40
procedures for, 32-10
Debt collection
abuses prohibited, 34-1 5
communicntion with debtor
restricted, 34-1 5
practices, 34-15
Debt Collection Practices Act, 34-1 5
Debt collector
defined, 34-15
Debtor
See also Loans; Suretyship
secured party and, on financing
statement, 28-40
vs. assignee, defenses, 28-50
INDEX
[References are to sections ( 5 ) .]
Debts
See also Credit cancellation of, 32-15
involuntary discharge of, 32-35
Deception
defense against, 15-90
Deeds
nature of, 10-45
security interest in, 10-45
Default
defined, 16-10
dcfcrminntion, 3 1-10
electronic malfunction suspends,
26-85
enforcement
liability of lender for Code
violations, 3 1-30
negotiable paper, 1 1-30, 1 1-45
parties secondarily liable pay,
14-60
reasons for, 32-5
remedies
constitutional limitations, 3 1-15
disposition of collateral, 3 1-20
repossession of collateral. 3 1-10
security agreement, 3 1-5
"standby 1 h e r of credit,"
preventative, 25-40
Defects
holder in due course, notice of,
defense, 15-15
negotiable instruments', 15-55
Defenses
See also Suretyship
absolute
against holder in due coursc,
15-50
defined, 15-50
lack of causation, 15-90
offenses creating, 15-75
agreements affecting, 15-60
bankn~ptcytrustcc nssertion of,
32-40
cnusntion, lnck of, 15-85
consumer's prescrvntion of, 35-5,
35-25
credit cardholders, 26-25
debtor against assignee, 28-50
defects in contractual relations,
15-55
.L disclosure errors, 33-50
discrimination offenses, 34-25
electronic transfer error, 26-70
holder in due course
cuts off certain defenses, 15-50,
15-55
notice of, 15-15', 15-60
illegality, 15-65, 15-70
incapacity, 15-85
kinds of, 15-50, 15-75, 15-80,
15-90, 15-100
misrepresentation, 15-90
mistake, 15-60
preservation of under Uniform
Consumer Credit Code, 35-20
restrictive indorsements cut off,
13-55
sealed instruments, 16-40
usury, 15-75, 15-80, 16-100
waiver of, 16-50, 16-105
consumer credit, 35-5, 35-10,
35-20
wrongs in contracting and transfer,
16-65
Delaware
branch banking, 5-5
credit laws, 17-45
direct return of dishonored
instrument, 21-60
holiday and weekend bank
transactions, 22-15
instrument "payable at" a bank,
2 1-65
Uniform Act for Simplification of
Fiduciary Security Transfers,
27-65
Delivery
incomplete paper, 15-85
transfer by, 13-5
without indorsement, 13-60
Demand
primary liability without, 18-20
Demand accounts, 19-20
Dcninnd for payrncnt. See
Prcscntmcnt for pnyment
1)cninntl notes. See Dcmnnd pnper
Dcmand pnpcr
See also Checks; Drafts
form, 1 1-35
negotiability, 11-40, 16-10
requirements, 11-40
no maturity stated, 22-10
overdue, 15-40
presentment in reasonable time,
22-20,22-30
 INDEX
[References are to sections ( 8 ) .]
Demand paper (cont'd)
presentment on Saturday, 22-15
presumption of maturity, 21-20
Depositary Bank. See Collection of
instruments
Deposit for collection
See Collection; Deposits
Depositors
See also Accounts
bank and, mutual duties, 20-5,
20- 125
duty of due care, 20-1 10
monthly statements, 20-101
payment after death, 19-45
relationship to bank. 21-10
right to privacy. 4-50
termination of account,
death o r incompetency, 19-45
Depository Institutions Deregulation
and Monetary Control Act
OF 1980 ( D I D M C A ) , 2-50
bank examinations under, 2-70
check clearance and collections,
2-60
commercial banking by thrift
institutions. 1-5
Federal Reserve Bank reserves,
2-50
foreign owned banking corporation,
4-80
fund transfers, 2-60
insurance of deposits, 2-50
interest and dividend deregulation,
4-25, 17-10
loan privileges broadened, 2-55
National Bank Act amended by,
2-50
reserve requirements, 1-35, 2-50
savings bank accounts, 2-50
savings institutions under, 2-85. 7-5
truth-in-lending changes, 33-10
Depository Institutions Deregulation
Committee. 2-50
Depository Institutions Management
Interlocks Act of 1978, 5-15
Deposits
in breach of trust. 21-45
checking, 19-20
credited, may constitute value,
! 27-35
I credits, provisionally given, 20-90,
20-95
failure to give, 26-70
rniscredited proceeds, 20-60
direct, by electronic transfers,
26-45
fiduciary
accounts, 27-40
under the Cornmcrcial Codc,
27-55
Uniform Fiduciaries Act, 27-45
garnishment restricted, 34- 10
insurance of Federal Deposit
Insurance Corporation, 3-5,
3-25
interests on, 4-25, 17-20
known to be trust funds, 2 1-40
non-deposit repurchase
transactions. 19-50
payment from fiduciary accounts,
27-50
risks and responsibilities, 19-1 5
savings, 19-20
special, 19-20, 20-1 5
title to funds, 19-20
two o r more trustees, 27-50
withdrawal, right of, 20-95, 22-45
Deposit slips
contracts on, 19-25, 19-30
Directorates, interlocking prohibited,
5-1 5
Directors. See Fiduciaries
Directors of corporation, fiduciary
relationship. 27-5
Direct returns, 2 1-60
Discharge
See also Payment
b y qualified acceptance, 14-50
cancellation as. 32-15
cancellation of signature, 18-20
composition with creditors, 32-10,
32-15
failure t o present, 22-55
in bankruptcy, 32-30
See also Bankruptcy
. .
primary parties to negotiable paper,
18-20
secondary liability. See Drawer,
Indorser
secondary parties to negotiable
paper, 18-20
security interest. 3 1-20, 3 1-25
surety, 18-15. 18-20
INDEX
[References are to sections ( 5 ) .]
Disclosure requirements
advertising of credit, 33-70
billing, 33-80
-civil liability, 33-50
closedend credit, 33-25
credit reporting agency to
consumer, 34-20
duty to revise statements, 33-65
electronic fund transfer, 26-90
enforcement by agencies, 33-55
e r r o n , 33-50
leases, 33-35
legislation, 33-10
model forms, 33-60
open-end credit, 33-30
real estate transactions, 33-40
transactions covered, 33-15
Discount
borrowing from Federal Reserve
Bank, 2-55
thrift institutions, 2-60
Discount rate. See Interest rate
Discount transaction
chattel paper, 16-35
negotiable paper, 1 1-5, 16-5
Discrimination
consumer credit, 34-25
H o m e Loan Bank members,
prohibited, 7-35
Dishonor
cancellalion of acceptance, 25-30
collecting bank's duties, 21-25
defined, 22-55
determination, method, 22-55
documentary-draft. 24-15
drawer's liability, 14-70
effect on unpaid seller of goods,
30-35
indoncr's liability, 14-65 .
iIXtnlment overdue and unpaid,
22-55
nonacceptance and, 22-60
notice of, 23-30, 23-80
See nlso Notice of dishonor
offer to certify as, 22-55
presentment excused, 22-55
presentment through clearinghouse,
22-55
CL proceedings on, 14-65
protest, notice of, 23-10
re-presented checks, 23-60
return of items, by collecting
bank's, 26-60
rights of holder, 22-55
qualified acceptance as, 14-45,
19-45
time drafts before maturity, 14-65
wrongful, 20-10, 20-1 5
Dishonored paper. See Dishonor
District of Columbia
branch banking, 5-5
direct return of dishonored
instrument omitted, 21-60
good faith requirement, stale
checks, 20-25
instrument "payable at" a bank,
equivalent to draft, 21-65
stop payment orders, 20-30
Uniform Act for Sinlplification of
Fiduciary Security Transfers,
27-65
Uniform Common Trust Fund Act,
27-70
Uniform Fiduciaries Act. 27-35
Dividends
bank payments, trend toward
deregulation, 2-75. 4-25
bankruptcy
See also Bankruptcy
regulation
Federal Deposit Insurance
Corporation, 3-55
Fcdernl Home Loan Bank
Board, 7-35
Dock rcccipts. See Con~rnodity
paper
Dock warrants. See Commodity
Paper
D o c u n ~ e n t a r ydrafts, 24-5
See also Collections; L e t t e n of
credit
collection of, 24-5, 24-15
defined, procedures, 24-5
dishonored, 24-15
underlying documents and goods,
bank's responsibility for, 24-15
Documents
dealing in, o r commercial paper,
1 0-55
security interest in, 28-10
transferability of, 10-60
 INDEX
[References ore to sections
Documents of title, 29-70
See also Warehouse receipts; Bills
of lading
carrier's liability, 12-30
conflict of laws governing
repealed by Commercial Code,
12-25
control of title to goods, 12-10
defined, 29-70
definition expanded by Commercial
Code, 12-20
delivery to "assigns," 12-25
documentary drafts with, 24-5,
24-1 5
formal requisites, 12-25
holder in due course, 15-10
identification of, 12-25
indorsement, 13-10, 14-65
on the instrument, 13-15
letter of credit, 25-50
maturity, 15-40
methods of transfer, 12-40
nature of, 12-40
negotiability
contents identifying instrument,
12-25
under Commercial Code, 12-20,
16-100
negotiable
goods not covered, 12- 15
negotiable money paper
distinguished, 12-50
negotiation by delivery, 12-40
negotiation of, 12-40
nonnegotiable
negotiability by contract, 16-100
not conforming to Commercial
Code, nonnegotiable, 16-100
order bill, negotiability, 12-20
perishable goods
time for taking. 15-40
printed form controls
negotiability, 12-25
property passed thereby, 12-10
security functions, 12-1 0
security interest, 29-70
priority, 30-20
transfer, 12-45
methods of, 12-40
warranty liability, 14-75, 24-15
warehousemen's liability, 12-30
( 5 ) .]
Drafts
See also Checks; Documentary
drafts; Negotiable paper
acceptance, 25-25
cancelled, 25-30
presentment for, 22-60
time, 22-60
bnnk, stopping payment, 20-40
check as, 7-20
collateral, Federal Reserve makes,
2-65
defined, 7-20. 10-20
formal requisites of. See
Ncgoti~blcpnper
form and eflect of acceptance. See
Acceptance
four-party paper, 7-20
maturity of. See Maturity
money orders as, 25-20
payable in money, 7-20
protest of, 23-10
share, 19-20
two-party paper, 7-20
unconditional, 11-20
written, and signed requirement,
11-25
Drawee
See also Acceptor
certainty of, requirement of
negotiability, 11-65
drafts, acceptance creates contract,
22-60
as consignee, 24-5
non-payment o r nonacceptance,
24-10
fictitious, presentment excused,
22-40
liability as acceptor, 14-15, 14-20
multiple drawees on insurance
drafts, 10-20
Drawee bank
duties of, 21-40
unacceptable as collecting bank,
21-15
Drawers
See also Maker; Second liability
discharge, 22-65
late presentment of checks,
2 1-15
drafts, as consignor, 24-5
INDEX
[References are to sections
Drawers (cont'd)
liability, 14-70
aflcctcd by failure of
presentment, 17-65
bank's as drawer, 20-40, 25-5
default of drawee, 14-70
dischnrgc in delay losses. 2 1-25
2 1-65, 23-5
on draft, 23-80
fictitious payee on instrument,
20-55
forged checks, 20-65
on noncollection, 16-70
post-dated chccks, 20-20
presentment of draft, 14-70,
22-20
protest, 14-65
unauthorized signature, 20-65
warranty, 14-70
Drawing right certificates in Reserve
Bank reserves, 2-25
D& Care
See nlso Good faith
bank's duty to customers, 20-85
depositor's duty to bnnk, 20- 1 10
duty of pledgee, 29-1 5
in electronic processing, 2 1-70
notice, 23-55
See also Diligence; Notice of
dishonor
notifying depositor of overdrafts,
20-80 .
Due process, 3 1-1 5
garnishment may violate, 20-125
Duty to inquire. See Notice
Edge Corporations, 8-1 5
Electronic device
Customer Bank Communication
Terminal (CBCT), 5-55,
26-45, 26-55
Elcctronic Fund Transfer Act
access cards, unsolicited,
restricted, 26-105
administrative and enforcement
rL
bodies, 26-95, 26-1 15
civil liability of institutions, 26-75
consumers. 26-50, 26-55
( 5 ).I
described, 26-50
disclosure obligations, 26-90
error resolution, 26-65
liability, financial institution's,
26-70
notice obligations. 26-90
pcnnltics Inr violntion, 26-1 I5
Scope of, 26-55
state-federal law conflict, 26-1 10,
26-1 15
Truth-in-Lending Act, 26-50
unauthorized transfer rules, 26-60
Elcctronic fund trnnsfcrs
ncccss cards, 26-60. 26- 105
check truncation, 20-105, 26-45,
26-55
civil actions against institutions,
26-75
defined, 26-55
disclosure requirements. 26-90
docurnentntion reqtlirements, 26-90
error resolution, 26-65
fcdcral regulation, 26-50, 26-55,
26-1 10
Fcderal Reserve System's, 2-60,
26-45
financial institution's liability to
customers for, 26-70
defense against failure, 26-70
interbank transfers, 21-75, 26-45
payments by
failure to make, 26-85
payroll, 26-45
recurring obligations, 26-45
Social Security and other
government, 26-45
preauthorized, 26-80
documentation required. 26-90
restrictions, 26- 100
rules by private ngrcenlent, 21-5
stnte laws, relation to, 26-1 10
statement of account, 26-90
stop payment rights. 26-80
suspense of obligations to third
parties, 26-85
malfunction of system, 26-85
system, 26-45
unauthorized transfers
customer's liability, 26-60, 26-65,
26-105
defined, 26-60
 INDEX INDEX

[References are t o seclions ( 8 ) .I [ReIerences are 10 secliotls ( 5 ) .]

Electronic fund transfers (cont'd) federal agencies, powers, 2-70, Farm loans powers, 3-5, 3-25, 3-35
unauthorized transfers (cont'd) 2-90,4-10 disclosure requirements, 33-15 receiver, 3-30

I financial institution's liability, Federal Deposit Insurance interest rates, 17-25 regulations, 3-35
26-60, 26-65 Corporation, 3-35,4-5 Farm products, 2 9 4 0 . responsibilities, 3-5
reporting requirements. 26-60 Federal Reserve System, 2-70 security interest in, 29-40 reserve fund, 3-5
Electronic processing Financial Institutions Examination place of filing, 29-40 savings banks, 7-90

i liability for errors in, 2 1-70

Embezzlement
fictitious or nonexisting payee,
20-55
Council, 4-10
loans or gifts to examiners, 4-30
Savings and Loan Insurance
Corporation, 7-50
priorities, 30-1 0
Federal Administrative Board
Rulings. 9-40
See also official name of board
state banks, insurance from, 1-10
supervision of banks, 3-35
termination of coverage, 3-25, 3-35
withdrawal, voluntary from, 3-25
Emergencies uniform standards for, 4-1 0 involvcd and Federal Register Federal Fair Credit Reporting Act
bank holidays declared, 2-95 Exchange. See Collection; Drafts jurisdiction over state banks, 9-40 Federal Trade Commission
extension of time limits in, 2 1 4 0 , Exchange Stabilization Fund Federal agencies. See Federal enforcement of provisions,
22-45 certificates, collateral, Federal government 34-20
unsound practices. desist order, Reserve Notes, 2-65 Federal Crcdit Union System, 7-70 Federal Farm Credit System, 8-30
4-1 5, 7-40 Executors Central Liquidity Facility. 7-70 Federal Financing Bank, 8-65
Employees See also Fiduciaries federal credit unions. 7-75 Federal funds. See Federal
See also Due care, Defenses; fiduciary relationship, 27-2 share insurance, 7-80 government
Fiduciaries notice of dishonor to, 27-5 Federal Deposit Insurance Federal government
interlocking positions prohibited, Export-Import Bank, 8-85 Association Scc 01.~0United States; Nnmc of
5-15 insurance of exports, 8-85 nondcposit linhilitics. 19-50 spccinc ngcncy
Endorsement. See Indorsement purpose, 8-85 Federal Deposit Insurance banking organizations, 1-15, 1-25
England termination date, 8-85 Corporation ( F D I C ) , 3-5, 3-35, banks created by, 1-25
bank credit as value, 15-35 26-1 15 commercial transactions using
Environmental law, banks and, nsscssn~cnts,3-1 5 fcdcrnl lnw, 9-35
regulation, 4-65 honrd of directors, 3-5 funds, deposit in Federal Reserve
Equal Credit Opportunity Act. 34-25 branch banking, 5-5 banks. 2-45
enforcement, 34-25 cease nnd desist orders by, banks funds, repurchase transnctions,
Equipment Facsimile signatures in "unsnfe nnd unsound 19-50
See also Fixtures negotiability of, 11-30 practices," 3-25, 3-35, 4-15 regulations, 9-40
leasing as security transaction, Fair Credit Reporting Act, 34-20 classification of banks, 1-10 published sources, 9 4 5
28-15 Federal Trade Commission, Electronic Fund Transfer Act regulatory agencies, 4-5, 8-80
rendered unusable, possession, enforcement of provisions, ndministered by, 26-95, 26-1 15 Federal Home Loan Bank Board,
31-10 34-20 examination by, 3-35,4-5 7-25, 26-1 15
security interest in. 29-35 Fair Debt Collection Practices, foreign banks and banking powers, 7-25,7-40
Equipment trust certificates (FDCP) Act, 34-15 banks as members, 4-80 savings and loan associations
See also Securities regulation by Federal Deposit examination by, 4-10
Farm Credit Act, 8-30
defined. use, 10-50 Insurance Corporation, supervision of Federal Savings and
Farm Credit Administration, 8-35 4-75, 4-80 Loan Insurnnce Corporation,
negotiability of, 12-65 Farm credit board, 8-30
security device, commercial paper, function, 3-5 7-25
10-50
Farm Credit System, 8-30 history, 3-5 Federal Home Loan Banks, 7-30
Equities Banks for Cooperatives, regional, insurance authorized accounts, 7-30
8-55 assessments, 3-1 5 capital stock subscription, 7-30
latent, cut off by assignee, 13-60
Errors Farm Credit Administration, 8-35 permanent funds, 3-20 districts, 7-30
billing dispute procedures, 33-80 Federal Intermediate Credit Banks, termination of, 3-25 reserves, 7-30
disclosure requirements, 33-50, 8-45 insured deposits, 3-10 Federal Home Loan Bank System
33-55 Federal Land Banks, regional, 8-40 interest rate regulation, 3-35 Board membership and powers,
electronic processing, 21-70.26-65 organization, 8-30 liquidation by, 3-30 7-25
Examination of banks Production Credit Associations, loans to banks, 3-30 Electronic Fund Transfer Act,
8-45 mergers arranged by, 3-30 administered by, 26-95,
bank service corporation, 5-35
credit unions, 7 - 8 0 Farm equipment, 29-35, 29-85 " organization, 3-5 26-1 15
 INDEX
[References are ro sections
Federal Home Loan
Bank System (conr'd)
Federal Home Loan Banks,
regional, 7-30
member institutions, 7-35
organization, 7-20
savings banks under, 7-90
Federal Intermediate Credit Banks,
845
Federal Land Bank Association, 8-40
Federal Land Banks, 8 4 0
Federal laws
See also Federal statutes
bankruptcy, 32-30
commercial transactions, 9-35,
9-50, 9-55
extent of jurisdiction, 9-35
history, 1-15
insolvency, 32-25
interaction with state, 9-50
outline of national banking system,
1-25
Pomerine Act, 9-35
preemption over state law. 9-50
relation to Commercial Code, 9-20,
9-30
relation to slate law, 9-35
type of subjects covered, 9-30
Federal Power Act
interlocking arrangements under,
5-15
Federal register, 9-45
Federal Reserve
See also Board of Governors
commercial paper rates,
usury, 12-75
remittance through, 1 6 4 5
Federal Reserve Act, 2-5, 2-85
Federal Reserve Bank notes
security for, 2-65
Federal Reserve Banks, 2-30
See also Collection, Board of
Governors of Federal Reserve
System
check clearance and collection, 2-60
collateral, 2-50, 2-65
!created by government, 2-5
depositories of the United States,
, 240,245
directors of, 2-35
histricts, 2-30
( 8 ) .]
electronic funds transfer, 2-60,
--
26-45
fiscal agents of the United States,
-2-40,
. 245
foreign banking activity, 4-75
foreign banking powers, 4-75
foreign business, 4-75
localion, 2-30.4-75
member banks borrowing from,
2-55
discounts and advances, 2-55
open market operations, 2-25
powers and duties, 2-40
profits of, 2-30
rediscount of paper, 2-45
reserves, 2-50
stock, 2-30
subscription to, 2-20
Federal Reserve Board. See Board
of Governors of Federal Reserve
System
Federal Reserve Bulletin
publication of regulations, 2-20
Federal Reserve districts
See also Federal Reserve Banks
map of, 2-30
Federal Reserve notes, 2-65
See also Money
collateral required for, 2-65
Comptroller of the Currency, 2-90
issued as currency, 1-65, 10-10
redemption, 2-65
security for, 10-10
Federal Reserve regulations, 2-20
collection of instruments, 21-20,
21-75
interest and dividends paid by
banks, 2-10, 2-75
negotiable paper necessary for
rediscount, 16-5
publications, 2-20
Federal Reserve rulings
supercede law, 2 1-75
Federal Reserve System, 2-5, 2-95
anti-inflation program, 2-80
bank holding company regulation,
2-10
bank supervision, 2-10
Board of Governors. See Board of
Governors of Federal Reserve
System
INDEX
[References are to secliom
Federal Reserve System (cont'd)
branch banking, 5-5, 19-10
clearinghouse function, 2-60
check collection and fund
transfers, 2-60
electronic, 2-60, 26-45
rules binding on banks, 21-5
coin and currency supply, 2-10
consumer credit controls, 2-10,
2-80
Depository Institutions
Deregulation and Monetary
Control Act of 1980, 2-50
cxnminntion of bnnks, 2-70, 4-10
Federal Reserve Bulletin, 2-20
foreign bank as member, 4-75
.. 2-5
historv.
interest of deposits, rate regulation,
2-10
interpretations of rulings, 2-20
national bank membership, 1-10
open market operations, 2-25
orders, 2-20
paper taken for rediscount,
negotiability, 1 1-5. 16-5
publicntions, 2-20
regulations, 2-20
Comptroller of the Currency's,
2-90
reserves, 2- 10, 2-50
rules, 21-75
rulings, 2-20
savings institutions, relationship
with, 2-85
state bank membership optional,
1-10
stock ns collateral, limitations,
2-65
stock margin requirements by, 2-10
structure, 2-5
truth-in-lending, 2- 10
unfair and deceptive practices,
2-10
withdrawal from, 2-50, 2-85
Federal Savings and Loan
Associations, 7-1 0 , 7 4 5
powers, 7 4 5
Federal Savings and Loan Insurance
rc Corporation, 7-50, 26-1 15
assessments by, 7-50
( 5 ) .]
insurance, 7-50
limit, 7-50
termination, 7-50
power, 7-50, 7-55, 7-60
supervised by Federal Home Loan
Bank Board, 7-50
supervision of savings and loan
corporation, 7-50
Federal Savings and Loan System,
740
Federal statutes
See also Statutes by name
authorizing types of money, 10-10
Pomcrinc Act
Bills of Lading Act still in force,
9-25
bills of lading negotiable in
hands of finder o r thief,
12-15
coexistence with Commercial
Code, 12-20
coverage of, 12-5
Federal Trade Commission
regulations, banks' unfair trade
prncliccs, 5-25. 34-30
enforcement credit reporting
regulations, 34-20
debt collection regulations,
34-15
equal credit regulations, 34-25
rule
holder in due course status
abolished, 35-10, 35-15
transactions covered by
consumers' credit, 35-15
Federal Trade Commission
Inlprovement Act, 34-30
unfair and deceptive practices,
34-30
Federal Truth-in-Lending Act. See
Truth-in-Lending
Fiduciaries
See also Receivers; Agents; Trustees
actions beyond powers void, 27-20
attachment, perfection and order
of priority of security interests,
27-55
bank accounts, forms, 19-35
banks as, 27-60
beneficiary, 27-10
 INDEX INDEX
[References arc to sections ( J ) . ] [References arc to sections ( 5 ) .]

1 Fiduciaries (cont'd)
breach of duty
bank directors of officers. 4-20
liability of third parties, 27-20,
27-25
third party's duty t o notice,
27-30, 27-35
breach of relationship, notice,
27-30
business units as, 27-10
double fiduciary capacity of
officers. 27-5
checks drawn by, 27-45, 27-50,
27-55
collection banks, 27-60
Commercial Code, 27-55
commingling of property prohibited.
27-1 0,27-15,27-40
commissions to, 27-1 0
Common Trust Fund Act, 27-7
competition with beneficiary
prohibited, 27- 10
conflict of interest, 27-10
contracts made by, 27-5
deposits, 27-40, 27-55
bank's liability, 27-40, 27-45,
27-55
in personal account. 27-40
joint trustees. 27-50
separate account, 27- 15, 27-40
duties of, 27-5. 27-10
violation, penalty, 4-20
evidence of authority, 27-20
executor's liability, 14- 1 10
funds handled by, 27-15, 27-30
good faith required, 21-20
loans to, 1-30,4-40
nature of relationship, 27-5
overdrafts by, 4 4 0
payment of personal debts of
fiduciaries, 2 7 4 0
personal profit prohibited, 27-10
securities
handled by, 27-1 5
transfer, 27-60,27-65
suspension or removal
causes, 4- 15, 4-20
Federal Home Loan Bank Board.
7-40
penalties, 4-20
third party dealing with, 27-20,
27-25,27-30
transactions with, 27-5, 27-75
transfer of negotiable instruments,
27-35
Uniform Act for Simplifications of
Fiduciary Security Transfers,
27-65
Uniform Common Trust Fund Act,
27-70
Uniform Fiduciaries Act, 7-35
deposits, 27-45, 27-50
wrongful transfer of property, 27-35
Fiduciary funds
deposits of a t common law, 2 7 4 0
Fiduciary relationship
See also Fiduciaries
defined, 27-5
Field warehouse systems, secured
transactions, 29-1 0, 29-45
Filing, financing statement
advance filing. 2 8 4 0
change of residence, 28-35,2840
change in place of business, 28-35
consignment sale, 28-1 5
d a t e of filing, 30-10
debtor's signature absent, 2 8 4 0
leases, personal property, 28-1 5
motor vehicles, security interest,
29-85
not notice to buyer, 30-20, 22-65
perfection of security interest, 28-30
pcriod of validity, 28-35, 2 8 4 0
place, 28-35
consumer good, 29-30
farm products, 29-40
fixtures. 29-80
wrong place, 28-35
requirement o r preference, 29-20
Filing procedures
See aho Filing. financial statement;
Financing statement
central filing systems, 28-35
continuation statement, 28-35
financing statement, 28-35, 28-40
nature of, 28-35
other documents, 28-40
placc of filing. 28-35
rcfiling, 28-40
release o r termination statement,
2845
Filing procedures (cottr'd)
security agreement contents of, 28-20
statement of assignment, 28-50
Final payment
defined, 20-90, 21-45
Finance charge computation, 33-20,
33-30
Finance companies, 8-25, 33-5
Financed sale, 35-15
Financial Institutions Regulatory and
Interest Rate Control Act of
1978, 1-30, 4-10
Financinl Institutions Examination
Council, 4-1 0
Financing statement, 2 8 4 0
amendment of, 28-45
collateral release from, 28-45
contents required, 28-40
covering proceeds, 30-25
filing of, 2 8 4 0 . See also Filing,
financial statement; Filing
procedures
new products in, 30-45
notice of assignment filed with,
28-50
termination statement filed with,
28-45
Fixtures
defined, 30-30
filing
date, 30-30
place, 28-35
security interest, 29-80
priority of claims, 30-30
severance from real estate. 30-30
Floor Plan financing. See Field
warehouse systems; Pledge;
Pledgee
Florida
bank holiday companies, interstate,
6-25
Blue Sky Laws, 15-70
branch banking, 5-5
direct return of dishonorcd
instrument, 2 1-60
instrument "payable at" a bank,
designates placc of payment.
2 1-65
Negotiable Instruments Law. 9-55
.C notcs, conditionnl rcfcrcncc on,
11-20
Uniform Act for Simplification of
Fiduciary Security Transfers,
27-65
Uniform Common Trust F u n d Act,
27-70
Foreclosr~rc. Sce Collateral; Mortgage;
Plcdgc; Sccurity dcvices; Security
interests
Foreign banking
agencies, 8-55
American banks doing, 4-75
fedcral regulation, 4-75, 4-80
Fcderal Reserve Banks, 4-75
foreign-owned banking
corporations, 4-80
privacy of customer's records, 4-50
Foreign banks
Edge Corporations, may control,
8-15
regulation in United States, 4-75,
4-80
Foreign exchange
See also Acceptances; Drafts;
Letters of credit; Money
commercial paper, 10-5, 10-15
currency stabilization by
government, 10-15
gold standard, 10-10
International Bank for
Reconstruction and
Redevelopment, 10- 15
lnternntionnl Monetary Fund, 10-15
redeemable in gold, 10-1 5
Foreign trade
See also Foreign banking
reporting exports of currency, 4-55
Foreign transactions, reporting
required, 4-55
Forgery
See also Alteration; Fraud
absolutc defense, 15-90
acccpting o r certifying forged o r
altered paper, 25-30
checks. 20-65
certified, 25-30
charging drawer's account, 20-55
custorncr's duty to report, 20-105
retained by bank, 20-105
signnfurcs. 19-40. 20-65
timely notice, 20-100
 INDEX
[References are to sections ( fi ) .]
Forgery (cont'd)
documents under letter of credit,
25-60
drawer's signature
bank's right to recover payment,
20-55
inability of bank to charge account,
20-35
indorsement, 2 0 4 5
instruments issued with blanks,
20-80
securities transfers, 27-65
transferor's liability, 14-75
travelers checks, 25-20
unauthorized signature, 20-65,
19-40
warranty against, 14-70
Formal requisites. See Negotiability;
Negotiable paper
Formalities
See also Presentment for
acceptance; Presentment for
payment
not necessary to hold parties to
negotiable nonmoney paper,
22-5
Forms
model disclasure form, 33-60
Forms of accounts. See Accounls
Fraud
See also Forgery; Defenses
bank securities, 4-70
credit card use, 26-20
criminal offenses, 4-70
defense of, 15-65. 15-70
void if hidden, 15-90
fictitious o r nonexisting payee used,
20-55, 20-65
holder in due course's knowledge
of, 15-15
transfer, in bankruptcy, 3 2 4 0
Fraud on creditors
good faith in, 15-25
Fund transfers
Federal Reserve System, 2-60,
2645
Gambling
instruments given for defense,
15-70, 15-75
Garnishment
bank deposits, 34-10
constitutional law, 20-1 25, 3 1-15
defined, 20-125
dischnrgc of cmploycc prohibitcd,
34-10
necessary for legal advice. 20-125
restrictions on, 34-10
amount collectible, 34-10
d o not apply to earnings in bank
account, 34-10
exemptions, 34-10
unconstitutional cases, 20-1 25
Georgia
branch banking, 5-5
direct return of dishonored
instrument, 21-60
garnishment statute unconstitutional,
31-15
Uniform Act for Simplification of
Fiduciary Security Transfers,
27-65
Gift
defense of, 15-55
loan or, to bank examiners, 4-30
value not conferred by, 15-30
Glass-Steagall Act of 1933, 5-30, 6-5,
6-30
Gold and gold certificates
bonds or notes stipulations, 11-35
collateral for paper money, 2-65
commercial paper and Federal
Reserve notes, 10- 15
commodity, 10-15
gold standard, variations in, 10-10
international agreements, "gold
clause," 10-15
legality of certificates, 10-10
private ownership, 7-15
Reserve Bank reserves, 2-5
US., history of, 10-10
Good faith
See also Bad faith; Holder in due
course
bank's
duty, dealing with alterations,
20-80
obligation to customers, 20-85
carelessness, 15-20
consumer paper, 20-60
* recovery, 15-85
defined, 15-20, 27-35
duty of fiduciaries, 27-5
INDEX
[References arc to sections ( 5 ) .I
Good faith (cont'd)
effect on acceleration at maturity,
16-10
fnilure to inquire, 15-20
flducinry rcquircnrcnt of, 27-20
for holder in due course, 15-15,
15-20
not changeable by agreement, 21-65
payment by bank, 19-45. 25-60
payment of checks, 20-25, 20-45
purchaser for value, 10-60, 15-20
requirement in
payment of negotiable paper,
15-20
performance of contract, 19-30
purchaser of instrument, 15-20
security agrccmcnt
burden of proof. 3 1-5
modified in, 28-50, 3 1-5
suspicion, 15-25
transferee, in bankruptcy, 32-40
waiver not valid, 14-50
Goods
See also Collaternl. Commodity
paper; Documents of title;
Fixtures, Liens, Security
interest; Tntst receipts
comniinglcd, 30-45
consignment goods, 28-1 5, 30-10
consumers, 29-30
defined, 29-25
equipment, 29-35
farm products. 29-40
inventory, 29-45
ninnufnctured. 30-45
payment in, negotiability, 11-30
reclamation by seller, 3-35
sale
under power of attorney, 30-35
unpnid seller's rights, 30-35
warchouse lien, 12-35
security interest in, 29-25. 3 0 4 5
transfer, legal effect, 10-60
stolen goods, 10-60
title, 10-60
types of, 29-25
Government
See also Federal government
securities, defective o r invalid,
Governor of the Farm Credit
Administration. 8-35, 8-40
Grace period
fixture filing, 30-30
perfecting of security interest, 30-5
Gunrantcc
indorscrrrcnl ns, 13-25
lcttcr of credit, 25-40
part of indorsement, 13-25
Guarantor
See also Suretyship
accommodation party, 18-25
discharged by lack of notice, 18-15
Guaranty
See nlso Suretyship
defined. 18-10
indorsement, and distinguished,
13-25
Guardian
See also Fiduciary
fiduciary relationship, 27-5
Hawaii
branch hanking, 5-5
direct return of dishonored
instrument, 21-60
instrunic~it"pnynblc nt" n bnnk,
equivalent to draft, 2 1-65
Uniform Common Trust Fund Act,
27-70
Uniform Fiduciaries Act, 27-35
usury controls, 17-35
Holdcr
nccclcration by, 16- 10
bond with underlying mortgage,
16-90
defined, 15-2
of bank's own instn~rnents,25-5
stop payment rights, 20-35
Holder for value
hank as. 15-35
defined, 15-30
Holder in due course
See also Bona fide purchasers;
Purchasers in regular course of
business
abolition in consumer transactions,
15-95
absolute defenses against, 15-50
accommodation paper, 15-55
altered or forged instrument, 25-30
 INDEX
[References are to sections
Holder in due course (cont'd)
altered paper, 20-75
assignee of, 1 5 4 5
bank as, 15-1 5, 15-20
capacity, 15-80, 15-85
causation, lack of. 15-90
certified checks, 25-25
chattels and chattel paper, 15-10
collecting bank as, 21-20, 2 1-15
contractual relation defects, 15-65
dcfenses against, 15-50, 15-75,
15-80
dcfcn.wa cut off by, 15-50, 15-70
defined, 15-5
Federal Trade Commission rule,
35-5, 35-10, 35-15
fiduciary relations, affecting, 27-35
finance company as, 15-10
good faith. 15-15, 15-20
illegality of paper, 15-70
knowledge of disabling facts, 15-1 5
knowledge of executory contracts,
15-15
later notice of defects, 15- 10
limitation of rights by separate
1 Housing and mortgage credit agencies,
I contract, 13-65
notice. See also Notice
of defenses o r defects, 15-15
suretyship, 18-25
overdue paper and, 15-35
possession, 15-5
iI
presentment for acceptance, 22-65
purchase at discount, 15-15
reasonable time for taking, 15-40
requirements of, 15-1 0
rights. 15-5
check improperly completed,
20-80
chccks improperly paid, 20-10
contrnct, on face, 13-60
instrumcnt with qualified
indorscmcnt. 13-30
notes accompanying mortgage,
16-30, 16-70
overdue paper, 15-40
postdated chccks, 20-20
rcstrictivcly indorsed instrumcnt,
1345
security agreements, 29-60, 30-20
stopped payment, 19-40
( 5 ) .]
status, consumer credit
abolished by FTC, 35-10, 35-15
legal restrictions, 33-5, 35-25
state laws limiting rights, 35-25
Uniform Consumer Crcdit Code
of 1968 eliminates, 35-20
suretyship, defenses against, 18-25
usurious paper, 15-75
value paid by, 15-30
wrongs in contracting, 15-60
"Holiday bank transactions" statutes,
22-15
Holidnys
bank holidays, 2-95
Comptroller of the Currency
declaration of, national
banks, 2-95
emergency o r ceremonial, 2-95
state banking authorities
declaration of, 2-95
effect on maturity of instruments,
22-15
Saturdays and Sundays, 22-15
Home Mortgage Disclosure Act of
1975,4-60
8-55
Idaho
Blue Sky Laws. 15-70
branch banking, 5-5
direct return of dishonored
instrument, 21-60
holiday and weekend bank
transactions, 22-1 5
instrumcnt "payable at" a bank,
dcaignntion of placc of
pnymcnt, 21-65
Uniform Act for Simplificntion of
Fiduciary Security Transfcrg,
27-65
Uniform Common Trust Fund Act,
27-70
Uniform Consumer Crcdit Codc
Act of 1968, 33-5, 35-20
,,
Uniform Fiduciaries Act, 27-35
Identification. See Forgery
INDEX
[References are to sections ( 5 ) .]
Illegality
See also Criminal offenses;
Defenses; Fraud
Blue Sky Laws, 15-65
Illinois
Blue Sky Laws. 15-70
branch banking, 5-5
direct return of dishonored
instrument, 21-60
holiday and weekend bank
transactions, 22-1 5
instrumcnt "pnynhlc nt" n hnnk,
designntion or place of
payment, 21-65
Uniform Act for Simplification of
Fiduciary Security Transfers,
27-65
Uniform Common Trust Fund Act,
27-70
Uniform Fiduciaries Act, 27-35
Imposter rule, 20-55
Impoundment, 20-1 25
Incapacity. See Capacity
lncompletc instruments
blanks, 11-55
criminal offenses, 11-55
Indemnity, 20-35
payment stopped by third parties,
20-35
Indexation, inflation and, 16-60
Indiana
branch banking, 5-5
direct return of dishonored
instrument, 21-60
holiday and weekend bank
transactions, 22-1 5
instrument "payable at" a bank,
designation of place of
pnymcnt, 21-65
Uniform Act lor Sirnplificntion or
Fid~rcinrySecurity Trnnsfcrs,
27-65
Uniform Consumer Credit Code
Act of 1968, 33-5, 35-20
Uniform Fiduciaries Act, 27-35
Indorscc
See also Holder; Holder in due
course; Indorsement; Indorser
indorsement and rights by, 13-45,
13-65
restrictive
banks, special rights, 13-45
rights of, 13-45
in trust
rights of, 13-45
lndorscmcnt
ambiguous signatures, 13-25
bad faith, 15-25
bearer instrument controlled by
special indorsement, 11-40
blank indorsement of stock
ccrtificntcs. 12-50
sccr~ritics,12-50
changed by parol evidence, 13-65
contractual agreements affecting,
13-65, 14-90
debt cancellation and, 32-15
document or attached paper, 13-10
documents of title, 12-40, 12-45
drawer not guarantee payees, 14-75
forged, 19-40, 20-15, 20-45, 20-65,
20- 100
See also Forgery
forms of, 13-15
conditional, 13-40, 13-65
qualified, 13-30
qualified in blank, 13-25
qualified special, 13-25
restrictive, 13-40
guaranteed, 20-35
investment paper, 12-65
kinds of, 13-15
blank, 13-15, 13-25
special, 13-25
missing, bank's power to supply,
13-50
money paper
on the instrument, 13-5
multiple payees, 13-60
nnturc of. 13-10
oral ngrccmcnts not ndniissiblc to
chnngc nnturc of. 13-65
qualificd, 13-30, 14-85
restrictive, 13-35, 20-35
bank's not bound by, 13-45,
2 1-20
binding on pnyor hnnk. 21-45
collecting bank exempt from,
2 1-45
conlmodity paper, effect on,
13-55
 INDEX
[References are to sections
Indorsement (conr'd)
restrictive (conr'd)
indorsee's rights, 13-45
securities, effect on, 13-55
types of, 13-35
securities
notice given by, 12-70
transfer without, 12-70
securities and commodity paper,
13-55
security contracts. 18-10
seven days to present, 22-20
special
blank indorsement changed to,
13-20
common forms of, 13-25
effect on negotiability, 13-25
forms of, 13-25
special purpose may be shown,
13-65
transfer of collateral liability, 14-60
transfer of part o r entire
instrument. 13-10
unqualified, right to, 13-60
unrestrictive changed to restrictive,
13-50
bank's special rights. 13-60
variations allowable, 20-55
without recourse, 13-30
See also Qualified indorsement
Indorser
See also Secondary liability
after maturity
forfeits rights, 22-20, 22-40
not entitled t o diligence, 22-20
unnecessary, 2 1-65
ambiguous signatures, 20-1 15
capacity, 13-25
discharge, late presentment, 22-20
discharged, tender of payment,
22-50
entitled to notice
accommodation on paper, 23-55
exempt from delay losses, 21-25
identification of, 20-45
jointly liable
all must receive notice of
dishonor, 23-40
liability, 14-65, 14-85, 22-5
bank's, 25-5
( 4 ) .]
discharged, 14-65
discharge if formalities not met,
23-5
nonacceptance, 14-65
nonnegotiable paper, 14-65
nonpayment, 14-70
protest and notice of dishonor,
14-55, 14-65
secondary, 14-60
waiver, 14-55, 14-65, 23-65
.Industrial banks
holding company's operation of,
6-15
state incorporated, 8-20
Infancy
defense on negotiable paper, 15-85
Inflation
anti-inflation program, 2-80 - Corporation; Federal Savings
indexation to combat, 16-60
Insanity. See Capacity
Insider information, 4-70
Insolvency
See also Bankruptcy, Receivers
banks
creditor's precedence, 25-5
effect on bank accounts, 1 9 4 5
liability of drawer in dishonor,
23-80
defined, 32-5
nature of, 32-5
of primarily liable, excuses
presentment, 22-35
remedies,-32-10
assignment to creditors, 32-20
bankruptcy, 32-30, 32-35
debt cancellation, 32-15
receivership, 32-25
reorganization, 32-30
security intercst in bank account,
and. 29-90, 30-25
seller of goods, efTect of on, 30-35
Installment sales, 33-25
See also Conditional sales
finance charges, 33-25, 33-30
interest rates, 33-25, 33-30
Truth-in-Lending Act rcquircments,
33-25, 33-30
Instrument given under agreement not
to prosecute, 15-65
void instruments, 15-85
INDEX
[References are lo sections ( 5 ) .]
Instruments
See also Negotiable instruments;
specific type of instrument
collection and payment of, 21-5,
21-75
defined. 29-60
issued with blanks, 20-80
payable
at or through banks, 21-65
in money, commercial paper,
10-20
security interest, 29-60
priority, 30-20
Insufficient funds
presentment not excused by, 22-40
Insurance
See also Federal Deposit Insurance
and Loan Insurance
Corporation
agent, 4-35
bank holding company activity,
6-15
bank scrvicc, 4-35
collateral insurance. 29-15
credit union share insurance, 7-75,
7-80
drafts drawn to pay, 10-20
facsimile signature misuse, 1 9 4 0
Federal Savings and Loan
Insurance Corporation limits,
7-50
security interest in proceeds,
secured transactions, 29-95
Intangibles
defined, 29-55
security interest, secured
transactions. 29-55, 30-5
Inter-American Development Bank,
8-85
Interest
cut OR by tender, 22-50
on demand deposits, 4-25
promise to pay effect on
negotiability, 11-30
security in savings and loan, 22-70
Interest coupons. See Bonds
Interest rate
rc. See also Consumer credit:
Disclosure requirement; Usury
business loans over $25,000, 17-25
calculation difficulty, 17-5
consumer loans
control by Federal Reserve, 2-80
credit control and, 2-80
credit unions, 7-80
deposits. 17-20
"export" of by national banks,
1745
farm loans, 17-25
Federal Home Loan Bank Board
regulation, 7-35
federally insured banks, 17-30
federal preemption of state usury
laws, 17-10
federal reserve
discount, 2-55
regulation. 2-75
loans to officers, directors, or
stockholders, 1-30, 4-40
maximum, 2-80, 4-30
"most favored lender," 17-40
prime, 17-50
real property loans, 17-15
residential property, 17-15
savings and loan associations, 7-50
tendency to deregulate, 2-75, 3-35,
4-25, 17-10
usury statutes, 15-80
Interim certificates
defined, 10-35
maturity inapplicable, defenses,
15-40
negotiability of, 12-5, 12-60, 12-65
Interlocking directorates, 5-15
Intermediary banks
See also Collection of instruments
defined, 19-5
duties and liability, 21-20
Intermediate credit associations
relation to intermediate credit, 8-45
International banking
See also Foreign banking; Foreign
banks
Edge Corporations. 8-15
federal regulation, 4-75
international finance organizations,
8-85
protest of drafts outside U.S., 23-10
International Banking Act of 1978,
4-80
 INDEX INDEX
[References are t o sections ( 8 ) .] [References are to sections ( 8 ) .I
International Chamber of Commerce, direct return of dishonored Kansas (cont'd) clean letters, 25-50
25-45. 25-65 instrument, 2 1-60 Uniform Common Trust Fund Act, Commercial Code, scope, 25-45
International finance organizations, instrument "payable at" a bank, 27-70 conditional, 25-40
8-85 designation of place of Uniform Consun~crCredit confirmntion of, 25-40
U.S. cooperation with, 8-85 payment, 21-65 Code Act of 1974. 33-5. 35-20 customer's obligation to reimburse
International Monetary Fund Uniform Act for Simplification of Uniform Consumer Sales Practices issuer, 25-55
See also Money Fiduciary Security Transfers, Act, 33-5 dcfincd, 25-40
control over foreign exchange, 27-65 usury controls, 17-35 form of, 25-40, 25-50
10-15 Uniform Common Trust Fund Act, Kentucky governing bodies, 25-45
Secretary of the Treasury's 27-70 Blue Sky Laws, 15-70 guarantee vs., 25-40
function, 10-15, 10-20 Uniform Consumer Credit Act of branch banking, 5-5 international, 25-65
Interstate banking ' 1974. 33-5, 35-20 direct return of dishonored issuer's obligations
bank holding companies', 6-25 usury controls, 17-35 instrument, 21-60 ensure compliance, 25-55
"export" of interest rate, 17-45 instrument "payable at" a bank. payment in good faith, 25-60
federal restriction, 5-40 equivnlent to n draft, 21-65 irrevocable, 25-50
non-banking- financial institutions. Uniform Fiduciaries Act, 27-35 nature of, 25-40
5-45 Kite, 14-70 "notation credit," 25-50
Interstate Land Sales Full Disclosure Joint accounts, 19-35 revocable, 25-50
stop payment rights, 20-30 Knowledge. See Notice
Act, 33-40 right of remitter, 25-70
Intrastate banking, 5-40 survivorship rights, 19-45 security interest in, 25-40
Joint stock companies standby, 25-40
Inventory stock certificates negotiable under
defined, 29-45 transfer, 25-40
Commercial Code, 1 1-20 uniform customs, 25-45, 25-65
security interest in, 29-45 Joint trust funds Land. See Renl estate
priority of purchase money, writing required, 25-40
management of, 27-70 Law telegram a writing, 25-50
30- 10 Judgment note plain English laws, 34-30 wrongful dishonor, 25-55
Investment banks accelerable paper, 16-55 Lease
banking functions, 8-10 Liability
acceleration, causc, 16-45 bnnk holding company activity, See nlso Drawer, Indorser; Issuer;
classification, 1-10 confession of, before maturity, 6- 15
commercial banks, 8-10 Payee; Primary liability
negotiability, 16-45 consumer agents, 14-95
functions. 1-10, 8-10 defined, 16-50 defined, 33-35
investment paper, 7-20 carrier's, 12-30
negotiability, 16-45 disclosure required, 33-35 civil, of institution, for electronic
liabilities under securities laws, 8-10 Judgments Consumer Leasing Act of 1976, fund transfers, 26-75
partnerships, 1-5, 8-10 confessions of. See Judgmcnt note 33-35 drawer, 14-70
separation from commercial equipment
banking, 5-30 effects of acceptance on liability of
as secured transaction, 28-15 other parties, 14-50
Investment paper nature of, 10-40
See also Bonds: Securities improper handling of drafts, 14-35
security device, 10-40
banks limited i n purchases, 4-30 indorser. 14-65
Kansas Legal tender
defined, 10-20 branch banking, 5-5 See also Money tender
limitation by contract, 14-90
negotiability maker's and acceptor's of
. - - of, 12-65, 12-70, direct return of dishonored history. 10-10 negotiable money paper,
I b-nu instrument, 21-60 substitute mny cnusc dishonor,
negotiability under Negotiable 14-15
holder in due course in consumer 22-55
Instruments Law, 16-80 transactions, 15-95 special contract for, 14-90
substitutes acceptable, conditions,
warranty having. 14-85
Investments by bank
limitations, 4-30
~ -.
industrial banks. 8-20
~~~- - -
~

instrument "payable at" a bank,

21-25, 22-50
payment discharges, 19-5
Lessee
Investment securities designation of place of liability, disclosure, 33-35 primary, 14-10
negotiability under Commercial payment, 21-65 presentment, multiple, 22-35
Letters of credit
Code, 12-65 Uniform Act for Simplification of acceptance, 25-55 qualified indorser, 14-70
Iowa Fiduciary Security Transfers, rr, assignability, 25-40 refusal to pny. 6-5
branch banking, 5-5 27-65 carricr's, 12-30 rcprcscntative capacity, 14-105
1-38
 INDEX
[References are t o sections
Liability (cont'd)
secondary, 14-10, 14-60, 22-5
applies only to money paper,
14-60
drawer, 14-50
indorser, 14-50
stop payment, 20-30
trustees, 10-105
Liability on instruments, 14-5, 14-10
acceptor's. 14-15. 14-35
bank's generally, 20-15, 25-5, 25-15
drawee's, 14-15, 14-35
drawer's, 14-1 5
generally, 14-5
guarantor's, 18-25
qualified
acceptance, 14-40, 14-50
indorsement, 13-30, 14-85
warehousemen's, 12-30
Liens
See also Collateral; Security; Pledge
banker's, 20-120
bankruptcy trustee's, 32-40
carrier's or warehouseman's,
12-35, 31-15
cut OR by transfer, 10-60
foreclosure
necessity of notice, 12-35
priority over security interest
real estate, 30-30
types, 30-40
statutory
bankruptcy trustee may set aside,
32-40
Limited partnership
bank accounts, 19-35
Liquidation of banks
Federal Deposit Insurance
Corporation, 3-30
Loan and finance companies, 8-25
banking functions, 8-25
Loans
bank loans to
bank affiliates, 4-45
directors, officers, o r
stockholders, 1-30, 1-40
member banks, Federal Reserve
System, 2-10. 2-40, 2-55
business, interest rate, 17-25
community credit needs, 4-60
(B).]
farm loans, disclosure requirements,
33-15
Federal Deposit Insurance
Corporation to banks, 3-30
gift o r loan, to bank examiners,
4-30
negotiability of paper bank takes
for loans, 16-5
portfolio restrictions, 4-30
purchase money loan, 35-15
tying arrangements, prohibition,
5-20
types of, under usury law, 17-10
Loss of instrument
as acceptance, 22-60
Louisiana
branch banking, 5-5
Commercial Code, partial adoption,
9-30
forgery of drawer's signature,
notifying bank, 20-100
holiday and weekend bank
transactions, 22-1 5
repossession of collateral, replevin
procedure constitutional,
31-15
Uniform Act for Simplification of
Fiduciary Security Transfers,
27-65
Uniform Bills of Lading Act slill in
force, 9-30
Uniform Fiduciaries Act, 27-35
Uniform Warehouse Receipts Act,
9-30
Magnuson-Moss Warranty-Federal
Trade Commission Act, 33-5
Maine
branch banking, 5-5
direct return of dishonored
instrument, 21-60
forgery of drawer's signature,
notifying bank, 20-100
holiday and weekend bank
transactions, 22- 15
industrial banks, 8-20
instrument "payable at" a bank,
equivalent to a draft, 21-65
NOW accounts, 19-20
INDEX
[Relerences arc to sections ( 5 ) .]
Maine (cont'd)
Uniform Act for Simplification of
Fiduciary Security Transfers,
27-65
Uniform Common Trust Fund Act,
27-70
Uniform Consumer Credit Code
Act of 1974, 33-5, 35-20
Maker
See also Drawer
definition of, 14-15
discharge, 22-65
late presentment of notes, 21-65
duties at payment, 22-30
liability, 14-15, 22-5
liability from moment of signature,
14-15
surety or guarantor, 18-25
suretyship defenses, 14-25
waiver by, defenses against
transferee, 16-105
Marginal notations. See Alteration
Married women. See Capacity;
Women
Maryland
branch banking, 5-5
direct return of dishonored
instrument, 21-60
holiday and weekend bank
transactions, 22-15
instrument "payable at" a bank,
designation of place of
payment, 21-65
Uniform Act for Simplification of
Fiduciary Security Transfers,
27-65
Uniform Fiduciaries Act, 27-35
Maskachusetts
Blue Sky Laws, 15-70
branch banking, 5-5
direct return of dishonored
instrument, 21-60
industrial banks, 8-20
instrument "payable at" a bank,
equivalent to a draft, 21-65
notice of dishonor rules, 21-10
NOW accounts, 19-20
+ Uniform Common Trust Fund Act,
27-70
usury controls, 17-35
Mastercard. See Credit cards
Maturity
accelerable paper defined, 16-5
acceleration of
at caprice of holder, 16-10
clauses, 16-5
in bad faith, 16-10
demand notes,
with interest, 22-20
without interest, 22-20
demand paper, 15-40
determination of, 22-10
formalities to be met at, 22-5
See also Presentment for
payment or acceptance
waiver of, 23-70
holder in due course taking before,
15-40
indefinite, negotiability, 16-50
instruments payable before. See
Acceleration clauses
none stated, payable on demand,
17-10
notice by mail, 22-30
paper payable "on or before,"
16-10
purchase of overdue papers, 15-45
rcnsonable, for taking money paper,
15-40
Saturdays, Sundays, and holidays,
22-15
securities, 15-40
"stale" paper, 15-45
transfer after, assignee, 15-45
Maximum interest rate, 2-80, 4-30
See also Usury
Memoranda
indorsement as, 13-65
on face of paper limiting drawer's
liability, 14-30, 14-75
Merchandise. See Goods
Merchandise paper. See Documents
of title
Mergers and consolidations
antitrust laws applicable. 5-25
Federal Deposit Insurance
Corporation supervision, 3-30,
3-35
federal regulation of, 5-10
holding companies', 6-35
Michigan
Blue Sky Laws, 15-70
branch banking, 5-5
 INDEX INDEX

[References are to s e c ~ i o m( 8 ) .] [References are to sections ( 8 ) .]

Michigan (conr'd) holiday and weekend bank Moncy (cotlr'd) direct return of dishonored
direct return of dishonored transactions. 22-1 5 gold instrument, 2 1-60
instrument, 21-60 instrument "payable at" a bank, commodity, 10-15 forgery of drawer's signature,
holiday and weekend bank designation of place of foreign exchange, 10-15 designation of place of
transactions, 22-1 5 payment, 21-65 "gold clause," 10-15 payment, notifying bank,
industrial banks, 8-20 Uniform Act for Simplification of privatc ownership. 10-15 20- 1 00
instrumcnt "payable at" a bnnk, Fiduciary Security Transfers, securities, 10-10 holiday and weekend bnnk
designation of place of 27-65 importing/exporting of monetary transactions, 22-1 5
payment, 21-65 Uniform Common Trust Fund Act, instruments, 4-55 instrument "payable at" a bank,
Uniform Act for Simplification of 27-70 instruments payable in classification 2 1-65
Fiduciary Security Transfers, Missouri of, 10-20 Uniform Act for Simplification of
27-65 Blue Sky Laws, 15-70 legal nature of, 10-10 Fiduciary Security Transfers.
Uniform Common Trust Fund Act, branch banking, 5-5 legal tender, 10-10 27-65
27-70 direct return of dishonored negotiable paper and distinguished, Uniform Common Trust Act, 27-70
Midnight deadline instrument, 21 -60 10-16 Morris Plan Banks, 8-20
collecting bank, 21-25 holiday and weekend bank negotiability of, 11-35 Mortgage
remittance instrument, 21-50 transactions, 22-15 payment in certain kinds, See also Bonds; Chattel mortgages;
defined, 19-5 instrumcnt "payable at" a bank, negotiability, 11-30 Real estate mortgages;
determining payability, 20-95 designation of place of reporting of transactions, 4-55 Security
notice of dishonored check, 20-90, payment, 21-65 types of, 10-10 assignability of, 16-70
21-55 Money-market funds. 5-45 community needs, 4-60
letter of credit provisions, 25-45 construction, priority of, 30-30
on protests, 23-20 mutual funds, portfolio regulation,
Uniform Act for Simplification of 4-30 corporate, 16-75, 16-90
payor bank's liability to meet, Fiduciary Security Transfers,
21-40, 21-55, 22-45 Money order federal aid agencies, 8-75
27-65 See also Draft, Negotiable paper interest rates permitted, 17-15
re-presented checks, 23-60
Minnesota Uniform Common Trust Fund Act, American Express travelers negotiability, 16-30, 16-75
Blue Sky Laws, 15-70 27-70 checks, 25-20 accompanying notes, 16-30
branch banking, 5-5 Uniform Fiduciaries Act, 27-35 bank, 25-20 provisions, 16-30
corporate bonds negotiable, 12-60 Mistake banks issuing, 25-20 state law governs, 16-70
credit cards, 17-45 See also Defenses; Errors customer drawn, 25-20 security devices, 10-45
direct return of dishonored certification, 25-35 defined, 25-20 transactions, credit disclosures,
instrument, 21-60 check paid improperly, 20-10 negotiability, 25-20 33-25, 33-30
industrial banks. 8-20 wrongful dishonor as result, personal. 25-20 transferable by assignment only,
instrument "payable at" a bank, liability, 20-15 Moncy paper 16-70
designation of place of Mobile homes nmbiguous terms and rules of "Most favored lender" doctrine, 17-40
payment, 21-65 loans, 17-15 construction, 1 1-75, 16-65 Motor vehicles
negotiability of bonds, 16-80, 16-90 rescission rights, 33-45 indoner's secondary liability, 14-65 certificate of title, 29-85
Uniform Act for Simplification of kinds of money, 11-35 security interest, 29-85
Monetary policy Municipal corporations
Fiduciary Security Transfers, liability of makers and acceptors of
Federal Reserve System Board of See also Corporations
27-65 Governors and, 4-5 negotiable, 14-15
Uniform Fiduciaries Act, 27-35 negotiability rcquircments, 4-25, capacity to contract, 15-80
inflation and, 2 4 0 , 16-60 11-10, 11-50 Mutual fund
usury controls, 17-35 open market operations, effect, 2-25
Minors. See Capacity negotiable, elementary bank as manager, 5-30
Miscredited proceeds, 20-60 reserve requirements, use in, 2-50 requirements of, 1 1-5, 11-75 portfolio regulation, 4-30
Misrepresentation Money qualified indorsement of, 13-30
defense, 15-90 See also Currency; Federal Reserve unconditional, 1 1-20
Mississippi notes value of. 15-30
Blue Sky Laws, 15-70 changes in legal structure, 10-10 written and signed requirement,
branch banking, 5-5 commercial paper, 10-5, 10- I0 1 1-30 National Bank Act of 1863. 1-15, 2-5
6
direct return of dishonored distinguished from bearer paper, Montana National banks
instrument, 21-60 10-55 branch banking, 5-5 changing to state banks, 1-35
 LNDEX
[References are lo sections
National banks (cont'd)
Comptroller of the Currency
regulation, 2-90
federal acts govern, 9 4 0
Federal Reserve System
membership, 1-10
foreign branches, 4-55
incidental powers, regulation, 4-35,
4-45
interstate credit activities, 17-45
interest rate, 15-75, 17-10, 1 7 4 0 ,
1745
limitations
indebtedness, 4-30
interest charged, 15-75
mergers, 1-35
mergers with state banks, 1-35
organization, 1-10
Comptroller of the Currency
approval, 2-90
receivership
Federal Deposit Insurance
Corporation termination
causes, 3-25, 3-30
trust activity, revocation by
Comptroller of the Currency,
2-90, 27-75
trust authority, regulation of, 27-75
usury, 15-75
National Conference of
Commissioners on Uniform
Laws
See also American Bar Association
and Uniform Laws
Commission
Commercial Code, 12-10
National Consumer Cooperative
1 Code, 20-55
Bank, 8-70
i National Credit Union
I
!
Administration, 7-70, 26-95,
26-1 15
i credit unions examination by,
4-10
National Credit Union Liquidity
Facility, 7-70
National government in banking,
I emergence of. 1-1 5
1 See a130 Government banking;
Administrative agencies
Nebraska
branch banking, 5-5
( 5 ) .]
credit cards, 17-45
direct return of dishonored
instrument omitted, 21-60
instrument "payable at" a bank,
designation of place of
payment, 21-65
presentment, place of, 22-30
Uniform Act for Simplification of
Fiduciary Security Transfers,
27-65
Uniform Common Tmst Fund Act,
27-70
Negligence
See also Due Care; Notice
alteration of instruments, drawer's
liability, 20-70, 20-80
depositor's duty to bank. 20-100
depository bank's liabiliiy, 19-30,
20-85
employees' negligence, 20-85
holder in due course, 15-15
not waivable by agreement, 21-75
recovery of payment on forged
checks, 20-65
waiver illegal under Commercial
Code, 19-30
Negotiability
acceleration clauses, effect, 16-10,
16-25, 16-45
additional promises in money
paper, 1 1-30
advantages of, 11-5, 16-5
bearer paper, 11-50
bonds. See Bonds
certainty as to sum, 11-30
certainty of parties, 11-45
certificate of deposit, 25-10
chattel paper, 16-35, 16-70
code not all-inclusive on, 16-100
collateral, clauses concerning,
effect, 16-55
commercial paper, 10-55
consumer credit contracts, 35-10,
35-20
credit card, 26-5
"cross-collateral" provisions, 16-60
demand paper, 1 1-40, 16-10
designation of payee. 11-50, 1 1-55
determinable future time, 11-45
discount transactions, 1 1-5, 16-5
drawee must be certain, 11-65
INDEX
[References are
Negotiability (conr'd)
Federal Reserve rulings, 1 1-5
fictitious or nonexisting payees,
11-60
formal requisites must be met,
1 1-70
formal requisites of, money paper,
11-10
gold clause, effect of, 11-35
goods o r services, 11-30
incomplete instruments, 11-60,
22-10
later completed, 15-90
indexation, effect, 16-60
investment paper, 12-65, 12-70,
16-80
judgment notes, 16-45
mere statement for, 16-65
money orders, 25-20
money paper requircments. 11-10
mortgages
corporate mortgages, 16-75
effect of lengthy contracts. 16-75
provisions affecting, 16-30
state law governs. 16-70
non-money paper, 11-5
notes payable out of special funds,
1 1-20
government body's negotiability,
1 1-20
order paper, 11-50
particular funds, 11-20
promises or order, 1 1- 15
promises to
d o additional acts, 16-15
pay interest, 11-35
pay on death, 11-45
preserve collateral, 16-15, 16-20,
16-25
reference to transactions, 11-20
requirements o f , 11-10, 11-15
sealed instruments, 16-40
securities, 16-100
statement of, on instrument, 16-65
stock exchange rules, effect, 16-95
"subject to," 11-25
sum of money must be calculable,
1 1-30, 16-60
title retaining contract, 16-70
travelers checks, 25-20
to sections ( § ) .]
unconditional order, checks as,
1 1-20
unconditional requirements, 11-20
waivers of rights, 16-50, 16-105
writing and signed, 11-25
Negotiability by contract, 16-100
natilrc of, 16-100
waivcrs distinguished, 16-105
Negotiable instruments
See also Negotiability; Negotiable
paper
as bundle of contracts, 15-50
conditional nature of, 21-50
descriptive matter in, effect, 11-20
determinable future time, payment,
1 1-45
incomplete, 1 1-60
later completed, 15-90
not enforceable. 22-10
liability of bank as signcr, 25-5
medium of pnyment, 21-50
proof OF ownership when lost,
22-35
sealed, 16-40
statement of declaration. 16-65
transfer, legal effect, 10-60
types of, 12-5
uniform law, 9-25
Negotiable Instruments Law
bonds, negotiability of, 11-15.
12-5, 16-85
certainty of sum requirement of
negotiability, 11-30
corporate bond, negotiability of,
12-5
fictitious payee
rule change by Commercial
good faith payment of fictitious
paper, 20-50, 20-55
incomplete stolen paper, 15-85
instruments payable at banks, 21-65
investment
negotiability
paperof, 16-80
jurisdictions where still in force,
9-25, 9-30
mortgages, nonnegotiable, 16-30
negotiability, all formal requisites
must be met, 11-70
negotiability by contract, 16-100,
16-105
 INDEX
[References are ro sections
Negotiable Instruments Law (cont'd)
notice under, 15-1 5
payment in due course under, 20-35
promises to accept under, 15-30
promises to pay o n death
ncgotiablc, 1 1-45
protest requirements, 23-10
repealed by Commercial Code, 9-30
requirements of negotiability, 11-10
restrictive indorsees
title o f , 13-45
Negotiable money papcr
See also Negotiability; Ncgotiablc
paper
acceptors' liability, 14-15
ambiguous terms and rules of
construction, 11-75
certainty as to sum, 11-30
demand paper, 1 1-40
designation of payee, 11-55
determinable future date, 11-45
elementary requirements, 11-5,
11-75
fictitious o r nonexisting payee,
11-60
kinds of money, 1 1-35
makers' liability, 14-1 5
negotiability requirements, 11-10
order o r bearer paper, 11-50
unconditional, 1 1-20
written and signed, 11-25
Negotiable notes. See Negotiable
Paper
Negotiable order of withdrawal
See also NOW accounts
accounts, 19-20
defined, 19-20
savings institutions opening, 7-50
use by credit unions, 19-20
Negotiable paper, 12-5, 12-70
See nl.ro Bonds; Checks; Drafts;
Equipment trust certificates;
Interim certificates; Letters o f
credit; Notcs: Receiver
ccrtificatcs; Securities;
Warehouse receipts
bills of lading, 12-4
carrier's
liability, 12-30
warehouseman's, lien. 12-35
commodity paper. 12-10, 12-20
negotiability, 12-5, 12-20
(B) .I
corporate bonds
prior statutes making ncgotiablc,
12-60
coverage by Commercial Code,
11-10, 12-65, 12-70
documents of title
identification of, 12-25
method of transfer. 12-40
effect of negotiation, 12-55
eligibility for rediscount by Federal
-
Reserve, 1 1 10
equipment trust certificates, 12-5
indorsement
forms of, 13-5, 13-65
nature of, 13-5, 13-10
restrictive, 13-35
special, 13-25
interim certificates. 12-5
investment securities under
Commercial Code, 12-65
1977 amendments. 12-70
uncertified securities, 12-70
money paper, 1 1-5. 1 1-75
See also Negotiable money paper
ocean freight bills, 12-5
payment by, 21-50
purchaser after maturity only
assignee, 1 1-5
purchaser of overdue o r "stale,"
14-45
security receipts, 12-5
stock certificates, 12-50
transfer
by indorsement, 13-5, 13-10
types, 13-5, 13-60
without indorsement, 13-5, 13-60
uniform laws and, 12-15
warranties on presentment for
performance, 14-60
Negotiation
See n1.w Transfer
acceleration on contingency, 16-25
documents of title, 12-40
nature of. 12-45
stock certificates, 12-50
Nevada
amendment to Uniform
Commercial Code o n
wrongful dishonor of
checks, 20-15
branch banking, 5-5
INDEX
[References ore t o sections ( 5 ) .]
Nevada (conr'd)
direct rcturn of dishonored
instrument omitted, 21-60
good faith requirement, state
checks, 20-25
instrument "paynble at" a bank,
equivnlcnt to a draft, 21-65
presentment, place of variation,
22-30
stop payment orders, 20-30
Uniform Act for Simplification of
Fiduciary Security Transfers,
27-65
Uniform Common Trust Fund Act,
27-70
Uniform Fiduciaries Act, 27-35
New Hampshire
branch banking, 5-5
direct return of dishonored
instrument, 21-60
industrial banks, 8-20
instrument "payable at" a bank.
equivalent to a draft, 21-65
N O W accounts, 19-20
Uniform Common Trust Fund Act,
27-70
New Jersey
branch banking, 5-5
direct return of dishonored
instrument omitted, 21-60
foreign currency acceptable in
instruments, 1 1-35
forgery of drawer's signature,
notifying bank, 20-100
holiday and weekend bank
transactions, 22-1 5
instrument "payable at" a bank.
equivalent to a draft, 21-65
Uniform Act for Simplification of
Fiduciary Security Transfers,
27-65
Uniform Fiduciaries Act, 27-35
New Mexico
hranch bnnking, 5-5
direct return of dishonored
instrument, 21-60
holiday and weekend bank
e+ transactions, 22-1 5
instrument "payable at" a bank,
designation of place of
payment, 21-65
Uniform Common Trust F u n d Act,
27-70
Uniform Fiduciaries Act, 27-35
New York
Dlue Sky Laws, 15-70
hranch hnnking. 5-5
corporate bonds ncgotiablc, 12-60
direct rcturn of dishonored
instrument, 21-60
holder in due course, 15-1 5
holiday and weekend bank
transactions, 22-15
industrial banks, 8-20
instntmcnt "payable 81" II bank,
equivalent to a draft, 21-65
letter of credit provisions, 22-45
loans below prime rate, 17-50
negotiable corporate bonds, 12-60,
16-80, 16-90
N O W accounts, 19-20
plain English law, 34-35
Uniform Act for Simplification of
Fiduciary Security Transfers,
27-65
Uniform Fiduciaries Act, 27-35
waiver clauses. 16-105
warranty by accommodation party,
18-25
New York Banking Law
and consumer legislation, 20-1 5
Night depositories
bank regarded as bailee, 19-15
Nonaction clause, 16-90
non-bank financial institutions,
competition from, 5-40, 5 4 5 ,
19-50
See also Bank holding companies
Nondeposit liability
bank transactions other than
regular accounts, 19-50
Nonnegotiable papcr
Src olso Assignment
eligibility for rediscount. 16-5
indorser's liability, 14-65
rediscount to Fctlcrnl Rcscrvc
prohibited, 16-5
North Carolina
branch banking, 5-5
forgery of drawer's signature,
notifying bank, 20-100
holiday and weekend bank
transactions, 22-1 5
 INDEX
[References are to sections
North Carolina (conr'd)
industrial banks, 8-20
instrument "payable at" a bank,
designation of place of
payment, 21-65
Uniform Act for Simplification of
Fiduciary Security Transfers,
27-65
Uniform Common Trust Fund Act,
27-70
Uniform Fiduciaries Act, 27-35
North Dakota
Blue Sky Laws, 15-70
branch banking, 5-5
direct return of dishonored
instruments, 21-60
instrument "payable at" a bank,
equivalent to a draft, 21-65
Uniform Act for Simplification of
Fiduciary Security Transfers,
27-65
Uniform Consumer Credit Code
Act of 1968, 35-20
Notary public
notice of dishonor, 23-35
Notes
See also Negotiable paper
collateral mortgages, negotiability,
16-30, 16-70
defined, 10-20
Notice of dishonor, 23-30
negotiability, 1 1-20, 1 1-50
payable at banks, check, 21-65
payable in money, 10-20
Notice
See also Notice of dishonor
actual notice of defects
negotiable paper, 15-15
agents' lack of authority to sign,
14-95
bailee's receipt of perfected security
interest, 29-5
bank's responsibility to depositors,
20-85
billing disputes, 33-80
chattel paper under security
interest, 29-65
collateral
repossession, 3 1-15
retention, 3 1-25
sale of, 3 1-20
INDEX
( 8 ) .I [References are to sections (5 ) .]
corporations, 15-25 Notice of dishonor (conr'd)
death or incompetence, to bank, left with third person, ineffective,
19-45 23-40 Ocean freight bills
defenses against negotiable paper, mail, 23-30, 23-50 See also Documents of title
15-10 need not be given, 23-55 negotiability, 12-10
defined, 27-35 not excused stnndard forms, 12-5
depositors of forged o r altered bankruptcy, 23-30 straight bill nonnegotiable, 12-10
checks, 20-100 insolvency, 23-30 Ocean shipping bills. See Documents
fiduciary relation, legal parties benefiting thereby, 23-30 of title; Ocean freight bills
requirements, 27-30, 27-35, partnerships, 23-40 Officers
floor plan, purchaser of goods, person authorized to give, 23-35 See also Agents; Fiduciaries
' 15-25 persons indorsement to, 13-25
holder in due course, 15-15, 15-60 jointly liable, 23-46 interlocking positions prohibited,
indorsers after maturity not receiving, notification, prior 5- 15
entitled, 22-40 parties, 18-45 loans to, 1-30, 4-40
judicial sale, 14-45 death of, 23-40, 23-50 overdrafts by, 4-40
maturity, by mail, 22-25, 22-30 presentment to indorser himself, payees of negotiable instruments,
midnight deadline for revocation of 2 1-50, 23-30 11-55
credit, 20-90 protest obviates, 23-30 suspension or removal
organizations, 15-25 reasonable action in, bank's, 23-50 by Fcdcrnl Home Loan Bank
primary liability without, 18-20 rccipicnts Uonrd, 7-40
purchaser with, only assignee, indorsers, 23-40 causes, 4-20
10-65 third person, 23-40 Ohio
receivership in payment of re-presented checks and, 23-30, branch banking, 5-5
accounb, 19-35 23-60 direct return of dishonored
recording acts, 27-30 requirements of. 23-10. 23-30 instrument, 21-60
negotiable paper, 15-10 good faith test, 15-20
telegraph, 23-30
restrictive indorsement give, 13-65 telephone, 23-30 instrument "payable at" a bank,
savings account withdrawal, 19-20 equivalent to a draft, 21-65
time
suspicious circumstances, 15-1 5 Uniform Common Trust Fund Act,
after prescribed time. 23-45
27-70
before dishonor, 23-45 Uniform Consumer Sales Practices
See also Notice
by mail, 23-45 Act, 33-5
addressing notice, 23-50,23-55 excusable delay, 23-45
Uniform Fiduciaries Act, 27-35
bank agent of collection, 23-35 given "when sent," 23-50
banks giving midnight deadline, Oklahoma
home of party, 23-45
23-45, 23-60 . individuals, 23-45 branch banking, 5-5
bankruptcy of party, 2 3 4 0 , 2 3 4 0 direct return of dishonored
limits, 23-45, 23-50
chargebacks and, 23-30 normal course of post, 23-45 instrument, 21-60
dispensed with reasonable diligence, instrument "payable at" a bank,
personal notice, 23-45
2345.23-55 place of busincss. 23-45 designation
pnymcnt, 21-65
of place of
drawer
within which given, 23-45
notice to, 23-55, 23-80 presentment of, place of. 22-30
under Uniform Commercial Code, Uniform Common Trust Fund Act, -
effective notice, 23-50 23-30
timely, 23-50 27-70
excusable delay, 23-25, 23-45, waiver, nature of, 23-65 Uniform Consumer Credit Code
See also Waiver, 23-70. 23-75 Act of 1968, 33-5, 35-20
23-55
excused writtcn or oral acceptable, 23-30 Open-end credit, 33-20, 33-30, 33-65,
indorser's liability, 14-65 Noting. See Notary public; Protest 33-70
form of, 23-30 NOW accounts, 7-50, 7-90, 19-15, See also Credit
C
incompetent person, 23-50 19-20 Open Market Committee, 2-25
late discovery of address, 23-50 Nullity. See Defenses; Illegality Open market operations, 2-25
 INDEX INDEX

[References are to sections ( 6 ) .I [References are ro secfions ($1.I

Oral agrccmcnts
See also Agreements; Verbal
agreements
changing the nature of
indorsements, 13-60
Order
requirement of negotiability, 1 1-10,
11-15
unconditional order, requirement
for, 1 1-20
Order for delivery of goods. See
Commodity paper
Order instruments. See Documents of
title
Order paper. See Negotiable paper
Oregon
assignee's rights, 16-105
branch banking, 5-5
direct return of dishonored
instrument omitted, 21-60
forgery of drawer's signature,
notifying bank, 20-1 00
holiday and weekend bank
transactions, 22-1 5
instrument "payable at" a bank,
designation of place of
payment, 21-65
presentment of, place of, variation,
22-30
Uniform Common Trust Fund Act,
27-70
Uniform Fiduciaries Act, 27-35
Other types of negotiable paper. See
type of paper involved
Overdraft
dcbt to bank, 20-5
due care and notification, 20-80
officers' or directors', 4-40
stop payment, 20-30
Overdue paper
See ulso Maturity; Stale chccks
demand paper, rules, 15-35
presentment of, 22-20
purchase before overdue, 15-35,
15-40
Paper money, Federal Reserve notes,
2-65
Parol evidence
facts outside instrument, 14-5
liability for facts extraneous to
negotiable paper, 14-5
negotiable instruments, 11-20,
11-75
alteration by, 15-60
variation of indorsement by, 13-65
Partnerships
bank accounts, 19-35
debtor on financing statement,
28-40
individual's position in wrongful
dishonor, 20-15
investment banking, 1-5, 8-10
notice of dishonor to, 23-40
presentment of paper to partners,
22-35
promissory notes, negotiability, '
11-20
Passbooks. See Contracts; Statements
Payee
designation of, 11-50, 11-55
embezzlement situations, 20-55
fictitious
effect on negotiability, 11-60
name, impersonation, 20-55
or nonexisting, 1 1-60, 20-55,
23-55
stop payment order, 20-30
identification, before payment,
20-45
inaccurate designation, 20-55
indorsement not guaranteed by
drawer, 14-70
name misspellcd, 20-55
negotiable instruments
designation, 11-55
Payment
acceptance of tender, 22-50
before maturity. See Accelcrntion
cancellation or revocation by payor
bank, 21-55
duties of collecting/payor bank,
2 1-45
failure to act on documentary
drafts as, 25-60
in due course abolished, 27-55
laws governing, 21-5, 21-10
letters of credit, 25-60
medium of, 21-35
Pnymcnt (cortr'd)
negotiable paper, 21-50
discharge of indorser, 21-50
presentment for, 22-5.22-65
refused or deferred without
dishonor, 2 2 4 5
systems
credit cards, 26-5, 26-40
electronic fund transfers, 26-45,
26-75
tender of, 22-50
time limits for payor bank, 21-40
types acccptnble, 2 1-35
under Uniform Commercial Code,
2 1-45
Payment of instruments, 21-5, 21-75
See also Collection of instruments
instruments payable at/thro~tgha
bank, 21-65
payor not bound by claims of third
party, 22-45
time of, 22-45
Payor
indemnity bond for lost inslrument,
22-35
Payor bank
See also Collection of instruments
defined, 19-5
Pennsylvania
branch banking, 5-5
conflict of laws doctrine, 9-55
direct return of dishonored
instrument. 21-60
holiday and weekend bank
transactions, 22-1 5
instritmcnt "payable at" n hank,
equivalent to a draft, 21-65
replevin, 3 1-15
Uniform Fiduciaries Act, 27-35
Personal finnnce, loan organizations
banking function, 1-5
Personal property
secured trnnsactions, 29-55
intangibles, defined, 29-55
transfer, legal effect, 10-60
Personal property, creation and
pcrfcction of sccurity interests
in, 28-5, 28-50
collateral, partial releases of, 28-45
6 Commercial Code scope, 28-10
filing, 28-35
finnncinl statements. 28-40
leases and consignments as security
transactions, 28-15
security agreement, 28-20
security interests
assignment, 28-50
perfection of, 28-30
purchase money, 28-50
termination statements, 28-45
Plain English laws, 34-35
Pledge
See also Collateral; Pledgee
contrnct right to purchnse
collateral, 29-5
duty of care of goods, 29-15
field warehouse systems, 29-10
possession of collateral as, 29-5
security interest in securities,
29-75
Pledgee
See also Collateral security
bills of sale, 10-40
contract rights, 10-40
deeds as, 10-45
duties of, 29-15
field warehouse system, 29-10
insurance, 29-1 5
lease, 10-40
reasonable care by, 29-15
trust receipts as, 10-50
Point of sale terminals, 26-45, 26-55
Pomerine Act, 9-35, 12-15, 12-25
See also Federal statutes
Federal Bills of Lading Act, 9-35
Portfolio, regulation, commercial
banks, 4-30
Power of attorney
See also Attorney
chattel paper to lender, 18-30
indorsement on stock certificates,
12-50
indorsement of transferred sccurity,
13-20, 16-85
registered bonds transfer, 16-85 .
stock certificates conveying, 12-50,
13-20
Prcscntment
See also Prescntmcnt for
acceptance; Presentment
for payment
address of party liable, 22-40
 WEX INDEX

[References are to sections (§).I [Reierences are to sections ( 5 ) .]

Presentment (cont'd) Present at maturity. See Presentment Production Credit Associations, 8-45 Public Utility Holding Company Act
approved methods, 22-25 Presentment for acceptance, 22-5, Products of 1935,5-15
at banks, 22-30 22-65 new products, security interest in, Puerto Rico
banking hours, 22-30 See also Presentment 30-45 branch banking, 5-5
customary time, 22-30 discussed, 22-5 Promise Commercial Code not adopted,
death of party, 22-25 extension of time by holder, 22-60 acceptance nonexistent paper, 9-30
delayed, 22-40 formalities. 22-5, 22-60 14-30 Uniform Bills of Lading Act, 12-15
documentary drafts, 24- 10 form of, 22-60 conditional sales contract, 16-35 Uniform Warehouse Receipts Act,
drawer's liability affected, 22-65 necessity for, 22-60 preservation, keeping up and 12-15
due date requirement, 22-10 notification of, 22-60 protection of collateral, Purchase money loan, 35-15
excusable, 22-40 , place of, 22-30 16-15, 16-20. 16-25 Purchase money security interest
excused for death o r insolvency, Saturdays, Sundays, and holidays, requirement of negotiability, 11-10, defined, 28-25
22-35 22-15 11-15 grace period, 30-5
formalities of, 22-25 time allowed for, 21-25, 22-45, unconditional requirement, 11-20 priority, 30-10
formalities to hold drawer, 22-65 22-60 Promissory notes. See Notes Purchaser
indorsers after maturity not Presentment for payment Property See also Bona fide purchaser
entitled, 22-40 See also Presentment after-acquired, as additional collateral, rights of. 3 1-20
indorsers' liability, seven-day checks, 22-20 collateral, 29-30, 29-45 definition, second secured party
presumption, 21 -35 day after maturity, 22-20 personal property included as, 30-20
lost instruments, 22-35 day before maturity, 22-20 crention and perfection of from fiduciary
mail, 22-25 demand instruments, 22-20 security interests in, 28-5, giving of value required, 27-25
notice that instrument matures, demand paper reasonable time, 28-50 liability, 27-20
22-25 22-20 transfer, legal effect of, 10-60 of instruments under security
notice through mail, 22-35 discussed, 22-5 Protectograph machines, 19-40 interest, 29-60, 30-20
not required, 22-40 failure does not discharge drawer, Protest, 23-10, 23-25 transferees other than bona fide,
fictitious persons, 22-40 22-20 See also Notice of dishonor;
10-65
impossibility, 22-40 place of, 22-30 Presentment for payment
delay in, 23-25 Purchaser in good faith
no expectation acceptor will pay, rules. 22-22 rights in property transferred,
22-45 satu;days, Sundays, and holidays, form of, 23-15
10-60
no expectation drawee will pay, 22- 15 loss of paper, 23-20
22-50 Primary liability midnight deadline, 23-20 Purchaser in regular course of
stop payment. 22-50 See also Acceptor; Liability; Maker notice of dishonor, obviated by, business
waiver, 22-50 commercial paper, 14-5 23-30 defined. 30-15
when, 22-40 discharge of, 18-20 noting for, 18-10 farm products, 29-40
partnership's liability, 22-35 nature of, 14-5 place of, 23-20 inventory, 29-45
payment or acceptance, 22-5, 22-65 presentment not necessary, 22-20 presumption of dishonor created priority over security interest,
place of principal debtor distinguished, by, 23-5 30-15, 30-20
business, 22-30 18-25 procedural advantage of, 23-10 required for
central processing center, 22-30 Prime interest rate, 17-50 required on bills drawn and payable chattel paper. 29-65
"preponderance
- - of evidence" proof, Principal debtor. See Suretyship outside of the United States, documents of title, 12-45, 15-10,
22-35 Priority of claims. See Security 23-10 19-70
primary liability without, 18-20 interest, priorities requirements of, 23-15
ieasonable hour, 22-25 Privacy, right to customer's financial time limits of, 23-20
through centralized processing records, 4-50 unnecessary, 23-25
center, 22-30 Proceeds of collateral waiver includes presentment and
through clearinghouse, 22-30 funds in bank accounts as, 29-90 notice of dishonor, 23-65,
time limits, 21-25, 22-45, 22-60 insurance on collateral. 29-95 23-70 Qualified acceptance, 14-45
unusual cases, 22-35 priority of claims to, 30-10. 30-25 Public law See also Acceptance; Certification
waiver, 23-65, 23-70 sale of collateral, 29-95, 31-20 divisions of, 9-10 "certified as originally issued,"
warranties on presentment of security interest in, 30-25 * Public officials 25-30
negotiable paper for surplus, debtor's rights to, 3 1-20 See also Fiduciary liability of drawer and prior
performance, 14-80 use after defaull 3 1-20 fiduciary relationship, 27-5 indoners, 14-50

INDEX
[References are to sections
Qualified indorser
liability, 14-70
warranty, 14-85
Railroads. See Carriers
Raised checks. See Alteration
Real estate
See also Mortgages
description o n
financing statement, 28-40,
29-40, 29-80
security agreement, 29-40
fvctures, 29-80, 30-30
portfolio restrictions
bank holding company. 6-15
commercial banks, 4-30
transactions
disclosure requirements, 33-40
rescission rights, 33-45
Real Estate Settlement Procedures
Act of 1974 ( R E S P A ) , 33-40
Reasonable time
See al.co Prcsentmenl
presentment for payment, 22-20
Receivers
See also Bankruptcy; Fiduciaries
assignment t o creditors,
arrangement, 32-20
Federal Deposit Insurance
Corporation as, 3-25, 3-30
fiduciary relationship, 27-5
powers of, 32-25
Receivers' certificates
loans and reorganization
distinguished, 10-30
Receiverships, 32-25
Recording
See also Registration
notice against negotiable paper,
15-15
Record-keeping
reporting and, currency
transactions, 4-55
Regulation of banking
bank service corporations, 5-35
conduct of business, 1-10
federal, 4-5, 4-80
( 5 ).I
Regulatory agencies, 4-5
See also Oflicisl name of agency
Comptroller of the Currency, 2-10,
2-90
Federal Deposit Insurance
Corporation, 3-35, 4-5, 4-10,
26-1 15
Federal H o m e Loan Bank Board,
26-1 15
Federal Savings and Loan
Insurance Corporation,
26-1 15
Federal Trade Commission, 5-10,
5-25
Federal Trade Commission Act,
5-10, 5-25
foreign banks, 8-85
laws governing
conflict of laws, 9-5, 9-55
law-making bodies, 9-5
preemption, 9-55
sources, state over federal, 9-5,
9-45, 9-50
state commercial law, 9-20
mergers, 3-35
National Credit Union
Administration, 26-1 15
national banks, 1-10
incidental power, 4-35
organization, 1- 10
state banking departments
function, 1-20
law governing. 1-20
list of addresses, 1-20
powers of, 1-20
state, of state banks, 1-20
Regulation by state, 6-15, 6-20
Reimbursement. See Suretyship
Remitter
defined, 25-70
liability a3 transferor, 25-70
party to negotiable paper, 25-70
rights of, 25-70
warranty liability, 25-70
Remitting bank, defined, 19-5
Remote service units. See Computers
Reorganization plans
banks insured by Federal Deposit
Insurance Corporation, 3-30
Replevin. 3 1-15
INDEX
[References are to sections
Reporting
record-keeping and, currency
trnnsnctions, 4-55
Reports, uniform system, 4-16
Reprcsentative. See Agent;
Fiduciaries; Trustee
Representative capacity
liability of persons signing in,
14-105
Repurchase agreements, 19-50
Reserve, Federal Reserve
requirements, 2-50
Reserves
Federal Home Loan Bank
rcquiremcnts, 7-30, 7-50
non-bank institutions exempt, 5-45
Restrictive indorsement
See also Indorsement; Indorser
binding o n payot banks, 21-45
not binding on collecting banks,
21-45
not binding o n intermediary banks,
2-15
securities and commodity paper,
13-55
Returns. direct. 21-60
Revolving charge account. See
Open-end credit
Rhode Island
branch banking, 5-5
direct return of dishonored
instrument, 21-60
holiday and weekend bank
trnnsnction, 22- 15
instrument "paynble at" n bank,
equivalent to a draft, 21-65
NOW accounts, 19-20
Uniform Act for Simplification of
Fiduciary Security Transfers,
27-65
Uniform Fiduciaries Act. 27-35
Right to Finnncial Privacy Act of
1978, 4-50
Rural Electrification Administration
( R E A ) , 8-6Q
+ Safekeeping
accounts distinguished, 19-15
--
(§).I
Sale. See Collateral; Consumer
credit; Goods; Purchaser;
Transfer
Saturday Afternoon Bank
Transactions Act
states adopting, 22-15
Saturdays
bank holiday, 22-1 5
effect on maturity of instruments,
22-1 5
presentment of instruments on,
22-1 5
Savings accounts
See also Accounts
nature of, 19-15, 19-20
-
Savines and loan associations
changes in ownership o r control,
7-55
charter, 7-10. 7-15
examination, 4-10, 7-50
federal and state, 7-10
Depository Institutions
Deregulation and Monetary
Control Act of 1980, effect
of on, 2-85
Federal Home Loan Bank Board,
7-25
Federal Home Loan Banks. 7-30
member institutions, 7-35
Federal Home Loan Bank System,
7-15
Federal Savings and Loan
Associations, 7-10, 7-45
powers of, 7-40
Fedcrnl Savings and Loan
Insurance Corporation, 7-50
bank examination by, 7-50
changes in control of insured
savings institutions, 7-20
Federal Savings a n d Loan System,
7-40
federally charted
conversion to state chartered,
740
electronic transactions, 26-105
Federal H o m e Loan Bank Board
regulation, 7-1 5, 7-40
organizational forms, 7-10
powers, 7-45
history, 7-10
insured changes in control of, 7-55
 INDEX
[References are to sectionr ( 8 ) .I
Savings and loan associations (cont'd)
interstate branching, 5-40
NOW accounts, 7-50,7-90,19-15
organizational forms, 7-10
record-keeping, 7-50
regulation of, 7-15
share draft accounts, 19-20
unfair practices, 34-30
Savings and loan holding companies.
7-60
Savings banks, 7-90,7-95
as "banks" under Uniform
Commercial Code, 1920
checking rights, 7-85
commercial banking activities by,
Id,7-95
demand deposit, 7-85
Depository Institutions
Deregulation and Monetary
Control Act of 1980,effect
of on, 2-85
Federal Reserve System and,
relationship, 2-85
state and federal, 3-15
Savings institutions, 7-5,7-95
See also Savings and loan
associations
activities, 7-5
central liquidity facility, 7-85
changes in control of insured
institutions, 7-55
credit unions. 7-65.7-80
expansion into commercial
banking, 7-95
generally, 7-5
savings and loan associations, 7-10,
7-50
savings banks, 7-70
relationship to Federal Reserve
System, 2-85
Sealed instmments, 16-40
negotiability of, 16-40
Secondary liability
Sec also Drawer; Indorser;
Liability
commercial paper, 14-5
discharge of, 18-20
See also Discharge
cancellation of signature, 18-20
extension of time, 18-20
drawers, 21-40,21-75
indorscrs, 21-40,21-75
nature of, 14-10,14-60
notice of dishonor to parties
having, 22-55,23-30
Secondary parties
defined, 22-5
right of recourse at maturity, 22-5
Secrecy
See also Privacy, right to
federal restrictions, 4-55
Secretary of the Treasury
International Monetary Fund,
10-15
subscription to stock of Export-
Import Bank, 8-85
Secured creditors
See also Creditors; Secured party
vs. unsecured, 32-45
Secured Party
See also Secured transactions;
Security agreement; Security
interest
assignee a3 secured party, 28-10,
29-50,29-65
conflicts with
buyers of goods, 30-15
other lienholders, 30-40
other secured parties, 30-5,
30-10,30-25,30-30,3045
purchasers of instruments,
chattel paper, documents,
30-20
real estate mortgages, 30-30
trustee in bankruptcy, 32-40,
32-45
unpaid sellers of goods, 30-35
consignor as secured party, 28-15
duties towards collateral. 29-15,
31-10,31-20,31-25
failure to comply with repossession
o r disposition provisions,
31-30
lessor as secured party, 28-15
remedies of, 31-5
subordination by agreement, 30-50
Uniform Commercial Code scope,
28-10
Secured transactions
Scc also Secured party; Security
agreement; Security interest
defined, 28-5
INDEX
[References are to sections
Secured transactions (conr'd)
personal property, 28-5
See also Personal property,
creation and perfection of
security interests in
priorities, right of competing
creditors, purchasen, and
transferees, 30-5
See also Security interests
buyers of goods, 30-15
fixtures. 30-30
lienholders under other laws,
30-40
perfected security interests,
30-10,30-45
proceeds, 30-25
purchasers of instruments,
chattel paper, documents,
30-20
unpaid sellers, 30-35
unpcrfected security interests,
30-5,30-45
types, 29-5
accounts. 29-50
chattel paper, 29-65,30-20
consumer goods, 29-30
documents of title, 29-70,30-20
equipment, 29-35
farm products, 29-40
field warehouse, 29-10
fixtures, 29-80.30-30
general intangibles, 29-55
. goods and chattels, gcncrally,
29-25,30-15,30-25,30-30,
30-35,30-45
instruments, 29-60,30-20
inventory, 29-45
motor vehicles, 29-85
pledge, 29-5
securities, 29-75
Securities
See dco Security devices
as loan collateral, 4-30,4-70,5-30
banker's lien on, 20-120
bank holding companies and
securities transactions, 6-30
bank securities, antifraud laws,
4-70
bearer, 12-70
6.
certified
defined, 29-75
( 5 ) .]
security interest, secured
transactions, 29-75
definitions, disputed, 5-30
dividends, purchaser's rights in,
1 2-55
fiduciary transfer of. 27-60.27-65
fiduciaj's duties in handlin.g,
27-15
Glass-Steagall Act, 5-30,6-30
government
dcfcctive or invalid, recovery,
15-85
indorsement
in blank, 13-20
notice given thereby. 13-25
on separate instrument, 13-10
restrictive, 13-55
instruments payable in, 10-35
commercial paper, 10-5,10-35
liability of issuers, 14-55
liahility of parties to, 14-5.14-100
insurers. 14-55
margin requirements, 2-10,4-70
negotiability, 16-100
nonnegotiable, 28-5
prohibition against banks dealing in
securities, 5-30,6-30
registered, 12-70
security interest in secured
transactions, 29-75
short-term repurchase transactions,
19-50
stalcncss, 15-40
transnctions involving
bank holding companies, 6-3
non-banking institutions,
permissible, 5-45
restrictions on banks. 4-30,4-70,
5-30
uncertificatcd. 29-75
dcfincd, 29-75
not negotiable, 12-70
security interest, 29-75
unincorporated bodies, 10-30
Securities Act Amendments of 1964,
4-70
Securities and Exchange Commission
( S E X ) . 4-70
banks and securities regulation,
5-30
 INDEX
[References arc to sections ( 8 ) .]
Securities and Exchange Commission
(SEC) (conr'd)
bank holding companies and
securities regulation, 6-30
investment banking, 8-10
Securities Exchange Act, 4-70
Security
See also Collateral
collateral held for debtor's other
loans, 16-55
contract rights as, 10-40
commercial paper transfer, 10-40
personal security contracts, 18-10
simple personal security, 18-10
types of, 18-5
Security agreements
See also Guaranty; Suretyship
acceleration clause, 3 1-5
Code rule changes limited, 3 1-5
copy of as financial statement,
28-40
default, 31-5
remedies, 3 1-10, 3 1-15, 3 1-20,
3 1-25
defined, 10-45
enforcement of, 28-20
modification after assignment,
28-50, 3 1-5
negotiability, 16-35, 16-70
personal, 18-10
pledge, 29-5, 29-10
purchaser's rights in, 16-70
subordination agreements, 30-50
Sccurity dealers. See Interim
ccrtificatcs
Security devices
See also Bailment lease; Bill of
sale, Chattel mortgage;
Collateral; Conditional sale;
Mortgage; Pledge; Trust
receipts
commercial paper, 10-5, 10-45
equipment trust certificates and
"trust receipts," 10-50
real estate, titles to, 10-45
contracts conferring negotiability,
16-100
paper evidencing title, 10-45
types of, 10-45, 10-50, 18-5
Security interest
See also Collateral; Filing,
1-58
Financing statement; Filing
procedures; Financing
statement; Secured party;
Secured transactions;
Security agreements
accounts, 29-50
accounts rcccivnblc, 29-50, 30-5
amcndmcnts, financing statements,
28-45
assignment of, 28-50
attachment, 28-20, 28-30
bank accounts, 29-90
bankruptcy, effect, 32-40, 32-45
chattels. 29-25
chattel paper, 29-65. 30-20
Commercial Code
exceptions, 28-10
priorities, 28-10
scope, 28-10
consignments, 28-1 5
consumer goods, 29-30
creation and perfection of
in personal property, 28-5
defined, 10-45, 28-10
discharge of, 3 1-20, 3 1-25
disclosure requirement, 33-30,
33-35
documents of title, 29-70, 30-20
equipment, 29-35
farm products, 29-40, 30-10
field warehouse system, 29-10
filing, 28-30, 28-40, 29-20
place of. 28-30
fixturcs, 29-80, 30-30
gcncral intangibles, 29-55, 30-5
instruments, 29-60. 30-20
insurance policies, 29-95
inventory, 29-45, 30-10
leases, personal property, as, 28-15
married persons' signatures, 34-25
motor vehicles, 29-85
perfection of, 28-30
agent, trustee, o r bailee holds
collateral, 29-5, 29-10
automatic, 29-20
documents, 29-70
filing for, 29-20
methods, 28-30
possession, 28-30, 29-5, 29-10,
29-20
personal property, 28-5, 28-50
INDEX
[Referencesare to scctionr ( 9 ) .]
Security interest (conf'd)
priorities, 30-5, 30-50
buyer of commercial paper,
30-20
buyer of goods, 30-1 5
commingled or processed
goods, 30-45
fixturcs, 30-30
lien creditor, 30-40, 32-40
other perfected security interests,
30-10, 30-45
proceeds of collateral, 30-25
subordination agreements, 30-50
unpaid seller of goods, 30-35
unsecured creditors, 32-45
purchase money, 28-25
rescission voids, 33-45
release or termination of collateral,
28-45
reorganizations aflect on, 32-30
securities, 29-75
termination statement, 28-45
unperfected, 28- 15
claimants with priority over,
30-5
securities, 29-75
Security receipts
negotiability of, 12-5
Self-help repossession, 3 1-15
Setoff
See also Lien
bank's right of, 20-120
due process, 31-1 5
joint nccount, 19-35(2)
security interest in account,
conflict with, 29-90
Settlement
defined, 19-5
provisional is revocable. 20-95
revocation and recovery right of,
21-55
types of payment acceptable, 21-35
Share draft accounts, 19-20
Shares
See also Stock certificates
defined, 10-30
shipment of goods. See Bills of
lading; Documentary drafts;
ocean shipping bills; Way
bills
Sherman Act, 5-25
Short-term transactions, 19-50
Signature
agent's, 14-95, 14-100
authentication necessary, 19-40
double, 19-40
in fraudulent intent, 20-55
facsimile, 19-40
forged or unauthorized, 20-55,
20-65
on checks, 20-65, 20-1 15
liability, 14-80, 19-40
liability incurred by, 14-5, 19-40
nature of, 1 1-25, 15-60
necessity for liability on negotiable
paper, 14-5
negotiability requires, 11-25
place on negotiable paper, 14-5
importance of, 14-5
representative's, 14-1 10
rubber stamp, 1 9 4 0
single, double, 19-40
travelers checks, 25-20
trustee's, 14-105
Signature cards
authorization requirement,
deposits/withdrawals, 19-40
nature of, 19-40
Silver, 10-10
Silver certificates
See also Money
legality of, 10-10
Simplification and Reform Act. See
Truth-in-Lending Act,
Simplification and Reform Act
Slander of credit. 20-15
Small Loan Acts
See also Illegality; Usury
instruments made in
violation of defense, 15-65
Sources of banking law
state and federal, 9-5, 9-45
Sources of law
constitutional law, 9-10, 9-15
United States, 9-5
South Carolina
branch banking, 5-5
direct return of dishonored,
instrument. 2 1-60
instrument "payable" at a bank,
designation of place of
payment, 21-65
 INDEX
[References are to seclioru ( 9 ) .]
South Carolina (cont'd)
Uniform Act for Simplification
of Fiduciary Security
Transfers, 27-65
Uniform Consumer Credit Code
Act of 1968, 33-5
usury controls, 17-35
South Dakota
branch banking, 5-5
direct return of dishonored
instrument, 21-60
holder in due course in consumer
transactions, 15-95
holiday and weekend bank
transactions. 22-1 5
instrument "payable at" a bank,
designation of place of
payment, 21 -65
Uniform Act for Simplification
of Fiduciary Security
Transfers, 27-65
Uniform Common Trust Fund
Act, 27-70
Uniform Fiduciaries Act, 27-35
Special accounts. See Accounts
Special contracts
See also Standard contracts
in commercial loans
acceleration clause, 16-10
chattel paper, 16-35
judgment notes, 16-30
provisions in mortgages, 16-30
sale o r holding of collateral,
16-60
liability limited by, parties to
commercial paper or
securities, 14-90
Special deposits
See also Accounts; Certificates of
deposit
bank's liability, 20-15
defined, 19-20
Special indorsement. See
Indorsement; Indorser
Specialized organizations with
banking functions. 8-5, 8-55
"Stale" negotiable paper. See
Maturity
Standard contracts
See also Special contracts
accelerable notes, 16-25
duty tb check bank statements,
20- 100
relief of liability for negligence,
20-80
stop payment renewal notice,
20-30
State Banking Commissioners
addresses, powers and duties, 1-20
State Banking Departments. See
State Banking Commissioners
State banks
changing to national, 1-35
examination of, 2-70
Federal Deposit Insurance
Corporation regulations, 3-35
foreign banking by, 4-75
loan restrictions, 14-30
merger with national banks, 1-35,
5-10
portfolio restrictions. 4-30
regulations, 1-20
receivership o r liquidation, 3-30
Stale check laws
See also Maturity
time limit, 20-15
State laws
consumer credit, 33-5
defenses, 35-20, 35-25
disclosure, 33-75
electronic transfers, 26-1 10
extent of jurisdiction, 9-20
foreign banks subject to, 4-80
insolvency, 32-25
interaction with federal, 9-50,
9-55
mortgage negotiability, 16-70
negotiable instruments, 15-70,
15-75, 15-80
superseded by federal law, 9-1 5
uniform laws are, 9-35
Statement
of account
in electronic transfers, 20-105,
26-90
timely correction required,
20- 100
debtor's, describing collateral,
28-20
declaring instrument negotiable,
16-65
INDEX
[Referencesare to sections ( 9 ) .]
Statement (cont'd)
financing statement. See
Financing statement
termination of security interest,
28-45
Statements
See also Accounts
depositor's duty to bank, re,
20- 100
Statute of limitations
reporting forgeries and alterations,
20-100
sealed instruments, 16-40
Statutes
See also name of state o r name of
statute involved
bank statements
time limit reporting errors,
20- 100
negotiability of corporate bonds,
1 2-55
negotiability of paper, 9-25
stop payment notice effective
only six months, 20-30
variations in state laws (see name
of state)
Steamship lines. See Carriers;
Ocean freight bills; Ocean
shipping bills
Stock certificates
See also Securities
defined, 10-30, 29-75
formal requisites not necessary,
12-55
indorsement
in blank, 12-55
not on the instrument, 13-5
interest in business, 10-30
commercial paper transfer, 10-30
maturity. 12-50, 15-40
negotiability of, 12-50
negotiation, effect of, 12-55
never issued to bearer, 12-55
security interest in, 29-75
transfer of, 12-55
Stock exchange
negotiability of instruments
+ traded on, 12-70
Stock exchange rules
effect on negotiability of paper,
16-95
Stockholder
loans to, interest rate, 1-30, 4-40
Stocks
registered securities, 12-70
Stock Transfer Association, 27-65
Stop payment, 20-30, 20-35, 20-40
after certification or acceptance,
25-25
bank drafts, 20-40
bank's rights on improper payment,
20-30
burden of proof, 20-30
cashiers' checks, 20-40
certified checks
bank's negligence, 20-30
drawer loses right, 25-25
third party's order, 20-35
validity, 20-40
confirmation of notice, 20-30
drawers disch~rgedby certification
cannot, 25-25
electronic transfers, preauthorized,
26-70, 26-80
holders in due course rights, 25-25
notice of, 20-15
notice of dishonor, 18-30
overdrafts and, 20-30
presentment, effect of. 2 2 4 5
renewal required, 20-30
right of subrogation, 20-30
third parties, 20-35
Stop payment order
characteristics for effective, 20-30
exculpating agreements invalid,
20-30
expired, on stale check, 20-25
joint accounts, 19-35
limited duration, 20-30
notice of dishonor obviated by,
23-55
presentment nullified by. 2 2 4 0
Subordination agreements, 30-50
Subrogation
bank's right. improper payment,
20- 10
equitable, 30-40
rights, stop payment orders, 20-30
surety's right to, 18-10
Sundays
bank holidays, 22-15
efTect on maturity of instruments,
22-15
 INDEX
[Relerences are to sections ( 8 ) .]
Superintendent of Ihnks
See also State Banking
Commissioners addresses, 1-20
Suretyship
See also Accommodation
bankruptcy, 18-15
banks and. 18-15
defenses, 18-15
accommodation parties, 18-25
changing time, 18-15
granting time, 18-25
gratuitous changes, 18- 15
indorsers' similar, 18-20
negotiable paper, 18-25
releasing collateral, 29-5
surrendering collateral, 18-20
variation of risk, 18-15
defined, 18-10
devices and defenses, 18-1 5
exoneration, 18-1 5
extension of time, 18-20
guaranty distinguished, 18-10
guaranty of payment, 18-10
letter of credit as, 25-40
married women, 15-80
negotiable paper, 18-25
primary and secondary liability
distinguished, 18-20, 18-25
primary or secondary liability on
negotiable paper, 18-20
principal debtor
primary liability distinguished,
18-25
principal debtor defined, 18-10
reimhuracmcnt, 18-20
secondary liability distinguished,
18-20
specific and general, 18-25
subrogation defined, 18-10
surety defined, 18-1 5
surety's rights
exoneration, 18-1 5
reimbursement, 18-10
subrogation, 18-10
warranties of accommodated party,
18-25
Taxes
Federal Reserve Banks exemption,
2-30
promises to pny, effect on
negotiability, 16-20
tax laws, secrecy laws for
enforcement, 4-55
Tender
See also Legal tender
instruments payable at banks,
2 1-65
nature of. 22-50
payment, acceptance discharges
debt, 22-50
refusal of, 22-50
willingness to pay, 22-50
Tennessee
Blue Sky Laws, 15-70
branch banking, 5-5
direct return of dishonored
instrument, 21-60
holiday and weekend bank
transactions, 22-1 5
industrial banks, 8-20
instrument "payable at" a bank,
designation of place of
payment, 21-65
Uniform Act for Simplification
of Fiduciary Security
Transfers, 27-65
Uniform Common Trust Fund
Act, 27-70
Uniform Fiduciaries Act, 27-35
Terminals. See Computers
Texas
Blue Sky Laws, 15-70
hranch hanking. 5-5
direct return of dishonored
instrument, 21 -60
instrument "payable at" a bank.
equivalent of a draft, 21-65
stop payment orders, 20-30
Uniform Act for Simplification of
Fiduciary Security Transfers,
27-65
Uniform Common Trust Fund
Act, 27-70
Theft
depositor's duly of duc care and,
20-1 10
instrument stolen when
incomplete, 15-85
Third parties. See Fiduciaries
Third party stop payment, 20-35
INDEX
[Rr/crences ore to sections (Q) .]
Thrift institutions. See Savings and
loan associations; Savings banks
Tie-ins, 5-20, 5-25, 6-15
Time
allowed for payment, 22-45
extension of an instrument, 16-50
effect on suretyship, 18-25
stop payment order submission,
20-30
Time paper
See also Maturity
consequences of-late presentment,
22-20
"Time-price" doctrine, 17-5
Title. See Certificates of title;
Documents of title
Trade acceptances, formal requests
of. See Acceptance of drafts;
Negotiable paper
Trade names
drawers of negotiable instruments,
1 1-65
payees of negotiable instruments,
1 1-60
Transfer
See also Assignment; Indorsement;
Negotiation
after maturity, 10-65
bankruptcy trustee voidance of,
32-40
chattel paper, 16-70
commercial paper, 10-5, 10-65
documents of title, 12-40, 12-45
flducinrica'
negotiable paper, 27-35
securities, 27-60, 27-65
investment paper, 12-70
legal effect, 10-60
mortgages, 16-70
negotiable paper, 13-5
forms of indorsement, 13-5
stock certificates. 12-55
types of. 13-5, 13-60
without indorsement, 13-60
wrongs in, 15-60
Transfer agents, 27-60, 27-65
adverse claims must be reported
to, 27-60
.4 proof of fiduciary nuthority, 27-60
Transferees
See also Assignees; Holders other
than bona fide purchases,
10-65
commercial paper, 10-65
rights in bankruptcy, 32-40
without indorsement rights of,
13-60
Transferor
See also Assignor; Indorser
fiduciary security transfer, 27-60
remitter as, 25-70
warranty liability, 14-75
Transportation Companies. See
Carriers
Travel agencies, 4-35
Travelers checks, 25-20
See also Remittance
American Express, 25-20
stolen, issuer's liability, 25-20
Travel services
bank's, 4-35
holding company's, 6-15
Trust. See Fiduciaries; Trust receipt
Trust certificates
for stock certificates, 10-30
negotiability, 12-60
Trust companies, 1-5
banking function, 1-5
commercial banks and,
distinguished, 10-5
holding company ownership, 6-15
Trust departments
See also Fiduciaries
federal savings and loans, 7-45
or-premises. 5-5
powers, Comptroller's revocation
of. 27-75
securities dealings not prohibited,
5-30
transactions, distinguished from
deposits, 19-15
Trustee in bankruptcy
See also Bankruptcy
exercises right of creditors. 32-40
rights and powen of, 32-30, 32-45
Trustees
See also Fiduciaries
assignment for the benefit of
creditors, 28-50, 32-20
bank accounts, 19-35
bank as, 19-15
bankruptcy, 32-30, 32-40
 INDEX
[Refercnccs are to sections (8) .]
Trustees (cont'd)
liability, 14-105, 14-1 10
limitation, 14-100
on commercial paper, 14-100
payment of, 14-95
payment on death of, 19-45
pledge of collateral as, 29-10
security interest
priority, 30-5, 30-50
trust department as, 19-15
Trust funds
See also Fiduciaries; Trustee;
Uniform Common Trust
Fund Act
common, 2 1-70
Trust oflicers
fiduciary duties, 27-5
Trust receipts
conditional sale compared, 16-35
defined, 10-50
security devices, commercial paper,
10-50
Trust Receipts Act. See Uniform
Laws
Truth-in-Lending Act
See also Consumer Credit
Protection Act; Disclosure
requirements
agricultural credit, 33-15
civil liability, 33-50
consumer leases, 33-35
credit billing procedures, 33-80
credit card, 26-10
issue rules, 26-1 5
transactions, 26-10, 26-25
creditor defined, 33-10
Depository Institutions
Deregulation and Monetary
Control Act of 1980 and,
33-10
disclosures, 33-10, 33-15
credit arrangement determines,
33-20
enforcement agencies, 33-25
installment payments, and, 33-25
mortgage transactions, 33-25,
33-30
provisions, 33-10
real estate transactions disclosure,
33-40
rescission, 33-45
revisions, 33-10
scope, 33-15
state law, effect on, 33-75
Truth-in-Lending Simplification and
Reform Act, 33-10
consumer's defenses, 33-50
credit billing, 33-80
disclosures, 33-25
model forms, 33-10, 33-60
effective date, 33-10
, enforcement agencies, powers,
33-55
refund of excess balance, 33-80
Typewriting
prevails over printing, 11-75
Unauthorized signature, 20-65
Unconditional. Sec Negotiability
Unconscionable contracts
See also Contracts
effect of bad faith, 15-20
in opening accounts, 19-30
waivers of defense, 16-1 05
Underwriters
See also Investment banking
organization, 8-10
Unfair business practices .
consumers' protection against,
2-10, 34-30
Uniform Act for Simplification of
Fiduciary Security Transfers,
27-65
Uniform Commercial Code (UCC)
See also Commercial Code
accelerable paper, 16-10
Uniform Common Trust Fund Act,
27-70
Uniform Consumer Credit Code
claims and defenses under, 35-20
consumer credit transactions,
35-20
history, 33-5
plain language in contracts
required, 34-35
Uniform Consumer Sales Practices
* repealed by Commercial Code,
Act, 33-5
INDEX
[References are to sections ( 5 ) .I
Uniform customs, 25-45, 25-65
International Chamber of
Commerce, 25-65
supplementing Commercial Code,
25-65
Uniform Fiduciaries Act, 27-45
Uniform laws
See olso title of acts named below
Act for Simplification of Fiduciary
Security Transfers, 21-65
not repealed by Commercial
Code, 21-65
Bills of Lading Act, 9-25.9-35
See also Federal statutes;
Pomerine Act
conveyance of title by finder
or thief, 12-1 5
repeal by Commercial Code,
9-25, 9-30, 12-5
Commercial Code. See
Commercial Code
Commission on, 9-20
See also Uniform Laws
Commission
Common Trust Fund Act. 21-70
Consumer Credit Code. 15-75,
35-20
conflict with federal act, 35-30
rights of holders in due course,
35-20
states enacting. 33-5
Consumer Sales Practices Act.
. 33-5
Fiducinrics Act
negotinblc instruments under,
2745
not repealed by Commercial
Code, 27-35
histow of, 9-20, 9-25
negotiability of commodity paper,
12- 15
Negotiable instruments Law. See
Negotiable Instrunlents Law
states still enforce, 9-25
Sales Act
See also Sales Act, 9-25
repealed by Commercial Code,
9-30
Stock Transfer Act, 9-25
9-30
Warehouse Receipts Act, 12-15
jurisdiction where still enforced,
9-25, 12-20
repealed by Commercial Code,
9-30
Uniform statutes
See also Uniform laws
old acts still enforced, 9-25
Unincorporated bodies
interests in business, transfer, 10-30
Unincorporated business
See also Joint stock companies;
Partnership
shares in, 10-30
negotiability under Commercial
Code, 10-30
Unincorporated companies
negotiability of notes, 11-20
shares in nontransferable, 10-30
United Nations
banking functions, 3-90
United States
Federal Reserve Banks' fiscal
agents, 2-40, 2-45
source of law, commercial
banking law, 9-5
See also Conflict of law; Federal
laws; State laws
United States notes
See 01x0 Money
authorization of, 10-10
legality of, 10-10
United Stntcs territories
fcdcral law governs, 9-35
Unsafe and unsound banking
practices
federal agencies' prevention of,
3-35, 4-15
penalties, 4-20
savings and loan associations.
7-40, 7-50
Unsecured creditors
See also Creditors
pro rata division of assets, 32-45
vs. secured, 32-45
Usages of the trade
agreements, 25-45
conditional letters of credit, 25-65
 J )
INDEX
[References are to secfionr
usury
See also Consumer statutes;
Defenses; Illegality; Interest;
Truth-in-Lending Act
defense, negotiable paper, 15-80,
16-100
defined, 17-5
Federal Consumer Credit
Protection Act, 15-75
statutes governing, 15-80
federal preemption, 17-10
state override of federal, 17-35
Utah
branch banking, 5-5
direct return of dishonored
instrument, 21-60
industrial banks, 8-20
instrument "payable at" a bank,
designation of place of
payment, 21-65
stop payment orders, 20-30
Uniform Consumer Credit Code
Act of 1968, 35-20
Uniform Act for Simplification of
Fiduciary Security Transfers,
27-65
Uniform Common Trust Fund
Act, 27-70
Uniform Consumer Sales Practices
Act, 33-5
Uniform Fiduciaries Act, 27-35
Value
See also Holder for value
bank credit as, 15-30
banker's lien
securities, 20- 120
collateral security as, 15-30
defined, 15-30, 27-35
in fiduciary transactions, 27-25
in relation to banks. 27-35
exchange for negotiable paper,
15-30
fiduciary relations effect on, 27-35
fiduciary standards, 27-30
"first in, first out," 15-30
for holder in due course, 15-35
"last in, first out," 15-35
overdraft, 15-35
( 8 ) .]
Verbal agreements. See Agreements
Vermont
branch banking, 5-5
direct return of dishonored
instrument, 21-60
holder in due course doctrine,
35-25
holiday and weekend bank
transactions, 22-1 5
instrument "payable at" a bank,
equivalent of draft, 21-65
NOW accounts, 19-20
Virginia
branch banking, 5-5
direct return of dishonored
instrument, 21-60
industrial banks, 8-20
instrument "payable at" a bank,^
designation of place of
payment, 21-65
instrument payable to order and
bearer, 1 1-50
Uniform Act for Simplification of
Fiduciary Security Transfers,
27-65
Virgin Islands
direct return of dishonored
instrument, 2 1-60
instrument "payable at" a bank,
equivalent of a draft, 21-65
Uniform Fiduciaries Act, 27-35
VISA U.S.A. See Credit cards
Void
See also Defenses
statutes making instruments,
15-75, 15-80
Voucher checks. See Checks
Wages
security interest, 28-10
Waiver
See also Drawer; Indorser;
Liability
after dishonor, 23-65
chargebacks, 23-70
clauses, 16- 105
conditional sales, 10-45
construction of, 23-70
INDEX
[References are to sections
Waiver (conr'd)
consumer's claims or defenses,
35-5, 35-10
state law, 35-20
debtor's, of notice, 3 1-25
debts, 32-1 5
defenses, 16-105
surety's, 18-15
embodied in the instrument, 23-65
extension of time, 16-55
fiduciary's breach of duty, 27-10
form of. 23-65
indorser's liability, 14-65
promise to pay, 14-65
lack of causation, 15-85
nature of, 23-70
presentment, 22-40
after waiver, 23-70
not subject to waiver, 23-70
protest and dishonor after,
23-65, 23-70
steps in presentment, 23-70
protest can dishonor notice after,
23-70
negotiability, 16-65
rights
electronic transfer actions,
26- 100
on negotiable paper, 16-50
Warehouse
field warehouse system, 29-10
Warehouse clearance certificates.
See Documents of title
Warehoi~scmen
duty of reasonable care, 12-30
lien on goods, 12-35, 31-15
rights to interplead claimants,
12-30
Wnrehor~sereccipts
See nlro Documents of title
hona fidc purchnscr's rights, 12-30
commercial paper, 10-25
defined, 10-25
formal requisites of negotiability,
12-25
negotiable and nonnegotiable,
12-10, 12-20
standard form, 12-5
Warehouse Receipts Act
* , See nlro Uniform laws
conveyance of title by finder of
thief, 12-15
( 8 ) .I
state where still in force, 9-25,
9-30
Warrants
negotiability, 12-65
Warranty
accommodation of parties, 18-25
breach of, by payee, 21-55
capacity to contract, 14-75
corporate securities, 14-75
public securities, 14-75
collateral securities, 14-85
consumer product, 34-30
disabling facts, 14-75
does not attach to merchandise
paper on delivery, 12-10
drawer's, 14-70
elements of, 14-5
forgery
drawee's signature, 14-70
drawer's signature, 14-80
maker's signature, 14-80
formalities at maturity not
necessary, 22-5
impairment of value, 14-75
indorsement, subsequent parties,
14-85
limitation by contract, 14-85
limitation of liability in, 14-85
measure of damages, 14-80
presentment for payment, 14-80,
25-30
forgery, 14-80
qualified indorser, 14-85
title of goods, 14-75
transfer
of paper, 14-75
only, 14-75
without indorsement, 14-85
transferor's, 14-75, 24-15
Washington
branch banking, 5-5
direct return of dishonored
instrument, 21-60
forgery of drawer's signature,
notifying bank, 20-100
instrument "payable at" a bank,
2 1-65
Uniform Act for Simplification
of Fiduciary Security
Transfers, 27-65
 I
INDEX

[References are to sections ( 5 ) .]

Washington (conr'd) Uniform Consumer Credit Code

Uniform Common Trust Fund
Act, 27-70
Uniform Fiduciaries Act, 27-35
Way bills, 10-25
See also Commodity paper
West Virginia
branch banking, 5-5
direct return of dishonored
instrument, 21-60
instrument "payable at" a bank,
21-65
Uniform Act for Simplification
of Fiduciary Security
Tran~lcrs,27-65
Uniform Common Trust Fund
Act, 27-70
Whcat tallies, 7-25
See also Commodity paper
Wire transfer
"logs" for, 21-75
Wisconsin
branch banking, 5-5
check protector figures control,
20-1 15
direct return of dishonored
instrument omitted, 2 1-60
forgery of drawer's signature,
notifying bank, 20-100
garnishment, 20-125
industrial banks, 8-20
instrument "payable at" a bank,
designation of place of
payment. 21-65
mcmoranda on inslrumcnts
control, 20-1 15
Uniform Act for Simplification
of Fiduciary Security
Transfers. 27-65
Act of 1968, 33-5
Uniform Common Trust Fund
Act, 27-70
Uniform Fiduciaries Act, 27-35
Withdrawals.. See Accounts
Women
capacity, 15-85
discrimination, 34-25
individual bank account, 19-35
World Bank, 8-85
Writing
See also Indorscmcnt; Signature
nmbiguous lcrms and rulc.~of
constitution, 11-75, 20-1 15
clTcct on ncgotiability, 11-25
nature of, 1 1-25
necessity for in contracts limiling
indorser's liability, 14-85
prevails over printing, 11-75,
20-1 15
printing as, 20- 115
typewriting as, 1 1-75
Wyoming
branch banking, 5-5
direct return of dishonored
instrument, 21-60
instrument "payable at a bank,"
equivalent of a draft, 21-65
Uniform Act for Simplification of
Fiduciary Security Transfers,
27-65
Uniform Consumcr Credit Code
Act of 1968, 33-5, 35-20
Uniform Common Trust Act,
27-70
Uniform Fiduciaries Act, 27-35