12.2.1.2 Notes - Muller v. Pondir | Kessler, Gilmore & Kronman | November 02, 2012

H2O

This is the old version of the H2O platform and is now read-only. This means you can view content but cannot create content. You can access the new platform at https://opencasebook.org. Thank you.

12.2.1.2 Notes - Muller v. Pondir

by Kessler, Gilmore & Kronman
1

NOTE

2

I. What seems to be meant by the statement at the beginning of the opinion that Pondir had acquired, as against Schepeler, "equitable title" to the bills?

3

2. If Schepeler had indorsed and delivered the bills to Pondir, Muller's equity of ownership would have been cut off, assuming that Pondir had taken the bills in good faith and without notice of Muller's claim. The transfer would then be referred to as a "negotiation" (see U.C.C. §3-202) and Pondir as a "holder in due course" (see U.C.C. §§3-302, 3-305). In the absence of indorsement and delivery Pondir did not even become a "holder" of the bills (which means that he could not have enforced payment of the bills against the obligors), let alone a "holder in due course" (I.e., a holder who holds free of equities of ownership, like those of Muller in the principal case, as well as of defenses such as failure of  consideration which may exist between the original parties to the instrument).

4

3. A basic rule of negotiable instruments law is that the only effective method of transferring a claim evidenced by an instrument negotiable in form is by the physical delivery of the instrument, together with any necessary indorsements. (On the formal requisites of negotiability see Britton on Negotiable Instruments (2d ed. 1961); Gilmore, The Commercial Doctrine of Good Faith Purchase, 63 Yale L.J. 1057 (1954).) This rule, as the principal case indicates, was firmly established at common law and has been carried forward by the codifying statutes (the Negotiable Instruments Law (N.I.L.), promulgated in 1896, was adopted in all American jurisdictions; it has now been superseded by Article. 3 of the Uniform Commercial Code). The rule applies not only to short term instruments for the payment of money (bills, notes and checks) but to long-term investment securities as well (see Article 8 of the Code).

5

At the opposite pole from negotiable instruments and securities are what the common law called "choses in action." The original common law distinction was between "things" (choses) that could be transferred by delivery of possession (chattels, negotiable instruments and the like) and "things" that, having, in fact or in law, no physical or tangible existence, could not be so transferred but that were enforceable by action at law or in equity. Claims arising out of contract or other relationships, not evidenced by a negotiable instrument or other formal writing, were choses in action. The term continues in current use, although the term "contract rights" has gained popularity as a synonym for many types of claims which the older cases called choses in action. The term "assignment" has been used for centuries to describe the transfer, whether absolute or for security, of choses in action or contract rights.

6

We must thus distinguish between claims of the negotiable instrument type, evidenced by a writing whose physical possession is essential to ownership of the claim, and claims of the chose in action or contract right type, not evidenced by such a writing. The latter type is "assigned"; the former type is "negotiated" (i.e., by endorsement and delivery). As the principal case indicates, an attempted "assignment" of a negotiable instrument is ineffective, except possibly against the transferor himself. Consider, in the light of the subsequent case material, whether Pondir might not have been better off if the security for his loan to Schepeler had been non-negotiable choses in action bought up by Muller and by him assigned to Schepeler.

7

The student should be warned that the distinction between "assignable" claims (choses in action) and "negotiable" claims (choses in possession) is not, and never has been, as neat and tidy as the preceding discussion may have suggested. There have always been claims of an intermediate class that, although the delivery of the writing evidencing the claim is looked on as having some legal or jural significance, can nevertheless be transferred by a "mere assignment" (i.e., an agreement to transfer without delivery of the writing). Thus, under Article 9 of the Uniform Commercial Code, a security interest in "chattel paper" (the term is defined in §9-105) can be "perfected" (i.e., made effective against third parties) either by delivery of the chattel paper to the secured party or by the filing of a financing statement in the public records. By way of contrast, a security interest in a negotiable instrument can be perfected under Article 9 only by delivery of the negotiable instrument to the secured party and a security interest in pure intangibles of the chose in action type ("accounts" and "general intangibles" in the Article 9 terminology) can be perfected only by filing. (For the definitions of the "pure intangibles," see §9-106, discussed infra p. 1457; for the perfection provisions, see §§9-301, 9-304(1), 9-305.) See generally Clark, Abstract Rights Versus Paper Rights Under Article 9 of the Uniform Commercial Code, 84 Yale L.J. 445 (1975).

8

4. The consideration doctrine tells us that a promise to make a gift is usually unenforceable. If the donor revokes his promise (or dies) before making the gift, the disappointed donee, except to the extent that he may be helped by the doctrine of promissory estoppel, has no recourse against the promisor (or his estate). The point in time at which a promise to make a gift of an intangible claim is to be considered as having been executed poses obvious difficulties. One instructive line of cases has to do with attempts by dying persons to make gifts of bank accounts held in savings accounts or in checking accounts. A typical savings account case is Brooks v. Mitchell, 163 Md. 1, 161 A. 261, 84 A.L.R. 547 (1932) (delivery of passbook to donee held to effect valid gift causa mortis of the money in the account). Cf. Burrows v. Burrows, 240 Mass. 485, 134 N.E. 271 (1922) (delivery of check together with checking account passbook by dying mother to daughter held not to effect a valid gift causa mortis). Why the apparent distinction between savings accounts and checking accounts? See Whitney v. Canadian Bank of Commerce, 232 Ore. 1, 374 P.2d 441 (1962); 239 Ore. 472, 398 P.2d 183 (1965), which involved attempted gifts causa mortis by delivery of passbooks of both the decedent's savings account and his checking account. (On the rule that the delivery of a check does not of itself operate as an assignment to the checkholder of funds in the bank account, see Note 5. How can a gift of a pure intangible or chose in action be made? Reread the discussion in Gray v. Barton, 55 N.Y. 68 (1873), discussed supra p. 673; see further Adams v. Merced Stone Co., 176 Cal. 415, 178 P. 498, 3 A.L.R. 928 (1917). Chase National Bank v. Sayles, 11 F.2d 948 (1st Cir 1926) contains an elaborate discussion of gift assignments that embalms much ancient learning.

9

5. There was some controversy at common law over the question whether a check drawn against a checking account was effective as an assignment to the checkholder of the money in the account up to the amount of the check. The majority common law position was that a check was not an assignment but merely a revocable order (from which it followed that the drawer-depositor could stop payment of his check at any time until the bank had paid (or certified) it). That position was codified in N.I.L. §189 and recodified in U.C.C. §3-409(1). The Code formulation is as follows: "A check or other draft does not of itself operate as an assignment of any funds in the hands of the drawee available for its payment, and the drawee [i.e., the bank] is not liable on the instrument until he accepts it." Note that the provision is that the check or draft does not "of itself" operate as an assignment. N.I.L. §189 also contained the "of itself" language. Thus the codifying statutes left open the theoretical possibility that money held in a checking account could be "assigned," rather than merely drawn against by check in the normal manner. The leading pre-statutory case on when a check could operate as an assignment was Fourth Street Bank v. Yardley, 165 U.S. 634 (1897). However, the check that was held effective as an assignment in the Yardley case was not a check drawn by an individual on his checking account; it was a "check" drawn by one bank in favor of another bank from which it had borrowed money to meet its clearing-house balances. The consequence of holding the "check" to be an assignment was that the payee-bank was given a priority over general creditors in the drawerbank's liquidation for insolvency. In recent years there seems to have been little litigation over attempted "assignments" of checking account balances.

Close

Annotated Text Information

June 02, 2014

12.2.1.2 Notes - Muller v. Pondir

12.2.1.2 Notes - Muller v. Pondir

Author Stats

Kessler, Gilmore & Kronman

Expand
Leitura Garamond Futura Verdana Proxima Nova Dagny Web
small medium large extra-large