Also known as:mercantile papers · commercial paper
Written by attorneys · grounded in primary & secondary sources — see below
Negotiable instruments such as checks and promissory notes that circulate in commerce as substitutes for money. Federal common law supplies uniform rules for such instruments when they are drawn on or payable by the United States because of the need for consistent treatment of government obligations.
Sources & Authorities
How it applies
Common Examples
6
Forged Endorsements on Relocation Checks
The Federal Housing Authority issued relocation assistance checks drawn on the United States to displaced tenants. Skyline Property Management persuaded tenants to endorse the checks over to it and deposited them at Metro Bank. Several endorsements turned out to be forged. The United States sued Skyline and Metro in federal court to recover the funds. The court applied a uniform federal standard to decide whether the bank bore the loss from the forged endorsements on these government instruments.
Insurance Association and Negotiable Instruments
The United States issued checks drawn on the Treasury to an insurance association as part of a federal program. When disputes arose over the rights of subsequent holders after forged endorsements, the court applied uniform federal common law rather than varying state rules to the government instruments.
Select any source to read its text and confirm it supports the definition.
Cases
Federal Rules
Uniform Acts
Restatements
Dictionaries
United States v. South-Eastern Underwriters Association322 U.S. 533, 558, 64 S.Ct. 1162, 1177 (1944)
Treasury Checks and Bank Liability
The United States issued Treasury checks to a contractor. Thieves forged the contractor's endorsement and deposited the checks at a local bank. The government sued the bank to recover the proceeds. The court applied federal common law to determine the bank's liability on the forged endorsements of these federal instruments.
Clearfield Trust Co. v. United States318 U.S. 363
Lottery Tickets as Commercial Instruments
The United States issued checks drawn on the Treasury to winners of a federal benefits program. When enforcement questions arose after forged endorsements, the court examined whether uniform federal standards governed the negotiability of these government instruments rather than state rules.
The Lottery Case (Champion v. Ames)188 U.S. 321 (1902)
Oil Supply Contracts and Payment Notes
The United States issued promissory notes payable by the Treasury under a federal supply contract. When the supplier sought to enforce the notes after a dispute, the court applied federal common law to determine rights on these government instruments rather than state supplementation rules.
Nanakuli Paving & Rock Sales, Inc. v. Shell Oil Co.664 F.2d 772 (9th Cir. 1991)
Demand Notes Issued by a Cooperative
The United States issued demand notes payable by the Treasury to a cooperative under a federal loan program. Investors later sued, and the court analyzed whether uniform federal common law governed the notes as government mercantile paper rather than other regulatory schemes.
Reves v. Ernst & Young494 U.S. 56 (1990)
Common questions
Frequently Asked
4
When does federal common law govern disputes over mercantile paper instead of state law?+
Federal common law governs when the paper consists of checks or notes drawn on or payable by the United States. The need for uniform treatment of federal fiscal obligations requires a single national standard rather than varying state rules.
Supporting sources
Does the fact that a federal check reaches a state-chartered bank eliminate the need for federal common law?+
No. The federal character of the instrument at issuance controls. Once the United States draws a check on the Treasury, uniform federal rules apply to its negotiation and endorsement even if later handled by state banks.
Supporting sources
What happens when forged endorsements appear on federal mercantile paper?+
The court applies federal common law to allocate loss between the United States and any depositary bank. State endorsement rules do not control because inconsistent state outcomes would impair federal fiscal operations.
Supporting sources
Can state garnishment orders reach funds represented by federal checks after deposit?+
Federal common law determines whether the checks remain immune from state creditor process. The federal interest in uniform treatment of government paper continues even after the checks enter a private bank account.
Supporting sources
664 F.2d 772 (9th Cir. 1991)Contracts
…the liberal approach toward the receipt of extrinsic evidence, in the face of the proliferation of standard form contracts and commercial paper, gives the courts a wider insight into the real intent of the parties. The district judge, “in his refusal to bar evidence of the circumstances surrounding the transaction, was applying…