Chapter 27 case answers:

1) A. How long is a written stop-payment order effective?

A written instruction given to a bank or financial institution to cancel a
payment for a transaction, in the form of a check, electronic payment, or some
other particular form of negotiable instrument is called a “stop-payment”.

Such stop-payment order shall be effective if it was issued before the bank
or financial institution has processed the transaction, and shall be effective for
only six months, which may be renewed for another six months.

B. What else could RPM have done to prevent this check from being cashed?
Stop-payment order may also be done orally. RPM could have called Bank
One Cambridge in order to effectuate a stop-payment order for the check it has
issued to Systems Marketing. However, such oral form of stop-payment shall only
be valid for 14 calendar days, and in order to extend its effectivity it must be
confirmed in writing subsequently.

“Revoking Authorization” is another option available to RPM where they

can inform Bank One Cambridge that it shall take away the permission of
automatic payments to be made out of their account to particular payees like, for
the case at bar, Systems Marketing. The usual process may be done personally at
the bank, or more conveniently over the phone or online. It is important that RPM
must request a copy of the record for such request of revoking authorization.

However, should RPM have issued a cashier’s check, cancellation would

be the more appropriate action. A cashier’s check’s payment cannot be stopped by
reason of the guarantee made by the bank on the payment and they are not
allowed from not paying once the check has been presented either for encashment
or deposit to a particular account. The only way the funds may be returned to
RPM’s account is to issue a cancellation of such cashier’s check and wait for the
funds to be returned to their account which would usually take 90 days.

2) What would happen if it turned out that RPM did not have a legitimate reason for
stopping payment on the check?

Generally, RPM, being the drawer of the check, has a legal right to order a
stop-payment to Bank One Cambridge, being the drawee, for the check it has
issued to Systems Marketing regardless of the former’s reason.

A presumption that once the check has been issued by the drawer to a
payee whom the drawer shall subsequently order its corresponding drawee to the
 stop-payment of the check before actual encashment thereof, it shall bear no
liability for the drawer as the check would be deemed dishonored.

However, an exemption to the general rule is when litigation has begun

between the drawer who placed a stop payment order to a check issued to a payee
for a reason other than a valid legal ground for non-payment. The liability which
will maybe incurred by the drawer would only pertain to the possible non-
payment or default in payment which is the result of the dishonoring of the check
by virtue of the stop-payment order. Such liability shall only arise should the
drawer, who has issued the stop-payment, fail to establish any and all evidence
not limited to only the first instance but all throughout the preponderance of total
evidence during litigation

3) A. What are a bank’s obligations with respect to stale checks?

Generally, checks that are presented for payment to a bank or financial
institution six months or more after it was issued is called a “stale check”, and
banks are not obligated to pay it once presented for payment by a holder.

B. Should Bank One have contacted RPM before paying the check? Why or why
not?
Yes, before paying the check, Bank One is should have contacted and
informed RPM about it. Although the Bank One Cambridge is left with the
discretion whether or not to accept or dishonor payment of the stale check
presented by Rierson of Systems Marketing, they shall be liable, however, to
RPM if they fail to consult with RPM for verification of the stale check presented
for payment, as such would constitute bad faith on the part of Bank One
Cambridge.

4) Assume that Rierson’s indorsement on the check was a forgery. Would a court be
likely to hold the bank liable for the amount of the check because it failed to verify
the signature on the check? Why or why not?
Yes, Bank One Cambridge may be held liable for failure of verification as
to the signature written on the check. Generally, when a bank pays a check with a
forged signature of its drawer, it is the bank who suffers the loss, not the drawer
whom they will have to refund for the money taken from the latter’s account.
Such rule bears with it the presumption of good faith in the part of the drawer, that
he/she is not negligent or in at least has not substantially contributed to the
forgery.
 The failure of verification by Bank One Cambridge before paying on the
check presented is prima facie evidence that they have not exercised due
diligence. Although the liability may be litigated, as jurisprudence provides,
should the bank be able to present evidence of RPM’s failure to notify the bank of
such forged or altered check as this may constitute to negligence on the part of the
drawer.

Chapter 28 case answers

1) For which of Barton's purchases (the surround-sound system, the kayak, the 4-
Runner, and the six iMacs) would the creditor need to file a financing statement to
perfect its security interest?
A security interest is perfected by a creditor, usually, through filing a financing
statement. This constitutes public notice to third parties informing them about the secured
party’s security interest therein. The financing statement must bear the following:
(1) name of the debtor ,
(2) name of the secured party, and
(3) particular collateral which it covers.

In all of Barton’s purchases, the respective creditors should file a financing

statement to perfect its security interest in their respective items:
(1) KDM Electronics with its (a) Bose surround-sound system and (b) six iMacs;
(2) Outdoor Outfitters with its Wilderness Systems kayak and roof rack; and
(3) Bridgeport Auto with its Toyota 4-Runner.

2) Suppose that Barton's contract for the office computers mentioned only the name
Brighton Homes. What would be the consequences if KDM Electronics filed a
financing statement that listed only Brighton Homes as the debtor's name?
As a general rule, under UCC 9-503 (c), merely writing either a: (1) trade name or
(2) fictitious name sufficient for the perfection of a financing statement. And such
constitutes an improper filing thereof. This effectively renders a secured party’s interest
as unperfected which in turn shall reduce his claim in case of debtor’s bankruptcy to that
of an unsecured creditor.

The financing statement that mentions only Brighton Homes is not sufficient to
identify Barton as the actual debtor of KDM electronics.

3) Which of these purchases would qualify as a PMSI in consumer goods?

A purchase money security interest (PMSI) is where a secured party provides the
funds to a debtor who purchases the subject collateral. Such is automatically perfected
when a security agreement may establish a security interest and such collateral is a
consumer good (other than vehicles subject to certificate of title or fixtures).
 Consumer goods on the other hand are goods for personal use by a purchaser,
other than for business use or resale.

All of the purchases of Barton qualify as PMSI in consumer goods, except: (1) the
six iMacs of KDM Electronics which was bought for his office and the Toyota 4-Runner
financed of Bridgeport Auto which is a vehicle subject to a certificate of title.

4) Suppose that after KDM Electronics repossesses the surround-sound system, it

decides to keep the system rather than sell it. Can KDM do this under Article 9?
Why or why not?
Under UCC 9-609 (b), upon the default of a debtor, repossession by a secured
party of a collateral covered in its security agreement may be done either to: (1) retain it
for full or partial payment of debt or (2) sell, lease, rent out, or commercially dispose of it
and apply the proceeds to the debt.

As a general rule, however, such secured party is allowed to retain the collateral
rather than selling it, if: (1) it do not consist of any consumer good and (2) 60% or more
of the purchase price has not yet been paid by the debtor thereof.

Thus, KDM cannot validly keep the surround-system rather than sell it because
such is a consumer good which is an exception to the general rule aforementioned.