COMMERCIAL PAPERS MAGGS FALL 2012
Terminology
People:
 Maker; 3-103(a)(7): A person who signs, or is identified in a note undertaking to pay.
 Co-Maker;3-116(a): A co-maker is when two or more people sign the note.
 Bearer; 3-109(a)(1);1-201(a): A person who is in possession of a negotiable instrument is payable to bearer, and
can tell that it is payable to bearer b/c it will say that it is payable to bearer.
 Drawee: The bank ordered to pay the check
 Payee; 3-110(a): A person whom the instrument is initially payable to.
 Holder; 1-201(b)(21); 3-201(a): A holder is entitled to enforce the instrument and can be holder if: (1) A person is
in possession of an instrument that is payable to bearer, (OR) if it is payable to the person who is in possession of the
instrument.
o Received instrument that is not payable to you but not indorsed then not holder: If received an instrument that
is payable to the person who transferred it to you and they did not indorse it, then not a holder.
o Indorsed in blank, then holder if in possession: If it is indorsed in blank it is a bearer instrument and the
person who is in possession will be the holder.
 Owner: Person who (1) has a possessory interest in the instrument and can sue a person for conversion to get the
instrument back, and (2) has a prior possessory interest in the instrument that is stronger than the person who has the
instrument.
o Owner not necessarily the holder: Owner of instrument is not always owner and likewise, the holder of the
instrument is not always the owner of the instrument.
 Loser; 3-309(a),(b): A person who is not in possession and is entitled to enforce if: (1) the person who lost the
instrument was entitled to enforce the instrument when loss of possession occurred, (2)the person did not loose
possession of the instrument through transfer or lawful seizure, (3) possession of the instrument is not impossible
because the instrument was: destroyed, its whereabouts cannot be determines, it is in the possession of a
thief/unknown person, and it is in possession of a person who cannot be found or is not amendable to service of
process.
Actions:
 Deliver;1-201(b)(15): (1) A voluntary transfer of possession where one person delivers an instrument to another
person, (AND) (2) it is not a loss.
 Issue, 3-105(a): First delivery of an instrument by maker or drawer with the purpose of fiving rights of the
instrument to another person.
 Negotiate; 3-201(b):Means in which an instrument goes from one person to another (AND) assigning the rights of
the instrument from one person to another.
o Negotiating an instrument: (1) Payable to bearer then it is negotiated by transfer alone, (2) if lost it is
negotiated since it is just a transfer of possession (3) If payable to person then (a) transfer possession (AND)
(a) transferor indorses instrument.
 Indorse, 3-201(a), 3-205(a), (b): (1) Writing name on instrument: If the instrument a blank indorsement then it
coverts it to bearer instrument and whoever is in possession of the instrument is considered to be the holder of the
instrument. (2) Special indorsement pay to the order of an identified person signing the instrument.
 Enforce, 3-301: The person who has the right to enforce the instrument if a law suite arises.
o People with right to enforce:
 (1) The Holder: The holder of the instrument has the right to enforce the instrument when a lawsuit
arises.
 (2) Person in possession of instrument w/ rights of holder: (1) Sell to 3rd party & fail to indorse:
Sell the instrument to a 3rd, but does not indorse then the 3rd party can enforce the instrument.
 Non holder with rights of holder; 3-203: If not a holder can still get the rights of a holder
through transfer that sells you rights to be holder.
 “A mere transferee:” not considered to be a good faith purchaser for value.
 (3) A loser; 3-309: A person who is not in possession of the instrument but is entitled to enforce the
instrument. Can enforce as loser if: create an instrument bond, but this creates problems since two
people are entitled to enforce instrument.
 Transfer; 3-203(a): Delivered by a person that is not the issuer for the purposes of giving the person receiving the
instrument the right to enforcement and is not received by fraud.
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1. NEGOTIATION, TRANSFER AND ENFORCEMENT
Enforcing an instrument:
 Plaintiff must prove to enforce instrument; 3-308(b): (1) Validity of signatures, (2) right to enforce, (3)
o (1) Validity of signatures: Presumption of validity, unless denied which means that the signatures are
assumed to be valid unless evidence is introduced to the contrary. Policy not a lot of forgeries.
o (2) Right to enforce: Prove that is a holder can do this buy (1) Present the instrument, (2) present evidence
that you are entitled to have the rights to enforce the instrument if not holder, but are in possession.
Discharge:
 Discharge if: (1) make payment to person entitled to enforce the instrument; 3-602(a), except if know the person is a
thief; 3-602(e).
 If pay finder of bearer instrument then discharged: If payable to bearer then it is discharged b/c he found it and
did not steal it.
 Assignment and discharge: Payment to a person not entitled to enforce does not discharge liability except in the
states that adopted 2002 Amendment that allows discharge if pay someone formally entitled to enforce.
Presentment; 3-501:
 Presentment: Demand to pay an instrument made by: (1) showing instrument, (2) show identification, (3) sign a
receipt or surrender the instrument
 Certain contracts waive right to presentment: Fore example how mortgage notes.
 Assignment of notes and presentment: Causes potential for fraud, but UCC Amended in 2011 to combat this:
o Someone formally entitled to enforce; 3-603(b): If make payment to someone who was formally able to
enforce eth note the obligation is discharged; however, this only applies if have received adequate notification
that it has been transferred to the transferee.
 Notification adequate if: (1) signed by the transferor or the transferee, (2) reasonably identifies the
transferred note (AND) (3) provides an address at which subsequent payments can be made.
 Demand note liable on presentment if assigned; 3-503(a)(1), 3-501(1),(b)(2): If it is a note payable on demand
then not liable for it until the third party demands payment on the instrument.
o Dishonored if presented and not paid; 3-502(1)(b)(2): A note is dishonored if presentment is made to the
drawee and payment is not made one the day that it becomes payable.
Defining a Negotiable Instrument:
 Important b/c if does not meet definition it is a contract: Important in assignment disputes, b/c there is no
notification of an assignment of a K then the K is discharged; however, a negotiable instrument(not in 2002
Amendment state) does not have a notification requirement. Does not void the instrument.
 Must be negotiable at time it was made: Cannot change the rules of negotiation, it has to be a negotiable instrument
at the time that it was made.
 Negotiable instrument is; 3-104(a): (1) An unconditional (2) promise OR order, (3) to pay a fixed amount of
money(a currency).
o (1) An unconditional; 3-106(a),(b): Cannot have any condition that payment depends on, or any conditions of
payment that are not on the instrument.
 Not a condition if it is made on collateral; 3-106(b): In addition to signed note promising
collateral repayment or acceleration or b/c the payment is limited to resort to a particular fund or
source.
 No other promise; 3-104(a)(2): No other act in addition to the payment
 Demand/Definite time; 4-104(a)(2): A note is usually paid at a definite time such as once a month.
o (2) Promise OR order; 3-103(a)(12),(a)(8): A Promise is a written or assigned promise to pay money to
another by the person who is going to pay, i.e. a note. A Order is a written instrument to someone else to pay
money signed by the person giving the instrument to someone else, i.e. a check.
o (3) to pay money(a currency):
 Money; 1-201(b)(24): A form of currency that is recognized and it does not have to be U.S.
currency.
 Fixed amount(Principle); 3-112 cmt. 1: Considered fixed: The principle has to be fixed, but the
interest can be variable. Considered not fixed: A share of profits.
 Interest; 3-112(b): Interest can be stated in an instrument in a fixed or variable amount of money. If
interest rate is not express on the instrument then it will depend on the variable interest rate of the
jurisdiction.
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Payable to bearer or order; 3-108(a); 3-104(a)(i),(c) cmt. 2:
o Payable to bearer; 3-108(a): (1) Payable to bearer if: (a) says so, (b) payable to cash, (c) no identified payee.
o Order; 3-104(a): “Magic words of negotiability:” Pay to the order of unless a check then not mandatory.
 Conspicuous statement; 3-104(d): Not negotiable Can make it not negotiable by saying so on the instrument or if
not a check crossing out pay to the order to.
Holder In Due Course:
 Defenses that MAY NOT be raised against a HIDC; 3-305(a)(2),(6); 3-302(a): (1) Lack of consideration, never
received consideration or failure of consideration, (2) fraud or mistake in the inducement, (3) Claims in
recouplment;3-305(a)(3),(b), 3-302(a): A claim such a s breach of warranty, or suing someone after you purchase
something but saying that you will not pay.
 Defense that CAN be raised against a HIDC; 3-305(a)(1); 3-302(a): (1) Infancy, party is to young to make a deal,
(2) Duress, note was not properly made, (3) fraud in factum illegality in the transaction i.e. induced the obligor to sign
the instrument w/o obligor having neither knowledge nor opportunity to learn of the instruments character or essential
terms, (4) Bankruptcy.
 If a holder in due course: Take the instrument free of all claims and defenses; however, if not a holder in due course
takes the instrument subject to claims against the instrument.
 Holder in due course doctrine; 3-306;3-405(a),(b): A holder in due course purchases a negotiable instrument in
(1) Good faith, (2) for value, and (3) with out notice that an instrument is (a) overdue, (b) evidence of forger, (c)
dishonored, (d) or that there is a flaw on the instrument that competing claims or defenses.
o (1) Good faith; 1-201(b)(20): Honesty and observing reasonable commercial standers of fair dealing, i.e the
conduct of the holder comported with industry or commercial standards applicable to the transaction.
 Old definition: Pure in hear and empty head test…if you are doing something that would be
considered to be dishonest.
o (2) For value, and; Took for value if: (1) holder bought and paid for the instrument, (2) holder took the
instrument as payment for a debt, (3) holder acquired a “security interest” in the instrument, (4) given credit
in depository bank. Not taken for value if: (1) holder was given/found/stole instrument, (2) holder promise to
pay for an instrument, (3) Only partial consideration was given.
 Took for value:
 (1) holder bought and paid for instrument; 3-303(a)(1): Transfer to a bank: Customer issues
not to the merchant who sells it to the bank and gives them money.
 (2)holder took the instrument as payment for debt; 3-303(a)(3): Discharging the debt is
value: If have a debt, and give it to person to pay off debt, then the forgiveness of the debt is
value.
 (3) holder acquires a “security interest” interest in the instrument; 3-303(a)(2): A form of
collateral against a piece of property, that if you do not pay can be foreclosed on.
o Bank takes a security interest: Banks take a security interest when a check is
deposited by providing credit, or a loan.
 (4) depository banks giving value; 4-211: Bank gives credit for check immediately.
 Not take for value:
 (1) holder was given/found/stole instrument: If an instrument is a gift, lost or stolen then it
has not been given for value. Policy: does not promote transferability & encourages wrongful
conduct.
 (2) holder promises to pay for an instrument, i.e. value v. consideration/partial holder due
course status; 3-303(b), 3-302(d)+cmt.6: Value is not a promise to pay in the future value
has to be something that has already been given.
o Not value unless actually promised, so if not preformed then not value;303(b):
Consideration: Consideration means sufficient to support a simple contract, if no
consideration then it could be a defense.
o Partial consideration; 3-302(d): If an instrument is issued for a promise of
performance of the promise is due and the promise has been performed.
o (3) with out notice; 3-302(a)(iii): (1) overdue (OR) (2) has been dishonored, (OR) (3) that there is an uncured
default with respect to payment of another instrument as pat of the same services, (OR) (4) has notice of a
breach of fiduciary duty. Typical ways holder may be given notice: told that there is a claim on note, note
itself indicates that it is overdue, documents attached reveals that there is a problem, or holder has a close
connection with payee and knows business practices and under close connection doctrine has reason to know
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of the defense.
 (1) Overdue; 3-302(a)(2)(ii) OR: Passage of time or dishonored if these conditions present cannot
be a HIDC.
 Checks; 3-304(a)(2): Overdue when check is dishonored or bounces. This means that the
holder and due course but the if it is transferred to someone else that person cannot be a
HIDC. Day after they are presented
 Notes: day after they are presented; if payable on demand(demand notes) becomes overdue
after a reasonable amount of time.
o Installment notes; 3-304(b)(1): Do not have to pay it all back at once just have to
pay it on a time; if behind and do not cure then are overdue and cannot be holder in
due course, but if catch up then can be a holder in due course
 Note vocabulary: (1) default if you miss a payment then you are in default. (2) arrears how
much are behind, plus any interest or fees that you are late on the note, (3) Cure catching up
and paying all the penalties and all the arrears. (4)Acceleration If you do not cure it will be
payable all at once. (5) Period of limitations;3-118(a): Three years after the dishonored test
or ten years after the drafting of the check.
 (2) Has been dishonored, (OR) Check: Bounces and Note: presented and not paid.
 (3) uncured default, (OR): see above
 (4) notice of breach of fiduciary duty: Fiduciary duty is a special duty to a person such as a client,
an officer to a corporation, a represented person and that person steals or misappropriates something.
It is considered notice if: (1) Holder has knowledge of breach of fiduciary status; (AND) Holder
knows instrument was issued/ used for personal benefit of the fiduciary
 (1) Holder has knowledge of breach of fiduciary status; 3-307(b)(ii): Can see evidence of a
fiduciary duty written on check, i.e. pay to the order of a guardian.
 (2) Holder knows instrument was issued/ used for personal benefit of the fiduciary; 3307(b)(2),(4): Requirements:
o (1) Taken in payment of personal debt,
o (2) Taken in a transaction by the taker to be for personal benefit for fiduciary (OR)
o (3) Deposited to an account of the fiduciary as such or an account of the represented
person.
 Normal way to do this: Write a check from the trustee account after
depositing.
 Exception; 3-307(b): holder does not have notice merely b/c the person who issued the
check was a fiduciary.
Shelter Doctrine; 2-203(b)+ cmt. 2 prg. 2: If purchase from a holder in due course whether or not a negotiation
vests in the transferee any right of the transfer to enforce the instrument including any right as a holder in due course
with the exception of fraud or illegality affecting the instrument.
o Enforcing under shelter doctrine: Can be a non-holder in due course with the rights of a HIDC gives you the
instrument. Once the defenses are stripped away they remain stripped away.
o Exception; Original Buyer Rule: The original buyer cannot buy it back from the HIDC and be protected
under the original owner doctrine.
Bears evidence of irregularity to call into question its authenticity; 3-302(a)(1): Does not bear such apparent
evidence of forgery or alteration or it is not otherwise irregular or incomplete as to call into question its authenticity.
Sources of consumer protection, protecting against HIDC or the waiver in defense clause in Ks:
o (1) Self protection, exercise of care with negotiable instruments: Once sign a negotiable instrument it can be
assigned to someone else and the defenses can be stripped away.
o (2) Common law public policy doctrine; Unico: Courts will not enforce K’s that violate public policy and
many have held that a waiver of defenses in consumer contracts violates public policy.
o (3) The UCC Close Connection Doctrine: Kaw Valley; Unico: Some courts have held that you cannot be a
HIDC b/c you are to close to the financing company.
o (4) Creditor in a consumer transaction; 3-307: The creditor in consumer transaction cannot take a negotiable
instrument.
o (5) Assignor of rights subject o claims and defenses even if HIDC; 3-404: The assignee of the right of a seller
are subject all the claims and defenses form the assignor or seller in the consumer even if they are a holder in
due course.
o (6) If take note from consumer, must have a legend: It will be unfair trade practice for a merchant to take a
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note form consumer unless the note contains a legend.
o (7) Non-seller financing: It is an unfair trade practice for a merchant to take money form the consumer if the
consumer got the money from a lender. The note will contain a legend and would only be applicable if there
was a connection between the merchant and the lender.
 If does not have a legend treat it like it has a legend:3-305: If it was suppose to contain a legend and
does not it will be treated like it has a legend; only rule for 10 states, but it is also common law.
 Seller vs. non seller financing: Seller financing i.e. consumer transfers goods or services and receives financing
from banks; cannot raise HIDC doctrine. Non-seller financing: borrow on a note and then use money to purchase
goods and so can assert HIDC doctrine.
Value for deposited checks in depository banks; 4-211:
 Depository bank; 4-105(2):
o Definition: Means the first bank to take an item even though it is also the payer bank, unless the item is
presented for intermediate payment i.e. over the counter.
 Option when deposited check is dishonored and returned:
o 1. Revoke credit given to the depositor; 4-214: If the collecting bank has made a provisional settlement for its
customers items and fails by reason of dishonor or some other reason it does not get paid for the check it may
obtain a revocation of the credit
o 2. Enforce check against drawer; 3-301;4-205(a):
 a. Depository bank holder even if not indorsed: the depository bank is holder even if the check is
no indorsed.
 b. As long as merchant holder then bank holder: If merchant holder depository bank holder.
 c. As long as the bank satisfies other conditions of 3-302: Has to meet all the requirements and has
to give for value.
 Depository bank has security interest in check: for the purpose of determining a banks status as holder in due
curse it has given value to the extent that it has a security interest in the check.
o 1. Security interest created when gives value for check; 4-210(a)+(b)[FIFO]: To the extent to which credit is
given for the time by the bank has been withdrawn the customer or applied by the bank to pay off the debt of
the customer.
o 2. First-in-first out: Credits first given are the first with drawn: If you put in $100.00 and another check in
for $100.00 and then with draw $100 then you are not given credit.
Plaintiff’s Argument
1.Plaintiff defendant failed to pay
4. Defense/Claim of recoupment is invalid
Defendant’s Argument
2. Plaintiff is not entitled to enforce
3. The instrument is subject to a defense/claim of
recoupment
6. Plaintiff is not a HIDC
8. Consumer laws perceive defense/claims in recoupment.
5. A HIDC is not subject to the defense/ claim
7. Shelter doctrine gives me HIDC rights
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2. LIABILITIES OF PARTIES ON CHECKS AND NOTES
Liabilities for Parties on Negotiable Instruments:
 Maker; 3-412: If you sing the note as the marker you are liable
 Co-Maker; 3-116(a): (1) except as otherwise provide by the instrument if two or more people indorse as makes then
they are both jointly and severally liable. (2) if you pay more than your share you can recover form the co-maker in
contribution.
o 2.Contribution: If pay more than fair share then the other parties that you are co-makers will have to
contribute.
 Drawee of check:
o 1. Ordinary Checks; 3-413(a) , 3-409(a),(d): (a) not liable if not accepted, but if accepted then liable to pay on
the terms of the draft.
 2. Accepted: Acceptance is a technical agreement to pay the check that may be indicated by (1)
signed agreement
o 2. Certified Checks; 3-409(d): (a) check certified when by the bank from which it is withdrawn (b) drawee is
liable once the check is certified and payee would have to indorse, (c) when the bank certifies a check they
take the money out of the makers account immediately.
o 3. Wrongful dishonor; 4-402(d): Drawer can pay the drawee for wrongful dishonor and the payor bank would
be liable for proximate cause damages caused by the wrongful dishonor.
 Drawer of Checks:
o A. Ordinary Checks; 3-414(b): If a check is dishonored then drawer is obliged to pay according to the terms
that it was issued.
o B. Certified Checks; 4-414(c): (1) The drawer is discharged regardless by who or when acceptance is
obtained, (2) the drawer is not liable b/c the bank guaranteed payment and took it out of the drawers account
and the drawer should not be liable twice on the check.
o C. Insolvent Drawer: If the drawer is insolvent can go after the indorser.
 Indorsers of a note or check:
o 1. Liability;3-415(a): If an instrument is dishonored an indorser is liable to pay the amount on the instrument
at the time it was dishonored
o 2. Can sue up chain of indorsers: Can try to recover up the chain of indorsers until get back to drawer if
cannot recover.
o 3. Indorser Limit Liability on Instrument: An indorsement written “without recourse” written on it or
otherwise disclaims liability of indorser then they are no liable to pay the instrument.
 Implication: If sign with out recourse it means that the indorser is signing the instrument to
negotiate it and are not accepting liability on it and this way they will not come after you if the drawer
is unable to pay.
o 4. 30 day discharge exception; 4-415(e): If it takes more then 30 days to present the instrument for payment
to the drawer then the indorser is discharged.
 Transferor of note or check for consideration:
o A. Transfer Warranties; 3-415(a): When a transferor sells the negotiable instrument have transferred
warranties that the instrument has certain properties.
 A person who takes value and transfers an instrument warrants the transferee and any
subsequent transferee:
 1. The transferor warrants that he or she is the person who is entitled to enforce the
instrument.
 2. All the signatures are authentic and authorized,
 3. The instrument has not been dishonored,
 4. There are no claims in recoupment
 5. No insolvency proceedings,
 6. It was authorized by the account for whom it was drawn on
o B. “With out Warranties” exception for notes; 3-416(c)+cmt. 5:
 Does not apply to checks: Cannot disclaim warranties on checks
 Only on notes; 3-416: Disclaimer of warranties must be expressed with words, such as stating
“without warranties.”
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C. Damages for breach of warranty; 3-416(b):
 1. extent injured, not more than instrument: Can recover to extent injured, but not more than
instrument.
 2. The amount that the holder is out b/c the maker has a defense:
 a. If HIDC: Enforce as a HIDC against the maker
 b. If not HIDC: Can recover from payee for breach of warranty
 c. Breach of warranty up chain of indorsers: can always recover for breach of warranty from
prior transferor if the instrument is for consideration and if it is indorsed b/c all of the prior
transferors have breached.
Cashiers and Teller’s Checks/ Checks Sold By Banks:
 Cashier’s check; 3-104(g): A check drawn on the bank itself and so the bank is both the drawer and the drawee
 Teller’s checks; 3-104(g): Draft drawn by bank on another bank or through another bank.
 Money orders; 3-104+cmt. 4: In most banks it is like a checking account with only a single check so when the banks
sell you a money order it is treated just like a person check, but the account is opened for just that check.
 Payee’s of instruments sold by banks:
o 1. Payerr v. Remitter; 3-103(a) (15); 3-201cmt 2 last sentence:
 Payee: Person who the check is payable too
 Remitter; 3-103(a)(15): A person who purchase the check from the issuer is payable to a person is
payable to a person other than the purchaser.
 Ownership; 3-201 cmt. 2: The remitter is the owner of the check until the check is
transferred to the seller
 May not get your money back with these instruments: If you buy a cashier’s check it is not
clear that you can get your money back.
The Merger Doctrine:
 The Merger Doctrine: When an instrument is take for an obligation, the underlying obligation is suspended or
discharged and the only rights are on the instrument.
 Ordinary Checks; 3-310(b)(1)(3): It taken for an obligation, the obligation is suspended unless the check is
dishonored then there is liability on the underlying obligation.
 Bank Checks; 3-310(a):
o 1. Obligation is discharged if accepted: Unless agreed to otherwise if a bank check is taken for payment then
the obligation is discharged to the amount the check is for.
o 2. Cannot enforce instrument against the purchaser only bank: can only enforce against the bank and not the
buyer duty to the merger doctrine because once you provide the bank check it is like you are paid with cash
and the underlying obligation is discharged.
o 3. Protection to seller: (a) If the remitter indorsers then can enforce against indorser, (b) Depository
insurance, the banks are insured.
Stopping Payment and Asserting Defenses:
 Stop payment on checks:
o 1. Drawer’s right to stop payment on checks; 4-403(a)+cmt. 1:
 The right to stop payment: A customer or any person authorized to draw on their account may
authorize a stop payment if the instrument can be identified and the stop payment can be executed in
a reasonable period of time.
 Procedure for stopping payment: (a) describe the check with reasonable certainty, (b) have the
check number, (c) are able to give notice before the check is submitted for payment, (d) usually have
to pay a fee to the bank.
 Liability:
 (1) Drawer’s continued liability on checks after stopping payment; 3-414(b):
o Liability: If an accepted draft is dishonored the drawer is obliged to pay the draft on
the terms that it was issued.
o After payment is stopped: (1) the payment being stopped has no liability on a
check, (2) the dishonoring of the check makes you liable on the check.
 Benefits and risks to drawer:
 Benefits: Gives the drawer leverage since it becomes the payee’s burden to bring a case
against the drawer to get the money back, which means that the drawer does not have the
bring a suite after paying the check, i.e. shifts the burden on brining the action.
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Risks of cancelling checks:
o Can ruin drawer’s credit: The payee can ruin the drawer’s credit by sending a
credit agency after the drawer or may file a credit report that would appear to anyone
who the drawer sought credit from.
o Criminal liability: If a drawer knowingly issues a check and plans on stopping
payment on the check it can result in criminal charges. If a drawer does not pay a
check; could go to the court house and file a complaint
 Drawee’s bank failure to stop payment; 4-401(a):
o 1. Cannot charge account; cf 4-401(a): The bank cannot account b/c the bank can only charge the drawer’s
account for a check that is properly payable form the account where the drawer is an authorized customer.
o 2. Liability to the drawer for damages; 4-403(c)+cmt. 7:
 Bank: The Bank would be liable for damages
 Burden on customer to prove: (i) difficulty to do since the payment from usually waives liability,
the stop payment order usually waives liability, but (ii) but UCC has said that these are not valid;
however, the waivers appear on every stop payment form.
 Stopping Payment on Bank Checks:
o 1. Bank has no duty to honor a customer’s stop payment request; 4-403 cmt. 4:
 Can stop payment if drawn on your account: A customer or any person who draws payment on
own account can stop payment on any check drawn on the account.
 Bank issued check are not drawn on drawer’s account: Since cashier or teller checks are not
drawn on the customer’s account there is no right for a customer to stop payment on the instrument if
tis drawn on another account.
o 2. Liabilities:
 Bank can only assert its own defenses and not that of customer; 3-305(c): In general can only
assert your own defense in action to enforce the obligation to pay an instrument cannot assert a
defense, claim or recoupment or the claim of another person.
 If pays then discharged; 3-602(a): If the bank pays then the bank will be discharged.
 Liability for wrongful refusal to pay: If the bank refuses to pay then the bank will have to pay
consequential damages, attorney fees and the obligation under the check.
 Bank’s liability on bank checks:
o 1. Buyer’s right to rescind negotiation to teller; 3-202(b); 3-606: sue the seller to get the check back
o 2. Banks will not let a customer purchase a cashier’s check on a personal check; 3-411: If bank refuse to pay
on the account then the bank has its own defense because the bank would be defrauded into paying the check
if the personal check bounced and if the bank refused to pay the bank would be liable.
o 3 If the bank wrongfully refuses to pay a cashier or teller check it would be liable under; 3-411: (a) if the bank
can raise its own defense, he refusal to pay is not wrongful, (b) defense my be stripped away if payee
becomes a HIDC.
Lost Instruments:
 In Situations where a check is lost:
o 1. Ask issuer to re-issue the check voluntarily: most disputes are probably resolved by asking the issuer to
reissue the check.
o 2. Not everyone actually does this: The problem with just reissuing the check is that if someone finds the
instrument they could be a HIDC.
o 3. Enforcing the instrument as a loser;3-301(iii); 3-309(a):
 A loser can enforce an instrument; 3-301(iii): One of the people who are entitled to enforce an
instrument is a loser.
 Protection of maker of an instrument that is lost:
o 1.Creation of risk by paying a lost instrument: The payee incurs risk if pays an instrument which is lost or
stolen b/c if found it could always be enforce.
o 2. Requirement of adequate protection; 3-309(b):
 Prevents risk of double liability to payee: If the loser wants to enforce they have to be provided
adequate protection against the risk of double liability.
 Methods of providing adequate protection:
 A. Lost instrument bond’s formal requirements:
o 1. Give check number,
o 2. Date of check
8
o
o
3. The instrument bond costs about 2% to 5% of the actual instrument
4. No guarantee that they will sell it to you, usually will run a credit check
beforehand.
 B. Why would a maker require a lost instrument bond: If the instrument is found that the
maker will not be liable to double liability.
 C. If the bond company has to pay will subrogate against loser: The bond will pay out and
then will go after the looser in order to recover the money the bond company had to pay to
the maker.
o 3. File a “declaration of lost (for lost bank checks); 3-312(a)(3):
 An affidavit stating that payee is a loser: An affidavit that say payee is a loser and that the payee
lost the instrument and cannot get it back.
 90 days waiting period and then pay; 3-312(b)(1)-(4): For the first 90 days the declaration of loss
has no effect, but if the claim becomes enforceable before the request for payment then the bank will
pay the instrument and will be discharged.
 HIDC can go after the person who filed the declaration of loss; 3-312(c): If the loser is paid then
the bank will be discharged, but if a HIDC tries to enforce the instrument the HIDC will force against
the person who filed the declaration.
 However if the loser indorses the instrument no one lese can be HIDC: if not indorsed by
payee and then lost the person who finds it cannot negotiate to a HIDC
 General note on the effectives of this provision: (1) will not help if a HIDC appears to enforce or
(2) before the 90 day period, (3) however if the instrument is not indorse by the payee, then if loss no
one can show up and enforce it as a HID
Accommodation Parties:
 Co-parties on notes: Lenders would like to have other people who will promise to pay the instrument, e.x. parent cosign on car.
o Anomalous indorser(Co-indorser; 3-205(d)):
 Liability to holder; 3-415(a); 3-116(a):
 Co-indorsers: The parties are liable as co-indorsers
 The purpose of co-indorsing is to incur liability; 3-205(d): An indorsement made by a
person who is not a holder of an instrument and does not effect negotiation. It is is the
opposite of a negation without recourse. It is an indorsement that is intended to take on
liability.
 If dishonored anomalous indorser is liaible;3-415(a): the anomalous indorser is liable.
 However, anomalous indorser can go after maker; 3-412:
o The indorsers are joint and severally liable: If two or more persons having liability
on the instrument then are joint and severally liable.
o If one party pays entire debt then can receive contribution: If one party pays the
entier amount the parties can receive contribution from the other parties.
 Contribution: Co-indorser is liable to the oblige for the full amount, but
then if you pay more than your fair share can recover from anyone else that is
liable up to their fair share.
 Cannot get back more than fair share: Cannot get back more than fair
share.
o Accommodation Co-makers; 3-419(a)+cmt. 1:
 Liability to holder: 3-419(a):
 A party becomes an accommodation party by: (a) the instrument issued for the value of
another party (b) the party signs it for the purpose of incurring liability on the instrument, and
(c) the party is not benefitted from signing the instrument.
 Jointly and severally liable to holder: Accommodation parties are jointly and severally
liable to the holder.
 Entitled to reimbursement for accommodated co-makers: The accommodation party who
pays the instrument is entitled to reimbursement from the accommodated party and to enforce
it against the accommodated party.
 Right of contribution from other accommodated parties;3-116: Everyone who sings in
the same capacity is joint and severally liable and can recover up to their equal share from the
9
other party.
 Acquisition of holder’s security interest; 3-419 cmt. 5: Accommodation party once pays
the obligation is entitled to enforce the instrument against the accommodated party and get a
security interest against the accommodated party.
Signatures in a representative capacity:
 Liability for signatures when signing in a representative capacity:
o If can bind on contract can bind on negotiable instrument if the person has the authority to bind the
corporation on a contract then has authority to bind on a negotiable instrument.
o If bound then there is liability: If the agent is capable to bind the principle then a plaintiff can sue the principle
on the instrument.
 Singers actual/ apparent authority; common law:
o Duty can be found in the bylaws of the corporation: the authority to bind parties on contracts can be found in
the bylaws of the corporation.
o Apparent authority: Principle acts as if the agent has actual authority to third parties
 Demonstrating agency
o
Agency shown unambiguously; 3-402(b)(1)+cmt. 2: If it is shown that an agent is unambiguously signing in
a representative capacity on behalf of a represented principle then the agent is not liable.
o If not unambiguous; 3-402(b)(2):
 Agent liable: If the form of the signature is not unambiguous the person is liable on the instrument if
(a) liable to a holder in due course (b) liable to others who are not holders in due course(listed below).
 Liability to a holder in due course: If do not have notice that the party did not intend to be
liable on the instrument the agent will be liable to a holder in due course.
 Liability to those who are not holder in due courses: If not a holder in due course have to
prove that it was signed in a representative capacity.
 Suggested ways to sign an instrument:
o Recommended: (a) Name of corporation, (b) By, person who is signing, position of person who is signing.
o Not liable if signature is not exactly as suggested in cmt. 2: (a) do not need to include title, ie. Courts say that
he maker who is signing in a representative capacity does not have to include title, (b) ½ cases do not need to
included company when signing on behalf.
o If sign incorrectly could be liable as a co-signer: In some cases have found agent liable as a co-signer
o Defending against a HIDC: An agent can defend against a HIDC if the HIDC has notice that the agent was
signing in a representative capacity
o If not defending against a HIDC: If not defending against a HIDC then signing in a representative capacity
would be a defense.
 Exception for checks if check is on pre-printed form: 3-402(c): Not liable if (a) have authority to sign, (b) are
signing in a representative capacity, (c) the check is on a pre-printed form that indicates that is there check
Accord and Satisfaction:
 Why make an accord and satisfaction: It is either and more advantageous than litigating.
 Accord and satisfaction is a settlement: If a person settles a contract for an accord and satisfaction then the parties
have given up their claims for consideration and the underlying claim is discharged.
 Four requirements for discharging a claim in accord and satisfaction; 3-311(a),(b):
(1) Good faith: Person acted in good faith and full satisfaction of claim
(2) Amt. in dispute: The claim is disputed, the amount is not liquidated and is subject to dispute
(3) Claimant received payment: claimant received payment for the claim, AND
(4) Conspicuous statement: The document has a conspicuous statement that it was meant for satisfaction, i.e.
“payment in full”
 Accord and satisfaction on checks:
o “Payment in full” checks: To settle a claim a person can put “payment in full satisfaction” on the back of the
check.
 EXCEPTION: If an unknown creditor; then will not be taken in accord and satisfaction:
o Dispute offices; 3-311(c):
 Have to notify in advance that settlement has been sent to office: The office has to be notified and
the settlement has to be sent to a designated office or place.
 If the office does not wish to settle: If the office does not wish to settle; the instrument has to be
returned or destroyed.
10
 If cashes then settled: If the office cashes the instrument then it is settled.
Policy: Some business that receive thousands of checks and are concerned about accidently
processing a check b/c it says “payment in full” on it. This would be unfair.
o Repayment in 90 days; 3-11(c)(2): if accidently accept and return in 90 days then the accord and satisfaction
can be undone.
 Exceptions to the exceptions; 3-311(d):
 If know taken in accord and satisfaction 90 day exception does not apply: If a person
took the check and knew that the check was being tendered in full satisfaction then the 90 day
exception does not apply.
 There has to be more then just notice: The person has to know, i.e. more than just notice
that the instrument is taken in full accord and satisfaction of the claim.
Ineffective attempts to discharge:
o Crossing out “payment in full” is an unauthorized alteration and has no effect on the check; 3-407(b): An
alteration fraudulently made on the check will have no effect and if the payee pays the check it will discharge
the obligation on the check.
o Reserving rights; 1-308(b):
 Cannot reserve rights on the back of checks: This does not apply to the accord and satisfaction
cases
 Just return if do not want to settle: if do not want to settle just return the check.


11
3. THE CHECK COLLECTION SYSTEM
Settlement on checks; 4-104(a)(4):
 Needed for payment: Settlement is essential for payment for an item.
 Occurs at a clearing exchange/ intermediary bank: Both banks will have accounts at the bank and will credit and
debit each others accounts.
 Settlement can be provisional or can be final: (a) Provisional- each settlement that occurs at the clearing house for
checks are provisional and can be undone if one of the parties decides to revoke repayment, (b) Final- At the midnight
deadline the settlements become final.
Midnight deadline; 4-104(a)(10):
 Marks the cut off to revoke settlement through the check collection system: The midnight deadline is the
following banking day after the bank has received the check. This means that all the debiting and crediting freezes up
at the intermediary bank.
 The midnight deadline is a strict deadline: It has to be sent in the mail at 11:59 and 59 seconds in order not to miss
the midnight deadline
 Excuses for missing the midnight deadline; 4-109(a):
o The bank are excused for things that are beyond the bank’s control such as: (a) interruption in
communication systems, (b) computer malfunctions, (c) failures of equipment, (d) war.
 Banking hours:
o Both depository and payor bank establish banking hours: Depository and payor bank have to process a large
amount of checks and therefore the banks are allowed to cut off their banking hours at a particular time.
o The rules regarding when banking hours can be set:
 2 p.m. or later: A bank may set it banking day to end at 2 p.m. or later and if it misses this deadline
then it is received on the following banking day.
 Federal Reserve banking hours are 24 hrs a day: The federal reserve is open 24 hours a day for
processing checks b/c there is no cut off and so the banking day ends at midnight.
Depository Bank Midnight deadline:
 Crediting customer’s account for deposited check:
Check Type:
Low risk/ 1st $100

Very low risk that these types of checks will bounce such as:
o
Checks drawn on treasury of U.S.
o
U.S. Postal service money orders
o
A check drawn on a Federal Reserve bank
o
A check drawn on unit of state or federal
government.
o
Teller check
Local

Checks that are served on the same processing center; that is the
same branch of the federal serve.
o
See 229. (m), (r), (s):

There are no more local checks
since all checks are drawn on the
same branch of the federal reserve.
Non-local

Checks that are on a different processing center; but these no
longer exist since there is only 1 Federal Reserve bank.
Exceptions:

New accounts:
o
Creating a new account and not having credit
could force the person to wait for a reasonable
amount of time.

Large Deposits:
o
Does not to apply to amounts which are in the
aggregate for than $5,000 in a banking day.
o
The first day have to give 100 and the next day
have to give $4,900, but can wait for a reasonable
amount of time to give the rest.
Availability
1-day(M-Tu)
Reg. CC
228.10(c)(i)-(vi)
2-day (M-W)
229.12(b)
5-day (M-M)
229.12(c)
Reasonable Period
229.13(b)-(f),(h)(2)
Revoking credit from a customer’s account:
Check Type:
Availability
Low risk/ 1st $100
1-day(M-Tu)
 Very low risk that these types of
checks will bounce such as:
o Checks drawn on treasury of
U.S.
o U.S. Postal service money
orders
Reg. CC
228.10(c)(i)-(vi)
12
o
o
A check drawn on a Federal
Reserve bank
A check drawn on unit of
state or federal government.
Teller check
o
Local
2-day (M-W)
229.12(b)
 Checks that are served on the same
processing center; that is the same
branch of the federal serve.
o See 229. (m), (r), (s):
 There are no more
local checks since all
checks are drawn on
the same branch of
the federal reserve.
Non-local
5-day (M-M)
229.12(c)
 Checks that are on a different
processing center; but these no longer
exist since there is only 1 Federal
Reserve bank.
Exceptions:
Reasonable Period
229.13(b)-(f),(h)(2)
 New accounts:
o Creating a new account and
not having credit could force
the person to wait for a
reasonable amount of time.
 Large Deposits:
o Does not to apply to amounts
which are in the aggregate for
than $5,000 in a banking day.
o The first day have to give 100
and the next day have to give
$4,900, but can wait for a
reasonable amount of time to
give the rest.
 Revoking credit with out liability; 4-214(a): can revoke without liability if:
(1) Did not receive final payment: If makes provisional settlement with customer for an item and fails to receive
settlement with a customer for an item that does comes final. The depository bank may revoke and get credit or
get a refund
(2) Bank has until midnight deadline to revoke: The bank has until the midnight deadline to revoke settlement or
notify the payee that it is going to revoke settlement.
(3) EXCEPTIONS: bank has until midnight deadline or until a reasonable time:
o Can go pass deadline: Can go pass midnight deadline to revoke settlement or notify the payee that it is
going to revoke settlement.
 Liability for late revocation; 4-214(a): (1) can go past midnight deadline but the bank is liable for any losses
resulting from the delay, (2) would just be liable for damages caused by missing the midnight deadline and not liable
for the entire check.
Payor’s Bank Midnight Deadline:
 Right to return check: 4-301(a):
(1) Midnight deadline; 4-104(a)(1): May revoke the settlement if the bank does so before the midnight deadline, but it
has to send a notice of dishonor or an image of a check.
o Does not matter when it decides to dishonor: The bank just has to dishonor before the midnight deadline.
(2) Accountable if not returned; 4-302(a)(1):
o Has to be in the outbox b/f the midnight deadline: The check has to be in the outbox by the midnight
deadline and sent by a courier or some expeditious form of mail.
13
o
o
If not sent back by midnight deadline then liable: Becomes liable if do not meet midnight deadline.
Simply missing midnight deadline does not rob payor bank from recourse:
o Can go after drawer: The payer bank is in possession of the check and can enforce it, however just
cannot send it back through the federal reserve system
o Can go after the indorser: Can go after also the indorsers of the instrument.
(3) Unavoidable delay; 4-109(b): (a) if acted diligently in light of the delay then there will be some flexibility, (b) the
standard is pretty high and it cannot be a result of normal problems.
 Expeditious return requirement:
(1) The 2 day/ 4 day test; 222.30(a)(1): MW; MF:
o Expeditious manner: A check is considered to be returned in an expeditious manner if a check is sent in a
method that would get it back to the center in a period of time that would ordinarily take for the check to get
back by. Does not specify method but just ahs to get to the place during the time limit.
o Local checks: 2 day requirement has to be returned by the end of the second banking day
o Not local checks: If not a local check, by the end of the fourth banking day.
o Midnight deadline is just an outbox requirement: The midnight deadline is the time limit where it has to
be dispatched to the check collection center.
(2) Forward collection test; 229.30(c):
o If dishonored check sent through check collection system expeditious: If a tape skirt is added to the check
and the check is processed through the check collection system the accounts would be debited and credited
very quickly.
o This would be fast enough: This would conform with all of the deadlines.
(3) Midnight deadline extension: 229.30(c):
o Possible 1 day extension:
 If miss deadline but get it back faster then would have if did not: In certain circumstances want to
return check b/c the midnight deadline has been missed there is an exception if it can be returned to
the depository bank faster then if it had met the midnight deadline.
 If get back same day b/f depository bank closes: can miss the midnight deadline if get back before the
bank closes.
o Relationship to UCC Midnight Deadline:
 Midnight deadline still applicable w/ exception to extension: If miss deadline then still accountable
 If make midnight deadline, but not expeditious return then liable: If make the midnight deadline, but
the method of return is not expeditious then are liable.
(4) Notice requirements for checks greater than $2,500; 229.33(a): If the check is dishonored for over $2,500 have to
call the depository bank by 4 p.m. the following day and tell them that the check is going to be dishonored.
Check Encoding:
 MIRC Codes: Magnetic Code so the check can be paid by a machine. The meaning of the codes that appear on the
check in order: (a) Payor bank #: Zip code and region, the bank, where to pay the check, check account number,
check number (b) Added later: the amount the check is encoded onto the check.
 Encoding problems:
(1) Contradictory Terms; 3-114:
o Written trumps numbers: If there are two conflicting terms on the check the written words will trump the
numbers.
(2) Encoding mistakes; 4-209(a),(c):
o Mistakes do not effect the amount of the checks: An encoding mistake does not change the amount
remains what the marker intended.
o Miscoding mistakes may breach encoding warranties:
(1) A person who encodes a check warrants to any subsequent bank that the information that the information
is correctly encoded.
(2) If a customer encodes then the depository bank as a result also makes an encoding warranty.
(3) DAMAGES: If there is an encoding mistake then may recover from the person who caused the breach of
warranty.
(3) Types of encoding mistakes and remedies:
o Under-encodingMistaken Payment: If the check is encoded for less then the drafter intended then it
could result in a mistaken payment.
 REMEDY: The bank that has made the error has to give back that amount that is owed.
o Over-encoding Wrongful Dishonor: If over code the check it may be wrongfully dishonored or if had the
14
money in the bank. An excessive amount of money may be with drawn from the account.
o REMEDY: The drawer has an action for wrongful dishonor and should be compensated
Check truncation, Electronic Presentment, and Conversion to Electronic Transfers:
 Check truncation: Check is destroyed after deposit and is converted into a electronic image.
 Before Check 21 Act; 4-110(a)+cmt. 2: (a) Payor bank had to agree to accept electronic presentments, and (b) when
it was converted it had to be an image of the instrument or an image describing the instrument.
 Check 21 Act, no consent needed; 12 U.S.C. 5002(16); 5003(a):
(1) May print electronic checks as substitute: Banks may print substitute checks from images with no consent
necessary from the banks. So it can go through the check collection system in an electronic form and can be
printed out if needed
o Print if need to enforce: If need to enforce the check in litigation usually have to have the check printed out.
(2) Reproduction must contain; 5002(1): Images of (a) front, (b) back, (c) MIRC line.
(3) Consent of the bank/ people is not required; 5003(a): No agreement necessary as long as warranties are mad
15
4. FRAUD AND FORGER IN CONNECTION WITH CHECKS
Types of forgeries:
 Forged Signature Problems; 4-403(a):
o Forged Check: Refers to a check with a forged drawer’s signature, i.e. write yourself a check on stolen
instrument. If printed forged.
 Enforceable: 3-403(a): An unauthorized signature is ineffective except as the signature as the
authorized signer in favor of some one in good faith who takes the instrument for value.
 Can recover for transfer warranties (not presentment): Since it is enforceable can sue up the
chain of endorsements to the forger i.e. that all signatures are authentic and authorized
o Forged Indorsement: Sign indorsement on back of check that is forged so that the check can be cashed
 NOT enforceable: 3-403(a): The check if fraudulently indorsed is not sufficient to allow the bank to
enforce the instrument against the forger.
 Can recover from the depository bank for breach of presentment warranties: The depository
bank is not someone who is entitled to enforce and therefore breach presentment warranties.
 Altered Check; 2-208(a)(2): If part of the check is altered like a name or some quality
o Liability: The depository bank is liable because it warrants that the check has not been altered.
 Not effective against the victim: The instrument can be enforced against the forger but not the victim.
Payor Bank’s Right to Charge Customer’s Account:
 Properly payable rule; 4-401(a): Can charge check if properly payable and it is properly payable if it is authorized,
even if it creates and overdraft.
(1) Authorized: Authorized by the customer and is in accordance with any agreement between the customer and the
bank.
(2) Not properly payable if: Has a forged indorsement OR a forged drawer’s signature
(3) If a lost check: Write a note to the bank and tell them that it is a loss or stolen check and if the check shows up the
bank cannot pay it b/c it is not properly payable.
 Exceptions:
(1) Negligence: 3-406(a),(b); 3-309(a)(9):
o If contributed to forgery; cannot raise forgery as a defense: May be precluded form asserting that a check
is unauthorized if negligence contributed to the making of the forged drawer or forged indorsement signature.
(2) Reporting Delay; 4-406(c), (d)(1) &(2), (e):
o Bank has a duty to provide customers with monthly statement;4-406(a): The bank has a duty to provide
the customers with a monthly statement and must provide the customer with enough information regarding
the account so the customer could make a determination that certain charges were unauthorized.
o Customer reporting delay; 4-406(c):
o Customer’s have a duty to examine monthly statements: Customer has a duty to look at month
statements and search for charges that are not authorized. If a charge is unauthorized the customer has
a duty to promptly report it to the bank.
o If not this may give the bank a defense: If the bank can prove a provable loss then it may give them a
right not to reverse unauthorized charges
(3) Provable Loss; 4-406(d)(1):
o If delayed reporting after receiving statement, and provided statement then bank could charge account
if: If the bank can prove that a delay in reporting caused the loss then customer would be precluded from
saying that the charge was unauthorized.
o This defense is never usually successful: Never works in practice because the bank cannot usually prove
that they could have recovered them in time. This is b/c the statement are sent out once a month.
(4) Same Wrong doer; 4-406(d)(2):
o If multiple forged checks are drafted by same forger then more likely that there is provable loss:
Customer who is the victim of repeated forgers by the same culprit and does not report it will be precluded for
asserting lack of authorization as a defense if does not report it in a reasonable time.
o Same wrongdoer rule does not apply to the first transaction: The bank cannot assert this defense on the
first transaction.
o Will be precluded for asserting defense on any transaction b/f giving notice of forgery: The victim will
be precluded from asserting defenses of non-authorization to anything that is unauthorized before they gave
notice to the bank.
16
(5) One year rule; 4-406(f):
o Customer has one year to tell bank check is unauthorized or loose defense: Have to tell with in one year
that the check is unauthorized or loose the ability to assert a forgery.
o Clock starts when statement of account is sent: The one-year clock starts ticking on the one year rule
when the statement is sent out.
o Most banks contract this agreement to be 60 days or less: Banks can shorten the one year rule when
customers form relationship with the bank.
 Exceptions to the exceptions:
(1) Bank Negligence: 3-406(b); 3-103(a)(9); 4-406(e):
o Loss Sharing; 3-406(b): The loss will be divided between the bank and the customer to the degree which the
parties are both responsible.
(2) Bank does not have to inspect each check; 3-103(a)(9):
o Bank does not have the duty to inspect every check: Reasonable commercial standards does not require the
bank to examine the instrument unless absence of checking varies form normal procedures from other banks
in the region.
o Most modern forgery detection efforts are by computer: Humans rarely ever manually inspect
instruments.
o Not negligent if follows reasonable commercial standards: Banks are not negligent if banks follow
reasonable commercial standards of other banks in the region. Most banks will not provide this type of
information to the public or experts.
(3) Payor banks has right to subrogation; 4-407(2): If the bank accidently pays after stop payment or for some other
reason it can step in the shoes of the payee or holder and have the right of the payee to subrogate any claims.
Other Bases of liability:
 Presentment warranties:
(1) Breaches b/c warrants that if makes present are entitled to enforce; 4-208(a)(1); 3-417(a)(1):
o Depository bank makes them to the payor bank: Person presenting warrants that they are someone who is
entitled enforce the instrument.
o Instrument is not altered: The presenter instruments that it is not altered subsequent to being drawn.
o No knowledge of unauthorized signatures: Do not know that the instrument contains forgeries.
(2) Depository bank bears the loss; 4-208(a)(1):
o Depository bank liable: If there is a forged indorsement then it breaches the presentment warranty and the
payor can push the liability back on the depository bank.
o Depository bank is liable because: The depository bank is not someone who is entitled to enforce the
instrument and therefore violates the presentment warranties.
 Payor Bank Restitution; 3-418(b):
(1) Restitution for mistaken payment: 3-418(b): The bank cannot charge back the customers account to get money
back but can try to go after the person who was wrongfully paid for restitution.
(2) EXCEPTION;3-418(c): Cannot take restitution from someone who takes the check in good faith and for value.
So for a forged indorsement/drawer signatures payor bank cannot depository bank for restitution. Policy: It is
incumbent on the plaintiff and not the defendant to inquire to see if the drawers signature is valid when the drawer
is paying the signature.
Conversion and Related Problems:
 Can bring suite for breach of transfer warranties:
(1) Transferor warrants that all signatures are authentic and authorized; 4-207(a)(2); 3-416(a)(2):
o A person who transfers warrants: A person who transfers warrants to the transferee that the signatures are
authorized, and a forged check breaches this warranty.
o Can recover from any previous transferor: Can recover any person up the chain of transferors.
o Note: When given to payor bank for payment it is a presentment and not transfer.
(2) Entitled to enforce; 4-207(a)(1); 3-416(a)(1): may sue any other indorsers b/c can enforce the instrument against
the forger
 Conversion; 3-420(a):
(1) If stolen payee can sue for conversion: If a check is stolen form the payee can sue for conversion.
(2) The payee can use the right of conversion against others:
o Recover from transferors or someone who takes payment off instrument: If converted can go after the
transferee or someone takes payment on the instrument.
o Depository bank: Can recover from the depository bank or payor bank because they made payment on the
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check.
o May recover for breach of transfer warranties: May recover from breach of warranties.
o A HIDC would not be immune from an action of conversion: A HIDC may be an exception, but has to
indorse.
(3) Drawer CANNOT bring an action for conversion;3-420(a): The drawer cannot bring an action fro conversion of
the instrument b/c cannot charge the check if it is not authorized. The drawer obligations on the check is not
suspended.
 Forged signature effective against signer; 3-403(a): Can enforce instrument against the person who signed the
instrument.
Imposter, Fictitious Payees, and other special cases:
 Misnamed Payee; 3-110(a); 3-204(d): A person spelled a persons name wrong
(1) Pay who the drawer intended to pay;3-110(a): The person who entitled to enforce the instrument who the person
issuing the instrument intended to pay, so the drawer’s intent governs.
(2) How should the payee indorse instrument; 3-204(d): Can be indorsed to the name that is stated on the instrument
or the real person’s name. Usually it is best to indorse as both.
 Nominal/ Fictitious payee; 3-404(a):
(1) Example:
o Fictitious: Just a random name that is made up, usually done to avoid auditors suspicions.
o Nominal: Someone who really existed, but the instrument never actually went into account.
(2) Since it is usually made by an employee it is authorized: If the person who created a check had the right to draft
checks then the payment is authorized and anyone can indorse it.
(3) The employer is liable, but the instrument will be treated like a bearer instrument; 3-404(b): If the person who
takes the instrument provides value then it can enforce the instrument and the employer will be liable not the
depository or payer bank.
 Imposter;3-404(a):
(1) Must make distinction of impersonation vs. misrepresentation of identity:
o Impersonation: This is where the person says that they are someone who they are not to get the person to
write a check to them.
o Misrepresentation: Says that they are a person who can act on the behalf of the person who the check is
being written to. 3-404(a) does not apply.
(2) Liability; 3-404(a):
o Impersonation: The check would be properly payable on the indorsement on the imposter and the loss falls
on the depository bank.
o Acting in concert with an imposter: The person acting in concert with the imposter has to induce the
drawer not the person depositing the check
o Misrepresentation: The loss falls on the drawer of the instrument
 DEFENSE to Nominal, fictitious payee or imposter is negligence of depository bank:
(1) If the check is properly payable then can ask them share loss; 3-404(d): Although the check is properly payable if
imposter or fictitious payee if the person was negligent in taking the check (depository bank) then can ask them to
share the loss.
(2) Can split the loss with anyone who is negligent: Could say that the depository bank is negligent in not checking
the indorsement.
Employee forgery; 3-405(a), (b) cmt. 3:
 The employer must be trusted to write checks: Have to be a person who is entitled to create checks
 Liability: The loss falls on the drawer if the employee is entrusted with the ability by the drawer to draft checks.
 However, employer may recover if bank is negligent: The employer could have alleged that the bank failed to
exercise reasonable care and then the employer may be able to share the losses with the employer.
 Employee forgery bears the loss if steals checks or payroll pads: There is some person in the institution who is
responsible for issuing all the payroll checks who is given information and sends it to the person who drafts checks.
The person trying to commit the fraud will feed that person false information so that person payroll pads.
 POLICY: Employer is in a better position to protect against the loss b/c they can hire the employees and can monitor
them.
Allocation of loss by contract:
 Variations by agreement; 4-103(a): Can vary terms of article 3 by certain limitations:
(1) Cannot disclaim: (a) lack of good faith, (b) negligence, OR (c) Limits to damages
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(2) Can reclassify what this things are: Can reclassify this if not manifestly unreasonable.
5. FUND TRANSFERS
Terms and Governing Laws:
 Payment order; 4A-103(a)(1): An unconditional instrument to pay money
o Requirements:
(1) Unconditional: Must be unconditional besides time of payment
o Cannot set a conditions have the bank transfer money when the account reaches a certain limit;
Trustmark.
(2) Specific identification: Identifies account of the beneficiary and the originator
 Governing laws:
(1) Laws governing Fed. Wire: Reg J. : All funds transfer systems go through Fed Wire systems and these preempt
state law. The Federal Rules essential adopts 4A so they are governed by the same rules
(2) Common law; 4A-102 cmt.: The intent of the drafters did not intend common law to be substituted, but some
courts ignored this.
Duty to pay and Acceptance:
 The duty to pay; 4A-402(b): The party accepting the payment order has the duty to pay.
(1) Acceptance of a payment order 4A-209(a): A bank accepts the payment order when it executes the payment order
and sends it to the next bank/ person in the chain.
(2) Liable when accepts: become liable on the order once accept the order, e.x. originator’s bank accepts when sends
the order of the originator to the intermediary bank.
o Acceptance automatic by beneficiary bank; 4A-208(b)(1)-(2): When the bank receives payment of full
amount of senders order and credits the beneficiary’s account, i.e. the “the message is the money.”
o Bank does not have a duty to accept the payment order; 4A-212; 4A-211:
(1) No liability if refuses to accept unless contract said it had to accept; 4A-212: If a receiving bank fails to
accept a PO that it had agreed to accept by express agreement then it does have a duty to accept. If there is no
agreement then no duty.
(2) Automatic cancellation after 5 days;4A-211(d): If not accepted in 5 days the payment order will be
automatically cancelled.
(3) If agreed to accept and did not then originator will get damages; 4A-305(d):
o If no agreement: Can only get interest and incidental damages
o Cannot get additional damages unless agreement: Cannot get additional damages including
consequential damages unless they are expressly in the agreement with the originator bank. So even if
they did agree to execute the payment order they have to expressly include a clause for consequential
damages.
Money Back Guarantee: 4A-402(c), (d):
 The money back guarantee:
(1) If does not reach destination payor gets money back: Although have a duty to pay immediately on the acceptance
of the order the payor gets money back if the order never got where it was suppose to go.
(2) Have to sue through the chain of banks and cannot skip: If the payment never gets where it is suppose to go the
originator can sue the originator bank and the banks are only liable to those who are before them on the chain.
(3) Let the banking system figure it out: The originator will get its money back and the law just lets the banking
system figure it out who is liable. This also provides the users with a measure of protection from bank
insolvencies.
 EXCEPTION: Does not apply if the intermediary bank is specified by originator; 4-402(e): This rule does not
apply strictly if the originator specifies which intermediary bank that the originator bank should use and that bank
becomes insolvent. The originator bank would not be liable in that situation.
Cancellation; 4A-211(b),(c):
 Cancellation before acceptance; 4A-211(b):
(1) Have to cancel before acceptance: Can stop a payment order if it has not been accepted.
(2) Cancellation is effective if: Effective if communication is received giving the receiving bank a reasonable amount
of time to act before accepted the PO.
(3) Difficulties cancelling before acceptance and how to avoid problems:
o Difficulties: Usually do not have time to cancel because most are executed immediately
o Tell banks to wait for confirmation b/f acceptance: Can tell the bank to way for your confirmation b/f the
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bank accepts the PO.
 Cancellation after acceptance; 4A-211(c)(1)-(2):
(1) Receiving bank has to agree: Cancellation or amendment is not accepted unless the receiving bank agrees.
(2) There are three requirements for cancellation: (1) Originator agrees to cancel, (2) originator bank sends message
to the intermediary bank, who also agrees to cancel, and (3) the intermediary bank forwards the message to the
beneficiary bank who also agrees to cancel.
(3) If the beneficiary bank has accepted the PO the only way to cancel afterward is if:
o One of the following for conditions are met: (1) Unauthorized PO, (2) Duplicate PO, (3) PO went to the
wrong person, OR (4) PO paid in an excessive amount i.e. the amount greater than the beneficiary was
entitled to receive form the originator.
o Reason why cannot cancel: The originator cannot cancel b/c they have buyers remorse
o POLICY: Fund transfers are intended to be fast, cheap, and final.
Mistakes in Executing POs:
 Recovery for incorrect payments:
o If partially right then can debit originators account: 4A-303(a): To the extent that the bank gets it right it is
allowed to charge the account for the PO
 Restitution for mistakes; 4A-303:
(1) Restitution: The bank who made the error can recover the amount that it overpaid through the theory of
restitution.
(2) Subject to discharge rule for value exception; 4A-303; Cmt. 2:
o Make payment by mistake that owe money to and cannot get it back: If you make payment by mistake to
someone that you owe money to then you cannot get that money back since justice would not require you to
give money back because you owed money to that person anyway. (this could demand on jurisdiction.)
 Improper execution; 4A-302(a)(1); 4A-305(a)-(c): If incorrectly accept a PO:
(1) Liability; 4A-302(a)(1): If the receiving bank accepts the PO the bank has the following obligations, the bank has
the duty to follow the instructions of the originator and the sender
(2) If do this incorrectly then could be liable for damages; 4A-305(a)-(c): If the receiving bank does not meet this
duty and it caused a period of delay they are required to pay interest and incidental damages, but cannot get
consequential damages unless expressly provided in an agreement.
Fraudulent Payment Orders:
 Liability for orders sent by others:
(1) Authorized; 4A-202: The banks have security measures to see if it was an authorized payment order.
o Originator can charge: The originator bank can charge the originator for PO when it is authorized
o Can pay order unless exception: Can pay only if authorized or if it falls into an exception as effective AND
unenforceable
(2) AND/ OR Effective; 4A-202(b):
o Unauthorized, but effective:
 Securities procedures met in good faith: If the bank and its customer who places the PO and it passes
through the banks security procedures then it is valid whether or not if it is authorized.
o However, security feature has to meet the following conditions: If the bank followed reasonable security
procedures and if the PO passed the security procedure and the bank accepted it in good faith then it is
effective.
(3) And not unenforceable; 4A-203(A)(2):
o If PO is accepted and is not authorized, but is effective b/c it passes through security features then the
following rules apply.
(1) The customer would have to prove that however the security features were breached it was not done by
someone who the customer trusted with information or anything to do with the customer.
 Note on security features being breached:
(1) If info from bank ban cannot charge customers: Not effective because he did not et the information from
customers.
(2) Info from customers(phishing?)bank can charge customers: (a) it would be effective and the customer would
not be able to rebut this, (b) the customers would not be to prove that this was not enforceable.
(3) Insufficient of how it was done bank can charge the customers: In most cases do not know how the money has
disappeared and the bank would win in this situation.
Incorrectly Identified Beneficiaries:
 If name= identified person and number= different persons account then:
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
(1) Beneficiary bank pays by account number; 4A-207(b)(1):
o The bank has no duty to look at the name just account number: The bank does have to look at the name
just the account number, and this can be followed even if the name refers to a different person than the
account number.
(2) Originator may recover restitution from the beneficiary; 4A-207(d)(1): can get the money back from the
originator bank if the beneficiary bank wrongfully pays the person identified by number and that person was not
entitled to receive payment form the originator, but cannot complain that the wrong person was paid.
(3) There are required disclosures about going with number over name which must be made to originator; 4A207(c)(2):
o Bank must give notice to the originator about these rules: The originator is supposed to receive notice
regarding the above rules, i.e. that the bank is going to go with the account number. Have to say that the bank
is going to pay the beneficiary by number regardless if the name and the numbers are different people.
If name=unidentified person or number of nonexistent account then:
(1) No acceptance possible; 4A-207(a): If have a nonexistent person or nonexistent number, cannot have acceptance
of the PO. Beneficiary bank cannot correct the number and pay it.
(2) Money back guarantee applies; 4A-402(b),(c): The originator would get money back by the money back
guarantee.
CREDIT CARDS
Liability for Unauthorized Charges:
 A card holder is liable if; 15 U.S. C. 1643; 1645:
(1) Card is used by cardholder (or for the cardholder’s benefit):
o If used card is authorized: If use your credit card then the charge is authorized and can be charged for it
o Burden on card issuer to show that use was authorized: The burden of proving the authority to use the
card is placed on the card issuer, who has to prove that it was used for the cardholders benefit then it will be
considered to be authorized.
 To prove used for benefit have to show that person has actual or implied authority:
(1) Actual Authority: Cardholder would actually give the car to the person to use
o The cardholder’s liability: Will be liable if someone who sues his card has actual authority to use the card
(2) Implied Authority: The authority that you have due to your position i.e. that you are a treasurer of a company and
someone who should through your position be able to use the card.
o The cardholder’s liability: The card holder would be liable
(3) Apparent Authority: Created when the principle tells a third part that thee gent has actual authority to bind the
principle.
o The cardholder’s liability: the card holder would be estopped from presenting himself as not having actual
authority.
o Negligence for failing to check statements: Could be liable through an apparent authority principle.
Miskinskoff.
 Unauthorized use of card by people who do not have authority: Theif’s, hackers, etc.
(1) Applicability: Both customers and business cards
(2) Liability:
o Only up to $50.00 and under conditions of 1645:
o The card holder will only be liable if; 1643:
(1) Not liable if the card holder had not received the credit card
o Total liability is $50 dollars:
(1) For some cards it is $0.00: Liability could be reduced if the company contracts it.
(2) If notify the bank before any charged not liable for $50.00: If notify the bank would not be
liable for over $50.00.
o Notified credit company:
(1) Cannot be liable after notify: Cannot be liable after notifying issuer bank
(2) No duty to report: There is no duty to report the loss.
Charging Back the Merchants:
 Under typical circumstances a credit card issuer may charge back to the merchant:
(1) Charges that are not authorized by the card holder:
o Merchant will be liable for charge back: Merchant will be liable for chargebacks for charges by the merchants
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which were not authorized
o Merchant is the risk bearer: If the person does not have authority then the risk is bore by the merchant so
should take protective measure such as asking for IDs or zip codes before taking payments.
o Charges on cancelled/ revoked cards are bore by the merchant: These risk are bore by the merchant and in
most cases the merchant will not be able to collect, the only protection a merchant has is to go through some sort
of automated service.
Assertion of Claims and DEFENSES:
 Claims against the merchant:
(1) Charges above credit limit: A claim or defense cannot exceed the amount of the balance that is on the card.
 Charges that a merchant may assert a claim/ defense against merchant; 1661:
(1) If can assert against merchant, can assert against card issuer: If a merchant does not provide consideration or
deliver on the goods that the cardholder purchases the cardholder can assert the claims against the issuer of the
card.
(2) Statutory right under 1661:
o A. Max liability cardholder $500.00: Max liability of the card holder is $500.000 regardless of the amount
of transaction
o B. Have to make good faith effort to resolve with merchant: have to make a good faith effort to resolve
the claim with the merchant before asserting the claim against the cardholder.
o C. Initial transaction more than $50.00: The amount of the initial transaction has to exceed $50.00.
o D. Same state and within 100 miles of address: Place where the initial transaction occurs is in the same
state as mailing address provided by cardholder or with in 100 miles of that address for this reason merchants
do not take credit from those out of state/travelers.
o Banks unusually augment this provision in contract: The banks usually augment the geographical
restrictions to allow them to charge back anywhere.
(3) Some banks will contract further protections than provided in 1661: Some banks offer card protection programs
or extending of warranties.
(4) Issuer cannot charge back b/c issuer does not want to pay: The issuer cannot charge back things that the
consumer does not. For these things the consumer bears the risk.
(5) State law claims may arise:
o State contract law: State contract law claims may arise that are not covered by 1661
o Existence of claims and defenses: The issuer cannot charge back things that the customer does not pay for
these expense the consumer bears the risk.
DEBIT CARDS
Governing law:
 Reg E. 1005.3(a)-(b), (1)& (2): Governs consumer transactions, i.e. electronic transaction and any ATM, online bill
payment, or debit transaction.
Liability for unauthorized transfers 1005.6(b)
 Loss or theft of access device:
(1) Timely Notice given=max $50.00: If the consumer notifies the financial institutions with in two business days of
learning of the lost or theft of device then will not be liable for more than $50.00.
(2) Timely notice not given=max $500.00: If consumer fails to give notice with in two days the max that they are
liable for is $500.00.
(3) Failure to examine statement: Have to notify with in 60 days of statement being issued of an unauthorized
transfer and after that 60 day period has passed the consumer will be liability
No right to assert claims and defense like a person using a credit card does:
 There is no chargeback system: When pay with debit card the money is gone and the consumer cannot assert the
claim against the bank and must go directly after the merchant.
LETTERS OF CREDIT:
Letters of Credit Definition; 5-102(a)(10):
 Issuer taking a definite undertaking to pay money to the beneficiary on the presentation of documents at the
request of the applicant:
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o
Elements:
 Have to say that it has to pay something
 There has to be a beneficiary
 There has to be documents presented
 Parties to a letter of credit:
o Applicant: The applicant owes money to the beneficiary or wants to make them feel comfortable in a
transaction and will go to the bank and ask the bank to issue a letter of credit.
o Issuer: The bank that will pay out when the documents are presented, usually will take a small fee.
o Beneficiary: The person who gets paid when presents the documents to the issuer.
 Types of letter of credit:
o Traditional “commercial use” letters of credit: Usually used for large shipments of goods and beneficiary will
produce a bill of lading. This will shift a lot of the risk of the transaction to the bank.
o Stand by letter of credit: Letter of credit does not serve as a payment device, but instead functions as a
guarantee, and usually beneficiary will present an affidavit alleging default.
Issuer’s Duty to Honor and to Reimbursement:
 Issuer’s duty to honor; 5-108(a),(e): An issuer shall honor a letter of credit if the documents comply with the letter
of credit, i.e. the documents specified in the application, and will not pay if the documents fail to comply.
 Issuer’s right to reimbursement; 5-108(i)(1): An issuer is entitled to be reimburse by the applicant by the funds that
are immediately available and if the funds are not available will have to pursue them through litigation.
Documentary Presentation Requirement:
 Policy: The bank may not know all of the facts that would facts that would give rise to payment of a letter of credit
and a clerk who determines whether or not the documents conform and there is not an intense investigation.
 Strict Compliance Standard; 5-108(a); cmt. 1 :
(1) Not substantial compliance: Documents have to more than substantially comply, but not have to literally comply
(2) Not slavish conformity: Does not have to be exactly the documents that are presented in the terms of the letter of
credit.
(3) Standard practice of issuers; 5-108(e):
o Compared to other intuitions: Standard practice of organizations which commonly issue letters of credit.
o Types of evidence to consider: (a) previous letters of credit from the same bank, (b) expert witness who will
testily on the issue, (c) the chamber of commerce guidelines(usually same as UCC).
Discrepancy in Application and Document Presentation:
 Issuer precluded asserted discrepancy; cmt 2 prg 3: If the issuer wants to dishonor a letter of credit the outer time
limit to do so is 7 days if notice is not given. If notice is given can do what a reasonable bank would do. The bank
should mention that there is a discrepancy.
 Discrepancy waived by the applicant:
(1) Issuer can contact applicant to clarify and waive discrepancy; 5-108(a): If there is a discrepancy the issuer can
contact the applicant and ask if it should be honored.
(2) Waiving a presentation does not constitute a waiver on future presentations: Just because the applicant waives one
or more presentations does not mean that there is a waiver on all future presentations.
 Standard practice is overridden by course of dealing: Issuer and applicants course of dealin over a period of time
can override standard practice.
Independence Principle; 5-103(d):
 All that matters is presentation of documents by the beneficiary: The issuer is only obligated to pay letters of
credit when the beneficiary presents documents and does not care if or if not the underlying obligation has been
satisfied.
 Underlying claims do not matter: The obligation to pay the letter of cred is not independent on the underlying
contract between the applicants and beneficiary and it does not matter if the beneficiary is entitled to payment.
 No merger doctrine in Article 5: When payment is given on the letter of credit there is nothing that suspends the
underlying obligation. Can sue under letter of credit or the claim.
Remedies:
 Claims and remedies in letter of credit cases:
(1) B v. I Wrongful Dishonor; 5-111(a),(e): The issuer does not honor the documents after they are presented and
the comply with the description in the letter.
o The beneficiary may recover form the issuer the amount that they were going to recover form the letter of
credit, but may not recover consequential damages, but may recover attorney fees.
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(2) B v. A Breach of Contract; 5-103(d): If do not pay under a letter of credit the beneficiary can law so the
applicant for the underlying claim.
(3) A v. I Wrongful Dishonor; 5-111(b), (e): Applicant tells the issuer to dishonor:
o If issuer wrongfully dishonors a letter of credit it may recover incidental, but not consequential damages
subtracted by the amount that was paid on the breach and can also recover attorney fees.
(4) A v. B Breach of Contract; 5-103(d): If applicant does not receive compensation they can sue for breach of
contract to the extent that the contract was not honored.
(5) I v. A Reimbursement; 5-108(i): If properly honors the claim the issue has a right to reimbursed from the
applicants bank account will take money from the account if not will bring an action or reimbursement under 5108(i).
(6) I v. B Subrogation to A’s Contract claim Against B; 5-117: If the issuer pays the beneficiary and cannot
recover form the applicant it is subrogated to any claim that the applicant has against the beneficiary. So if the
applicant has a breach of K claim they can assert the breach of K claim against the beneficiary and recover.
(7) A, I v. 3rd Parties; Subrogation claim against third parties; 5-117(a),(b): It may be the case that the applicant
and issuer may be subrogated against third parties.
Fraud and Forgery:
 Fraud occurs: Fraud occurs when there is a presentation of money or an affidavit which is forged or false
 Issuer can dishonor if fraud:
(1) If a document is forged: IF a document required for presentation is forged then can dishonor.
(2) Or materially fraudulent: The document is not forged but says something that is not true.
(3) Or would facility a fraud: A document is material and not forged but honoring the document would be a material
fraud because the person who made the letter intended to mislead.
 The applicant could seek an injunction to stop a letter of credit from being honored; 5-108(a)(b):
o Requirements: The court of competent jurisdiction may temporarily or permantly enjoin the issuer only if (a)
forger, (b) there is a material fraud, or (c) it would facilitate a fraud.
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