2012 Commercial Law Developments

VII. Commercial Paper and Electronic Funds Transfers

A. Negotiable Instruments and Holder in Due Course

  • Carver Federal Savings Bank v. 3 Whale Square, LLC, 2012 WL 3194314 (N.Y. Super. Ct. 2012) -- A promissory note contained a waiver of notification of default.  The note was not rendered ambiguous by another clause requiring notifications to be sent by certified mail because the note also required the borrower to provide notification of certain prepayments.

  • JCC Development Corp. v. Levy, 146 Cal. Rptr. 3d 635 (Cal. Ct. App. 2012) -- A promissory note authorized the lender to accelerate the debt upon the borrower's default and, in the same paragraph, provided that "[t]hereafter, interest shall accrue at the maximum legal rate" did not call for default-rate interest after the note matured.  The default-rate interest applied only after acceleration and, upon maturity, there was nothing to accelerate.

  • Murphy v. Aurora Loan Services, _____________ _____ (_____) -- Homeowners who borrowed money for the purpose of purchasing a home brought suit against MERS and the lender and its servicer to quiet title based on seven alleged defects in the ability of either MERS or the lender to foreclose on their homes.  MERS was the homeowners' nominal mortgagee.  The homeowners' promissory notes were pooled, securitized, and sold into the secondary market, after which MERS assigned each mortgage to the lender.  The lender foreclosed after homeowners defaulted on their mortgages.  Homeowners then brought suit alleging that neither MERS nor the lender had the authority to foreclose.  The lower court dismissed all seven claims as variations of the "show-me-the-note" theory, which has been rejected in Minnesota.  Show-me-the-note claims argue the holder of legal title to a mortgage cannot foreclose without producing the underlying promissory note.  The court upheld the dismissal of five claims, but reversed and remanded with respect to two quiet title claims that did not rely on the show-me-the-note theory.  In these two claims homeowners allege that assignments to MERS or the lender were either unrecorded or executed by individuals lacking authority to do so.

  • California Bank & Trust v. Shilo Inn, 2012 WL 5605589 (D. Or. 2012) -- A term in promissory note providing for the interest rate to increase by 5% upon default was an unenforceable liquidated damages provision under California Civil Code § 1671 because the creditor offered no evidence that the higher interest rate bore any relation to the anticipated harm arising from the default.

  • Jones v. Wells Fargo Bank, 666 F.3d 955 (5th Cir. 2012) -- The court finds that the lower court properly found a bank liable for conversion and breach of contract based on a cashier's check purchased by the plaintiff, where the bank deposited the check into the wrong account.  UCC § 3-420.

B. Electronic Funds Transfer

  • Licci v. Lebanese Canadian Bank, SAL, 2012 U.S. App. LEXIS 4525 (2d Cir. Mar. 5, 2012) -- Companion cases alleging American Express was liable for Lebanese terrorist attacks because it made wire transfers to terrorists.  The court states banks do not have a duty to protect non-customers from torts by bank customers.

  • Charles Russell, LLP v. HSBC Bank USA, N.A. (In re Awal Bank, BSC), 455 B.R. 73, 75 U.C.C. Rep. Serv. 2d (Callaghan) 245 (Bankr. S.D.N.Y. 2011) -- A bank received almost $13 million in an inadvertent wire transfer two weeks before another bank opened insolvency proceedings in Bahrain.  The recipient bank set off the $13 million against outstandings on the other bank's credit facility.  The administrator for the other bank's insolvency brought common law claims against the recipient bank seeking return of the money (including conversion and unjust enrichment).  The recipient bank countered that Article 4A of the UCC, governing electronic transfers, governed the transaction and that, pursuant to the version of Article 4A in effect in New York, § 4A-209(b)(2) treated the wire transfer as complete and cut off all common law claims.  The court concluded that Article 4A governed if the setoff was accomplished before the recipient bank had notice of the error (UCC § 4A-211(b)) and that Article 4A's rules were focused on transfers of funds to an unintended beneficiary (UCC § 4A-205(a)) and not to transfers to an intended beneficiary but the wrong account/bank.  The court refused to dismiss the complaint, pending further factual information on when the recipient bank had notice.  The case also includes discussion of Article 15 Bankruptcy Rules.

  • Patco Construction Company, Inc. v. People's United Bank d/b/a Ocean Bank, No. 11-2031 (1st Cir. 2012) -- A bank's security procedures for confirming authenticity of instructions -- involving verification questions that were not frequently updated -- were inadequate under UCC Article 4A because they were not commercially reasonable.

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