Secured Transactions and Other Payment Systems - Case Study Example

6995 words Running head: US Commercial laws Name: University/College: Course: Lecturer: Date: Secured transactions and other payment systems. Introduction The Uniform Commercial Code forms the basis of Article 9 as pertinent in the United States Commercial Law. It is therefore of paramount importance to comprehend its principle application in civil law. As such the paper herein seeks to address common issues of conflict for which the Article 9 thereof provides the legal platform for restitution. Nonetheless, the ruling depends on the grounds for each case in question and the evidence supported by law. Errors of omission and/or commission including forgery, deliberate acts of bad faith, misrepresentation and negligence may cost the concerned parties a great deal of economic loss. Consequently, financial transactions are very sensitive hence the need for professional advice. In this case, both secured transactions and negotiable payments are legally binding thus proficient guidance is highly recommended as delineated in the cases demonstrated hitherto. Question 1 Octopus National Bank (ONB) Vs. Massive Dynamics, 2010 Description of the case: Massive Dynamics aspires to obtain a loan of USD $1,000,000 from ONB in Texas. It has offered six items as security interest as under. A: 10 acres of land in Arizona used by the firm for product safety tests. In this case, Article 9 applies as outlined in Section 9 – 203. The security referred to herein as 10 acres of land constitutes tangible collateral. As such it’s classified as a fixture under general goods acceptable for security interest. However, it is worth noting that the land mentioned hitherto is located outside Texas hence subjected to other judicial law, Section 9 – 311 (b). Whereas the property is covered by Certificate of title, the perfection process is complicated on the basis of locality in line with Section 9 – 311(a)(3). First and foremost, it must be understood that the piece of land is used by the firm for conducting safety tests of its products. In order to make the security agreement effective, ONB and the Massive Dynamics must complete the Fixture Filing under Section 9 – 102(40) as read with Section 9 – 502(a) (b). According to Section 9 – 316, the filing must be done in Arizona where the land is located. This is important since it helps secure priority of the alien creditor, ONB. By so doing the creditor is enlisted in the certificate of title under the name of Massive Dynamics as the debtor. In the event of default in payment, ONB shall not be subordinated on the grounds of being an external lender. The second method of perfection is by taking possession of delivery of the certificated security. Land is covered by Title Deed as proof of ownership. Therefore, obtaining the document referred to as Certificate of title relating to the 10 acres of land in Arizona owned by Massive Dynamics is sufficient perfection. This certificate ought to be signed and properly endorsed to ONB by the debtor1. In Section 9 – 313(a), taking possession of the certificate of title is legally in order and gives ONB the right of direct control over the security interest. On the other hand, the bank may enter into an agreement with the Massive Dynamics to extend the right of control over the land pertaining disposition and the debtor’s liabilities in deficiencies. The first method of filing financing statement is requirement by law, (Section 9 - 502). Besides, perfecting a security interest in more than one way is permissible. The later method of perfection is recommended. This is because, such agreements renders the creditor the authority of direct control as applied in the principles of first-in-time, first-in-priority in accordance with Section 9 – 314(b). The idea may be helpful in the event that some conflict arises in future over the same security interest. B. Crops growing on 100 acres of land in Kansas for organic food for the employees. To begin with, Article 9 applies in this case. Whereas crops are categorized under Section 9 – 334, they are particularly classified as consumable goods viz-a-vis farm products. The crops thereof are meant for direct consumption. As a result, the security in it is of such a nature so uncertain that the creditor may not ethically control the proceeds. Secondly, the proceeds are subject to the unpredicted events of nature including weather changes. Thus, the value of the anticipated crops 1. Part of this argument is obtained from Mastering Secured Transactions by Richard H. Nowka, 2009. may not be accurately computed beyond the probabilistic estimates for similar tracks of land. With this in mind, the security interest therein is unstable and the collateral per se is not recommended. If only the crops were intended for sale, then the scenario would be different.2 However, having been offered as guarantee, ONB is obliged to effect the agreement through perfection as provided by Section 9 – 501 read with Sections 9 – 310 and 312(a). The method entails filing the Financing Statement. This should be done and a copy filed in the state of location, Kansas, (Section 9 -315(a)) as read with Section 9 – 311(b). In complying with the financing statement, ONB should insist on doing an agreement with the Massive Dynamics over the main procedures of disposition of the proceeds. For purposes of good order, the agreement should be done at state level since the crops are cultivated on a foreign locality. The consensus depends on the local regulations. This is the only modest way of perfecting the security interest of crops thereof. In my professional opinion, this method of perfection is recommended for the following reasons. First, it meets the general requirements for making any security agreement effective as outlined in Uniform Commercial Code, Section 9 – 501. It is the basic principle of perfection in secured transactions.3 The second reason is that, the advanced agreement empowers ONB to have priority of control of the crops (Section 9 - 334) C: A certificate for 20,000 shares of Massive Dynamics stock. Whenever shares are mentioned in secured transactions, Article 9 of the UCC applies. In particular, the guarantee here is covered under Section 9 – 102 that encompasses security bonds and stocks. Shares are among the items enlisted in the certificated securities in line with Section 9 -102(49) as read with Section 9 – 313(b) of the UCC, US Commercial Law. 2. Part of this argument is obtained from Secured Transactions Day 1: PowerPoint presentation by Gerry W. Beyer. July, 2010. 3. Ibid. Shares are intangible collaterals classified as investment property. Subsequently, the interest is identified by the Certificate of title which can be endorsed as guarantee in such secured transactions. Care must be taken while handling investment properties in the likes of share and security bonds. In light of the caution, Octopus National Bank not only needs to be certain of the managing firm but also the face value of each share. These will determine the best method for perfection as would generate most favourable grounds of control and priority. In the case of Debtor, Alpha and Beta, it was held that Beta had control of the shares hence enjoyed priority over Alpha even though both had perfected the security interest by filing.4 There are at least three methods of perfecting this security interest. The first method refers to the mandatory filing financing statement applicable under the general principles of perfection, Section 9 – 312 (a); subject to Section 9 – 501. The second is perfection by possession. In this case, ONB may take possession of delivery of the certificate of title. As said in the proposed interest, Massive Dynamics is offering the Certificate for the shares. It is therefore advisable that ONB takes possession of the supposed certificate. This effect amounts to perfection be possession, Section 9 – 313(a) consistent with Section 9 – 316(d). As such, possession gives Octopus National Bank rights to direct disposition of the 20,000 shares of Massive Dynamics stock. The third method of perfection involves perfection by control in addition to possession of the certificated title. This may be attained by entering into agreement with Massive Dynamics. An agreement of such a nature may possibly incorporate entitlement to dividends, distributions and proceeds (Section 9 - 339). In my professional view point, conflicts may arise in future. Should this occur, ONB will have a priority right as an intermediary over the external lenders.5 4. The citation is drawn from Example 1 in the Secured Transactions – Outline: Springs 2003 by Prof. Khan. 5. The sentiments in this portion correspond to the arguments of Professor Khan as in Example 6 under Section 9 – 328, of the Outline Notes. At this juncture, I recommend the third combination of perfection. Other than meeting the legal requirement of filing, the later gives an upper hand in securing claim. It also defines the debtor’s liabilities in the description of the collateral in question. Further, the concept of possession and control hybrid eliminates any unforeseen possibility of subordination in the events of conflicting controls in future. On the other hand, the method will typically ensure that the Octopus National Bank retains immunity against the debtor’s claims until such a time the creditor shall have ceased to be an entitled secured party. The idea here is consistent with Section 9 – 623 notwithstanding Section 8 – 106(e). D. Megalon Model NCC-1701 computer which Massive Dynamics uses to manage its accounts receivable and payroll. Electronics usable for business purposes are generally accepted as security interest under the UCC. Thus, Article 9 applies as in Section 9 – 203(b). The machine forms part of the company assets and is quite useful for the daily operations of Massive Dynamics as far as cash management is concerned. Having this in mind, the importance of this item so offered as security cannot be overemphasized. Based on the nature of usage, the collateral herein described can be classified as business equipment. It falls in the category of goods and particularly; equipment, (Section 9 – 102 (b)(12)). The security here is easily movable hence subject to a consignment. However, the security interest is specific to a particular model. The model mentioned thereof works with a licensed software used to maintain accounts receivable and payrolls. As a result the value of such software is maintained in the form of chattel paper. On this basis we can confidently ascertain that the collateral in this case is intangible property classified as Chattel Paper, Section 9 – 102(11) read with Section 9 - 330. In order to perfect this type of security interest, ONB has two methods at hand. The first technique is perfection by filing. The second method is perfection by control. In the later, ONB can influence the process to see its name included in the register of owners. By so doing it gains right of ownership but subject to the consent of the registered owner; Massive Dynamics.6 Since taking possession of the said computer would paralyze the firm’s operations, it is not recommended. Note that this software is uniquely tailored to Massive Dynamics hence possessing it would make little sense. Well, the US Commercial Law recognizes the place of software utilized as security in secured transactions. It is therefore prudent to culminate that perfection by filing is sufficient However, obtaining the right of control would cause no harm provided the registered owner has consented. This method is therefore recommended for it addresses the concerns for possible conflict in control and subordination as specified in Section 9 – 334(c) E: A Super Cool Model Mark VI central air conditioning unit that is installed in Massive Dynamics’ manufacturing facility located in Grand Haven, Michigan. The installed collateral is covered in Section 9 – 334(a). Thus, UCC 9 applies. Notwithstanding, security interest of such a nature so installed in the debtor’s business premises are deemed to be fixtures or goods to become fixtures. Consequently, the collateral thence qualifies to be a business equipment as it is utilized in the line of production. It is however interesting to synonymously consider the security as both an equipment and fixture at the same time. Nevertheless, it serves both purposes of utility and indirect production apparatus. Perfection by filing financing statement is sufficient to make this security interest effective in favour of Octopus National Bank. Of utmost importance is the fact that the security offered in this case is situated in a different locality. As such, it is vital to consider the grounds of application subject to other jurisdictions, Section 9 – 301(a)(3)(A). The edict therefore is applicable in accordance with the general rules of debtor’s location delineated in Section 9 – 307(b), notwithstanding subsection (c) of the same. With regard to Section 9 – 316(b) perfection by filing would be sufficient. For this reason, the filing method is highly advised. 6. Section 9 – 105 outlines the general rules governing the secured control on chattel papers. F. Limousine the President of Massive Dynamics uses to escort potential clients. In this case, Massive Dynamics presents an item of esthetic value. Comparing the value of the loan applied for, the security offered would slightly match the amount. However, the face value of the automobile here is immaterial in defining the parameters of the security interest. Having touched on automobiles, Article 9 applies. The security agreement here is governed by Section 9 – 311(a) and (d) under Part V of the Uniform Commercial Law. This part generally applies to automobiles, fixtures and investment properties. Being a car used to escort potential clients; this security shall be classified as consumable good generally incorporated under Section 9 – 313(b) for certificated securities. It can be perfected by three methods. First, is by filing the financing statement. This is a general application for almost all security interests.7 Besides, the creditor; ONB has the right to perfect by control. This can be effected by legally including their name on the certificated title. In this case, ONB may include the name in the list of secured creditors related to the limousine owned by the Massive Dynamics in Texas. The third option for perfection comprises the aspect of possessing delivery of the certificated security. Octopus National Bank may choose to take custody of the logbook serving as the title referred to herein. On the other hand, it may literally decide to possess the car. The later would not be so appropriate, thus leaving possession of the certificated security as the method of choice. For purposes of clarity, priority and control, my expertise technical knowhow would purport a combination of possession of delivery of certificated security and inclusion of name in the certificate of title, Section 9 – 303. Besides, this is the widely practiced method of perfection for automobiles in the United States. 7. Not all automobiles are covered by certificate of title as in Section 9 – 313(b) Question 2 Description: Determining priority where conflict arises over secured interest in business as under A. The office table: First and foremost, the table herein in question ceased to be a property of Gloria when Sara bought it initially. The item returned to scene only on January 13 and was not officially sold or leased to Gloria. Therefore it does not legally belong to Gloria or form part of her inventory. In this case, she only acts as a broker and agent of Sara who is the official owner of the table recognized by law. By so agreeing to display the table in her showroom, Gloria is acting in good faith and is not legally associated by this particular piece of furniture as in Section 9 – 320(a). However, it must be noted that the 10% payable to her if she sells the table accrues to sufficient consideration. Although this payment is subject to the sale of the item, Gloria is the legal custodian of the office table therein for the meantime on local agreement with Sara.8 On the basis of the above logical reasoning, it emerges that neither ONB nor Tom has legal interest on the office table. This is deduced form the fact that, the security interests perfected by filing in both cases only covered the properties of Gloria; either current or after as the case may be. As such these two creditors have neither have control nor possession even though they are secured creditors in Gloria’s assets and inventory. Thus, they have no priority over the office table in Gloria’s showroom, Section 9 – 317(b). On the other hand, Willy is an external creditor who is also unsecured. Well, where conflict of control arises in law, the secured creditor wins. Secondly, when Gloria failed to secure the loan she is rendered unlimited in liability and tax returns. In the event that she incurs liability, the creditor has the right over all her assets and any other property or inventory to settle the credit deficiencies. With this in mind, the office table on display is an extra source of income 8. Sara was a buyer of goods without the knowledge of incumbent security agreement. Thus, she takes free of the security interest. for Gloria hence subjected to sheriff’s levies. As a result, Willy has interest over the office table even if it does not belong to Gloria. The claimant position emanates on the grounds that Gloria had interest on the sale of that furniture. Notwithstanding, Sara retains priority over her office furniture on the principles of Section 9 – 317(b) read with Section 9 – 201(a). B. The Oriental rug: this is a specified collateral. Since Tom enjoy the specificity of collateral description, he takes control over other secured creditors. This rule is applicable regardless of first-in-time, first-in-right concept.9 However; it is quite pertinent that Octopus National Bank secured the right of control over all assets and inventory of Gloria Depots as perfected by filing way before any other lenders. Moreover, the bank herein referred to as ONB has control of all the assets and inventory of Gloria Depots both current and after as specified in the financing statement. Both Tom and Octopus National Bank have control over the Oriental rug as perfected by filing. Therefore the general rule of control does not apply.10 Willy on the other hand is an unsecured creditor. Recall: in case of conflicting control, the secured creditors win. Sara is a third party only cover by the local arrangement applicable between Gloria and her. Hence, she is neither a creditor nor a security interest party. As such she commands no control or priority over the Oriental rug. According to Section 9 – 339 holistically read with Section 9 – 322, ONB is advantageously placed as the intermediary secured creditor. Therefore, ONB has priority over the Oriental rug in question. C. The portrait of Davy Crockett. This autographed portrait is part of the furnishing thereof in Gloria’s Depot. Whereas both ONB and Tom have perfected the security interest thereon by filing, Tom has control. Consequently, he commands priority over the specified security in question; other things remaining constant. 9. Part of this concept is elaborated by Gerry W. Beyer in his presentation on Secured Transactions. 10. Adopted from Example 5 of Section 9 – 328 in Prof. Khan’s Article 9 Outline Notes. While Gloria owes Willy unlimited liability, Willy is an unsecured creditor. Taking into account the fundamental parameters of security interest, Willy does not have control in relation to the secured creditors. However, this claimant came into play on February 22, 2010 before Tom perfected the security interest on March 1, 2010. By this order, Tom’s perfection of the security interest was instituted when the interest is already under conflict.11 For that reason, Willy may take priority over Tom, Section 9 – 334(c). Given that Tom and ONB both have control and the security in question is under conflict, it preempts the consideration of seniority of perfection. Notably, ONB perfected the interest on January 2, 2010 and the conflict of interest came into sight on February 22. This occurred at least nine (9) days before Tom accomplished the basic rule of perfection by filing. In light of this, Willy’s right of interest had not elapsed after the 21st day as in Section 9 – 315(d). Tom has weaker defense against Willy on the basis of time governed by Subsection 315(d) above. On the contrary, Willy is both a subordinate and unsecured creditor in relation to ONB. Sara is not an interested and/or secured creditor and Gloria is a common debtor. Therefore, the ruling under Section 9 – 334(i)(vi) shall hold in favour of the Octopus National Bank as the creditor of priority over the claimed portrait of Davy Crockett. D. The antique roll top desk. The inventory herein was sold to Maude on February 20, 2010. By this time only ONB had signed the security agreement covering all the assets and inventory of Gloria’s Depot. Since we are not told, it is worth noting that the creditor hitherto had not perfected by filing. The same applies to Tom who only perfected by filing on March 1, 2010. This was effected when the desk had already been sold. According to the principles of perfection, neither ONB nor Tom had priority over the antique roll top desk thereon sold to Maude. 11. The idea thereon is elaborated in the UCC – 9 Section 315(d)(3) and summarized in the General Rules for Fixture Priority by Gerry W. Beyer, July 12, 2010. Sara is not an interested party while Willy is unsecured. By this argument, Sara will not be considered in ruling while Willy would not be given priority. This leaves only the two secured interest creditors; ONB and Tom. Owing that Tom had not perfected the security except for signing the security agreement on February 15, 2010 and ONB is just secured but no filing record, they both have limited control, (Nowka, 2009). As the security in question had not been made effective, Gloria enjoyed the right of control until the time of sale. By selling the good, Gloria passed the right of control to Maude in good faith in line with Section 9 – 317 (b). Therefore, Maude secured the right of control and priority on purchase and full payment of the market price.12 In the event that conflict arises, as it did on February 22, 2010 when the sheriff acted upon Willy’s instruction to levy Gloria’s assets the buyer maintain the right as prescribed in Section 9 – 320(b)(1), (2) & (4) of the Uniform Commercial Code. Thus, the ruling shall hold in favour of Maude for priority over the antique roll top. Question 3 Description of the Case: Big Auto Sales is the creditor while Maria being the debtor. Having defaulted, the creditor involves a third party on contract to repossess the interest, Subaru Forester. Paul is an agent of the third party (contractor) who acts on the instruction of his principal Expert Repo. Paul is a profession quite acquainted with the rules governing repossession. In the normal course of duty, conflict arose hence the case at hand. Considering the general principles of repossession in Section 9 – 609(a) unless otherwise directed by a court of law, Paul executed the job in utmost good faith. By order of the United States Commercial Law, Big Auto Sales did not serve its debtor with a notice of repossession. Unless expressed by Section 9 -609(c), the law generally allows the defaulted 12. Whereas Section 9 – 320(b)(1),(2) & (4) applies, it is clear that the desk sold to Maude was old-fashioned and/or traditional hence would be fitting for family use rather than business. If so, the subsection (3) of this section covers her in taking free of secured interest. creditor to literally take repossession of the property without prior notice.13 This rule is modestly applicable provided the creditor or his agents thereof does not breach the debtor’s peace, (Section 9 – 609(b)(2)). Therefore, Maria cannot successfully file a law suit against Big Auto Sales. Taking this into account, Paul needed not to notify Maria of the due repossession of her Subaru Forester. Although, the courtesy to inform her of the operation could have saved the day, it was not Paul’s fault to tow the car with Maria’s two children locked therein. Technically, the law does not clearly define the extent of breach or the factors tantamount to breach of peace. In keeping with Section 1 – 106 (law of tort) Expert Repo owed her the duty of skill and care even if it was not lawfully required to inform Maria of the repossession task and procedure. On this ground of violation of Section 9 – 609, Maria has cause of action along the lines of Section 1 – 106(b) against Expert Repo. Despite the fact that it was Paul who breached the peace thereupon, he cannot be held personally liable. He committed the breach during the normal course of duty while acting on behalf of the principal. Driving the car back to Maria and surrendering the key to her is immaterial and cannot excuse the authors thereof from liability. As a result, Expert Repo bears the burden of liability. Subject to this, Maria must prove beyond reasonable doubt that indeed her peace was breached without her personal negligence, (Section 1 - 106) read with Section 9 – 625 of the Uniform Commercial Law. Question 4 Description of the Case: The ONB is looking forward to buying several negotiable instruments including promissory notes and draft. To be very sure of the legality of negotiability, the bank is seeking professional advice pertinent in the formality of instrument availed. The general rule for cases of similar a nature is covered in Section 9 – 330(47). 13. Reference is made to Gerry W. Beyer’s notes on Secured Transactions presentation of July, 2010 in line with Section 9 – 609. The note does not have a handwritten signature. Instead, the maker’s signature was computer generated. According to the US Commercial Law governing negotiable instruments, Section 9 – 203(b) permits electronic signature as sufficient authentication. With this in mind Octopus National Bank does not necessarily have to obtain the handwritten signature of the maker. However, for purposes of legal safety and fraud control, ONB ought to ascertain that the signature was generated with maker’s express consent. Besides, the maker should present the bona fide identification documents to accompany the negotiable note.14 My client may only accept the note if the proposed conditions above are fully met. The reason behind this is to limit liability as may be cases by potential fraudsters. B. “I promise to pay to the order of William Bell USD $1,000 if I make the highest mark in USA Commercial Law at La Trobe University during the Winter 2010 term.” Statements like this are deemed to conditional. If the order and specified amount were not incorporated then the statement would be considered express. Express conditions are impermissible. However, the donor has negotiated specific amount (USD $1,000) to the order of William Bell during winter 2010 term. Such specific statements are allowed (Nowka, 2008) and would generally not frustrate the legality of the negotiable instrument. In this manner, the note is safely drawn and negotiated. Therefore, ONB can buy it. C. “This note is subject to the contract I signed with the payee, Paula Prince, on May 1, 2010. Even if the date and the partisan of a different contract are indicated, subjecting a given instrument to another contract is not allowed.15 Going by such statement; Octopus National Bank is predisposed to unrevealed conditions of unrelated course. Where these conditions are made in bad faith or otherwise, their existence imposes greater uncertainty of the said negotiable instrument. Nowka, 2008 argues that the term ‘subject to’ ties the application and negotiability 14. A similar case was used as an example in Prof. Khan’s Secured Transactions: Security Agreements, Outline Notes of Springs – 2003. 15. Gerry W. Beyer’s PowerPoint presentation on the principles of negotiability. July, 2010 of instruments covered under Article 4 to local rules practicable in the mentioned contract. On professional perspective, I would advice Octopus National Bank not to accept or buy notes of such state of affairs. First, the statement contravenes the common rule of negotiability. Secondly, it complicates the process of payment as it involves external undefined terms. D. “This note is in payment for a Sony television which I have purchased from the maker.” The payment is perfectly in order and the instrument is conditionally acceptable. In the case above, the note is said to be an instrument of consideration. By all means, the note thereon takes into account a particular Sony television bought from the maker. Therefore, the maker becomes the sole party for which the payment can be effected. Thus, the instrument is conducive for deliberation by Octopus National Bank. I recommend the note because it is clear, specific and precise, (Nowka, 2008). E. “This note is payable from the proceeds of my 2011 cotton crop.” Where payments are directed to a particular source, the statement is acceptable. The bank therefore is hereby directed to obtain the funds from proceeds 2011 cotton crop and not of any other source. Meaning, payment explicit in the note cannot be effected from proceeds of cotton realized in other years other than 2011. The note surmounts to unconditional promise to pay as discussed by Gerry, 2010. The client is thereto at liberty to buy the note as it does not create grounds for ambiguity or conflict of interest in payment. F. The note provides “for interest at 2% above the United States prime rate of interest.” In general, the statement is permissible. ONB may go ahead and buy the note. This is for the reason that the maker has defined the affected percentage to be paid. He has clearly substantiated the interest rated against which the payment should be instituted. The United States prime rate is quite universal hence easily accessible to the commercial banks including the ONB. Should it have been that the amount in percentage was not definite; the note would have been disregarded. However, care has been exercised to address the possible uncertainties ordinarily observable in the fluctuating interest rates. For this purpose, I advise ONB to take up the proposal. G. “Payment must be made in Euros; United States dollars or other currency is not acceptable.” The statement therein construes an express condition. As observed, express conditions are not allowed in instruments of payment. Such statement frustrates the integrity of negotiability and limits the scope of judgment. Assume that the payee is not comfortable with Euros but would prefer US Dollars or any other currency, such a payee is grounded and limited to the unfavorable terms of the maker. From this view point the maker’s intent of negotiation is questionable. In as much as the maker reserves the right of terms, the note thereof is not worth considering. H. “the maker hereby reserves the right to extend the due date by whatever period of time the maker determines to be financially advisable.” This is allowed. As Gerry (2010) puts it, the maker enjoys the lieu way of extending the period of payment as deemed favourable. The prerequisite per se is admissible for payments due at definite times. As such, Octopus may accept the note though the uncertainty that comes with such extensions of date cannot be estimated. I. “The weather is nice today.” The check thence is quite express and uncertain. Similarly, the check allows not for unwarranted personal sentiments as they add no value to the terms applicable for the intended payment. For this course, the maker portrays unrealistic predicament of laxity hence cannot be predicted with sufficient degree of genuineness. I would advise ONB to disregard the check for lack of professionalism and error of commission. J. A check states, “Pay to Walter Bishop.” This statement falls under the general wording of negotiation. It refers to the payee who must be the bearer of the note. In this light, ONB is encouraged to accept the note. The notation of specific name helps control chances of wrongful payment, (Nowka, 2008). Question 5 Description of the Case: Joan Maker and Harry Seller are the original maker and payee of the negotiable instrument herein. Seller obtained the instrument but defaulted by delivering faulty goods for which Joan withheld considerations due. However, Seller went ahead and endorsed the note to George who later re-indorsed it to Sam who takes the note for claim after maturity and Joan declined. A. The law of contract universally states that for every accepted offer there must be consideration. Where a party beaches the contract, the deal collapse and the contract ceases to exist. On the other hand, the accused will be liable to pay damages for the breach in favour of the plaintiff. However, if the parties still acted as if the contract was still healthy, the court shall not allow them to deny liability. Secondly, one cannot give that which he has not, so is the rule of ownership. Until the time that Maker discovered the goods were faulty, Seller remained a bona fide holder in due course. Thereafter, Joan brought it to Seller’s attention that the goods were faulty hence the cause of total failure of consideration. From this time, the contract is no more and the value of the instrument is frustrated in law. Being aware of the situation, Seller still indorsed the note to George on June 15, 2010. Though not informed of the truth and he accepted the instrument in good faith, technically, George has no legal right of holder in due course. As a result he too cannot pass on the right that he holds not. On the contrary, Seller received considerations from George. By order of this fact, George becomes a perpetual holder in due course in his contract with Seller even though Seller used a defaulted note in bad faith (Section 1 - 203). Reasonably, George passes the legality to Sam in good faith. Therefore, Sam is a holder in due course.16 16. Gifts such as those given for birthdays are accepted exceptions for which consideration may not be necessitated for beneficent to command the right of holder in due course, UCC 3 & 4 B. The law is an ass. First, the answer is yes, Sam can win the lawsuit against Maker. Since she did not return the goods to Seller she is liable for damages for total failure of consideration. This is enforceable regardless of the faulty status of the goods provided she is still intentionally in custody of them, (Section 1 - 102). You cannot possibly retain ones’ goods apparently for free without his/her express consent. Provided Maker was quite aware that the contract had been breached, she failed to exercise reasonable practicable measure as to repossess the negotiable instrument. Her action contributes negligence; intentional or otherwise. As a result, Seller took advantage leading to loss suffered by both Sam and George who acted in utmost good faith. In the case of Leasing Service Corp. vs. Don and Lu, 1979, the defendants defaulted and failed to pay for the faulty logging machine fifteen months after lease. The plaintiff repossesses the logger in question and sued them for the deficiencies. It was held that the defendants failed to institute reasonable proceeding as to resolve the case. Court ruled in favour of the plaintiff and awarded damages accordingly. Question 6 A. ONB was justified to dishonor the check. First and foremost, the check was wrongfully indorsed. If originally it was payable to the order of Bill and Betty, then it would only be right that both Bill and Betty indorsed it to the third party. In the case of Dan, only Bill indorsed it. How could ONB ascertain that Betty consented to the endorsement? On this ground of insecurity and inadequate validity, ONB could only reject the check. B. CSB properly debited Dan’s account for the amount of USD $500. However, the bank herein does not have sufficient defense for the action thereof. Having credited the account means that they found no irregularity on the check. If not so, the bank should then count the blame on the cashier who cleared that particular check. Besides, the verifying officer must have noticed the error of omission thereon as to dishonor the check but he/she failed. It is therefore not of good course that CSB escapes liability for its own unprofessional incompetency. C. Whereas Dan ignored the improper endorsement as committed by Bill, the endorser owed him the duty of utmost good faith. Secondly, Bill intentionally unless otherwise stated failed to consult Betty for the purpose of indorsing the check thereafter. As such Bill is liable for the mishap suffered by Dan for loss of the debited USD $500. As a result, Dan is justified to claim damages against Bill for total lack of consideration. On the other hand, he may choose to repossess the antique camera. Thirdly, Dan may sue Bill for damages and specific performance on grounds of breach of contract and negligence. D. Bases on the law of contract, there was no indenture between Dan and Betty. In this case, Betty is just but a victim of circumstance. She is a third party to the contract between Dan and Bill. Perhaps Betty was not even aware of the contract thereof said to exist between the two. Therefore, Dan has no legal right against Betty unless he can prove beyond any reasonable doubt that Betty was aware of the contract and acted in bad faith as to fail to sign the check alongside Bill. E. If there be anything; involving Adam in this case is far fetched and may construe trespass. Adam did his part by correctly drawing the check payable to the order of Bill and Betty. That is all he needed to do for payment of work done by the payees. In the event that the check hitherto bounced for lack of funds in the drawer’s account, then Dan would have right against Adam. Nonetheless, this was not the case unless otherwise stated. As a result, Dan has no grounds for suit against Adam. Question Seven A. Indeed Julia has a claim, but let’s ask, ‘against whom?’ Is it ONB or CSB? This forms the basis of argument. The burden of proof as to confirm the correct identity of the payee rests on the drawee. On other hand, the bank owes its customers the duty of skill and care as to prevent any potential loss of cash attributable to fraudulent imposters. A name is just but a conglomeration of letters that anyone else can possibly write on the check. Unless stated that the check is payable to Julia or the bearer, the bank could not have possibly assumed that the bearer, payee and the signed name were one and the same person thereon referred to as Julia. It is enforceable in a court of law where a bank fails to exercise reasonably practicable care to protect the customer’s interest in payments. If ONB could have cashed the check, then Julia can succeed against ONB for damages. However, the check was cashed by CSB and not ONB. Therefore, Julia has no right against ONB. She may only succeed against CSB for damages on grounds of negligence. B. If ONB is liable to Julia, whether or not it can recover the money from CSB is technical. But the answer is yes. The mutual relations of commercial banks is governed by the regulations of the ex-chequer. As a result, each bank owes the other the same duty of reasonable skill and care synonymous to that of a bank and its customer. In the event that one bank was responsible for negligence that saw the success of a wrongful payment due for a customer of yet another bank, the depository bank shall be liable for the loss. In this case, CSB failed to institute appropriate measures to protect the interest of ONB from which the money was to be reimbursed. Therefore, CSB bears the burden to refund the lost USD $42,500 payable to Julia, a client of ONB. Consequently, ONB has the right to recover the cash from CSB. C. Based on the rules of offer and acceptance as provided in UCC 3&4, for every possession there must be consideration. Whereas Julia lost the check due to theft, the check thereon drawn by Stan to the amount of USD $42,500 was sufficient consideration for the sold underlying equipment. Unless Julia appropriately reported the loss of the check promptly envisaged to stop payment before the check was cashed, she cannot succeed against Stan for another payment. By so doing, Julia will be committing double jeopardy. If the check had not been cashed then, she can succeed per se. But as it stands now, she has no right for claim against Stan. D. Julia has no enforceable claim against ONB. This is because the bank mentioned herein did not sign the check. Secondly, the due payment thereof was a refund and Julia needed not to prove identity as the original payment advanced to Elroy had the right details of the payee. Therefore, ONB only needed to forward the amount to Julia once the check had been endorsed by her or her agents thereof. E. Accordingly, Julia can succeed against Elroy Electronics for her USD $3,500. This is because it was the mistake of the drawer that led to the wrongful payment. If only Elroy Electronics had used the correct address, Julia would not have lost the money to an unknown person. We understand that the check was correctly drawn and the drawee cashed it rightfully without any imposed obligation. Therefore, Elroy Electronics remains the only liable party to this case since whoever forged her name cannot be traced. Conclusion Basically, the US Commercial Law is an eye opener. Through the fundamental principles of UCC with particular regard to Articles 9, 3 & 4, judicial procedures in secured transactions and negotiable instruments are formalized. It is important to consider the legality applicable thereof whenever one contemplates business involvement of similar a nature. Most conflicts arising in business are either a matter of legal philosophy, ignorance or intentional fraud. Money issues are very sensitive and can result in unwarranted loss. Therefore, reasonably applicable care is advised either to prevent avoid or escape liability. As such, it is prudent to embrace the spirit of utmost good faith. References Gerry W. Beyer. (2010) Commercial Paper. PowerPoint presentation. Gerry W. Beyer. (2010) Secured Transactions. PowerPoint presentation Khan (2003) Secured Transactions – Outline. Richard H. Nowka, (2009) Mastering Secured Transactions UCC Article 9. Carolina Academic Press. Richard H. Nowka. (2008) Mastering Negotiable Instruments: UCC Articles 3 and 4 and other Payment Systems. North Carolina: Carolina Academic Press. Uniform Commercial Code. Retrieved from http://www.Law.Cornell.Edu/Ucc/Ucc.Table.html. Read More