Case 27-3 Great Neck Capital

• Fact: Harnischfeger’s external auditor was PwC. They had PwC review their financial condition and advised them that their information conformed with GAAP.
• However after some year end transactions; largest order included fine paper machines in Indonesia resulting in a 600 million dollar order.
• Company subsequently went bankrupt.
• Issue: Whether PwC, or outside auditor, can be held liable under sections 10B and rule 10B-5. Can they be a primary violator?
• Rationale: The court referenced a prior case, Central Bank of Denver. To support the rationale for this case, “an accountant liability for aiding and abetting is hard to distinguish from primary liability.” This rationale supports the Central Bank ruling therefore PwC cannot be held liable under S10(b) but can be held liable for statements in the audit report.
• Conclusion: PwC’s motion to dismiss granted in part and denied in part.

Happy Thanksgiving!

Please have a Happy Thanksgiving!! Take care- and stay safe! See you on Monday! Rick

Chapter 11 Case 1

Chapter 11 Case 1


Facts:
-Credit Alliance provided financing to LB Smith
-Credit Alliance told Smith that before they extended financing they would have to to examine audit financial statements
-Smith provided Credit Alliance with its consolidated financials
-contained an auditors report prepared by Arthur Anderson saying it was in accordance with GAAP and GAAS(standards)
-Credit Alliance relied on these statements and provided substantial funding to Smith
-1980- Smith filed a petition for bankruptcy
-had already defaulted on several millions of dollars of credit obligations to CA
-1981- CA sued for damages on outstanding loans to Smith
-CA claimed negligence and fraud by Andersen in the preparation of the audit reports
-Said that Andersen knew (or should have known) that the statements were used by smith to receive credit

Issue: Whether Smith can rely on the financial statements audited by Andersen. Whether there is privity of contract between Credit Alliance and Arthur Andersen

Rationale: (1) the accountants must have awareness that the financial reports were to be used for a particular purpose (2) in the furtherance of which a known party was intended to rely and (3) there must have been some conduct on the part of the accountants linking them to that party which evinces the accountants’ understanding of that parties reliance

There was no allegation, Andersen had direct dealings with Credit Alliance

Conclusion: CA fell within the exception to the general rule that requires privity to maintain an accounting against an accountant for negligence. The dismissed the charges against Andersen

Chapter 27

Hey all,

My mom works at a bank so Professor Custin asked me to ask her a couple questions to help clarify our class discussion last week. Here are the main points:

1) If somebody writes me a check, and I endorse the back of the check but I do not write "for deposit only," then I lose the check before I bring it to the bank, the check turns into a bearer instrument and whoever finds it can cash the check.

2) However, if I write "for deposit only" on the back of the check and I endorse the check, then it doesn't matter if I lose the check because it can only be deposited into an account with my name on it.

3) It doesn't matter what you write on the back of the check first (for deposit only and then your signature or the other way around). All that matters is that both components are there.

4) Also, if you bring a check to the bank that is not endorsed on the back, most tellers will make you sign it before you give it to them.

5) Lastly, banks used to require that you write your account number on the check, but now it is not required for security reasons.

Hope that helps!

Case 27-2 Mid Atlantic

Case 27-2: Mid-Atlantic Tennis Courts v. Citizens Bank and trust Company of Maryland

· Facts

o Mid-Atlantic wanted to expand its business and hired Loy Smith as a commission salesman.

o He was authorized to sell tennis court jobs and to deliver the executed contracts and any customer deposits received directly to the business office of Mid-Atlantic in Virginia.

o Smith was scheming to defraud Mid-Atlantic and entered into 8 contracts with potential customers and did not inform Mid-Atlantic.

o He accepted deposit checks from the customers made payable either to himself only, to Mid-Atlantic only, or to both jointly.

o Smith opened 2 checking accounts with defendant in his own name into which he deposited these checks.

· Issue

o Whether the checks should or should not have been accepted by defendant for deposit in anyone’s account other than Mid-Atlantic’s.

· Rationale

o The only endorsement a bank can supply is that of its customer and it is clear that Mid-Atlantic was not the defendant’s customer.

· Conclusion

o The plaintiff has 2 UCC theories of recovery available with regard to the items that bore nothing more than language “for deposit only:

§ Conversion and breach of restriction, but either theory entitles it to summary judgment on these items, and the recovery is the same.

o Order issued in favor of plaintiff

Case 27-2(Braden Corp. & Frank W. Splittorff v. The citizens National Bank of Evansville) Ct of Appeals of Indiana, 1996

Facts: Splitorff wrote check (from Braden Corp) to Polymer Corp. Polymer Corp presented check for deposit at Citizens bank on same day. Citizens gave Polymer provisional credit for amount of check. Polymer immediately used funds to pay checks that Polymer had previously written. Citizens went to NBD (bank of Braden) to get money and NBD didn’t pay because of insufficient funds in Braden’s account. At a later date, Braden Corp. had sufficient funds, verified by Splittorff at Citizens bank. Before Citizen could demand money from NBD, there was a stop order placed on the check. Citizen filed suit against Braden and Splittorff for $5,000 in damages for the check, $15,000 in treble damages, and $2,400 in collection and court costs.

Issue: Whether Citizens was a holder in due course of the check. (give value?)

Rationale: Citizens gave value for the check by issuing provisional credit to Polymer for the check, thus becoming holder in due course.

Conclusion: Citizens is holder in due course and it did give value for the check.

Case 27-5

Facts
• Elden Guerette purchased a life insurance policy from Steven Hall, an agent of the Sun Life Assurance Company.
• Guerrette made his three adult children his beneficiaries
• When Guerette died, Sun Life issued each child a check for $40,759.35
• These checks were drawn on Sun Life’s account at Chase Manhattan Bank and Hall was supposed to deliver the checks to the beneficiaries.
• Instead, Hall fraudulently convinced the beneficiaries to endorse the checks and sin them over to him as an investment in his corporation.
• Paul Richard, Hall’s associate, deposited the checks into his account at the Maine Family Federal Credit Union which permitted Richard to immediately access those funds.
• The next day, the Guerrette beneficiaries regretted their decision and asked Sun Life to stop payment on the checks. Sun Life ordered Chase Manhattan to stop payment; thus, when the Credit Union presented the beneficiary checks for payment, Chase refused to pay.
• At this point, Richard had already used $42,000.
• The Credit Union filed suit against Sun Life, the Guerrettes, and Richard.
• The Credit Union argued that it was a holder in due course and this not subject to the defenses raised by Sun Life and the Guerrettes. However, the trial court held that the credit union did not act in good faith and was thus not a holder in due course. The Credit Union appealed.
Issue
• Did the Credit Union act in good faith in allowing Richard to cash the checks from the Guerrette’s?
Rationale
• UCC definition of “good faith” means honesty in fact and the observance of reasonable commercial standards of fair dealing.
• This is both a subjective and objective definition of good faith
• The Credit Union had no knowledge that Richard obtained the Sun Life checks by fraud nor were they aware that a stop payment order had been placed on the Sun Life checks.
o Therefore the Credit Union acted with honesty in fact. (subjective)
• The objective part is “reasonable commercial standards of fair dealing”
o The test is that the pure heart of the holder must now be accompanied by reasoning that assures conduct comporting with reasonable commercial standards of fair dealing.
o The drafters limited the requirement of fair dealing to conduct that is reasonable in the commercial context of the transaction at issue.
Conclusion
• When a check in an amount greater than $5,000 is deposited, or when a check is payable by a non-local bank, a credit union is permitted to withhold provisional credit for longer periods of time than it is allowed in other circumstances. Therefore, the size of the check and the location of the payor bank are under the objective standard of good faith.
• The appellate court affirmed the trial court’s decision that the Credit Union did not act in “good faith.”

Chapter 27 Case 6

Facts:
-The Hathorns purchased a group home from the Batchelders, the purchase agreement stated that the sale of the home was contingent upon the parties agreement to a management contract
-The parties agreed that the B would manage the home
-As a result for the agreement the Hathorns executed a 10000 promissory not to the B
-The note was secured by a mortgage
-the first payment was due in last September 1989 but there was a dispute regarding the B performance as managers so the H elected to terminate the management contract
-H sought a declaratory judgment and they lawfully terminated the management contract
-In August of 89 the B transferred the promissory note and the mortgage to Loftus (lawyer) who represented the B as partial payment for his attorney fees, the B owed him 20,000 the H told him that they would pay the Sept 1989 installment on the note in escrow until the declaratory litigation on the judgment was resolved
-In May of 1992 the court ruled against the B finding that they would have to pay the H attorney fees and costs of $11,000
-The H petitioned to have the $11,000 set off against the mortgage and note
-June of 93- the trial court ruled that the H promissory note was discharged in full “subject to the rights” if any of third parties
-Loftus claimed t be the holder in due course of the note and refused to release the mortgage
- The H filed a petition to quiet title in 1994 L counterclaimed demanding payment, the trial court ruled for L and the H appealed

Issue:
Whether the H are qualified for defense of set-off or “defense or claim in recoupment”

Rationale:
They do not qualify for recoupment bc pg. 704 last 3 paragraphs

Conclusion:
The Hathorns are required to pay the amount due on the promissory note

Case 27-1

Anthony Stefano has signed his bonds and other negotiable instruments payable to his sons to avoid probate taxes after his death. One son, Leo, is the executor of the estate, and the other Marc, lives in California. The checks are all mailed to Anthony's old home in which Leo now resides. Leo deposits all checks into First national bank. Marc requested his funds from the bank, and the bank denied. The bank refuses to give the money because the checks were delivered to Leo, not Marc. Even though Marc was not there for constructive delivery and did not recieve money himself, because Leo is the agent of the estate, Marc holds a valid claim to the money.

27.3 Page 692 Michael J. Kane, Jr. v. Grace Kroll (Appellate court)

Facts - Plaintiff sold defendant’s son some cows. The defendant’s son had his mother (defendant) pay for the cows but when she found out her son wouldn’t be paying his mother back, she put a stop payment on the check. The bank didn’t honor the check and the plaintiff sued the defendant for the amount of the check claiming he was a holder in due course.

Issue - Whether Kane is a holder in due course

Rationale - Because the plaintiff (1) took the check for value, (2) took it in good faith, and (3) had no knowledge that the check would be cancelled, he satisfied all three requirements to show he was a holder in due course

Conclusion - If you satisfy the 3 requirements then you’re a holder in due course

Cashiers v. Certified Check

What's the difference between a cashier's check and a certified check?
by Mary Beth Guard, BOL Guru
BIO AND CONTACT INFO

QUESTION: I understand that a Certified Check is written on funds deposited in an account and the bank guarantees those funds for the check. A cashier's check is purchased with funds provided by the customer and the bank issues a cashier's check that is guaranteed by those funds. Am I correct or not?

ANSWER: Article 3 of the Uniform Commercial Code defines a "certified check" under 3-409 as "a check accepted by the bank on which it is drawn. Acceptance may be made as stated in subsection (a) or by a writing on the check which indicates that the check is certified. The drawee of a check has no obligation to certify the check, and refusal to certify is not dishonor of the check."

You are correct that a certified check is one drawn on a customer's account on which the bank has noted its certification.

A cashier's check is a direct bank obligation -- a check drawn by the bank on an account maintained at the same institution. It is defined under UCC 3-104(g) as "a draft with respect to which the drawer and drawee are the same bank or branches of the same bank."

Conforming Goods

Page 591 - Perfect Tender Rule (Questions 23-24 from test outline)

If the goods fail in any respect to conform to the contract, the buyer/lessee has the right to:

1. accept the goods

2. reject the entire shipment, or

3. accept part and reject part.

Page 582 - Risk of Loss during a Breach of Contract (Question 19)

...does not provide the goods that were described in the contract, the buyer may either:

1. accept the nonconforming goods as is or

2. reject the goods subject to the seller's curing the deficiency in the goods

(3) 2nd paragraph - revoke the contract if cure not possible/doesn't occur

I feel like I'm missing something here. Both seem to have to do with non-conforming goods yet both are giving different options on the buyer's end to what he can do. Can someone clear this up for me?

Shipment Contract / Origin Contract

Shipment Contract

A contract of Sale in which a seller bears the risk of loss only until the shipment of goods arrives at its named place of shipment (or port of origin). Therefore, an Origin contract is a shipment contract.

extra credit

My parents just bought a brand new house in San Clemente. There was a interior designer hired to set up furniture in the house. When we purchased the house we had the option to by the house with the furniture or bring in our own and have the interior designer return the furniture. We chose to pay for the furniture (which included TV's, kitchen appliances, couches, etc...) and make it ours. However, recently we received a phone call from the furniture shop in LA wanting the furniture back because we found out the interior designer was a Con Artist and she never fulfilled her contract with the shop. We purchased the furniture in good faith and for the proper value. The designer had a agreement to rent the furniture with the option to sell. However, she was arrested and never payed the shop the money she owed. Before she was arrested we had already paid her the thousands for the furniture. At this point, does my dad own the furniture? Or would we have to return it?

Article about Richmond Case

I know it's more relevant to Business Law I, but if anyone wants more information, here is a link to a CNN article written about the rape case that we talked about at the beginning of class yesterday.


http://www.cnn.com/2009/CRIME/10/27/california.gang.rape.investigation/index.html