Commercial Law - Robert A. Weber, Jr.

• Publication year: 1998

Commercial Law

Robert A. Weber, Jr.^*

I. Banking

A. Loan Commitments

Loan commitments, as most first-year law students learn, must be in writing to be enforceable under the Statute of Frauds, codified in Georgia at O.C.G.A. section 13-5-30(7). Of course, that rule begs the question of which written memoranda will qualify thereunder. In Oceanmark Bank, F.S.B. v. Stubblefield,¹ the court found that a bank's letter stating the borrower's loan application was approved did not constitute a binding loan commitment under the Statute of Frauds because it did not specify a maturity date.² Further, the letter did not include a provision pertaining to the rate of interest after the first year of the loan. Because the letter did not show that an agreement had been reached on all terms and conditions, "no enforceable loan commitment was made."³

Similarly, the court in Kamat v. Allatoona Federal⁴ found that various documents failed to satisfy the Statute of Frauds in the loan commitment context.⁵ In Kamat plaintiff-borrower made an application with defendant-lender preparatory to plaintiff's attendance at a condominium auction. Plaintiff bid at the auction after being informed by defendant- lender that "their loan application was approved."⁶ In plaintiff's subsequent breach of contract claim against the defendant-lender for its failure to provide financing after plaintiff became contractually bound to purchase the condominium, defendant-lender raised the Statute of Frauds defense. Plaintiff responded by citing a letter from the lender prior to the auction stating that plaintiff's loan application was "approved."⁷ Plaintiff also cited a good faith estimate of closing costs, which set forth "the loan amount and the interest rate for an FHA insured adjustable mortgage."⁸ The court held that neither of these documents satisfied the Statute of Frauds.⁹ As to the first document, the court noted the letter listed defendant's reasons for being unable to provide plaintiff with financing, and therefore, the letter could not be viewed as a loan commitment.¹⁰ Further, the reference in the letter to an earlier loan approval was, at most, a reference to the lender's oral commitment.¹¹ Finally, the good faith estimate, although containing the terms of the proposed loan, contained no written commitment by defendant to make the loan.¹²

Finally, the court in Georgia First Bank v. Mathis¹³ demonstrated that Georgia courts remain reluctant to force a lender to extend credit under a loan commitment when the borrower fails to adhere to the terms of the commitment. In Mathis the bank issued a five-page commitment letter to the borrower, who proposed to construct an amusement park. Signed by both parties, the letter listed five situations under which the bank could cancel the commitment to loan the money. One of these grounds was the occurrence of "any adverse change with respect to the project, the collateral, or other source of repayment."¹⁴

When the bank issued the letter, it did so in contemplation of receiving a first lien position on borrower's residence, even though the bank knew at the time that another lender had a first position. When the bank learned that the holder of the first position would not subordinate as the borrower had indicated, the bank was entitled to cancel the commitment because "the absence of this security was material."¹⁵ The court thus found that an "adverse change" had occurred "with respect to the project, the collateral, or other source of repayment."¹⁶ Regrettably, the court refused to address the bank's argument that the commitment was not an enforceable contract.¹⁷ Had it chosen to do so, the court could have provided valuable guidance to those drafting such documents.

B. UCC Issues

The court in Weldon v. Trust Co. Bank, N.A.¹⁸ addressed issues "concerning the circumstances under which payment on a cashier's check may be stopped by either the bank issuing the check or the remitter, who is one who purchases a cashier's check payable to another party."¹⁹ The court began its discussion by differentiating between a cashier's check, which is a "check drawn by a bank on itself," and a certified check, which is "a personal check that a bank has accepted."²⁰ In Weldon an individual who wished to purchase goods from seller deposited funds into his mother's account at defendant-bank. On March 23, 1995, the mother purchased a cashier's check from the bank with those funds. Four days later the son's agent delivered the cashier's check to the seller, who released and shipped the goods in reliance of the cashier's check. The next day the son contacted the bank to request a stop payment on the cashier's check because the goods were defective. Although the bank initially stopped payment and dishonored the cashier's check, it subsequently paid the item upon learning from the seller's bank that the check had in fact been delivered to the seller.²¹

The question was whether a cashier's check, like a certified check, "operates as an assignment of funds to the payee."²² The court began by noting that although a majority of commentators disagree, Georgia courts subscribe to "the view that a cashier's check is the equivalent of a certified check" and that "[c]ases subsequent to Wright hold that a cashier's check is accepted in advance by the act of its issuance and operates an assignment of funds to the payee."²³ Accordingly, the stop-payment order came too late under O.C.G.A section 11-4-303(1).²⁴ "When the money was withdrawn from [the mother's] account and the cashier's check was issued in [seller's] name, it became [seller's] property. [The mother] could not recall the cashier's check or stop payment on it."²⁵ Because prerevision statutes applied, the court did not indicate whether its holding in Weldon would be binding under the 1996 version of Uniform Commercial Code ("UCC") Articles 3 and 4.

In Vickers v. Broxton State Bank,²⁶ the issue was whether a bank had exhibited the "good faith" that is a prerequisite to the sixty-day statement rule in O.C.G.A. section 11-4-406.²⁷ Plaintiff and his partner maintained an account with defendant-bank. Although the account could only properly be drawn upon by items containing the signatures of both plaintiff and his partner, the bank paid several thousand dollars in checks signed only by plaintiff's partner. The bank defended its actions under O.C.G.A. sections 11-4-406 (1) and (4), which provide that a customer may not recover against the bank for improperly paid items when the bank sent an account statement accompanied by items paid in "good faith," and the customer does not discover and report any improperly paid items within sixty days from such statement.²⁸ The trial court granted the bank partial summary judgment based on this defense.²⁹

On appeal, plaintiff argued he was entitled to have a jury determine whether the bank had paid the improperly signed checks in "good faith."³⁰ The court of appeals disagreed, noting that "issues of good faith [did] not always present jury questions."³¹ The court of appeals found that although evidence showed plaintiff "was a new customer of the bank, and the bank had a long-term relationship with his partner, this relationship [gave] rise to no inference that the bank treated him dishonestly."³² Further, "any bad faith the bank exhibited after [plaintiff] notified it of the errors [was] immaterial because '[t]he transactions regarding which lack of good faith must be shown are paying the checks and debiting [the] account.'"³³ Therefore, grant of partial summary judgment to the bank was proper.³⁴

The court in Summit Transportation Services, Inc. v. NationsBank (South), N.A.³⁵ also addressed issues pertaining to a bank's "statement" defense under O.C.G.A. section 11-4-406. First, the court held that sending only imaged copies of paid items to a customer constituted a "reasonable manner" of making items available to its customer under O.C.G.A. section ll-4-406(l).³⁶ Second, the court addressed the quantum of evidence necessary for a plaintiff to demonstrate that its bank was negligent in honoring forged checks.³⁷ In Summit the bank was unable to produce (1) documentary evidence explaining its policies in verifying signatures on checks, (2) signature cards or the depository agreement with plaintiff, or (3) any witness to explain its verification procedures.³⁸ Therefore, the bank failed to show that it had complied with industry standards and "exercised the requisite degree of ordinary care in processing [plaintiff's] checks."³⁹ In addition, the court found that the standard for determining the bank's negligence within the sixty-day period was the same as that for determining the bank's negligence under the fourteen-day period set forth in O.C.G.A. section 11-4-406(3).⁴⁰

As a final note on UCC issues, the court in Jurisco, Inc. v. Bank South, N.A.⁴¹ addressed two issues pertaining to an issuer-bank's obligation under a letter of credit. The letter of credit in Jurisco required "a signed written statement from an authorized officer" of the beneficiary of the letter of credit, for a valid draw to be made.⁴² The beneficiary was in receivership, and the question was whether the receiver was "an authorized officer" under the terms of the letter of credit.⁴³ Noting that there was no Georgia precedent on this issue, the court found that substantial rather than strict compliance under the terms of a letter of credit was the applicable standard.⁴⁴ Therefore, the court held that the beneficiary's receiver was an "authorized officer" "entitled to make a demand for payment on the letter of credit,"⁴⁵ The court also addressed the independence principle, which states that a "bank's obligation to the beneficiary is independent of the beneficiary's performance on the underlying contract. Put another way, the issuer must pay on a proper demand from the beneficiary even though the beneficiary may have breached the underlying contract with the applicant."⁴⁶ The...