CREDITORS' RIGHTS
.IN TEXAS
SECOND EDITION .
Volume 1
Eugene A. Cook
Editor in Chief
Austin
1981
Contents
Volume 1
Letter from the President of the State Bar of Texas
Preface to the Second Edition
/
/
xi
xiii
1 Ethical and Practical Considerations in
Handling Creditors' Claims / 1
Daniel I. Goldberg
2 Seller's Rights and Remedies Under Article 2 of the
Uniform Commercial Code / 19
Richard M. Alderman
3
Commercial Paper Under Article 3 of
the Uniform Commercial Code / 101
Iohn E. Krahmer
4
Bank Deposits and Collections Under Article 4 of
the .Uniform Commercial Code / 179
Iohn E. Krahmer
5 Bulk Transfers / 205
Lennart V. Larson
6
Secured Transactions
Dellas W. Lee
7 Prejudgment Remedies
Eugene A. Cook
/
233
/
343
8
Liability of Separate and Community Property
for Obligations of Spouses to Strangers / 433
W. ]. Williamson
9
Bonds and Liens on Public and Private
Construction Projects / 457
Tom D. Matthews,Ir.
vii
3
Commercial Paper Under Article 3
of the Uniform Commercial Code
JOHN
I.
II.
III.
IV.
V.
Introduction and Background
Negotiability
Transfer, Negotiation, and Holding in Due Course
Liability and Discharge of Parties
Special Procedural Matters Affecting Enforcement
of Instruments
VI. Finality of Payment or Acceptance
VII. Bibliography
E ..KRAHMER
§§ 3.01-.05
§§ 3.11-.23
§§ 3.31-.42
§§ 3.51-.57
§§ 3.61-.63
§ 3.64
§ 3.71
I. Introduction and Background
§ 3.01 Limitation on Scope of Chapter
§ 3.02 The Adoption of Article 3 in Texas
§ 3.03 The Scope of Article 3
§ 3.04 The Terminology of Article 3
§ 3.05 The Basic Structure of Article 3-An Overview
E. KRAHMER-Professor of law, Texas Tech University, Lubbock, Texas. Admitted to
bar, Iowa, 1966. Education: University of Iowa (B.A., 1965; J.D., 1966); Harvard University
(LL.M., 1967). Author, «Annual Survey of Texas Law: Commercial Transactions," 34 Southwestern Law Journal 199 (1980), and 35 Southwestern Law Journal 191 (1981); «Creditors,
Consumers, and Article 9 of the Uniform Commercial Code," 5 University of Toledo Law
Review 1 (1973); "Some Problems of Consumer Class Actions," 8 University of Richmond Law
Review 213 (1972); 1979 supplement to Vernon's Texas Code Forms Annotated, UCC Forms,
edited by F. Elliott and M. Ruud (Vernon Law Book Co., 1968); and several other articles and
books. Coauthor, "Fuentes v. Shevin: Due Process and the Consumer, A Legal and Empirical
Study," 4 Texas Tech Law Review 23 (1972). Member, Committee on Uniform Commercial
Code of the Corporation, Banking and Business Law Section, State Bar of '\exas, 1973 to
present. Selected by students as Outstanding Law Professor at Texas Tech University, 1974,
1976, and 1978.
The author gratefully acknowledges the contribution of Charles Nettles, a graduate of the
Texas Tech University School of Law, for his research assistance in the preparation of this
material.
JOHN
101
COMMERCIAL PAPER UNDER ARTICLE
3
II. Negotiability
§ 3.11 The Fonn of Negotiable Instruments Under Article 3
§ 3.12 The Requirement of a "Writing"
§ 3.13 The Definition of "Instrument"
§ 3.14 The Requirement That a Writing Be "Signed" and the Burden of
Establishing Signatures
§ 3.15 The Definitions of "Maker," "Drawer," "Drawee," "Payee," and
"Acceptor"
§ 3.16 The Requirement of an Unconditional Order or Promise
§ 3.17 The Requirement of a Sum Certain
§ 3.18 The Requirement of Provision for Payment in Money
§ 3.19 The Requirement Forbidding "Other Promises, Orders, Etc."
§ 3.20 The Requirement That an Instrument Be Payable on Demand or at
a Definite Time
§ 3.21 The Requirement That an Instrument Be Payable to Order or to
Bearer
§ 3.22 Other Matters Affecting Negotiability
(a) Seal
(b) Date, Antedating, or Postdating
(c) Incomplete Instruments
(d) Instruments Payable to Two or More Persons
(e) Instruments Payable with Words of Description
(f) Instruments "Payable at" a Bank
(g) Instruments "Payable Through" a Bank
§ 3.23 Ambiguous Tenns and Rules of Construction
III. Transfer, Negotiation, and Holding in Due Course
§ 3.31 Effects of "Transfer" and "Negotiation" Defined and Distinguished
§ 3.32 Negotiation Defined
§ 3.33 Negotiation of Bearer Paper
§ 3.34 Negotiation of Order Paper
§ 3.35 Negotiation Distinguished from Assignment
§ 3.36 Special Rules Regarding Issue, Negotiation, and Indorsement
(a) Issue of an Instrument
(b) Indorsement by Payee
(c) Signature in Ambiguous Capacity
(d) Order of Liability of Indorsers
(e) Types of Indorsement
(f) Indorsement by Wrong or Misspelled Name
(g) Indorsement by Mark or Other Symbol
(h) Forged and Otherwise False Indorsements on Order Paper
(i) Forged and False Indorsements on Bearer Paper
(j) Unauthorized Delivery of Bearer Paper
(k) Rescission of Negotiation
§ 3.37 The Holder in Due Course
(a) Importance and Characteristics
(b) General Requirements
102
Chapter Contents
(c)
(d)
(e)
(f)
(g)
(h)
(i)
§ 3.38
§ 3.39
§ 3.40
§ 3.41
§ 3.42
The Value Requirement
The Good-Faith Requirement
The "Without Notice" Requirement
Circumstances That Give "Notice"
Circumstances That Do Not Give "Notice"
Effective Date and Duration of Notice
Special Rules Preventing Acquisition of the Status
(1) Purchase at Judicial Sale
(2) Acquisition by Legal Process
(3) Purchase As Part of a Bulk Transaction
(4) Purchase of a Limited Interest
(5) Purchase from "Closely Connected" Transferor
(6) Limitation of Holder-in-Due-Course Status by State Statute
(7) Limitation of Holder-in-Due-Course Status by Federal Trade
Commission Regulation
Substitute for Holding in Due Course-The Shelter Doctrine
Substitute for Holding in Due Course-The Waiver of Defenses
Clause
The Rights of a Holder in Due Course
Burden of Proving Holder-in-Due-Course Status
The Rights of One Not a Holder in Due Course
IV. Liability and Discharge of Parties
§ 3.51 Liability of Parties-In General
§ 3.52 Contract Liability-Common Characteristics for All Types
(a) Authorized and Unauthorized Signatures
(b) Signatures by Agents
.
(c) Incomplete Instruments
(d) Negligence, Preclusion, and Material Alteration
§ 3.53 Contract Liability-The Several Types and Their Characteristics
(a) Contract of the Maker
(b) Contract of the Acceptor
(c) Contract of the Drawer
(d) Contract of the Indorser
(e) Contracts of Guarantors
(f) Contracts of Accommodation Parties
§ 3.54 Contract Liability-The Elements of Presentment, Dishonor, Notice
of Dishonor, and Protest
(a) When Presentment Is Required, Waived, or Excused
(b) Time and Manner for Making Presentment
(c) Rights of Party to Whom Presentment Is Made
(d) What Constitutes Dishonor
(e) When Notice of Dishonor Is Required, Waived, or Excused
(f) How and When Notice of Dishonor Is To Be Given
(g) When Protest Is Required and How It Is Made
(h) Evidence and Notice of Dishonor
§ 3.55 Warranty Liability-In General
103
§ 3.01
COMMERCIAL PAPER UNDER ARTICLE
3
(a) Warranties Arising upon Transfer of an Instrument
(b) Warranties Arising upon Payment or Acceptance of an
Instrument
§ 3.56 Conversion Liability-In General
(a) When Conversion Occurs
(b) Measure of Da~ages
§ 3.57 Discharge of Parties-In General
(a) Discharge by Impairment of Recourse or Collateral (Suretyship
Defenses)
(b) Discharge by Cancellation or Renunciation
(c) Discharge by Certification of a Check
(d) Discharge by an Acceptance Varying a Draft
(e) Discharge by Fraudulent and Material Alteration
(f) Discharge by Unexcused Delay or Failure To Make a Necessary
Presentment, Notice of Dishonor, or Protest
(g) Discharge by Reacquisition of an Instrument by a Prior Party
(h) Discharge by Tender of Payment
(i) Discharge by Payment or Satisfaction
(j) Discharge by Other Act or Agreement
(k) Discharge or Suspension of Underlying Obligations
V. Special Procedural Matters Affecting Enforcement of Instruments
§ 3.61 Notice to Third Party by "Vouching In"
§ 3.62 Enforcement of Lost, Destroyed, or Stolen Instruments
§ 3.63 Accrual of Cause of Action
VI. Finality of Payment or Acceptance
§ 3.64 Holders in Due Course or Others Changing Position in Reliance
VII. Bibliography
§ 3.71 Helpful References
[ Unassigned section numbers are reserved for possible use in supplementation.]
1.
INTRODUCTION AND BACKGROUND
§ 3.01 Limitation on Scope of Chapter
This chapter is generally limited to a discussion of commercial paper under
article 3 of the Uniform Commercial Code as adopted in Texas and applied
by the Texas courts. Other statutes, such as the Federal Truth in Lending
104
4
Bank Deposits and Collections Under Article 4
of the Uniform Commercial Code
JOHN
I. Introduction and Background
II. Status and Responsibilities of Collecting Banks
III. Responsibilities of Payor Banks in Dealing with Items Presented
for Payment and When Final Payment Occurs
IV. The Relationship Between a Payor Bank and Its Customer
V. Bibliography
E. KRAHMER
§§ 4.01-.04
§§ 4.11-.13
§§ 4.21-.23
§§ 4.31-.36
§ 4.41
I. Introduction and Background
§ 4.01 Limitation on Scope of Chapter and a Cautionary Note
§ 4.02 The Adoption of Article 4 in Texas
§ 4.03 Conflict of Laws Under Article 4
§ 4.04 The Terminology of Article 4
II. Status and Responsibilities of Collecting Banks
§ 4.11 Basic Rules of Handling an Item for Collection and Accounting for
the Proceeds
§ 4.12 The Duty of Using Ordinary Care
(a) Effecting Presentment
(b) Sending Notice of Dishonor, Returning Unpaid Items, and the Like
(c) Settling for an Item or Charging Back Unpaid Items
(d) Effecting Protest
(e) Notifying of Loss or Delay
§ 4.13 The Status of Collecting Banks As "Agents" and Code Limitations on
That Status
(a) Collecting Banks As Holders of Items
(b) Warranties of Collecting Banks upon Transfer or Presentment of
Items
(c) When Collecting Banks Become Accountable for the Proceeds of
Items
JOHN
E. KRAHMER-See author's biographical note in chapter 3.
179
§ 4.01
BANK DEPOSITS AND COLLECTIONS UNDER ARTICLE
4
III. Responsibilities of Payor Banks in Dealing with Items Presented
for Payment and When Final Payment Occurs
§ 4.21 Items Presented for Payment to Payor Banks
(a) The Time Frame for Payor Banks in Deciding Whether To Pay
an Item
(b) When Is an Item "Properly Payable" by a Payor Bank?
§ 4.22 Final Payment of Items by Payor Banks
§ 4.23 Charge-back of Provisional Settlements by a Payor Bank
IV. The Relationship Between a Payor Bank and Its Customer
§ 4.31 Liability of a Payor Bank for Paying an Item That Is Not Properly
Payable
§ 4.32 Liability of a Payor Bank for Wrongful Dishonor of an Item
§ 4.33 Right of a Customer To Stop Payment of Items
§ 4.34 Timeliness of Stop-Orders, Legal Process, Notices, or Setoffs
§ 4.35 Payor Bank's Right to Subrogation on Improper Payment
§ 4.36 Customer's Duty To Discover and Report Unauthorized Signatures
and Alterations
V" Bibliography
§ 4.41 Helpful References
[Unassigned section numbers are reserved for possible use in supplementation.]
I.
INTRODUCTION AND BACKGROUND
§ 4.01 Limitation on Scope of Chapter and a Cautionary Note
This chapter deals with the deposit and collection through banking channels of instruments that call for the payment of money, whether or not the
instruments are "negotiable" under article 3.1 As a practical matter, however, the vast majority of instruments hqndled by banks for collection and
payment are negotiable instruments, most commonly in the form of checks. 2
Article 4 uses the term item to refer to any instrument calling for payment
1. The requirements for negotiability appear in TEX. Bus. & COM. CODE ANN. § 3.104
(Tex. UCC, 1968). The operation of article
3 is discussed in chapter 3 of this volume.
For further reading on article 4, see generally H. BAILEY, BRADY'S LAW OF BANK
CHECKS (4th ed. 1970 & Cum. Supp. 1978);
J. CLARKE, H. BAILEY & R. YOUNG, BANK
DEPOSITS AND COLLECTIONS (4th ed. 1972).
\
180
2. Each year some 25 billion checks are
processed through banks for collection, and
it has been estimated that these checks account for 90 percent of the dollar volume of
transactions in the United States-some 5 to
6 trillion dollars. CAMBRIDGE RESEARCH INSTITUTE, TRENDS AFFECTING THE U.S. BANKING SYSTEM 132 (1976).