Uniform Commercial Code: Article 3
Definitions
Negotiable Instruments

Brief definition: A signed writing that orders or promises the payment of money

Long definition: An unconditional promise or order to pay a fixed amount of money,
with or without interest or other charges described in the promise or order, if all of
the following apply:
o It is payable to bearer or to order at the time it is issued or first comes into
possession of a holder
o It is payable on demand or at a definite time
o It does not state any other undertaking or instruction by the person
promising or ordering payment to do any act in addition to the payment of
money
Draft
A draft is an instrument that is an order to pay (for example, a check or share draft drawn
on a credit union).
Note
A note is an instrument that is a promise to pay (such as a typical installment loan).
Cashier’s Check
A draft with respect to which the drawer and drawee are the same bank or branches of the
same bank.
Teller’s Check
A draft drawn by a bank on another bank or payable at or through a bank.
Certified Check
A check accepted by the bank on which it is drawn (“acceptance” means the drawee bank’s
signed agreement to pay the check as presented)
Payees

The payee of an instrument is the person to whom an instrument is payable.

An instrument is payable to any person intended by one or more of the signers of
the instrument.

The payee can be identified by name, identifying number, office, or account number
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Uniform Commercial Code: Article 3
Multiple Payees
 A check payable to “John Doe or Jane Doe” can be paid to either John or Jane Doe

A check payable to “John Doe and Jane Doe,” is payable to both parties (both must
endorse)

A check is payable to “John Doe, Jane Doe,” is payable to either John or Jane Doe
Conflicting Amounts

Words prevail over numbers

For example, a check payable to the order of John Doe orders the payment of
“$1,000” (numeric) and “Ten Thousand Dollars” (spelled-out), is properly payable
in the amount of ten thousand dollars.
Statute of Limitations
A party entitled to payment of a personal check must bring a lawsuit to enforce the
payment within three years after the check has been dishonored or 10 years from the date
the check was issued, whichever occurs earlier.
Negotiation

“Negotiation” of an instrument means a transfer of possession of the instrument, by
a person other than the issuer, to another person.

The person to whom this transfer is made is known as the “holder” of the
instrument.
Transfer
Unless two parties have otherwise agreed, an instrument is transferred from one party to
another for value.
Endorsement
“Endorsement” generally means a signature (other than the signature of the maker,
drawer, or acceptor) on an instrument for the purpose of negotiating it or restricting
payment of the instrument.
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Uniform Commercial Code: Article 3
Special Endorsement
An endorsement is a “special endorsement” if it includes the signature of a holder and
identifies a person to whom the instrument will then be made payable. For example, if a
check is payable to John Doe, and he endorses it “Pay to the order of Jane Doe” and signs his
name, John Doe has made a “special endorsement.” The check is then payable only to Jane
Doe (who, in turn, can add her own special endorsement)
Blank Endorsement
If the holder simply signs his name with no other instructions or wording, the endorsement
is known as a “blank endorsement.” A check endorsed in blank becomes payable to anyone
who later comes into its possession unless and until someone adds a special endorsement
Enforcement of Instruments
Holder in Due Course

Any holder of an instrument is entitled to its enforcement. A “Holder in Due Course”
(HIDC) has special rights to enforce an instrument.

HIDC-status limits the types of defenses to payment that can be raised (such as a
stop payment). A holder of an instrument becomes an HIDC if and only if:
o At the time the instrument is issued or negotiated to the holder it does not
bear “such apparent evidence of forgery or alteration or is not otherwise so
irregular or incomplete as to call into question its authenticity”
AND
o The holder took the instrument:

For value

In good faith

Without notice that the instrument was overdue or had been
dishonored or there was an incurred default with respect to payment
of another instrument issued as part of the same series

Without notice that the instrument contained an unauthorized
signature or had been altered

Without notice of any claim to a property right or possessory right in
the instrument
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Uniform Commercial Code: Article 3
Defenses to Payment

Minority of the obligor

Duress, lack of legal capacity, or illegality of the transaction which under other law

Fraud that induced the obligor to sign the instrument without knowing what the
instrument was

Discharge of the obligor in insolvency proceedings (typically bankruptcy)
Enforcement of Lost, Destroyed, or Stolen Instruments
The payee is entitled to enforce a lost, destroyed, or stolen instrument if:
 He was in possession of the instrument and entitled to enforce it immediately before
it was lost, destroyed, or stolen.

The loss of possession was not the result of a transfer by the individual or a lawful
seizure.

The person cannot reasonably obtain possession of the instrument because it was
destroyed, its whereabouts cannot be determined, or it is in the wrongful possession
of an unknown person or a person that cannot be found.
Note: A lawsuit may be necessary to enforce payment
Lost, Destroyed, or Stolen Cashier’s Check, Teller’s Check or Certified
Check

In the case of cashier’s checks, teller’s checks, and certified checks, the payable
amount is a direct obligation of the bank that issues the instrument.

The individual who claims the right to receive the amount of a cashier’s check,
teller’s check, or certified check that was lost, destroyed, or stolen (known as the
“claimant”) may provide to the issuing bank a claim to the amount of the check.
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Uniform Commercial Code: Article 3
Procedure for Claim
The claim must include a “declaration of loss” — a written statement made under the
penalty of perjury — which states that:
 Declarer lost possession of a check.

Declarer is the drawer or payee (for certified checks) or the remitter or payee (for
cashier’s checks and teller’s checks) of the check.

Loss of possession was not the result of a transfer by the declarer or a lawful
seizure.

Declarer cannot reasonably obtain possession of the check because it was
destroyed, its whereabouts cannot be determined, or it is in the wrongful possession
of an unknown person or a person that cannot be found or is not amenable to
service of process.
The claim must:
 Describe the check with reasonable certainty

Be received by the obligated bank in time for it to act on it before the check has been
paid

Claimant must provide reasonable identification if requested by the obligated bank..
If all of these conditions are met, the claim becomes enforceable on the 90th day following
the date of the check (for cashier’s checks and teller’s checks) or the date the check was
certified (for certified checks). In the rare case where a claim is made after 90 days have
elapsed, it is immediately enforceable.
Wrongful Refusal to Honor a Cashier’s Check, Teller’s Check, or
Certified Check

If a credit union wrongfully refuses to honor one of these instruments, the person
claiming the right to payment is entitled to compensation for expenses and loss of
interest resulting from the nonpayment.

The obligated credit union may be required to pay consequential damages as well.
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Uniform Commercial Code: Article 3
Accord and Satisfaction by Use of Instrument
Basic Procedures

If a debtor has a good-faith dispute with a creditor about the amount owed on a
debt, he can offer to settle the debt for less than the amount the creditor believes is
owed by presenting the creditor with a check marked “payment in full.”

If the creditor accepts the check, it has in effect agreed to accept the lesser amount
as payment in full.
Limitations

A debtor must in good faith raise a bona fide dispute to the amount owed

Creditors may notify debtors that any payments sent with “paid in full” notations
must be sent to a specific address

An inadvertently accepted payment in accord and satisfaction can be sent back to
the debtor within 90 days of its acceptance.
Liability of parties
Signatures
An individual is not liable on an instrument unless her signature appears on the
instrument, or if she is represented by an agent or representative who signed the
instrument on her behalf.
Transfer and Presentment Warranties

Each party who endorses an instrument makes warranties that there are no
unauthorized or missing endorsements on the instruments.

If it later turns out that there was, indeed, a fraudulent endorsement, then the
endorser who presented the item to the drawee bank for payment has breached this
warranty and the drawee bank is entitled to return the item to — and be
reimbursed by — that party.

Any breach of warranty claim must be asserted generally within 30 days after the
drawee learns of the breach and the identity of the person who negotiated the item.
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Uniform Commercial Code: Article 3
Employee Endorsements

If a credit union in good faith pays an instrument based on the fraudulent
endorsement of an employee of the drawer who has been entrusted with
“responsibility” with respect to any instrument, the endorsement is effective as the
endorsement of the person to whom the instrument is payable if it is made in the
name of that person.

The credit union that pays the instrument must exercise ordinary care in paying the
item.

“Responsibility” with respect to an instrument means authority to:
o Sign or endorse instruments on behalf of the employer.
o Process instruments received by the employer for bookkeeping purposes, for
deposit to an account, or for other disposition.
o Prepare or process instruments for issue in the name of the employer.
o Supply information determining the names or addresses of payees of
instruments to be issued in the name of the employer.
o Control the disposition of instruments to be issued in the name of the
employer.
o Act otherwise with respect to instruments in a responsible capacity.
Note: an employee does not have “responsibility” with respect to an instrument merely
because he has access to it.
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