BANK OFFICERS HANDBOOK OF COMMERCIAL BANKING LAW WITHIN THE UNITED STATESCONTAINING THE SECRET RULES TO AID IN TIlE CREATION OF MONEY OUT

OF TIIIN AIR!

My people are destroyed for lack of knowledge... and since knowledge is power.. one then cannot be destroyed.. especially by the bartkers!

To Mary, Caroline, and Katherine Schroeder and Edna Taylor

Preface to Sixth EditionThere are few aspects of commercial banking law that are not now in the process of substantial change or that have not recently experienced substantial change. A flood of federal legislation not only has affected traditional bank regulatory issues but also has established a body of substantive law affecting numerous types ofcommercial transactions ofimportance to commercial banks. Expanded activity by the federal banking regulatory agencies has accompanied many of these legislative actions. The enlarged responsibility given to the Federal'Reserve Board to manage the nation's check collection and payments system in the Expedited Funds Availability Act of 1987 is but one example. Other examples exist in areas involving consumer issues, regulatory enforcement authority, and the scope ofcommercial bank's powers, as a result ofefforts by legislators and regulators to adjust to dramatic changes that have occurred in the markets in which commercial banks compete and the technology goveming the manner in which depository institutions conduct their business. This book is designed to fumish general information about the law relating to commercial banking in three important areas. Part I of the book discusses federal banking regulation. This part describes the general regulatory system, the primary federal regulators, the types of banking institutions that are regulated, and some of the important areas of regulatory control. It discusses the major federal legislation and principal case law to give the reader a general understanding of the complex network of regulatory law that affects the activities of commercial banks and similar depository institutions. Part II of the book focuses specifically on payment systems and negotiable instruments. It gives an introduction to the basic law governing the rights and liabilities of parties to instruments such as checks, drafts, notes, letters ofcredit, and other types of commercial paper. It discusses electronic fund transfers, credit card transactions, and transactions involving other forms of payment. It also discusses some of the basic legal principles that govern the relationship between a bank and its customer. This pan of the book contains extensive treatment of the Uniform Commercial Code provisions bearing on these subjects, and describes the interrelationship ofthese VCC rules with other state and federal laws. Part III of the book covers the general rules applicable to secured lending transactions involving personal property security_ This part of the book explains the basic rules provided by Article 9 of the Uniform Commercial Code on creation of a security interest, priorities among creditors, and enforcement of a security interest. The interaction of Article 9 with other federal law, such as bankruptcy and certain consumer credit regulations, is described.v

PREFACE TO SIXTH EDITION

vi

The book is designed to give general information for bankers and commerciallawyers. Given the broad scope ofthis book, it cannot provide complete, indepth coverage of all issues. The footnotes, where they have been inserted, are not intended to be a comprehensive statement of all legal authorities on any particular issue, but rather refer to cases and other authorities to illustrate the principles being discussed in the text. For those who are interested in obtaining more detailed information, there are references to supplemental texts, articles, and other authorities. The major cases, statutes, and sources of regulatory action are identified. As a result the book should be useful both as an introductory text for those who seek a general understanding of these areas ofcommercial banking law and as a general reference and research tool for those with more specific interests. It should assist the banker in understanding the legal framework that supports the activities of commercial banking, alert the banker to areas where legal problems may exist, give notice of areas where the law is in the process of change, and help the banker to discuss and raise questions about issues with legal counsel in an informed manner. The book also should assist bank lawyers and law students to gain a general understanding of the extensive and often exceedingly technical body of state and federal laws that is relevant to commercial banking transactions, to identify the principal sources ofstatutory and other law bearing on particular problems, and to obtain additional information on numerous subjects through the various references and other research aids provided. To assist research, the abbreviations and citations in the text and footnotes generally conform toA Uniform System afCitation (14th ed. 1986), which is published by The Harvard Law Review Association and is generally available in law libraries. This book is not a substitute for consultation with legal counsel but rather is intended to assist bankers and others to become sensitive to situations where consultation with legal counsel may be helpful. Such consultation is important for several reasons. This book cannot provide a complete analysis or discussion of each subject covered. The applicability of the law to particular situations depends upon both the investigation of specific facts and the performing of complete research and analysis of the particular law of the relevant jurisdiction applicable to the situation. In the commercial banking law area, actions by regulatory agencies are frequent and extensive. In addition, Congress and the state legislatures are engaged in consideration of new laws on many aspects of commercial banking, and state and federal courts are constantly issuing significant decisions. Therefore, proper interpretation of the law is complex, because of the intricate web of state, federal, and regulatory law that is applicable. In general, the cutoffdate for the materials on which this book is based is July 1987 although in particular areas more recent developments ofsignificance are noted, as in the case of certain key decisions of the U.S. Supreme Court and the action by the Federal Reserve Board in enacting Regulation CC on the availability of funds and collection of checks.

vii

PREFACE TO SIXTH EDITION

This book benefited; from the outstanding assistance of many persons. General help in research and preparing the manuscript for publication was provided by Cherry Lee Croushore, Catherine R. Hardwick, Laurie Stewart, and David A. Craze. Additionally, Catherine Hardwick contributed substantially in the writing of Chapters 10 and 25, and Cherry Lee Croushore made significant contributions to Chapter 26. The efforts of Fran Kendall and Kay Winn also deserve special recognition. Their professional and diligent efforts made it possible to process the many drafts and redrafts for this book and still maintain a reasonable adherence to production deadlines. Thanks also go to others on the staff at the College of Law, Arizona State University, who gave support to this project: Rhonda Kirkeide, Monica Tineo, and Dean Paul Bender.MILTO~ R. SCHROEDER

August 1988

Summary of ContentsPart I The Nature and Regulation of Banking: An Overview1.

Introduction to Banking Regulation ................... .....................

1-1 2-1 3-1 4..1 5-1 6-1

2. U.S. Banking System ............................ 3. The Federal Reserve System 4. National Banks 5. Bank Holding Companies ......................... 6. Regulation of Bank Expansion Through Branching and Interstate Banking ................................ 7. Bank Examination and Supervision and Restrictions on Loans and Investments 8. The Restrictions Against Banks Engaging in Certain SecuritiesActivities

7..18 1

9. Enforcement Powers of the Banking Regulatory Agencies Under Federal Banking Laws

9-1

10. Liquidation, Reorganization, and Supervision of Failing Banks and Thrift Institutions ............................ 10-1

n.

Deposits and Deposit Insurance ..................... 11-1 11-1 13-1

12. Financial Transactions Regulation, Money-Laundering Controls, and Crimes Related to Bank Transactions 13. Bank Customer Privacy and Other Bank Activities Subject to Special Regulation

Part II

Bank Payments and Negotiable Instruments14-1 15-1 16-1IX

14. Sources of Commercial Banking Law and Basic Principles Governing Commercial Paper 15. Rights and Liabilities of Parties to Commercial Paper 16. Holders in Due Course

SUMMARY OF CONTENTS

X

17.. utters of Cred.it

17-1

18. Altemative Payment Systems: Bank Cards, Credit Cards, and Electronic Fund Transfers .................... 18-119. Bank Accounts 19-1

20. Mutual Duties of the Bank and the Depositor .......... 20-1 21. Collection and Payment of Instruments ............... 21-1

Part III Security Transactions in Personal Property and Related Credit Practices22. Creation of Security Interests in a Debtor's Personal Property 22-1 23. Priorities: Rights of Competing Creditors, Purchasers, and Transferees 24. Debtor Default and Enforcement of Security Agreements2S. Bankruptcy Table of vec Sections

23.. 1.. .. 24-125 1 T l

26. Interest Rate Controls and Credit Practices Regulation ... 26-1

Table of USC Sections.. . . . . . . . . . . . . . . . . .. . . . . .. . . . .. . . . . . . .Index.. . . . . . . . . . . . . . . . . . .. . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . .

T-17I.. J

Table of Cases . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... T-33

Table of ContentsPart I - The Nature and Regulation of Banking: An Overview1 Introduction to Banking Regulation~ ~

1.0 I Defining "Commercial Banking" . . . . . . . . . . . . . . . . . . . . . . . . 1.02 History of Banking Regulation. . . . . . . [I] First Bank of the United States. . . . [2] Second Bank of the United States. . [3) State-Chartered Banks. . . . . . . . . . [4] Federal Reserve Act of 1913 [5J Banking Since the 1950s. . . . . . . . . ... ... ... ... " ... . . . . ... ... .. ... ... .. ........ ........ '" ................ . . . . . . . . . . . . . . . . .. .. .. .. . . . .

I-I 1-4 1-4 1-5 1-6 1-7 1-8

2 U.S. Banking System11 2.0 I Classification of Commercial Banks and Thrift Institutions . . . . [l] National Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [2] State Banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [3] State Member Banks .. . . . . . . . . . . . . . . . . . . . . . . . . . . . [4] State-Insured Banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [5] Other Depository Institutions. . . . . . . . . . . . . . . . . . . . . . . [a] Savings and Loan Associations . . . . . . . . . . . . . . . . . . . TABLE 2-1 Number ofInsured Commercial Banks by Class and Principal Assets and Liabilities of Each (1986) . . . . . . . TABLE 22 Number of Banking Offices in the United States (1986) [b] Credit Unions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [c] Savings Banks~ ~

. . . . . . . . . .

2-2 2-2 2-3 2-3 2-3 2-4 2-4 2-5 2-6 2-7 2-8 2-92-10

2.02 Definition of "Depository Institutions" 2.03 Federal Banking Regulatory Agencies. . . . . . . . . . . . . . . . . . . . .

t 2.04 State Regulation of Banks .. . . . . . . . . . . . . . . . . . . . . . . . . . ..~

2-11 2-13 2-13 2-13' 2-14

2.05 Specialized Organizations With Banking Functions. . . . . . . . . .. [I] Industria! Banks or Morris Plan Banks '. . . . . . . . [2J Loan and Finance Companies TABLE 2-3 State Bank Commissioners . . . . . . . . . . . . . . . . . . . .Xl

TABLE OF CONTENTS [3 J Edge Corporations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [4] Export-Import Bank of the United States .. ...... [5] International Finance Organizations. . . . . . . . . . . . . . . . . . . [6J Housing and Mortgage Credit Agencies. . . . . . . . . . . . . . . . . raj The Federal Home Loan Mortgage Corporation , (b I The Federal Housing Administration [cJ The Federal National Mortgage Association , [d] The Government National Mortgage Association. . . . .. . [7] Special Purpose Federal Agencies with Financing Functions [8J The Farm Credit System ........... .... [a] Federal Land Banks and Associations . . . . . . . . . . . . . . . [bJ Federal Intermediate Credit Banks and Production Credit Associations leI Banks for Cooperatives. . . . . . . . . . . . . . . . . . . . . . . . . . [dj Farm Credit Boards , tel Farm Credit Administration " [tl 1988 Restructuring of the Farm Credit System [g] Borrowers' Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

xii 217 217 2-17 2.17 2.18 2-18 2.18 218 219 2\9 2-20 2-21 2-21 2-21 2-22 2-23 2-25

3 The Federal Reserve System'1 3.0 I Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .~ ~

3-2 32 35 3-5 37 3-10 JII J14 3-\ B 3-20 3-22 3-22 3-22 323 3-24 3-26 327 3-27 3-28 3-28

3.02 The Structure and Functions of the Federal Reserve System .... 3.03 The Organization and Powers of the Federal Reserve System. . . . [I] Board of Governors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TABLE 3) Federal Reserve Banks' Income and Expenses ... [2] Open Market Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . TABLE 3-2 Regulations of the Board of Governors of the Federal Reserve System . . . . . . . . . . . . . . . . . . . . . . . . . . . . [3] Federal Reserve Banks and Directors. . . . . . . . . . . . . . . . . . [4] Member Banks [5] The Relationship of the Federal Reserve System to Nonmember Depository Institutions. . . . . . . . . . . . . . . . . .. 3.04 Banking Functions of the Federal Reserve System. . . . . . . . . . . . [I] Depository Functions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [a] Reserve Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [b] Fiscal Agents and Depositories for the United States. . . . [2\ Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [a] Reserve Requirements .. , .... , . . . . . . . . . . . . . . . . .. TABLE 3-3 Reserve Ratios . . . . . . . . . . . . . . . . . . . . . . . . .. [b] Reserve Requirement Exemption . . . . . . . . . . .. Ic] Reserves of Nonmember Banks '. . . . . .. [dJ Reserve Requirements for Reserve Banks ., ,.

~

xiii

TABLE OF CONTENTS [e] Reserve Requirements and Monetary Policy . . . . . . . . . . [3] Currency Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [4] Reserve Bank lending Authority . . . . . . . . . . . . . . . . . . . . . [a] Advances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [b] Discounts [c] Federal Reserve System Credit. . . . . . . . . . . . . . . . . . . . [5] National Payments System: Fund Transfer and Check Collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [a] Check Collection ... . . . . . . . . . . . . . . . . . . . . . . . . . . . TABLE 3-4 Number of checks, Total and Collected by the Federal Reserve, Selected Years, 1920-1983 . . . . . . . . . . . . . [b] Fund Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [c] Regulatory Activities to Manage the Payment System ... [61 Credit and Interest Controls . . . . . . . . . . . . . . . . . . . . . . . . . [a] Margin Requirements for Securities Credit [b] Interest Rate Controls [c] Credit Controls 3-28 3-29 3-30 3-31 3-32 3-32 3-34 3-34 3-35 3-36 3-39 3-41 3-4 I 3-42 3-45

4 National Banks~

4.01 Overview ............ [I] Organization of National Banks .. . . . . . . . . . . . . . . . . . [2] Charters for Nonbank Banks [3] Changes in Names and Locations of National Banks. . . . [4J Suits Against National Banks. . . . . . . . . . . . . . . . . . . . .

... ... ... ...

4-1 4-2 4-4 4-5 4-5 4-7 4-8 4-9 4-10 4-11 4-12 4-12 4-12 4-13 4-13 4-14 4-14 4-16 4-16 4-17 4-18 4-19 4 I9

~

4.02 The Comptroller of the Currency . . . . . . . . . . . . . . . . . . . . . . . . TABLE 4- I Regulations of the Comptroller of the Currency . . . . . [11 National Bank Holidays and Emergency Powers. . . . . . . . . . [2] Unclaimed Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.03 Powers of National Banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . [I] Express Powers of National Banks. . . . . . . . . . . . . . . . . . . . [a] Trust Authority. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [b] Real Estate Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . [c] Transactions in Coin and Bullion ... . . . . . . . . . . . . . . . [d] Financing by Leasing Personal Property [e] Lotteries [2] The Incidental Powers of National Banks . . . . . . . . . . . . . . . [a] Borrowing Money. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [b] Insurance Activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . [c] Computer Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . [d] Guaranty Agreements ,.......... tel Other Powers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [/] Ultra Vires Acts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

~

TABLE OF CONTENTS

xiv

5 Bank Holding CompaniesII 5,01 The Evolution of Bank Holding Company Regulation. . .. . . . . . [I J Definition of "Bank Holding Company" . , ,. TABLE 5-1 Number and Deposits of Registered Bank Holding Companies-Selected Years, 1957-1983 , , , [2J The History of Bank Holding Company Regulation. , . . . . . . [3J Nonbank Banks ,, ,... [4J Nonbank Banks Under the Competitive Equality Banking Amendments of 1987 ... , , .. , ..... , . . . . . . . . . . . . . . . . [a] Exceptions to the Definition of "Bank" . , , [b] Immediate Divestiture for "New Bank" Acquisitions Between March 5,1987 and Date of Enactment. .. ' ., " [cl Grandfather Rights for Pre-March 5, 1987 Acquisitions ,.... [d I Conditions for Retaining Control " [e) Exception for Activities of Certain Savings Banks .. , . . . If] Thrift Institutions' Bank .. , , , .. , , ,,,... [g) Restrictions on Member Banks' Transactions With ,.,.,." , Affiliates , .. , II 5.02 Regulation of Bank Holding Company Activities [I I Exemptions to Prohibition of Nonbank Activities .. , , . . . . . [2J Activities Closely Related to Banking , , ... , , .... , , . . . . . (a] Activities Allowed Under Board Regulation Y .. , , .. , , . [bJ Deciding When an Activity Is Closely Related to Banking [c) Approval of Nonbank Activities-Hearings and Judicial Review ., "..... [3] Other Authority for and Restrictions on the Activities of Bank Holding Companies ... , .... , , .. , .... , . , .. , ... , [a] 1987 Moratorium on Certain Nonbanking Activities . . . . [i] Certain activities of foreign banks .. ,.,......... Iii) Securities transactions of banks and bank holding companies ,. , , [iii] Insurance activities of banks and bank holding companies , , .. , , , ,. [iv) Powers to engage in real estate transactions ",.", [bJ Securities Activities of Bank Holding Companies ,,, [c] Insurance Activities ' , .. , . , , .. , . . [d] Bank Service Companies ., ,, , , , .. , . . . . . . . Ie] Bankers' Banks .. , , . , , , If] Thrift Institutions' Bank ,., , [g) Other Bank Holding Company Activities ,.,.,. [4] Export Trading Companies ,................ II 5.03 Savings and Loan Holding Companies , .. , , .' ,,.. [I) Regulation of Savings and Loan Holding Companies in General ,, ' ,, , .. , . , . . . . . . . 5-2 5-2 5-4 5-5 5- 7 5-11 5-12 5-14 5-14 5-17 5-17 5-17 5-17 5-18 5-18 5-21 5-21 5-26 5-29 5-31 5-31 5-31 5-32 5-32 5-33 5-33 5-33 5-35 5-35 5-36 5-36 5-36 5-40 5-40

xv

TABLE OF CONTENTS [2] Effect of the Competitive Equality Banking Act of 1987 on Regulation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [a] Regulation of Business Activities of Savings and Loan Holding Companies and Their Noninsured Institution Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [b1 Regulation of Relationships Between Insured Institution Subsidiaries and Affiliate Companies. . . . . . . . . . . . . . . . [c] Extension of Tying Prohibitions to StateChartered Insured Institutions ........ [d] Interstate Activities eel Affiliations With Securities Firms . . . . . . . . . . . . . . . . . . [f] Treatment of FDIC-Insured State Savings Banks as Insured Institutions for Regulation as Subsidiaries of a Savings and Loan Holding Company. . . . . . . . . . . . . . . .

5-42 542 5-45 5-46 546 546 5-47

6 Regulation of Bank Expansion Through Branching and

Interstate Banking116.01 Branch Banking. . . . . . . . . . . . . . . . . . . . . . . . . . . . [1] Definition of "Branch" . . . . . . . . . . . . . . . . . . . . [2] Establishing New Branches-The McFadden Act [3] State Regulation of Bank Branching. . . . . . . . . . ......... . ... ..... ... . . . . . . .........0

6-2 6-2 6-6 6-9 6-10 610 6-14 6-14 616 6-19 6-20 6-22 6-24 6-26 6-27 6-27 6-30 6-31 6-32 6-35

11 6.02 Interstate Bank Expansion by Bank Holding Companies . [I] The Douglas Amendment [2] Expansion Through Nonbank Subsidiaries-The Douglas Amendment, the Commerce Clause, and Other Constitutional Considerations .. [a] Lewis v. BoT. Investment Managers, Inc [b] Northeast Bancorp. Inc. v. Board ofGovernors [c] Sears. Roebuck & Co. v. Brown [3] Interstate Expansion Through Nonbank Subsidiaries [4] Effects of the Competitive Equality Banking Act of 1987 on Nonbank Bank Interstate Expansion0 0 0 0 0 0 0 0 0 0

0

0

0

0

0

11 6.03 ATM Networks and the Restrictions on Interstate Banking

0

11 6.04 Regulation of Branching by Savings and Loan Associations ....

0

11 6.05 Emergency Acquisitions of Financially Weak Banks . . . . . . . . . . [1] Emergency Acquisition Authority [2] Effects of the Competitive Equality Banking Act of 1987 on Emergency Acquisition Powers [a] Enlarged Emergency Acquisition Powers of the FDIC 0.. [b] Acquisition of a Bank in Danger of Closing. . . . . . . . . . .0 0 0

11 6.06 Bank Holding Company Acquisition of Thrift Institutions ..

0

TABLE OF CONTENTS

xvi

7 Bank Examination and Supervision and Restrictions on Loans and Investments~

7.01 Examination and Supervision Generally. . . . . . . . . . . . . . . . . . .

7-17-2

ll] Federal Bank Examination. . . . . . . . . . . . . . . . . . . . . . . . . . [2] Portfolio Regulation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [aj Loans and Extensions of Credit. . . . . . . . . . . . . . . . . . . . [b1 Exceptions to the Limitations on Loans to a Single Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [i] Bankacceptances [ii] Real estate loans. . . . . . . . . . . . . . . . . . . . . . . . . . . [iii] Other investments. . . . . . . . . . . . . . . . . . . . . . . . . . [c] State Banks and Savings and Loan Associations. . . . . . . .~

7-77-7 7-9

7-11712

7-127-13 7-157-]6

7.02 Securities Activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

[I) Scope of Federal Securities Laws Generally, as Applied to '" Banks [2] Antifraud Provisions of the Federal Securities Laws [3] Definition of "Security" Under the Securities Act of 1933 and the Securities Exchange Act of 1934 . . . . . . . . . . . . . . . . [a] Transactions in Stocks, Bonds, and Similar Securities ... [b] Certificates of Deposit and Other Bank Deposits . . . . . . . [c] Promissory Notes and Commercial Loan Agreements ... [d] Investment Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . .

7-19 7-217-22 7-23 7-25 7-27

8 The Restrictions Against Banks Engaging in Certain Securities Activities~

8.0] The Prohibition Against Dealing in Securities-The Glass-

Steagall Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [] I Basic Provisions of the Act. . . . . . . . . . . . . . . . . . . . . . . . . . [2] Scope of the Glass-Steagall Act. . . . . . . . . . . . . . . . . . . . . . . [a] Application of the Act to National Banks, Member Banks, Insured Banks, and Savings and Loan Associations [b] Application of the Act to Bank Holding Companies and Their Affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [3 J Interpretation of the Glass-Steagall Act. . . . . . . . . . . . . . . . . raj The Subtle Hazards Analysis of the Camp Decision . . . . . [b] Defining a Security for Purposes of the Act. . . . . . . . . . . [4] The Bankers Trust Case: Placement of Commercial Paper and the Ban on Underwriting. . . . . . . . . . . . . . . . . . . . . . . . [5] Discount Brokerage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [a] National Banks [bl Bank Holding Companies :. . . . . . [6) Collective Investment Funds

8-2 8-3 8-5 8-5 8-78-9 8-9

8-11 8-13 8-16 8-16 8-178-19

xVii

TABLE OF CONTENTS [a] The Comptroller's Citibank Decision [b] Judicial Reaction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [7] Affiliations Between Banks and Securities FirmsDetermining When a Firm is "Engaged Principally" in Securities Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [8] Restrictions on Securities Activities Imposed by the Competitive Equality Banking Act of 1987 . . . . . . . . . . . . . . [aJ Bank Holding Companies. , . . . . . . . . . . . . . . . . . . . . . . [b] SaVings and Loan Holding Companies [c] Moratorium On Certain Nonbanking Activities. . . . . . . .8-20 8-21 8-24 8-27 8-27 8-29 8-30 8-31 8-31 8-34

11 8.02 The Government Securities Act of 1986 . . . . . . . . . . . . . . . . . .. [I] U.S. Government Securities Market. . . . . . . . . . . . . . . . . . . [2] Congressional Response-The Government Securities Act of1986 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9 Enforcement Powers of the Banking Regulatory Agencies Under Federal Banking Laws119.01 Regulating Unsafe and Unsound Banking Practices ... , . . . . . . .

[I] Cease and Desist Orders ,............. [2] Suspension and Removal of Officers and Directors .. , . . . . . [a] Authority of the Federal Supervisory Agencies. . . . . . . . . [b] Procedure for Removal or Suspension. . . . . . . . . . . . . . . [3] CiVil Money Penalties ............ [4] Special Liabilities of Officers and Directors ,... . [5] Judicial Review of Agency Actions ,...11 9.02 Transactions With Insiders and Affiliates. . . . . . . . . . . . . . . . . .

9-1 9-1 9-4 9-4 9-6 9-9 9-10 9-11 9-12 9-12 9-15 9-15 9-16 9-17 9-20

[I] Loans to or by Executive Officers of Member Banks [2] Loans to Officers of Banks Where Correspondent Accounts Are Maintained . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [3] Transactions With Affiliates. . . . . . . . . . . . . . . . . . . . . . . .. [4] Restrictions on Transactions With Affiliates Under the Competitive Equality Banking Act of 1987 ..... ... . [5] Tying Arrangements :, ,: . . . . . . . . . . . . .. . [6] Interlocking Management Arrangements. . . . . . . . . . . . . . . .

10

Liquidation, Reorganization, and Supervision of Failing Banks and Thrift Institutions...... ...........10-2 10-4 10-4 10-6

11 10.01 Termination of Deposit Insurance

11 10.02 Receiverships :............ [IJ Events That Justify the Appointment of a Receiver. . . . . . . . [2] Discretion of the Agency and Scope of Judicial Review. . . . .

TABLE OF CONTENTS [3] General Powers and Duties of the Receiver. . . . . . . . . . . . . . [al National Banks til Liquidation and distribution of assets. . . . . . . . . . . . [ii) Purchase and assumption agreements. . . . . . . . . . .. [b j Savings and Loan Associations . . . . . . . . . . . . . . . . . . .. [4J Requirement of a Ratable Distribution " [a] Preferences ... : ........................... " [bJ Application to Purchase and Assumption Agreements. .. (5) Enforcing Obligations; Defenses the FDIC May Avoid. . . . .. ,........ [a] Holder in Due Course Status [b] The Shield Statute .. . . . . . . . . . . . . . . . . . . . . . . . . . .. [c] Section 29(c) of the Securities Exchange Act. . . . . . . . .. {6] Resolving Disputed Claims; Jurisdiction and Choice of Law [a] Banks [b] Savings and Loan Associations . . . . . . . . . . . . . . . . . . ..~

xviii 10-7 10-8 10-8 10-10 10-11 10-12 10-13 10-15 10-15 10-16 10-17 10-21 10-22 10-22 10-23 10-24 10-24 10-25 1025 10-27 10-28 10-30 10-30 10-30 10-31

10.03 Financial Assistance to Weak Banks. . . . . . . . . . . . . . . . . . . . .. [J] Direct Financial Aid [2] Merger Assistance , . . . . . . . . . . . . . .. [a] Gam-St Germain Depository Institutions Act " [b] Judicial Review of Agency Decisions to Give Merger Assistance . . . . . . . . . . . . . . . . . . . . . . .. [3J Net Worth Certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . .. 10.04 New Banks and Bridge Banks. . . . . . . . . . . . . . . . . . . . . . . . . .. [I) Deposit Insurance National Banks . . . . . . . . . . . . . . . . . . .. [2) Bridge Banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 10.05 Other Regulatory Powers. . . . . . . . . . . . . . . . . . . . . . . . . . . . ..

~

~

11

Deposits and Deposit Insurance11-2 11-3 11-3 11-4 11-6 11-8 11-9 11-10 ll-ll 11-13 II- t3

'1 11.01 The Federal Deposit Insurance Corporation . . . . . . . . . . . . . . . . [I] Insured Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . raj Definition of "Deposit" ................... TABLE 11-1 Regulations of the Federal Deposit Insurance Corporation ,................ TABLE 11-2 Maximum Limits on Insured Deposits . . . . . [b] Mistaken Payment in Excess ofInsurance . . . . . . . . . . . . [2] Computing the Amount oflnsurance: Rules for Multiple Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [3] The Deposit Insurance System. . . . . . . . . . . . . . . . . . . . . .. '. . . .. [4j General Regulatory Authority of the FDIC

1111.02 Thrift Institution Deposit Insurance. . . . . . . . . .. . . . . . . . . . .. [I] Federal Savings and Loan Insurance Corporation . . . . . . . ..

xix

TABLE OF CONTENTS

[2] Financial Rescue of the Federal Savings and Loan Insurance System By the Competitive Equality Banking Act of 1987 .. , [3] Measures to Improve FHLBB and FSLIC Regulation of Financially Weak Institutions , [a] Accounting Principles. . . . . . . . . . . . . . . . . . . . . . . . . .. [b] Capital Forbearance Programs [c] General Supervisory Powers. . . . . . . . . . . . . . . . . . . . .. [d] Holding Corporation for Troubled Assets~

11-14 11-18 11-18 11-19 11-20 11-21

11.03 Credit Union Share Insurance

, . .. 1\-2111-24

~~

11.04 Deposit Insurance Backed by the Full Faith and Credit of the

United States11.05 Withholding Tax on Interest Paid

, 11-25

12 Financial Transactions Regulation, Money-Laundering Controls, and Crimes Related to Bank Transactions~

12.01 Financial Transactions Offenses. . . . . . . . . . . . . . . . . . . . . . . . .

12-2

[1] Financial Record-Keeping Requirements [2] Reporting of Currency Transactions. . . . . . . . . . . . . . . . . .. [a] Bank Secrecy Act of 1970 . . . . . . . . . . . . . . . . . . . . . . . . [b] Structured Transactions and Penalties for Reporting Violations ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [3] Money-Laundering Controls. . . . . . . . . . . . . . . . . . . . . . . . . [a] Money-Laundering Offenses . . . . . . . . . . . . . . . . . . . . .. [b 1 Monetary Transactions Involving Proceeds of Crime . . .. [c] RICO and Other Enforcement Measures. . . . . . . . . . . .. [4] Special Enforcement Powers. . . . . . . . . . . . . . . . . . . . . . . .. [a] Authority to Investigate Violations. . . . . . . . . . . . . . . .. [b] Compelling Information About Foreign Bank Records Protected Under Foreign Law , [c] Forfeiture of Property ,. . [dl Immunity for Reports of Violations tel Change in Bank Control. . . . . . . . . . . . . . . . . . . . . . . .. 11 12.02 Other Criminal Laws Relating to Bank Transactions. . . . . . . . .. [l]BankBribery [2] Misapplication of Funds [3] False Entries " [4] Other Federal Criminal Offenses. . . . . . . . . . . . . . . . . . . . ..

12-2 12-3 12-312- 7 12-9 12-9 12-12 12-12 12-12 12-12 12-13 12-15 12-16 12-17

12-17 12-18 12-23 1227 12-32

13 Bank Customer Privacy and Other Bank Activities Subject to Special Regulation11 13.0 I Privacy for Financial Records of Bank Customers. . . . . . . . . . . .13-1

TABLE OF CONTENTS [I] Rights to Privacy Under the U.S. Constitution. . . . . . . . . . . [21 Right to Financial Privacy Act ,, ,.......... [a] Conditions of Disclosure [b] Special Circumstances and Procedures [c] Scope and Operation of Act [dJ Privacy Act of 1974 . . . . . . . . . . . . . . . . . . . . . . . . . . . . [3J Privacy Rights Under Other Laws , 13.02 Regulation of Political Activities "

xx13-2 13-4 13-4 13-5 13-6 13-8 13-9 13-1 J

'113.03 Anticompetitive Conduct. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 13-12 [I) Antitrust Regulation 13-12 [2J Unfair Trade Practices. . . . . . . . . . . . . . . . . . . . . . . . . . . .. 13-15 [3J Consolidations and Mergers. . . . . . . . . . . . . . . . . . . . . . . .. 13-16 [4J Change in Control " 13-19 11 13.04 Local Credit Needs: The Community Reinvestment Act of 1977 13-20

Part II - Bank Payments and Negotiable Instruments14 Sources of CommerciaJ Banking Law and Basic Principles Governing Commercial Paper11 14.01 Sources of Commercial Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . [I] Federal Power Over Commercial Laws. . . . . . . . . . . . . . . . . [2] State Commercial Law-The Uniform Commercial Code. . . TABLE 14-1 State Enactments ofUCC and Amendments. . . . . . . [3] The Role of the Federal Government as the Source of Commercial Law ,................ TABLE 14-2 Legal Treatises on the Uniform Commercial Code and Related Subjects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [a) Federal Administrative Agencies. . . . . . . . . . . . . . . . . .. [b] Preemption of Federal Over State Rules '" TABLE 14-3 Hierarchy of Laws. . . . . . . . . . . . . . . . . . . . . .. [cl Authority of Federal Reserve System To Regulate Certain ,............... Payment Methods [4) Conflict of Laws Doctrines . . . . . . . . . . . . . . . . . . . . . . . . ..~

14-2 14-3 14-5 14-7 14-9 14-10 14-11 14-12 14-13 14-15 14- J 7 14-20 14-20 14-24

14.02 Money [I] Defining Money. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [2J Gold and Foreign Exchange , .. , . . . . . . . . . . . . . .. 14.03 Commercial Paper [l J Negotiable Instruments [2] Letters of Credit , .. ' ' ' "

~

14-26 , 14-26 14-28

xxi

TABLE OF CONTENTS [3] Securities [4] Documents of Title '" [5] Security Agreements , 14-28 , 14-29 14-29 14-30 14-30 14-31 14-31 14-33 14-37 14-38 14-38 14-39 14-42 14-4214-43 14-44 14-44 14-45

'14.04 Requirements for Instruments to Be Negotiable [I] Advantages of Negotiability. . . . . . . . . . . . . . . . . . . . . . . .. [2] Requirements for Negotiability. . . . . . . . . . . . . . . . . . . . . .. [a] Promise or Order. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [b] Unconditional. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. leI In Writing and Signed [dj Certainty as to Sum , tel Payable in Money. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [f] Payable on Demand. . . . . . . . . . . . . . . . . . . . . . . . . . .. [gl Payable at a Defmite Time. . . . . . . . . . . . . . . . . . . . . .. [hI Payable to Order or Bearer. . . . . . . . . . . . . . . . . . . . . .. til Designation of Payee . . . . . . . . . . . . . . . . . . . . . . . . . .. [j] Drawee Must Be Certain " [k] Instruments Not Payable to Order or to Bearer " [I] Ambiguous Terms and Rules of Construction

1114.05 Documents of Title and Securities " 1445 " 14-46 [1] Documents of Title 14-47 [al Negotiability of Documents of Title [bl Liability of Bailee for Loss or Damage to or Failure to Deliver Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 14-49 [cl Carrier's or Warehouseman's Lien. . . . . . . . . . . . . . . . .. 14-52 [2] Investment Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 14-53 14-54 [aj Investment Securities Under the Pre-1977 VCC [bl Investment Securities Under the UCC-1977 Amendments and Uncertificated Securities 14-54

15 Rights and Liabilities of Parties to Commercial Paper1115.01 Transfer and Negotiation of Commercial Paper .. . . . . . . . . . . . [1] Transfer of Property Generally. . . . . . . . . . . . . . . . . . . . . . . [2] Transfer of Negotiable Instruments. . . . . . . . . . . . . . . . . . . . [3] Indorsements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [a] Types ofIndorsements . . . . . . . . . . . . . . . . . . . . . . . . . . [il Blank indorsement [ii] Special indorsement [iii] Indorsement without recourse . . . . . . . . . . .. [iv] Restrictive indorsements . . . . . . . . . . . . . . . . . . . .. [vI Conditional indorsements . . . . . . . . . . . . . . . . . . .. [b] Rights and Duties of Restrictive Indorsees......... .... [c] Bank's Power to Supply Missing Indorsement. . . . . . . .. 15-2 15-2 15-5 15-7 15-8 15-8 15-9 15-10 15-10 15-11 15-12 15-13

TABLE OF CONTENTS fdJ Transferees ofInstruments With Missing Indorsement. .. (e] Limitation of Indorsees' Rights by Separate Contract. . .. 11 15.02 Liability of Parties on Negotiable Instruments [l] Primary and Secondary Liability [2] Liability of Maker and Acceptors . . . . . . . . . . . . . . . . . . . .. (3] Acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [4) Indorser's Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [5] Drawer's Liability . . . . . . . . . . . . . . . . . . . .. II 15.03 Liability in Warranty for Transfer and Presentment of Negotiable Instruments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [I) Presentment Versus Transfer Warranties. . . . . . . . . . . . . . .. [2) Warranties of Customers and Collecting Banks. . . . . . . . . ..

xxii 15-14 15-18 15.19 15-20 15.20 15-22 15-24 15.25 15-26 15-27 15-30 15-31 15-31 15-33 15-33 15-34 15-39 15-39 15-39 15-41 15-42 15-44 15-44 15-46 15-47 15-47 15-49 IS-52 15-55 15-58 15-58 15-61 15-62 15-66 15-69

'il 15.04 Liability of Agents and Representatives . . . . . . . . .. [1] Rules Regarding Liability. . . . . . . . . . . . . . . . . . . . . . . . . .. (2) Case Examples " , . . . . . . . . . . . . . .. [a] Principal's Name Missing ' . . . . . . . . . . . . . .. [b) Agent Fails to Sign in a Manner That Shows Agency Status11 15.05 Bank's Liability on Negotiable Instruments Generally. . . . . . . .. [ I] Certificates of Deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [2] Cashier's Checks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [3) Money Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [4] Traveler's Checks , . . . . . .. [5) Accepted Drafts and Certified Checks , . . . .. la) Obligations of Acceptance or Certification. . . . . . . . . . .. [b) Certifying or Accepting Forged or Altered Paper. . . . . .. Ie) Mistaken Certincation , . . . . . . . . . . . .. '115.06' Sureties and Accommodation Parties. . . . . . . ... ..... ... [I J The Rights of an Accommodation Party Against the Principal [2) The Obligation of an Accommodation Party to Pay. . . . . . .. [3] Defenses to Payment of an Accommodation Party. . . . . . . .. [4] Accommodation Parties in Consumer Transactions... .....

'I 15.07 Discharge of Liability

. . . . . . . . . . . . ..

'115.08 Handling ofInstruments Involving a Fiduciary. . . . . . . . . . . . .. [l] UCC Provisions Relating to Fiduciaries , . .. [2] Uniform Fiduciaries Act Provisions. . . . . . . . . . . . . . . . . .. [3] Problems in Determining When There Is Knowledge of a Breach of Fiduciary Duty. . . . . . . . . . . . . . . . . . . . . . . . . ..

16 Holders in Due CourseII 16.0 I Holder in Due Course Requirements 16-2

xxiii

TABLE OF CONTENTS [1) The Holder Requirement. . . . . . . . . . . . . . . . . . . . . . . . . . . 16-3 [2) Taking Without Notice of Defects or Defenses . . . . . . . . . . . 16-3 [a) Definition of "Notice" .. . . . . . . . . . . . . . . . . . . . . . . . . 16-5 [b] What Constitutes Notice ofa Claim or Defense. . . . . . . . 16-5 [3) Good Faith 16-II [4]GivingValue 16-15 [5] Persons Who Cannot Qualify as Holders in Due Course. . .. 16-19

~

16.02 Rights of a Holder in Due Course. . . . . . . . . . . . . . . . . . . . . . .. 16-20 [1) Freedom From Conflicting Claims. . . . . . . . . . . . . . . . . . .. 16-21 [2] Freedom From Defenses 16-21 [a] Defenses of Parties With Whom the Holder Has Dealt. .. 16-21 [b] Real and Personal Defenses 16-23 Ic] Categories of Real Defenses . . . . . . . . . . . . . . .. 16-24 [i] Incapacity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 16-24 [iiI Duress or illegality 16-25 [iii] Fraudulent misrepresentation of the nature of the instrument .... . . . . . . . . . . . . . . . . . . . . . . . . . .. 16-26 [iv] Discharge in insolvency proceedings. . . . . . . . . . . .. 16-27 [v] Other discharges when the holder has notice. . . . . .. 16-27 16-28 16-31 16-33 16-35 16-37 16-38 16-38 16-39 16-40 16-42 16-43 16-43 16-44 16-44 16-45 16.04 The Shelter Principle-Acquiring the Rights of a Holder in Due Course by Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..

11 16.03 Rights of a Holder Who Is Not a Holder in Due Course~

'II 16.05 Defenses to the Instrument Based Upon Separate Conditions or~

16.06 Preservation of Claims and Defenses in Consumer Transactions [I] Abolition of Holder in Due Course Status by FTC. . . . . . . .. [2] Transactions Covered by FTC Rule [a) Financed Sale and Purchase Money Loan [b] Impact of FTC Rule. . . . . . . . . . . . . . . . . . . . . . . . . . .. [c] Case Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [3] Preservation of Claims and Defenses Under the Uniform Consumer Credit Code. . . . . . . . . . . . . . . . . . . . . . . . . . . .. [a] Section 3.307: Use of Negotiable Instruments. . . . . . . .. [bJ Section 3.403: Credit Card Transactions . . . . . . . . . . . .. [c) Section 3.404: Waiver of Defense Clauses. . . . . . . . . . .. [d) Section 3.405: Availability of Claims and Defenses Against Lender. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [4J Other State and Federal Restrictions on Holder in Due Course Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..

17

Letters of Credit17-1

11 17.01 Rights and Duties of Parties in Letter of Credit Transactions. . . .

TABLE OF CONTENTS [1] (21 [3) [4J Scope of UCC Letter of Credit Provisions. . . . . . . . . . . . . . . Form of Letters of Credit. . . . . . . . . . . . . . . . . . . . . . .. . .. Letters of Credit Are Not Guarantees . . . . . . . . . . . . . . . . . . International Letters of Credit and the Uniform Customs. . .

xxiv 17-4 17-5 17-7 17-8 17-9 17-9 17-11 17-12 17-14 17-17 17-19 17-21 17-22 17-24

1117.02 Obligations of an lssuer ofa Lelter of Credit. [ 1J Issuer's Obligation to Its Customer . . . . . . . . . . . . . . . . . . . . [2] Issuer's Obligation to Pay the Beneficiary . . . . . . . . . . . . . .. raj Indemnities [b} Relationship of Letter of Credit to the Underlying Contract [3] Standby Letters of Credit 1117.03 Documentary Drafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [I] Bank's Duty to Present Draft and to Notify Customer of Nonpayment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [2} Bank's Responsibilities for the Documents and the Goods. ..~

17.04 Letters of Credit and Bankruptcy . . . . . . . . . . . . . . . . . . . . . . ..

18 Alternative Payment Systems: Bank Cards, Credit Cards, and Electronic Fund Transfers'I 18.01 Alternative Payment Systems Generally . . . . . . . . . . . . . . . . . . .

[1) Types of Transactions [a} Check Truncation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . [b] Automated Clearinghouse Transactions. . . . . . . . . . . . . [c] Book Entry Securities and Safekeeping Services. . . . . . . [d] Wire Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [e J Automated Teller Machines .. ..... ......... (I] Point of Sale Terminals [g) Home Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [h} Credit Cards [2] Sources of Law~

18-3 18-3 18-3 18-4 18-5 Ill-5 18-6 186 18-6 18-7 18-7

18.02 Electronic Fund Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188 [I] Scope of the Electronic Fund Transfer Act 189 [2] Error Resolution . . . . . . . . . . . . . . . . . .. 18-12 [3] Failure to Execute a Transfer or Stop Transfer Order 18-13 Properly [4 J Preauthorized Transfers and Stop Payment Rights. . . . . . .. 18-14 [5] Suspension of Obligations to Third Parties. . . . . . . . . . . .. 18-15 (6] Disclosure and Notice Obligations 18-15 [Ii] Initial Disclosure and Notice of Changes .. 1816 [b] Documentation of Transfers Made Through an Electronic Terminal . . . . . . . . . . . . . . . . . . . . . . . . . .. 1816 [cJ Preauthorized Transfers . . . . . . . . . . . . . . . . . . . . . . .. 18-17

xxv

TABLE OF CONTENTS [d] Periodic Statement of Account. . . . . . . . . . . . . . . . . .. 18-18 tel Notice of Error Resolution Procedures 18-19 [I] Documentation as Proof of Transfer . . . . . . . . . . . . . .. 18-19 Miscellaneous Restrictions . . . . . . . . . . . . . . . . . . . . . . . .. 18-19 Issuing Access Cards 1\\-19 Relation to State Law . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 18-21 Enforcement Powers and Private Remedies. . . . . . . . . . . .. 18-22 [a] Administrative Enforcement. . . . . . . . . . . . . . . . . . . .. 18-22 [b] Criminal Enforcement 18-22 [c) Liability of Institutions , . . . . . . . . .. 18-23 18-24 18-27 18-28 18-28 18-31 18-31 18-32 18-32 18-33 18-33 18-34 18-34 18-35 18-37 18-38 18-41 18-41 18-42 18-42 18-45 18-47 18-50 18-50 18-52 18-53 18-54 18-56 18-60

[7]

(8) [9] [10]

'I 18.03 Bank Credit Cards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..

[I] [2] [3] [4] [5] [6]

Truth-in-Lending Act Provisions Issuing Credit Cards " Preservation of Cardholder Claims and Defenses. . . . . . . .. Prohibition Against Setoff of Obligations. . . . . . . . . . . . . .. Wrongful Refusal to Extend Credit. . . . . . . . . . . . . . . . . .. Terms of Credit Card Plans Affecting Merchants and Others Who Honor the Card . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [7] Duty of Sellers to Notify Issuers of Returned Goods and Other Credits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [8] Credit Card Fraud ,

~

18.04 Unauthorized Electronic Fund Transfers and Credit Card Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [I) Unauthorized Use of Credit Cards. . . . . . . . . . . . . . . . . .. [a] Statutory Rules and Regulation Z . . . . . . . . . . . . . . . .. [b] Definition of "Unauthorized Use" . . . . . . . . . . . . . . . .. til Loaning of the credit card " [ii] Estranged spouses and other family members. . . . . . . .. [iii] Lost and stolen cards [iv] Employer-employee . . . . . . . . . . . . . . . . . . . . .. [2] Unauthorized Electronic Fund Transfers. . . . . . . . . . . . . .. [a] Statutory Rules and Reguiation E . . . . . . . . . . . . . . . .. [b] Definition of "Unauthorized Transfer" . . . . . . . . . . . .. 18.05 Fund Transfers Not Regulated by the Electronic Fund Transfer Act, the Truth-in-Lending Act, or the VCC. . . . . . . . . . . . . . . .. [1] Regulation of Wire Transfers by tile Federal Reserve System [a] Basic Definitions [b] Authority of the Reserve Bank to Process Transfer. . . .. [c] Procedures Governing Reserve Bank Transfers [d] Liability of the Reserve Ba:J.k . . . . . . . . . . . . . . . . . . .. [2] Bank Liability for Erroneous or Wrongful Fund Transfers .. [3] Proposed Revision ofUCC to Cover Moderp Payment Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..

~

TABLE OF CONTENTS [4J Check Truncation and Other Electronic Processing Methods of Check Collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [5) Regulation of ACH Transactions [6J Regulation of Direct Deposit Payments and Book Entry Securities Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . ..

xxvi

18-61 18-64 18-66

19 Bank Accounts'I 19.0 I Basic UCC Definitions. . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . .

19-2 19-4 19-4 19-4 19-5 19-7 19-9 19-9 19-11 19-11 19-12 19-12 19-13 19-14 19-15 19-15 19-15 19-16 19-17 19-20 19-20 19-20 19-21 19-22 19-23 19-25 19-26 19-27 19-28 \9-29 19-30 19-30 19-31 19-32 19-35

1119.02 Nature of Bank Accounts... . .. . . . .. [I] Legal Relationship Between Bank and Depositor. . . . . . . . . . raj Bank as Debtor to Its Depositor . . . . . .. [b J Bank as Bailee or Trustee . . . . . . . . . . . . . . . . . . . . . . . . [cJ Accounts at Branches . . . . . . . . . . . . . . . . . . . . . . . . . .. [dj Bank Ownership of Deposited Funds [2] Kinds of Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [a] Checking Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . .. [b] Savings Accounts " [c) Special Deposits " [dJ Certificates of Deposit Ie] NOW Accounts . . . . . . . . . . . . . . . . .. [f] Automatic Transfer Accounts . . . . . . . . . . . . . . . . . . . .. [g) Share Draft Accounts . . . . . . . . . . . . . . . . . . . . . . . . . .. [hl Money Market Accounts. . . . . . . . . . . . . . . . . . . . . . . .. [3J Opening an Account....... .. [4] Unconscionable Agreements. . . . . . . . . . . . . . . . . . . . . . . .. [5] Termination of Relationship

t 19.03 Forms of Accounts[l] Individual Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..

[2J Joint or Multiple Party Accounts . . . . . . . . . . .. {a] Common-Law Rules. . . . . . . . . . . . . . . . . . . . . . . . . . .. [bJ Uniform Probate Code. . . . . . . . . . . . . . . . . . . . . . . . .. [c] Creditors' Rights Against Joint Account [d] Ownership Interests . . . . . . . . . . . . . . . . . . . . . . . . . . .. Ie] Bank Payment of Joint Account Funds . . . . . . . . . . . . .. If] Liability for Overdrafts. . . . . . . . . . . . . . . . . . . . . . . . .. [g] Conflicting Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [3J Partnership Accounts " [4] Corporate Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..11 19.04 Signatures

_. . . . . . . . . . . . .. [I] What Constitutes a Signature . . . . . . . . . . . . . . . . . . . . . .. [2] Single, Multiple, and Facsimile Signatures "

11 19.05 Nondeposit Liabilities

xxvii

TABLE OF CONTENTS

20~ ~ ~~ ~

Mutual Duties of the Bank and the Depositor20-2 20-4 20-5 20-10 . .. 20-11 . .. 20-11 . .. 20-12 . .. 20-13 20-17 20-18 . .. 20-21 . .. 20-22 . .. 20-23 . .. 20-23 20-28 20-37 20-43 20-43 20-45 20-49

20.01 Bank's Right to Charge Customer's Account. . . . . . . . . . . . . . .. 20.02 Improper Payment and Bank's Rights of Subrogation . . . . . . . . . 20.03 Liability of Bank for Refusal to Pay . . . . . . . . . . . . . . . . . . . . . . 20.04 Postdated Checks and Stale Checks 20.05 Stopping Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [1] Basic Rules on Stopping Payment. . . . . . . . . . . . . . . . . . [a] When Is a Stop Payment Order Timely? . . . . . . . . . [b] Subrogation Rights and Proof of Loss . . . . . . . . . . . . [2] Claims of Third Parties to Checks [3] Stopping Payment on Cashier's Checks, Bank Drafts, and Certified Checks 20.06 Bank's Duty to Pay the Holder. . . . . . . . . . . . . . . . . . . . . [1] Order Paper and Identification of Payees and Indorsers [2] Bearer Paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [3] Fictitious or Nonexisting Payees ,. . . . . . . . .

~

11 20.07 Miscredited Proceeds and Restrictive Indorsements

. . . . . ..

1120.08 Checks With Forged or Unauthorized Signatures [1] Breach of Warranty by Customer Obtaining Payment of Check With Forged Indorsement [2] Conversion of Check When Bank Pays Over a Forged Indorsement [3] Customer Negligence As Defense to Bank's Payment of Check With Unauthorized Signature or Alteration. . . . . . . .. [4] Bank's Improper Payment of Check as Cause of Customer Loss ,........................

t 20.09 Alteration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 20-50 [1] Altered Checks That Were Complete When Signed. . . . . . .. 20-52 [2] Instruments Issued With Blanks. . . . . . . . . . . . . . . . . . . . .. 20-54~ ~

20.10 Depository Bank's Obligation of Good Faith 20.11 Bank's Right to Revoke Credits to Customer's Account and to Charge Customer for Items Not Paid . . . . . . . . . . . . . . . . . . . .. [I] Customer's Right to Withdraw Against Items Deposited. . .. [a] Customer's Right to Withdraw Against Deposited Items Under the UCC , . . . . . . . . . . . . . . . . . . . . . . .. [b] The Expedited Funds Availability Act of 1987 . . . . . . . .. [i] Definitions and scope of EFAA [ii] Funds availability requirements. . . . . . . . . . . . . . .. [iii] Accrual of interest on deposits ... '.' . . . . . . . . . . .. [iv] Calculation of business days. . . . . . . . . . . . . . . . . .. [v] Administrative enforcement and private remedies ..

20-55 20-56 20-60 20-61 20-63 20-64 20-64 20-73 20-74 20-74

TABLE OF CONTENTS

xxviii

[vi] Federal Reserve Board Regulation CC ... _. . . . . .. 20-75

1120.12 Customer's Duty to Examine Statements of Account. . . . . . . . .. 20-81 [I] Duty to Examine Statements and to Report Improper Payments ..................................... 20-81 [2] Duty to Report Forgeries and Alterations When Bank Retains Checks 20-86 [3] ~egligence and the Duty of Due Care Under the UCC 20-87 11 20.13 Liability of Bank on Promises and Representations With Respect to Its Customer's Account '" _. . . . . . . . . . . . .. 20-88

21

Collection and Payment of Instruments21-2 21-3 21-5 21-5

t 21.01 Responsibilities of Banks in Collecting Payment of Checks and Other Negotiable Instruments _........................ [I] Liability of Depositary Bank for Collecting Payment . [2] Bank's Duties in Choosing Other Collecting Banks . [3] Duties of Intermediary . [4] Effect of Private Agreements on Banks' Duties .

21-7

11 21.02 Failure to Act Properly in Collecting the Item [I] Duty of Holder to Present Instrument Promptly [2] Duty of Collecting Bank to Act Promptly [3] Form of Payment [4] Delay From Misroutings

. 21-9 . 21-9 . 21-10 . 21-11 . 21-1221-15

1: 21.03 Payment of Items by Payor Bank . [1] Accountability of Payor Bank for Payment of Items . [2] Legal Consequences and Timing of Payment . [3) Notice to Payor From Notations on Checks . [4] Effect of Payment on the Underlying Transaction . [5] Payment by Remittance Instrument . [6] Payor Bank's Right to Cancel Payment and Recover Proceeds [7] Application of Final Payment Rule . [8] Method of Return ofltems Not Paid Under UCC and Federal Reserve Board Rules .'1 21.04 Instruments Payable at or Through Banks

21-1521-18 21-20 21-21

21-23 21-24 21-2821-30

. 21-32 . 21-34 . 21-35 . 21-36

f 21.05 Errors in Handling Computer-Encoded Checks

\ I] Errors in Check Amounts [2] Errors in Routing Directions

1/21.06 Collection and Return of Checlcs Under Feceral Reserve Board Regulation CC : . 21-391121.07 Use of Central Data Processing Center for Payment of Checks by

Bank With Multiple Branches 11 21.08 Payment of Lost or Stolen Checks

. 21-42 . 21-45

TABLE OF CONTENTS

xxx

Part III - Security Transactions in Personal Property and Related Credit Practices22 Creation of Security Interests in a Debtor's Personal PropertyII 22.01 Security Interests in Personal Property Under the VCC . . . . . . .. [l J Scope of VCC on Security Interests [2] Leases and Consignments as Security Transactions . . . . . . .. [a) Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [bJ Consignments22-2 22-3 22-6 22.6 22-9

. . . . . . . . . . . . . . . . . . . . . . .. 22) 0 '1/22.02 Creating a Security Interest [1] The Security Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . .. 2210 [2] Purchase Money Security Interests. . . . . . . . . . . . . . . . . .. 22-16 11 22.03 Perfection, Termination, and Transfer of Security Interests " [I] Filing Requirements [2] Requirements of Financing Statements. . . . . . . . . . . . . . . .. [a] Information Requirements . . . . . . . . . . . . . . . . . . . . . .. [b] Other Requirements as to Effectiveness " [3J Termination Statements and Partial Releases of Collateral. .. [4] Transfer of Security Interests . . . . . . . . . . . . . . . . . . . . . . .. [5] Place of Filing UCC Financing Statement. . . . . . . . . . . . . .. TABLE 22-1 1972 and Pre-I 972 Versions ofUCC TABLE 22-2 State Filing Systems for Article 9 Security Transactions (UCC 9-401). . . . . . . . . . . . . . . . . . . . . . . . . . .. TABLE 22-3 State Filing Locations for Article 9 Security Transactions (VCC 9-401) . . . . . . . . . . . . . . . . . . . . . . . . . . .. 11 22.04 Security Interests When the Secured Party Has Possession ofthe Collateral . ~ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [)] The Pledge [a] Creating a Security Interest by Pledging Collateral . . . . .. Ib] Perfecting the Security Interest in Pledged Collateral . . .. [2J Field Warehouse Systems " [3] Duties of a Pledgee1: 22.05 Automatic Perfection and Perfection of Security Interests in Collateral Governed by Systems Other Than the UCC. . . . . . . .. 22-18 22-19 2222 2222 2225 2227 22211 22-30 2232 2234 2240 22-45 2245 2245 22-46 2249 2250 22-51 22-52 2253 22-54 22-54 22-56

11 22.06 Security Interests in Goods and Chattels. [l] Consumer Goods. . . . . . . . . . . . . . . (2] Equipment [3] Farm Products. . . . . . . . . . . . . . . . . 14] Inventory ..... ......

. . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . ..

xxxi

TABLE OF CONTENTS

[5] Fixtures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 22-59 [6] Motor Vehicles . . . . . . .. 22-60~

22.07 Security Interests in Intangibles and Like Property . . . . . . . . . .. [I] Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . .. [2] General Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [3] Instruments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [4] Chattel Paper [5] Documents of Title [6] Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [a] Certificated Securities. . . . . . . . . . . . . . . . . . . . . . . . . .. [b] Cases Involving Certificated Securities [c] Uncertificated Securities. . . . . . . . . . . . . . . . . . . . . . . .. [d] U.S. Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [7] Bank Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [8J Insurance Policies . . . . . . . . . . . . . . . . . . . . . . . .. [9] Real Estate-Related Interests . . . . . . . . . . . ..

22-61 22-61 22-66 22-67 22-68 2269 2270 22-72 2273 22-77 22-78 22-78 2280 2281

23~

Priorities: Rights of Competing Creditors, Purchasers, and Transferees23-2 23-2 23-4 23-5 23-7 23-8 23-8 23-8 23-11 23-15 23-16 23-16 23-18 23-19 23-22 23-26 23-27 23-31

23.01 Priorities Between Parties With Security Interests in the Same Collateral [IJ Unperfected Security Interests . . . . . . . . . . . . . . . . . . . . . . . [2] Perfected Security Interests [a] Purchase Money Security Interests ...... [b] Security Interests in Crops ..... . . . . . . . . . . . . . . . . . . 23.02 Rights of Buyers and Purchasers. . . . . . . . . . . . . . . . . . . . . . . . . [I] Buyers of Goods .... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [a] Buyers in the Ordinary Course of Business [b] Buyers From Debtors Who Have Authority to Sell. . . . .. [c] Scope of Protection for Buyers in the Ordinary Course of Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [2J Buyers of Farm Products-The Food Security Act of 1985 .. [a] Reasons for Enactment. . . . . . . . . . . . . . . . . . . . . . . . .. [b] Provisions of the Act ... . . . . . . . . . . . . . . . . . . . . . . .. [c] Presale Notice Procedures. . . . . . . . . . . . . . . . . . . . . . .. [d] Notification Through a Central Filing System [e] Debtor's Duty to Identify Buyers, Commission Merchants, and Sales Agents. . . . . . . . . . . . . . . . . . . . .. [f] Scope of the Act and Federal Preemption [3] Purchasers of Instruments, Chattel Paper, and Documents. ..

~

~ 23.03 Special Priority Rules

23-32 [I] Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 23-32

TABLE OF CONTENTS [2] [3] [4] [5] [6] Fixtures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rights of Unpaid Sellers of Goods ... . . . . . . . . . . . . Conflicts With Liens Arising Under Other Laws ..... Commingled or Processed Goods. . . . . . . . . . . . . . . . Subordination Agreements. . . . . . . . . . . . . . . . . . . . . ... ... ... ... ... .. .. .. .. ..

xxxii 23-34 23-36 23-38 23-39 23-40

24

Debtor Default and Enforcement of Security Agreements24-2 24-2 24-2 24-4 24-4 24-5 24-6 24-9 24-9 24-11 24-14 24-15 24-16 24-17 24-21 24-21 24-21 24-23 24-26 24-27 24-30 24-31 24-31 24-32 24-34 24-34 24-36 24-39 24-39 24-41 24-44 24-45 24-48

1124.01 General Rules on When an Obligation Is Due. . . . . . . . . . . . . . . [I] Obligations Based on Promissory Notes [a] Notes Payable on Demand. . . . . . . . . . . . . . . . . . . . . .. [b] Acceleration Clauses. . . . . . . . . . . . . . . . . . . . . . . . . . .. [i] Good faith requirement. . . . . . . . . . . . . . . . . . . . . . [iiI Types of acceleration provisions. . . . . . . . . . . . . . .. [iii] Scope of UCC 1-208 . . . . . . . . . . . . . . . . . . . . . .. [c] Due-on-Sale Clauses. . . . . . . . . . . . . . . . . . . . . . . . . . .. til Enforceability in real estate transactions. . . . . . . . . . Iii] Gam-St Germain Act [2] ::\'otes With Special Contract Provisions . . . . . . . . . . . . . . .. [3] Waiver or Cancellation of Debts. . . . . . . . . . . . . . . . . . . . .. [a] Problems With Renewal Notes. . . . . . . . . . . . . . . . . . .. [b] Full Payment Checks ; . .. '/24.02 Special Duties of Good Faith and Fiduciary Responsibility of Bank to Customer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [I] The Bank as a Fiduciary. . . . . . .. . . . . . . . . . . . . . . . . . . [a] Fiduciary Relationships Generally. . . . . . . . . . . . . . . . Ib] Transactions Where a Bank Is a Fiduciary. . . . . . . . . . [2] A Bank's Duty of Good Faith and Related Obligations. . . [a) Theories Underlying Lender Liability Cases. . . . . . . . . Ib] Liability Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. .. ..

11 24.03 Enforcement of Security Interests Under UCC Anicle 9 [I] Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [2] Repossession of the Collateral [3] Constitutional Limitations on Secured Pany Remedies. . . .. [a] Supreme Court Due Process Decisions Ib] Self-Help Repossession and the Issue of State Action. . .. [4] Disposition of Collateral After Default. . . . . . . . . . . . . . . .. [a) Requirements for Disposal of Collateral [b] Cases Illustrating Requirements . . . . . . . . . . . . . . . . . .. [5] Retention of Collateral in Discharge of the Obligation. . . . .. [6] Creditor Liability for Failure to Comply With UCC :... Procedures 11 24.04 Special Consumer Credit Rules

xxxiii

TABLE OF CONTENTS

25 Bankruptcy~

25.01 Source of Law, Jurisdiction, and Procedure 25.02 Different Types of Bankruptcy Proceedings [1] Chapter 7: - Liquidation [2] Chapter 13: - Debt Adjustment [3] Chapter II: - Reorganization [4] Chapter 12: - Family Farmer

25-2 . 25-5 . 255 . 25-6 . 258 . 25-11 . 25-14 . . . . . 25-15 25-15 25-16 25-17 2518

~

t 25.03 Voluntary Versus Involuntary Proceedingsf 25.04 Property of the Bankruptcy Estate

[1] [2] [3] [4]~

Determining What Constitutes Properly Exemptions Lien Avoidance for Exempt Property Turnover of Property Belonging to the Estate

. 25-19 25.05 The Automatic Stay [ I J General Rule . . . . . . . . . . . . . . . . . , , . . , . . . . . . . . . . . . . . 2519 [2] Exceptions , , , , . 25-21 [3) Procedure for Obtaining Relief From the Stay . 25-23 [4J The Secured Creditor, the Collateral, and Adequate Protection , . 25-2425.06 Creditors' Claims: Procedures and Priority of Distribution

~~

"

25-26 25-28 2529 25-30 25-31 25-32 2532 25-36 25-39 25-41 25-42 25-42 25-43 25-44 25-45 25-45 2549 2550

25.07 Powers and Duties of the Bankruptcy Trustee '. (I J Trustee as Lien Creditor. . . . . . . . . . . . . . . . . . . . . . . . . . .. [2] Trustee as Successor to the Rights of Actual Unsecured Creditors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [3) Power to Set Aside Statutory Liens " [4] Power to Set Aside Preferences _ , . .. [a] Elements of a Preference. . . . . . . . . . . . . . . . . . . . . . . .. [b] Statutory Exceptions ' [5] Power to Set Aside Fraudulent Conveyances. . . . . . . . . . . .. [6] Rights of Transferees in Avoided Transfers. . . . . . . . . . . . .. [7] Other Specific Powers of the Trustee. , . . . . . . . . . . . . . . . .. [a] Executory Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . .. [b] Waiving the Attorney-Client Privilege. . . . . . . . . . . . . .. [c] Abandoning Property of the Estate. . . . . . . . . . . . . . . .. 25.08 Discharge of the Debtor , . . . . . . . . . . . . . . . . . . . . . . . .. _. . . . . . . . . . . . . .. [I] Nondischargeable Debts [2J Objections to Discharge , , .. , . . . . .. [3] Reaffirmation of Debt by the Debtor , .. , , " , . . ..

~

~

25.09 Issues Involving the Rights and Duties of a Bank ,.'..... 2552 [I] Checks in the Process of Collection .... , ... , , . . . . . . . . .. 25-52

TABLE OF CONTENTS [2] Letters of Credit as Preferences [3] The Bank's Right of Setoff and the Automatic Stay . . . . . . .. fa] Requirements of General Right of Setoff " fbJ Prepetition Setoff. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [c] Postpetition Setoff; "Freezing" Accounts. . . . . . . . . . . .. Id} Setoffs and the Involuntary Bankruptcy. . . . . . . . . . . . .. [4] Credit Card Purchases as Nondischargeable Debts. . . . . . . .. f5J Employees Who File Bankruptcy ..... . . . . . . . . . . . . . . .. [6J Environmental Protection, Hazardous Wastes, and the Bankrupt Debtor " (a] Environmental Proceedings and the Automatic Stay (bJ Dischargeability of Orders and Fines Arising From Environmental Violations. . . . . . . . . . . . . . . . . . . . . . .. [c] Abandonment of the Property and Liability for Cleanup " [dJ Priority Status for Claims Resulting from Cleanup. . . . ..

xxxiv 25-53 25-57 25-57 25-58 25-60 25-61 25-62 25-65 25-66 25-67 25-67 25-68 25-70

26 Interest Rate Controls and Credit Practices Regulation~ ~

26.0 I Sources of Law

". . . . . . . . . .

26-2 26-4 26-5 26-8 26-9 26-11 26-12 26-13 26-13 26-14 26-14 26.15 2616 26-16 2618 26-19 2623

26.02 Interest and Usury. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [l] State Law Regulating Interest Rates ., . . . . . . . . . . . . . . . . . fZ] National Banks .... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ia] Role of State Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . fb] Most Favored Lender Doctrine. . . . . . . . . . . . . . . . . . .. leJ Interstate Credit Activities .... . . . . . . . . . . . . . . . . . .. [3} Federal Preemption of State Usury Law ... . . . . . . . . . . . .. [a] Depository Institutions Deregulation and Monetary Control Act " [b] Preemption Provisions for Specific Categories Under the Act (i] Residential real property loans. . . . . . . . . . . . . . . .. [ii] Obligations of depository institutions. . . . . . . . . . .. [iii] Business and agricultural loans of $1 ,000 or more. .. [iv] Other loans by federally ins'Jred depository institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [c] State Laws Overriding Federal Interest Limits. . . . . . . .. [4] The Prime Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [5] Variable Rate and Other Nontraditional Mortgage Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..

t 26.03 Credit Disclosure Regulation: Truth-in-Lending Act . . . . . . . . ..

2625 [1] Scope and Requirements of the Act ,................... 26-26 [2] Closed-End and Open-End Credit Arrangements " 26-31 [a] Closed-End Credit Disclosure Requirements. . . . . . . . .. 26-31

xxxv[3] [4] [5]

TABLE OF CONTENTS

[6]

[b] Open-End Credit Disclosure Requirements " Consumer Leases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. Disclosures and Rescission Rights in Real Estate Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. General Provisions of the Act. . . . . . . . . . . . . . . . . . . . . . .. [a] Duty to Revise Prior Disclosures. . . . . . . . . . . . . . . . . .. , [b] Regulation of Credit Advertising [c] Effect of Truth-in-Lending on State Law [d] Credit Billing , Civil Liability and Administrative Enforcement [a] Creditor Liability for Damages , {i] Creditor defenses , [ii] Liability of assignee from a creditor [bi Administrative Enforcement. . . . . . . . . . . . . . . . . . . . .. (e] Reliance on Model Forms. . . . . . . . . . . . . . . . . . . . . . ..

26-35 26-40 26-4 \ 26-44 26-44 26-44 26-46 26-46 26-49 26-49 26-50 26-51 26-52 26-53

t 26.04 Consumer Credit Protection Act

26-53 [I] Restrictions on Garnishment ., , 26-54 [2] Debt Collection Practices. . . . . . . . . . . . . . . . . . . . . . . . . .. 26-55 [3] Credit Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 26-57

~

26.05 Other Consumer Credit-Related Laws. . . . . . . . . . . . . . . . . . .. 26-61 [I] Unfair or Deceptive Practices-Federal Trade Commission Improvement Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 26-61 [2] Plain English Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 26-62 26-63 26-63 26-67 26-70 26-71 26-72 26-74 26-75 26-79T-t

11 26.06 Credit Discrimination and the Equal Credit Opportunity Act [I] Scope of the Act , [2] What Constitutes Discrimination Under ECOA [3] Prohibited Discrimination in Credit Application and Evaluation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [4] Special-Purpose Credit Programs .. . . . . . . . . . . . . . . . . . .. [5] Notice Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [6] Civil Liability for Violation of ECOA . . . . . . . . . . . . . . . . .. [7] Relationship to State Laws Establishing Marital and Other Property Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. [8J Relationship to Other State Laws. . . . . . . . . . . . . . . . . . . ..

Table of UCC Sections Tab]e of USC Sections " Tab]e of Cases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. Index :......

T17T-))

I-I

IThe Nature and Regulation of Banking: An Overview

1Introduction to Banking Regulation~ ~

1.01 Defining "Commercial Banking" . . . . . . . . . . . . . . . . . . . . . . . . 1.02 History of Banking Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . [1] First Bank of the United States. . . . . . . . . . . . . . . . . . . . . . . [2] Second Bank of the United States. . . . . . . . . . . . . . . . . . . . . [3] State-Chartered Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [41 Federal Reserve Act of 19 I 3 . . . . . . . . . . . . . . . . . . . . . . . . . [5) Banking Since the I 950s. . . . . . . . . . . . . . . . . . . . . . . . . . . .

1-[ 1-4 1-41-5 1-6

1-7I-g

~

1.01 DEFINING "COMMERCIAL BANKING"

"Commercial banking" was defined in the previous edition of this book as the activity of a banking institution whose "principal business is to accept deposits, make loans, collect commercial paper, and arrange the transfer of funds.'" Under the banking law from the adoption of the Glass-Steagall Act in the 1930s until the beginning of the 1980s, there was a distinct demarcation between commercial banks and other financial institutions, such as investment banks, securities firms, and commercial financial services conglomerates. All this is changing. The types of institutions that can engage in traditional commercial banking functions have enlarged as a result of legislation giving additional powers to thrift institutions. The types ofactivities commercial banks engage in have expanded as a result of legislation at both the state and federal levels and as a result ofjudicial decisions dismantling parts of the wall erected by the Glass-Steagall Act to keep commercial banks insulated from the risks of dealing in securities. The "nonbank bank" explosion has started a restructuring of the banking market into holding companies capable of offering an array of financial services. In light of these developments, perhaps the most suitable1 F. Beutel & M. Schroeder, Bank Officer's Handbook of Commercial Banking Law 3 (5th cd. 1982).

I-I

, 1.01

OVERVIEW

1-2

definition is one offered by an English text: "[Blanks come in all shapes and sizes, with different name tags applied indifferent countries, often quite loosely. Banks make most oftheir money from the difference between interest rates paid to depositors and charged to borrowers." Commercial banks are "publicly quoted and profit oriented. They deal directly with the public, taking deposits, making loans and providing a range of financial services from foreign exchange to investment advice. Most countries have settled for between four and ten;" but in the United States there are nearly 15,000 because of "banking laws that have prevented banks qperating in more than one state, and in different types of business .... "2 In addition to commercial banks, there are many specialized depository institutions that have been established to perform specialized roles. Thrift institutions such as savings and loan associations and credit unions are important examples. At their inception, savings and loan associations primarily engaged in home mortgage lending and offering passbook-type savings to consumers. With the enactment of the Depository Institutions Deregulation and Monetary Control Act of 1980, thrifts gained expanded authority to engage in commercial banking activities. Further incorporation into the general banking market has occurred as a result of the restructuring brought about by the financial failures and weakened condition ofthrift institutions in the I 980s, which led to changes in the law to encourage the acquisition and merger of weak institutions with stronger financial institutions, including banks. These developments are discussed in Chapters 6 and 10. To a great extent, thrift institutions are subject to a regulatory regime similar to that governing commercial banks, and engage in banking functions similar to those of commercial banks. Subsequent chapters discuss how thrifts fit into this regulatory scheme. There are other specialized consumer-oriented financial companies. Credit unions may be organized under state and federal statutes with the power to maintain customer share accounts against which drafts may be drawn payable in a manner similar to checks. Credit unions are discussed in detail in Chapter 2. There are also personal finance Joan organizations authorized under the laws of the several states that loan small amounts of money to consumers, often at specially regulated rates that are higher than the usual interest rates allowed. These organizations normally are not deposit-taking institutions but operate with their own capital and credit. Banks often have their own small loan departments to make the same type ofloans, and holding companies may have special consumer loan subsidiaries or affiliate companies. 3 Although trust activities have become a part of the activity of many commercial banks,' this book does not deal with the laws that govern these trustee

2 R. Pennant-Rea & B, Emmoll, The Pocket Economist 9 (1983) 3S ee \2 CFR 22S,25(b)(l) (1987), 4 See 12 USC 92a (1982). which gives authority to national banks to engage in trust

1-3

BANKING REGULATION

111.01

relationships and activities. The competition for funds has led some banks to offer managed investment accounts through their trust departments similar to those offered by mutual funds and other securities firms. These developments are discussed in Chapter 8. Again, there are trust companies organized under state law that operate by accepting money for the purpose of investment where the beneficial interest in the funds remains in the original owner. This book does not address trust companies as such, but these firms may become part of a banking company's corporate structure through affiliation as a subsidiary or other affiliate organization. See Chapter 5 for a discussion of this issue. There are other types of banking functions and specialized banks: for example, reserve banks, which are really bankers' banks; investment banks, whose chief business is underwriting and dealing in securities, and providing fmancial advice and aid in corporate acquisitions and mergers; agricultural banks; foreign trade banks; and other specialized banks that have charters to engage in particular types ofbusiness. Some examples of these organizations are briefly described in Chapter 2. Further, the peculiarities of federal laws regulating bank holding companies have encouraged the proliferation of various financial institutions that have been chartered as full-service banks but that limit their functions to activities such as consumer lending and credit card operations. These developments are discussed in Chapter 5. Because ofthe diversity offunctions of commercial banks and the variety of depository institutions involved in them, this book does not attempt a comprehensive survey ofall banking acti vity. Rather, it emphasizes the basic regulatory structure that governs traditional commercial banking institutions and the commercial activities associated with accepting deposits, collecting commercial paper, making payments and transferring funds, and engaging in certain credit transactions. Thus, Part I consists of a review of the body of regulatory law affecting the organization, authority, and supervision of commercial banks and a description of the primary federal banking regulatory agencies-the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, the Federal Savings and Loan Insurance Corporation, and the Federal Home Loan Bank Board. Part II examines the law that defines the rights and duties related to various types of commercial paper-checks, notes, cashier's checks, letters of credit, documents of title, and other paper, and describes the law affecting bank and customer relations. Part III outlines some of the fundamental law applicable to security transactions in personal property and related credit practices. As this introduction indicates, the laws and regulations that govern commercial banking are numerous and complex. The various types of financial institutions engaging in commercial banking activities are matched by an equalactivities. The Depository Institutions Deregulation and Monetary Control Act of 1980 also gave thnft institutions chartcred by the Federal Home Loan Bank Board the authority to engagc in trust activities under certain conditions. 12 USC 1464(n) (1982).

'1.02

OVERVIEW

1-4

diversity of statutes and regulations controlling the activities of these institutions. At the federal level alone, responsibility for regulating banking activities has been parceled out among a number of separate agencies; when regulatory authority is shared by state and federal agencies, the complexity of the law is compounded. In addition, the law governing the transactions of commercial banks is complex. The Uniform Commercial Code has brought a desirable uniformity to the law in many areas, but there are many special purpose statutes, frequently intended to give special consumer protection, that must be taken into account in analyzing banking transactions. There is a growing body of federal law that must be considered along with the state commercial law ofthe UCC and common law. This book is intended to serve as a beginning guide for the bank officer engaged in these commercial banking transactions and the attorneys called upon to advise in banking matters. It is not a substitute for careful legal counsel, however, and such assistance should be obtained because this book can neither cover all the details applicable in particular matters, especially at the regulatory level, nor report on all the local variations, changes, and new developments. Moreover, the facts ofa particular situation will vary in ways that may introduce new legal problems or otherwise affect the legal analysis. Obtaining the advice of competent legal counsel is essential.

~

1.02 HISTORY OF BANKING REGULATION

Il) First Bank of the United States The complex structure of the modern banking system is the product of controversies accompanying the development of banking, and particularly federal involvement in banking, that date from the first days ofthe nation.' Controversy first emerged over the creation of a central national bank. The first Secretary of the Treasury, Alexander Hamilton, supported creation ofa national bank. The first Secretary of State, Thomas Jefferson, opposed it. Hamilton prevailed, and Congress created the First Bank of the United States, giving it a charter of twenty years. The bank was not only the largest bank of its time; it was also the largest corporation in the United States. The bank was located in Philadelphia, but had branches in other major cities.', For a history of the development of banking, see generally J. Norton & S. Whitley, Banking Law Manual (1981); R. Johnson, Historical Beginnings-The Federal Reserve (1980); G. Fischer, American Banking Structure (1968); J. Knox, A History of Banking in lhe United Slates (1903). See also Scott, "Patchwork Quilt: Slate and Federal Roles in Bank Regulation," 32 Stan. L. Rev. 687-742 (1980); Wayne & Spagnola, "The Myth of Bank Deregulation: for Every Action There Is an Equal and Opposite Reaction," 42 Wash. & Lee L. Rev. 383-403 (1985). 'Johnson, Historical Beginnings-The Federal Reserve 8 (1980).

1-5

BANKING REGULAnON

'I 1.02[2]

The First Bank of the United States was a success because it was able to provide a uniform and reliable currency.' Before the establishment of the bank, the currency in circulation (except for coins and some greenbacks) consisted mainly of notes issued by state banks. The notes of the First Bank ofthe United States came to account for about 20 percent ofthe notes in circulation. However, some hostility to a central bank existed, and added to this hostility were complaints of foreign domination and charges of unconstitutionality. The growing number of state banks joined the cause against the First Bank of the United States, arguing that the national bank was not necessary in view of the increased number of state banks. The state banks resented the practice followed by the First Bank of retiring 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 otherwise would have been needed. Opposition to the first bank became so strong that when Jefferson's Republican party came into power in 180l, a bill to recharter the bank failed, and the bank died when its charter expired in 181 J.. After the first bank's charter expired, the nation experienced serious economic problems because of the lack of an effective banking system. Although a number of state banks existed, the bank notes they issued were often of dubious quality. The disruptions of the War of 1812 heightened this problem. Bank failures became common after 1809,s and, with the expiration of the First Bank in I 811, there was no central bank to come to the assistance of the weaker banks." These and other difficulties in managing the federal government's financial affairs without a national bank 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."

[2] Second Bank of the United StatesThe Second Bank of the United States was larger than the first, and many came to view it as too powerful, including President Andrew Jackson. During Jackson's first term as President, his political rival, Henry Clay, convinced Congress to pass a bill extending the charter of the bank. Clay, as a presidential aspirant, hoped to exploit Jackson's expected veto of the bill as a political issue in the 1832 presidential election. The plan backfired when Jackson's veto, accompanied by a ringing message attacking the constitutionality of the bank, brought him widespread popular support, a:Jd he was reelected by a substantial'E, Symons, Jr. & J. White, Banking Law 11-13 (2d ed. 1984). , Ie. sId, "[d. at 13. 11 Johnson, supra note 6, at 8,

11 1.02131

OVERVIEW

1-6

margin. Four years later, in 1836, the charter of the Second Bank of the United States expired. 12 Although the constitutionality of the bank was attacked during this period, the U.S. Supreme Court had upheld the power ofCongress to establish a national bank as early as 1819. ChiefJustice Marshall, in the historic case of McCulloch v: Maryland, ruled that the chartering ofthe First Bank of the United States was a measure "necessary and proper" to the exercise of Congress's fiscal powers under the Constitution to raise revenue, borrow money, and regulate commerce. 13 Under the supremacy clause of the U.S. Constitution, which makes the laws of the United States superior to state law, Chief Justice Marshall held that the establishment of the bank could not be restricted by inconsistent state legislation. This decision was reaffirmed five years later in Osborn v. Bank ofthe

United States. 14[3] State-Chartered Banks After the demise of the Second Bank of the United States, banking was carried on through state-chartered banks. This period saw the enactment ofstate legislation authorizing "free banking." Much of this legislation, which made it easier to incorporate state banks, was patterned after the New York Free Banking Act of 1838 . Under these statutes, it was no longer necessary to obtain a special state charter; anyone who met the minimum incorporation requirements could establish a bank. As a result, the number of state banks grew. The system oflocal state banks that subsequently emerged led to problems. Banks varied greatly in the adequacy of their capital and the reserves retained against bank notes and demand deposits. Some banks engaged in risky lending policies. The bank notes issued by the individual banks were of disparate quality. The amount of credit extended by banks fluctuated erratically without regard to the needs of the economy. IS Finally, in 1863, the Civil War increased pressure for a sound financial and monetary system, forcing Congre