bank officers handbook of commercial banking law in usa (6th ed.)

BANK OFFICERSHANDBOOK

OFCOMMERCIALBANKING LAW

WITHINTHE UNITED STATES

CONTAINING THE SECRET RULESTO AID IN TIlE CREATION OF MONEY OUT

OF TIIIN AIR!

My people are destroyed for lack ofknowledge... and since knowledgeis power.. one then cannot be destroyed.. especially by the bartkers!

ToMary, Caroline, and Katherine Schroeder

andEdna Taylor

Preface to Sixth Edition

There are few aspects of commercial banking law that are not now in theprocess of substantial change or that have not recently experienced substantialchange. A flood of federal legislation not only has affected traditional bankregulatory issues but also has established a body of substantive law affectingnumerous types ofcommercial transactions ofimportance to commercial banks.Expanded activity by the federal banking regulatory agencies has accompaniedmany of these legislative actions. The enlarged responsibility given to the Fed-eral'Reserve Board to manage the nation's check collection and paymentssystem in the Expedited Funds Availability Act of 1987 is but one example.Other examples exist in areas involving consumer issues, regulatory enforce-ment authority, and the scope ofcommercial bank's powers, as a result ofeffortsby legislators and regulators to adjust to dramatic changes that have occurred inthe markets in which commercial banks compete and the technology govemingthe manner in which depository institutions conduct their business.

This book is designed to fumish general information about the law relatingto commercial banking in three important areas. Part I of the book discussesfederal banking regulation. This part describes the general regulatory system, theprimary federal regulators, the types of banking institutions that are regulated,and some of the important areas of regulatory control. It discusses the majorfederal legislation and principal case law to give the reader a general understand-ing of the complex network of regulatory law that affects the activities of com-mercial banks and similar depository institutions.

Part II of the book focuses specifically on payment systems and negotiableinstruments. It gives an introduction to the basic law governing the rights andliabilities 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. Italso discusses some of the basic legal principles that govern the relationshipbetween a bank and its customer. This pan of the book contains extensivetreatment of the Uniform Commercial Code provisions bearing on these sub-jects, and describes the interrelationship ofthese VCC rules with other state andfederal laws.

Part III of the book covers the general rules applicable to secured lendingtransactions involving personal property security_ This part of the book explainsthe basic rules provided by Article 9 of the Uniform Commercial Code oncreation of a security interest, priorities among creditors, and enforcement of asecurity interest. The interaction of Article 9 with other federal law, such asbankruptcy and certain consumer credit regulations, is described.

v

Property Jaime DiazHighlight






















PREFACE TO SIXTH EDITION vi

The book is designed to give general information for bankers and commer-ciallawyers. Given the broad scope ofthis book, it cannot provide complete, in-depth coverage of all issues. The footnotes, where they have been inserted, arenot intended to be a comprehensive statement of all legal authorities on anyparticular issue, but rather refer to cases and other authorities to illustrate theprinciples being discussed in the text. For those who are interested in obtainingmore detailed information, there are references to supplemental texts, articles,and other authorities. The major cases, statutes, and sources ofregulatory actionare identified. As a result the book should be useful both as an introductory textfor those who seek a general understanding ofthese areas ofcommercial bankinglaw and as a general reference and research tool for those with more specificinterests. It should assist the banker in understanding the legal framework thatsupports the activities of commercial banking, alert the banker to areas wherelegal problems may exist, give notice of areas where the law is in the process ofchange, and help the banker to discuss and raise questions about issues with legalcounsel in an informed manner. The book also should assist bank lawyers andlaw students to gain a general understanding of the extensive and often exceed-ingly technical body of state and federal laws that is relevant to commercialbanking transactions, to identify the principal sources ofstatutory and other lawbearing on particular problems, and to obtain additional information on numer-ous subjects through the various references and other research aids provided. Toassist research, the abbreviations and citations in the text and footnotes gener-ally conform toA Uniform System afCitation (14th ed. 1986), which is publishedby The Harvard Law Review Association and is generally available in lawlibraries.

This book is not a substitute for consultation with legal counsel but rather isintended to assist bankers and others to become sensitive to situations whereconsultation with legal counsel may be helpful. Such consultation is importantfor several reasons. This book cannot provide a complete analysis or discussionof each subject covered. The applicability of the law to particular situationsdepends upon both the investigation of specific facts and the performing ofcomplete research and analysis of the particular law of the relevant jurisdictionapplicable to the situation. In the commercial banking law area, actions byregulatory agencies are frequent and extensive. In addition, Congress and thestate legislatures are engaged in consideration of new laws on many aspects ofcommercial banking, and state and federal courts are constantly issuing signifi-cant decisions. Therefore, proper interpretation of the law is complex, becauseof the intricate web of state, federal, and regulatory law that is applicable. Ingeneral, the cutoffdate for the materials on which this book is based is July 1987although 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 actionby the Federal Reserve Board in enacting Regulation CC on the availability offunds 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 wasprovided by Cherry Lee Croushore, Catherine R. Hardwick, Laurie Stewart, andDavid A. Craze. Additionally, Catherine Hardwick contributed substantially inthe writing of Chapters 10 and 25, and Cherry Lee Croushore made significantcontributions to Chapter 26. The efforts of Fran Kendall and Kay Winn alsodeserve special recognition. Their professional and diligent efforts made itpossible to process the many drafts and redrafts for this book and still maintain areasonable adherence to production deadlines. Thanks also go to others on thestaff at the College of Law, Arizona State University, who gave support to thisproject: Rhonda Kirkeide, Monica Tineo, and Dean Paul Bender.

MILTO~ R. SCHROEDERAugust 1988













Summary of Contents

Part I The Nature and Regulation of Banking: An Overview1. Introduction to Banking Regulation ................... 1-12. U.S. Banking System ............................ 2-13. The Federal Reserve System ..................... 3-14. National Banks 4..15. Bank Holding Companies ......................... 5-16. Regulation of Bank Expansion Through Branching and

Interstate Banking ................................ 6-17. Bank Examination and Supervision and Restrictions on Loans

and Investments 7..18. The Restrictions Against Banks Engaging in Certain Securities

Activities 8 19. Enforcement Powers of the Banking Regulatory Agencies

Under Federal Banking Laws 9-110. Liquidation, Reorganization, and Supervision of Failing Banks

and Thrift Institutions ............................ 10-1n. Deposits and Deposit Insurance ..................... 11-112. Financial Transactions Regulation, Money-Laundering

Controls, and Crimes Related to Bank Transactions 11-113. Bank Customer Privacy and Other Bank Activities Subject to

Special Regulation 13-1

Part II Bank Payments and Negotiable Instruments14. Sources of Commercial Banking Law and Basic Principles

Governing Commercial Paper 14-115. Rights and Liabilities of Parties to Commercial Paper 15-116. Holders in Due Course 16-1

IX






















SUMMARY OF CONTENTS X

17.. utters of Cred.it 17-118. Altemative Payment Systems: Bank Cards, Credit Cards, and

Electronic Fund Transfers .................... 18-119. Bank Accounts 19-120. Mutual Duties of the Bank and the Depositor .......... 20-121. Collection and Payment of Instruments ............... 21-1

Part III Security Transactions in Personal Property andRelated Credit Practices

22. Creation of Security Interests in a Debtor's Personal Property 22-123. Priorities: Rights of Competing Creditors, Purchasers, and

Transferees 23.. 124. Debtor Default and Enforcement of Security Agreements .. .. 24-12S. Bankruptcy 25 126. Interest Rate Controls and Credit Practices Regulation ... 26-1Table of vec Sections T lTable of USC Sections.. .. .. .. .. .. . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. T-17Table of Cases .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .... T-33Index.. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . I..J





















Table of Contents

Part I - The Nature and Regulation of Banking:An Overview

1 Introduction to Banking Regulation~ 1.0 I Defining "Commercial Banking" . . . . . . . . . . . . . . . . . . . . . . . . I-I~ 1.02 History of Banking Regulation. . . . . . . . . . . . . . . . . . . . . . . . . . 1-4

[I] First Bank of the United States. . . . . . . . . . . . . . . . . . . . . . . 1-4[2] Second Bank of the United States. . . . . . . . . . . . . . . . . . . . . 1-5[3) State-Chartered Banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-6[4] Federal Reserve Act of 1913 " '" 1-7[5J Banking Since the 1950s. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-8

2 U.S. Banking System11 2.0 I Classification of Commercial Banks and Thrift Institutions . . . . . 2-2

[l] National Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-2[2] State Banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-3[3] State Member Banks .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-3[4] State-Insured Banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-3[5] Other Depository Institutions. . . . . . . . . . . . . . . . . . . . . . . . 2-4

[a] Savings and Loan Associations . . . . . . . . . . . . . . . . . . . . 2-4TABLE 2-1 Number ofInsured Commercial Banks by Classand Principal Assets and Liabilities of Each (1986) . . . . . . . . 2-5TABLE 22 Number of Banking Offices in the United States(1986) . 2-6[b] Credit Unions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-7[c] Savings Banks 2-8~ 2.02 Definition of "Depository Institutions" 2-9~ 2.03 Federal Banking Regulatory Agencies. . . . . . . . . . . . . . . . . . . . . 2-10t 2.04 State Regulation of Banks .. . . . . . . . . . . . . . . . . . . . . . . . . . .. 2-11

~ 2.05 Specialized Organizations With Banking Functions. . . . . . . . . .. 2-13[I] Industria! Banks or Morris Plan Banks '. . . . . . . . 2-13[2J Loan and Finance Companies 2-13'TABLE 2-3 State Bank Commissioners . . . . . . . . . . . . . . . . . . . . 2-14

Xl




















TABLE OF CONTENTS xii

[3J Edge Corporations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217[4] Export-Import Bank of the United States . . . . . . . . 217[5] International Finance Organizations. . . . . . . . . . . . . . . . . . . 2-17[6J Housing and Mortgage Credit Agencies. . . . . . . . . . . . . . . . . 2.17

raj The Federal Home Loan Mortgage Corporation , 2.18(bI The Federal Housing Administration 2-18[cJ The Federal National Mortgage Association , 2.18[d] The Government National Mortgage Association. . . . .. . 218

[7] Special Purpose Federal Agencies with Financing Functions 219[8J The Farm Credit System . . . . . . . . . . . . . . . 2\9

[a] Federal Land Banks and Associations . . . . . . . . . . . . . . . 2-20[bJ Federal Intermediate Credit Banks and Production

Credit Associations 2-21leI Banks for Cooperatives. . . . . . . . . . . . . . . . . . . . . . . . . . 2-21[dj Farm Credit Boards , 2-21tel Farm Credit Administration " 2-22[tl 1988 Restructuring of the Farm Credit System 2-23[g] Borrowers' Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-25

3 The Federal Reserve System'1 3.0 I Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-2~ 3.02 The Structure and Functions of the Federal Reserve System .... 32

~ 3.03 The Organization and Powers of the Federal Reserve System. . . . 35[I] Board of Governors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-5

TABLE 3) Federal Reserve Banks' Income and Expenses ... 37[2] Open Market Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . 3-10

TABLE 3-2 Regulations of the Board of Governors of theFederal Reserve System . . . . . . . . . . . . . . . . . . . . . . . . . . . . JII

[3] Federal Reserve Banks and Directors. . . . . . . . . . . . . . . . . . J14[4] Member Banks 3-\ B[5] The Relationship of the Federal Reserve System to

Nonmember Depository Institutions. . . . . . . . . . . . . . . . . .. 3-20~ 3.04 Banking Functions of the Federal Reserve System. . . . . . . . . . . . 3-22

[I] Depository Functions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-22[a] Reserve Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-22[b] Fiscal Agents and Depositories for the United States. . . . 323

[2\ Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 3-24[a] Reserve Requirements .. , .... , . . . . . . . . . . . . . . . . .. 3-26TABLE 3-3 Reserve Ratios . . . . . . . . . . . . . . . . . . . . . . . . .. 327[b] Reserve Requirement Exemption . . . . . . . . . . .. 3-27Ic] Reserves of Nonmember Banks '. . . . . .. 3-28[dJ Reserve Requirements for Reserve Banks ., ,. 3-28






































xiii TABLE OF CONTENTS

[e] Reserve Requirements and Monetary Policy . . . . . . . . . . 3-28[3] Currency Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-29[4] Reserve Bank lending Authority . . . . . . . . . . . . . . . . . . . . . 3-30

[a] Advances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-31[b] Discounts 3-32[c] Federal Reserve System Credit. . . . . . . . . . . . . . . . . . . . 3-32

[5] National Payments System: Fund Transfer and CheckCollection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-34[a] Check Collection ... . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-34TABLE 3-4 Number of checks, Total and Collected by theFederal Reserve, Selected Years, 1920-1983 . . . . . . . . . . . . . 3-35[b] Fund Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-36[c] Regulatory Activities to Manage the Payment System ... 3-39

[61 Credit and Interest Controls . . . . . . . . . . . . . . . . . . . . . . . . . 3-41[a] Margin Requirements for Securities Credit 3-4 I[b] Interest Rate Controls 3-42[c] Credit Controls 3-45

4 National Banks~ 4.01 Overview . . . . . . . . . . . . . . . 4-1

[I] Organization of National Banks .. . . . . . . . . . . . . . . . . . . . . 4-2[2] Charters for Nonbank Banks 4-4[3] Changes in Names and Locations of National Banks. . . . . . . 4-5[4J Suits Against National Banks. . . . . . . . . . . . . . . . . . . . . . . . 4-5~ 4.02 The Comptroller of the Currency . . . . . . . . . . . . . . . . . . . . . . . . 4-7

TABLE 4-I Regulations of the Comptroller of the Currency . . . . . 4-8[11 National Bank Holidays and Emergency Powers. . . . . . . . . . 4-9[2] Unclaimed Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-10~ 4.03 Powers of National Banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-11

[I] Express Powers of National Banks. . . . . . . . . . . . . . . . . . . . 4-12[a] Trust Authority. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-12[b] Real Estate Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . 4-12[c] Transactions in Coin and Bullion ... . . . . . . . . . . . . . . . 4-13[d] Financing by Leasing Personal Property 4-13[e] Lotteries 4-14

[2] The Incidental Powers of National Banks . . . . . . . . . . . . . . . 4-14[a] Borrowing Money. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-16[b] Insurance Activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-16[c] Computer Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-17[d] Guaranty Agreements , . . . . . . . . . . 4-18tel Other Powers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 4-19[/] Ultra Vires Acts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 I9




























TABLE OF CONTENTS

5 Bank Holding Companies

xiv

II 5,01 The Evolution of Bank Holding Company Regulation. . .. . . . . . 5-2[I J Definition of "Bank Holding Company" . , , . 5-2

TABLE 5-1 Number and Deposits of Registered Bank HoldingCompanies-Selected Years, 1957-1983 , , , 5-4

[2J The History of Bank Holding Company Regulation. , . . . . . . 5-5[3J Nonbank Banks , , , . . . 5-7[4J Nonbank Banks Under the Competitive Equality Banking

Amendments of 1987 ... , , .. , ..... , . . . . . . . . . . . . . . . . 5-11[a] Exceptions to the Definition of "Bank" . , , 5-12[b] Immediate Divestiture for "New Bank" Acquisitions

Between March 5,1987 and Date of Enactment. .. ' ., " 5-14[cl Grandfather Rights for Pre-March 5, 1987 Acquisitions 5-14[dI Conditions for Retaining Control " ,.... 5-17[e) Exception for Activities of Certain Savings Banks .. , . . . 5-17If] Thrift Institutions' Bank .. , , , .. , , , , , . . . 5-17[g) Restrictions on Member Banks' Transactions With

Affiliates , .. , ,.,.,." , 5-17II 5.02 Regulation of Bank Holding Company Activities 5-18

[I I Exemptions to Prohibition of Nonbank Activities .. , , . . . . . 5-18[2J Activities Closely Related to Banking , , ... , , .... , , . . . . . 5-21

(a] Activities Allowed Under Board Regulation Y .. , , .. , , . 5-21[bJ Deciding When an Activity Is Closely Related to Banking 5-26[c) Approval of Nonbank Activities-Hearings and Judicial

Review ., "..... 5-29[3] Other Authority for and Restrictions on the Activities of

Bank Holding Companies ... , .... , , .. , .... , . , .. , ... , 5-31[a] 1987 Moratorium on Certain Nonbanking Activities . . . . 5-31

[i] Certain activities of foreign banks .. ,.,......... 5-31Iii) Securities transactions of banks and bank holding

companies , . , , 5-32[iii] Insurance activities of banks and bank holding

companies , , .. , , , , . 5-32[iv) Powers to engage in real estate transactions ",.", 5-33

[bJ Securities Activities of Bank Holding Companies , , , 5-33[c] Insurance Activities ' , .. , . , , .. , . . 5-33[d] Bank Service Companies ., , , , , , .. , . . . . . . . 5-35Ie] Bankers' Banks .. , , . , , , 5-35If] Thrift Institutions' Bank , . , , 5-36[g) Other Bank Holding Company Activities , . , . , . 5-36

[4] Export Trading Companies ,................ 5-36II 5.03 Savings and Loan Holding Companies , .. , , .' , , . . 5-40

[I) Regulation of Savings and Loan Holding Companies inGeneral , , ' , , , .. , . , . . . . . . . 5-40



xv TABLE OF CONTENTS

[2] Effect of the Competitive Equality Banking Act of 1987 onRegulation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-42[a] Regulation of Business Activities of Savings and Loan

Holding Companies and Their Noninsured InstitutionSubsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 542

[b1 Regulation of Relationships Between Insured InstitutionSubsidiaries and Affiliate Companies. . . . . . . . . . . . . . . . 5-45

[c] Extension of Tying Prohibitions to StateCharteredInsured Institutions . . . . . . . . 5-46

[d] Interstate Activities 546eel Affiliations With Securities Firms . . . . . . . . . . . . . . . . . . 546[f] Treatment of FDIC-Insured State Savings Banks as

Insured Institutions for Regulation as Subsidiaries of aSavings and Loan Holding Company. . . . . . . . . . . . . . . . 5-47

6 Regulation of Bank Expansion Through Branching andInterstate Banking

116.01 Branch Banking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-2[1] Definition of "Branch" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-2[2] Establishing New Branches-The McFadden Act ... . . . . . . 6-6[3] State Regulation of Bank Branching. . . . . . . . . . . . . . . . . . . 6-9

11 6.02 Interstate Bank Expansion by Bank Holding Companies . 0 6-10[I] The Douglas Amendment 0 0 0 610[2] Expansion Through Nonbank Subsidiaries-The Douglas

Amendment, the Commerce Clause, and OtherConstitutional Considerations .. 0 0 0 0 0 6-14[a] Lewis v. BoT. Investment Managers, Inc 0 6-14[b] Northeast Bancorp. Inc. v. Board ofGovernors 0 616[c] Sears. Roebuck & Co. v. Brown 0 6-19

[3] Interstate Expansion Through Nonbank Subsidiaries 0 6-20[4] Effects of the Competitive Equality Banking Act of 1987 on

Nonbank Bank Interstate Expansion 0 0 0 6-2211 6.03 ATM Networks and the Restrictions on Interstate Banking 0 6-2411 6.04 Regulation of Branching by Savings and Loan Associations .... 0 6-2611 6.05 Emergency Acquisitions of Financially Weak Banks . . . . . . . . . . 6-27

[1] Emergency Acquisition Authority 0 6-27[2] Effects of the Competitive Equality Banking Act of 1987 on

Emergency Acquisition Powers 0 0 6-30[a] Enlarged Emergency Acquisition Powers of the FDIC 0.. 6-31[b] Acquisition of a Bank in Danger of Closing. . . . . . . . . . . 6-32

11 6.06 Bank Holding Company Acquisition of Thrift Institutions .. 0 6-35

TABLE OF CONTENTS

7 Bank Examination and Supervision and Restrictions onLoans and Investments

xvi

~ 7.01 Examination and Supervision Generally. . . . . . . . . . . . . . . . . . . 7-1ll] Federal Bank Examination. . . . . . . . . . . . . . . . . . . . . . . . . . 7-2[2] Portfolio Regulation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-7

[aj Loans and Extensions of Credit. . . . . . . . . . . . . . . . . . . . 7-7[b1 Exceptions to the Limitations on Loans to a Single

Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-9[i] Bankacceptances 7-11

[ii] Real estate loans. . . . . . . . . . . . . . . . . . . . . . . . . . . 712[iii] Other investments. . . . . . . . . . . . . . . . . . . . . . . . . . 7-12

[c] State Banks and Savings and Loan Associations. . . . . . . . 7-13~ 7.02 Securities Activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-15

[I) Scope of Federal Securities Laws Generally, as Applied toBanks '" 7-]6

[2] Antifraud Provisions of the Federal Securities Laws 7-19[3] Definition of "Security" Under the Securities Act of 1933

and the Securities Exchange Act of 1934 . . . . . . . . . . . . . . . . 7-21[a] Transactions in Stocks, Bonds, and Similar Securities ... 7-22[b] Certificates of Deposit and Other Bank Deposits . . . . . . . 7-23[c] Promissory Notes and Commercial Loan Agreements ... 7-25[d] Investment Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . 7-27

8 The Restrictions Against Banks Engaging in CertainSecurities Activities~ 8.0] The Prohibition Against Dealing in Securities-The Glass-

Steagall Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-2[] I Basic Provisions of the Act. . . . . . . . . . . . . . . . . . . . . . . . . . 8-3[2] Scope of the Glass-Steagall Act. . . . . . . . . . . . . . . . . . . . . . . 8-5

[a] Application of the Act to National Banks, MemberBanks, Insured Banks, and Savings and Loan Associations 8-5

[b] Application of the Act to Bank Holding Companies andTheir Affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-7

[3J Interpretation of the Glass-Steagall Act. . . . . . . . . . . . . . . . . 8-9raj The Subtle Hazards Analysis of the Camp Decision . . . . . 8-9[b] Defining a Security for Purposes of the Act. . . . . . . . . . . 8-11

[4] The Bankers Trust Case: Placement of Commercial Paperand the Ban on Underwriting. . . . . . . . . . . . . . . . . . . . . . . . 8-13

[5] Discount Brokerage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-16[a] National Banks 8-16[bl Bank Holding Companies :. . . . . . 8-17

[6) Collective Investment Funds 8-19

xVii TABLE OF CONTENTS

[a] The Comptroller's Citibank Decision 8-20[b] Judicial Reaction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-21

[7] Affiliations Between Banks and Securities Firms-Determining When a Firm is "Engaged Principally" inSecurities Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-24

[8] Restrictions on Securities Activities Imposed by theCompetitive Equality Banking Act of 1987 . . . . . . . . . . . . . . 8-27[aJ Bank Holding Companies. , . . . . . . . . . . . . . . . . . . . . . . 8-27[b] SaVings and Loan Holding Companies 8-29[c] Moratorium On Certain Nonbanking Activities. . . . . . . . 8-30

11 8.02 The Government Securities Act of 1986 . . . . . . . . . . . . . . . . . .. 8-31[I] U.S. Government Securities Market. . . . . . . . . . . . . . . . . . . 8-31[2] Congressional Response-The Government Securities Act of

1986 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-34

9 Enforcement Powers of the Banking Regulatory AgenciesUnder Federal Banking Laws

119.01 Regulating Unsafe and Unsound Banking Practices ... , . . . . . . . 9-1[I] Cease and Desist Orders , . . . . . . . . . . . . . 9-1[2] Suspension and Removal of Officers and Directors .. , . . . . . 9-4

[a] Authority of the Federal Supervisory Agencies. . . . . . . . . 9-4[b] Procedure for Removal or Suspension. . . . . . . . . . . . . . . 9-6

[3] CiVil Money Penalties . . . . . . . . . . . . 9-9[4] Special Liabilities of Officers and Directors , . . . . 9-10[5] Judicial Review of Agency Actions , . . . 9-11

11 9.02 Transactions With Insiders and Affiliates. . . . . . . . . . . . . . . . . . 9-12[I] Loans to or by Executive Officers of Member Banks 9-12[2] Loans to Officers of Banks Where Correspondent Accounts

Are Maintained . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 9-15[3] Transactions With Affiliates. . . . . . . . . . . . . . . . . . . . . . . .. 9-15[4] Restrictions on Transactions With Affiliates Under the

Competitive Equality Banking Act of 1987 ..... ... . 9-16[5] Tying Arrangements :, ,: . . . . . . . . . . . . .. . 9-17[6] Interlocking Management Arrangements. . . . . . . . . . . . . . . . 9-20

10 Liquidation, Reorganization, and Supervision of FailingBanks and Thrift Institutions

11 10.01 Termination of Deposit Insurance . . . . . . . . . . . . . . . . . 10-2

11 10.02 Receiverships : . . . . . . . . . . . . 10-4[IJ Events That Justify the Appointment of a Receiver. . . . . . . . 10-4[2] Discretion of the Agency and Scope of Judicial Review. . . . . 10-6

TABLE OF CONTENTS xviii

[3] General Powers and Duties of the Receiver. . . . . . . . . . . . . . 10-7[al National Banks 10-8

til Liquidation and distribution of assets. . . . . . . . . . . . 10-8[ii) Purchase and assumption agreements. . . . . . . . . . .. 10-10

[bj Savings and Loan Associations . . . . . . . . . . . . . . . . . . .. 10-11[4J Requirement of a Ratable Distribution " 10-12

[a] Preferences ... : ........................... " 10-13[bJ Application to Purchase and Assumption Agreements. .. 10-15

(5) Enforcing Obligations; Defenses the FDIC May Avoid. . . . .. 10-15[a] Holder in Due Course Status ,........ 10-16[b] The Shield Statute .. . . . . . . . . . . . . . . . . . . . . . . . . . .. 10-17[c] Section 29(c) of the Securities Exchange Act. . . . . . . . .. 10-21

{6] Resolving Disputed Claims; Jurisdiction and Choice of Law 10-22[a] Banks 10-22[b] Savings and Loan Associations . . . . . . . . . . . . . . . . . . .. 10-23

~ 10.03 Financial Assistance to Weak Banks. . . . . . . . . . . . . . . . . . . . .. 10-24[J] Direct Financial Aid 10-24[2] Merger Assistance , . . . . . . . . . . . . . .. 10-25

[a] Gam-St Germain Depository Institutions Act " 1025[b] Judicial Review of Agency Decisions to Give Merger

Assistance . . . . . . . . . . . . . . . . . . . . . . .. 10-27[3J Net Worth Certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . .. 10-28~ 10.04 New Banks and Bridge Banks. . . . . . . . . . . . . . . . . . . . . . . . . .. 10-30

[I) Deposit Insurance National Banks . . . . . . . . . . . . . . . . . . .. 10-30[2) Bridge Banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 10-30~ 10.05 Other Regulatory Powers. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 10-31

11 Deposits and Deposit Insurance'1 11.01 The Federal Deposit Insurance Corporation . . . . . . . . . . . . . . . . 11-2

[I] Insured Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11-3raj Definition of "Deposit" . . . . . . . . . . . . . . . . . . . 11-3

TABLE 11-1 Regulations of the Federal Deposit InsuranceCorporation , . . . . . . . . . . . . . . . . 11-4TABLE 11-2 Maximum Limits on Insured Deposits . . . . . 11-6

[b] Mistaken Payment in Excess ofInsurance . . . . . . . . . . . . 11-8[2] Computing the Amount oflnsurance: Rules for Multiple

Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11-9[3] The Deposit Insurance System. . . . . . . . . . . . . . . . . . . . . .. 11-10[4j General Regulatory Authority of the FDIC '. . . .. ll-ll

1111.02 Thrift Institution Deposit Insurance. . . . . . . . . .. . . . . . . . . . .. 11-13[I] Federal Savings and Loan Insurance Corporation . . . . . . . .. II- t3

xix TABLE OF CONTENTS

[2] Financial Rescue of the Federal Savings and Loan InsuranceSystem By the Competitive Equality Banking Act of 1987 .. , 11-14

[3] Measures to Improve FHLBB and FSLIC Regulation ofFinancially Weak Institutions , 11-18[a] Accounting Principles. . . . . . . . . . . . . . . . . . . . . . . . . .. 11-18[b] Capital Forbearance Programs 11-19[c] General Supervisory Powers. . . . . . . . . . . . . . . . . . . . .. 11-20[d] Holding Corporation for Troubled Assets 11-21~ 11.03 Credit Union Share Insurance , . .. 1\-21~ 11.04 Deposit Insurance Backed by the Full Faith and Credit of the

United States 11-24~ 11.05 Withholding Tax on Interest Paid , 11-25

12 Financial Transactions Regulation, Money-LaunderingControls, and Crimes Related to Bank Transactions~ 12.01 Financial Transactions Offenses. . . . . . . . . . . . . . . . . . . . . . . . . 12-2

[1] Financial Record-Keeping Requirements 12-2[2] Reporting of Currency Transactions. . . . . . . . . . . . . . . . . .. 12-3

[a] Bank Secrecy Act of 1970 . . . . . . . . . . . . . . . . . . . . . . . . 12-3[b] Structured Transactions and Penalties for Reporting

Violations ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-7[3] Money-Laundering Controls. . . . . . . . . . . . . . . . . . . . . . . . . 12-9

[a] Money-Laundering Offenses . . . . . . . . . . . . . . . . . . . . .. 12-9[b1 Monetary Transactions Involving Proceeds of Crime . . .. 12-12[c] RICO and Other Enforcement Measures. . . . . . . . . . . .. 12-12

[4] Special Enforcement Powers. . . . . . . . . . . . . . . . . . . . . . . .. 12-12[a] Authority to Investigate Violations. . . . . . . . . . . . . . . .. 12-12[b] Compelling Information About Foreign Bank Records

Protected Under Foreign Law , 12-13[c] Forfeiture of Property ,. . 12-15[dl Immunity for Reports of Violations 12-16tel Change in Bank Control. . . . . . . . . . . . . . . . . . . . . . . .. 12-17

11 12.02 Other Criminal Laws Relating to Bank Transactions. . . . . . . . .. 12-17[l]BankBribery 12-18[2] Misapplication of Funds 12-23[3] False Entries " 1227[4] Other Federal Criminal Offenses. . . . . . . . . . . . . . . . . . . . .. 12-32

13 Bank Customer Privacy and Other Bank ActivitiesSubject to Special Regulation

11 13.0 I Privacy for Financial Records of Bank Customers. . . . . . . . . . . . 13-1

TABLE OF CONTENTS xx

[I] Rights to Privacy Under the U.S. Constitution. . . . . . . . . . . 13-2[21 Right to Financial Privacy Act , , , . . . . . . . . . . 13-4

[a] Conditions of Disclosure 13-4[b] Special Circumstances and Procedures 13-5[c] Scope and Operation of Act 13-6[dJ Privacy Act of 1974 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13-8

[3J Privacy Rights Under Other Laws 13-9, 13.02 Regulation of Political Activities " 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 Instruments

14 Sources of CommerciaJ Banking Law and Basic PrinciplesGoverning Commercial Paper

11 14.01 Sources ofCommercial Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14-2[I] Federal Power Over Commercial Laws. . . . . . . . . . . . . . . . . 14-3[2] State Commercial Law-The Uniform Commercial Code. . . 14-5TABLE 14-1 State Enactments ofUCC and Amendments. . . . . . . 14-7[3] The Role of the Federal Government as the Source of

Commercial Law , . . . . . . . . . . . . . . . . 14-9TABLE 14-2 Legal Treatises on the Uniform Commercial Codeand Related Subjects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 14-10

[a) Federal Administrative Agencies. . . . . . . . . . . . . . . . . .. 14-11[b] Preemption of Federal Over State Rules '" 14-12TABLE 14-3 Hierarchy of Laws. . . . . . . . . . . . . . . . . . . . . .. 14-13[cl Authority of Federal Reserve System To Regulate Certain

Payment Methods ,............... 14-15[4) Conflict of Laws Doctrines . . . . . . . . . . . . . . . . . . . . . . . . .. 14-J7~ 14.02 Money 14-20

[I] Defining Money. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 14-20[2J Gold and Foreign Exchange , .. , . . . . . . . . . . . . . .. 14-24~ 14.03 Commercial Paper , .. ' ' ' " 14-26

[l J Negotiable Instruments , 14-26[2] Letters of Credit 14-28

xxi TABLE OF CONTENTS

[3] Securities , 14-28[4] Documents of Title '" , 14-29[5] Security Agreements 14-29

'14.04 Requirements for Instruments to Be Negotiable 14-30[I] Advantages of Negotiability. . . . . . . . . . . . . . . . . . . . . . . .. 14-30[2] Requirements for Negotiability. . . . . . . . . . . . . . . . . . . . . .. 14-31

[a] Promise or Order. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 14-31[b] Unconditional. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 14-33leI In Writing and Signed 14-37[dj Certainty as to Sum , 14-38tel Payable in Money. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 14-38[f] Payable on Demand. . . . . . . . . . . . . . . . . . . . . . . . . . .. 14-39[gl Payable at a Defmite Time. . . . . . . . . . . . . . . . . . . . . .. 14-42[hI Payable to Order or Bearer. . . . . . . . . . . . . . . . . . . . . .. 14-42-til Designation of Payee . . . . . . . . . . . . . . . . . . . . . . . . . .. 14-43[j] Drawee Must Be Certain " 14-44[k] Instruments Not Payable to Order or to Bearer " 14-44[I] Ambiguous Terms and Rules of Construction 14-45

1114.05 Documents of Title and Securities " 1445[1] Documents of Title " 14-46

[al Negotiability of Documents of Title 14-47[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[aj Investment Securities Under the Pre-1977 VCC 14-54[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 .. . . . . . . . . . . . 15-2

[1] Transfer of Property Generally. . . . . . . . . . . . . . . . . . . . . . . 15-2[2] Transfer of Negotiable Instruments. . . . . . . . . . . . . . . . . . . . 15-5[3] Indorsements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15-7

[a] Types ofIndorsements . . . . . . . . . . . . . . . . . . . . . . . . . . 15-8[il Blank indorsement 15-8

[ii] Special indorsement 15-9[iii] Indorsement without recourse . . . . . . . . . . .. 15-10[iv] Restrictive indorsements . . . . . . . . . . . . . . . . . . . .. 15-10[vI Conditional indorsements . . . . . . . . . . . . . . . . . . .. 15-11

[b] Rights and Duties of Restrictive Indorsees......... .... 15-12[c] Bank's Power to Supply Missing Indorsement. . . . . . . .. 15-13

TABLE OF CONTENTS xxii

fdJ Transferees ofInstruments With Missing Indorsement. .. 15-14(e] Limitation of Indorsees' Rights by Separate Contract. . .. 15-18

11 15.02 Liability of Parties on Negotiable Instruments 15.19[l] Primary and Secondary Liability 15-20[2] Liability of Maker and Acceptors . . . . . . . . . . . . . . . . . . . .. 15.20(3] Acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 15-22[4) Indorser's Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 15-24[5] Drawer's Liability . . . . . . . . . . . . . . . . . . . .. 15.25

II 15.03 Liability in Warranty for Transfer and Presentment of NegotiableInstruments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 15-26[I) Presentment Versus Transfer Warranties. . . . . . . . . . . . . . .. 15-27[2) Warranties of Customers and Collecting Banks. . . . . . . . . .. 15-30

'il 15.04 Liability of Agents and Representatives . . . . . . . . .. 15-31[1] Rules Regarding Liability. . . . . . . . . . . . . . . . . . . . . . . . . .. 15-31(2) Case Examples " , . . . . . . . . . . . . . .. 15-33

[a] Principal's Name Missing ' . . . . . . . . . . . . . .. 15-33[b) Agent Fails to Sign in a Manner That Shows Agency

Status 15-3411 15.05 Bank's Liability on Negotiable Instruments Generally. . . . . . . .. 15-39

[ I] Certificates of Deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 15-39[2] Cashier's Checks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 15-39[3) Money Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 15-41[4] Traveler's Checks , . . . . . .. 15-42[5) Accepted Drafts and Certified Checks , . . . .. 15-44

la) Obligations of Acceptance or Certification. . . . . . . . . . .. 15-44[b) Certifying or Accepting Forged or Altered Paper. . . . . .. 15-46Ie) Mistaken Certincation , . . . . . . . . . . . .. 15-47

'115.06' Sureties and Accommodation Parties. . . . . . . ... ..... ... 15-47[I J The Rights of an Accommodation Party Against the Principal 15-49[2) The Obligation of an Accommodation Party to Pay. . . . . . .. IS-52[3] Defenses to Payment of an Accommodation Party. . . . . . . .. 15-55[4] Accommodation Parties in Consumer Transactions... ..... 15-58

'I 15.07 Discharge of Liability . . . . . . . . . . . . .. 15-58'115.08 Handling ofInstruments Involving a Fiduciary. . . . . . . . . . . . .. 15-61

[l] UCC Provisions Relating to Fiduciaries , . .. 15-62[2] Uniform Fiduciaries Act Provisions. . . . . . . . . . . . . . . . . .. 15-66[3] Problems in Determining When There Is Knowledge of a

Breach of Fiduciary Duty. . . . . . . . . . . . . . . . . . . . . . . . . .. 15-69

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 16-23Ic] Categories of Real Defenses . . . . . . . . . . . . . . .. 16-24

[i] Incapacity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 16-24[iiI Duress or illegality 16-25

[iii] Fraudulent misrepresentation of the nature of theinstrument .... . . . . . . . . . . . . . . . . . . . . . . . . . .. 16-26

[iv] Discharge in insolvency proceedings. . . . . . . . . . . .. 16-27[v] Other discharges when the holder has notice. . . . . .. 16-27

11 16.03 Rights of a Holder Who Is Not a Holder in Due Course 16-28~ 16.04 The Shelter Principle-Acquiring the Rights of a Holder in Due

Course by Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 16-31'II 16.05 Defenses to the Instrument Based Upon Separate Conditions or

Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 16-33~ 16.06 Preservation of Claims and Defenses in Consumer Transactions 16-35

[I] Abolition of Holder in Due Course Status by FTC. . . . . . . .. 16-37[2] Transactions Covered by FTC Rule 16-38

[a) Financed Sale and Purchase Money Loan 16-38[b] Impact of FTC Rule. . . . . . . . . . . . . . . . . . . . . . . . . . .. 16-39[c] Case Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 16-40

[3] Preservation of Claims and Defenses Under the UniformConsumer Credit Code. . . . . . . . . . . . . . . . . . . . . . . . . . . .. 16-42[a] Section 3.307: Use of Negotiable Instruments. . . . . . . .. 16-43[bJ Section 3.403: Credit Card Transactions . . . . . . . . . . . .. 16-43[c) Section 3.404: Waiver of Defense Clauses. . . . . . . . . . .. 16-44[d) Section 3.405: Availability of Claims and Defenses

Against Lender. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 16-44[4J Other State and Federal Restrictions on Holder in Due

Course Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 16-45

17 Letters of Credit11 17.01 Rights and Duties of Parties in Letter of Credit Transactions. . . . 17-1

TABLE OF CONTENTS xxiv

[1] Scope of UCC Letter of Credit Provisions. . . . . . . . . . . . . . . 17-4(21 Form of Letters of Credit. . . . . . . . . . . . . . . . . . . . . . .. . .. 17-5[3) Letters of Credit Are Not Guarantees . . . . . . . . . . . . . . . . . . 17-7[4J International Letters of Credit and the Uniform Customs. . . 17-8

1117.02 Obligations of an lssuer ofa Lelter of Credit. 17-9[1J Issuer's Obligation to Its Customer . . . . . . . . . . . . . . . . . . . . 17-9[2] Issuer's Obligation to Pay the Beneficiary . . . . . . . . . . . . . .. 17-11

raj Indemnities 17-12[b} Relationship of Letter of Credit to the Underlying

Contract 17-14[3] Standby Letters of Credit 17-17

1117.03 Documentary Drafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 17-19[I] Bank's Duty to Present Draft and to Notify Customer of

Nonpayment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 17-21[2} Bank's Responsibilities for the Documents and the Goods. .. 17-22~ 17.04 Letters of Credit and Bankruptcy . . . . . . . . . . . . . . . . . . . . . . .. 17-24

18 Alternative Payment Systems: Bank Cards, Credit Cards,and Electronic Fund Transfers

'I 18.01 Alternative Payment Systems Generally . . . . . . . . . . . . . . . . . . . 18-3[1) Types of Transactions 18-3

[a} Check Truncation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18-3[b] Automated Clearinghouse Transactions. . . . . . . . . . . . . 18-4[c] Book Entry Securities and Safekeeping Services. . . . . . . 18-5[d] Wire Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ill-5[eJ Automated Teller Machines . . . . . . . . . . . . . . . . 18-6(I] Point of Sale Terminals 186[g) Home Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18-6[h} Credit Cards 18-7

[2] Sources of Law 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

Properly 18-13[4J 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. . . . . . . . . . . . . . . . . .. 18-18tel Notice of Error Resolution Procedures 18-19[I] Documentation as Proof of Transfer . . . . . . . . . . . . . .. 18-19

[7] Miscellaneous Restrictions . . . . . . . . . . . . . . . . . . . . . . . .. 18-19(8) Issuing Access Cards 1\\-19[9] Relation to State Law . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 18-21

[10] Enforcement Powers and Private Remedies. . . . . . . . . . . .. 18-22[a] Administrative Enforcement. . . . . . . . . . . . . . . . . . . .. 18-22[b] Criminal Enforcement 18-22[c) Liability of Institutions , . . . . . . . . .. 18-23

'I 18.03 Bank Credit Cards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 18-24[I] Truth-in-Lending Act Provisions 18-27[2] Issuing Credit Cards " 18-28[3] Preservation of Cardholder Claims and Defenses. . . . . . . .. 18-28[4] Prohibition Against Setoff of Obligations. . . . . . . . . . . . . .. 18-31[5] Wrongful Refusal to Extend Credit. . . . . . . . . . . . . . . . . .. 18-31[6] Terms of Credit Card Plans Affecting Merchants and Others

Who Honor the Card . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 18-32[7] Duty of Sellers to Notify Issuers of Returned Goods and

Other Credits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 18-32[8] Credit Card Fraud , 18-33~ 18.04 Unauthorized Electronic Fund Transfers and Credit Card

Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 18-33[I) Unauthorized Use of Credit Cards. . . . . . . . . . . . . . . . . .. 18-34

[a] Statutory Rules and Regulation Z . . . . . . . . . . . . . . . .. 18-34[b] Definition of "Unauthorized Use" . . . . . . . . . . . . . . . .. 18-35til Loaning of the credit card " 18-37

[ii] Estranged spouses and other family members. . . . . . . .. 18-38[iii] Lost and stolen cards 18-41[iv] Employer-employee . . . . . . . . . . . . . . . . . . . . .. 18-41

[2] Unauthorized Electronic Fund Transfers. . . . . . . . . . . . . .. 18-42[a] Statutory Rules and Reguiation E . . . . . . . . . . . . . . . .. 18-42[b] Definition of "Unauthorized Transfer" . . . . . . . . . . . .. 18-45~ 18.05 Fund Transfers Not Regulated by the Electronic Fund Transfer

Act, the Truth-in-Lending Act, or the VCC. . . . . . . . . . . . . . . .. 18-47[1] Regulation of Wire Transfers by tile Federal Reserve System 18-50

[a] Basic Definitions 18-50[b] Authority of the Reserve Bank to Process Transfer. . . .. 18-52[c] Procedures Governing Reserve Bank Transfers 18-53[d] Liability of the Reserve Ba:J.k . . . . . . . . . . . . . . . . . . .. 18-54

[2] Bank Liability for Erroneous or Wrongful Fund Transfers .. 18-56[3] Proposed Revision ofUCC to Cover Moderp Payment

Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 18-60

TABLE OF CONTENTS xxvi

[4J Check Truncation and Other Electronic Processing Methodsof Check Collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 18-61

[5) Regulation of ACH Transactions 18-64[6J Regulation of Direct Deposit Payments and Book Entry

Securities Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . .. 18-66

19 Bank Accounts'I 19.0 I Basic UCC Definitions. . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . 19-21119.02 Nature of Bank Accounts... . .. . . . .. 19-4

[I] Legal Relationship Between Bank and Depositor. . . . . . . . . . 19-4raj Bank as Debtor to Its Depositor . . . . . .. 19-4[bJ Bank as Bailee or Trustee . . . . . . . . . . . . . . . . . . . . . . . . 19-5[cJ Accounts at Branches . . . . . . . . . . . . . . . . . . . . . . . . . .. 19-7[dj Bank Ownership of Deposited Funds 19-9

[2] Kinds of Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19-9[a] Checking Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . .. 19-11[b] Savings Accounts " 19-11[c) Special Deposits " 19-12[dJ Certificates of Deposit 19-12Ie] NOW Accounts . . . . . . . . . . . . . . . . .. 19-13[f] Automatic Transfer Accounts . . . . . . . . . . . . . . . . . . . .. 19-14[g) Share Draft Accounts . . . . . . . . . . . . . . . . . . . . . . . . . .. 19-15[hl Money Market Accounts. . . . . . . . . . . . . . . . . . . . . . . .. 19-15

[3J Opening an Account....... .. 19-15[4] Unconscionable Agreements. . . . . . . . . . . . . . . . . . . . . . . .. 19-16[5] Termination of Relationship 19-17

t 19.03 Forms of Accounts 19-20[l] Individual Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 19-20[2J Joint or Multiple Party Accounts . . . . . . . . . . .. 19-20

{a] Common-Law Rules. . . . . . . . . . . . . . . . . . . . . . . . . . .. 19-21[bJ Uniform Probate Code. . . . . . . . . . . . . . . . . . . . . . . . .. 19-22[c] Creditors' Rights Against Joint Account 19-23[d] Ownership Interests . . . . . . . . . . . . . . . . . . . . . . . . . . .. 19-25Ie] Bank Payment of Joint Account Funds . . . . . . . . . . . . .. 19-26If] Liability for Overdrafts. . . . . . . . . . . . . . . . . . . . . . . . .. 19-27[g] Conflicting Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 19-28

[3J Partnership Accounts " \9-29[4] Corporate Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 19-30

11 19.04 Signatures _. . . . . . . . . . . . .. 19-30[I] What Constitutes a Signature . . . . . . . . . . . . . . . . . . . . . .. 19-31[2] Single, Multiple, and Facsimile Signatures 19-32

11 19.05 Nondeposit Liabilities " 19-35

xxvii TABLE OF CONTENTS

20 Mutual Duties of the Bank and the Depositor~ 20.01 Bank's Right to Charge Customer's Account. . . . . . . . . . . . . . .. 20-2~ 20.02 Improper Payment and Bank's Rights of Subrogation . . . . . . . . . 20-4~ 20.03 Liability of Bank for Refusal to Pay . . . . . . . . . . . . . . . . . . . . . . 20-5~ 20.04 Postdated Checks and Stale Checks 20-10~ 20.05 Stopping Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 20-11

[1] Basic Rules on Stopping Payment. . . . . . . . . . . . . . . . . . . .. 20-11[a] When Is a Stop Payment Order Timely? . . . . . . . . . . .. 20-12[b] Subrogation Rights and Proof of Loss . . . . . . . . . . . . . .. 20-13

[2] Claims of Third Parties to Checks 20-17[3] Stopping Payment on Cashier's Checks, Bank Drafts, and

Certified Checks 20-18~ 20.06 Bank's Duty to Pay the Holder. . . . . . . . . . . . . . . . . . . . . . . . .. 20-21

[1] Order Paper and Identification of Payees and Indorsers . . . .. 20-22[2] Bearer Paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 20-23[3] Fictitious or Nonexisting Payees , . . . . .. 20-23

11 20.07 Miscredited Proceeds and Restrictive Indorsements . . . . . .. 20-281120.08 Checks With Forged or Unauthorized Signatures 20-37

[1] Breach of Warranty by Customer Obtaining Payment ofCheck With Forged Indorsement 20-43

[2] Conversion of Check When Bank Pays Over a ForgedIndorsement 20-43

[3] Customer Negligence As Defense to Bank's Payment ofCheck With Unauthorized Signature or Alteration. . . . . . . .. 20-45

[4] Bank's Improper Payment of Check as Cause of CustomerLoss ,........................ 20-49

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 20-55~ 20.11 Bank's Right to Revoke Credits to Customer's Account and to

Charge Customer for Items Not Paid . . . . . . . . . . . . . . . . . . . .. 20-56[I] Customer's Right to Withdraw Against Items Deposited. . .. 20-60

[a] Customer's Right to Withdraw Against Deposited ItemsUnder the UCC , . . . . . . . . . . . . . . . . . . . . . . .. 20-61

[b] The Expedited Funds Availability Act of 1987 . . . . . . . .. 20-63[i] Definitions and scope of EFAA 20-64[ii] Funds availability requirements. . . . . . . . . . . . . . .. 20-64

[iii] Accrual of interest on deposits ... '.' . . . . . . . . . . .. 20-73[iv] Calculation of business days. . . . . . . . . . . . . . . . . .. 20-74[v] Administrative enforcement and private remedies .. 20-74

TABLE OF CONTENTS xxviii

[vi] Federal Reserve Board Regulation CC ... _. . . . . .. 20-751120.12 Customer's Duty to Examine Statements of Account. . . . . . . . .. 20-81

[I] Duty to Examine Statements and to Report ImproperPayments ..................................... 20-81

[2] Duty to Report Forgeries and Alterations When Bank RetainsChecks 20-86

[3] ~egligence and the Duty of Due Care Under the UCC 20-8711 20.13 Liability of Bank on Promises and Representations With Respect

to Its Customer's Account '" _. . . . . . . . . . . . .. 20-88

21 Collection and Payment of Instrumentst 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 .

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 .

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 .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 BoardRegulation CC : .

1121.07 Use of Central Data Processing Center for Payment of Checks byBank With Multiple Branches .

11 21.08 Payment of Lost or Stolen Checks .

21-221-321-521-521-721-921-9

21-1021-1121-1221-1521-1521-1821-2021-2121-2321-2421-28

21-3021-32

21-3421-3521-36

21-39

21-42

21-45

TABLE OF CONTENTS xxx

Part III - Security Transactions in Personal Propertyand Related Credit Practices

22 Creation of Security Interests in a Debtor's PersonalProperty

II 22.01 Security Interests in Personal Property Under the VCC . . . . . . .. 22-2[l J Scope ofVCC on Security Interests 22-3[2] Leases and Consignments as Security Transactions . . . . . . .. 22-6

[a) Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 22.6[bJ Consignments 22-9

'1/22.02 Creating a Security Interest . . . . . . . . . . . . . . . . . . . . . . .. 22) 0[1] The Security Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . .. 2210[2] Purchase Money Security Interests. . . . . . . . . . . . . . . . . .. 22-16

11 22.03 Perfection, Termination, and Transfer of Security Interests " 22-18[I] Filing Requirements 22-19[2] Requirements of Financing Statements. . . . . . . . . . . . . . . .. 2222

[a] Information Requirements . . . . . . . . . . . . . . . . . . . . . .. 2222[b] Other Requirements as to Effectiveness " 2225

[3J Termination Statements and Partial Releases of Collateral. .. 2227[4] Transfer of Security Interests . . . . . . . . . . . . . . . . . . . . . . .. 22211[5] Place of Filing UCC Financing Statement. . . . . . . . . . . . . .. 22-30TABLE 22-1 1972 and Pre-I 972 Versions ofUCC 2232TABLE 22-2 State Filing Systems for Article 9 SecurityTransactions (UCC 9-401). . . . . . . . . . . . . . . . . . . . . . . . . . .. 2234TABLE 22-3 State Filing Locations for Article 9 SecurityTransactions (VCC 9-401) . . . . . . . . . . . . . . . . . . . . . . . . . . .. 2240

11 22.04 Security Interests When the Secured Party Has Possession oftheCollateral . ~ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 22-45[)] The Pledge 2245

[a] Creating a Security Interest by Pledging Collateral . . . . .. 2245Ib] Perfecting the Security Interest in Pledged Collateral . . .. 22-46

[2J Field Warehouse Systems " 2249[3] Duties of a Pledgee 2250

1: 22.05 Automatic Perfection and Perfection of Security Interests inCollateral Governed by Systems Other Than the UCC. . . . . . . .. 22-51

11 22.06 Security Interests in Goods and Chattels. . . . . . . . . . . . . . . . . .. 22-52[l] Consumer Goods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 2253(2] Equipment 22-54[3] Farm Products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 22-5414] Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 22-56

xxxi TABLE OF CONTENTS

[5] Fixtures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 22-59[6] Motor Vehicles . . . . . . .. 22-60~ 22.07 Security Interests in Intangibles and Like Property . . . . . . . . . .. 22-61

[I] Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . .. 22-61[2] General Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 22-66[3] Instruments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 22-67[4] Chattel Paper 22-68[5] Documents of Title 2269[6] Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 2270

[a] Certificated Securities. . . . . . . . . . . . . . . . . . . . . . . . . .. 22-72[b] Cases Involving Certificated Securities 2273[c] Uncertificated Securities. . . . . . . . . . . . . . . . . . . . . . . .. 22-77[d] U.S. Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 22-78

[7] Bank Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 22-78[8J Insurance Policies . . . . . . . . . . . . . . . . . . . . . . . .. 2280[9] Real Estate-Related Interests . . . . . . . . . . . .. 2281

23 Priorities: Rights of Competing Creditors, Purchasers,and Transferees~ 23.01 Priorities Between Parties With Security Interests in the Same

Collateral 23-2[IJ Unperfected Security Interests . . . . . . . . . . . . . . . . . . . . . . . 23-2[2] Perfected Security Interests 23-4

[a] Purchase Money Security Interests . . . . . . 23-5[b] Security Interests in Crops ..... . . . . . . . . . . . . . . . . . . 23-7~ 23.02 Rights of Buyers and Purchasers. . . . . . . . . . . . . . . . . . . . . . . . . 23-8

[I] Buyers of Goods .... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23-8[a] Buyers in the Ordinary Course of Business 23-8[b] Buyers From Debtors Who Have Authority to Sell. . . . .. 23-11[c] Scope of Protection for Buyers in the Ordinary Course of

Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 23-15[2J Buyers of Farm Products-The Food Security Act of 1985 .. 23-16

[a] Reasons for Enactment. . . . . . . . . . . . . . . . . . . . . . . . .. 23-16[b] Provisions of the Act ... . . . . . . . . . . . . . . . . . . . . . . .. 23-18[c] Presale Notice Procedures. . . . . . . . . . . . . . . . . . . . . . .. 23-19[d] Notification Through a Central Filing System 23-22[e] Debtor's Duty to Identify Buyers, Commission

Merchants, and Sales Agents. . . . . . . . . . . . . . . . . . . . .. 23-26[f] Scope of the Act and Federal Preemption 23-27

[3] Purchasers of Instruments, Chattel Paper, and Documents. .. 23-31~ 23.03 Special Priority Rules 23-32

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

TABLE OF CONTENTS xxxii

[2] Fixtures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 23-34[3] Rights of Unpaid Sellers of Goods ... . . . . . . . . . . . . . . . .. 23-36[4] Conflicts With Liens Arising Under Other Laws ..... . . . .. 23-38[5] Commingled or Processed Goods. . . . . . . . . . . . . . . . . . . .. 23-39[6] Subordination Agreements. . . . . . . . . . . . . . . . . . . . . . . . .. 23-40

24 Debtor Default and Enforcement of Security Agreements1124.01 General Rules on When an Obligation Is Due. . . . . . . . . . . . . . . 24-2

[I] Obligations Based on Promissory Notes 24-2[a] Notes Payable on Demand. . . . . . . . . . . . . . . . . . . . . .. 24-2[b] Acceleration Clauses. . . . . . . . . . . . . . . . . . . . . . . . . . .. 24-4

[i] Good faith requirement. . . . . . . . . . . . . . . . . . . . . . 24-4[iiI Types of acceleration provisions. . . . . . . . . . . . . . .. 24-5

[iii] Scope of UCC 1-208 . . . . . . . . . . . . . . . . . . . . . .. 24-6[c] Due-on-Sale Clauses. . . . . . . . . . . . . . . . . . . . . . . . . . .. 24-9

til Enforceability in real estate transactions. . . . . . . . . . 24-9Iii] Gam-St Germain Act 24-11

[2] ::\'otes With Special Contract Provisions . . . . . . . . . . . . . . .. 24-14[3] Waiver or Cancellation of Debts. . . . . . . . . . . . . . . . . . . . .. 24-15

[a] Problems With Renewal Notes. . . . . . . . . . . . . . . . . . .. 24-16[b] Full Payment Checks ; . .. 24-17

'/24.02 Special Duties of Good Faith and Fiduciary Responsibility ofBank to Customer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 24-21[I] The Bank as a Fiduciary. . . . . . .. . . . . . . . . . . . . . . . . . . .. 24-21

[a] Fiduciary Relationships Generally. . . . . . . . . . . . . . . . .. 24-21Ib] Transactions Where a Bank Is a Fiduciary. . . . . . . . . . .. 24-23

[2] A Bank's Duty of Good Faith and Related Obligations. . . .. 24-26[a) Theories Underlying Lender Liability Cases. . . . . . . . . .. 24-27Ib] Liability Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 24-30

11 24.03 Enforcement of Security Interests Under UCC Anicle 9 24-31[I] Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 24-31[2] Repossession of the Collateral 24-32[3] Constitutional Limitations on Secured Pany Remedies. . . .. 24-34

[a] Supreme Court Due Process Decisions 24-34Ib] Self-Help Repossession and the Issue of State Action. . .. 24-36

[4] Disposition of Collateral After Default. . . . . . . . . . . . . . . .. 24-39[a) Requirements for Disposal of Collateral 24-39[b] Cases Illustrating Requirements . . . . . . . . . . . . . . . . . .. 24-41

[5] Retention of Collateral in Discharge of the Obligation. . . . .. 24-44[6] Creditor Liability for Failure to Comply With UCC

Procedures :... 24-4511 24.04 Special Consumer Credit Rules 24-48

xxxiii TABLE OF CONTENTS

25 Bankruptcy~ 25.01

~ 25.02

t 25.03f 25.04

~ 25.05

Source of Law, Jurisdiction, and ProcedureDifferent Types of Bankruptcy Proceedings .[1] Chapter 7: - Liquidation .[2] Chapter 13: - Debt Adjustment .[3] Chapter II: - Reorganization .[4] Chapter 12: - Family Farmer .Voluntary Versus Involuntary Proceedings .Property of the Bankruptcy Estate .[1] Determining What Constitutes Properly .[2] Exemptions .[3] Lien Avoidance for Exempt Property .[4] Turnover of Property Belonging to the Estate .The Automatic Stay .[ IJ General Rule . . . . . . . . . . . . . . . . . , , . . , . . . . . . . . . . . . . .[2] Exceptions , , , , .[3) Procedure for Obtaining Relief From the Stay .[4J The Secured Creditor, the Collateral, and Adequate

Protection , .

25-2

25-525525-6258

25-1125-1425-1525-1525-1625-17251825-19251925-2125-23

25-24~ 25.06 Creditors' Claims: Procedures and Priority of Distribution " 25-26~ 25.07 Powers and Duties of the Bankruptcy Trustee '. 25-28

(I J Trustee as Lien Creditor. . . . . . . . . . . . . . . . . . . . . . . . . . .. 2529[2] Trustee as Successor to the Rights of Actual Unsecured

Creditors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 25-30[3) Power to Set Aside Statutory Liens " 25-31[4] Power to Set Aside Preferences _ , . .. 25-32

[a] Elements of a Preference. . . . . . . . . . . . . . . . . . . . . . . .. 2532[b] Statutory Exceptions ' 25-36

[5] Power to Set Aside Fraudulent Conveyances. . . . . . . . . . . .. 25-39[6] Rights of Transferees in Avoided Transfers. . . . . . . . . . . . .. 25-41[7] Other Specific Powers of the Trustee. , . . . . . . . . . . . . . . . .. 25-42

[a] Executory Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . .. 25-42[b] Waiving the Attorney-Client Privilege. . . . . . . . . . . . . .. 25-43[c] Abandoning Property of the Estate. . . . . . . . . . . . . . . .. 25-44~ 25.08 Discharge of the Debtor , . . . . . . . . . . . . . . . . . . . . . . . .. 25-45

[I] Nondischargeable Debts _. . . . . . . . . . . . . .. 25-45[2J Objections to Discharge , , .. , . . . . .. 2549[3] Reaffirmation of Debt by the Debtor , .. , , " , . . .. 2550~ 25.09 Issues Involving the Rights and Duties of a Bank ,.'..... 2552

[I] Checks in the Process of Collection .... , ... , , . . . . . . . . .. 25-52

TABLE OF CONTENTS xxxiv

[2] Letters of Credit as Preferences 25-53[3] The Bank's Right of Setoff and the Automatic Stay . . . . . . .. 25-57

fa] Requirements of General Right of Setoff " 25-57fbJ Prepetition Setoff. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 25-58[c] Postpetition Setoff; "Freezing" Accounts. . . . . . . . . . . .. 25-60Id} Setoffs and the Involuntary Bankruptcy. . . . . . . . . . . . .. 25-61

[4] Credit Card Purchases as Nondischargeable Debts. . . . . . . .. 25-62f5J Employees Who File Bankruptcy ..... . . . . . . . . . . . . . . .. 25-65[6J Environmental Protection, Hazardous Wastes, and the

Bankrupt Debtor " 25-66(a] Environmental Proceedings and the Automatic Stay 25-67(bJ Dischargeability of Orders and Fines Arising From

Environmental Violations. . . . . . . . . . . . . . . . . . . . . . .. 25-67[c] Abandonment of the Property and Liability for

Cleanup " 25-68[dJ Priority Status for Claims Resulting from Cleanup. . . . .. 25-70

26 Interest Rate Controls and Credit Practices Regulation~ 26.0 I Sources of Law " . . . . . . . . . . 26-2~ 26.02 Interest and Usury. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26-4

[l] State Law Regulating Interest Rates ., . . . . . . . . . . . . . . . . . 26-5fZ] National Banks .... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26-8

Ia] Role of State Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26-9fb] Most Favored Lender Doctrine. . . . . . . . . . . . . . . . . . .. 26-11leJ Interstate Credit Activities .... . . . . . . . . . . . . . . . . . .. 26-12

[3} Federal Preemption of State Usury Law ... . . . . . . . . . . . .. 26-13[a] Depository Institutions Deregulation and Monetary

Control Act " 26-13[b] Preemption Provisions for Specific Categories Under the

Act 26-14(i] Residential real property loans. . . . . . . . . . . . . . . .. 26-14

[ii] Obligations of depository institutions. . . . . . . . . . .. 26.15[iii] Business and agricultural loans of $1 ,000 or more. .. 2616[iv] Other loans by federally ins'Jred depository

institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 26-16[c] State Laws Overriding Federal Interest Limits. . . . . . . .. 2618

[4] The Prime Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 26-19[5] Variable Rate and Other Nontraditional Mortgage

Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 2623

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 TABLE OF CONTENTS

[b] Open-End Credit Disclosure Requirements " 26-35[3] Consumer Leases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 26-40[4] Disclosures and Rescission Rights in Real Estate

Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 26-4 \[5] General Provisions of the Act. . . . . . . . . . . . . . . . . . . . . . .. 26-44

[a] Duty to Revise Prior Disclosures. . . . . . . . . . . . . . . . . .. 26-44[b] Regulation of Credit Advertising , 26-44[c] Effect of Truth-in-Lending on State Law 26-46[d] Credit Billing , 26-46

[6] Civil Liability and Administrative Enforcement 26-49[a] Creditor Liability for Damages , 26-49

{i] Creditor defenses 26-50[ii] Liability of assignee from a creditor , 26-51

[bi Administrative Enforcement. . . . . . . . . . . . . . . . . . . . .. 26-52(e] Reliance on Model Forms. . . . . . . . . . . . . . . . . . . . . . .. 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 CommissionImprovement Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 26-61

[2] Plain English Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 26-6211 26.06 Credit Discrimination and the Equal Credit Opportunity Act 26-63

[I] Scope of the Act , 26-63[2] What Constitutes Discrimination Under ECOA 26-67[3] Prohibited Discrimination in Credit Application and

Evaluation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 26-70[4] Special-Purpose Credit Programs .. . . . . . . . . . . . . . . . . . .. 26-71[5] Notice Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 26-72[6] Civil Liability for Violation of ECOA . . . . . . . . . . . . . . . . .. 26-74[7] Relationship to State Laws Establishing Marital and Other

Property Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 26-75[8J Relationship to Other State Laws. . . . . . . . . . . . . . . . . . . .. 26-79

Table of UCC Sections T-tTab]e of USC Sections " T17Tab]e of Cases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. T-))Index : . . . . . . I-I

IThe Nature and

Regulation of Banking:An Overview

1Introduction to Banking

Regulation

~ 1.01 Defining "Commercial Banking" . . . . . . . . . . . . . . . . . . . . . . . . 1-[~ 1.02 History of Banking Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . 1-4

[1] First Bank of the United States. . . . . . . . . . . . . . . . . . . . . . . 1-4[2] Second Bank of the United States. . . . . . . . . . . . . . . . . . . . . 1-5[3] State-Chartered Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-6[41 Federal Reserve Act of 19 I 3 . . . . . . . . . . . . . . . . . . . . . . . . . 1-7[5) Banking Since the I950s. . . . . . . . . . . . . . . . . . . . . . . . . . . . I-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 acceptdeposits, make loans, collect commercial paper, and arrange the transfer offunds.'" Under the banking law from the adoption of the Glass-Steagall Act inthe 1930s until the beginning of the 1980s, there was a distinct demarcationbetween commercial banks and other financial institutions, such as investmentbanks, securities firms, and commercial financial services conglomerates.

All this is changing. The types of institutions that can engage in traditionalcommercial banking functions have enlarged as a result of legislation givingadditional powers to thrift institutions. The types ofactivities commercial banksengage in have expanded as a result of legislation at both the state and federallevels and as a result ofjudicial decisions dismantling parts of the wall erected bythe Glass-Steagall Act to keep commercial banks insulated from the risks ofdealing in securities. The "nonbank bank" explosion has started a restructuringof the banking market into holding companies capable of offering an array offinancial services. In light of these developments, perhaps the most suitable

1 F. Beutel & M. Schroeder, Bank Officer's Handbook ofCommercial 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 andsizes, with different name tags applied indifferent countries, often quite loosely.Banks make most oftheir money from the difference between interest rates paidto depositors and charged to borrowers." Commercial banks are "publiclyquoted and profit oriented. They deal directly with the public, taking deposits,making loans and providing a range of financial services from foreign exchangeto investment advice. Most countries have settled for between four and ten;" butin the United States there are nearly 15,000 because of "banking laws that haveprevented banks qperating in more than one state, and in different types ofbusiness ...."2

In addition to commercial banks, there are many specialized depositoryinstitutions that have been established to perform specialized roles. Thrift insti-tutions such as savings and loan associations and credit unions are importantexamples. At their inception, savings and loan associations primarily engaged inhome mortgage lending and offering passbook-type savings to consumers. Withthe enactment of the Depository Institutions Deregulation and Monetary Con-trol Act of 1980, thrifts gained expanded authority to engage in commercialbanking activities. Further incorporation into the general banking market hasoccurred as a result of the restructuring brought about by the financial failuresand weakened condition ofthrift institutions in the I980s, which led to changesin the law to encourage the acquisition and merger of weak institutions withstronger financial institutions, including banks. These developments are dis-cussed in Chapters 6 and 10. To a great extent, thrift institutions are subject to aregulatory regime similar to that governing commercial banks, and engage inbanking functions similar to those of commercial banks. Subsequent chaptersdiscuss how thrifts fit into this regulatory scheme.

There are other specialized consumer-oriented financial companies. Creditunions may be organized under state and federal statutes with the power tomaintain customer share accounts against which drafts may be drawn payable ina manner similar to checks. Credit unions are discussed in detail in Chapter 2.There are also personal finance Joan organizations authorized under the laws ofthe several states that loan small amounts of money to consumers, often atspecially regulated rates that are higher than the usual interest rates allowed.These organizations normally are not deposit-taking institutions but operatewith their own capital and credit. Banks often have their own small loan depart-ments to make the same type ofloans, and holding companies may have specialconsumer loan subsidiaries or affiliate companies.3

Although trust activities have become a part of the activity of many com-mercial banks,' this book does not deal with the laws that govern these trustee

2 R. Pennant-Rea & B, Emmoll, The Pocket Economist 9 (1983)3See \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 tooffer managed investment accounts through their trust departments similar tothose offered by mutual funds and other securities firms. These developmentsare discussed in Chapter 8. Again, there are trust companies organized understate law that operate by accepting money for the purpose of investment wherethe beneficial interest in the funds remains in the original owner. This book doesnot address trust companies as such, but these firms may become part of abanking company's corporate structure through affiliation as a subsidiary orother affiliate organization. See Chapter 5 for a discussion of this issue.

There are other types ofbanking functions and specialized banks: for exam-ple, reserve banks, which are really bankers' banks; investment banks, whosechiefbusiness is underwriting and dealing in securities, and providing fmancialadvice and aid in corporate acquisitions and mergers; agricultural banks; foreigntrade banks; and other specialized banks that have charters to engage in particu-lar types ofbusiness. Some examples ofthese organizations are briefly describedin Chapter 2. Further, the peculiarities of federal laws regulating bank holdingcompanies have encouraged the proliferation of various financial institutionsthat have been chartered as full-service banks but that limit their functions toactivities such as consumer lending and credit card operations. These develop-ments are discussed in Chapter 5.

Because ofthe diversity offunctions ofcommercial banks and the variety ofdepository institutions involved in them, this book does not attempt a compre-hensive survey ofall banking activity. Rather, it emphasizes the basic regulatorystructure that governs traditional commercial banking institutions and the com-mercial activities associated with accepting deposits, collecting commercialpaper, making payments and transferring funds, and engaging in certain credittransactions. Thus, Part I consists of a review of the body of regulatory lawaffecting the organization, authority, and supervision of commercial banks anda description of the primary federal banking regulatory agencies-the Comp-troller of the Currency, the Federal Deposit Insurance Corporation, the Board ofGovernors of the Federal Reserve System, the Federal Savings and Loan Insur-ance Corporation, and the Federal Home Loan Bank Board. Part II examines thelaw that defines the rights and duties related to various types of commercialpaper-checks, notes, cashier's checks, letters ofcredit, documents of title, andother paper, and describes the law affecting bank and customer relations. PartIII outlines some of the fundamental law applicable to security transactions inpersonal property and related credit practices.

As this introduction indicates, the laws and regulations that govern com-mercial banking are numerous and complex. The various types of financialinstitutions engaging in commercial banking activities are matched by an equal

activities. The Depository Institutions Deregulation and Monetary Control Act of 1980also gave thnft institutions chartcred by the Federal Home Loan Bank Board the author-ity 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 institu-tions. At the federal level alone, responsibility for regulating banking activitieshas been parceled out among a number of separate agencies; when regulatoryauthority is shared by state and federal agencies, the complexity of the law iscompounded.

In addition, the law governing the transactions of commercial banks iscomplex. The Uniform Commercial Code has brought a desirable uniformity tothe law in many areas, but there are many special purpose statutes, frequentlyintended